Exhibit 10.11


 


[George M. Sherman Form]


 


NON-QUALIFIED STOCK OPTION AGREEMENT

OF

REXNORD HOLDINGS, INC.


 


THIS AGREEMENT (this “Agreement”), dated as of [                  ]
is made by and among Rexnord Holdings, Inc., a Delaware corporation (the “Company”),
Cypress Industrial Holdings, LLC, a Maryland limited liability company (“Industrial”),
Cypress Group, LLC, a Maryland limited liability company (“Cypress”),
and George M. Sherman, a Consultant to the Company or one of its Subsidiaries
(as defined herein) (the “Optionee”).


 


WHEREAS, the Company wishes to afford the Optionee the opportunity to purchase
shares of its common stock, par value $0.01 per share (“Common Stock”);


 


WHEREAS, the Company wishes to carry out the 2006 Stock Option Plan of Rexnord
Holdings, Inc. (as may be amended from time to time, the “Plan”),
the terms of which are hereby incorporated by reference and made a part of this
Agreement; and


 


WHEREAS, the Board (i) has determined that it would be to the advantage
and in the best interests of the Company and its stockholders to grant the
Non-Qualified Stock Option provided for herein (the “Option”) to the
Optionee as an inducement for the Optionee to enter into or remain in the
service of the Company or one of its Subsidiaries and as an incentive for
increased efforts by the Optionee during such service, and (ii) has
instructed the officers of the Company to issue said Option.


 


NOW, THEREFORE, in consideration of the mutual covenants herein contained and other
good and valuable consideration, receipt and sufficiency of which is hereby
acknowledged, the parties hereto do hereby agree as follows:


 


ARTICLE I

DEFINITIONS


 


Whenever
the following terms are used in this Agreement, they shall have the meaning
specified below unless the context clearly indicates otherwise.  Capitalized terms used in this Agreement and
not defined below shall have the meaning given to such terms in the Plan.  The singular pronoun shall include the
plural, where the context so indicates.


 


“Cause”
shall have the meaning ascribed to such term in any consulting agreement
(including, without limitation, the Consulting Agreement) in effect between the
Company or any of its Subsidiaries and the Optionee as of the date of the
Optionee’s termination of service and, in the absence of any such consulting
agreement, “Cause” shall mean,


 


(a)                                  the failure of the Optionee to carry out, or
comply with, in each case in any material respect, any lawful and reasonable
directive of the Board or the Board of Directors of Rexnord Corporation or any
of their respective designees consistent with the terms of the Optionee’s
consultancy, which is not remedied within 30 days after the receipt of written
notice from the Company specifying such failure;


 

















 


(b)                                 the Optionee’s conviction, plea of no contest,
plea of nolo contendere, or
imposition of unadjudicated probation for any felony;


 


(c)                                  the Optionee’s unlawful use (including being
under the influence) or possession of illegal drugs;


 


(d)                                 the Optionee’s commission of an act of fraud,
embezzlement, misappropriation, willful misconduct, or breach of fiduciary duty
against the Company or any of its Subsidiaries;


 


(e)                                  the breach by the Optionee of any of the
provisions contained in Article IV below or similar provisions contained
in any other agreement with the Company or any of its Subsidiaries or other
Affiliates; or


 


(f)                                    the Optionee’s material breach of the Cypress
Stockholders’ Agreement.


 


“Consulting
Agreement” means that certain Management Consulting Agreement, dated as of
the Closing Date, by and among Rexnord Corporation, a Delaware corporation, the
Optionee, Industrial and Cypress, as the same may be amended from time to time.


 


“Cumulative
Debt Repayment” for a given fiscal year shall mean the positive excess, if
any, of (a) the weighted average of the debt outstanding during the 60
calendar days preceding April 30, 2006, as such debt outstanding may be
increased or decreased as appropriate for the effect of any post closing
adjustment as determined by the Committee, over (b) the weighted average of
the debt outstanding during the 60 calendar days preceding April 30 of the
fiscal year immediately following the given fiscal year.


 


“Cumulative
Debt Repayment Target” for a period commencing on or after April 1,
2006 shall be as set forth in Appendix A to this Agreement, subject to the
provisions of Section 5.6 hereof.


 


“Cumulative
EBITDA” as of a given date shall mean the total of EBITDA from and after April 1,
2006 through such date.


 


“Cumulative
EBITDA Target” for a given period commencing on or after April 1,
2006, shall be as set forth in Appendix A of this Agreement, subject to the
provisions of Section 5.6 hereof.


 


“Cypress
Stockholders’ Agreement” shall mean that certain agreement by and among the
Optionee, Industrial, the Company and the other stockholders of the Company
party thereto, which contains certain restrictions and limitations applicable
to the shares of Common Stock acquired upon Option exercise (and to other
shares of Common Stock, if any, held by the Optionee during the term of such agreement).  If the Optionee is not a party to the Cypress
Stockholders’ Agreement at the time of exercise of the Option (or any portion
thereof), the exercise of the Option shall be subject to the condition that the
Optionee enter into the Cypress Stockholders’ Agreement.  The Cypress Stockholders’ Agreement shall
constitute a Stockholders’ Agreement for purposes of the Plan.


 

















 


“Debt
Repayment” for a given fiscal year of the Company shall mean, excluding any
debt repayment in conjunction with an equity offering of securities of the
Company, the positive excess, if any, of (a) the weighted average of the
debt outstanding during the 60 calendar days preceding April 30 of the
given fiscal year, over (b) the weighted average of the debt outstanding
during the 60 calendar days preceding April 30 of the fiscal year
immediately following the given fiscal year.


 


“Debt
Repayment Target” for a period commencing on or after April 1, 2006
shall be as set forth in Appendix A to this Agreement, subject to the
provisions of Section 5.6 hereof.


 


“EBITDA”
for a given period shall mean consolidated net income before interest, taxes,
depreciation, amortization, extraordinary items (including Other Income and
Expense items as well as LIFO Income and Expense items) and management or
similar fees payable to Apollo Management, L.P. or any of its Affiliates, as
reflected on the Company’s audited consolidated financial statements for such
period.  Consolidated net income shall be
determined in accordance with generally accepted accounting principles except
that gains or losses from extraordinary, unusual or non-recurring items may be
excluded in the discretion of the Committee.


 


“EBITDA
Target” for a given period commencing on or after April 1, 2006, shall
be as set forth in Appendix A of this Agreement, subject to the provisions of Section 5.6
hereof.


 


“Good
Reason” shall have the meaning ascribed to it in any consulting agreement
(including, without limitation, the Consulting Agreement) in effect between the
Company or any of its Subsidiaries and the Optionee as of the date of the
Optionee’s termination of service and, in the absence of any such consulting
agreement, “Good Reason” shall mean,


 


(a)                                  the failure of the Company to continue the
Optionee in the position of Non-Executive Chairman of the Board;


 


(b)                                 a material diminution in the Optionee’s
responsibilities, duties or authorities;


 


(c)                                  the failure of the Company to make any
material payment or provide any material benefit to which the Optionee is
entitled;


 


(d)                                 the material breach by the Company or any of
its Subsidiaries of the Consulting Agreement; or


 


(e)                                  the material breach by the Company or any of
its Subsidiaries of the Cypress Stockholders’ Agreement;


 


provided, however,
that the Optionee may not terminate the Optionee’s services for Good Reason
unless the Optionee provides the Company or the Subsidiary of the Company for
which the Optionee is performing services with at least 30 days’ prior written
notice of the Optionee’s intent to resign for Good Reason, with such notice to
set forth the event or events constituting Good Reason, and the Company or the
Subsidiary for which the Optionee is performing services has not remedied the
alleged violation(s) within the 30-day period.


 

















 


“Principal
Stockholder(s) Investment” means direct or indirect investments in shares
of Common Stock, preferred stock or other debt or equity securities of the
Company or any of its Subsidiaries made by the Principal Stockholder(s) on or
after the Closing Date.


 


“Principal
Stockholder(s) CAGR” means the pretax compound annual growth rate
calculated on a quarterly basis based on the cash proceeds realized to the
Principal Stockholder(s) in a Liquidity Event on the Principal Stockholder(s)
Investment (which proceeds, for purposes hereof, shall be determined after
deducting all transaction costs and all investment banking, accounting,
attorney, consultant and similar fees paid or payable by the Principal
Stockholder(s) to the extent not paid or reimbursed by the Company or any other
third party) and the aggregate amount invested by the Principal Stockholder(s)
for all Principal Stockholder(s) Investments, assuming all Principal
Stockholder(s) Investments were purchased by one Person and were held
continuously by such Person, after dilution for outstanding options, warrants
or other rights to acquire shares of Common Stock or other equity securities of
the Company.  The Principal
Stockholder(s) CAGR shall be determined based on the actual time of each
Principal Stockholder(s) Investment and including, as a return on such
investment, any cash dividends, cash distributions or cash interest paid by the
Company or any Subsidiary of the Company in respect of such investment during
such period, but shall exclude any management or monitoring fees paid to Apollo
Management, L.P. or any of its Affiliates.


 


ARTICLE II

GRANT OF OPTION


 


Section 2.1                                      Grant of Option


 


In
consideration of the Optionee’s agreement to enter into or remain in the
service of the Company or one of its Subsidiaries and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, on the date hereof the Company irrevocably grants to the Optionee
the Option to purchase any part or all of an aggregate of 576,765 shares of
Common Stock upon the terms and conditions set forth in the Plan and this
Agreement.  The Optionee hereby agrees
that (i) except as required by law, the Optionee will not disclose to any
Person other than the Optionee’s spouse and legal, financial and other advisors
(if any) the grant of the Option or any of the terms or provisions hereof
without the prior approval of the Committee, and (ii) in the discretion of
the Committee, the Option shall terminate and any unexercised portion of such
Option (whether or not vested) shall be forfeited if the Optionee violates the
non-disclosure provisions of this Section 2.1.


 


Section 2.2                                      Option Subject to Plan


 


The
Option granted hereunder is subject to the terms and provisions of the Plan,
including without limitation, Article V and Sections 7.1, 7.2, 7.3 and
7.10 thereof.


 


Section 2.3                                      Option Price


 


The
purchase price of the shares of Common Stock covered by the Option shall be
$47.50 per share (without commission or other charge).


 

















 


ARTICLE III

EXERCISABILITY


 


Section 3.1                                      Commencement of Exercisability 


 


(a)                                  Subject to Section 3.1(f) and Section 3.3
of this Agreement, 50% of the Option shall become vested in five cumulative
installments provided that the Consulting Agreement remains continuously in
effect from the date of grant through such date as follows:


 


(i)                                     The first installment shall consist of 10% of
the shares of Common Stock covered by such Option and shall become vested on July 21,
2007;


 


(ii)                                  The second installment shall consist of 10%
of the shares of Common Stock covered by such Option and shall become vested on
July 21, 2008;


 


(iii)                               The third installment shall consist of 10% of
the shares of Common Stock covered by such Option and shall become vested on July 21,
2009;


 


(iv)                              The fourth installment shall consist of 10%
of the shares of Common Stock covered by such Option and shall become vested on
July 21, 2010; and


 


(v)                                 The fifth installment shall consist of 10% of
the shares of Common Stock covered by such Option and shall become vested on July 21,
2011.


 


(b)                                 Subject to Section 3.1(f) and Section 3.3,
50% of the Option shall become fully vested as follows:


 


(i)                                     An installment of up to 2.5% of the shares of
Common Stock covered by the Option shall become vested on, or within 120 days
following, March 31 of each fiscal year 2007 through 2011, in each case as
determined by the Committee in its sole discretion as follows:


 


(A)                              with respect to the fiscal year ending March 31,
2007, if the Debt Repayment for such fiscal year equals or exceeds the Debt
Repayment Target for such fiscal year, then 2.5% of the shares of Common Stock
covered by the Option shall become vested;


 


(B)                                with respect to the fiscal year ending March 31,
2008:


 


(1)                                  if the Debt Repayment for such fiscal year
equals or exceeds 95%, but is less than 100%, of the Debt Repayment Target for
such fiscal year, then 1.875% of the shares of Common Stock covered by the
Option shall become vested; or


 

















 


(2)                                  if the Debt Repayment for such fiscal year
equals or exceeds the Debt Repayment Target for such fiscal year, then 2.5% of
the shares of Common Stock covered by the Option shall become vested;


 


(C)                                with respect to each fiscal year ending March 31,
2009, 2010 and 2011:


 


(1)                                  if the Debt Repayment for any such fiscal
year equals or exceeds 90%, but is less than 95%, of the Debt Repayment Target
for such fiscal year, then 1.25% of the shares of Common Stock covered by the
Option shall become vested; or


 


(2)                                  if the Debt Repayment for any such fiscal
year equals or exceeds 95%, but is less than 100%, of the Debt Repayment Target
for such fiscal year, then 1.875% of the shares of Common Stock covered by the
Option shall become vested; or


 


(3)                                  if the Debt Repayment for any such fiscal
year equals or exceeds the Debt Repayment Target for such fiscal year, then
2.5% of the shares of Common Stock covered by the Option shall become vested.


 


(ii)                                  An installment of up to 2.5% of the shares of
Common Stock covered by the Option shall become vested on, or within 120 days
following, March 31 of each fiscal year 2007 through 2011 as determined by
the Committee in its sole discretion as follows:


 


(A)                              with respect to the fiscal year ending March 31,
2007, if the Cumulative Debt Repayment for such fiscal year equals or exceeds
the Cumulative Debt Repayment Target for such fiscal year, then 2.5% of the
shares of Common Stock covered by the Option shall become vested;


 


(B)                                with respect to the fiscal year ending March 31,
2008:


 


(1)                                  if the Cumulative Debt Repayment for such
fiscal year equals or exceeds 95%, but is less than 100%, of the Cumulative
Debt Repayment Target for such fiscal year, then 1.875% of the shares of Common
Stock covered by the Option shall become vested; or


 


(2)                                  if the Cumulative Debt Repayment for such
fiscal year equals or exceeds the Cumulative Debt Repayment Target for such
fiscal year, then 2.5% of the shares of Common Stock covered by the Option
shall become vested;


 

















 


(C)                                with respect to each fiscal year ending March 31,
2009, 2010 and 2011:


 


(1)                                  if the Cumulative Debt Repayment for such
fiscal year equals or exceeds 90%, but is less than 95%, of the Cumulative Debt
Repayment Target for such fiscal year, then 1.25% of the shares of Common Stock
covered by the Option shall become vested; or


 


(2)                                  if the Cumulative Debt Repayment for such
fiscal year equals or exceeds 95%, but is less than 100%, of the Cumulative
Debt Repayment Target for such fiscal year, then 1.875% of the shares of Common
Stock covered by the Option shall become vested; or


 


(3)                                  if the Cumulative Debt Repayment for such
fiscal year equals or exceeds the Cumulative Debt Repayment Target for such
fiscal year, then 2.5% of the shares of Common Stock covered by the Option
shall become vested.


 


(iii)                               If the Cumulative Debt Repayment as of the
end of any fiscal year 2007 through 2011 is less than the Cumulative Debt
Repayment Target through the end of such fiscal year, that portion of the
Option that was subject to accelerated vesting pursuant to Section 3.1(b)(i) and
3.1(b)(ii), but which did not become vested pursuant to Sections 3.1(b)(i)(A), (B) or
(C) or 3.1(b)(ii)(A), (B) or (C), with respect to such fiscal year,
subject to Section 3.2 and 3.4, shall become vested, as determined by the
Committee, on, or within 120 days following, the last day of the first fiscal
year in which the Cumulative Debt Repayment equals or exceeds the Cumulative
Debt Repayment Target for such fiscal year.


 


(iv)                              An installment of up to 2.5% of the shares of
Common Stock covered by the Option shall become vested on, or within 120 days
following, March 31 of each fiscal year 2007 through 2011 as determined by
the Committee in its sole discretion as follows:


 


(A)                              with respect to the fiscal year ending March 31,
2007, if EBITDA for such fiscal year equals or exceeds the EBITDA Target for
such fiscal year, then 2.5% of the shares of Common Stock covered by the Option
shall become vested;


 


(B)                                with respect to the fiscal year ending March 31,
2008:


 


(1)                                  if EBITDA for such fiscal year equals or
exceeds 95%, but is less than 100%, of the EBITDA Target for such fiscal year,
then 1.875% of the shares of Common Stock covered by the Option shall become
vested; or


 


(2)                                  if EBITDA for such fiscal year equals or
exceeds the EBITDA Target for such fiscal year, then 2.5% of the shares of
Common Stock covered by the Option shall become vested;


 

















 


(C)                                with respect to each fiscal year ending March 31,
2009, 2010 and 2011:


 


(1)                                  if EBITDA for any such fiscal year equals or
exceeds 90%, but is less than 95%, of the EBITDA Target for such fiscal year,
then 1.25% of the shares of Common Stock covered by the Option shall become
vested; or


 


(2)                                  if EBITDA for any such fiscal year equals or
exceeds 95%, but is less than 100%, of the EBITDA Target for such fiscal year,
then 1.875% of the shares of Common Stock covered by the Option shall become
vested; or


 


(3)                                  if EBITDA for any such fiscal year equals or
exceeds the EBITDA Target for such fiscal year, then 2.5% of the shares of
Common Stock covered by the Option shall become vested.


 


(v)                                 An installment of up to 2.5% of the shares of
Common Stock covered by the Option shall become vested on, or within 120 days
following, March 31 of each fiscal year 2007 through 2011 as determined by
the Committee in its sole discretion as follows:


 


(A)                              with respect to the fiscal year ending March 31,
2007, if Cumulative EBITDA for such fiscal year equals or exceeds the
Cumulative EBITDA Target for such fiscal year, then 2.5% of the shares of
Common Stock covered by the Option shall become vested;


 


(B)                                with respect to the fiscal year ending March 31,
2008:


 


(1)                                  if Cumulative EBITDA for such fiscal year
equals or exceeds 95%, but is less than 100%, of the Cumulative EBITDA Target
for such fiscal year, then 1.875% of the shares of Common Stock covered by the
Option shall become vested; or


 


(2)                                  if Cumulative EBITDA for such fiscal year
equals or exceeds the Cumulative EBITDA Target for such fiscal year, then 2.5%
of the shares of Common Stock covered by the Option shall become vested;


 


(C)                                with respect to each fiscal year ending March 31,
2009, 2010 and 2011:


 


(1)                                  if Cumulative EBITDA for such fiscal year
equals or exceeds 90%, but is less than 95%, of the Cumulative EBITDA Target
for such fiscal year, then 1.25% of the shares of Common Stock covered by the
Option shall become vested; or


 

















 


(2)                                  if Cumulative EBITDA for such fiscal year
equals or exceeds 95%, but is less than 100%, of the Cumulative EBITDA Target
for such fiscal year, then 1.875% of the shares of Common Stock covered by the
Option shall become vested; or


 


(3)                                  if Cumulative EBITDA for such fiscal year
equals or exceeds the Cumulative EBITDA Target for such fiscal year, then 2.5%
of the shares of Common Stock covered by the Option shall become vested.


 


(vi)                              if Cumulative EBITDA as of the end of any
fiscal year 2007 through 2011 is less than the Cumulative EBITDA Target through
the end of such fiscal year, that portion of the Option that was subject to
accelerated vesting pursuant to Sections 3.1(b)(iv) and 3.1(b)(v), but
which did not become vested pursuant to Sections 3.1(b)(iv)(A), (B) or (C) or
3.1(b)(v)(A), (B) or (C), with respect to such fiscal year, subject to
Sections 3.2 and 3.4, shall become vested, as determined by the Committee, on,
or within 120 days following, the last day of the first fiscal year in which
Cumulative EBITDA equals or exceeds the Cumulative EBITDA Target for such
fiscal year.


 


(c)                                  Notwithstanding the foregoing provisions of
this Section 3.1, but subject to Section 3.1(f), upon the occurrence
of the first Liquidity Event, the following shall immediately prior to the
effective date of such Liquidity Event become vested in full:


 


(i)                                     that portion of the Option that remains
eligible to become vested pursuant to Section 3.1(a);


 


(ii)                                  at the election and sole discretion of the
Committee, that portion of the Option that has not, as of such Liquidity Event,
become eligible to become vested pursuant to Sections 3.1(b)(i), 3.1(b)(ii),
3.1(b)(iv) or 3.1(b)(v);


 


(iii)                               that portion of the Option that remains
eligible to become vested pursuant to Section 3.1(b), but only if the
Principal Stockholder(s) CAGR as of the Liquidity Event equals or exceeds 25%.


 


(d)                                 The Committee shall make the determination as
to whether the respective Debt Repayment, Cumulative Debt Repayment, EBITDA,
and Cumulative EBITDA Targets have been met, and shall determine the extent, if
any, to which the Option as become vested, on any such date as the Committee in
its sole discretion shall determine; provided,
however, that with respect to
each fiscal year such date shall not be later than the 120th day
following March 31 of such fiscal year.


 


(e)                                  Notwithstanding anything to the contrary in Section 3.3,
if the Consulting Agreement is terminated (i) by the Optionee for Good
Reason or (ii) by the Company or any of its Subsidiaries without Cause and
not as a result of the failure of the Optionee substantially to satisfy
reasonable performance standards (taking into account macroeconomic factors
affecting the Company), the Option shall become fully exercisable as of the
termination of the Consulting Agreement.


 

















 


(f)                                    After giving effect to Section 3.1(e) and
except with respect to any portion of the Option that as of the termination of
the Consulting Agreement is eligible to vest pursuant to Section 3.1(b) for
the fiscal year preceding the fiscal year in which such termination occurs, no
portion of the Option which is unvested upon the termination of the Consulting
Agreement for any reason shall thereafter become vested.


 


Section 3.2                                      Duration of Exercisability


 


The
installments provided for in Section 3.1 are cumulative.  Each such installment which becomes vested
pursuant to Section 3.1 shall remain vested and may be exercised until the
Option expires pursuant to Section 3.3.


 


Section 3.3                                      Expiration of Option


 


The
Option may not be exercised to any extent by any Person after the first to
occur of any of the following events:


 


(a)                                  The expiration of ten years from the date the
Option was granted;


 


(b)                                 If the Consulting Agreement is terminated for
any reason other than (i) by the Company or any Subsidiary of the Company
for Cause, (ii) on account of the death or disability (as defined in Section 22(e)(3) of
the Code) of the Optionee, (iii) by the Optionee for Good Reason or (iv) by
the Company or any Subsidiary of the Company without Cause and not as a result
of the failure of the Optionee substantially to satisfy reasonable performance
standards (taking into account macroeconomic factors affecting the Company and
its Subsidiaries), the later of (x) the ninetieth day following the date of the
termination of the Consulting Agreement or (y) to the extent that, as of the
termination of the Consulting Agreement, any portion of the Option remains
eligible to vest pursuant to Section 3.1(b) for the fiscal year
preceding the fiscal year in which the termination of the Consulting Agreement
occurs, the thirtieth day following the date of the Committee’s determination
under Section 3.1(d) for such fiscal year;


 


(c)                                  The expiration of ten years from the date the
Option was granted in the event of the termination of the Consulting Agreement (i) by
the Optionee for Good Reason or (ii) by the Company or any Subsidiary of
the Company without Cause and not as a result of the failure of the Optionee
substantially to satisfy reasonable performance standards (taking into account
macroeconomic factors affecting the Company);


 


(d)                                 Except as the Committee may otherwise decide,
the date of the termination of the Consulting Agreement by the Company or any
Subsidiary of the Company for Cause;


 


(e)                                  The expiration of 12 months from the date of
the termination of the Consulting Agreement on account of the Optionee’s death
or disability (within the meaning of Section 22(e)(3) of the Code);
or


 

















 


(f)                                    The occurrence of a Liquidity Event, provided
that any portion of the Option that is vested as of the occurrence of the
Liquidity Event may be exercised concurrently therewith.


 


Section 3.4                                      Partial Exercise


 


Any
vested portion of the Option or the entire Option, if then wholly vested, may
be exercised in whole or in part at any time prior to the time when the Option
or portion thereof expires; provided,
however, that each partial exercise
shall be for not less than 100 shares of Common Stock and shall be for whole
shares of Common Stock only.


 


Section 3.5                                      Exercise of Option


 


The
exercise of the Option shall be governed by the terms of this Agreement and the
terms of the Plan, including without limitation, the provisions of Article V
of the Plan, which, among other things, require that the Optionee deliver an
executed copy of a Joinder to the Stockholders’ Agreement designated by the
Company (in the form attached to such Stockholders’ Agreement), which for this
purpose shall be the Cypress Stockholders’ Agreement, to the Secretary as a
condition to the exercise of the Option.


 


ARTICLE IV

RESTRICTIVE COVENANTS


 


Section 4.1                                      Non-Competition


 


During
the term of the Consulting Agreement and for a period of two years thereafter,
each of the Optionee, Industrial and Cypress shall not, without the prior
written consent of the Company, which consent may be granted or withheld by the
Company in its sole discretion, directly or indirectly engage in, consult, have
any equity interest in, or manage or operate any person, firm, corporation,
partnership or business (whether as director, officer, employee, agent,
representative, partner, security holder, consultant or otherwise) that engages
in any business which competes with any material business of the Company or any
of its Subsidiaries anywhere in the world (as conducted during the term of the
Consulting Agreement); provided, however,
that (A) the Optionee, Industrial and Cypress, and any of their Affiliates,
shall be permitted to acquire stock or membership interests in such an entity
provided the entity is publicly traded and the acquired interest is not more
than five percent (5%) of the outstanding shares or membership interests of the
entity; and (B) the Optionee, Industrial and Cypress shall be permitted to
hold stock or membership interests in companies and businesses in which the
Optionee, Industrial, Cypress or other entities affiliated with the Optionee
hold stock or membership interests immediately prior to the Closing Date
(including, without limitation, stock in Colfax, Inc. and related
entities), or invested prior to the date of this Agreement.


 


Section 4.2                                      Customer Non-Solicitation


 


During
the term of the Consulting Agreement and for a period of two years thereafter,
each of the Optionee, Industrial and Cypress agrees not to, and will not permit
any of their respective Affiliates to, directly or indirectly, induce or
attempt to induce any customer, supplier, licensee or other business relation
of the Company or any of its Subsidiaries to cease doing


 

















 


business with the Company or
any of its Subsidiaries, or in any way interfere with the relationship between
any such customer, supplier, licensee or business relation, on the one hand,
and the Company or any of its Subsidiaries, on the other hand.


 


Section 4.3                                      Non-Solicitation/Non-Hiring of Employees


 


During
the term of the Consulting Agreement and for a period of two years thereafter,
each of the Optionee, Industrial and Cypress agrees not to, and will not permit
any of their respective Affiliates to, directly or indirectly, hire, solicit or
accept, if offered, with or without solicitation, on the Optionee’s, Industrial’s
or Cypress’ behalf or on behalf of any other person, the services of any person
who is (or was at any time in the preceding six months) an employee of the
Company or any of its Subsidiaries, nor solicit any of the Company’s or any of
its Subsidiaries’ employees to terminate employment with the Company or any of
its Subsidiaries (it being understood that the foregoing shall not apply to
employees solicited or hired without the Optionee’s knowledge and shall not
preclude Cypress, Industrial or other companies or businesses associated with
the Optionee from soliciting employees generally though newspaper or other mass
media advertising).


 


Section 4.4                                      Non-Disparagement


 


During
the term of the Consulting Agreement and thereafter in perpetuity, each of the
Optionee, Industrial and Cypress shall not knowingly disparage, criticize, or otherwise
make derogatory statements regarding the Company or its Affiliates,
Subsidiaries, successors, directors, officers, customers or suppliers.  During the term of the Consulting Agreement
and thereafter in perpetuity, none of the Company, Rexnord Corporation, nor any
of their respective officers shall knowingly disparage, criticize, or otherwise
make derogatory statements regarding any of the Optionee, Industrial or
Cypress.  The restrictions of this Section 4.4
shall not apply to any statements that are made truthfully in response to a
subpoena or other compulsory legal process.


 


Section 4.5                                      Non-Disclosure of Confidential Information


 


During
the term of the Consulting Agreement and thereafter in perpetuity, each of the
Optionee, Industrial and Cypress shall maintain in confidence and shall not
directly, indirectly or otherwise, use, disseminate, disclose or publish, or
use for their respective benefit or the benefit of any Person, any confidential
or proprietary information or trade secrets of or relating to the Company or
any of its Subsidiaries or Affiliates, including, without limitation,
information with respect to the Company’s or any of its Subsidiaries’
operations, processes, products, inventions, business practices, finances,
principals, vendors, suppliers, customers, potential customers, marketing
methods, costs, prices, contractual relationships, regulatory status,
compensation paid to employees or other terms of employment, or deliver to any
Person any document, record, notebook, computer program or similar repository
of or containing any such confidential or proprietary information or trade
secrets.  Upon the termination of the
Consulting Agreement for any reason, each of the Optionee, Industrial and Cypress
shall promptly deliver to the Company all correspondence, drawings, manuals,
letters, notes, notebooks, reports, programs, plans, proposals, financial
documents, or any other documents concerning the Company’s or any of its
Subsidiaries’ customers, business plans, marketing strategies, products or
processes.  Each of the


 

















 


Optionee, Industrial and
Cypress may respond to a lawful and valid subpoena or other legal process but
shall give the Company the earliest possible notice thereof, shall, as much in
advance of the return date as possible, make available to the Company and its
counsel the documents and other information sought and shall assist such
counsel in resisting or otherwise responding to such process.


 


Section 4.6                                      Injunctive Relief


 


Each
of the Optionee, Industrial and Cypress hereby acknowledges that a breach of
the covenants contained in this Article IV will cause irreparable damage
to the Company and its goodwill, the exact amount of which will be difficult or
impossible to ascertain, and that the remedies at law for any such breach will
be inadequate.  Accordingly, each of the
Optionee, Industrial and Cypress hereby agrees that, in the event of a breach
of any of the covenants contained in this Article IV, in addition to any
other remedy which may be available at law or in equity, the Company shall be
entitled to specific performance and injunctive relief.  The Company hereby acknowledges that a breach
of the Company’s covenant contained in Section 4.4 will cause irreparable
damage to the Optionee, Cypress, Industrial and their respective goodwill, the
exact amount of which will be difficult or impossible to ascertain, and that
the remedies at law for any such breach will be inadequate.  Accordingly, the Company hereby agrees that,
in the event of a breach of the Company’s covenant contained in Section 4.4,
in addition to any other remedy which may be available at law or in equity, the
Optionee, Cypress and Industrial shall be entitled to specific performance and
injunctive relief.


 


ARTICLE V

OTHER PROVISIONS


 


Section 5.1                                      Not a Contract of Consultancy


 


Nothing
in this Agreement or in the Plan shall (i) confer upon the Optionee any
right to continue in the service of the Company or any of its Subsidiaries, or (ii) interfere
with or restrict in any way the rights of the Company or its Subsidiaries,
which are hereby expressly reserved, to discharge the Optionee at any time for
any reason whatsoever, with or without Cause, except as otherwise provided in
the Consulting Agreement or any other agreement in effect from time to time.


 


Section 5.2                                      Shares Subject to Plan and Stockholder
Agreement


 


The
Optionee acknowledges that any shares of Common Stock acquired upon exercise of
the Option are subject to the terms of the Plan and the Cypress Stockholders’
Agreement, including without limitation, the restrictions set forth in Section 5.6
of the Plan.


 


Section 5.3                                      Construction


 


This
Agreement shall be administered, interpreted and enforced under the laws of the
state of New York, without regard to conflicts of law provisions that would
give effect to the laws of another jurisdiction.


 

















 


Section 5.4                                      Conformity to Securities Laws


 


The
Optionee acknowledges that the Plan is intended to conform to the extent
necessary with all provisions of the Securities Act and the Exchange Act and
any and all regulations and rules promulgated thereunder by the Securities
and Exchange Commission, including without limitation, Rule 16b-3 of the
Exchange Act.  Notwithstanding anything
herein to the contrary, the Plan shall be administered, and the Option is
granted and may be exercised, only in such a manner as to conform to such laws,
rules and regulations.  To the
extent permitted by applicable law, the Plan and this Agreement shall be deemed
amended to the extent necessary to conform to such laws, rules and
regulations.


 


Section 5.5                                      280G Compliance


 


In
the event that the Optionee or Industrial becomes entitled to payments or
benefits under this Agreement and/or any other payments or benefits by reason
of a “change of control” as defined in Section 280G of the Code and
regulations thereunder (collectively, the “Payments”), and any such
Payment constitutes a “parachute payment” as defined in Section 280G of
the Code and regulations thereunder, the Company and the Optionee or
Industrial, as applicable, shall use their respective reasonable best efforts
to obtain stockholder approval of such Payments in the manner provided in Section 280G(b)(5)(B) of
the Code and regulations thereunder; provided,
however, that nothing in this Section 5.5
shall be interpreted to require the Optionee or Industrial to waive any of the
Optionee’s or Industrial’s rights under the Option or otherwise.


 


Section 5.6                                      Adjustments in Debt Repayment and EBITDA
Targets


 


The
Debt Repayment and EBITDA Targets (including the Cumulative Debt Repayment and
Cumulative EBITDA Targets) specified in Appendix A are based upon certain
revenue and expense assumptions about the future business of the Company as of
the date the Option is granted. 
Accordingly, in the event that, after such date, the Committee determines,
in its sole discretion, that any acquisition or disposition of any business by
the Company or any dividend or other distribution (whether in the form of cash,
Common Stock, other securities, or other property), recapitalization,
reclassification, stock split, reverse stock split, reorganization, merger,
consolidation, split-up, spin-off, combination, repurchase, or exchange of
Common Stock or other securities of the Company, issuance of warrants or other
rights to purchase Common Stock or other securities of the Company, any unusual
or nonrecurring transactions or events affecting the Company, or the financial
statements of the Company, or change in applicable laws, regulations, or
accounting principles occurs such that an adjustment is determined by the Committee
to be appropriate in order to prevent dilution or enlargement of the benefits
or potential benefits intended to be made available under the Plan or with
respect to the Option, then the Committee shall, in good faith and in such
manner as it may deem equitable, adjust the financial targets set forth on
Appendix A to reflect the projected effect of such transaction(s) or event(s)
on Debt Repayment and/or EBITDA, subject to Section 7.1 of the Plan.


 

















 


Section 5.7                                      Entire Agreement


 


The
parties hereto acknowledge that this Agreement and the Plan set forth the
entire agreement and understanding of the parties and superseded all prior
written or oral agreements or understandings with respect to the subject matter
hereof, except that any provision therein regarding confidentiality or
non-competition remain in full force and effect in favor of the Company and its
Subsidiaries as if the agreements containing such provisions were not
superseded.  The obligations imposed by
this Agreement are severable and should be construed independently of each
other.  The invalidity of one provision
shall not affect the validity of any other provision.  If any provision of this Agreement shall be invalid
or unenforceable, in whole or in part, or as applied to any circumstances,
under the laws of any jurisdiction which may govern for such purpose, then such
provision shall be deemed, to the extent allowed by the laws of such
jurisdiction, to be modified or restricted to the extent and in the manner
necessary to render the same valid and enforceable, either generally or as
applied to such circumstance, or shall be deemed exercised from this Agreement,
as the case may require, and this Agreement shall be construed and enforced to
the maximum extent permitted by law, as if such provision had been originally
incorporated herein as so modified or restricted, or as if such provision had
not been originally incorporated herein, as the case may be.


 

















 


Section 5.8                                      Amendment


 


The
Board at any time, and from time to time, may amend the terms of this
Agreement, provided, however,
that the rights of the Optionee shall not be adversely impaired without the
Optionee’s written consent.  The Company
shall provide the Optionee with notice and a copy of any amendment made to this
Agreement.


 


Section 5.9                                      Arbitration; Waiver of Jury Trial


 


Any
dispute or controversy arising under, out of, or in connection with or in
relation to this Agreement or the Plan shall be finally determined and settled
by arbitration in New York, New York in accordance with the Commercial Rules of
the American Arbitration Association, and judgment upon the award may be
entered in any court having jurisdiction. 
Within 20 days of the conclusion of the arbitration hearing, the
arbitrator shall prepare written findings of fact and conclusions of law.  It is mutually agreed that the written
decision of the arbitrator shall be valid, binding, final and non-appealable; provided, however, that the parties hereto
agree that the arbitrator shall not be empowered to award punitive damages
against any party to such arbitration. 
To the extent permitted by law, the arbitrator’s fees and expenses will
be borne equally by each party.  In the
event that an action is brought to enforce the provisions of this Agreement or
the Plan pursuant to this Section 5.9, each party shall pay its own
attorney’s fees and expenses regardless of whether in the opinion of the court
or arbitrator deciding such action there is a prevailing party.  EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY
WAIVES ALL RIGHT TO TRIAL, INCLUDING TRIAL BY JURY, IN ANY ACTION, PROCEEDING
OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THE PLAN OR THIS AGREEMENT.


 


Section 5.10                                Notices


 


All
notices, requests, consents and other communications hereunder to any party
hereto shall be deemed to be sufficient if contained in a written instrument
and shall be deemed to have been duly given when delivered in person, by
telecopy, by nationally-recognized overnight courier, or by first class
registered or certified mail, postage prepaid, addressed to such party at the
address set forth below or such other address as may hereafter be designated in
writing by the addressee to the addressor:


 


(i)                                     if to the Company, to:


 


Rexnord
Holdings, Inc.

4701 Greenfield Avenue

Milwaukee, WI 53214

Attention:  Patty Whaley


 


with
copies to:


 


Rexnord
Holdings, Inc.


c/o
Apollo Management, L.P.


10250
Constellation Blvd, Suite 2900


Los
Angeles, CA 90067


 

















 


Fax:  (310) 843-1933


Attention:  Larry Berg


 


and


 


Rexnord
Holdings, Inc.

c/o Apollo Management, L.P.

9 West 57th Street, 43rd Floor

New York, NY  10019

Fax:  (212) 515-3288

Attention:   Steven Martinez


 


and


 


O’Melveny &
Myers LLP

Times Square Tower

7 Times Square

New York, NY  10036

Fax:  (212) 326-2061

Attention:  John M. Scott, Esq.


 


(ii)                                  if to the Optionee, Industrial or Cypress,
to:


 


Cypress
Group, LLC




 


 


Attention:  George M. Sherman


 


with
a copy to:


 


King &
Spalding LLP

1700 Pennsylvania Avenue, NW

Washington, D.C.  2006

Fax:  (202) 626-3737

Attention:  Glenn C. Campbell


 


Section 5.11                                Counterparts


 


This
Agreement may be executed in several counterparts, including via facsimile
transmission, each of which shall be deemed to be an original, but all of which
together will constitute one and the same Agreement.


 


[Signature Page to Follow]


 

















 


IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto
as of the day, month and year first set forth above.


 


 


	
   

  	
  THE
  COMPANY:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Rexnord Holdings, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Print Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  THE
  OPTIONEE:

  
	
   

  	
   

  
	
   

  	
  George M. Sherman

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Signature:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Taxpayer
  Identification Number:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
							



 

















 


	
   

  	
  INDUSTRIAL:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Cypress Industrial
  Holdings, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Print Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Taxpayer
  Identification Number:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  CYPRESS:

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Cypress Group, LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Print Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address:

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Taxpayer
  Identification Number: