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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14D-9
Solicitation/Recommendation Statement
Pursuant to Section 14(d)(4)
of the Securities Exchange Act of 1934
Recovery Engineering, Inc.
(Name of Subject Company)
Recovery Engineering, Inc.
(Name of Person(s) Filing Statement)
Common Stock, par value $.01 per share
(including the associated Common Stock purchase rights)
(Title of Class of Securities)
756269 10 6
(CUSIP Number of Class of Securities)
Brian F. Sullivan
Chairman and Chief Executive Officer
Recovery Engineering, Inc.
9300 North 75th Avenue
Minneapolis, Minnesota 55428
(612) 315-5500
(Name, address and telephone number of person
authorized to receive notice and communications
on behalf of the person(s) filing statement)
Copies to:
Eric O. Madson
Robins, Kaplan, Miller & Ciresi L.L.P.
2800 LaSalle Plaza
800 LaSalle Avenue
Minneapolis, Minnesota 55402
(612) 349-8500
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Item 1. Security and Subject Company.
The name of the subject company is Recovery Engineering, Inc., a Minnesota
corporation (the "Company"), and the address of its principal executive office
is 9300 North 75th Avenue, Minneapolis, Minnesota 55428. The title of the
class of equity securities to which this Statement relates is the common stock
of the Company, par value $.01 per share (the "Common Stock"), and the
associated Common Stock purchase rights under the Company's Rights Agreement
dated January 30, 1996, between the Company and Norwest Bank Minnesota, N.A,
as Rights Agent, as amended (the "Rights Agreement"). The shares of Common
Stock, together with the associated rights pursuant to the Rights Agreement,
are referred to herein as the "Shares."
Item 2. Tender Offer of the Bidder.
This Statement relates to the tender offer by Tenzing, Inc., a Minnesota
corporation ("Offeror"), a wholly owned subsidiary of The Procter & Gamble
Company, an Ohio corporation ("Parent"), described in the Tender Offer
Statement on Schedule 14D-1, dated September 1, 1999 (the "Schedule 14D-1"),
to acquire all outstanding Shares at a price of $35.25 per share of Common
Stock outstanding, net to the seller in cash, without interest thereon (the
"Offer Price" or the "Merger Consideration"), upon the terms and subject to
the conditions set forth in the Offer to Purchase, dated September 1, 1999
(the "Offer to Purchase") and the related letter of transmittal (which,
together with the Offer to Purchase constitute the "Offer" and are contained
within the Schedule 14D-1).
The Offer is being made pursuant to an Agreement and Plan of Merger, dated
as of August 26, 1999 (the "Merger Agreement"), among Parent, Offeror and the
Company. The Merger Agreement provides, among other things, that as promptly
as practicable after the satisfaction or waiver of the conditions set forth in
the Merger Agreement, Offeror will be merged with and into the Company (the
"Merger"), and the Company will continue as the surviving corporation (the
"Surviving Corporation") and a wholly owned subsidiary of Parent. A copy of
the Merger Agreement is filed herewith as Exhibit 1 and is incorporated herein
by reference.
As set forth in the Schedule 14D-1, the principal executive offices of
Parent and Offeror are located at One Procter & Gamble Plaza, Cincinnati, Ohio
45202.
Item 3. Identity and Background.
(a) The name and business address of the Company, which is the person
filing this Statement, are set forth in Item 1 above.
(b)(1) Certain contracts, agreements, arrangements and understandings
between the Company or its affiliates and its executive officers,
directors or affiliates are described in the Information Statement
dated September 1, 1999 (the "Information Statement") attached
hereto as Annex I. The Information Statement is being furnished to
shareholders of the Company pursuant to Section 14(f) of the
Securities Exchange Act of 1934 and Rule 14f-1 thereunder in
connection with Offeror's right (after consummation of the Offer) to
designate persons to the board of directors of the Company (the
"Board of Directors" or "Board") other than at a meeting of the
shareholders of the Company. The Information Statement is
incorporated herein by reference. Except as described in this Item
3(b)(1), there are no material contracts, agreements, arrangements
or understandings, or any potential or actual conflicts of interest,
between the Company or its affiliates and the Company or any of its
executive officers, directors or affiliates.
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(2) Descriptions of (i) the Merger Agreement, (ii) the Confidentiality
Agreement, (iii) the Stock Option Agreement, (iv) the Tender and
Option Agreement, (v) the Consulting Agreement, Non-Competition
Agreement and Letter of Understanding for Brian F. Sullivan, and
(vi) the Non-Competition Agreement and Letter of Understanding for
Reed A. Watson are set forth below. Except as described in this
Item 3(b)(2), there are no material contracts, agreements,
arrangements or understandings, or any potential or actual
conflicts of interest, between the Company or its affiliates and
Parent, Offeror or any of their respective executive officers,
directors or affiliates.
THE MERGER AGREEMENT
The following is a summary of the material terms of the Merger Agreement.
This summary is not a complete description of the terms and conditions thereof
and is qualified in its entirety by reference to the full text thereof, which
is incorporated herein by reference and a copy of which has been filed with
the Commission as Exhibit 1 to the Schedule 14D-9.
The Offer. The Merger Agreement provides for the commencement of the Offer,
in connection with which Parent and Offeror have expressly reserved the right
to waive certain conditions to the Offer, but without the prior written
consent of the Company, Offeror has agreed not to (i) waive the condition that
there be validly tendered and not withdrawn prior to expiration of the Offer
at least a majority of the Shares outstanding on a fully diluted basis (the
"Minimum Condition"), (ii) reduce the number of Shares subject to the Offer,
(iii) reduce the price per Share to be paid pursuant to the Offer, (iv) extend
the Offer if all of the Offer conditions are satisfied or waived, (v) change
the form of consideration payable in the Offer or (vi) amend or modify any
term or condition of the Offer in any manner adverse to the holders of Shares.
Notwithstanding the foregoing, Offeror may, in its reasonable discretion
without the consent of the Company, extend the Offer at any time and from time
to time (A) if by 12:00 midnight, New York City time, on Wednesday, September
29, 1999 (or any other date or time then set as the "Expiration Date") any of
the conditions to the Offer shall not have been satisfied or waived, (B) for
any period required by any statute or rule, regulation, interpretation or
position of the Securities and Exchange Commission (the "Commission") or its
staff applicable to the Offer, (C) for any period required by applicable law
in connection with an increase in the consideration to be paid pursuant to the
Offer, and (D) if all Offer conditions are satisfied or waived but the number
of Shares tendered is more than 80%, but less than 90%, of the then
outstanding number of Shares, for an aggregate period of not more than ten
business days (for all such extensions under this clause (D)) beyond the
latest expiration date that would be permitted under clause (A), (B) or (C) of
this sentence. In addition, the Merger Agreement provides that if any
condition to the Offer is not satisfied at the Expiration Date but is
reasonably capable of being satisfied within three business days thereof,
Offeror shall, and Parent shall cause Offeror to, extend the Offer for three
business days and Parent and the Company shall each use reasonable efforts to
cause such condition to become satisfied during such three business day
period.
Conditions to the Offer. Notwithstanding any other provision of the Offer,
and subject to the terms and conditions of the Merger Agreement, Offeror shall
not be required to accept for payment or pay for, subject to any applicable
rules and regulations of the Commission, including Rule 14e-1(c) of the
Exchange Act, any Shares not theretofore accepted for payment or paid for and
may terminate or amend the Offer as to such Shares unless (i) the Minimum
Condition is satisfied and (ii) any waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act") applicable to
the purchase of Shares pursuant to the Offer shall have expired or been
terminated. Furthermore, notwithstanding any other term of the Offer or the
Merger Agreement, Offeror shall not be required to accept for payment or,
subject as aforesaid, to pay for any Shares not theretofore accepted for
payment or paid for, and may terminate or amend the Offer if at any time on or
after the date of the Merger Agreement and before the acceptance of such
Shares for payment or the payment therefor, any of the following conditions
exist or shall occur and remain in effect at the scheduled expiration of the
Offer:
(a) there shall have been instituted or pending any litigation before any
court or other governmental entity which seeks to or, if successful, would
(i) challenge or restrict the acquisition by Parent or Offeror
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(or any of its affiliates) of Shares pursuant to the Offer or the Merger,
restrain, prohibit or delay the making or consummation of the Offer or the
Merger, or obtain any damages in connection therewith, (ii) make the
purchase of or payment for some or all of the Shares pursuant to the Offer
or the Merger illegal or otherwise restrict or prohibit consummation of the
Offer or the Merger, (iii) impose limitations on the ability of Parent or
Offeror (or any of their affiliates) effectively to acquire, operate or
hold, or require Parent, Offeror or the Company or any of their respective
affiliates or subsidiaries to dispose of or hold separate, any portion of
the assets or the business of any one of them or their subsidiaries or
affiliates, (iv) impose limitations on the ability of Parent, Offeror or
their affiliates to exercise full rights of ownership of the Shares
acquired by it pursuant to the Offer or the Merger, including, without
limitation, the right to vote the Shares acquired by it on all matters
properly presented to the shareholders of the Company, (v) restrict any
future business activity by Parent, Offeror, the Company or any of their
affiliates, including, without limitation, requiring the prior consent of
any person or entity (including any governmental entity) to future
transactions by Parent, Offeror, the Company or any of their affiliates, or
(vi) otherwise affect Parent, Offeror, the Company or any of their
respective affiliates, which, in each such case described in (i) through
(vi), is reasonably likely to have a material adverse effect on the
Company, Parent or Offeror or otherwise make consummation of the Offer or
the Merger unduly burdensome; or
(b) there shall have been promulgated, enacted, entered, enforced or
deemed applicable to the Offer or the Merger, by any governmental entity,
any law (other than the HSR Act) that is reasonably likely to result in any
of the consequences referred to in subsection (a) above; or
(c) the Merger Agreement shall have been terminated in accordance with
its terms; or
(d) (i) any of the representations and warranties made by the Company in
the Merger Agreement or in any ancillary document (which for purposes of
this clause (d) shall be read as though none of them contained any material
adverse effect or materiality qualifications) shall not have been true and
correct in all respects when made, or shall thereafter have ceased to be
true and correct in all respects as if made as of such later date (other
than representations and warranties made as of a specified date), except
where the failure of the representations and warranties to be true and
correct in all respects would not in the aggregate have a material adverse
effect on the Company, or (ii) the Company shall have breached or failed to
comply in any material respect with any of its obligations under the Merger
Agreement; or
(e) the Board of Directors shall have modified or amended its
recommendation of the Offer or the Merger in any manner adverse to Parent
or Offeror or shall have withdrawn or failed to confirm within five
business days of Parent's request therefor its recommendation of the Offer
or the Merger or shall have recommended acceptance of any Acquisition
Proposal (as defined in "No Solicitation" below) or shall have resolved to
do any of the foregoing; or
(f) any change, new event or development shall have occurred or be
threatened which, either individually or in the aggregate, would or is
likely to have a material adverse effect on the Company, other than changes
in general economic, financial, regulatory, political or market conditions.
The foregoing conditions are for the sole benefit of Parent and Offeror and
may be asserted by Parent or Offeror with respect to the consummation of the
Offer regardless of the circumstances giving rise to any such condition (other
than any action or inaction by Parent or Offeror) and may be waived by Parent
or Offeror, in whole or in part, at any time and from time to time, in the
reasonable discretion of Parent subject to the terms of the Merger Agreement.
The failure by Parent or Offeror at any time to exercise any of the foregoing
rights will not be deemed a waiver of any right, the waiver of such right with
respect to any particular facts or circumstances shall not be deemed a waiver
with respect to any other facts or circumstances, and each right will be
deemed an ongoing right which may be asserted at any time and from time to
time.
Should the Offer be terminated pursuant to the foregoing provisions, all
tendered Shares not theretofore accepted for payment shall forthwith be
returned to the tendering shareholders.
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Consideration to be Paid in the Merger. The Merger Agreement provides that
subject to the terms and conditions set forth in the Merger Agreement and the
applicable provisions of the Minnesota Business Corporation Act (the
"Minnesota Law"), Offeror shall be merged with and into the Company and the
separate existence of Offeror will cease, and the Company shall be the
Surviving Corporation and shall be a wholly owned subsidiary of Parent. In the
Merger, each share of common stock, $.01 par value per share, of Offeror
issued and outstanding immediately prior to the time of filing of articles of
merger relating to the Merger with the Secretary of State of the State of
Minnesota, or such later time as may be set forth therein (the "Effective
Time"), shall continue to remain outstanding and shall constitute one share of
common stock of the Surviving Corporation. At the Effective Time, each
outstanding Share (other than Shares owned by Parent or any direct or indirect
subsidiary of Parent, or Shares held by shareholders, if any, who perfect
their appraisal rights under Minnesota Law (the "Excluded Shareholders"), or
Shares owned by the Company or its wholly owned subsidiary, Recovery
Engineering International, Ltd. ("REI Barbados")), shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into the right to receive the Merger Consideration, without interest. The
Merger Agreement provides that (subject to the provisions of the Merger
Agreement and the applicable provisions of Minnesota Law) the closing of the
Merger shall occur on a date to be specified by the parties, which shall be no
later than two business days after the satisfaction or waiver of the
conditions to closing set forth in Article VIII of the Merger Agreement,
unless another date is agreed to in writing by the parties thereto.
Treatment of Stock Options and Warrants. The Merger Agreement provides that
at the Effective Time, each outstanding option to purchase Shares under the
Company's stock option plans (individually an "Option" and collectively,
"Options"), whether or not then exercisable, and all warrants to acquire
Shares (individually, a "Warrant" and collectively, "Warrants") outstanding
immediately prior to the Effective Time, whether or not then exercisable,
shall (by all appropriate and necessary action taken prior to the date of the
Merger Agreement of the Board of Directors or such committee or committees of
the Board as are vested with authority to administer the Company's stock
option plans) be cancelled. Each holder of an Option or Warrant (other than
Excluded Options) shall be entitled to receive for each Share subject to an
Option or Warrant an amount in cash equal to the excess, if any, of the Merger
Consideration over the per share exercise price of such Option or Warrant,
without interest. "Excluded Options" are the options of holders set forth in
Section 3.1(d) of the Company Disclosure Letter to the Merger Agreement which
such holders have agreed will be cancelled without payment at the Effective
Time. All amounts payable in respect of Options and Warrants shall be subject
to all applicable withholding of taxes. The Company has agreed to use its
reasonable efforts to obtain all necessary consents, if any, of the holders of
Options or Warrants to the cancellation of the Options or Warrants.
Treatment of Convertible Notes. The Merger Agreement provides that the 5%
Convertible Notes due 2003 of the Company (the "Convertible Notes")
outstanding immediately prior to the Effective Time shall be cancelled and the
holders of the Convertible Notes shall be entitled to receive an amount in
cash equal to (i) the Merger Consideration times (ii) the number of Shares
that would be issuable to such holders upon conversion of the Convertible
Notes, based on the Merger Consideration (i.e., one Share for each $14.85
principal amount of the Convertible Notes). No consideration or other value
shall be paid to the holders of the Convertible Notes in respect of the reset
rights granted to the holders of the Convertible Notes pursuant to Section
9.6(j) of the Securities Purchase Agreement, dated as of July 19, 1996, as
amended, between the Company and the other parties thereto. At the Effective
Time, such reset rights will be cancelled and shall expire. The amounts
payable in respect of the Convertible Notes shall be subject to all applicable
withholding of taxes. The Company has obtained the consent of the holders of
Convertible Notes to the cancellation of the Convertible Notes.
Company ESPP. The Merger Agreement provides that prior to any public
announcement that it has entered into the Merger Agreement, the Company shall
have taken all corporate action necessary to amend the Company's 1994 Stock
Purchase Plan (the "ESPP") such that, following the amendment of the ESPP, (i)
no person shall commence to participate therein, (ii) no participant shall be
permitted to increase the amount of payroll deductions in respect thereof,
(iii) the "Stock Purchase Date" (as defined in the ESPP) to occur on or first
following amendment of the ESPP (whichever is earlier) shall be the final date
on which Common Stock is
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purchased thereunder, and (iv) the ESPP shall be terminated effective on the
Effective Date. Promptly following such Stock Purchase Date, any payroll
deductions not applied to the purchase of Shares shall be remitted to
participants.
Board Representation. The Merger Agreement provides that, promptly upon the
purchase of Shares pursuant to the Offer, and from time to time thereafter,
Parent shall be entitled to designate such number of directors as will give
Parent representation on the Board of Directors equal to the product of (i)
the total number of directors then on the Board of Directors and (ii) the
percentage that the number of Shares purchased by Offeror or Parent bears to
the number of Shares then outstanding, rounded up to the next whole number,
and the Company shall, upon request by Parent, promptly increase the size of
the Board of Directors and/or exercise its reasonable efforts to secure the
resignations of such number of directors as is necessary to enable Parent's
designees to be so elected. At the request of Parent, the Company will use its
reasonable efforts to cause such individuals designated by Parent to
constitute the same percentage of (i) each committee of the Board of
Directors, (ii) the board of directors of REI Barbados, and (iii) the
committees of the board of directors of REI Barbados. The Company's
obligations to appoint designees to the Board of Directors are subject to
Section 14(f) of the Exchange Act. Notwithstanding anything stated in the
Merger Agreement, if Shares are purchased pursuant to the Offer, Parent and
Offeror shall use reasonable efforts to assure that until the Effective Time,
the Board of Directors has at least one director who is a director on the date
of the Merger Agreement and is not an employee of the Company.
The Merger Agreement also provides that following the election or
appointment of Parent's designees and prior to the Effective Time, the
approval of a majority of the directors of the Company then in office who are
not designated by Parent shall be required to authorize (i) any amendment to
the Company's articles of incorporation or bylaws, (ii) any termination of the
Merger Agreement, (iii) any amendment of the Merger Agreement requiring action
by the Board of Directors, (iv) any extension of time for the performance of
the obligations or other acts of Parent or Offeror and (v) any waiver of
compliance with any of the agreements or conditions contained in the Merger
Agreement for the benefit of the Company.
Shareholder Meeting. The Merger Agreement provides that, if required by
applicable law, the Company, acting through the Board of Directors, shall (i)
call a meeting of its shareholders (the "Shareholder Meeting") for the purpose
of voting upon the Merger, (ii) hold the Shareholder Meeting as soon as
practicable following the termination or expiration of the Offer or the
purchase of Shares pursuant to the Offer, (iii) submit the Merger Agreement
and the transactions contemplated thereby for approval of the Company's
shareholders at the Shareholder Meeting and (iv) recommend to its shareholders
the approval of the Merger, unless it has received a written opinion from
outside counsel that such recommendation would violate the Board of Directors'
fiduciary duty under applicable law. At the Shareholder Meeting, Parent and
Offeror shall cause all Shares then owned by them to be voted in favor of
approval and adoption of the Merger. The Merger Agreement provides that,
notwithstanding the foregoing, if Offeror or any other subsidiary of Parent
shall acquire at least 90% of the outstanding Shares, the parties thereto
shall take all necessary and appropriate action to cause the Merger to become
effective as soon as practicable after the expiration of the Offer without a
shareholders meeting in accordance with Section 302A.621 of the Minnesota Law.
Representations and Warranties. The Merger Agreement contains various
representations and warranties of the parties thereto. These include
representations and warranties by the Company with respect to (i) the due
organization, existence, qualification, good standing, corporate power and
authority of the Company and REI Barbados; (ii) the capital structure of the
Company and REI Barbados; (iii) the due authorization, execution, delivery and
performance of the Merger Agreement, the Stock Option Agreement (as described
below), and the documents contemplated thereby (the Stock Option Agreement and
such other documents, collectively, the "Ancillary Documents") and the
consummation of transactions contemplated thereby, and the validity and
enforceability thereof; (iv) required filings, consents and approvals and the
absence of any violations, breaches or defaults which would result from
performance by the Company of the Merger Agreement and the Ancillary
Documents; (v) the accuracy of reports filed by the Company with the
Commission (including financial
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statements) since January 1, 1996; (vi) the absence of certain changes or
events; (vii) the absence of any material litigation; (viii) the absence of
any undisclosed material liabilities; (ix) certain employee benefit matters;
(x) compliance with applicable laws, licenses and permits and the absence of
any default or violation with respect to material contracts; (xi) antitakeover
statutes; (xii) environmental matters relating to the Company and REI
Barbados; (xiii) the opinion of Goldman, Sachs & Co. ("Goldman Sachs" or the
"Financial Advisor"); (xiv) certain tax matters; (xv) compliance with the
Company's articles of incorporation and bylaws; (xvi) certain intellectual
property matters; (xvii) title to assets; (xviii) year 2000 compliance; (xix)
insurance; (xx) the Rights Agreement; (xxi) the absence of brokers or finders
other than the Financial Advisor; (xxii) the accuracy of the Schedule 14D-9
filed by the Company; (xxiii) labor and employment matters; (xxiv) the
validity and enforceability of material contracts; (xxv) the possession by the
Company and REI Barbados of necessary licenses, permits, certificates of need,
approvals and authorizations; and (xxvi) shareholder approvals.
Parent and Offeror have also made certain representations and warranties,
including with respect to (i) the due organization, existence, good standing
and corporate power and authority of Parent and Offeror; (ii) the due
authorization, execution, delivery and performance of the Merger Agreement,
the Ancillary Documents and the Tender and Option Agreement (as described
below) and the consummation of transactions contemplated thereby, and the
validity and enforceability thereof; (iii) required filings, consents and
approvals and the absence of any violations, breaches or defaults which would
result from performance by Parent or Offeror of the Merger Agreement, the
Ancillary Documents and the Tender and Option Agreement; (iv) compliance by
Parent and Offeror with their respective certificates or articles of
incorporation and bylaws; (v) the accuracy of information provided by Parent
or Offeror in the Schedule 14D-1 and the other documents pursuant to which the
Offer is being made; (vi) approval by the board of directors of Parent of the
Merger Agreement, the Merger and the other transactions contemplated thereby;
(vii) shareholder approvals; (viii) the lack of any contracts, agreements or
arrangements that would trigger Section 302A.673 of the Minnesota Law; (ix)
the activities of Offeror and its lack of subsidiaries; and (x) the
sufficiency of funds available to Parent and Offeror for the consummation of
the Offer and the Merger.
Conduct of Interim Operations. The Company has agreed that from the date of
the Merger Agreement to the Effective Time, with certain exceptions, unless
Parent has consented in writing thereto, the Company shall, and shall cause
REI Barbados to, conduct its operations and business, in all material
respects, in the ordinary and usual course of business and consistent with
past practice, and use its reasonable efforts to preserve intact its business
organizations' goodwill, maintain in effect all existing material
qualifications, licenses, permits, approvals and authorizations, substantially
comply with all applicable laws, keep available the services of its present
executive officers and key employees, and preserve the goodwill and business
relationships with suppliers, distributors, customers and others having
business relationships with it.
In addition, the Company has agreed, from the date of the Merger Agreement
to the Effective Time, with certain exceptions, that it will not, and will
cause REI Barbados not to: (i) except to the extent required by law or the
rules and regulations of NASDAQ/NMS, amend or otherwise change its articles of
incorporation or bylaws, (ii) with certain exceptions, issue, authorize, sell,
pledge or dispose of, grant or otherwise create any additional shares of, or
any Options to acquire any shares of, its capital stock or any debt or equity
securities convertible into or exchangeable for such capital stock or
accelerate any right to convert or exchange or acquire any of its securities
for any such shares or ownership interest, or take any action to cause to be
exercisable any otherwise unexercisable Option granted under any of the
Company's stock option plans; (iii) purchase, redeem or otherwise acquire or
retire any shares of its capital stock or any long-term debt; (iv) declare,
set aside, make or pay any dividend or other distribution, payable in cash,
stock, property or otherwise, with respect to any of its capital stock, or
subdivide, reclassify, recapitalize, split, combine or exchange any of its
shares of capital stock or otherwise change its capitalization as it exists on
the date of the Merger Agreement; (v) incur or become contingently liable with
respect to any indebtedness for borrowed money or the deferred purchase price
for property or services or pursuant to any capital lease or other financing
or guarantee any such indebtedness or issue any debt securities, (vi) except
as may be required by applicable laws or the Merger Agreement, (a) increase
the compensation payable or to become payable to, or enter into any employment
agreement with its executive officers or employees, except in the ordinary
course of business consistent with past practice; (b) grant any
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severance or termination pay to any director, executive officer or employee of
the Company or REI Barbados, except pursuant to existing benefit plans of the
Company; (c) enter into any severance agreement with any director, executive
officer or employee or (d) except as required by applicable laws, establish,
adopt, enter into, terminate, withdraw from or amend in any material respect
or take action to accelerate or waive any rights or benefits under any plan,
program or arrangement of the Company, (vii) take any action, other than
reasonable actions in the ordinary course of business consistent with past
practice, with respect to accounting policies or procedures, except as may be
required by generally accepted accounting principles, make any material tax
election, settle any material tax liability or audit or, except as required by
law, amend in any material respect any material tax return, (viii) acquire by
merger, purchase or otherwise an equity interest in or a substantial portion
of the assets of any business or any business entity; (ix) mortgage or
otherwise encumber or subject to any lien, or sell, transfer or otherwise
dispose of, any of its properties or assets, other than certain transactions
in the ordinary course of business and consistent with past practice; (x)
settle or compromise any material pending or threatened litigation; (xi) make
any advance, loan, extension of credit or capital contribution to, or purchase
or acquire (by merger or otherwise) any stock, bonds, notes, debentures or
other securities of, or any assets constituting a business unit of, or make
any other investment in, any person, firm or entity, with certain exceptions;
(xii) make any capital expenditures in the aggregate for the Company and REI
Barbados in excess of the amounts specified in the Company's budget for
capital expenditures, (xiii) waive, amend or allow to lapse any term or
condition of any confidentiality or "standstill" agreement to which the
Company is a party; (xiv) (a) enter into any contracts with distributors or
sales agents other than contracts terminable without penalty on less than 30
days' notice, (b) enter into any contracts to distribute products for others
or which restrict the ability of the Company, REI Barbados or the Company's
affiliates to compete or (c) enter into any other contracts that would
constitute Material Contracts (as defined in the Merger Agreement); or (d)
amend any of the foregoing agreements as they exist on the date hereof; (xv)
amend or waive the Rights Agreement, or redeem the Rights, except in
connection with the transactions contemplated under the Merger Agreement or
the Ancillary Documents; (xvi) effect any material change in the Company's
advertising, product promotion or brand support policies or programs or commit
to any significant new product promotion or advertising campaign; (xvii)
effect any material change in the Company's billing practices or sales terms,
or cause or permit a material acceleration or delay in the manufacture,
shipment or sale of inventory, the collection of accounts or notes receivable
or the payment of accounts or notes payable; (xviii) enter into any contracts
for derivatives; (xix) waive, relinquish, release or terminate any right or
claim, including any such right or claim under any Material Contract, except
in the ordinary course of business consistent with the customary past practice
of the Company, or permit any rights of material value to use any intellectual
property to lapse or be forfeited; (xx) take any action to cause the Common
Stock to be delisted from the NASDAQ/NMS prior to the completion of the Offer;
(xxi) take any action that would reasonably be expected to render Parent's and
Offeror's representations and warranties under the Merger Agreement to be
untrue or result in Parent or Offeror being unable to perform their respective
obligations or comply with their respective covenants under the Merger
Agreement; or (xxii) agree in writing or otherwise to take any of the
foregoing actions.
Access to Information. Under the Merger Agreement, from the date of the
Merger Agreement to the Effective Time, the Company and REI Barbados have
agreed to (i) afford to the officers, employees, auditors, agents and advisors
of Parent full access at all reasonable times to all of its officers,
employees, agents, properties, offices, plants and other facilities, books,
records and tax returns, (ii) furnish promptly to Parent all financial,
operating and other data and information as may be reasonably requested, and
(iii) permit Parent to make such copies of documents and such inspections and
investigations, including, without limitation, such environmental assessments
and testing as Parent may request. Such information shall be held in
confidence to the extent required by, and in accordance with, the provisions
of the Confidentiality Agreement (as defined in "CONFIDENTIALITY AGREEMENT"
below), which shall remain in full force and effect.
No Solicitation. The Company has agreed in the Merger Agreement that the
Company shall not, and shall not permit REI Barbados or any officer or
director to, and shall use its best efforts to cause the employees, agents or
other authorized representatives of the Company and REI Barbados not to,
directly or indirectly, (i) initiate, solicit or knowingly encourage,
facilitate or assist (including by furnishing any information or providing any
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access to the properties, books or records of the Company) any inquiries or
proposals that constitute, or could reasonably be expected to lead to, a
proposal or offer for a merger, consolidation, business combination, sale of
assets representing a material portion of the assets of the Company and REI
Barbados, taken as a whole, sale of shares of capital stock representing,
individually or in the aggregate, 10% or more of the voting power of the
Company, including, without limitation, by way of a tender offer or exchange
offer for shares of capital stock representing 10% or more of the voting power
of the Company (any of the foregoing proposals or inquiries being an
"Acquisition Proposal"), (ii) engage in negotiations concerning, or provide
any information or data relating to the Company or REI Barbados for the
purposes of making any Acquisition Proposal, (iii) agree to, approve or
recommend any Acquisition Proposal or (iv) take any other action inconsistent
with the obligations and commitments assumed by the Company pursuant to the
"No Solicitation" provisions of the Merger Agreement. Nothing in the Merger
Agreement, however, shall prevent the Company or its Board of Directors from
(A) furnishing nonpublic information to, entering into customary
confidentiality agreements with, or entering into discussions with, any person
or entity in connection with an unsolicited bona fide written Acquisition
Proposal to the Company or its shareholders if the Company provides Parent
with at least two business' days notice of its intent to do so and the
Acquisition Proposal is made in writing prior to Offeror and/or Parent having
purchased any Shares under the Offer, and the Board of Directors, by action of
a majority of the entire Board of Directors, determines in good faith that
such Acquisition Proposal constitutes, or is reasonably likely to constitute,
a Superior Proposal or (B) taking and disclosing to its shareholders a
position with respect to such Acquisition Proposal or making any other public
disclosure that, in the written opinion of the Company's counsel, is required
by applicable law; provided, however, that the Board of Directors will not
recommend that the shareholders of the Company tender their Shares into any
tender offer unless (i) the Board of Directors determines that such tender
offer constitutes a Superior Proposal and (ii) the Company has provided Parent
and Offeror with not less than two business days' prior notice of its intent
to do so.
For purposes of the Merger Agreement, "Superior Proposal" means a bona fide
written Acquisition Proposal which (A) (i) was not solicited, encouraged or
knowingly facilitated in violation of the Merger Agreement, (ii) was received
in writing by the Company prior to Offeror and/or Parent having purchased any
Shares under the Offer and (iii) a majority of the members of the Board of
Directors determines in their good faith judgment (after consultation with
independent financial advisors) to be more favorable from a financial point of
view to the Company and its shareholders than the Merger after giving effect
to any increase in the Merger Consideration, and (B) is reasonably capable of
being completed, taking into account all legal, financial, regulatory and
other aspects of such proposal; provided, however, that an Acquisition
Proposal shall not constitute a Superior Proposal if the Acquisition Proposal
is subject to a financing condition unless the Board of Directors, by action
of a majority of the entire Board of Directors in good faith, based on the
advice of the Financial Advisor or another nationally recognized investment
banking firm, determines that the Acquisition Proposal is readily financeable.
The Company has also agreed to immediately cease and terminate any existing
activities, discussions or negotiations by the Company or any of its
authorized representatives conducted heretofore with respect to any of the
foregoing, take the necessary steps to inform such parties of the obligations
undertaken in the "No Solicitation" provisions of the Merger Agreement, and
request that such parties promptly return all documents (and all copies
thereof) furnished to them by the Company or its authorized representatives in
connection with such activities, discussions and negotiations. The Company
shall also (i) promptly notify Parent in writing after receipt by it or its
authorized representatives of any Acquisition Proposal or any inquiries
indicating that any person is considering making an Acquisition Proposal, and
provide a copy of such Acquisition Proposal or, in connection with any non-
written inquiry or Acquisition Proposal, a written statement setting forth in
detail a description of the inquiry or the terms and conditions of the
Acquisition Proposal, (ii) promptly notify Parent in writing after receipt of
any request for nonpublic information relating to it or REI Barbados or for
access to its or REI Barbados' properties, books or records by any person
that, to the knowledge of the Company's executive officers, may be considering
making an Acquisition Proposal and (iii) promptly keep Parent advised of the
status of any such Acquisition Proposal, indication or request.
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Fees and Expenses. Except as otherwise provided in the Merger Agreement,
whether or not the Offer is consummated, all costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
shall be paid by the party incurring such expenses, except that the expenses
incurred in connection with printing certain of the documents to be filed with
the Commission shall be paid in equal shares by the Company and Parent.
The Merger Agreement provides that, under certain circumstances, the Company
shall pay to Parent a fee equal to $11.865 million (the "Termination Fee").
The Company is obligated to pay the Termination Fee under the following
circumstances: (i) the Company terminates the Merger Agreement because, prior
to Offeror and/or Parent having purchased any Shares under the Offer, the
Board of Directors shall have concurrently approved, and the Company shall
have concurrently entered into, a definitive agreement providing for the
implementation of a Superior Proposal; (ii) Parent terminates the Merger
Agreement because the Board of Directors has modified or amended its
recommendation of the Offer or the Merger in any manner adverse to Parent or
Offeror or has withdrawn or failed to confirm within five business days of
Parent's request therefor its recommendation of the Offer or the Merger or has
recommended acceptance of any Acquisition Proposal or has resolved to do any
of the foregoing; and (iii) Parent terminates the Merger Agreement upon the
termination or expiration of the Offer because the Minimum Condition shall not
have been satisfied and (x) at the time of such termination an Acquisition
Proposal is outstanding and (y) during the term of the Merger Agreement or
within 12 months after the termination of the Merger Agreement, the Board of
Directors recommends an Acquisition Proposal or the Company enters into an
agreement providing for an Acquisition Proposal or a transaction contemplated
by an Acquisition Proposal occurs.
Other Agreements. The Merger Agreement provides that, subject to the terms
and conditions provided in the Merger Agreement, each of the Company, Parent
and Offeror shall (i) make promptly its respective filings, and any other
required submissions, under the HSR Act with respect to the transactions
contemplated by the Merger Agreement, and (ii) use reasonable efforts to take
or cause to be taken all appropriate action, and do or cause to be done all
things necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated thereby, including
using reasonable best efforts to obtain all licenses, permits, consents,
approvals, authorizations, qualifications and orders of governmental entities,
and obtain all consents and approvals from parties to contracts with the
Company and Parent and their respective subsidiaries as are necessary for the
transactions contemplated thereby; provided, however, that Parent shall not be
required by any provision of the Merger Agreement to take any action,
including entering into any consent decree that requires the divestiture of a
material amount of assets of Parent or any of its subsidiaries. Each of Parent
and the Company shall, subject to Parent's direction, use all its reasonable
efforts to contest any proceeding seeking a preliminary injunction or other
legal impediment to, and to resolve any objections as may be asserted by any
governmental entity with respect to, the Offer and/or the Merger under the HSR
Act or any other antitrust laws. If, at any time after the Effective Time, any
further action is necessary or desirable to carry out the purposes of the
Merger Agreement, the proper officers and directors of each party to the
Merger Agreement shall use their reasonable efforts to take all such action.
The Merger Agreement also contains agreements on (i) notification of certain
matters, (ii) the restructuring of the Merger, (iii) the Shareholder Meeting,
(iv) the preparation of a proxy statement and its compliance with the federal
securities laws, (v) public announcements with respect to the Merger Agreement
or any of the transactions contemplated thereby and (vi) the Confidentiality
Agreement.
Conditions to the Merger. The Merger Agreement provides that the respective
obligation of each party to effect the Merger is subject to the satisfaction
or waiver of each of the following conditions: (i) if the approval of the
Merger Agreement and the Merger by the holders of Shares is required by
applicable law, the Merger Agreement shall have been approved by holders of
the Shares in accordance with the Minnesota Law and the Company's articles of
incorporation and bylaws; (ii) any waiting period applicable to the
consummation of the Merger under the HSR Act shall have expired or been
terminated; and (iii) none of the parties to the Merger Agreement shall be
subject to any order or injunction of a court of competent jurisdiction which
prohibits the consummation of the transactions contemplated by the Merger
Agreement.
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The obligations of the Company to effect the Merger are subject to the
satisfaction of the following conditions, unless waived by the Company: (a)
the representations and warranties of Parent and Offeror contained in the
Merger Agreement that are qualified as to materiality shall be true and
correct, and those not so qualified shall be true and correct in all material
respects, in each case at and as of the Effective Time with the same force and
effect as though made at and as of the Effective Time (except and to the
extent a representation or warranty speaks specifically as of an earlier date
or except as contemplated by the Merger Agreement), (b) Parent and Offeror
have performed, in all material respects, all obligations and complied, in all
material respects, with all covenants required by the Merger Agreement to be
performed or complied with by them prior to the Effective Time and (c) Parent
shall have delivered to the Company a certificate, dated the Effective Time
and signed by an executive officer of Parent, evidencing compliance with
clauses (a) and (b).
The obligations of Parent and Offeror to effect the Merger are subject to
the satisfaction of the following conditions, unless waived by Parent and
Offeror: (a) the representations and warranties of the Company contained in
the Merger Agreement that are qualified as to materiality shall be true and
correct, and those not so qualified shall be true and correct in all material
respects, in each case at and as of the Effective Time with the same force and
effect as though made at and as of the Effective Time (except and to the
extent a representation or warranty speaks specifically as of an earlier date
or except as contemplated by the Merger Agreement), (b) the Company has
performed, in all material respects, all obligations and complied, in all
material respects, with all covenants required by the Merger Agreement to be
performed or complied with by it prior to the Effective Time, (c) the Company
shall have delivered to Parent a certificate, dated the Effective Time and
signed by an executive officer of the Company, evidencing compliance with
clauses (a) and (b), and (d) Offeror and/or Parent shall have accepted for
payment and paid for all of the Shares tendered pursuant to the Offer.
Termination. The Merger Agreement, notwithstanding approval thereof by the
shareholders of the Company, may be terminated at any time prior to the
Effective Time:
(a) by mutual written consent of the Company and Parent;
(b) by Parent or the Company, if (i) the Effective Time shall not have
occurred on or before 180 days from the date of the Merger Agreement;
provided, however, that the right to terminate the Merger Agreement
pursuant to clause (i) shall not be available to any party whose failure to
fulfill any obligation under the Merger Agreement has been the cause of, or
resulted in, the failure of the Effective Time to occur on or before such
date; (ii) any governmental entity, the consent of which is a condition to
the obligations of the Company and Parent to consummate the transactions
contemplated by the Merger Agreement, shall have determined not to grant
its consent and all appeals of such determination shall have been taken and
have been unsuccessful; (iii) any court of competent jurisdiction shall
have issued an order, judgment or decree restraining, enjoining or
otherwise prohibiting the Merger and such order, judgment or decree shall
have become final and nonappealable; or (iv) upon a vote at a duly held
meeting or upon an adjournment thereof, the shareholders of the Company
shall have failed to approve the Merger or give any requisite approval in
connection therewith;
(c) by the Company, if prior to Offeror and/or Parent having purchased
any Shares under the Offer, the Board of Directors shall concurrently
approve, and the Company shall concurrently enter into, a definitive
agreement providing for the implementation of a Superior Proposal; and
(d) by Parent, (i) upon the termination or expiration of the Offer
without the purchase of any Common Stock thereunder if the Minimum
Condition shall not have been satisfied; (ii) the failure of any condition
specified in "Conditions to the Offer" above prior to Offeror and/or Parent
having purchased any shares of Common Stock under the Offer, regardless of
whether the Offer is made, which failure either continues through, or
cannot in Parent's reasonable judgment be cured prior to, the date the
Offer is scheduled to expire (if the Offer has been commenced) or, if the
Offer has not commenced, would be scheduled to expire if it were commenced
on the business day after the date of the Merger Agreement; provided,
however, that the right to terminate the Merger Agreement pursuant to this
clause is not available to Parent if Parent's
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failure to fulfill any obligation under the Merger Agreement has been the
cause of or resulted in the failure of any such condition; or (iii) the
Board of Directors shall have modified or amended its recommendation of the
Offer or the Merger in any manner adverse to Parent or Offeror or shall
have withdrawn or failed to confirm within five business days of Parent's
request therefor its recommendation of the Offer or the Merger or shall
have recommended acceptance of any Acquisition Proposal or shall have
resolved to do any of the foregoing.
Indemnification; Directors' and Officers' Insurance. The Merger Agreement
provides that from and after the Effective Time, Parent and the Surviving
Corporation shall indemnify, defend and hold harmless each individual and
every person who is or was a director or officer of the Company (the
"Indemnified Parties"), against any expenses, judgments, fines, losses,
claims, damages, liabilities and amounts paid in settlement of (provided that
such settlement has been approved by Parent, such approval not to be
unreasonably withheld), or otherwise incurred in connection with any claim,
action, suit, proceeding, inquiry or investigation (a "Claim"), based in whole
or in part on the fact that such person is or was a director, officer,
employee or agent of the Company and arising out of actions or omissions
occurring at or prior to the Effective Time (including the transactions
contemplated thereby), in each case to the full extent permitted under the
Minnesota Law and the Company's articles of incorporation and bylaws as in
effect on the date of the Merger Agreement. Parent and the Surviving
Corporation shall also advance expenses as incurred to the fullest extent
permitted under applicable law, provided the person to whom expenses are
advanced provides an undertaking to repay such advances required under the
Minnesota Law.
For a period of six years after the Effective Time (or in the event any
Claim is asserted within such six year period, until final disposition of that
Claim), Parent shall cause the Surviving Corporation to keep in effect
provisions in its articles of incorporation and bylaws providing for
exculpation of director liability, advancement of expenses and indemnification
of Indemnified Parties to the fullest extent permitted under the Minnesota
Law, and such provisions shall not be amended except as required by applicable
law or except to make changes permitted by law that would enlarge the right of
indemnification of the Indemnified Parties.
The Merger Agreement also provides that for a period of six years after the
Effective Time, Parent shall cause the Surviving Corporation to maintain in
effect the current policies of directors' and officers' liability insurance
maintained by the Company covering persons who are currently covered by the
Company's directors' and officers' liability insurance policies with respect
to actions or omissions occurring at or prior to the Effective Time to the
extent that such policies are available; provided, however, that policies of
at least the same coverage containing terms and conditions no less
advantageous to the insured may be substituted therefor, and the Surviving
Corporation shall not be required to expend amounts in excess of 150% of the
current annual premiums for the twelve-month period ending November 15, 1999
(the "Maximum Premium"). In the event the annual premium payable for such
insurance coverage exceeds the Maximum Premium, Parent shall be obligated to
obtain and maintain in effect a policy with the greatest amount of coverage
available for a cost not exceeding the Maximum Premium.
Certain Employee Matters. The Merger Agreement provides that during the
period commencing at the Effective Time and ending on the second anniversary
thereof, the employees of the Company and REI Barbados will continue to be
provided with benefits in the aggregate that are (A) substantially equivalent
to the benefits provided under Company benefit plans in effect on the date of
the Merger Agreement or (B) if equal to or greater than the benefits described
in clause (A) above, the benefits provided under benefit plans maintained by
Parent for employees of Parent and Parent's subsidiaries (other than the
Surviving Corporation and its subsidiaries). All vacation, holiday, sickness
and personal days accrued by the employees of the Company and REI Barbados
shall be honored. In addition, for a period of at least two years after the
Effective Time (or for such longer or shorter period as is permitted or
required by applicable statute), Parent has agreed that it will cause the
Surviving Corporation to provide for the benefit of individuals who,
immediately prior to the Effective Time, are former employees of the Company
and REI Barbados with benefits that are substantially equivalent, in the
aggregate, to the benefits that are provided to them immediately prior to the
Effective Time under Company benefit plans.
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In the event that any employee of the Surviving Corporation or one of its
subsidiaries is at any time after the Effective Time transferred to Parent or
any affiliate of Parent (other than the Surviving Corporation and its
subsidiaries) or becomes a participant in any employee benefit plan or
arrangement maintained by or contributed by Parent or any affiliate of Parent
(other than the Surviving Corporation and its subsidiaries), Parent will cause
such plan or arrangement to treat the prior service of such employee with the
Company and REI Barbados prior to the Effective Time to the extent prior
service is generally recognized under such plan or arrangement of the Company,
as service rendered to Parent or such affiliates for purposes of eligibility,
vesting or entitlement to benefits under such plan or arrangement. Parent has
also agreed that it shall cause to be waived any pre-existing condition
limitation under its benefit plans that might otherwise apply to such employee
(or a former employee). Parent agrees to recognize the dollar amount of all
expenses incurred by such employees (or former employees) during the calendar
year in which the Effective Time occurs for purposes of satisfying the
calendar year deductibles and co-payment limitations for such year under the
relevant benefit plans of Parent and its subsidiaries.
Parent has represented in the Merger Agreement that its current intent is to
cause the Surviving Corporation to maintain its principal production facility
in the Minneapolis, Minnesota metropolitan area for a period of at least two
years after the Effective Time.
With respect to the employees of the Company and REI Barbados set forth on
Section 7.1(c) of the Company Disclosure Letter to the Merger Agreement,
Parent has agreed to cause the Surviving Corporation to maintain and fund the
Company's incentive bonus plan as in effect on the date of the Merger
Agreement (the "Current Plan") through the performance period ending December
31, 1999. For the performance period ending December 31, 1999, the portion of
such bonuses that are based on the Company's operating income (the "Company
Performance Component") shall not be less than 80% of the maximum amount of
the Company Performance Component as described in such plan. If an employee is
terminated without cause prior to December 31, 1999, such employee shall be
paid such bonus in an amount prorated according to the period of the
employee's service to the Company during 1999. Effective January 1, 2000, the
Current Plan shall terminate, and such employees of the Company and REI
Barbados shall commence to participate in Parent's incentive bonus plan (the
"Parent Plan") and shall be entitled to an award from the Parent Plan which
reflects (i) the actual period of participation of such employees in the
Parent Plan and (ii) the actual performance of the applicable business unit
during such period.
Amendment. At any time before or after approval of the Merger Agreement and
the transactions contemplated thereby by the shareholders of the Company and
prior to the Effective Time, Parent or the Company may amend or supplement in
writing the Merger Agreement with respect to any of its terms, except that
following approval by the shareholders of the Company, there shall be no
amendment or supplement which by law requires further approval by such
shareholders without further approval by the shareholders of the Company.
Timing. The exact timing and details of the Merger will depend upon legal
requirements and a variety of other factors, including the number of Shares
acquired by Offeror pursuant to the Offer. Although the Company has agreed to
cause the Merger to be consummated on the terms contained in the Merger
Agreement, there can be no assurance as to the timing of the Merger.
CONFIDENTIALITY AGREEMENT
The following is a summary of the material terms of the Confidentiality
Agreement. This summary is not a complete description of the terms and
conditions thereof and is qualified in its entirety by reference to the full
text thereof, which is incorporated herein by reference and a copy of which
has been filed with the Commission as Exhibit 2 to the Schedule 14D-9.
On June 24, 1999, the Financial Advisor (on behalf of the Company) and
Parent entered into a confidentiality agreement, which agreement was amended
on July 27, 1999 (the "Confidentiality Agreement").
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The Confidentiality Agreement contains customary provisions pursuant to which,
among other matters, Parent agreed for a period of three years to keep
confidential all non-public information furnished to it by the Company (the
"Confidential Information") and to use such information solely for the purpose
of evaluating a possible transaction between Parent and the Company. Parent
has also agreed in the Confidentiality Agreement that, for a period of three
years after the date of the Confidentiality Agreement, neither it nor any of
its affiliates will, without the prior written consent of the Company,
generally solicit to employ (whether as an employee, officer, director, agent
consultant or independent contractor) any person who was an employee of the
Company on the date of the Confidentiality Agreement.
STOCK OPTION AGREEMENT
The following is a summary of the material terms of the Stock Option
Agreement. This summary is not a complete description of the terms and
conditions thereof and is qualified in its entirety by reference to the full
text thereof, which is incorporated herein by reference and a copy of which
has been filed with the Commission as Exhibit 3 to the Schedule 14D-9.
Concurrently with the execution and delivery of the Merger Agreement, the
Company entered into the Stock Option Agreement with Parent (the "Stock Option
Agreement"). Pursuant to the Stock Option Agreement, the Company has granted
to Parent, on the terms and subject to the conditions thereof, an option to
purchase up to 1,202,875 Shares. Any reference to a majority of the issued and
outstanding Shares or Shares outstanding on a fully diluted basis, or similar
references, for purposes of this Schedule 14D-9, as provided in the documents
described herein, excludes from the determination thereof any shares of Common
Stock issuable upon the exercise of the Stock Option Agreement.
Grant and Exercise of Purchase Option. Under the Stock Option Agreement, the
Company granted to Parent an irrevocable option (the "Parent Option") to
purchase up to 1,202,875 Shares (the "Option Shares") at a purchase price
equal to $35.25 per share (the "Purchase Price"). The Parent Option may be
exercised by Parent, in whole or in part, at any time, following (but not
prior to) the occurrence of any event as a result of which Parent is entitled
to receive the Termination Fee (a "Purchase Event"). The Parent Option is
subject to appropriate adjustment in the event of any change in the number of
issued and outstanding shares of capital stock of the Company to maintain
Parent's rights under the Stock Option Agreement, including the right to
purchase up to 19.9% of the capital stock of the Company entitled to vote
generally for election of directors of the Company outstanding immediately
prior to exercise; provided, however, that the Parent Option will terminate
upon the earliest to occur of (A) the Effective Time, (B) termination of the
Merger Agreement in accordance with its terms other than upon, during the
continuance of, or after, a Purchase Event or an event which could lead to a
Purchase Event, and (C) 120 days after the first occurrence of a Purchase
Event. Any purchase of Option Shares upon exercise of the Parent Option will
be subject to compliance with the HSR Act and the obtaining or making of any
consents, approvals, orders, notifications, filings, expiration of applicable
waiting periods or authorizations, the failure of which to have obtained or
made would have the effect of making the purchase of Option Shares by Parent
illegal.
In the event that Parent is entitled to and wishes to exercise the Parent
Option, it will send to the Company a written notice (an "Exercise Notice") to
that effect which specifies the number of Option Shares, if any, Parent wishes
to purchase, the number of Option Shares, if any, with respect to which Parent
wishes to exercise its Cash-Out Right (as defined below), and a date not later
than 20 business days following the date such notice is given (the "Notice
Date") for the closing of such purchase. Any exercise of the Parent Option and
purchase of Option Shares will be subject to compliance with applicable laws,
which may prohibit the purchase of the Option Shares specified in the Exercise
Notice without first obtaining certain regulatory approvals. In such event, if
the Parent Option is otherwise exercisable and Parent wishes to exercise the
Parent Option, Parent may acquire the maximum number of Option Shares
specified in the Exercise Notice that it is then permitted to acquire under
the applicable laws, and if Parent thereafter obtains the necessary regulatory
approvals to acquire the remaining balance of the Option Shares specified in
the Exercise Notice, then it will be entitled to acquire the remaining
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balance. In the event that Parent exercised the Parent Option and either (i)
Parent receives official notice that a regulatory approval required for the
purchase of any Option Shares will not be issued or granted or (ii) such
regulatory approval has not been issued or granted within six months of the
date of the Exercise Notice, then Parent will have the right, but not the
obligation, to exercise its Cash-Out Right with respect to the Option Shares
for which such regulatory approval has not been issued or granted.
Cash-Out Right. The Stock Option Agreement provides that if, at any time
during the period commencing on a Purchase Event and ending on the termination
of the Parent Option, Parent sends to the Company an Exercise Notice
indicating Parent's election to exercise a cash-out right (the "Cash-Out
Right"), then the Company will pay to Parent in exchange for the cancellation
of the Parent Option with respect to such number of Option Shares as Parent
specifies in the Exercise Notice, an amount in cash equal to such number of
Option Shares multiplied by the difference between (i) the average closing
price, for the 10 NASDAQ/NMS trading days commencing on the 12th NASDAQ/NMS
trading day immediately preceding the Notice Date, per share of Common Stock
as reported on the NASDAQ/NMS (or, if not listed on the NASDAQ/NMS, as
reported on any other national securities exchange or national securities
quotation system on which the Common Stock is listed or quoted, as reported in
The Wall Street Journal (Northeast edition), or, if not reported therein, any
other authoritative source) and (ii) the Purchase Price. Notwithstanding the
termination of the Parent Option, Parent will be entitled to exercise its
Cash-Out Right if it has exercised such right in accordance with the terms of
the Stock Option Agreement prior to the termination of the Parent Option.
Registration Rights. The Stock Option Agreement provides that the Company
will, if requested by Parent at any time within two years of the exercise of
the Parent Option (a "Demand Registration"), as expeditiously as possible
prepare and file up to two registration statements under the Securities Act if
such registration is necessary in order to permit the sale of any Option
Shares or securities that have been acquired by or are issuable to Parent upon
exercise of the Parent Option in accordance with the intended method of sale
or other disposition stated by Parent, including a "shelf" registration
statement under Rule 415 under the Securities Act, and the Company will use
its best efforts to qualify such Option Shares or other securities under any
applicable state securities laws. In addition, the Company will use best
efforts to cause each such registration statement to become effective when
requested by Parent, to obtain all consents or waivers of other parties which
are required therefor, and to keep such registration statement effective for
such period not in excess of 180 calendar days from the day such registration
statement first becomes effective as may be reasonably necessary to effect
such sale or other disposition. The obligations of the Company under the Stock
Option Agreement to file a registration statement and to maintain its
effectiveness may be suspended for up to 60 consecutive calendar days if the
Board of Directors determines in good faith that the filing of such
registration statement or the maintenance of its effectiveness would be
seriously detrimental to the Company; provided, however, that (i) the
suspension of the Company's obligations may occur only one time in any six-
month period and (ii) any requested registration so suspended will not count
for purposes of requests for Demand Registrations to which Parent is entitled.
All expenses related to a registration statement prepared and filed under the
Stock Option Agreement, and any sale covered thereby, will be at the Company's
expense, except for underwriting discounts or commissions. The Stock Option
Agreement also provides that if, during the time periods at which Parent is
entitled to request Demand Registrations the Company effects a registration
under the Securities Act of Common Stock for its own account or for any other
shareholders of the Company (other than on Form S-4 or Form S-8, or any
successor form), it will allow Parent the right to participate in such
registration, and such participation will not affect the obligation of the
Company to effect Demand Registrations for Parent; provided, however, that if
the managing underwriters of such offering advise the Company in writing that
in their opinion the number of shares of Common Stock requested to be included
in such registration exceeds the number which can be sold in such offering or
could materially impact the marketing or price of such offering, the Company
will include the shares requested to be included therein by Parent pro rata
with the shares intended to be included therein by the Company and any other
seller of securities under such registration statement. In connection with any
registration under the Stock Option Agreement, the Company and Parent will
provide each other and any underwriter of the offering with customary
representations, warranties, covenants, indemnification, and contribution in
connection with such registration.
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Profit Limitation. The Stock Option Agreement provides that, notwithstanding
any other provision of the Stock Option Agreement, in no event will Parent's
Total Profit (as defined below) plus any Termination Fee paid to Parent exceed
in the aggregate $11.865 million, and, if the total amount that otherwise
would be received by Parent would exceed such amount, Parent, at its sole
election, shall either (i) reduce the number of shares of Common Stock subject
to the Parent Option, (ii) deliver to the Company for cancellation Option
Shares previously purchased by Parent against the refund of the purchase price
therefor, (iii) pay cash to the Company or (iv) any combination thereof, so
that Parent's actually realized Total Profit, when aggregated with the
Termination Fee so paid to Parent, shall not exceed $11.865 million, based on
the transaction value after taking into account the foregoing actions. The
Stock Option Agreement further provides that the Parent Option may not be
exercised for a number of Option Shares as would, as of the date of exercise,
result in a Notional Total Profit (as defined below) which, together with any
Termination Fee theretofore paid to Parent, would exceed $11.865 million.
The term "Total Profit" as used in the Stock Option Agreement means the
aggregate amount (before taxes) of the following: (i) the amount received by
Parent pursuant to Parent's exercise of the Cash-Out Right, (ii)(x) the net
cash amounts or the fair market value of any property received by Parent
pursuant to the sale of Option Shares (or (A) any other securities into which
such Option Shares are converted or exchanged or (B) any property, cash or
other securities received pursuant to the Stock Option Agreement ("Additional
Property")) to any unaffiliated party, but in no case less than the fair
market value of such Option Shares at the time of such sale, less (y) Parent's
purchase price of such Option Shares, and (iii) the net cash amounts received
by Parent on the transfer of the Parent Option (or any portion thereof) to any
unaffiliated party.
As used in the Stock Option Agreement, the term "Notional Total Profit" with
respect to any number of Option Shares as to which Parent may propose to
exercise the Parent Option means the Total Profit determined as of the date of
such proposal assuming for such purpose that the Parent Option were exercised
on such date for such number of Option Shares and assuming that (i) such
Option Shares (or any other securities into which such Option Shares are
converted or exchanged), together with all other Option Shares held by Parent
and its affiliates as of such date, were sold for cash at the closing market
price on the NASDAQ/NMS for the Common Stock as of the close of business on
the preceding trading day (less customary brokerage commissions) and (ii) the
Additional Property is disposed of for fair market value.
Other Agreements. The Stock Option Agreement also provides that if Common
Stock or any other securities to be acquired upon exercise of the Parent
Option are then listed on the NASDAQ/NMS (or any other national securities
exchange or national securities quotation system), the Company, upon the
request of Parent, will promptly file an application to list the shares of
Common Stock or other securities to be acquired upon exercise of the Parent
Option on the NASDAQ/NMS (and any other such national securities exchange or
national securities quotation system) and will use its best efforts to obtain
approval of such listing as promptly as practicable.
Other. Because the rights and obligations of Parent and the Company under
the Stock Option Agreement are subject to compliance with the HSR Act, Parent
will include in its merger notifications to be filed with the Department of
Justice and Federal Trade Commission a description of its rights under the
Stock Option Agreement.
TENDER AND OPTION AGREEMENT
The following is a summary of the material terms of the Tender and Option
Agreement. This summary is not a complete description of the terms and
conditions thereof and is qualified in its entirety by reference to the full
text thereof, which is incorporated herein by reference and a copy of which
has been filed with the Commission as Exhibit 4 to the Schedule 14D-9.
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Tender of Shares. Concurrently with the execution and delivery of the Merger
Agreement, and in order to induce Parent and Offeror to enter into the Merger
Agreement, certain of the Company's shareholders (the "Major Shareholders")
who beneficially own in the aggregate, as of August 26, 1999, approximately
19.3% of the outstanding Shares have entered into a Tender and Option
Agreement with Parent and Offeror (the "Tender and Option Agreement").
Pursuant to the Tender and Option Agreement, the Major Shareholders have
agreed, among other things, to tender promptly the Shares held by them
pursuant to the Offer and not to withdraw any such Shares, and to various
other provisions described below.
Transfer of the Shares. Pursuant to the Tender and Option Agreement, each
Major Shareholder has agreed, during the term of the Agreement, except as
otherwise expressly provided therein, that such Major Shareholder will not (a)
tender into any tender or exchange offer or otherwise sell, transfer, pledge,
assign, hypothecate or otherwise dispose of (including by operation of law),
or create any lien on, any of the Shares, (b) deposit the Shares into a voting
trust, enter into a voting agreement or arrangement with respect to the Shares
or grant any proxy or power of attorney with respect to the Shares, (c) enter
into any contract, option or other arrangement (including any profit sharing
arrangement) or undertaking with respect to the direct or indirect acquisition
or sale, transfer, pledge, assignment, hypothecation or other disposition of
any interest in or the voting of any Shares or any other securities of the
Company, (d) exercise any rights (including under Section 302A.473 of the
Minnesota Law) to demand appraisal of any Shares which may arise with respect
to the Merger, or (e) take any other action that would in any way restrict,
limit or interfere with the performance of such Major Shareholder's
obligations thereunder or the transactions contemplated thereby or which would
otherwise diminish the benefits of the Tender and Option Agreement to Parent
or Offeror.
Tender of Shares. The Tender and Option Agreement provides that each Major
Shareholder agrees that such Major Shareholder will validly tender (or cause
the record owner of such shares to validly tender) and sell (and not withdraw,
except in the event the Purchase Option (as defined below) is exercised, in
which case such withdrawal shall be for the limited purpose of consummating
the Purchase Option) pursuant to and in accordance with the terms of the Offer
not later than the fifth business day after commencement of the Offer (or the
earlier of the expiration date of the Offer and the fifth business day after
such Shares are acquired by such Major Shareholder if the Major Shareholder
acquires Shares after the date thereof), or, if the Major Shareholder has not
received the Offer documents by such time, within two business days following
receipt of such documents, all of the then outstanding Shares beneficially
owned by such Major Shareholder (including the Shares outstanding as of the
date of the Tender and Option Agreement and Shares issued following the
exercise (if any) of the Options, Warrants, and Rights, in each case as set
forth on Schedule A to the Tender and Option Agreement). Upon the purchase by
Parent or Offeror of all of such then outstanding Shares beneficially owned by
such Major Shareholder pursuant to the Offer, the Tender and Option Agreement
will terminate as it relates to such Major Shareholder.
Voting Agreement. The Tender and Option Agreement also provides that each
Major Shareholder (a) agrees to appear (or not appear, if requested by Parent
or Offeror) at any annual, special, postponed or adjourned meeting of the
shareholders of the Company or otherwise cause the Shares such Major
Shareholder beneficially owns to be counted as present (or absent, if
requested by Parent or Offeror) thereat for purposes of establishing a quorum
and to vote or consent, and (b) constitutes and appoints Parent and Offeror,
or any nominee thereof, with full power of substitution, during and for the
term of the Tender and Option Agreement, as his true and lawful attorney and
proxy for and in his name, place and stead, to vote all the Shares such Major
Shareholder beneficially owns at the time of such vote, at any annual,
special, postponed or adjourned meeting of the shareholders of the Company
(and this appointment will include the right to sign his or its name (as
shareholder) to any consent, certificate or other document relating to the
Company that the laws of the State of Minnesota may require or permit), in the
case of both (a) and (b) above, (x) in favor of approval and adoption of the
Merger Agreement and approval and adoption of the Merger and the other
transactions contemplated thereby and (y) against (1) any Acquisition Proposal
(other than the Merger and the other transactions contemplated thereby), (2)
any action or agreement that would result in a breach in any respect of any
covenant, agreement, representation or warranty of the Company under the
Merger Agreement and (3) any other action that is intended,
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or could be expected, to impede, interfere with, delay, postpone, or adversely
affect the Offer, the Merger and the other transactions contemplated by the
Tender and Option Agreement, the Merger Agreement and the Ancillary Documents.
No Solicitation. The Tender and Option Agreement provides that each Major
Shareholder agrees that neither such Major Shareholder nor any of such Major
Shareholder's officers, directors, employees, trustees, representatives,
agents or affiliates (including, without limitation, any investment banker,
attorney or accountant retained by any of them) will directly or indirectly
initiate, solicit or encourage (including by way of furnishing non-public
information or assistance), or take any other action to facilitate, any
inquiries or the making or submission of any Acquisition Proposal, or enter
into or maintain or continue discussions or negotiate with any person or
entity in furtherance of such inquiries or to obtain or induce any person to
make or submit an Acquisition Proposal or agree to or endorse any Acquisition
Proposal or assist or participate in, facilitate or encourage, any effort or
attempt by any other person or entity to do or seek any of the foregoing or
authorize or permit any of its officers, directors, employees, trustees or any
of its affiliates or any investment banker, financial advisor, attorney,
accountant or other representative or agent retained by any of them to take
any such action. Each Major Shareholder shall promptly advise Parent in
writing of the receipt of any request for information or any inquiries or
proposals relating to an Acquisition Proposal.
Grant of Purchase Option. The Tender and Option Agreement provides that each
Major Shareholder grants to Parent and Offeror an irrevocable option (the
"Purchase Option") to purchase for cash, in a manner set forth below, any or
all of the Shares (and including Shares acquired after the date of the Tender
and Option Agreement by such Shareholder) beneficially owned by the Major
Shareholder at a price per Share (the "Exercise Price") equal to the Merger
Consideration. The Exercise Price as it relates to the Options and Warrants
beneficially owned by each Major Shareholder shall be an amount in cash equal
to the excess, if any, of the Merger Consideration over the per share exercise
price of such Option or Warrant, without interest. To the extent that the per
share exercise or conversion price of any Option or Warrant exceeds the Merger
Consideration, such Option or Warrant shall be canceled and the Major
Shareholder shall not receive or be entitled to receive any consideration from
Parent, Offeror or the Company relating thereto. The Rights associated with
any Shares transferred pursuant to the Tender and Option Agreement will be
transferred with such Shares without payment of any additional consideration
therefor. In the event of any stock dividends, stock splits,
recapitalizations, combinations, exchanges of shares or the like, the Exercise
Price will be appropriately adjusted. The amount payable shall be subject to
all applicable withholding taxes.
Exercise of Purchase Option. The Tender and Option Agreement provides that
the Purchase Option may be exercised by Parent or Offeror, in whole or in
part, at any time or from time to time after the occurrence of any Trigger
Event. A "Trigger Event" means any one of the following: (i) the Merger
Agreement becomes terminable under circumstances that entitle Parent or
Offeror to receive the Termination Fee (regardless of whether the Merger
Agreement is actually terminated and whether the Termination Fee is then
actually paid) or (ii) the Offer is consummated but, due to the failure of the
Major Shareholder to validly tender and not withdraw all of the then
outstanding Shares beneficially owned by such Major Shareholder, Parent has
not accepted for payment or paid for all of such Shares. If requested by
Parent and Offeror, such Major Shareholder shall exercise and/or convert all
Options and Warrants (to the extent exercisable and convertible) and other
rights (including conversion or exchange rights), other than Options and
Warrants with exercise or conversion prices above the Merger Consideration,
beneficially owned by such Major Shareholder, and shall, if directed by Parent
and Offeror, tender the Shares acquired pursuant to such exercise or
conversion into the Offer or sell such Shares to Parent or Offeror as provided
in the Tender and Option Agreement.
Total Profit Remittance. The Tender and Option Agreement provides that in
the in the event that, within 12 months of the exercise of the Purchase
Option, Parent sells, to a third party which is not an affiliate of Parent,
Shares acquired by means of exercise of the Purchase Option ("Exercise
Shares") for an aggregate consideration (the "Aggregate Consideration")
greater than the aggregate Exercise Price (the "Aggregate Exercise Price")
paid for such Shares, Parent agrees to pay to the Major Shareholders an amount
equal to the excess of the Aggregate Consideration over the Aggregate Exercise
Price. Each Major Shareholder shall be entitled to the
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proportion of such excess equal to the proportion of the total number of
Exercise Shares which were acquired from such Major Shareholder. In addition,
in the event that, within 12 months of the exercise of the Purchase Option,
Parent shall consummate a merger agreement with the Company, or shall purchase
Shares pursuant to a tender offer for all Shares, at a price per Share (taking
into account any stock dividends, stock splits, recapitalizations,
combinations, exchanges of shares or the like or any other action that would
have the effect of changing Parent's ownership of the Company's capital stock
or other securities) in excess of the Exercise Price, Parent agrees to pay
each Major Shareholder such excess for each Exercise Share purchased from such
Major Shareholder.
Representations and Warranties. Under the Tender and Option Agreement, the
Major Shareholders made customary representations and warranties to Parent and
Offeror, including with respect to their authority to enter into and perform
their obligations under the Tender and Option Agreement, the due execution and
delivery by the Major Shareholders of the Tender and Option Agreement and
their good title to all of the Shares, free and clear of all encumbrances.
Each of Parent and Offeror has also made customary representations and
warranties under the Tender and Option Agreement, including with respect to
Parent's and Offeror's authority to enter into and perform its obligations
under the Tender and Option Agreement and the due execution and delivery by
Parent and Offeror of the Tender and Option Agreement.
Termination. The Tender and Option Agreement will terminate, with respect to
any Major Shareholder, upon the purchase by Parent and/or Offeror of all of
the then outstanding Shares beneficially owned by such Major Shareholder
pursuant to the Offer, and otherwise, upon the earliest of: (i) the Effective
Time; (ii) termination of the Merger Agreement in accordance with its terms
other than upon, during the continuance of, or after, a Trigger Event or an
event which could lead to a Trigger Event; or (iii) 120 days following any
termination of the Merger Agreement upon, during the continuance of or after a
Trigger Event (or if, at the expiration of such 120 day period the Purchase
Option cannot be exercised by reason of any applicable judgment, decree,
order, injunction, law or regulation, ten business days after such impediment
to exercise has been removed or has become final and not subject to appeal).
CONSULTING AGREEMENT, NON-COMPETITION AGREEMENT AND LETTER OF UNDERSTANDING
FOR BRIAN F. SULLIVAN
In connection with the execution and delivery of the Merger Agreement,
Parent entered into a Consulting Agreement and a Non-Competition Agreement
with Brian F. Sullivan, and executed a Letter of Understanding with the
Company and Mr. Sullivan, each dated as of August 26, 1999 (collectively, the
"Sullivan Agreements"). The following is a summary of the material terms of
the Sullivan Agreements. This summary is not a complete description of the
terms and conditions of the Sullivan Agreements and is qualified in its
entirety by reference to the full text of the Sullivan Agreements, which are
incorporated herein by reference and copies of which have been filed with the
Commission as Exhibit 5 to the Schedule 14D-9.
Pursuant to the Consulting Agreement, Mr. Sullivan will serve Parent as a
consultant commencing with the Effective Time and ending upon the attainment
of certain objectives. Mr. Sullivan will receive consulting fees of $1,000,000
in the aggregate for services rendered pursuant to the Consulting Agreement
and will assign to Parent all of his proprietary rights in and to all
inventions, discoveries, improvements and patentable or copyrightable works
initiated, conceived or made by him, either alone or in conjunction with
others, during the term of the Consulting Agreement and related to the
business or activities of Parent and/or its subsidiaries.
Mr. Sullivan's Non-Competition Agreement requires him to refrain for a
period commencing upon the Effective Date and for three years thereafter from
(i) soliciting or hiring any employee of Parent or otherwise interfering with
or disrupting the employment relationship between Parent and any employee,
(ii) engaging in any business that is competitive with any business or line of
business of the Company as it exists prior to the
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Effective Date in any country in the world, or (iii) interfering with or
otherwise disrupting the relationship between Parent and any vendor, supplier
or client. Mr. Sullivan is also permanently prohibited from disclosing or
otherwise divulging any confidential information of the Company. In
consideration of such restrictions, Parent will pay to Mr. Sullivan over three
years an aggregate sum of $1,942,500.
In the Letter of Understanding, Mr. Sullivan agreed that 35,000 of his
250,000 Options will be cancelled at the Effective Time without payment and
that the Merger Consideration payable to Mr. Sullivan at the Effective Time
with respect to the remaining 215,000 Options will be reduced by an amount
equal to the principal and accrued interest on Mr. Sullivan's promissory note
dated April 18, 1997, payable to the Company, whereupon the Company will
cancel and discharge all of Mr. Sullivan's obligations thereunder. In
addition, pursuant to the Letter of Understanding, Mr. Sullivan agreed that
the Company will terminate the Change-in-Control Severance Pay Agreement
between the Company and Mr. Sullivan immediately prior to the Effective Date
and Mr. Sullivan will have no rights thereunder.
NON-COMPETITION AGREEMENT AND LETTER OF UNDERSTANDING
FOR REED A. WATSON
In connection with the execution and delivery of the Merger Agreement,
Parent entered into a Non-Competition Agreement with Reed A. Watson, and
executed a Letter of Understanding with the Company and Mr. Watson, each dated
as of August 26, 1999 (collectively, the "Watson Agreements"). The following
is a summary of the material terms of the Watson Agreements. This summary is
not a complete description of the terms and conditions of the Watson
Agreements and is qualified in its entirety by reference to the full text of
the Watson Agreements, which are incorporated herein by reference and copies
of which have been filed with the Commission as Exhibit 6 to the Schedule 14D-
9.
Mr. Watson's Non-Competition Agreement requires him to refrain for a period
commencing upon the Effective Date and for two years thereafter from (i)
soliciting or hiring any employee of Parent or otherwise interfering with or
disrupting the employment relationship between Parent and any employee, (ii)
engaging in any business that is competitive with any business or line of
business of the Company as it exists prior to the Effective Date in any
country in the world, or (iii) interfering with or otherwise disrupting the
relationship between Parent and any vendor, supplier or client. Mr. Watson is
also permanently prohibited from disclosing or otherwise divulging any
confidential information of the Company. In consideration of such
restrictions, Parent will pay to Mr. Watson over two years an aggregate sum of
$850,000.
In the Letter of Understanding, Mr. Watson agreed that 52,000 of his 150,000
Options will be cancelled at the Effective Time without payment. In addition,
pursuant to the Letter of Understanding, Mr. Watson agreed that the Company
will terminate the Change-in-Control Severance Pay Agreement between the
Company and Mr. Watson immediately prior to the Effective Date and Mr. Watson
will have no rights thereunder.
Item 4. The Solicitation or Recommendation.
(a) Recommendation of the Board of Directors.
At a meeting held on August 25, 1999, the Board of Directors (with all
directors present) unanimously approved the Merger Agreement and the
transactions contemplated thereby, including the Offer and the Merger, and
determined that the terms of the Offer and the Merger are fair to, and in the
best interests of, the Company and the Company's shareholders.
The Company's Board of Directors unanimously recommends that shareholders
accept the Offer and tender their Shares pursuant to the Offer and approve and
adopt the Merger Agreement and the transactions contemplated thereby,
including the Merger, if a vote of shareholders is required to complete the
Merger.
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The unanimous approval and recommendation of the Board of Directors included
the affirmative vote of Robert R. Gheewalla, a Vice President of Goldman
Sachs. As described in Item 4(b) below, Goldman Sachs acted as exclusive
financial advisor to the Company in connection with various matters that
pertain to the execution by the Company of the Merger Agreement, and an
affiliate of Goldman Sachs, Goldman Sachs Group, L.P., is the holder of an
investment in the Company in the form of $15.0 million aggregate amount of the
Convertible Notes.
As set forth in the Offer, the Merger Agreement and the Letter of
Transmittal (the "Offer Documents"), Offeror will purchase Shares tendered
prior to the close of the Offer if the conditions to the Offer have been
satisfied (or waived). Shareholders considering not tendering their Shares in
order to wait for the Merger should note that if the Minimum Condition is not
satisfied or any of the other conditions to the Offer are not satisfied,
Offeror is not obligated to purchase any Shares, and can terminate the Offer
and the Merger Agreement and not proceed with the Merger. Under the Minnesota
Law, the affirmative vote of the holders of a majority of the outstanding
Shares is required to approve the Merger. Accordingly, if the conditions to
the Offer are satisfied, Offeror will have sufficient voting power to cause
the approval of the Merger without the affirmative vote of any other
shareholder.
The Offer is scheduled to expire at 12:00 midnight, New York City time, on
Wednesday, September 29, 1999, unless Offeror elects to extend the period of
time for which the Offer is open. A letter to the Company's shareholders
communicating the Board of Directors' recommendation and a press release
announcing the Offer, the Merger and the Merger Agreement are filed as Exhibit
7 and Exhibit 8, respectively, to this Schedule 14D-9 and are incorporated
herein by reference.
(b) Background of the Offer; Reasons for the Recommendation.
Background
In February 1999, Brian F. Sullivan, Chairman and Chief Executive Officer of
the Company, was approached concerning the possibility of a strategic alliance
or business combination with another consumer products company ("Potential
Buyer A"). In response, Mr. Sullivan met with representatives of Potential
Buyer A at its offices to conduct a high level business review of the Company.
The parties executed a confidentiality agreement on February 18, 1999, and
thereafter exchanged information during the period from February 1999 to April
1999.
On April 29, 1999, at a meeting of the Board of Directors, Mr. Sullivan
provided information concerning his discussions with Potential Buyer A and
discussed strategic alternatives available to the Company. The Board and
certain members of senior management analyzed a number of industry trends and
conditions, as well as issues specific to the Company. The Board of Directors
authorized management to explore strategic alternatives available to the
Company and to engage an investment banking firm. The Board reviewed the
qualifications of a number of investment banking firms, including Goldman
Sachs. As part of such review, the Board noted that Goldman Sachs Group, L.P.,
has an investment in the Company in the form of the Convertible Notes; that
Robert R. Gheewalla, a Vice President of Goldman Sachs, is a director of the
Company; and that Goldman Sachs provides investment banking services to a
number of companies that might have an interest in effecting a possible
business combination or other strategic alliance with the Company. The Board
determined that such relationships did not prevent Goldman Sachs from fully
and fairly representing the interests of the Company and did not impair the
ability of the Board to rely on the advice and opinions of Goldman Sachs.
The Company then met with Goldman Sachs and another investment banking firm.
On May 14, 1999, after considering the relative qualifications of the two
firms, the Company engaged Goldman Sachs as the Company's exclusive financial
advisor for the purpose of advising the Company in connection with a possible
sale of all or a portion of the Company. The Company requested Goldman Sachs
to identify the companies that might be most likely to be interested in
effecting a possible business combination or other strategic alliance with the
Company.
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On June 1, 1999, the Board of Directors held a telephonic conference at
which Mr. Sullivan reported on the Company's operations, including its
expectations regarding operating results for the quarter ending July 4, 1999,
as well as the status of the activities of Goldman Sachs and the projected
schedule for contacting potential acquirers. The Board authorized Mr. Sullivan
to direct Goldman Sachs to approach several companies concerning their
possible interest in a business combination or other strategic alliance with
the Company.
During the period from mid-June 1999 to August 20, 1999, Goldman Sachs
conducted a structured process to solicit interest in an acquisition of all or
part of the Company from potential acquirers, provide interested parties with
confidential information to assist them in evaluating the Company, and obtain
definitive proposals. From mid-June to July 26, 1999, Goldman Sachs contacted
a number of potential acquirers and provided confidential information to those
companies which expressed an interest in a possible transaction and which
signed confidentiality agreements with the Company. Those that received such
information were invited to provide preliminary written indications of
interest by July 26, 1999.
In June 1999, Parent was contacted by representatives of Goldman Sachs to
determine Parent's interest in a potential transaction with the Company.
Subsequent to this discussion, Goldman Sachs, on behalf of the Company, signed
the Confidentiality Agreement with Parent (which was subsequently amended) and
provided Parent with confidential information on the Company.
On June 30, 1999, the Board of Directors held a telephonic conference at
which Mr. Sullivan reported on the status of Goldman Sachs' activities on
behalf of the Company.
On July 2, 1999, Mr. Sullivan met with representatives of Parent at the
offices of Parent and presented an overview of the Company. The discussions
included product strategy and development, and historical and projected
financial results.
On July 13, 1999, Mr. Sullivan met with other senior executives of Parent at
the offices of Parent. The discussions included strategy, management, market
trends, sales and marketing, product development, and historical and projected
financial results.
On July 15, 1999, Goldman Sachs contacted an additional consumer products
company ("Potential Buyer B") to determine its interest in a potential
transaction with the Company. This party expressed interest, and was asked by
Goldman Sachs to provide certain information concerning such party to enable
the Company and Goldman Sachs to evaluate a possible transaction between such
party and the Company.
On July 20, 1999, Parent retained J.P. Morgan Securities Inc. ("J.P.
Morgan") to act as its financial advisor with respect to a potential
transaction with the Company.
On July 21, 1999, the Board of Directors held a telephonic meeting at which
Mr. Sullivan reported on the status of the Company's operations, including its
results of operations for the quarter ended July 4, 1999. Mr. Sullivan also
reported on the responses that had been received by Goldman Sachs at that
date.
On July 22, 1999, Mr. Sullivan met with senior executives of Potential Buyer
A. Discussions included the same topics discussed at the July 13, 1999 meeting
with Parent.
On July 26, 1999, the Company received initial non-binding indications of
interest from Parent and Potential Buyer A. On August 2, 1999, a third
consumer products company ("Potential Buyer C") provided the Company with its
initial non-binding indication of interest. Shortly thereafter, Robins,
Kaplan, Miller & Ciresi L.L.P., as counsel to the Company, distributed to each
of the interested parties a proposed form of merger agreement and identified
August 20, 1999 as the date for submission of definitive proposals.
During the period from August 3, 1999 through August 12, 1999, Parent,
Potential Buyer A and Potential Buyer C and their respective legal and
financial advisors met in Minneapolis, Minnesota, with senior
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management of the Company and representatives of Goldman Sachs for the purpose
of conducting an in-depth business and operations review of the Company.
During such meetings, the Company provided to each interested party certain
confidential information regarding the Company. Thereafter, the Company
provided the interested parties with supplemental information requested by
them.
On August 20, 1999, Parent delivered to Goldman Sachs a letter indicating,
among other things, its interest in acquiring the Company at a price of $33.75
per Share in cash, subject to negotiation of definitive documentation and
provided that Parent was able to reach satisfactory arrangements with the
Company's senior management regarding their continuing role in the Company
following the transaction. Parent also delivered to Goldman Sachs a revision
of the draft merger agreement that had been proposed by the Company.
On August 20, 1999, the Company and Goldman Sachs also received
communications from Potential Buyer A. This party indicated it was expecting
to submit a bid, but requested a substantial extension of time to conduct
additional due diligence. The Company and Goldman Sachs promptly provided
additional information requested by this party, but advised that the party's
interest would be considered only if the Company timely received a written
proposal accompanied by a proposed form of merger agreement.
On August 20, 1999, Potential Buyer C decided not to submit a proposal to
acquire the Company after being informed by Goldman Sachs that its bid would
not be competitive unless this party increased its price significantly from
that stated in its preliminary indication of interest.
On August 20, 1999, the Board of Directors held a telephonic meeting to
review Parent's proposal and the status of discussions with the other
interested parties. The Board established a special committee of disinterested
directors, composed of all directors other than Mr. Sullivan, to consider and
take action with respect to the proposal from Parent and any proposals that
might be received from other parties. The special committee directed Mr.
Sullivan to negotiate with and obtain additional information from Parent with
respect to its proposal and to continue to communicate with Potential Buyer A.
The special committee also requested that Goldman Sachs undertake a study to
enable it to render an opinion as to the fairness, from a financial point of
view, of the financial consideration to be received by the Company's
shareholders under Parent's proposal or under any proposal received from other
interested parties.
On August 21, 1999, Parent and J.P. Morgan held a conference call with
Goldman Sachs during which they discussed Parent's proposal to acquire the
Company. In that conversation, Goldman Sachs indicated that Parent would
increase its chances of acquiring the Company if Parent increased the amount
it was willing to pay for the Shares.
On August 22, 1999, J.P. Morgan and Goldman Sachs had several conversations
during which they discussed Parent's proposal.
Later on August 22, Parent advised Goldman Sachs that Parent was willing to
discuss a transaction that delivered $35.25 per Share in cash to the Company's
shareholders, subject to negotiation of definitive documentation and provided
that Parent was able to reach satisfactory arrangements with the Company's
senior management regarding their continuing role in the Company following the
transaction.
From August 23, 1999 through August 25, 1999, the Company, Parent and their
respective legal and financial advisors participated in numerous conferences
in Minneapolis, Minnesota, during which the terms of the Merger Agreement, the
Tender and Option Agreement, the Stock Option Agreement and ancillary
documents, and the manner in which the transaction would be effected, were
reviewed, discussed and negotiated extensively.
During the period from August 20, 1999 through August 25, 1999, Goldman
Sachs continued communicating with Potential Buyer A. This party indicated an
interest at a price in a range equal to or higher than the price proposed by
Parent, but continued to ask for additional time for further due diligence
despite the fact that discussions with this party began in February 1999.
Although the Company believed that it had provided
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all interested parties adequate time to conduct due diligence, Potential Buyer
A declined to comply with the timetable established by the Company and Goldman
Sachs for submitting a written proposal accompanied by a proposed form of
merger agreement. In view of the months of discussions with this party, its
failure to comply with the timetable applicable to all parties and its
requests for additional due diligence, the Company and Goldman Sachs concluded
that Potential Buyer A was not likely to come forward with a competitive and
definitive proposal.
On August 23, 1999, Goldman Sachs received the information it had requested
from Potential Buyer B. After reviewing such information, the Company and
Goldman Sachs decided not to continue discussions with such party.
On August 25, 1999, the Board of Directors held a telephonic meeting to
review the status of the transaction. At this meeting, Mr. Sullivan provided a
report to the Board concerning the communications with Parent and with other
interested parties during the previous five days. Mr. Sullivan and the
Company's legal and financial advisors then described in detail for the Board
the overall terms of the transaction and the results of the negotiations of
the Merger Agreement, the Tender and Option Agreement and the Ancillary
Documents. The Board discussed these matters at length, as well as the
potential risks and benefits of the transaction and related issues. The Board
noted that Goldman Sachs Group, L.P. has an investment in the Company in the
form of the Convertible Notes; that Robert R. Gheewalla, a Vice President of
Goldman Sachs, is a director of the Company; and that Goldman Sachs has
provided and continues to provide certain investment banking services to
Parent and may continue to do so in the future, but the Board determined that
such relationships did not impair its ability to rely on the opinion which had
been requested from Goldman Sachs. Goldman Sachs then presented to the Board
its oral opinion (which was subsequently confirmed in writing) that as of such
date, based on and subject to the various factors considered, assumptions made
and scope of review undertaken that was described to the Board of Directors at
the meeting, the $35.25 per Share in cash to be received by the holders of
Shares in the Offer and Merger is fair from a financial point of view to such
holders. After extensive discussion, and after considering the advice of
counsel and the opinion from Goldman Sachs, the special committee of the
Board, consisting of all of the independent directors of the Board in
accordance with Section 302A.673 of the Minnesota Law, unanimously approved
the Offer, the Merger and the Merger Agreement. Immediately thereafter, the
Board unanimously approved the Offer, the Merger and the Merger Agreement and
determined that the terms of the Offer and the Merger are in the best
interests of the Company and its shareholders. At the direction of the Board,
management and the Company's legal advisors worked with Parent and its
management and counsel to finalize the documentation. The Merger Agreement,
the Stock Option Agreement, the Tender and Option Agreement and ancillary
documents were executed and delivered during the morning of August 26, 1999.
On August 26, 1999, Goldman Sachs Group L.P. approved the terms of the Merger
Agreement and agreed to the cancellation of the Convertible Notes in exchange
for a cash payment at the Effective Time equal to $35.25 times the number of
Shares that would be issuable to the holders of the Convertible Notes upon
conversion of the Convertible Notes, based on the Merger Consideration (i.e.
one Share for each $14.85 principal amount of Convertible Notes). On August
26, 1999, Parent and the Company issued a joint press release announcing the
execution of the Merger Agreement.
Reasons for the Recommendation.
In approving the Offer, the Merger and the Merger Agreement and recommending
that all shareholders tender their Shares pursuant to the Offer and approve
and adopt the Merger Agreement and the transactions contemplated by the Merger
Agreement, including the Merger, the Board of Directors considered a number of
factors, including:
1. the terms and conditions of the Merger Agreement, including the amount
and form of the consideration;
2. the Board of Directors' familiarity with and review of the business,
financial condition, results of operations and prospects of the Company,
including the desirability of attempting to increase sales of the
23
<PAGE>
Company's products in international markets; the prospect, including
anticipated timing, of additional competitors in the Company's business and
the potential effects of such competitors on the Company's business; and
the advantages in a competitive environment of strategically aligning with
a large, well-capitalized company;
3. the historical market price performance of the Common Stock, the
present value of the projected future market price of such stock, the
timing of the transaction and the risks that such projected performance
might not be achieved;
4. the fact that the $35.25 per Share price represents a premium of 100%
over the closing sale price per Share as reported on the NASDAQ/NMS on
August 25, 1999, the date the Board of Directors authorized and approved
the Offer and the Merger, and a premium of approximately 91% over the
highest closing sale price of the Shares during the 52 weeks prior to the
execution of the Merger Agreement;
5. the possible alternatives to the Offer and the Merger, including that
Offeror appeared unlikely to pay a higher price despite the effort to
increase the proposed price, that Goldman Sachs had effectively canvassed
the market of other logical buyers, and that continuing independence would,
as a practical matter, involve the risks referred to in paragraphs 2 and 3
above;
6. the likelihood that the proposed Merger would be consummated,
including the absence of a financing condition to the Offer and the limited
number of conditions to the obligations of Parent and Offeror to consummate
the Offer and the Merger;
7. the fact that the Merger Agreement, which contains provisions
prohibiting the Company and its officers, directors, employees, advisors or
representatives from soliciting, initiating or knowingly encouraging any
potential Acquisition Proposal, nevertheless does permit the Company to
furnish non-public information and provide access to, or to participate in
discussions and negotiations with, any person or entity that makes a bona
fide unsolicited Acquisition Proposal after the date of the Merger
Agreement, if the Board of Directors determines in good faith that such
Acquisition Proposal constitutes, or is reasonably likely to lead to, a
Superior Proposal;
8. the Board's belief that the terms of the Merger Agreement, taking into
account the Stock Option Agreement, the Tender and Option Agreement, and
the termination fee payable to Parent in the event of the Company's
acceptance of a Superior Proposal, should not unduly discourage superior
third party offers;
9. the fact that certain significant shareholders of the Company were
prepared to endorse the transaction and to enter into the Tender and Option
Agreement with Parent and Offeror;
10. the effect of the transaction on the Company's relationships with its
employees and customers; and
11. the oral opinion of Goldman Sachs delivered at the meeting of the
Board of Directors held on August 25, 1999 (which opinion was subsequently
confirmed in writing as of August 26, 1999) (the "Fairness Opinion"), to
the effect that, as of such date, and based on and subject to the various
factors considered, assumptions made and scope of review undertaken that
was described to the Board of Directors at the meeting, the $35.25 per
Share in cash to be received by the holders of Shares in the Offer and
Merger is fair from a financial point of view to such holders.
The Board of Directors did not assign relative weights to the factors or
determine that any factor was of more importance than other factors. Rather,
the Board of Directors viewed its position and recommendation as being based
on the totality of the information presented to and considered by it.
The full text of the Fairness Opinion, which sets forth the assumptions
made, general procedures followed, matters considered and limitations on the
review undertaken by Goldman Sachs, is filed herewith as Exhibit 9 and is
incorporated herein by reference. Shareholders are urged to read the Fairness
Opinion carefully in its entirety.
24
<PAGE>
Item 5. Persons Retained, Employed or To Be Compensated.
The Company and Goldman Sachs entered into an agreement, dated May 14, 1999,
pursuant to which Goldman Sachs was retained as the Company's exclusive
financial advisor in connection with the possible sale of all or a portion of
the Company. For its services as financial advisor, the Company has paid
Goldman Sachs a fee in cash of $150,000 and has agreed to pay the following
fees (with the $150,000 fee already paid to be applied against any additional
fee which may become payable): (a) a fee equal to 1.5% of the aggregate
consideration paid to the Company or its shareholders in connection with a
purchase of 50% or more of the outstanding Common Stock or the assets of the
Company, including but not limited to private or open market purchases of
stock, a tender offer, a merger or a sale by the Company of its stock or
assets, or (b) a fee to be mutually agreed upon by the Company and Goldman
Sachs, but in no event less than $2,000,000, if less than 50% of the
outstanding Common Stock or the assets of the Company are acquired. The
Company has also agreed to reimburse Goldman Sachs for its reasonable out-of-
pocket expenses (including the fees and expenses of its counsel) and to
indemnify Goldman Sachs against certain liabilities and expenses.
Neither the Company nor any other persons acting on its behalf currently
intends to employ, retain or compensate any other person to make solicitations
or recommendations to shareholders on its behalf concerning the Offer.
Item 6. Recent Transactions and Intent With Respect to Securities.
(a) No transactions in the Shares have been effected during the past 60
days by the Company or, to the knowledge of the Company, by any
executive officer, director, affiliate or subsidiary of the Company,
other than (i) grants of Options and (ii) the issuance of shares of
Common Stock pursuant to the Company's 1994 Stock Purchase Plan.
(b) To the knowledge of the Company, its executive officers, directors,
affiliates and subsidiary presently intend to tender, pursuant to the
Offer, any Shares which are held of record or are beneficially owned by
them.
Item 7. Certain Negotiations and Transactions by the Subject Company.
(a) Except as set forth in this Schedule 14D-9, the Company is not engaged
in any negotiation in response to the Offer which relates to or would
result in (i) an extraordinary transaction, such as a merger or
reorganization, involving the Company or REI Barbados; (ii) a purchase,
sale or transfer of a material amount of assets by the Company or REI
Barbados; (iii) a tender offer for or other acquisition of securities
by or of the Company; or (iv) any material change in the present
capitalization or dividend policy of the Company. As described in Item
3(b) above, the Board of Directors of the Company, in connection with
the exercise of its fiduciary duties, is permitted under certain
conditions to engage in negotiations in response to an unsolicited
Acquisition Proposal.
(b) Except as described in Items 3(b) and 4 above, there are no
transactions, board resolutions, agreements in principle or signed
contracts in response to the Offer which relate to or would result in
one or more of the matters referred to in paragraph (a) of this Item 7.
Item 8. Additional Information To Be Furnished.
i. The Information Statement attached as Annex I hereto and incorporated
herein by reference is being furnished pursuant to Rule 14f-1 under the
Exchange Act in connection with the potential designation by Parent, pursuant
to the Merger Agreement, of certain persons to be appointed to the Board of
Directors other than at a meeting of shareholders, as described in Item
3(b)(1).
ii. At a meeting held on August 25, 1999, a special committee of the Board
of Directors and the entire Board approved the Merger Agreement and the
transactions contemplated thereby for purposes of Sections
25
<PAGE>
302A.671 and 302A.673 of the Minnesota Law. Also at that meeting, the special
committee and the entire Board took all necessary action such that the Rights
Agreement would not affect or be affected by the Merger Agreement, the Stock
Option Agreement and the Tender and Option Agreement, the Offer, the
announcement of the Offer, the purchase of Shares by Parent or Offeror
pursuant to the Offer, the Merger, or any transaction contemplated thereby.
iii. No dissenters' rights are available in connection with the Offer.
However, if the Merger is consummated, dissenting shareholders who comply with
statutory procedural requirements will be entitled to exercise dissenters'
rights for the fair value for their Shares under Section 302A.473 of the
Minnesota Law. To be entitled to payment, the dissenting shareholder must not
accept the Offer; must file with the Company, prior to the vote for the
Merger, a written notice of intent to demand payment of the fair value of the
Shares; must not vote in favor of the Merger; and must satisfy the other
procedural requirements of Section 302A.473 of the Minnesota Law. Any
shareholder contemplating the exercise of their dissenters' rights should
review carefully the provisions of Sections 302A.471 and 302A.473 of the
Minnesota Law, particularly the procedural steps required to perfect such
rights. SUCH RIGHTS WILL BE LOST IF THE PROCEDURAL REQUIREMENTS OF SECTION
302A.473 ARE NOT FULLY AND PRECISELY SATISFIED.
If a vote of shareholders is required to approve the Merger under the
Minnesota Law, the notice and proxy statement for the Shareholder Meeting will
again inform each shareholder of record as of the record date of the
Shareholder Meeting (excluding persons who tender all of their Shares pursuant
to the Offer if such Shares are purchased in the Offer) of their dissenters'
rights and shall include a copy of Sections 302A.471 and 302A.473 of the
Minnesota Law and a summary description of the procedures to be followed under
those Sections to obtain payment of fair value for their Shares under those
Sections. If a shareholder vote is not required to approve the Merger, the
Surviving Corporation will send a notice to those persons who are shareholders
of the Surviving Corporation immediately prior to the Effective Time of the
Merger which, among other things, includes a copy of Sections 302A.471 and
302A.473 of the Minnesota Law and a summary description of the procedures to
be followed under those Sections to obtain payment of fair value for their
Shares under those Sections.
Item 9. Material To Be Filed as Exhibits.
<TABLE>
<C> <S>
(a) None.
(b) None.
(c) Exhibit 1 Agreement and Plan of Merger, dated as of August 26, 1999
Exhibit 2 Confidentiality Agreement dated June 24, 1999, as amended July
27, 1999
Exhibit 3 Stock Option Agreement, dated as of August 26, 1999
Exhibit 4 Tender and Option Agreement, dated as of August 26, 1999
Exhibit 5 Consulting Agreement, Non-Competition Agreement and Letter of
Understanding for Brian F. Sullivan, each dated as of August
26, 1999
Exhibit 6 Non-Competition Agreement and Letter of Understanding for Reed
A. Watson, each dated as of August 26, 1999
Exhibit 7 Letter to the Company's shareholders communicating the Board
of Directors' recommendation, dated September 1, 1999*
Exhibit 8 Press release announcing the Offer, the Merger and the Merger
Agreement, dated August 26, 1999
Exhibit 9 Opinion of Goldman, Sachs & Co., dated August 26, 1999*
</TABLE>
--------
*Included in copies of the Schedule 14D-9 mailed to shareholders.
26
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
RECOVERY ENGINEERING, INC.
By: /s/ Brian F. Sullivan
Brian F. Sullivan
Chairman and Chief Executive Officer
Dated: September 1, 1999
27
<PAGE>
ANNEX I
RECOVERY ENGINEERING, INC.
9300 North 75th Avenue
Minneapolis, Minnesota 55428
INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE SECURITIES EXCHANGE
ACT OF 1934 AND RULE 14F-1 THEREUNDER
----------------
GENERAL INFORMATION
This Information Statement is being mailed on or about September 1, 1999, as
part of the Solicitation/ Recommendation Statement on Schedule 14D-9 (the
"Schedule 14D-9") of Recovery Engineering, Inc., a Minnesota corporation (the
"Company"), to the holders of record of shares of common stock, par value $.01
per share, of the Company (the "Common Stock" or the "Shares"). You are
receiving this Information Statement in connection with the possible election
or appointment of persons designated by Purchaser (as defined below) to a
majority of the seats of the Board of Directors of the Company (the "Board of
Directors" or "Board").
On August 26, 1999, the Company, The Procter & Gamble Company, an Ohio
corporation ("Parent"), and Tenzing, Inc., a Minnesota corporation and a
wholly owned subsidiary of Parent ("Purchaser"), entered into an Agreement and
Plan of Merger (the "Merger Agreement") pursuant to which (i) Purchaser will
commence a tender offer (the "Offer") for all outstanding Shares at a price of
$35.25 per Share (the "Merger Consideration"), net to the seller in cash
without interest thereon and (ii) Purchaser will be merged with and into the
Company (the "Merger") upon the filing of articles of merger relating to the
Merger with the Secretary of State of the State of Minnesota, or such later
time as may be set forth therein (the "Effective Time"). As a result of the
Offer and the Merger, the Company will continue as a wholly owned subsidiary
of Parent.
The Merger Agreement provides that, promptly upon the purchase by Purchaser
of the Shares pursuant to the Offer, Purchaser will be entitled to designate
directors (the "Purchaser Designees") on the Board that will give Purchaser
representation substantially proportionate to its ownership interest. The
Merger Agreement requires the Company promptly to take necessary action to
cause the Purchaser Designees to be elected or appointed to the Board under
the circumstances described therein. This Information Statement is required by
Section 14(f) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and Rule 14f-1 thereunder. Capitalized terms used herein and
not otherwise defined shall have the meaning set forth in the Schedule 14D-9.
You are urged to read this Information Statement carefully. You are not,
however, required to take any action in connection with this Information
Statement.
The information contained in this Information Statement concerning Purchaser
and the Purchaser Designees has been furnished to the Company by Purchaser.
The Company assumes no responsibility for the accuracy or completeness of such
information.
The Common Stock is the only class of voting securities of the Company
outstanding. Each share of Common Stock has one vote. As of August 25, 1999,
there were 6,044,601 shares of Common Stock outstanding.
RIGHT TO DESIGNATE DIRECTORS; PURCHASER DESIGNEES
The Merger Agreement provides that, promptly upon the purchase by Purchaser
of the Shares pursuant to the Offer, and from time to time thereafter,
Purchaser will be entitled, subject to compliance with Section 14(f) of the
Exchange Act, to designate up to such number of directors, rounded up to the
next whole number, on the
I-1
<PAGE>
Board as will give Purchaser representation on the Board equal to the product
of the total number of directors on the Board (giving effect to the directors
elected pursuant to this sentence) multiplied by the percentage that the
aggregate number of Shares beneficially owned by Purchaser or any affiliate of
Purchaser following such purchase bears to the total number of Shares then
outstanding, and the Company will, at such time, promptly take all actions
necessary to cause the Purchaser Designees to be elected or appointed as
directors of the Company, including increasing the size of the Board or
securing the resignations of incumbent directors or both. At such times, the
Company will, upon the written request of Purchaser, use its reasonable
efforts to cause the Purchaser Designees to constitute the same percentage as
persons designated by Purchaser will constitute of the Board of (i) each
committee of the Board, (ii) the board of directors of Recovery Engineering
International, Ltd., a Barbados corporation and a wholly owned subsidiary of
the Company ("REI Barbados"), and (iii) the committees of the board of
directors of REI Barbados. Notwithstanding anything stated herein, if Shares
are purchased pursuant to the Offer, Parent and Purchaser will use reasonable
efforts to assure that, until the Effective Time, the Board has at least one
director who is a director on the date of the Merger Agreement and is not an
employee of the Company.
It is expected that on the date that Purchaser accepts for payment and
purchases the Shares under the Offer the Company will promptly take such other
action as will be necessary to enable the Purchaser Designees to be elected to
the Company's Board of Directors.
Set forth below is the name, age and present principal occupation or
employment for each of the persons who may be designated by Parent as
Purchaser Designees. Unless otherwise indicated below, the business address
for each of the individuals listed below is One Procter & Gamble Plaza,
Cincinnati, Ohio 45202-3315. Each of the individuals listed below is a citizen
of the United States.
<TABLE>
<CAPTION>
Present Principal Occupation or Employment; Material
Name and Age Positions Held During the Past Five Years
------------ ----------------------------------------------------
<S> <C>
Bruce L. Byrnes (51)..... Director and President of Tenzing, Inc.; January 1,
1999--President-Global Health Care and Corporate New
Ventures, The Procter & Gamble Company; 1996-1998--
responsible for Health Care in North America, The
Procter & Gamble Company; 1995-1996--responsible for
Paper Products in North America, The Procter &
Gamble Company; 1994-1995--responsible for Paper and
Beverage in Europe, The Procter & Gamble Company.
Clayton C. Daley, Jr. Director and Vice President and Chief Financial
(47).................... Officer of Tenzing, Inc.; 1998--Chief Financial
Officer, The Procter & Gamble Company; 1994-1998--
Vice President and Treasurer, The Procter & Gamble
Company.
Gretchen W. Price (44)... Director and Vice President and Treasurer of
Tenzing, Inc.; 1998--Vice President and Treasurer,
The Procter & Gamble Company; 1996-1998--responsible
for Internal Controls-Worldwide, The Procter &
Gamble Company; 1994-1996--Vice President and
Comptroller with responsibilities for Food and
Beverage Products in North America, The Procter &
Gamble Company.
</TABLE>
Any other officer of Purchaser or Parent listed in Schedule I to the Offer
to Purchase dated September 1, 1999, filed as an Exhibit to the Tender Offer
Statement on Schedule 14D-1 of Purchaser or Parent may also be designated by
Parent as a Purchaser Designee.
None of the persons from among whom the Purchaser Designees will be selected
or their associates is a director of, or holds any position with, the Company.
To the knowledge of the Company, none of the Purchaser Designees or their
associates beneficially own any equity securities, or rights to acquire any
equity securities, of the Company or has been involved in any transactions
with the Company or any of its directors or executive officers that are
required to be disclosed pursuant to the rules and regulations of the
Securities and Exchange Commission (the "Commission").
I-2
<PAGE>
CURRENT BOARD OF DIRECTORS OF THE COMPANY
The business and affairs of the Company are managed under the direction of
its Board of Directors. Directors of the Company are elected by a plurality of
the votes cast in an election of directors at any annual or special meeting of
the shareholders. The Company's articles of incorporation do not permit
cumulative voting for directors.
The Board is divided into three classes, each class being as nearly equal in
number as possible: Class 1, Class 2 and Class 3. Each director serves for a
term ending upon the election of directors at the third annual meeting
following the annual meeting at which the class was elected; provided,
however, that the directors initially elected to Class 1 serve for a term
ending upon the election of directors at the first annual meeting following
the end of the calendar year 1999, the directors initially elected to Class 2
serve for a term ending upon the election of directors at the second annual
meeting following the end of the calendar year 1999, and the directors
initially elected to Class 3 serve for a term ending upon the election of
directors at the third annual meeting following the end of the calendar year
1999.
The Company's articles of incorporation fix the variable range of the number
of directors and provide that the precise number of directors, within that
variable range, will be as from time to time designated by the majority of the
directors then in office, even if less than a quorum. Seven directors have
been elected to the classes and for the terms set forth below. Each of the
directors named below has served continuously as a director since the year
indicated.
<TABLE>
<CAPTION>
Director
Name Positions With Company Age Since
- ---- ---------------------- --- --------
<S> <C> <C> <C>
Class 1 Directors (term
expires in 2000):
Robert R. Gheewalla..... Director 31 1998
William D. Thompson..... Director 77 1995
Class 2 Directors (term
expires in 2001):
John E. Gherty.......... Director 55 1988
Sanjay H. Patel......... Director 38 1996
Richard J. Zeckhauser... Director 58 1987
Class 3 Directors (term
expires in 2002):
Brian F. Sullivan....... Chairman, Chief Executive Officer and Director 37 1986
William F. Wanner,
Jr. ................... Director 56 1986
</TABLE>
ROBERT R. GHEEWALLA has been a director of the Company since February 1998.
Mr. Gheewalla is a Vice President in the Principal Investment Area of Goldman,
Sachs & Co. where he has worked since 1994. From 1989 to 1991, he worked in
the Global Finance Department of Goldman, Sachs & Co. Mr. Gheewalla also
serves on the Advisory Committees or Boards of Directors of North American
RailNet, Inc. and JAMtv Corporation.
WILLIAM D. THOMPSON has been a director of the Company since December 1995.
Mr. Thompson served as Executive Vice President of the New York City
advertising firm of Young & Rubicam, Inc. until his retirement in 1989. During
37 years of service for Young & Rubicam, Mr. Thompson oversaw accounts for
numerous companies, including General Foods, Merrill Lynch, General Electric,
Warner-Lambert, Bristol-Meyers Squibb, and Johnson & Johnson.
I-3
<PAGE>
JOHN E. GHERTY has been a director of the Company since 1988. Mr. Gherty has
been President and Chief Executive Officer of Land O' Lakes, Inc., a food and
agricultural company, since 1989 and prior thereto was Group Vice President
and Chief Administrative Officer of Land O' Lakes, Inc. Mr. Gherty is also a
director of CF Industries, Inc., the National Council of Farmer Cooperatives
and the Minnesota Business Partnership.
SANJAY H. PATEL has been a director of the Company since July 1996. Mr.
Patel has been a Senior Managing Director of GSCP, Inc., the manager of the
Greenwich Street Capital Partners II, L.P. and its affiliated private equity
funds, since April 1998. Mr. Patel was a Managing Director in the Principal
Investment Area of Goldman, Sachs & Co. from 1996 to January 1998, and worked
in the Leveraged Buyout Group of Goldman, Sachs & Co. from 1987 to 1996. Mr.
Patel is also the Chairman of the Board of Directors of Atlantic Express
Transportation Corp.
RICHARD J. ZECKHAUSER has been a director of the Company since 1987. Dr.
Zeckhauser has been a professor of political economy at the John F. Kennedy
School of Government at Harvard University since 1968. Dr. Zeckhauser was a
co-founder of Niederhoffer, Cross and Zeckhauser, a New York-based investment
firm specializing in mergers and acquisitions and money management.
BRIAN F. SULLIVAN has been the Chief Executive Officer and a director of the
Company since its inception in 1986, and was named Chairman in February 1999.
He also served as President of the Company from 1986 to February 1999 and as
Chief Financial Officer of the Company from 1986 to 1994. Mr. Sullivan has
established and directed the implementation of the Company's strategic
direction since its inception. He has led the Company from the development
stage through its initial contracts with the United States armed forces, the
introduction of reverse osmosis desalinators and portable drinking water
systems, and the development and introduction of the Company's household
drinking water systems. Mr. Sullivan is named as an inventor on four United
States patents held by the Company. Mr. Sullivan is also a director of North
Central Life Insurance Company.
WILLIAM F. WANNER, JR. has been a director of the Company since its
inception in 1986. Mr. Wanner served as Chairman of the Board of the Company
from 1986 to 1994. Since 1973, Mr. Wanner has been the Chief Executive Officer
and principal shareholder of Wanner Engineering, Inc. and its affiliated
companies, which design, produce and market a range of high pressure pumps and
controls.
Pursuant to a Securities Purchase Agreement dated July 19, 1996 (the
"Securities Purchase Agreement"), between the Company and five investment
partnerships affiliated with The Goldman Sachs Group, L.P. (collectively, "GS
Group"), GS Group has the right to nominate one person to serve on the Board
of Directors, and the Company has agreed to use its best efforts to secure the
election of such nominee to the Board of Directors. Mr. Gheewalla has been
nominated by GS Group and has been elected director pursuant to such
arrangement. The Company knows of no other arrangements or understandings
between a director and any other person pursuant to which he has been selected
as a director. There is no family relationship between any of the directors or
executive officers of the Company.
BOARD COMMITTEES AND ACTIONS
During calendar year 1998, the Board of Directors met four times. The Board
of Directors has two standing committees, a Compensation Committee and an
Audit Committee, which met three times and one time, respectively, during
1998. Each director attended at least 75% of the total number of meetings of
the Board and of committees on which the director served, except for Mr.
Gherty who was absent from two meetings of the Board of Directors.
The Compensation Committee reviews and makes recommendations to the Board of
Directors regarding salaries, compensation and benefits of executive officers
of the Company and administers the Company's 1986
I-4
<PAGE>
Stock Option Plan and 1994 Stock Option and Incentive Plan. The members of the
Compensation Committee are Mr. Gherty, Mr. Patel and Mr. Wanner.
The Audit Committee reviews the internal and external financial reporting of
the Company and reviews the scope of the independent audit. During 1998, the
members of the Audit Committee were Mr. Gheewalla, Mr. Thompson and Dr.
Zeckhauser.
The Board of Directors acts as the nominating committee for selecting the
Board's nominees for election as directors. The Company's bylaws require that
shareholder nominations for director be made pursuant to timely notice in
writing to the Company. To be timely, written notice must be delivered to the
Company not less than 60 nor more than 90 days prior to the date of the
scheduled annual meeting; however, if the Company gives less than 70 days'
notice of such meeting, the shareholder may deliver notice no later than the
tenth day following the earlier of the day on which the Company's notice of
the date of the meeting was mailed or the day on which such date was publicly
disclosed. The bylaws further provide that the shareholder's notice shall set
forth certain information concerning each nominee, including (i) the name,
age, business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the class and number of shares
of Common Stock beneficially owned by such person on the date of the notice,
and (iv) any other information relating to such person that would be required
to be disclosed pursuant to Regulation 13D and Regulation 14A under the
Exchange Act. In addition, the shareholder giving the notice is required to
state the name and address of such shareholder and the identity of other
shareholders known by such shareholder to be supporting such nominees and the
extent of such shareholders' beneficial ownership of Common Stock. A majority
of the continuing directors may reject a nomination by a shareholder not
timely made in accordance with the requirements of the bylaws. In case of a
deficiency in such shareholder's notice, the shareholder has the opportunity
to cure the deficiency by providing additional information within five days of
the date that such a deficiency notice is given to the shareholder. A majority
of the continuing directors determines whether the deficiency has been cured
by the shareholder.
DIRECTOR COMPENSATION
Directors of the Company receive no cash fee for their service as directors.
Non-employee directors of the Company have been granted stock options in
connection with their service as directors, including options automatically
granted under the Company's 1993 Director Stock Option Plan.
EXECUTIVE OFFICERS
The following discussion sets forth information about the executive officers
of the Company who are not directors.
<TABLE>
<S> <C> <C> <C>
Officer
Name Positions With Company Age Since
- ---- ---------------------- --- -------
Reed A.
Watson.... President and Chief Operating Officer 40 1999
Charles F.
Karpinske.. Vice President and Chief Financial Officer 44 1996
Richard D.
Hembree... Vice President--Engineering 46 1987
Jeffrey T.
Dekko..... Vice President--Marketing 32 1995
Barry B.
Van
Lerberghe.. Vice President--Sales 37 1995
Daniel B.
Seebart... Vice President--Manufacturing 52 1998
</TABLE>
REED A. WATSON has served as President and Chief Operating Officer of the
Company since February 1999. From 1992 until joining the Company, Mr. Watson
was employed by The Pillsbury Company, where he served most recently as the
Vice President and General Manager of the $1.8 billion Baked Foods Division.
Prior to his tenure at Pillsbury, Mr. Watson was employed in various marketing
capacities at Kraft Foods, Inc.
I-5
<PAGE>
CHARLES F. KARPINSKE has served as the Company's Vice President and Chief
Financial Officer since February 1996. Prior to joining the Company, Mr.
Karpinske served as Vice President of Operations and Chief Financial Officer
of Goretek Data Systems, a software development company, from April 1995 to
February 1996. From August 1993 to March 1995, Mr. Karpinske was the Chief
Operating Officer and Chief Financial Officer for Decision Data, a
manufacturer and distributor of computer equipment. From October 1986 to July
1993, Mr. Karpinske worked for Apertus Technologies (formerly Lee Data), a
manufacturer and distributor of computer equipment, serving in a number of
financial positions including Chief Financial Officer, Vice President of
Finance and Administration and Corporate Controller.
RICHARD D. HEMBREE has served as chief engineer of the Company since 1986
and Vice President--Engineering since 1987. Mr. Hembree has been principally
responsible for the development of new technologies incorporated into the
Company's products. Mr. Hembree is named as an inventor on eight United States
patents held by the Company. From 1983 to 1986, Mr. Hembree was a senior
design engineer at Seagold Industries Corporation, a manufacturer of
desalinators, where he designed several energy recovery pumps and was engaged
in the design and development of manual desalinators and hydraulic energy
recovery devices.
JEFFREY T. DEKKO has served as Vice President--Marketing of the Company
since July 1995. Mr. Dekko served as Vice President of Recreational Products
for the Company from October 1994 to July 1995. Mr. Dekko directs the
Company's marketing efforts in the consumer household water products category.
From 1988 to October 1994, Mr. Dekko was marketing manager for General Mills,
Inc.
BARRY B. VAN LERBERGHE has served as Vice President--Sales of the Company
since July 1995. Prior to joining the Company, Mr. Van Lerberghe was Western
Regional Manager for Sunbeam Household Products from 1992 to 1995, and
District Sales Manager for Polaroid Corporation from 1988 to 1992.
DANIEL B. SEEBART has served as Vice President--Manufacturing of the Company
since October 1998. From 1991 to September 1998, Mr. Seebart was employed by
Onan, a division of Cummings Engine Company, where he served as plant manager
and executive director of continuous improvement. Prior to 1991, Mr. Seebart
served as a vice president at Century Manufacturing Company.
I-6
<PAGE>
EXECUTIVE COMPENSATION
The following Summary Compensation Table shows cash and other compensation
paid or accrued during the last three fiscal years to the Company's Chief
Executive Officer and each of the four other most highly compensated executive
officers of the Company.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-Term
Compensation Compensation
----------------- ------------
Name and Principal Awards Other
Position Year Salary Bonus(1) Options(#) Compensation(2)
- ------------------ ---- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Brian F. Sullivan......... 1998 $275,000 $ -- -- $3,200
(Chairman and Chief Execu-
tive Officer) 1997 205,000 150,000 -- 3,200
1996 150,000 -- 250,000 --
Charles F. Karpinske (3).. 1998 $161,000 $ -- 10,000 $3,200
(Vice President and Chief
Financial Officer) 1997 140,000 64,280 40,000 3,023
1996 112,500 -- 25,000 --
Richard D. Hembree........ 1998 $145,000 $ -- 15,000 $2,994
(Vice President--Engineer-
ing) 1997 112,000 49,164 10,000 2,382
1996 99,900 -- -- 1,996
Jeffrey T. Dekko.......... 1998 $132,000 $ -- 9,000 $1,333
(Vice President--Market-
ing) 1997 110,000 60,345 12,000 2,575
1996 88,500 -- 14,000 1,312
Barry B. Van Lerberghe.... 1998 $132,000 $ -- 9,000 $2,753
(Vice President--Sales) 1997 110,000 57,020 12,000 2,491
1996 96,300 -- 13,000 2,140
</TABLE>
- --------
(1) The executive officers of the Company are eligible to earn annual cash
bonuses tied to the level of achievement of annual performance targets.
(2) Represents the Company's matching contribution under its 401(k)
Retirement Savings Plan.
(3) Mr. Karpinske's employment with the Company commenced in February 1996.
AGREEMENTS WITH EXECUTIVES
The Company, GS Group and Brian F. Sullivan entered into an Executive
Restriction Agreement dated July 19, 1996 in connection with the Company's
sale of its 5% Convertible Notes due 2003 (the "Convertible Notes") to GS
Group.
The Company has entered into Change-in-Control Severance Pay Agreements with
each of its executive officers which provide that if the executive officer's
employment with the Company is terminated within 24 months following a
"change-in-control" of the Company, other than termination for cause,
voluntary termination by the executive officer, or termination on account of
death or disability, the Company will (i) pay to the executive officer an
amount equal to a multiple of his average annual compensation, including
bonus, for the three-year period ending in the year in which his employment
terminates, (ii) provide continued coverage under the Company's insurance
programs, and (iii) pay the executive officer an amount equal to the
difference between the aggregate fair market value of shares subject to stock
options which are forfeited or become unexercisable as a result of his
termination of employment, and the aggregate exercise price of such options.
The applicable multiples of average annual compensation are three times for
Mr. Sullivan, two times for Mr. Karpinske and Mr. Hembree, and one time for
Mr. Dekko and Mr. Van Lerberghe. For these purposes, a "change-in-control"
means (i) the dissolution or liquidation of the Company, or a merger,
consolidation or other corporate reorganization in which the Company is not
the surviving party; (ii) the sale of all or substantially all of the business
or assets of the Company; (iii) the acquisition by any person of securities
representing more than 25% of the voting power
I-7
<PAGE>
of the Company's outstanding securities; or (iv) individuals who constitute
the Board of Directors at the beginning of any two-year period ceasing to
constitute at least a majority of the Board of Directors, unless each new
director is approved by a two-thirds vote of the directors then in office who
were directors at the beginning of such period. At the Effective Time, the
Change-in-Control Severance Pay Agreements for five of the seven executive
officers will be cancelled.
RETIREMENT SAVINGS PLAN
The Company maintains a profit sharing and savings plan (the "401(k) Plan")
under Section 401(k) of the Internal Revenue Code of 1986, as amended (the
"Code"), which allows employees to contribute up to 15% of their pre-tax
income to the 401(k) Plan. The 401(k) Plan includes a discretionary matching
contribution by the Company and provides that the Company may make an
additional discretionary contribution out of profits at the end of any year.
The Company made discretionary matching contributions of $61,000, $98,000 and
$170,000 for 1996, 1997 and fiscal 1998, respectively. No additional
discretionary contributions were made by the Company for 1996, 1997 or fiscal
1998.
STOCK OPTIONS
Since its inception, the Company has utilized stock and stock options to
provide incentives and rewards to its employees and directors. The Recovery
Engineering, Inc. 1986 Stock Option Plan (the "1986 Option Plan") permits the
granting of awards to directors and employees of the Company in the form of
stock options. Stock options granted under the 1986 Option Plan may be
"incentive stock options" meeting the requirements of Section 422 of the Code
or non-qualified options which do not meet the requirements of Section 422. At
February 28, 1999, options for an aggregate of 17,150 Shares were outstanding
under the 1986 Plan. The outstanding options are presently exercisable with
respect to 15,650 Shares. No additional options may be granted under the 1986
Plan.
The Recovery Engineering, Inc. 1994 Stock Option and Incentive Plan (the
"1994 Plan") permits the granting of awards to employees, consultants and
other service providers in the form of incentive stock options, non-qualified
stock options and grants of restricted stock. At February 28, 1999, options
for an aggregate of 1,102,432 Shares were outstanding under the 1994 Plan, and
89,343 Shares were available for grant. The outstanding stock options are
presently exercisable with respect to 382,071 Shares. Awards may be granted
under the 1994 Plan through January 31, 2004. The 1994 Plan may be terminated
earlier by the Board of Directors in its sole discretion.
The 1986 Option Plan and the 1994 Plan are administered by the Compensation
Committee of the Board of Directors. These plans give broad powers to the
Committee to administer and interpret the plans, including the authority to
select the individuals to be granted awards and to prescribe the particular
form and conditions of each award granted. Awards are granted on the basis of
various factors, including the individual's capacity for contributing to the
successful performance of the Company, the nature of the operations for which
the individual is responsible, and the period for which the individual has
served or will have served the Company at the vesting of the award.
I-8
<PAGE>
The following table shows certain information regarding stock options
granted to the executive officers named in the Summary Compensation Table
during the Company's 1998 fiscal year.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable Value
at Assumed Annual
Rates of Stock
Price
Appreciation for
Individual Grants Option Term (1)
------------------------------------------------- -----------------
Percent of Total
Options Granted Exercise
Options to Employees in Price Expiration
Name Granted (#) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ---- ----------- ---------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Brian F. Sullivan....... -- -- -- -- -- --
Charles F. Karpinske.... 10,000(2) 5.0% $23.38 01/12/2008 $147,004 $372,537
Richard D. Hembree...... 15,000(2) 7.5% $23.38 01/12/2008 $220,506 $558,806
Jeffrey T. Dekko........ 9,000(2) 4.5% $23.38 01/12/2008 $132,304 $335,284
Barry B. Van Lerberghe.. 9,000(2) 4.5% $23.38 01/12/2008 $132,304 $335,284
</TABLE>
- --------
(1) Represents the potential net realizable value of each grant of options
assuming that the market price of the underlying Common Stock appreciates
in value from its fair market value on the date of grant to the end of the
option term at the indicated annual rates.
(2) Each option was granted on January 12, 1998 and vests with respect to 25%
of the option shares on the first, second, third and fourth anniversaries
of the grant date.
The following table shows information for the executive officers named in
the Summary Compensation Table regarding the exercise of stock options during
fiscal 1998 and the number and value of unexercised stock options held by as
of the end of fiscal 1998.
Aggregated Option Exercises in Last Fiscal Year and Year-End Option Values
<TABLE>
<CAPTION>
Value of Unexercised
Shares Number of Unexercised In-the-Money Options
Acquired on Options at Year-End (#) at Year-End ($)(1)
Exercise Value ------------------------- -------------------------
(#) Realized ($) Exercisable/Unexercisable Exercisable/Unexercisable
----------- ------------ ------------------------- -------------------------
<S> <C> <C> <C> <C>
Brian F. Sullivan....... -- -- 121,500/250,000 $0/$0
Charles F. Karpinske.... -- -- 41,250/33,750 $0/$0
Richard D. Hembree...... -- -- 58,750/16,250 $0/$0
Jeffrey T. Dekko........ -- -- 26,250/19,750 $0/$0
Barry B. Van Lerberghe.. -- -- 23,750/22,250 $0/$0
</TABLE>
- --------
(1) The December 31, 1998 closing price of $6.63 per share as reported on the
NASDAQ/NMS was less than the exercise price of all of the options held by
the executive officers named in the Summary Compensation Table.
Mr. Sullivan has agreed that 35,000 of his 250,000 options will be cancelled
at the Effective Time without payment and that the Merger Consideration
payable to Mr. Sullivan at the Effective Time with respect to the remaining
215,000 options will be reduced by an amount equal to the principal and
accrued interest on Mr. Sullivan's promissory note dated April 18, 1997,
payable to the Company, whereupon the Company will cancel and discharge all of
Mr. Sullivan's obligations thereunder.
I-9
<PAGE>
DIRECTOR STOCK OPTION PLAN
The Company's 1993 Director Stock Option Plan (the "Director Option Plan")
provides for the automatic granting of an option for shares of Common Stock to
each non-employee director of the Company on the date of his or her initial
election or appointment as a director, and additional options on the date of
each annual meeting of shareholders at which the director is re-elected by the
shareholders. The number of Shares covered by such options was 1,000 Shares
per grant through 1996, and 4,000 Shares per grant for 1997 and subsequent
years. The exercise price of options granted under the Director Option Plan is
equal to 85% of the fair market value of the Common Stock on the date of
grant. At February 28, 1999, options for an aggregate of 61,000 Shares were
outstanding under the Director Option Plan and 53,000 Shares were available
for grant.
EMPLOYEE STOCK PURCHASE PLAN
The Company's 1994 Stock Purchase Plan permits eligible employees to make
voluntary contributions through payroll deductions, to be used to purchase
Common Stock from the Company on a monthly basis at a price equal to 85% of
the fair market value of a share of Common Stock on the purchase date. The
number of Shares that an employee may purchase under the Stock Purchase Plan
may not exceed 500 Shares during any calendar year, and the aggregate purchase
price of Shares purchased by any employee under the Stock Purchase Plan may
not exceed $10,000 during any calendar year. The Company issued 6,874 Shares,
9,501 Shares and 21,068 Shares under the Stock Purchase Plan in 1996, 1997 and
fiscal 1998, respectively.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Decisions and recommendations regarding compensation paid to the Company's
executive officers in 1998 were made by a Compensation Committee consisting of
John E. Gherty, Sanjay H. Patel and William F. Wanner, Jr., each of whom is a
non-employee director of the Company. Brian F. Sullivan, the only executive
officer of the Company who serves on the Board of Directors, abstains from
voting on compensation matters affecting his compensation.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
The Company's directors, executive officers and any persons holding more
than 10% of the outstanding Common Stock are required to file with the
Commission reports concerning their initial ownership of Common Stock and any
subsequent changes in such ownership. The Company believes that during 1998
the filing requirements were satisfied on a timely basis by all such persons,
except as follows: two transactions by Mr. Patel and one transaction by Dr.
Zeckhauser were not reported on a timely basis. In making this disclosure, the
Company has relied solely on written representations of its directors,
officers and beneficial owners of more than 10% of the Common Stock and copies
of the reports they have filed with the Commission and furnished to the
Company.
CERTAIN TRANSACTIONS
Pursuant to the Securities Purchase Agreement, the Company issued to GS
Group $15.0 million principal amount of the Convertible Notes. The Convertible
Notes are convertible into shares of Common Stock at a conversion price of
$14.85 per share. The Convertible Notes include certain reset rights which
provide for an adjustment of the conversion price if at the time the
Convertible Notes are converted into Common Stock, the market price of the
Common Stock is below certain levels. The Convertible Notes may be converted
into Common Stock at any time at the option of GS Group or, if certain
conditions are satisfied, after January 18, 2000, by the Company. The
Convertible Notes bear interest at the rate of 5% per annum, payable quarterly
on
I-10
<PAGE>
March 31, June 30, September 30, and December 31 in each year, commencing
September 30, 1996. If not converted, the principal amount of the Convertible
Notes is payable in annual installments starting August 1, 2001. The
Convertible Notes may be prepaid in whole or in part at any time by the
Company, without penalty, provided that if less than the entire indebtedness
evidenced by the Convertible Notes is to be prepaid by the Company, it must
offer to repay the Convertible Notes pro rata from each holder thereof.
Under the Securities Purchase Agreement, for so long as at least 25% of the
initial amount of Convertible Notes remain outstanding and GS Group holds at
least a majority of the outstanding Convertible Notes, at each meeting for the
election of directors of the Company, the Company is to use its best efforts
to cause to be elected to, and maintained as a member of, the Board of
Directors, one person designated by GS Group. The representative is to be a
member of the Company's executive and finance committees, if any, or any other
committee performing substantially similar functions and, upon request by the
representative, any other committee of the Board of Directors. The Company has
also agreed that if, at any time, GS Group does not have a representative on
the Board of Directors, GS Group will be entitled to have an observer present
at all meetings of the Board. Robert R. Gheewalla currently serves as a
director of the Company as the designee of GS Group.
In connection with the sale of the Convertible Notes, the Company, GS Group
and Brian F. Sullivan entered into an Executive Restriction Agreement, dated
July 19, 1996. The Executive Restriction Agreement prohibits, subject to
certain exceptions, Mr. Sullivan's sale of Common Stock until July 19, 1998.
After that date, Mr. Sullivan may not sell or otherwise transfer in any
transaction more than 25% of the Common Stock (including Shares subject to
stock options) which he held as of July 19, 1996 unless the holders of the
Convertible Notes are allowed to participate in such sale on a pro rata basis.
Under the Executive Restriction Agreement, Mr. Sullivan also has agreed to
refrain from competing with the Company for three years after (i) his
employment with the Company is terminated for cause or (ii) he resigns from
the Company other than for good reason (as defined in the Executive
Restriction Agreement).
In April 1997, Mr. Sullivan exercised stock options for an aggregate of
199,000 shares of Common Stock, and paid the exercise price of the options by
delivering to the Company his promissory note dated April 18, 1997, in the
principal amount of $497,500. The note bears interest at the rate of 9.25% per
annum, and matures on June 30, 2001.
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee of the Board of Directors (the "Committee") is
composed of non-employee directors of the Company. For 1998 the Committee
consisted of John E. Gherty, Sanjay H. Patel and William F. Wanner, Jr. The
Committee is responsible for assuring that compensation for executives is
consistent with the Company's compensation philosophy. The Committee also
administers and makes grants under the Company's stock option plans with
respect to the Company's executive officers.
The Company's executive compensation program is based on a pay-for-
performance philosophy. Under the Company's program, an executive's
compensation consists of three components: base salary, an annual incentive
(bonus) payment, and long-term incentives (principally stock options). Base
salaries generally are set at levels competitive with base salaries for
comparable positions in the marketplace. In addition, base salaries reflect
the executive's individual job responsibilities, his or her sustained
performance in fulfilling those responsibilities and the impact of such
performance on the business results of the Company. Base salaries for
executive officers were increased for 1998 based on the Company's achievements
in the market for household water filter products and the additional
responsibilities assumed by the executive officers in connection with the
growth of the Company's operations. Mr. Sullivan's base salary was increased
for 1998 based on the Company's achievements and to more nearly align his base
salary with those of chief executive officers of comparable companies.
Payments under the Company's management bonus program are tied to the level
of achievement of performance objectives for business functions under the
executive's direction and performance objectives for the
I-11
<PAGE>
Company as a whole. Performance objectives are based on the Company's annual
strategic plan as reviewed by the Board of Directors. An executive's annual
bonus potential is a percentage of his or her base salary and, for executives
other than Mr. Sullivan, is based on the achievement of various operating
objectives. Mr. Sullivan is eligible to earn a cash bonus based on the
Company's net income before income taxes. No bonuses were earned by any of the
executive officers in fiscal 1998.
The Company's long-term incentives are in the form of stock options. The
objective of these awards is to advance the longer term interests of the
Company and its shareholders, complement incentives tied to annual
performance, and align the interests of executives more closely with those of
shareholders. The Company also believes that the entrepreneurial character of
its executives makes the long-term incentives provided by its stock option
program especially significant in the motivation and retention of its
executives. The number of stock options awarded to an executive is based on
the executive's position and his or her performance in that position. The
executive's right to the stock options generally vests over a four-year period
and each option is exercisable, to the extent it has vested, over a ten-year
period following its grant. In the case of Mr. Sullivan, a significant portion
of his stock options vest upon the achievement of certain sales and income
objectives established by the Committee.
The Committee believes that the Company's executives are focused on the
attainment of a sustained high rate of growth and profitability for the
benefit of the Company and its shareholders, and that the Company's
compensation program, with its emphasis on performance-based and long-term
incentive compensation, serves to reinforce this focus.
By the Compensation Committee
John E. Gherty
Sanjay H. Patel
William F. Wanner, Jr.
I-12
<PAGE>
PERFORMANCE GRAPH
The following graph shows changes during the five-year period ended December
31, 1998, in the value of $100 invested in: (1) the Common Stock; (2) the CRSP
Total Return Index for The Nasdaq Stock Market (US); and (3) Nasdaq Non-
Financial Stocks. The values of each investment as of the dates indicated are
based on share prices plus any dividends paid in cash, with the dividends
reinvested on the date they were paid. The calculations exclude trading
commissions and taxes.
[GRAPH]
<TABLE>
<CAPTION>
12/31/93 12/30/94 12/29/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Recovery Engineering,
Inc. .................. $100.00 $149.49 $123.23 $ 56.57 $197.98 $ 53.54
CRSP Index for Nasdaq
Stock Market (US)...... $100.00 $ 97.75 $138.26 $170.01 $208.30 $293.52
Nasdaq Non-Financial
Stocks................. $100.00 $ 96.16 $134.03 $162.84 $190.73 $280.01
</TABLE>
I-13
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table shows information as of August 25, 1999, regarding the
beneficial ownership of shares of Common Stock by (i) each shareholder known
by the Company to own beneficially more than five percent (5%) of the Common
Stock, (ii) each director or nominee for director of the Company, (iii) each
executive officer named in the Summary Compensation Table, and (iv) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
Name and Address of Beneficial Number of Shares Percent of
Owner Beneficially Owned (1) Outstanding Shares (2)
- ------------------------------ ---------------------- ----------------------
<S> <C> <C>
Certain investment funds
affiliated with
The Goldman Sachs Group, L.P. 1,027,101 14.5%
(3).............................
85 Broad Street
New York, NY 10004
Wanner Engineering, Inc. (4)..... 596,100 9.9%
1204 Chestnut Avenue
Minneapolis, MN 55403
US Trust Company of New York 570,100 9.4%
(5).............................
114 West 47th Street
New York, NY 10036
Safeco Corp. (6)................. 446,750 7.4%
4333 Brooklyn Avenue NE
Seattle, WA 98185
Ashford Capital Management Inc. 372,400 6.2%
(7).............................
P.O. Box 4172
Wilmington, DE 19807
Directors and executive officers:
Brian F. Sullivan (8)(9)......... 530,000 8.6%
Charles F. Karpinske (8)......... 41,299 *
Richard D. Hembree (8)........... 134,973 2.2%
Jeffrey T. Dekko (8)............. 28,831 *
Barry B. Van Lerberghe (8)....... 30,804 *
Robert R. Gheewalla (8)(10)...... 12,000 *
John E. Gherty (8)(11)........... 72,247 1.2%
Sanjay H. Patel (8)(12).......... 16,700 *
William D. Thompson (8).......... 29,000 *
William F. Wanner, Jr. (8)(13)... 662,150 10.9%
Richard J. Zeckhauser (8)(14).... 99,500 1.6%
All directors and executive
officers as a group
(13 persons, including those
named above) (8)................ 1,657,504 25.7%
</TABLE>
- --------
* Less than one percent.
(1) Each person has sole voting and sole power with respect to all outstanding
Shares, except as noted.
(2) Based on 6,044,601 Shares outstanding at August 25, 1999. Such amount does
not include 2,369,768 shares of Common Stock issuable upon exercise of
stock options and warrants or conversion of the Convertible Notes
outstanding at August 25, 1999. Each figure showing the percentage of
outstanding Shares owned beneficially has been calculated by treating as
outstanding and owned the Shares which could be purchased by the indicated
person(s) within 60 days upon the exercise of existing stock options or
the conversion of the Convertible Notes.
(3) Reflects information included on a Schedule 13D, dated April 30, 1998,
filed with the Commission by certain investment partnerships, of which GS
Group is the general partner, managing general partner, managing partner
or investment manager. Includes (i) 1,010,101 Shares which may be acquired
upon the
I-14
<PAGE>
conversion of the Convertible Notes owned by the investment partnerships,
and (ii) 17,000 Shares subject to options held for the benefit of GS Group
by Mr. Gheewalla and Mr. Patel (see Notes 8, 11 and 13). Includes the
Convertible Notes held of record by GS Capital Partners II, L.P., currently
convertible into 633,766 Shares, the Convertible Notes held of record by GS
Capital Partners II Offshore, L.P., currently convertible into 251,948
Shares, the Convertible Notes held of record by Stone Street Fund 1996,
L.P., currently convertible into 60,191 Shares, the Convertible Notes held
of record by Bridge Street Fund 1996, L.P. , currently convertible into
40,819 Shares, and the Convertible Notes held of record by Goldman, Sachs &
Co. Verwaltungs GmbH, currently convertible into 23,377 Shares. Does not
include up to 367,309 aggregate Shares in respect of certain reset rights
held by the investment partnerships. The reset rights are created in
certain events through an adjustment of the conversion price applicable to
the Convertible Notes. GS Group disclaims beneficial ownership of the
Shares owned by such investment partnerships to the extent attributable to
partnership interests therein held by persons other than GS Group and its
affiliates. Each of such investment partnerships shares voting and
investment power with certain of its respective affiliates.
(4) Mr. Wanner, a director of the Company, is a director, officer and
principal shareholder of Wanner Engineering, Inc. Such Shares are also
included in the Shares beneficially owned by Mr. Wanner.
(5) Reflects information as of December 31, 1998, based on a Schedule 13G,
dated February 12, 1999, filed by such company with the Commission, which
indicates that the shareholder has shared voting power and shared
dispositive power with respect to said Shares.
(6) Reflects information as of December 31, 1998, based on a Schedule 13G,
dated February 11, 1999, filed by such company with the Commission, which
indicates that the shareholder has shared voting power and shared
dispositive power with respect to said Shares.
(7) Reflects information as of December 31, 1998, based on a Schedule 13G,
dated February 2, 1999, filed by such company with the Commission, which
indicates that the shareholder has sole voting power and sole dispositive
power with respect to said Shares.
(8) Includes Shares which could be purchased within 60 days upon the exercise
of stock options as follows: Mr. Sullivan, 121,500 Shares; Mr. Karpinske,
41,250 Shares; Mr. Hembree, 103,750 Shares; Mr. Dekko, 26,250 Shares; Mr.
Van Lerberghe, 26,750 Shares; Mr. Gheewalla, 12,000 Shares; Mr. Gherty,
14,000 Shares; Mr. Patel, 13,000 Shares; Mr. Thompson, 14,000 Shares; Mr.
Wanner, 8,000 Shares; Dr. Zeckhauser, 15,000 Shares; and all directors
and executive officers as a group, 395,500 Shares.
(9) Mr. Sullivan's address is 9300 North 75th Avenue, Minneapolis, MN 55428.
(10) Includes 12,000 Shares subject to options held for the benefit of GS
Group. Does not include other securities that may be deemed to be
beneficially owned by GS Group (see Note 3). Mr. Gheewalla, a director of
the Company, is an associate of Goldman, Sachs & Co., the investment
manager for certain of the investment partnerships. Mr. Gheewalla
disclaims beneficial ownership of such securities.
(11) Includes 10,701 Shares held by Mr. Gherty as custodian for his minor
children.
(12) Includes 5,000 Shares subject to options held for the benefit of GS Group
with which Mr. Patel was previously associated. Mr. Patel disclaims
beneficial ownership of such securities.
(13) Includes 2,200 Shares held by Mr. Wanner as trustee for members of his
family and 596,100 Shares owned by Wanner Engineering, Inc., of which Mr.
Wanner is a director, officer and principal shareholder.
(14) Includes 25,000 Shares owned by Dr. Zeckhauser's wife. Dr. Zeckhauser,
having no voting or dispositive powers with respect to such Shares,
disclaims beneficial ownership of such Shares.
I-15
<PAGE>
AGREEMENT AND PLAN OF MERGER
dated as of August 26, 1999
by and among
RECOVERY ENGINEERING, INC.,
THE PROCTER AND GAMBLE COMPANY
and
TENZING, INC.
<PAGE>
TABLE OF CONTENTS
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<TABLE>
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Page
<S> <C>
ARTICLE I
THE OFFER
SECTION 1.1. The Offer 2
SECTION 1.2. Actions by the Parent and Merger Sub 3
SECTION 1.3. Actions by the Company 3
SECTION 1.4. Directors 5
ARTICLE II
THE MERGER
SECTION 2.1. The Merger 6
SECTION 2.2. Effective Time of the Merger 6
SECTION 2.3. Closing 6
SECTION 2.4. Effects of the Merger 7
SECTION 2.5. Articles of Incorporation and Bylaws 7
SECTION 2.6. Directors 7
SECTION 2.7. Officers 7
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1. Conversion of Capital Stock 7
SECTION 3.2. Exchange of Certificates 9
SECTION 3.3. Adjustments to Prevent Dilution 10
SECTION 3.4. Dissenting Shares 11
SECTION 3.5. Merger Without Meeting of Shareholders 11
ARTICLE IV
REPRESENTATIONS AND WARRANTEES OF THE COMPANY
SECTION 4.1. Organization and Qualifications; Subsidiaries 11
SECTION 4.2. Articles of Incorporation and Bylaws 12
SECTION 4.3. Capitalization 12
SECTION 4.4. Authority Relative to This Agreement 14
SECTION 4.5. No Conflict; Required Filings and Consents; Certain Contracts 14
SECTION 4.6. Compliance 15
SECTION 4.7. SEC Reports and Financial Statements 15
SECTION 4.8. Absence of Certain Changes or Events 16
SECTION 4.9. Litigation 16
SECTION 4.10. Information Statement 16
SECTION 4.11. Employee Benefit Plans 17
SECTION 4.12. Labor and Employment Matters 18
SECTION 4.13. Vote Required 18
SECTION 4.14. Opinion of Financial Advisor 19
SECTION 4.15. Brokers 19
SECTION 4.16. Taxes 19
SECTION 4.17. Licenses and Permits 20
SECTION 4.18. Title to Assets 21
</TABLE>
<PAGE>
<TABLE>
<S> <C>
SECTION 4.19. Material Contracts 21
SECTION 4.20. Intellectual Property Rights 22
SECTION 4.21. State Takeover Statutes Inapplicable 23
SECTION 4.22. Rights Agreement 23
SECTION 4.23. Year 2000 23
SECTION 4.24. Insurance 24
SECTION 4.25. Environmental Matters 24
ARTICLE V
REPRESENTATIONS AND WARRANTEES OF THE PARENT
AND MERGER SUB
SECTION 5.1. Organization and Qualifications; Subsidiaries 26
SECTION 5.2. Certificate of Incorporation and Bylaws 26
SECTION 5.3. Authority Relative to This Agreement 26
SECTION 5.4. No Conflict 27
SECTION 5.5. Offer Documents 27
SECTION 5.6. Board Approval 27
SECTION 5.7. Vote Required 28
SECTION 5.8. No Arrangements Triggering Section 302A.673 of the MBCA 28
SECTION 5.9. Merger Sub 28
SECTION 5.10. Financing 28
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.1. Conduct of Business of the Company Pending the Merger 28
ARTICLE VII
ADDITIONAL COVENANTS
SECTION 7.1. Access to Information 31
SECTION 7.2. No Solicitation 31
SECTION 7.3. Directors and Officers Indemnification and Insurance 33
SECTION 7.4. Notification of Certain Matters 35
SECTION 7.5. Restructuring of Merger 35
SECTION 7.6. Company Shareholder Meeting 35
SECTION 7.7. Proxy Statements 35
SECTION 7.8. Further Action, Reasonable Efforts 36
SECTION 7.9. Public Announcements 37
SECTION 7.10. Employee Benefits 37
SECTION 7.11. Confidentiality Agreement 38
ARTICLE VIII
CONDITIONS TO THE MERGER
SECTION 8.1. Conditions to Each Party's Obligation to Effect the Merger 39
SECTION 8.2. Conditions to Obligations of the Company to Effect the Merger 39
SECTION 8.3. Conditions to Obligations of the Parent and Merger Sub to Effect the Merger 39
ARTICLE IX
</TABLE>
<PAGE>
<TABLE>
<S> <C>
TERMINATION WAIVER, AMENDMENT AND CLOSING
SECTION 9.1. Termination 40
SECTION 9.2. Effect of Termination 41
SECTION 9.3. Termination Fee 41
SECTION 9.4. Amendment or Supplement 42
SECTION 9.5. Extension of Time, Waiver, Etc 42
ARTICLE X
MISCELLANEOUS
SECTION 10.1. No Survival of Representations and Warranties 42
SECTION 10.2. Expenses 42
SECTION 10.3. Counterparts 43
SECTION 10.4. Governing Law 43
SECTION 10.5. Notices 43
SECTION 10.6. Miscellaneous 44
SECTION 10.7. Severability 44
SECTION 10.8. Enforcement of Agreement 44
</TABLE>
EXHIBIT A - CONDITIONS OF THE OFFER
<PAGE>
LIST OF DEFINED TERMS
Section Where Defined
Action Section 7.3
Acquisition Proposal Section 7.2
Agreement Introduction
Ancillary Documents Section 4.4
Articles of Merger Section 2.2
Audit Section 4.16
Benefit Plans Section 4.11
Blue Sky Laws Section 4.5
Board Section 1.3
Board of Directors Section 1.3
Cap Section 4.11
Certificates Section 3.1
Claim Section 7.3
Closing Section 2.3
Closing Date Section 2.3
Code Section 4.11
Company Introduction
Company Benefit Plans Section 4.11
Company Common Stock Section 1.1
Company Disclosure Letter Section 4.3
Company ESPP Section 3.2
Company Material Adverse Effect Section 4.1
Company Meeting Section 6.6
Company Option Plans Section 4.3
Company Performance Component Section 7.10
Company Preferred Stock Section 4.3
Company SEC Reports Section 4.7
Company Shares Trust Section 2.2
Company Stock Options Section 4.3
Confidentiality Agreement Section 7.1
Continuing Directors Section 1.3
Contracts Section 4.5
Convertible Notes Preambles
Covered Person Section 7.3
Current Plan Section 7.10
Derivative Section 4.19
Dissenting Shares Section 3.4
Effective Time Section 2.2
Environmental Costs Section 4.25
Environment Laws Section 4.25
ERISA Section 4.11
Excess Shares Section 2.2
Exchange Act Section 1.1
Exchange Fund Section 3.2
Excluded Options Section 3.1
Fairness Opinion Section 1.3
Financial Advisor Section 1.3
Governmental Entity Section 4.5
Hazardous Substances Section 4.25
HSR Act Section 4.5
<PAGE>
Indemnified Party Section 7.3
Information Statement Section 4.10
Intellectual Property Rights Section 4.20
Laws Section 4.5
Liens Section 4.3
Litigation Section 4.9
Losses Section 7.3
Material Contracts Section 4.19
Maximum Premium Section 7.3
MBCA Section 1.3
Merger Section 2.1
Merger Consideration Section 1.1
Merger Filing Section 2.2
Merger Sub Introduction
Minimum Condition Exhibit A
Offer Section 1.1
Offer Documents Section 1.2
Option Agreement Preambles
Options Section 4.3
Parent Introduction
Parent Material Adverse Effect Section 5.1
Parent Plan Section 7.10
Paying Agent Section 3.2
Percentage Section 1.4
Permits Section 4.17
Plan Options Section 4.3
Proxy Statement Section 7.7
REI Barbados Section 4.1
Representatives Section 7.1
Required Company Vote Section 4.13
Rights Section 4.3
Rights Amendment Section 4.22
Rights Agreement Section 1.3
Schedule 14D-9 Section 1.3
SEC Section 1.1
Securities Act Section 4.7
Shareholders Meeting Section 7.6
Stock Purchase Date Section 3.2
Subsidiary Section 4.1
Superior Proposal Section 7.2
Surviving Corporation Section 2.1
Systems Section 4.23
Taxes Section 4.16
Tax Authority Section 4.16
Tax Returns Section 4.16
Tender and Option Agreement Preambles
Termination Fee Section 9.4
Third Party Options Section 4.3
Transactions Section 4.4
Warrant Section 3.3
Year 2000 Compliant Section 4.23
1999 Balance Sheet Section 4.18
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER is dated as of August 26, 1999 (this
"Agreement"), by and among The Procter and Gamble Company, an Ohio corporation
(the "Parent"), Recovery Engineering, Inc., a Minnesota corporation (the
"Company"), and Tenzing, Inc., a Minnesota corporation and a wholly owned
subsidiary of the Parent ("Merger Sub").
WHEREAS, the Boards of Directors of the Parent and the Company each
have determined that it is in the best interests of their respective companies
and shareholders for the Parent to acquire the Company upon the terms and
subject to the conditions set forth herein;
WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Company has entered into an agreement (the "Option Agreement ")
with the Parent and Merger Sub pursuant to which the Company has granted to
Merger Sub an unconditional, irrevocable option to purchase up to 1,202,875
newly-issued shares of Company Common Stock (defined terms used herein not
previously defined having the meanings as hereinafter defined) of the Company
and the associated Rights, representing 19.9% of the outstanding shares of
Company Common Stock as of the date of this Agreement;
WHEREAS, simultaneously with the execution and delivery of this
Agreement, certain shareholders of the Company have entered into an agreement
(the "Tender and Option Agreement") with the Parent and Merger Sub pursuant to
which such shareholders have agreed to take certain actions with respect to the
shares of Company Common Stock now or hereafter beneficially owned by such
shareholders and have granted to the Parent and Merger Sub an unconditional,
irrevocable option to purchase such shares of Company Common Stock on the terms
and conditions set forth therein;
WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Company has entered into consulting, employment and/or non-
compete agreements with Messrs. Brian F. Sullivan, Reed A. Watson, Richard D.
Hembree and Daniel B. Seebart; and
WHEREAS, the holders of the $15 million principal amount of 5%
Convertible Notes due 2003 (the "Convertible Notes") of the Company have
consented in writing to the Merger.
NOW, THEREFORE, in consideration of the mutual representations,
warranties and agreements contained herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound hereby, agree as follows:
<PAGE>
ARTICLE I
THE OFFER
SECTION 1.1. The Offer.
(a) The Offer. Subject to the provisions of this Agreement and this
Agreement not having been terminated, as promptly as practicable but in no event
later than September 1, 1999, Merger Sub shall, and the Parent shall cause
Merger Sub to, commence, within the meaning of Rule 14d-2 under the Securities
Exchange Act of 1934, as amended, and the rules and regulations promulgated
thereunder (the "Exchange Act"), an offer to purchase all of the outstanding
shares of common stock, par value $.01 per share (the "Company Common Stock"),
of the Company, together with the associated Rights, at a price equal to $35.25
per share of Company Common Stock (the "Merger Consideration"), net to the
seller in cash (the "Offer"). Except where the context otherwise requires, all
references herein to the shares of Company Common Stock shall include the
associated Rights. The obligation of Merger Sub to, and of the Parent to cause
Merger Sub to, commence the Offer and to accept for payment, and pay for, any
shares of Company Common Stock tendered pursuant to the Offer shall be subject
to the conditions set forth in Exhibit A and to the other terms and conditions
of this Agreement. Subject to the provisions of this Agreement, the Offer shall
expire 20 business days after the date of its commencement, unless this
Agreement is terminated in accordance with Article IX, in which case the Offer
(whether or not previously extended in accordance with the terms hereof) shall
expire on such date of termination.
(b) Waiver. Without the prior written consent of the Company,
Merger Sub shall not (i) waive the Minimum Condition (as defined in Exhibit A),
(ii) reduce the number of shares of Company Common Stock subject to the Offer,
(iii) reduce the Merger Consideration, (iv) extend the Offer if all of the Offer
conditions are satisfied or waived, (v) change the form of consideration payable
in the Offer, or (vi) amend or modify any term or condition of the Offer
(including the conditions set forth in Exhibit A) in any manner adverse to the
holders of Company Common Stock. Notwithstanding anything herein to the
contrary, Merger Sub may, in its reasonable discretion without the consent of
the Company, extend the Offer at any time and from time to time (i) if at the
then scheduled expiration date of the Offer any of the conditions to Merger
Sub's obligation to accept for payment and pay for shares of Company Common
Stock shall not have been satisfied or waived; (ii) for any period required by
any rule, regulation, interpretation or position of the Securities and Exchange
Commission (the "SEC") or its staff applicable to the Offer; (iii) for any
period required by applicable Laws in connection with an increase in the
consideration to be paid pursuant to the Offer; and (iv) if all Offer conditions
are satisfied or waived but the number of shares of Company Common Stock
tendered is 80% or more, but less than 90%, of the then outstanding number of
shares of Company Common Stock, for an aggregate period of not more than 10
business days (for all such extensions under this clause (iv)) beyond the latest
expiration date that would be permitted under clause (i), (ii) or (iii) of this
sentence. In addition, if any condition set forth in Exhibit A is not satisfied
at the scheduled expiration of the Offer but is reasonably capable of being
satisfied within three business days thereof, Merger Sub shall, and Parent shall
cause Merger Sub to, extend the Offer for three business days and the Parent and
the Company shall each use reasonable efforts to cause such condition to become
satisfied during such three business day period. Subject to the terms and
<PAGE>
conditions of the Offer and this Agreement (including the right of termination
in accordance with Article IX), Merger Sub shall, and the Parent shall cause
Merger Sub to, accept for payment and pay for, in accordance with the terms of
the Offer, all shares of Company Common Stock validly tendered and not withdrawn
pursuant to the Offer as soon as practicable after the expiration of the Offer
but in no event later than two business days after expiration of the Offer.
Notwithstanding the immediately preceding sentence and subject to the applicable
rules of the SEC and the terms and conditions of the Offer, Merger Sub expressly
reserves the right to delay payment for shares of Company Common Stock in order
to comply in whole or in part with applicable Laws. Any such delay shall be
effected in compliance with Rule 14e-1(c) under the Exchange Act.
SECTION 1.2. Actions by the Parent and Merger Sub.
(a) Offer Documents. As soon as reasonably practicable following
execution of this Agreement, but in no event later than five business days from
the date hereof, the Parent and Merger Sub shall prepare and file with the SEC a
Tender Offer Statement on Schedule 14D-1 with respect to the Offer, which shall
contain an offer to purchase and a related letter of transmittal and any other
ancillary documents pursuant to which the Offer shall be made (such Schedule
14D-1 and the documents therein pursuant to which the Offer will be made,
together with any supplements or amendments thereto, the "Offer Documents").
The Company and its counsel shall be given an opportunity to review and
comment upon the Offer Documents (and shall provide any comments thereon as
soon as practicable) prior to the filing thereof with the SEC. The Offer
Documents shall comply as to form in all material respects with the requirements
of the Exchange Act, and on the date filed with the SEC and on the date first
published, sent or given to the Company's shareholders, the Offer Documents
shall not contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that no representation is made by the Parent or Merger
Sub with respect to information supplied by the Company for inclusion in the
Offer Documents. Each of the Parent, Merger Sub and the Company agrees promptly
to correct any information provided by it for use in the Offer Documents if and
to the extent that such information shall have become false or misleading in any
material respect, and each of the Parent, Merger Sub and the Company further
agrees to take all steps necessary to cause the Offer Documents as so corrected
to be filed with the SEC and to be disseminated to holders of shares of Company
Common Stock, in each case as and to the extent required by applicable federal
securities laws. The Parent and Merger Sub agree to provide the Company and its
counsel in writing with any comments the Parent, Merger Sub or their counsel may
receive from the SEC or its staff with respect to the Offer Documents promptly
after receipt of such comments and with copies of any written responses and
telephonic notification of any verbal responses by the Parent, Merger Sub or
their counsel.
(b) Funds. The Parent shall provide or cause to be provided to
Merger Sub all of the funds necessary to purchase any shares of Company Common
Stock that Merger Sub becomes obligated to purchase pursuant to the Offer.
SECTION 1.3 Actions by the Company.
<PAGE>
(a) Company Approvals. The Company hereby approves of and consents to
the Offer and represents and warrants that the Board of Directors of the Company
(the "Board of Directors" or the "Board") at a meeting duly called and held has
duly adopted resolutions (i) approving this Agreement, the Option Agreement, the
Ancillary Documents, the Offer and the Merger, determining that the Merger is
advisable and that the terms of the Offer and the Merger are fair to, and in the
best interests of, the Company and the Company's shareholders and recommending
that the Company's shareholders accept the Offer and approve the Merger and this
Agreement, and (ii) taking all action necessary so that Sections 302A.671,
302A.673 and 302A.675 of the Minnesota Business Corporation Act (the "MBCA"),
and the Rights Agreement, dated as of January 30, 1996, between the Company and
Norwest Bank Minnesota, N.A., as Rights Agent, as amended (the "Rights
Agreement"), are and, through the Effective Time, will be inapplicable to the
Parent and Merger Sub, the Offer, the Merger, this Agreement, the Option
Agreement, the Tender and Option Agreement, any of the Ancillary Documents or
any of the transactions contemplated hereby or thereby. The Company further
represents and warrants that the Board of Directors has received the written
opinion of Goldman, Sachs & Co. (the "Financial Advisor") that the proposed
consideration to be received by the holders of shares of Company Common Stock
pursuant to the Offer and the Merger is fair to such holders from a financial
point of view (the "Fairness Opinion"). The Company hereby consents to the
inclusion in the Offer Documents of the recommendation of the Board of Directors
described in the first sentence of this Section 1.3(a). The Company hereby
represents and warrants that it has been authorized by the Financial Advisor to
permit the inclusion of the Fairness Opinion and references thereto, subject to
prior review and consent by the Financial Advisor (such consent not to be
unreasonably withheld), in the Offer Documents, the Schedule 14D-9 and the Proxy
Statement. The Company has been advised by its directors and executive officers
that they intend to tender into the Offer all shares of Company Common Stock
beneficially owned by them on the date hereof.
(b) Schedule 14D-9. On the date the Offer Documents are filed with
the SEC, the Company shall file with the SEC a Solicitation/Recommendation
Statement on Schedule 14D-9 with respect to the Offer (such Schedule 14D-9, as
amended from time to time, the "Schedule 14D-9") containing the recommendations
described in Section 1.3(a) and shall disseminate the Schedule 14D-9 to the
shareholders of the Company as required by Rule 14d-9 promulgated under the
Exchange Act. To the extent practicable, the Company shall cooperate with Merger
Sub and/or the Parent in mailing or otherwise disseminating the Schedule 14D-9
with the appropriate Offer Documents to the Company's shareholders. The Parent
and its counsel shall be given an opportunity to review and comment upon the
Schedule 14D-9 (and shall provide any comments thereon as soon as practicable)
prior to the filing thereof with the SEC. The Schedule 14D-9 shall comply as to
form in all material respects with the requirements of the Exchange Act and, on
the date filed with the SEC and on the date first published, sent or given to
the Company's shareholders, shall not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading, except that no representation is
made by the Company with respect to information supplied by the Parent or Merger
Sub for inclusion in the Schedule 14D-9. Each of the Company, the Parent and
Merger Sub agrees promptly to correct any information provided by it for use in
the Schedule 14D-9 if and to the extent that such information shall have become
false or misleading in any
<PAGE>
material respect, and the Company further agrees to take all steps necessary to
cause the Schedule 14D-9 as so corrected to be filed with the SEC and to be
disseminated to the holders of shares of Company Common Stock, in each case as
and to the extent required by applicable federal securities laws. The Company
agrees to provide the Parent and Merger Sub and their counsel in writing with
any comments the Company or its counsel may receive from the SEC or its staff
with respect to the Schedule 14D-9 promptly after the receipt of such comments
and with copies of any written response and telephonic notification of any
verbal responses by the Company or its counsel.
(c) Mailing. In connection with the Offer, the Company shall cause
its transfer agent to furnish Merger Sub with mailing labels containing the
names and addresses of the record holders of Company Common Stock as of a recent
date and thereafter, until expiration of the Offer, of those persons becoming
record holders subsequent to such recent date, together with copies of all lists
of shareholders, security position listings and computer files and all other
information in the Company's possession or control regarding the beneficial
owners of Company Common Stock, and shall furnish to Merger Sub such information
and assistance (including updated lists of shareholders, security position
listings and computer files) as Merger Sub may reasonably request in
communicating the Offer to the Company's shareholders. Subject to the
requirements of applicable Laws, and except for such steps as are necessary to
disseminate the Offer Documents and any other documents necessary to consummate
the Offer and the Merger, the Parent and Merger Sub and each of their affiliates
and associates shall hold in confidence the information contained in any of such
labels, lists and files, shall use such information only in connection with the
Offer and the Merger, and, if this Agreement is terminated, shall promptly
deliver to the Company all copies of such information then in their possession
or under their control.
(d) Change in Law. Subject to the terms and conditions of this
Agreement, if there shall occur a change in Law or in a binding judicial
interpretation of existing Law which would, in the absence of action by the
Company or the Board, prevent Merger Sub, were it to acquire a majority of the
shares of Company Common Stock then outstanding on a fully diluted basis, from
approving and adopting this Agreement by its affirmative vote as the holder of a
majority of the outstanding shares of Company Common Stock and without the
affirmative vote of any other shareholder, the Company will use its reasonable
efforts to promptly take or cause such action to be taken.
SECTION 1.4. Directors.
(a) Appointment of Directors. Promptly upon the purchase of shares
of Company Common Stock pursuant to the Offer, and from lime to time thereafter,
the Parent shall be entitled to designate such number of directors, rounded up
to the next whole number, as will give the Parent representation on the Board of
Directors equal to the product of (i) the number of directors then on the Board
of Directors and (ii) the percentage that the number of shares of Company Common
Stock purchased by Merger Sub or the Parent or any affiliate pursuant to the
Offer bears to the number of shares of Company Common Stock then outstanding
(the "Percentage"), and the Company shall, upon request by the Parent, promptly
increase the size of the Board of Directors and/or exercise its reasonable
efforts to secure the resignations of such number of directors as is necessary
to enable the Parent's designees to be elected to the Board of
<PAGE>
Directors and shall cause the Parent's designees to be so elected. At the
request of the Parent, the Company will use its reasonable efforts to cause such
individuals designated by the Parent to constitute the same Percentage of (i)
each committee of the Board of Directors, (ii) the board of directors of REI
Barbados and (iii) the committees of the board of directors of REI Barbados. The
Company's obligations to appoint designees to the Board of Directors shall be
subject to Section 14(f) of the Exchange Act. The Company shall take, at its
expense, all action necessary to effect any such election, and shall include in
the Schedule 14D-9 the information required by Section 14(f) of the Exchange Act
and Rule 14f-l promulgated thereunder. The Parent will supply to the Company in
writing and be solely responsible for any information with respect to itself and
its nominees, directors and affiliates required by Section 14(f) and Rule 14f-l.
Notwithstanding anything stated herein, if shares of Company Common Stock are
purchased pursuant to the Offer, Parent and Merger Sub shall use reasonable
efforts to assure that until the Effective Time, the Company's Board of
Directors has at least one director who is a director on the date hereof and is
not an employee of the Company.
(b) Continuing Directors. Following the election or appointment of
the Parent's designees pursuant to this Section 1.4 and prior to the Effective
Time, the approval of a majority of the directors of the Company then in office
who are not designated by the Parent (the "Continuing Directors") shall be
required to authorize (and such authorization shall constitute the authorization
of the Board of Directors and no other action on the part of the Company,
including any action by any other director of the Company, shall be required to
authorize) any amendment to the Company's articles of incorporation or by-laws,
any termination of this Agreement by the Company, any amendment of this
Agreement requiring action by the Board of Directors, any extension of time for
the performance of any of the obligations or other acts of the Parent or Merger
Sub, and any waiver of compliance with any of the agreements or conditions
contained herein for the benefit of the Company.
ARTICLE II
THE MERGER
SECTION 2.1. The Merger. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 2.2), in accordance
with the MBCA, Merger Sub shall be merged with and into the Company in
accordance with this Agreement and the separate existence of Merger Sub shall
cease (the "Merger"). The Company shall be the surviving corporation in the
Merger (hereinafter sometimes referred to as the "Surviving Corporation").
SECTION 2.2. Effective Time of the Merger. Upon the terms and subject to
the conditions hereof, articles of merger (the "Articles of Merger") shall be
duly prepared by the Surviving Corporation and executed by the Surviving
Corporation and, if required under the MBCA, Merger Sub, and thereafter
delivered to the Secretary of State of the State of Minnesota, for filing, on
the Closing Date (as defined in Section 2.3). The Merger shall become effective
as of the date and at such time as the Articles of Merger pursuant to Section
302A.615 of the MBCA (the "Merger Filing") with the Secretary of State of the
State of Minnesota or at such subsequent date or time as shall be agreed by the
Company and the Parent and specified in the Articles of Merger and in
<PAGE>
accordance with the MBCA (the time the Merger becomes effective pursuant to the
MBCA being referred to herein as the "Effective Time").
SECTION 2.3. Closing. Subject to the satisfaction or waiver of all of the
conditions to closing contained in Article VIII hereof, the closing of the
Merger (the "Closing") will take place at 10:00 a.m., Minneapolis, Minnesota
time, on a date to be specified by the parties, which shall be no later than two
business days after the satisfaction or waiver of the conditions to Closing
contained in Article VIII, at the offices of Robins, Kaplan, Miller & Ciresi
L.L.P., 2800 LaSalle Plaza, 800 LaSalle Avenue, Minneapolis, Minnesota 55402,
unless another date or place is agreed to in writing by the parties hereto. The
date and time at which the Closing occurs is referred to herein as the "Closing
Date."
SECTION 2.4. Effects of the Merger. The Merger shall have the effects set
forth in the MBCA, including Section 302A.641 of the MBCA. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time all the
properties, rights, privileges, powers and franchises of the Company and Merger
Sub shall vest in the Surviving Corporation and all debts, liabilities and
duties of the Company and Merger Sub shall become the debts, liabilities and
duties of the Surviving Corporation.
SECTION 2.5. Articles of Incorporation and Bylaws.
(a) The articles of incorporation of Merger Sub in effect at the
Effective Time shall be the articles of incorporation of the Surviving
Corporation until amended in accordance with the terms thereof and with
applicable Laws.
(b) The bylaws of Merger Sub in effect at the Effective Time shall be
the bylaws of the Surviving Corporation until amended in accordance with the
terms thereof and with applicable Laws.
SECTION 2.6. Directors. The directors of Merger Sub immediately prior to
the Effective Time shall be the directors of the Surviving Corporation, each to
hold office from the Effective Time in accordance with the articles of
incorporation and bylaws of the Surviving Corporation and until his or her
successor is duly elected and qualified.
SECTION 2.7. Officers. The officers of the Company immediately prior to
the Effective Time shall be the officers of the Surviving Corporation, each to
hold office from the Effective Time in accordance with the articles of
incorporation and bylaws of the Surviving Corporation and until his or her
successor is duly appointed and qualified.
ARTICLE III
CONVERSION OF SHARES
SECTION 3.1. Conversion of Capital Stock. As of the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of Company Common Stock or of the holder of any shares of capital stock
of Merger Sub:
<PAGE>
(a) Capital Stock of Merger Subsidiary. Each issued and outstanding
share of common stock, par value $.01 per share, of Merger Sub shall be
converted into and become one fully paid and nonassessable share of common
stock, par value $.01 per share, of the Surviving Corporation.
(b) Cancellation of Parent-Owned Stock. Any shares of Company Common
Stock owned by the Parent, the Company, or any of their respective Subsidiaries
shall automatically be cancelled and retired and shall cease to exist and no
consideration shall be delivered in exchange therefor.
(c) Exchange Ratio for Company Common Stock. Each share of Company
Common Stock issued and outstanding immediately prior to the Effective Time
(subject to Section 3.1(b) and other than Dissenting Shares) shall, by virtue of
the Merger and without any action on the part of the holder thereof, be
converted into the right to receive cash in the amount of the Merger
Consideration. As a result of the Merger and without any action on the part of
the holder thereof, at the Effective Time all shares of Company Common Stock
shall cease to be outstanding and shall be canceled and retired and shall cease
to exist, and each holder of shares of Company Common Stock (other than the
Parent, the Company or any of their respective Subsidiaries) shall thereafter
cease to have any rights with respect to such shares of Company Common Stock,
except the right to receive, without interest, the Merger Consideration in
accordance with Section 3.2 upon the surrender of a certificate or certificates
(a "Certificate") representing such shares of Company Common Stock or, with
respect to Dissenting Shares, payment of the appraised value of Dissenting
Shares in accordance with Section 3.6.
(d) Stock Options. All Company Stock Options outstanding immediately
prior to the Effective Time under the Company Option Plans, whether or not then
exercisable, shall (by all appropriate and necessary action taken prior to the
date of this Agreement of the Board of Directors or such committee or committees
of the Board of Directors as are vested with authority to administer the Company
Option Plans) be canceled. In cancellation thereof, each holder of an Option
(other than Excluded Options) shall be entitled to receive, for each share of
Company Common Stock subject to an Option (other than Excluded Options), an
amount in cash equal to the excess, if any, of the Merger Consideration over the
per share exercise price of such Option, without interest. The amounts payable
pursuant to this Section 3.1(d) shall be subject to all applicable withholding
of taxes. The Company shall use its reasonable efforts to obtain all necessary
consents, if any, of the holders of Options to the cancellation of the Options
in accordance with this Section 3.1(d). "Excluded Options" shall mean the
options of the holders set forth in Section 3.1(d) of the Company Disclosure
Letter which such holders have agreed will be cancelled without payment at the
Effective Time.
(e) Warrants. All warrants (individually, a "Warrant" and
collectively, the "Warrants") to purchase Company Common Stock outstanding
immediately prior to the Effective Time, whether or not then exercisable, shall
(by all appropriate and necessary action taken prior to the date of the Board of
Directors) be canceled and each holder of a Warrant shall be entitled to
receive, for each share of Company Common Stock subject to a Warrant, an amount
in cash equal to the excess, if any, of the Merger Consideration over the per
share exercise price of such Warrant, without interest. The amounts payable
pursuant to this Section 3.1(e) shall be subject to all applicable withholding
<PAGE>
of taxes. The Company shall use its reasonable efforts to obtain all necessary
consents, if any, of the holders of Warrants to the cancellation of the Warrants
in accordance with this Section 3.1(e).
(f) Convertible Notes. The Convertible Notes outstanding immediately
prior to the Effective Time shall be canceled and the holders of the Convertible
Notes shall be entitled to receive an amount in cash equal to (i) the Merger
Consideration, times (ii) the number of shares of Company Common Stock that
would be issuable to such holders upon conversion of the Convertible Notes,
based on the Merger Consideration (i.e., one share of Company Common Stock for
each $14.85 principal amount of the Convertible Notes). No consideration or
other value shall be paid to the holders of the Convertible Notes under this
Section 3.1(f) in respect of the reset rights granted to the holders of the
Convertible Notes pursuant to Section 9.6(j) of the Securities Purchase
Agreement dated as of July 19, 1996, as amended by Amendment No. 1, dated as of
March 31, 1997,and as further amended by the letter agreement dated April 24,
1997, between the Company and the other parties thereto. At the Effective Time,
such reset rights shall be cancelled and shall expire. The amounts payable
pursuant to this Section 3.1(f) shall be subject to all applicable withholding
of taxes. The Company shall use its reasonable efforts to obtain all necessary
consents, if any, of the holders of the Convertible Notes to the cancellation of
the Convertible Notes in accordance with this Section 3.1(f).
SECTION 3.2. Exchange of Certificates.
(a) Paying Agent. Prior to the Effective Time, the Parent shall
appoint a commercial bank or trust company having net capital of not less than
$20 million, or such other party reasonably satisfactory to the Company, to act
as paying agent hereunder for payment of the Merger Consideration upon surrender
of Certificates (the "Paying Agent"). The Parent shall take all steps necessary
to cause the Surviving Corporation, the Company or Merger Sub to provide the
Paying Agent with cash in amounts necessary to pay for all the shares of Company
Common Stock pursuant to Section 3.1(c) and, in connection with the Options,
pursuant to Section 3.1(d), in connection with the Warrants, pursuant to Section
3.1(e), and in connection with the Convertible Notes, pursuant to Section
3.1(f), as and when such amounts are needed by the Paying Agent to fund the
payment of checks presented to the Paying Agent. Such amounts shall hereinafter
be referred to as the "Exchange Fund."
(b) Mailing. As soon as practicable after the Effective Time, the
Parent shall cause the Paying Agent to mail to each holder of record of shares
of Company Common Stock immediately prior to the Effective Time (i) a letter of
transmittal which shall specify that delivery shall be effected, and risk of
loss and title to such Certificates shall pass, only upon delivery of the
Certificates to the Paying Agent and which letter shall be in such form and have
such other provisions as the Parent may reasonably specify and (ii) instructions
for effecting the surrender of such Certificates in exchange for the Merger
Consideration. Upon surrender of a Certificate to the Paying Agent together with
such letter of transmittal, duly executed and completed in accordance with the
instructions thereto, and such other documents as may reasonably be required by
the Paying Agent, the holder of such Certificate shall be entitled to receive in
exchange therefor the amount of cash into which shares of Company Common Stock
theretofore represented by such Certificate shall have
<PAGE>
been converted pursuant to Section 3.1, and the shares represented by the
Certificate so surrendered shall forthwith be canceled. No interest will be paid
or will accrue on the cash payable upon surrender of any Certificate. In the
event of a transfer of ownership of Company Common Stock which is not registered
in the transfer records of the Company, payment may be made with respect to such
Company Common Stock to such a transferee if the Certificate representing such
shares of Company Common Stock is presented to the Paying Agent, accompanied by
all documents required to evidence and effect such transfer and to evidence that
any applicable stock transfer taxes have been paid. Until surrendered as
contemplated by this Section 3.2, each Certificate shall be deemed, at any time
after the Effective Time, to represent only the right to receive upon such
surrender the amount of cash into which shares of Company Common Stock
theretofore represented by such Certificate shall have been converted pursuant
to Section 3.1.
(c) No Transfers. At and after the Effective Time, there shall be no
transfers on the stock transfer books of the Company of the shares of Company
Common Stock which were outstanding immediately prior to the Effective Time. If,
after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be canceled and exchanged as provided in this Article
III.
(d) Unclaimed Portion of Exchange Fund. Any portion of the Exchange
Fund (including the proceeds of any interest and other income received by the
Paying Agent in respect of all such funds) that remains unclaimed by the former
shareholders of the Company six months after the Effective Time shall be
delivered to the Surviving Corporation. Any former shareholders of the Company
who have not theretofore complied with this Article III shall thereafter look
only to the Surviving Corporation for payment of any Merger Consideration that
may be payable upon surrender of any Certificates such shareholder holds, as
determined pursuant to this Agreement, without any interest thereon.
(e) No Liability. None of the Parent, the Company, the Surviving
Corporation, the Paying Agent or any other person shall be liable to any former
holder of shares of Company Common Stock for any amount properly delivered to a
public official pursuant to applicable abandoned property, escheat or similar
Laws.
(f) Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
the Surviving Corporation, the posting by such person of a bond in such
reasonable amount as the Surviving Corporation may direct as indemnity against
any claim that may be made against it with respect to such Certificate, the
Paying Agent will issue in exchange for such lost, stolen or destroyed
Certificate the Merger Consideration payable in respect thereof pursuant to this
Agreement.
(g) Company ESPP. Prior to any public announcement that it has
entered into this Agreement, the Company shall have taken all corporate action
necessary to amend its 1994 Stock Purchase Plan (the "Company ESPP") such that,
following the amendment of the Company ESPP, (i) no person shall commence to
participate therein, (ii) no participant shall be permitted to increase the
amount of payroll deductions in respect thereof, (iii) the "Stock Purchase
Date"
<PAGE>
(as defined in the Company ESPP) to occur on or first following amendment of the
ESPP (whichever is earlier) shall be the final date on which Company Common
Stock is purchased thereunder, and (iv) the Company ESPP shall be terminated
effective on the Effective Date. Promptly following such Stock Purchase Date,
any payroll deductions not applied to the purchase of shares of Company Common
Stock shall be remitted to participants.
SECTION 3.3. Adjustments to Prevent Dilution. In the event that prior
to the Effective Time there is a change in the number of shares of Company
Common Stock or securities convertible or exchangeable into or exercisable for
shares of Company Common Stock issued and outstanding as a result of a
reclassification, stock split (including a reverse stock split), stock dividend
or distribution or similar transaction, the Merger Consideration shall be
equitably adjusted to eliminate the effects of that event.
SECTION 3.4. Dissenting Shares. Notwithstanding anything in this
Agreement to the contrary, if required by the MBCA, but only to the extent
required thereby, shares of Company Common Stock outstanding immediately prior
to the Effective Time and held by a holder who has not voted in favor of the
Merger and who has demanded appraisal for such shares in accordance with Section
302A.473 of the MBCA ("Dissenting Shares") shall not be converted into the right
to receive the Merger Consideration as provided in Sections 3.1 and 3.2, unless
and until such holder fails to perfect or withdraws or otherwise loses his right
to appraisal and payment under the MBCA. If, after the Effective Time, any such
holder fails to perfect or withdraws or loses his right to appraisal, such
Dissenting Shares shall thereupon be treated as if they had been converted as of
the Effective Time into the right to receive the Merger Consideration, if any,
to which such holder is entitled, without interest or dividends thereon. The
Company shall give the Parent prompt notice of any demands received by the
Company for appraisal of shares and, prior to the Effective Time, the Parent
shall have the right to participate in all negotiations and proceedings with
respect to such demands. Prior to the Effective Time, the Company shall not,
except with the prior written consent of the Parent, make any payment with
respect to, or settle or offer to settle, any such demands.
SECTION 3.5. Merger Without Meeting of Shareholders.
Notwithstanding the foregoing, if Merger Sub, or any other direct or indirect
Subsidiary of the Parent, shall acquire at least 90 percent of the outstanding
shares of Company Common Stock pursuant to the Offer, the parties hereto shall
take all necessary and appropriate action to cause the Merger to become
effective as soon as practicable after the expiration of the Offer without a
meeting of shareholders of the Company, in accordance with Section 302A.621 of
the MBCA.
ARTICLE IV
REPRESENTATIONS AND WARRANTEES OF THE COMPANY
Subject to the letter of the Company, dated the date hereof and
addressed to the Parent and Merger Sub (the "Company Disclosure Letter"), the
Company hereby represents and warrants to the Parent and Merger Sub that:
SECTION 4.1. Organization and Qualifications; Subsidiaries.
<PAGE>
(a) Each of the Company and Recovery Engineering International,
Ltd., a Barbados corporation ("REI Barbados") (i) is a corporation, partnership
or other legal entity duly incorporated or organized, validly existing and in
good standing under the laws of the jurisdiction of its incorporation or
organization and (ii) has the requisite power and authority and all necessary
governmental approvals to own, lease and operate its properties and to carry on
its business as it is now being conducted, except, in the case of this clause
(ii), where the failure to have such power, authority and governmental approvals
would not, individually or in the aggregate, have a Company Material Adverse
Effect (as defined below). Each of the Company and REI Barbados is duly
qualified or licensed as a foreign corporation to transact business, and is in
good standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes such qualification
or licensing necessary, except for such failures to be so qualified or licensed
and in good standing that would not, individually or in the aggregate, have a
Company Material Adverse Effect. For purposes of this Agreement, a "Company
Material Adverse Effect" shall mean any change or effect (i) that is materially
adverse to the business, assets, financial condition or results of operations of
the Company and REI Barbados, taken as a whole, (ii) that materially adversely
affects the ability of the Company to consummate the transactions contemplated
by this Agreement or that would prevent or materially delay consummation of the
Merger, or (iii) that materially adversely affects the ability of the Company to
conduct its business after the Closing consistent with the manner conducted in
the past.
(b) For purposes of this Agreement, a "Subsidiary" means, with
respect to the Parent, the Company or any other person, any entity of which the
Parent, the Company or such other person, as the case may be (either alone or
through or together with any other Subsidiary), owns, directly or indirectly,
stock or other equity interests the holders of which are generally entitled to
more than 50% of the vote for the election of the board of directors or other
governing body of such corporation or other legal entity.
SECTION 4.2. Articles of Incorporation and Bylaws. The Company has
heretofore made available to the Parent a complete and correct copy of the
articles of incorporation and the bylaws or equivalent organizational documents,
each as amended to the date hereof, of the Company and REI Barbados. Such
articles of incorporation, bylaws and equivalent organizational documents are in
full force and effect. The Company is not in violation of any provision of its
articles of incorporation or bylaws. REI Barbados is not in violation of any
provision of its articles of incorporation, bylaws or equivalent organizational
documents, except for such violations that would not, individually or in the
aggregate, have a Company Material Adverse Effect.
SECTION 4.3. Capitalization.
(a) The authorized capital stock of the Company consists of
100,000,000 shares of capital stock, all of which is Company Common Stock. As of
August 25, 1999, (i)(A) 6,044,601 shares of Company Common Stock were issued and
outstanding, all of which were validly issued, fully paid and nonassessable, (B)
6,044,601 common stock purchase rights ("Rights") issued pursuant to the Rights
Agreement were issued and outstanding, and (C) no class or series of preferred
stock of the Company had been established; and (ii)(A) options to purchase
("Plan Options") 1,279,667 shares of Company Common Stock which were
<PAGE>
granted pursuant to the Company's 1986 Stock Option Plan, the Company's 1994
Stock Option and Incentive Plan, and the Company's 1993 Director Stock Option
Plan (the "Company Option Plans") were outstanding, (B) no shares of Company
Common Stock were reserved for issuance pursuant to options under the Company
Option Plans, (C) 80,000 shares of Company Common Stock were reserved for
issuance upon exercise of outstanding options and warrants listed in Section 4.3
of the Company Disclosure Letter (the "Third Party Options" and, together with
the Plan Options, the "Company Stock Options"), (D) 44,385 shares of Company
Common Stock were reserved for issuance pursuant to the Company ESPP (with
approximately 750 shares expected to be issued under the ESPP between the date
hereof and the Closing Date, based on current prices for the Company Common
Stock and the current contribution rates of participants in the Company ESPP at
the date of this Agreement), (E) up to 1,377,410 shares of Company Common Stock
were reserved for issuance upon conversion of the Convertible Notes at a
conversion price described in Section 4.3 of the Company Disclosure Letter, (F)
no shares of Company Common Stock were held by the Company in its treasury and
(G) no shares of Company Common Stock were held by REI Barbados. The number of
shares of Company Common Stock issuable upon conversion of the Convertible
Notes, based on the Merger Consideration, is 1,010,101 shares. Except as set
forth above, no shares of capital stock or other voting securities of the
Company are issued, reserved for issuance or outstanding and, since August 25,
1999, no shares of capital stock or other voting securities or options in
respect thereof have been issued except upon the exercise of the Company Stock
Options outstanding on August 25, 1999. Except as set forth in this Section 4.3
or in Section 4.3 of the Company Disclosure Letter, and except as contemplated
by this Agreement and the Ancillary Documents, there are no options, warrants,
calls, rights, subscriptions, convertible or exchangeable securities or other
rights, agreements, arrangements or commitments of any kind or character to
which the Company or REI Barbados is a party (collectively, "Options") relating
to the issued or unissued capital stock of the Company or REI Barbados, or
obligating the Company or REI Barbados to issue, transfer, grant or sell any
shares of capital stock of, or other equity interests in, or securities
convertible into or exchangeable for any capital stock or other equity interests
in, the Company or REI Barbados. Section 4.3 of the Company Disclosure Letter
sets forth, for each Company Stock Option, the holder and the exercise price
thereof. After the Effective Time, the Surviving Corporation will have no
obligation to issue, transfer or sell any shares of capital stock of the Company
or the Surviving Corporation pursuant to any Company Option Plan. Except as set
forth in Section 4.3 of the Company Disclosure Letter, there are no voting
trusts or other agreements or understandings to which the Company or REI
Barbados is a party with respect to the voting of capital stock of the Company
or REI Barbados. All shares of outstanding Company Common Stock have been duly
authorized, validly issued and are nonassessable and all shares of Company
Common Stock subject to issuance as aforesaid, upon issuance on the terms and
conditions specified in the instruments pursuant to which they are issuable,
will be duly authorized, validly issued, fully paid and nonassessable. Except as
set forth in Section 4.3 of the Company Disclosure Letter, there are no
outstanding contractual obligations of the Company or REI Barbados to
repurchase, redeem or otherwise acquire any shares of Company Common Stock or
any other shares of capital stock of the Company or REI Barbados, or make any
material investment (in the form of a loan, capital contribution or otherwise)
in REI Barbados or any other person.
<PAGE>
(b) Each outstanding share of capital stock of REI Barbados is
duly authorized, validly issued, fully paid and nonassessable and each such
share is owned by the Company free and clear of all security interests, liens,
claims, pledges, options, rights of first refusal, agreements, limitations on
voting rights, charges and other encumbrances of any nature whatsoever
(collectively, "Liens"). Section 4.3 of the Company Disclosure Letter sets forth
the authorized capital stock and the number of issued and outstanding shares of
capital stock of REI Barbados. Except for REI Barbados, neither the Company nor
REI Barbados owns directly or indirectly any interest or investment (whether
equity or debt) in any corporation, partnership, joint venture, business, trust
or other entity. REI Barbados (i) has not engaged in any business activity, (ii)
does not have any liabilities of any kind, (iii) has assets with a value of less
than $5,000, (iv) has not entered into any Contracts, and (v) is not the subject
of any Litigation.
SECTION 4.4. Authority Relative to This Agreement. The Company has all
necessary corporate power and authority to execute and deliver this Agreement,
the Option Agreement and the documents contemplated hereby or thereby or
executed in connection herewith or therewith to which the Company is a party
(the Option Agreement and such other agreements and documents, collectively, the
"Ancillary Documents"), to perform its obligations hereunder and thereunder and,
subject to adoption of this Agreement by the Required Company Vote (as defined
in Section 4.13), if required by applicable Laws, to consummate the transactions
contemplated hereby and thereby (the "Transactions"). The execution and delivery
of this Agreement and any Ancillary Document by the Company and the consummation
by the Company of the Transactions have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of the
Company are necessary to authorize this Agreement or any Ancillary Document or
to consummate the Transactions (other than (i) the Required Company Vote, if
required by applicable Laws, and (ii) the Merger Filing). This Agreement and any
Ancillary Document have each been or will be duly and validly executed and
delivered by the Company and, assuming the due authorization, execution and
delivery thereof by the Parent and Merger Sub, constitute or will constitute the
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with their respective terms, except as enforcement may be
limited by bankruptcy, insolvency, moratorium or other similar laws relating to
creditors rights generally and by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
SECTION 4.5. No Conflict; Required Filings and Consents; Certain
Contracts.
(a) Except as set forth in Section 4.5(a) of the Company
Disclosure Letter, the execution and delivery of this Agreement and the
Ancillary Documents by the Company do not, and the performance of its
obligations under this Agreement and the Ancillary Documents and the
consummation of the Transactions by the Company will not, (i) conflict with or
violate the articles of incorporation or bylaws or equivalent organizational
documents of the Company or REI Barbados, (ii) subject to the making of the
filings and obtaining the approvals identified in Section 4.5(b), conflict with
or violate any law, rule, regulation, order, judgment or decree (collectively,
"Laws") applicable to the Company or REI Barbados or by which any property or
asset of the Company or REI Barbados is bound or affected or, directly or
<PAGE>
indirectly, result in any of the consequences referred to in subsection (a) of
Exhibit A hereto, or (iii) conflict with or result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, result in the loss (by the Company, REI Barbados
or the Surviving Corporation) or modification in a manner materially adverse to
the Company and REI Barbados of any material right or benefit under, or give to
others any right of termination, amendment, acceleration, repurchase or
repayment, increased payments or cancellation of, or result in the creation of a
Lien or other encumbrance on any property or asset of the Company or REI
Barbados pursuant to, any note, bond, mortgage, indenture, contract, agreement,
lease, license, permit, franchise, or other instrument or obligation, whether
written or oral (collectively, "Contracts"), to which the Company or REI
Barbados is a party or by which the Company or REI Barbados or any property or
asset of the Company or REI Barbados is bound or affected, except, in the case
of clauses (ii) and (iii), for any such conflicts, violations, breaches,
defaults or other occurrences which would not, individually or in the aggregate,
have a Company Material Adverse Effect.
(b) The execution and delivery of this Agreement and the
Ancillary Documents by the Company do not, and the performance of its
obligations under this Agreement and the Ancillary Documents and the
consummation of the Transactions by the Company will not, require any consent,
approval, authorization or permit of, or filing with or notification to, any
federal, state or local governmental or regulatory agency, authority, commission
or instrumentality, whether domestic or foreign (each a "Governmental Entity"),
except (i) for (A) applicable requirements of the Exchange Act and state
securities or "blue sky" laws ("Blue Sky Laws"), (B) the pre-merger notification
requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and the rules and regulations thereunder (the "HSR Act"), and (C) the
Merger Filing, and (ii) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not,
individually or in the aggregate, have a Company Material Adverse Effect.
(c) Except as set forth in Section 4.5(c) of the Company
Disclosure Letter or in the Contracts filed (or incorporated) as exhibits to the
Company's Annual Report on Form 10-K for the year ended January 3, 1999 or the
other Company SEC Reports (as defined in Section 4.7) filed thereafter, there
are no Contracts to which the Company is a party or by which the Company or any
asset of the Company is bound, which by its terms limits in any material respect
the ability of the Company or, after consummation of the Transactions, would by
its terms limit in any material respect the ability of the Parent or any of its
affiliates, to engage in any business in any area or for any period.
SECTION 4.6. Compliance. Except as set forth in Section 4.6 of the
Company Disclosure Letter, neither the Company nor REI Barbados is in conflict
with, or in default or violation of, (i) any Law applicable to the Company or
REI Barbados or by which any property or asset of the Company or REI Barbados is
bound or affected, or (ii) any Contract to which the Company or REI Barbados is
a party or by which the Company or REI Barbados or any property or asset of the
Company or REI Barbados is bound or affected, except for any such conflicts,
defaults or violations that would not, individually or in the aggregate, have a
Company Material Adverse Effect.
<PAGE>
SECTION 4.7. SEC Reports and Financial Statements. Each form, report,
schedule, registration statement and definitive proxy statement filed by the
Company with the SEC since January 1, 1996 and prior to the date hereof
(including exhibits and any amendments thereto) (as such documents have been
amended prior to the date hereof, the "Company SEC Reports"), as of their
respective dates, complied in all material respects with the applicable
requirements of the Securities Act of 1933, as amended (the "Securities Act")
and the Exchange Act and the rules and regulations thereunder. None of the
Company SEC Reports, as of their respective dates, contains any untrue statement
of a material fact or omits 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. The Company has made
available to the Parent true, accurate and complete copies of all of the Company
SEC Reports. The consolidated financial statements (including any notes and
related schedules) of the Company and REI Barbados included in such reports
comply as to form in all material respects with applicable accounting
requirements and with the published rules and regulations of the SEC with
respect thereto, have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto or, in the case of the
unaudited interim financial statements, as permitted by Form 10-Q of the SEC)
and fairly present in all material respects (subject, in the case of the
unaudited interim financial statements, to normal, year-end audit adjustments)
the consolidated financial position of the Company and REI Barbados as at the
dates thereof and the consolidated results of their operations and cash flows
for the periods then ended. Neither the Company nor REI Barbados has any
liabilities or obligations (whether absolute, accrued, fixed, contingent,
liquidated, unliquidated or otherwise) of any nature, except liabilities,
obligations or contingencies (a) which are reflected on the audited balance
sheet of the Company and REI Barbados as at January 3, 1999 (including the notes
thereto), or (b) which (i) were incurred in the ordinary course of business
after January 3, 1999 and consistent with past practices and which would not,
individually or in the aggregate, have a Company Material Adverse Effect, (ii)
are disclosed or reflected in the Company SEC Reports filed after January 3,
1999 and prior to the date of this Agreement or (iii) would not, individually or
in the aggregate, have a Company Material Adverse Effect. Since January 1, 1996,
the Company has timely filed with the SEC all forms, reports and other documents
required to be filed prior to the date hereof, and REI Barbados has not filed,
or been required to file, any form, report or other document with the SEC, in
each case, pursuant to the Securities Act, the Exchange Act or the rules and
regulations thereunder.
SECTION 4.8. Absence of Certain Changes or Events. Except as set forth
in Section 4.8 of the Company Disclosure Letter, as contemplated by this
Agreement or as disclosed in any Company SEC Report filed prior to the date of
this Agreement, since January 3, 1999, (i) the Company and REI Barbados have
conducted their respective businesses only in the ordinary course, consistent
with past practice, (ii) there has not occurred or arisen any event that,
individually or in the aggregate, has had or would be reasonably expected to
have a Company Material Adverse Effect excluding any circumstance, fact, change,
development, effect or impairment resulting from (A) the entering into of this
Agreement and the announcement thereof and the transactions contemplated hereby
and (B) changes in general economic, financial, regulatory, political or market
conditions, and (iii) neither the Company nor REI Barbados has taken any action
<PAGE>
which, if taken after the date hereof, would constitute a violation of or
require the Parent's consent under Section 6.1.
SECTION 4.9. Litigation. Except as disclosed in Section 4.9 of the
Company Disclosure Letter or in the Company SEC Reports, there are (i) no
claims, suits, actions, proceedings, arbitrations, investigations or audits
(collectively, "Litigation") pending or, to the knowledge of the Company's
executive officers, threatened, or (ii) no investigations or reviews by any
Governmental Entity pending or, to the knowledge of the Company's executive
officers, threatened, against, relating to or affecting the Company or REI
Barbados, which in either case would have, individually or in the aggregate, a
Company Material Adverse Effect, nor is there any judgment, decree, order,
injunction, writ or rule of any court, governmental department, commission,
agency, instrumentality or authority or any arbitrator outstanding against the
Company or REI Barbados.
SECTION 4.10. Information Statement. None of the information contained
in the Schedule 14D-9, the information statement, if any, filed by the Company
in connection with the Offer pursuant to Rule 14f-1 under the Exchange Act (the
"Information Statement"), or incorporated by reference therein or any amendment
or supplement thereto, at the respective times such documents are filed with the
SEC or first published, sent or given to the Company's shareholders, contain or
will contain any untrue statement of a material fact or omit or will omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
are made, not misleading, except that no representation is made by the Company
with respect to information supplied by the Parent or Merger Sub specifically
for inclusion in the Schedule 14D-9 or Information Statement or any amendment or
supplement. None of the information supplied or to be supplied by the Company
for inclusion or incorporation by reference in the Offer Documents will, at the
date of filing with the SEC, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. If at any time prior to the Effective Time the
Company's executive officers shall obtain knowledge of any facts with respect to
itself, any of its officers and directors or REI Barbados that would require the
supplement or amendment to any of the foregoing documents in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, or to comply with applicable Laws, such amendment or
supplement shall be promptly filed with the SEC and, as required by Law,
disseminated to the shareholders of the Company, and in the event the Parent
shall advise the Company as to its obtaining knowledge of any facts that would
make it necessary to supplement or amend any of the foregoing documents, the
Company shall promptly amend or supplement such document as required and
distribute the same to its shareholders.
SECTION 4.11. Employee Benefit Plans.
(a) Section 4.11 of the Company Disclosure Letter sets forth a
list of each material pension, retirement, savings, disability, dental, health,
life, death benefit, group insurance, profit-sharing, deferred compensation,
stock purchase, stock option (or other equity award), bonus, incentive,
termination, severance pay or other employee benefit plan, trust,
<PAGE>
arrangement, contract, commitment, agreement or policy (collectively, "Benefit
Plans") sponsored or maintained by the Company or REI Barbados, in which present
or former employees or directors of the Company or REI Barbados (or any
beneficiary or dependent of the foregoing) participate, or pursuant to which the
Company or REI Barbados may have any liability (contingent or otherwise)
(collectively, the "Company Benefit Plans"). True and complete copies of the
Company Benefit Plans (together with such other information related thereto as
the Parent may reasonably have requested) have been delivered to the Parent.
(b) Except as set forth in Section 4.11 of the Company Disclosure
Letter and except as would not, individually or in the aggregate, have a Company
Material Adverse Effect: (A) the Company Benefit Plans have been administered
and are in compliance with the terms of such plan and all applicable Laws, (B)
no "reportable event" (as such term is used in Section 4043 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA") (other than those
events for which the 30 day notice has been waived pursuant to the regulations),
"prohibited transaction" (as such term is used in Section 406 of ERISA or
Section 4975 of the Internal Revenue Code of 1986, as amended (the "Code") or
"accumulated funding deficiency" (as such term is used in Section 412 or 4971 of
the Code) has heretofore occurred with respect to any Company Benefit Plan and
(C) each Company Benefit Plan intended to qualify under Section 401(a) of the
Code has received a favorable determination from the IRS regarding its qualified
status and no event has occurred that could reasonably be expected to result in
the loss of such qualified status.
(c) There is no litigation or administrative or other proceeding,
or any claim, suit, audit or investigation, involving any Company Benefit Plan
(other than routine claims for benefits), nor, to the knowledge of the Company's
executive officers, is any such proceeding threatened, in each case that,
individually or in the aggregate, would have a Company Material Adverse Effect.
Neither the Company nor REI Barbados has incurred, nor, to the knowledge of the
Company's executive officers, is reasonably likely to incur any withdrawal
liability with respect to any "multiemployer plan" (within the meaning of
Section 3(37) of ERISA) which remains unsatisfied in an amount which would have
a Company Material Adverse Effect. The termination of, or withdrawal from, any
Company Benefit Plan or multiemployer plan to which the Company or REI Barbados
contributes, will not subject the Company or REI Barbados to any liability under
Title IV of ERISA that individually or in the aggregate would have a Company
Material Adverse Effect.
(d) At no time has the Company or REI Barbados (i) contributed to
or been required to contribute to, or incurred any withdrawal liability (within
the meaning of Section 4201 of ERISA) under, any "multiemployer plan" (within
the meaning of Sections 3(37) or 4001(a)(3) of ERISA), or (ii) contributed to or
been required to contribute to any "defined benefit plan" (within the meaning of
Section 3(35) of ERISA).
(e) Other than as set forth on Section 4.11 of the Company
Disclosure Letter, the execution of, and performance of the transactions
contemplated in, this Agreement will not (either alone or upon the occurrence of
any additional or subsequent events) (i) constitute an event under any Company
Benefit Plan that will or may result in any payment (whether of severance pay or
otherwise), acceleration, forgiveness of indebtedness, vesting, distribution,
increase in benefits or obligation to fund benefits with respect to any current
<PAGE>
or former employee or director of the Company or REI Barbados, or (ii) result in
the triggering or imposition of any restrictions or limitations on the right of
the Company, the Parent or any of their Subsidiaries to amend or terminate any
Company Benefit Plan. No payment or benefit which will or may be made by the
Company, the Parent or any of their Subsidiaries will be characterized as an
"excess parachute payment," within the meaning of Section 280G(b)(1) of the
Code.
SECTION 4.12. Labor and Employment Matters. Except as set forth in
Section 4.12 of the Company Disclosure Letter, (a) neither the Company nor REI
Barbados is a party to, or bound by, any collective bargaining agreement or
other Contract or understanding with a labor union or labor organization; and
(b) there is no (i) unfair labor practice, labor dispute (other than routine
individual grievances) or labor arbitration proceeding pending or, to the
knowledge of the Company's executive officers, threatened against the Company or
REI Barbados, (ii) activity or proceeding by a labor union or representative
thereof to organize any employees of the Company or REI Barbados, or (iii)
lockouts, strikes, slowdowns, work stoppages or threats thereof by or with
respect to such employees.
SECTION 4.13. Vote Required. Unless the Merger may be consummated in
accordance with Section 302A.621 of the MBCA, in which case no vote of the
holders of the shares of Company Common Stock is required to approve this
Agreement and the Transactions, the affirmative vote of the holders of a
majority of the outstanding shares of Company Common Stock entitled to vote (the
"Required Company Vote") is the only vote or approval of the holders of any
class or series of the Company's capital stock necessary to adopt this Agreement
and approve the transactions contemplated hereby, except those approvals which
have heretofore been obtained (assuming that neither the Parent nor its
affiliates or associates (as defined in Section 302A.011 of the MBCA) are
"interested shareholders" of the Company under Section 302A.673 of the MBCA
immediately before the execution and delivery of this Agreement).
SECTION 4.14. Opinion of Financial Advisor. The Company's Board of
Directors has received the opinion of Goldman, Sachs & Co., dated August 25,
1999, to the effect that, as of such date, the Merger Consideration to be
received by the shareholders of the Company is fair, from a financial point of
view, to such shareholders.
SECTION 4.15. Brokers. Except as set forth in Section 4.15 of the
Company Disclosure Letter, no broker, finder or investment banker (other than
Goldman, Sachs & Co.) is entitled to any brokerage, finder's or other fee or
commission in connection with the Transactions based upon arrangements made by
or on behalf of the Company. The Company has previously delivered to Parent a
full and accurate copy of the Company's engagement letter with Goldman, Sachs &
Co. Section 4.15 of the Company Disclosure Letter sets forth the Company's
obligations to Goldman, Sachs & Co. in connection with its role as financial
advisor to the Company.
SECTION 4.16. Taxes.
(a) Except as set forth in Section 4.16(a) of the Company
Disclosure Letter:
<PAGE>
(i) The Company and REI Barbados have timely filed (or
have had timely filed on their behalf) all Tax Returns required to be filed by
any of them. All such Tax Returns are true, correct and complete in all respects
except for such instances which, individually or in the aggregate, would not
have a Company Material Adverse Effect.
(ii) The Company and REI Barbados have paid (or have had
paid on their behalf) all Taxes due, except for Taxes the non-payment of which,
individually or in the aggregate, would not have a Company Material Adverse
Effect.
(iii) The most recent financial statements contained in the
Company SEC Reports reflect full reserves for all Taxes payable by the Company
and REI Barbados for all Tax periods and portions thereof through the date of
such financial statements, except to the extent that any failure to so reserve,
individually or in the aggregate, would not have a Company Material Adverse
Effect.
(iv) The Federal income Tax Returns of the Company have
not been audited. There are no taxable years currently under Audit, and the
Company has not been notified that any Audit by a Taxing Authority will commence
with respect to the Company or REI Barbados. There are no outstanding waivers or
pending requests for waivers to extend the statutory period of limitations to
assess any Taxes on the Company or REI Barbados, except to the extent any such
waiver or request for waiver, individually or in the aggregate, would not have a
Company Material Adverse Effect.
(v) No deficiency or adjustment for any Taxes has been
proposed, asserted or assessed against the Company or REI Barbados that has not
been paid or fully reserved for on the financial statements of the Company,
except for deficiencies or adjustments that, individually or in the aggregate,
would not have a Company Material Adverse Effect, and, to the knowledge of the
Company's executive officers, no such deficiency or adjustment has been
threatened. There are no Liens for material Taxes upon the assets or property of
the Company or REI Barbados, except Liens for current Taxes not yet due.
(vi) The Company and REI Barbados have withheld and paid
over to the relevant Tax Authority all Taxes required to have been withheld and
paid in connection with payments to employees, independent contractors,
creditors, shareholders or other third parties, except for such Taxes which,
individually or in the aggregate, would not have a Company Material Adverse
Effect.
(vii) Neither the Company nor REI Barbados is a party to
any Tax sharing, Tax allocation, Tax indemnity or similar agreement.
(viii) No "consent" within the meaning of Section 341(f) of
the Code has been filed with respect to the Company or REI Barbados.
(b) For purposes of this Agreement, the following terms shall
have the following meanings:
<PAGE>
(i) "Audit" shall mean any audit, assessment of Taxes,
other examination by any Tax Authority, proceeding or appeal of such proceeding
relating to Taxes.
(ii) "Taxes" shall mean all Federal, state, local and
foreign income, gross receipts, sales, use, ad valorem, transfer, franchise,
profits, license, excise, employment, payroll, premium, alternative or added
minimum, transfer, stamp, customs, duties or other taxes, and other assessments
of a similar nature (whether imposed directly or through withholding), including
any interest, additions to tax, or penalties applicable thereto and including
any liability in respect of any tax as a transferee or successor, by Law,
Contract or otherwise.
(iii) "Tax Authority" shall mean the Internal Revenue
Service and any other domestic or foreign governmental authority responsible for
the administration of any Taxes.
(iv) "Tax Returns" shall mean all Federal, state, local
and foreign tax returns, declarations, statements, reports, schedules and forms
relating to Taxes, including, without limitation, any information returns,
claims for refund, declaration of estimated Tax and any amended tax return
relating to Taxes.
SECTION 4.17. Licenses and Permits. Except as set forth in Section
4.17 of the Company Disclosure Letter, the Company and REI Barbados have all
necessary licenses, permits, certificates of need, approvals and authorizations
(collectively, "Permits") from all Governmental Entities required to lawfully
conduct their respective businesses as presently conducted, except for those
Permits the lack of which, individually or in the aggregate, would not have a
Company Material Adverse Effect, and (a) no Permit is subject to revocation or
forfeiture by virtue of any existing circumstances, (b) there is no Litigation
pending or, to the knowledge of the Company's executive officers, threatened to
modify or revoke any Permit, and (c) no Permit is subject to any outstanding
order, decree, judgment, stipulation, or investigation that would be likely to
affect such Permit, except for instances of any of the foregoing items (a)
through (c) which, individually or in the aggregate, would not have a Company
Material Adverse Effect.
SECTION 4.18. Title to Assets.
(a) Section 4.18(a) of the Company Disclosure Letter sets
forth a complete and accurate list of all leased and owned real properties of
the Company. The Company has good and marketable title to all of its real and
personal properties and assets reflected on the Balance Sheet of the Company at
July 4, 1999 included in the Company's Quarterly Report on Form 10-Q for the
period ended July 4, 1999 (the "1999 Balance Sheet"), free and clear of all
Liens except for (i) Liens which secure indebtedness which is properly reflected
in the 1999 Balance Sheet; (ii) Liens for Taxes accrued but not yet payable;
(iii) Liens arising as a matter of law in the ordinary course of business with
respect to obligations incurred after the date of the 1999 Balance Sheet,
provided that the obligations secured by such Liens are not delinquent; and (iv)
such imperfections of title and Liens, if any, as individually or in the
aggregate would not have a Company Material Adverse Effect. Except as set forth
in Section 4.18(a) of the Company Disclosure Letter, the Company owns, or has
<PAGE>
valid leasehold interests in, all properties and assets used by it in the
conduct of its business, except where the absence of such ownership or leasehold
interests would not individually or in the aggregate have a Company Material
Adverse Effect.
(b) Except as set forth in Section 4.18(b) of the Company
Disclosure Letter, the Company does not have any legal obligation, absolute or
contingent, to any other person to sell or dispose of any of its assets, other
than orders for sale of inventory in the ordinary course of business, with an
aggregate value in excess of $250,000.
SECTION 4.19. Material Contracts. Section 4.19 of the Company
Disclosure Letter sets forth a list as of the date hereof of all (i) Contracts
for borrowed money or guarantees thereof, (ii) Contracts involving any rate swap
transaction, basis swap, forward rate transaction, commodity swap, commodity
option, equity or equity index swap, equity or equity index option, bond option,
interest rate option, foreign exchange transaction, cap transaction, floor
transaction, collar transaction, currency swap transaction, cross-currency rate
swap transaction, currency option or any other similar transaction (including
any option with respect to any of these transactions), or any combination of
these transactions (each a "Derivative" and collectively, "Derivatives"), (iii)
Contracts containing covenants by the Company restricting its ability or the
ability of any affiliates of the Company to engage in any line of business, (iv)
Contracts to purchase materials, supplies or other assets, other than purchase
orders entered into in the ordinary course of business consistent with the
customary past practice of the Company and other Contracts involving obligations
of less than $250,000 individually and $500,000 in the aggregate, (v) Contracts
to purchase or acquire advertising or other product promotion or brand support
other than spot orders purchased in the ordinary course of business or involving
commitments by the Company of less than $250,000, (vi) Contracts with
distributors, sub-distributors or sales agents for the Company or in which the
Company acts as distributor or sales agent for others, (vii) Contracts in which
the Company's surviving liability (including indemnities) could exceed $250,000
and involving the sale or other disposition by the Company of one or more
business units, divisions or entities (including former Subsidiaries); (viii)
Contracts involving the sale, disposition or licensing of other material assets
of the Company (including intellectual property), other than the sale of
inventory in the ordinary course of business, (ix) Contracts involving the
investment, including by way of capital contribution, loan or advance, by the
Company in any other person, firm or entity, other than cash and cash
equivalents and other than investments no longer owned by the Company, (x) other
Contracts under which the unpaid liability of the Company is $250,000 or more or
are otherwise material, and (xi) promotion Contracts with a term of longer than
three (3) months (all Contracts described in each of the categories (i) through
(xi) above, "Material Contracts"). All Material Contracts to which the Company
is a party or by which any of its assets are bound are valid and binding, in
full force and effect and enforceable against the parties thereto in accordance
with their respective terms, except where the failure to be so valid and
binding, in full force and effect or enforceable would not individually or in
the aggregate have a Company Material Adverse Effect. There is not under any
such Contract, any existing default, or event, which after notice or lapse of
time, or both, would constitute a default, by the Company, or to the knowledge
of the Company's executive officers, any other party, other than any such
<PAGE>
defaults or events which, individually or in the aggregate, would not have a
Company Material Adverse Effect.
SECTION 4.20. Intellectual Property Rights.
(a) The Company and REI Barbados have and will, after giving
effect to the consummation of the Transactions, have to the same extent and on
the same terms as prior to the Closing, (i) valid rights to use, whether through
ownership, licensing or otherwise, all patents, trademarks, service marks, trade
dress, trade names, domain names, copyrights, trade secrets (where recognized by
applicable law), licenses, information, proprietary rights and processes that
are used in its business as now conducted (collectively the "Intellectual
Property Rights"), and (ii) except as disclosed in Section 4.20 of the Company
Disclosure Letter, the right to require the applicant of any Intellectual
Property Right which is an application to transfer ownership thereof and of the
related registration to the Company or REI Barbados once it issues.
(b) Except as disclosed in Section 4.20 of the Company
Disclosure Letter, no Intellectual Property Right is subject to any outstanding
judgment, injunction, order, decree or agreement restricting the use thereof by
the Company or REI Barbados, except for any judgment, injunction, order, decree
or agreement which would not reasonably be expected to have a Company Material
Adverse Effect.
(c) Each Intellectual Property Right which is a patent, patent
application, trademark registration, trademark application, service mark
registration, service mark application, domain name (with respect to domain
names, to the knowledge of the Company's executive officers), copyright
registration or copyright application, is set forth on Section 4.20 of the
Company Disclosure Letter. All registered patents, trademarks, domain names,
service marks and copyrights listed on Section 4.20 of the Company Disclosure
Letter are valid (when in use) and existing and in full force and effect, and
owned by the Company or REI Barbados free and clear of any Liens. Section 4.20
of the Company Disclosure Letter sets forth a complete and accurate list of all
Contracts in which the Company is a licensor or licensee of Intellectual
Property Rights.
(d) To the knowledge of the Company's executive officers, other
than as set forth on Section 4.20 of the Company Disclosure Letter: (i) no third
party has interfered with, infringed upon, misappropriated or otherwise come
into conflict with any of the Intellectual Property Rights except in such a way
as would not jeopardize the validity of such Intellectual Property Rights or the
ability of the Company or REI Barbados to use the registered patents or the
Intellectual Property Rights in substantially the manner they are used on the
date hereof, and (ii) neither the Company nor REI Barbados, by using the
Intellectual Property Rights, has materially interfered with, infringed upon,
misappropriated or otherwise come into conflict with any material registered
trademark of any third party nor, by using such registered patents, any material
registered patent of any third party.
SECTION 4.21. State Takeover Statutes Inapplicable. From and after
the date hereof and at all times at or prior to the Effective Time, (i) Sections
302A.67l, 302A.673 and 302A.675 of the MBCA will be inapplicable to the Offer,
the Merger, this Agreement, the Ancillary Documents, the Tender and Option
<PAGE>
Agreement and the transactions contemplated hereby and thereby, and the Company
has received an opinion to that effect from Robins, Kaplan, Miller & Ciresi
L.L.P., and (ii) no other takeover Law in effect on the date hereof could affect
the ability of the Parent or Merger Sub to consummate the transactions
contemplated hereby or thereby or have, either individually or in the aggregate,
a Company Material Adverse Effect or a Parent Material Adverse Effect.
SECTION 4.22. Rights Agreement. Pursuant to action of the Board of
Directors on August 25, 1999, the Company amended (the "Rights Amendment") the
Rights Agreement so that the Rights Agreement will not affect or be affected by
this Agreement, the Option Agreement, the Tender and Option Agreement, the
Offer, the announcement of the Offer, the purchase of shares of Company Common
Stock by the Parent or Merger Sub pursuant to the Offer, the Merger, or any
transaction contemplated hereby or thereby, and the Company has received an
opinion to that effect from Robins, Kaplan, Miller & Ciresi L.L.P. The
Distribution Date (as defined in the Rights Agreement) has not occurred. The
Rights Amendment has been duly authorized, executed and delivered by the Company
and is valid and enforceable in accordance with its terms.
SECTION 4.23. Year 2000.
(a) The Company is in the process of conducting an inventory and
assessment of all software, computers, network equipment, technical
infrastructure, production equipment and other equipment and systems that are
material to the operation of its business and that rely on, utilize or perform
date or time processing ("Systems") to ensure that the Systems are Year 2000
Compliant.
(b) The Company reasonably expects that implementation and
testing of the Systems to ensure that they are Year 2000 Compliant will be
completed by September 30, 1999. Any failure of any of the Company's Systems to
be Year 2000 Compliant has not had and is not reasonably expected to have a
Company Material Adverse Effect.
(c) In addition to upgrading its own Systems, the Company has
contacted certain significant suppliers to determine whether their Systems are
Year 2000 Compliant. The Company has not received any information which would
indicate that the Systems of its suppliers will not be Year 2000 Compliant to
the extent the same could reasonably be expected to result in any significant
disruption to the Company's sources of supplies.
(d) "Year 2000 Compliant" means a System will at all times: (i)
consistently and accurately handle and process date and time information and
data values before, during and after January 1, 2000, including but not limited
to accepting date input, providing date output, and performing calculations on
or utilizing dates or portions of dates; (ii) function accurately and in
accordance with its specifications without interruption, abnormal endings,
degradation, change in operation or other impact, or disruption of other
systems, resulting from processing date or time data with values, before, during
and after January 1, 2000; (iii) respond to and process two-digit date input in
a way that resolves any ambiguity as to century; and (iv) store and provide
output of date information in ways that are unambiguous as to century.
<PAGE>
SECTION 4.24. Insurance. The Company and REI Barbados maintain in
force insurance policies and bonds in such amounts and against such liabilities
and hazards as are consistent with industry practice. A complete list of all
material insurance policies is set forth in Section 4.24 of the Company
Disclosure Letter. Except as set forth in Section 4.24 of the Company Disclosure
Letter, neither the Company nor REI Barbados is now liable, nor will any of them
become liable, for any retroactive premium adjustment not reflected in the 1999
Balance Sheet or otherwise provided for as set forth in Section 4.24 of the
Company Disclosure Letter. All policies are valid and enforceable and in full
force and effect, all premiums owing in respect thereof have been timely paid,
and neither the Company nor REI Barbados has received any notice of premium
increase or cancellation with respect to any of its insurance policies or bonds.
Except as set forth in Section 4.24 of the Company Disclosure Letter and except
for any matters which, individually or in the aggregate, would not have a
Company Material Adverse Effect, there are no claims pending as to which the
insurer has denied liability or is reserving its rights, and all claims have
been timely and properly filed. Within the last three years, neither the Company
nor REI Barbados has been refused any insurance coverage sought or applied for,
and the Company has no reason to believe that their existing insurance coverage
cannot be renewed as and when the same shall expire, upon terms and conditions
standard in the market at the time renewal is sought.
SECTION 4.25. Environmental Matters.
(a) Except as disclosed on Section 4.25 of the Company
Disclosure Letter and except as to matters that would not reasonably be expected
to have a Company Material Adverse Effect:
(i) no written notice, request for information, order,
complaint or penalty has been received, and there are no judicial or
administrative actions, suits or proceedings pending or, to the knowledge of the
Company's executive officers, threatened, which allege a violation of any
Environmental Laws, in each case relating to the Company and arising out of any
Environmental Laws;
(ii) the Company has all environmental permits necessary
for its operations to comply with all applicable Environmental Laws, and is in
compliance with the terms of such environmental permits, has made all
appropriate filings for the issuance or renewal of such environmental permits
and is in compliance with all other applicable Environmental Laws;
(iii) all of the facilities currently owned, leased or
operated by the Company are free of any Hazardous Substances (except those
authorized pursuant to and in accordance with applicable Environmental Laws) and
are free of all contamination arising from, relating to, or resulting from any
such Hazardous Substances, and there has been no release or other dissemination
at any time during the ownership or occupancy by the Company or REI Barbados of
such facilities of any Hazardous Substances at, on, about, under or within any
such facilities (other than pursuant to and in accordance with applicable
Environmental Laws) and there are no facilities formerly owned or operated by
the Company or REI Barbados which are not currently owned by them;
(iv) neither the Company nor REI Barbados has used any
waste disposal site, or otherwise disposed of, transported or arranged for the
<PAGE>
transportation of any Hazardous Substances to any place or location in violation
of any Environmental Laws; and
(v) all written environmental audits and reports conducted
within the past five years by the Company or REI Barbados of any property
currently owned or leased or operated by the Company or REI Barbados have been
delivered to the Parent prior to the date hereof.
(b) The following terms shall have the meaning set forth below:
(i) "Hazardous Substances" means any pollutant,
contaminant or any toxic, radioactive or other hazardous substance as such terms
are defined in, or identified pursuant to, any Environmental Law.
(ii) "Environmental Costs" means any reasonable
investigation, testing, sampling, cleanup, remediation, removal or other
response costs, costs to achieve and maintain compliance with Environmental
Laws, expenses of consultants, counsel and other experts, liabilities (including
liabilities for damages for personal injury or property damage and natural
resources damage), civil or criminal fines or penalties, judgments and amounts
paid in settlement in each case arising out of or relating to or resulting from
any environmental matter.
(iii) "Environmental Laws" means any and all common and
statutory laws, regulations, ordinances and rules, in each case as in effect on
the date hereof, that have as their principal purpose the protection of the
environment.
ARTICLE V
REPRESENTATIONS AND WARRANTEES OF THE PARENT
AND MERGER SUB
The Parent and Merger Sub hereby represent and warrant to the Company
that:
SECTION 5.1. Organization and Qualifications; Subsidiaries. Each of
the Parent and Merger Sub is a corporation, partnership or other legal entity
duly incorporated or organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation or organization and has the
requisite power and authority and all necessary governmental approvals to own,
lease and operate its properties and to carry on its business as it is now being
conducted, except where the failure to be so organized, existing or in good
standing or to have such power, authority and governmental approvals would not,
individually or in the aggregate, have a Parent Material Adverse Effect (as
defined below). For purposes of this Agreement, a "Parent Material Adverse
Effect" shall mean any change or effect that adversely affects the ability of
the Parent to consummate the transactions contemplated by this Agreement in any
material respect, or that would prevent or delay in any material respect
consummation of the Merger.
SECTION 5.2. Certificate of Incorporation and Bylaws. The
Parent has heretofore made available to the Company a complete and correct copy
of the
<PAGE>
certificate of incorporation and the bylaws or equivalent organizational
documents, each as amended to the date hereof, of the Parent and Merger Sub.
Such certificates of incorporation, bylaws and equivalent organizational
documents are in full force and effect. The Parent is not in violation of any
provision of its certificate of incorporation or bylaws. Merger Sub is not in
violation of any provision of its certificate of incorporation, bylaws or
equivalent organizational documents, except for such violations as would not,
individually or in the aggregate, have a Parent Material Adverse Effect.
SECTION 5.3. Authority Relative to This Agreement. Each of the
Parent and Merger Sub has all necessary corporate power and authority to execute
and deliver this Agreement, the Ancillary Documents and the Tender and Option
Agreement, to perform its obligations hereunder and thereunder and to consummate
the transactions contemplated hereby and thereby. The execution and delivery of
this Agreement, the Ancillary Documents and the Tender and Option Agreement by
the Parent and Merger Sub and the consummation by the Parent and Merger Sub of
the transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action and no other corporate proceedings
on the part of the Parent or Merger Sub are necessary to authorize this
Agreement, the Ancillary Documents and the Tender and Option Agreement or to
consummate the transactions contemplated hereby or thereby (other than the
Merger Filing). This Agreement, the Ancillary Documents and the Tender and
Option Agreement have each been duly and validly executed and delivered by the
Parent and Merger Sub and, assuming the due authorization, execution and
delivery thereof by the Company, constitute the legal, valid and binding
obligation of the Parent and Merger Sub, enforceable against the Parent and
Merger Sub in accordance with their respective terms, except as enforcement may
be limited by bankruptcy, insolvency, moratorium or other similar laws relating
to creditors rights generally and by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in equity or at law).
<PAGE>
SECTION 5.4. No Conflict, Required Filings and Consents.
(a) The execution and delivery of this Agreement by the
Parent and Merger Sub do not, and the performance of their respective
obligations under this Agreement, the Ancillary Documents and the Tender and
Option Agreement and the consummation of the transactions contemplated hereby
and thereby by the Parent and Merger Sub will not, (i) conflict with or violate
the articles of incorporation or bylaws or equivalent organizational documents
of the Parent or Merger Sub, (ii) subject to making the filings and obtaining
the approvals identified in Section 4.5(b), conflict with or violate any Law
applicable to the Parent or Merger Sub or by which any property or asset of the
Parent or Merger Sub is bound or affected, except, in the case of clause (ii),
for any such conflicts, violations, breaches, defaults or other occurrences
which would not, individually or in the aggregate, have a Parent Material
Adverse Effect.
(b) The execution and delivery of this Agreement, the
Ancillary Documents and the Tender and Option Agreement by the Parent and Merger
Sub do not, and the performance of their respective obligations under this
Agreement, the Ancillary Documents and the Tender and Option Agreement and the
consummation of the transactions contemplated hereby and thereby by the Parent
and Merger Sub will not, require any consent, approval, authorization or permit
of, or filing with or notification to, any Governmental Entity, except (i) for
(A) applicable requirements, if any, of the Exchange Act or the Blue Sky laws,
(B) the premerger notification requirements of the HSR Act, and (C) the Merger
Filing, and (ii) where the failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not,
individually or in the aggregate, prevent or delay in any material respect
consummation of the Merger, or otherwise prevent the Parent or Merger Sub from
performing its respective obligations under this Agreement in any material
respect, and would not, individually or in the aggregate, have a Parent Material
Adverse Effect.
SECTION 5.5. Offer Documents. None of the information contained in
the Offer Documents or any schedule thereto required to be filed with the SEC or
in any amendment or supplement thereto will contain, on the date of filing with
the SEC, any untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the statements
made therein, in light of the circumstances under which they are made, not
misleading, except that no representation is made by the Parent or Merger Sub
with respect to information supplied by the Company specifically for inclusion
in the Offer Documents or any schedule thereto required to be filed with the SEC
or in any amendment or supplement thereto. None of the information supplied by
the Parent or Merger Sub specifically for inclusion in the Schedule 14D-9 will,
at the date of filing with the SEC, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
SECTION 5.6. Board Approval. The Board of Directors of the
Parent by resolutions duly adopted at a meeting duly called and held, has
approved this Agreement, the Merger and the other transactions contemplated
hereby.
<PAGE>
SECTION 5.7. Vote Required . No vote of the holders of any class or
series of the Parent's capital stock is necessary to adopt this Agreement and
approve the transactions contemplated hereby.
SECTION 5.8. No Arrangements Triggering Section 302A.673 of the MBCA.
Neither the Parent nor, to the best of the knowledge of Parent's executive
officers, any of its affiliates or associates (each as defined in Section
302A.011 of the MBCA) is party to any contract, agreement or other arrangement,
that would cause it to be an "interested shareholder" within the meaning of
Section 302A.011(Subd. 49) of the MBCA.
SECTION 5.9. Merger Sub. Merger Sub has not conducted any activities
other than in connection with the organization of Merger Sub, the negotiation
and execution of this Agreement, and the consummation of the transactions
contemplated hereby. Merger Sub has no Subsidiaries.
SECTION 5.10. Financing. At the consummation of the Offer and at the
Effective Time, the Parent will have or will cause Merger Sub to have funds
available to the Parent or Merger Sub sufficient to consummate the Offer and the
Merger on the terms contemplated hereby.
ARTICLE VI
CONDUCT OF BUSINESS PENDING THE MERGER
SECTION 6.1. Conduct of Business of the Company Pending the Merger.
The Company covenants and agrees that, except as expressly permitted or
contemplated by this Agreement or as set forth in Section 6.1 of the Company
Disclosure Letter, until the Effective Time, unless the Parent shall otherwise
agree in writing prior to the taking of any action otherwise prohibited by the
terms of this Section 6.1, the Company shall, and shall cause REI Barbados to,
conduct its operations and business in the ordinary and usual course of
business, and consistent with past practice and use its reasonable efforts to
preserve intact its business organizations' goodwill, maintain in effect all
existing material qualifications, licenses, permits, approvals and other
authorizations, substantially comply with all applicable Laws, keep available
the services of its present executive officers and key employees, and preserve
the goodwill and business relationships with suppliers, distributors, customers
and others having business relationships with it. Without limiting the
generality of the foregoing, and except as otherwise expressly permitted by this
Agreement or as set forth in Section 6.1 of the Company Disclosure Letter, prior
to the Effective Time, without the prior written consent of the Parent, the
Company will not, and will cause REI Barbados not to:
(a) except to the extent required by Law or the rules and
regulations of The Nasdaq Stock Market, amend or otherwise change the articles
of incorporation or bylaws of the Company;
(b) issue or authorize or propose the issuance of, sell, pledge
or dispose of, grant or otherwise create, or agree to issue or authorize or
propose the issuance, sale, pledge or disposition of, grant or otherwise create
any additional shares of, or any Options to acquire any shares of, its capital
stock or any debt or equity securities convertible into or exchangeable for such
capital stock or accelerate any right to convert or exchange or acquire
<PAGE>
any securities of the Company for any such shares or ownership interest or take
any action to cause to be exercisable any otherwise unexercisable option under
any Company Stock Option granted under any Company Option Plan, other than (i)
the issuance of 1,010,101 shares of Company Common Stock upon the conversion of
the Convertible Notes, (ii) any such issuance pursuant to the exercise of
Company Stock Options granted prior to the date hereof under the Company Option
Plans, in accordance with their respective terms as in effect on the date
hereof, (iii) the issuance of shares of Company Common Stock pursuant to the
Company ESPP in accordance with its terms as in effect on the date hereof in
accordance with Section 3.2(g).
(c) purchase, redeem or otherwise acquire or retire, or offer to
purchase, redeem or otherwise acquire or retire, (i) any shares of its capital
stock (including any Options with respect to its capital stock and any security
convertible or exchangeable into its capital stock), or (ii) any long-term debt;
(d) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect to any
of its capital stock, or subdivide, reclassify, recapitalize, split, combine or
exchange any of its shares of capital stock or otherwise change its
capitalization as it exists on the date hereof;
(e) incur or become contingently liable with respect to any
indebtedness for borrowed money or the deferred purchase price for property or
services or pursuant to any capital lease or other financing or guarantee any
such indebtedness or issue any debt securities;
(f) except as may be required by applicable Laws, or as
contemplated by this Agreement, (i) increase the compensation payable or to
become payable to, or enter into any employment agreement with, its executive
officers or employees, except to non-executive officers in the ordinary course
of business consistent with past practice; (ii) grant any severance or
termination pay to any director, executive officer or employee of the Company or
REI Barbados, except pursuant to existing Company Benefit Plans; (iii) enter
into any severance agreement with any director, executive officer or employee;
or (iv) except as required by applicable Laws, establish, adopt, enter into,
terminate, withdraw from or amend in any material respect or take action to
accelerate or waive (or otherwise diminish) any rights or benefits under any
Company Benefit Plan or any other plan, program or arrangement, or any material
employment policy;
(g) take any action, other than reasonable actions in the
ordinary course of business and consistent with past practice, with respect to
accounting policies or procedures (including Tax accounting policies, procedures
and elections relating to Taxes that would apply to the Company after the
Merger), except as may be required by generally accepted accounting principles,
or settle any material Audit, make any material Tax election or settle any
material Tax liability or, except as required by Law, amend in any material
respect any material Tax Return;
(h) acquire or agree to acquire by merging or consolidating
with, or by purchasing an equity interest in or a portion of the assets of, or
<PAGE>
by any other manner, any business or any corporation, partnership, association
or other business entity;
(i) mortgage or otherwise encumber or subject to any Lien, or
sell, transfer or otherwise dispose of (by merger or otherwise), any of its
properties or assets, other than encumbrances and Liens that are incurred in the
ordinary course of business and consistent with past practice and sales,
transfers and dispositions of inventory in the ordinary course of business and
consistent with past practice;
(j) settle or compromise any material pending or threatened
Litigation;
(k) make any advance, loan, extension of credit or capital
contribution to, or purchase or acquire (by merger or otherwise) any stock,
bonds, notes, debentures or other securities of, or any assets constituting a
business unit of, or make any other investment in, any person, firm or entity,
except (a) extensions of trade credit and endorsements of negotiable instruments
and other negotiable documents in the ordinary course of business, (b)
investments in cash and cash equivalents, and (c) payroll and travel advances in
the ordinary course of business;
(l) make any capital expenditures in the aggregate for the
Company and REI Barbados in excess of the amounts specified in the Company's
budget for capital expenditures, a true and complete copy of which has
previously been delivered to the Parent;
(m) waive, amend or allow to lapse any term or condition of any
confidentiality or "standstill" agreement to which the Company is a party;
(n) enter into (a) any Contracts with distributors or sales
agents other than Contracts terminable without penalty on less than 30 days'
notice, (b) any Contracts to distribute products for others or which restrict
the ability of the Company, REI Barbados or the Company's affiliates to compete
or (c) any other Contracts that would constitute Material Contracts; or amend
any of the foregoing agreements as they exist on the date hereof;
(o) amend, change or waive (or exempt any person or entity from
the effect of) the Rights Agreement, or redeem the Rights, except in connection
with the transactions contemplated under this Agreement or the Ancillary
Documents;
(p) change any of the accounting principles or practices used by
the Company;
(q) effect any material change in the Company's advertising,
product promotion or brand support policies or programs or commit to any
significant new product promotion or advertising campaign;
(r) effect any material change in the Company's billing
practices or sales terms, or cause or permit a material acceleration or delay in
the manufacture, shipment or sale of inventory, the collection of accounts or
notes receivable or the payment of accounts or notes payable;
<PAGE>
(s) enter into any Contracts for Derivatives;
(t) waive, relinquish, release or terminate any right or claim,
including any such right or claim under any Material Contract, except in the
ordinary course of business consistent with the customary past practice of the
Company, or permit any rights of material value to use any Intellectual Property
to lapse or be forfeited;
(u) take any action to cause the Company Common Stock to be
delisted from the NASDAQ National Market prior to the completion of the Offer;
(v) take any action that would reasonably be expected to result
in the conditions contained in Section 8.2(a) or 8.2(b) not to be satisfied; or
(w) authorize any of, or commit or agree to take any of, the
foregoing actions.
ARTICLE VII
ADDITIONAL COVENANTS
SECTION 7.1. Access to Information.
(a) From the date hereof to the Effective Time, the Company
shall (and shall cause REI Barbados and their respective officers, directors,
employees, auditors and agents to) afford the officers, employees, auditors,
agents and advisors (the "Representatives") of the Parent access at all
reasonable times to its officers, employees, agents, properties, offices, plants
and other facilities, books, records (including auditors work papers) and Tax
Returns, and shall furnish such Representatives with all financial, operating
and other data and information as may be reasonably requested, and permit the
Parent to make such copies of documents and such inspections and investigations,
including, without limitation, such environmental assessments and testing as the
Parent may request. All information so obtained will be subject to the
Confidentiality Agreement, dated June 24, 1999, between and the Financial
Advisor on behalf of the Company and the Parent, as amended on July 27, 1999
(the "Confidentiality Agreement").
(b) No investigation pursuant to this Section 7.1 shall affect
any representation or warranty in this Agreement of any party hereto or any
condition to the obligations of the parties hereto.
SECTION 7.2. No Solicitation.
(a) The Company shall not, nor shall it permit REI Barbados, or
any officer or director to, and shall use its best efforts to cause the
employees, agents or Representatives of the Company and REI Barbados (including,
without limitation, any investment banker, attorney or accountant retained by
the Company or REI Barbados), not to, directly or indirectly, (i) initiate,
solicit or knowingly encourage, facilitate or assist (including by furnishing
any information or providing any access to the properties, books or records of
the Company) any inquiries or proposals that constitute, or could reasonably be
expected to lead to, a proposal or offer for a merger, consolidation, business
<PAGE>
combination, sale of assets representing a material portion of the assets of the
Company and REI Barbados, taken as a whole, sale of shares of capital stock
representing, individually or in the aggregate, 10% or more of the voting power
of the Company, including, without limitation, by way of a tender offer or
exchange offer by any person for shares of capital stock representing 10% or
more of the voting power of the Company, other than the Transactions (any of the
foregoing inquiries or proposals being referred to in this Agreement as an
"Acquisition Proposal"), (ii) engage in negotiations or discussions concerning,
or provide to any person or entity any information or data relating to the
Company or REI Barbados for the purposes of making, any Acquisition Proposal,
(iii) agree to, approve or recommend any Acquisition Proposal or (iv) take any
other action inconsistent with the obligations and commitments assumed by the
Company pursuant to this Section 7.2; provided, however, that nothing contained
in this Agreement shall prevent the Company or its Board of Directors from (A)
furnishing nonpublic information to, entering into customary confidentiality
agreements with, or entering into discussions or negotiations with, any person
or entity in connection with an unsolicited bona fide written Acquisition
Proposal to the Company or its shareholders, if the Company provides the Parent
with at least 2 business days' notice of its intent to do so and the Acquisition
Proposal is made in writing prior to Merger Sub and/or the Parent having
purchased any shares of Company Common Stock under the Offer and the Board of
Directors of the Company, by action of a majority of the entire Board of
Directors of the Company, determines in good faith that such Acquisition
Proposal constitutes, or is reasonably likely to lead to, a Superior Proposal or
(B) taking and disclosing to its shareholders a position with respect to such
Acquisition Proposal or making any other public disclosure that, in the opinion
of the Company's counsel, is required by applicable Laws; provided, however,
that the Board of Directors will not recommend that the shareholders of the
Company tender their shares of Company Common Stock into any tender offer unless
(i) the Board of Directors determines that such tender offer constitutes a
Superior Proposal and (ii) the Company has provided the Parent and Merger Sub
with not less than two business days' prior notice of its intent to do so. For
purposes of this Agreement, "Superior Proposal" means a bona fide written
Acquisition Proposal which was not solicited, encouraged or knowingly
facilitated in violation of this Section 7.2, and which was received in writing
by the Company prior to Merger Sub and/or the Parent having purchased any shares
of Company Common Stock under the Offer and which a majority of the members of
the Board of Directors of the Company determines in their good faith judgment
(after consultation with independent financial advisors) to be more favorable
from a financial point of view to the Company and its shareholders than the
Merger, after giving effect to any increase in the Merger Consideration offered
by the Parent and Merger Sub, and is reasonably capable of being completed,
taking into account all legal, financial, regulatory and other aspects of such
proposal; provided, however, that an Acquisition Proposal shall not constitute a
Superior Proposal if the Acquisition Proposal is subject to a financing
condition unless the Board of Directors, by action of a majority of the entire
Board of Directors in good faith, based on the advice of the Financial Advisor
or other nationally recognized investment banking firm, determines that the
Acquisition Proposal is readily financeable. The Company will immediately cease
and cause to be terminated any existing activities, discussions or negotiations
by the Company or its Representatives with any parties conducted heretofore with
respect to any of the foregoing, take the necessary steps to inform such parties
of the obligations undertaken in this Section 7.2., and request that such
parties promptly return all documents (and all copies thereof) furnished to them
<PAGE>
by the Company or its Representatives in connection with such activities,
discussions and negotiations. Nothing in this Section 7.2 shall (i) permit the
Company to terminate this Agreement (except as specifically provided in Article
IX hereof), or (ii) affect any other obligation of the Company under this
Agreement. For purposes of this Agreement, an Acquisition Proposal shall not be
deemed to exist solely as a result of a person filing a report on Schedule 13G
to report ownership of the Company Common Stock.
(b) The Company shall (i) promptly notify the Parent in writing
after receipt by the Company (or its Representatives) of any Acquisition
Proposal or any inquiries indicating that any person is considering making or
wishes to make an Acquisition Proposal and provide a copy of such Acquisition
Proposal or, in connection with any non-written inquiries or Acquisition
Proposal, provide a written statement setting forth in detail a description of
the inquiry or the terms and conditions of the Acquisition Proposal, (ii)
promptly notify the Parent in writing after receipt of any request for nonpublic
information relating to it or REI Barbados or for access to its or REI Barbados'
properties, books or records by any person that, to the knowledge of the
Company's executive officers, may be considering making, or has made, an
Acquisition Proposal and (iii) promptly keep the Parent advised of the status of
any such Acquisition Proposal, indication or request including, without
limitation, the identity of the party making such Acquisition Proposal,
indication or request, and all terms relating to such Acquisition Proposal.
(c) In no event will the Company provide any non-public
information regarding the Company to any party making an Acquisition Proposal
unless such party enters into a written confidentiality agreement containing
provisions substantially similar to those contained in the Confidentiality
Agreement.
SECTION 7.3. Directors and Officers Indemnification and Insurance
(a) From and after the Effective Time, the Parent shall cause
the Surviving Corporation to and the Surviving Corporation shall indemnify,
defend and hold harmless the present and former officers, directors, employees
and agents of the Company (each a "Covered Person") against all losses,
expenses, claims, damages, liabilities or amounts ("Losses") that are paid in
settlement (provided that such settlement has been approved by the Parent, such
approval not to be unreasonably withheld) of, or otherwise in connection with,
any claim, action, suit, proceeding or investigation (a "Claim"), based in whole
or in part on the fact that such person is or was a director, officer, employee
or agent of the Company and arising out of actions or omissions occurring at or
prior to the Effective Time (including, without limitation, the Transactions),
in each case to the full extent permitted under the MBCA and the Company's
articles of incorporation and bylaws as in effect on the date of this Agreement.
The Surviving Corporation shall pay any expenses in advance of the final
disposition of any such Claim to each Covered Person to the fullest extent
permitted under the MBCA upon receipt from the Covered Person to whom expenses
are advanced of an undertaking to repay such advances required under the MBCA.
The Surviving Corporation shall cooperate in the defense of any such matter.
(b) For a period of six years after the Closing Date (or in the
event any Claim is asserted within such six year period, until final
<PAGE>
disposition of that Claim), the Parent shall cause the Surviving Corporation to
keep in effect provisions in its articles of incorporation and bylaws providing
for exculpation of director liability, advancing expenses prior to disposition
of any Claim and its indemnification of the Covered Persons to the fullest
extent permitted under the MBCA, which provisions shall not be amended except as
required by applicable Law or except to make changes permitted by law that would
enlarge the right of indemnification of the Covered Persons.
(c) For a period of six (6) years after the Effective Time, the
Parent shall cause the Surviving Corporation to maintain in effect the current
policies of directors and officers liability insurance maintained by the Company
covering persons who are currently covered by the Company's officers and
directors liability insurance policies with respect to actions or omissions
occurring at or prior to the Effective Time to the extent that such policies are
available; provided, that policies of at least the same coverage containing
terms and conditions which are no less advantageous to the insureds may be
substituted therefor, provided, further, that in no event shall the Surviving
Corporation be required to expend amounts for premiums per annum in excess of
150% of the current annual premiums for the twelve-month period ending November
15, 1999 (which premium the Company represents and warrants to be $107,500 in
the aggregate for the policy year which began in November 1998) (the "Maximum
Premium") to maintain or procure insurance coverage pursuant to this Section
6.3, or, if the cost of such coverage exceeds the Maximum Premium, the maximum
amount of coverage that can be purchased for the Maximum Premium.
(d) From and after the Effective Time, the Parent agrees to
indemnify, defend and hold harmless the Covered Persons against all Losses that
are paid in settlement (provided that such settlement has been approved by the
Parent, such approval not to be unreasonably withheld) of, or otherwise in
connection with, a Claim based in whole or in part on the fact that such Covered
Person is or was a director or officer of the Company and arising out of actions
or omissions occurring at or prior to the Effective Time (including, without
limitation, the Transactions), in each case to the fullest extent permitted by
applicable Law and whether or not the Surviving Corporation is permitted by
applicable Law to provide any indemnity with respect to such Losses. The Parent
shall pay any expenses in advance of the final disposition of any such Claim to
each Covered Person to the fullest extent permitted by applicable Law upon
receipt from the Covered Person to whom such expenses are advanced of an
undertaking to repay such advances required under applicable Law. The Parent
shall cooperate in the defense of any such matter.
(e) If any Litigation described in this Section 7.3 (each, an
"Action") arises or occurs, the Surviving Corporation shall control the defense
of such Action with counsel selected by the Surviving Corporation, which counsel
shall be reasonably acceptable to the party seeking indemnification pursuant to
this Section 7.3 (each, an "Indemnified Party"); provided that the Indemnified
Party shall be permitted to participate in the defense of such Action through
counsel selected by the Indemnified Party, which counsel shall be reasonably
acceptable to the Surviving Corporation, at the Indemnified Party's expense.
Notwithstanding the foregoing, if there is any conflict between the Surviving
Corporation and any Indemnified Parties or there are additional defenses
available to any Indemnified Parties, the Indemnified Parties shall be permitted
to participate in the defense of such Action with counsel selected by the
Indemnified Parties, which counsel shall be reasonably acceptable to the
<PAGE>
Surviving Corporation, and the Indemnified Parties shall be indemnified
therefor; provided that the Surviving Corporation shall not be obligated to pay
the reasonable fees and expenses of more than one counsel for all Indemnified
Parties in any single Action except to the extent that, in the opinion of
counsel for the Indemnified Parties, two or more of such Indemnified Parties
have conflicting interests in the outcome of such Action. The Surviving
Corporation shall not be liable for any settlement effected without its written
consent, which consent shall not be unreasonably withheld.
(f) The provisions of this Section 7.3 shall survive the
consummation of the Merger and expressly are intended to benefit each of the
Covered Persons.
SECTION 7.4. Notification of Certain Matters. The Parent shall give
prompt notice to the Company, and the Company shall give prompt notice to the
Parent, of (a) the occurrence or nonoccurrence of any event the occurrence or
nonoccurrence of which would be likely to cause any covenant, condition or
agreement contained in this Agreement or any Ancillary Document not to be
complied with or satisfied and (b) any failure of the Parent or the Company, as
the case may be, to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it hereunder; provided, however, that the
delivery of any notice pursuant to this Section 7.4 shall not limit or otherwise
affect the remedies available hereunder to the party receiving such notice.
SECTION 7.5. Restructuring of Merger. Upon the mutual agreement of
the Parent and the Company, the Merger shall be restructured in the form of a
forward subsidiary merger of the Company into Merger Sub or any other affiliate
of the Parent, with Merger Sub or such affiliate being the surviving
corporation, or as a merger of the Company into the Parent, with the Parent
being the surviving corporation. In such event, this Agreement shall be deemed
appropriately modified to reflect such form of merger.
SECTION 7.6. Company Shareholder Meeting. Subject to Section 3.5,
the Company shall (i) call a meeting of its shareholders (the "Shareholders
Meeting") for the purpose of voting upon the Merger, (ii) hold the Shareholders
Meeting as soon as practicable following the termination or expiration of the
Offer or the purchase of shares of Company Common Stock pursuant to the Offer,
(iii) submit this Agreement and the transactions contemplated hereby for
approval of the Company's shareholders at the Shareholders Meeting, and (iv)
include in the Proxy Statement the recommendation of its Board of Directors that
its shareholders approve this Agreement and the transactions contemplated
hereby; provided, however, it need not include such recommendation if it has
received a written opinion from outside counsel that such recommendation would
violate the Board of Directors' fiduciary duties under applicable Law. If the
Parent or Merger Sub purchases any Company Common Stock pursuant to the Offer,
the record date for the Shareholders Meeting shall be a date subsequent to the
date the Parent or Merger Sub becomes a record holder of Company Common Stock
purchased pursuant to the Offer.
SECTION 7.7. Proxy Statements.
(a) If required by applicable Law, the Company will, as soon as
practicable following the termination or expiration of the Offer, prepare and
file a preliminary Proxy Statement (such proxy statement, and any amendments or
<PAGE>
supplements thereto, the "Proxy Statement") or, if applicable, an information
statement with the SEC with respect to the Shareholders Meeting and will use its
reasonable efforts to respond to any comments of the SEC or its staff and to
cause the Proxy Statement to be cleared by the SEC as soon as practicable. The
Company will notify the Parent of the receipt of any comments from the SEC or
its staff and of any request by the SEC or its staff for amendments or
supplements to the Proxy Statement or for additional information and will supply
the Parent with copies of all correspondence between the Company or any of its
representatives, on the one hand, and the SEC or its staff, on the other hand,
with respect to the Proxy Statement or the Merger. The Company shall give the
Parent and its counsel (who shall provide any comments thereon as soon as
practicable) the opportunity to review the Proxy Statement prior to its being
filed with the SEC and shall give the Parent and its counsel (who shall provide
any comments thereon as soon as practicable) the opportunity to review all
amendments and supplements to the Proxy Statement and all responses to requests
for additional information and replies to comments prior to their being filed
with, or sent to, the SEC. Each of the Company and the Parent agrees to use its
reasonable efforts, after consultation with the other parties hereto, to respond
promptly to all such comments of and requests by the SEC. As promptly as
practicable after the Proxy Statement has been cleared by the SEC, the Company
shall mail the Proxy Statement to the shareholders of the Company. If at any
time prior to the approval of this Agreement by the Company's shareholders there
shall occur any event that should be set forth in an amendment or supplement to
the Proxy Statement, the Company will prepare and mail to its shareholders such
an amendment or supplement.
(b) The Company represents and warrants that the Proxy Statement
will comply as to form in all material respects with the Exchange Act and, at
the respective times filed with the SEC and distributed to shareholders of the
Company, will not contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; provided, that the Company makes no representation or
warranty as to any information included in the Proxy Statement which was
provided by the Parent or Merger Sub. The Parent represents and warrants that
none of the information supplied by the Parent or Merger Sub for inclusion in
the Proxy Statement will, at the respective times filed with the SEC and
distributed to shareholders of the Company, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(c) The Company shall use its reasonable efforts to obtain the
necessary approvals by its shareholders of this Agreement and the transactions
contemplated hereby.
(d) The Parent agrees, subject to applicable Law, to cause all
shares of Company Common Stock purchased by Merger Sub and/or the Parent
pursuant to the Offer and all other shares of Company Common Stock owned by the
Parent, Merger Sub or any other Subsidiary or affiliate of the Parent to be
voted in favor of the approval of this Agreement and the transactions
contemplated hereby.
SECTION 7.8. Further Action, Reasonable Efforts.
<PAGE>
(a) Upon the terms and subject to the conditions hereof, each of
the parties hereto shall (i) make promptly its respective filings, and
thereafter make any other required submissions, under the HSR Act with respect
to the Transactions, and (ii) use reasonable efforts to take, or cause to be
taken, all appropriate action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable Laws and regulations to
consummate and make effective the transactions contemplated hereby, including,
without limitation, using reasonable efforts to obtain all licenses, permits,
consents, approvals, authorizations, qualifications and orders of Governmental
Entities, make all filings and required submissions with Governmental Entities,
including foreign filings and submissions, and obtain all consents and approvals
from parties to Contracts with the Company and the Parent and their respective
Subsidiaries as are necessary for the consummation of the transactions
contemplated hereby; provided, however, that the Parent shall not be required by
any provision of this Agreement to take any action, including entering into any
consent decree that requires the divestiture of a material amount of assets of
the Parent or any of its Subsidiaries. Each of the Parent and the Company shall,
subject to the Parent's direction, use all its reasonable efforts to contest any
proceeding seeking a preliminary injunction or other legal impediment to, and to
resolve any objections as may be asserted by any Governmental Entity with
respect to, the Offer and/or the Merger under the HSR Act or any other antitrust
Laws; provided that the foregoing shall not require the Parent to take any
action that is reasonably likely to result in any of the consequences specified
in subsection (a) of Exhibit A. In case at any time after the Effective Time any
other action is necessary or desirable to carry out the purposes of this
Agreement, the proper officers and directors of each party to this Agreement
shall use their reasonable efforts to take all such action.
(b) Each party shall use its reasonable efforts not to take any
action, or enter into any transaction, which would result in a breach of any
covenant made by it in this Agreement.
(c) Each party hereto shall, subject to the fulfillment at or
before the Effective Time of each of the conditions of performance set forth
herein or the waiver thereof, perform such further acts and execute such
documents as may be reasonably required to effect the transactions contemplated
hereby.
SECTION 7.9. Public Announcements. The initial press release relating
to this Agreement shall be a joint press release. Thereafter, the Company and
the Parent shall consult with each other before issuing any press release or
otherwise making any public statements with respect to this Agreement or any of
the transactions contemplated hereby and shall not issue any such press release
or make any such public statement without the prior consent of the other party,
which consent shall not be unreasonably withheld or delayed; provided, however,
that a party may, without the prior consent of the other party, issue such press
release or make such public statement as may be required by Law or any listing
agreement or arrangement to which the Company or the Parent is a party with a
national securities exchange or The Nasdaq Stock Market if it has used all
reasonable efforts to consult with the other party and to obtain such party's
consent but has been unable to do so in a timely manner.
SECTION 7.10. Employee Benefits.
<PAGE>
(a) For a period of at least two years after the Effective Time,
the Parent will cause the Surviving Corporation to provide for the benefit of
the employees of the Company and REI Barbados benefits in the aggregate that are
(A) substantially equivalent to the benefits provided under Company Benefit
Plans in effect on the date of this Agreement, or (B) if equal to or greater
than the benefits described in clause (A) above, the benefits provided under
benefit plans maintained by the Parent for employees of the Parent and the
Parent Subsidiaries (other than the Surviving Corporation and its Subsidiaries).
Without limiting the generality of the foregoing, all vacation, holiday,
sickness and personal days accrued by the employees of the Company and REI
Barbados shall be honored. For a period of at least two years after the
Effective Time (or for such longer or shorter period as is permitted or required
by applicable statute), the Parent will cause the Surviving Corporation to
provide for the benefit of individuals who, immediately prior to the Effective
Time, are former employees of the Company and REI Barbados with benefits that
are substantially equivalent, in the aggregate, to the benefits that are
provided to them immediately prior to the Effective Time under Company Benefit
Plans. In the event that any employee of the Surviving Corporation or one of its
Subsidiaries is at any time after the Effective Time transferred to the Parent
or any affiliate of the Parent (other than the Surviving Corporation and its
Subsidiaries) or becomes a participant in an employee benefit plan, program or
arrangement maintained by or contributed by the Parent or any affiliate of the
Parent (other than the Surviving Corporation and its Subsidiaries), the Parent
shall cause such plan, program or arrangement to treat the prior service of such
employee with the Company and REI Barbados prior to the Effective Time, to the
extent prior service is generally recognized under such plan, program or
arrangement of the Company, as service rendered to the Parent or such affiliates
for purposes of eligibility, vesting or entitlement to benefits under such
plans, program or arrangement (reduced, however, to avoid duplication of
benefits for the same period of service). The Parent shall cause to be waived
any pre-existing condition limitation under its benefit plans that might
otherwise apply to such employee or, to the extent applicable, a former
employee. The Parent agrees to recognize (or cause to be recognized) the dollar
amount of all expenses incurred by such employees or, to the extent applicable,
former employees, during the calendar year in which the Effective Time occurs
for purposes of satisfying the calendar year deductibles and co-payment
limitations for such year under the relevant benefit plans of the Parent and
their respective Subsidiaries.
(b) The Parent represents that its current intent is to cause
the Surviving Corporation to maintain its principal production facility in the
Minneapolis, Minnesota metropolitan area for a period of at least two years
after the Effective Time.
(c) With respect to the employees of the Company and REI
Barbados set forth on Section 7.10(c) of the Company Disclosure Letter, the
Parent will cause the Surviving Corporation to maintain and fund the Company's
incentive bonus plan as in effect on the date hereof (the "Current Plan")
through the performance period ending December 31, 1999. For the performance
period ending December 31, 1999, the portion of such bonuses that are based on
the Company's operating income (the "Company Performance Component") shall not
be less than 80% of the maximum amount of the Company Performance Component as
described in such plan. If an employee is terminated without cause prior to
<PAGE>
December 31, 1999, such employee shall be paid such bonus in an amount pro rated
according to the period of the employee's service to the Company during 1999.
Effective January 1, 2000, the Current Plan shall terminate, and the employees
of the Company and REI Barbados set forth on Schedule 7.10(c) shall commence to
participate in the Parent's incentive bonus plan (the "Parent Plan") and shall
be entitled to an award from the Parent Plan which reflects (i) the actual
period of participation of such employees in the Parent Plan and (ii) the actual
performance of the applicable business unit during such period.
SECTION 7.11. Confidentiality Agreement. The Company hereby waives
the provisions of the Confidentiality Agreement as and to the extent necessary
to permit the consummation of the transactions contemplated hereby. Upon
acceptance of the shares of Company Common Stock pursuant to the Offer, the
Confidentiality Agreement shall be deemed to have terminated without further
action by the parties hereto.
ARTICLE VIII
CONDITIONS TO THE MERGER
SECTION 8.1. Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to this Agreement to effect the
Merger shall be subject to the following conditions:
(a) The waiting period applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated.
(b) None of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction which prohibits the consummation
of the transactions contemplated by this Agreement.
(c) If required by applicable Law, this Agreement and the Merger
shall have been approved by the shareholders of the Company in accordance with
the MBCA and the Company's articles of incorporation and bylaws.
SECTION 8.2. Conditions to Obligations of the Company to Effect the
Merger. The obligations of the Company to effect the Merger are subject to the
satisfaction of the following conditions, unless waived by the Company:
(a) The representations and warranties of the Parent and Merger
Sub contained herein that are qualified as to materiality shall be true and
correct, and those not so qualified shall be true and correct in all material
respects, in each case at and as of the Effective Time with the same force and
effect as though made at and as of the Effective Time (except to the extent a
representation or warranty speaks specifically as of an earlier date or except
as contemplated by this Agreement).
(b) The Parent and Merger Sub have performed, in all material
respects, all obligations and complied, in all material respects, with all
covenants required by this Agreement to be performed or complied with by them
prior to the Effective Time.
<PAGE>
(c) The Parent shall have delivered to the Company a
certificate, dated the Effective Time and signed by an executive officer of
Parent, evidencing compliance with Sections 8.2(a) and (b).
SECTION 8.3. Conditions to Obligations of the Parent and Merger Sub
to Effect the Merger. The obligations of the Parent and Merger Sub to effect the
Merger are subject to the satisfaction of the following conditions, unless
waived by the Parent and Merger Sub:
(a) The representations and warranties of the Company contained
herein that are qualified as to materiality shall be true and correct, and those
not so qualified shall be true and correct in all material respects, in each
case at and as of the Effective Time with the same force and effect as though
made at and as of the Effective Time (except to the extent a representation or
warranty speaks specifically as of an earlier date or except as contemplated by
this Agreement).
(b) The Company shall have performed, in all material respects,
all obligations and complied, in all material respects, with all covenants
required by this Agreement to be performed or complied with by it prior to the
Effective Time.
(c) The Company shall have delivered to the Parent a
certificate, dated the Effective Time and signed by an executive officer of the
Company, evidencing compliance with Sections 8.3(a) and (b).
(d) Merger Sub and/or the Parent shall have accepted for payment
and paid for all of the shares of Company Common Stock tendered pursuant to the
Offer.
ARTICLE IX
TERMINATION WAIVER, AMENDMENT AND CLOSING
SECTION 9.1. Termination. This Agreement may be terminated and
abandoned at any time prior to the Effective Time, whether before or after
approval of this Agreement, the Merger and the other Transactions by the
shareholders of the Company:
(a) by the mutual written consent of the Company and the Parent;
(b) by the Company or the Parent, if (i) the Effective Time
shall not have occurred on or before 180 days from the date hereof, provided,
however, that the right to terminate this Agreement pursuant to clause (i) shall
not be available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of the Effective
Time to occur on or before such date, (ii) any Governmental Entity, the consent
of which is a condition to the obligations of the Company and the Parent to
consummate the transactions contemplated hereby, shall have determined not to
grant its consent and all appeals of such determination shall have been taken
and have been unsuccessful, (iii) any court of competent jurisdiction shall have
issued an order, judgment or decree (other than a temporary restraining order)
restraining, enjoining or otherwise prohibiting the Merger and such order,
<PAGE>
judgment or decree shall have become final and nonappealable, or (iv) upon a
vote at a duly held meeting or upon an adjournment thereof, the shareholders of
the Company shall have failed to approve the Merger or give any approval
required by the applicable Law in connection therewith.
(c) by the Company, if prior to Merger Sub and/or the Parent
having purchased any shares of Company Common Stock under the Offer, the Board
of Directors of the Company shall concurrently approve, and the Company shall
concurrently enter into, a definitive agreement providing for the implementation
of a Superior Proposal; provided, however, that (i) the Company is not then in
breach of Section 7.2, (ii) no termination pursuant to this Section 9.1(c) shall
be effective unless the Company shall simultaneously make the payment required
by Section 9.3, and (iii) the Company has provided to the Parent and Merger Sub
three business days' notice of its intent to so terminate the Agreement and,
with such notice, delivered to the Parent and Merger Sub a copy of the written
agreement embodying the Acquisition Proposal in its then most definitive form;
and
(d) by the Parent,
(i) upon the termination or expiration of the Offer
without the purchase of any Company Common Stock thereunder if the Minimum
Condition shall not have been satisfied;
(ii) the failure of any condition specified in subsections
(a) through (f) of Exhibit A prior to Merger Sub and/or the Parent having
purchased any shares of Company Common Stock under the Offer, regardless of
whether the Offer is made, which failure either continues through, or cannot in
the Parent's reasonable judgment be cured prior to, the date the Offer is
scheduled to expire (if the Offer has been commenced) or, if the Offer has not
commenced, would be scheduled to expire if it were commenced on the business day
after the date hereof (provided that the right to terminate this Agreement
pursuant to this clause (d)(ii) shall not be available to the Parent if the
Parent's failure to fulfill any obligation under this Agreement has been the
cause of or resulted in the failure of any such condition); or
(iii) the Board of Directors shall have modified or amended
its recommendation of the Offer or the Merger in any manner adverse to the
Parent or Merger Sub or shall have withdrawn or failed to confirm within five
business days of the Parent's request therefor its recommendation of the Offer
or the Merger or shall have recommended acceptance of any Acquisition Proposal
or shall have resolved to do any of the foregoing.
SECTION 9.2. Effect of Termination. In the event of termination of
this Agreement by the Company or the Parent as provided in Section 9.1 hereof,
this Agreement shall forthwith become void (except for the last sentence of
Section 1.3(c), the last sentence of Section 7.1(a), Sections 9.3, 10.2, 10.4,
10.6, 10.7 and 10.8 and this Section 9.2) and there shall be no liability on the
part of the Company, the Parent, Merger Sub or their respective officers or
directors, except for any breach of a party's obligations under such provisions.
Notwithstanding the foregoing, no party hereto shall be relieved from liability
for any willful, material breach of this Agreement.
SECTION 9.3. Termination Fee. If this Agreement is terminated:
<PAGE>
(i) by the Company pursuant to Section 9.1(c), then the
Company shall pay to the Parent on the next business day following the date of
such termination, the Termination Fee;
(ii) by the Parent pursuant to Section 9.1(d)(iii), then
the Company shall pay to the Parent on the next business day following the date
of such termination, the Termination Fee; and
(iii) by the Parent pursuant to Section 9.1(d)(i), and (x)
at the time of such termination an Acquisition Proposal is outstanding and (y)
during the term of this Agreement or within 12 months after the termination of
this Agreement, the Board of Directors recommends an Acquisition Proposal or the
Company enters into an agreement providing for an Acquisition Proposal or a
transaction contemplated by an Acquisition Proposal occurs, then on the next
business day following the earliest of the recommendation of an Acquisition
Proposal, the entering into of an agreement providing for an Acquisition
Proposal or the occurrence of the transaction contemplated by an Acquisition
Proposal, the Company shall pay to the Parent the Termination Fee.
"Termination Fee" shall mean $11,865,000.
SECTION 9.4. Amendment or Supplement. At any time before or after
approval of this Agreement and the Transactions by the shareholders of the
Company and prior to the Effective Time, this Agreement may be amended or
supplemented in writing by the Company (subject to Section 1.4(b)) and the
Parent with respect to any of the terms contained in this Agreement, except that
following approval by the shareholders of the Company there shall be no
amendment or supplement which by Law requires further approval by such
shareholders without further approval by the shareholders of the Company.
SECTION 9.5. Extension of Time, Waiver, Etc. At any time prior to the
Effective Time, the Company and the Parent may:
(a) extend the time for the performance of any of the
obligations or acts of the other party;
(b) waive any inaccuracies in the representations and warranties
of the other party contained herein or in any document delivered pursuant
hereto; or
(c) waive compliance with any of the agreements or conditions of
the other party contained herein; provided, however, that no failure or delay by
the Company or the Parent in exercising any right hereunder shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right hereunder.
Any agreement on the part of a party hereto to any extension or waiver
contemplated by this Section 9.5 shall be valid only if set forth in an
instrument in writing signed on behalf of such party.
ARTICLE X
<PAGE>
MISCELLANEOUS
SECTION 10.1. No Survival of Representations and Warranties. None of
the representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Merger or the termination
of this Agreement pursuant to Article IX.
SECTION 10.2. Expenses. Except as provided in Article IX, whether or
not the Merger is consummated, all costs and expenses incurred in connection
with this Agreement and the transactions contemplated hereby shall be paid by
the party incurring such expenses, except that the expenses incurred in
connection with printing the Offer Documents, the Schedule 14D-9 and the Proxy
Statement shall be paid in equal shares by the Company and the Parent.
SECTION 10.3. Counterparts. This Agreement may be executed in two or
more counterparts, all of which shall be considered the same agreement.
SECTION 10.4. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Minnesota, without regard
to the principles of conflicts of laws thereof.
SECTION 10.5. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed given if delivered by hand,
mailed by registered or certified mail (return receipt requested) or sent by
prepaid overnight courier (with proof of service) or confirmed to facsimile to
the parties as follows (or at such other addresses for a party as shall be
specified by like notice) and shall be deemed given on the date on which so
hand-delivered, or sent by confirmed telecopier and on the day after it has been
so mailed or sent by courier:
To the Parent or Merger Sub:
The Procter and Gamble Company
One Procter and Gamble Plaza
Cincinnati, OH 45202
Facsimile: (513) 983-9379
Attention: Treasurer
with a copy (which shall not constitute notice) to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, NY 10004
Facsimile: (212) 859-4000
Attention: Stephen Fraidin (P.C.)
To the Company:
Recovery Engineering, Inc.
9300 North 75th Street
Minneapolis, MN 55428
Facsimile: (612) 315-5508
Attention: Chief Executive Officer
<PAGE>
with a copy (which shall not constitute notice) to:
Robins, Kaplan, Miller & Ciresi L.L.P.
2800 LaSalle Plaza
800 LaSalle Avenue
Minneapolis, Minnesota 55402
Facsimile: (612) 339-4181
Attention: Eric O. Madson, Esq.
SECTION 10.6. Miscellaneous.
(a) This Agreement, together with the exhibit hereto, the
Company Disclosure Letter, the Confidentiality Agreement, the Ancillary
Documents and the Tender and Option Agreement, constitutes the entire agreement,
and supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof and thereof.
(b) This Agreement, except for the provisions of Article II and
Section 7.3, is not intended to and shall not confer upon any person other than
the parties hereto any rights or remedies hereunder or by reason hereof.
(c) This Agreement shall not, nor shall any of the rights or
interests hereunder, be assigned by any party hereto or be assignable by
operation of law or otherwise without the prior written consent of the other
parties; provided, however, that either the Parent or Merger Sub (or both) may
assign its rights hereunder (including, without limitation, the right to make
the Offer and/or purchase shares of Company Common Stock in the Offer) to an
affiliate, but nothing shall relieve the assignor from its obligations
hereunder. Subject to the preceding sentence, this Agreement shall be binding
upon and shall inure to the benefit to the parties hereto and their respective
successors and assigns.
(d) The headings contained in this Agreement are for reference
purposes and shall not affect in any way the meaning or interpretation of this
Agreement.
SECTION 10.7 Severability. Any term or provision of this Agreement
which is invalid or unenforceable in any jurisdiction shall, as to that
jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or affecting the validity or enforceability of
any of the terms or provisions of this Agreement in any other jurisdiction. If
any provision of this Agreement is so broad as to be unenforceable, the
provision shall be interpreted to be only so broad as is enforceable.
SECTION 10.8. Enforcement of Agreement. The parties hereto agree
that irreparable damage would occur in the event that any of the provisions of
this Agreement were not performed in accordance with its specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court, this being in
addition to any other remedy to which they are entitled at law or in equity.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered as of the date first above written.
<PAGE>
RECOVERY ENGINEERING, INC.
/s/ Brian F. Sullivan
By:__________________________________
Name: Brian F. Sullivan
Title: Chief Executive Officer
THE PROCTER AND GAMBLE COMPANY
/s/ Gretchen W. Price
By:__________________________________
Name: Gretchen W. Price
Title: Treasurer
TENZING, INC.
/s/ Gretchen W. Price
By:__________________________________
Name: Gretchen W. Price
Title: Vice President and
Treasurer
<PAGE>
EXHIBIT A
CONDITIONS OF THE OFFER
Notwithstanding any other term of the Offer or this Agreement,
Merger Sub shall not be required to accept for payment or pay for, subject to
any applicable rules and regulations of the SEC, including Rule 14e-l(c) of the
Exchange Act, any shares of Company Common Stock not theretofore accepted for
payment or paid for and may terminate or amend the Offer as to such shares of
Company Common Stock unless (i) there shall have been validly tendered and not
withdrawn prior to the expiration of the Offer that number of shares of Company
Common Stock which would represent at least a majority of the outstanding shares
of Company Common Stock on a fully diluted basis (the "Minimum Condition") and
(ii) any waiting period under the HSR Act applicable to the purchase of shares
of Company Common Stock pursuant to the Offer shall have expired or been
terminated. Furthermore, notwithstanding any other term of the Offer or this
Agreement, Merger Sub shall not be required to accept for payment or, subject as
aforesaid, to pay for any shares of Company Common Stock not theretofore
accepted for payment or paid for, and may terminate or amend the Offer if at any
time on or after the date of this Agreement and before the acceptance of such
shares of Company Common Stock for payment or the payment therefor, any of the
following conditions exist or shall occur and remain in effect at the scheduled
expiration of the Offer:
(a) there shall have been instituted or pending any
litigation before any court or other Governmental Entity which seeks to or, if
successful, would (i) challenge or restrict the acquisition by the Parent or
Merger Sub (or any of its affiliates) of shares of Company Common Stock pursuant
to the Offer or the Merger, restrain, prohibit or delay the making or
consummation of the Offer or the Merger, or obtain any damages in connection
therewith, (ii) make the purchase of or payment for some or all of the shares of
Company Common Stock pursuant to the Offer or the Merger illegal or otherwise
restrict or prohibit consummation of the Offer or the Merger, (iii) impose
limitations on the ability of the Parent or Merger Sub (or any of their
affiliates) effectively to acquire, operate or hold, or require the Parent,
Merger Sub or Company or any of their respective affiliates or Subsidiaries to
dispose of or hold separate, any portion of the assets or the business of any
one of them or their Subsidiaries or affiliates, (iv) impose limitations on the
ability of the Parent, Merger Sub or their affiliates to exercise full rights of
ownership of the shares of Company Common Stock acquired by it pursuant to the
Offer or the Merger, including, without limitation, the right to vote the shares
acquired by it on all matters properly presented to the shareholders of the
Company, (v) restrict any future business activity by the Parent, Merger Sub,
the Company or any of their affiliates, including, without limitation, requiring
the prior consent of any person or entity (including any Governmental Entity) to
future transactions by the Parent, Merger Sub, the Company or any of their
affiliates, or (vi) otherwise affect the Parent, Merger Sub, the Company or any
of their respective affiliates, which, in each such case described in (i)
through (vi), is reasonably likely to have a Company Material Adverse Effect or
a Parent Material Adverse Effect or otherwise make consummation of the Offer or
the Merger unduly burdensome; or
(b) there shall have been promulgated, enacted, entered,
enforced or deemed applicable to the Offer or the Merger, by any Governmental
<PAGE>
Entity, any Law (other than the HSR Act) that is reasonably likely to result in
any of the consequences referred to in subsection (a) above; or
(c) this Agreement shall have been terminated in accordance
with its terms; or
(d) (i) any of the representations and warranties made by
the Company in this Agreement or in any Ancillary Document (which for purposes
of this clause (d) shall be read as though none of them contained any Material
Adverse Effect or materiality qualifications) shall not have been true and
correct in all respects when made, or shall thereafter have ceased to be true
and correct in all respects as if made as of such later date (other than
representations and warranties made as of a specified date), except where the
failure of the representations and warranties to be true and correct in all
respects would not in the aggregate have a Company Material Adverse Effect, or
(ii) the Company shall have breached or failed to comply in any material respect
with any of its obligations under this Agreement; or
(e) the Board of Directors shall have modified or amended
its recommendation of the Offer or the Merger in any manner adverse to the
Parent or Merger Sub or shall have withdrawn or failed to confirm within five
business days of the Parent's request therefor its recommendation of the Offer
or the Merger or shall have recommended acceptance of any Acquisition Proposal
or shall have resolved to do any of the foregoing; or
(f) any change, new event or development shall have occurred
or be threatened which, either individually or in the aggregate, would or is
likely in the future to have a Company Material Adverse Effect, other than
changes in general economic, financial, regulatory, political or market
conditions.
The foregoing conditions are for the sole benefit of the Parent and
Merger Sub and may be asserted by the Parent or Merger Sub with respect to the
consummation of the Offer regardless of the circumstances giving rise to any
such condition (other than any action or inaction by the Parent or Merger Sub)
and may be waived by the Parent or Merger Sub, in whole or in part, at any time
and from time to time, in the reasonable discretion of the Parent subject to the
terms of the Agreement. The failure by the Parent or Merger Sub at any time to
exercise any of the foregoing rights will not be deemed a waiver of any right,
the waiver of such right with respect to any particular facts or circumstances
shall not be deemed a waiver with respect to any other facts or circumstances,
and each right will be deemed an ongoing right which may be asserted at any time
and from time to time.
Should the Offer be terminated pursuant to the foregoing provisions,
all tendered shares of Company Common Stock not theretofore accepted for payment
shall forthwith be returned by the Paying Agent to the tendering shareholders.
<PAGE>
[LETTERHEAD OF GOLDMAN, SACHS & CO. APPEARS HERE]
Goldman
Sachs
PERSONAL AND CONFIDENTIAL
- -------------------------
June 24, 1999
The Procter & Gamble Company
One Procter & Gamble Plaza
Cincinnati, OH 45202
Attention: Mr. John Zuske
Director, Acquisitions & Divestitures Coordination
Ladies and Gentlemen:
In connection with your consideration of a possible transaction with Recovery
Engineering, Inc. (the "Company"), you have requested information concerning the
Company. As a condition to your being furnished such information, you agree to
treat any information concerning the Company (whether prepared by the Company,
its advisors or otherwise) which is furnished to you by or on behalf of the
Company (herein collectively referred to as the "Evaluation Material") in
accordance with the provisions of this letter and to take or abstain from taking
certain other actions herein set forth. The term "Evaluation Material" does not
include information which (i) is already in your possession, provided that such
information is not known by you to be subject to another confidentiality
agreement with or other obligation of secrecy to the Company or another party,
or (ii) becomes generally available to the public other than as a result of a
disclosure by you or your directors, officers, employees, agents or advisors, or
(iii) becomes available to you on a non-confidential basis from a source other
than the Company or its advisors, provided that such source is not known by you
to be bound by a confidentiality agreement with or other obligation of secrecy
to the Company or another party.
You hereby agree that the Evaluation Material will be used solely for the
purpose of evaluating a possible transaction between the Company and you, and
that such information will be kept confidential by you and your advisors;
provided, however, that (i) any of such information may be disclosed to your
directors, officers and employees and representatives of your advisors who need
to know such information for the purpose of evaluating any such possible
transaction between the Company and you (it being understood that such
directors, officers, employees and representatives shall be informed by you of
the confidential nature of such information and shall be directed by you to
treat such information confidentially), and (ii) any disclosure of such
information may be made to which the Company consents in writing.
You agree that, if you are requested or required by judicial or administrative
process or by other requirements of law to disclose all or any part of the
Evaluation Material to any other person, you will give us sufficient advance
notice to enable us to attempt to obtain appropriate protective orders, and
<PAGE>
The Procter & Gamble Company
June 24, 1999
Page Two
will cooperate with us in any efforts by us to obtain such protective order or
other appropriate remedy. If such protective order or other remedy is not
obtained and you are nevertheless, in the opinion of your counsel, compelled to
disclose any Evaluation Material, you agree to exercise your best efforts to
have confidential treatment accorded to any such information that you are
required to disclose.
You hereby acknowledge that you are aware, and that you will advise such
directors, officers, employees and representatives who are informed as to the
matters which are the subject of this letter, that the United States securities
laws prohibit any person who has received from an issuer material, non-public
information concerning the matters which are the subject of this letter from
purchasing or selling securities of such issuer or from communicating such
information to any other person under circumstances in which it is reasonably
foreseeable that such person is likely to purchase or sell such securities.
In addition, without the prior written consent of the Company, you will not, and
will direct such directors, officers, employees and representatives not to,
disclose to any person either the fact that discussions or negotiations are
taking place concerning a possible transaction between the Company and you or
any of the terms, conditions or other facts with respect to any such possible
transaction, including the status thereof.
You agree that, for a period of three years from the date of this letter you
will not, directly or indirectly, solicit to employ (whether as an employee,
officer, director, agent, consultant or independent contractor) any person who
is now employed by the Company. The term "solicit to employ" includes any
communications (written, telephonic or oral) from or initiated by you or your
representatives or any search or other recruitment entity or person employed by
you, to any employee of the Company, but does not include advertising to fill
one or more positions in any newspaper of general circulation or industry
publication on a basis consistent with your past practice.
You agree that all communications regarding any possible transaction, requests
for additional information, requests for facility tours or management
interviews, or questions regarding procedure shall be submitted or directed to
Goldman Sachs and that you will not initiate or maintain contact with any
director, officer or employee of the Company with respect to any possible
transaction or regarding the business, operations, prospects or finances of the
Company, unless the Company shall have otherwise agreed in writing.
You acknowledge that money damages would not be a sufficient remedy for any
breach of the provisions of this letter and agree that in addition to all other
legal or equitable remedies, the Company shall be entitled to equitable relief,
including injunction, in the event of any breach of the provisions of this
letter. You agree that you shall not oppose the granting of such relief and
shall waive any requirement for the securing or posting of any bond in
connection with such remedy.
<PAGE>
The Procter & Gamble Company
June 24, 1999
Page Three
Although the Company has endeavored to include in the Evaluation Material
information known to it which it believes to be relevant for the purpose of your
investigation, you understand that neither the Company nor any of its
representatives or advisors have made or make any representation or warranty as
to the accuracy or completeness of the Evaluation Material. You agree that
neither the Company nor its representatives or advisors shall have any liability
to you or any of your representatives or advisors resulting from the use of the
Evaluation Material.
In the event that you do not proceed with the transaction which is the subject
of this letter within a reasonable time, or upon the written request of the
Company, you shall promptly redeliver to the Company (and such redelivery shall
be certified in writing to the Company by an authorized officer supervising such
redelivery) all written Evaluation Material and any other written material
containing or reflecting any information in the Evaluation Material (whether
prepared by the Company, its advisors or otherwise) and will not retain any
copies, extracts or other reproductions in whole or in part of such written
material. All documents, memoranda, notes and other writings whatsoever prepared
by you or your advisors based on the information in the Evaluation Material
shall be destroyed, and such destruction shall be certified in writing to the
Company by an authorized officer supervising such destruction.
You agree that unless and until a definitive agreement between the Company and
you with respect to any transaction referred to in the first paragraph of this
letter has been executed and delivered, neither the Company nor you will be
under any legal obligation of any kind whatsoever with respect to such a
transaction by virtue of this or any written or oral expression with respect to
such a transaction by any of its directors, officers, employees, agents or any
other representatives or its advisors or representatives thereof except, in the
case of this letter, for the matters specifically agreed to herein. The
agreement set forth in this paragraph may be modified or waived only by a
separate writing by the Company and you expressly so modifying or waiving such
agreement.
No failure or delay by the Company in exercising or enforcing any right or
undertaking under this letter shall constitute a waiver of or otherwise
prejudice any such rights or undertakings of the Company.
The provisions of this letter will expire three years from the date of this
letter.
<PAGE>
The Procter & Gamble Company
June 24, 1999
Page Four
This letter shall be governed by, and construed in accordance with, the laws of
the State of New York.
Very truly yours,
RECOVERY ENGINEERING, INC.
/s/ Goldman, Sachs & Co.
By_____________________________________
Goldman, Sachs & Co.
on behalf of Recovery Engineering, Inc.
Confirmed and Agreed to:
THE PROCTER & GAMBLE COMPANY
By: /s/ John R. Zuske
--------------------------------
Date: 6-24-99
--------------------------------
<PAGE>
[LETTERHEAD OF GOLDMAN SACHS APPEARS HERE]
Goldman
Sachs
PERSONAL & CONFIDENTIAL
- -----------------------
July 27, 1999
The Procter & Gamble Company
One Procter & Gamble Plaza
Cincinnati, OH 45202
Attention: Mr. John Zuske
Director, Acquisitions & Divestitures Coordination
Ladies and Gentlemen:
This Agreement supplements our Confidentiality Agreement dated June 24, 1999
(the "Confidentiality Agreement").
1. Evaluation Material
-------------------
The parties acknowledge that Evaluation Material as defined in the
Confidentiality Agreement includes, without limitation, the following
information regarding or pertaining to a party: technical information and
data of all types, patents, trade secrets, manufacturing processes,
information regarding operations, costs and pricing, business plans and
prospects, budgets, information regarding research and development and
other information concerning the present or future business, products or
competitive position of the disclosing party. All of such Evaluation
Material shall be treated as provided in the Confidentiality Agreement.
2. Prohibition on Use
------------------
The parties agree that no Evaluation Material disclosed to a party will be
used in any present or future business activity of the receiving party,
including without limitation, to develop new products, technologies or
manufacturing processes or techniques. Such limitations do not limit in any
way receiving party's, or its affiliates' ability to independently develop
new products, technologies or manufacturing processes or techniques without
the use of Evaluation Materials.
3. Supplemental Obligations Regarding Return of Evaluation Material
----------------------------------------------------------------
Following return or destruction of all Evaluation Material in tangible form
as contemplated by the Confidentiality Agreement, the parties will have a
continuing obligation to comply with the confidentiality and non-use
provisions as set forth in the Confidentiality Agreement.
<PAGE>
The Procter & Gamble Company
July 27, 1999
Page Two
4. Remedies: Indemnification
-------------------------
In addition to the remedies provided in the Confidentiality Agreement, the
parties agree that they will be entitled to seek equitable relief, including
injunctions and specific performance, for any breach or threatened or
prospective breach of the provisions of the Confidentiality Agreement or this
Agreement.
5. Continued Effect of Confidentiality Agreement
---------------------------------------------
Except as expressly modified or supplemented by this Agreement, the
Confidentiality Agreement which you have previously executed will
remain in full force and effect in accordance with its terms.
In order to record your agreement with the foregoing, please sign and return a
copy of this Agreement.
THE PROCTER & GAMBLE COMPANY
By /s/ John R. Zuske
----------------------------
RECOVERY ENGINEERING, INC.
By /s/ Goldman, Sachs & Co.
----------------------------
Goldman, Sachs & Co.
on behalf of Recovery Engineering, Inc.
Acknowledged and Accepted
Agreed to this __ day of ____, 1999
<PAGE>
======================================
STOCK OPTION AGREEMENT
by and between
RECOVERY ENGINEERING, INC.
and
THE PROCTER AND GAMBLE COMPANY
Dated as of August 26, 1999
======================================
<PAGE>
STOCK OPTION AGREEMENT
STOCK OPTION AGREEMENT, dated as of August 26, 1999 (this "Agreement"), by
---------
and between Recovery Engineering, Inc., a Minnesota corporation (the "Company"),
-------
and The Procter and Gamble Company, an Ohio corporation ("Grantee").
-------
RECITALS
WHEREAS, the Company, Grantee and Tenzing, Inc., a Minnesota corporation
and a wholly owned subsidiary of Grantee ("Merger Sub"), have entered into an
----------
Agreement and Plan of Merger, dated as of the date hereof (as the same may be
amended and supplemented, the "Merger Agreement"; defined terms used but not
----------------
defined herein have the meanings set forth in the Merger Agreement), providing
for, among other things, an Offer by Merger Sub for all the outstanding shares
of common stock, par value $0.01 per share, of the Company (the "Company Common
--------------
Stock") and, subsequent thereto, assuming the Offer is consummated on the terms
- -----
set forth in the Offer Documents and all the other conditions to the Merger are
satisfied or waived, the Merger of Merger Sub with and into the Company with the
Company as the surviving corporation in the Merger, pursuant to which the
Company will become a wholly owned subsidiary of Grantee; and
WHEREAS, as a condition and inducement to each of Grantee's and Merger
Sub's willingness to enter into the Merger Agreement, Grantee has requested that
the Company agree, and the Company has agreed, to grant Grantee the Option (as
defined below).
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
Company and Grantee agree as follows:
Section 1. Grant of Option. Subject to the terms and conditions set forth
---------------
herein, the Company hereby grants to Grantee an irrevocable option (the
"Option") to purchase up to 1,202,875 (as adjusted as set forth herein) shares
------
(the "Option Shares") of Company Common Stock, at a purchase price of $35.25 (as
-------------
adjusted as set forth herein) per Option Share (the "Purchase Price"); provided,
-------------- --------
however, that in no event shall the number of Option Shares exceed 19.9% of the
- -------
capital stock entitled to vote generally for the election of directors of the
Company that is issued and outstanding at the time of exercise (without giving
effect to the Option Shares issued or issuable under the Option) (the "Maximum
-------
Applicable Percentage"). The number of Option Shares purchasable upon exercise
- ---------------------
of the Option and the Option Price is subject to adjustment as set forth herein
and subject to Section 9(b).
Section 2. Exercise of Option. (a) Grantee may exercise the Option, with
------------------
respect to any or all of the Option Shares at any time, subject to the
provisions of Section 2(c), after the occurrence of any event as a result of
which the Grantee is entitled to receive a Termination Fee pursuant to Section
9.3 of the Merger Agreement (a "Purchase
--------
<PAGE>
Event") (regardless of whether the Merger Agreement is actually terminated and
- -----
whether such Termination Fee is then actually paid); provided, however, that (i)
-------- -------
except as provided in the last sentence of this Section 2(a), the Option will
terminate and be of no further force and effect upon the earliest to occur of
(A) the Effective Time, (B) termination of the Merger Agreement in accordance
with its terms other than upon, during the continuance of, or after, a Purchase
Event or an event which could lead to a Purchase Event, and (C) 120 days after
the first occurrence of a Purchase Event, and (ii) any purchase of Option Shares
upon exercise of the Option will be subject to compliance with the HSR Act and
the obtaining or making of any consents, approvals, orders, notifications,
filings, expiration of applicable waiting periods or authorizations, the failure
of which to have obtained or made would have the effect of making the purchase
of Option Shares by Grantee illegal (the "Regulatory Approvals").
--------------------
Notwithstanding the termination of the Option, Grantee will be entitled to
purchase the Option Shares if it has exercised the Option in accordance with the
terms hereof prior to the termination of the Option and the termination of the
Option will not affect any rights hereunder (including, without limitation,
Section 7 hereof) which by their terms do not terminate or expire prior to or as
of such termination.
(b) In the event that Grantee is required to, or is entitled to and
wishes to exercise the Option, it will send to the Company a written notice (an
"Exercise Notice"; the date of which being herein referred to as the "Notice
--------------- ------
Date") to that effect which Exercise Notice also specifies the number of Option
- ----
Shares, if any, Grantee wishes to purchase, the number of Option Shares, if any,
with respect to which Grantee wishes to exercise its Cash-Out Right (as defined
herein) pursuant to Section 7(c), the denominations of the certificate or
certificates evidencing the Option Shares which Grantee wishes to purchase and a
date (an "Option Closing Date"), subject to the following sentence, not later
-------------------
than 20 business days from the Notice Date for the closing of such purchase (an
"Option Closing"). Any Option Closing will be at an agreed location and time in
--------------
New York, New York on the applicable Option Closing Date or at such later date
as may be necessary so as to comply with the provisions of Section 2(c).
(c) Notwithstanding anything to the contrary contained herein, any
exercise of the Option and purchase of Option Shares shall be subject to
compliance with applicable Laws, which may prohibit the purchase of any or all
of the Option Shares specified in the Exercise Notice without first obtaining or
making certain Regulatory Approvals. In such event, if the Option is otherwise
exercisable and Grantee wishes to exercise the Option, the Option may be
exercised in accordance with Section 2(b) and Grantee shall acquire the maximum
number of Option Shares specified in the Exercise Notice that Grantee is then
permitted to acquire under the applicable Laws, and if Grantee thereafter
obtains the Regulatory Approvals to acquire the remaining balance of the Option
Shares specified in the Exercise Notice, then Grantee shall be entitled to
acquire such remaining balance. The Company agrees to use its reasonable best
efforts to assist Grantee in seeking the Regulatory Approvals and Grantee agrees
to use its reasonable best efforts to obtain such Regulatory Approvals as
promptly as practicable.
-2-
<PAGE>
In the event that Grantee exercised the Option and either (i) Grantee
receives official notice that a Regulatory Approval required for the purchase of
any Option Shares will not be issued or granted or (ii) such Regulatory Approval
has not been issued or granted within six months of the date of the Exercise
Notice, then Grantee shall have the right, but not the obligation, to exercise
its Cash-Out Right pursuant to Section 7(c) with respect to the Option Shares
for which such Regulatory Approval will not be issued or granted or has not been
issued or granted.
Section 3. Payment and Delivery of Certificates. (a) At any Option
------------------------------------
Closing, Grantee will pay to the Company in immediately available funds by wire
transfer to a bank account designated in writing by the Company an amount equal
to the Purchase Price multiplied by the number of Option Shares to be purchased
at such Option Closing.
(b) At any Option Closing, simultaneously with the delivery of
immediately available funds as provided in Section 3(a), the Company will
deliver to Grantee a certificate or certificates representing the Option Shares
to be purchased at such Option Closing, which Option Shares will be free and
clear of all Liens. If at the time of issuance of the Option Shares hereunder,
the Company shall have issued any rights or other securities which are attached
to or otherwise associated with the Company Common Stock, then each Option Share
shall also represent such rights or other securities with terms substantially
the same as, and at least as favorable to the Grantee as are provided under any
shareholder rights agreement or similar agreement of the Company then in effect.
(c) Certificates for the Option Shares delivered at an Option Closing
will have typed or printed thereon a restrictive legend which will read
substantially as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY
BE REOFFERED OR SOLD ONLY IF SO REGISTERED OR IF AN EXEMPTION
FROM SUCH REGISTRATION IS AVAILABLE."
It is understood and agreed that the legend will be removed by delivery of
substitute certificate(s) without such reference if such Option Shares have been
registered pursuant to the Securities Act, such Option Shares have been sold in
reliance on and in accordance with Rule 144 under the Securities Act or Grantee
has delivered to the Company a copy of a letter from the staff of the SEC, or an
opinion of counsel in form and substance reasonably satisfactory to the Company
and its counsel, to the effect that such legend is not required for purposes of
the Securities Act.
Section 4. Covenants of the Company. In addition to its other agreements
------------------------
and covenants herein, the Company agrees:
-3-
<PAGE>
(a) Shares Reserved for Issuance. To maintain, free from preemptive
----------------------------
rights, sufficient authorized but unissued or treasury shares of Company Common
Stock so that the Option may be fully exercised without additional authorization
of Company Common Stock after giving effect to all other options, warrants,
convertible securities and other rights of third parties to purchase shares of
Company Common Stock from the Company, and to issue the appropriate number of
shares of Company Common Stock pursuant to the terms of this Agreement.
(b) No Avoidance. Not to avoid or seek to avoid (whether by charter
------------
amendment or through reorganization, consolidation, merger, issuance of rights,
dissolution or sale of assets, or by any other voluntary act) the observance or
performance of any of the covenants, agreements or conditions to be observed or
performed hereunder by the Company.
Section 5. Representations and Warranties of the Company. The Company
---------------------------------------------
hereby represents and warrants to Grantee as follows:
(a) Merger Agreement. The Company hereby makes each of the
----------------
representations and warranties contained in Sections 4.3, 4.5, 4.6, 4.21 and
4.22 of the Merger Agreement as they relate to the Company and this Agreement,
as if such representations and warranties were set forth herein.
(b) Authorized Stock. The Company has taken all necessary corporate
----------------
and other action to authorize and reserve and, subject to the expiration or
termination of any required waiting period under the HSR Act, to permit it to
issue, and, at all times from the date hereof until the obligation to deliver
Option Shares upon the exercise of the Option terminates, shall have reserved
for issuance, upon exercise of the Option, shares of Company Common Stock
necessary for Grantee to exercise the Option, and the Company will take all
necessary corporate action to authorize and reserve for issuance all additional
shares of Company Common Stock or other securities which may be issued pursuant
to Section 7 upon exercise of the Option. The shares of Company Common Stock to
be issued upon due exercise of the Option, including all additional shares of
Company Common Stock or other securities which may be issuable upon exercise of
the Option or any other securities which may be issued pursuant to Section 7,
upon issuance pursuant hereto, will be duly and validly issued, fully paid and
nonassessable, and will be delivered free and clear of all Liens, including
without limitation, any preemptive rights of any shareholder of the Company.
(c) Takeover Statutes. The Company's Board of Directors has taken all
-----------------
appropriate and necessary actions such that Sections 302A.671, 302A.673 and
302A675 of the MBCA are inapplicable to the execution and delivery of this
Agreement and to the consummation of the transactions contemplated hereby. No
other takeover Law as in effect on the date hereof is applicable to the
execution and delivery of this Agreement, the Company Common Stock issuable
hereunder or to the other transactions contemplated by this Agreement. No anti-
takeover provision contained in the Company's articles of incorporation, by-laws
or agreements is applicable to the execution and
-4-
<PAGE>
delivery of this Agreement, the Company Common Stock issuable hereunder or to
the other transactions contemplated by this Agreement.
Section 6. Representations and Warranties of Grantee. Grantee
-----------------------------------------
hereby represents and warrants to the Company that any Option Shares or other
securities acquired by Grantee upon exercise of the Option will not be
transferred or otherwise disposed of except in a transaction registered, or
exempt from registration, under the Securities Act.
Section 7. Adjustment Upon Changes in Capitalization, etc. (a)
----------------------------------------------
In the event of any change in the Company Common Stock by reason of a stock
dividend, split-up, reverse stock split, merger, recapitalization, combination,
exchange of shares, or similar transaction, the type and number of shares or
securities subject to the Option, and the Purchase Price thereof, will be
adjusted appropriately, and proper provision will be made in the agreements
governing such transaction, so that Grantee will receive upon exercise of the
Option the number and class of shares or other securities or property that
Grantee would have received in respect of Company Common Stock if the Option had
been exercised immediately prior to such event or the record date therefor, as
applicable. Subject to Section 1, and without limiting the parties' relative
rights and obligations under the Merger Agreement, if any additional shares of
Company Common Stock are issued after the date of this Agreement (other than
pursuant to an event described in the first sentence of this Section 7(a)), the
number of shares of Company Common Stock subject to the Option will be adjusted
so that, after such issuance, it equates the Maximum Applicable Percentage.
(b) Without limiting the parties' relative rights and obligations
under the Merger Agreement, in the event that the Company enters into an
agreement (i) to consolidate with or merge into any person, other than Grantee
or one of its subsidiaries, and the Company will not be the continuing or
surviving corporation in such consolidation or merger, (ii) to permit any
person, other than Grantee or one of its subsidiaries, to merge into the Company
and the Company will be the continuing or surviving corporation, but in
connection with such merger, the shares of Company Common Stock outstanding
immediately prior to the consummation of such merger will be changed into or
exchanged for stock or other securities of the Company or any other person or
cash or any other property, or the shares of Company Common Stock outstanding
immediately prior to the consummation of such merger will, after such merger,
represent less than 50% of the outstanding voting securities of the merged
company, or (iii) to sell or otherwise transfer all or substantially all of its
assets to any person, other than Grantee or one of its subsidiaries, then, and
in each such case, the agreement governing such transaction will make proper
provision so that the Option will, upon the consummation of any such transaction
and upon the terms and conditions set forth herein, be converted into, or
exchanged for, an option with identical terms appropriately adjusted to acquire
the number and class of shares or other securities or property that Grantee
would have received in respect of Company Common Stock if the Option had been
exercised immediately prior to such consolidation, merger, sale, or
-5-
<PAGE>
transfer, or the record date therefor, as applicable, and make any other
necessary adjustments.
(c) If, at any time during the period commencing on a Purchase Event
and ending on the termination of the Option in accordance with Section 2,
Grantee sends to the Company an Exercise Notice indicating Grantee's election to
exercise its right (the "Cash-Out Right") pursuant to this Section 7(c), then
--------------
the Company shall pay to Grantee, on the Option Closing Date, in exchange for
the cancellation of the Option with respect to such number of Option Shares as
Grantee specifies in the Exercise Notice, an amount in cash equal to such number
of Option Shares multiplied by the difference between (i) the average closing
price, for the 10 NASDAQ/National Market System ("NASDAQ/NMS") trading days
----------
commencing on the 12th NASDAQ/NMS trading day immediately preceding the Notice
Date, per share of Company Common Stock as reported on the NASDAQ/NMS (or, if
not listed on the NASDAQ/NMS, as reported on any other national securities
exchange or national securities quotation system on which the Company Common
Stock is listed or quoted, as reported in The Wall Street Journal (Northeast
-----------------------
edition), or, if not reported therein, any other authoritative source) (the
"Closing Price") and (ii) the Purchase Price. Notwithstanding the termination
-------------
of the Option, Grantee will be entitled to exercise its rights under this
Section 7(c) if it has exercised such rights in accordance with the terms hereof
prior to the termination of the Option.
Section 8. Registration Rights. The Company will, if requested by Grantee
-------------------
at any time and from time to time within two years of the exercise of the Option
(a "Demand Registration"), as expeditiously as possible prepare and file up to
-------------------
two registration statements under the Securities Act if such registration is
necessary in order to permit the sale or other disposition of any or all Option
Shares or securities that have been acquired by or are issuable to Grantee upon
exercise of the Option in accordance with the intended method of sale or other
disposition stated by Grantee, including a "shelf" registration statement under
Rule 415 under the Securities Act or any successor provision, and the Company
will use its best efforts to qualify such Option Shares or other securities
under any applicable state securities laws. The Company will use best efforts
to cause each such registration statement to become effective when requested by
Grantee, to obtain all consents or waivers of other parties which are required
therefor, and to keep such registration statement effective for such period not
in excess of 180 calendar days from the day such registration statement first
becomes effective as may be reasonably necessary to effect such sale or other
disposition. The obligations of the Company hereunder to file a registration
statement and to maintain its effectiveness may be suspended for up to 60
consecutive calendar days if the Board of Directors of the Company shall have
determined in good faith that the filing of such registration statement or the
maintenance of its effectiveness would be seriously detrimental to the Company;
provided, however, that the suspension of the Company's obligations may occur
- -------- -------
only one time in any six-month period; provided, further, that any requested
-------- -------
registration suspended hereunder will not count for purposes of requests for
Demand Registrations to which Grantee is entitled hereunder. All expenses
related to a registration statement prepared and filed under this Section 8, and
any sale covered thereby, will be at the Company's
-6-
<PAGE>
expense, except for underwriting discounts or commissions. Grantee will provide
all information reasonably requested by the Company for inclusion in any
registration statement to be filed hereunder. If, during the time periods
referred to in the first sentence of this Section 8, the Company effects a
registration under the Securities Act of Company Common Stock for its own
account or for any other shareholders of the Company (other than on Form S-4 or
Form S-8, or any successor form), it will allow Grantee the right to participate
in such registration, and such participation will not affect the obligation of
the Company to effect Demand Registrations for Grantee under this Section 8;
provided, that, if the managing underwriters of such offering advise the Company
- -------- ----
in writing that in their opinion the number of shares of Company Common Stock
requested to be included in such registration exceeds the number which can be
sold in such offering or could materially impact the marketing or prices of such
offering, the Company will include the shares requested to be included therein
by Grantee pro rata with the shares intended to be included therein by the
Company and any other seller of securities under such registration statement.
In connection with any registration pursuant to this Section 8, the Company and
Grantee will provide each other and any underwriter of the offering with
customary representations, warranties, covenants, indemnification, and
contribution in connection with such registration.
Section 9. Limitation on Profit. (a) Notwithstanding any other provision
--------------------
of this Agreement, in no event shall Grantee's Total Profit (as defined below)
plus any Termination Fee paid to Grantee pursuant to Section 9.3 of the Merger
Agreement exceed in the aggregate $11,865,000 and, if the total amount that
otherwise would be received by Grantee would exceed such amount, Grantee, at its
sole election, shall either (i) reduce the number of shares of Company Common
Stock subject to the Option, (ii) deliver to the Company for cancellation Option
Shares previously purchased by Grantee against the refund of the purchase price
therefor, (iii) pay cash to the Company or (iv) any combination thereof, so that
Grantee's actually realized Total Profit, when aggregated with such Termination
Fee so paid to Grantee, shall not exceed $11,865,000, based on the transaction
value after taking into account the foregoing actions.
(b) Notwithstanding any other provision of this Agreement, the
Option may not be exercised for a number of Option Shares as would, as of the
date of exercise, result in a Notional Total Profit (as defined below) which,
together with any Termination Fee theretofore paid to Grantee, and after giving
effect to any election made by Grantee under Section 9(a), would exceed
$11,865,000; provided, that nothing in this sentence shall restrict any exercise
--------
of the Option permitted hereby on any subsequent date.
(c) As used herein, the term "Total Profit" shall mean the
------------
aggregate amount (before taxes) of the following: (i) the amount received by
Grantee pursuant to the Grantee's exercise of the Cash-Out Right, (ii)(x) the
net cash amounts or the fair market value of any property received by Grantee
pursuant to the sale of Option Shares (or (A) any other securities into which
such Option Shares are converted or exchanged or (B) any property, cash or other
securities received pursuant to adjustments
-7-
<PAGE>
under Section 7 or delivered pursuant to Section 3(b) ("Additional Property"))
-------------------
to any unaffiliated party, but in no case less than the fair market value of
such Option Shares at the time of such sale, less (y) the Grantee's purchase
price of such Option Shares, and (iii) the net cash amounts received by Grantee
on the transfer (in accordance with Section 16(a) hereof) of the Option (or any
portion thereof) to any unaffiliated party.
(d) As used herein, the term "Notional Total Profit" with
---------------------
respect to any number of Option Shares as to which Grantee may propose to
exercise the Option shall be the Total Profit determined as of the date of such
proposal assuming for such purpose that the Option were exercised on such date
for such number of Option Shares and assuming that (i) such Option Shares (or
any other securities into which such Option Shares are converted or exchanged),
together with all other Option Shares held by Grantee and its affiliates as of
such date, were sold for cash at the closing market price on the NASDAQ/NMS for
the Company Common Stock as of the close of business on the preceding trading
day (less customary brokerage commissions) and (ii) the Additional Property is
disposed of for fair market value.
Section 10. Listing. If Company Common Stock or any other securities to
-------
be acquired upon exercise of the Option are then listed on the NASDAQ/NMS (or
any other national securities exchange or national securities quotation system),
the Company, upon the request of Grantee, will promptly file an application to
list the shares of Company Common Stock or other securities to be acquired upon
exercise of the Option on the NASDAQ/NMS (and any other such national securities
exchange or national securities quotation system) and will use its best efforts
to obtain approval of such listing as promptly as practicable.
Section 11. Survival of Representations and Warranties. All
------------------------------------------
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive for twelve months after the termination
of the Option. The covenants and agreements made herein will survive in
accordance with their respective terms.
Section 12. Expenses. Except as otherwise provided in the Merger
--------
Agreement, all costs and expenses incurred in connection with this Agreement
shall be paid by the party incurring such expenses.
Section 13. Counterparts. This Agreement may be executed in two or more
------------
counterparts, all of which shall be considered the same agreement.
Section 14. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Minnesota, without regard
to principles of conflicts of laws thereof.
Section 15. Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed given if delivered by hand, mailed by
registered or certified mail (return receipt requested) or sent by prepaid
overnight courier (with proof of service) or confirmed to facsimile to the
parties as follows (or at such other addresses for a party
-8-
<PAGE>
as shall be specified by like notice) and shall be deemed given on the date on
which so hand-delivered, or sent by confirmed telecopier and on the day after it
has been so mailed or sent by courier:
To Grantee:
The Procter and Gamble Company
One Procter and Gamble Plaza
Cincinnati, OH 45202
Attention: Treasurer
Fax: 513-983-9379
with a copy (which shall not constitute notice) to:
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, NY 10004
Attention: Stephen Fraidin (P.C.)
Fax: 212-859-4000
To the Company:
Recovery Engineering, Inc.
9300 North 75/th/ Street
Minneapolis, MN 55428
Attention: Chief Executive Officer
Fax: 612-315-5508
-9-
<PAGE>
with a copy (which shall not constitute notice) to:
Robins, Kaplan, Miller & Ciresi L.L.P.
2800 LaSalle Plaza
800 LaSalle Avenue
Minneapolis, MN 55402
Attention: Eric O. Madison, Esq.
Fax: 612-339-4181
Section 16. Miscellaneous. (a) This Agreement shall not, nor shall any of
-------------
the rights or interests hereunder, be assigned by any party hereto or assignable
by operation of law or otherwise without the prior written consent of the other
parties hereto; provided, however, that Purchaser may assign its rights
hereunder to an affiliate, but nothing shall relieve the assignor from its
obligations hereunder. Subject to the preceding sentence, this Agreement shall
be binding upon and shall inure to the benefit to the parties hereto and their
respective successors and assigns.
(b) The headings contained in this Agreement are for reference purposes
and shall not affect in any way the meaning or interpretation of this Agreement.
In this Agreement, unless the context otherwise requires, words describing the
singular number shall include the plural and vice versa, and words denoting any
gender shall include all genders and words denoting natural persons shall
include corporations and partnerships and vice versa. Whenever the words
"include," "includes" or "including" are used in this Agreement, they shall be
understood to be followed by the words "without limitation."
(c) All rights, powers and remedies provided under this Agreement or
otherwise available in respect hereof at law or in equity will be cumulative and
not alternative, and the exercise of any thereof by either party will not
preclude the simultaneous or later exercise of any other such right, power or
remedy by such party.
Section 17. Severability. Any term or provision of this Agreement which
------------
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or unenforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
Section 18. Enforcement of Agreement; Waiver of Jury Trial. (a) The
----------------------------------------------
parties hereto agree that irreparable damage would occur in the event that any
of the provisions of this Agreement were not performed in accordance with its
specific terms or was otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce
-10-
<PAGE>
specifically the terms and provisions hereof in any court, this being in
addition to any other remedy to which they are entitled at law or in equity.
(b) Each of the parties irrevocably and unconditionally waives,
to the fullest extent permitted by applicable law, any and all rights to trial
by jury in connection with any litigation arising out of or relating to this
Agreement.
Section 19. Extension of Time, Waiver, Etc. The Company
------------------------------
and Grantee may:
(a) extend the time for the performance of any of the
obligations or acts of the other party;
(b) waive any inaccuracies in the representations and warranties
of the other party contained herein or in any document delivered pursuant
hereto; or
(c) waive compliance with any of the agreements or conditions of
the other party contained herein; provided, however, that no failure or delay by
the Company or Grantee in exercising any right hereunder shall operate as a
waiver thereof nor shall any single or partial exercise thereof preclude any
other or further exercise thereof or the exercise of any other right hereunder.
Any agreement on the part of a party hereto to any extension or waiver
contemplated by this Section 19 shall be valid only if set forth in an instrment
in writing signed on behalf of such party.
Section 20. Amendment. This Agreement may not be amended,
----------
except by an instrument in writing signed on behalf of each of the parties.
Section 21. Further Assurances. In the event of any
------------------
exercise of the Option by Grantee, the Company and Grantee will execute and
deliver all other documents and instruments and take all other actions that may
be reasonably necessary in order to consummate the transactions provided for by
such exercise.
-11-
<PAGE>
IN WITNESS WHEREOF, the Company and Grantee have each caused this Agreement
to be signed by their respective officers thereunto duly authorized as of the
day and year first written above.
THE PROCTER AND GAMBLE COMPANY
/s/ Gretchen W. Price
By: ___________________________
Name: Gretchen W. Price
Title: Treasurer
RECOVERY ENGINEERING, INC.
/s/ Brian F. Sullivan
By: ___________________________
Name: Brian F. Sullivan
Title: Chairman
-12-
<PAGE>
================================
TENDER AND OPTION AGREEMENT
among
THE PROCTER AND GAMBLE COMPANY,
TENZING, INC.
and
THE STOCKHOLDERS LISTED ON SCHEDULE A
Dated as of August 26, 1999
================================
<PAGE>
TENDER AND OPTION AGREEMENT
TENDER AND OPTION AGREEMENT, dated as of August 26, 1999 (this
"Agreement"), among The Procter and Gamble Company, an Ohio corporation
---------
("Purchaser"), Tenzing, Inc., a Minnesota corporation and a wholly owned
---------
subsidiary of Purchaser ("Merger Sub"), and each of the persons listed on
----------
Schedule A hereto (each a "Stockholder" and, collectively, the "Stockholders").
----------- ------------
RECITALS
WHEREAS, Purchaser, Merger Sub and Recovery Engineering, Inc., a
Minnesota corporation (the "Company"), have entered into an Agreement and Plan
-------
of Merger dated as of the date hereof (as the same may be amended or
supplemented, the "Merger Agreement") providing for, among other things, an
----------------
Offer by Merger Sub for all of the issued and outstanding shares of common
stock, par value $0.01 per share, of the Company (the "Company Common Stock"),
--------------------
and, subsequent thereto, assuming the Offer is consummated on the terms set
forth in the Offer Documents and all the other conditions to the Merger are
satisfied or waived, the Merger of Merger Sub with and into the Company with the
Company as the surviving corporation in the Merger, pursuant to which the
Company will become a wholly owned subsidiary of Purchaser;
WHEREAS, each Stockholder is the beneficial owner of the shares of
Company Common Stock, Options, Warrants, and Rights set forth opposite such
Stockholder's name on Schedule A hereto (collectively referred to herein as the
"Securities" of such Stockholder; such Securities, as such Securities may be
----------
adjusted by stock dividend, stock split, recapitalization, combination or
exchange of shares, merger, consolidation, reorganization or other change or
transaction of or by the Company, together with shares of Company Common Stock
issuable upon the exercise of Options, Warrants, and shares of Company Common
Stock issuable upon the exercise of Rights being referred to herein as the
"Shares" of such Stockholder); and
------
WHEREAS, as a condition to each of Purchaser and Merger Sub's
willingness to enter into the Merger Agreement, Purchaser and Merger Sub have
requested that the Stockholders enter into, and the Stockholders have agreed to
enter into, this Agreement;
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties agree as follows:
Section 1. Certain Definitions. Capitalized terms used but not otherwise
-------------------
defined herein have the meanings ascribed to such terms in the Merger Agreement.
Section 2. Representations and Warranties of the Stockholders. Each
--------------------------------------------------
Stockholder, severally and not jointly, represents and warrants to Purchaser and
Merger Sub, as of the date hereof and as of the Closing (as defined below), as
follows:
<PAGE>
(a) The Stockholder is the beneficial owner (as defined in Rule 13d-3
under the Exchange Act) of, and has good title to, all of the Securities set
forth opposite such Stockholder's name on Schedule A, free and clear of any
----------
pledge, hypothecation, claim, security interest, charge, encumbrance, voting
trust agreement, interest, option, lien, charge or similar restriction or
limitation, including any restriction on the right to vote, sell or otherwise
dispose of the Securities, other than those arising under the federal and state
securities laws (each, a "Lien"), except as set forth in this Agreement.
----
(b) The Securities constitute all of the securities (as defined in
Section 3(a)(10) of the Exchange Act) of the Company beneficially owned,
directly or indirectly, by the Stockholder.
(c) Except for the Securities, the Stockholder does not, directly or
indirectly, beneficially own or have any option, warrant or other right to
acquire any securities of the Company that are or may by their terms become
entitled to vote or any securities that are convertible or exchangeable into or
exercisable for any securities of the Company that are or may by their terms
become entitled to vote, nor is the Stockholder subject to any contract,
commitment, arrangement, understanding, restriction or relationship (whether or
not legally enforceable), other than this Agreement, that provides for such
Stockholder to vote or acquire any securities of the Company. The Stockholder
holds exclusive power to vote the Company Common Stock set forth opposite its
name on Schedule A, if any, and has not granted a proxy to any other person to
vote any Company Common Stock (including those issuable upon exercise of the
Options, Warrants or Rights), subject to the limitations set forth in this
Agreement.
(d) This Agreement has been duly executed and delivered by the
Stockholder, and assuming the due authorization, execution and delivery thereof
by the other parties hereto, constitutes the legal, valid and binding obligation
of the Stockholder, enforceable against the Stockholder in accordance with its
terms, except as enforcement against the Stockholder may be limited by
bankruptcy, insolvency, moratorium or other similar laws relating to creditors
rights generally and by general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at law).
(e) Neither the execution and delivery of this Agreement nor the
performance by the Stockholder of the Stockholder's obligations hereunder will
conflict with, result in a violation or breach of, or constitute a default (or
an event that, with notice or lapse of time or both, would result in a default)
or give rise to any right of termination, amendment, cancellation, or
acceleration or result in the creation of any Lien on any Shares under, (i) any
contract, commitment, agreement, understanding, arrangement or restriction of
any kind to which the Stockholder is a party or by which the Stockholder is
bound or (ii) any injunction, judgment, writ, decree, order or ruling applicable
to the Stockholder, except for conflicts, violations, breaches, defaults,
terminations, amendments, cancellations, accelerations or Liens that would not
individually or in the aggregate be expected
<PAGE>
to prevent or materially impair or delay the consummation by such Stockholder of
the transactions contemplated hereby.
(f) Neither the execution and delivery of this Agreement nor the
performance by the Stockholder of the Stockholder's obligations hereunder will
(i) violate any Law applicable to the Stockholder or require any order, consent,
authorization or approval of, filing or registration with, or declaration or
notice to, any court, administrative agency or other governmental body or
authority, other than any required notices or filings pursuant to the HSR Act,
foreign antitrust or competition laws or the federal securities laws, or (ii) if
the Stockholder is not a natural person, conflict with or violate the articles
of incorporation or bylaws or equivalent organizational documents of such
Stockholder.
(g) No investment banker, broker, finder or other intermediary is, or
will be, entitled to a fee or commission from Merger Sub, Purchaser or the
Company in respect of this Agreement based on any arrangement or agreement made
by or on behalf of such Stockholder in this Agreement or otherwise in his or her
capacity as a stockholder of the Company.
(h) The Stockholder understands and acknowledges that Purchaser is
entering into, and causing Merger Sub to enter into, the Merger Agreement in
reliance upon the Stockholder's execution and delivery of this Agreement.
(i) If the Stockholder is not a natural person, such Stockholder is a
corporation, partnership or other legal entity duly incorporated or organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation or organization.
(j) If the Stockholder is not a natural person, (i) such Stockholder
has all necessary corporate or partnership power and authority to execute and
deliver this Agreement, to perform its obligations hereunder and to consummate
the transactions contemplated hereunder, and (ii) the execution and delivery of
this Agreement by such Stockholder and the consummation by such Stockholder of
the transactions contemplated hereunder have been duly and validly authorized by
all necessary corporate or other action and no other corporate or other
proceedings on the part of such Stockholder are necessary to authorize this
Agreement or to consummate the transactions contemplated hereunder.
Section 3. Representations and Warranties of Purchaser and Merger Sub.
----------------------------------------------------------
Purchaser and Merger Sub hereby make each of the representations and warranties
contained in Sections 5.1, 5.3 and 5.4 of the Merger Agreement, as if such
representations and warranties were set forth herein.
Section 4. Transfer of the Shares. During the term of this Agreement,
----------------------
except as otherwise expressly provided herein, each Stockholder agrees that such
Stockholder will not (a) tender into any tender or exchange offer or otherwise
sell,
-3-
<PAGE>
transfer, pledge, assign, hypothecate or otherwise dispose of (including by
operation of Law), or create any Lien on, any of the Shares, (b) deposit the
Shares into a voting trust, enter into a voting agreement or arrangement with
respect to the Shares or grant any proxy or power of attorney with respect to
the Shares, (c) enter into any contract, option or other arrangement (including
any profit sharing arrangement) or undertaking with respect to the direct or
indirect acquisition or sale, transfer, pledge, assignment, hypothecation or
other disposition of any interest in or the voting of any Shares or any other
securities of the Company, (d) exercise any rights (including, without
limitation, under Section 302A.473 of the Minnesota Business Corporation Act) to
demand appraisal of any Shares which may arise with respect to the Merger, or
(e) take any other action that would in any way restrict, limit or interfere
with the performance of such Stockholder's obligations hereunder or the
transactions contemplated hereby or which would otherwise diminish the benefits
of this Agreement to Purchaser or Merger Sub.
Section 5. Adjustments. (a) In the event (i) of any stock dividend,
-----------
stock split, recapitalization, reclassification, combination or exchange of
shares of capital stock or other securities of the Company on, of or affecting
the Shares or the like or any other action that would have the effect of
changing a Stockholder's ownership of the Company's capital stock or other
securities or (ii) a Stockholder becomes the beneficial owner of any additional
Shares of or other securities of the Company, then the terms of this Agreement
will apply to the shares of capital stock and other securities of the Company
held by such Stockholder immediately following the effectiveness of the events
described in clause (i) or such Stockholder becoming the beneficial owner
thereof, as described in clause (ii), as though they were Shares hereunder.
(b) Each Stockholder hereby agrees, while this Agreement is in
effect, to promptly notify Purchaser and Merger Sub of the number of any new
Shares acquired by such Stockholder, if any, after the date hereof.
Section 6. Tender of Shares of Company Common Stock. Each Stockholder
----------------------------------------
hereby agrees that such Stockholder will validly tender (or cause the record
owner of such shares to validly tender) and sell (and not withdraw, except in
the event the Purchase Option is exercised, in which case such withdrawal shall
be for the limited purpose of consummating the Purchase Option) pursuant to and
in accordance with the terms of the Offer not later than the fifth business day
after commencement of the Offer (or the earlier of the expiration date of the
Offer and the fifth business day after such shares of Company Common Stock are
acquired by such Stockholder if the Stockholder acquires shares of Company
Common Stock after the date hereof), or, if the Stockholder has not received the
Offer Documents by such time, within two business days following receipt of such
documents, all of the then outstanding shares of Company Common Stock
beneficially owned by such Stockholder (including the shares of Company Common
Stock outstanding as of the date hereof and shares of Company Common Stock
issued following the exercise (if any) of the Options, Warrants, and Rights, in
each case as set forth on Schedule A hereto opposite such Stockholder's name).
Upon the purchase by Purchaser or Merger Sub of all of such then outstanding
<PAGE>
shares of Company Common Stock beneficially owned by such Stockholder pursuant
to the Offer in accordance with this Section 6, this Agreement will terminate as
it relates to such Stockholder. In the event, notwithstanding the provisions of
the first sentence of this Section 6, any shares of Company Common Stock
beneficially owned by a Stockholder are for any reason withdrawn from the Offer
or are not purchased pursuant to the Offer, such shares of Company Common Stock
will remain subject to the terms of this Agreement. Each Stockholder
acknowledges that Purchaser's obligation to accept for payment and pay for the
shares of Company Common Stock tendered in the Offer is subject to all the terms
and conditions of the Offer.
Section 7. Voting Agreement. Each Stockholder, by this Agreement, does
----------------
hereby (a) agree to appear (or not appear, if requested by Purchaser or Merger
Sub) at any annual, special, postponed or adjourned meeting of the stockholders
of the Company or otherwise cause the shares of Company Common Stock such
Stockholder beneficially owns to be counted as present (or absent, if requested
by Purchaser or Merger Sub) thereat for purposes of establishing a quorum and to
vote or consent, and (b) constitute and appoint Purchaser and Merger Sub, or any
nominee thereof, with full power of substitution, during and for the term of
this Agreement, as his true and lawful attorney and proxy for and in his name,
place and stead, to vote all the shares of Company Common Stock such Stockholder
beneficially owns at the time of such vote, at any annual, special, postponed or
adjourned meeting of the stockholders of the Company (and this appointment will
include the right to sign his or its name (as stockholder) to any consent,
certificate or other document relating to the Company that the laws of the State
of Minnesota may require or permit), in the case of both (a) and (b) above, (x)
in favor of approval and adoption of the Merger Agreement and approval and
adoption of the Merger and the other transactions contemplated thereby and (y)
against (1) any Acquisition Proposal (other than the Merger and the other
transactions contemplated thereby), (2) any action or agreement that would
result in a breach in any respect of any covenant, agreement, representation or
warranty of the Company under the Merger Agreement and (3) any other action that
is intended, or could be expected, to impede, interfere with, delay, postpone,
or adversely affect the Offer, the Merger and the other transactions
contemplated by this Agreement, the Merger Agreement and the Ancillary
Documents. This proxy and power of attorney is a proxy and power coupled with an
interest, and each Stockholder declares that it is irrevocable until this
Agreement shall terminate in accordance with its terms. Each Stockholder hereby
revokes all and any other proxies with respect to the Shares that such
Stockholder may have heretofore made or granted. For shares of Company Common
Stock as to which a Stockholder is the beneficial but not the record owner, such
Stockholder shall use his or its best efforts to cause any record owner of such
Shares to grant to Purchaser a proxy to the same effect as that contained
herein. Each Stockholder hereby agrees to permit Purchaser and Merger Sub to
publish and disclose in the Offer Documents and the Proxy Statement and related
filings under the securities laws such Stockholder's identity
-5-
<PAGE>
and ownership of Shares and the nature of his or its commitments, arrangements
and understandings under this Agreement.
Section 8. No Solicitation. Each Stockholder agrees that neither such
---------------
Stockholder nor any of such Stockholder's officers, directors, employees,
trustees, representatives, agents or affiliates (including, without limitation,
any investment banker, attorney or accountant retained by any of them) will
directly or indirectly initiate, solicit or encourage (including by way of
furnishing non-public information or assistance), or take any other action to
facilitate, any inquiries or the making or submission of any Acquisition
Proposal, or enter into or maintain or continue discussions or negotiate with
any person or entity in furtherance of such inquiries or to obtain or induce any
person to make or submit an Acquisition Proposal or agree to or endorse any
Acquisition Proposal or assist or participate in, facilitate or encourage, any
effort or attempt by any other person or entity to do or seek any of the
foregoing or authorize or permit any of its officers, directors, employees,
trustees or any of its affiliates or any investment banker, financial advisor,
attorney, accountant or other representative or agent retained by any of them to
take any such action. Each Stockholder shall promptly advise Purchaser in
writing of the receipt of request for information or any inquiries or proposals
relating to an Acquisition Proposal.
Section 9. Grant of Purchase Option. The Stockholder hereby grants to
------------------------
Purchaser and Merger Sub an irrevocable option (the "Purchase Option") to
---------------
purchase for cash at a price (the "Exercise Price") set forth below, in a manner
--------------
set forth below, any or all of the Shares (and including Shares acquired after
the date hereof by such Stockholder) beneficially owned by the Stockholder. The
Exercise Price for shares of Company Common Stock shall be equal to the Merger
Consideration. The Exercise Price as it relates to the Options and Warrants
shall be an amount in cash equal to the excess, if any, of the Merger
Consideration over the per share exercise price of such Option or Warrant,
without interest. To the extent that the per share exercise or conversion price
of any Option or Warrant exceeds the Merger Consideration, such Option or
Warrant shall be canceled and the Stockholder shall not receive or be entitled
to receive any consideration from Purchaser, Merger Sub or the Company relating
thereto. The Rights associated with any shares of Company Common Stock
transferred pursuant to this Agreement will be transferred with such shares of
Company Common Stock without payment of any additional consideration therefor.
In the event of any stock dividends, stock splits, recapitalizations,
combinations, exchanges of shares or the like, the Exercise Price will be
appropriately adjusted for the purpose of this Section 9. The amount payable
pursuant to this Section 9 shall be subject to all applicable withholding taxes.
Section 10. Exercise of Purchase Option.
---------------------------
(a) Subject to the conditions set forth in Section 12 hereof, the
Purchase Option may be exercised by Purchaser or Merger Sub, in whole or in
part, at any time or from time to time after the occurrence of any Trigger Event
(as defined below). Each Stockholder shall notify Purchaser promptly in writing
of
<PAGE>
the occurrence of any Trigger Event, it being understood that the giving of
such notice by the Stockholder is not a condition to the right of Purchaser or
Merger Sub to exercise the Purchase Option. In the event Purchaser or Merger Sub
wishes to exercise the Purchase Option, Purchaser shall deliver to each
Stockholder a written notice (an "Exercise Notice") specifying the total number
---------------
of Shares it wishes to purchase from such Stockholder. Each closing of a
purchase of Shares (a "Closing") will occur at a place, on a date and at a time
-------
designated by Purchaser or Merger Sub in an Exercise Notice delivered at least
two business days prior to the date of the Closing.
(b) A "Trigger Event" means any one of the following: (i) the Merger
-------------
Agreement becomes terminable under circumstances that entitle Purchaser or
Merger Sub to receive the Termination Fee under Section 9.3 of the Merger
Agreement (regardless of whether the Merger Agreement is actually terminated and
whether such Termination Fee is then actually paid) or (ii) the Offer is
consummated but, due to the failure of the Stockholder to validly tender and not
withdraw all of the then outstanding shares of Company Common Stock beneficially
owned by such Stockholder, the Purchaser has not accepted for payment or paid
for all of such shares of Company Common Stock.
(c) If requested by Purchaser and Merger Sub in the Exercise Notice,
such Stockholder shall exercise and/or convert all Options and Warrants (to the
extent exercisable and convertible) and other rights (including conversion or
exchange rights), other than Options and Warrants with exercise or conversion
prices above the Merger Consideration, beneficially owned by such Stockholder,
and shall, if directed by Purchaser and Merger Sub, tender the shares of Company
Common Stock acquired pursuant to such exercise or conversion into the Offer or
sell such shares of Company Common Stock to Purchaser or Merger Sub as provided
in this Agreement.
(d) In the event that, within 12 months of the exercise of the
Purchase Option, Purchaser sells, to a third party which is not an affiliate of
Purchaser, Shares acquired by means of exercise of the Purchase Option
("Exercise Shares") for an aggregate consideration (the "Aggregate
--------------- ---------
Consideration") greater than the aggregate Exercise Price (the "Aggregate
- ------------- ---------
Exercise Price") paid for such Shares, Purchaser agrees to pay to the
- --------------
Stockholders an amount equal to the excess of the Aggregate Consideration over
the Aggregate Exercise Price. Each Stockholder shall be entitled to the
proportion of such excess equal to proportion of the total number of Exercise
Shares which were acquired from such Stockholder. In addition, in the event
that, within 12 months of the exercise of the Purchase Option, Purchaser shall
consummate a merger agreement with the Company, or shall purchase Shares
pursuant to a tender offer for all Shares, at a price per share (taking into
account any stock dividends, stock splits, recapitalizations, combinations,
exchanges of shares or the like or any other action that would have the effect
of changing Purchaser's ownership of the Company's
-7-
<PAGE>
capital stock or other securities) in excess of the Exercise Price, Purchaser
agrees to pay each Stockholder such excess for each Exercise Share purchased
from such Stockholder.
Section 11. Termination. This Agreement will terminate (a) pursuant to
-----------
Section 6 or (b) upon the earliest of: (i) the Effective Time; (ii) termination
of the Merger Agreement in accordance with its terms other than upon, during the
continuance of, or after, a Trigger Event or an event which could lead to a
Trigger Event; or (iii) 120 days following any termination of the Merger
Agreement upon, during the continuance of or after a Trigger Event (or if, at
the expiration of such 120 day period the Purchase Option cannot be exercised by
reason of any applicable judgment, decree, order, injunction, law or regulation,
10 business days after such impediment to exercise has been removed or has
become final and not subject to appeal). Upon the giving by Purchaser or Merger
Sub to the Stockholder of the Exercise Notice and the tender of the aggregate
Exercise Price, Purchaser or Merger Sub, as the case may be, will be deemed to
be the holder of record of the Shares transferable upon such exercise,
notwithstanding that the stock transfer books of the Company are then closed or
that certificates representing such Shares have not been actually delivered to
Purchaser. Notwithstanding the termination of this Agreement, Purchaser will be
entitled to purchase the Shares subject to the Purchase Option if it has
exercised the Purchase Option in accordance with the terms hereof prior to the
termination of this Agreement and the termination of this Agreement will not
affect any rights hereunder which by their terms do not terminate or expire
prior to or as of such termination.
Section 12. Conditions To Closing. The obligation of each Stockholder to
---------------------
sell such Stockholder's Shares to Purchaser or Merger Sub hereunder is subject
to the conditions that (i) all waiting periods, if any, under the HSR Act,
applicable to the sale of the Shares or the acquisition of the Shares by
Purchaser or Merger Sub, as the case may be, hereunder have expired or have been
terminated; (ii) all consents, approvals, orders or authorizations of, or
registrations, declarations or filings with, any court, administrative agency or
other Governmental Entity, if any, required in connection with the sale of the
Shares or the acquisition of the Shares by Purchaser or Merger Sub hereunder
have been obtained or made; and (iii) no preliminary or permanent injunction or
other order by any court of competent jurisdiction prohibiting or otherwise
restraining such sale or acquisition is in effect.
Section 13. Closing. At any Closing with respect to Shares beneficially
-------
owned by a Stockholder, (a) such Stockholder will deliver to Purchaser, Merger
Sub or their respective designee a certificate or certificates in definitive
form representing the number of the Shares designated by Purchaser or Merger
Sub, as the case may be, in its Exercise Notice, such certificate to be
registered in the name of Purchaser, Merger Sub or their respective designee and
(b) Purchaser or Merger Sub, as the case may be, will deliver to the Stockholder
the aggregate Exercise Price for the Shares so designated and being purchased by
wire transfer of immediately available funds.
<PAGE>
Section 14. Survival of Representations and Warranties. All
------------------------------------------
representations and warranties in this Agreement or in any instrument delivered
pursuant to this Agreement shall survive for twelve months after the termination
hereof. The covenants and agreements made herein will survive in accordance with
their respective terms.
Section 15. Expenses. Except as otherwise provided in the Merger
--------
Agreement, all costs and expenses incurred in connection with this Agreement
shall be paid by the party incurring such expenses.
Section 16. Counterparts. This Agreement may be executed in two or more
------------
counterparts, all of which shall be considered the same agreement.
Section 17. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of Minnesota, without regard
to principles of conflicts of laws thereof.
Section 18. Notices. All notices and other communications hereunder shall
-------
be in writing and shall be deemed given if delivered by hand, mailed by
registered or certified mail (return receipt requested) or sent by prepaid
overnight courier (with proof of service) or confirmed to facsimile to the
parties as follows (or at such other addresses for a party as shall be specified
by like notice) and shall be deemed given on the date on which so hand-
delivered, or sent by confirmed telecopier and on the day after it has been so
mailed or sent by courier:
To Purchaser or Merger Sub:
The Procter and Gamble Company
One Procter and Gamble Plaza
Cincinnati, OH 45202
Attention: Treasurer
Fax: 513-983-9379
with a copy (which shall not constitute notice) to:
Fried, Frank, Harris, Shriver & Jacobson
One New York PlazaNew York, NY 10004
Attention: Stephen Fraidin (P.C.)
Fax: 212-859-4000
If to a Stockholder, at the address set forth on Schedule A hereto or to
such other address as any party may have furnished to the other parties in
writing in accordance herewith.
Section 19. Miscellaneous.
-------------
-9-
<PAGE>
(a) This Agreement shall not, nor shall any of the rights or interests
hereunder, be assigned by any party hereto or assignable by operation of law or
otherwise without the prior written consent of the other parties hereto;
provided, however, that Purchaser may assign its rights hereunder to an
affiliate, but nothing shall relieve the assignor from its obligations
hereunder. Subject to the preceding sentence, this Agreement shall be binding
upon and shall inure to the benefit to the parties hereto and their respective
successors and assigns.
(b) The headings contained in this Agreement are for reference
purposes and shall not affect in any way the meaning or interpretation of this
Agreement. In this Agreement, unless the context otherwise requires, words
describing the singular number shall include the plural and vice versa, and
words denoting any gender shall include all genders and words denoting natural
persons shall include corporations and partnerships and vice versa. Whenever the
words "include," "includes" or "including" are used in this Agreement, they
shall be understood to be followed by the words "without limitation."
(c) All rights, powers and remedies provided under this Agreement or
otherwise available in respect hereof at law or in equity will be cumulative and
not alternative, and the exercise of any thereof by either party will not
preclude the simultaneous or later exercise of any other such right, power or
remedy by such party.
Section 20. Severability. Any term or provision of this Agreement which
------------
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or unenforceability of any of the terms or
provisions of this Agreement in any other jurisdiction. If any provision of
this Agreement is so broad as to be unenforceable, the provision shall be
interpreted to be only so broad as is enforceable.
Section 21. Enforcement of Agreement; Waiver of Jury Trial. (a) The
----------------------------------------------
parties hereto agree that irreparable damage would occur in the event that any
of the provisions of this Agreement were not performed in accordance with its
specific terms or was otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches of
this Agreement and to enforce specifically the terms and provisions hereof in
any court, this being in addition to any other remedy to which they are entitled
at law or in equity.
(b) Each of the parties irrevocably and unconditionally
waives, to the fullest extent permitted by applicable law, any and all rights to
trial by jury in connection with any litigation arising out of or relating to
this Agreement.
Section 22. Waiver, Etc. Any provision of this Agreement may be waived at
-----------
any time by the party that is entitled to the benefits thereof. No such
<PAGE>
waiver, amendment or supplement will be effective unless in writing and signed
by the party or parties sought to be bound thereby. Any waiver by any party of a
breach of any provision of this Agreement will not operate as or be construed to
be a waiver of any other breach of such provision or of any breach of any other
provision of this Agreement. The failure of a party to insist upon strict
adherence to any term of this Agreement or one or more sections hereof will not
be considered a waiver or deprive that party of the right thereafter to insist
upon strict adherence to that term or any other term of this Agreement.
Section 23. Amendment. This Agreement may not be amended, except by an
----------
instrument in writing signed on behalf of each of the parties.
Section 24. Further Assurances. (a) Each party hereto will execute and
------------------
deliver all other documents and instruments and take all other actions that may
be reasonably necessary in order to consummate the transactions provided for by
such exercise.
(b) Each of the Stockholders will execute and deliver all
documents and instruments and take all other actions that may be reasonably
necessary to permit the Purchaser to exercise all rights granted to the
Purchaser by such Stockholder and obtain all benefits contemplated under this
Agreement with respect to the rights granted by such Stockholder.
Section 25. Publicity. A Stockholder shall not issue any press release or
---------
otherwise make any public statements with respect to this Agreement or the
Merger Agreement or the other transactions contemplated hereby or thereby
without the consent of Purchaser and Merger Sub; provided, however, that a
Stockholder may, without the prior consent of Purchaser and Merger Sub, issue a
press release or otherwise make such public statement as may be required by Law
if it has used all reasonable efforts to consult with Purchaser and Merger Sub
and to obtain Purchaser and Merger Sub's consent but has been unable to do so in
a timely manner.
Section 26. Stockholder Capacity. No person executing this Agreement
--------------------
makes any agreement or understanding herein in such Stockholder's capacity as a
director or officer of the Company. Each Stockholder signs solely in such
Stockholder's capacity as the beneficial owner of such Stockholder's Shares and
nothing herein shall limit or affect any actions taken by a Stockholder in such
Stockholder's capacity as an officer or director of the Company to the extent
specifically permitted by the Merger Agreement.
Section 27. Lien. (a) Brian F. Sullivan ("Sullivan") represents that the
----
shares of Company Common Stock set forth opposite his name on Schedule A are
subject to Liens as described in Schedule B. Sullivan agrees that (i) by 5:00
p.m. on August 27, 1999, 80% of such shares of Company Common Stock will no
longer be subject to such Lien or any other Lien and (ii) by 5:00 p.m. on
-11-
<PAGE>
September 1, 1999, no such shares will be subject to such Lien or any other
Lien. Sullivan agrees that he will not permit the holder of such Lien to obtain
any rights in the shares of Company Common Stock, including by foreclosure, and
will take all actions necessary or advisable to prevent such holder from
obtaining such rights.
(b) William F. Wanner, Jr. and WEC, Inc., jointly and severally
represent that the shares of Company Common Stock set forth opposite their
respective names on Schedule A are subject to Liens as described in Schedule B.
Wanner and WEC, Inc. agree that (i) by 5:00 p.m. on August 27, 1999, 80% of such
shares (in the aggregate) will no longer be subject to such Lien or any other
Lien and (ii) by 5:00 p.m. on September 1, 1999, no such shares will be subject
to such Lien or any other Lien. Wanner and WEC, Inc. agree that he will not
permit the holder of such Lien to obtain any rights in the shares of Company
Common Stock, including by foreclosure, and will take all actions necessary or
advisable to prevent such holder from obtaining such rights.
Section 27. Enforcement of Agreement. The parties hereto agree that
------------------------
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with its specific terms or were
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof in any court, this being in
addition to any other remedy to which they are entitled at law or in equity.
<PAGE>
IN WITNESS WHEREOF, each of the Purchaser and Merger Sub has caused this
Agreement to be signed by its officer or director thereunto duly authorized and
each Stockholder has signed this Agreement, all as of the date first written
above.
THE PROCTER & GAMBLE COMPANY
/s/ Gretchen W. Price
By:____________________________________
Name: Gretchen W. Price
Title: Treasurer
TENZING, INC.
/s/ Gretchen W. Price
By:____________________________________
Name: Gretchen W. Price
Title:
WEC, INC.
/s/ William F. Wanner, Jr.
By:____________________________________
Name: William F. Wanner, Jr.
Title:
/s/ William F. Wanner, Jr.
_______________________________________
William F. Wanner, Jr.
/s/ Brian F. Sullivan
_______________________________________
Brian F. Sullivan
-13-
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Stockholder Address Number of Number of Number of Number of
Shares Options Warrants Rights
<S> <C> <C> <C> <C> <C>
WEC, Inc. (formerly 1204 Chestnut Ave. 596,100 -0- -0- 596,100
known as Wanner Minneapolis, MN 55403
Engineering, Inc.)
William F. Wanner, Jr. 1204 Chestnut Ave. 58,050 8,000 -0- 58,050
Minneapolis, MN 55403
Brian F. Sullivan 9300 North 75th Ave. 408,500 371,500 -0- 408,500
Minneapolis, MN 55428
- -------------------------------------------------------------------------------------------------------------
</TABLE>
SCHEDULE B
1. The shares of Common Stock owned by WEC, Inc. are subject to a lien in
favor of Firstar Bank of Minnesota, N.A. ( "Firstar Bank") in connection
with a Credit Agreement between WEC, Inc. and the Bank.
2. The shares of Common Stock owned by William F. Wanner, Jr. are subject to a
lien in favor of Bank Windsor ("Windsor Bank") in connection with a loan
from the Bank to Mr. Wanner.
3. The shares of Common Stock owned by Brian F. Sullivan are held in margin
accounts at certain brokers from whom Mr. Sullivan has obtained margin
loans.
<PAGE>
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (the "Agreement"), dated as of August 26,
1999 between The Procter & Gamble Company, an Ohio corporation and/or its
affiliates, ("P&G") and Brian Sullivan ("Sullivan").
Purpose
Recovery Engineering, Inc. ("REI") has entered into an Agreement and
Plan of Merger (the "Merger Agreement") with The Procter & Gamble Company and
Tenzing, Inc. ("Tenzing"), a wholly owned subdiary of The Procter & Gamble
Company, dated as of August 26, 1999, pursuant to which, at the "Effective Time"
(as defined in the Merger Agreement), REI shall merge with Tenzing (the
"Merger"); and
Sullivan is the Chief Executive Officer of REI and shall receive
significant payments and benefits by reason of the consummation of the Merger,
and is desirous that the Merger be so consummated; and
P&G desires Sullivan to provide certain consulting services to P&G and
Sullivan is willing to provide such services to P&G on the terms and conditions
set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein, and intending to be legally bound hereby, the parties hereto agree as
follows:
1. Retention as a Consultant. P&G shall retain Sullivan and Sullivan
-------------------------
shall serve P&G as a consultant, on the terms and conditions set forth herein.
2. Term. Sullivan shall be so retained for the period commencing as
----
of the Effective Time and ending upon the payment of the Second Milestone (as
defined below), unless terminated earlier pursuant to this Agreement (the
"Consulting Term"). The Consulting Term may be terminated by either party
("Non-breaching Party) if the other party breaches its obligations under this
Agreement ("Breaching Party") upon ten (10) days' prior written notice, unless
the Breaching party cures such breach within such ten (10) day period. If P&G
terminates the Consulting Term, P&G shall have no obligations to Sullivan other
than to pay the portion of the Fee (defined below), if any, which is accrued and
unpaid as of the date of termination.
3. Duties. During the Consulting Term, Sullivan shall render
------
consulting services to P&G with respect to the project involving [Confidential]
generally outlined in Attachment 1 (the "Project"). In performing his duties,
Sullivan shall deliver the following milestones as part of the Project:
(a) [Confidential]
<PAGE>
(b) [Confidential]
Sullivan shall be accountable to B. L. Byrnes or his designee for the
Project and Sullivan shall report his progress on the Project to such person on
a regular basis. P&G shall provide Sullivan with reasonable resources,
consistent with REI past practices, to assist him in fulfilling his duties
within the time frames contemplated in this Section 3.;
4. Place of Performance. Sullivan shall perform his duties hereunder
--------------------
at REI's 75th Avenue facility in Minneapolis, Minnesota or such other place as
reasonably agreed by the parties.
5. Compensation and Related Matters. As full and complete
--------------------------------
compensation for the services to be rendered by Sullivan hereunder P&G shall
make the following payments to Sullivan:
(a) Consulting Fees. Subject to Section 2 hereof, in consideration
---------------
for Sullivan providing consulting services hereunder, P&G shall pay Sullivan
$500,000 at the First Milestone and $500,000 at the Second Milestone if they are
completed within the period set forth above for the entire Consulting Term (the
"Fee"). Payments shall be made within fifteen (15) days of P&G's receipt of
Sullivan's invoice for services rendered.
(b) Reimbursement of Expenses. P&G shall reimburse Sullivan for
-------------------------
reasonable business expenses incurred in the performance of Sullivan's duties
hereunder upon submission of reasonably satisfactory documentation in accordance
with the general policies of P&G.
(c) Withholding. Consultant acknowledges that he is not an "employee"
-----------
(or person of similar status) of P&G or any of its affiliates for purposes of
the Internal Revenue Code of 1996, as amended (the "Code"), and participation in
any and all employee benefit plans of P&G or any of its affiliates. Sullivan
waives any rights he may have to participate in any employee, fringe benefit or
other similar plan of P&G or any of its affiliates. Consultant acknowledges
that he will not be paid any "wages" (as defined in the Code) hereunder and that
Sullivan shall be solely responsible for all taxes imposed on him by reason of
any compensation, benefits or other amounts payable hereunder.
-2-
<PAGE>
6. Unauthorized Disclosure. Sullivan agrees and understands that in
-----------------------
connection with the performance of services hereunder , Sullivan has been and
will be exposed to and receive information regarding the business and affairs of
P&G and its affiliates. Sullivan agrees that during the Consulting Term and
thereafter, he will not (x) use any of such information for himself or for any
person, firm, corporation, partnership or other entity or (y) disclose any of
such information to any person, firm, corporation, partnership or other entity.
This confidentiality covenant has no temporal, geographical or territorial
restriction. Sullivan agrees and understands that the provisions of this
Section 6 are reasonable and necessary to prevent the improper use or disclosure
of confidential information of P&G or its affiliates.
7. Proprietary Rights. Sullivan represents and warrants that all
------------------
patents, patent applications, rights to inventions, copyright registrations and
other license, trademark and trade name rights heretofore owned by Sullivan and
relating to the business of P&G or any of its subsidiaries have been duly
transferred to such corporation. Sullivan shall disclose promptly to P&G any
and all inventions, discoveries, improvements and patentable or copyrightable
works initiated, conceived or made by him, either alone or in conjunction with
others, during the Consulting Term and related to the business or activities of
P&G and/or its subsidiaries and he assigns all of his interest therein to P&G or
its nominee. Whenever requested to do so by P&G, Sullivan shall execute any and
all applications, assignments or other instruments which P&G shall deem
necessary to apply for and obtain trademarks, patents or copyrights of the
United States or any foreign country or otherwise protect P&G's and/or its
subsidiaries' interest therein. These obligations shall continue beyond the
conclusion of the Consulting Term with respect to inventions, discoveries,
improvements or copyrightable works initiated, conceived or made by Sullivan
during the Consulting Term and shall be binding upon Sullivan's employers,
assigns, executors, administrators and other legal representatives.
8. Non-Waiver of Rights. The failure to enforce at any time the
--------------------
provisions of this Agreement or to require at any time performance by any other
party of any of the provisions hereof shall in no way be construed to be a
waiver of such provisions or to affect either the validity of this Agreement or
any part hereof, or the right of any party to enforce each and every provision
in accordance with its terms.
9. Return of Company Property. Sullivan agrees to return to P&G
--------------------------
immediately upon termination of the Consulting Term all documents, files, and
other property of any kind belonging to P&G. Upon Sullivan's request, P&G shall
provide Sullivan a receipt for such returned property.
10. Binding Effect/Assignment. This Agreement shall inure to the
-------------------------
benefit of and be binding upon the parties hereto and their respective heirs,
executors, personal representatives, estates, successors (including, without
limitation, by way of merger) and assigns. Notwithstanding the provisions or
the immediately preceding sentence, Sullivan shall not assign all or any portion
of this Agreement without the prior written consent of P&G.
11. Notice. For the purposes of this Agreement, notices, demands and
------
all other communications provided for in this Agreement shall be in writing and
shall be deemed to
-3-
<PAGE>
have been duly given when delivered or (unless otherwise specified) mailed by
United States certified or registered mail, return receipt requested, postage
prepaid, addressed as follows:
If to Sullivan:
Brian Sullivan
1822 Morgan Road
Medina, MN 55356
If to P&G:
1 Procter & Gamble Plaza
Cincinnati, OH 45202
Attn: Vice President - Corporate New Ventures
or to such other address as either party may have furnished to the other in
writing in accordance herewith, except that notices of change of address shall
be effective only upon receipt.
12. Dispute Resolution. Any disputes under this Agreement shall be
-------------------
arbitrated pursuant to the rules of the American Arbitration Association in
Minneapolis, Minnesota.
13. Modification of Agreement; Governing Law. No provision of this
----------------------------------------
Agreement may be modified, waived or discharged unless such waiver, modification
or discharge is agreed to in writing and signed by the parties hereto. No
waiver by either party hereto at any time of any breach by the other party
hereto, or compliance with, any condition or provision of this Agreement to be
performed by such other party shall be deemed a waiver of similar of dissimilar
provisions or conditions at the same or at any prior or subsequent time. The
validity, interpretation, construction and performance of this Agreement shall
be governed by the laws of the State of Minnesota without regard to its
conflicts of law principles.
14. Severability. If any provision of this Agreement, or any
------------
application thereof to any circumstances, is invalid, in whole or in part, such
provision or application shall to that extent be severable and shall not affect
other provisions or applications of this Agreement.
15. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one and the same instrument.
-4-
<PAGE>
16. Entire Agreement. This Agreement sets forth the entire
----------------
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements, written or oral, between them as to such
subject matter.
17. Headings. The headings contained herein are solely for the
--------
purposes of reference, are not part of this Agreement and shall not in any way
affect the meaning or interpretation of this Agreement.
18. Assignment. Sullivan shall not assign his rights and obligations
-----------
under this Agreement. P&G may assign its rights and obligations under this
Agreement to an affiliate.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
The Procter & Gamble Company
By: /s/ Gretchen W. Price
-------------------------------
Name: Gretchen W. Price
Title: Treasurer
Brian Sullivan
/s/ Brian F. Sullivan
----------------------------------
-6-
<PAGE>
NON-COMPETITION AGREEMENT
-------------------------
THIS NON-COMPETITION AGREEMENT (this "Agreement") is made and entered
effective as of the 26th day of August, 1999, by and between The Procter &
Gamble Company and its affiliates ("P&G"), and Brian Sullivan ("Sullivan").
Purpose:
--------
Recovery Engineering, Inc. ("REI") has entered into an Agreement and
Plan of Merger (the "Merger Agreement") with The Procter & Gamble Company and
Tenzing, Inc. ("Tenzing") , dated as of August 26, 1999, pursuant to which, at
the Effective Time (as defined in the Merger Agreement), REI shall merge with
Tenzing (the "Merger"); and
Sullivan is the Chairman and Chief Executive Officer of REI and shall
resign his position at REI on the Effective Date; and
Sullivan, in his employment with REI, learned confidential information and
trade secrets of REI, and established personal and business relationships with
the REI's customers, suppliers and other business associates, and the use by
Sullivan of such relationships or information to compete with P&G or to aid
others to compete with P&G would have a detrimental effect on the future
profitable operation of P&G; and
Sullivan has had an opportunity to, and has, reviewed this Agreement and
consulted with counsel regarding same;
NOW, THEREFORE, in consideration of (i) the above premises and (ii) other
good and valuable consideration, the receipt and sufficiency of which hereby are
acknowledged by Sullivan, Sullivan and P&G hereby covenant and agree as follows:
1. Term and Compensation. The term of this Agreement shall be for a
---------------------
period commencing upon the Effective Date and ending three years thereafter (the
"Non-Compete Term"). In consideration for Sullivan's obligations under this
Agreement, P&G shall pay Sullivan $647,500 on the Effective Date, $647,500 one
(1) year after the Effective Date, and $647,500 two (2) years after the
Effective Date.
2. Non-Competition and Non-Solicitation Covenants. During the Non-Compete
----------------------------------------------
Term, Sullivan shall not, as an employee (other than as a consultant of P&G),
employer, stockholder, officer, director, partner, associate, consultant,
advisor, proprietor, lender, or in any other manner or capacity, directly or
indirectly, (i) solicit or hire any employee of P&G or otherwise interfere with
or disrupt the employment relationship between P&G and any employee, (ii) engage
in any business that is competitive with any business or line of business of
REI, as it existed prior to the Effective Date (the "Business"), in any country
in the world and/or (iii) interfere with or otherwise disrupt the relationship
between P&G and any vendor, supplier or
<PAGE>
client. Notwithstanding (ii) above, nothing herein shall prohibit Sullivan from
owning publicly-traded securities of any company that competes with the
Business, so long as Sullivan does not indirectly or directly control such
company, or is otherwise deemed an affiliate of such company as defined in Rule
144(a)(1) under the Securities Act of 1933, as amended.
Sullivan expressly recognizes and agrees that the restraints imposed by
this Section 2 are reasonable as to time and geographic scope and not
oppressive. Sullivan further expressly recognizes and agrees that the
restraints imposed by this Section 2 represent a reasonable and necessary
restriction for the protection of the legitimate interests of the P&G, that the
failure by Sullivan to observe and comply with the covenants and agreements in
this Section will cause irreparable harm to P&G, that it is and will continue to
be difficult to ascertain the harm and damages to P&G that such a failure by
Sullivan would cause, that the consideration received by Sullivan for entering
into these covenants and agreements is fair, that the covenants and agreements
and their enforcement will not deprive Sullivan of his ability to earn a
reasonable living, and that Sullivan has acquired knowledge and skills in this
field that will allow him to obtain employment without violating these covenants
and agreements. Sullivan further expressly acknowledges that he has consulted
independent counsel, and has reviewed and considered this Agreement with that
counsel before executing this Agreement.
3. Memoranda, Notes, Records, Etc. All memoranda, notes, records,
------------------------------
customer lists or other documents made or compiled by Sullivan or otherwise made
available to him concerning the business of REI or P&G or its subsidiaries or
affiliates shall become P&G's property and shall be delivered to P&G at the
Effective Date, except to the extent such documents are necessary for Sullivan
to perform his duties under the Consulting Agreement between Sullivan and P&G
dated as of an even date herewith, and Sullivan shall retain no copies of those
documents.
4. Nondisclosure.
-------------
(a) Sullivan hereby acknowledges that in connection with his
employment by REI he was exposed to and obtained certain information (including
without limitation, procedures, memoranda, notes, records and customer lists
whether such information has been or is made, developed or compiled by Sullivan
or otherwise has been or is made available to him) regarding the business and
operations of REI; Sullivan further acknowledges that such information is
unique, valuable, considered trade secrets and deemed proprietary by P&G. For
purposes of this Agreement, such information shall be referred to as
"Confidential Information", except that the following shall not be considered
Confidential Information; (a) information disclosed on a non-confidential basis
to third parties by REI and (b) information disclosed and made available to the
general public under operation of law.
(b) Sullivan agrees that all Confidential Information is and will
remain the property of the P&G. Sullivan further agrees, for the duration of
the Non-Compete Term and thereafter, to hold in the strictest confidence all
Confidential Information, and to not, directly or indirectly, duplicate, sell,
use, lease, commercialize, disclose or otherwise divulge to any person or entity
any portion of the Confidential Information or use any Confidential Information
for his
-2-
<PAGE>
own benefit or profit or allow any person or entity, other than P&G and its
authorized employees, to use or otherwise gain access to any Confidential
Information.
5. Enforcement. The parties hereto recognize that the covenants of
-----------
Sullivan hereunder are special, unique and of extraordinary character. If
Sullivan shall breach or fail to perform any term, condition or duty in this
Agreement required to be observed or performed by Sullivan, P&G shall be
entitled, inter alia, to institute and prosecute proceedings in any court of
competent jurisdiction, to enforce the specific performance thereof by Sullivan
and to enjoin Sullivan from performing services for any person or entity or
otherwise acting in violation of Sections 2, 3 and 4 hereof. In the event of a
breach of the provisions of this Agreement, Sullivan agrees that the remedies at
law available to P&G would be inadequate to protect P&G's interests;
accordingly, Sullivan agrees not to challenge the claim by P&G for any equitable
remedy including specific performance on the basis that there are adequate
remedies at law. In case of any breach of this Agreement, nothing herein
contained shall be construed to prevent P&G from seeking such other remedy in
the courts as P&G may elect or invoke.
6. Severability/Modification. If any term or provision of this Agreement
-------------------------
is held or deemed to be invalid or unenforceable, in whole or in part, by a
court of competent jurisdiction, such term or provision shall be ineffective to
the extent of such invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this Agreement.
7. Entire Agreement/Amendment. This instrument contains the entire
--------------------------
agreement between the parties hereto with respect to the subject matter hereof,
and may be amended only by an agreement in writing signed by the party against
whom enforcement of any waiver, change, modification or discharge is sought.
8. Assignment.
----------
(a) Sullivan may not delegate the performance of any of his
obligations or duties hereunder, or assign any rights hereunder, without the
prior written consent of P&G. Any such purported delegation or assignment in
the absence of such written consent shall be null and void with not force or
effect.
(b) The P&G may not assign this Agreement except to any P&G affiliate.
(c) Subject to the limitations imposed by this Section 10, this
Agreement shall be binding on and inure to the benefit of the parties hereto and
their respective successors, permitted assigns, heirs and legal representatives.
9. Governing Law. THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS
-------------
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA WITHOUT REGARD
TO THE LAWS OF CONFLICT OF LAWS.
-3-
<PAGE>
10. Headings. The section headings herein are for convenience only and
--------
shall not be used in interpreting or construing this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date first above written.
Brian Sullivan:
/s/ Brian F. Sullivan
---------------------------------
The Procter & Gamble Company:
/s/ Gretchen W. Price
---------------------------------
By: Gretchen W. Price
------------------------------
Its: Treasurer
-----------------------------
-4-
<PAGE>
Letter of Understanding
-----------------------
This Letter of Understanding (the "Agreement") is made and entered
effective as of the 26th day of August, 1999, by and between Recovery
Engineering, Inc. ("REI") The Procter & Gamble Company and its affiliates
("P&G"), and Brian Sullivan ("Sullivan").
Purpose
-------
Recovery Engineering, Inc. ("REI") has entered into an Agreement and Plan
of Merger (the "Merger Agreement") with P&G, dated as of August 26, 1999,
pursuant to which, at the Effective Time (as defined in the Merger Agreement),
REI shall merge with a subsidiary of P&G (the "Merger"); and
Brian Sullivan ("Sullivan") is the Chairman and Chief Executive Officer of
REI. Sullivan is also a significant shareholder of REI.
As mutual inducements for the parties to enter into the Merger Agreement,
the parties agree to the following:
1. Options. Sullivan owns 250,000 outstanding stock options which were
---------
granted under various REI stock option plans. Pursuant to such plans
(including, without limitation, change of control provisions in such plans),
Sullivan has the right to exercise such options on or about the Effective
Time. Notwithstanding the foregoing, Sullivan agrees that pursuant to the
Merger Agreement, at the Effective Time, all of his 250,000 stock options
will be canceled. With respect to 215,000 of such 250,000 stock options,
Sullivan will have the right to receive the difference between the strike
price and the Offer Price ($4,568,750) minus the full amount of the
principal and accrued interest (accrued to the Effective Date) under the
Note (as defined below). Sullivan will have no rights with respect to the
35,000 stock options.
2. Note. Sullivan has a $497,500 Promissory Note dated April 18, 1997, payable
-----
to REI, that bears an interest rate of 9.25% per annum ("Note"). Sullivan's
obligations under the Note shall be discharged as a result of the amount due
under the Note being deducted from the amount paid to Sullivan pursuant to
paragraph 1.
3. Other Agreements. Sullivan has executed a Non-Competition Agreement and a
-----------------
Consulting Agreement at an even date herewith.
4. Severance Agreement. Sullivan agrees that REI shall terminate or cause to
--------------------
be terminated the Change-in-Control Severance Pay Agreement between REI and
Sullivan immediately prior to the Effective Date, such that Sullivan shall
have no rights thereunder.
<PAGE>
Agreed and accepted:
Brian Sullivan
/s/ Brian F. Sullivan
___________________
Recovery Engineering, Inc.
/s/ Brian F. Sullivan
___________________
By: Brian F. Sullivan
Chief Executive Officer
The Procter & Gamble Company
/s/ Gretchen W. Price
________________________
By: Treasurer
<PAGE>
NON-COMPETITION AGREEMENT
-------------------------
THIS NON-COMPETITION AGREEMENT (this "Agreement") is made and entered
effective as of the 26th day of August, 1999, by and between The Procter &
Gamble Company and its affiliates ("P&G"), and Reed Watson ("Watson").
Purpose:
--------
Recovery Engineering, Inc. ("REI") has entered into an Agreement and
Plan of Merger (the "Merger Agreement") with The Procter & Gamble Company and
Tenzing, Inc., ("Tenzing") dated as of August 26, 1999, pursuant to which, at
the Effective Time (as defined in the Merger Agreement), REI shall merge with
Tenzing (the "Merger"); and
Watson is the Chief Operating Officer of REI and shall resign his position
at REI on the Effective Date; and
Watson, in his employment with REI, learned confidential information and
trade secrets of REI, and established personal and business relationships with
the REI's customers, suppliers and other business associates, and the use by
Watson of such relationships or information to compete with P&G or to aid others
to compete with P&G would have a detrimental effect on the future profitable
operation of P&G; and
Watson has had an opportunity to, and has, reviewed this Agreement and
consulted with counsel regarding same;
NOW, THEREFORE, in consideration of (i) the above premises and (ii) other
good and valuable consideration, the receipt and sufficiency of which hereby are
acknowledged by Watson, Watson and P&G hereby covenant and agree as follows:
1. Term and Compensation. The term of this Agreement shall be for a
---------------------
period commencing upon the Effective Date and ending two years thereafter (the
"Non-Compete Term"). In consideration for Watson's obligations under this
Agreement, P&G shall pay Watson $425,000 on the Effective Date and $425,000 one
(1) year after the Effective Date.
2. Non-Competition and Non-Solicitation Covenants. During the Non-Compete
----------------------------------------------
Term, Watson shall not, as an employee (other than as a consultant of P&G),
employer, stockholder, officer, director, partner, associate, consultant,
advisor, proprietor, lender, or in any other manner or capacity, directly or
indirectly, (i) solicit or hire any employee of P&G or otherwise interfere with
or disrupt the employment relationship between P&G and any employee, (ii) engage
in any business that is competitive with any business or line of business of
REI, as it existed prior to the Effective Date (the "Business), in any country
in the world and/or (iii)
<PAGE>
interfere with or otherwise disrupt the relationship between P&G and any vendor,
supplier or client. Notwithstanding (ii) above, nothing herein shall prohibit
Watson from owning publicly-traded securities of any company that competes with
the Business, so long as Watson does not indirectly or directly control such
company, or is otherwise deemed an affiliate of such company as defined in Rule
144(a)(1) under the Securities Act of 1933, as amended.
Watson expressly recognizes and agrees that the restraints imposed by this
Section 2 are reasonable as to time and geographic scope and not oppressive.
Watson further expressly recognizes and agrees that the restraints imposed by
this Section 2 represent a reasonable and necessary restriction for the
protection of the legitimate interests of the P&G, that the failure by Watson to
observe and comply with the covenants and agreements in this Section will cause
irreparable harm to P&G, that it is and will continue to be difficult to
ascertain the harm and damages to P&G that such a failure by Watson would cause,
that the consideration received by Watson for entering into these covenants and
agreements is fair, that the covenants and agreements and their enforcement will
not deprive Watson of his ability to earn a reasonable living, and that Watson
has acquired knowledge and skills in this field that will allow him to obtain
employment without violating these covenants and agreements. Watson further
expressly acknowledges that he has been encouraged to and has consulted
independent counsel, and has reviewed and considered this Agreement with that
counsel before executing this Agreement.
3. Memoranda, Notes, Records, Etc. All memoranda, notes, records,
------------------------------
customer lists or other documents made or compiled by Watson or otherwise made
available to him concerning the business of REI or P&G or its subsidiaries or
affiliates shall P&G's property and shall be delivered to P&G at the Effective
Date.
4. Nondisclosure.
-------------
(a) Watson hereby acknowledges that in connection with his employment
by REI he was exposed to and obtained certain information (including without
limitation, procedures, memoranda, notes, records and customer lists whether
such information has been or is made, developed or compiled by Watson or
otherwise has been or is made available to him) regarding the business and
operations of REI; Watson further acknowledges that such information is unique,
valuable, considered trade secrets and deemed proprietary by P&G. For purposes
of this Agreement, such information shall be referred to as "Confidential
Information", except that the following shall not be considered Confidential
Information; (a) information disclosed on a non-confidential basis to third
parties by REI and (b) information disclosed and made available to the general
public under operation of law.
(b) Watson agrees that all Confidential Information is and will remain
the property of the P&G. Watson further agrees, for the duration of the Non-
Compete Term and thereafter, to hold in the strictest confidence all
Confidential Information, and to not, directly or indirectly, duplicate, sell,
use, lease, commercialize, disclose or otherwise divulge to any person or entity
any portion of the Confidential Information or use any Confidential Information
for his own benefit or profit or allow any person or entity, other than P&G and
its authorized employees, to use or otherwise gain access to any Confidential
Information.
-2-
<PAGE>
5. Enforcement. The parties hereto recognize that the covenants of Watson
-----------
hereunder are special, unique and of extraordinary character. If Watson shall
breach or fail to perform any term, condition or duty in this Agreement required
to be observed or performed by Watson, P&G shall be entitled, inter alia, to
institute and prosecute proceedings in any court of competent jurisdiction, to
enforce the specific performance thereof by Watson and to enjoin Watson from
performing services for any person or entity or otherwise acting in violation of
Sections 2, 3 and 4 hereof. In the event of a breach of the provisions of this
Agreement, Watson agrees that the remedies at law available to P&G would be
inadequate to protect P&G's interests; accordingly, Watson agrees not to
challenge the claim by P&G for any equitable remedy including specific
performance on the basis that there are adequate remedies at law. In case of
any breach of this Agreement, nothing herein contained shall be construed to
prevent P&G from seeking such other remedy in the courts as P&G may elect or
invoke.
6. Severability/Modification. If any term or provision of this Agreement
-------------------------
is held or deemed to be invalid or unenforceable, in whole or in part, by a
court of competent jurisdiction, such term or provision shall be ineffective to
the extent of such invalidity or unenforceability without rendering invalid or
unenforceable the remaining terms and provisions of this Agreement.
7. Entire Agreement/Amendment. This instrument contains the entire
--------------------------
agreement between the parties hereto with respect to the subject matter hereof,
and may be amended only by an agreement in writing signed by the party against
whom enforcement of any waiver, change, modification or discharge is sought.
8. Assignment.
----------
(a) Watson may not delegate the performance of any of his obligations
or duties hereunder, or assign any rights hereunder, without the prior written
consent of P&G. Any such purported delegation or assignment in the absence of
such written consent shall be null and void with not force or effect.
(b) The P&G may not assign this Agreement except to any P&G affiliate.
(c) Subject to the limitations imposed by this Section 10, this
Agreement shall be binding on and inure to the benefit of the parties hereto and
their respective successors, permitted assigns, heirs and legal representatives.
9. Governing Law. THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS
-------------
AGREEMENT SHALL BE GOVERNED BY THE LAWS OF THE STATE OF MINNESOTA WITHOUT REGARD
TO THE LAWS OF CONFLICT OF LAWS.
10. Headings. The section headings herein are for convenience only and
--------
shall not be used in interpreting or construing this Agreement.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement effective as
of the date first above written.
Reed Watson:
/s/ Reed Watson
-------------------------------
The Procter & Gamble Company:
/s/ Gretchen W. Price
-------------------------------
By: Gretchen W. Price
----------------------------
Its: Treasurer
---------------------------
-4-
<PAGE>
Letter of Understanding
-----------------------
This Letter of Understanding (the "Agreement") is made and entered
effective as of the 26th day of August, 1999, by and between Recovery
Engineering, Inc. ("REI") The Procter & Gamble Company and its affiliates
("P&G"), and Reed Watson ("Watson").
Purpose
-------
Recovery Engineering, Inc. ("REI") has entered into an Agreement and Plan
of Merger (the "Merger Agreement") with P&G, dated as of August 26, 1999,
pursuant to which, at the Effective Time (as defined in the Merger Agreement),
REI shall merge with a subsidiary of P&G (the "Merger"); and
Watson is the President and Chief Operating Officer of REI.
As mutual inducements for the parties to enter into the Merger Agreement,
the parties agree to the following:
1. Options. Watson owns 150,000 outstanding stock options which were granted
---------
under various REI stock option plans. Pursuant to such plans (including,
without limitation, change of control provisions in such plans), Watson has
the right to exercise such options on or about the Effective Time.
Notwithstanding the foregoing, Watson agrees that pursuant to the Merger
Agreement, at the Effective Time, all of his 150,000 stock options will be
canceled. With respect to 98,000 of such 150,000 stock options, Watson will
have the right to receive the difference between the strike price and the
Offer Price ($2,730,000). Watson will have no rights with respect to the
remaining 52,000 stock options.
2. Non-Competition Agreement. Watson has executed a Non-Competition Agreement
--------------------------
at an even date herewith.
3. Severance Agreement. Watson agrees that REI shall terminate or cause to be
--------------------
terminated the Change-in-Control Severance Pay Agreement between REI and
Watson immediately prior to the Effective Date, such that Watson shall not
have any rights thereunder.
<PAGE>
Agreed and accepted:
Reed Watson
/s/ Reed Watson
___________________
Recovery Engineering, Inc.
/s/ Brian F. Sullivan
___________________
By: Brian F. Sullivan
Chief Executive Officer
The Procter & Gamble Company
/s/ Gretchen W. Price
________________________
By: Gretchen W. Price
<PAGE>
RECOVERY ENGINEERING, INC.
9300 North 75th Avenue
Minneapolis, MN 55428
September 1, 1999
Dear Shareholders:
We are very pleased to inform you that on August 26, 1999, Recovery
Engineering, Inc. entered into an Agreement and Plan of Merger with The
Procter & Gamble Company pursuant to which Tenzing, Inc., a wholly owned
subsidiary of P&G, today commenced a cash tender offer for all outstanding
shares of Recovery's common stock at a price of $35.25 per share. Following
completion of this offer, upon the terms and subject to the conditions of the
Agreement and Plan of Merger, Tenzing, Inc. will be merged with and into
Recovery, and each of the shares of Recovery's common stock not owned by P&G
and its affiliates or by dissenting shareholders will be converted into the
right to receive in cash $35.25, the same price paid pursuant to the tender
offer.
Your Board of Directors has unanimously approved the Agreement and Plan of
Merger, has determined that the P&G offer is in the best interests of Recovery
and its shareholders and recommends that shareholders accept the offer and
tender their shares pursuant to the offer.
In arriving at its determination, your Board of Directors considered a
number of factors described in the attached Schedule 14D-9 that is being filed
today with the Securities and Exchange Commission, including the opinion of
its financial advisor, Goldman, Sachs & Co., that the consideration to be
received by the holders of Recovery's common stock pursuant to the Agreement
and Plan of Merger is fair from a financial point of view to such holders.
Accompanying this letter is the P&G Offer to Purchase dated September 1,
1999, together with related materials including a Letter of Transmittal to be
used for tendering your shares. These documents set forth the terms and
conditions of the P&G offer and provide instructions as to how to tender your
shares. I urge you to read the enclosed materials carefully in making your
decision with respect to tendering your shares pursuant to the P&G offer.
I, personally, along with your Board of Directors and the management and
employees of Recovery, thank you most sincerely for your support over the
years.
Sincerely,
/s/ Brian F. Sullivan
Brian F. Sullivan
Chairman and Chief Executive Officer
<PAGE>
P&G to Tender for Recovery Engineering
Aug. 26
The Procter & Gamble Company (NYSE: PG) and Recovery Engineering, Inc.
(Nasdaq: REIN), the manufacturer of PUR household drinking water systems and
filters, today announced that they have entered into a definitive agreement for
P&G to acquire Recovery Engineering through a cash tender offer.
The tender offer will begin within five business days at a price of $35.25
per share in cash for all of the shares of Recovery Engineering, for a total
enterprise value of approximately $265 million. It is expected to be completed
by early October 1999. The tender offer, which has been approved by the boards
of directors of both companies, is subject to the tender of a majority of the
outstanding Recovery Engineering shares, the expiration of any relevant waiting
periods, and other customary conditions.
Recovery Engineering is one of the world's leading manufacturers of
consumer drinking water systems, which are sold under the PUR brand name. The
company's focus on research has yielded proprietary, advanced water filtration
technologies. This has led to the introduction of innovative water filters that
provide safe and simple protection from unhealthy drinking water, both at home
and outdoors. The company entered the household water filtration market in 1995,
has grown volume and share dramatically and is now a market leader.
"Recovery Engineering is in the forefront of the fast-growing market for
home water filtration systems," said Durk I. Jager, president and chief
executive of Procter & Gamble. "Their superior technologies provide a terrific
opportunity for P&G to improve the lives of the world's consumers."
"P&G has the global distribution reach and a proven ability to develop and
market global brands which can establish PUR as a world leader in household
water filtration," said Brian F. Sullivan, chairman and CEO of Recovery
Engineering. "The board of directors of Recovery Engineering believes that this
transaction is in the best interests of Recovery Engineering's shareholders and
employees, and unanimously recommends that all shareholders tender their shares
to P&G."
J.P. Morgan & Co. Incorporated served as financial advisor to Procter
<PAGE>
& Gamble in this transaction. Goldman Sachs & Company acted as financial advisor
to Recovery Engineering.
Procter & Gamble markets more than 300 brands to nearly five billion people
in more than 140 countries. These brands include Tide(R), Crest(R), Pantene
Pro-V(R), Pampers(R), Pepto-Bismol(R) and Safeguard(R). P&G has on-the-ground
operations in 70 countries and employs more than 110,000 people. For fiscal
1998-99, P&G's sales were $38 billion.
Recovery Engineering is one of the world's leading manufacturers of
consumer drinking water systems. Sold under the PUR brand name, Recovery
Engineering markets household, recreational and marine drinking water products
through more than 35,000 retail outlets in North America and through
international distributors. Founded in 1986 and based in Minneapolis, Minnesota,
the company went public in 1993 at a share price of $7. It is committed to
improving the world's drinking water through technological innovation.
The news release (as well as oral statements or other written statements
made or to be made by Recovery Engineering) contains statements relating to
future events or the future financial performance of Recovery Engineering which
are forward-looking statements within the meaning of the safe harbor provisions
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Forward-looking statements involve
risks and uncertainties that could significantly affect anticipated results in
the future and, accordingly, actual results may differ materially from those
described in the forward-looking statements. These risks and uncertainties
include, but are not limited to, the effects of economic conditions, product
demand, competitive products, and other factors described from time to time in
Procter & Gamble's and Recovery Engineering's Annual reports, respectively, on
Form 10K and certain registration statements of Procter & Gamble and Recovery
Engineering.
<PAGE>
EXHIBIT 99
- --------------------------------------------------------------------------------
Goldman, Sachs & Co. | 85 Broad Street | New York, New York 10004
Tel: 212-902-1000
Goldman
Sachs
PERSONAL & CONFIDENTIAL
- -----------------------
- --------------------------------------------------------------------------------
August 26, 1999
Board of Directors
Recovery Engineering, Inc.
9300 North 75th Avenue
Minneapolis, MN 55428
Gentlemen:
You have requested our opinion as to the fairness from a financial point of view
to the holders of the outstanding shares of Common Stock, par value $0.01 per
share (the "Shares"), of Recovery Engineering, Inc. (the "Company") of the
$35.25 per Share in cash to be received by such holders in the Tender Offer and
the Merger (as defined below) pursuant to the Agreement and Plan of Merger,
dated as of August 26, 1999, among The Procter & Gamble Company ("Parent"), an
indirect wholly-owned subsidiary of Parent, Tenzing, Inc. ("Tenzing"), and the
Company (the "Agreement"). Subject to the terms of the Agreement, Parent will
cause Tenzing to commence a tender offer for all the Shares (the "Tender Offer")
at a price equal to $35.25 per Share in cash for each Share accepted. The
Agreement further provides that following purchase of the Shares pursuant to the
Tender Offer, Tenzing shall be merged with and into the Company (the "Merger")
and each outstanding Share (other than Shares owned by Parent, the Company or
any of their subsidiaries) will be converted into the right to receive $35.25 in
cash.
Goldman, Sachs & Co., as part of its investment banking business, is continually
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, competitive biddings,
secondary distributions of listed and unlisted securities, private placements
and valuations for estate, corporate and other purposes. We are familiar with
the Company, having acted as its financial advisor in connection with, and
having participated in certain of the negotiations leading to, the Agreement.
As the Board of Directors is aware, the Goldman Sachs Group, L.P. has an
investment in the Company in the form of the $15.0 million aggregate principal
amount 5% Convertible Notes due 2003, and Mr. Robert Gheewalla, a Vice President
of Goldman, Sachs & Co., is a director of the Company. In addition, we have
provided certain investment banking services to Parent from time to time,
including having acted as lead managing underwriter of the public offering of
the $750,000,000 aggregate principal amount of 5.25% Notes due 2003 of Parent in
September 1998, as lead managing underwriter of the public offering of the
$500,000,000 aggregate principal amount of 5.625% Notes due 2008 of Parent in
April 1998 and as lead managing underwriter of the public offering of
$75,000,000 aggregate principal amount of Floating Rate Notes due 2048 of Parent
in December 1998, and having acted as financial advisor to Parent in
numerous strategic
<PAGE>
Recovery Engineering, Inc.
August 26, 1999
Page Two
transactions including the acquisition by Parent of Tambrands Inc. in July 1997,
the divestiture by Parent of the Duncan Hines business in January 1998 and the
pending acquisition by Parent of the Iams Company. In addition, we are
currently providing investment banking services to Parent and may continue to
provide investment banking services to Parent in the future. Goldman, Sachs &
Co. provides a full range of financial advisory and securities services and, in
the course of its normal trading activities, may from time to time effect
transactions and hold securities, including derivative securities, of the
Company or Parent for its own account and for the accounts of customers.
In connection with this opinion, we have reviewed, among other things, the
Agreement; Annual Reports to Shareholders and Annual Reports on Form 10-K of the
Company for the five fiscal years ended January 3, 1999; certain interim reports
to shareholders and Quarterly Reports on Form 10-Q of the Company; certain other
communications from the Company to its shareholders; and certain internal
financial analyses and forecasts for the Company prepared by its management. We
also have held discussions with members of the senior management of the Company
regarding its past and current business operations, financial condition and
future prospects. In addition, we have reviewed the reported price and trading
activity for the Shares, compared certain financial and stock market information
for the Company with similar information for certain other companies the
securities of which are publicly traded, reviewed the financial terms of certain
recent business combinations in the consumer brand industry specifically and in
other industries generally and performed such other studies and analyses as we
considered appropriate.
We have relied upon the accuracy and completeness of all of the financial and
other information reviewed by us and have assumed such accuracy and completeness
for purposes of rendering this opinion. In addition, we have not made an
independent evaluation or appraisal of the assets and liabilities of the Company
or any of its subsidiaries and we have not been furnished with any such
evaluation or appraisal. Our advisory services and the opinion expressed herein
are provided for the information and assistance of the Board of Directors of the
Company in connection with its consideration of the transaction contemplated by
the Agreement and such opinion does not constitute a recommendation as to
whether or not any holder of Shares should tender such Shares in connection with
such transaction.
<PAGE>
Recovery Engineering, Inc.
August 26, 1999
Page Three
Based upon and subject to the foregoing and based upon such other matters as we
consider relevant, it is our opinion that as of the date hereof the $35.25 per
Share in cash to be received by the holders of Shares in the Tender Offer and
the Merger is fair from a financial point of view to such holders.
Very truly yours,
/s/ Goldman Sachs & Co.
- -------------------------
GOLDMAN, SACHS & CO.
