Document:

STOCK OPTION AGREEMENT

TABLE OF CONTENTS

									
	STOCK OPTION AGREEMENT
	TERMS AND CONDITIONS OF STOCK OPTIONS

EXECUTION COPY

NATIONAL WATERWORKS HOLDINGS, INC.

STOCK OPTION AGREEMENT

     THIS STOCK OPTION AGREEMENT (this “Option Agreement”) is entered into as of March 1, 2005 by
and between National Waterworks Holdings, Inc., a Delaware corporation (the “Company”), and Philip
Keipp (the “Optionee”) and evidences the stock option (the “Option”) granted by the Company to the
Optionee as of the Award Date and as to the number of shares of the Company’s Class A Common Stock,
$0.01 par value (the “Common Stock”), first set forth below.

	 	 	 	 	 	 	 
	Number of Shares of Common Stock:1 95,628	 	Award Date: March 1, 2005
	 
	 	 	 	 	 	 
	Exercise Price per Share:1	 	$102.00	 	Expiration Date:1,2 March 1, 2015
	 
	 	 	 	 	 	 
	 	 	Calculation Date:	 	January 1, 2005

     The Option is subject to the Terms and Conditions of Stock Options (the “Terms”) attached to
this Option Agreement (incorporated herein by this reference). The Option has been granted to the
Optionee in addition to, and not in lieu of, any other form of compensation otherwise payable or to
be paid to the Optionee. The Option is intended as a nonqualified stock option and shall not be
deemed to be an incentive stock option within the meaning of Section 422 of the Code. The parties
agree to the terms of the Option set forth herein, and the Optionee acknowledges receipt of a copy
of the Terms.

	 	 	 	 	 
	“OPTIONEE”	 	NATIONAL WATERWORKS HOLDINGS, INC.
	 	 	a Delaware corporation
	/s/ Philip Keipp
	 	 	 	 
	

	 	 	 	 
	Signature
	 	 	 	 
	

	 	By:
	 	/s/ Harry K. Hornish, Jr.
	

	 	 	 	 
	Philip Keipp
	 	 	 	 
	

	 	 	 	 
	Print Name

	 	Its:
	 	President and Chief Executive Officer

CONSENT OF SPOUSE

     In consideration of the Company’s execution of this Option Agreement, the undersigned spouse
of the Optionee agrees to be bound by all of the terms and provisions hereof.

	 	 	 
	/s/ Carrie L. Keipp

	 	March 1, 2005
	 

	 	 
	Signature of Spouse

	 	Date

	1	 	Subject to adjustment under Section 5.1 of the Terms.
	 
	2	 	Subject to early termination under Section 5.2 of the Terms.

 

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TERMS AND CONDITIONS OF STOCK OPTIONS

1. Vesting. The Option shall vest and become exercisable in accordance with this Section .

     1.1 Time-Based Vesting. Fifty Percent (50%) of the aggregate number of shares of
Common Stock subject to the Option (“Time-Based Vesting Option Shares”) shall vest as described in
the schedule below (each such date, a “Vesting Date”) as to that number of Time-Based Vesting
Option Shares set forth opposite such Vesting Date:

	 	 	 	 	 	 
	 
	 	 	 	 	No. of Time-Based Vesting Option	 
	 	Vesting Date	 	 	Shares	 
	 	On the first anniversary of the Calculation Date

	 	 	12.5% of the
Time-Based Vesting
Option Shares	 
	 	After the first anniversary of the Calculation
Date through the fourth anniversary of the
Calculation Date

	 	 	An additional 1.0417%
of the Time-Based
Vesting Option Shares
on the first day of
each calendar month
after the first
anniversary of the
Grant Date until 100%
of the Time-Based
Vesting Option Shares
are vested	 
	 

     1.2 Performance-Based Vesting — EBITDA. In addition to time-based vesting pursuant
to Section 1.1, six and one-quarter percent (6.25%) of the aggregate number of shares of Common
Stock subject to the Option (“EBITDA Option Shares”) shall vest on each December 31st, commencing
on December 31, 2005 and ending on December 31, 2008 provided that the Company generates EBITDA for
such calendar year in an amount equal to the Minimum EBITDA set forth below. “EBITDA” shall mean
the Company’s earnings before reduction for interest, income tax, depreciation and amortization for
any period calculated in the same manner as the monthly reporting package presented to the Board.
Notwithstanding the foregoing, in the event that the Company exceeds the Minimum EBITDA in any
successor calendar year ending on or prior to December 31, 2008, the amount of such excess may be
applied to any prior year in which the Company’s EBITDA was less than the Minimum EBITDA for such
year and, to the extent that adding such excess results in the Company’s EBITDA for such period to
exceed the Minimum EBITDA for such year, the EBITDA Option Shares subject to vesting on the last
date of such year shall be deemed vested. Notwithstanding the foregoing, in the event that the
Company exceeds the Minimum EBITDA in any calendar year ending on or prior to December 31, 2007, up
to $5,000,000 of such excess may be applied to the Company’s EBITDA for the calendar year
immediately following such year only if the Company’s EBITDA for such immediately following year is
less than the Minimum EBITDA for such year and, to the extent that adding up to $5,000,000 of such
excess results in the Company’s EBITDA for such immediately following year to exceed the Minimum
EBITDA for such year, the EBITDA Option Shares subject to vesting on the last date of such year
shall be deemed vested.

 

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	 	Calendar Year	 	 	Minimum EBITDA	 
	 	2005

	 	 	$	130,100,000	 	 
	 	2006

	 	 	$	136,600,000	 	 
	 	2007

	 	 	$	143,400,000	 	 
	 	2008

	 	 	$	150,600,000	 	 
	 

The Minimum EBITDA targets set forth above shall be appropriately adjusted by the Board of
Directors of the Company (the “Board”) for acquisitions made by the Company (whether by purchase of
assets, merger or otherwise) and such adjustments shall take into account the pro forma annual
EBITDA of any acquired business. For purposes of clarity, EBITDA calculations shall not be reduced
by the amounts paid by the Company under that certain Management Agreement by and among the
Company, J.P. Morgan Partners, LLC and THL Managers V, LLC dated November 22, 2002.

     1.3 Performance-Based Vesting — Net Working Capital Percentage. In addition to
time-based vesting pursuant to Section 1.1 and EBITDA performance-based vesting pursuant to Section
1.2, six and one-quarter percent (6.25%) of the aggregate number of shares of Common Stock subject
to the Option(“Net Working Capital Option Shares”) shall vest on each December 31st, commencing on
December 31, 2005 and ending on December 31, 2008 provided that the Company achieves a Net Working
Capital Ratio (as defined below) for such calendar year not to exceed the Maximum Net Working
Capital Ratio set forth below.

	 	 	 	 	 	 	 	 
	 
	 	Calendar Year	 	 	Maximum Net Working Capital Percentage	 
	 	2005

	 	 	 	13.3	%	 
	 	2006

	 	 	 	13.2	%	 
	 	2007

	 	 	 	13.1	%	 
	 	2008

	 	 	 	13.0	%	 
	 

The Maximum Net Working Capital Ratio shall be subject to appropriate adjustment by the Board in
the event that the Company acquires any business(es) with an aggregate purchase price in excess of
$10,000,000 (including any earnout components, etc.).

"Net Working Capital Ratio” shall equal the simple average of the Monthly Net Working Capital
Ratios (as defined below) during such calendar year. The “Monthly Net Working Capital Ratios”
shall equal a fraction, the numerator of which is the Net Working Capital (as defined below)
calculated on the last day of such calendar month, and the denominator of which is the product of
twelve (12) and the Net Sales (calculated in accordance with past practice ) generated by the
Company during such calendar month. “Net Working Capital” shall mean the excess of (i) the sum of
the Company’s accounts receivables and inventory over (ii) the Company’s accounts payable, each as
calculated in accordance with past practice.

     1.4 Accelerated Vesting. Notwithstanding the vesting terms set forth in Sections 1.2
and 1.3 above, 100% of the EBITDA Option Shares and 100% of the Net Working Capital Option Shares
shall automatically and immediately vest upon the first to occur of the following:

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	 	(a)  	the consummation of a Company Sale in which either (i) the price per
share of the Company’s common shares or (ii) the amount distributed per share of
the Company’s common shares, in either case, exceeds (x) one and one half times
the Exercise Price if such Company Sale closes on or before the two year
anniversary of the Calculation Date, (y) two times the Exercise Price if such
Company Sale closes after the two year anniversary of the Calculation Date but on
or before the four year anniversary of the Calculation Date, or (z) two and one
half times the Exercise Price if such Company Sale closes after the four year
anniversary of the Calculation Date; or
	 
	 	(b)  	following an IPO, the average closing price of the Company’s common
stock (as quoted on the Composite Tape of the principle national securities
exchange or furnished by the NASD, as applicable) for a consecutive 180 trading
day-period exceeds two and one half times the Exercise Price.

     In the event that the vesting of the EBITDA Option Shares and Net Working Capital Option
Shares accelerates as result of clause (a), the EBITDA Option Shares and Net Working Capital Option
Shares shall be deemed to vest immediately prior to the consummation of the Company Sale. “Company
Sale” means the sale of the Company or National Waterworks, Inc. (“NWI”) to one or more independent
third parties, pursuant to which such party or parties acquire (1) capital stock of the Company
possessing the voting power to elect a majority in voting power of the Board or the Board of
Directors of NWI (whether by merger, consolidation or issuance, sale, or transfer of the Company’s
capital stock) or (2) all or substantially all of the Company’s assets determined on a consolidated
basis. “IPO” means a public offering of the Company’s common stock in connection with, or
following, which the Company’s common stock will be registered under the U.S. Securities Exchange
Act of 1934, as amended, and will be listed or quoted on a recognized national securities exchange
or in the NASDAQ National Market Quotation System.

     In the event that the Optionee ceases to be employed by the Company or any of its subsidiaries
for any reason, then (i) all Time-Based Vesting Option Shares shall cease vesting effective as of
the Severance Date (as defined in Section 5.3) and (ii) in the event that the Company achieves
Minimum EBITDA and/or achieves a Net Working Capital Ratio not to exceed the Maximum Net Working
Capital Ratio, as the case may be, with respect to the year in which such termination occurs, the
EBITDA Option Shares or Net Working Capital Option Shares, as the case may be, for such year
multiplied by a fraction, the numerator of which shall equal the number of whole months during such
year that the Optionee remained employed with the Company and the denominator of which is 12, shall
be deemed vested as of the end of such year. Notwithstanding the foregoing or the vesting terms
set forth in Sections 1.1, 1.2 and 1.3 above, upon the Optionee’s termination without Cause within
twelve (12) months after the consummation of a Company Sale, all Time-Based Vesting Option Shares
subject to vesting pursuant to Section 1.1 shall automatically and immediately vest.

     Notwithstanding the vesting terms set forth in Sections 1.2 and 1.3 above, if the Optionee
remains employed by the Company or any of its subsidiaries from the Calculation Date through the
eighth anniversary of the Calculation Date, 100% of the EBITDA Option Shares and 100% of the Net
Working Capital Option Shares shall automatically and immediately vest on the eighth anniversary of
the Calculation Date.

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2. Limits on Exercise.

     As set forth in the Option Agreement, the Option may be exercised only to the extent the
Option is then vested and exercisable.

	 	•  	Cumulative Exercisability. To the extent that the Option is vested and
exercisable, the Optionee has the right to exercise the Option (to the extent not
previously exercised), and such right shall continue, until the expiration or earlier
termination of the Option.
	 
	 	•  	No Fractional Shares. Fractional share interests shall be disregarded, but
may be cumulated.
	 
	 	•  	Minimum Exercise. No fewer than 100 shares of Common Stock may be purchased
at any one time, unless the number purchased is the total number at the time
exercisable under the Option

3. No Employment or Service Commitment.

     The vesting schedule requires continued service through each applicable vesting date as a
condition to the vesting of the applicable installment of the Option and the rights and benefits
under this Option Agreement. Partial service, even if substantial, during any vesting period will
not entitle the Optionee to any proportionate vesting or avoid or mitigate a termination of rights
and benefits upon or following a termination of employment or services as provided in Section 5
below.

     Nothing contained in this Option Agreement constitutes an employment or service commitment by
the Company, confers upon the Optionee any right to remain in the employ or service of the Company,
interferes in any way with the right of the Company at any time to terminate such employment or
service, or affects the right of the Company to increase or decrease the Optionee’s other
compensation; subject in each case to any independent right of the Optionee under a separate
employment or service contract other than this Option Agreement.

4. Exercise of Option.

     4.1 Method of Exercise. The Option shall be exercisable by the delivery to the Secretary of
the Company of a written notice stating the number of shares of Common Stock to be purchased
pursuant to the Option and accompanied by:

	 	•  	delivery of an executed Exercise Agreement in substantially the form attached hereto
as Exhibit A or such other form as from time to time may be required by the Company
(the “Exercise Agreement”);
	 
	 	•  	payment in full for the Exercise Price of the shares to be purchased in one of the
forms set forth under Section 4.2;
	 
	 	•  	satisfaction of the tax withholding provisions of Section 4.3; and
	 
	 	•  	any written statements or agreements required pursuant to Section 8.

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     4.2 Payment of Exercise Price. The Exercise Price of the shares to be purchased will be paid
in full at the time of each purchase in one or a combination of the following methods:

	 	•  	in cash or by electronic funds transfer;
	 
	 	•  	by certified or cashier’s check payable to the order of the Company;
	 
	 	•  	by notice and third party payment in such manner as may be authorized by the
Company;
	 
	 	•  	subject to the proviso below and the approval of the Company’s Board at the time, by
the delivery of shares of Common Stock already owned by the Optionee, provided that any
shares of Common Stock delivered that were initially acquired from the Company upon
exercise of a stock option must have been owned by the Optionee at least six (6) months
as of the date of delivery.

Shares of Common Stock used to satisfy the Exercise Price will be valued at their fair market value
on the date of exercise. “Fair Market Value” on any date means:

	 	•  	if the stock is listed or admitted to trade on a national securities exchange, the
closing price of the stock on the Composite Tape, as published in the Western Edition
of The Wall Street Journal, of the principal national securities exchange on which the
stock is so listed or admitted to trade, on such date, or, if there is no trading of
the stock on such date, then the closing price of the stock as quoted on such Composite
Tape on the next preceding date on which there was trading in such shares;
	 
	 	•  	if the stock is not listed or admitted to trade on a national securities exchange,
the last/closing price for the stock on such date, as furnished by the National
Association of Securities Dealers, Inc. (“NASD”) through the NASDAQ National Market
Reporting System or a similar organization if the NASD is no longer reporting such
information;
	 
	 	•  	if the stock is not listed or admitted to trade on a national securities exchange
and is not reported on the National Market Reporting System, the mean between the bid
and asked price for the stock on such date, as furnished by the NASD or a similar
organization; or
	 
	 	•  	if the stock is not listed or admitted to trade on a national securities exchange,
is not reported on the National Market Reporting System and if bid and asked prices for
the stock are not furnished by the NASD or a similar organization, the value as
established by the Company in good faith at such time for such purpose.

     4.3 Tax Withholding. Upon any exercise, vesting, or payment of the Option, the Company shall
have the right at its option to:

	 	•  	require the Optionee (or his personal representative or his beneficiary, in the case
of the Optionee’s disability or death, as the case may be) to pay or provide for
payment of the amount of any taxes which the Company may be required to withhold with
respect to the Option event or payment; or

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	 	•  	reduce the number of shares of Common Stock to be delivered by (or otherwise
reacquire) the appropriate number of shares of Common Stock, valued at their then Fair
Market Value, to satisfy such withholding obligation.

In no event will the value of any shares withheld exceed the minimum amount of required withholding
under applicable law.

5. Adjustments; Early Termination.

     5.1 Adjustments. Upon or in contemplation of a Company Sale or an IPO, the Board may, but
shall not be obligated to, in such manner, to such extent (if any) and at such time as it deems
appropriate and equitable in the circumstances:

	 	•  	proportionately adjust any or all of (a) the number of shares of Common Stock or the
number and type of other securities that thereafter may be made the subject of the
Option, and (b) the Exercise Price of the Option, or
	 
	 	•  	make provision for a cash payment or for the substitution or exchange of the Option
or the cash, securities or property deliverable to the Optionee based upon the
distribution or consideration payable to holders of the Common Stock upon or in respect
of such event.

     In connection with either a Company Sale or an IPO, the Company may, but shall not be
obligated to, take such action prior to such event to the extent that the Company deems the action
necessary to permit the Optionee to realize the benefits intended to be conveyed with respect to
the underlying shares in the same manner as is or will be available to stockholders generally.
Subject to the Expiration Date of the Option or any earlier termination of the Option pursuant to
Section 5.3, to the extent practicable, the Company may, but shall not be obligated to, take such
actions as are necessary to cause this Option Agreement to survive the consummation of an IPO.

     5.2 Possible Early Termination of Option. To the extent the Option is vested and not
exercised in connection with or prior to (a) a dissolution of the Company, (b) an event described
in Section 5.1 that the Company does not survive, or (c) the consummation of a Company Sale, the
Option shall terminate, subject to any provision that has been made by the Company through a plan
of reorganization or otherwise for the substitution, assumption, exchange or other settlement of
the Option.

     5.3 Termination of Option Upon a Termination of the Optionee’s Services. Subject to earlier
termination on the Expiration Date of the Option or pursuant to Section 5.2, if the Optionee’s
services to the Company terminate for any reason:

	 	•  	the Optionee will have until the date that is 30 days from the date his or her
services to the Company terminate (the “Severance Date”) to exercise the Option (or
portion thereof) to the extent that it was vested on the Severance Date;
	 
	 	•  	the Option, to the extent not vested on the Severance Date, shall terminate on the
Severance Date; and

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	 	•  	the Option, to the extent exercisable for the 30-day period following the Severance
Date and not exercised during such period, shall terminate at the close of business on
the last day of the 30-day period.

     If the termination of the Optionee’s services to the Company is a result of the Optionee’s
death or permanent and total disability, as determined by the Company in its discretion, then the
30-day period reference in the preceding paragraph shall be extended to 180 days from the Severance
Date, subject to earlier termination of the Option on the Expiration Date of the Option or as
contemplated by Section 4.2. If the termination of the Optionee’s services to the Company is a
result of a termination by the Company for Cause, then the Option will terminate on the Severance
Date, whether or not the Option is then vested.

     "Cause” shall mean (i) the failure by the Optionee to perform such duties as are reasonably
requested by the Board which is not cured within thirty (30) days of receipt by the Optionee of
written notice detailing the same from the Board, (ii) the Optionee’s willful disregard of his
duties or failure to act, where such action would be in the ordinary course of the Optionee’s
duties, (iii) the failure by the Optionee to observe all written material Company policies and
written material policies of all Affiliates of the Company generally applicable to executives of
the Company and/or its Affiliates of which the Optionee has notice, (iv) gross negligence or
willful misconduct by the Optionee in the performance of his duties, (v) the commission by the
Optionee of any act of fraud, theft or financial dishonesty with respect to the Company or any of
its Affiliates, or any felony or criminal act involving moral turpitude, (vi) the material breach
by the Optionee of (a) this Option Agreement or (b) the Stockholders’ Agreement dated as of
November 22, 2002 among the Company and the other parties thereto, as amended (the “Stockholders’
Agreement”) or (vii) chronic absenteeism. “Affiliate” means any parent corporation that owns,
directly or indirectly, a majority of the voting interests in the Company (a “parent”), any entity
a majority of the voting interests in which are owned, directly or indirectly, by the Company, and
any entity a majority of the voting interests in which are owned, directly or indirectly, by any
parent of the Company.

     The Board shall be the sole judge of whether the Optionee continues to render services to the
Company, unless a service contract other than an option agreement otherwise provides. If in these
circumstances the Company notifies the Optionee in writing that a termination of services of the
Optionee for purposes of this Option Agreement has occurred, then (unless a service contract
otherwise expressly provides), the Optionee’s termination of services for purposes of this Option
Agreement shall be the date which is 10 days after the Company’s mailing of the notice.

6. Non-Transferability and Other Restrictions.

     The Option and any other rights of the Optionee under this Option Agreement are
nontransferable and exercisable only by the Optionee, except as set forth below.

     The exercise and transfer restrictions set forth above will not apply to:

	 	•  	transfers to the Company;
	 
	 	•  	the designation of a beneficiary to receive benefits if the Optionee dies or, if the
Optionee has died, transfers to or exercises by the Optionee’s beneficiary, or, in the

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	 	   	absence of a validly designated beneficiary, transfers by will or the laws of descent
and distribution;
	 
	 	•  	if the Optionee has suffered a disability, permitted transfers or exercises on
behalf of the Optionee by the Optionee’s duly authorized legal representative.

7. Securities Law Compliance.

     The Optionee acknowledges that the Option and the shares of Common Stock are not being
registered under the Securities Act of 1933, as amended (the “Securities Act”), based, in part, in
reliance upon an exemption from registration under the Securities Act, and a comparable exemption
from qualification under applicable securities laws, as each may be amended from time to time. The
Optionee by executing this Option Agreement hereby makes the following representations to the
Company and acknowledges that the Company’s reliance on federal and state securities law exemptions
from registration and qualification is predicated, in substantial part, upon the accuracy of these
representations:

	 	•  	The Optionee is acquiring the Option and if and when he/she exercises the Option will
acquire the shares of Common Stock solely for the Optionee’s own account, for investment
purposes only, and not with a view to or an intent to sell, or to offer for resale in
connection with any unregistered distribution, all or any portion of the shares within the
meaning of the Securities Act and/or other applicable state securities laws.
	 
	 	•  	In evaluating the merits and risks of an investment in the Common Stock, the Optionee
has and will rely upon the advice of his/her own legal counsel, tax advisors, and/or
investment advisors.
	 
	 	•  	The Optionee is knowledgeable about the Company and has a preexisting personal or
business relationship with the Company. As a result of such relationship, he/she is
familiar with, among other characteristics, its business and financial circumstances and
has access on a regular basis to or may request the Company’s condensed consolidated
balance sheet and condensed consolidated income statement setting forth information
material to the Company’s financial condition, operations and prospects.
	 
	 	•  	The Optionee is aware that the Option may be of no practical value, that any value it
may have depends on its vesting and exercisability as well as an increase in the fair
market value of the underlying shares of Common Stock to an amount in excess of the
Exercise Price, and that any investment in common shares of a closely held Company such as
the Company is non-marketable, non-transferable and could require capital to be invested
for an indefinite period of time, possibly without return, and at substantial risk of loss.
	 
	 	•  	The Optionee understands that any shares of Common Stock acquired on exercise of the
Option will be characterized as “restricted securities” under the federal securities laws,
and that under such laws and applicable regulations such securities may be resold without
registration under the Securities Act only in certain limited circumstances, including in
accordance with the conditions of Rule 144 promulgated under the Securities Act, as
presently in effect, with which the Optionee is familiar.

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	 	•  	The Optionee has read and understands the restrictions and limitations set forth in the
Option Agreement, the Exercise Agreement and the Stockholders’ Agreement, which are imposed
on the Option and any shares of Common Stock which may be acquired upon exercise of the
Option.
	 
	 	•  	At no time was an oral representation made to the Optionee relating to the Option or the
purchase of shares of Common Stock and the Optionee was not presented with or solicited by
any promotional meeting or material relating to the Option or the Common Stock.
	 
	 	•  	The Optionee (1) has an individual net worth, or joint net worth with his or her spouse,
of more than $1,000,000, (2) has had individual net income in excess of $200,000 in each of
the two most recent years (or joint net income with his or her spouse in excess of $300,000
in each of those years) and reasonably expects to reach that same income level in the
current year or (3) is an “Executive Officer” of the Company as defined in Rule 501(f) of
the Securities Act.

8. Legal Compliance.

     The grant of the Option and the offer, issuance and delivery of shares of Common Stock in
respect of the Option are subject to compliance with all applicable federal and state laws, rules
and regulations (including but not limited to state and federal securities laws, and federal margin
requirements) and to such approvals by any listing, regulatory or governmental authority as may, in
the opinion of counsel for the Company, be necessary or advisable in connection therewith. The
person acquiring any securities under the Option will, if requested by the Company, provide such
assurances and representations to the Company as the Company may deem necessary or desirable to
assure compliance with all applicable legal and accounting requirements. No person holding shares
acquired upon exercise of the Option shall sell, pledge or otherwise transfer the shares except in
accordance with the express terms of this Option Agreement, the Exercise Agreement and the
Stockholders’ Agreement. Any attempted transfer in violation of this Section 8 shall be void and
of no effect. Without in any way limiting the provisions set forth above, no holder shall make any
disposition of all or any portion of shares of Common Stock acquired under the Option, except in
compliance with all applicable federal and state securities laws and unless and until:

	 	•  	there is then in effect a registration statement under the Securities Act of 1933, as
amended, covering such proposed disposition and such disposition is made in accordance with
such registration statement; or

	 	•  	such disposition is made in accordance with Rule 144 under the Securities Act of 1933,
as amended; or

	 	•  	such holder notifies the Company of the proposed disposition and furnishes the Company
with a statement of the circumstances surrounding the proposed disposition, and, if
requested by the Company, furnishes to the Company an opinion of counsel acceptable to the
Company’s counsel, that such disposition will not require registration under the Securities
Act of 1933, as amended, and will be in compliance with all applicable state securities
laws.

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Notwithstanding anything else herein to the contrary, the Company has no obligation to register the
Common Stock or file any registration statement under either federal or state securities laws, nor
does the Company make any representation concerning the likelihood of a public offering of the
Common Stock or any other securities of the Company.

     All certificates evidencing shares of Common Stock issued or delivered under the Option shall
bear the legend set forth in the Exercise Agreement and/or any other appropriate or required
legends under applicable laws.

9. Notices.

     Any notice to be given under the terms of this Option Agreement or the Exercise Agreement
shall be in writing and addressed to the Company at its principal office to the attention of the
Secretary, and to the Optionee at the Optionee’s last address on the payroll records of the
Company, or at such other address as either party may hereafter designate in writing to the other.
Any such notice shall be given only when received, but if the Optionee is no longer an employee of
the Company, shall be deemed to have been duly given when enclosed in a properly sealed envelope
addressed as aforesaid, registered or certified, and deposited (postage and registry or
certification fee prepaid) in a post office or branch post office regularly maintained by the
United States Government.

10. Entire Agreement.

     This Option Agreement (together with the form of Exercise Agreement attached hereto) and the
Stockholders’ Agreement constitute the entire agreement and supersedes all prior understandings and
agreements, written or oral, of the parties hereto with respect to the subject matter hereof. This
Option Agreement and the Exercise Agreement may be amended only be a written instrument signed by
both the Optionee and the Company. The Company may, however, unilaterally waive any provision
hereof or of the Exercise Agreement in writing to the extent such waiver does not adversely affect
the interests of the Optionee hereunder, but no such waiver shall operate as or be construed to be
a subsequent waiver of the same provision or a waiver of any other provision hereof. In the event
of a conflict or inconsistency between the terms and conditions of this Option Agreement (together
with the form of Exercise Agreement attached hereto) and the Stockholders’ Agreement, the terms and
conditions of the Stockholders’ Agreement shall govern.

11. Charter Documents; Privileges of Stock Ownership.

     The Articles of Incorporation and By-Laws of the Company and the Stockholders’ Agreement, as
each of them may lawfully be amended from time to time, may provide for additional restrictions and
limitations with respect to the Common Stock (including additional restrictions and limitations on
the transfer of Common Stock) or priorities, rights and preferences as to securities and interests
prior in rights to the Common Stock. To the extent that these restrictions and limitations are
greater than those set forth in this Option Agreement, such restrictions and limitations shall
apply to any shares of Common Stock acquired pursuant to the exercise of the Option and are
incorporated herein by this reference.

     Except as otherwise expressly authorized by the Company, a holder of the Option will not be
entitled to any privilege of stock ownership as to any shares of Common Stock not

10

Table of Contents

actually delivered to and held of record by the holder. No adjustment will be made for
dividends or other rights as a stockholder for which a record date is prior to such date of
delivery.

12. Governing Law; Captions; Corporate Powers; Other Benefits.

     This Option Agreement shall be governed by and construed and enforced in accordance with the
laws of the State of New York without regard to conflict of law principles thereunder. Captions
and headings are given to the sections and subsections of this Option Agreement solely as a
convenience to facilitate reference. Such headings will not be deemed in any way material or
relevant to the construction or interpretation of this Option Agreement or any provision hereof.

     The existence of the Option and this Option Agreement shall not affect or restrict in any way
the right or power of the Board or the stockholders of the Company to make or authorize any
adjustment, recapitalization, reorganization or other change in the Company’s capital structure or
its business, any merger or consolidation of the Company, any issue of bonds, debentures, preferred
or prior preference stocks ahead of or affecting the Company’s capital stock or the rights thereof,
the dissolution or liquidation of the Company or any sale or transfer of all or any part of its
assets or business, or any other corporate act or proceeding.

     Payments and other benefits received by the Optionee made pursuant to this Option Agreement
shall not be deemed a part of the Optionee’s regular, recurring compensation for purposes of the
termination, indemnity or severance pay law of any country or state and shall not be included in,
nor have any effect on, the determination of benefits under any other employee benefit plan or
similar arrangement provided by the Company or one of its affiliates unless expressly so provided
by such other plan or arrangements.

(Remainder of Page Intentionally Left Blank)

11

Table of Contents

EXHIBIT A

NATIONAL WATERWORKS HOLDINGS, INC.

STOCK OPTION EXERCISE AGREEMENT

     The undersigned (the “Purchaser”) hereby irrevocably elects to exercise his/her right,
evidenced by that certain Stock Option Agreement dated as of ___, 2005 (the “Option
Agreement”), as follows:

	 	•  	the Purchaser hereby irrevocably elects to purchase ___shares of
Class A Common Stock, $0.01 (the “Shares”), of National Waterworks Holdings, Inc., a
Delaware corporation (the “Company”), and
	 
	 	•  	such purchase shall be at the price of $  per share, for an
aggregate amount of $___(subject to applicable withholding taxes
pursuant to Section 4.3 of the Option Agreement).

     Capitalized terms are defined in the Option Agreement if not defined herein.

     1. Delivery of Share Certificate. The Purchaser requests that a certificate representing the
Shares be registered to Purchaser and delivered to:                                                                                 
                                                                                                                                            .

     2. Investment Representations. The Purchaser hereby affirms as made as of the date hereof the
representations in Section 7 of the Option Agreement and such representations are incorporated
herein by this reference. The Purchaser represents that he/she has no need for liquidity in this
investment, has the ability to bear the economic risk of this investment, and can afford a complete
loss of the purchase price for the Shares.

     The Purchaser also understands and acknowledges that the certificates representing the Shares
will be legended as follows:

     “THE SALE, TRANSFER, ASSIGNMENT, PLEDGE, OR ENCUMBRANCE OF THE SECURITIES REPRESENTED BY THIS
CERTIFICATE AND THE RIGHTS OF THE HOLDER OF SUCH SECURITIES IN RESPECT OF THE ELECTION OF DIRECTORS
ARE SUBJECT TO A STOCKHOLDERS’ AGREEMENT DATED NOVEMBER 22, 2002, AS AMENDED, AMONG NATIONAL
WATERWORKS HOLDINGS, INC. AND CERTAIN HOLDERS OF ITS OUTSTANDING CAPITAL STOCK. COPIES OF SUCH
AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS
CERTIFICATE TO THE SECRETARY OF NATIONAL WATERWORKS HOLDINGS, INC.”

     “THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES OR BLUE SKY
LAWS. THESE SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SAID ACT OR LAWS.”

 

Table of Contents

     3. Limitation on Disposition. Any transfer of the Shares must comply with (a) all applicable
laws set forth in Section 8 of the Option Agreement and (b) the Stockholders’ Agreement The
Shares, if a transfer thereof is otherwise permitted, shall remain subject to the lock-up
restriction set forth below, the share legend requirements of Section 2 hereof and any restrictions
under the Stockholders’ Agreement.

     4. Lock-Up Agreement. Neither the Purchaser nor any permitted transferee of the Purchaser
may, directly or indirectly, offer, sell or transfer or dispose of any of the Shares or any
interest therein (or agree to do any thereof) (collectively, a “Transfer”) during the period
commencing as of 14 days prior to and ending one hundred eighty (180) days, or such lesser period
of time as the relevant underwriters may permit, after the effective date of a registration
statement covering any public offering of the Company’s securities of which the Purchaser has
notice. The Purchaser shall agree and consent to the entry of stop transfer instructions with the
Company’s transfer agent against the Transfer of the Company’s securities beneficially owned by the
Purchaser and shall conform the limitations hereunder by agreement with and for the benefit of the
relevant underwriters by a lock-up agreement or other agreement in customary form. Notwithstanding
anything else herein to the contrary, this section shall not be construed so as to prohibit the
Purchaser from participating in a registration or a public offering of the Common Stock with
respect to any shares which he or she may hold at that time, provided, however, that such
participation shall be at the sole discretion of the Board. To the extent that the restrictions
and limitations set forth in the Stockholders’ Agreement or any other agreement to which the
Optionee is a party concerning the information set forth in this Section 4 are greater than those
set forth in this Option Agreement, such restrictions and limitations shall apply to any shares of
Common Stock acquired pursuant to the exercise of the Option and are incorporated herein by this
reference.

     5. Option Agreement and Stockholders’ Agreement. The Purchaser acknowledges that all of
his/her rights are subject to, and the Purchaser agrees to be bound by, all of the terms and
conditions of the Option Agreement and the Stockholders’ Agreement, which are incorporated herein
by this reference. If a conflict or inconsistency between the terms and conditions of this
Exercise Agreement and of the Option Agreement and/or the Stockholders’ Agreement shall arise, the
terms and conditions of the Stockholders’ Agreement and/or the Option Agreement shall govern. The
Purchaser acknowledges reading and understanding these documents and having an opportunity to ask
any questions that he/she may have had about them.

	 	 	 	 	 
	“PURCHASER”	 	ACCEPTED BY:
	 	 	NATIONAL WATERWORKS HOLDINGS, INC
	

	 	By:	 	 
	 

	 	 	 	 
	Signature
	 	 	 	 
	 
	 	 	 	 
	

	 	Its:	 	 
	 

	 	 	 	 
	Print Name
	 	 	 	 
	 
	 	 	 	 
	 

	 	 	 	 
	Date
	 	(To be completed by the Company after
the price (including applicable
withholding taxes), value (if
applicable) and receipt of funds is
verified.)EXHIBIT 10.39

 

Exhibit 10.39

Execution Copy

Agreement

          Agreement, dated as of February 28, 2005 (this “Agreement”), among PHIBRO ANIMAL
HEALTH CORPORATION (formerly known as Philipp Brothers Chemicals, Inc.), a New York corporation
(the “Corporation”), PAHC HOLDINGS CORPORATION, a Delaware corporation
(“Holdings”), PALLADIUM CAPITAL MANAGEMENT, L.L.C., a Delaware limited liability company
(“Palladium”), PALLADIUM EQUITY PARTNERS II, L.P. a Delaware limited partnership (“PEP
II”), PALLADIUM EQUITY PARTNERS II-A, L.P., a Delaware limited partnership (“PEP
II-A”), and PALLADIUM EQUITY INVESTORS II, L.P., a Delaware limited partnership (“PEI”
and together with PEP II and PEP II-A, the “Investor Stockholders”) (each a “Party”
and, together, the “Parties”), and for the limited purposes set forth in Section 3 hereof,
Jack C. Bendheim and Marvin S. Sussman (each a “Principal Stockholder” and,
together, the “Principal Stockholders”).

          WHEREAS, the parties desire to reflect certain agreements regarding, among other things, (i)
the Stockholders Agreement, dated as of November 30, 2000, by and among the Corporation, the
Investor Stockholders and the stockholders signatory thereto (as amended, modified and/or waived,
the “Stockholders Agreement”), (ii) certain provisions of the Certificate of Incorporation
of the Company, as amended (the “Charter”) and (iii) that certain Purchase and Sale
Agreement dated as of December 26, 2003 among the Corporation, the Investor Stockholders, The
Prince Manufacturing Company and others (the “Prince Agreement”);

          NOW, THEREFORE, in consideration of the premises, mutual promises and mutual benefits to be
derived and the covenants contained herein, and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the parties agree as follows:

     1. Each of the Investor Stockholders hereby agrees that, notwithstanding anything to the
contrary contained in the Stockholders Agreement or in the Charter:

          (a) The Corporation shall be entitled to call for redemption, and to redeem, on February 28,
2005 (the “Redemption Date”), all of the issued and outstanding Series C Redeemable
Participating Preferred Shares, par value $100.00 per share, of the Corporation (the “Series C
Preferred Shares”), for an aggregate redemption price for all such shares of $26.4 million
(which corresponds to a per share redemption price of $2,492.68) (the “Redemption Price”),
to be allocated among the Investor Stockholders, pro rata in accordance with their respective
shares of Series C Preferred

1

 

Shares, as provided in Schedule I hereto. The Redemption Price shall be in consideration of
the Redemption and the other matters set forth in this Agreement.

          (b) The Investor Stockholders shall tender to the Corporation at its principal executive
office all of the issued and outstanding shares of Series C Preferred Shares, and all certificates
therefor, duly endorsed, or accompanied by duly executed stock powers, in blank, on the Redemption
Date (the “Redemption”), in consideration of the wire transfer of the Redemption Price,
consistent with Schedule I hereto, to the account specified on said Schedule I.

          (c) The Redemption Price, the Redemption and the Capital Stock Transaction Adjustment herein
agreed to shall be in lieu of and in full satisfaction of the following:

          (i) any and all amounts provided for in the Charter and/or any calculations as to
redemption price and/or any such amounts required pursuant thereto, and all other
provisions of the Charter providing for any redemption of Series C Preferred Shares or
otherwise applicable in respect of the Redemption and/or any of the Holding Company
Transactions (as defined herein); provided that the provisions of Section 3(c) of Article
FOURTH of the Certificate of Amendment of Certificate of Incorporation of the Corporation,
dated November 30, 2000, as amended (the “Amendment”), as amended by Section 2
below, shall apply to any Capital Stock Transaction (as defined below);

          (ii) any and all amounts now or hereafter due or payable in respect of the Backstop
Indemnification Amount referred to in section 4.3 of the Prince Agreement; and

          (iii) any and all liabilities and obligations in respect of the foregoing.

          (d) Each of the Investor Stockholders hereby waives any deficiencies in or with respect to any
notice of redemption given by the Corporation, or to be given by the Corporation with respect to
the Redemption, and without limiting the foregoing hereby waives, to the maximum extent permitted
by applicable law, any requirement that notice of the Redemption be given within any required
period prior thereto. Without limiting the foregoing, the Investor Stockholders hereby acknowledge
the Notice of Redemption by the Corporation dated February 17, 2005, and agree that no other or
further notice of the Redemption need be given by the Corporation, and such notice, together with
this Agreement, shall be in lieu of the notice and notice period specified in Section 3(a)(iv) of
Article FOURTH of the Amendment, and the record date of the determination of the Series C Preferred
Shares to be redeemed may be the date of such notice.

2

 

     2. If the aforesaid Redemption pursuant to this Agreement shall occur, then Section 3(a)(iii)
of Article FOURTH of the Amendment shall be deleted in its entirety. In addition, Section 3(c)(i)
thereof shall be amended to read as follows:

     “(c) Capital Stock Transaction Adjustment. If (i) the Corporation, a member of the
Bendheim Group (as defined below), or PAHC Holdings Corporation (“Holdings”) shall effect a
Capital Stock Transaction (as defined below) and (ii) in the case of a Capital Stock Transaction
referred to in clause (1) of the definition thereof, as a result of such transaction or a
combination of such transactions, members of the Bendheim Group in the aggregate shall receive cash
or capital stock or other securities of a class that is registered under the Securities Act of
1933, as amended, with respect to or in exchange for capital stock of the Corporation or Holdings
owned by members of the Bendheim Group, on a cumulative basis from and after the Redemption Date,
in excess of $24 million, then within three (3) business days after the later of the consummation
of the Capital Stock Transaction or receipt of the $24 million, the Corporation shall pay the
Capital Stock Transaction Amount (as defined below) to the Investor Stockholders.

“Bendheim Group” means, collectively, (i) Jack C. Bendheim, (ii) each of his
spouse, siblings, ancestors, descendants (whether by blood, marriage or adoption, and
including stepchildren), and the spouses, siblings, ancestors and descendents thereof
(whether by blood, marriage or adoption, and including stepchildren), and the
beneficiaries, estates and legal representatives of any of the foregoing, including,
without limitation and for the avoidance of doubt, Marvin S. Sussman, (iii) all trusts of
which any of the foregoing, individually or in the aggregate, are the majority in interest
beneficiaries or grantors, (iv) all corporations, partnerships, limited liability
companies, investment funds or other persons or entities principally owned by and/or
organized or operating for the benefit of any of the foregoing, and (v) all affiliates of
Jack C. Bendheim and Marvin S. Sussman.

“Capital Stock Transaction” means (1) any of the following: (A) any
recapitalization of the Corporation or Holdings of any of its or their capital stock, (B)
any consolidation, merger or combination of the Corporation or Holdings with or into
another corporation or entity, (C) any sale or conveyance of assets of the Corporation or
Holdings to any person or entity, (D) any sale or transfer for value by any member or
members of the Bendheim Group of shares of capital stock of Holdings, other than to or
among members of the Bendheim Group, or (E) any redemption, acquisition or other purchase
by Holdings or any subsidiary thereof of, or any dividend or distribution on, any shares of
Holdings beneficially owned by any member or members of the Bendheim Group, other than
pursuant to the Phibro-Tech Agreement (as such agreement is defined below); and (2) any
initial public offering of any capital stock of Holdings pursuant to an effective
registration statement under the Securities Act of 1933,

3

 

as amended, at a pre-money valuation for the capital stock owned by the Bendheim Group of
more than $24 million. For purposes hereof, (i) a bona fide pledge, encumbrance or
hypothecation of capital stock as security for indebtedness of the Corporation, Holdings or
a subsidiary thereof or in connection with a guaranty thereof, or any related foreclosure
or assignment in lieu of foreclosure, shall not be a sale or transfer within the meaning or
intent of clause (1)(D) above, and (ii) if members of the Bendheim Group shall contribute
their shares of Holdings to and form a holding company for Holdings, references in this
Section (c) to “Holdings” shall be deemed to include such new holding company.

“Capital Stock Transaction Amount” means $4 million, less all amounts (if any)
previously paid in respect of the Capital Stock Transaction Amount.

“Phibro-Tech Agreement” means the Stockholders Agreement, dated February 21, 1995,
between Phibro-Tech, Inc., I. David Paley, Nathan Bistricer and James O. Herlands, as
amended and in effect on the date hereof, and as thereafter amended, except for any
amendment subsequent to the date hereof which causes the terms of such agreement to be less
favorable in any respect to the Corporation or to any Investor Stockholder.”

     3. The Charter shall be amended to reflect the provisions of Sections 1 and 2 hereof, pursuant
to a Certificate of Amendment substantially in the form of Exhibit 3 hereto (the “New
Amendment”). The Corporation, Holdings, the Principal Stockholders and the Investor
Stockholders hereby irrevocably consent to and approve the New Amendment, and irrevocably agree to
vote in favor of the New Amendment at any meeting of shareholders or holders of any class or series
of shares of the Corporation at which such vote is to be taken. Anything to the contrary contained
in this Agreement notwithstanding, the Redemption shall be conditioned upon the filing with the
Secretary of State of the State of New York of a Certificate of Amendment to the Charter consistent
with the New Amendment.

     4. The Investor Stockholders hereby consent to the Holding Company Transactions to the extent
any aspect thereof requires any consent pursuant to the Stockholders Agreement or the Charter. The
“Holding Company Transactions” means (a) the contribution by each holder of capital stock
of the Corporation, other than the Investor Stockholders, of the capital stock held by them,
respectively, to Holdings in exchange for substantially the same number and class of shares of
capital stock of Holdings, (b) the issuance of $29 million of 15% senior secured notes due 2010 of
Holdings, with interest payable at the election of Holdings in cash or pay-in-kind notes, and the
pledge of and grant of security interests in substantially all of the assets of Holdings (which as
of the date hereof consist solely of capital stock of the Corporation and proceeds of such notes)
to secure the indebtedness and obligations of Holdings in respect of such notes and/or the
indenture and related instruments and agreements

4

 

pursuant to which such notes were issued and such pledge and grant of security interests are to be
made, and (c) the use of the proceeds from the sale of such notes, upon release from escrow, by
Holdings, directly or indirectly, to redeem the Series C Preferred Shares of the Corporation either
by (i) making a capital contribution to the Corporation to contemporaneously finance the redemption
of the Series C Preferred Shares, or (ii) purchase a new series of preferred stock of the
Corporation, referred to as Series D Preferred Shares, that may be issued by the Corporation to
finance the redemption of the Series C Preferred Shares.

     5. The Corporation reserves the right to abandon or terminate the Redemption (even after any
call or notice thereof) and any of the Holding Company Transactions at any time and for any reason
without liability to Palladium or the Investor Stockholders.

     6. Each Investor Stockholder hereby waives any and all provisions of the Stockholders
Agreement, the Charter and/or any other document that requires any Investor Director, Investor
Stockholder or holder of Series C Preferred Shares to approve the Redemption or the Holding Company
Transactions, or which conditions consummation of the Redemption or the Holding Company
Transactions on any Investor Director, Investor Stockholder or holder of Series C Preferred Shares
approval thereof.

     7. The parties hereto agree that, upon the Redemption, the Stockholders Agreement shall
terminate, the right of the Investor Stockholders to representation on the Board of Directors shall
terminate, and the former holders of Series C Preferred Shares will have no voting or consent
rights, except that the Corporation, without the prior consent or affirmative vote of the holders
of at least two-thirds of the holders of Series C Preferred Shares on the date of Redemption, given
in person or by proxy, either in writing or at a meeting called therefore, shall not amend, alter
or change the rights, preferences, privileges or powers of the Series C Preferred Shares contained
in the Certificate of Incorporation in any manner that adversely affects any shares thereof or
present or future holders thereof.

     8. (a) Palladium and each of the Investor Stockholders hereby fully releases and forever
discharges the Corporation and all of its subsidiary companies and their present and former
officers, directors, employees, shareholders, agents, attorneys, insurance carriers, and other
representatives, and all of their respective successors, heirs, assigns, predecessors, departments,
affiliated companies, associated companies and ventures, from and on account of any and all claims,
demands, or actions of any nature whatsoever, now known or anticipated or unknown or unanticipated,
which it ever had, now has, might have, or might claim to have, for or arising out of or relating
to the Released Claims (as defined below).

5

 

     Notwithstanding anything to the contrary herein, the Released Claims do not include, and
specifically exclude, any and all claims, demands, or actions of any nature whatsoever, now known
or anticipated or unknown or unanticipated, which Palladium and each of the Investor Stockholders
ever had, now has, might have, or might claim to have, for or arising out of or relating to
indemnification and any other obligations expressly set forth in the documents set forth on
Schedule 8(a) hereto, in each case including all schedules and exhibits thereto; provided
that any claim or cause of action under the Prince Agreement (as defined in said Schedule 8(a)) or
any certificate or other document delivered pursuant thereto with respect to a breach of Section
5.30 of the Prince Agreement or indemnification in respect thereof, including without limitation,
any Fraud Claim (as defined therein), shall be Released Claims.

     For purposes hereof, the “Released Claims” shall mean any and all claims, causes of
action, liabilities and obligations related to or arising out of the Series C Preferred Shares or
any provisions of the Charter relating thereto, or the Holding Company Transactions, and shall
include, but shall not be limited to, any claim or cause of action, or any liabilities or
obligations, arising out of the redemption or repurchase of any shares of Class C Preferred Stock,
under any federal or state securities or other law, regulation or ordinance, or any public policy,
whether by contract, by reason of any tort, or under common law, and whether for fraud (including
but not limited to fraud in the inducement), failure to disclose or misleading or inadequate
disclosure of information, or otherwise, and any and all claims for costs, fees or other expenses,
including attorneys’ fees, incurred in connection with any of the foregoing; it being understood
that the rights and obligations under this Agreement (including, as contemplated by Section 2
hereof, rights and obligations under the Charter with respect to any Capital Stock Transaction) do
not constitute Released Claims.

          (b) Palladium and each of the Investor Stockholders represents and warrants that it has not
assigned, transferred or otherwise encumbered or purported to assign, encumber or transfer to any
person or entity any of the Released Claims or any part or portion of any of the Released Claims.
Palladium and each of the Investor Stockholders agrees that the release set forth in this Section 8
shall not be deemed or construed at any time to be an admission by the Corporation or any other
person or entity of any improper or unlawful conduct or breach of contract.

          (c) The Corporation represents that its Quarterly Report on Form 10-Q for the period ended
December 31, 2004 and Post-Effective Amendment No. 1 to Registration Statement on Form S-4 filed
February 25, 2005, its most recent public securities filings with the Securities and Exchange
Commission, present fairly in all material respects all material facts about the Corporation, its
business and financial condition.

          (d) Until the Capital Stock Transaction Amount shall be paid in full, the Corporation shall
deliver to the Investor Stockholders by first class mail, postage

6

 

prepaid, a notice certifying the amount of cash and capital stock and other securities of a class
that is registered under the Securities Act of 1933, as amended, received by members of the
Bendheim Group (as defined in Section 2 above) in the aggregate with respect to or in exchange for
capital stock of the Corporation or Holdings owned by members of the Bendheim Group, as a result of
a Capital Stock Transaction or a combination of Capital Stock Transactions effected by the
Corporation, a member of the Bendheim Group or Holdings. Each such notice shall be sent within
ninety (90) days after the end of each fiscal year of the Corporation and, if a Capital Stock
Transaction Amount shall be payable, within three (3) business days after the Capital Stock
Transaction or dividend or distribution giving rise to the payment obligation with respect to such
Capital Stock Transaction Amount. Each such notice shall state the following: (A) the amount of
proceeds of Capital Stock Transactions and dividends or distributions in each case counting towards
the $24 million threshold in the Capital Stock Transaction Adjustment (if any) during such period
and the cumulative amount received by members of the Bendheim Group in the aggregate counting
towards such $24 million threshold from the date hereof, and (B) if applicable, the Capital Stock
Transaction Amount payable and the method of calculation therefor.

     9. Neither this Agreement nor any provision hereof may be waived, amended or modified except
pursuant to an agreement or agreements in writing entered into by the Corporation and the Investor
Stockholders.

     10. It is the desire and intent of the parties that the provisions of this Agreement be
enforced to the fullest extent permissible under the laws and public policies applied in each
jurisdiction in which enforcement is sought. Accordingly, in the event that any provision of this
Agreement would be held in any jurisdiction to be invalid, prohibited or unenforceable for any
reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the
remaining provisions of this Agreement or affecting the validity or enforceability of such
provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be
more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, it
shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions
of this Agreement or affecting the validity or enforceability of such provision in any other
jurisdiction.

     11. Except as expressly provided herein, this Agreement shall not confer any rights or
remedies upon any person or entity other than the parties hereto and their respective successors
and permitted assigns. This Agreement may not be assigned by any party hereto without the prior
written consent of the other parties. Any attempted assignment without such consent shall be void.
This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and permitted assigns, as applicable.

7

 

     12. All notices or other communications pursuant to this Agreement shall be in writing and
shall be deemed to be sufficient if delivered personally, telecopied, sent by
nationally-recognized, overnight courier or mailed by registered or certified mail (return receipt
requested), postage prepaid, to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):

          (a) if to Palladium or any Investor Stockholder, to:

	 	 	 
	

	 	c/o Palladium Capital Management, L.L.C.
	

	 	1270 Avenue of the Americas, Suite 2200
	

	 	New York, New York 10020
	

	 	Telephone:  (212) 218-5150
	

	 	Facsimile: (212) 218-5155
	

	 	Attention: Marcos A. Rodriguez
	 
	 	 
	

	 	          with a copy to:
	 
	 	 
	

	 	O’Melveny & Myers LLP
	

	 	Times Square Tower
	

	 	7 Times Square
	

	 	New York, New York 10036
	

	 	Telephone: (212) 408-2469
	

	 	Telecopier: (212) 326-2061
	

	 	Attention: Gregory Gilbert, Esq.
	 
	 	 
	

	 	(i) if to the Corporation, to:
	 
	 	 
	

	 	Phibro Animal Health Corporation
	

	 	65 Challenger Road, Third Floor
	

	 	Ridgefield Park, New Jersey 07660
	

	 	Telephone: (201) 329-7300
	

	 	Facsimile: (201) 329-7399
	

	 	Attention: Mr. Jack Bendheim
	 
	 	 
	

	 	          with a copy to:
	 
	 	 
	

	 	Golenbock Eiseman Assor Bell & Peskoe LLP
	

	 	437 Madison Avenue
	

	 	New York, New York 10022
	

	 	Telephone: (212) 907-7300
	

	 	Telecopier: (212) 754-0330
	

	 	Attention: Lawrence M. Bell, Esq.

8

 

All such notices and other communications shall be deemed to have been given and received (A) in
the case of personal delivery, on the date of such delivery, (B) in the case of delivery by
telecopy, on the date of such delivery, (C) in the case of delivery by nationally-recognized,
overnight courier, on the business day following dispatch, and (D) in the case of mailing, on the
third business day following such mailing.

Each party may change its address from time to time for purposes of notice or other communication
hereunder by giving notice to the other parties hereto in accordance with this section. Each
notice or other communication shall for all purposes of this Agreement be treated as being
effective or having been given upon receipt unless otherwise indicated herein.

     13. This Agreement may be executed in two or more counterparts, all of which shall be
considered one and the same agreement and shall become effective when one or more counterparts have
been signed by each of the parties and delivered (by facsimile or otherwise) to the other party, it
being understood that all parties need not sign the same counterpart. Any counterpart or other
signature hereupon delivered by facsimile shall be deemed for all purposes as constituting good and
valid execution and delivery of this Agreement by such party.

     14. THE PROVISIONS OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS ENTERED INTO AND FULLY PERFORMED WITHIN THE
STATE OF NEW YORK BY RESIDENTS OF THE STATE OF NEW YORK.

     15. Each of the parties hereto hereby irrevocably and unconditionally submits, for itself or
himself and its or his property, to the exclusive jurisdiction of any New York state court or
federal court of the United States of America sitting in New York County, New York, and any
appellate court from any thereof, in any action or proceeding arising out of or relating to this
Agreement or the transactions contemplated hereunder or for recognition or enforcement of any
judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all
claims in respect of any such action or proceeding may be heard and determined in any such New York
state court or, to the extent permitted by law, in any such federal court. Each of the parties
hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be
enforced in other jurisdictions by suit on the judgment or in any other manner provided by law.

     Each of the parties hereto irrevocably and unconditionally waives, to the fullest extent it or
he may legally and effectively do so, any objection that it or he may now or hereafter have to the
laying of venue of any suit, action or proceeding arising out of or relating to the Agreement or
the transactions contemplated hereby in any New York state or federal court sitting in New York
County, New York. Each of the parties hereto

9

 

irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to
the maintenance of such action or proceeding in any such court.

     The parties hereto further agree that the mailing by certified or registered mail, return
receipt requested, of any process required by any such court shall constitute valid and lawful
service of process against them, without the necessity for service by any other means provided by
law.

     16. Where specific language is used to clarify by example a general statement contained
herein, such specific language shall not be deemed to modify, limit or restrict in any manner the
construction of the general statement to which it relates. The language used in this Agreement
shall be deemed to be the language chosen by the parties to express their mutual intent, and no
rule of strict construction shall be applied against any party.

     17. The parties shall each have and retain all other rights and remedies existing in their
favor at law or equity, including, without limitation, any actions for specific performance and/or
injunctive or other equitable relief to enforce or prevent any violations of the provisions of this
Agreement.

     18. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY DOCUMENTS
RELATED HERETO.

     19. Each party hereto shall bear its own costs and expenses in connection with this Agreement
and the transactions contemplated hereby.

     20. The Schedules identified in this Agreement are incorporated herein by reference and made a
part hereof.

     21. Whenever the context may require, any pronouns used herein shall include the corresponding
masculine, feminine or neuter forms, and the singular form of nouns and pronouns shall include the
plural and vice-versa.

     22. This Agreement shall terminate and be of no further force immediately if the Corporation
does not stand ready and able to effect the Redemption prior to March 1, 2005. Notwithstanding the
foregoing and for the avoidance of doubt, in the event that this Agreement is terminated in
accordance with the preceding sentence, the consents in this Agreement and waivers set forth in
this Agreement shall survive with respect to all actions theretofore taken by the Corporation in
reliance thereon, and the release set forth in Section 8 hereof will become null and void as though
this Agreement had never been executed or delivered and such release not given.

[Remainder of this Page Intentionally Left Blank]

10

 

     IN WITNESS WHEREOF, each of the parties hereto has duly executed this Agreement as of the date
first written above.

	 	 	 	 	 
	 	 	PHIBRO ANIMAL HEALTH CORPORATION
	 
	 	 	 	 
	

	 	By:
	 	/s/ Richard G. Johnson
	

	 	 	 	 
	

	 	 	 	Name: Richard G. Johnson
	

	 	 	 	Title: CFO

	 	 	 	 	 
	 	 	PALLADIUM EQUITY PARTNERS II, L.P.
By: Palladium Equity Partners II, L.L.C.
	 
	 	 	 	 
	

	 	By:
	 	/s/ Peter Joseph
	

	 	 	 	 
	

	 	 	 	Name: Peter Joseph
	

	 	 	 	Title: Member

	 	 	 	 	 
	 	 	PALLADIUM EQUITY PARTNERS II-A, L.P.
By: Palladium Equity Partners II, L.L.C.
	 
	 	 	 	 
	

	 	By:
	 	/s/ Peter Joseph
	

	 	 	 	 
	

	 	 	 	Name: Peter Joseph
	

	 	 	 	Title: Member

	 	 	 	 	 
	 	 	PALLADIUM EQUITY INVESTORS II, L.P.
By: Palladium Equity Partners II, L.L.C.
	 
	 	 	 	 
	

	 	By:
	 	/s/ Peter Joseph
	

	 	 	 	 
	

	 	 	 	Name: Peter Joseph
	

	 	 	 	Title: Member

	 	 	 	 	 
	 	 	PALLADIUM CAPITAL MANAGEMENT,
L.L.C.
	 
	 	 	 	 
	

	 	By:
	 	/s/ Peter Joseph
	

	 	 	 	 
	

	 	 	 	Name: Peter Joseph
	

	 	 	 	Title: Managing Director

	 	 	 
	

	 	AS TO SECTION 3 OF THE AGREEMENT ONLY:
	 
	 	 
	

	 	/s/ Jack C. Bendheim
	

	 	 
	

	 	Jack C. Bendheim:

	 	 	 
	

	 	AS TO SECTION 3 OF THE AGREEMENT ONLY:
	 
	 	 
	

	 	/s/ Marvin S. Sussman
	

	 	 
	

	 	Marvin S. Sussman

11

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