Restructuring Agreement

RESTRUCTURING AGREEMENT


DATED AS OF


APRIL 9, 2004


BY AND AMONG


KH LLC, A DELAWARE LIMITED LIABILITY COMPANY,


CELERITY GROUP, INC., A DELAWARE CORPORATION,


KINETICS GROUP, INC., A DELAWARE CORPORATION,


CELERITY GROUP, INC., A CALIFORNIA CORPORATION,


KINETICS CHEMPURE SYSTEMS, INC., AN ARIZONA CORPORATION,


FTS SYSTEMS, INC. (f/k/a KINETICS THERMAL SYSTEMS), A NEW YORK CORPORATION,


KINETIC SYSTEMS, INC., A CALIFORNIA CORPORATION,


KINETIC SYSTEMS CARIBE, INC., A DELAWARE CORPORATION,


KINETIC SYSTEMS INTERNATIONAL, INC., A CALIFORNIA CORPORATION


TENNENBAUM CAPITAL PARTNERS, LLC,


ARES CORPORATE OPPORTUNITIES FUND, L.P.,


ARES LEVERAGED INVESTMENT FUND II, L.P.,


ARES III CLO, LTD.,


ARES IV CLO, LTD.,


ARES VII CLO LTD.,


ARES VIII CLO LTD.,


ARES TOTAL VALUE FUND, L.P.,


SPECIAL VALUE ABSOLUTE RETURN FUND, LLC,


SPECIAL VALUE BOND FUND, LLC,


SPECIAL VALUE BOND FUND II, LLC,


J.B. FUQUA FAMILY CHARITABLE LEAD ANNUITY TRUST - 2000,


MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY,


MIDOCEAN CAPITAL INVESTORS, L.P.,


MIDOCEAN CELERITY INVESTMENT PARTNERS, LP,


BEHRMAN CAPITAL III LP,


STRATEGIC ENTREPRENEUR FUND III L.P.,


GRYPHON PARTNERS II, L.P.,


GRYPHON PARTNERS II-A, L.P.,


THIS RESTRUCTURING AGREEMENT (this "Agreement"), dated as of April 9, 2004, is entered into by and among (1) KH LLC, a Delaware limited liability company ("KH LLC"); (2) Celerity Group, Inc., a Delaware corporation, f/k/a Kinetics Holdings Corporation ("Holdings"), Kinetics Group, Inc., a Delaware corporation ("KGI"), Celerity Group, Inc., a California corporation ("Celerity"), Kinetics Chempure Systems, Inc., an Arizona corporation ("Chempure"), FTS Systems, a New York corporation ("KTS") (Holdings, KGI, Celerity, Chempure, and KTS, collectively, the "Celerity Group"); (3) Kinetic Systems, Inc., a California corporation ("KSI"), Kinetic Systems Caribe, Inc., a Delaware corporation ("KSB"), Kinetic Systems International, Inc., a California corporation ("KSI International" and together with KSI and KSB, collectively, the "KSI Group"); (4) Tennenbaum Capital Partners, LLC ("TCP"), Ares Corporate Opportunities Fund, L.P. ("ACOF"), Ares Leveraged Investment Fund II, L.P. ("Ares II"), Ares III CLO, Ltd. ("Ares III"), Ares IV CLO, Ltd. ("Ares IV"), Ares VII CLO Ltd., ("Ares VII"), Ares VIII CLO Ltd. ("Ares VIII"), Ares Total Value Fund, L.P. ("AVTF"), Special Value Absolute Return Fund, LLC ("SVAR"), Special Value Bond Fund, LLC ("SVBF"), Special Value Bond Fund II, LLC ("SVBF II"), J.B. Fuqua Family Charitable Lead Annuity Trust -- 2000 ("J.B. Fuqua"), Massachusetts Mutual Life Insurance Company, ("Mass Mutual"), MidOcean Celerity Investment Partners, L.P. ("MidOcean"), MidOcean Capital Investors, L.P. ("MidOcean Investors"), Behrman Capital III LP ("Capital III"), Strategic Entrepreneur Fund III L.P., (together with Capital III, "Behrman") and Gryphon Partners II, L.P. ("Gryphon II"), Gryphon Partners II-A, L.P. (together with Gryphon II, "Gryphon"). Each of the foregoing parties are referred to individually as a "Party" and collectively as the "Parties."


RECITALS


WHEREAS, the Parties have determined that a split of the Celerity Group business and the KSI Group business is in the mutual best interests of the Parties as well as the potential underwritten initial public offering of common stock of Holdings (the "Holdings IPO") would be in their mutual best interests and in the best interests of the other stakeholders of Holdings;


WHEREAS, the Parties have concluded that a series of financing, capital and corporate restructuring transactions (collectively, the "Restructuring") are necessary to facilitate the split and the Holdings IPO, all as set forth more specifically herein and in the term sheet attached to this Agreement as Exhibit A (the "Term Sheet") ;


WHEREAS, simultaneous with the execution of this Agreement, the Parties, together with additional stakeholders of the Celerity Group and the KSI Group, are entering into a number of agreements and completing a series of transactions constituting a portion of the Restructuring (collectively, the "Phase I Restructuring"), all as set forth more specifically in Article II of this Agreement;


WHEREAS, the Parties are proceeding with the Phase I Restructuring in partial reliance upon their mutual commitment to use their respective best efforts to complete the balance of the Restructuring (collectively, the "Phase II Restructuring"), by completing the additional transactions and entering into the additional related agreements contemplated by Article III of this Agreement; and


WHEREAS, the Parties desire, as a condition to the completion of the Phase I Restructuring, to memorialize their respective good faith intentions and obligations to use their


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respective commercially reasonable efforts to complete the Phase II Restructuring substantially in accordance with the terms set forth in Article III by entering into this Agreement.


NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:


AGREEMENT


ARTICLE I


DEFINITIONS


SECTION 1.1 DEFINED TERMS. As used in this Agreement, the following terms have the meanings specified below.


"Abandonment Agreement" has the meaning set forth in Section 2.3(c)(ii).


"ACOF" has the meaning set forth in the preamble.


"ATVF" has the meaning set forth in the preamble.


"Amended and Restated TCP Purchase Agreement" has the meaning set forth in Section 2.3(b)(i).


"Amended and Restated Securities Purchase Agreement" means the Amended and Restated Securities Purchase Agreement dated as of April 2, 2004 by and among KGI, KHC, KSI, ACOF, SVAR, SVBF, SVBF II, MidOcean Investors, Berhman and Gryphon that memorializes certain rights and understandings with respect to the senior subordinated notes due 2006 issued by KGI and warrants issued in connection therewith.


"Ares Current Holders" means Ares II, Ares VII and Ares VIII.


"Ares Purchasers" means Ares III, Ares IV and Ares ATV.


"Ares II" has the meaning set forth in the preamble.


"Ares III" has the meaning set forth in the preamble.


"Ares IV" has the meaning set forth in the preamble.


"Ares VII" has the meaning set forth in the preamble.


"Ares VIII" has the meaning set forth in the preamble.


"Assignment Agreement" has the meaning set forth in Section 2.3(c)(i).


"Behrman" has the meaning set forth in the preamble.


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"Behrman Note" means the Capital Call Note held by Behrman in the original principal amount of $4,581,270.74.


"Bridge Contribution Agreement" has the meaning set forth in Section 2.2.


"Bridge Instruments" means those certain 12.5% Junior Subordinated Notes issued by KGI in favor of the Bridge Instrumentholders, each dated July 17, 2003.


"Bridge Instrumentholders" means each registered holder of the Bridge Instruments, together with their successors and registered assigns.


"Bridge Instrument Exchange Option Agreement" has the meaning set forth in Section 2.4(c)(vii).


"Capital III" has the meaning set forth in the preamble.


"Capital Call Exchange Agreement" has the meaning set forth in Section 2.4(c)(iii).


"Capital Call Notes" means those certain 15% Convertible Senior Subordinated Notes dated June 6, 2003 and issued by Holdings to the Capital Call Noteholders in the original principal amount of $10,000,000.


"Capital Call Noteholders" means collectively MidOcean Investors and Behrman.


"Celerity" has the meaning set forth in the preamble.


"Celerity Group" has the meaning set forth in the preamble.


"Celerity Merger" has the meaning set forth in Section 3.3.


"Chempure" has the meaning set forth in the preamble.


"Contributions and Exchanges" has the meaning set forth in Section 2.4(c).


"Contributing Optionees" has the meaning set forth in Section 2.4(c)(v).


"Credit Agreement" means that certain Amended and Restated Credit Agreement, dated as of December 10, 2002, by and among Holdings, KGI, as the "Borrower", the Guarantors party thereto, The Bank of Nova Scotia, as Administrative Agent, Collateral Agent and Documentation Agent, Bankers Trust Company, as Syndication Agent, Deutsche Bank Securities, Inc., as Lead Arranger and Book Manager, Banc One Capital Markets, Inc., as Co-Arranger and various Lenders party thereto, as may be amended, supplemented, amended and restated or otherwise modified from time to time.


"First Seller Note" means that certain First 11% Junior Subordinated Note dated August 30, 2000 in the original principal amount of $25,000,000, issued by Holdings in favor of United States Filter.


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"Governmental Authority" means the government of the United States or of any other nation, or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity (including any federal or other association of or with which any such nation may be a member or associated) exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government.


"Gryphon" has the meaning set forth in the preamble.


"Gryphon II" has the meaning set forth in the preamble.


"Holdings" has the meaning set forth in the preamble.


"Holdings IPO" has the meaning set forth in the first recital.


"Holdings Merger" has the meaning set forth in Section 2.4(b).


"J.B. Fuqua" has the meaning set forth in the preamble.


"KGI" has the meaning set forth in the preamble.


"KGI Contributions" has the meaning set forth in Section 2.5.


"KH LLC" has the meaning set forth in the preamble.


"KSB" has the meaning set forth in the preamble.


"KSI" has the meaning set forth in the preamble.


"KSI Bridge Instruments" has the meaning set forth in Section 2.2.


"KSI Group" has the meaning set forth in the preamble.


"KSI Mezzanine Purchase Agreement" has the meaning set forth in Section 3.6(a).


"KSI Note" has the meaning set forth in Section 2.5.


"KSI Spin-Off" has the meaning set forth in Section 2.6.


"KSI TCP Purchase Agreement" has the meaning set forth in Section 3.6(b).


"KTS" has the meaning set forth in the preamble.


"March Bridge" means the $5 million bridge financing to Celerity evidenced by the 30 day subordinated secured note and security agreement, each dated as of March 8, 2004 between Celerity and certain shareholders of Holdings, and the guaranty of KSI in favor of lenders under the March Bridge.


"Mass Mutual" has the meaning set forth in the preamble.


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"Merger Sub" has the meaning set forth in Section 2.4(b).


"Merger Agreement" has the meaning set forth in Section 2.4(b).


"Mezzanine1 Loans" means loans in the aggregate principal amount of $5,000,000 under the Amended and Restated Securities Purchase Agreement that are transferred from Holdings (as successor by merger with KGI) to KSI as part of the transactions contemplated by Section 3.6(a).


"Mezzanine Notes" shall mean the notes evidencing the loans made pursuant to the Amended and Restated Securities Purchase Agreement.


"Mezzanine Purchase Option Agreement" has the meaning set forth in Section 2.3(c)(iv).


"Mezzanine Purchasers" means those purchasers of the notes issued by KGI pursuant to the Amended and Restated Securities Purchase Agreement.


"Mezzanine Warrants" shall mean the "Warrants," as defined in the Original Mezzanine Purchase Agreement.


"MidOcean" has the meaning set forth in the preamble.


"MidOcean Investors" has the meaning set forth in the preamble.


"MidOcean Note" means the Capital Call Note held by MidOcean Investors in the original principal amount of $5,379,446.92.


"New KSI Revolver" has the meaning set forth in Section 3.6(a)(iii).


"New Second Lien Notes" means those promissory notes issued by Holdings in favor of the TCP Purchasers pursuant to the Amended and Restated TCP Purchase Agreement.


"Option Exchange Agreement" has the meaning set forth in Section 2.4(c)(v).


"Original Mezzanine Loan Facility" means the aggregate senior subordinated loans made to KGI by the Original Mezzanine Purchasers in an original aggregate principal amount of $70,000,000.


"Original Mezzanine Notes" means the aggregate senior subordinated notes issued by KGI to the Original Mezzanine Purchasers in an original aggregate principal amount of $70,000,000.


"Original Mezzanine Purchase Agreement" means that certain Securities Purchase Agreement, dated as of August 30, 2000, by and among Holdings, KGI, as "Borrower," and the Original Mezzanine Purchasers, as may be amended, supplemented, amended and restated or otherwise modified from time to time prior to the date hereof.


"Original Mezzanine Purchasers" means collectively J. H. Whitney Mezzanine Fund, L.P., J. H. Whitney Market Value Fund, L.P., The Northwestern Mutual Life Insurance Company, Albion Alliance Mezzanine Fund, L.P., Albion Alliance Mezzanine Fund II, L.P.,


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GoldenTree High Yield Opportunities I L.P., GoldenTree High Yield Master Fund, Ltd. and DB Structured Products, Inc., f/k/a Deutsche Banc Sharps Pixley Inc., SVAR, SVBF and SVBF II.


"Parties" has the meaning set forth in the preamble.


"Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.


"Phase I Restructuring" has the meaning set forth in the third recital.


"Phase II Restructuring" has the meaning set forth in the fourth recital.


"Registration Statement" has the meaning set forth in Section 3.1.


"Restructuring" has the meaning set forth in the second recital.


"Restructuring Document" has the meaning set forth in Section 5.1.


"SEC" shall mean the Securities and Exchange Commission or any successor thereto.


"Second Lien Notes" means those senior secured notes issued pursuant to the Amended and Restated TCP Purchase Agreement.


"Second Seller Note" means that certain Second 11% Convertible Junior Subordinated Note dated August 30, 2000 in the original principal amount of $25,000,000, issued by Holdings in favor of United States Filter.


"Senior Bank Purchase Option Agreement" has the meaning set forth in Section 2.3(a)(ii).


"Senior Lenders" means collectively The Bank of Nova Scotia, Bankers Trust Company, Deutsche Bank Securities, Inc., Banc One Capital Markets, Inc., and various Lenders to the Credit Agreement, together with their successors and registered assigns.


"Senior Loan Facility" means the aggregate loans and facility made by the Senior Lenders to KGI in an aggregate original principal amount of $260,000,000.


"Shareholders Agreement" has the meaning set forth in Section 2.4(d).


"Strategic Note" means the Capital Call Note held by Strategic Entrepreneur Fund III, L.P. in the original principal amount of $39,282.34.


"Subsidiary" shall mean, as to any Person, (i) any corporation more than 50% of whose stock of any class or classes having by the terms thereof ordinary voting power to elect a majority of the directors of such corporation (irrespective of whether or not at the time stock of any class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time owned by such Person and/or one or more Subsidiaries of such Person and (ii) any partnership, association, joint venture or other entity in


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which such Person and/or one or more Subsidiaries of such Person has more than a 50% equity interest at the time.


"SVAR" has the meaning set forth in the preamble.


"SVBF" has the meaning set forth in the preamble.


"SVBF II" has the meaning set forth in the preamble.


"TCP" has the meaning set forth in the preamble.


"TCP/Mezzanine Exchange Agreement" has the meaning set forth in Section 2.4(c)(iv).


"TCP Purchase Agreement" means that certain Purchase Agreement, dated as of September 26, 2003 by and among Holdings, KGI, as the "Borrower," the Guarantors party thereto, the TCP Purchasers and Tennenbaum Capital Partners, LLC, as collateral agent for the TCP Purchasers, as amended, supplemented, amended and restated or otherwise modified from time to time.


"TCP Purchasers" means SVAR, SVBF, SVBF II, the Ares Purchasers, J.B. Fuqua and Mass Mutual.


"TCP Purchase Option Agreement" has the meaning set forth in Section 2.3(b)(ii).


"TCP Warrants" shall mean the "Tennenbaum Warrants," as defined in the TCP Purchase Agreement.


"TCP1 Notes" means the Second Lien Notes in the aggregate principal amount of $50,000,000 that will be transferred from KGI to KSI as part of the transactions contemplated by Section 3.6(b).


"Term Sheet" has the meaning set forth in the second recital.


"Transaction Documents" means, collectively, this Agreement (including all exhibits and schedules hereto) and all other agreements exhibited to this Agreement or contemplated herein to be entered into in respect of the Restructuring.


"Transactions" means the execution, delivery and performance by each Party of, and all other transactions contemplated by, the Transaction Documents.


"United States Filter" means United States Filter Corporation, a Delaware corporation.


"United States Filter Exchange Agreement" has the meaning set forth in Section 2.4(c)(ii).


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ARTICLE II


PHASE I RESTRUCTURING


SECTION 2.1 PLAN AND INTENTION.


(a) Simultaneous with the execution of this Agreement the Parties are executing and delivering each of the agreements identified in this Article II and effecting the transactions contemplated by such agreements. Each of the agreements required to be delivered and each of the transactions contemplated by such agreements and this Article II are being entered into and/or performed on the understanding that all of such agreements will be executed and delivered and all such transactions performed as required herein and therein, and the failure of any one step shall relieve the Parties of their obligations to deliver the agreements identified in this Article II or to proceed with any of the transactions contemplated by such agreements or this Article II. Each Party is entering into each such agreement on the understanding and expectation that the Parties shall in good faith negotiate with the other Parties in an effort to reach agreement on a version of each of the agreements identified in Article III that will be acceptable to each party to each such agreement and shall use commercially reasonable efforts to execute and deliver such agreements expeditiously upon such agreement and to cause the transactions contemplated by such executed agreements to occur as promptly as practicable (it being understood among the Parties that "best effort" and commercially reasonable efforts" for purposes of this Agreement shall not require any Party to agree to any agreement or provision: (1) that is not reasonable and customary with respect to such a party in a similar circumstance (except to the extent that such agreement or provision is set forth in this Agreement or the Term Sheet), (2) that conflicts with or in inconsistent with this Agreement (including the Term Sheet) or (3) that requires such Party to contribute or lend additional funds to the Celerity Group or the KSI Group other than pursuant to a definitive document expressly contemplated under this Agreement and acceptable to such Party). References in the Phase I Restructuring to definitive agreements shall refer to the forms of such agreements substantially in the form of those documents marked "final" with the consent of the parties thereto as of the date hereof.


(b) To the extent that there is any conflict between this Agreement and any definitive agreement referenced herein and executed by the parties thereto, the terms of such executed, definitive agreement shall prevail.


SECTION 2.2 CONTRIBUTION OF BRIDGE INSTRUMENTS. Simultaneous with the execution of this Agreement, the Bridge Instrumentholders have executed and delivered an agreement (the "Bridge Contribution Agreement") pursuant to which the Bridge Instrumentholders shall contribute the Bridge Instruments to KSI in exchange for issuance by KSI to the Bridge Instrumentholders of Junior Subordinated Instruments, in form and substance similar to Exhibit A to the Bridge Contribution Agreement (collectively, the "KSI Bridge Instruments"). The Bridge Instrumentholders, KSI and KGI also shall have executed and delivered a side letter which provides each Bridge Instrumentholder with the right to rescind its contribution of the Bridge Instruments to KSI in the event that the Holdings IPO does not occur on or before June 30, 2004; provided that if the Bridge Instrumentholders exercise their rescission right, then no later than two days prior to the consummation of a Holdings IPO that occurs after June 30, 2004,


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the Bridge Instrumentholders shall recontribute the Bridge Instruments to KSI if the Phase II Restructuring is consummated on or prior to the consummation of the Holdings IPO.


SECTION 2.3 FINANCING TRANSACTIONS.


(a) SENIOR LOAN FACILITY. Contemporaneous with the execution of this Agreement, the Celerity Group and the KSI Group shall effect a restructuring of the Senior Loan Facility as follows:


(i) Amendment No. 7 to the Credit Agreement shall be executed by all parties thereto and be delivered to Holdings and KGI.


(ii) KSI and the other parties thereto shall have executed a purchase option agreement in favor of the Senior Lenders (the "Senior Bank Purchase Option Agreement"). The purposes of the Senior Bank Purchase Option Agreement will be, among other things, to establish the financial covenants applicable to the KSI Group on a stand-alone basis following the KSI Spin-Off and to grant an option in favor of the Senior Lenders that provides for the Senior Lenders to require KSI to purchase KGI's obligations outstanding under the Senior Loan Facility in the event of an Event of Default (as defined in the Senior Bank Purchase Option Agreement).


(b) TCP AGREEMENTS. Contemporaneous with the execution of this Agreement, the TCP Purchasers, the Celerity Group and the KSI Group shall effect a restructuring of the TCP Purchase Agreement and Second Lien Notes as follows:


(i) The TCP Purchasers and the other parties thereto shall have executed and delivered an amended and restated TCP Purchase Agreement (the "Amended and Restated TCP Purchase Agreement"), which shall reflect the terms set forth in the Term Sheet opposite the caption "New 2nd Lien Notes." Pursuant to the Amended and Restated TCP Purchase Agreement the following transactions will occur:


(1) the TCP Purchasers (other than the Ares
Purchasers) will purchase from KGI (x) $29,000,000 aggregate principal
amount of New Second Lien Notes (with the same priority and ranking as
the existing Second Lien Notes) and (y) a strip of warrants to purchase
3.03% of the fully diluted equity of Holdings. in exchange for
$16,669,027.00 and (ii) the $10,000,000 of existing Mezzanine Notes
purchased pursuant to Section 2.3(c) below;


(2) SVAR, SVBF and SVBF II will purchase
from KGI a liquidation certificate with a payment amount of $833,333.33
in exchange for $125,000.00 in cash,


(3) SVAR, SVBF and SVBF II will pay
$74,676.64 for a strip of warrants equal to the amount sufficient to
gross up SVAR, SVBF and SVBF II to 5/60 of 6% of the fully diluted
equity of Holdings (to be calculated excluding the TCP Retained
Warrants (as defined in the TCP Purchase Agreement),


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(4) the Ares Purchasers will purchase from
KGI (x) $5 million aggregate principal amount of New Second Lien Notes
(with the same priority and ranking as the existing Second Lien Notes)
and (y) a strip of warrants to purchase 0.5% of the fully diluted
equity of Holdings in exchange for $5,000,000 in cash; and


(5) the TCP Purchasers will receive
anti-dilution protection for the warrants that they acquired in
connection with their purchase of existing Second Lien Notes as set
forth in the Term Sheet.


(ii) KSI and the other parties thereto shall have executed a purchase option agreement in favor of the TCP Purchasers (the "TCP Purchase Option Agreement"). The purposes of the TCP Purchase Option Agreement will be, among other things, to establish the financial covenants applicable to the KSI Group on a stand-alone basis following the KSI Spin-Off and to grant to the TCP Purchasers the opt ...