**EXHIBIT10 (a)**

 

Certain portions have

been omitted and

filed separately pursuant

to Rule 24b-2 of the 

Securities Exchange

Act of 1934.

 

**MLS, LLC**

**3300Wells Fargo Center**

**90South Seventh Street**

**Minneapolis,MN   55402**

**(612)672-8351**

** **

**PERSONAL AND CONFIDENTIAL**

 

May 15, 2001

[**TERMINATED BY LETTER DATED AUGUST 13, 2001**]

**[RESCINDEDWITH NO FURTHER OBLIGATIONS BY LETTER APRIL 1, 2002]**

Mr. D. Dean Spatz

Chairman & Chief Executive Officer

Osmonics, Inc.

5951 Clearwater Drive

Minnetonka, Minnesota 55343-8995

 

Dear Mr. Spatz:

 

This letter is to confirm the arrangements under which MLS, LLC (“MLS”)is exclusively engaged by Osmonics, Inc. (the “Company”) as advisor to assistthe Company with the possible sale of all or a portion of the equity or theassets of the Company.

 

**Services.** MLS will advise the Company in regard to the possible sale of more than50% of the equity of the Company or substantially all of the assets of theCompany and will provide the following services:

 

Review and analyze thebusiness operations of the Company and the industry and market which it serves.

 

Assist in the preparationof a written report describing the Company, its history, the nature of itsbusiness operations, its management structure, including such financialinformation as may be appropriate to reflect past performance and projectedgrowth and future earnings capacity, and such other information as is deemednecessary or appropriate.  The Companyand its personnel will provide initial and working drafts of the data anddescriptions necessary for the report.

 

Counsel the Company as tostrategy and tactics for negotiating with prospective purchasers andparticipate in such negotiations.

 

Assist the Company innegotiating and preparing an agreement in principle, if appropriate, and adefinitive sales agreement.

 

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Assist the Company in anyproceedings relating to board or regulatory approvals required for the SaleTransaction.

 

Coordinate the efforts oflegal counsel, auditors, real estate advisors and other professionals retainedby the Company toward an efficient closing of the Sale Transaction.

 

Render such otherfinancial, advisory and investment banking services as may from time to time beagreed.

 

MLS will not and is not required to provide any appraisal, valuationreports or fairness opinions in connection with the services to be providedherein and the Company understands that such appraisals, valuation reports orfairness opinions will more than likely be required.

 

It is the intent of the parties that Snow individually performs thebulk of the services called for hereunder. MLS agrees to utilize the services of Michael L. Snow (“Snow”) absenthis death or incapacity. Notwithstanding Snow’s death or incapacity, the Company shall continueto use MLS.

 

The terms of any sale will be subject to the approval of the Company,in its sole discretion, and MLS is not authorized to make any agreement orcommitment for or on behalf of the Company. The Company shall not have any obligation to accept any offer regardlessof the amount or terms.

 

**Fee**. The fees for our engagement will depend on theoutcome of this sale assignment.  If thepurchase of 50% or more of the outstanding common stock or the assets (based onthe book value thereof) of the Company is accomplished in one or a series oftransactions, including, but not limited to, private or open market purchasesof stock, a tender offer, a merger or a sale by the Company of its stock orassets, we will receive from the Company a transaction fee of 1% of theaggregate consideration paid in such transactions.  Except as provided herein, a transaction fee will be paid to usin cash upon consummation of each transaction.

 

The aggregate consideration for purposes of calculating a transaction feeshall be:

 

(i)                     in the case of the sale, exchange or purchase of theCompany’s equity securities, the total consideration paid for such securities(including amounts paid to holders of options, warrants and convertiblesecurities), plus the principal amount of all indebtedness for borrowed moneyas set forth on the most recent consolidated balance sheet of the Company priorto the consummation of such sale, exchange or purchase, and

 

(ii)                  in the case of a sale or disposition by the Company ofassets, the total consideration paid for such assets, plus the net value of anycurrent assets not sold by the Company and the principal amount of allindebtedness for borrowed money assumed by the purchaser.

 

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Amounts paid into escrow and contingent payments in connection with anytransaction will be included as part of the aggregate consideration.  Fees on amounts paid into escrow will bepayable upon the establishment of such escrow. If the consideration in connection with any transaction may be increasedby payments related to future events, the portion of our fee relating to suchcontingent payments will be calculated and paid if and when such contingentpayments are made.  Aggregateconsideration also shall include the aggregate amount of any (i) dividends orother distributions declared by the Company with respect to its stock after thedate hereof, other than normal recurring cash dividends in amounts notmaterially greater than currently paid, and (ii) amounts paid by the Company torepurchase any securities of the Company outstanding on the date hereof.

 

In connection with a sale of 50% or more of the outstanding commonstock of the Company, the transaction fee will be payable and calculated underthe definition of aggregate consideration set forth above as though 100% of theoutstanding common stock on a fully diluted basis had been acquired for thesame per share amount paid in the transaction in which 50% or more of theCompany’s outstanding common stock is acquired by a purchaser or group ofaffiliated purchasers.

 

If any portion of the aggregate consideration is paid in the form ofsecurities, the value of such securities, for purposes of calculating thetransaction fee, will be determined by the average of the last sales prices forsuch securities on the five trading days ending five trading days prior to thedate of the consummation of the transaction. If such securities do not have an existing public trading market, thevalue of the securities shall be the mutually agreed upon fair market value onthe day prior to the consummation of the transaction.

 

In the event that the Company rejects a bona fide offer or offers at aprice meeting or exceeding [$                ][omitted pursuant to Rule 24b-2] per share of Company stock on a fullydiluted basis (“Minimum Consideration”), MLS will be deemed to have dischargedall of the services required hereunder and the Company shall pay a fee of OnePercent (1%) of such offer, provided, however, that (i) the bona fide offermust be incorporated in a written agreement setting forth all material terms oftransaction, including, with reasonable specification, the representations,warranties and covenants required of the Company, and (ii) the consideration,except for liabilities assumed by the buyer, must be all cash or marketablesecurities, or, if not all cash or marketable securities, the present value ofall such consideration (calculated with a mutually agreed to discount rate),must equal an amount substantially equivalent to the Minimum Consideration; and(iii) the proposed purchaser must have a demonstrated credit capacity tofinance and consummate the transaction without material variance, unless due toa default by the Company.

 

In order to coordinate most effectively our efforts together to effecta transaction satisfactory to you during the term of our engagement, theCompany and its management will promptly inform MLS of any inquiry they mayreceive concerning the availability of all or a portion of the stock or assetsof the Company for purchase.  Also,during the period of our engagement, neither the 

 

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Company nor its management will initiate any discussions looking towardthe sale of all or a portion of the stock or assets of the Company withoutfirst consulting with MLS.

 

**General.**

 

In addition to any fees payable as provided above, you also agree toreimburse MLS periodically, upon request, and upon consummation of thetransaction or transactions contemplated hereby or upon termination of ourservices pursuant to this agreement, for our reasonable out-of-pocket expensesincluding the fees and disbursements of our attorneys, plus any sales, use orsimilar taxes (including additions to such taxes, if any) arising in connectionwith any matter referred to in this letter.

 

Please note that any written or oral opinion or advice provided by MLSin connection with our engagement is exclusively for the information of theBoard of Directors and senior management of the Company, and may not bedisclosed to any third party or circulated or referred to publicly without ourprior written consent.

 

The Company agrees to the provisions with respect to our indemnity andother matters set forth in Annex A which is incorporated by reference into thisletter.

 

You or MLS may terminate our services at any time, with or withoutcause, effective upon receipt of written notice to that effect.  However, we will be entitled to theapplicable transaction fee set forth above in the event that at any time priorto the later of (i) the expiration of one year after such termination or (ii)July 31, 2002 an agreement is entered into with respect to a sale of all or aportion of the stock or assets of the Company which is eventually consummated.  The Company’s obligations set forth aboveshall survive the death or incapacity of any of the principals of MLS or Snow.

 

The Company recognizes that in providing our services pursuant to thisletter, we will rely upon and assume the accuracy and completeness of all ofthe financial and other information discussed with or reviewed by MLS for suchpurposes, and we do not assume responsibility for the accuracy or completenessthereof.  We will have no obligation toconduct any independent evaluation or appraisal of the assets or liabilities ofthe Company or any other party or to advise or opine on any related solvencyissues or fairness of the transaction to the Company’s shareholders.  The Company acknowledges that it will likelyneed to hire a firm to provide such evaluation, appraisal and/or opinion.  It is understood and agreed that we will actunder this letter as an independent contractor with duties solely to theCompany and nothing in this letter or the nature of our services shall bedeemed to create a fiduciary or agency relationship between us and the Companyor its stockholders.  Except as setforth in Annex A hereto, nothing in this letter is intended to confer upon anyother person (including stockholders, employees or creditors of the Company)any rights or remedies hereunder or by reason hereof.

 

We do not provide accounting, tax or legal advice.  The Company is authorized, subject toapplicable law, to disclose any and all aspects of this potential transactionthat are necessary to 

 

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support any U.S. federal income tax benefits expected to be claimedwith respect to such transaction, without our imposing any limitation of anykind.

 

Please confirm that the foregoing is in accordance with yourunderstanding by signing and returning to us the enclosed copy of this letter,which shall become a binding agreement upon our receipt.  We are delighted to accept this engagementand look forward to working with you on this assignment.

 
| Very truly yours, | Agreed to and accepted by |
|-------------------|---------------------------|
|              |                      |
|              |                      |
|              |                      |
| MLS, LLC          | OSMONICS, Inc.            |
|              |                      |
|              |                      |
|              |                      |
| By:               | /s/ Michael L. Snow       |   | By: | /s/ D. Dean Spatz |   |
|              | Michael L. Snow, Manager  |   | D. Dean Spatz, CEO |
|              |                      |   |
| Date:             | 15 May 2001               |   | Date: | 16 May 2001 |   |
|                   |                           |  |  |  |  |  |  |  |  |

 

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***Annex A***

 

*In the event that we become involvedin any capacity in any action, proceeding or investigation brought by oragainst any person, including stockholders of the Company, in connection withor as a result of either our engagement or any matter referred to in thisletter, the Company periodically will reimburse MLS for our legal and otherexpenses (including the cost of any investigation and preparation) incurred inconnection therewith.  The Company alsowill indemnify and hold MLS harmless against any and all losses, claims,damages or liabilities to any such person in connection with or as a result ofeither our engagement or any matter referred to in this letter, except to theextent that any such loss, claim, damage or liability results from our grossnegligence or bad faith in performing the services that are the subject of thisletter.  If for any reason the foregoingindemnification is unavailable to MLS or insufficient to hold MLS harmless, thenthe Company shall contribute to the amount paid or payable by MLS as a resultof such loss, claim, damage or liability in such proportion as is appropriateto reflect the relative economic interests of the Company and its stockholderson the one hand and MLS on the other hand in the matters contemplated by thisletter as well as the relative fault of the Company and MLS with respect tosuch loss, claim, damage or liability and any other relevant equitableconsiderations.  The reimbursement,indemnity and contribution obligations of the Company under this paragraphshall be in addition to any liability which the Company may otherwise have,shall extend upon the same terms and conditions to any of our affiliates andour partners, members, directors, governors, managers, officers, agents, employeesand controlling persons (if any), as the case may be and any such affiliate,and shall be binding upon and inure to the benefit of any successors, assigns,heirs and personal representatives of the Company, MLS, any such affiliate andany such person.  The Company alsoagrees that neither we nor any of such affiliates, partners, members,directors, governors, managers, officers, agents, employees or controllingpersons shall have any liability to the Company or any person asserting claimson behalf of or in right of the Company in connection with or as a result ofeither our engagement or any matter referred to in this letter except to theextent that any losses, claims, damages, liabilities or expenses incurred bythe Company result from our gross negligence or bad faith in performing theservices that are the subject of this letter. Prior to entering into any agreement or arrangement with respect to, oreffecting, any proposed sale, exchange, dividend or other distribution orliquidation of all or a significant portion of its assets in one or a series oftransactions or any significant recapitalization or reclassification of itsoutstanding securities that does not directly or indirectly provide for theassumption of the obligations of the Company set forth in this Annex A, theCompany will notify MLS in writing thereof (if not previously so notified) and,if requested by MLS, shall arrange in connection therewith alternative means ofproviding for the obligations of the Company set forth in this paragraph,including the assumption of such obligations by another party, insurance,surety bonds or the creation of an escrow, in each case in an amount and uponterms and conditions satisfactory to MLS. **Any right to trial by jury withrespect to any action or proceeding arising in connection with or as a resultof either our engagement or any matter referred to in this letter is herebywaived by the parties hereto. The provisions of this Annex A shall survive anytermination or completion of***

 

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***the engagementprovided by this letter, and this letter shall be governed by and construed inaccordance with the laws of the State of Minnesota without regard to principlesof conflicts of laws.***

 

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