-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V9QGMQmPH6wXcbcSiz9iWKSnw8qbhWYtFN1CShkf0UWhR7AZMAd2vHAeBskKdLip gagF4Z1mcgAu6CblWRX1CA== 0000950134-97-003014.txt : 19970418 0000950134-97-003014.hdr.sgml : 19970418 ACCESSION NUMBER: 0000950134-97-003014 CONFORMED SUBMISSION TYPE: SC 14D1 PUBLIC DOCUMENT COUNT: 16 FILED AS OF DATE: 19970417 SROS: NONE GROUP MEMBERS: HC ACQUISITION CORP GROUP MEMBERS: HEDSTROM CORPORATION SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: ERO INC CENTRAL INDEX KEY: 0000884319 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 363573286 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D SEC ACT: 1934 Act SEC FILE NUMBER: 005-43468 FILM NUMBER: 97582852 BUSINESS ADDRESS: STREET 1: 585 SLAWIN COURT CITY: MOUNT PROSPECT STATE: IL ZIP: 60056 BUSINESS PHONE: 8478039200 MAIL ADDRESS: STREET 1: 585 SLAWIN CT CITY: MT PROSPECT STATE: IL ZIP: 60056-2183 SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: ERO INC CENTRAL INDEX KEY: 0000884319 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 363573286 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D1 SEC ACT: 1934 Act SEC FILE NUMBER: 005-43468 FILM NUMBER: 97582853 BUSINESS ADDRESS: STREET 1: 585 SLAWIN COURT CITY: MOUNT PROSPECT STATE: IL ZIP: 60056 BUSINESS PHONE: 8478039200 MAIL ADDRESS: STREET 1: 585 SLAWIN CT CITY: MT PROSPECT STATE: IL ZIP: 60056-2183 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: HC ACQUISITION CORP CENTRAL INDEX KEY: 0001037909 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 232893431 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: SC 14D1 BUSINESS ADDRESS: STREET 1: CHERRINGTON CORPORATE CENTER STREET 2: 300 CORPORATE CENTER DR SUITE 100 CITY: CORAOPOLIS STATE: PA ZIP: 15108 MAIL ADDRESS: STREET 2: 100 CRESCENT COURT SUITE 1300 CITY: DALLAS STATE: TX ZIP: 75201 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: HC ACQUISITION CORP CENTRAL INDEX KEY: 0001037909 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 232893431 STATE OF INCORPORATION: DE FILING VALUES: FORM TYPE: SC 14D1 BUSINESS ADDRESS: STREET 1: CHERRINGTON CORPORATE CENTER STREET 2: 300 CORPORATE CENTER DR SUITE 100 CITY: CORAOPOLIS STATE: PA ZIP: 15108 MAIL ADDRESS: STREET 2: 100 CRESCENT COURT SUITE 1300 CITY: DALLAS STATE: TX ZIP: 75201 SC 14D1 1 SCHEDULE 14D1 AND SCHEDULE 13D 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------- SCHEDULE 14D-1 Tender Offer Statement Pursuant to Section 14(d)(1) of the Securities Exchange Act of 1934 and SCHEDULE 13D under the Securities Exchange Act of 1934 -------------- ERO, INC. (Name of Subject Company) -------------- HC ACQUISITION CORP. HEDSTROM CORPORATION (Bidders) -------------- Common Stock, $.01 par value (Title of Class of Securities) -------------- ------------------- 268911104 (Common Stock) (CUSIP number of Class of Securities) -------------- Alan B. Menkes Hicks, Muse, Tate & Furst Incorporated 1325 Avenue of the Americas, 25th Floor New York, New York 10019 (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of the Bidders) -------------- Copy to: Simeon Gold, Esq. Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 -------------- April 10, 1997 (Date of Event which Registration Filing Statement on Schedule 13D) CALCULATION OF FILING FEE =============================================================================== TRANSACTION VALUATION* AMOUNT OF FILING FEE - ------------------------------------------------------------------------------- $122,600,000 $24,520 =============================================================================== * Estimated for purposes of calculating the amount of the filing fee only. The amount assumes the purchase of 10,274,300 shares of common stock, par value $.01 per share (the "Shares"), at a per Share purchase price of $11.25 and the cancellation of and settlement with respect to options to purchase 1,458,000 Shares. Such number of Shares and options represents all of the Shares and options outstanding as of April 10, 1997. [ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. Amount Previously Paid: None Form or Registration No.: Not Applicable Filing Party: Not Applicable Date Filed: Not Applicable Page 1 of 8 Pages Exhibit Index is located on Page 1 2 CUSIP NO. 268911104 14D-1 PAGE 2 OF 8 PAGES - ----------------------------------------------------------------------------------------------------------- NAME OF REPORTING PERSON 1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS HC Acquisition Corp. - ----------------------------------------------------------------------------------------------------------- CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP 2 (a) [ ] (b) [ ] - ----------------------------------------------------------------------------------------------------------- SEC USE ONLY 3 - ----------------------------------------------------------------------------------------------------------- SOURCE OF FUNDS 4 BK, AF - ----------------------------------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(e) or 2(f). [ ] - ----------------------------------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION State of Delaware - ----------------------------------------------------------------------------------------------------------- AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING 7 PERSON 3,940,000* - ----------------------------------------------------------------------------------------------------------- 8 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7) EXCLUDES CERTAIN SHARES [ ] - ----------------------------------------------------------------------------------------------------------- 9 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7) 38.3% - ----------------------------------------------------------------------------------------------------------- TYPE OF REPORTING PERSON 10 CO - -----------------------------------------------------------------------------------------------------------
* On April 10, 1997, Hedstrom Corporation, a Delaware corporation ("Parent"), and HC Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent ("Purchaser"), entered into a Stockholders Agreement (the "Stockholders Agreement") with ERO, Inc., a Delaware corporation (the "Company") and Golder, Thoma, Cressey Fund III Limited Partnership (the "Selling Stockholder"), pursuant to which the Selling Stockholder agreed to validly tender and not withdraw an aggregate of 3,940,000 shares of the Company's common stock, par value $.01 per share (the "Shares") pursuant to Purchaser's offer to purchase all outstanding Shares at a purchase price per Share of $11.25, net to the seller in cash. The Stockholders Agreement is more fully described in Section 12 of the Offer to Purchase, dated April 17, 1997. 2 3 CUSIP NO. 268911104 14D-1 Page 3 of 8 Pages < - ----------------------------------------------------------------------------------------------------------- NAME OF REPORTING PERSON 1 S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSONS Hedstrom Corporation - ----------------------------------------------------------------------------------------------------------- CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP 2 (a) [ ] (b) [ ] - ----------------------------------------------------------------------------------------------------------- SEC USE ONLY 3 - ----------------------------------------------------------------------------------------------------------- SOURCE OF FUNDS 4 BK, AF, OO - ----------------------------------------------------------------------------------------------------------- 5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(e) or 2(f). [ ] - ----------------------------------------------------------------------------------------------------------- 6 CITIZENSHIP OR PLACE OF ORGANIZATION State of Delaware - ----------------------------------------------------------------------------------------------------------- AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING 7 PERSON 3,940,000* - ----------------------------------------------------------------------------------------------------------- 8 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (7) EXCLUDES CERTAIN SHARES [ ] - ----------------------------------------------------------------------------------------------------------- 9 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (7) 38.3% - ----------------------------------------------------------------------------------------------------------- TYPE OF REPORTING PERSON 10 CO - -----------------------------------------------------------------------------------------------------------
* On April 10, 1997, Hedstrom Corporation, a Delaware corporation ("Parent"), and HC Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent ("Purchaser"), entered into a Stockholders Agreement (the "Stockholders Agreement") with ERO, Inc., a Delaware corporation (the "Company") and Golder, Thoma Cressey Fund III Limited Partnership (the "Selling Stockholder"), pursuant to which the Selling Stockholder agreed to validly tender and not withdraw an aggregate of 3,940,000 shares of the Company's common stock, par value $.01 per share (the "Shares") pursuant to Purchaser's offer to purchase all outstanding Shares at a purchase price per Share of $11.25, net to the seller in cash. The Stockholders Agreement is more fully described in Section 12 of the Offer to Purchase, dated April 17, 1997. 3 4 TENDER OFFER This Tender Offer Statement on Schedule 14D-1 and Statement on Schedule 13D is filed by HC Acquisition Corp., a Delaware corporation ("Purchaser"), and Hedstrom Corporation, a Delaware corporation ("Parent"), relating to the offer by Purchaser to purchase all outstanding shares of common stock, par value $.01 per share (the "Shares"), of ERO, Inc., a Delaware corporation (the "Company"), at $11.25 per Share, net to the seller in cash, on the terms and subject to the conditions set forth in the Offer to Purchase, dated April 17, 1997 (the "Offer to Purchase"), and in the related Letter of Transmittal, copies of which are attached hereto as Exhibits (a)(1) and (a)(2), respectively (which collectively constitute the "Offer"). The item numbers and responses thereto below are in accordance with the requirements of Schedule 14D-1. ITEM 1. SECURITY AND SUBJECT COMPANY. (a) The name of the subject company, a Delaware corporation, is ERO, Inc. (the "Company"). The address of the Company's principal executive offices is 585 Slawin Court, Mount Prospect, Illinois 60056. (b) The information set forth on the cover page and under "Introduction" in the Offer to Purchase is incorporated herein by reference. (c) The information set forth in Section 6 of the Offer to Purchase is incorporated herein by reference. ITEM 2. IDENTITY AND BACKGROUND. (a)-(d), (g) This Statement is filed by Purchaser and Parent. The information set forth on the cover page of, under "Introduction" and in Section 9 of, and in Schedule I to the Offer to Purchase is incorporated herein by reference. (e)-(f) During the last five years, neither Purchaser or Parent nor, to their knowledge, any of the persons listed in Schedule I (Directors and Executive Officers) to the Offer to Purchase, (i) has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) has been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting activities subject to, federal or state securities laws or finding any violation of such laws. ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS WITH THE SUBJECT COMPANY. (a) None. (b) The information set forth under "Introduction," and in Sections 8, 11, and 12 of the Offer to Purchase is incorporated herein by reference. ITEM 4. SOURCES AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a)-(b) The information set forth under "Introduction" and in Section 10 of the Offer to Purchase is incorporated herein by reference. (c) Not applicable. 4 5 ITEM 5. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE BIDDERS. (a)-(e) The information set forth under "Introduction" and in Sections 12 and 13 of the Offer to Purchase is incorporated herein by reference. (f)-(g) The information set forth under Section 7 of the Offer to Purchase is incorporated herein by reference. ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY. (a) The information set forth under "Introduction" and in Section 12 of the Offer to Purchase is incorporated herein by reference. (b) The information set forth under "Introduction" and in Section 12 of the Offer to Purchase is incorporated herein by reference. ITEM 7. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE SUBJECT COMPANY'S SECURITIES. The information set forth under "Introduction" and in Sections 9, 10, 11, and 12 of the Offer to Purchase is incorporated herein by reference. ITEM 8. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. The information set forth under "Introduction" and in Section 16 of the Offer to Purchase is incorporated herein by reference. ITEM 9. FINANCIAL STATEMENTS OF CERTAIN BIDDERS. The information set forth in Section 9 of the Offer to Purchase is incorporated herein by reference. ITEM 10. ADDITIONAL INFORMATION. (a) The information set forth under Sections 8, 10, 11 and 12 of the Offer to Purchase is incorporated herein by reference. (b)-(e) The information set forth under Sections 10 and 15 of the Offer to Purchase is incorporated herein by reference. (f) The information set forth in the Offer to Purchase and the Letter of Transmittal, copies of which are attached hereto as Exhibits (a)(1) and (a)(2), respectively, is incorporated herein by reference. ITEM 11. MATERIAL TO BE FILED AS EXHIBITS. 99(a)(1) Offer to Purchase, dated April 17, 1997. 99(a)(2) Letter of Transmittal. 99(a)(3) Notice of Guaranteed Delivery. 5 6 99(a)(4) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. 99(a)(5) Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. 99(a)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. 99(a)(7) Form of Summary Advertisement, dated April 17, 1997. 99(a)(8) Text of Press Release, dated April 11, 1997. 99(b)(1) Equity Commitment Letter, dated April 10, 1997, from Hicks Muse Equity Fund II, L.P. to Parent. 99(b)(2) Engagement Letter, dated April 11, 1997, from Credit Suisse First Boston Corporation to Parent. 99(b)(3) Senior Discount Notes Commitment Letter, dated April 11, 1997, from Credit Suisse First Boston Corporation to Parent. 99(b)(4) Bridge Loan Commitment Letter, dated April 11, 1997, from Credit Suisse First Boston Corporation to Parent. 99(b)(5) Acquisition Credit Facilities Commitment Letter, dated April 10, 1997, from Credit Suisse First Boston Corporation to Parent. 99(c)(1) Agreement and Plan of Merger, dated April 10, 1997, among Parent, Purchaser, and the Company. 99(c)(2) Stockholders Agreement, dated April 10, 1997, among Parent, Purchaser, the Company and Golder, Thoma, Cressey Fund III Limited Partnership. 99(d) None. 99(e) Not applicable. 99(f) None. 6 7 SIGNATURES After due inquiry and to the best of my knowledge and belief, the undersigned certify that the information set forth in this statement is true, complete and correct. Dated: April 17, 1997 HC ACQUISITION CORP. By: /s/ Andrew S. Rosen --------------------------------- Title: Vice President HEDSTROM CORPORATION By: /s/ Andrew S. Rosen --------------------------------- Title: Vice President 7 8 EXHIBIT INDEX Exhibit 99(a)(1) Offer to Purchase, dated April 17, 1997. 99(a)(2) Letter of Transmittal. 99(a)(3) Notice of Guaranteed Delivery. 99(a)(4) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. 99(a)(5) Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. 99(a)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. 99(a)(7) Form of Summary Advertisement, dated April 17, 1997. 99(a)(8) Text of Press Release, dated April 11, 1997. 99(b)(1) Equity Commitment Letter, dated April 10, 1997, from Hicks Muse Equity Fund II, L.P. to Parent. 99(b)(2) Engagement Letter, dated April 11, 1997, from Credit Suisse First Boston Corporation to Parent. 99(b)(3) Senior Discount Notes Commitment Letter, dated April 11, 1997, from Credit Suisse First Boston Corporation to Parent. 99(b)(4) Bridge Loan Commitment Letter, dated April 11, 1997, from Credit Suisse First Boston Corporation to Parent. 99(b)(5) Acquisition Credit Facilities Commitment Letter, dated April 10, 1997, from Credit Suisse First Boston Corporation to Parent. 99(c)(1) Agreement and Plan of Merger, dated April 10, 1997, among Parent, Purchaser, and the Company. 99(c)(2) Stockholders Agreement, dated April 10, 1997, among Parent, Purchaser, the Company and Golder, Thoma, Cressey Fund III Limited Partnership. 99(d) None. 99(e) Not applicable. 99(f) None. EX-99.(A)(1) 2 OFFER TO PURCHASE 1 Offer to Purchase for Cash All Outstanding Shares of Common Stock of ERO, INC. at $11.25 NET PER SHARE by HC ACQUISITION CORP. a wholly owned subsidiary of HEDSTROM CORPORATION THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MONDAY, JUNE 2, 1997, UNLESS THE OFFER IS EXTENDED. ------------------ THE BOARD OF DIRECTORS OF ERO, INC. (THE "COMPANY") HAS UNANIMOUSLY (A) DETERMINED THAT EACH OF THE MERGER AGREEMENT, THE OFFER AND THE MERGER (EACH AS DEFINED HEREIN) IS FAIR TO AND IN THE BEST INTERESTS OF HOLDERS ("STOCKHOLDERS") OF THE COMPANY'S COMMON STOCK, PAR VALUE $.01 PER SHARE ("SHARES"), (B) APPROVED THE EXECUTION, DELIVERY AND PERFORMANCE OF THE MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER, SUCH APPROVAL CONSTITUTING APPROVAL THEREOF FOR PURPOSES OF SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW, AS AMENDED, AND FOR PURPOSES OF ARTICLE NINE OF THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION, AND (C) RESOLVED TO RECOMMEND ACCEPTANCE OF THE OFFER AND, IF REQUIRED, BOTH THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE APPROVAL OF THE MERGER BY THE STOCKHOLDERS. HEDSTROM CORPORATION AND HC ACQUISITION CORP. HAVE ENTERED INTO A STOCKHOLDERS AGREEMENT WITH GOLDER, THOMA, CRESSEY FUND III LIMITED PARTNERSHIP (THE "SELLING STOCKHOLDER"), PURSUANT TO WHICH, AMONG OTHER THINGS, THE SELLING STOCKHOLDER HAS AGREED TO VALIDLY TENDER (AND NOT TO WITHDRAW) PURSUANT TO AND IN ACCORDANCE WITH THE OFFER, APPROXIMATELY 33.6% OF THE OUTSTANDING SHARES (CALCULATED ON A FULLY DILUTED BASIS) AT THE OFFER PRICE. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (A) THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER A NUMBER OF SHARES WHICH CONSTITUTES A MAJORITY OF THE SHARES OUTSTANDING ON A FULLY DILUTED BASIS ON THE DATE OF PURCHASE AND (B) THE DEBT FINANCING SOURCES OF HEDSTROM CORPORATION AND ITS PARENT COMPANY, HEDSTROM HOLDINGS, INC., HAVING PROVIDED THE APPLICABLE DEBT FINANCING PURSUANT TO THE FINANCING COMMITMENTS (AS DEFINED HEREIN). THE OFFER IS ALSO SUBJECT TO CERTAIN OTHER CONDITIONS CONTAINED IN THIS OFFER TO PURCHASE. SEE INTRODUCTION AND SECTIONS 1 AND 14 HEREOF. IMPORTANT Any Stockholder desiring to tender all or a portion of such Stockholder's Shares should either (1) complete and sign the Letter of Transmittal provided herewith (or a manually signed facsimile thereof) in accordance with the instructions in the Letter of Transmittal, mail or deliver it and any other required documents to the Depositary identified in the Letter of Transmittal and either deliver the certificates for such Shares to the Depositary along with the Letter of Transmittal or tender such Shares pursuant to the procedures for book-entry transfer set forth in Section 3 hereof or (2) request such Stockholder's broker, dealer, commercial bank, trust company or other nominee to effect the transaction for such Stockholder. Any Stockholder whose Shares are registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such broker, dealer, commercial bank, trust company or other nominee if such Stockholder desires to tender such Shares. Any Stockholder who desires to tender Shares and whose certificates representing such Shares are not immediately available or who cannot comply with the procedure for book-entry transfer on a timely basis should tender such Shares by following the procedures for guaranteed delivery set forth in Section 3. Questions and requests for assistance may be directed to the Information Agent or the Dealer Manager at their respective addresses and telephone numbers set forth on the back cover of this Offer to Purchase. Requests for additional copies of this Offer to Purchase, the Letter of Transmittal, the Notice of Guaranteed Delivery and other related materials may be directed to the Information Agent or to brokers, dealers, commercial banks and trust companies. The Dealer Manager for the Offer is: [CREDIT SUISSE LOGO] April 17, 1997 2 TABLE OF CONTENTS
PAGE ---- INTRODUCTION................................................ 3 1. Terms of the Offer................................. 4 2. Acceptance for Payment and Payment for Shares...... 6 3. Procedure for Tendering Shares..................... 7 4. Withdrawal Rights.................................. 9 5. Certain Federal Income Tax Consequences of the Offer and the Merger.................................. 10 6. Price Range of the Shares; Dividends on the Shares................................................ 11 7. Effect of the Offer on the Market for the Shares, Nasdaq Stock Market Listing, Exchange Act Registration and Margin Securities................. 11 8. Certain Information Concerning the Company......... 12 9. Certain Information Concerning Purchaser, Parent and Holdings.......................................... 15 10. Source and Amount of Funds......................... 16 11. Background of the Offer............................ 21 12. Purpose of the Offer and the Merger; Plans for the Company; Merger Agreement; Other Agreements; Other Matters............................................ 22 13. Dividends and Distributions........................ 32 14. Certain Conditions of the Offer.................... 32 15. Certain Legal Matters.............................. 34 16. Fees and Expenses.................................. 36 17. Miscellaneous...................................... 36 Schedule I -- Directors and Executive Officers of Holdings, Parent and Purchaser...................................... I-1
2 3 To the Holders of Common Stock of ERO, Inc. INTRODUCTION HC Acquisition Corp., a Delaware corporation ("Purchaser") and a direct wholly owned subsidiary of Hedstrom Corporation, a Delaware corporation ("Parent"), hereby offers to purchase all outstanding shares of the common stock, par value $.01 per share ("Shares"), of ERO, Inc., a Delaware corporation (the "Company"), at a purchase price of $11.25 per Share (the "Offer Price"), net to the seller in cash, upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which, together with any amendments or supplements hereto or thereto, collectively constitute the "Offer"). The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of April 10, 1997, among Parent, Purchaser and the Company (the "Merger Agreement"). The Merger Agreement provides, among other things, for the commencement of the Offer by Purchaser and further provides that, following the consummation of the Offer and subject to the satisfaction or waiver of certain conditions, Purchaser will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a direct wholly owned subsidiary of Parent (the "Surviving Corporation"). In the Merger, each issued and outstanding Share (excluding Shares directly or indirectly owned by the Company or by Parent, Purchaser or any other subsidiary of Parent and Shares owned by stockholders of the Company who shall have not voted in favor of the Merger or consented thereto in writing and who shall have demanded properly in writing appraisal for such shares under Delaware law ("Dissenting Shares")) will be converted at the effective time of the Merger (the "Effective Time") into the right to receive the per Share amount actually paid in the Offer, in cash, without any interest thereon (the "Merger Consideration"), less any required withholding taxes. The Board of Directors of the Company (the "Board") has unanimously (i) determined that each of the Merger Agreement, the Offer and the Merger is fair to and in the best interests of the holders of the Shares (the "Stockholders"), (ii) approved the execution, delivery and performance of the Merger Agreement and the consummation of the transactions contemplated thereby, including the Offer and the Merger, such approval constituting approval thereof for purposes of Section 203 of the Delaware General Corporation Law, as amended (the "DGCL"), and for purposes of Article Nine of the Company's Amended and Restated Certificate of Incorporation and (iii) resolved to recommend acceptance of the Offer and, if required, both the approval and adoption of the Merger Agreement and the approval of the Merger by the Stockholders. Dean Witter Reynolds, Inc. ("Dean Witter"), the Company's financial advisor, has delivered to the Board its written opinion, dated April 10, 1997, that, as of such date and based upon and subject to the matters set forth therein, the cash consideration to be received by the Stockholders (other than Parent, Purchaser and any other subsidiary of Parent) pursuant to the Offer and Merger is fair, from a financial point of view, to such Stockholders. A copy of the opinion of Dean Witter is contained in the Company's Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9") filed with the Securities and Exchange Commission (the "Commission") in connection with the Offer. A copy of the Schedule 14D-9 is being furnished to the Stockholders herewith. The Offer is conditioned upon, among other things, (i) there being validly tendered and not withdrawn prior to the Expiration Date (as defined in Section 1 below) a number of Shares (the "Minimum Number of Shares") which constitutes a majority of the Shares outstanding on a fully-diluted basis ("fully diluted basis" meaning, as of any date, the number of Shares outstanding, together with Shares which the Company may be required, now or in the future, to issue pursuant to options, warrants or other rights or obligations outstanding at that date) on the date of purchase (the "Minimum Tender Condition") and (ii) the debt financing sources of Parent and its corporate parent, Hedstrom Holdings, Inc., a Delaware corporation ("Holdings"), having provided the applicable debt financing pursuant to the Financing Commitments (as defined in Section 10). The Offer is also subject to certain other conditions. See Sections 1 and 14. The Company has informed Purchaser that as of April 10, 1997, (i) 10,274,300 Shares were issued and outstanding and 1,458,000 Shares were reserved for issuance upon the exercise of outstanding options to purchase Shares ("Options") granted under the Company's 1988 Key Employee Stock Option Plan, 1992 Key 3 4 Employee Stock Option Plan and 1992 Director's Stock Option Plan or otherwise (collectively, the "Stock Option Plans"). Based on the foregoing, at least 5,866,151 Shares must be validly tendered and not withdrawn in the Offer for the Minimum Tender Condition to be met. Concurrently with the execution of the Merger Agreement, Parent and Purchaser entered into a Stockholders Agreement, dated April 10, 1997 (the "Stockholders Agreement"), with Golder, Thoma, Cressey Fund III Limited Partnership (the "Selling Stockholder") which owns, in the aggregate, 3,940,000 (or approximately 33.6%) of the outstanding Shares calculated on a fully-diluted basis. Pursuant to the Stockholders Agreement, the Selling Stockholder has agreed to validly tender pursuant to the Offer and not to withdraw all Shares which are owned of record or beneficially by them prior to the Expiration Date. The consummation of the Merger is subject to the satisfaction or waiver of a number of conditions, including, if required, the approval of the Merger by the requisite vote of the Stockholders. Under the DGCL, the Stockholder vote necessary to approve the Merger will be the affirmative vote of at least a majority of the outstanding Shares, including Shares held by Purchaser and its affiliates. If the Minimum Tender Condition is met and the Offer is consummated, Purchaser will own a sufficient number of shares to cause the Merger to be approved. If Purchaser acquires at least 90% of the outstanding Shares pursuant to the Offer or otherwise, Purchaser will be able to effect the Merger pursuant to the "short-form" merger provisions of Section 253 of the DGCL, without prior notice to, or any action by, any other Stockholder. In each event, Purchaser intends to effect the Merger as promptly as practicable following the purchase of Shares in the Offer. See Section 12. The Merger Agreement is more fully described in Section 12. Certain federal income tax consequences of the sale of Shares pursuant to the Offer and the exchange of Shares for the Merger Consideration pursuant to the Merger are described in Section 5. Tendering Stockholders will not be obligated to pay brokerage fees or commissions to the Dealer Manager, the Depositary or the Information Agent or, except as set forth in Instruction 6 to the Letter of Transmittal, transfer taxes on the sale of Shares pursuant to the Offer or the Merger. A tendering Stockholder who holds securities with such Stockholder's broker may be required by such broker to pay a service charge or other fee. Purchaser will pay all charges and expenses of Credit Suisse First Boston Corporation ("Credit Suisse First Boston" or "CSFB"), as the dealer manager (the "Dealer Manager"), IBJ Schroder Bank & Trust Company, as the depositary (the "Depositary"), and MacKenzie Partners, Inc., as the information agent (the "Information Agent"), incurred in connection with the Offer. See Section 16. 1. TERMS OF THE OFFER Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), Purchaser will accept for payment (and thereby purchase) all Shares that are validly tendered and not withdrawn in accordance with Section 4 below prior to the Expiration Date. As used in the Offer, the term "Expiration Date" shall mean 12:00 midnight, New York City time, on June 2, 1997, unless and until Purchaser, in accordance with the terms of the Offer and the Merger Agreement, shall have extended the period of time during which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date at which the Offer, as so extended by Purchaser, shall expire. As used in this Offer to Purchase, "business day" has the meaning set forth in Rule 14d-1(c)(6) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In the event that the Offer is not consummated, Purchaser may seek to acquire Shares through open market purchases, privately negotiated transactions, or otherwise, upon such terms and conditions and at such prices as it shall determine, which may be more or less than the Offer Price and could be for cash or other consideration. In certain circumstances in connection with the termination of the Merger Agreement, Purchaser would be prohibited from acquiring any shares other than pursuant to the Offer. The Offer is conditioned upon, among other things, satisfaction of the Minimum Tender Condition and the debt financing sources of Parent and Holdings having provided the applicable debt financing pursuant to the Financing Commitments, and the expiration or termination of all waiting periods imposed by the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations thereunder (the "HSR Act"). The 4 5 Offer is also subject to certain other conditions set forth in Section 14 below. Subject to the terms of the Merger Agreement, including in certain instances the Company's consent, Purchaser reserves the right (but shall not be obligated) to amend or modify the terms of the Offer, including, without limitation, the right, if by the Expiration Date any or all of the conditions of the Offer are not satisfied or waived, to (i) extend the period during which the Offer is open and, subject to the rights of tendering Stockholders to withdraw their Shares, retain all tendered Shares until the Expiration Date, (ii) waive or reduce the Minimum Tender Condition or waive any or all of the conditions of the Offer and, subject to complying with applicable rules and regulations of the Commission, accept for payment or purchase all validly tendered Shares and not extend the Offer, or (iii) terminate the Offer and not accept for payment any Shares and return promptly all tendered Shares to tendering Stockholders. Notwithstanding the foregoing, without the prior written consent of the Company, Purchaser may not (and Parent shall not cause Purchaser to) (i) decrease the Offer Price or the form of consideration therefor or decrease the number of Shares sought pursuant to the Offer, (ii) amend or waive the Minimum Tender Condition, (iii) extend the Expiration Date (except that Purchaser may extend the Expiration Date (a) as required by any rule, regulation or interpretation of the Commission, (b) for such periods as Purchaser may reasonably deem necessary (but not to a date later than the 60th calendar day after the date of commencement) in the event that any condition to the Offer is not satisfied or (c) for one or more times for an aggregate period of up to 15 days (not to exceed 60 calendar days from the date of commencement) for any reason other than those specified in the immediately preceding clause (a) and clause (b)) or (iv) change any condition or impose additional conditions to the Offer or amend any term of the Offer in any manner adverse to holders of Shares; provided, however, that, except as set forth above, Purchaser may waive any other condition to the Offer in its sole discretion; and provided further that the Offer (i) may be extended in connection with an increase in the consideration to be paid pursuant to the Offer so as to comply with applicable rules and regulations of the Commission and (ii) will, for one time only, be automatically extended for a period which ends on the 15th business day from the date the Company shall have received an Acquisition Proposal (as defined in Section 12 below) in the event the Company shall receive such Acquisition Proposal less than ten business days prior to the Expiration Date. Assuming the prior satisfaction or waiver of the conditions to the Offer, Purchaser shall accept for payment, and pay for, in accordance with the terms of the Offer, all Shares validly tendered and not withdrawn pursuant to the Offer as soon as practicable after the Expiration Date. The Commission has announced that, under its interpretation of Rules 14d-4(c) and 14d-6(d) under the Exchange Act, material changes in the terms of a tender offer or information concerning a tender offer may require that the tender offer be extended so that it remains open for a sufficient period of time to allow security holders to consider such material changes or information in deciding whether or not to tender or withdraw their securities. The minimum period during which an offer must remain open following material changes in the terms of the Offer or information concerning the Offer, other than a change in price or a change in percentage of securities sought, will depend upon the facts and circumstances, including the relative materiality of the terms or information. If Purchaser decides to increase or, subject to the consent of the Company, to decrease the consideration in the Offer, to make a change in the percentage of Shares sought or, subject to the consent of the Company, to change or waive the Minimum Tender Condition and, if at the time that notice of any such changes is first published, sent or given to Stockholders, the Offer is scheduled to expire at any time earlier than the tenth business day after (and including) the date of such notice, then the Offer will be extended until the expiration of at least such period of ten business days. Purchaser also reserves the right, subject to applicable laws (including applicable regulations of the Commission promulgated under the Exchange Act) and to the terms of the Merger Agreement, at any time or from time to time, to delay acceptance for payment of or payment for any Shares, regardless of whether the Shares were theretofore accepted for payment, or to terminate the Offer and not accept for payment or pay for any Shares not theretofore accepted for payment or paid for, upon the occurrence of any of the conditions specified in Section 14 below, by giving oral or written notice of such delay in payment or termination to the Depositary. The reservation by Purchaser of the right to delay acceptance for payment of or payment for Shares is subject to the provisions of Rule 14e-1(c) under the Exchange Act, which requires that Purchaser pay the consideration offered or return the Shares deposited by or on behalf of Stockholders promptly after the termination or withdrawal of the Offer. Any delay in acceptance for payment or payment beyond the time 5 6 permitted by applicable law will be effectuated by an extension of the period of time during which the Offer is open. Any extension, delay in payment, termination or amendment will be followed as promptly as practicable by public announcement, the announcement in the case of an extension to be issued no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Without limiting the manner in which Purchaser may choose to make any public announcement, Purchaser will have no obligation to publish, advertise or otherwise communicate any such announcement other than by issuing a release to the Dow Jones News Service (or a similar news service) or as otherwise may be required by law. The Company has provided Purchaser with its stockholder list as of April 11, 1997 and security position listings for the purpose of disseminating the Offer to Stockholders. This Offer to Purchase, the related Letter of Transmittal and other relevant materials will be mailed to record holders of Shares and will be furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the Company's stockholder list as of April 11, 1997 or, if applicable, who are listed as participants in a clearing agency's security position listing, for subsequent transmittal to beneficial owners of Shares. 2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), Purchaser will accept for payment (and thereby purchase) and pay for Shares that are validly tendered and not withdrawn on or prior to the Expiration Date, as soon as practicable after the later of the following dates: (i) the Expiration Date and (ii) the date of satisfaction or waiver of all of the conditions to the Offer set forth herein. Purchaser expressly reserves the right, in its discretion, subject to applicable laws and regulations, to delay acceptance for payment of or payment for Shares in order to comply, in whole or in part, with any applicable law, government regulation or condition contained herein. See Section 14 below. In all cases, payment for Shares purchased pursuant to the Offer will be made only after timely receipt by the Depositary of (i) certificates for such Shares (or a Book-Entry Confirmation (as defined in Section 3) with respect to such Shares) and (ii) the Letter of Transmittal (or a manually signed facsimile thereof), properly completed and duly executed, with all required signature guarantees and all other documents required by the Letter of Transmittal. See Section 3 below. For purposes of the Offer, Purchaser will be deemed to have accepted for payment (and thereby purchased) tendered Shares as, if and when Purchaser gives oral or written notice to the Depositary of Purchaser's acceptance of such Shares for payment. In all cases, payment for Shares purchased pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for tendering Stockholders for the purpose of receiving payment from Purchaser and transmitting payment to tendering Stockholders whose Shares have theretofore been accepted for payment. If, for any reason, acceptance for payment of any Shares tendered pursuant to the Offer is delayed, or Purchaser is unable to accept for payment Shares tendered pursuant to the Offer, then, without prejudice to Purchaser's rights under Section 14, the Depositary may, nevertheless, on behalf of Purchaser, retain tendered Shares, and such Shares may not be withdrawn, except to the extent that the tendering Stockholders are entitled to withdrawal rights as described in Section 4 below and as otherwise required by Rule 14e-1(c) under the Exchange Act. Under no circumstances will interest on the purchase price be paid by Purchaser, regardless of any delay in making such payment. If any tendered Shares are not purchased for any reason or if certificates are submitted for more Shares than are tendered, certificates for such Shares not purchased or tendered will be returned pursuant to the instructions of the tendering Stockholder without expense to the tendering Stockholder (or, in the case of Shares delivered by book-entry transfer, into the Depositary's account at a Book-Entry Transfer Facility (as defined in Section 3) pursuant to the procedures set forth in Section 3, such Shares will be credited to an account maintained at the appropriate Book-Entry Transfer Facility) as promptly as practicable following the expiration, termination or withdrawal of the Offer. 6 7 If, prior to the Expiration Date, Purchaser increases the consideration to be paid per Share pursuant to the Offer, Purchaser will pay such increased consideration for all such Shares purchased pursuant to the Offer, whether or not such Shares were tendered prior to such increase in consideration. Purchaser reserves the right to transfer or assign, in whole or from time to time in part, to any newly-formed direct wholly owned subsidiary of Parent or Purchaser the right to purchase Shares tendered pursuant to the Offer; however, no such transfer or assignment will release Purchaser from its obligations under the Offer or prejudice the rights of tendering Stockholders to receive payment for Shares validly tendered and accepted for payment pursuant to the Offer. 3. PROCEDURE FOR TENDERING SHARES Valid Tenders. For Shares to be validly tendered pursuant to the Offer, either (a) a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof), with all required signature guarantees and all other documents required by the Letter of Transmittal, must be received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date and either (i) certificates representing such Shares must be received by the Depositary at any such address prior to the Expiration Date or (ii) such Shares must be delivered pursuant to the procedures for book-entry transfer set forth below and a Book-Entry Confirmation (as defined below) must be received by the Depositary prior to the Expiration Date or (b) the tendering Stockholder must comply with the guaranteed delivery procedures set forth below. No alternative, conditional or contingent tenders will be accepted. Book-Entry Transfer. The Depositary will establish an account with respect to the Shares at The Depository Trust Company and the Philadelphia Depository Trust Company (each, a "Book-Entry Transfer Facility" and, collectively, the "Book-Entry Transfer Facilities") for purposes of the Offer within two business days after the date of this Offer to Purchase. Any financial institution that is a participant in any of the Book-Entry Transfer Facilities' systems may make book-entry delivery of Shares by causing a Book-Entry Transfer Facility to transfer such Shares into the Depositary's account at such Book-Entry Transfer Facility in accordance with that Book-Entry Transfer Facility's procedure for such transfer. However, although delivery of Shares may be effected through book-entry transfer into the Depositary's account at a Book-Entry Transfer Facility, the Letter of Transmittal (or a manually signed facsimile thereof), properly completed and duly executed, with all required signature guarantees and all other required documents, must in any case be transmitted to and received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date, or the tendering Stockholder must comply with the guaranteed delivery procedures described below. The confirmation of a book-entry transfer of Shares into the Depositary's account at a Book-Entry Transfer Facility as described above is referred to herein as a "Book-Entry Confirmation". Delivery of documents to a Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures does not constitute delivery to the Depositary. Signature Guarantee. Except as otherwise provided below, all signatures on a Letter of Transmittal must be guaranteed by a financial institution (including most commercial banks, savings and loan associations and brokerage houses) that is a participant in the Security Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program (an "Eligible Institution"). Signatures on a Letter of Transmittal need not be guaranteed (a) if the Letter of Transmittal is signed by the registered holders (which term, for purposes of this section, includes any participant in any of the Book-Entry Transfer Facilities' systems whose name appears on a security position listing as the owner of the Shares) of Shares tendered therewith and such registered holder has not completed the box entitled "Special Payment Instructions" or the box entitled "Special Delivery Instructions" on the Letter of Transmittal or (b) if such Shares are tendered for the account of an Eligible Institution. See Instructions 1 and 5 of the Letter of Transmittal. If the certificates representing Shares are registered in the name of a person other than the signer of the Letter of Transmittal or if certificates for Shares not accepted for payment or not tendered are to be issued to a person other than the registered holder, then the certificates must be endorsed or accompanied by appropriate stock powers, in each case signed exactly as the name or names of the registered holder or holders appear on the certificates, with the signatures on the certificates or stock powers guaranteed as described above and as provided in the Letter of Transmittal. See Instructions 1 and 5 of the Letter of Transmittal. 7 8 Guaranteed Delivery. If a Stockholder desires to tender Shares pursuant to the Offer and such Stockholder's certificates are not immediately available or the procedures for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach the Depositary prior to the Expiration Date, such Shares may nevertheless be tendered if all of the following guaranteed delivery procedures are complied with: (i) such tender is made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by Purchaser herewith, is received by the Depositary as provided below prior to the Expiration Date; and (iii) the certificates for all tendered Shares in proper form for transfer or a Book-Entry Confirmation with respect to all tendered Shares, together with a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof) and all required signature guarantees and all other documents required by the Letter of Transmittal, are received by the Depositary by 5 p.m., New York City time, on the third business day after the date of execution of such Notice of Guaranteed Delivery. THE NOTICE OF GUARANTEED DELIVERY MAY BE DELIVERED BY HAND OR TRANSMITTED BY FACSIMILE TRANSMISSION OR MAILED TO THE DEPOSITARY AND MUST INCLUDE AN ENDORSEMENT BY AN ELIGIBLE INSTITUTION IN THE FORM SET FORTH IN SUCH NOTICE OF GUARANTEED DELIVERY. IN ALL CASES, SHARES SHALL NOT BE DEEMED VALIDLY TENDERED UNLESS A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL (OR A MANUALLY SIGNED FACSIMILE THEREOF) IS RECEIVED BY THE DEPOSITARY. THE METHOD OF DELIVERY OF CERTIFICATES FOR SHARES, THE LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS (INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY) IS AT THE OPTION AND SOLE RISK OF THE TENDERING STOCKHOLDER AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. Notwithstanding any other provision hereof, payment for Shares accepted for payment pursuant to the Offer in all cases will be made only after timely receipt by the Depositary of certificates for (or a Book-Entry Confirmation with respect to) such Shares and a Letter of Transmittal (or a manually signed facsimile thereof), properly completed and duly executed, with all required signature guarantees and all other documents required by the Letter of Transmittal. BACKUP FEDERAL INCOME TAX WITHHOLDING. TO PREVENT BACKUP FEDERAL INCOME TAX WITHHOLDING OF 31% OF THE PAYMENTS MADE TO A STOCKHOLDER WITH RESPECT TO THE PURCHASE PRICE OF SHARES ACQUIRED PURSUANT TO THE OFFER OR THE MERGER, SUCH STOCKHOLDER MUST PROVIDE THE DEPOSITARY WITH SUCH STOCKHOLDER'S CORRECT TAXPAYER IDENTIFICATION NUMBER AND CERTIFY THAT SUCH STOCKHOLDER IS NOT SUBJECT TO BACKUP FEDERAL INCOME TAX WITHHOLDING BY COMPLETING THE SUBSTITUTE FORM W-9 INCLUDED IN THE LETTER OF TRANSMITTAL. SEE INSTRUCTION 10 OF THE LETTER OF TRANSMITTAL AND SECTION 5 BELOW. Determination of Validity. All questions as to the form of documents and the validity, eligibility (including time or receipt) and acceptance for payment of any tender of Shares pursuant to any of the procedures described above will be determined by Purchaser in its sole discretion, which determination shall be final and binding on all parties. Purchaser reserves the absolute right to reject any or all tenders of Shares determined not to be in proper form or the acceptance of or payment for which may, in the opinion of counsel, be unlawful and reserves the absolute right (but shall not be obligated) to waive any defect or irregularity in any tender of Shares. Subject to the terms of the Merger Agreement, Purchaser also reserves the absolute right (but shall not be obligated) to waive or to amend any of the conditions of the Offer. Purchaser's interpretation of the terms and conditions of the Offer (including the Letter of Transmittal and the instructions thereto) will be final and binding on all parties. No tender of Shares will be deemed to have been validly made until all defects and irregularities have been cured or waived. None of the Purchaser, Parent, the Dealer Manager, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification. 8 9 Other Requirements. By executing and delivering a Letter of Transmittal, a tendering Stockholder irrevocably appoints designees of Purchaser as his attorneys-in-fact and proxies, with full power of substitution, in the manner set forth in the Letter of Transmittal, to the full extent of such Stockholder's rights with respect to the Shares tendered by such Stockholder and accepted for payment by Purchaser and with respect to any and all other Shares or other securities issued or issuable in respect of such Shares, on or after the date of the Offer. All such powers of attorney and proxies shall be considered coupled with an interest in the tendered Shares and therefore irrevocable. Such appointment will be effective when, and only to the extent that, Purchaser accepts such Shares for payment. Upon such acceptance for payment, all prior powers of attorney and proxies given by such Stockholder with respect to such Shares (and any other Shares or other securities so issued in respect of such purchased Shares) will be revoked, without further action, and no subsequent powers of attorney and proxies may be given (and, if given, will not be deemed effective) by such Stockholder. The designees of Purchaser will be empowered to exercise all voting and other rights of such Stockholder with respect to such Shares (and any other Shares or securities so issued in respect of such purchased Shares) as they in their sole discretion may deem proper, including, without limitation, in respect of any annual or special meeting of the Stockholders, or any adjournment or postponement thereof, in connection with any action by written consent in lieu of a meeting or otherwise (including any such meeting or action by written consent to approve the Merger). Purchaser reserves the absolute right to require that, in order for Shares to be validly tendered, immediately upon Purchaser's acceptance for payment of such Shares, Purchaser must be able to exercise full voting and other rights with respect to such Shares, including the right to vote at any meeting of Stockholders then scheduled. A tender of Shares pursuant to any of the procedures described above will constitute the tendering Stockholder's acceptance of the terms and conditions of the Offer. Purchaser's acceptance for payment of Shares tendered pursuant to the Offer will constitute a binding agreement between the tendering Stockholder and Purchaser upon the terms and conditions of the Offer. 4. WITHDRAWAL RIGHTS Tenders of Shares made pursuant to the Offer are irrevocable, except as otherwise provided in this Section 4. Shares tendered pursuant to the Offer may be withdrawn at any time prior to the Expiration Date and, unless theretofore accepted for payment by Purchaser as provided herein, may also be withdrawn at any time after June 16, 1997. If Purchaser extends the Offer, is delayed in its purchase of or payment for Shares or is unable to purchase or pay for Shares for any reason, then, without prejudice to the rights of Purchaser hereunder, tendered Shares may be retained by the Depositary on behalf of Purchaser and may not be withdrawn except to the extent that tendering Stockholders are entitled to withdrawal rights as set forth in this Section 4. The reservation by Purchaser of the right to delay the acceptance or purchase of or payment for Shares is subject to the provisions of Rule 14e-1(c) under the Exchange Act, which requires Purchaser to pay the consideration offered or return Shares deposited by or on behalf of Stockholders promptly after the termination or withdrawal of the Offer. For a withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase. Any such notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder, if different from that of the person who tendered such Shares. If certificates evidencing Shares have been delivered or otherwise identified to the Depositary, then prior to the release of such certificates, the tendering Stockholder must also submit the serial numbers shown on the particular certificates evidencing the Shares to be withdrawn, and the signature on the notice of withdrawal must be guaranteed by an Eligible Institution (except in the case of Shares tendered for the account of an Eligible Institution). If Shares have been tendered pursuant to the procedure for book-entry transfer set forth in Section 3, the notice of withdrawal must specify the name and number of the account at the applicable Book-Entry Transfer Facility to be credited with the withdrawn Shares. All questions as to form and validity (including time of receipt) of notice of withdrawal will be determined by Purchaser, in its sole discretion, whose determination shall be final and binding on all parties. No withdrawal of Shares shall be deemed to have been properly made until all defects and irregularities have been cured or waived. None of Purchaser, Parent, the Dealer Manager, the Depositary, the Information Agent or any other person will be under any duty to give 9 10 notification of any defects or irregularities in any notice of withdrawal or incur any liability for failing to give such notification. Any Shares properly withdrawn will be deemed not validly tendered for purposes of the Offer, but may be tendered at any subsequent time prior to the Expiration Date by following any of the procedures described in Section 3 above. 5. CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE OFFER AND THE MERGER The following is a summary of the material federal income tax consequences of the Offer and the Merger to Stockholders whose Shares are purchased pursuant to the Offer or whose Shares are converted into the right to receive the Merger Consideration in the Merger (including any cash amounts received by dissenting Stockholders pursuant to the exercise of appraisal rights). The discussion applies only to Stockholders in whose hands Shares are capital assets, and may not apply to holders who received their Shares pursuant to the exercise of employee stock options or otherwise as compensation, or who are not citizens or residents of the United States. THE FEDERAL INCOME TAX CONSEQUENCES SET FORTH BELOW ARE INCLUDED FOR GENERAL INFORMATIONAL PURPOSES ONLY AND ARE BASED UPON PRESENT LAW. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, EACH STOCKHOLDER SHOULD CONSULT SUCH STOCKHOLDER'S OWN TAX ADVISOR TO DETERMINE THE APPLICABILITY OF THE RULES DISCUSSED BELOW TO SUCH STOCKHOLDER AND THE PARTICULAR TAX EFFECTS OF THE OFFER AND THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS. Receipt of the Offer Price or the Merger Consideration. The receipt by a Stockholder of the Offer Price or the Merger Consideration (including any cash amounts received by dissenting Stockholders pursuant to the exercise of appraisal rights) in exchange for such Shares will be a taxable transaction for federal income tax purposes. In general, for federal income tax purposes, a Stockholder will recognize gain (or loss) equal to the difference between his adjusted tax basis in the Shares sold pursuant to the Offer or converted to cash in the Merger and the amount of cash received therefor. Gain (or loss) must be determined separately for each block of Shares (i.e., Shares acquired at the same cost in a single transaction) sold pursuant to the Offer or converted to cash in the Merger. Such gain (or loss) will be capital gain (or loss) and will be long-term gain (or loss) if, on the date of sale (or, if applicable, the Effective Time), the Shares were held for more than one year. President Clinton has proposed legislation which would require a holder to determine adjusted basis for Shares based on the average of such holder's total adjusted basis for Shares. Among other things, such proposal may affect the federal income tax consequences of the receipt of the Offer Price or the Merger Consideration by Stockholders holding blocks of Shares with different holding periods. However, it is not possible to predict whether such proposal will be enacted into law or, if so, whether such legislation will apply to the Offer or to the Merger. Backup Withholding. Payments in connection with the Offer or the Merger may be subject to "backup withholding" at a 31% rate. Backup withholding generally applies if the Stockholder (a) fails to furnish his social security number or other taxpayer identification number ("TIN"), (b) furnishes an incorrect TIN, (c) fails properly to report interest or dividends or (d) under certain circumstances, fails to provide a certified statement, signed under penalties of perjury, that the TIN provided is his correct number and that he is not subject to backup withholding. Backup withholding is not an additional tax but merely an advance payment, which may be refunded to the extent it results in an overpayment of tax. Any amounts withheld from a payment to a Stockholder under the backup withholding rules will be allowed as a credit against such Stockholder's federal income tax liability, provided that the required information is provided to the Internal Revenue Service. Certain persons generally are exempt from backup withholding, including corporations and financial institutions. Certain penalties apply for failure to furnish correct information and for failure to include the reportable payments in income. Each Stockholder should consult with such Stockholder's own tax advisor as to such Stockholder's qualification for exemption from withholding and the procedure for obtaining such exemption. 10 11 6. PRICE RANGE OF THE SHARES; DIVIDENDS ON THE SHARES According to the Company's Annual report on Form 10-K for the fiscal year ended December 31, 1996 (the "Company 10-K") and information supplied to Purchaser by the Company, the Shares commenced trading on Nasdaq Stock Market under the symbol "EROI" on April 7, 1992. Based on the foregoing, the Company has never paid regular cash dividends on the Shares; furthermore, the Merger Agreement prohibits the Company from declaring or paying any dividend or distribution on the Shares. The following table sets forth, for the periods indicated, the high and low closing sales prices per Share on the Nasdaq Stock Market.
HIGH LOW ------- ------ FISCAL YEAR 1995: First Quarter............................................. $ 8.250 $6.750 Second Quarter............................................ 9.250 7.000 Third Quarter............................................. 9.000 6.500 Fourth Quarter............................................ 7.250 5.250 FISCAL YEAR 1996: First Quarter............................................. 7.250 5.750 Second Quarter............................................ 7.250 5.750 Third Quarter............................................. 6.250 4.250 Fourth Quarter............................................ 8.750 5.125 FISCAL YEAR 1997: First Quarter............................................. 10.250 6.750 Second Quarter (through April 16, 1997)................... 10.875 9.375
On April 10, 1997, the last full trading day before the public announcement of Purchaser's intention to acquire the Shares, the closing sales price per Share on the Nasdaq Stock Market was $10.250. On April 16, 1997, the last full trading day before the commencement of the Offer, the closing sales price per Share on the Nasdaq Stock Market was $10.875 per Share. STOCKHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE SHARES. 7. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES, NASDAQ STOCK MARKET LISTING, EXCHANGE ACT REGISTRATION AND MARGIN SECURITIES The purchase of Shares pursuant to the Offer will reduce the number of holders of Shares and the number of Shares that might otherwise trade publicly and could adversely affect the liquidity and market value of the remaining Shares held by the public. The extent of the public market for the Shares and, according to the published guidelines of the NASD, the continued trading of the Shares on the Nasdaq Stock Market, after commencement of the Offer will depend upon the number of holders of Shares remaining at such time, the interest in maintaining a market in such Shares on the part of securities firms, the possible termination of registration of such Shares under the Exchange Act, as described below, and other factors. If, as a result of the purchase of Shares pursuant to the Offer or otherwise, trading of the Shares on the Nasdaq Stock Market is discontinued, the liquidity of and market for the Shares could be adversely affected. Purchaser cannot predict whether or to what extent the reduction in the number of Shares that might otherwise trade publicly would have an adverse or beneficial effect on the market price for or marketability of the Shares or whether it would cause future prices to be greater or less than the Offer Price. The Shares are currently registered under Section 12(g) of the Exchange Act. Registration of the Shares under the Exchange Act may be terminated upon application by the Company to the Commission if the Shares are not held by at least 300 holders of record. Termination of registration of the Shares under the Exchange Act would substantially reduce the information required to be furnished by the Company to its stockholders and to the Commission and could make certain provisions of the Exchange Act no longer applicable to the Company, such as the short-swing profit recovery provisions of Section 16(b) of the Exchange Act, the requirement of furnishing 11 12 a proxy statement pursuant to Section 14(a) of the Exchange Act in connection with stockholders' meetings and the related requirement of furnishing an annual report to stockholders and the requirements of Rule 13e-3 under the Exchange Act with respect to "going private" transactions. Furthermore, the ability of "affiliates" of the Company and persons holding "restricted securities" of the Company to dispose of such securities pursuant to Rule 144 or 144A promulgated under the Securities Act of 1933, as amended, may be impaired or eliminated. Purchaser intends to seek to cause the Company to terminate the registration of the Shares under the Exchange Act as soon after the completion of the Offer as the requirements for such termination are met. If registration of the Shares is not terminated prior to the Merger, the registration of the Shares under the Exchange Act will be terminated following consummation of the Merger. The Shares are currently "margin securities" under the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which has the effect, among other things, of allowing brokers to extend credit on the loan value of the Shares. Depending upon factors similar to those described above regarding listing and market quotations, it is possible that, following the Offer, the Shares would no longer constitute "margin securities" for the purposes of the margin regulations of the Federal Reserve Board and therefore could no longer be used as collateral for loans made by brokers. If registration of Shares under the Exchange Act were terminated, the Shares would no longer be "margin securities" or be eligible for listing on the Nasdaq Stock Market. 8. CERTAIN INFORMATION CONCERNING THE COMPANY The Company is a Delaware corporation with its principal executive offices located at 585 Slawin Court, Mount Prospect, Illinois 60056. According to the Company's annual report on Form 10-K for the fiscal year ended December 31, 1996, the Company is a leading designer, manufacturer, importer and marketer of licensed and branded children's leisure products. The Company's major products are grouped into four business units: ERO Industries, Inc., which consists of "Slumber Shoppe" and water sports; Amav Industries, Inc., which consists of children's activities, arts and crafts; Impact, Inc., which consists of back-to-school products; and Priss Prints, Inc., which consists of children's room decor products. The Company's products are sold to all major mass merchants and big box retailers such as toy stores, office superstores, home improvement centers and specialty craft stores. 12 13 Set forth below is certain selected consolidated financial information with respect to the Company and its subsidiaries excerpted from the Company's annual report on Form 10-K for the fiscal year ended December 31, 1996. More comprehensive financial information is included in such reports and other documents filed by the Company with the Commission, and the following summary is qualified in its entirety by reference to such reports and other documents and all of the financial information (including any related notes) contained therein. Such reports and other documents should be available for inspection and copies thereof should be obtainable in the manner set forth below under "Available Information." ERO, INC. SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA) CONSOLIDATED STATEMENT OF OPERATIONS DATA:
YEAR ENDED DECEMBER 31, -------------------------------- 1996 1995 1994 -------- -------- -------- Net sales.......................................... $157,913 $128,722 $126,734 Cost of sales...................................... 97,802 80,693 79,776 -------- -------- -------- Gross profit....................................... 60,111 48,029 46,958 Selling, general and administrative expense........ 38,896 33,183 34,078 -------- -------- -------- Operating income................................... 21,215 14,846 12,880 Interest expense................................... 9,062 1,997 1,939 -------- -------- -------- Income before income taxes......................... 12,153 12,849 10,941 Income tax provision............................... 4,395 5,167 4,482 -------- -------- -------- Net income......................................... $ 7,758 $ 7,682 $ 6,459 ======== ======== ======== Net income per share............................... $ 0.75 $ 0.73 $ 0.61 Weighted average number of shares outstanding...... 10,316 10,487 10,580
CONSOLIDATED BALANCE SHEET DATA:
YEAR ENDED DECEMBER 31, ------------------------ 1996 1995 --------- --------- Total current assets................................. $ 79,533 $ 58,496 Total assets......................................... 159,994 144,138 Current portion of long-term debt.................... 8,893 6,728 Total current liabilities............................ 29,697 29,804 Total long-term debt................................. 86,747 78,270 Deferred income tax liability........................ 536 -- Total liabilities.................................... 116,980 108,074 Total stockholders' equity........................... 43,014 36,064
Available Information. The Company is subject to the informational filing requirements of the Exchange Act. In accordance therewith, the Company files periodic reports, proxy statements and other information with the Commission under the Exchange Act relating to its business, financial condition and other matters. The Company is required to disclose in such proxy statements certain information, as of particular dates, concerning the Company's directors and officers, their remuneration, stock options granted to them, the principal holders of the Company's securities and any material interest of such persons in transactions with the Company. Such reports, proxy statements and other information may be inspected and copied at the Commission's office at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and 7 World Trade Center, 13th Floor, New York, New York 10048. Copies of such material may also be obtained upon payment of the Commission's prescribed fees by writing to the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission also maintains a Web site 13 14 (http://www.sec.gov) that contains reports, proxy and information statements regarding registrants, such as the Company, that file electronically with the Commission. Except as otherwise stated in this Offer to Purchase, the information concerning the Company contained herein has been taken from or based upon publicly available documents on file with the Commission and other publicly available information. Although Purchaser and Parent do not have any knowledge that any such information is untrue, neither Purchaser nor Parent takes any responsibility for the accuracy or completeness of such information or for any failure by the Company to disclose events that may have occurred and may affect the significance or accuracy of any such information. A copy of the Offer to Purchase, and certain of the agreements referred to herein, are attached as exhibits to Parent's and Purchaser's Tender Offer Statement on Schedule 14D-1 and Statement on Schedule 13D, dated April 17, 1997 (the "Schedule 14D-1"), which has been filed with the Commission. The Schedule 14D-1 and the exhibits thereto, along with such documents as may be filed by Parent and Purchaser with the Commission, may be examined and copied from the offices of the Commission in the manner set forth above. Projections. To the knowledge of Parent and Purchaser, the Company does not as a matter of course make public forecasts as to its future economic performance. However, in connection with Parent's due diligence investigation of the Company, the Company provided Parent with estimates for net sales and net income for the year ending on December 31, 1997 of $188.6 million and $10.5 million, respectively. Such estimates were part of a budget presented to and approved by the Board. During the course of Parent's due diligence, an officer of the Company also provided Parent with "best case" estimates of net sales and net income for the same period of $192.5 million and $14.1 million, respectively. The latter estimates were not part of the budget approved by the Board and were prepared on an expedited basis without the benefit of any research or analysis. In addition, these estimates were not relied upon by Parent. The budgeted and non-budgeted estimates are hereinafter collectively referred to as the "Projections." THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TO PUBLIC DISCLOSURE OR COMPLIANCE WITH THE PUBLISHED GUIDELINES OF THE COMMISSION REGARDING PROJECTIONS, NOR WERE THEY PREPARED IN ACCORDANCE WITH THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS FOR PREPARATION AND PRESENTATION OF FINANCIAL PROJECTIONS. THE PROJECTIONS DO NOT PURPORT TO PRESENT OPERATIONS IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND HAVE NOT BEEN AUDITED, COMPILED OR OTHERWISE EXAMINED BY INDEPENDENT ACCOUNTANTS. THE PROJECTIONS ARE INCLUDED HEREIN ONLY BECAUSE SUCH INFORMATION WAS PROVIDED TO PARENT AND PURCHASER IN CONNECTION WITH THEIR DUE DILIGENCE INVESTIGATION OF THE COMPANY. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE PROJECTIONS. THE PROJECTIONS REFLECT NUMEROUS ASSUMPTIONS, ALL MADE BY MANAGEMENT OF THE COMPANY, WITH RESPECT TO INDUSTRY PERFORMANCE, GENERAL BUSINESS, ECONOMIC, MARKET AND FINANCIAL CONDITIONS AND OTHER MATTERS, ALL OF WHICH ARE DIFFICULT TO PREDICT, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL AND NONE OF WHICH WERE SUBJECT TO APPROVAL BY PARENT OR THE PURCHASER. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT THE ASSUMPTIONS MADE IN PREPARING THE PROJECTIONS WILL PROVE TO BE ACCURATE, AND ACTUAL RESULTS MAY BE MATERIALLY GREATER OR LESS THAN THOSE CONTAINED IN THE PROJECTIONS. THE INCLUSION OF THE PROJECTIONS HEREIN SHOULD NOT BE REGARDED AS AN INDICATION THAT ANY OF PARENT, PURCHASER, THE COMPANY OR THEIR RESPECTIVE FINANCIAL ADVISORS CONSIDERED OR CONSIDER THE PROJECTIONS TO BE A RELIABLE PREDICTION OF FUTURE EVENTS, AND THE PROJECTIONS SHOULD NOT BE RELIED UPON AS SUCH. NONE OF PARENT, PURCHASER, THE COMPANY AND THEIR RESPECTIVE FINANCIAL ADVISORS ASSUMES ANY RESPONSIBILITY FOR THE VALIDITY, REASONABLENESS, ACCURACY OR COMPLETENESS OF THE PROJECTIONS. NONE OF PARENT, PURCHASER, THE COMPANY OR ANY OF THEIR FINANCIAL ADVISORS HAS MADE, OR MAKES, ANY REPRESENTATION TO ANY PERSON REGARDING THE INFORMATION CONTAINED IN THE PROJECTIONS AND NONE OF THEM INTENDS TO UPDATE OR OTHERWISE REVISE THE PROJECTIONS TO REFLECT CIRCUMSTANCES EXISTING AFTER THE DATE WHEN MADE OR TO REFLECT THE OCCURRENCE OF FUTURE EVENTS EVEN IN THE EVENT THAT ANY OR ALL OF THE ASSUMPTIONS UNDERLYING THE PROJECTIONS ARE SHOWN TO BE IN ERROR. 14 15 9. CERTAIN INFORMATION CONCERNING PURCHASER, PARENT AND HOLDINGS Purchaser, a Delaware corporation, was organized to acquire all the outstanding Shares pursuant to the Merger Agreement and has not conducted any unrelated activities since its organization. All of the outstanding capital stock of Purchaser is owned by Parent. The principal executive offices of Purchaser are located at Cherrington Corporate Center, 300 Corporate Center Drive, Suite 100, Coraopolis, Pennsylvania 15108. Parent, a Delaware corporation, is a leading U.S. manufacturer of children's leisure products that are sold primarily through national retailers. Parent is organized into two divisions representing its principal product categories, outdoor gym sets and play balls. Each division also manufactures a wide variety of industrial and consumer products that are sold to original equipment manufacturers. The principal executive offices of Parent are located at Cherrington Corporate Center, 300 Corporate Center Drive, Suite 100, Coraopolis, Pennsylvania 15108. The following table presents selected operating, balance sheet and other data of Parent as of and for the fiscal years ended July 31, 1995 and 1996 and as of and for the five month period ended December 31, 1996.
5 MONTHS ENDED YEAR ENDED ------------ -------------------- DECEMBER 31, 1995 1996 1996 -------- -------- ------------ (IN THOUSANDS) OPERATING DATA: Net sales...................................... $133,862 $133,194 $23,994 Operating profit............................... 6,186 3,632 (5,619) Other expense (income): Interest.................................... 4,573 5,896 2,158 Recapitalization expense.................... -- 9,600 -- Other expense (income)...................... 46 110 (37) Net earnings (loss)............................ 3,877 (7,735) (4,771) BALANCE SHEET DATA (AT END OF PERIOD): Working capital................................ $ 1,720 $ 16,498 $ 9,373 Total assets................................... 70,287 85,697 72,395 Long-term debt, less current maturities........ 4,205 38,500 36,750 Stockholders' equity (deficit)................. 15,509 2,172 (2,599)
Hedstrom Holdings, Inc., a Delaware corporation ("Holdings"), is a holding company, the primary asset of which is the common stock of the Parent. The principal executive offices of Holdings are located at Cherrington Corporate Center, 300 Corporate Center Drive, Suite 100, Coraopolis, Pennsylvania 15108. During the last five years, neither Purchaser, Parent nor Holdings nor, to the knowledge of Purchaser or Parent, any of the persons listed in Schedule I (i) has been convicted in a criminal proceeding (excluding traffic violations and similar misdemeanors) or (ii) was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting activities subject to, Federal or state securities laws or finding any violation of such laws. The name, business address, present principal occupation or employment, five-year employment history and citizenship of each director and executive officer of Purchaser, Parent and Holdings are set forth in Schedule I. Neither of Purchaser, Parent nor Holdings nor, to the knowledge of Purchaser or Parent, any of the persons listed in Schedule I or any associate or majority owned subsidiary of any such persons, beneficially owns or has a right to acquire any equity security of the Company. Neither of Purchaser, Parent nor Holdings nor, to the knowledge of Purchaser or Parent, any of their respective directors, executive officers or subsidiaries has effected any transaction in any equity security of the Company during the past 60 days. Except as described in this Offer to Purchase, (i) neither Purchaser, Parent nor Holdings nor, to the knowledge of Purchaser or Parent, any of the persons listed in Schedule I has any contract, arrangement, 15 16 understanding or relationship (whether or not legally enforceable) with any other person with respect to any securities of the Company, including, but not limited to, any contract, arrangement, understanding or relationship concerning the transfer or the voting of any such securities, joint ventures, loan or option arrangements, puts or calls, guarantees of loans, guarantees against loss, or the giving or withholding of proxies; (ii) there have been no contacts, negotiations or transactions between Purchaser, Parent or Holdings, or any of their respective subsidiaries or, to the knowledge of Purchaser, Parent or Holdings, any of the persons listed on Schedule I on the one hand, and the Company or any of its directors, officers or affiliates, on the other hand, that are required to be disclosed pursuant to the rules and regulations of the Commission. 10. SOURCE AND AMOUNT OF FUNDS Parent and Purchaser estimate that the total amount of funds required by the Purchaser to (i) purchase all of the 10,274,300 Shares issued and outstanding, (ii) fund the net consideration payable in respect of outstanding options to purchase 1,458,000 Shares, (iii) refinance certain existing indebtedness of Parent and the Company, and (iv) pay fees and expenses incurred in connection with the Offer and the Merger will be approximately $302 million. Of these funds, $65 million will be contributed by Holdings to Parent, who will in turn contribute such amount to Purchaser. Holdings intends to obtain $40 million of these funds pursuant to the sale of shares of its common stock to its current majority stockholder, Hicks Muse Equity Fund II, L.P. ("HMF II"), an affiliate of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse") (or to an affiliate of HMF II) and to obtain $25 million of these funds pursuant to the sale of senior discount notes (the "Holdings Senior Discount Notes"). Parent intends to obtain $115 million of the required funds pursuant to the sale of senior subordinated notes (the "Senior Subordinated Notes") (or in lieu thereof, a bridge loan in a similar amount) and to contribute such amount to Purchaser. The balance of the required funds will be borrowed by Parent under new senior secured bank credit facilities of up to $180 million (the "Credit Facilities"). Parent has obtained commitments (the "Financing Commitments") with respect to each of the foregoing financing transactions. The following table has been prepared by Parent and Purchaser after discussions with management of the Company and sets forth the approximate amounts, proposed sources, and uses of funds necessary to consummate the Offer and the Merger and the related refinancings:
$ IN MILLIONS ------------- Sources: Sale of Holdings Common Stock............................. $ 40.0 Sale of Holdings Senior Discount Notes.................... 25.0 Sale of Senior Subordinated Notes......................... 115.0 Borrowings under Credit Facilities........................ 127.4 ------ Total............................................. $307.4 ====== Uses: Purchase Shares........................................... $115.6 Settlement of options..................................... 7.0 Refinance existing senior debt of Parent.................. 75.6 Refinance existing debt of Company........................ 88.3 Fees and expenses......................................... $ 20.8 ------ Total............................................. $307.4 ======
The following is a summary of certain material terms of the Financing Commitments. This summary is not a complete description of the terms and conditions of these documents and is qualified in its entirety by reference to the full texts of such documents which are incorporated herein by reference. A copy of each of the Financing Commitments has been filed with the Commission as an exhibit to the Schedule 14D-1 and each may be examined, and copies thereof may be obtained, as set forth in Section 8. 16 17 CSFB Engagement Letter. CSFB and Parent are parties to an Engagement Letter (the "CSFB Engagement Letter"), dated April 11, 1997, pursuant to which CSFB has committed to use its best efforts to complete the private placement of the Senior Subordinated Notes and the Holdings Senior Discount Notes. In the event that CSFB determines, after consultation with Parent, that market conditions existing at the time of the proposed commencement of such offerings make it unlikely that the offerings could be successfully consummated, CSFB may elect to postpone such offerings until market conditions, in CSFB's judgment, no longer preclude the successful completion of such offerings. Senior Subordinated Notes. Parent intends to issue $115 million of Senior Subordinated Notes pursuant to the Commission's Rule 144A. The Senior Subordinated Notes will mature ten years from the issue date, and interest will accrue and be payable thereon in cash from the issue date. The Senior Subordinated Notes will be unsecured and subordinated in right of payment to all existing and future senior indebtedness of Parent (including indebtedness under the Credit Facilities), senior in right of payment to all existing and future subordinated indebtedness of Parent and will rank pari passu with all existing and future senior subordinated indebtedness of the Parent. The Senior Subordinated Notes will be guaranteed on a senior subordinated basis by each domestic subsidiary of the Parent, and on a senior basis by Holdings (to the extent the Credit Facilities are also guaranteed by Holdings). In connection with the issuance of the Senior Subordinated Notes, Parent will enter into a registration rights agreement containing terms customary for Rule 144A offerings. The Senior Subordinated Notes will contain negative covenants and events of default customary for high yield securities. Holdings Senior Discount Notes. Holdings intends to issue $25 million of Holdings Senior Discount Notes pursuant to Rule 144A. The Holdings Senior Discount Notes will mature twelve years from the issue date and no cash interest will accrue or be payable thereon until the fifth anniversary of the issue date, after which time interest will accrue and be payable in cash. The Holdings Senior Discount Notes will be senior, unsecured obligations of Holdings, ranking pari passu in right of payment with all existing and future senior unsecured obligations of Holdings (including guarantees by Holdings of the Credit Facilities and the Senior Subordinated Notes) and will rank senior to all future subordinated debt of Holdings. In connection with the issuance of the Holdings Senior Discount Notes, Holdings will enter into a registration rights agreement containing terms customary for Rule 144A offerings. The Holdings Senior Discount Notes will contain negative covenants customary for high yield securities. Holdings Senior Discount Notes Commitment Letter. CSFB and Holdings are parties to a Holdings Senior Discount Notes Commitment Letter (the "Holdings Senior Discount Notes Commitment Letter"), dated April 11, 1997, pursuant to which CSFB has committed to purchase, or to cause one or more of its affiliates to purchase, Holdings Senior Discount Notes for gross proceeds of up to $25 million, upon the written request of Parent to do so if such Holding Senior Discount Notes cannot be sold on or prior to the later of the Expiration Date or the date that is 60 days from the date of the Holdings Senior Discount Notes Commitment Letter Expiration Date. The Holdings Senior Discount Notes will be issued at an initial discount to maturity that, calculated on a semi-annual bond equivalent basis, is an implied interest rate equal to (a) in the event the offering of Senior Subordinated Notes is consummated, the sum of the coupon rate of the Senior Subordinated Notes plus 5%; or (b) in the event the offering of Senior Subordinated Notes is not consummated, the sum of the yield on U.S. Government Treasury obligations maturing on the day 12 years from the day immediately preceding the date of issuance of such Senior Discount Notes plus 8.75%. In no event will the initial discount to maturity exceed 15%. 17 18 Holdings will be required to file within 30 days following the date of issuance of the Holdings Senior Discount Notes, a shelf registration statement with respect to resales of the Holdings Senior Discount Notes. If within 90 days from the issue date, a shelf registration statement for resales of Holdings Senior Discount Notes is not declared effective, or, if after becoming effective the shelf registration statement ceases to be effective or ceases to be usable in connection with resales of Holdings Senior Discount Notes (subject to customary exceptions), the rate at which interest accrues and becomes payable on the Holdings Senior Discount Notes will increase by 0.5% at the end of each 90-day period thereafter until such default shall be cured. In no event will the interest on the Holdings Senior Discount Notes increase by more than an aggregate of 2.0%. In connection with its purchase of any of the Holdings Senior Discount Notes pursuant to the request of Parent, CSFB will receive rights ("Initial Purchaser Discount Note Rights") to acquire equity interests representing 10% of the common stock of Holdings, subject to forfeiture in certain circumstances, at no additional cost. The Initial Purchaser Discount Note Rights will be issued pursuant to a rights agreement containing customary anti-dilution provisions and registration rights. Bridge Loan Commitment Letter. Bridge Loans. Pursuant to a Bridge Loan Commitment Letter (the "Bridge Loan Commitment Letter"), dated April 11, 1997, between CSFB and Parent, CSFB has committed to provide a bridge loan of up to $115.0 million (the "Bridge Loan") to Parent to the extent CSFB is unable to sell the Senior Subordinated Notes. In the event that Parent has not issued the Senior Subordinated Notes prior to the date on which Shares are acquired by Purchaser pursuant to the Offer, Parent will use its reasonable best efforts to promptly refinance the Bridge Loans. Subordination and guarantee provisions contained in the Bridge Loan Commitment Letter are similar to those contained in the CSFB Engagement Letter with respect to the Senior Subordinated Notes. The Bridge Loans will mature on the date which is 364 days after the Date on which Shares are acquired by Purchaser pursuant to the Offer (the "Bridge Maturity Date"). If any Bridge Loan is not repaid in full on or prior to the Bridge Maturity Date, the applicable Bridge Loan lender will have the option at any time or from time to time to receive, in exchange for such Bridge Loan or portion thereof, exchange notes of Parent (the "Exchange Notes") ranking pari passu with the Bridge Loans and having the terms set forth in the term sheet attached as Annex I to the Bridge Loan Commitment Letter. Prior to the Bridge Maturity Date, the Bridge Loans will accrue interest at a rate per annum equal to 3 month Adjusted LIBOR (adjusted to reflect statutory reserve requirement) plus the applicable spread. The spread on the Bridge Loans initially will be 600 basis points and will increase by 50 basis points at the end of each three-month period until the Bridge Maturity Date; provided, however, that the interest rate on Bridge Loans in effect at any time prior to the Bridge Maturity Date shall not exceed 18% per annum, and cash interest on the Bridge Loans shall not exceed 15% per annum. Following the Bridge Maturity Date, all outstanding Bridge Loans will accrue interest at the rate provided for in the Exchange Notes, subject to the absolute and cash caps contained therein. The making of the Bridge Loans shall be subject to the same conditions precedent as each of the other debt financing transactions contemplated by the Financing Commitments. The Bridge Loan documents will also contain representations and warranties and convenants standard for such types of debt financings. Parent will be required to file a registration statement under the Securities Act or prepare an offering memorandum covering senior subordinated notes of Parent to be issued in a public offering or private placement to refinance in full the Bridge Loans and to consummate such refinancing as soon as possible after the date on which Shares are acquired by Purchaser pursuant to the Offer in an amount sufficient to refinance all amounts outstanding under the Bridge Loan and on such terms and conditions (including, without limitation, interest rate, yield, redemption prices and dates) as CSFB may in its reasonable judgment determine to be appropriate in light of prevailing circumstances and market conditions and the financial condition and prospects of Parent, provided that Parent will not be required to issue senior subordinated notes bearing interest in excess of the maximum interest rates applicable to the Exchange Notes. 18 19 The events of default will be those customary for facilities similar to the Bridge Loan facilities and others as are reasonably specified by the Agent, including but not limited to nonpayment of principal, interest, fees or other amounts when due and violation of covenants, among others. Exchange Notes. The Exchange Notes will be available only in exchange for the Bridge Loans. The face amount of any Exchange Note will equal 100% of the aggregate principal amount (including any accrued interest not required to be paid in cash) of the Bridge Loan for which it is exchanged. The Exchange Notes will mature on the tenth anniversary of the date on which the Shares are purchased by Parent pursuant to the Offer. The Exchange Notes will bear interest at a rate per annum, subject to certain exemptions, equal to the interest rate on the Bridge Loans on the Bridge Loan Maturity Date. Notwithstanding the foregoing, the interest rate on Exchange Notes in effect at any time shall not exceed 18% per annum, and to the extent that the interest payable on Exchange Notes exceeds a rate of 15% per annum, Parent may, at its option, cause such excess interest to be paid by issuing additional Exchange Notes in a principal amount equal to such excess portion of interest. Interest on Exchange Notes will be payable semiannually in arrears. In no event shall the interest rate on the Exchange Notes exceed the highest lawful rate permitted under applicable law. Exchange Notes will rank pari passu with Bridge Loans. Subject to the conditions precedent to fundings, Parent will use its reasonable best efforts to cause to be filed within 30 days after the first issuance of the Exchange Notes to any Bridge Loan lender and to become effective within 120 days after such issuance, an exchange offer registration statement or a shelf registration statement and Parent will use its best efforts to keep such registration statement effective for customary periods, not to exceed three years after final issuance of Exchange Notes, and to amend such registration statement from time to time as necessary to include newly issued Exchange Notes from time to time. On the date Shares are purchased by the Purchaser pursuant to the Offer, rights to acquire equity interests representing 12 1/2% of the fully diluted common stock of Holdings will be delivered and held in an escrow account by a mutually agreeable fiduciary at no cost to holders of Exchange Notes. Each Right will be exercisable for a period of 10 years from the Closing Date and will have mutually agreed provisions relating to antidilution and limited registration rights in certain circumstances. After the Bridge Maturity Date, the Rights will be released from the escrow under specified circumstances. The applicable covenants and events of default are both typical of those for an indenture governing a high-yield senior subordinated note issue. Credit Facilities Commitment Letter. Pursuant to the Credit Facilities Commitment Letter (the "Credit Facilities Commitment Letter") dated as of April 10, 1997, between CSFB and Parent, which CSFB has committed to provide senior secured credit facilities of up to $180 million (the "Credit Facilities") to Parent as an agent for a syndicate of financial institutions (together with CSFB, the "Lenders") to provide all or a portion of the Credit Facilities: The Credit Facilities will consist of a 6-year senior secured term loan facility in the amount of $75 million (the "Tranche A Facility"), an 8-year senior secured term loan facility in the amount of $35 million (the "Tranche B Facility"; together with the Tranche A Facility, the "Term Loan Facilities") and a 6-year senior secured revolving credit facility in the amount of $70 million (the "Revolving Credit Facility"). The Term Loan Facilities will be available in a single drawing on the date upon which the conditions precedent to borrowing are satisfied (the "Closing Date"). In addition, they shall amortize in quarterly installments (commencing on December 31, 1997) to be mutually agreed upon. The Revolving Credit Facility will be available on a revolving basis during the period commencing on the Closing Date and ending on the maturity date for the Tranche A Facility (the "Termination Date"). The availability under the Revolving Credit Facility will be subject to a borrowing base in the amount from time to time equal to the sum of 85% of certain qualifying receivables and 50% of certain qualifying inventories of the Parent and its domestic subsidiaries. A portion of the Revolving Credit Facility to be mutually agreed upon will be available for the issuance of letters of credit by CSFB. 19 20 Provided that Purchaser acquires at least 75% of the outstanding capital shares of the Company pursuant to the Offer, Parent will be allowed to lend proceeds of the Credit Facilities to the Company for the purpose of financing the working capital needs of the Company pending the consummation of the Merger (the "Specified Loans"). The Parent may elect that all or a portion of the loans borrowed by it bear interest at a rate per annum equal to CSFB's prime rate (or equivalent rate) ("ABR") plus an applicable margin with respect thereto or (b) the Eurodollar rate plus an applicable margin with respect thereto. The applicable margin for the various credit facilities under Eurodollar Loans is as follows: 2 1/2% for the Tranche A Facility; 3% for the Tranche B Facility; and 2 1/2% for the Revolving Credit Facility. The applicable margin for the various credit facilities under ABR Loans is as follows: 1 1/2% for the Tranche A Facility; 2% for the Tranche B Facility; and 1 1/2% for the Revolving Credit Facility. The foregoing margins for the Tranche A Facility and the Revolving Credit Facility shall be adjusted from time to time by amounts to be agreed upon based on the leverage ratio of Parent then in effect. At any time when the Parent is in default in the payment of any amount due under the Credit Facilities, the principal of all loans under the Credit Facilities shall bear interest at 2% above the rate otherwise applicable thereto. Overdue interest, fees and other amounts shall bear interest at 2% above the rate applicable to ABR Loans. Guarantees and Collateral. The Credit Facilities shall be guaranteed by Holdings, Parent and each domestic subsidiary of the Parent. The Credit Facilities will be secured by a pledge of the capital stock of Parent and by substantially all assets of Parent and its domestic subsidiaries (including, without limitation, the Company), subject to exceptions to be mutually agreed upon. Prior to the date upon which the Merger is consummated, the assets of the Company and its subsidiaries which constitute collateral (other than any capital stock of the Company, which shall secure the full amount of the Credit Facilities) shall secure only any outstanding Specified Loans. The Credit Facilities also shall be secured by 65% (or such higher percentage as may be pledged without the incurrence of material adverse legal or tax consequences) of each foreign subsidiary the capital stock of which is owned directly by the Parent or a domestic subsidiary thereof (subject to exceptions to be mutually agreed upon based upon uneconomic transaction costs and/or adverse tax consequences). Certain Conditions Relating to Credit Facilities. The initial availability of the Credit Facilities is conditioned upon satisfaction (on or prior to July 30, 1997) of, among other things, the conditions precedent applicable to the other debt financing transactions described above. The making of each extension of credit shall be conditioned upon certain ongoing conditions, including the accuracy of representations and warranties in the Credit Documentation and the absence of default at the time of, or after giving effect to the making of, such extension of credit. The Credit Documentation shall contain representations, warranties, covenants and events of default customary for financings of this type and other terms deemed appropriate by the Lenders. HMF II Letter. In an agreement dated April 10, 1997, Hicks Muse committed to invest (or to cause an affiliate to invest) up to $40 million in the common equity of Holdings subject to certain terms and conditions and pursuant to a purchase (the "Purchase") of the common equity of Holdings. The proceeds of this equity investment will be used in connection with the Acquisition. Conditions to the Purchase by Hicks Muse or an Affiliate. The Purchase is subject to (i) negotiation and execution of mutually satisfactory definitive stock purchase agreements containing representations, warranties, covenants, conditions, and indemnifications customary for transactions of this type and (ii) the consummation of the Offer by the Parent on its terms set forth in the Merger Agreement, as it may be amended from time to time. The agreement by Hicks Muse also contains provisions for indemnification, expense reimbursement, termination fees paid by target, publicity, access to information, conduct of business, closing date, further action, confidentiality, term and non-disclosure. 20 21 11. BACKGROUND OF THE OFFER Set forth below is a description of the background of the Offer, including a brief description of the material contacts between Parent and its affiliates and the Company and its affiliates regarding the transactions described herein. On August 13, 1996, representatives from Parent met with representatives from the Company to discuss a possible business combination. In late August 1996, representatives of the Company met with representatives of Parent's financial advisors, HM2/Management Partners, L.P. ("HM2"), an affiliate of Hicks Muse. During September 1996, the Company received inquiries from several interested parties regarding a possible business combination. In order to assist the Board of the Company in evaluating such inquiries, on October 1, 1996, the Company retained Dean Witter Reynolds Inc. ("Dean Witter"). During October and November 1996, representatives from the Company met with various parties. On January 13, 1997, representatives of the Company met with representatives of Parent and HM2. During late February and early March 1997, representatives from the Company met with representatives of the Parent on several occasions. Negotiations among the Company, the Parent, and their respective representatives continued through April 10, 1997 with respect to various matters, including the economic terms of the Merger and the legal and financial advisors of the Parent conducted their due diligence review of the Company and representatives of the Company and Parent negotiated the Merger Agreement and the details of the transactions contemplated thereby. On April 10, 1997, the parties reached agreement on the final terms of the Merger Agreement and the related transactions contemplated thereunder. The Board of Directors of the Company held a meeting on April 10, 1997 to discuss the proposed Offer and Merger, the Merger Agreement, and the related transactions contemplated thereunder. After reviewing the transaction with the Company's legal and financial advisors and hearing the presentation of Dean Witter, the Company's financial advisor, the Board discussed the proposed Offer and Merger and all transactions contemplated thereby. The Board unanimously approved the Offer, the Merger, and the Merger Agreement, and resolved to recommend that the stockholders of the Company tender their Shares pursuant to the Offer and executed and delivered the Merger Agreement late in the evening on April 10, 1997. The Board of Directors of Parent also held a meeting on April 10, 1997 at which the Board of Directors of Purchaser unanimously approved the Offer, the Merger, the Merger Agreement, the Financing Commitments and the transactions contemplated by each of the foregoing. Late in the evening of April 10, 1997, HMF II delivered its commitment to purchase up to $40 million of Holding's common equity and CSFB delivered each of the other Financing Commitments and Parent delivered copies of the Financing Commitments to representatives of the Company. Following delivery of the Financing Commitments, the Merger Agreement was executed and delivered by Parent, Purchaser and the Company. On April 11, 1997, the first business day following the execution and delivery of the Merger Agreement, each of Parent and the Company issued a press release announcing the execution and delivery of the Merger Agreement. On April 17, 1997, Purchaser commenced the Offer. 21 22 12. PURPOSE OF THE OFFER AND THE MERGER; PLANS FOR THE COMPANY; MERGER AGREEMENT; STOCKHOLDERS AGREEMENT; OTHER MATTERS Purpose of the Offer and the Merger Plans for the Company The purpose of the Offer and the Merger is to enable Parent, through Purchaser, to acquire in one or more transactions control of the Board and the entire equity interest in the Company. The Offer is intended to increase the likelihood that the Merger will be completed promptly. Parent intends, from time to time after completion of the Offer, to evaluate and review the Company's assets, operations, management and personnel and consider what, if any, changes would be desirable in light of circumstances which then exist. Parent reserves the right to take such actions or effect such changes as it deems advisable. Except as noted in this Offer to Purchase, Purchaser and Parent have no present plans or proposals that would result in an extraordinary corporate transaction, such as a merger, reorganization, liquidation, or sale or transfer of a material amount of assets, involving the Company or any other material changes in the Company's capitalization, dividend policy, corporate structure, business or composition of its management. The Merger Agreement The following is a summary of the material terms of the Merger Agreement. This summary is not a complete description of the terms and conditions thereof and is qualified in its entirety by reference to the full text thereof, which is incorporated herein by reference and a copy of which has been filed with the Commission as an exhibit to the Schedule 14D-1. The Merger Agreement may be examined, and copies thereof may be obtained, as set forth in Section 8 above. The Offer. The Merger Agreement provides for the commencement of the Offer, in connection with which the Purchaser has expressly reserved the right to amend or modify the terms of the Offer and to waive certain conditions of the Offer; however, without the prior written consent of the Company, Purchaser has agreed not to (i) decrease the Offer Price or the form of consideration therefor or decrease the number of Shares sought pursuant to the Offer, (ii) amend or waive the condition that there shall be validly tendered and not withdrawn prior to the time the Offer expires a number of Shares which constitutes at least a majority of the Shares outstanding on a fully-diluted basis on the date of purchase, (iii) extend the expiration date of the Offer (except that Purchaser may extend the expiration date of the Offer (a) as required by any rule, regulation or interpretation of the Commission, (b) for such periods as Purchaser may reasonably deem necessary (but not to a date later than the 60th calendar day after the date of commencement) in the event that any condition to the Offer is not satisfied, or (c) for one or more times for an aggregate period of up to 15 days (not to exceed 60 calendar days from the date of commencement) for any reason other than those specified in the immediately preceding clause (a) or clause (b)), or (iv) change any condition or impose additional conditions to the Offer or amend any term of the Offer in any manner adverse to holders of Shares; provided, however, that, except as set forth above, Purchaser may waive any other condition to the Offer in its sole discretion; and provided further, that the Offer (i) may be extended in connection with an increase in the consideration to be paid pursuant to the Offer so as to comply with applicable rules and regulations of the Commission and (ii) will, for one time only, be automatically extended for a period which ends on the 15th business day from the date the Company shall have received an Acquisition Proposal (as defined below) in the event the Company shall receive such Acquisition Proposal less than ten business days prior to the expiration of the Offer. Assuming the prior satisfaction or waiver of the conditions to the Offer, Purchaser has agreed to accept for payment, and pay for, in accordance with the terms of the Offer, all Shares validly tendered and not withdrawn pursuant to the Offer as soon as practicable after the expiration date thereof. Board Representation. The Merger Agreement provides that upon the purchase by Parent or any of its subsidiaries of such number of Shares which represents at least a majority of the outstanding Shares on a fully-diluted basis, and from time to time thereafter, Parent shall be entitled to designate such number of directors, rounded up to the next whole number (but in no event more than one less than the total number of directors on the Board of the Company), as will give Parent, subject to compliance with Section 14(f) of the Exchange Act, 22 23 representation on the Board equal to the product of (x) the number of directors on the Board (giving effect to any increase in the number of directors pursuant to the Merger Agreement) and (y) the percentage that such number of Shares so purchased bears to the aggregate number of Shares outstanding (such number being the "Board Percentage"). The Company has agreed, upon request of Parent and subject to applicable law, to promptly satisfy the Board Percentage by increasing the size of the Board or using its best efforts to secure the resignations of such number of directors as is necessary to enable Parent's designees to be elected to the Board and to cause Parent's designees promptly to be so elected, provided that no such action shall be taken which would result in there being, prior to the consummation of the Merger, less than two directors of the Company that are not affiliated with Parent. The Company has agreed to take, at its expense and at Parent's request, all lawful action necessary to effect any such election, including, without limitation, mailing to the Stockholders the information required by Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder, unless such information has previously been provided to the Stockholders in the Schedule 14D-9. Parent has agreed to supply the Company in writing and be solely responsible for any information with respect to itself and its nominees, directors and affiliates required by Section 14(f) of the Exchange Act and Rule 14f-1 thereunder. Following the election or appointment of Parent's designees pursuant to the Merger Agreement and prior to the Effective Time of the Merger, any amendment or termination of the Merger Agreement, extension for the performance or waiver of the obligations or other acts of Parent or Purchaser or waiver of the Company's rights thereunder shall require the concurrence of a majority of the directors of the Company then in office who are Continuing Directors. The term "Continuing Director" means (i) each member of the Board on the date of the Merger Agreement who voted to approve the Merger Agreement and (ii) any successor to any Continuing Director that was recommended to succeed such Continuing Director by a majority of the Continuing Directors then on the Board. Consideration to be Paid in the Merger. The Merger Agreement provides that upon the terms and subject to the conditions set forth in the Merger Agreement, Purchaser will be merged with and into the Company, with the Company continuing as the surviving corporation and as a direct wholly owned subsidiary of Parent. At the Effective Time, by virtue of the Merger and without any action on the part of Purchaser, the Company or the holders of any of the Shares, each Share issued and outstanding immediately prior to the Effective Time (excluding Shares owned directly or indirectly by the Company or by Parent, Purchaser or any other subsidiary of Parent and Dissenting Shares) shall be converted into the right to receive the per share amount actually paid in the Offer in cash, without any interest thereon, less any required withholding taxes. Each share of the capital stock of Purchaser issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable share of common stock, par value $.01 per share, of the Surviving Corporation. Stockholder Meeting. The Merger Agreement provides that as soon as practicable following the acceptance for payment of and payment for Shares by Purchaser in the Offer, the Company and Parent shall prepare and file with the Commission a proxy statement (if required by applicable law) in definitive form relating to a meeting of the Stockholders to approve the Merger (as may be amended from time to time, the "Proxy Statement"). Pursuant to the Merger Agreement, the Company is required to use all commercially reasonable efforts to respond to all Commission comments with respect to the Proxy Statement and to cause the Proxy Statement to be mailed to the Stockholders at the earliest practicable date. The Merger Agreement also provides that the Company will, as soon as practicable following the acceptance for payment of and payment for Shares in the Offer, duly call, give notice of, convene and hold a meeting (the "Special Meeting") of its Stockholders for the purpose of approving the Merger Agreement and the transactions contemplated thereby. At the Special Meeting, Parent shall cause all the Shares then owned by Parent and Purchaser to be voted in favor of the Merger. Notwithstanding the foregoing, in the event Purchaser acquires at least 90% of the outstanding Shares in the Offer, Parent, Purchaser and the Company have agreed to take, at the request of Purchaser, all necessary and appropriate action to cause the Merger to become effective, as soon as practicable after the expiration of their Offer, without a meeting of the Stockholders in accordance with Section 253 of the DGCL. Representations and Warranties. The Merger Agreement contains various representations and warranties of the parties thereto. These include representations and warranties by the Company with respect to corporate existence and power, capital structure, corporate authorization, noncontravention, consents and approvals. Commission filings, information supplied, compliance with applicable laws, litigation, taxes, pension and benefit plans and ERISA, absence of certain changes or events, absence of undisclosed material liabilities, opinion of 23 24 financial advisor, vote required, labor matters, intangible property, environmental matters, real property, board recommendation, material contracts, related party transactions, indebtedness, liens, customers and suppliers and other matters. Parent and Purchaser have also made certain representations and warranties with respect to corporate existence and power, corporate authorization, noncontravention, consents and approvals, information supplied, board recommendation, financing and other matters. Conduct of Business Pending the Merger. The Company has agreed as to the Company and its subsidiaries that during the period from the date of the Merger Agreement to the Effective Time, except as otherwise provided in the Merger Agreement or consented to by Parent in writing, each of the Company and its subsidiaries will conduct its business in the usual, regular and ordinary course of business in substantially the same manner as conducted prior to the date of the Merger Agreement and shall use all reasonable efforts to preserve intact its business organization, keep available the services of its current officers and employees and preserve its relationships with customers, suppliers and others with whom it has business dealings. The Company has further agreed that it shall not: (i) declare or pay any dividends on or make any other distributions in respect of any of its capital stock; (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock; (iii) repurchase or otherwise acquire any shares of its capital stock, except as contemplated by the Merger Agreement or as required by the terms of its securities outstanding or any employee benefit plan in effect on the date of the Merger Agreement; (iv) grant any options, warrants or rights to purchase Shares; (v) except as contemplated by the Merger Agreement, amend the terms of or reprice any option or amend the terms of any of the Stock Option Plans; (vi) issue, deliver or sell, or authorize or propose to issue, deliver or sell, any shares of its capital stock, any voting debt or any securities convertible into, or any rights, warrants or options to acquire, any such shares, voting debt or convertible securities, other than issuances of Shares upon the exercise of options or warrants that were outstanding on the date of the Merger Agreement; (vii) as to the Company only make or propose to make any changes in its Certificate of Incorporation or Bylaws; (viii) merge or consolidate with, or acquire any equity interest in, any corporation, partnership, association or other business organization, or enter into an agreement with respect thereto; (ix) acquire or agree to acquire any assets of any corporation, partnership, association or other business organization or division thereof, except for the purchase of inventory and supplies in the ordinary course of business or the acquisition by the Company or any subsidiary thereof of equity interests in any customer or supplier of the Company in satisfaction of outstanding claims against such party in bankruptcy proceedings consistent with past practice; (x) sell, lease, encumber or otherwise dispose of, or agree to sell, lease (whether such lease is an operating or capital lease), encumber or otherwise dispose of, any of its assets (including, without limitation, any capital stock or other ownership interest of any subsidiary of the Company) except sales of inventory or sales or returns of obsolete or surplus equipment in the ordinary course of business consistent with past practice; (xi) authorize, recommend, propose or announce an intention to adopt a plan of complete or partial liquidation or dissolution of the Company; (xii) except as expressly permitted by the terms of the Merger Agreement, knowingly or intentionally take or agree or commit to take any action that is reasonably likely to result in any of the Company's representations or warranties contained in the Merger Agreement being untrue in any material respect or any of the Company's covenants contained in the Merger Agreement or any of the conditions to the Merger not being satisfied in all material respects; (xiii) without the prior written consent of Parent, grant any increases in the compensation of its directors, officers or key employees, pay or agree to pay any pension, retirement allowance or other employee benefit not required or contemplated to be paid prior to the Effective Time by any of its existing benefit plans or employee arrangements as in effect on the date of the Merger Agreement to any such director, officer or key employee, enter into any new, or materially amend any existing, employment, severance or termination agreement with any such director, officer or key employee or, except as may be required to comply with applicable law, become obligated under any new employee benefit plan or employee arrangement, which was not in existence on the date of the Merger Agreement, or amend any such plan or arrangement in existence on the date of the Merger Agreement if such amendment would have the effect of materially enhancing any benefits thereunder; (xiv) without the consent of Parent (which shall not be unreasonably withheld), assume or incur any indebtedness for borrowed money or guarantee any such indebtedness, issue or sell any debt securities or warrants or rights to acquire debt securities of the Company or any of its subsidiaries or guarantee any debt securities of others, or enter into any lease (whether such lease is an 24 25 operating or a capital lease) or create any mortgages, liens, security interests or other encumbrances on the property of the Company or any of its subsidiaries or enter into any "keep well" or other agreement or arrangement to maintain the financial condition of another person except for (x) indebtedness incurred by the Company from time to time for working capital purposes in the ordinary course of business under the Second Amended and Restated Credit Agreement, dated as of December 14, 1995, among the Company, the financial institutions party thereto and the First National Bank of Chicago, as agent (y) indebtedness incurred to fund capital expenditures permitted by the Merger Agreement and (z) entering into leases for personal property in the ordinary course of business consistent with past practice; (xv) without the prior written consent of Parent (which shall not reasonably be withheld), enter into any contracts involving aggregate annual payments in excess of $250,000 except for license agreements entered into in the ordinary course of business, consistent with past practice, or, modify, rescind, terminate, waive, release or otherwise amend in any material respect any of the terms or provisions of any material contract in any manner material and adverse to the Company or any subsidiary thereof; (xvi) take any action, other than in the ordinary course of business consistent with past practice or as required by the Commission or by law, with respect to accounting policies, procedures and practices; or (xvii) incur any capital expenditures in excess of $100,000, except as permitted by the Merger Agreement. Parent has agreed as to Parent and Purchaser and its subsidiaries that during the period from the date of the Merger Agreement to the Effective time, Parent will not knowingly or intentionally take or agree or commit to take, nor will it permit Purchaser or any of the subsidiaries of Parent to take or agree or commit to take, any action to prohibit or prevent the financing sources of Parent and Purchaser from providing the debt and equity financing contemplated by the Financing Commitments. Other Agreements. The Company, Parent and Purchaser have agreed to use their respective commercially reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable, under applicable laws and regulations or otherwise, to consummate and make effective the transactions contemplated by the Merger Agreement, subject, as applicable, to Stockholder approval, including cooperating fully with the other party, including by provision of information and making of all necessary filings in connection with, among other things, approvals under the HSR Act. The Company has agreed to cooperate with Parent's and Purchaser's efforts to secure the financing contemplated by the Financing Commitments, such cooperation to include providing such information to Parent's and Purchaser's financing sources as Parent or Purchaser may reasonably request and making available senior officers and such other employees of the Company as Parent and Purchaser may reasonably request to assist in preparing offering documents and marketing materials and to participate in any marketing and sales efforts relating to the Financing Commitments as reasonably requested by Parent consistent with their other business obligation; provided that the Company shall incur no liability as a result of participation by any officer or employee in such financing efforts. Parent and the Company have also made certain agreements regarding publicity, access to information and confidentiality. The Company has further agreed to use its reasonable efforts to assist Parent, at Parent's expense, in obtaining any consent from third parties necessary to allow the Company to continue operating its business as presently conducted as a result of the consummation of the Offer and the Merger. No Solicitation. From and after the date of the Merger Agreement until the termination thereof, neither the Company or any of its subsidiaries, nor any of their respective officers, directors, representatives, agents or affiliates (including, without limitation, any investment banker, attorney or accountant retained by the Company or any of its subsidiaries) (such officers, directors, employees, representatives, agents, affiliates, investment bankers, attorneys and accountants being collectively referred to as "Representatives"), will, and the Company will use its reasonable best efforts to cause the employees of the Company and its subsidiaries not to, directly or indirectly, initiate, solicit or encourage (including by way of furnishing information or assistance), or take any other action to facilitate, any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Acquisition Proposal (as defined below), or enter into or maintain or continue discussions or negotiate with any person or entity in furtherance of such inquiries or for the purpose of obtaining an Acquisition Proposal, or agree to or endorse any Acquisition Proposal, and neither the Company nor any of its subsidiaries will authorize or permit any of its Representatives to take any such action, and the Company shall notify Parent orally (within one business day) and in writing (as promptly as practicable) of all of the relevant 25 26 details relating to, and all material aspects of, all inquiries and proposals which it or any of its subsidiaries or any of their respective Representatives may receive relating to any of such matters and, if such inquiry or proposal is in writing, the Company shall deliver to Parent a copy of such inquiry or proposal as promptly as practicable; provided, however, that the Board is not prohibited from (i) furnishing information to, or entering into discussions with, any person or entity that makes an unsolicited written bona fide Acquisition Proposal (provided that such person or entity has the necessary funds or commitments to provide the funds to effect such Acquisition Proposal; provided further, however that the Company shall have two business days from the date it receives such Acquisition Proposal to determine whether such person or entity has such funds or commitments) if, and only to the extent that, (A) the Board, after consultation with and based upon the advice of independent legal counsel (who may be the Company's regularly engaged independent legal counsel), determines in good faith that such action is advisable for the Board to comply with its fiduciary duties to Stockholders under applicable law, (B) prior to taking such action, the Company (x) provides reasonable prior notice to Parent to the effect that it is taking such action and (y) receives from such person or entity an executed confidentiality agreement in reasonably customary form, and (C) the Company shall, to the extent consistent with the Board's fiduciary duties to Stockholders under applicable law, promptly and continuously advise Parent as to all of the relevant details relating to, and all material aspects of, any such discussions or negotiations; (ii) failing to make or reaffirm, withdrawing, adversely modifying or taking a public position materially inconsistent with its recommendation to the Stockholders (which may include making any statement required by Rule 14e-2 under the Exchange Act) to approve the Merger Agreement and the transactions contemplated thereby, including the Merger, and to accept the Offer and tender their Shares pursuant thereto, if there exists an Acquisition Proposal and the Board, after consultation with and based upon the advice of independent legal counsel (who may be the Company's regularly engaged independent counsel), determines in good faith that such action is advisable for the Board to comply with its fiduciary duties to Stockholders under applicable law; or (iii) making a "stop-look-and-listen" communication with respect to an Acquisition Proposal of the nature contemplated in, and otherwise in compliance with, Rule 14d-9 under the Exchange Act as a result of an Acquisition Proposal. The term "Acquisition Proposal" means any of the following transactions (other than the transactions among the Company, Parent and Purchaser contemplated in the Merger Agreement) involving the Company or any of its subsidiaries: (i) any merger, consolidation, share exchange, recapitalization, business combination or other similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 10% or more of the assets of the Company and its subsidiaries, taken as a whole, in a single transaction or series of transactions; (iii) any tender offer or exchange offer for 10% or more of the outstanding shares of capital stock of the Company or the filing of a registration statement under the Securities Act in connection therewith; or (iv) any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing. Fees and Expenses. The Merger Agreement provides that all costs and expenses incurred in connection with the Merger Agreement and the transactions contemplated thereby shall be paid by the party incurring such expense, except as otherwise provided in the Merger Agreement and except with respect to claims for damages incurred as a result of the breach of the Merger Agreement. In addition, the Company has agreed to pay Parent a fee in immediately available funds equal to $3,000,000 upon the termination of the Merger Agreement in accordance with the terms thereof if either of the following events shall have occurred (each, a "Trigger Event"): (i) the Board shall have (A) withdrawn or adversely modified in any material respect or taken a public position materially inconsistent with, its approval or recommendation of the Offer, the Merger, the Merger Agreement or the Stockholders Agreement or (B) in the event an Acquisition Proposal has been made to the Company prior to the expiration of the Offer, the Company shall have failed to publicly reaffirm its approval or recommendation of the Offer, the Merger, the Merger Agreement and the Stockholders Agreement on or before the earlier to occur of (1) the tenth business day following the date on which such Acquisition Proposal shall have been made or (2) the third business day prior to the latest possible expiration date of the Offer; provided that a "stop-look-and-listen" communication, by itself, shall not constitute a Trigger Event; or (ii) an Acquisition Proposal has been recommended or accepted by the Company or the Company shall have entered into an agreement (other than a confidentiality agreement as contemplated by the Merger Agreement) with respect to an Acquisition Proposal. In addition, Parent has agreed to pay to the Company a fee in immediately available funds equal to $3,000,000 upon the termination of the Merger Agreement in the event the Offer expires or is withdrawn, abandoned or terminated 26 27 if the sole reason for such expiration, withdrawal, abandonment or termination is the failure of the debt financing sources for Parent and Holdings to provide the debt financing pursuant to the Financing Commitments. Any amounts payable to Parent pursuant to the foregoing that are not paid when due shall bear interest at the prime rate from the date due through and including the date paid. Conditions to the Merger. Pursuant to the Merger Agreement, the respective obligation of each party to effect the Merger is subject to the satisfaction prior to the Closing Date of the following conditions: (i) the Merger Agreement and the Merger shall have been approved and adopted by the affirmative vote or written consent of the holders of a majority of the outstanding Shares entitled to vote thereon or consent thereto if such vote or consent is required by applicable law; provided that Parent and Purchaser shall vote all Shares purchased pursuant to the Offer or the stockholders Agreement in favor of the Merger, (ii) the waiting period (and any extension thereof) applicable to the Merger under the HSR Act shall have been terminated or shall have expired, and no restrictive order or other requirements shall have been placed on the Company, Parent, Purchaser or the Surviving Corporation in connection therewith, (iii) no temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Merger shall be in effect; provided, however, that prior to invoking the condition, each party shall use all commercially reasonable efforts to have any such decree, ruling, injunction or order vacated, (iv) no statute, rule, order, decree or regulation shall have been enacted or promulgated by any government or governmental agency or authority which prohibits the consummation of the Merger; and (v) Purchaser shall have accepted for payment and paid for the Shares tendered in the Offer such that, after such acceptance and payment, Parent and its affiliates shall own, at consummation of the Offer, a majority of the outstanding Shares of the Company on a fully diluted basis; provided that this condition shall be deemed to have been satisfied if Purchaser fails to accept for payment and pay for Shares pursuant to the Offer in violation of the terms and conditions of the Offer. The obligations of Parent and Purchaser to effect the Merger is further subject to (i) the receipt by Parent and Holdings of the debt and equity financing pursuant to the Financing Commitments and (ii) there being no more than ten percent of the Shares outstanding immediately prior to the Effective Time which shall be Dissenting Shares. Termination. The Merger Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after approval of the matters presented in connection with the Merger by the stockholders of the Company or Parent by (i) mutual written consent of the Company and Parent or by mutual action of their respective Boards of Directors; (ii) either the Company or Parent, (a) so long as such party is not then in material breach of its obligations under the Merger Agreement, if there has been a breach of any representation, warranty, covenant or agreement (determined without giving effect to any "Material Adverse Effect" (defined as any events, changes or effects with respect to any person which, individually or in the aggregate, could reasonably be expected to have a material adverse effect on the business, results of operations or financial conditions of such party and its subsidiaries taken as a whole, except for certain matters with respect to the Company), "materiality" or similar qualification contained therein) on the part of the other set forth in the Merger Agreement, which breach (other than a breach of certain covenants and agreements specified in the Merger Agreement) has not been cured within ten calendar days following receipt by the breaching party of notice of such breach, unless such breach could not, individually or in the aggregate with other breaches, be reasonably expected to (1) have a "Material Adverse Effect" under the Merger Agreement or (2) materially adversely affect the ability of the parties thereto to consummate the transactions contemplated thereby, or (b) if any permanent injunction or other order of a court or other competent authority preventing the consummation of the Offer or the Merger shall have become final and non-appealable; (iii) either the Company or Parent, so long as such party is not then in material breach of its obligations under the Merger Agreement, if the Merger shall not have been consummated on or before the 135th calendar day following the consummation of the Offer; provided, that such right to terminate the Merger Agreement under this clause shall not be available to any party whose failure to fulfill any obligation under the Merger Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date; (iv) Parent in the event that a Trigger Event has occurred prior to the consummation of the Offer (see "Fees and Expenses" above); (v) Parent in the event an Acquisition Proposal has been made to the Company prior to the expiration of the Offer and the Company shall fail to publicly reaffirm its approval or recommendation of the Offer, the Merger, the Merger Agreement and the Stockholders Agreement on or before the earlier to occur of (a) the tenth business day following the date on which such Acquisition Proposal 27 28 shall have been made or (b) the third business day prior to the latest possible expiration of the Offer; (vi) Parent or the Company, if the Offer terminates, is withdrawn, abandoned or expires by reason of the failure to satisfy any of the conditions described in Section 14 of this Offer to Purchase; (vii) the Company, if the Offer shall have expired or have been withdrawn, abandoned or terminated without any Shares being purchased by Purchaser thereunder on or prior to the 60th calendar day after the date of commencement of the Offer; (viii) by the Company, if (a) the Board of Directors of the Company shall fail to make or reaffirm, withdraw, adversely modify or take a public position materially inconsistent with its recommendation that the Stockholders approve the Merger Agreement and the Merger and accept the Offer and tender their Shares pursuant thereto if there exists an Acquisition Proposal and the Board of Directors of the Company, after consultation with and based upon the advice of independent legal counsel (who may be the Company's regularly engaged independent counsel), determines in good faith that such action is advisable for the Board of Directors of the Company to comply with its fiduciary duties to holders of Shares under applicable law, and (b) the Company shall have paid a termination fee to Parent or Parent's designee in the amount of $3,000,000, provided, however, that if the excess of (A) the sum of (x) the average balance of the Company's cash on hand for the ten day period preceding the date the Company seeks to terminate this Agreement under this clause (h) plus (y) the average available capacity under the Company Credit Agreement over the ten day period preceding the date the Company wishes to terminate the Merger Agreement under this clause (h) over (B) $2,000,000 (such excess being referred to as the "Available Cash"), is less than $3,000,000, then in lieu of having paid the $3,000,000 termination fee, the Company shall have (A) paid the entire amount of the Available Cash to Parent or Parent's designee and (B) delivered to Parent a written commitment by the Company (in a form satisfactory to Parent), unconditionally guaranteed by a financially responsible and reputable entity (as determined by Parent in its sole discretion), acknowledging the Company's obligation to pay the difference between the $3,000,000 termination fee and the amount of Available Cash paid by the Company to Parent or Parent's designee in connection with the termination of the Merger Agreement (together with interest at the prime rate accruing from the date on which payment of the termination fee contemplated by this clause (h) would have been due and payable) on the earlier of (A) such date as the Company shall have additional Available Cash sufficient to pay such difference, (B) the closing of the tender offer relating to the Acquisition Proposal with respect to which the Company terminated the Merger Agreement (the "Competing Offer"), (C) the expiration of the Competing Offer or (D) the date which is 60 calendar days after the date on which the Offer was commenced; and (ix) the Company if Purchaser shall not have commenced the Offer within ten business days after the execution and delivery of the Merger Agreement by Parent and Purchaser. In the event of termination of the Merger Agreement by either the Company or Parent as provided therein, the Merger Agreement shall forthwith become void and there shall be no liability or obligation on the part of Parent, Purchaser or the Company, or their respective affiliates, officers, directors or shareholders, except to the extent that such termination results from the material breach by a party to the Merger Agreement of any of its representations or warranties, or of any of its covenants or agreements, in each case, as set forth in the Merger Agreement. Indemnification. The Merger Agreement provides that the Company shall, and from and after the Effective Time, the Surviving Corporation shall, indemnify, defend and hold harmless each person who was at the date of the Merger Agreement, or had been at any time prior to the date of the Merger Agreement or who becomes prior to the Effective Time, an officer, director, employee or agent of the Company (the "Indemnified Parties") against all losses, claims, damages, costs, expenses (including attorneys' fees and expenses), liabilities or judgments or amounts paid in settlement with the approval of the indemnifying party (which approval shall not be unreasonably withheld) of or in connection with any threatened or actual claim, action, suit, proceeding or investigation based in whole or in part on or arising in whole or in part out of the fact that such person is or was a director, officer, employee or agent of the Company whether pertaining to any matter existing or occurring at or prior to the Effective Time or any acts or omissions occurring or existing at or prior to the Effective Time and whether asserted or claimed prior to, or at or after, the Effective Time ("Indemnified Liabilities"), including all Indemnified Liabilities based in whole or in part on, or arising in whole or in part out of, or pertaining to the Merger Agreement or the transactions contemplated thereby, in each case to the full extent a corporation is permitted under the DGCL to indemnify its own directors or officers, as the case may be, and the Company and the Surviving Corporation, as the case may be, shall pay expenses in advance of the final disposition of any such action or proceeding to each Indemnified Party to the full extent permitted by law. All rights to indemnification, 28 29 including provisions relating to advances of expenses incurred in defense of any action or suit, existing in favor of the Indemnified Parties with respect to matters occurring through the Effective Time, shall survive the Merger and shall continue in full force and effect for a period of not less than six years from the Effective Time; provided, however, that all rights to indemnification in respect of any Indemnified Liabilities asserted or made within such period shall continue until the disposition of such Indemnified Liabilities. Parent and Purchaser have also agreed to unconditionally waive and release the Indemnified Parties from and have agreed to indemnify, defend and hold harmless the Indemnified Parties from and against any and all claims, demands, causes of action, liabilities, costs or expenses, whether arising under contract, statute, common law or otherwise, with respect to environmental matters (including, without limitation any of the foregoing arising under CERCLA or other environmental laws). Directors' and Officers' Insurance. For a period of six years after the Effective Time, the Surviving Corporation shall cause to be maintained in effect the current policies of directors' and officers' liability insurance maintained by the Company and its subsidiaries (provided that Parent may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are no less advantageous in any material respect to the Indemnified Parties) with respect to matters arising before the Effective Time or any acts or omissions occurring or existing at or prior to the Effective Time, provided that the Surviving Corporation shall not be required to pay an annual premium for such insurance in excess of 200% of the last annual premium paid by the Company prior to the date of the Merger Agreement, but in such case shall purchase as much coverage as possible for such amount. Amendment. Subject to applicable law, the Merger Agreement may be amended, modified or supplemented only by written agreement of Parent, Purchaser and the Company at any time prior to the Effective Time with respect to any of the terms contained therein; provided however, that after the consummation of the Offer, no term or condition relating to the procedural or financial aspects of the Merger may be amended or modified in any manner adversely affecting the Stockholders including, without limitation, by reducing the amount of or changing the form of Merger Consideration. Timing. The Merger Agreement provides that the closing of the Merger shall occur on the second business day after satisfaction and/or waiver of the conditions set forth in the Merger Agreement unless another date, time or place is agreed to in writing by Parent, Purchaser and the Company. The Merger shall become effective upon the filing of a certificate of merger or a certificate of ownership and merger, as the case may be, or at such time thereafter as may be provided in such certificate (as the Company and Purchaser shall agree), with the Secretary of State of the State of Delaware, as provided in the DGCL, which certificate shall be filed as soon as practicable on or after the date of the closing of the Merger. The exact timing and details of the Merger will depend upon legal requirements and a variety of other factors, including the number of Shares acquired by Purchaser pursuant to the Offer. Although Parent has agreed to cause the Merger to be consummated on the terms set forth above, there can be no assurance as to the timing of the Merger. Other Agreements Confidentiality Agreements. On December 10, 1996, the Parent and the Company entered into a Confidentiality Agreement (the "Confidentiality Agreement") pursuant to which the Company agreed to supply certain information to the Parent and the Parent agreed to treat such information as confidential and to use such information solely in connection with the evaluation of a possible transaction with the Company. The Parent agreed that until December 10, 1997, it would not, among other things, take any action that would cause or facilitate the acquisition by any person, including the Parent or its affiliates, of any securities or assets of, or a merger or business combination with, the Company. 29 30 The Stockholders Agreement The following is a summary of the material terms of the Stockholders Agreement. This summary is not a complete description of the terms and conditions thereof and is qualified in its entirety by reference to the full text thereof which is incorporated herein by reference and a copy of which has been filed with the Commission as an exhibit to the Schedule 14D-1. The Stockholders Agreement may be examined, and copies thereof may be obtained, as set forth in Section 8 above. Tender of Shares. Simultaneously with the execution of the Merger Agreement, Parent, Purchaser and the Selling Stockholder entered into the Stockholders Agreement. Upon the terms and subject to the conditions of such agreement, the Selling Stockholder has (i) agreed to validly tender and not to withdraw pursuant to and in accordance with the terms of the Offer, not later than the fifth business day after commencement of the Offer, the Shares owned beneficially by it and (ii) agreed to permit Parent and Purchaser to publish and disclose its identity and ownership of Shares and the nature of its commitments, arrangements and understandings under the Stockholders Agreement in the documents relating to the Offer and, if stockholder approval for the Merger is required, in any proxy statement relating thereto (including all documents and schedules filed with the Commission). Voting. The Selling Stockholder has agreed that during the period commencing on the date of the Stockholders Agreement and continuing until the first to occur of the Effective Time, the termination of the Stockholders Agreement or termination of the Merger Agreement in accordance with its terms, at any meeting of the Stockholders, however called, the Selling Stockholder shall vote (or cause to be voted) the Shares held of record or beneficially owned by the Stockholder, (i) in favor of the Merger, the execution and delivery by the Company of the Merger Agreement and the approval of the terms thereof, and each of the other actions contemplated by the Merger Agreement and the Stockholders Agreement and any actions required in furtherance thereof; (ii) against any action or agreement that would result in a breach in any respect of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement or the Stockholders Agreement; and (iii) except as otherwise agreed to in writing in advance by Parent, against the following actions (other than the Merger and the transactions contemplated by the Merger Agreement): (A) any extraordinary corporate transaction, such as a merger, consolidation or other business combination involving the Company or its subsidiaries; (B) a sale, lease or transfer of a material amount of assets of the Company or its subsidiaries, or a reorganization, recapitalization, dissolution or liquidation of the Company or its subsidiaries; (C)(1) any change in a majority of the persons who constitute the board of directors of the Company; (2) any change in the present capitalization of the Company or any amendment of the Company's Certificate of Incorporation or Bylaws; (3) any other material change in the Company's corporate structure or business; or (4) any other action which, in the case of each of the matters referred to in clauses (c)(1), (2), or (3), is intended, or could reasonably be expected, to impede, interfere with, delay, postpone, or materially adversely affect the Merger and the transactions contemplated by the Stockholders Agreement and the Merger Agreement. The Selling Stockholder further agreed not to enter into any agreement or understanding with any person or entity the effect of which would be inconsistent or violative of the provisions and agreements described above. In addition, the Selling Stockholder granted to Parent a proxy to vote the Shares of the Selling Stockholder in accordance with the provisions and agreements described above and revoked any proxy previously granted by the Selling Stockholder with respect to such Shares. Representations, Warranties, Covenants and Other Agreements. In connection with the Stockholders Agreement, the Selling Stockholder has made certain customary representations, warranties and covenants, including with respect to (i) its ownership of the Shares and its rights and powers with respect thereto, (ii) its authority to enter into and perform its obligations under the Stockholders Agreement, (iii) noncontravention and enforceability, (iv) absence of conflicts, (v) the absence of liens and encumbrances on and in respect of its Shares, (vi) restrictions on the transfer of its Shares and the granting of proxies with respect thereto, (vii) the solicitation of Acquisition Proposals, and (viii) the waiver of its appraisal rights. Termination. Other than as provided therein, the Stockholders Agreement terminates by its terms upon the termination of the Merger Agreement by Parent or the Company. The Selling Stockholder also has the absolute right, exercisable in its sole description, to terminate the Stockholders Agreement if the Merger Agreement is 30 31 amended in any respect in a manner that is adverse to the Selling Stockholder or if the Offer is terminated, withdrawn, abandoned, expires or is modified in any manner that is adverse to the Selling Stockholder. Other Matters Delaware Law. Section 203 of the DGCL prevents an "interested stockholder" (generally, a stockholder owning 15% or more of a corporation's outstanding voting stock or an affiliate or associate thereof) from engaging in a "business combination" (defined to include a merger and certain other transactions) with a Delaware corporation for a period of three years following the date on which such stockholder became an interested stockholder unless (i) prior to such date, the corporation's board of directors approved either the business combination or the transaction which resulted in such stockholder becoming an interested stock holder, (ii) upon consummation of the transaction which resulted in such stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the corporation's voting stock outstanding at the time the transaction commenced (excluding shares owned by certain employee stock plans and persons who are directors and also officers of the corporation) or (iii) on or subsequent to such date, the business combination is approved by the corporation's board of directors and authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock not owned by the interested stockholder. The Company, pursuant to a resolution of the Board, has rendered Section 203 of the DGCL inapplicable to the Offer and the Merger. Accordingly, the restrictions of Section 203 of the DGCL do not apply to the transactions contemplated by the Offer or the Merger Agreement. Charter Restrictions. The Company's certificate of incorporation provides that any transaction or contract involving a merger of the Company or any of its subsidiaries or certain other enumerated transactions with the Company or any of its subsidiaries (a "Business Combination") with any Interested Stockholder (as defined below) or affiliate of any Interested Stockholder shall require the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors voting together as a single class. Such vote is not required for any Business Combination if, among other things, the Business Combination shall have been approved by a majority of the Disinterested Directors (as defined below). For purposes of the foregoing, (i) "Disinterested Director" means any member of the Board not affiliated with the Interested Stockholder and who was a member of the Board prior to the time the Interested Stockholder became an Interested Stockholder, and any successor of a Disinterested Director recommended by a majority of the Disinterested Directors and (ii) "Interested Stockholder" means any person (other than the Company, any subsidiary of the Company or any stockholder owning fifty percent (50%) or more of the Company's outstanding securities on the date its certificate of incorporation was filed) who or which: (A) is the beneficial owner of twenty percent (20%) or more of the voting power of the outstanding stock of the company, or (B) is an affiliate of the Company and at any time in the prior two (2) years owned twenty percent (20%) or more of the then outstanding voting stock of the Company, or (C) is an assignee of voting stock which at any time in the prior two (2) years was owned by an Interested Stockholder and the assignment of such stock was not pursuant to a public offering (in calculating beneficial ownership for purposes of the foregoing, shares subject to options, etc. are included in determining the number of shares owned but not included in determining the total number of shares outstanding). The Offer and the Merger have been approved by all of the Disinterested Directors. Accordingly, the foregoing restrictions do not apply to the Offer or the Merger. Appraisal Rights. No appraisal rights are available to holders of Shares in connection with the Offer. However, if the Merger is consummated, holders of Shares will have certain rights under Section 262 of the DGCL to dissent and demand appraisal of, and payment in cash for the fair value of, their Shares. Such rights, if the statutory procedures are complied with, could lead to a judicial determination of the fair value (excluding any element of value arising from accomplishment or expectation of the Merger) required to be paid in cash to such dissenting holders for their Shares. Any such judicial determination of the fair value of Shares could be based upon considerations other than or in addition to the Offer Price and the market value of the Shares, including 31 32 asset values and the investment value of the Shares. The value so determined could be more or less than the Offer Price or the Merger Consideration. If any holder of Shares who demands appraisal under Section 262 of the DGCL fails to perfect, or effectively withdraws or loses his right to appraisal, as provided in the DGCL, the Shares of such holder will be converted into the Merger Consideration in accordance with the Merger Agreement. A Stockholder may withdraw his demand for appraisal by delivery to Parent of a written withdrawal of his demand for appraisal and acceptance of the Merger. Failure to follow the steps required by Section 262 of the DGCL for perfecting appraisal rights may result in the loss of such rights. Going Private Transactions. Rule 13e-3 under the Exchange Act is applicable to certain "going-private" transactions. Purchaser does not believe that Rule 13e-3 will be applicable to the Merger unless, among other things, the Merger is completed more than one year after termination of the Offer. If applicable, Rule 13e-3 would require, among other things, that certain financial information regarding the Company and certain information regarding the fairness of the Merger and the consideration offered to minority Stockholders be filed with the Commission and disclosed to minority Stockholders prior to consummation of the Merger. 13. DIVIDENDS AND DISTRIBUTIONS If, on or after the date of the Merger Agreement, the Company should (a) split, combine or otherwise change the Shares or its capitalization, (b) acquire currently outstanding Shares or otherwise cause a reduction in the number of outstanding Shares or (c) issue or sell additional Shares, shares of any other class of capital stock, other voting securities or any securities convertible into, or rights, warrants or operations, conditional or otherwise, to acquire, any of the foregoing, then subject to the provisions of Section 14 below, Purchaser, in its sole discretion, may make such adjustments as it deems appropriate in the Offer Price and other terms of the Offer, including, without limitation, the number or type of securities offered to be purchased. If, on or after the date of the Merger Agreement, the Company should declare or pay any cash dividend on the Shares or make other distributions on the Shares or issue with respect to the Shares, any additional Shares, shares of any other class of capital stock, other voting securities or any securities convertible into, or rights, warrants or options, conditional or otherwise, to acquire, any of the foregoing, payable or distributable to Stockholders of record on a date prior to the transfer of the Shares purchased pursuant to the Offer to Purchase or its nominee or transferee on the Company's stock transfer records, then, subject to the provisions of Section 14 below, (i) the Offer Price may, in the sole discretion of Purchaser, be reduced by the amount of any such cash dividend or cash distribution and (ii) the whole of any such noncash dividend, distribution or issuance to be received by the tendering Stockholders will (A) be received and held by the tendering Stockholders for the account of Purchaser and will be required to be promptly remitted and transferred by each tendering Stockholder to the Depositary for the account of Purchaser, accompanied by appropriate documentation of transfer, or (B) at the direction of Purchaser, be exercised for the benefit of Purchaser, in which case the proceeds of such exercise will promptly be remitted to Purchaser. Pending such remittance and subject to applicable law, Purchaser will be entitled to all rights and privileges as owner of any such noncash dividend, distribution, issuance or proceeds and may withhold the entire Offer Price or deduct from the Offer Price the amount or value thereof, as determined by Purchaser in its sole discretion. Pursuant to the terms of the Merger Agreement, the Company is prohibited from taking any of the actions described in the two preceding paragraphs and nothing herein shall constitute a waiver by Purchaser or Parent of any of its rights under the Merger Agreement or a limitation of remedies available to Purchaser or Parent for any breach of the Merger Agreement, including termination thereof. 14. CERTAIN CONDITIONS OF THE OFFER Notwithstanding any other provision of the Offer, Purchaser shall not be required to accept for payment or, subject to any applicable rules and regulations of the Commission, including Rule 14e-l (c) under the Exchange Act (relating to Purchaser's obligation to pay for or return tendered Shares promptly after expiration or 32 33 termination of the Offer), to pay for any Shares tendered, and may postpone the acceptance for payment or, subject to the restriction referred to above, payment for any Shares tendered, and may amend or terminate the Offer (whether or not any Shares have theretofore been purchased or paid for) if, (i) there have not been validly tendered and not withdrawn prior to the Expiration Date a number of Shares which constitutes a majority of the Shares outstanding on a fully-diluted basis on the date of purchase, (ii) any applicable waiting periods under the HSR Act shall not have expired or been terminated prior to the Expiration Date, or (iii) the debt financing sources for Parent and Holdings shall not have provided the applicable debt financing to Parent and Purchaser pursuant to the Financing Commitments, or (iv) at any time on or after the date of the Merger Agreement and before acceptance for payment of, or payment for, such Shares any of the following events shall have occurred: (a) there shall be pending, as of the Expiration Date or at any time thereafter, any litigation that seeks to (1) challenge the acquisition by Parent, Purchaser or any of their respective affiliates or subsidiaries of Shares pursuant to the Offer or restrain, prohibit or delay the making or consummation of the Offer or the Merger, (2) make the purchase of or payment for some or all of the Shares pursuant to the Offer or the Merger illegal, (3) impose limitations on the ability of Parent, Purchaser or any of their respective affiliates or subsidiaries effectively to acquire or hold, or to require Parent, Purchaser, the Company or any of their respective affiliates or subsidiaries to dispose of or hold separate, any material portion of their assets or business, (4) impose material limitations on the ability of Parent, Purchaser, the Company or any of their respective affiliates or subsidiaries to continue to conduct, own or operate, as heretofore conducted, owned or operated, all or any material portion of their businesses or assets, (5) impose or result in material limitations on the ability of Parent, Purchaser or any of their respective affiliates or subsidiaries to exercise full rights of ownership of the Shares purchased by them, including, without limitation, the right to vote the Shares purchased by them on all matters properly presented to the Stockholders, or (6) prohibit or restrict in a material manner the financing of the Offer; (b) there shall have been promulgated, enacted, entered, enforced or deemed applicable to the Offer or the Merger, any Law (defined as any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company or any of its subsidiaries or any of their respective properties or assets), or there shall have been issued any decree, order or injunction, that results in any of the consequences referred to in subsection (a) above; (c) except as set forth on Exhibit D or Schedule 4.1(j) to the Merger Agreement, any event or events shall have occurred that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect (as defined below) on the Company; (d) there shall have occurred (1) any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market in the United States for a period in excess of forty-eight hours, (2) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (3) the commencement of a war, armed hostilities or other international or national calamity, directly or indirectly involving the United States, (4) any limitations (whether or not mandatory) imposed by any governmental authority on the nature or extension of credit or further extension of credit by banks or other lending institutions, or (5) in the case of clauses (3) and (4) above, a material acceleration or worsening thereof; (e) the representations and warranties of the Company contained in the Merger Agreement (without giving effect to any "Material Adverse Effect", "materiality" or similar qualifications contained therein) shall not be true and correct in all respects as of the date of consummation of the Offer as though made on and as of such date except (1) for changes specifically permitted by the Merger Agreement, (2) that those representations and warranties which address matters only as of a particular date shall remain true and correct as of such date, and (3) for breaches or inaccuracies which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company; (f) the obligations of the Company contained in the Merger Agreement (without giving effect to any "Material Adverse Effect", "materiality" or similar qualifications contained therein) to be performed at or prior to the consummation of the Offer shall not have been performed or complied with in all respects by the Company prior to the consummation of the Offer except for failures to perform or comply which, 33 34 individually or in the aggregate, could not (1) reasonably be expected to have a Material Adverse Effect on the Company or (2) materially adversely affect the ability of the parties to the Merger Agreement to consummate the transactions contemplated thereby; (g) the Merger Agreement shall have been terminated in accordance with its terms; (h) prior to the purchase of Shares pursuant to the Offer, an Acquisition Proposal for the Company exists and the Board shall have withdrawn or materially modified or changed (including by amendment of the Schedule 14D-9) in a manner adverse to Purchaser its recommendation of the Offer, the Merger Agreement or the Merger; or (i) it shall have been publicly disclosed or Parent or Purchaser shall have otherwise learned that any person, entity or "group" (as defined in Section 13(d)(3) of the Exchange Act, other than Parent or its affiliates or subsidiaries, or any group of which any of such persons or entities is a member, or any party to the Stockholders Agreement), shall have acquired beneficial ownership (determined pursuant to Rule 13d-3 promulgated under the Exchange Act) of more than 20% of any class or series of capital stock of the Company (including, without limitation, the Shares), through the acquisition of stock, the formation of a group or otherwise, or shall have been granted an option, right or warrant (conditional or otherwise) to acquire beneficial ownership of more than 20% of any class or series of capital stock of the Company (including, without limitation, the Shares). The foregoing conditions are for the sole benefit of Purchaser and its affiliates and may be asserted by Purchaser regardless of the circumstances (including, without limitation, any action or inaction by Purchaser or any of its affiliates) giving rise to any such condition or may be waived by Purchaser, in whole or in part, from time to time in its sole discretion, except as otherwise provided in the Merger Agreement. The failure by Purchaser at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right and may be asserted at any time and from time to time. Any determination by Purchaser concerning any of the events described above shall be final and binding. 15. CERTAIN LEGAL MATTERS Except as described in this Section 15, based on a review of publicly available filings made by the Company with the Commission and other publicly available information concerning the Company, but without any independent investigation thereof, neither Purchaser nor Parent is aware of any license or regulatory permit that appears to be material to the business of the Company and its subsidiaries, taken as a whole, that might be adversely affected by Purchaser's acquisition of Shares as contemplated herein or of any approval or other action by any Governmental Authority that would be required for the acquisition or ownership of Shares by Purchaser as contemplated herein. Should any such approval or other action be required, Purchaser and Parent currently contemplate that such approval or other action will be sought, except as described below under "State Takeover Laws." While, except as otherwise expressly described in this Section 15, Purchaser does not presently intend to delay the acceptance for payment of or payment for Shares tendered pursuant to the Offer pending the outcome of any such matter, there can be no assurance that any such approval or other action, if needed, would be obtained or would be obtained without substantial conditions or that failure to obtain any such approval or other action might not result in consequences adverse to the Company's business or that certain parts of the Company's business might not have to be disposed of if such approvals were not obtained or such other actions were not taken or in order to obtain any such approval or other action. If certain types of adverse action are taken with respect to the matters discussed below, Purchaser could decline to accept for payment or pay for any Shares tendered. See Section 14 above for certain conditions to the Offer. State Takeover Laws. A number of states throughout the United States have enacted takeover statutes that purport, in varying degrees, to be applicable to attempts to acquire securities of corporations that are incorporated or have assets, stockholders, executive offices or places of business in such states. In Edgar v. MITE Corp., the Supreme Court of the United States held that the Illinois Business Takeover Act, which involved state securities laws, that made the takeover of certain corporations more difficult, imposed a substantial burden on interstate commerce and therefore was unconstitutional. In CTS Corp. v. Dynamics Corp. of America, however, the 34 35 Supreme Court of the United States held that a state may, as a matter of corporate law and, in particular, those laws concerning corporate governance, constitutionally disqualify a potential acquiror from voting on the affairs of a target corporation without prior approval of the remaining stockholders, provided that such laws were applicable only under certain conditions. Section 203 of the DGCL limits the ability of a Delaware corporation to engage in business combinations with "interested stockholders" (defined as any beneficial owner of 15% or more of the outstanding voting stock of the corporation) unless, among other things, the corporation's board of directors has given its prior approval to either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder." As indicated above in Section 12, the Company, pursuant to a resolution of the Board, has rendered Section 203 of the DGCL inapplicable to the Offer and the Merger. Based on information supplied by the Company and the Company's representations in the Merger Agreement, Purchaser does not believe that any state takeover statutes apply to the Offer or the Merger. Neither Purchaser nor Parent has currently complied with any state takeover statute or regulation. Purchaser reserves the right to challenge the applicability or validity of any state law purportedly applicable to the Offer or the Merger and nothing in this Offer to Purchase or any action taken in connection with the Offer or the Merger is intended as a waiver of such right. If it is asserted that any state takeover statute is applicable to the Offer or the Merger and an appropriate court does not determine that it is inapplicable or invalid as applied to the Offer or the Merger, Purchaser might be required to file certain information with, or to receive approvals from, the relevant state authorities, and Purchaser might be unable to accept for payment or pay for Shares tendered pursuant to the Offer, or be delayed in consummating the Offer or the Merger. In such case, Purchaser may not be obligated to accept for payment or pay for any Shares tendered pursuant to the Offer. Antitrust. Under the provisions of the HSR Act applicable to the Offer, the purchase of Shares pursuant to the Offer may be consummated following the expiration of a 15-calendar-day waiting period following the filing by Parent of a Pre-Merger Notification and Report Form with respect to the Offer, unless Parent receives a request for additional information or documentary material from the Antitrust Division of the United States Department of Justice (the "Antitrust Division") or the United States Federal Trade Commission ("FTC") or unless early termination of the waiting period is granted. Parent expects to file a Pre-Merger Notification and Report Form with respect to the Offer as soon as practicable following commencement of the Offer. If, within the initial 15- day waiting period, either the Antitrust Division or the FTC requests additional information or documentary material from Parent concerning the Offer, the waiting period will be extended and will expire at 11:59 p.m., New York City time, on the tenth calendar day after the date of substantial compliance by Parent with such request. Only one extension of the waiting period pursuant to a request for additional information is authorized by the HSR Act. Thereafter, such waiting period may be extended only by court order or with the consent of Parent. In practice, complying with a request for additional information or documentary material can take a significant amount of time. In addition, if the Antitrust Division or the FTC raises substantive issues in connection with a proposed transaction, the parties frequently engage in negotiations with the relevant governmental agency concerning possible means of addressing those issues and may agree to delay consummation of the transaction while such negotiations continue. Moreover, the Merger Agreement generally provides that the Offer may be extended for an aggregate period of not more than 60 days in the event that any condition to the Offer is not satisfied. The FTC and the Antitrust Division frequently scrutinize the legality under the antitrust laws of transactions such as Purchaser's proposed acquisition of the Company. At any time before or after Purchaser's purchase of Shares pursuant to the Offer, the Antitrust Division or the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the purchase of Shares pursuant to the Offer or the consummation of the Merger or seeking the divestiture of Shares acquired by Purchaser or the divestiture of substantial assets of Parent or its subsidiaries, or the Company or its subsidiaries. Private parties may also bring legal action under certain circumstances. There can be no assurance that a challenge to the Offer on antitrust grounds will not be made or, if such a challenge is made, of the result thereof. 35 36 In addition to the foregoing, certain filings, notices, and/or approvals may be required under Canadian antitrust laws, including the Competition Act and the Investment Canada Act. Parent and Purchaser intend to comply with all applicable requirements under such laws, if any. 16. FEES AND EXPENSES HM2 has provided certain financial advisory services to Parent in connection with the proposed acquisition of the Company. Parent has agreed to pay HM2 a fee of $406,000, which fee is payable upon the consummation of the Offer. In addition, Parent has agreed to reimburse HM2 for all out-of-pocket expenses incurred by HM2, including the reasonable fees of its counsel, and to indemnify HM2 and certain related persons against certain liabilities and expenses, including certain liabilities under the federal securities laws. Parent and Purchaser have retained CSFB to act as the Dealer Manager in connection with the Offer. CSFB will receive a fee in the amount of $100,000 for its services as the Dealer Manager, will be reimbursed for certain reasonable out-of-pocket expenses and will be indemnified against certain liabilities and expenses in connection therewith, including certain liabilities under federal securities laws. Parent and Purchaser have retained MacKenzie Partners, Inc. to act as the Information Agent and IBJ Schroder Bank & Trust Company to act as the Depositary in connection with the Offer. The Information Agent and the Depositary will receive reasonable and customary compensation for their services, will be reimbursed for certain reasonable out-of-pocket expenses and will be indemnified against certain liabilities and expenses in connection therewith, including certain liabilities under the federal securities laws. Except as set forth above, Purchaser will not pay any fees or commissions to any broker or dealer or other person for soliciting tenders of Shares pursuant to the Offer. Brokers, dealers, commercial banks and trust companies will be reimbursed by Purchaser for customary mailing and handling expenses incurred by them in forwarding the offering materials to their customers. 17. MISCELLANEOUS The Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares residing in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the securities, blue sky or other laws of such jurisdiction. However, the Purchaser may, in its discretion, take such action as it may deem necessary to make the Offer in any jurisdiction and extend the Offer to holders of Shares in such jurisdiction. In those jurisdictions where securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of the Purchaser by CSFB or one or more registered brokers or dealers that are licensed under the laws of such jurisdictions. Purchaser has filed with the Commission the Schedule 14D-1 pursuant to Rule 14d-1 under the Exchange Act containing certain additional information with respect to the Offer. Such Schedule and any amendments thereto, including exhibits, may be examined and copies may be obtained from the principal office of the Commission in the manner set forth in Section 8 above (except that they will not be available at the regional offices of the Commission). NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF PURCHASER NOT CONTAINED IN THIS OFFER TO PURCHASE OR IN THE LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. HC ACQUISITION CORP. HEDSTROM CORPORATION April 17, 1997 36 37 SCHEDULE I DIRECTORS AND EXECUTIVE OFFICERS OF HOLDINGS, PARENT AND PURCHASER A. DIRECTORS AND EXECUTIVE OFFICERS OF HOLDINGS The following table sets forth the name, present principal occupation or employment and material occupation, positions, offices or employment for the past five years of each director and executive officer of Parent. Unless otherwise indicated below, the address of each director and officer is Cherrington Corporate Center, 300 Corporate Center Drive, Suite 100, Coraopolis, Pennsylvania 15108 and each such person is a citizen of the United States.
PRESENT PRINCIPAL OCCUPATION NAME AND OR EMPLOYMENT AND FIVE-YEAR BUSINESS ADDRESS EMPLOYMENT HISTORY ---------------- ---------------------------- John R. Muse................................ Chairman of the Board, Holdings 200 Crescent Court (1995-present); Managing Director and Suite 1600 Principal, Hicks Muse (1989-present) Dallas, Texas 75201 Arnold E. Ditri............................. Director and President, Holdings (1991-present); Director and President, Parent (1995-present); Chairman of the Board, Parent (1991-1995) Robert H. Elman............................. Director, Holdings (1995-present); Chairman 2701 Industrial Drive of the Board; DESA International, Inc. Bowling Green, Kentucky 42101 (1985-present) Alan B. Menkes.............................. Director and Vice President, Holdings (1995- 1325 Avenue of the Americas present); Managing Director and Principal, 25th Floor Hicks Muse (April 1996-present); Vice New York, New York 10019 President, Hicks Muse (1992-March 1996); Vice President, The Carlyle Group (1988-1992) David F. Crowley............................ Vice President and Chief Financial Officer, Holdings (1994-present); Vice President and Chief Financial Officer, Lineal Group, Inc. (1992-1994); Chief Financial Officer, Everlock Fastening Systems, Inc., (1986-1992)
I-1 38 SCHEDULE I B. DIRECTORS AND EXECUTIVE OFFICERS OF PARENT The following table sets forth the name, present principal occupation or employment and material occupation, positions, offices or employment for the past five years of each director and executive officer of Parent. Unless otherwise indicated below, the address of each director and officer is Cherrington Corporate Center, 300 Corporate Center Drive, Suite 100, Coraopolis, Pennsylvania 15108 and each such person is a citizen of the United States.
PRESENT PRINCIPAL OCCUPATION NAME AND OR EMPLOYMENT AND FIVE-YEAR BUSINESS ADDRESS EMPLOYMENT HISTORY ---------------- ---------------------------- John R. Muse................................ Chairman of the Board, Parent 200 Crescent Court (1995-present); Managing Director and Suite 1600 Principal, Hicks Muse (1989-present) Dallas, Texas 75201 Arnold E. Ditri............................. Director and President, Parent (1995-present); Chairman of Board, Parent (1991-1995); Director and President, Holdings (1991-present) Robert H. Elman............................. Director, Parent (1995-present); Chairman of 2701 Industrial Drive the Board, DESA International Inc. Bowling Green, Kentucky 42101 (1985-present) Alan B. Menkes.............................. Director and Vice President, Parent 1325 Avenue of the Americas (1995-present); Managing Director and 25th Floor Principal, Hicks Muse (April 1996-present); New York, New York 10019 The Carlyle Group (1988- 1992) John D. Dellos.............................. Executive Vice President, Operations, Parent (1994-present); Senior Vice President of Manufacturing, PPM Cranes (1990-1994) Alfred C. Carosi............................ Executive Vice President, Sales, Parent (1996-present); Vice President -- Marketing, Very Fine Products, (1995-1996); Senior Vice President -- Marketing, Parker Bros. division of Hasbro (1991-1995) Alastair McKelvie........................... Director and Executive Vice President, Parent (1991-present) David F. Crowley............................ Vice President and Chief Financial Officer, Parent (1994-present); Vice President and Chief Financial Officer, Lineal Group, Inc. (1992-1994); Chief Financial Officer, Everlock Fastening Systems, Inc., (1986-1992)
I-2 39 SCHEDULE I C. DIRECTORS AND EXECUTIVE OFFICERS OF PURCHASER The following table sets forth the name, business address, present principal occupation or employment and material occupations, positions, offices or employment for the past five years of each director and executive officer of Purchaser. Unless otherwise indicated below, the address of each director and officer is: 1325 Avenue of the Americas, 25th Floor, New York, New York 10019 and each such person is a citizen of the United States.
PRESENT PRINCIPAL OCCUPATION NAME AND OR EMPLOYMENT AND FIVE-YEAR BUSINESS ADDRESS EMPLOYMENT HISTORY ---------------- ---------------------------- Alan B. Menkes.............................. Director, President and Secretary, Holdings (April 9, 1997-present); Managing Director and Principal, Hicks Muse (April 1996-present); Vice President, Hicks Muse (1992-April 1996); The Carlyle Group (1988-1992). Andrew S. Rosen............................. Vice President and Secretary, Holdings (April 9, 1997-present); Vice President, Hicks Muse (January 1997-present); Associate, Hicks Muse (August 1993-December 1996); Associate, The Carlyle Group (January 1992-June 1993).
I-3 40 Facsimile copies of the Letter of Transmittal, properly completed and duly signed, will be accepted. The Letter of Transmittal, certificates for Shares and any other required documents should be sent or delivered by each Stockholder or his broker, dealer, commercial bank, trust company or other nominee to the Depositary, at one of the addresses set forth below: The Depositary for the Offer is: IBJ SCHRODER BANK & TRUST COMPANY By Mail: By Facsimile Transmission: By Hand/Overnight Delivery: IBJ Schroder Bank & Trust Company (212) 858-2611 IBJ Schroder Bank & Trust Company P.O. Box 84 One State Street Bowling Green Station To Confirm New York, New York 10004 New York, New York 10274-0084 Facsimile Transmissions Call Attn: Securities Processing Attn: Reorganization Operations Window, Subcellar One, Department (212) 858-2103 (SC-1)
Any questions and request for assistance or additional copies of this Offer to Purchase, the Letter of Transmittal and the Notice of Guaranteed Delivery may be directed to the Information Agent at the telephone numbers and addresses below. You may also contact your local broker, dealer, commercial bank or trust company for assistance concerning the Offer. The Information Agent for the Offer is: [MACKENZIE LOGO] 156 Fifth Avenue New York, New York 10010 (212) 929-5500 (Call Collect) or Call Toll-Free (800) 322-2885 The Dealer Manager for the Offer is: CREDIT SUISSE FIRST BOSTON Eleven Madison Avenue New York, New York 10010-3629 Call Toll-Free (888) 671-4243 EX-99.(A)(2) 3 LETTER OF TRANSMITTAL 1 LETTER OF TRANSMITTAL TO TENDER SHARES OF COMMON STOCK OF ERO, INC. PURSUANT TO THE OFFER TO PURCHASE DATED APRIL 17, 1997 BY HC ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF HEDSTROM CORPORATION THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MONDAY, JUNE 2, 1997, UNLESS THE OFFER IS EXTENDED. The Depositary for the Offer is: IBJ SCHRODER BANK & TRUST COMPANY By Mail: By Facsimile Transmission: By Hand/Overnight Delivery: IBJ Schroder Bank & Trust Company (212) 858-2611 IBJ Schroder Bank & Trust Company P.O. Box 84 One State Street Bowling Green Station To Confirm New York, New York 10004 New York, New York 10274-0084 Facsimile Transmissions Call Attn: Securities Processing Attn: Reorganization Operations Window, Subcellar One, Department (212) 858-2103 (SC-1)
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE TRANSMISSION TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. YOU MUST SIGN THIS LETTER OF TRANSMITTAL IN THE APPROPRIATE SPACE THEREFOR PROVIDED BELOW AND COMPLETE THE SUBSTITUTE FORM W-9 SET FORTH BELOW.
- ---------------------------------------------------------------------------------------------------------------------- DESCRIPTION OF SHARES TENDERED - ---------------------------------------------------------------------------------------------------------------------- NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) SHARES NUMBER OF SHARES NUMBER OF (PLEASE FILL IN, IF BLANK, EXACTLY AS NAME(S) CERTIFICATE REPRESENTED BY SHARES APPEAR(S) ON THE CERTIFICATE(S) NUMBER(S)(1) CERTIFICATE(S)(1) TENDERED(2) - ---------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------ ------------------------------------------------------ AFFIX LABEL HERE ------------------------------------------------------ ------------------------------------------------------ ====================================================== Total Shares - ---------------------------------------------------------------------------------------------------------------------- (1) Need not be completed by holders of Shares delivering Shares by Book-Entry Transfer. (2) Unless otherwise indicated, it will be assumed that all Shares represented by Certificates delivered to the Depositary are being tendered. See Instruction 4. - ----------------------------------------------------------------------------------------------------------------------
2 THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. This Letter of Transmittal is to be completed by holders of Shares (as defined below) of ERO, Inc. ("Stockholders") if certificates evidencing Shares ("Certificates") are to be forwarded herewith or if delivery of Shares is to be made by book-entry transfer to an account maintained by IBJ Schroder Bank & Trust Company (the "Depositary") at The Depository Trust Company ("DTC") or the Philadelphia Depository Trust Company ("PDTC") (each a "Book-Entry Transfer Facility") pursuant to the procedures set forth under "Procedure for Tendering Shares" in the Offer to Purchase (as defined below). Stockholders whose Certificates are not immediately available or who cannot deliver either their Certificates for, or a Book-Entry Confirmation (as defined under "Procedure for Tendering Shares -- Book-Entry Transfer" in the Offer to Purchase) with respect to, their Shares and all other required documents to the Depositary prior to the Expiration Date (as defined under "Terms of the Offer" in the Offer to Purchase) may tender their Shares according to the guaranteed delivery procedure set forth under "Procedure for Tendering Shares -- Guaranteed Delivery" in the Offer to Purchase. See Instruction 2 hereof. Delivery of documents to a Book-Entry Transfer Facility does not constitute delivery to the Depositary. [ ] CHECK HERE IF TENDERED SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE DEPOSITARY WITH A BOOK-ENTRY TRANSFER FACILITY, AND COMPLETE THE FOLLOWING (ONLY PARTICIPANTS IN A BOOK-ENTRY TRANSFER FACILITY MAY DELIVER SHARES BY BOOK-ENTRY TRANSFER). Name of Tendering Institution: ----------------------------------------------- Check Box of Book-Entry Transfer Facility: [ ] DTC [ ] PDTC Account Number: -------------------------------------------------------------- Transaction Code Number: ----------------------------------------------------- [ ] CHECK HERE IF SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING. PLEASE ENCLOSE A PHOTOCOPY OF SUCH NOTICE OF GUARANTEED DELIVERY. Name(s) of Registered Holder(s): --------------------------------------------- Window Ticket Number (if any): ----------------------------------------------- Date of Execution of Notice of Guaranteed Delivery: -------------------------- Name of Institution that Guaranteed Delivery: -------------------------------- ------------------------------------------------------------------------------ If Delivered by Book-Entry Transfer, Check Box of Applicable Book-Entry Transfer Facility: [ ] DTC [ ] PDTC Account Number: -------------------------------------------------------------- Transaction Code Number: ----------------------------------------------------- 2 3 SPECIAL PAYMENT INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if Certificates for Shares not tendered or not accepted for payment and/or the check for the purchase price of Shares accepted for payment are to be issued in the name of someone other than the undersigned, or if Shares delivered by book-entry transfer that are not accepted for payment are to be returned by credit to an account maintained at a Book-Entry Transfer Facility, other than to the account indicated above. Issue (check appropriate box(es)): [ ] Check to: [ ] Certificate to: Name: --------------------------------------------------------------------------- (Please Type or Print) Address: ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Include Zip Code) - -------------------------------------------------------------------------------- (Tax Identification or Social Security No.) (See Substitute Form W-9) Credit unpurchased Shares delivered by book-entry transfer to the Book-Entry Transfer Facility account set forth below: [ ] DTC [ ] PDTC (check one) - -------------------------------------------------------------------------------- (DTC/PDTC Account Number) SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if Certificates for Shares not tendered or not accepted for payment and/or the check for the purchase price of Shares accepted for payment are to be sent to someone other than the undersigned or to the undersigned at an address other than that shown above. Mail (check appropriate box(es)): [ ] Check to: [ ] Certificate to: Name: --------------------------------------------------------------------------- (Please Type or Print) Address: ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Include Zip Code) - -------------------------------------------------------------------------------- (Tax Identification or Social Security No.) NOTE: SIGNATURE(S) MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: The undersigned hereby tenders to HC Acquisition Corp., a Delaware corporation ("Purchaser") and wholly owned subsidiary of Hedstrom Corporation, a Delaware corporation, the above-described shares of common stock, $.01 par value per share (the "Shares"), of ERO, Inc., a Delaware corporation (the "Company"), at a purchase price of $11.25 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated April 17, 1997 (the "Offer to Purchase"), receipt of which is hereby acknowledged, and in this Letter of Transmittal (which, together with any amendments or supplements hereto or thereto, collectively constitute the "Offer"). Subject to, and effective upon, acceptance for payment of the Shares tendered herewith in accordance with the terms and subject to the conditions of the Offer, the undersigned hereby sells, assigns and transfers to, or upon the order of, Purchaser all right, title and interest in and to all of the Shares that are being tendered hereby 3 4 and any and all other Shares or other securities issued or issuable in respect of such Shares on or after April 17, 1997 (a "Distribution") and irrevocably constitutes and appoints the Depositary the true and lawful agent and attorney-in-fact of the undersigned with respect to such Shares (and any Distributions), with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to (i) deliver certificates (the "Certificates") evidencing such Shares (and any Distributions), or transfer ownership of such Shares (and any Distributions) on the account books maintained by a Book-Entry Transfer Facility together, in any such case, with all accompanying evidences of transfer and authenticity to, or upon the order of, Purchaser upon receipt by the Depositary, as the undersigned's agent, of the purchase price with respect to such Shares, (ii) present such Shares (and any Distributions) for transfer on the books of the Company and (iii) receive all benefits and otherwise exercise all rights of beneficial ownership of such Shares (and any Distributions), all in accordance with the terms and subject to the Offer. The undersigned hereby irrevocably appoints each designee of Purchaser as the attorney-in-fact and proxy of the undersigned, each with full power of substitution, to the full extent of the undersigned's rights with respect to all Shares (and any Distributions) tendered hereby, including, without limitation, the right to vote such Shares (and any Distributions) in such manner as each such attorney and proxy or his substitute shall, in his sole discretion, deem proper. All such powers of attorney and proxies shall be considered coupled with an interest in the Shares tendered herewith and therefore be irrevocable. Such appointment will be effective when, and only to the extent that, Purchaser accepts such Shares for payment. Upon such acceptance for payment, all prior powers of attorney and proxies given by the undersigned with respect to such Shares (and any Distributions) will be revoked, without further action, and no subsequent powers of attorney's and proxies may be given with respect thereto (and, if given, will be deemed ineffective). The designees of Purchaser will, with respect to the Shares (and any Distributions) for which such appointment is effective, be empowered to exercise all voting and other rights of the undersigned with respect to such Shares (and any Distributions) as they in their sole discretion may deem proper, including, without limitation, in respect of any annual or special meeting of the stockholders of the Company, or any adjournment or postponement thereof, in connection with any action by written consent in lieu of a meeting or otherwise. The undersigned acknowledges that Purchaser reserves the absolute right to require that, in order for Shares to be deemed validly tendered, immediately upon the acceptance for payment of such Shares, Purchaser or its designees must be able to exercise full voting rights with respect to such Shares (and any Distributions), including, without limitation, the right to vote at any meeting of stockholders of the Company then scheduled. The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Shares (and any Distributions) tendered hereby and that when such Shares (and any Distributions) are accepted for payment and paid for by Purchaser, Purchaser will acquire good, marketable and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances, and that the Shares (and any Distributions) tendered hereby will not be subject to any adverse claim. The undersigned, upon request, will execute and deliver any additional documents deemed by the Depositary or Purchaser to be necessary or desirable to complete the sale, assignment and transfer of Shares (and any Distributions) tendered hereby. In addition, the undersigned shall promptly remit and transfer to the Depositary for the account of Purchaser any and all Distributions issued to the undersigned on or after April 17, 1997 in respect of the Shares tendered hereby, accompanied by appropriate documentation of transfer, and pending such remittance and transfer or appropriate assurance thereof, Purchaser shall be entitled to all rights and privileges as owner of any such Distributions and may withhold the entire purchase price or deduct from the purchase price the amount of value thereof, as determined by Purchaser in its sole discretion. All authority conferred or agreed to be conferred in this Letter of Transmittal shall be binding upon the successors, assigns, heirs, executors, administrators and legal representatives of the undersigned and shall not be affected by, and shall survive, the death or incapacity of the undersigned. Except as stated in the Offer to Purchase, this tender is irrevocable. The undersigned understands that the valid tender of Shares pursuant to any one of the procedures described in "Procedure for Tendering Shares" in the Offer to Purchase and in the instructions hereto will constitute a binding agreement between the undersigned and Purchaser with respect to such Shares upon the terms and subject to the conditions of the Offer. The undersigned recognizes that, under certain circumstances 4 5 set forth in the Offer to Purchase, Purchaser may not be required to accept for payment any of the Shares tendered hereby or may accept for payment fewer than all of the Shares tendered hereby. Unless otherwise indicated herein under "Special Payment Instructions," please issue the check for the purchase price and/or return any Certificates evidencing Shares not tendered or not accepted for payment in the name(s) of the registered holder(s) appearing under "Description of Shares Tendered." Similarly, unless otherwise indicated under "Special Delivery Instructions," please mail the check for the purchase price and/or return any Certificates evidencing Shares not tendered or not accepted for payment (and accompanying documents, as appropriate) to the address(es) of the registered holder(s) appearing under "Description of Shares Tendered." In the event that both the "Special Payment Instructions" and the "Special Delivery Instructions" are completed, please issue the check for the purchase price and/or return any such Certificates evidencing Shares not tendered or not accepted for payment (and accompanying documents, as appropriate) to, the person(s) so indicated. Unless otherwise indicated herein under "Special Payment Instructions," in the case of a book-entry delivery of Shares, please credit the account maintained at the Book-Entry Transfer Facility indicated above with respect to any Shares not accepted for payment. The undersigned recognizes that Purchaser has no obligation pursuant to the "Special Payment Instructions" to transfer any Shares from the name of the registered holder thereof if Purchaser does not accept for payment any of the Shares tendered hereby. 5 6 INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER 1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, signatures on this Letter of Transmittal must be guaranteed by a financial institution (including most commercial banks, savings and loan associations and brokerage houses) that is a participant in the Security Transfer Agents Medallion Program, the New York Stock Exchange Medallion Signature Guarantee Program or the Stock Exchange Medallion Program (an "Eligible Institution"). Signatures on this Letter of Transmittal need not be guaranteed (a) if this Letter of Transmittal is signed by the registered holders (which term, for purposes of this section, includes any participant in any of the Book-Entry Transfer Facilities' systems whose name appears on a security position listing as the owner of the Shares) or Shares tendered herewith and such registered holder has not completed the box entitled "Special Payment Instructions" or the box entitled "Special Delivery Instructions" on this Letter of Transmittal or (b) if such Shares are tendered herewith for the account of an Eligible Institution. See Instruction 5. If the Certificates are registered in the name of a person other than the signer of this Letter of Transmittal or if Certificates evidencing Shares not accepted for payment or not tendered are to be issued to a person other than the registered holder, then the tendered Certificates must be endorsed or accompanied by duly executed stock powers, in either case signed exactly as the name or names of the registered owner or owners appear on the Certificates, with the signatures on the Certificates or stock powers guaranteed by an Eligible Institution as provided herein. See Instruction 5. 2. REQUIREMENTS OF TENDER. This Letter of Transmittal is to be completed by Stockholders if Certificates are to be forwarded herewith or if delivery of Shares is to be made pursuant to the procedures for book-entry transfer set forth under "Procedure for Tendering Shares -- Book-Entry Transfer" in the Offer to Purchase. For a Stockholder to validly tender Shares pursuant to the Offer, either (a) a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof), with all required signature guarantees and all other documents required thereby, must be received by the Depositary at one of its addresses set forth above prior to the Expiration Date (as defined in the Offer to Purchase) and either (i) Certificates representing such tendered Shares must be received by the Depositary at one of such addresses prior to the Expiration Date or (ii) such Shares must he delivered pursuant to the procedures for book-entry transfer set forth under "Procedure for Tendering Shares -- Book-Entry Transfer" in the Offer to Purchase and a Book-Entry Confirmation must be received by the Depositary prior to the Expiration Date or (b) the tendering Stockholder must comply with the guaranteed delivery procedures set forth below and under "Procedure for Tendering Shares -- Guaranteed Delivery" in the Offer to Purchase. Stockholders whose Certificates are not immediately available or who cannot deliver their Certificates and all other required documents to the Depositary or complete the procedures for book-entry transfer prior to the Expiration Date may tender their Shares by properly completing and duly executing a Notice of Guaranteed Delivery pursuant to the guaranteed delivery procedures set forth in "Procedure for Tendering Shares -- Guaranteed Delivery" in the Offer to Purchase. Pursuant to such procedures (i) such tender must he made by or through an Eligible Institution, (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form made available by Purchaser, must be received by the Depositary prior to the Expiration Date and (iii) the Certificates representing all tendered Shares in proper form for transfer, or a Book-Entry Confirmation with respect to all tendered Shares, together with a properly completed and duly executed Letter of Transmittal (or a manually-signed facsimile thereof), with all required signature guarantees and all other documents required by this Letter of Transmittal, must be received by the Depositary by 5:00 p.m., New York City time, on the third business day after the date of execution of such Notice of Guaranteed Delivery. If Certificates are forwarded separately to the Depositary, a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof) must accompany each such delivery. THE METHOD OF DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND SOLE RISK OF THE TENDERING STOCKHOLDER AND THE DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. 6 7 No alternative, conditional or contingent tenders will be accepted and no fractional Shares will be purchased. All tendering Stockholders, by execution of this Letter of Transmittal (or a facsimile thereof), waive any right to receive any notice of the acceptance of their Shares for payment. 3. INADEQUATE SPACE. If the space provided herein is inadequate, the information required under "Description of Shares Tendered" should be listed on a separate signed schedule attached hereto. 4. PARTIAL TENDERS. If fewer than all of the Shares represented by any Certificates delivered to the Depositary herewith are to he tendered hereby, fill in the number of Shares which are to be tendered in the box entitled "Number of Shares Tendered." In such case, a new Certificate for the remainder of the Shares that were evidenced by your old Certificate(s) will be sent, without expense, to the person(s) signing this Letter of Transmittal, unless otherwise provided in the box entitled "Special Payment Instructions" or the box entitled "Special Delivery Instructions" in this Letter of Transmittal, as soon as practicable after the Expiration Date. All Shares represented by Certificate(s) delivered to the Depositary will be deemed to have been tendered unless otherwise indicated. 5. SIGNATURES ON LETTER OF TRANSMITTAL, INSTRUMENTS OF TRANSFER AND ENDORSEMENTS. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, the signature(s) must correspond exactly with the name(s) as written on the face of the Certificate(s) without alteration, enlargement or any change whatsoever. If any of the Shares tendered hereby are owned of record by two or more joint owners, all such owners must sign this Letter of Transmittal. If any of the tendered Shares are registered in different names on several Certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of Certificates. If this Letter of Transmittal or any Certificates or instruments of transfer are signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing, and proper evidence satisfactory to Purchaser of each person's authority to so act must be submitted. If this Letter of Transmittal is signed by the registered holder(s) of the Shares listed and transmitted hereby, NO ENDORSEMENTS OF CERTIFICATES OR SEPARATE INSTRUMENTS OF TRANSFER ARE REQUIRED UNLESS CERTIFICATES NOT TENDERED OR NOT PURCHASED ARE TO BE ISSUED OR RETURNED TO A PERSON OTHER THAN THE REGISTERED HOLDER(S). Signatures on such Certificates or instruments of transfer must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered holder(s) of the Shares evidenced by the Certificate(s) listed and transmitted hereby, the Certificate(s) must be endorsed or accompanied by appropriate instruments of transfer, in either case signed exactly as the name(s) of the registered holder(s) appear on the Certificate(s). Signatures on such Certificate(s) or instruments of transfer must be guaranteed by an Eligible Institution. 6. TRANSFER TAXES. Except as set forth in this Instruction 6, Purchaser will pay or cause to be paid any transfer taxes with respect to the transfer and sale of Shares to it or its order pursuant to the Offer. If, however, payment of the purchase price is to be made to, or (in the circumstances permitted hereby) if Certificates for Shares not tendered or not purchased are to be registered in the name of, any person other than the registered holder(s), or if tendered Certificates are registered in the name of any person other than the person(s) signing this Letter of Transmittal, the amount of any transfer taxes (whether imposed on the registered holder(s) or such person) payable on account of the transfer to such person will be deducted from the purchase price unless satisfactory evidence of the payment of such taxes or exemption therefrom is submitted. Except as provided in this Instruction 6, it will not be necessary for transfer tax stamps to be affixed to the Certificate(s) listed in this Letter of Transmittal. 7 8 7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If a check and/or Certificates for unpurchased Shares are to be issued in the name of a person other than the signer of this Letter of Transmittal or if a check is to be sent and/or such Certificates are to be returned to someone other than the signer of this Letter of Transmittal or to an address other than that shown above, the appropriate boxes on this Letter of Transmittal must be completed. If any tendered Shares are not purchased for any reason and such Shares are delivered by Book-Entry Transfer Facility, such shares will be credited to an account maintained at the appropriate Book-Entry Transfer Facility. 8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance may be directed to the Information Agent or the Dealer Manager at their respective addresses or telephone numbers set forth below and requests for additional copies of the Offer to Purchase, this Letter of Transmittal and the Notice of Guaranteed Delivery may be directed to the Information Agent or brokers, dealers, commercial banks and trust companies and such materials will be furnished at Purchaser's expense. 9. WAIVER OF CONDITIONS. Subject to the Merger Agreement, the conditions of the Offer may be waived by the Purchaser, in whole or in part, at any time or from time to time, in the Purchaser's sole discretion. 10. BACKUP WITHHOLDING TAX. Except in the case of foreign persons, each tendering Stockholder is required to provide the Depositary with a correct Taxpayer Identification Number ("TIN") on Substitute Form W-9, which is provided under "Important Tax Information" below, and to certify that such Stockholder is not subject to backup withholding. Failure to provide the information on the Substitute Form W-9 may subject the tendering Stockholder to 31% federal income tax backup withholding on the payment of the purchase price for the Shares. The tendering Stockholder should indicate in the box in Part I of the Substitute Form W-9 if such stockholder has not been issued a TIN and has applied for a TIN or intends to apply for a TIN in the near future. If the Stockholder has indicated in the box in Part I that a TIN has been applied for and the Depositary is not provided with a TIN by the time of payment, the Depositary will withhold 31% of all payments of the purchase price, if any, made thereafter pursuant to the Offer until a TIN is provided to the Depositary. A tendering Stockholder who is a foreign person (i.e., who is not a citizen or resident of the United States) should provide the Depositary with a completed Form W-8. Please contact the Depositary, if necessary, in order to obtain a copy of Form W-8. 11. LOST OR DESTROYED CERTIFICATES. If any Certificate(s) representing Shares has been lost or destroyed, the holders should promptly notify the Depositary, IBJ Schroder Bank & Trust Company, at (212) 858-2103. The holders will then be instructed as to the procedure to be followed in order to replace the Certificate(s). This Letter of Transmittal and related documents cannot be processed until the procedures for replacing lost or destroyed Certificates have been followed. IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE THEREOF), PROPERLY COMPLETED AND DULY EXECUTED, MUST BE RECEIVED BY THE DEPOSITARY (TOGETHER WITH CERTIFICATES OR A BOOK-ENTRY CONFIRMATION FOR SHARES AND ALL OTHER REQUIRED DOCUMENTS AND/OR SIGNATURES), OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE DEPOSITARY, PRIOR TO THE EXPIRATION DATE. 8 9 IMPORTANT TAX INFORMATION Under federal income tax law, a Stockholder whose tendered Shares are accepted for payment is required to provide the Depositary (as payor) with such stockholder's correct TIN on Substitute Form W-9 below. If such stockholder is an individual, the TIN is such individual's social security number. If the tendering Stockholder has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, such Stockholder should so indicate on the Substitute Form W-9. See Instruction 10. If the Depositary is not provided with the correct TIN, the Stockholder may be subject to a $50 penalty imposed by the Internal Revenue Service (the "IRS"). In addition, payments that are made to such Stockholders with respect to Shares purchased pursuant to the Offer may be subject to backup federal income tax withholding. Certain Stockholders are not subject to these backup withholding and reporting requirements. In order for a foreign person to qualify as an exempt recipient, such Stockholder generally must submit a Form W-8. Form W-8 can be obtained from the Depositary. See the enclosed Guidelines or Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. Other exempt recipients should complete Form W-9 in order to avoid the possible imposition of backup withholding. If backup withholding applies, the Depositary is required to withhold 31% of any payments made to the Stockholder. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may be obtained from the IRS. PURPOSE OF SUBSTITUTE FORM W-9 To prevent backup federal income tax withholding with respect to payment of the purchase price for Shares purchased pursuant to the Offer, generally a Stockholder must provide the Depositary with his correct TIN by completing the Substitute Form W-9 below, certifying that the TIN provided on Substitute Form W-9 is correct (or that such Stockholder is awaiting a TIN) and that (i) such Stockholder is exempt from backup withholding or (ii) such Stockholder has not been notified by the IRS that such Stockholder is subject to backup withholding as a result of failure to report all interest or dividends or (iii) the IRS has notified the Stockholder that such Stockholder is not longer subject to backup withholding. WHAT NUMBER TO GIVE THE DEPOSITARY The Stockholder is required to give the Depositary the social security number or employer identification number of the record holder of the Shares tendered hereby. If the Shares are registered in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidance on which number to report. 9 10 IMPORTANT STOCKHOLDER: SIGN HERE AND COMPLETE SUBSTITUTE FORM W-9 ON REVERSE - -------------------------------------------------------------------------------- (Signature(s) of Stockholder(s) Dated: , 1997 ------------------------------- (Must be signed by the registered holder(s) exactly as name(s) appears(s) on the Certificate or on a security position listing or by person(s) authorized to become registered holder(s) by Certificates and documents transmitted herewith. If signature is by trustees, executors, administrators, guardians, attorneys-in-fact, agents, officers of corporations or others acting in a fiduciary or representative capacity, please provide the following information. See Instruction 5.) Name(s): ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- (Please Type or Print) Capacity (Full title): ---------------------------------------------------------- (See Instruction 5) Address: ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- (Include Zip Code) Area Codes and Telephone Numbers: ----------------------------------------------- (Home) ----------------------------------------------- (Business) Taxpayer Identification or Social Security No. ---------------------------------- (Complete Substitution Form W-9 on following page) GUARANTEE OF SIGNATURE(S) (SEE INSTRUCTIONS 1 AND 5) - -------------------------------------------------------------------------------- Authorized Signature(s) - -------------------------------------------------------------------------------- (Name) - -------------------------------------------------------------------------------- (Name of Firm) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Address Including Zip Code) - -------------------------------------------------------------------------------- 10 11 ------------------------------------------------------------------------------------------------------------------- PAYER'S NAME: IBJ SCHRODER BANK & TRUST COMPANY, AS DEPOSITARY ------------------------------------------------------------------------------------------------------------------- SUBSTITUTE PLEASE PROVIDE YOUR TIN IN THE BOX AT PART I -- Social Security Number OR FORM W-9 RIGHT AND CERTIFY BY SIGNING AND DATING Employer Identification Number BELOW DEPARTMENT OF THE ------------------------------------------ ------------------------------------------ TREASURY INTERNAL Name (If awaiting TIN, write "Applied For") REVENUE SERVICE ------------------------------------------ ---------------------------------------- PAYER'S REQUEST FOR Business Name PART II -- For Payees exempt from backup TAXPAYER IDENTIFICATION withholding, see the enclosed Guidelines NUMBER (TIN) Please check appropriate box: for Certification of Taxpayer Identification Number on Substitute Form [ ] Individual/Sole Proprietor W-9, check the exempt box below, and [ ] Corporation complete the Form W-9. [ ] Partnership [ ] Other ------------------------------------------ Exempt [ ] Address ------------------------------------------ City, State, Zip Code - ------------------------------------------------------------------------------------------------------------------ CERTIFICATION. Under penalties of perjury, I certify that: (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me), and (2) I am not subject to backup withholding either because (a) I am exempt from backup withholding, or (b) I have not been notified by the Internal Revenue Service ("IRS") that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding. CERTIFICATION INSTRUCTIONS. You must cross out item (2) above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you were subject to backup withholding, you received another notification from the IRS that you are no longer subject to backup withholding, do not cross out item (2). (Also see instructions in the enclosed Guidelines). ------------------------------------------------------------------------------------------------------------------- SIGNATURE: ______________________________________________ DATE:__________________________, 1997 - --------------------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL INSTRUCTIONS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU WROTE "APPLIED FOR" IN PART I OF THE SUBSTITUTE FORM W-9. CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (1) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (2) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number by the time of payment, 31% of all payments of the Offer Price made to me thereafter will be withheld until I provide a number. SIGNATURE: _____________________________ DATE:_____________, 1997 11 12 The Information Agent for the Offer is: [MACKENZIE LOGO] 156 Fifth Avenue New York, New York 10010 (212) 929-5500 (call collect) or CALL TOLL-FREE (800) 322-2885 The Dealer Manager for the Offer is: CREDIT SUISSE FIRST BOSTON Eleven Madison Avenue New York, New York 10010-3629 Telephone (888) 671-4243 EX-99.(A)(3) 4 NOTICE OF GUARANTEED DELIVERY 1 NOTICE OF GUARANTEED DELIVERY for TENDER OF SHARES OF COMMON STOCK of ERO, INC. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MONDAY, JUNE 2, 1997, UNLESS THE OFFER IS EXTENDED. HC Acquisition Corp., a Delaware corporation ("Purchaser") and wholly owned subsidiary of Hedstrom Corporation, a Delaware corporation ("Parent"), has offered to purchase all the outstanding shares of common stock, $.01 par value per share ("Shares"), of ERO, Inc., a Delaware corporation (the "Company"), at a purchase price of $11.25 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated April 17, 1997 (the "Offer to Purchase"), and the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer"). This Notice of Guaranteed Delivery or one substantially equivalent hereto must be used to accept the Offer if certificates representing the Shares (the "Certificates") are not immediately available or the procedures for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach IBJ Schroder Bank & Trust Company (the "Depositary") prior to the Expiration Date (as defined in the Offer to Purchase). This Notice of Guaranteed Delivery may be delivered by hand or transmitted by facsimile transmission or mailed to the Depositary. See "Procedure for Tendering Shares -- Guaranteed Delivery" in the Offer to Purchase. The Depositary for the Offer is: IBJ SCHRODER BANK & TRUST COMPANY By Mail: By Facsimile Transmission: By Hand/Overnight Delivery: IBJ Schroder Bank & Trust Company (212) 858-2611 IBJ Schroder Bank & Trust Company P.O. Box 84 One State Street Bowling Green Station To Confirm New York, New York 10004 New York, New York 10274-0084 Facsimile Transmissions Call Attn: Securities Processing Attn: Reorganization Operations Window, Subcellar One, Department (212) 858-2103 (SC-1)
Delivery of this Notice of Guaranteed Delivery to an address other than as set forth above or transmission of instructions via a facsimile transmission to a number other than as set forth above will not constitute a valid delivery. This Notice of Guaranteed Delivery is not to be used to guarantee signatures. If a signature on a Letter of Transmittal is required to be guaranteed by an "Eligible Institution" under the instructions thereto, such signature guarantee must appear in the applicable space provided in the signature box on the Letter of Transmittal. The Eligible Institution that completes this form must communicate the guarantee to the Depositary and must deliver the Letter of Transmittal and certificates for Shares to the Depositary within the time period shown herein. Failure to do so could result in a financial loss to such Eligible Institution. THE GUARANTEE ON THE REVERSE SIDE MUST BE COMPLETED 2 Ladies and Gentlemen: The undersigned hereby tenders to HC Acquisition Corp., a Delaware corporation ("Purchaser") and wholly owned subsidiary of Hedstrom Corporation, a Delaware corporation, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated April 17, 1997 (the "Offer to Purchase"), and the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer"), receipt of each of which is hereby acknowledged, the number of Shares indicated below pursuant to the guaranteed delivery procedures set forth under "Procedure for Tendering Shares -- Guaranteed Delivery" in the Offer to Purchase. Number of Shares: - -------------------------------------------------------------------------------- Certificate Nos. (if available): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Check ONE box if Shares will be tendered by book-entry transfer: [ ] The Depository Trust Company [ ] Philadelphia Depository Trust Company Account Number: ----------------------------------------------------------------- Dated: , 1997 -------------------------------------------------------------------- Name(s) of Record Holder(s): - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Please type or Print) Address(es): -------------------------------------------------------------------- - -------------------------------------------------------------------------------- (Zip Code) Area Code and Tel. No.: --------------------------------------------------------- Signature(s): ------------------------------------------------------------------- - -------------------------------------------------------------------------------- THE GUARANTEE SET FORTH BELOW MUST BE COMPLETED GUARANTEE (Not to be used for signature guarantee) The undersigned, an Eligible Institution (as such term is defined under "Procedure for Tendering Shares -- Signature Guarantee" in the Offer to Purchase), hereby guarantees to deliver to the Depositary the Certificates representing the Shares tendered hereby, in proper form for transfer, or a Book-Entry Confirmation (as defined under "Procedure for Tendering Shares -- Book-Entry Transfer" in the Offer to Purchase) with respect to such Shares, in either case together with a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof), with all required signature guarantees and all other documents required by the Letter of Transmittal, all by 5:00 p.m., New York City time, on the third business day after the date hereof. Name of Firm: ------------------------------------------------------------------- Address: ------------------------------------------------------------------------ - -------------------------------------------------------------------------------- (Zip Code) Area Code and Tel. No.: --------------------------------------------------------- - -------------------------------------------------------------------------------- (Authorized Signature) - -------------------------------------------------------------------------------- (Please type or Print) Title: -------------------------------------------------------------------------- Dated: , 1997 -------------------------------------------------------------------- NOTE: DO NOT SEND CERTIFICATES FOR SHARES WITH THIS NOTICE OF GUARANTEED DELIVERY. CERTIFICATES FOR SHARES SHOULD BE SENT ONLY TOGETHER WITH YOUR LETTER OF TRANSMITTAL. 2 EX-99.(A)(4) 5 LETTER TO BROKERS, DEALERS 1 CREDIT FIRST CREDIT SUISSE FIRST BOSTON CORPORATION SUISSE BOSTON Eleven Madison Avenue Telephone 212 325 2000 New York, NY 10010-3629
Offer to Purchase for Cash All Outstanding Shares of Common Stock of ERO, INC. at $11.25 NET PER SHARE by HC ACQUISITION CORP. a wholly owned subsidiary of HEDSTROM CORPORATION THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MONDAY, JUNE 2, 1997, UNLESS THE OFFER IS EXTENDED. April 17, 1997 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: We have been appointed by HC Acquisition Corp., a Delaware corporation ("Purchaser") and wholly owned subsidiary of Hedstrom Corporation, a Delaware corporation ("Parent"), to act as Dealer Manager in connection with Purchaser's offer to purchase all of the outstanding shares of common stock, par value $0.01 per share (the "Shares"), of ERO, Inc., a Delaware corporation (the "Company"), at a purchase price of $11.25 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated April 17, 1997 (the "Offer to Purchase"), and the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer"). Enclosed herewith for your information and forwarding to your clients are copies of the following documents: 1. Offer to Purchase, dated April 17, 1997. 2. The Letter of Transmittal to tender Shares is for your use and for the information of your clients. Facsimile copies of the Letter of Transmittal may be used to tender Shares. 3. A letter to stockholders of the Company from D. Richard Ryan, Jr., Chairman of the Board of Company, together with a Solicitation/Recommendation Statement on Schedule 14D-9 filed with the Securities and Exchange Commission by the Company and mailed to stockholders of the Company. 4. The Notice of Guaranteed Delivery for Shares to be used to accept the Offer if neither of the two procedures for tendering Shares set forth in the Offer to Purchase can be completed on a timely basis. 5. A printed form of letter which may be sent to your clients for whose accounts you hold Shares registered in your name or in the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Offer. 6. Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. 2 7. A return envelope addressed to IBJ Schroder Bank & Trust Company, the Depositary. Please furnish copies of the enclosed materials to those of your clients for whose accounts you hold Shares in your name or in the name of your nominee. YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MONDAY, JUNE 2, 1997, UNLESS THE OFFER IS EXTENDED. Please note the following: 1. The offer price is $11.25 per Share, net to the seller in cash. 2. The Offer is conditioned upon, among other things, there being validly tendered and not withdrawn prior to the expiration of the Offer that number of Shares which would represent, on a fully-diluted basis, at least a majority of the outstanding Shares. See "INTRODUCTION," "Terms of the Offer" and "Certain Conditions of the Offer" in the Offer to Purchase. 3. The Offer is being made for all outstanding Shares. 4. Tendering stockholders will not be obligated to pay brokerage fees or commissions to the Dealer Manager, the Depositary or the Information Agent (as defined in the Offer to Purchase) or, except as set forth in Instruction 6 to the Letter of Transmittal, transfer taxes on the sale of Shares pursuant to the Offer. However, federal income tax backup withholding at a rate of 31% may be required unless an exemption is provided or unless the required taxpayer identification information is provided. See Instruction 10 of, and "IMPORTANT TAX INFORMATION" in, the Letter of Transmittal. 5. The Offer and withdrawal rights will expire at 12:00 midnight, New York City time, on Monday, June 2, 1997, unless extended. See "Terms of Offer" in the Offer to Purchase. 6. The Board of Directors of the Company has unanimously (A) determined that each of the Merger Agreement (as defined in the Offer to Purchase), the Offer and the Merger (as defined in the Offer to Purchase) is fair to and in the best interests of the holders of Shares, (B) approved the execution, delivery and performance of the Merger Agreement (as defined in the Offer to Purchase) and the consummation of the transactions contemplated thereby, including the Offer and the Merger such approval constituting approval thereof for purposes of Section 203 of the Delaware General Corporate Law, as amended, and for purposes of Article Nine of the Company's Amended and Restated Certificate of Incorporation, and (C) resolved to recommend acceptance of the Offer, and, if required, both the approval and adoption of the Merger Agreement and the approval of the Merger by the holders of Shares. 7. In all cases, payment for Shares purchased pursuant to the Offer will be made only after timely receipt by the Depositary of certificates for, or a Book-Entry Confirmation (as defined under "Procedure for Tendering Shares -- Book-Entry Transfer" in the Offer to Purchase) with respect to, such Shares and a Letter of Transmittal (or a manually signed facsimile thereof), properly completed and duly executed with all required signature guarantees and all other documents required by the Letter of Transmittal. See "Procedures for Tendering Shares" in the Offer to Purchase. For Shares to be validly tendered pursuant to the Offer, either (a) a Letter of Transmittal (or a manually signed facsimile thereof), properly completed and duly executed, with all required signature guarantees and all other documents required by the Letter of Transmittal, must be received by the Depositary at one of its addresses set forth on the back cover of the Offer to Purchase prior to the Expiration Date (as defined in the Offer to Purchase) and either (i) certificates representing Shares must be received by the Depositary at any such address prior to the Expiration Date or (ii) such Shares must be delivered pursuant to the procedures for book-entry transfer set forth in the Offer to Purchase and a Book-Entry Confirmation (as defined in the Offer to Purchase) must be received by the Depositary prior to the Expiration Date or (b) the tendering stockholder must comply with the guaranteed delivery procedures set forth in the Offer to Purchase. No alternative, conditional or contingent 2 3 tenders will be accepted. If a stockholder desires to tender Shares pursuant to the Offer and such stockholder's certificates for such Shares are not immediately available or the procedures for book-entry transfer set forth in the Offer to Purchase cannot be completed on a timely basis or time will not permit all required documents to reach IBJ Schroder Bank & Trust Company (the "Depositary") prior to the Expiration Date, such Shares may nevertheless be tendered according to the guaranteed delivery procedures under "Procedure for Tendering Shares -- Guaranteed Delivery" in the Offer to Purchase. Purchaser will not pay any fees or commission to any broker, dealer or other persons for soliciting tenders of Shares pursuant to the Offer (other than the Dealer Manager, the Depositary and the Information Agent as described in the Offer to Purchase). Purchaser will, however, upon request, reimburse you for customary mailing and handling expenses incurred by you in forwarding the enclosed tender offer materials to your clients. Purchaser will pay or cause to be paid any transfer taxes payable on the sale of Shares to it, except as otherwise provided in Instruction 6 of the Letter of Transmittal. Any inquiries you may have with respect to the Offer should be addressed to Credit Suisse First Boston, the Dealer Manager for the Offer, at Eleven Madison Avenue, New York, New York 10010-3629 ((888) 671-4243), or IBJ Schroder Bank & Trust Company, the Depositary for the Offer, at P.O. Box 84, Bowling Green Station, New York, New York 10274-0084, Attn: Reorganization Operations Dept. ((212) 858-2103) or MacKenzie Partners, Inc., the Information Agent for the Offer at 156 Fifth Avenue, New York, New York 10010 ((212) 929-5500 (call collect) or (800) 322-2885). Requests for additional copies of the enclosed tender offer materials may be directed to the Information Agent at the above address and telephone number. Very truly yours, CREDIT SUISSE FIRST BOSTON CORPORATION NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON AS THE AGENT OF PURCHASER, PARENT, THE COMPANY, THE DEPOSITARY, THE INFORMATION AGENT, THE DEALER MANAGER OR ANY AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENT OR USE ANY DOCUMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN. 3 EX-99.(A)(5) 6 LETTER TO CLIENTS 1 OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK of ERO, INC. at $11.25 NET PER SHARE by HC ACQUISITION CORP. a wholly owned subsidiary of HEDSTROM CORPORATION THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MONDAY, JUNE 2, 1997 UNLESS THE OFFER IS EXTENDED. To Our Clients: Enclosed for your consideration are the Offer to Purchase, dated April 17, 1997 (the "Offer to Purchase"), and the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer") relating to the offer by HC Acquisition Corp., a Delaware corporation ("Purchaser"), and wholly owned subsidiary of Hedstrom Corporation, a Delaware corporation ("Parent"), to purchase all outstanding shares of common stock, $.01 par value per share ("Shares"), of ERO, Inc., a Delaware corporation (the "Company"), at a purchase price of $11.25 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase and the Letter of Transmittal. Holders who desire to tender Shares pursuant to the Offer and whose certificates for such Shares (the "Certificates") are not immediately available or the procedures for book-entry transfer set forth in the Offer to Purchase cannot be completed on a timely basis or time will not permit all required documents to reach IBJ Schroder Bank & Trust Company (the "Depositary") prior to the Expiration Date (as defined in the Offer to Purchase) may nevertheless tender their Shares according to the guaranteed delivery procedures set forth under "Procedure of Tendering Shares -- Guaranteed Delivery" in the Offer to Purchase. We are (or our nominee is) the holder of record of Shares held by us for your account. A TENDER OF SUCH SHARES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES HELD BY US FOR YOUR ACCOUNT. Accordingly, we request instructions as to whether you wish to have us tender on your behalf any or all Shares held by us for your account pursuant to the terms and conditions set forth in the Offer. Please note the following: 1. The offer price is $11.25 per Share, net to the seller in cash. 2. The Offer is conditioned upon, among other things, there being validly tendered and not withdrawn prior to the expiration of the Offer that number of Shares which would represent, on a fully-diluted basis, at least a majority of the outstanding Shares. See "INTRODUCTION," "Terms of the Offer" and "Certain Conditions of the Offer" in the Offer to Purchase. 3. The Offer is being made for all outstanding Shares. 2 4. Tendering stockholders will not be obligated to pay brokerage fees or commissions to the Dealer Manager (as defined in the Offer to Purchase), the Depositary or the Information Agent (as defined in the Offer to Purchase) or, except as set forth in Instruction 6 to the Letter of Transmittal, transfer taxes on the sale of Shares pursuant to the Offer. However, federal income tax backup withholding at a rate of 31% may be required unless an exemption is provided or unless the required taxpayer identification information is provided. See Instruction 10 of, and "IMPORTANT TAX INFORMATION" in, the Letter of Transmittal. 5. The Offer and withdrawal rights will expire at 12:00 midnight, New York City time, on Monday, June 2, 1997, unless extended. See "Terms of the Offer" in the Offer to Purchase. 6. The Board of Directors of the Company has unanimously (A) determined that each of the Merger Agreement (as defined in the Offer to Purchase), the Offer and the Merger (as defined in the Offer to Purchase) is fair to and in the best interests of the holders of Shares, (B) approved the execution, delivery and performance of the Merger Agreement (as defined in the Offer to Purchase) and the consummation of the transactions contemplated thereby, including the Offer and the Merger, such approval constituting approval thereof for purposes of Section 203 of the Delaware General Corporation Law, as amended, and for purposes of Article Nine of the Company's Amended and Restated Certificate of Incorporation, and (C) resolved to recommend acceptance of the Offer and, if required, both the approval and adoption of the Merger Agreement and approval of the Merger by the holders of Shares. 7. In all cases, payment for Shares purchased pursuant to the Offer will be made only after timely receipt by the Depositary of certificates for, or a Book-Entry Confirmation (as defined in the Offer to Purchase) with respect to, such Shares and a Letter of Transmittal (or a manually signed facsimile thereof), properly completed and duly executed, with all required signature guarantees and all other documents required by the Letter of Transmittal. See "Procedure for Tendering Shares" in the Offer to Purchase. If you wish to have us tender any or all of the Shares held by us for your account, please so instruct us by completing, executing, detaching and returning to us the instruction form set forth herein. If you authorize the tender of your Shares, all such Shares will be tendered unless otherwise specified in the instruction form. An envelope to return your instructions to us is enclosed. Your instructions should be forwarded to us in ample time to permit us to submit a tender on your behalf prior to the expiration of the Offer. THE OFFER IS MADE SOLELY BY THE OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL AND IS BEING MADE TO ALL HOLDERS OF SHARES. The Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares residing in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the securities, blue sky or other laws of such jurisdiction. However, Purchaser may, in its discretion, take such actions as it may deem necessary to make the Offer in any jurisdiction (including, without limitation, the extension of the Offer). In those jurisdictions where securities, blue sky or other laws require the Offer to be made by a licensed broker or dealer, the Offer will be deemed to be made on behalf of Purchaser by Credit Suisse First Boston Corporation or one or more registered brokers or dealers that are licensed under the laws of such jurisdictions. 2 3 INSTRUCTIONS WITH RESPECT TO THE OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF ERO, INC. The undersigned acknowledge(s) receipt of your letter, the enclosed Offer to Purchase dated April 17, 1997 (the "Offer to Purchase"), and the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer") in connection with the offer by HC Acquisition Corp., a Delaware corporation ("Purchaser") and wholly owned subsidiary of Hedstrom Corporation, a Delaware corporation, to purchase all outstanding shares of common stock, $.01 par value per share ("Shares"), of ERO, Inc., a Delaware corporation, at a purchase price of $11.25 per Share, net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer. This will instruct you to tender to Purchaser the number of Shares indicated below (or if no number is indicated below, all Shares) which are held by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Offer. Number of Shares to be Tendered: ------------------------------------------------ Date: , 1997 --------------------------------------------------------------------- - -------------------------------------------------------------------------------- SIGN HERE Signature(s): ------------------------------------------------------------------- Print or Type Name(s): ---------------------------------------------------------- Print or Type Address(es): ------------------------------------------------------ Area Code and Telephone Number(s): ---------------------------------------------- Taxpayer Identification or Social Security Number(s): --------------------------- EX-99.(A)(6) 7 GUIDELINES FOR CERTIFICATION 1 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER -- Social Security Numbers have nine digits separated by two hyphens: i.e., 000-00-0000. Employer Identification Numbers have nine digits separated by only one hyphen: i.e., 00-0000000. The table below will help determine the type of number to give the payer.
- --------------------------------------------------------------- - --------------------------------------------------------------- GIVE THE SOCIAL SECURITY FOR THIS TYPE OF ACCOUNT: NUMBER OF -- - -------------------------------------------------------------- GIVE THE EMPLOYER IDENTIFICATION FOR THIS TYPE OF ACCOUNT: NUMBER OF -- - -------------------------------------------------------------- 1. An individual's account The individual 2. Two or more individuals (joint The actual owner of the account) account or, if combined funds, any one of the individuals(1) 3. Husband and wife (joint The actual owner of the account) account or, if joint funds, either person(1) 4. Custodian account of a minor The minor(2) (Uniform Gift to Minors Act) 5. Adult and minor (joint account) The adult or, if the minor is the only contributor, the minor(1) 6. Account in the name of guardian The ward, minor, or or committee for a designated incompetent person(3) ward, minor, or incompetent person 7. a. The usual revocable savings The grantor-trustee(1) trust account (grantor is also trustee) The actual owner(1) b. So-called trust account that is not a legal or valid trust under State law 8. Sole proprietorship account The owner(4) 9. A valid trust, estate, or The legal entity (Do not pension trust furnish the identifying number of the personal representative or trustee unless the legal entity itself is not designated in the account title.)(5) 10. Corporate account The corporation 11. Religious, charitable, or The organization educational organization account 12. Partnership account held in the The partnership name of the business 13. Association, club, or other The organization tax-exempt organization 14. A broker or registered nominee The broker or nominee 15. Account with the Department of The public entity Agriculture in the name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments - --------------------------------------------------------------- - ---------------------------------------------------------------
(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's social security number. (4) You must show your individual name, but you may also enter your business or "doing business" name. You may use either your Social Security Number or Employer Identification Number. (5) List first and circle the name of the legal trust, estate, or pension trust. NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. 2 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER OF SUBSTITUTE FORM W-9 PAGE 2 OBTAINING A NUMBER If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Number Card, or Form SS-4, Application for Employer Identification Number, at the local office of the Social Security Administration or the Internal Revenue Service (the "IRS") and apply for a number. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees specifically exempted from backup withholding on ALL payments by brokers include the following: - - A corporation. - - A financial institution. - - An organization exempt from tax under section 501(a), or an individual retirement plan or a custodial account under Section 403(b)(7) if the account satisfies the requirements of section 401(F)(2). - - The United States or any agency or instrumentality thereof. - - A State, the District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof. - - A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof. - - An international organization or any agency, or instrumentality thereof. - - A registered dealer in securities or commodities registered in the U.S. or a possession of the U.S. - - A real estate investment trust. - - A common trust fund operated by a bank under section 584(a). - - An entity registered at all times under the Investment Company Act of 1940. - - A foreign central bank of issue. - - A futures commission merchant registered with the Commodity Futures Trading Commission. - - A person registered under the Investment Advisors Act of 1940 who regularly acts as a broker. Payments of dividends and patronage dividends not generally subject to backup withholding include the following: - - Payments to nonresident aliens subject to withholding under section 1441. - - Payments to partnerships not engaged in a trade or business in the U.S. and which have at least one nonresident partner. - - Payments of patronage dividends where the amount received is not paid in money. - - Payments made by certain foreign organizations. - - Payments made to a nominee. Payments of interest not generally subject to backup withholding include the following: - - Payments of interest on obligations issued by individuals. Note: You may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and you have not provided your correct taxpayer identification number to the payer. - - Payments of tax-exempt interest (including exempt-interest dividends under section 852). - - Payments described in section 6049(b)(5) to non-resident aliens. - - Payments on tax-free covenant bonds under section 1451. - - Payments made by certain foreign organizations. - - Payments made to a nominee. Exempt payees described above should file Form W-9 to avoid possible erroneous backup withholding. FILE THIS FORM WITH THE PAYER, FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, CHECK "EXEMPT" IN PART II OF THE FORM, SIGN AND DATE THE FORM AND RETURN IT TO THE PAYER. Certain payments other than interest, dividends, and patronage dividends, that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6045, and 6050A. PRIVACY ACT NOTICE. -- Section 6109 requires most recipients of dividend, interest, or other payments to give taxpayer identification numbers to payers who must report the payments to IRS. IRS uses the numbers for identification purposes. Payers must be given the numbers whether or not recipients are required to file tax returns. Beginning January 1, 1993, payers must generally withhold 31% of taxable interest, dividend, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER. -- If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) FAILURE TO REPORT CERTAIN DIVIDEND AND INTEREST PAYMENTS -- If you fail to include any portion of an includible payment for interest, dividends, or patronage dividends in gross income, such failure will be treated as being due to negligence and will be subject to a penalty of 5% on any portion of an under-payment attributable to that failure unless there is clear and convincing evidence to the contrary. (3) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING. -- If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500. (4) CRIMINAL PENALTY FOR FALSIFYING INFORMATION. -- Falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. EX-99.(A)(7) 8 FORM OF SUMMARY ADVERTISEMENT 1 EXHIBIT 99.(a)(7) This announcement is neither an offer to purchase nor a solicitation of an offer to sell Shares. The Offer is made solely by the Offer to Purchase dated April 17, 1997 (the "Offer to Purchase") and the related Letter of Transmittal, and any amendments or supplements thereto, and is being made to all holders of Shares. The Offer is not being made to (nor will tenders be accepted from or on behalf of) holders of Shares in any jurisdiction in which the making of the Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. In those jurisdictions where securities, blue sky or other laws require the Offer to be made by the licensed broker or dealer, the Offer shall be deemed to be made on behalf of Purchaser by Credit Suisse First Boston Corporation ("Credit Suisse First Boston") or one or more registered brokers or dealers licensed under the laws of such jurisdiction. NOTICE OF OFFER TO PURCHASE FOR CASH ALL OUTSTANDING SHARES OF COMMON STOCK OF ERO, INC. AT $11.25 NET PER SHARE BY HC ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF HEDSTROM CORPORATION HC Acquisition Corp., a Delaware corporation ("Purchaser") and a direct wholly owned subsidiary of Hedstrom Corporation, a Delaware corporation ("Parent"), is offering to purchase all outstanding shares of the common stock, $.01 par value per share (the "Shares"), of ERO, Inc., a Delaware corporation (the "Company"), at a purchase price of $11.25 per Share (the "Offer Price"), net to the seller in cash, upon the terms and subject to the conditions set forth in the Offer to Purchase dated April 17, 1997 and in the related Letter of Transmittal (which, together with the Offer to Purchase and any amendments or supplements thereto, collectively constitute the "Offer"). - ------------------------------------------------------------------------------- THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON MONDAY, JUNE 2, 1997, UNLESS THE OFFER IS EXTENDED. =============================================================================== The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of April 10, 1997, among Parent, Purchaser and the Company (the "Merger Agreement"). The Merger Agreement provides, among other things, for the commencement of the Offer by Purchaser and further provides that, subject to the satisfaction or waiver of certain conditions, Purchaser will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as a direct wholly owned subsidiary of Parent (the "Surviving Corporation"). In the Merger, each issued and outstanding Share (excluding Shares directly or indirectly owned by the Company, Parent, Purchaser or any other subsidiary of Parent and Shares owned by stockholders who shall have not voted in favor of the Merger or consented thereto in writing and who shall have demanded properly in writing appraisal for such shares under Delaware law) will be converted at the effective time of the Merger (the "Effective Time") into the right to receive the per Share Amount actually paid in the Offer, in cash, without any interest thereon (the "Merger Consideration") less any required withholding (the "Merger Consideration"). 2 THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY (A) DETERMINED THAT EACH OF THE MERGER AGREEMENT, THE OFFER AND THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF THE HOLDERS OF SHARES (THE "STOCKHOLDERS"), (B) APPROVED THE EXECUTION, DELIVERY AND PERFORMANCE OF THE MERGER AGREEMENT AND THE CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER, SUCH APPROVAL CONSTITUTING APPROVAL CONSTITUTING APPROVAL THEREOF FOR PURPOSES OF SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW, AS AMENDED, AND FOR PURPOSES OF ARTICLE NINE OF THE COMPANY'S AMENDED AND RESTATED CERTIFICATE OF INCORPORATION, AND (C) RESOLVED TO RECOMMEND ACCEPTANCE OF THE OFFER, AND, IF REQUIRED, BOTH THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE APPROVAL OF THE MERGER BY THE STOCKHOLDERS. PARENT AND PURCHASER HAVE ENTERED INTO A STOCKHOLDERS AGREEMENT WITH GOLDER, THOMA, CRESSEY FUND II LIMITED PARTNERSHIP (THE "SELLING STOCKHOLDER"), PURSUANT TO WHICH, AMONG OTHER THINGS, THE SELLING STOCKHOLDER HAS AGREED TO VALIDLY TENDER AND NOT WITHDRAW (AND NOT TO WITHDRAW) PURSUANT TO AND IN ACCORDANCE WITH THE OFFER, APPROXIMATELY 33.6% OF THE OUTSTANDING SHARES (CALCULATED ON A FULLY DILUTED BASIS) AT THE OFFER PRICE. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (A) THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION DATE (AS DEFINED BELOW) A NUMBER OF SHARES WHICH CONSTITUTES A MAJORITY OF THE SHARES OUTSTANDING, ON A FULLY DILUTED BASIS ON THE DATE OF PURCHASE, (B) THE DEBT FINANCING SOURCES OF PARENT AND ITS PARENT COMPANY, HEDSTROM HOLDINGS, INC. HAVING PROVIDED THE APPLICABLE DEBT FINANCING PURSUANT TO THEIR FINANCING COMMITMENTS. THE OFFER IS ALSO SUBJECT TO CERTAIN OTHER CONDITIONS CONTAINED IN THE OFFER TO PURCHASE. For purposes of the Offer, the Purchaser will be deemed to have accepted for payment (and thereby purchased) tendered Shares as, if and when Purchaser gives oral or written notice to IBJ Schroder Bank & Trust Company, as the Depositary (in such capacity, the "Depositary"), of Purchaser's acceptance of such Shares for payment. In all cases, payment for Shares purchased pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for tendering Stockholders for the purpose of receiving payment from Purchaser and transmitting payment to tendering Stockholders whose shares have theretofore been accepted for payment. In all cases, payment for Shares purchased pursuant to the Offer will be made only after timely receipt by the Depositary of (i) certificates for such Shares (or a confirmation of a book-entry transfer of Shares into the Depositary's account at The Depository Trust Company or the Philadelphia Depository Trust Company (each, a "Book-Entry Transfer Facility") pursuant to the procedures set forth in Section 3 of the Offer to Purchase) and (ii) the Letter of Transmittal (or a manually signed facsimile thereof), properly completed and duly executed with all required signature guarantees, and all other documents required by the Letter of Transmittal. Under no circumstances will interest on the Offer Price be paid by the Purchaser, regardless of any delay in making such payment. The term "Expiration Date" shall mean 12:00 Midnight, New York City time, on Monday, June 2, 1997, unless and until Purchaser, in accordance with the terms of the Offer and the Merger Agreement, shall have extended the period of time during which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date at which the Offer, as so extended by Purchaser, shall expire. Subject to the terms of the Merger Agreement, Purchaser expressly reserves the right, in its sole discretion, at any time or from time to time, to extend the period of time during which the Offer is open by giving oral or written notice of such extension to the Depositary and by making a public announcement of such extension. There can be no assurance that Purchaser will exercise its right to extend the Offer. Purchaser also expressly reserves the right, subject to applicable laws (including applicable regulations of the Securities and Exchange Commission promulgated under the Securities Exchange Act of 1934, as amended), and to the terms of the Merger Agreement, at any time or from time to time, (i) to delay acceptance for payment of or payment for any Shares, regardless of whether the Shares were theretofore accepted for payment, or to terminate the Offer and not accept for payment or pay for any Shares not theretofore accepted for payment or paid for, upon the occurrence of any of the conditions specified in Section 14 of the Offer to Purchase, by giving oral or written notice of such delay in payment or termination to the Depositary, and (ii) to amend the Offer in any respect, by giving oral or written notice to the Depositary. Any extension, delay in payment, termination or amendment will be followed as promptly as practicable by public announcement, the announcement in the case of an extension to be issued no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. Without limiting the manner in which Purchaser may choose to make any public announcement, Purchaser will have no obligation to publish, advertise or otherwise communicate any such announcement other than by issuing a press release to the Dow Jones News Service (or a similar news service) or as otherwise may be required by law. 2 3 Tenders of Shares made pursuant to the Offer are irrevocable, except as otherwise provided below. Shares tendered pursuant to the Offer may be withdrawn any time prior to the Expiration Date and, unless theretofore accepted for payment by the Purchaser, may also be withdrawn at any time after June 16, 1997. For a withdrawal to be effective, a written, telegraphic or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of the Offer to Purchase. Any such notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder, if different from that of the person who tendered such Shares. If certificates evidencing Shares have been delivered or otherwise identified to the Depositary, then prior to the release of such certificates, the tendering Stockholder must also submit the serial numbers shown on the particular certificates evidencing the Shares to be withdrawn, and the signature on the notice of withdrawal must be guaranteed by an Eligible Institution (as defined in Section 3 of the Offer to Purchase) (except in the case of Shares tendered for the account of an Eligible Institution). If Shares have been tendered pursuant to the procedure for book-entry transfer set forth in Section 3 of the Offer to Purchase, the notice of withdrawal must specify the name and number of the account at the applicable Book-Entry Transfer Facility to be credited with the withdrawn Shares. All questions as to form and validity (including time of receipt) of notice of withdrawal will be determined by Purchaser, in its sole discretion, whose determination shall be final and binding on all parties. No withdrawal of Shares shall be deemed to have been properly made until all defects and irregularities have been cured or waived. None of Purchaser, Parent, the Dealer Manager, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failing to give such notification. The Company has provided Purchaser with its stockholder list and security position listings for the purpose of disseminating the Offer to Stockholders. The Offer to Purchase, the related Letter of Transmittal and other relevant materials will be mailed to record holders of Shares and will be furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the Company's stockholder list or, if applicable, who are listed as participants in a clearing agency's security position listing, for subsequent transmittal to beneficial owners of Shares by Purchaser. The information required to be disclosed by Rule 14d-6(e)(1)(vii) of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, is contained in the Offer to Purchase and is incorporated herein by reference. THE OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION THAT SHOULD BE READ CAREFULLY BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. Requests for copies of the Offer to Purchase, the Letter of Transmittal and other tender offer documents may be directed to the Information Agent as set forth below, and copies will be furnished promptly at the Purchaser's expenses. Questions or request for assistance may be directed to the Information Agent or the Dealer Manger. No fees or commissions will be payable to brokers, dealers or other persons (other than the Dealer Manager, the Depositary and the Information Agent) in connection with the solicitation of tenders of shares pursuant to the Offer. The information Agent for the Offer is: Mackenzie Partners, Inc. 156 Fifth Avenue New York, New York 10010 (212) 929-5500 (Call Collect) or Call Toll-Free (800) 322-2885 3 4 The Dealer Manager for the Offer is: Credit Suisse First Boston Eleven Madison Avenue New York, New York 10010-3629 Call Toll-Free (888) 671-4243 April 17, 1997 4 EX-99.(A)(8) 9 TEXT OF PRESS RELEASE 1 Exhibit 99.(a)(8) Contact: Roy Winnick Kekst and Company 212-593-2655 HEDSTROM CORPORATION, LEADING U.S. MAKER OF CHILDREN'S OUTDOOR PLAY EQUIPMENT, TO ACQUIRE ERO, INC. IN TRANSACTION VALUED AT APPROXIMATELY $203 MILLION DALLAS and PITTSBURGH, April 11, 1997 -- Hicks, Muse, Tate & Furst Incorporated today announced that Hedstrom Corporation, of Pittsburgh, the nation's leading manufacturer of children's outdoor play equipment and play balls, has agreed to acquire ERO, Inc. (Nasdaq: EROI), of Mount Prospect, Illinois, a major manufacturer of children's leisure and activity products, in a transaction valued at approximately $203 million. Hicks Muse acquired Hedstrom in October 1995. The parties expect to complete the transaction within sixty days. Under the terms of the definitive agreement between Hedstrom and ERO, Hedstrom will pay $11.25 per share in cash, or approximately $123 million, for the equity of ERO and refinance ERO's existing debt of approximately $80 million. ERO's Board of Directors has unanimously approved the transaction and recommended approval of the transaction by ERO's shareholders. ERO's largest shareholder, the private equity investment firm of Golder, Thoma, Cressey, Rauner, Inc. (GTCR), has supported ERO's acquisition strategy since it took the company private in 1988. GTCR, which currently owns about 38 percent of ERO's common stock outstanding, has agreed to tender its shares in favor of the proposed transaction. Alan B. Menkes, a Managing Director of Hicks Muse and a Director of Hedstrom, said: "When we acquired Hedstrom in October 1995, we believed that it would be an excellent platform from which to make further acquisitions in the children's indoor and outdoor play equipment businesses. The combination of these two fine companies, (more) 2 2 Hedstrom and ERO, is the first major step in that process, and is consistent with our firm's buy-and-build philosophy." Arnold E. Ditrl, Chief Executive Officer of Hedstrom, said: "We are delighted to be teaming up with ERO, Inc., whose products and distribution channels are complementary to Hedstrom's. The combination of Hedstrom and ERO will create an enterprise well-positioned for long-term success as a leading manufacturer and marketer of play products for children." D. Richard Ryan, Jr., Chairman, President and Chief Executive Officer of ERO, said: "We clearly think this transaction is in the best interest of ERO shareholders. The merger also represents a great opportunity for both companies to become a more important factor in children's leisure products." Completion of the transaction is contingent upon the tender of a majority of ERO's outstanding shares, expiration of the applicable Hart-Scott Rodino waiting period, and other customary closing conditions. ERO is a leading marketer of children's leisure products in multiple market segments through its four operating subsidiaries. ERO Industries sells licensed Slumber Shoppe and children's water sports products through sporting goods and toy channels. Amav Industries, a wholly-owned subsidiary of ERO, sells its arts, crafts and activity products in toy and craft departments. ERO's Impact subsidiary sells licensed and branded back-to-school products to stationary buyers. ERO's Priss Prints unit markets a range of children's room decor products through juvenile, paint and wallpaper and domestics departments. ERO's manufacturing facilities are located in Montreal, Canada and Hazlehurst, Georgia. On February 6, 1997, ERO reported that for its fiscal year ended (more) 3 3 December 31, 1996, the Company achieved net income of $7,758,000 on sales of $157,913.000. Founded in 1915, Hedstrom manufactures and distributes activity-oriented play products for children. The Company's major product lines include swing sets, wood gym kits and slides, play balls and ball pits, and ride-on products. Hedstrom's manufacturing facilities are located in Bedford, Pennsylvania, and Ashland, Ohio. Since its formation in 1989, Hicks, Muse, Tate & Furst Incorporated has completed or currently has pending more than 70 transactions with a total capital value of approximately $19 billion. Headquartered in Dallas, the firm also has offices in New York, St. Louis and Mexico City. EX-99.(B)(1) 10 EQUITY COMMITMENT LETTER 1 EXHIBIT 99.(b)(1) HICKS MUSE EQUITY FUND II, L.P. 200 Crescent Court, Suite 1600 Dallas, Texas 75201 April 10, 1997 Hedstrom Holdings, Inc. 200 Crescent Court, Suite 1600 Dallas, Texas 75201 Gentlemen: You have advised Hicks Muse Equity Fund II, L.P. ("Hicks Muse") that Hedstrom Corporation (the "Company"), through a wholly-owned subsidiary thereof ("Acquisition Co.") will make a cash tender offer (the "Offer") at a price not to exceed $11.25 per share for all of the issued and outstanding shares of common stock, par value $0.01 per share (the "Target Stock"), of ERO, Inc. ("Target"), followed by a merger of Acquisition Co. with and into Target (collectively, the "Acquisition"). This is to confirm that, subject to the terms hereof and upon the satisfaction of the last to occur of the conditions set forth below, Hicks Muse or an affiliate hereby commits to invest up to $40 million in Hedstrom Holdings, Inc. ("Holdings") pursuant to a purchase (the "Purchase") of the common equity of Holdings, the proceeds of which will be used in connection with the Acquisition. 1. Conditions. The Purchase is subject to (i) negotiation and execution of mutually satisfactory definitive stock purchase agreements containing representations, warranties, covenants, conditions, and indemnifications customary for transactions of this type and (ii) the consummation of the Offer by the Company on the terms set forth in that certain Merger Agreement, dated April 10, 1997, between the Company, Acquisition Co. and Target, as it may be amended from time to time. 2. Indemnity. Holdings and the Company agree to indemnify Hicks Muse, its affiliates, and their respective owners, officers, directors, agents, and employees (collectively, the "Indemnified Persons") against all expenses, damages, and liabilities suffered or incurred by any of them in connection with the transactions contemplated hereby (including those resulting from Hicks Muse's negligence), provided that the foregoing will not apply to any losses of an Indemnified Person to the extent they are found by a final decision of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnified Person. Such indemnity shall be payable as expenses, damages, and liabilities are incurred and shall survive any termination of this letter. HOLDINGS HEREBY ACKNOWLEDGES THAT THE FOREGOING INDEMNITY SHALL BE APPLICABLE TO ALL CLAIMS, LIABILITIES, LOSSES, DAMAGES OR EXPENSES THAT HAVE RESULTED FROM OR ARE ALLEGED TO HAVE RESULTED FROM THE ACTIVE OR PASSIVE OR THE SOLE, JOINT OR CONCURRENT ORDINARY NEGLIGENCE OF HICKS MUSE OR ANY OTHER INDEMNIFIED PERSON. 3. Expense Reimbursement. In consideration of the Hicks Muse commitment contained herein, Holdings and the Company agree to promptly pay or cause to be paid upon receipt of any request 2 Hedstrom Holdings, Inc. April 10, 1997 Page 2 therefor all reasonable accounting, legal, banking and other out-of-pocket expenses of Hicks Muse relating to the transaction contemplated hereby. 4. Termination Fees Paid by Target. In further consideration of the Hicks Muse commitment contained herein, Holdings and the Company agree to promptly pay or cause to be paid to HM2/Management Partners, L.P. that amount of the fees required to be paid by Target to the Company or its designee in connection with the termination of that certain Agreement and Plan of Merger, dated April 10, 1997, by and among the Company, Acquisition Co. and Target which remain after (i) payment by Holdings and the Company of their expenses incurred in connection with the Acquisition and (ii) payment of a portion of such fees to Holdings's and the Company's financing sources as specified in the commitment letters of such financing sources. 5. Publicity. Hicks Muse and Holdings agree to consult with each other and will mutually agree upon the content and timing of any press release or other public statement with respect to the transactions contemplated herein. 6. Access to Information. Holdings and the Company shall provide Hicks Muse and its representatives full and complete access to the books, records, facilities, management and key personnel of Holdings and the Company. 7. Conduct of Business. From and after the date hereof until the termination of this agreement Holdings and the Company shall conduct their businesses only in the ordinary course. 8. Closing Date. The parties shall use their best efforts to close the transaction within 195 days after the date this letter is accepted by Holdings. 9. Further Actions. Each of the parties hereto agrees to take, or cause to be taken, all actions, and to do, or cause to be done as promptly as practicable, all things necessary, proper and advisable under applicable laws and regulations to consummate and make effective as promptly as practicable the transactions contemplated by this letter and to negotiate in good faith with respect to the same. If at any time after the Purchase any further actions is necessary or desirable to carry out the purposes of this letter, including, without limitation, the execution of additional instruments, the proper officers and directors of each party to this letter shall take all such necessary action. 10. Confidentiality. Each party hereto shall each keep confidential all information obtained by it with respect to the other in connection with this letter, and will use such information solely in connection with the transactions contemplated hereby, and if the transactions contemplated hereby are not consummated, each shall destroy, without retaining a copy thereof, any schedules, documents or other written information obtained from the other in connection with this letter and the transactions contemplated hereby. Notwithstanding the foregoing, neither party shall be required to keep confidential or destroy any information which (a) is known or available through other lawful sources, not bound by a confidentiality agreement with the disclosing party, (b) is or becomes publicly known through no fault of the receiving party or its agents, (c) is required to be disclosed pursuant to an order or request of a judicial authority or governmental entity (provided the disclosing party is given reasonable prior notice), or (d) is developed by the receiving party independently of the disclosure by the disclosing party. 2 3 Hedstrom Holdings, Inc. April 10, 1997 Page 3 11. Governing Law. This letter shall be governed by and construed in accordance with the laws of the State of Texas without regard to the conflict-of-laws titles thereof. 12. Term. The obligations of the parties hereto (except those set forth in Sections 2, 3, 4 and 9) may be terminated, after 12:00 midnight, Dallas, Texas time on the 195th day after the date this letter is accepted by the Company, by either party by written notice delivered to the other. 13. Non-Disclosure. You agree that this letter and its terms and conditions may not be disclosed, directly or indirectly, to any other person except to your officers, agents and advisors who are directly involved in the consideration of this matter, without the prior written consent of Hicks Muse. 14. Notice of Indemnity Provisions. THIS AGREEMENT CONTAINS INDEMNIFICATION PROVISIONS IN PARAGRAPH 2, NOTICE OF WHICH IS HEREBY GIVEN. Very truly yours, HICKS MUSE TATE & FURST EQUITY FUND II, L.P. By: HM2/GP Partners, L.P., its General Partner By: Hicks Muse GP Partners, L.P. its General Partner By: Hicks Muse Fund II Incorporated its General Partner By: /s/ ALAN B. MENKES ------------------------------- Name: Alan B. Menkes Managing Director and Principal ACCEPTED AND AGREED TO: HEDSTROM HOLDINGS, INC. By: /s/ ANDREW S. ROSEN ------------------------- Name: Andrew S. Rosen ------------------------- Title: Vice President ------------------------- Dated: April 10, 1997 3 EX-99.(B)(2) 11 ENGAGEMENT LETTER 4-11-97 1 EXHIBIT 99.(b)(2) CREDIT SUISSE FIRST BOSTON CORPORATION Eleven Madison Avenue New York, NY 10055 April 11, 1997 Hedstrom Corporation Cherrington Corporate Center 300 Corporate Center Drive, Suite 100 Coraopolis, PA 15108 Attention: Mr. Arnold E. Ditri Chief Executive Officer Hedstrom Corporation Engagement Letter Dear Mr. Ditri: You have advised us that Hedstrom Corporation ("Acquiror" or "you") intend to acquire (the "Acquisition") all of the issued and outstanding capital stock of a company you have identified to us as Gadget Corporation ("Target") pursuant to a tender offer for all such shares (the "Tender Offer"). We understand that the cash price per share to be paid in the Tender Offer will be up to $11.25, representing a maximum aggregate purchase price for Target of $220 million (including the outstanding debt of Target), subject to seasonal working capital requirements. You have further advised us that in connection with the Acquisition (i) you will form a Delaware corporation ("AcquisitionCo"), and will make an equity contribution of $40 million (the "Equity Contribution") to AcquisitionCo in exchange for all of its outstanding capital stock, (ii) AcquisitionCo will commence the Tender Offer and (iii) upon consummation of the Tender Offer, (a) Hedstrom Holdings Corporation ("Holdings"), the holder of all the capital stock of Acquiror, will issue senior discount notes, which will not require cash interest payments by Holdings for at least 5 years after issuance (the "Holdings Senior Discount Notes"), for aggregate gross proceeds, together with the aggregate principal amount of the Senior Subordinated Notes (as defined), of $140 million, (b) you 2 2 will obtain senior secured credit facilities (the "Senior Bank Facilities") in an aggregate principal amount of $180 million, consisting of a $110 million term facility and a $70 million revolving credit facility (up to an amount to be agreed upon of which may be borrowed in connection with the Acquisition for the purpose of refinancing short-term indebtedness incurred to fund seasonal working capital requirements), and (c) you will issue senior subordinated notes (the "Senior Subordinated Notes" and, together with the Holdings Senior Discount Notes, the "Notes")) in a principal amount, together with the gross proceeds from the Holdings Senior Discount Note Offering (as defined), of $140 million or, in lieu thereof, incur a senior subordinated bridge loan in a principal amount of $115 million. Based upon and subject to the foregoing, and pursuant to the terms and subject to the conditions set forth in the Summaries of Terms and Conditions attached as Exhibits A and B hereto (each a "Summary of Terms"), and as further provided below, Credit Suisse First Boston Corporation (the "Initial Purchaser") hereby commits to use its reasonable best efforts, in cooperation with you and Target, to complete the private placements of the Holdings Senior Discount Notes (the "Holdings Senior Discount Note Offering") and the Senior Subordinated Notes (the "Senior Subordinated Note Offering", and, together with the Holdings Senior Discount Note Offering, the "Offerings") as soon as reasonably practicable following the execution of definitive documentation relating to the Acquisition; provided, however, that, in the event the Initial Purchaser determines, after consultation with you, that market conditions existing at the time of the proposed commencement the Offerings make it unlikely that the Offerings could be successfully consummated on reasonable terms, the Initial Purchaser may elect to postpone the Offerings until such market conditions, in the Initial Purchaser's judgment, no longer preclude the successful completion of the Offerings. The Tender Offer, the Equity Contribution, the incurrence of the Senior Bank Facilities, the Acquisition, the Offerings or the incurrence of the Bridge Loan are referred to herein collectively as the "Transactions". To assist the Initial Purchaser in a timely completion of the Offerings, you agree, upon the Initial Purchaser's reasonable request, to (a) promptly provide (and to use your reasonable best efforts to cause Target to provide) to the Initial Purchaser all financial and other information in your or their possession with respect to Target, the Transactions and any other transactions contemplated therewith, including but not limited to 3 3 information and projections prepared by you or by your advisors on your behalf relating to Target, the Transactions and the other transactions contemplated therewith, (b) make your (and to use your reasonable best efforts to cause Target to make its) senior officers and representatives available to the Initial Purchaser in connection with the Offerings (including any resale of the Holdings Senior Discount Notes by the Initial Purchaser (a "Resale")), including making them available to assist in the preparation of one or more offering documents (including assistance in obtaining industry data), to participate in due diligence sessions and to participate in one or more road shows to market the Notes and (c) prepare, and to cause your affiliates and advisors to prepare (and to use your reasonable best efforts to cause Target to assist in the preparation of), one or more appropriate offering documents, and to assist the Initial Purchaser in preparing other appropriate marketing materials, in each case to be used in connection with the Offerings (including any Resale). Without limiting the foregoing, in connection with your using your reasonable best efforts to cause Target to assist in the undertakings described in clauses (a), (b) and (c) above, you agree to use your reasonable best efforts to include in the applicable documents relating to or effecting the Acquisition a provision obligating Target to facilitate the Offerings in the manner described in clauses (a), (b) and (c) above. In consideration for the Initial Purchaser's commitment to use its reasonable best efforts to complete the Offerings as soon as reasonably practicable following the execution of definitive documentation relating to the Transactions (the "Commitment"), you hereby agree that the Initial Purchaser will be offered to be the lead placement agent (i) with respect to the Offerings and (ii) in connection with any other offering or placement of securities by you, Holdings or Target in lieu of the Offerings. You hereby agree to pay in cash to the Initial Purchaser the fees set forth in the fee letter dated the date hereof and delivered herewith among the Initial Purchaser and Acquiror (in each case subject to the conditions set forth in such fee letter). It is understood and agreed that the Initial Purchaser shall not have any obligation hereunder to act as underwriter, placement agent or purchaser with respect to any Notes unless and until such time as the Initial Purchaser has executed and delivered an underwriting, placement agent or purchase agreement in the form customarily used by the Initial Purchaser for similar transactions, setting forth the obligations of the Initial Purchaser. 4 4 Based on current market conditions, the Initial Purchaser expects that the Notes will be on terms substantially as set forth in Exhibits A and B, respectively, although the actual terms of the Notes may vary and/or market conditions may not permit the issuance of the Notes. It is understood that the preceding sentence shall give rise to no liability (and does not constitute any commitment) of the Initial Purchaser. Upon consummating the sale of any Notes, the Initial Purchaser may place customary "tombstone" advertisement(s) in publication(s) of the Initial Purchaser's choice at its own expense with the prior approval of the Acquiror, which approval shall not be unreasonably withheld. The Commitment, and CSFB's obligation to consummate the Offerings, are subject to the satisfaction of the closing conditions set forth in Annex I to Exhibit A. The Commitment will expire at 5:00 p.m., New York City time on April 18, 1997, unless accepted prior to such time and, if accepted prior to such time, the Commitment will expire at 5:00 p.m. New York City time on the earliest of (a) the date of the termination of the Tender Offer or the date Acquiror purchases, or elects not to purchase shares of Target's Capital Stock, (b) the incurrence of the Bridge Loan and (c) the date that is 75 days from the date hereof. Expiration or termination of the Commitment shall not affect your obligations under the following sentence or the second succeeding paragraph, all of which obligations shall remain in full force and effect regardless of any termination of the Commitment or the completion of the Acquisition and the other Transactions. In connection with this Engagement Letter, the Initial Purchaser and the Acquiror have executed the Indemnity Agreement attached as Exhibit C hereto. This letter shall be governed by and construed in accordance with the laws of the State of New York. Delivery of an executed counterpart of this letter by telecopier shall be effective as delivery of a manually executed counterpart of this letter. You and we hereby irrevocably waive any right to trial by jury in any action, claim, suit or proceeding (whether based on contract, tort or otherwise) arising out of or relating to this letter or the transactions contemplated hereby. This letter is not assignable by you to any other person or entity, and, except as otherwise provided herein, this letter is not assignable by us without your consent. This letter has been delivered to you for your information and is not to be distributed or disclosed to, or otherwise relied upon by, any other person (including pursuant 5 5 to any proxy statement or other publicly filed document) without the Initial Purchaser's prior written consent, except that you may disclose this letter (a) on a confidential need-to-know basis to Target and its advisors and to your advisors and (b) as required by applicable law or compulsory legal process. Very truly yours, CREDIT SUISSE FIRST BOSTON CORPORATION, By: /s/ Harold W. Bogle ------------------------------------ Harold W. Bogle Managing Director Agreed to and Accepted HEDSTROM CORPORATION, By /s/ Andrew S. Rosen ---------------------------- Date: -------------------------- 6 Exhibit A HEDSTROM CORPORATION Offering of Senior Subordinated Notes Preliminary Summary of Terms Issuer and Issue: Hedstrom Corporation ("Hedstrom" and the "Issuer") will issue Senior Subordinated Notes (the "Notes") the proceeds of which will fund a tender offer (the "Tender Offer") by AcquisitionCo ("AcquisitionCo") for all of the issued and outstanding capital stock of Target ("Target"). Amounts: The aggregate principal amount of the Senior Subordinated Notes, together with the aggregate gross proceeds from the issuance of the Holdings Senior Discount Notes, will equal up to $140 million. Maturity: 10 years. Distribution Method: Pursuant to Rule 144A. Use of Proceeds: To fund a portion of the purchase price paid in the Acquisition of all of the issued and outstanding shares of Target. Interest: Accruing and payable in cash from the issue date. Guarantees: The Senior Subordinated Notes will be guaranteed, on a senior subordinated basis, by each domestic subsidiary of the Issuer (the "Subsidiary Guarantors"). To the extent the Senior Bank 7 2 Facilities are guaranteed on a senior basis by Hedstrom Holdings Corporation ("Holdings"), the Senior Subordinated Notes will be guaranteed on a senior basis by Holdings. Ranking: The Senior Subordinated Notes will be senior subordinated, unsecured obligations of the Issuer, subordinated in right of payment to all existing and future Senior Indebtedness of the Issuer (including the Senior Bank Facilities) to the extent set forth in the Indenture, and senior in right of payment to all existing and future Subordinated Indebtedness of the Issuer. The Senior Subordinated Notes will rank pari passu with all existing and future Senior Subordinated Indebtedness of the Issuer. Mandatory Redemption: None. Optional Redemption: The Senior Subordinated Notes will be non-callable for five years and will be callable at par plus one-half of the coupon following the fifth anniversary of issuance, declining ratably to par following the eighth anniversary of issuance. Equity Offering At any time prior to the third Redemption: anniversary of issuance, the Issuer may redeem an amount to be determined of the Senior Subordinated Notes from the proceeds of one or more public 8 3 equity offerings at a redemption price to be fixed at the time of, and as a function of, the pricing of the Senior Subordinated Notes, plus accrued and unpaid interest. Registration The Issuer will enter into a Requirement: registration agreement relating to the Senior Subordinated Notes containing terms customary for Rule 144A offerings. Pursuant to the registration agreement, the Issuer will be obligated to consummate an exchange offer pursuant to an effective registration statement or to cause a shelf registration statement with respect to resales of the Senior Subordinated Notes to be declared effective under the Securities Act and, if one of such events does not occur prior to the date that is 150 days after the date of issuance of the Senior Subordinated Notes, interest on the Senior Subordinated Notes will increase by 0.5% per annum, payable in cash, until such default shall be cured. SEC Reports: Notwithstanding that the Issuer may not be, or may not be required to remain, subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Issuer will file with the SEC and provide the Trustee and holders of the Senior Subordinated Notes with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act. 9 4 Negative Covenants: Customary for high yield securities such as the Senior Subordinated Notes and others to be reasonably specified by the Initial Purchaser, including but not limited to limitation on other senior subordinated indebtedness, limitation on indebtedness and preferred stock of restricted subsidiaries, limitation on indebtedness, limitation on restricted payments, limitation on transactions with affiliates, limitation on the sale or issuance of restricted subsidiaries' capital stock, limitation on restrictions on distributions from restricted subsidiaries, limitation on asset sales and limitation on merger, consolidation or sale of assets. Change of Control: In the event of a Change of Control, each holder of Notes will have the right to require the Issuer to repurchase such holder's Notes at a purchase price equal to 101% of the principal amount thereof, plus accrued and unpaid interest. Events of Default: Customary for high yield subordinated notes such as the Senior Subordinated Notes and others to be reasonably specified by the Initial Purchaser, including but not limited to nonpayment of principal or interest, violation of covenants, cross acceleration to other debt in excess of an amount to be agreed upon, bankruptcy and judgments. Governing Law: New York. 10 [ Annex II] [to Exhibit A] CLOSING CONDITIONS Capitalized terms used but not defined herein shall, unless otherwise specified, have the meanings assigned to such terms in the Letters (as defined). The Commitments of Credit Suisse First Boston or Credit Suisse First Boston Corporation (collectively, "CSFB") pursuant to the Bridge Loan Commitment Letter, the Engagement Letter and the Commitment Letter, each dated as of April 11, 1997, as the case may be, between CSFB and Hedstrom Corporation (together, the "Letters") shall be subject to the following conditions: (i) there not becoming known to CSFB after the date of the Letters any information or other matter relating to Acquiror or Target which CSFB has reasonable cause to believe is accurate and which is inconsistent in a material and adverse manner with any information or other matter disclosed to CSFB by Acquiror or Target prior to the date of the Letters; (ii) the obligations of the parties thereto contained in the Agreement and Plan of Merger dated April 11, 1997, among Acquiror, AcquisitionCo and Target (the "Merger Agreement") to be performed at or prior to the consummation of the Tender Offer shall have been performed or complied with by Acquiror, AcquisitionCo and Target prior to the consummation of the Tender Offer, except where the failure so to perform or comply could not reasonably be expected to result in a Material Adverse Effect (as defined); (iii) there shall be no litigation or administrative proceedings or other legal or regulatory developments, actual or threatened, that, singly or in the aggregate, could have a Material Adverse Effect on Acquiror or Target or the ability of Acquiror to fully and timely perform its obligations under the documents executed in connection with the Transactions, or the ability of the parties to consummate the financing or 11 2 the other Transactions contemplated by the Letters or the validity or enforceability of any of the documents executed in connection with the Transactions or the rights, remedies and benefits available to the parties thereunder; (iv) CSFB and, if applicable, the Lenders, shall have received an opinion (and related going-concern valuation) reasonably satisfactory in all respects to the Lenders and CSFB, as applicable, from an independent valuation firm reasonably satisfactory to the Lenders and CSFB, as applicable, in each case to the effect that, after giving effect to the Transactions, Acquiror will not be insolvent, will not be rendered insolvent by the indebtedness incurred in connection therewith, will not be left with unreasonably small capital with which to engage in its business and will not have incurred debts beyond its ability to pay such debts as they mature; (v) CSFB's and, if applicable, the Lenders', reasonable satisfaction in all material respects with any amendments to any of the terms of (i) the Tender Offer and all material documents relating thereto, (ii) any definitive agreements relating to the Acquisition and any other material agreements to be entered into in connection with the Acquisition and (iii) the Senior Bank Facilities and the Equity Contribution; (vi) the receipt by CSFB and, if applicable, the Lenders', of financial statements of Acquiror and Target (including notes thereto), consisting of (a) audited and pro forma balance sheets for each period in the 3 fiscal-year period ended December 31, 1996, and (b) audited and pro forma statements of operations and cash flows for each period in the 3 fiscal-year period ended December 31, 1996, and CSFB's and, if applicable, the Lenders', receipt of any unaudited interim financial statements deemed necessary or reasonably desirable in the judgment of CSFB and the Lenders, if applicable, and all such financial statements, historical or pro forma delivered pursuant 12 3 to this paragraph (vi) to be in compliance with the requirements of Regulation S-X for a public offering registered under the Securities Act or 1933 (the "Securities Act"); (vii) the approval and/or recommendation by the Board of Directors of Target of the Tender Offer and the Acquisition; (viii) the waiting period (and any extension thereof) applicable to the merger of AcquisitionCo and Target under the HSR Act (as defined in the Merger Agreement) shall have been terminated or shall have expired, and no restrictive order or other requirements shall have been placed on Acquiror, AcquisitionCo, Target or the surviving entity in connection therewith, except where such restrictive order or other requirements could not reasonably be expected to result in a Material Adverse Effect; (ix) there not having occurred or becoming known to CSFB (a)any event or events having occurred that, individually or in the aggregate, could have a Material Adverse Effect on Acquiror or Target or (b) (i) any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market in the United States for a period in excess of forty-eight hours, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) the commencement of a war, armed hostilities or other international or national calamity, directly or indirectly involving the United States, (iv) any limitations (whether or not mandatory) imposed by any governmental authority on the nature or extension of credit or further extension of credit by banks or other lending institutions, (v) in the case of the foregoing clauses (iii) and (iv), a material acceleration or worsening thereof, or (vi) any other material adverse change in bank or capital market conditions that has had a material adverse effect on the syndication of leveraged bank credit facilities or 13 4 the consummation of high yield offerings, as the case may be, that CSFB shall reasonably determine makes it impracticable to consummate the Offerings prior to the termination of the Offering Period or syndication of the Bridge Loan, as the case may be; (x) CSFB's satisfaction that, immediately prior to and during the marketing period for any Offering or syndication of the Bridge Loan, as the case may be, there shall be no competing issues of debt securities or commercial bank facilities (other than the Senior Bank Facilities the Senior Subordinated Note Offering or Bridge Loan and the Holdings Senior Discount Note Offering, as applicable) of Acquiror, Holdings or AcquisitionCo; (xi) the negotiation, preparation, execution and delivery of definitive documentation reasonably satisfactory to CSFB, in connection with the Offerings, the Bridge Loan and the purchase of the Holdings Senior Discount Notes, if applicable; (xii) customary closing conditions for transactions similar to the Bridge Loan, the Offerings and the purchase of the Holdings Senior Discount Notes including the accuracy of all representations and warranties contained in the Letters, the absence of any defaults, no material change in the capital, corporate and organizational structure of Holdings, Acquiror and its subsidiaries (after giving effect to the Transactions), compliance with laws, adequate insurance, except where the failure so to perform or comply with such customary closing conditions could not reasonably be expected to result in a Material Adverse Effect, and the receipt by CSFB of reasonably satisfactory legal opinions from Acquiror's counsel in connection with the Offerings and the Bridge Loan (including 10b-5 opinions relating to any offering documents) and satisfactory accountant's "comfort" letters in connection with the Offerings; and (xiii) payment of fees. 14 5 A "Material Adverse Effect" shall mean the result of one or more events, changes or effects which, individually or in the aggregate, could reasonably be expected to have a material adverse effect on (i) the business, results of operations, financial condition or prospects of Acquiror, AcquisitionCo or Target and each of their respective subsidiaries, in each case, taken as a whole and (ii) the ability of CSFB to consummate the Offerings prior to the Offering Period or syndicate the Bridge Loan. 15 Exhibit B HOLDINGS Offering of Senior Discount Notes Preliminary Summary of Terms Issuer and Issue: Hedstrom Holdings Corporation ("Holdings" or "Issuer"), a corporation which will own all the equity interests of Hedstrom Corporation ("Acquiror"), will issue senior discount notes (the "Holdings Senior Discount Notes"). Amounts: The aggregate principal amount of the Holdings Senior Discount Notes, together with the aggregate gross proceeds from the issuance of the Senior Subordinated Notes of Acquiror, will equal up to $140 million. Maturity: 12 years. Distribution Method: Pursuant to Rule 144A. Use of Proceeds: To fund a portion of the purchase price paid in the Acquisition of all of the issued and outstanding shares of Target. Interest: No cash interest accruing or payable until the fifth anniversary of the issue date and interest accruing and payable in cash thereafter. Security: The Holdings Senior Discount Notes will be unsecured. Guarantees: None. 16 2 Ranking: The Holdings Senior Discount Notes will be senior, unsecured obligations of Holdings, ranking pari passu in right of payment with all existing and future senior unsecured obligations of Holdings (including guarantees by Holdings of the Senior Bank Facilities and the Senior Subordinated Notes) and will rank senior to all future subordinated debt of Holdings. Mandatory Redemption: None. Optional Redemption: The Holdings Senior Discount Notes will be non-callable for five years and will be callable at par plus one-half of the yield following the fifth anniversary of issuance, declining ratably to par following the eighth anniversary of issuance. Equity Offering At any time prior to the third Redemption: anniversary of issuance, Holdings may redeem up to an amount to be determined of the Holdings Senior Discount Notes, in each case from the proceeds of one or more public equity offerings at a redemption price to be fixed at the time of, and as a function of, the pricing of the Holdings Senior Discount Notes, plus accrued and unpaid interest. Registration The Issuer will enter into a Requirement: registration agreement relating to the Holdings Senior Discount Notes, which will contain terms customary 17 3 for Rule 144A offerings. Pursuant to the registration agreement, Holdings will be obligated to consummate an exchange offer pursuant to an effective registration statement or to cause a shelf registration statement with respect to resales of the Holdings Senior Discount Notes, to be declared effective under the Securities Act and, if one of such events does not occur prior to the date that is 150 days after the date of issuance of the Holdings Senior Discount Notes, cash interest on the Holdings Senior Discount Notes of 0.5% per annum will accrue and be payable in cash until such default shall be cured. SEC Reports: Notwithstanding that Holdings may not be, or may not be required to remain, subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, Holdings will file with the SEC and provide the Trustee and holders of the Holdings Senior Discount Notes with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act. Negative Covenants: Customary for high yield discount securities similar to the Holdings Senior Discount Notes and others as are reasonably specified by the Initial Purchaser, including but not limited to: limitation on indebtedness, limitation on indebtedness and preferred stock of 18 4 restricted subsidiaries, limitation on restricted payments, limitations on transactions with affiliates, limitation on the sale or issuance of restricted subsidiaries' capital stock, limitation on restrictions on distributions from restricted subsidiaries, limitation on asset sales, limitation on liens and limitation on merger, consolidation or sale of assets. Change of Control: In the event of a Change of Control, each holder of Holdings Senior Discount Notes will have the right to require the Issuer to repurchase such holder's Holdings Senior Discount Notes at 101% of the Accreted Value thereof, plus accrued and unpaid interest. Events of Default: Customary for high yield discount securities such as the Holdings Senior Discount Notes and others as are reasonably specified by the Initial Purchaser, including but not limited to: nonpayment of principal or interest, violation of covenants, cross acceleration to other debt in excess of an amount to be agreed upon, bankruptcy and judgments. Governing Law: New York. 19 EXHIBIT C April 11, 1997 TO: Credit Suisse First Boston Corporation Eleven Madison Avenue New York, New York 10010-3629 In connection with your engagement (the "engagement") to advise and assist us with the private placements of the Holdings Senior Discount Notes and the Senior Subordinated Notes (each as defined in the Engagement Letter dated the date hereof between us and you), we agree to indemnify and hold harmless CREDIT SUISSE FIRST BOSTON CORPORATION ("CSFB" or "you") and its affiliates, the respective directors, officers, partners, agents and employees of CSFB and its affiliates, and each other person, if any, controlling CSFB or any of its affiliates (collectively, "Indemnified Persons"), from and against, and we agree that no Indemnified Person shall have any liability to us or our owners, parents, affiliates, security holders or creditors for, any losses, claims, damages or liabilities (including actions or proceedings in respect thereof) (collectively "Losses") (A) related to or arising out of (i) our actions or failures to act (including statements or omissions made, or information provided, by us or our agents) or (ii) actions or failures to act by an Indemnified Person with our express consent or in reasonable reliance on our actions or failures to act, or (B) otherwise related to or arising out of the engagement or your performance thereof, except that this indemnity shall not apply to any Losses that are judicially determined to have resulted from your willful misconduct, bad faith or gross negligence. If such indemnification is for any reason not available or insufficient to hold you harmless, we agree to contribute to the Losses involved in such proportion as is appropriate to reflect the relative benefits received (or anticipated to be received) by us and by you with respect to the engagement or, if such allocation is judicially determined unavailable, in such proportion as is appropriate to reflect other equitable considerations such as the relative fault of us on the one hand and of you on the other hand; provided, however, that, to the extent permitted by applicable law, 20 2 the Indemnified Persons shall not be responsible for amounts which in the aggregate are in excess of the amount of all fees actually received by you from us in connection with the engagement. Relative benefits to us, on the one hand, and you, on the other hand, with respect to the engagement shall be deemed to be in the same proportion as (i) the total value paid or proposed to be paid or received or proposed to be received by us or our security holders, as the case may be, pursuant to the transactions, whether or not consummated, contemplated by the engagement bears to (ii) all fees proposed to be paid to you in connection with the engagement. We will reimburse each Indemnified Person for all expenses (including without limitation reasonable fees and disbursements of counsel and expenses incurred in connection with preparing for and responding to third party subpoenas) as they are incurred by such Indemnified Person in connection with investigating, preparing for or defending any action, claim, investigation, inquiry, arbitration or other proceeding ("Action") referred to above (or enforcing this agreement or the Engagement Letter), whether or not in connection with pending or threatened litigation in which any Indemnified Person is a party, and whether or not such Action is initiated or brought by you; provided, however, that if it is finally judicially determined that Losses resulted from the bad faith or gross negligence of an Indemnified Person as set forth in the exception to clause (B) above, you agree to reimburse us for all expenses actually advanced by us to you and any other Indemnified Person hereunder to the extent applicable to such Losses. Promptly after receipt by an Indemnified Person of notice of any complaint or the commencement of any Action with respect to which indemnification is being sought hereunder, such person will notify us in writing of such complaint or of the commencement of such Action, but failure so to notify us will not relieve us from any liability which we may have hereunder or otherwise, except to the extent that such failure materially prejudices our rights. If we so elect or are requested by such Indemnified Person, we will assume the defense of such Action, including the employment of counsel reasonably satisfactory to you and the payments of the fees 21 3 and disbursements of such counsel. In the event, however, such Indemnified Person reasonably determines in its judgment that having common counsel would present such counsel with a conflict of interest or if we fail to assume the defense of the Action in a timely manner, then such Indemnified Person may employ separate counsel to represent or defend it in any such Action, and we will pay the fees and disbursements of such counsel; provided, however, that we will not be required to pay the fees and disbursements of more than one separate counsel (in addition to local counsel) for all Indemnified Persons in any jurisdiction in any single Action. In any Action the defense of which we assume, the Indemnified Person will have the right to participate in such litigation and to retain its own counsel at such Indemnified Person's own expense. We further agree that we will not settle or compromise or consent to the entry of any judgment in any pending or threatened Action in respect of which indemnification may be sought hereunder (whether or not an Indemnified Person is a party therein) unless we have given you reasonable prior written notice thereof and used all reasonable efforts, after consultation with you, to obtain an unconditional release of each Indemnified Person from all liability arising therefrom. Our obligations hereunder shall be in addition to any rights that any Indemnified Person may have at common law or otherwise. Solely for the purpose of enforcing this agreement, we hereby consent to personal jurisdiction and to service and venue in any court in which any claim which is subject to this agreement is brought by or against any Indemnified Person. We acknowledge that in connection with the engagement you are acting as an independent contractor with duties owing solely to us. YOU HEREBY AGREE, AND WE HEREBY AGREE ON OUR OWN BEHALF AND, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ON BEHALF OF OUR SECURITY HOLDERS, TO WAIVE ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM, COUNTER-CLAIM OR ACTION ARISING OUT OF THE ENGAGEMENT, YOUR PERFORMANCE THEREOF OR THIS AGREEMENT. The provisions of this agreement shall apply to the engagement (including related activities prior to the date hereof) and any modification thereof and shall remain 22 4 in full force and effect regardless of the completion or termination of the engagement. This agreement and any other agreements relating to the engagement shall be governed by and construed in accordance with the laws of the State of New York, without regard to conflicts of law principles. Very truly yours, HEDSTROM CORPORATION, By: /s/ Andrew S. Rosen ----------------------------------- Name: Andrew S. Rosen Title:Vice President Accepted and agreed to as of the date hereof: CREDIT SUISSE FIRST BOSTON CORPORATION By: /s/ Harold W. Bogle ------------------------------------ Name: Harold W. Bogle Title:Managing Director EX-99.(B)(3) 12 SENIOR DISCOUNT NOTES COMMITMENT LETTER 1 EXHIBIT 99.(b)(3) CREDIT SUISSE FIRST BOSTON CORPORATION Eleven Madison Avenue New York, NY 10055 April 11, 1997 Hedstrom Corporation Cherrington Corporate Center 300 Corporate Center Drive, Suite 100 Coraopolis, PA 15108 Attention: Mr. Arnold E. Ditri Chief Executive Officer Hedstrom Corporation Commitment Letter Senior Discount Notes Dear Mr. Ditri: You have advised us that you intend to acquire (the "Acquisition") all of the issued and outstanding capital stock of a company you have identified to us as Gadget Corporation ("Target") pursuant to a tender offer for all such shares (the "Tender Offer"). We understand that the cash price per share to be paid in the Tender Offer will be up to $11.25, representing a maximum aggregate purchase price for Target of $220 million (including the outstanding debt of Target), subject to seasonal working capital requirements. You have further advised us that in connection with the Acquisition (i) you will form a Delaware corporation ("AcquisitionCo"), and will make an equity contribution of $40 million (the "Equity Contribution") to AcquisitionCo in exchange for all of its outstanding capital 2 stock,(ii) AcquisitionCo will commence the Tender Offer and (iii) upon consummation of the Tender Offer, (a) Hedstrom Holdings Corporation ("Holdings"), the holder of all the capital stock of the Acquiror, will issue senior discount notes, which will not require cash interest payments by Holdings for at least 5 years after issuance (the "Holdings Senior Discount Notes"), for aggregate gross proceeds, together with the aggregate principal amount of the Senior Subordinated Notes (as defined), of $140 million, (b) you will obtain senior secured credit facilities (the "Senior Bank Facilities") in an aggregate principal amount of $180 million, consisting of a $110 million term facility and a $70 million revolving credit facility (up to an amount to be agreed upon of which may be borrowed in connection with the Acquisition for the purpose of refinancing short-term indebtedness incurred to fund seasonal working capital requirements), and (c) you will issue senior subordinated notes (the "Senior Subordinated Notes") in a principal amount, together with the gross proceeds from the offering of the Holdings Senior Discount Notes, of $140 million or, in lieu thereof, incur a senior subordinated bridge loan in a principal amount of $115 million. Reference is made to the engagement letter dated the date hereof between us and you (the "Engagement Letter"). Pursuant to the Engagement Letter, Credit Suisse First Boston Corporation (the "Initial Purchaser") has committed to use its best efforts to complete the private placement of the Holdings Senior Discount Notes (the "Offering"). In connection with the Offering, you have requested that the Initial Purchaser commit to purchase, or to cause one or more of its affiliates to purchase, Holdings Senior Discount Notes for gross proceeds of up to $25 million, if such Notes cannot be sold pursuant to the Offering on or prior to the later of the date that is 60 days from the date hereof and the expiration date of the Tender Offer (the "Offering Period"). The Initial Purchaser is pleased to hereby confirm that, in the event the Offering is not completed within the Offering Period, it hereby commits (the "Commitment"), upon the written request of 3 Acquiror to do so (which written request (a "Purchase Request") must be delivered no later than the final day of the Offering Period) and subject to the terms and conditions described below, to purchase, or to cause one or more of its affiliates to purchase, Holdings Senior Discount Notes, or to cause one or more of its affiliates to make loans, for aggregate gross proceeds of $25 million on the terms set forth therefor (which shall also be applicable for such loans) in Exhibit A attached hereto (the "Summary of Terms"). In the event the Acquiror timely delivers a Purchase Request, the Initial Purchaser will consummate the purchase of such Holdings Senior Discount Notes within five business days following the expiration of the Offering Period. The Tender Offer, the Equity Contribution, the incurrence of the Senior Bank Facilities, the Acquisition, Offering and the offering of Senior Subordinated Notes or the incurrence of the Bridge Loan are referred to herein collectively as the "Transactions". The Commitment is subject to the satisfaction of the closing conditions set forth in Annex I to Exhibit A attached hereto. Notwithstanding anything in this letter to the contrary, the Commitment will expire at 5:00 p.m., New York City time on April 18, 1997, unless accepted prior to such time and, if accepted prior to such time, the Commitment will expire at 5:00 p.m. New York City time on the earliest of (i) the termination of the Tender Offer or the date Acquiror purchases, or elects not to purchase shares of Target's capital stock, (ii) the date of issuance of the Holdings Senior Discount Notes and (iii) the date that is 75 days from the date hereof. In addition, the Commitment shall terminate (a) in the event that, after completion of an offering memorandum relating to the Offering, the Initial Purchaser shall have delivered a written notice to Acquiror recommending that Holdings proceed with the marketing effort for the Offering and Acquiror elects (which election shall be made within two business days following receipt of such notice) not to then proceed with such marketing effort, or (b) following the marketing effort with respect to the Offering, (i) the Initial Purchaser is prepared to enter into a customary 4 purchase agreement providing for the purchase of the Holdings Senior Discount Notes (and the terms of such Holdings Senior Discount Notes are consistent in all material respects with the Summary of Terms and the Holdings Senior Discount Notes have a total yield to maturity (determined in good faith and in a manner consistent with this letter) equal to or less than the Initial Purchaser Discount Note Yield (as defined in the Summary of Terms) and, if warrants to purchase common stock are required, the amount of common stock subject to such warrants (as determined) is equal to or less than the maximum amount of common stock subject to the Initial Purchaser Discount Note Warrants (as defined in the Summary of Terms)) and (ii) Acquiror elects not to enter into such purchase agreement or, having entered into such purchase agreement, such Offering is not consummated for any reason other than the failure by the Initial Purchaser to comply with its obligations under such purchase agreement; provided, however, that upon termination of the Commitment pursuant to clause (a) or (b), the right of the Acquiror to deliver a Purchase Request shall simultaneously terminate. Expiration or termination of the Commitment shall not affect your obligations under the following sentence or the second succeeding paragraph, all of which obligations shall remain in full force and effect regardless of any termination of the Commitment or the completion of the Acquisition and the other Transactions. You hereby agree to indemnify and hold harmless the Initial Purchaser, its affiliates and its directors, officers, employees, agents and advisors (each, an "Indemnified Party"), from and against any and all claims, damages, liabilities (including securities law liabilities), losses and expenses, including without limitation fees, expenses and disbursements of counsel, which may be incurred by or asserted against an Indemnified Party in connection with the Initial Purchaser's commitment or participation in the Transactions or the Commitment or any related matter or any investigation, litigation or proceeding in connection therewith and whether or not the Transactions or the note purchases by the Initial Purchaser pursuant to the Commitment are consummated, except to the extent such claim, damage, loss, liability or expenses is found in a final nonappealable judgment by a court 5 of competent jurisdiction to have resulted from such Indemnified Party's own gross negligence or willful misconduct or material breach of this Commitment Letter. None of Acquiror, AcquisitionCo or the Initial Purchaser shall be responsible or liable to any other party or any other person for consequential damages which may be alleged as a result of this letter. This letter shall be governed by and construed in accordance with the laws of the State of New York. Delivery of an executed counterpart of this letter by telecopier shall be effective as delivery of a manually executed counterpart of this letter. You and we hereby irrevocably waive any right to trial by jury in any action, claim, suit or proceeding (whether based on contract, tort or otherwise) arising out of or relating to this letter or the transactions contemplated hereby. This letter is not assignable by you to any other person or entity, and, except as otherwise provided herein, this letter is not assignable by us without your consent. 6 This letter has been delivered to you for your information and is not to be distributed or disclosed to, or otherwise relied upon by, any other person (including pursuant to any proxy statement or other publicly filed document) without the Initial Purchaser's prior written consent, except that you may disclose this letter (a) on a confidential need-to-know basis to Target and its advisors and to your advisors and (b) as required by applicable law or compulsory legal process. Very truly yours, CREDIT SUISSE FIRST BOSTON CORPORATION, By: /s/ Harold W. Bogle ------------------------- Harold W. Bogle Managing Director Agreed to and Accepted HEDSTROM CORPORATION, By: /s/ Andrew S. Rosen ------------------- Date: ____________________ 7 Exhibit A HOLDINGS Senior Discount Notes Preliminary Summary of Terms Issuer and Issue: Hedstrom Holdings Corporation ("Holdings" or "Issuer"), a corporation which owns all the equity interests of Hedstrom Corporation ("Acquiror"), will issue senior discount notes (the "Holdings Senior Discount Notes"). Amounts: Up to $25 million. Maturity: 12 years. Use of Proceeds: To fund a portion of the purchase price paid in the Acquisition of all of the issued and outstanding shares of Target. Interest: No cash interest accruing or payable until the fifth anniversary of the issue date and interest accruing and payable in cash thereafter. Security: The Holdings Senior Discount Notes will be unsecured. Guarantees: None. Ranking: The Holdings Senior Discount Notes will be senior, unsecured obligations of Holdings, ranking pari passu in right of payment with all existing and future senior unsecured obligations of Holdings (including guarantees by Holdings 8 of the Senior Bank Facilities and the Senior Subordinated Notes) and will rank senior to all future subordinated debt of Holdings. Mandatory Redemption: None. Optional Redemption: The Holdings Senior Discount Notes will be non-callable for five years and will be callable at par plus one-half of the yield following the fifth anniversary of issuance, declining ratably to par following the eighth anniversary of issuance. Equity Offering Redemption: At any time prior to the third anniversary of issuance, Holdings may redeem up to an agreed upon percentage of the Holdings Senior Discount Notes, in each case from the proceeds of one or more public equity offerings at a redemption price to be fixed at the time of, and as a function of, the pricing of the Holdings Senior Discount Notes, plus accrued and unpaid interest. SEC Reports: Notwithstanding that Holdings may not be, or may not be required to remain, subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, Holdings will file with the SEC and provide the Trustee and holders of the Holdings Senior Discount Notes with such annual reports and such information, documents and other reports as are specified in Sections 13 and 15(d) of the Exchange Act. 9 3 Negative Covenants: Customary for high yield discount securities similar to the Holdings Senior Discount Notes and others as are reasonably specified by the Initial Purchaser, including but not limited to: limitation on Indebtedness, limitation on Indebtedness and preferred stock of restricted subsidiaries, limitation on restricted payments, limitations on transactions with affiliates, limitation on the sale or issuance of restricted subsidiaries' capital stock, limitation on restrictions on distributions from restricted subsidiaries, limitation on asset sales, limitation on liens and limitation on merger, consolidation or sale of assets. Change of Control: In the event of a Change of Control, each holder of Holdings Senior Discount Notes will have the right to require the Issuer to repurchase such holder's Holdings Senior Discount Notes at 101% of the Accreted Value thereof, plus accrued and unpaid interest. Events of Default: Customary for high yield discount securities such as the Holdings Senior Discount Notes and others as are reasonably specified by the Initial Purchaser, including but not limited to: nonpayment of principal or interest, violation of covenants, cross acceleration to other debt in excess of an amount 10 4 to be agreed upon, bankruptcy and judgments. Governing Law: New York. Yield: The Holdings Senior Discount Notes will be purchased by the Initial Purchaser at a discount to maturity (the "Initial Purchaser Discount Note Yield") that, calculated on a semi-annual bond equivalent basis, equals (a) in the event the offering of Senior Subordinated Notes is consummated, the sum of (i) the coupon borne by the Senior Subordinated Notes, plus (ii) 500 basis points; or (b) in the event the offering of Senior Subordinated Notes is not consummated, the sum of (i) the yield, on the Treasury Note maturing on the day 12 years from the day immediately preceding the date of purchase of such Holdings Senior Discount Notes by the Initial Purchaser (or, if no Treasury Note matures on such day, the yield determined by linear interpolation of the yields on the Treasury Notes maturing immediately prior to and immediately following such date) plus (ii) 875 basis points; provided that in no event shall the Initial Purchaser Discount Note Yield exceed 15%. Consummation of It will be a condition to the purchase of Tender Offer and any Holdings Senior Discount Notes (together Acquisition: with the other conditions set forth in the Commitment Letter) by the Initial Purchaser that the Tender Offer and the Acquisition be consummated 11 5 concurrently with or prior to such purchase of such Notes. Registration Holdings will file within 30 days following Rights and Cooperation: the date of issuance of such Holdings Senior Discount Notes to the Initial Purchaser, and will use its best efforts to cause to become effective as soon thereafter as practicable, a shelf registration statement with respect to resales of such Holdings Senior Discount Notes. Holdings will keep such shelf registration statement effective and available (subject to customary exceptions) until it is no longer needed to permit unrestricted resales of such Holdings Senior Discount Notes by the Initial Purchaser, but in no event longer than three years from the date of issuance of such Holdings Senior Discount Notes to the Initial Purchaser. If within 90 days from the issue date of such Holdings Senior Discount Notes, a shelf registration statement for resales of such Holdings Senior Discount Notes has not been declared effective, or, if after becoming effective the shelf registration statement ceases to be effective or ceases to be useable in connection with resales of such Holdings Senior Discount Notes (subject to customary exceptions), cash interest will accrue and be payable at a rate of 0.5% per annum at the end of each 90-day period thereafter until such default shall be cured; provided, however, that in no event shall the interest on 12 6 the Holdings Senior Discount Notes increase by more than an aggregate of 2.0% per annum. Holdings agrees, at its expense, to assist the Initial Purchaser in connection with resales of any of the Holdings Senior Discount Notes, including making its (and using its best efforts to cause Target to make its) senior officers available to the Initial Purchaser, including making them available to assist in the preparation of marketing materials relating to any resales, to participate in due diligence sessions and to participate in road shows or other presentations to prospective purchasers of such Holdings Senior Discount Notes. Rights: In connection with its purchase of any of the Holdings Senior Discount Notes pursuant to a Purchase Request, the Initial Purchaser will receive rights (the "Initial Purchaser Discount Note Rights") to acquire equity interests without an exercise price representing 10% of the common stock of Holdings; provided, however, that if within 60 days after such purchase of any of the Holdings Senior Discount Notes, the Initial Purchaser resells such Holdings Senior Discount Notes to a third party, then the Initial Purchaser shall return to Holdings Initial Purchaser Discount Note Rights equal to 50% of the difference between the amount of Initial Purchaser Discount Note Rights 13 7 representing 10% of the common stock of Holdings and the aggregate amount of Initial Purchaser Discount Note Rights transferred to such third party in connection with such resale. The Initial Purchaser Discount Note Rights will be issued pursuant to a rights agreement containing customary anti-dilution provisions and registration rights. Notwithstanding the reference to the issuance of the Initial Purchase Discount Note Rights, Holdings will instead issue shares of its common stock directly in an amount equal to the amount for which the Rights would have been exercisable. 14 [ Annex II] [to Exhibit A] CLOSING CONDITIONS Capitalized terms used but not defined herein shall, unless otherwise specified, have the meanings assigned to such terms in the Letters (as defined). The Commitments of Credit Suisse First Boston or Credit Suisse First Boston Corporation (collectively, "CSFB") pursuant to the Bridge Loan Commitment Letter, the Engagement Letter and the Commitment Letter, each dated as of April 11, 1997, as the case may be, between CSFB and Hedstrom Corporation (together, the "Letters") shall be subject to the following conditions: (i) there not becoming known to CSFB after the date of the Letters any information or other matter relating to Acquiror or Target which CSFB has reasonable cause to believe is accurate and which is inconsistent in a material and adverse manner with any information or other matter disclosed to CSFB by Acquiror or Target prior to the date of the Letters; (ii) the obligations of the parties thereto contained in the Agreement and Plan of Merger dated April 11, 1997, among Acquiror, AcquisitionCo and Target (the "Merger Agreement") to be performed at or prior to the consummation of the Tender Offer shall have been performed or complied with by Acquiror, AcquisitionCo and Target prior to the consummation of the Tender Offer, except where the failure so to perform or comply could not reasonably be expected to result in a Material Adverse Effect (as defined); (iii) there shall be no litigation or administrative proceedings or other legal or regulatory developments, actual or threatened, that, singly or in the aggregate, could have a Material Adverse Effect on Acquiror or Target or the ability of Acquiror to fully and timely perform its obligations under the documents executed in connection with the Transactions, or the ability of the parties to consummate the financing or 15 2 the other Transactions contemplated by the Letters or the validity or enforceability of any of the documents executed in connection with the Transactions or the rights, remedies and benefits available to the parties thereunder; (iv) CSFB and, if applicable, the Lenders, shall have received an opinion (and related going-concern valuation) reasonably satisfactory in all respects to the Lenders and CSFB, as applicable, from an independent valuation firm reasonably satisfactory to the Lenders and CSFB, as applicable, in each case to the effect that, after giving effect to the Transactions, Acquiror will not be insolvent, will not be rendered insolvent by the indebtedness incurred in connection therewith, will not be left with unreasonably small capital with which to engage in its business and will not have incurred debts beyond its ability to pay such debts as they mature; (v) CSFB's and, if applicable, the Lenders', reasonable satisfaction in all material respects with any amendments to any of the terms of (i) the Tender Offer and all material documents relating thereto, (ii) any definitive agreements relating to the Acquisition and any other material agreements to be entered into in connection with the Acquisition and (iii) the Senior Bank Facilities and the Equity Contribution; (vi) the receipt by CSFB and, if applicable, the Lenders', of financial statements of Acquiror and Target (including notes thereto), consisting of (a) audited and pro forma balance sheets for each period in the 3 fiscal-year period ended December 31, 1996, and (b) audited and pro forma statements of operations and cash flows for each period in the 3 fiscal-year period ended December 31, 1996, and CSFB's and, if applicable, the Lenders', receipt of any unaudited interim financial statements deemed necessary or reasonably desirable in the judgment of CSFB and the Lenders, if applicable, and all such financial statements, historical or pro forma delivered pursuant 16 3 to this paragraph (vi) to be in compliance with the requirements of Regulation S-X for a public offering registered under the Securities Act or 1933 (the "Securities Act"); (vii) the approval and/or recommendation by the Board of Directors of Target of the Tender Offer and the Acquisition; (viii) the waiting period (and any extension thereof) applicable to the merger of AcquisitionCo and Target under the HSR Act (as defined in the Merger Agreement) shall have been terminated or shall have expired, and no restrictive order or other requirements shall have been placed on Acquiror, AcquisitionCo, Target or the surviving entity in connection therewith, except where such restrictive order or other requirements could not reasonably be expected to result in a Material Adverse Effect; (ix) there not having occurred or becoming known to CSFB (a)any event or events having occurred that, individually or in the aggregate, could have a Material Adverse Effect on Acquiror or Target or (b) (i) any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market in the United States for a period in excess of forty-eight hours, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) the commencement of a war, armed hostilities or other international or national calamity, directly or indirectly involving the United States, (iv) any limitations (whether or not mandatory) imposed by any governmental authority on the nature or extension of credit or further extension of credit by banks or other lending institutions, (v) in the case of the foregoing clauses (iii) and (iv), a material acceleration or worsening thereof, or (vi) any other material adverse change in bank or capital market conditions that has had a material adverse effect on the syndication of leveraged bank credit facilities or 17 4 the consummation of high yield offerings, as the case may be, that CSFB shall reasonably determine makes it impracticable to consummate the Offerings prior to the termination of the Offering Period or syndication of the Bridge Loan, as the case may be; (x) CSFB's satisfaction that, immediately prior to and during the marketing period for any Offering or syndication of the Bridge Loan, as the case may be, there shall be no competing issues of debt securities or commercial bank facilities (other than the Senior Bank Facilities the Senior Subordinated Note Offering or Bridge Loan and the Holdings Senior Discount Note Offering, as applicable) of Acquiror, Holdings or AcquisitionCo; (xi) the negotiation, preparation, execution and delivery of definitive documentation reasonably satisfactory to CSFB, in connection with the Offerings, the Bridge Loan and the purchase of the Holdings Senior Discount Notes, if applicable; (xii) customary closing conditions for transactions similar to the Bridge Loan, the Offerings and the purchase of the Holdings Senior Discount Notes including the accuracy of all representations and warranties contained in the Letters, the absence of any defaults, no material change in the capital, corporate and organizational structure of Holdings, Acquiror and its subsidiaries (after giving effect to the Transactions), compliance with laws, adequate insurance, except where the failure so to perform or comply with such customary closing conditions could not reasonably be expected to result in a Material Adverse Effect, and the receipt by CSFB of reasonably satisfactory legal opinions from Acquiror's counsel in connection with the Offerings and the Bridge Loan (including 10b-5 opinions relating to any offering documents) and satisfactory accountant's "comfort" letters in connection with the Offerings; and (xiii) payment of fees. 18 5 A "Material Adverse Effect" shall mean the result of one or more events, changes or effects which, individually or in the aggregate, could reasonably be expected to have a material adverse effect on (i) the business, results of operations, financial condition or prospects of Acquiror, AcquisitionCo or Target and each of their respective subsidiaries, in each case, taken as a whole and (ii) the ability of CSFB to consummate the Offerings prior to the Offering Period or syndicate the Bridge Loan. EX-99.(B)(4) 13 BRIDGE LOAN COMMITMENT LETTER 1 EXHIBIT 99.(b)(4) April 11, 1997 Hedstrom Corporation Cherrington Corporate Center 300 Corporate Center Drive, Suite 100 Coraopolis, PA 15108 Attention: Mr. Arnold E. Ditri Chief Executive Officer Hedstrom Corporation Bridge Loan Commitment Letter Dear Mr. Ditri: You have advised CREDIT SUISSE FIRST BOSTON CORPORATION ("CSFB" or "we" or "us") that Hedstrom Corporation (the "Acquiror" or "you"), intends to acquire (the "Acquisition") all of the issued and outstanding shares of capital stock of a company you have identified to us as Gadget Corporation ("Target") pursuant to a tender offer for all such shares (the "Tender Offer"). We understand that the cash price per share to be paid in the Tender Offer will be $11.25, representing a maximum aggregate purchase price for Target of approximately $220 million (including the outstanding debt of Target), subject to seasonal working capital requirements. You have further advised us that in connection with the Acquisition (i) you will form a Delaware corporation ("AcquisitionCo"), and will make an equity contribution of $40 million (the "Equity Contribution") to AcquisitionCo in exchange for all of its outstanding capital stock, (ii) AcquisitionCo will commence the Tender Offer and (iii) upon consummation of the Tender Offer, (a) Hedstrom Holdings Corporation ("Holdings"), the holder of all the capital stock of Acquiror, will issue senior discount notes, which will not require cash interest payments by Holdings for at least 5 years after issuance (the "Holdings Senior Discount Notes"), for aggregate gross proceeds, together with the aggregate principal amount of the Notes (as defined), of $140 million, (b) you will obtain senior secured credit facilities (the "Senior Bank Facilities") in an aggregate principal amount of $180 million, consisting of a $110 million term facility and a $70 million revolving credit facility (up to an amount to be agreed upon of which may be borrowed in connection with the Acquisition for the 2 2 purpose of refinancing short-term indebtedness incurred to fund seasonal working capital requirements), and (c) you will issue senior subordinated notes (the "Notes") in a principal amount, together with the gross proceeds from the offering of the Holdings Senior Discount Notes, of $140 million or, in lieu thereof, incur the Bridge Loan (as defined) in a principal amount of $115 million. In connection with the Acquisition, you have requested that CSFB commit to provide a bridge term loan of up to $115.0 million (the "Bridge Loan") to you. CSFB is pleased to confirm that it hereby commits to provide the entire amount of the Bridge Loan on the terms and subject to customary closing conditions to be set forth in the definitive documentation relating to the Bridge Loan, including without limitation those conditions set forth in Annex II to the Summary of Principal Terms and Conditions attached as Exhibit A (the "Term Sheet"). The Tender Offer, the Equity Contribution, the incurrence of the Senior Bank Facilities, the issuance of the Holdings Senior Discount Notes, the Acquisition and the issuance of the Notes or the incurrence of the Bridge Loan are referred to herein collectively as the "Transactions". CSFB reserves the right and intends, prior to or after the execution of the Bridge Loan Documents, to syndicate all or a portion of its commitment to one or more financial institutions (such financial institutions, together with CSFB, the "Lenders") reasonably satisfactory to you and CSFB that will become parties to the Bridge Loan Documents. It is agreed that CSFB will act as the sole administrative agent for, and sole arranger and syndication manager of, the Bridge Loan and that no additional agents or co-agents or arrangers will be appointed without the prior written consent of CSFB. Completion of the syndication of the Bridge Loan is not a condition to CSFB's funding the Bridge Loan. You agree to assist CSFB in forming any such syndicate and to provide the Lenders, promptly upon request, with all information reasonably requested by them to complete successfully the syndication, including but not limited to (a) an information package for delivery to potential Lenders and participants and (b) all information and projections prepared by you or your advisers relating to the transactions described herein. You also agree to use your reasonable best efforts to ensure that CSFB's syndication efforts benefit from your existing lending 3 3 relationships. You further agree to make appropriate senior officers and representatives of Acquiror and to use your reasonable best efforts to make the appropriate senior officers and representatives of Target available to participate in informational meetings for potential Lenders and participants at such times and places as CSFB may reasonably request. You represent and warrant and covenant that: (a) all information (other than projections) which has been or is hereafter furnished to CSFB by you or any of your representatives in connection with the Transactions is and will be complete and correct in all material respects as of the time furnished and does not and will not as of the time furnished contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not materially misleading in light of the circumstances under which such statements were made; and (b) all financial projections that have been or are hereafter prepared by you or on your behalf and made available to CSFB have been or will be prepared in good faith based upon reasonable assumptions. You agree to supplement the information and projections referred to in clauses (a) and (b) above from time to time until completion of the syndication so that the representations and warranties in the preceding sentence remain correct without regard to when such information and projections were furnished. In arranging and syndicating the Bridge Loan, CSFB will be entitled to use and rely on such information and projections without independent verification thereof. In connection with the syndication of the Bridge Loan, CSFB may, in its discretion, allocate to other Lenders portions of any fees payable to CSFB in connection with the Bridge Loan. You agree that no Lender will receive any compensation of any kind for its participation in the Bridge Loan except as expressly provided for in this letter or in the bridge fee letter dated the date hereof (the "Bridge Fee Letter"). Subject to the consummation of the Transactions, you agree to reimburse CSFB and its affiliates, upon 4 4 request, for their reasonable fees and expenses incurred in connection with the preparation, execution and delivery of this letter and the Bridge Loan Documents and the activities thereunder or contemplated thereby, including syndication expenses (other than fees allocated in accordance with the preceding paragraph); provided, however, that you agree to reimburse CSFB and its affiliates, upon request, for the reasonable fees and expenses of their counsel, whether or not the Transactions are consummated and whether incurred before or after the execution of this letter. You hereby agree to indemnify and hold harmless CSFB and each other Lender, their respective affiliates and each of their respective directors, officers, employees, agents and advisors (each, an "Indemnified Party"), from and against any and all claims, damages, liabilities (including securities law liabilities), losses and expenses, including without limitation reasonable fees, expenses and disbursements of counsel, which may be incurred by or asserted against an Indemnified Party in connection with CSFB's or any Lender's commitment or participation in the Transactions or the Bridge Loan or any related matter or any investigation, litigation or proceeding in connection therewith and whether or not the Transactions or the Bridge Loan are consummated, except to the extent such claim, damage, loss, liability or expense is found in a final nonappealable judgment by a court of competent jurisdiction to have resulted from such Indemnified Party's own gross negligence or willful misconduct or material breach of this Commitment Letter. None of Acquiror, AcquisitionCo, CSFB or any other Lender shall be responsible or liable to any other party or any other person for consequential damages which may be alleged as a result of this letter. This letter is confidential and shall not be disclosed by you to any person other than (i) accountants, attorneys and advisors for you or any of your affiliates, (ii) rating agencies, (iii) to the extent approved by CSFB, other advisors in connection with the Acquisition, and then only on a confidential basis, (iv) as required by applicable law and compulsory legal process, and (v) Target and its accountants, attorneys and advisors; provided that these restrictions shall expire on the later of (a) your acceptance of this Letter and (b) approval of the Acquisition by the Board of Directors of Target. Our offer to provide the Bridge Loan will terminate at 5:00 p.m. New York time, (i) on April 18, 1997, 5 5 unless on or before that date you sign and return an enclosed counterpart of this letter and the Bridge Fee Letter, and (ii) if accepted by April 18, 1997, on the earliest of (a) the date of the termination of the Tender Offer or the date Acquiror purchases, or elects not to purchase shares of Target's capital stock (after funding pursuant to this Commitment Letter), (b) the date of issuance of the Notes and (c) the date that is 75 days from the date hereof. In any event, your obligations with respect to reimbursement, indemnification and confidentiality shall remain in full force and effect, regardless of any termination of the commitment of CSFB made hereunder. This letter is intended to be solely for the benefit of the parties hereto and is not intended to confer any benefits upon, or create any rights in favor of, any person other than the parties hereto. This letter and CSFB's commitment hereunder may not be assigned by you without the prior written consent of CSFB, and attempted assignment without such consent shall be void. CSFB's commitment hereunder may be assigned by CSFB to any of its affiliates or any Lender, but any such assignment to an affiliate shall not relieve CSFB from any of its obligations hereunder unless and until the Bridge Loan shall have been funded in full by such affiliate. This letter may not be amended or modified or any provisions hereof waived except in writing signed by CSFB and you. This letter agreement shall be governed by and construed in accordance with the internal laws of the State of New York. This letter agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and all of which together shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page of this letter by facsimile 6 6 transmission shall be effective as delivery of a manually signed counterpart hereof. We appreciate the opportunity to assist you in this very important transaction. Very truly yours, CREDIT SUISSE FIRST BOSTON CORPORATION, By: /s/ Harold W. Bogle ------------------------- Harold W. Bogle Managing Director AGREED TO AND ACCEPTED HEDSTROM CORPORATION, By: /s/ Andrew S. Rosen ------------------- Name: Andrew S. Rosen Title: Vice President 7 Exhibit A Bridge Loan Facility Summary of Principal Terms and Conditions 1/ Arranger and Administrative Agent: CREDIT SUISSE FIRST BOSTON ("CSFB" or the "Agent"). Lenders: A syndicate of lenders (the "Lenders") arranged by CSFB and reasonably acceptable to Borrower. Borrower: Hedstrom Corporation ("Acquiror" or the "Borrower"), a wholly owned subsidiary of Hedstrom Holdings Corporation ("Holdings"). Amount: Up to $115.0 million aggregate principal amount. Rank: The loans to be made hereunder by each of the Lenders (the "Bridge Loans") will be senior subordinated debt of Acquiror, subordinated in right of payment to all existing and future Senior Indebtedness of Acquiror, including the borrowings under the Senior Bank Facilities. Guarantees: The Borrower's obligations under the Bridge Loans will be guaranteed by Holdings, to the extent the Senior Bank Facilities are guaranteed by Holdings, on a pari passu basis with the guarantee of the Senior Bank Facilities and the Holdings Senior Discount Notes and on a senior subordinated basis by each direct or indirect domestic subsidiary of Acquiror. Use of Proceeds: The proceeds of the Bridge Loans, together with the proceeds of the Holdings Senior Discount Notes and __________________________________ 1/ All capitalized terms used but not defined herein have the meanings given to them in the Commitment Letter to which this term sheet is attached. 8 2 the Senior Bank Facilities, will be used to consummate the Acquisition. Funding: The Lenders will make the Bridge Loans simultaneously with the consummation of the other Transactions (the "Closing Date"). Notes: The Borrower will use its reasonable best efforts to issue up to $115.0 million principal amount of senior subordinated notes (the "Notes") in lieu of borrowing the Bridge Loans. In the event that Acquiror has not issued the Notes prior to the Closing Date, Acquiror will use its reasonable best efforts to refinance the Bridge Loans as promptly as practicable after the Closing Date, as further described under "Affirmative Covenants". Maturity/Exchange: The Bridge Loans will mature on the date which is 364 days after the Closing Date (the "Bridge Maturity Date"). If any Bridge Loan is not repaid in full on or prior to the Bridge Maturity Date, the Lender thereof will have the option at any time or from time to time to receive, in exchange for such Bridge Loan or portion thereof, exchange notes of Acquiror (the "Exchange Notes") ranking pari passu with the Bridge Loans and having the terms set forth in the term sheet attached hereto as Annex I. If any Lender does not exchange its Bridge Loan for Exchange Notes on the Bridge Maturity Date, such Lender shall be required to extend the maturity of such loan to another date selected by such Lender. If, at such extended maturity, such Lender does not exchange its Bridge Loan, such Lender shall be required again to 9 3 extend the maturity of such Bridge Loan to another date selected by such Lender (provided, that such Lender shall not be required to extend the maturity of its loans beyond the tenth anniversary of the Closing Date (the "Final Maturity Date")) and this sentence shall apply to each extended maturity of its Bridge Loan prior to the Final Maturity Date. Interest Rates: Prior to the Bridge Maturity Date, the Bridge Loans will accrue interest at a rate per annum equal to 3 month Adjusted LIBOR plus the applicable spread. The spread on the Bridge Loans will initially be 600 basis points and will increase by 50 basis points at the end of each three-month period until the Bridge Maturity Date; provided, however, that the interest rate on Bridge Loans in effect at any time prior to the Bridge Maturity Date shall not exceed 18% per annum, and cash interest on the Bridge Loans shall not exceed 15% per annum. Adjusted LIBOR will at all times include any applicable statutory reserves. In the event that Adjusted LIBOR cannot be determined, or any Lender is unable lawfully to maintain a loan accruing interest at Adjusted LIBOR, the affected Bridge Loans will accrue interest until the Bridge Maturity Date at the "Alternate Base Rate" which will be the higher of (i) CSFB's Prime Rate less 1% and (ii) the Federal Funds Effective Rate plus 1/2 of 1%, plus in each case the applicable spread less 100 basis points. 10 4 Following the Bridge Maturity Date, all outstanding Bridge Loans will accrue interest at the rate provided for the Exchange Notes in Annex I hereto, subject to the absolute and cash caps therein. Calculation of interest shall be on the basis of actual days elapsed in a year of 360 days (or 365 or 366 days, as the case may be, in the case of Bridge Loans based on the Prime Rate). Interest Payments: Interest will be payable in arrears (a) for Bridge Loans accruing interest at a rate based on Adjusted LIBOR, at the end of each Adjusted LIBOR period and on the Bridge Maturity Date, (b) for Bridge Loans accruing interest at the Alternate Base Rate, at the end of each fiscal quarter of Acquiror following the Closing Date and on the Bridge Maturity Date and (c) for Bridge Loans outstanding after the Bridge Maturity Date, at the end of each fiscal quarter of Acquiror following the Bridge Maturity Date. Mandatory Prepayments: Subject to the terms of the Senior Bank Facilities, the Bridge Loans will be required to be prepaid with: (a) subject to limited exceptions, 100% of the net cash proceeds of the issuance or incurrence of debt or of any sale and lease-back; and (b) 100% of the net cash proceeds from any issuance of equity securities in any public offering or private placement 11 5 or from any capital contribution. Optional Prepayments: Bridge Loans may be repaid at any time upon ten days' prior notice to the Agent, in whole or in part at the option of Acquiror in a minimum principal amount and in multiples to be agreed upon, without premium or penalty (except breakage costs in the case of Adjusted LIBOR loans). Conditions to Closing: The making of the Bridge Loans shall be subject to conditions precedent that are usual for facilities and transactions of this type including but not limited to those conditions specified in Annex II attached hereto (all such conditions to be satisfied in a manner reasonably satisfactory in all respects to the Agent). Representations and Warranties: Customary for loans similar to the Bridge Loans and such additional representations and warranties as may reasonably be required by the Agent, including but not limited to: no Default or Event of Default; absence of material adverse change; financial statements; absence of undisclosed liabilities or material contingent liabilities not known to the Agent prior to the date hereof; compliance with laws; solvency; no conflicts with laws, charter documents or agreements; good standing; payment of taxes; ownership of properties; and absence of liens and security interests. 12 6 Affirmative Covenants: Customary for loans similar to the Bridge Loans and such others as may reasonably be required by the Agent, including but not limited to: maintenance of corporate existence and rights; compliance with laws; performance of obligations; maintenance of properties in good repair; maintenance of appropriate and adequate insurance; inspection of books and properties; payment of taxes and other liabilities; notice of defaults, litigation and other adverse action; delivery of financial statements, financial projections and compliance certificates; and further assurances. In addition, Acquiror will agree to file a registration statement under the Securities Act or prepare an offering memorandum covering senior subordinated notes of Acquiror (the "Securities") to be issued in a public offering or private placement to refinance in full the Bridge Loans (the "Loan Refinancing") and to consummate such Loan Refinancing as soon as possible after the Closing Date in an amount sufficient to refinance all amounts outstanding under the Bridge Loan Documents and on such terms and conditions (including without limitation interest rate, yield, redemption prices and dates) as CSFB may in its reasonable judgment determine to be appropriate in light of prevailing circumstances and market conditions and the financial condition and prospects of Acquiror, provided that Acquiror shall not be required to issue senior subordinated notes bearing interest in excess of the maximum interest rate (and maximum 13 7 cash interest rate) set forth in Annex I applicable to Exchange Notes. The indenture for the Securities will be substantially in the form of CSFB's standard indenture for high-yield debt securities, modified as appropriate to reflect the terms of this transaction and the financial condition and prospects of the Borrower and its subsidiaries, and in form and substance reasonably satisfactory to CSFB and the Borrower. If any Securities are issued in a transaction not registered under the Securities Act to effect the Loan Refinancing, all such Securities shall be entitled to the benefit of registration rights agreements to be entered into by the Borrower in customary form acceptable to CSFB. Negative Covenants: Customary for loans similar to the Bridge Loans and such others as may reasonably be required by the Agent, including but not limited to: limitations on incurrence of indebtedness (including no Senior Subordinated Debt other than the Bridge Loans); limitations on loans, investments and joint ventures; limitations on guarantees or other contingent obligations; limitations on restricted payments (including dividends, redemptions and repurchases of capital stock); limitations on fundamental changes (including limitations on mergers, acquisitions and asset sales); limitations on operating leases; limitations on sale-leaseback transactions; limitations on transactions with affiliates; limitations on dividend and other payment restrictions affecting subsidiaries; limitations on capital expenditures; limitations 14 8 on lines of business; limitations on amendment of indebtedness and other material documents; and limitations on prepayment or repurchase of other indebtedness. Events of Default: Customary for facilities similar to the Bridge Loan facilities and others as are reasonably specified by the Agent, including but not limited to: nonpayment of principal, interest, fees or other amounts when due; violation of covenants; failure of any representation or warranty to be true in all material respects; cross-default and cross-acceleration; Change in Control; bankruptcy events; material judgments; ERISA; and actual or asserted invalidity of any Bridge Loan Document. Yield Protection and Increased Costs: Customary for facilities of this type. Assignments and Participations: Acquiror may not assign its rights or obligations in connection with the Bridge Loan Documents without the prior written consent of all the Lenders. Lenders will have the absolute and unconditional right to assign Bridge Loans and commitments without the consent of the Borrower, and assignments will be by novation which will release the obligation of the assigning Lender; provided, that CSFB shall retain voting control with respect to at least a majority of the aggregate amount of loans and commitments under the Bridge Loan facilities. During the syndication process, CSFB will inform the Borrower of 15 9 the names of potential Lenders that it is approaching. CSFB will act as Agent for all assignees (if any) holding the Bridge Loans from time to time. Lenders will be permitted to participate their Bridge Loans to other financial institutions; provided that the Lenders granting participations retain the voting rights to such participated amounts. Participants will have the same benefits as the selling Lenders would have with regard to yield protection and increased costs, collateral benefits and provision of information on Acquiror and Target. Voting: Amendments and waivers of any provision of any Bridge Loan Documents will require the approval of Lenders holding loans and commitments representing a majority of the aggregate amount of the loans and commitments under the Bridge Loan facilities, except that the consent of all affected Lenders shall be required with respect to (a) increases in commitments, (b) reductions of principal, interest or fees and (c) extensions of the Bridge Maturity Date. Expenses and Indemnification: In addition to those out-of-pocket expenses reimbursable under the Commitment Letter, all out-of-pocket expenses of the Agent (and the Lenders for enforcement costs and documentary taxes) associated with the preparation, execution and delivery of any waiver or modification (whether or not effective) of, and the enforcement of, any Bridge Loan Document or any document relating to the 16 10 refinancing of the Bridge Loans (including the reasonable fees, disbursements and other charges of counsel for the Agent) are to be paid by Acquiror. Acquiror will indemnify the Agent and the other Lenders and hold them harmless from and against all costs, expenses (including fees, disbursements and other charges of counsel) and liabilities arising out of or relating to any litigation or other proceeding (regardless of whether the Agent or any such other Lender is a party thereto) that relate to the Transactions, the Bridge Loans or the refinancing thereof; provided, that neither the Agent nor any such other Lender will be indemnified for any costs, expense or liability to the extent determined by a court of competent jurisdiction in a final and nonappealable judgment to have resulted from any such person's gross negligence or willful misconduct or material breach of a Bridge Loan Document. Governing Law and Forum: New York. 17 Annex I to Exhibit A Exchange Notes Summary of Principal Terms and Conditions 1/ Issuer: Acquiror will issue Exchange Notes under an indenture which complies with the Trust Indenture Act (the "Indenture"). Principal Amount: The Exchange Notes will be available only in exchange for the Bridge Loans. The face amount of any Exchange Note will equal 100% of the aggregate principal amount (including any accrued interest not required to be paid in cash) of the Bridge Loan for which it is exchanged. Maturity: The Exchange Notes will mature on the tenth anniversary of the Closing Date. Interest Rate: Exchange Notes will bear interest at a rate equal to the Initial Rate (as defined below) plus the Exchange Spread (as defined below). Notwithstanding the foregoing, the interest rate on Exchange Notes in effect at any time shall not exceed 18% per annum, and to the extent that the interest payable on Exchange Notes exceeds a rate of 15% per annum, Acquiror may, at its option, cause such excess interest to be paid by issuing additional Exchange Notes in a principal amount equal to such excess portion of interest. Interest on Exchange Notes will be payable semiannually in arrears. __________________________________ 1/ All capitalized terms used but not defined herein have the meanings given in the Summary of Principal Terms and Conditions of the Bridge Loan Facilities to which this Annex I is attached. 18 2 In no event shall the interest rate on the Exchange Notes exceed the highest lawful rate permitted under applicable law. "Exchange Spread" shall mean 50 basis points during the three-month period commencing on the Bridge Maturity Date and shall increase by 50 basis points at the beginning of each subsequent three-month period. "Initial Rate" shall be determined on the Bridge Maturity Date and shall be equal to the greatest of (a) the interest rate borne by Bridge Loans on the day immediately preceding the Bridge Maturity Date, (b) the Treasury Rate (as defined below) on the Bridge Maturity Date plus 650 basis points and (c) the CREDIT SUISSE FIRST BOSTON CORPORATION High Yield Index Rate on the Bridge Maturity Date plus 200 basis points. "Treasury Rate" means (i) the rate borne by direct obligations of the United States maturing on the tenth anniversary of the Closing Date and (ii) if there are no such obligations, the rate determined by linear interpolation between the rates borne by the two direct obligations of the United States maturing closest to, but straddling, the tenth anniversary of the Closing Date, in each case as published by the Board of Governors of the Federal Reserve System. Rank: Exchange Notes will rank pari passu with Bridge Loans. Mandatory Redemption: Same as Bridge Loans. 19 3 Optional Redemption: Same as Bridge Loans. Registration Rights: Subject to the conditions precedent to fundings, Acquiror will use its reasonable best efforts to cause to be filed within 30 days after the first issuance of the Exchange Notes to any Lender and to become effective within 120 days after such issuance, an exchange offer registration statement or a shelf registration statement and Acquiror will use its best efforts to keep such registration statement effective for customary periods, not to exceed three years after final issuance of Exchange Notes, and to amend such registration statement from time to time as necessary to include newly issued Exchange Notes from time to time. Exchange Notes Escrowed: The Exchange Notes will be delivered on the Closing Date and held, undated, in escrow by a mutually agreeable fiduciary. Right To Transfer Exchange Notes: The holders of the Exchange Notes shall have the absolute and unconditional right to transfer such Exchange Notes to any third parties in compliance with applicable law. Equity Amount Escrowed: On the Closing Date, rights to acquire equity interests without an exercise price (the "Rights") representing 12 1/2% of the fully diluted common stock of Holdings will be delivered and held in an escrow account by a mutually agreeable fiduciary. Each Right will be exercisable for a period of 10 years from the Closing Date and will have mutually 20 4 agreed provisions relating to antidilution and limited registration rights in certain circumstances. After the Bridge Maturity Date, the Rights will be released from the escrow under two alternative circumstances: release for resale in connection with a bona fide, arms'-length sale of Bridge Loans or Exchange Notes and release pursuant to an "earn-in" formula. Notwithstanding the reference to the issuance of the Rights, Holdings will instead issue shares of its common stock directly in an amount equal to the amount for which the Rights would have been exercisable. Release of Rights for Resale: With respect to release for resale, Rights will be released from escrow at the request of a holder of Exchange Notes or Bridge Loans (in an amount not to exceed such holder's share of the Rights initially placed in escrow, such share to be equal to such holder's pro rata share of the aggregate principal amount of Exchange Notes and Bridge Loans calculated immediately following the Bridge Maturity Date) in connection with a transfer by such holder of any Exchange Notes or Bridge Loans and such Rights to a third party. Rights shall be released for resale only upon the representation of the holder that the Rights are necessary for a resale of the Bridge Loans or Exchange Notes, and only to the extent necessary so that the sale price (including the Rights) does not exceed the principal amount of the Bridge Loans or Exchange Notes so sold. 21 5 "Earn-in" of Rights: With respect to an "earn-in" release, the holder of any Bridge Loans or Exchange Notes immediately following the Bridge Maturity Date shall be entitled to receive (i) on the Bridge Maturity Date, Rights representing such holder's pro rata share of 5% of the fully diluted common stock of Holdings; and (ii) six months after the Bridge Maturity Date, additional Rights representing such holder's pro rata share of 3 3/4% of the fully diluted common stock of Holdings; and (iii) one year after the Bridge Maturity Date, additional Rights representing such holder's pro rata share of 3 3/4% of the fully diluted common stock of Holdings. Rights will be released from escrow pursuant to the "earn-in" provisions to the extent earned by a holder, in accordance with the foregoing, and requested by such holder. Unless previously released pursuant to the preceding sentence, all Rights earned by a holder pursuant to the "earn-in" provisions shall be released to such holder upon such holder ceasing to own any Bridge Loans or Exchange Notes. Cancellation of Rights: Any Rights to which none of the holders of Exchange Notes or the Bridge Loans is, or may become, entitled as set forth above shall be returned to Holdings for cancellation. Covenants: Those typical for an indenture governing a high-yield senior subordinated note issue. Events of Default: Those typical for an indenture governing a high-yield senior subordinated note issue. 22 6 Governing Law and Forum: New York. 23 [ Annex II] [to Exhibit A] CLOSING CONDITIONS Capitalized terms used but not defined herein shall, unless otherwise specified, have the meanings assigned to such terms in the Letters (as defined). The Commitments of Credit Suisse First Boston or Credit Suisse First Boston Corporation (collectively, "CSFB") pursuant to the Bridge Loan Commitment Letter, the Engagement Letter and the Commitment Letter, each dated as of April 11, 1997, as the case may be, between CSFB and Hedstrom Corporation (together, the "Letters") shall be subject to the following conditions: (i) there not becoming known to CSFB after the date of the Letters any information or other matter relating to Acquiror or Target which CSFB has reasonable cause to believe is accurate and which is inconsistent in a material and adverse manner with any information or other matter disclosed to CSFB by Acquiror or Target prior to the date of the Letters; (ii) the obligations of the parties thereto contained in the Agreement and Plan of Merger dated April 11, 1997, among Acquiror, AcquisitionCo and Target (the "Merger Agreement") to be performed at or prior to the consummation of the Tender Offer shall have been performed or complied with by Acquiror, AcquisitionCo and Target prior to the consummation of the Tender Offer, except where the failure so to perform or comply could not reasonably be expected to result in a Material Adverse Effect (as defined); (iii) there shall be no litigation or administrative proceedings or other legal or regulatory developments, actual or threatened, that, singly or in the aggregate, could have a Material Adverse Effect on Acquiror or Target or the ability of Acquiror to fully and timely perform its obligations under the documents executed in connection with the Transactions, or the ability of the parties to consummate the financing or 24 2 the other Transactions contemplated by the Letters or the validity or enforceability of any of the documents executed in connection with the Transactions or the rights, remedies and benefits available to the parties thereunder; (iv) CSFB and, if applicable, the Lenders, shall have received an opinion (and related going-concern valuation) reasonably satisfactory in all respects to the Lenders and CSFB, as applicable, from an independent valuation firm reasonably satisfactory to the Lenders and CSFB, as applicable, in each case to the effect that, after giving effect to the Transactions, Acquiror will not be insolvent, will not be rendered insolvent by the indebtedness incurred in connection therewith, will not be left with unreasonably small capital with which to engage in its business and will not have incurred debts beyond its ability to pay such debts as they mature; (v) CSFB's and, if applicable, the Lenders', reasonable satisfaction in all material respects with any amendments to any of the terms of (i) the Tender Offer and all material documents relating thereto, (ii) any definitive agreements relating to the Acquisition and any other material agreements to be entered into in connection with the Acquisition and (iii) the Senior Bank Facilities and the Equity Contribution; (vi) the receipt by CSFB and, if applicable, the Lenders', of financial statements of Acquiror and Target (including notes thereto), consisting of (a) audited and pro forma balance sheets for each period in the 3 fiscal-year period ended December 31, 1996, and (b) audited and pro forma statements of operations and cash flows for each period in the 3 fiscal-year period ended December 31, 1996, and CSFB's and, if applicable, the Lenders', receipt of any unaudited interim financial statements deemed necessary or reasonably desirable in the judgment of CSFB and the Lenders, if applicable, and all such financial statements, historical or pro forma delivered pursuant 25 3 to this paragraph (vi) to be in compliance with the requirements of Regulation S-X for a public offering registered under the Securities Act or 1933 (the "Securities Act"); (vii) the approval and/or recommendation by the Board of Directors of Target of the Tender Offer and the Acquisition; (viii) the waiting period (and any extension thereof) applicable to the merger of AcquisitionCo and Target under the HSR Act (as defined in the Merger Agreement) shall have been terminated or shall have expired, and no restrictive order or other requirements shall have been placed on Acquiror, AcquisitionCo, Target or the surviving entity in connection therewith, except where such restrictive order or other requirements could not reasonably be expected to result in a Material Adverse Effect; (ix) there not having occurred or becoming known to CSFB (a)any event or events having occurred that, individually or in the aggregate, could have a Material Adverse Effect on Acquiror or Target or (b) (i) any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market in the United States for a period in excess of forty-eight hours, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) the commencement of a war, armed hostilities or other international or national calamity, directly or indirectly involving the United States, (iv) any limitations (whether or not mandatory) imposed by any governmental authority on the nature or extension of credit or further extension of credit by banks or other lending institutions, (v) in the case of the foregoing clauses (iii) and (iv), a material acceleration or worsening thereof, or (vi) any other material adverse change in bank or capital market conditions that has had a material adverse effect on the syndication of leveraged bank credit facilities or 26 4 the consummation of high yield offerings, as the case may be, that CSFB shall reasonably determine makes it impracticable to consummate the Offerings prior to the termination of the Offering Period or syndication of the Bridge Loan, as the case may be; (x) CSFB's satisfaction that, immediately prior to and during the marketing period for any Offering or syndication of the Bridge Loan, as the case may be, there shall be no competing issues of debt securities or commercial bank facilities (other than the Senior Bank Facilities the Senior Subordinated Note Offering or Bridge Loan and the Holdings Senior Discount Note Offering, as applicable) of Acquiror, Holdings or AcquisitionCo; (xi) the negotiation, preparation, execution and delivery of definitive documentation reasonably satisfactory to CSFB, in connection with the Offerings, the Bridge Loan and the purchase of the Holdings Senior Discount Notes, if applicable; (xii) customary closing conditions for transactions similar to the Bridge Loan, the Offerings and the purchase of the Holdings Senior Discount Notes including the accuracy of all representations and warranties contained in the Letters, the absence of any defaults, no material change in the capital, corporate and organizational structure of Holdings, Acquiror and its subsidiaries (after giving effect to the Transactions), compliance with laws, adequate insurance, except where the failure so to perform or comply with such customary closing conditions could not reasonably be expected to result in a Material Adverse Effect, and the receipt by CSFB of reasonably satisfactory legal opinions from Acquiror's counsel in connection with the Offerings and the Bridge Loan (including 10b-5 opinions relating to any offering documents) and satisfactory accountant's "comfort" letters in connection with the Offerings; and (xiii) payment of fees. 27 5 A "Material Adverse Effect" shall mean the result of one or more events, changes or effects which, individually or in the aggregate, could reasonably be expected to have a material adverse effect on (i) the business, results of operations, financial condition or prospects of Acquiror, AcquisitionCo or Target and each of their respective subsidiaries, in each case, taken as a whole and (ii) the ability of CSFB to consummate the Offerings prior to the Offering Period or syndicate the Bridge Loan. EX-99.(B)(5) 14 ACQUISITION CREDIT FACILITIES COMMITMENT LETTER 1 EXHIBIT 99.(b)(5) CREDIT FIRST SUISSE BOSTON CREDIT SUISSE FIRST BOSTON Eleven Madison Avenue New York, NY 10010-3629 April 10, 1997 Hedstrom Corporation Cherrington Corporate Center 300 Corporate Center Drive, Suite 100 Pittsburgh, Pennsylvania 15108 Attention: Arnold E. Ditri, Chief Executive Officer Re: Commitment Letter Proposed Acquisition Credit Facilities Dear Sirs: We understand that (a) Hedstrom Corporation (the "Borrower") intends to form an acquisition vehicle ("AcquisitionCo") to commence a tender offer for all of the issued and outstanding capital stock of a company which you have identified to us and which we have referred to as "Gadgets" (the "Target") at a price of $11.25 per share (the "Tender Offer") and (b) promptly following the purchase by AcquisitionCo of the shares of capital stock of the Target which are validly tendered (and not withdrawn) pursuant to the Tender Offer (the "Tendered Shares"), the Target will be merged with and into AcquisitionCo, with AcquisitionCo being the surviving entity of such merger (the "Merger"; together with the Tender Offer, the "Acquisition"). You have informed us that Golder, Thoma, Cressey, Rauner, Inc. has agreed to tender the full amount of its equity interest in the Target pursuant to the Tender Offer. You have informed us that the total consideration for the Acquisition will be approximately $220,000,000 (subject to seasonal working capital requirements) and that a portion of such consideration will be financed through: (a) the issuance and sale by the Borrower of approximately $115,000,000 of senior subordinated notes of the Borrower; (b) the issuance and sale by a holding company ("HoldingCo") for the Borrower of approximately $25,000,000 of senior discount notes; and (c) the contribution by HoldingCo to the Borrower of not less than $40,000,000 in common equity. 2 2 We understand that the Borrower will require $180,000,000 in senior secured credit facilities (the "Credit Facilities") in order to (w) finance the remainder of the consideration for the Acquisition, (x) refinance certain existing indebtedness of the Borrower and its subsidiaries (including, without limitation, the Target and its subsidiaries), (y) provide working capital for the Borrower and its subsidiaries (including, without limitation, the Target and its subsidiaries) and (z) pay fees and expenses in connection with the transactions contemplated hereby. Credit Suisse First Boston ("CSFB") is pleased to inform you that it is willing to commit to provide the full amount of the Credit Facilities. Although CSFB is committing to provide all of the Credit Facilities, it expects to act as agent for a syndicate of financial institutions (together with CSFB, the "Lenders") to provide all or a portion of the Credit Facilities. Additionally, we shall be entitled, after consultation with you, to reallocate the amounts of the individual tranches of the Credit Facilities (including, without limitation, to eliminate any such tranche) if CSFB determines that such changes are advisable in order to ensure a successful syndication or an optimal credit structure; provided that the aggregate amount of the Credit Facilities shall not be reduced. Attached as Exhibit A to this letter is a Statement of Terms and Conditions (the "Term Sheet") setting forth the principal terms and conditions on and subject to which CSFB is willing to make available its portion of the Credit Facilities. The terms and conditions of CSFB's commitment hereunder and of the Credit Facilities are not limited to those set forth herein and in the Term Sheet, and any matters that are not covered by the provisions hereof and of the Term Sheet shall be subject to our mutual agreement. It is agreed that CSFB will act as the sole administrative agent for, and sole arranger and syndication manager of, the Credit Facilities and that no additional agents or co-agents or arrangers will be appointed without the prior written consent of CSFB. You hereby agree that, in providing the services contemplated by this letter, CSFB and its affiliates may share with each other such confidential or other information relating to Hicks, Muse, Tate & Furst, Inc. ("HMT&F"), the Borrower, the Target, their respective subsidiaries and investments and the Acquisition as from time to time may be in their possession; provided that each recipient of such information shall agree to maintain the confidentiality thereof in accordance with our customary practice. You agree to assist CSFB in forming any such syndicate and to provide CSFB and the other Lenders, promptly upon request, with all information reasonably requested by them to complete successfully the syndication, including, but not limited to, (a) an information package for delivery to potential syndicate members and participants (the "Information Memorandum") and (b) all information and projections prepared by you or your advisers relating to the transaction described herein. You also agree to use your best efforts to ensure that CSFB's syndication efforts benefit from the existing lending relationships of HMT&F and the Borrower. You further agree to make appropriate senior officers and representatives of HMT&F and the Borrower available to participate in information meetings for potential syndicate members and participants at such times and places as CSFB may reasonably request. 3 3 You represent and warrant and covenant that: (a) all information (other than any financial projections contemplated by clause (b) below) which has been or is hereafter made available to CSFB by you or any of your representatives in connection with the transaction contemplated hereby is and will be complete and correct in all material respects and does not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not materially misleading in light of the circumstances under which such statements are made; and (b) all financial projections that have been or are hereafter prepared by you or on your behalf and made available to CSFB or any other participants in the Credit Facilities have been or will be prepared in good faith based upon reasonable assumptions. You agree to supplement the information and projections referred to in clauses (a) and (b) above from time to time until completion of the syndication so that the representations and warranties in the preceding sentence remain correct. In arranging and syndicating the Credit Facilities, CSFB will use and rely on such information and projections without independent verification thereof. In connection with the syndication of the Credit Facilities, CSFB may, in its discretion, allocate to other Lenders portions of any fees payable to CSFB in connection with the Credit Facilities. You agree that no Lender will receive any compensation of any kind for its participation in the Credit Facilities, except as expressly provided for in this letter or in the Fee Letter referred to below. The reasonable costs and expenses (including, without limitation, the fees and expenses of outside counsel to CSFB, the allocated fees and expenses of in-house counsel to CSFB and CSFB's syndication and other out-of- pocket expenses) arising in connection with the preparation, execution and delivery of this letter and the definitive financing agreements shall be for your account; provided that, in the event that the Tender Offer is not consummated and you are not able to obtain reimbursement of the foregoing expenses from the Target, your liability pursuant to this sentence shall be limited to the reasonable fees and expenses of outside counsel (including, without limitation, any local counsel) to CSFB. You further agree to indemnify and hold harmless each Lender (including CSFB) and each director, officer, employee, affiliate (including, without limitation, CSFB) and agent thereof (each, an "indemnified person") against, and to reimburse each indemnified person, upon its demand, for, any losses, claims, damages, liabilities or other expenses ("Losses") to which such indemnified person may become subject insofar as such Losses arise out of or in any way relate to or result from the Acquisition, this letter or the financing contemplated hereby, including, without limitation, Losses consisting of legal or other expenses incurred in connection with investigating, defending or participating in any legal proceeding relating to any of the foregoing (whether or not such indemnified person is a party thereto); provided that the foregoing will not apply to any Losses to the extent they are found by a final decision of a court of competent jurisdiction to have resulted from the gross negligence or 4 4 willful misconduct of, or the breach of this Commitment Letter by, such indemnified person. The obligations of the Borrower under this paragraph shall remain effective whether or not definitive financing documentation is executed and notwithstanding any termination of this letter; provided, however, that, if such definitive financing documentation is executed, the terms of such definitive financing documentation shall supersede the terms hereof. Neither CSFB nor any other indemnified person shall be responsible or liable to any other person for consequential damages which may be alleged as a result of this letter or the financing contemplated hereby and neither CSFB nor any other indemnified person shall be responsible or liable for any damages which may be alleged as a result of its failure, in accordance with the terms of this letter, to provide the Credit Facilities. The provisions of this letter are supplemented as set forth in a separate fee letter dated the date hereof from us to you (the "Fee Letter") and are subject to the terms of such Fee Letter. By executing this letter, you acknowledge that this letter and the Fee Letter are the only agreements between you and CSFB with respect to the Credit Facilities and set forth the entire understanding of the parties with respect thereto. Neither this letter nor the Fee Letter may be changed except pursuant to a writing signed by each of the parties hereto. THIS LETTER SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. Prior to your acceptance hereof, you agree that neither this letter, the Fee Letter, nor any of their terms or substance, shall be disclosed, directly or indirectly, to any other person except to (a) the Target, (b) such of your employees, agents and advisers who are directly involved in the consideration of this matter and (c) as disclosure may be compelled in a judicial or administrative proceeding or as otherwise required by law; provided that you may freely disclose this letter (but not the Fee Letter), and its terms and substance, at any time following your acceptance hereof. 5 5 If you are in agreement with the foregoing, please sign and return to CSFB the enclosed copies of this letter and the Fee Letter by no later than 5:00 p.m., New York time, on Friday, April 11, 1997. This offer shall terminate at such time unless prior thereto we shall have received signed copies of such letters. We look forward to working with you on this transaction. Very truly yours, CREDIT SUISSE FIRST BOSTON By: /s/ Ann F. Lopez ----------------------------- Name: Ann F. Lopez Title: Managing Director By: /s/ Richard D. Carey ----------------------------- Name: Richard D. Carey Title: Director Accepted and agreed to as of the date first above written : HEDSTROM CORPORATION By: /s/ Andrew S. Rosen ----------------------------- Name: Andrew S. Rosen Title: Vice President 6 EXHIBIT A US$180,000,000 CREDIT FACILITIES Summary of Terms and Conditions April 10, 1997 ---------- I. Parties Borrower: Hedstrom Corporation (the "Borrower"). Lenders: The banks, financial institutions and other entities, including Credit Suisse First Boston ("CSFB"), selected in the syndication effort (collectively, the "Lenders"). Lenders shall not be required to participate ratably in the Credit Facilities described below. Administrative Agent and Arranger: CSFB (in such capacity, the "Administrative Agent"). II. Type and Amount of Credit Facilities A. Tranche A Term Loan Facility Type of Facility: 6-year senior, secured, term loan facility in the amount of $75,000,000 (the "Tranche A Facility"). Availability: The Tranche A Facility shall be available in a single drawing on the date upon which the conditions precedent to borrowing are satisfied (the "Closing Date"). Amortization: The Tranche A Facility shall amortize in quarterly installments (commencing on December 31, 1997) to be mutually agreed upon. Use of Proceeds: To (a) finance a portion of the consideration for the acquisition of the shares of capital stock of ERO, Inc. (the "Target") which are validly tendered and not withdrawn (the "Tendered Shares") pursuant to a tender offer to be commenced by an acquisition vehicle ("AcquisitionCo") to be organized by the Borrower (the "Tender Offer"), (b) to finance the merger of the Target with and into AcquisitionCo, with AcquisitionCo being the surviving corporation thereof (the "Merger"; together with the Tender Offer, the "Acquisition"), (c) refinance certain outstanding indebtedness of the Borrower, the Target and their respective subsidiaries and (d) pay fees and expenses relating thereto. 7 2 B. Tranche B Term Loan Facility Type of Facility: 8-year senior, secured, term loan facility in the amount of $35,000,000 (the "Tranche B Facility"; together with the Tranche A Facility, the "Term Loan Facilities"). Availability: The Tranche B Facility shall be available in a single drawing on the Closing Date. Amortization: The Tranche B Facility shall amortize in quarterly installments (commencing on December 31, 1997) to be mutually agreed upon. Use of Proceeds: To (a) finance a portion of the consideration for the Acquisition, (b) refinance certain outstanding indebtedness of the Borrower, the Target and their respective subsidiaries and (c) pay fees and expenses relating thereto. C. Revolving Credit Facility Revolving Credit Facility: 6-year senior, secured revolving credit facility in the amount of $70,000,000 (the "Revolving Credit Facility"; together with the Term Loan Facilities, the "Credit Facilities") Availability: The Revolving Credit Facility shall be available on a revolving basis during the period commencing on the Closing Date and ending on the maturity date for the Tranche A Facility (the "Termination Date"). In addition, ABR Loans (as defined on Annex I) under the Revolving Credit Facility shall be available to the Borrower on a same-day basis. The availability of the Revolving Credit Facility shall be subject to a borrowing base in the amount from time to time equal to 85% of "Eligible Receivables" and 50% of "Eligible Inventory" (each of which terms shall be defined in the definitive credit agreement and related documentation (the "Credit Documentation") for the Credit Facilities) of the Borrower and its domestic subsidiaries. The Borrowing Base will be computed at least monthly by the Borrower and a Borrowing Base certificate presenting the Borrower's computation will be delivered to the Administrative Agent promptly, but in no event later than the 15th day of the following month. In the event that AcquisitionCo has acquired at least 75% of the issued and outstanding capital stock of the Target pursuant to the Tender Offer, the Borrower may make loans to the Target for the purpose of financing the working capital needs of the Target 8 3 pending the consummation of the Merger (the "Specified Loans"). Letters of Credit: A portion of the Revolving Credit Facility to be mutually agreed upon shall be available for the issuance of letters of credit (the "Letters of Credit") by CSFB (in such capacity, the "Issuing Lender"). No Letter of Credit shall have an expiration date after the earlier of (a) one year after the date of issuance and (b) five business days prior to the Termination Date; provided that any Letter of Credit with a one-year tenor may provide for the renewal thereof for additional one-year periods (which shall in no event extend beyond the date referred to in clause (b) above). Drawings under any Letter of Credit shall be reimbursed by the Borrower (whether with its own funds or with the proceeds of loans under the Revolving Credit Facility) on the same business day. To the extent that the Borrower does not so reimburse the Issuing Lender, the Lenders under the Revolving Credit Facility shall be irrevocably and unconditionally obligated to reimburse the Issuing Lender on a pro rata basis. Swing Line Loans: A portion of the Revolving Credit Facility not in excess of $10,000,000 shall be available for swing line loans (the "Swing Line Loans") from CSFB on same-day notice. Any such Swing Line Loans will reduce availability under the Revolving Credit Facility on a dollar-for-dollar basis. Each Lender under the Revolving Credit Facility shall acquire, under certain circumstances, an irrevocable and unconditional pro rata participation in each such Swing Line Loan. Clean-Up: The outstanding principal amount of all loans under the Revolving Credit Facility may not exceed an amount to be mutually agreed upon for a period to be mutually agreed upon during each calendar year. Maturity: The Termination Date. Purpose: The proceeds of the loans under the Revolving Credit Facility shall be used by the Borrower and its subsidiaries for working capital and other general corporate purposes (including, without limitation, for the same purposes as the Term Loan Facilities). III. General Payment Provisions Fees and Interest Rates: As set forth on Annex I. Optional Prepayments and 9 4 Commitment Reductions: Loans may be prepaid and commitments may be reduced by the Borrower in minimum amounts to be agreed upon. Mandatory Prepayments and Commitment Reductions: The Credit Facilities shall be reduced with (a) 100% of the net proceeds of asset sales by the Borrower and its subsidiaries, (b) 100% of the net proceeds from the incurrence of debt by the Borrower and its subsidiaries, (c) 100% of the net proceeds from the offering and sale of equity by the Borrower and its subsidiaries and (d) commencing with the 1998 fiscal year of the Borrower, 75% of excess cash flow of the Borrower and its subsidiaries (in each case, subject to exceptions to be mutually agreed upon). All such reductions shall be applied, first, to prepay the remaining installments of the Term Loan Facility (ratably between the Tranche A Facility and the Tranche B Facility and in ratably among the scheduled maturities of each such Tranche based upon the number of remaining installments) and, second, to reduce the Revolving Credit Facility (and, to the extent necessary, to repay the loans and cash collateralize the Letters of Credit outstanding thereunder). IV. Guarantees and Collateral Guarantees: The Credit Facilities shall be guaranteed by (a) the HoldingCo, (b) the Borrower and (c) each domestic subsidiary of the Borrower (each, a "Guarantor"; together with the Borrower, the "Credit Parties"). Collateral: The Credit Facilities shall be secured by the capital stock of the Borrower and by substantially all assets of the Borrower and its domestic subsidiaries (including, without limitation, the Target), subject to exceptions to be mutually agreed upon. Prior to the date upon which the Merger is consummated, the assets of the Target and its Subsidiaries which constitute collateral (other than any capital stock of the Target, which shall secure the full amount of the Credit Facilities) shall secure only any outstanding Specified Loans. The Credit Facilities also shall be secured by 65% (or such higher percentage as may be pledged without the incurrence of material adverse legal or tax consequences) of each foreign subsidiary the capital stock of which is owned directly by the Borrower or a domestic subsidiary thereof (subject to exceptions to be mutually agreed upon based upon uneconomic transaction costs and/or adverse tax consequences). 10 5 V. Certain Conditions Initial Conditions: The availability of the Credit Facilities shall be conditioned upon satisfaction (on or prior to July 30, 1997) of, among other things, the conditions precedent described in Annex II and those set forth below (the date upon which all such conditions precedent shall be satisfied, the "Closing Date"): 1. The Lenders shall have received the results of a recent lien search in each of the jurisdictions and offices where assets of the Borrower, the Target or any of their respective subsidiaries are located or recorded, and such search shall reveal no liens on any of the assets of any such entities, except for liens permitted by the Credit Documentation or otherwise approved by the Administrative Agent. 2. The Administrative Agent shall have received all documentation necessary to grant to it, and to perfect, a security interest in all assets described opposite the caption "Collateral" above. On-Going Conditions: The making of each extension of credit shall be conditioned upon (a) all representations and warranties in the Credit Documentation (including, without limitation, the material adverse change and litigation representations) being true and correct in all material respects and (b) there being no default or event of default in existence at the time of, or after giving effect to the making of, such extension of credit. As used herein and in the Credit Documentation a "material adverse change" shall mean any event, development or circumstance that has had or could reasonably be expected to have a material adverse effect on (a) the Acquisition, (b) the business, assets, property, condition (financial or otherwise) or prospects of the Target or of the Borrower and its subsidiaries taken as a whole (after giving effect to the consummation of the Acquisition) or (c) the validity or enforceability of any of the Credit Documentation or the rights and remedies of the Administrative Agent and the Lenders thereunder. 11 6 VI. Representations, Warranties, Covenants and Events of Default The Credit Documentation shall contain representations, warranties, covenants and events of default customary for financings of this type and other terms deemed appropriate by the Lenders, including, without limitation: Representations and Warranties: Accuracy of financial statements (including pro forma financial statements); absence of undisclosed liabilities; no material adverse change; corporate existence; compliance with law; corporate power and authority; enforceability of Credit Documentation; no conflict with law or contractual obligations; no material litigation; no default; ownership of property; liens; intellectual property; no burdensome restrictions; taxes; Federal Reserve regulations; ERISA; Investment Company Act; subsidiaries; environmental matters; accuracy of disclosure; and creation and perfection of security interests. Affirmative Covenants: Delivery of audited and unaudited financial statements, reports, accountants' letters, projections, officers' certificates and other information requested by the Lenders; payment of other obligations; continuation of business and maintenance of existence and material rights and privileges; compliance with laws and material contractual obligations; maintenance of property and insurance; maintenance of books and records; right of the Lenders to inspect property and books and records; notices of defaults, litigation and other material events; compliance with environmental laws; and agreement to grant security interests in after-acquired property. Certain of the affirmative covenants shall be subject to customary "baskets" and exceptions to be mutually agreed upon. Financial Covenants: To include minimum interest coverage ratio, maximum leverage ratio and limitation on capital expenditures (including, without limitations, capital expenditures relating to acquisitions), with relevant definitions and covenant levels to be mutually agreed upon. Negative Covenants: Limitations on: indebtedness (including preferred stock); liens; guarantee obligations; mergers, consolidations, liquidations and dissolutions; sales of assets; investments, loans and advances; dividends and other restricted payments; leases; payments and modifications of subordinated and other debt instruments; transactions with affiliates; sale and leasebacks; changes in fiscal year; negative pledge clauses; and changes in lines of business. 12 7 Certain of the negative covenants shall be subject to customary "baskets" and exceptions to be mutually agreed upon. Events of Default: Nonpayment of principal when due; nonpayment of interest, fees or other amounts within 5 days after the date when due; material inaccuracy of representations and warranties; violation of covenants (subject, in the case of certain affirmative covenants, to a 30-day grace period); cross-default; bankruptcy; certain ERISA events; material judgments; actual or asserted invalidity of any guarantee or security document, subordination provisions or security interest; and a change of control to be mutually agreed upon. It also shall be an event of default if HoldingCo shall have any material liabilities (other than the HoldingCo Discount Notes) or assets (other than its equity interest in the Borrower). Certain of the events of default shall include customary grace periods and/or baskets to be mutually agreed upon. VII. Certain Other Terms Voting: Amendments and waivers with respect to the Credit Documentation shall require the approval of Lenders holding commitments representing not less than a majority of the aggregate amount of the commitments under the Credit Facilities (the "Required Lenders"), except that (a) the consent of each Lender directly affected thereby shall be required with respect to (i) reductions in the principal amount of the loans or other extensions of credit (absent an actual repayment thereof) or extensions of the Termination Date, (ii) reductions in the rate of interest or any fee or extensions of any due date thereof, (iii) increases in the amount of any Lender's commitment and (b) the consent of 100% of the Lenders shall be required with respect to (i) releases of all or substantially all of the collateral or guarantees and (ii) modifications to any of the voting percentages. Assignments and Participations: The Lenders shall be permitted to assign and sell participations in their extensions of credit and commitments, subject, in the case of assignments to Eligible Assignees (to be defined in a manner to be mutually agreed upon), to the consent of the Administrative Agent (which consent shall not be unreasonably withheld) and to the payment by the assigning Lender to the Administrative Agent of a $3,500 transfer fee. In the case of partial assignments, the minimum assignment amount shall be $5,000,000, and, after giving effect thereto, the assigning Lender shall have commitments and extensions of credit 13 8 aggregating at least $5,000,000. Participants shall have the same benefits as the Lenders with respect to yield protection and increased cost provisions. Voting rights of participants shall be limited to the customary "sacred rights." Pledges of loans in accordance with applicable law shall be permitted without restriction. Promissory notes shall be issued under the Credit Facilities only upon request. Non-pro rata assignments shall be permitted. Yield Protection: The Credit Documentation shall contain customary provisions (a) protecting the Lenders against loss of yield resulting from changes in reserve, tax, capital adequacy and other requirements of law and from the imposition of withholding or other taxes and (b) indemnifying the Lenders for "breakage costs" incurred in connection with, among other things, prepayment of a Eurocurrency Loan (as defined in Annex I) on a day other than the last day of an interest period with respect thereto. Expenses and Indemnification: The Credit Documentation shall provide that the Borrower shall pay (a) all reasonable out-of-pocket expenses of the Administrative Agent associated with the syndication of the Credit Facilities and the preparation, execution, delivery and administration of the Credit Documentation and any amendment or waiver with respect thereto (including the reasonable fees and disbursements and other charges of counsel to the Administrative Agent) and (b) all out-of-pocket expenses of the Administrative Agent and a single counsel to the Lenders in connection with the enforcement of the Credit Documentation (including the fees and disbursements and other charges of counsel). The Borrower shall indemnify, pay and hold harmless the Administrative Agent, the Arranger and the Lenders (and their respective directors, officers, employees and agents) against any loss, liability, cost or expense incurred in respect of the financing contemplated hereby or the use or the proposed use of proceeds thereof (except to the extent resulting from the gross negligence or willful misconduct of, or a breach of the Credit Documentation by, the indemnified party). Governing Law and Forum: State of New York. Counsel to the Administrative Agent: Simpson Thacher & Bartlett. 14 9 Commitment Termination Date: The Credit Documentation must have been entered into on or before June 30, 1997. 15 Annex I Interest and Certain Fees Interest Rate Options: The Borrower may elect that all or a portion of the loans borrowed by it bear interest at a rate per annum equal to (a) the ABR plus the Applicable Margin with respect thereto or (b) the Eurocurrency Rate plus the Applicable Margin with respect thereto; provided that Swing Line Loans shall bear interest only at a rate based upon the ABR. For purposes hereof: "ABR" means the higher of (i) the rate of interest publicly announced by CSFB as its prime rate in effect at its principal office in New York City (the "Prime Rate") and (ii) the federal funds effective rate from time to time plus 0.5%; "Eurocurrency Rate" means the rate (grossed-up for maximum statutory reserve requirements for eurocurrency liabilities) at which eurocurrency deposits in the relevant denomination currency for one, two, three, six or (subject to availability) nine months (as selected by the Borrower) are offered by CSFB in the relevant interbank eurocurrency market. Applicable Margin: Initially, the rates per annum set forth below:
======================================================= Applicable Margin -------------------------- Eurodollar ABR Loans Facility Loans ------------------------------------------------------- Tranche A Facility 2-1/2% 1-1/2% ------------------------------------------------------- Tranche B Facility 3% 2% ------------------------------------------------------- Revolving Credit Facility 2-1/2% 1-1/2% =======================================================
The foregoing margins for the Tranche A Facility and the Revolving Credit Facility shall be adjusted from time to time by amounts to be agreed upon based on the leverage ratio of the Borrower then in effect. Interest Payment Dates: In the case of loans bearing interest based upon the ABR ("ABR Loans"), in arrears on the last business day of each calendar quarter. 16 2 In the case of loans bearing interest based upon the Eurocurrency Rate ("Eurocurrency Loans"), on the last day of each relevant interest period and, in the case of any interest period longer than three months, on each successive date three months after the first day of such interest period. Letter of Credit Fees: The Borrower shall pay a commission on all outstanding Letters of Credit at a per annum rate equal to the Applicable Margin then in effect with respect to Eurodollar Loans on the face amount of each such Letter of Credit (of which 1/4 of 1% of the face amount of each such Letter of Credit shall be for the account of the Issuing Lender and the remainder shall be for the account of the Lenders). Such commission shall be shared ratably among the Lenders participating in the Revolving Credit Facility and shall be payable quarterly in arrears. In addition, customary administrative, issuance, amendment, payment and negotiation charges shall be payable to the Issuing Lender for its own account. Commitment Fees: The Borrower shall pay to the Administrative Agent, for the ratable benefit of the Lenders, a commitment fee calculated at the rate of 1/2 of 1% per annum on the average daily unused portion of the Credit Facilities, payable in arrears on the last business day of each calendar quarter. Swing Line Loans shall, for purposes of the commitment fee calculations only, not be deemed to be a utilization of the Revolving Credit Facility. Default Rate: At any time when the Borrower is in default in the payment of any amount due under the Credit Facilities, the principal of all loans under the Credit Facilities shall bear interest at 2% above the rate otherwise applicable thereto. Overdue interest, fees and other amounts shall bear interest at 2% above the rate applicable to ABR Loans. Rate and Fee Basis: All per annum rates shall be calculated on the basis of a year of 360 days (or 365/366 days, in the case of ABR Loans the interest rate payable on which is then based on the Prime Rate) for actual days elapsed. 17 Annex II Initial Conditions For purposes of determining the satisfaction of the closing conditions attached hereto, (a) unless otherwise defined herein or therein, capitalized terms which are used in such closing conditions shall have the meanings assigned thereto in the Letters, (b) the term "Offerings" shall include, in any event, the syndication of the Credit Facilities and (c) the term "Offering Period" shall include, in any event, the period from the date hereof through June 30, 1997. 18 [ Annex II] [to Exhibit A] CLOSING CONDITIONS Capitalized terms used but not defined herein shall, unless otherwise specified, have the meanings assigned to such terms in the Letters (as defined). The Commitments of Credit Suisse First Boston or Credit Suisse First Boston Corporation (collectively, "CSFB") pursuant to the Bridge Loan Commitment Letter, the Engagement Letter and the Commitment Letter, each dated as of April 11, 1997, as the case may be, between CSFB and Hedstrom Corporation (together, the "Letters") shall be subject to the following conditions: (i) there not becoming known to CSFB after the date of the Letters any information or other matter relating to Acquiror or Target which CSFB has reasonable cause to believe is accurate and which is inconsistent in a material and adverse manner with any information or other matter disclosed to CSFB by Acquiror or Target prior to the date of the Letters; (ii) the obligations of the parties thereto contained in the Agreement and Plan of Merger dated April 11, 1997, among Acquiror, AcquisitionCo and Target (the "Merger Agreement") to be performed at or prior to the consummation of the Tender Offer shall have been performed or complied with by Acquiror, AcquisitionCo and Target prior to the consummation of the Tender Offer, except where the failure so to perform or comply could not reasonably be expected to result in a Material Adverse Effect (as defined); (iii) there shall be no litigation or administrative proceedings or other legal or regulatory developments, actual or threatened, that, singly or in the aggregate, could have a Material Adverse Effect on Acquiror or Target or the ability of Acquiror to fully and timely perform its obligations under the documents executed in connection with the Transactions, or the ability of the parties to consummate the financing or 19 2 the other Transactions contemplated by the Letters or the validity or enforceability of any of the documents executed in connection with the Transactions or the rights, remedies and benefits available to the parties thereunder; (iv) CSFB and, if applicable, the Lenders, shall have received an opinion (and related going-concern valuation) reasonably satisfactory in all respects to the Lenders and CSFB, as applicable, from an independent valuation firm reasonably satisfactory to the Lenders and CSFB, as applicable, in each case to the effect that, after giving effect to the Transactions, Acquiror will not be insolvent, will not be rendered insolvent by the indebtedness incurred in connection therewith, will not be left with unreasonably small capital with which to engage in its business and will not have incurred debts beyond its ability to pay such debts as they mature; (v) CSFB's and, if applicable, the Lenders', reasonable satisfaction in all material respects with any amendments to any of the terms of (i) the Tender Offer and all material documents relating thereto, (ii) any definitive agreements relating to the Acquisition and any other material agreements to be entered into in connection with the Acquisition and (iii) the Senior Bank Facilities and the Equity Contribution; (vi) the receipt by CSFB and, if applicable, the Lenders', of financial statements of Acquiror and Target (including notes thereto), consisting of (a) audited and pro forma balance sheets for each period in the 3 fiscal-year period ended December 31, 1996, and (b) audited and pro forma statements of operations and cash flows for each period in the 3 fiscal-year period ended December 31, 1996, and CSFB's and, if applicable, the Lenders', receipt of any unaudited interim financial statements deemed necessary or reasonably desirable in the judgment of CSFB and the Lenders, if applicable, and all such financial statements, historical or pro forma delivered pursuant 20 3 to this paragraph (vi) to be in compliance with the requirements of Regulation S-X for a public offering registered under the Securities Act or 1933 (the "Securities Act"); (vii) the approval and/or recommendation by the Board of Directors of Target of the Tender Offer and the Acquisition; (viii) the waiting period (and any extension thereof) applicable to the merger of AcquisitionCo and Target under the HSR Act (as defined in the Merger Agreement) shall have been terminated or shall have expired, and no restrictive order or other requirements shall have been placed on Acquiror, AcquisitionCo, Target or the surviving entity in connection therewith, except where such restrictive order or other requirements could not reasonably be expected to result in a Material Adverse Effect; (ix) there not having occurred or becoming known to CSFB (a)any event or events having occurred that, individually or in the aggregate, could have a Material Adverse Effect on Acquiror or Target or (b) (i) any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market in the United States for a period in excess of forty-eight hours, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) the commencement of a war, armed hostilities or other international or national calamity, directly or indirectly involving the United States, (iv) any limitations (whether or not mandatory) imposed by any governmental authority on the nature or extension of credit or further extension of credit by banks or other lending institutions, (v) in the case of the foregoing clauses (iii) and (iv), a material acceleration or worsening thereof, or (vi) any other material adverse change in bank or capital market conditions that has had a material adverse effect on the syndication of leveraged bank credit facilities or 21 4 the consummation of high yield offerings, as the case may be, that CSFB shall reasonably determine makes it impracticable to consummate the Offerings prior to the termination of the Offering Period or syndication of the Bridge Loan, as the case may be; (x) CSFB's satisfaction that, immediately prior to and during the marketing period for any Offering or syndication of the Bridge Loan, as the case may be, there shall be no competing issues of debt securities or commercial bank facilities (other than the Senior Bank Facilities the Senior Subordinated Note Offering or Bridge Loan and the Holdings Senior Discount Note Offering, as applicable) of Acquiror, Holdings or AcquisitionCo; (xi) the negotiation, preparation, execution and delivery of definitive documentation reasonably satisfactory to CSFB, in connection with the Offerings, the Bridge Loan and the purchase of the Holdings Senior Discount Notes, if applicable; (xii) customary closing conditions for transactions similar to the Bridge Loan, the Offerings and the purchase of the Holdings Senior Discount Notes including the accuracy of all representations and warranties contained in the Letters, the absence of any defaults, no material change in the capital, corporate and organizational structure of Holdings, Acquiror and its subsidiaries (after giving effect to the Transactions), compliance with laws, adequate insurance, except where the failure so to perform or comply with such customary closing conditions could not reasonably be expected to result in a Material Adverse Effect, and the receipt by CSFB of reasonably satisfactory legal opinions from Acquiror's counsel in connection with the Offerings and the Bridge Loan (including 10b-5 opinions relating to any offering documents) and satisfactory accountant's "comfort" letters in connection with the Offerings; and (xiii) payment of fees. 22 5 A "Material Adverse Effect" shall mean the result of one or more events, changes or effects which, individually or in the aggregate, could reasonably be expected to have a material adverse effect on (i) the business, results of operations, financial condition or prospects of Acquiror, AcquisitionCo or Target and each of their respective subsidiaries, in each case, taken as a whole and (ii) the ability of CSFB to consummate the Offerings prior to the Offering Period or syndicate the Bridge Loan. EX-99.(C)(1) 15 AGREEMENT AND PLAN OF MERGER 1 EXHIBIT 99.(c)(1) AGREEMENT AND PLAN OF MERGER AMONG HEDSTROM CORPORATION, HC ACQUISITION CORP. AND ERO, INC. dated as of April 10, 1997 2 TABLE OF CONTENTS
Page ---- ARTICLE I THE OFFER 1.1 The Offer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Offer Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1.3 Company Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 1.4 Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 ARTICLE II THE MERGER 2.1 The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 2.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.3 Effective Time of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.4 Effects of the Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 ARTICLE III EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES 3.1 Effect on Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.2 Conversion of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 3.3 Payment for Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 3.4 Stock Transfer Books . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.5 Stock Option Plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3.6 Dissenting Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Representations and Warranties of the Company . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.2 Representations and Warranties of Parent and Sub . . . . . . . . . . . . . . . . . . . . . . . . 31 ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS 5.1 Covenants of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3 ARTICLE VI ADDITIONAL AGREEMENTS 6.1 Preparation of the Proxy Statement; Company Stockholders Meeting; Merger without a Company Stockholders Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 6.2 Access to Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 6.3 [Intentionally Omitted] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 6.4 Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 6.5 Brokers or Finders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 6.6 Indemnification; Directors' and Officers' Insurance . . . . . . . . . . . . . . . . . . . . . . 42 6.7 Commercially Reasonable Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 6.8 Conduct of Business of Sub . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 6.9 Publicity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 6.10 Withholding Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 6.11 Continuation of Employee Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 ARTICLE VII CONDITIONS PRECEDENT 7.1 Conditions to Each Party's Obligation to Effect the Merger . . . . . . . . . . . . . . . . . . . 47 7.2 Conditions to Obligation of Parent and Sub . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 ARTICLE VIII TERMINATION AND AMENDMENT 8.1 Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 8.2 Effect of Termination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 8.3 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 8.4 Extension; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 ARTICLE IX GENERAL PROVISIONS 9.1 Nonsurvival of Representations, Warranties and Agreements . . . . . . . . . . . . . . . . . . . 51 9.2 Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 9.3 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 9.4 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 9.5 Entire Agreement; No Third Party Beneficiaries; Rights of Ownership . . . . . . . . . . . . . . 53 9.6 Governing Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 9.7 Assignment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
4 AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER, dated as of April 10, 1997 (the "Agreement"), is made and entered into by and among Hedstrom Corporation, a Delaware corporation ("Parent"), HC Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Parent ("Sub"), and ERO, Inc., a Delaware corporation (the "Company"). WHEREAS, the respective Boards of Directors of Parent, Sub and the Company have unanimously approved the acquisition of the Company by Parent, by means of the merger (the "Merger") of Sub with and into the Company, upon the terms and subject to the conditions set forth in this Agreement; WHEREAS, to effectuate the acquisition, Parent and the Company each desire that Sub commence a cash tender offer to purchase all of the outstanding shares of common stock, par value $0.01 per share, of the Company ("Shares" or "Company Common Stock") upon the terms and subject to the conditions set forth in this Agreement and the Offer Documents (as defined in Section 1.2), and the Board of Directors of the Company has unanimously approved such Offer (as defined in Section 1.1) and agreed to recommend to the stockholders of the Company that they accept the Offer and tender their Company Common Stock pursuant thereto; and WHEREAS, Parent and Sub are unwilling to enter into this Agreement (and effect the transactions contemplated hereby) unless, contemporaneously with the execution and delivery hereof, certain beneficial and record holders of the Company Common Stock enter into agreements (collectively, the "Stockholders Agreement") providing for certain matters with respect to their Shares (including the tender of their Shares and certain other actions relating to the Offer) and the other transactions contemplated by this Agreement, and, in order to induce Parent and Sub to enter into this Agreement, the Company has approved the execution and delivery by Parent and such stockholders of the Stockholders Agreement, and such stockholders have agreed to execute and deliver the Stockholders Agreement; and WHEREAS, Parent, Sub and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Offer and the Merger and also to prescribe various conditions to the consummation thereof; 5 NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements herein contained, the parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE I THE OFFER 1.1 The Offer. (a) Provided that none of the events set forth in Exhibit A hereto shall have occurred and be continuing, as promptly as practicable (but in any event not later than five business days after the public announcement of the execution and delivery of this Agreement), Sub shall commence (within the meaning of Rule 14d-2 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), an offer to purchase (the "Offer") all outstanding shares of the Company Common Stock at a price of $11.25 per share, net to the seller in cash (the "Offer Consideration"). The obligation of Parent and Sub to commence the Offer, consummate the Offer, accept for payment and to pay for shares of Company Common Stock validly tendered in the Offer and not withdrawn shall be subject only to those conditions set forth in Exhibit A hereto. (b) Parent and Sub expressly reserve the right to amend or modify the terms of the Offer, except that, without the prior written consent of the Company, Sub shall not (and Parent shall not cause Sub to): (i) decrease the Offer Consideration, change the form of the Offer Consideration or decrease the number of Shares sought pursuant to the Offer, (ii) amend or waive the condition that there shall be validly tendered and not withdrawn prior to the time the Offer expires a number of shares of Company Common Stock which constitutes a majority of the Shares outstanding on a fully-diluted basis on the date of purchase ("on a fully-diluted basis" having the following meaning, as of any date: the number of shares of Company Common Stock outstanding, together with Shares which the Company may be required, now or in the future, to issue pursuant to options, warrants or other rights or obligations outstanding at that date), (iii) extend the expiration date of the Offer (except that Sub may extend the expiration date of the Offer (a) as required by any rule, regulation or interpretation of the United States Securities and Exchange Commission (the "SEC"), (b) for such periods as Sub may reasonably deem necessary (but not to a date later than the 60th calendar day after the date of commencement) in the event that any condition to the Offer is not satisfied, or (c) for one or more times for an aggregate period of up to 15 days (not to exceed 60 calendar days from the date of commencement) for any reason other than those specified in the immediately preceding 2 6 clause (a) or clause (b)), or (iv) change any condition or impose additional conditions to the Offer or amend any term of the Offer in any manner adverse to holders of shares of Company Common Stock; provided, however, that, except as set forth above, Sub may waive any other condition to the Offer in its sole discretion; and provided further, that the Offer (i) may be extended in connection with an increase in the consideration to be paid pursuant to the Offer so as to comply with applicable rules and regulations of the SEC, and (ii) will, for one time only, be automatically extended for a period which ends on the 15th business day from the date the Company shall have received an Acquisition Proposal (as hereinafter defined) in the event the Company shall receive such Acquisition Proposal less than ten business days prior to the expiration of the Offer. Assuming the prior satisfaction or waiver of the conditions to the Offer, Sub shall accept for payment, and pay for, in accordance with the terms of the Offer, all shares of Company Common Stock validly tendered and not withdrawn pursuant to the Offer as soon as practicable after the expiration date thereof. 1.2 Offer Documents. As soon as practicable on the date of commencement of the Offer, Parent and Sub shall file or cause to be filed with the SEC a Tender Offer Statement on Schedule 14D-1 (the "Schedule 14D- 1") with respect to the Offer which shall contain the offer to purchase, related letter of transmittal and other ancillary Offer documents and instruments pursuant to which the Offer will be made (collectively with any supplements or amendments thereto, the "Offer Documents"). The Offer Documents (i) shall contain (or shall be amended in a timely manner to contain) all information which is required to be included therein in accordance with the Exchange Act and the rules and regulations thereunder and any other applicable law and (ii) shall conform in all material respects with the requirements of the Exchange Act and any other applicable law. Notwithstanding the foregoing, no agreement or representation hereby is made or shall be made by Parent or Sub with respect to information supplied by the Company expressly for inclusion in, or with respect to Company information derived from the Company's public SEC filings that is included or incorporated by reference in, the Offer Documents. Parent, Sub and the Company each agree promptly to correct any information provided by them for use in the Offer Documents if and to the extent that it shall have become false or misleading in any material respect and Sub further agrees to take all lawful action necessary to cause the Offer Documents as so corrected to be filed promptly with the SEC and to be disseminated to holders of Company Common Stock, in each case as and to the extent required by applicable law. In conducting the Offer, Parent and Sub shall comply in all material respects with the Exchange Act and any other applicable law. The 3 7 Company and its counsel shall be given reasonable opportunity to review and comment on the Offer Documents and any amendments or supplements thereto prior to the filing thereof with the SEC. To the extent practicable, the Company and its counsel shall also be given reasonable opportunity to review and comment on correspondence with the SEC concerning the Offer Documents prior to the delivery thereof to the SEC. 1.3 Company Actions. The Company hereby consents to the Offer and the Merger and represents that (a) its Board of Directors (at a meeting duly called and held) has unanimously (i) determined that each of this Agreement, the Offer and the Merger are fair to and in the best interests of the stockholders of the Company, (ii) approved the execution, delivery and performance of this Agreement and the consummation of the transactions contemplated hereby and thereby, including the Offer and the Merger, and such approval constitutes approval of the foregoing for purposes of Section 203 of the Delaware General Corporation Law, as amended (the "DGCL"), and for purposes of Article Nine of the Company's Amended and Restated Certificate of Incorporation, (iii) resolved to recommend (x) acceptance of the Offer, (y) approval and adoption of this Agreement (if required) and (z) approval of the Merger, by the holders of Company Common Stock, and (b) Dean Witter Reynolds Inc. (the "Financial Advisor") has delivered to the Board of Directors of the Company its written opinion that, as of such date and based upon and subject to the matters set forth therein, the Offer Consideration to be received by the holders of Company Common Stock (other than Parent, Sub and any other Subsidiary of Parent) in the Offer is fair, from a financial point of view, to such holders. The Company acknowledges and agrees that the Board of Directors of the Company may not withdraw, modify or amend its approval or recommendation of the Offer, this Agreement, the Stockholders Agreement or the Merger except in accordance with Section 5.1(e)(ii). The Company hereby consents to the inclusion in the Offer Documents of the recommendation referred to in this Section 1.3. The Company hereby agrees to file with the SEC, simultaneously with the filing by Parent and Sub of the Schedule 14D-1 (or promptly after such filing), a Solicitation/Recommendation Statement on Schedule 14D-9 (together with all amendments and supplements thereto, the "Schedule 14D-9") containing such recommendations of the Board of Directors of the Company in favor of the Offer and the Merger and otherwise complying with Rule 14d-9 under the Exchange Act. The Schedule 14D-9 shall comply in all material respects with the Exchange Act and any other applicable law and shall contain (or shall be amended in a timely manner to contain) all information that is required to be included therein in accordance with the Exchange Act and the rules and regulations promulgated thereunder 4 8 and any other applicable law. Notwithstanding the foregoing, no agreement or representation hereby is made or shall be made by the Company with respect to Parent, Sub or any other Subsidiary of Parent. The Company, Parent and Sub each agree promptly to correct any information provided by them for use in the Schedule 14D-9 if and to the extent that it shall have become false or misleading in any material respect and the Company further agrees to take all lawful action necessary to cause the Schedule 14D-9 as so corrected to be promptly filed with the SEC and disseminated to the holders of Company Common Stock, in each case as and to the extent required by applicable law. Parent, Sub and their counsel shall be given an opportunity to review and comment on the Schedule 14D-9 and any amendments thereto prior to the filing thereof with the SEC. To the extent practicable, Parent, Sub and their counsel shall also be given reasonable opportunity to review and comment on correspondence with the SEC concerning the Schedule 14D-9 prior to the delivery thereof to the SEC. In connection with the Offer, the Company shall promptly furnish, or cause its transfer agent to furnish, Parent with mailing labels, security position listings and all available listings or computer files containing the names and addresses of the record holders of the Company Common Stock as of the latest practicable date and shall furnish, or cause its transfer agent to furnish, Parent with such information and assistance (including updated lists of stockholders, mailing labels and lists of security positions) as Parent or its agents may reasonably request in communicating the Offer to the record and beneficial holders of Company Common Stock. Subject to the requirements of applicable law, and except for such actions as are necessary to disseminate the Offer Documents and any other documents necessary to consummate the Offer and the Merger, Parent and Sub and each of their affiliates, associates, partners, employees, agents and advisors shall hold in confidence the information contained in such labels and lists, shall use such information only in connection with the Offer and the Merger, and, if this Agreement is terminated for any reason, shall deliver promptly to the Company all copies of such information then in their possession or control. 1.4 Directors. (a) Upon the purchase pursuant to the Offer by Sub of such number of shares of Company Common Stock which represents a majority of the outstanding shares of Company Common Stock (on a fully diluted basis), and from time to time thereafter, Parent shall be entitled to designate such number of directors, rounded up to the next whole number (but in no event more than one less than the total number of directors on the Board of Directors of the Company) as will give Parent, subject to compliance with Section 14(f) of the Exchange Act, representation on the Board of Directors of the Company equal to 5 9 the product of (x) the number of directors on the Board of Directors of the Company (giving effect to any increase in the number of directors pursuant to this Section 1.4) and (y) the percentage that such number of Shares so purchased bears to the aggregate number of Shares outstanding (such number being, the "Board Percentage"), and the Company shall, upon request by Parent and subject to applicable law, promptly satisfy the Board Percentage by (i) increasing the size of the Board of Directors of the Company or (ii) using its best efforts to secure the resignations of such number of directors as is necessary to enable Parent's designees to be elected to the Board of Directors of the Company and shall cause Parent's designees promptly to be so elected, provided that no such action shall be taken which would result in there being, prior to the consummation of the Merger, less than two directors of the Company that are not affiliated with Parent. At the request of Parent, the Company shall take, at the Company's expense, all lawful action necessary to effect any such election, including, without limitation, mailing to its stockholders the information required by Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder, unless such information has previously been provided to the Company's stockholders in the Schedule 14D-9. Parent will supply to the Company in writing and be solely responsible for any information with respect to itself and its nominees, directors and affiliates required by Section 14(f) of the Exchange Act and Rule 14f-1 thereunder. (b) Following the election or appointment of Parent's designees pursuant to this Section 1.4 and prior to the Effective Time of the Merger, any amendment or termination of this Agreement, extension for the performance or waiver of the obligations or other acts of Parent or Sub or waiver of the Company's rights thereunder shall require the concurrence of a majority of directors of the Company then in office who are Continuing Directors. The term "Continuing Director" shall mean (i) each member of the board of directors on the date hereof who voted to approve this Agreement and (ii) any successor to any Continuing Director that was recommended to succeed such Continuing Director by a majority of the Continuing Directors then on the board of directors. ARTICLE II THE MERGER 2.1 The Merger. Upon the terms and subject to the conditions set forth in this Agreement, and in accordance with the DGCL, Sub shall be merged with and into the Company at the Effective Time. At the Effective Time, the separate corporate 6 10 existence of Sub shall cease, and the Company shall continue as the surviving corporation and a direct wholly owned subsidiary of Parent (Sub and the Company are sometimes hereinafter referred to as "Constituent Corporations" and, as the context requires, the Company is sometimes hereinafter referred to as the "Surviving Corporation"), and shall continue under the name "ERO, Inc.". 2.2 Closing. Unless this Agreement shall have been terminated and the transactions herein contemplated shall have been abandoned pursuant to Section 8.1, and subject to the satisfaction or waiver of the conditions set forth in Article VII, the closing of the Merger (the "Closing") shall take place at 10:00 a.m., New York time, on the second business day after satisfaction and/or waiver of all of the conditions set forth in Article VII (the "Closing Date"), at the offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, New York 10153, unless another date, time or place is agreed to in writing by the parties hereto. 2.3 Effective Time of the Merger. Subject to the provisions of this Agreement, the parties hereto shall cause the Merger to be consummated by filing a certificate of merger (the "Certificate of Merger") with the Secretary of State of the State of Delaware, as provided in the DGCL, as soon as practicable on or after the Closing Date. The Merger shall become effective upon such filing or at such time thereafter as is provided in the Certificate of Merger as the Company and Sub shall agree (the "Effective Time"). 2.4 Effects of the Merger. (a) The Merger shall have the effects as set forth in the applicable provisions of the DGCL. (b) The directors of Sub and the officers of the Company immediately prior to the Effective Time shall, from and after the Effective Time, be the initial directors and officers of the Surviving Corporation until their successors have been duly elected or appointed and qualified, or until their earlier death, resignation or removal in accordance with the Surviving Corporation's Certificate of Incorporation and Bylaws. (c) The Certificate of Incorporation of the Company shall be amended and restated in its entirety as set forth on Exhibit B hereto, and, from and after the Effective Time, such amended and restated Certificate of Incorporation shall be the Certificate of Incorporation of the Surviving Corporation, until duly amended in accordance with the terms thereof and the DGCL. 7 11 (d) The Bylaws of the Company shall be amended and restated in their entirety as set forth on Exhibit C hereto and, from and after the Effective Time, such amended and restated Bylaws shall be the Bylaws of the Surviving Corporation until thereafter amended as provided by applicable law, the Certificate of Incorporation or the Bylaws. ARTICLE III EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES 3.1 Effect on Capital Stock. At the Effective Time, by virtue of the Merger and without any action on the part of any holder of shares of Company Common Stock or any holder of shares of capital stock of Sub: (a) Capital Stock of Sub. Each share of the capital stock of Sub issued and outstanding immediately prior to the Effective Time shall be converted into and become one fully paid and nonassessable share of Common Stock, par value $0.01 per share, of the Surviving Corporation. (b) Cancellation of Treasury Stock and Parent-Owned Stock. Each share of Company Common Stock and all other shares of capital stock of the Company that are owned by the Company and all shares of Company Common Stock and other shares of capital stock of the Company owned by Parent or Sub shall be canceled and retired and shall cease to exist and no consideration shall be delivered or deliverable in exchange therefor. 3.2 Conversion of Securities. At the Effective Time, by virtue of the Merger and without any action on the part of Sub, the Company or the holders of any of the shares thereof: (a)(i) Subject to the other provisions of this Section 3.2, each share of Company Common Stock issued and outstanding immediately prior to the Effective Time (excluding shares owned, directly or indirectly, by the Company or by Parent, Sub or any other Subsidiary of Parent and Dissenting Shares (as defined in Section 3.6)) shall be converted into the right to receive the per share amount actually paid in the Offer, payable to the holder thereof in cash, without any interest thereon (the amount so paid in the Offer, in cash, is herein referred to as the "Merger Consideration"), upon surrender and exchange of the Certificate (as defined in Section 3.3) representing such share of Company Common Stock. As used in this Agreement, the word "Subsidiary", with respect to any party, 8 12 means any corporation, partnership, joint venture or other organization, whether incorporated or unincorporated, of which: (i) such party or any other Subsidiary of such party is a general partner; (ii) voting power to elect a majority of the Board of Directors or others performing similar functions with respect to such corporation, partnership, joint venture or other organization is held by such party or by any one or more of its Subsidiaries, or by such party and any one or more of its Subsidiaries; or (iii) at least 25% of the equity, other securities or other interests is, directly or indirectly, owned or controlled by such party or by any one or more of its Subsidiaries, or by such party and any one or more of its Subsidiaries. (ii) All such shares of Company Common Stock, when converted as provided in Section 3.2(a)(i), no longer shall be outstanding and shall automatically be canceled and retired and shall cease to exist, and each Certificate previously evidencing such Shares shall thereafter represent only the right to receive the Merger Consideration. The holders of Certificates previously evidencing Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to the Company Common Stock except as otherwise provided herein or by law and, upon the surrender of Certificates in accordance with the provisions of Section 3.3, shall only represent the right to receive for their Shares, the Merger Consideration, without any interest thereon. 3.3 Payment for Shares. (a) Paying Agent. Prior to the Effective Time, Parent shall appoint a United States bank or trust company reasonably acceptable to the Company to act as paying agent (the "Paying Agent") for the payment of the Merger Consideration, and Parent shall cause the Surviving Corporation to deposit with the Paying Agent in a separate fund established for the benefit of the holders of shares of Company Common Stock, for payment in accordance with this Article III, through the Paying Agent (the "Payment Fund"), immediately available funds in amounts necessary to make the payments pursuant to Section 3.2(a)(i) and this Section 3.3 to holders (other than the Company or Parent, Sub or any other Subsidiary of Parent, or holders of Dissenting Shares). The Paying Agent shall, pursuant to irrevocable instructions, pay the Merger Consideration out of the Payment Fund. If for any reason (including losses) the Payment Fund is inadequate to pay the amounts to which holders of shares of Company Common Stock shall be entitled under this Section 3.3, Parent shall take all steps necessary to enable or cause the Surviving Corporation to deposit in trust additional cash with 9 13 the Paying Agent sufficient to make all payments required under this Agreement, and Parent and the Surviving Corporation shall in any event be liable for payment thereof. The Payment Fund shall not be used for any purpose except as expressly provided in this Agreement. (b) Payment Procedures. As soon as reasonably practicable after the Effective Time, the Surviving Corporation shall instruct the Paying Agent to mail to each holder of record (other than the Company or Parent, Sub or any other Subsidiary of Parent) of a Certificate or Certificates which, immediately prior to the Effective Time, evidenced outstanding shares of Company Common Stock (the "Certificates"), (i) a form of letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon proper delivery of the Certificates to the Paying Agent, and shall be in such form and have such other provisions as the Surviving Corporation reasonably may specify) and (ii) instructions for use in effecting the surrender of the Certificates in exchange for payment of the Merger Consideration. Upon surrender of a Certificate for cancellation to the Paying Agent together with such letter of transmittal, duly executed, and such other customary documents as may be required pursuant to such instructions, the holder of such Certificate shall be entitled to receive in respect thereof cash in an amount equal to the product of (x) the number of shares of Company Common Stock represented by such Certificate and (y) the Merger Consideration, and the Certificate so surrendered shall forthwith be canceled. No interest shall be paid or accrued on the Merger Consideration payable upon the surrender of any Certificate. If payment is to be made to a person other than the person in whose name the surrendered Certificate is registered, it shall be a condition of payment that the Certificate so surrendered shall be properly endorsed or otherwise in proper form for transfer and that the person requesting such payment shall pay any transfer or other taxes required by reason of the payment to a person other than the registered holder of the surrendered Certificate or established to the satisfaction of the Surviving Corporation that such tax has been paid or is not applicable. Until surrendered in accordance with the provisions of this Section 3.3(b), each Certificate (other than Certificates representing Shares owned by the Company or Parent, Sub or any other Subsidiary of Parent) shall be deemed at any time after the Effective Time to represent for all purposes only the right to receive the Merger Consideration. (c) Termination of Payment Fund; Interest. Any portion of the Payment Fund which remains undistributed to the holders of Company Common Stock for 270 days after the Effective 10 14 Time shall be delivered to the Surviving Corporation, upon demand, and any holders of Company Common Stock who have not theretofore complied with this Article III and the instructions set forth in the letter of transmittal mailed to such holder after the Effective Time shall thereafter look only to the Surviving Corporation for payment of the Merger Consideration to which they are entitled. All interest accrued in respect of the Payment Fund shall inure to the benefit of and be paid to the Surviving Corporation. (d) No Liability. None of Parent, the Company or the Surviving Corporation shall be liable to any holder of shares of Company Common Stock for any cash from the Payment Fund delivered to a public official pursuant to any applicable abandoned property, escheat or similar law. 3.4 Stock Transfer Books. At the Effective Time, the stock transfer books of the Company shall be closed and there shall be no further registration of transfers of shares of Company Common Stock thereafter on the records of the Company. On or after the Effective Time, any certificates presented to the Paying Agent or Parent for any reason, except notation thereon that a stockholder has elected to exercise his rights to appraisal pursuant to the DGCL, shall be converted into the Merger Consideration as provided in this Article III. 3.5 Stock Option Plans. At the Effective Time, each holder of a then outstanding option to purchase Shares under any of the Company's 1988 Key Employee Stock Option Plan, 1992 Key Employee Stock Option Plan and 1992 Directors' Stock Option Plan (collectively, the "Stock Option Plans"), or otherwise set forth on Schedule 4.1(b), whether or not then exercisable or vested (collectively, the "Options"), shall, in cancellation and settlement thereof, receive for each Share subject to such Option an amount (subject to any applicable withholding tax) in cash equal to the difference between the amount per share actually paid in the Offer and the per Share exercise price of such Option to the extent such difference is a positive number (such amount being hereinafter referred to as, the "Option Consideration"); provided, however, that with respect to any person subject to Section 16(a) of the Exchange Act, any such amount shall be paid as soon as practicable after the first date payment can be made without liability to such person under Section 16(b) of the Exchange Act. Upon receipt of the Option Consideration, the Option shall be canceled. The surrender of an Option to the Company in exchange for the Option Consideration shall be deemed a release of any and all rights the holder had or may have had in respect of such Option. Prior to the expiration of the Offer, the Company shall use its reasonable efforts to obtain all 11 15 necessary consents or releases from holders of Options under the Stock Option Plans and take all such other lawful action as may be reasonably necessary to give effect to the transactions contemplated by this Section 3.5. The Stock Option Plans shall terminate as of the Effective Time, and the provisions in any other plan, program or arrangement providing for the issuance or grant of any other interest in respect of the capital stock of the Company or any Subsidiary thereof shall be canceled as of the Effective Time. Prior to the expiration of the Offer, the Company shall use its reasonable efforts to take all action necessary (including causing the Board of Directors of the Company to take such actions as are allowed by the Stock Option Plans) to (i) ensure that, following the Effective Time, no participant in the Stock Option Plans or any other plans, programs or arrangements shall have any right thereunder to acquire equity securities of the Company, the Surviving Corporation or any Subsidiary thereof and (ii) terminate all such plans, programs and arrangements. 3.6 Dissenting Shares. Notwithstanding any other provisions of this Agreement to the contrary, shares of Company Common Stock that are outstanding immediately prior to the Effective Time and which are held by stockholders who shall have not voted in favor of the Merger or consented thereto in writing and who shall have demanded properly appraisal for such shares in accordance with Section 262 of the DGCL (collectively, the "Dissenting Shares") shall not be converted into or represent the right to receive the Merger Consideration. Such stockholders instead shall be entitled to receive payment of the appraised value of such shares of Company Common Stock held by them in accordance with the provisions of such Section 262 of the DGCL, except that all Dissenting Shares held by stockholders who shall have failed to perfect or who effectively shall have withdrawn or otherwise lost their rights to appraisal of such shares of Company Common Stock under such Section 262 of the DGCL shall thereupon be deemed to have been converted into and to have become exchangeable, as of the Effective Time, for the right to receive, without any interest thereon, the Merger Consideration upon surrender in the manner provided in Section 3.3, of the Certificate or Certificates that, immediately prior to the Effective Time, evidenced such shares of Company Common Stock. ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Representations and Warranties of the Company. The Company represents and warrants to Parent and Sub as follows: 12 16 (a) Organization, Standing and Power. Each of the Company and its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of its respective jurisdiction of incorporation, has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted, and is duly qualified to do business as a foreign corporation and in good standing to conduct business in each jurisdiction in which the business it is conducting, or the operation, ownership or leasing of its properties, makes such qualification necessary, other than in such jurisdictions where the failure so to qualify could not reasonably be expected to (i) have a Material Adverse Effect (as defined below) with respect to the Company or (ii) materially impair the ability of the Company to consummate the transactions contemplated by this Agreement. The Company has heretofore made available to Parent complete and correct copies of its and its Subsidiaries' respective Certificates of Incorporation and Bylaws. All Subsidiaries of the Company and their respective jurisdictions of incorporation or organization are identified on Schedule 4.1(a). As used in this Agreement: a "Material Adverse Effect" shall mean, with respect to any party, any events, changes or effects which, individually or in the aggregate, could reasonably be expected to have a material adverse effect on the business, results of operations or financial condition of such party and its Subsidiaries, taken as a whole; provided, however, that the matters disclosed on Exhibit D hereto shall not be considered in determining whether one or more events, changes or effects could reasonably be expected to have a Material Adverse Effect on the Company. (b) Capital Structure. As of the date hereof, the authorized capital stock of the Company consists of 50,000,000 Shares and 9,947,700 shares of preferred stock, par value $.01 per share (the "Preferred Stock"). As of the date hereof: (i) 10,274,300 Shares are issued and outstanding; (ii) no shares of Preferred Stock are issued and outstanding; and (iii) 1,458,000 Shares are reserved for issuance pursuant to Options outstanding under the Stock Option Plans. Except for the issuance of Shares pursuant to the exercise of outstanding Options, there are no employment, executive termination or similar agreements providing for the issuance of Shares. As of the date hereof, 120,000 Shares are held by the Company and no Shares are held by Subsidiaries of the Company. No bonds, debentures, notes or other instruments or evidence of indebtedness having the right to vote (or convertible into, or exercisable or exchangeable for, securities having the right to vote) on any matters on which the Company stockholders may vote ("Company Voting Debt") were issued or outstanding. All outstanding Shares are validly issued, fully paid and 13 17 nonassessable and are not subject to preemptive or other similar rights. Except as set forth on Schedule 4.1(b), all outstanding shares of capital stock of the Subsidiaries of the Company are owned by the Company or a direct or indirect Subsidiary of the Company, free and clear of all liens, charges, encumbrances, claims and options of any nature. Except as set forth in this Section 4.1(b), there are outstanding: (i) no shares of capital stock, Company Voting Debt or other voting securities of the Company; (ii) no securities of the Company or any Subsidiary of the Company convertible into, or exchangeable or exercisable for, shares of capital stock, Company Voting Debt or other voting securities of the Company or any Subsidiary of the Company; and (iii) no options, warrants, calls, rights (including preemptive rights), commitments or agreements to which the Company or any Subsidiary of the Company is a party or by which it is bound, in any case obligating the Company or any Subsidiary of the Company to issue, deliver, sell, purchase, redeem or acquire, or cause to be issued, delivered, sold, purchased, redeemed or acquired, additional shares of capital stock or any Company Voting Debt or other voting securities of the Company or of any Subsidiary of the Company, or obligating the Company or any Subsidiary of the Company to grant, extend or enter into any such option, warrant, call, right, commitment or agreement. Except as set forth on Schedule 4.1(b), since December 31, 1996, the Company has not (i) granted any options, warrants or rights to purchase shares of Company Common Stock or (ii) amended or repriced any Option or any of the Stock Option Plans. Set forth on Schedule 4.1(b) is a list of all outstanding options, warrants and rights to purchase shares of Company Common Stock and the exercise prices relating thereto. Except as disclosed in the Company SEC Documents (as defined below), there are not as of the date hereof and there will not be at the Effective Time any stockholder agreements, voting trusts or other agreements or understandings to which the Company is a party or by which it is bound relating to the voting of any shares of the capital stock of the Company which will limit in any way the solicitation of proxies by or on behalf of the Company from, or the casting of votes by, the stockholders of the Company with respect to the Merger. There are no restrictions on the Company to vote the stock of any of its Subsidiaries. (c) Authority; No Violations; Consents and Approvals. (i) The Company has all requisite corporate power and authority to enter into this Agreement and, subject to the Company Stockholder Approval (as defined in Section 4.1(c)(iii)), to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company, 14 18 subject, if required with respect to consummation of the Merger, to the Company Stockholder Approval. This Agreement has been duly executed and delivered by the Company and, subject, if required with respect to consummation of the Merger, to the Company Stockholder Approval, and assuming that this Agreement constitutes the valid and binding agreement of Parent and Sub, constitutes a valid and binding obligation of the Company enforceable in accordance with its terms and conditions except that the enforcement hereof may be limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). (ii) Except as set forth on Schedule 4.1(c)(ii), the execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by the Company will not conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both) under, or give rise to a right of termination, cancellation or acceleration (including pursuant to any put right) of any obligation or the loss of a material benefit under, or the creation of a lien, pledge, security interest or other encumbrance on assets or property, or right of first refusal with respect to any asset or property (any such conflict, violation, default, right of termination, cancellation or acceleration, loss, creation or right of first refusal, a "Violation"), pursuant to, (A) any provision of the Certificate of Incorporation or Bylaws of the Company or any of its Subsidiaries or (B) except as to which requisite waivers or consents have been obtained and assuming the consents, approvals, authorizations or permits and filings or notifications referred to in paragraph (iii) of this Section 4.1(c) are duly and timely obtained or made and, if required, the Company Stockholder Approval has been obtained, result in any Violation of (1) any loan or credit agreement, note, mortgage, deed of trust, indenture, lease, Benefit Plan (as defined in Section 4.1(i)), Company Permit (as defined in Section 4.1(f)), or any other agreement, obligation, instrument, concession, franchise, or license or (2) any judgment, order, decree, statute, law, ordinance, rule or regulation applicable to the Company or any of its Subsidiaries or their respective properties or assets (collectively, "Laws"), except in the case of clause (1) and (2) for any Violations that, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company. The Board of Directors of the Company has taken all actions necessary under the Company's Amended and Restated Certificate of Incorporation, including approving the transactions contemplated by this Agreement, to ensure that 15 19 Section 1 of Article Nine of the Company's Amended and Restated Certificate of Incorporation does not, and will not, apply to the transactions contemplated in this Agreement. The Board of Directors of the Company has taken all actions necessary under the DGCL, including approving the transactions contemplated by this Agreement and the Stockholders Agreement, to ensure that Section 203 of the DGCL does not, and will not, apply to the transactions contemplated in this Agreement or the Stockholders Agreement. (iii) No consent, approval, order or authorization of, or registration, declaration or filing with, notice to, or permit from any court, administrative agency or commission or other governmental authority or instrumentality, domestic or foreign (a "Governmental Entity"), is required by or with respect to the Company or any of its Subsidiaries in connection with the execution and delivery of this Agreement by the Company or the consummation by the Company of the transactions contemplated hereby, except for: (A) the filing of a pre-merger notification and report form by the Company under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the expiration or termination of the applicable waiting period thereunder; (B) the filing with the SEC of (x) a proxy statement (if required by applicable law) in definitive form relating to a meeting of the holders of Company Common Stock to approve the Merger (such proxy statement as amended or supplemented from time to time being hereinafter referred to as the "Proxy Statement"), (y) the Schedule 14D-9 in connection with the Offer, and (z) such reports under and such other compliance with the Exchange Act and the rules and regulations thereunder as may be required in connection with this Agreement and the transactions contemplated hereby; (C) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware and appropriate documents with the relevant authorities of other states in which the Company does business; (D) such filings and approvals as may be required by any applicable state securities, "blue sky" or takeover laws; (E) such filings and approvals as may be required by any foreign pre-merger notification, securities, corporate or other law, rule or regulation (including the Investment Canada Act); (F) such filings in connection with any state or local tax which is attributable to the beneficial ownership of the Company's or its Subsidiaries' real property, if any (collectively, the "Gains and Transfer Taxes"); (G) such other filings and consents as may be required under any environmental, health or safety law or regulation pertaining to any notification, disclosure or required approval necessitated by the Merger or the transactions contemplated by this Agreement; (H) the approval of this Agreement and the Merger by the holders of a majority of the 16 20 outstanding Shares ("Company Stockholder Approval") and (I) such other consents, approvals, orders, authorizations, registrations, declarations, filings, notices or permits the failure of which to be obtained or made could not reasonably be expected to have a Material Adverse Effect on the Company. (d) SEC Documents. The Company has made available to Parent a true and complete copy of each report, schedule, registration statement and definitive proxy statement filed by the Company with the SEC since January 1, 1995 and prior to the date of this Agreement (the "Company SEC Documents"), which are all the documents (other than preliminary material) that the Company was required to file with the SEC since such date. As of their respective dates, the Company SEC Documents complied in all material respects with the requirements of the Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act, as the case may be, and the rules and regulations of the SEC promulgated thereunder applicable to such Company SEC Documents, and none of the Company SEC Documents contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. Except as disclosed on Schedule 4.1(d), the financial statements of the Company included in the Company SEC Documents complied as to form in all material respects with the published rules and regulations of the SEC with respect thereto, were prepared in accordance with generally accepted accounting principles ("GAAP") applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto or, in the case of the unaudited statements, as permitted by Rule 10-01 of Regulation S-X of the SEC) and fairly present in accordance with applicable requirements of GAAP (subject, in the case of the unaudited statements, to normal, recurring adjustments, which will not be material, either individually or in the aggregate) the consolidated financial position of the Company and its consolidated Subsidiaries as of their respective dates and the consolidated results of operations and the consolidated cash flows of the Company and its consolidated Subsidiaries for the periods presented therein. (e) Information Supplied. None of the information supplied or to be supplied by the Company specifically for inclusion or incorporation by reference in (i) any of the Offer Documents will, at the time the Offer Documents are first published, sent or given to holders of Company Common Stock, and at any time they are amended or supplemented, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, 17 21 not misleading, and (ii) the Proxy Statement will, on the date it is first mailed to the holders of the Company Common Stock or at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. If, at any time prior to the expiration of the Offer or the Effective Time, any event with respect to the Company or any of its Subsidiaries, or with respect to other information supplied by the Company specifically for inclusion in the Offer Documents or the Proxy Statement, shall occur which is required to be described in an amendment of, or a supplement to, the Offer Documents or the Proxy Statement, as the case may be, such event shall be so described, and such amendment or supplement shall be promptly filed with the SEC and, as required by law, disseminated to the stockholders of the Company. The Proxy Statement, insofar as it relates to the Company or its Subsidiaries or other information supplied by the Company specifically for inclusion therein will comply as to form, in all material respects, with the provisions of the Exchange Act or the rules and regulations thereunder. Notwithstanding the foregoing, the Company makes no representation or warranty with respect to (i) the information supplied or to be supplied by Parent or Sub for inclusion in the Offer Documents or the Proxy Statement or (ii) except as provided in the immediately following sentence, any projections, forward-looking statements or similar information provided to Parent or Sub that is not of a historical nature. The budget prepared by the Company and attached to Schedule 4.1(e) hereto was prepared in good faith based upon reasonable assumptions. (f) Compliance with Applicable Laws. The Company and its Subsidiaries hold all permits, licenses, variances, exemptions, orders, franchises and approvals of all Governmental Entities necessary for the lawful conduct of their respective businesses (the "Company Permits"), except where the failure to hold any such Company Permits could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company. The Company and its Subsidiaries are in compliance with the terms of the Company Permits, except where the failure to be in compliance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company. A list of the material Company Permits is set forth on Schedule 4.1(f). Except as disclosed in Schedule 4.1(f), the businesses of the Company and its Subsidiaries are not being conducted in violation of any law, ordinance or regulation of any Governmental Entity except for any such violations which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company. As of the date of this Agreement, no investigation or 18 22 review by any Governmental Entity with respect to the Company or any of its Subsidiaries is pending or, to the knowledge of the Company, has been threatened which could reasonably be expected to have a Material Adverse Effect on the Company. (g) Litigation. Except as set forth on Schedule 4.1(g), there is no suit, action or proceeding pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary of the Company ("Company Litigation"), nor is there any material judgment, decree, injunction, rule or order of any Governmental Entity or arbitrator outstanding against the Company or any Subsidiary of the Company ("Company Order"). In addition, except as expressly set forth on Schedule 4.1(g) as having such effect, none of the claims and judgments pending, or to the knowledge of the Company, threatened pursuant to all Company Litigation and Company Orders, could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company. (h) Taxes. Except as set forth on Schedule 4.1(h) hereto: (i) All Tax Returns required to be filed by or with respect to the Company and each of its Subsidiaries have been duly and timely filed (taking into account all valid extensions of filing dates), except where the failure to file such Tax Returns would not have a Material Adverse Effect on the Company, and all such Tax Returns are true, correct and complete in all material respects. The Company and each of its Subsidiaries has duly and timely paid (or there has been paid on its behalf) all Taxes that are due, except to the extent that the failure to pay such Taxes would not have a Material Adverse Effect the Company and except for Taxes being contested in good faith by appropriate proceedings and for which adequate reserves have been established in the Company's audited financial statements for the year ended December 31, 1996 in accordance with generally accepted accounting principles. With respect to any period for which Taxes are not yet due with respect to the Company or any Subsidiary, the Company and each of its Subsidiaries has made due and sufficient current accruals for such Taxes in accordance with GAAP in the most recent financial statements contained in the Company SEC Documents. The Company and each of its Subsidiaries has made (or there has been made on its behalf) all required estimated Tax payments sufficient to avoid any material underpayment penalties. The Company and each of its Subsidiaries has withheld and paid all material Taxes required by all applicable laws to be withheld or paid in 19 23 connection with any amounts paid or owing to any employee, creditor, independent contractor or other third party. (ii) There are no outstanding agreements, waivers, or arrangements extending the statutory period of limitation applicable to any claim for, or the period for the collection or assessment of, material Taxes due from or with respect to the Company or any of its Subsidiaries for any taxable period. No audit or other proceeding by any court, governmental or regulatory authority, or similar person is pending or, to the knowledge of the Company, threatened in regard to any material Taxes due from or with respect to the Company or any of the Subsidiaries or any material Tax Return filed by or with respect to the Company or any Subsidiary other than normal and routine audits by nonfederal governmental authorities. Neither the Company nor any Subsidiary of the Company has received notice that any assessment of Taxes is proposed against the Company or any of its Subsidiaries or any of their assets which, if ultimately paid by the Company or any Subsidiary of the Company would have a Material Adverse Effect on the Company. (iii) No consent to the application of Section 341(f)(2) of the Code (or any predecessor provision) has been made or filed by or with respect to the Company or any of its Subsidiaries or any of their assets. None of the Company or any of its Subsidiaries has agreed to make any adjustment pursuant to Section 481(a) of the Code (or any predecessor provision) by reason of any change in any accounting method, and there is no application pending with any taxing authority requesting permission for any changes in any accounting method of the Company or any of its Subsidiaries which, in each respective case, will or would reasonably cause the Company or any of is Subsidiaries to include any material adjustment in taxable income for any taxable period (or portion thereof) ending after the Closing Date. (iv) None of the Company or any of its Subsidiaries is a party to, is bound by, or has any obligation under, any Tax sharing agreement, Tax allocation agreement or similar contract other than any agreement to which the Company and its Subsidiaries are the sole parties. (v) There is no contract, agreement, plan or arrangement covering any person that, individually or collectively, could give rise to the payment of any amount that would not be deductible by the Company or any of its Subsidiaries by reason of Section 280G of the Code. 20 24 (vi) The term "Code" shall mean the Internal Revenue Code of 1986, as amended. The term "Taxes" shall mean all taxes, charges, fees, levies, or other similar assessments or liabilities, including without limitation (a) income, gross receipts, ad valorem, premium, excise, real property, personal property, sales, use, transfer, withholding, employment, payroll, and franchise taxes imposed by the United States of America, or by any state, local, or foreign government, or any subdivision, agency, or other similar person of the United States or any such government; and (b) any interest, fines, penalties, assessments, or additions to taxes resulting from, attributable to, or incurred in connection with any Tax or any contest, dispute, or refund thereof. The term "Tax Returns" shall mean any report, return, or statement required to be supplied to a taxing authority in connection with Taxes. (i) Pension And Benefit Plans; ERISA. (i) Schedule 4.1(i)(i) sets forth a complete and correct list of: (A) all "employee benefit plans", as defined in Section 3(3) of ERISA, maintained by the Company or any of its Subsidiaries to which Company or any of its Subsidiaries has any obligation or liability, contingent or otherwise ("Benefit Plans"); and (B) all employment or consulting agreements, and all bonus or other incentive compensation, deferred compensation, salary continuation, disability, stock award, stock option, stock purchase or other material employee benefit policies or arrangements which the Company or any of its Subsidiaries maintains or to which the Company or any of its Subsidiaries has any obligation or liability (contingent or otherwise) (the "Employee Arrangements"). (ii) With respect to each Benefit Plan and Employee Arrangement, a complete and correct copy of each of the following documents (if applicable) has been made available to Purchaser: (i) the most recent plan and related trust documents, and all amendments thereto; (ii) the most recent summary plan description, and all related summaries of material modifications thereto; (iii) the most recent Form 5500 (including schedules and attachments); (iv) the 21 25 most recent IRS determination letter; and (v) the most recent actuarial reports. (iii) To the Company's knowledge, the Company and its Subsidiaries do not currently have and have not during the preceding six years had any obligation or liability (contingent or otherwise) under Title IV of ERISA. (iv) The Benefit Plans and their related trusts intended to qualify under Sections 401(a) and 501(a) of the Code, respectively, are qualified under such sections. (v) All contributions or other payments required to have been made by the Company or any of its Subsidiaries to or under any Benefit Plan or Employee Arrangement by applicable law or the terms of such Benefit Plan or Employee Arrangement (or any agreement relating thereto) have been timely and properly made or are properly accrued on the Company's audited financial statements for the year ended December 31, 1996 in accordance with generally accepted accounting principles. (vi) The Benefit Plans and Employee Arrangements have been maintained and administered in all material respects in accordance with their terms and applicable laws. (vii) Except as disclosed in Schedule 4.1(i)(vii), there are no pending or, to the best knowledge of the Company, threatened actions, claims or proceedings against or relating to any Benefit Plan or Employee Arrangement other than routine benefit claims by persons entitled to benefits thereunder and other than actions, claims or proceedings which, individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect on the Company. (viii) Except as disclosed in Schedule 4.1(i)(viii), the Company and its Subsidiaries do not maintain or have an obligation to contribute to retiree life or retiree health plans which provide for continuing benefits or coverage for current or former officers, directors or employees of the Company or any of its Subsidiaries except (i) as may be required under Part 6 of Title I of ERISA) and at the sole expense of the participant or the participant's beneficiary or (ii) a medical expense reimbursement account plan pursuant to Section 125 of the Code. 22 26 (j) Absence of Certain Changes or Events. Except as set forth on Exhibit D or Schedule 4.1(j) or as contemplated by this Agreement, since December 31, 1996, the business of the Company and its Subsidiaries has been carried on only in the ordinary and usual course and no event or events has or have occurred that (either individually or in the aggregate) has had, or reasonably could be expected to have, a Material Adverse Effect on the Company. (k) No Undisclosed Material Liabilities. Except as specifically and individually set forth on Schedule 4.1(k) or the other schedules hereto (specific reference to which shall be made on Schedule 4.1(k)), there are no liabilities of the Company or any Subsidiary of any kind whatsoever, whether accrued, contingent, absolute, determined, determinable or otherwise, that are material to the Company and its Subsidiaries considered as a whole other than: (i) liabilities reflected on the Company's audited financial statements (together with the related notes thereto) filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1996 (as filed with the SEC); and (ii) liabilities under this Agreement. (l) Opinion of Financial Advisor. The Company has received the opinion of the Financial Advisor dated April 10, 1997, to the effect that, as of the date thereof, the Offer Consideration to be received by the holders of Company Common Stock in the Offer and the Merger Consideration to be received by the holders of Company Common Stock in the Merger is fair from a financial point of view to such holders, a signed, true and complete copy of which opinion shall be delivered to Parent, and such opinion has not been withdrawn or modified. True and complete copies of all agreements and understandings between the Company or any of its affiliates and the Financial Advisor relating to the transactions contemplated by this Agreement are attached hereto as Schedule 4.1(l). (m) Vote Required. In the event that Section 253 of the DGCL is inapplicable and unavailable to effectuate the Merger, the affirmative vote of the holders of a majority of the outstanding shares of Company Common Stock is the only vote of the holders of any class or series of the Company's capital stock necessary (under applicable law or otherwise) to approve the Merger and this Agreement and the transactions contemplated hereby. (n) Labor Matters. Except to the extent as such could not reasonably be expected to have a Material Adverse Effect on the Company or as set forth on Schedule 4.1(n): 23 27 (i) Neither the Company nor any of its Subsidiaries is a party to any labor or collective bargaining agreement, and no employees of Company or any of its Subsidiaries are represented by any labor organization. Within the preceding three years, there have been no representation or certification proceedings, or petitions seeking a representation proceeding, pending or, to the knowledge of the Company, threatened to be brought or filed with the National Labor Relations Board or any other labor relations tribunal or authority. Within the preceding three years, to the knowledge of Company, there have been no organizing activities involving Company or any of its Subsidiaries with respect to any group of employees of Company or any of its Subsidiaries. (ii) There are no strikes, work stoppages, slowdowns, lockouts, material arbitrations or material grievances or other material labor disputes pending or, to the knowledge of the Company, threatened against or involving Company or any of its Subsidiaries. There are no unfair labor practice charges, grievances or complaints pending or, to the knowledge of Company, threatened by or on behalf of any employee or group of employees of Company or any of its Subsidiaries. (iii) There are no complaints, charges or claims against Company or any of its Subsidiaries pending or, to the knowledge of Company, threatened to be brought or filed with any governmental authority, arbitrator or court based on, arising out of, in connection with, or otherwise relating to the employment or termination of employment of any individual by Company or any of its Subsidiaries. (iv) Each of the Company and its Subsidiaries is in material compliance with all laws, regulations and orders relating to the employment of labor, including all such laws, regulations and orders relating to wages, hours, collective bargaining, discrimination, civil rights, safety and health, workers' compensation and the collection and payment of withholding and/or social security taxes and any similar tax. (v) Since July 31, 1996, there has been no "mass layoff" or "plant closing" (as defined by the Worker Adjustment Retraining and Notification Act of 1988, as amended ("WARN Act") with respect to the Company or any of its Subsidiaries. 24 28 (o) Intangible Property. Each of the Company and its Subsidiaries owns or has a right to use each trademark, trade name, patent, service mark, brand mark, brand name, computer program, database, industrial design and copyright owned or used in connection with the operation of its businesses, including any registrations thereof and pending applications therefor, and each license or other contract relating thereto (collectively, the "Company Intangible Property"), free and clear of any and all liens, claims or encumbrances, except where the failure to own or have a right to use such property could not reasonably be expected to have a Material Adverse Effect on the Company. To the Company's knowledge, Schedule 4.1(o) hereto sets forth a complete list of the Company Intangible Property. Except to the extent that such could not reasonably be expected to have a Material Adverse Effect on the Company, the use of the Company Intangible Property by the Company or its Subsidiaries does not conflict with, infringe upon, violate or interfere with or constitute an appropriation of any right, title, interest or goodwill, including, without limitation, any intellectual property right, trademark, trade name, patent, service mark, brand mark, brand name, computer program, database, industrial design, copyright or any pending application therefor of any other person. (p) Environmental Matters. (i) For purposes of this Agreement: (A) "Environmental Costs and Liabilities" means any and all losses, liabilities, obligations, damages, fines, penalties, judgments, actions, claims, costs and expenses (including, without limitation, fees, disbursements and expenses of legal counsel, experts, engineers and consultants and the reasonable costs of investigation and feasibility studies and the reasonable costs to clean up, remove, treat, or in any other way address any Hazardous Materials) arising with respect to any violation of or liability arising pursuant to or under any Environmental Law. (B) "Environmental Law" means any applicable law regulating or prohibiting Releases of Hazardous Materials into any part of the natural environment, or pertaining to the protection of natural resources, the environment and public and employee health and safety from Hazardous Materials including, without limitation, the Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA") (42 U.S.C. Section 9601 et seq.), the Hazardous Materials Transportation Act 25 29 (49 U.S.C. Section 1801 et seq.), the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), the Clean Water Act (33 U.S.C. Section 1251 et seq.), the Clean Air Act (33 U.S.C. Section 7401 et seq.), the Toxic Substances Control Act (15 U.S.C. Section 7401 et seq.), the Federal Insecticide, Fungicide, and Rodenticide Act (7 U.S.C. Section 136 et seq.), and the Occupational Safety and Health Act (29 U.S.C. Section 651 et seq.) ("OSHA") and the regulations promulgated pursuant thereto, and any such applicable state or local statutes, including, without limitation, the Industrial Site Recovery Act ("IRSA"), and the regulations promulgated pursuant thereto, as such laws have been and may be amended or supplemented through the Closing Date; (C) "Hazardous Material" means any substance, material or waste which is regulated with respect to its toxic or otherwise hazardous character by any public or governmental authority in the jurisdictions in which the applicable party or its Subsidiaries conducts business, or the United States, including, without limitation, any material or substance which is defined as a "hazardous waste," "hazardous material," "hazardous substance," "extremely hazardous waste" or "restricted hazardous waste," "contaminant," "toxic waste" or "toxic substance" under any provision of Environmental Law and shall also include, without limitation, petroleum, petroleum products, asbestos, polychlorinated biphenyls and radioactive materials; (D) "Release" means any release, spill, effluent, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching, or migration into the environment; and (E) "Remedial Action" means all actions, including, without limitation, any capital expenditures, required by a governmental entity or required under any Environmental Law, or voluntarily undertaken to (I) clean up, remove, treat, or in any other way ameliorate or address any Hazardous Materials or other substance in the environment; (II) prevent the Release or threat of Release, or minimize the further Release of any Hazardous Material so it does not endanger or threaten to endanger the public health or welfare or the environment; (III) perform pre-remedial studies and investigations or post-remedial monitoring and care pertaining or relating to a Release; or 26 30 (IV) bring the applicable party into compliance with any Environmental Law. (ii) Except as set forth on Schedule 4.1(p) hereto: (A) The operations of the Company and its Subsidiaries have been and, as of the Closing Date, will be, in compliance in all respects with all Environmental Laws except for any such noncompliance which could not reasonably be expected to result in a Material Adverse Effect on the Company; (B) The Company and its Subsidiaries have obtained and will, as of the Closing Date, maintain all permits required under applicable Environmental Laws for the continued operations of their respective businesses, except such permits the lack of which would not materially impair the ability of the Company and its Subsidiaries to continue operations; (C) The Company and its Subsidiaries are not subject to any outstanding material written orders from, or material written agreements with, any Governmental Entity or other person respecting (A) violations or liability pursuant to Environmental Laws, (B) Remedial Action or (C) any Release or threatened Release of a Hazardous Material; (D) The Company and its Subsidiaries have not received any written communication alleging, with respect to any such party, the material violation of or material liability under any Environmental Law, which violation or liability is outstanding; (E) Neither the Company nor any of its Subsidiaries has any contingent liability in connection with the Release of any Hazardous Material into the environment (whether on-site or off- site) which would be reasonably likely to result in the Company and its Subsidiaries incurring Environmental Costs and Liabilities which could reasonably be expected to result in a Material Adverse Effect on the Company; (F) The operations of the Company or its Subsidiaries do not involve the transportation, treatment, storage or disposal of hazardous waste, as defined and regulated under permit requirements set forth in 40 C.F.R. Parts 260-270 (in effect as of the date of this Agreement) or any state equivalent; 27 31 (G) To the knowledge of the Company, there is not now nor has there been in the past, on or in any property of the Company or its Subsidiaries any of the following: (A) any underground storage tanks or surface impoundments containing Hazardous Materials, (B) any asbestos-containing materials, or (C) any polychlorinated biphenyls in regulated quantities; and (H) No judicial or administrative proceedings or governmental investigations are pending or, to the knowledge of the Company, threatened against the Company or any of its Subsidiaries alleging the violation of or seeking to impose liability pursuant to any Environmental Law, except for any such proceedings or investigations that could not reasonably be expected to result in a Material Adverse Effect on the Company. (iii) This Section 4.1(p) sets forth the sole and exclusive representations and warranties of the Company relating to Environmental Matters, including, without limitation, any matters arising under Environmental Laws. (q) Real Property. (i) Schedule 4.1(q)(i) sets forth all of the real property owned in fee by the Company and its Subsidiaries. Each of the Company and its Subsidiaries has good and marketable title to each parcel of real property owned by it free and clear of all mortgages, pledges, liens, encumbrances and security interests, except (1) those described in the Company SEC Documents, (2) those reflected or reserved against in the audited balance sheet of the Company dated as of December 31, 1996, and (3) to the extent that such could not reasonably be expected to have a Material Adverse Effect on the Company, (A) taxes and general and special assessments not in default and payable without penalty and interest, (B) mechanics and similar statutory liens arising or incurred in the ordinary course of business for amounts that are not delinquent, (C) any zoning, building, and land use regulation imposed by any Governmental Entity, and (D) any covenant, restriction, or easement expressly set forth in the title documents governing such real property filed with the appropriate Governmental Entity. (ii) Schedule 4.1(q)(ii) sets forth each lease, sublease or other agreement (collectively, the "Real Property Leases") under which the Company or any of its 28 32 Subsidiaries uses or occupies or has the right to use or occupy, now or in the future, any real property. Each Real Property Lease is valid, binding and in full force and effect, all rent and other sums and charges payable by the Company and its Subsidiaries as tenants thereunder are current, no termination event or condition or uncured default of a material nature on the part of the Company or any Subsidiary of the Company exists under any Real Property Lease. Each of the Company and its Subsidiaries has a good and valid leasehold interest in each parcel of real property leased by it free and clear of all mortgages, pledges, liens, encumbrances and security interests, except (i) those disclosed in the Company's SEC Documents, (ii) those reflected or reserved against in the balance sheet of the Company dated as of December 31, 1996, (iii) taxes and general and special assessments not in default and payable without penalty and interest and (iv) those which could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect on the Company. (r) Board Recommendation. As of the date hereof, the Board of Directors of the Company, at a meeting duly called and held, has by the vote of those directors present (who constituted 100% of the directors then in office) (i) determined that this Agreement and the transactions contemplated hereby, including the Offer and the Merger, taken together, are fair to and in the best interests of the stockholders of the Company and has approved the same, and (ii) resolved to recommend that the holders of the shares of Company Common Stock approve this Agreement and the transactions contemplated herein, including the Merger (if required), and accept the Offer and tender their shares of Company Common Stock pursuant thereto. (s) Material Contracts. The Company has made available to Parent (i) true and complete copies of all written contracts, agreements, commitments, arrangements, leases (including with respect to personal property), policies and other instruments to which it or any of its Subsidiaries is a party or by which it or any such Subsidiary is bound which (A) require payments to be made in excess of $250,000 per year for goods and/or services, (B) require payments to be made in excess of $100,000 with respect to any licenses granted to the Company or any of its Subsidiaries, or (C) do not by their terms expire and are not subject to termination within 60 days from the date of the execution and delivery thereof (collectively, "Material Contracts"), and (ii) a written description of each Material Contract of which the Company is aware that has not been reduced to writing; provided, however, that blanket purchase orders or similar arrangements shall not be considered Material Contracts 29 33 for purposes of this Agreement. Each of the Material Contracts is listed on Schedule 4.1(s). Neither the Company nor any of its Subsidiaries is, or has received any written notice that any other party is, in default in any respect under any such Material Contract, except for those defaults which could not, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect with respect to the Company; and, to the Company's knowledge, there has not occurred any event or events that with the lapse of time or the giving of notice or both would constitute such a material default, except for those defaults which could not, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect with respect to the Company. (t) Related Party Transactions. Except as set forth on Schedule 4.1(t) or as disclosed in the Company SEC Documents, no director, officer, "affiliate" or "associate" (as such terms are defined in Rule 12b-2 under the Exchange Act) of the Company or any of its Subsidiaries (i) has borrowed any monies from or has outstanding any indebtedness or other similar obligations to the Company or any of its Subsidiaries, or (ii) is otherwise a party to any contract, arrangement or understanding with the Company or any of its Subsidiaries. (u) Indebtedness. Except as set forth on Schedule 4.1(u) hereto or in the Company's audited financial statements as of December 31, 1996, on the date hereof neither the Company nor any of its Subsidiaries has any outstanding indebtedness for borrowed money or representing the deferred purchase price of property or services or similar liabilities or obligations, including any guarantee in respect thereof ("Indebtedness"), or is a party to any agreement, arrangement or understanding providing for the creation, incurrence or assumption thereof. (v) Liens. Neither the Company nor any of its Subsidiaries has granted, created, or suffered to exist with respect to any of its assets, any mortgage, pledge, charge, hypothecation, collateral assignment, lien (statutory or otherwise), encumbrance or security agreement of any kind or nature whatsoever, except (1) those described in the Company SEC Documents, (2) those reflected or reserved against in the audited balance sheet of the Company dated as of December 31, 1996, and (3) to the extent that such could not reasonably be expected to have a Material Adverse Effect on the Company, (A) taxes and general and special assessments not in default and payable without penalty and interest, (B) mechanics and similar statutory liens arising or incurred in the ordinary course of business for amounts that are not delinquent, (C) any zoning, building, and 30 34 land use regulation imposed by any Governmental Entity, and (D) any covenant, restriction, or easement expressly set forth in the title documents governing real property of the Company or any of its Subsidiaries and filed with the appropriate Governmental Entity. (w) Customers and Suppliers. Schedule 4.1(w) sets forth (a) a list of the ten largest customers of the Company and its Subsidiaries based on sales during the fiscal year ended December 31, 1996, showing the approximate total sales to each such customer during such fiscal year and (b) a list of the ten largest suppliers of the Company and its Subsidiaries based on purchases during the fiscal year ended December 31, 1996, showing the approximate total purchases from each such supplier during such fiscal year. Except as described on Schedule 4.1(w), to the Company's knowledge there has not been any adverse change in the business relationship of the Company or any Subsidiary of the Company with any customer or supplier named in Schedule 4.1(w) which could reasonably be expected to have a Material Adverse Change on the Company. 4.2 Representations and Warranties of Parent and Sub. Parent and Sub represent and warrant to the Company as follows: (a) Organization, Standing and Power. Each of Parent and Sub is a corporation duly organized, validly existing and in good standing under the laws of its state of incorporation or organization, has all requisite power and authority to own, lease and operate its properties and to carry on its business as now being conducted, and is duly qualified to do business as a foreign corporation and in good standing to conduct business in each jurisdiction in which the business it is conducting, or the operation, ownership or leasing of its properties, makes such qualification necessary, other than in such jurisdictions where the failure so to qualify could not have a Material Adverse Effect with respect to Parent. Parent and Sub have heretofore made available to the Company complete and correct copies of their respective Certificates of Incorporation and Bylaws. (b) Authority; No Violations; Consents and Approvals. (i) Each of Parent and Sub has all requisite corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Parent and Sub. This Agreement has been duly executed and delivered by each of Parent and Sub and 31 35 assuming this Agreement constitutes the valid and binding agreement of the Company, constitutes a valid and binding obligation of Parent and Sub enforceable in accordance with its terms and conditions except that the enforcement hereof may be limited by (a) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other similar laws now or hereafter in effect relating to creditors' rights generally and (b) general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). (ii) The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby by each of Parent and Sub will not result in any Violation pursuant to any provision of the respective Articles or Certificates of Incorporation or Bylaws of Parent or Sub or, except as to which requisite waivers or consents have been obtained and assuming the consents, approvals, authorizations or permits and filings or notifications referred to in paragraph (iii) of this Section 4.2(b) are duly and timely obtained or made, and, if required, the Company Stockholder Approval has been obtained, result in any Violation of any loan or credit agreement, note, mortgage, indenture, lease, or other agreement, obligation, instrument, concession, franchise, license, judgment, order, decree, statute, law, ordinance, rule or regulation applicable to Parent or Sub or their respective properties or assets, which could have a Material Adverse Effect with respect to Parent. (iii) No consent, approval, order or authorization of, or registration, declaration or filing with, notice to, or permit from any Governmental Entity, is required by or with respect to Parent or Sub in connection with the execution and delivery of this Agreement by each of Parent and Sub or the consummation by each of Parent or Sub of the transactions contemplated hereby, except for: (A) filings under the HSR Act; (B) the filing with the SEC of (x) the Schedule 14D-1 in connection with the commencement and consummation of the Offer and (y) such reports under and such other compliance with the Exchange Act and the rules and regulations thereunder, as may be required in connection with this Agreement and the transactions contemplated hereby; (C) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware; (D) such filings and approvals as may be required by any applicable state securities, "blue sky" or takeover laws; (E) such filings and approvals as may be required by any foreign pre-merger notification, securities, corporate or other law, 32 36 rule or regulation; (F) such filings in connection with any Gains and Transfer Taxes; and (G) such other such filings and consents as may be required under any environmental, health or safety law or regulation pertaining to any notification, disclosure or required approval necessitated by the Merger or the transactions contemplated by this Agreement. (c) Information Supplied. None of the information supplied or to be supplied by Parent or Sub for inclusion or incorporation by reference in (i) the Schedule 14D-9 will, at the time the Schedule 14D-9 is filed with the SEC, and at any time it is amended or supplemented, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading, and (ii) the Proxy Statement will, at the date it is first mailed to the Company's stockholders or at the Effective Time, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. If, at any time prior to the Effective Time, any event with respect to Parent or Sub, or with respect to information supplied by Parent or Sub for inclusion in the Schedule 14D-9 or the Proxy Statement, shall occur which is required to be described in an amendment of, or a supplement to, any of such documents, such event shall be so described to the Company. (d) Board Recommendation. The Board of Directors of the Parent, at a meeting duly called and held, has by the vote of those directors present determined that this Agreement and the transactions contemplated hereby, including the Offer and the Merger, taken together, are fair to and in the best interests of Parent and has approved the same. (e) Financing. Parent and Sub have delivered to the Company a true and complete copy of (i) a letter of commitment obtained by Parent from Credit Suisse First Boston to provide debt financing for the transactions contemplated hereby pursuant to a senior credit facility; (ii) a letter of commitment obtained by Parent from Credit Suisse First Boston with respect to senior subordinated debt financing for the transactions contemplated hereby pursuant to the sale by Parent of senior subordinated notes; (iii) a letter of commitment obtained by Hedstrom Holdings, Inc., the sole stockholder of Parent ("Holdings"), from Credit Suisse First Boston with respect to senior debt financing for the transactions contemplated hereby pursuant to the sale by Holdings of senior notes; and (iv) from Hicks Muse Equity Fund 33 37 II, L.P. to provide certain equity financing pursuant to the sale by Holdings of shares of its common stock (collectively, the "Financing Commitments"). Executed copies of the Financing Commitments are attached hereto as Exhibit 4.2(e). Assuming that the financing contemplated by the Financing Commitments is consummated in accordance with the terms thereof, the funds to be borrowed and/or provided thereunder by Parent and Holdings will provide sufficient funds to pay the Offer Consideration, the Merger Consideration and all related fees and expenses. As of the date of this Agreement, Parent is not aware of any facts or circumstances that create a reasonable basis for Parent to believe that Parent and Holdings will not be able to obtain financing in accordance with the terms of the Financing Commitments. Parent agrees to promptly notify the Company if the statements in the immediately preceding sentence are no longer true and correct. Parent and Sub agree with the Company that they will not waive, release, modify, rescind, terminate or otherwise amend any of the material terms or conditions in the commitment letters referred to in this Section 4.2(e), without the prior written consent of the Company. ARTICLE V COVENANTS RELATING TO CONDUCT OF BUSINESS 5.1 Covenants of the Company. During the period from the date of this Agreement and continuing until the Effective Time, the Company agrees as to the Company and its Subsidiaries that (except as expressly contemplated or permitted by this Agreement, or to the extent that Parent shall otherwise consent in writing): (a) Ordinary Course. Each of the Company and its Subsidiaries shall carry on its businesses in the usual, regular and ordinary course in substantially the same manner as heretofore conducted and shall use all reasonable efforts to preserve intact its present business organization, keep available the services of its current officers and employees and preserve its relationships with customers, suppliers and others having business dealings with it. (b) Dividends; Changes in Stock. The Company shall not, nor shall it permit any of its Subsidiaries to: (i) declare or pay any dividends on or make other distributions in respect of any of its capital stock; (ii) split, combine or reclassify any of its capital stock or issue or authorize or propose the issuance of any other securities in respect of, in lieu of or in substitution for shares of its capital stock; or (iii) repurchase or otherwise acquire, or permit any Subsidiary to purchase or 34 38 otherwise acquire, any shares of its capital stock, except (A) as contemplated by Section 3.5 of this Agreement and (B) as required by the terms of its securities outstanding or any employee benefit plan in effect on the date hereof. (c) Issuance of Securities. The Company shall not, nor shall it permit any of its Subsidiaries to, (i) grant any options, warrants or rights, to purchase shares of Company Common Stock, (ii) except as contemplated by Section 3.5 of this Agreement, amend the terms of or reprice any Option or amend the terms of any of the Stock Option Plans, or (iii) issue, deliver or sell, or authorize or propose to issue, deliver or sell, any shares of its capital stock of any class or series, any Company Voting Debt or any securities convertible into, or any rights, warrants or options to acquire, any such shares, Company Voting Debt or convertible securities, other than the issuance of Shares upon the exercise of Options or Warrants that are outstanding on the date hereof. (d) Governing Documents. The Company shall not amend or propose to amend its Certificate of Incorporation or Bylaws. (e) No Solicitation. From and after the date hereof until the termination of this Agreement, neither the Company or any of its Subsidiaries, nor any of their respective officers, directors, representatives, agents or affiliates (including, without limitation, any investment banker, attorney or accountant retained by the Company or any of its Subsidiaries) (such officers, directors, employees, representatives, agents, affiliates, investment bankers, attorneys and accountants being referred to herein, collectively, as "Representatives"), will, and the Company will use its reasonable best efforts to cause the employees of the Company and its Subsidiaries not to, directly or indirectly, initiate, solicit or encourage (including by way of furnishing information or assistance), or take any other action to facilitate, any inquiries or the making of any proposal that constitutes, or may reasonably be expected to lead to, any Acquisition Proposal (as defined below), or enter into or maintain or continue discussions or negotiate with any person or entity in furtherance of such inquiries or for the purpose of obtaining an Acquisition Proposal, or agree to or endorse any Acquisition Proposal, and neither the Company nor any of its Subsidiaries will authorize or permit any of its Representatives to take any such action, and the Company shall notify Parent orally (within one business day) and in writing (as promptly as practicable) of all of the relevant details relating to, and all material aspects of, all inquiries and proposals which it or any of its Subsidiaries or any of their respective Representatives may receive relating to any of such matters and, if such inquiry 35 39 or proposal is in writing, the Company shall deliver to Parent a copy of such inquiry or proposal as promptly as practicable; provided, however, that nothing contained in this Section 5.1(e) shall prohibit the Board of Directors of the Company from: (i) furnishing information to, or entering into discussions or negotiations with, any person or entity that makes an unsolicited written, bona fide Acquisition Proposal (provided that such person or entity has the necessary funds or commitments to provide the funds to effect such Acquisition Proposal; provided further, however, that the Company shall have two business days from the date it receives such Acquisition Proposal to determine whether such person or entity has such funds or commitments) if, and only to the extent that, (A) the Board of Directors of the Company, after consultation with and based upon the advice of independent legal counsel (who may be the Company's regularly engaged independent legal counsel), determines in good faith that such action is advisable for the Board of Directors of the Company to comply with its fiduciary duties to stockholders under applicable law, (B) prior to taking such action, the Company (x) provides reasonable prior notice to Parent to the effect that it is taking such action and (y) receives from such person or entity an executed confidentiality agreement in reasonably customary form, and (C) the Company shall , to the extent consistent with the Board of Directors fiduciary duties to stockholders under applicable law, promptly and continuously advise Parent as to all of the relevant details relating to, and all material aspects, of any such discussions or negotiations; (ii) failing to make or reaffirm, withdrawing, adversely modifying or taking a public position materially inconsistent with its recommendation referred to in Section 4.1(r) (which may include making any statement required by Rule 14e-2 under the Exchange Act) if there exists an Acquisition Proposal and the Board of Directors of the Company, after consultation with and based upon the advice of independent legal counsel (who may be the Company's regularly engaged independent counsel), determines in good faith that such action is advisable for the Board of Directors of the Company to comply with its fiduciary duties to holders of Shares under applicable law; or (iii) making a "stop-look-and-listen" communication with respect to an Acquisition Proposal, the Offer or this Agreement of the nature contemplated in, and otherwise in compliance with, Rule 14d-9 under the Exchange Act as a result of receiving an Acquisition Proposal. 36 40 For purposes of this Agreement, "Acquisition Proposal" shall mean any of the following (other than the transactions among the Company, Parent and Sub contemplated hereunder) involving the Company or any of its Subsidiaries: (i) any merger, consolidation, share exchange, recapitalization, business combination, or other similar transaction; (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition of 10% or more of the assets (computed based on the fair market value of such assets as determined by the Board of Directors of the Company in good faith) of the Company and its Subsidiaries, taken as a whole, in a single transaction or series of transactions; (iii) any tender offer or exchange offer for 10% or more of the outstanding shares of capital stock of the Company or the filing of a registration statement under the Securities Act in connection therewith; or (iv) any public announcement of a proposal, plan or intention to do any of the foregoing or any agreement to engage in any of the foregoing. (f) No Acquisitions. The Company shall not, nor shall it permit any of its Subsidiaries to: (i) merge or consolidate with, or acquire any equity interest in, any corporation, partnership, association or other business organization, or enter into an agreement with respect thereto or (ii) acquire or agree to acquire any assets of any corporation, partnership, association or other business organization or division thereof, except for the purchase of inventory and supplies in the ordinary course of business or the acquisition by the Company or any Subsidiary of equity interests in any customer or supplier of the Company in satisfaction of outstanding claims against such party in bankruptcy proceedings consistent with past practice. (g) No Dispositions. Other than sales of inventory or sales or returns of obselete or surplus equipment in the ordinary course of business consistent with past practice, the Company shall not, nor shall it permit any of its Subsidiaries to, sell, lease, encumber or otherwise dispose of, or agree to sell, lease (whether such lease is an operating or capital lease), encumber or otherwise dispose of, any of its assets (including, without limitation, any capital stock or other ownership interest of any Subsidiary of the Company). (h) Governmental Filings. The Company shall promptly provide Parent (or its counsel) with copies of all filings made by the Company with the SEC or any other state or federal Governmental Entity in connection with this Agreement and the transactions contemplated hereby. (i) No Dissolution, Etc. The Company shall not authorize, recommend, propose or announce an intention to adopt a 37 41 plan of complete or partial liquidation or dissolution of the Company or any of its Subsidiaries. (j) Other Actions. (i) Except as expressly permitted by the terms of this Agreement, the Company will not knowingly or intentionally take or agree or commit to take, nor will it permit any of its Subsidiaries to take or agree or commit to take, any action that is reasonably likely to result in any of the Company's representations or warranties hereunder being untrue in any material respect or in any of the Company's covenants hereunder or any of the conditions to the Merger not being satisfied in all material respects. (ii) Parent will not knowingly or intentionally take or agree or commit to take, nor will it permit Holdings or any of the Subsidiaries of Parent to take or agree or commit to take, any action to prohibit or prevent the financing sources of Parent and Holdings from providing the debt and equity financing contemplated by the Financing Commitments. (k) Certain Employee Matters. The Company and its Subsidiaries shall not (without the prior written consent of Parent): (i) grant any increases in the compensation of any of its directors, officers or key employees; (ii) pay or agree to pay any pension, retirement allowance or other employee benefit not required or contemplated to be paid prior to the Effective Time by any of the existing Benefit Plans or Employee Arrangements as in effect on the date hereof to any such director, officer or key employee, whether past or present; (iii) enter into any new, or materially amend any existing, employment or severance or termination agreement with any such director, officer or key employee; or (iv) except as may be required to comply with applicable law, become obligated under any new Benefit Plan or Employee Arrangement, which was not in existence on the date hereof, or amend any such plan or arrangement in existence on the date hereof if such amendment would have the effect of materially enhancing any benefits thereunder. (l) Indebtedness; Agreements. (i) Except for indebtedness incurred by the Company from time to time for working capital purposes in the ordinary course of business under that certain Second Amended and Restated Credit Agreement, dated as of December 14, 1995 among the Company, the financial institutions party 38 42 thereto and the First National Bank of Chicago, as agent (the "Company Credit Agreement"), indebtedness incurred to fund capital expenditures permitted under Section 5.1(n) of this Agreement and entering into leases for personal property in the ordinary course of business consistent with past practice, the Company shall not, nor shall the Company permit any of its Subsidiaries to, without the prior written consent of Parent (which shall not be unreasonably withheld), assume or incur any indebtedness for borrowed money or guarantee any such indebtedness or issue or sell any debt securities or warrants or rights to acquire any debt securities of the Company or any of its Subsidiaries or guarantee any debt securities of others or enter into any lease (whether such lease is an operating or capital lease) or create any mortgages, liens, security interests or other encumbrances on the property of the Company or any of its Subsidiaries in connection with any indebtedness thereof, or enter into any "keep well" or other agreement or arrangement to maintain the financial condition of another person. (ii) Without the prior written consent of Parent (which shall not be unreasonably withheld), the Company shall not, nor shall the Company permit any of its Subsidiaries to, (A) enter into any contracts involving aggregate annual payments not in excess of $250,000, except for license agreements entered into in the ordinary course of the Company's business consistent with past practice, or (b) modify, rescind, terminate, waive, release or otherwise amend in any material respect any of the terms or provisions of any Material Contract in any manner that is material and adverse to the Company or the respective Subsidiary of the Company party thereto. (m) Accounting. The Company shall not take any action, other than in the ordinary course of business, consistent with past practice or as required by the SEC or by law, with respect to accounting policies, procedures and practices. (n) Capital Expenditures. Except for the capital expenditures set forth on Schedule 5.1(n), the Company and its Subsidiaries shall not incur any capital expenditures in excess of $100,000. 39 43 ARTICLE VI ADDITIONAL AGREEMENTS 6.1 Preparation of the Proxy Statement; Company Stockholders Meeting; Merger without a Company Stockholders Meeting. (a) The Company and Parent will, as soon as practicable following the acceptance for payment of and payment for shares of the Company Common Stock by Sub in the Offer, prepare and file the Proxy Statement with the SEC. The Company will use all commercially reasonable efforts to respond to all SEC comments with respect to the Proxy Statement and to cause the Proxy Statement to be mailed to the Company's stockholders at the earliest practicable date. (b) The Company will, as soon as practicable following the acceptance for payment of and payment for shares of the Company Common Stock by Sub in the Offer, duly call, give notice of, convene and hold a meeting of the Company's stockholders for the purpose of approving this Agreement and the transactions contemplated hereby. At such stockholders meeting, Parent shall cause all of the shares of Company Common Stock then owned by Parent and Sub to be voted in favor of the Merger. (c) Notwithstanding the foregoing clauses (a) and (b), in the event that Parent and Sub shall acquire at least 90% of the outstanding shares of Company Common Stock in the Offer, the parties hereto agree, at the request of Sub, to take all necessary and appropriate action to cause the Merger to become effective, as soon as practicable after the expiration of the Offer, without a meeting of stockholders of the Company, in accordance with Section 253 of the DGCL. (d) Sub shall promptly submit this Agreement and the transactions contemplated hereby for approval and adoption by Parent, as its sole stockholder, by written consent. 6.2 Access to Information. Upon reasonable notice, each of the Company or Parent, as the case may be, shall (and shall cause each of its Subsidiaries to) afford to the officers, employees, accountants, counsel and other representatives of the other party (including, in the case of Parent and Sub, potential financing sources and their employees, accountants, counsel and other representatives), access, during normal business hours during the period prior to the Effective Time, to all its properties, books, contracts, commitments and records and, during such period, such party shall (and shall cause each of its Subsidiaries to) furnish promptly to the other party, (a) a copy 40 44 of each report, schedule, registration statement and other document filed or received by it during such period pursuant to SEC requirements and (b) all other information concerning its business, properties and personnel as such other party may reasonably request. The Confidentiality Agreement, dated as of December 10, 1996, between Parent and the Company (the "Confidentiality Agreement") shall apply with respect to information furnished thereunder or hereunder and any other activities contemplated thereby. 6.3 [Intentionally Omitted]. 6.4 Fees and Expenses. (a) Except as otherwise provided in this Section 6.4 and except with respect to claims for damages incurred as a result of the breach of this Agreement, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such expense. (b) The Company agrees to pay Parent or Parent's designee a fee in immediately available funds equal to $3,000,000 upon the termination of this Agreement under Section 8.1(d) or Section 8.1(e), if any of the events set forth in either clause (i) or clause (ii) below occurs (each, a "Trigger Event"): (i) the Board of Directors of the Company shall have (A) withdrawn or adversely modified, or taken a public position materially inconsistent with, its approval or recommendation of the Offer, the Merger, this Agreement or the Stockholders Agreement, or (B) failed to reaffirm its approval or recommendation of the Offer, the Merger and this Agreement under the circumstances set forth in Section 8.1(e); provided that a Company action permitted by Section 5.1(e)(iii) hereof shall not, by itself, constitute a Trigger Event; or (ii) an Acquisition Proposal has been recommended or accepted by the Company or the Company shall have entered into an agreement (other than a confidentiality agreement as contemplated by Section 5.1(e)) with respect to an Acquisition Proposal. (c) Parent agrees to pay to the Company a fee in immediately available funds equal to $3,000,000 upon the termination of this Agreement under Section 8.1(f) in the event that the Offer expires or is withdrawn, abandoned or terminated if the sole reason for such expiration, withdrawal, abandonment or termination is the failure of the condition described in item (iii) on Exhibit A hereto. 41 45 (d) Any amounts due under this Section 6.4 that are not paid when due shall bear interest at the prime rate from the date due through and including the date paid. 6.5 Brokers or Finders. (a) The Company represents, as to itself, its Subsidiaries and its affiliates, that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any broker's or finders fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, except the Financial Advisor, whose fees and expenses will be paid by the Company in accordance with the Company's agreements with such firm (copies of which have been delivered by the Company to Parent prior to the date of this Agreement). (b) Parent represents, as to itself, its Subsidiaries and its affiliates, that no agent, broker, investment banker, financial advisor or other firm or person is or will be entitled to any broker's or finders fee or any other commission or similar fee in connection with any of the transactions contemplated by this Agreement, except for Hicks, Muse, Tate & Furst Incorporated, whose fees and expenses will be paid by Parent in accordance with the Parent's agreements with such firm (copies of which have been made available to the Company prior to the date of this Agreement). 6.6 Indemnification; Directors' and Officers' Insurance. (a) The Company shall, and from and after the Effective Time, the Surviving Corporation shall, indemnify, defend and hold harmless each person who is now, or has been at any time prior to the date hereof or who becomes prior to the Effective Time, an officer, director, employee or agent of the Company or any of its Subsidiaries(the "Indemnified Parties") against all losses, claims, damages, costs, expenses (including attorneys' fees and expenses), liabilities or judgments or amounts that are paid in settlement with the approval of the indemnifying party (which approval shall not be unreasonably withheld) of or in connection with any threatened or actual claim, action, suit, proceeding or investigation based in whole or in part on or arising in whole or in part out of the fact that such person is or was a director, officer, employee or agent of the Company or any of its Subsidiaries whether pertaining to any matter existing or occurring at or prior to the Effective Time or any acts or omissions occurring or existing at or prior to the Effective Time and whether asserted or claimed prior to, or at or after, the Effective Time ("Indemnified Liabilities"), including all Indemnified Liabilities based in whole or in part on, or arising in whole or in part out of, or pertaining to this Agreement or the transactions contemplated hereby, in each case 42 46 to the full extent a corporation is permitted under the DGCL to indemnify its own directors or officers as the case may be (and the Company and the Surviving Corporation, as the case may be, shall pay expenses in advance of the final disposition of any such action or proceeding to each Indemnified Party to the full extent permitted by law). Without limiting the foregoing, in the event any such claim, action, suit, proceeding or investigation is brought against any Indemnified Parties (whether arising before or after the Effective Time), (i) the Indemnified Parties may retain the Company's regularly engaged independent legal counsel or counsel satisfactory to them and reasonably satisfactory to the Company (or them and reasonably satisfactory to the Surviving Corporation after the Effective Time) and the Company (or after the Effective Time, the Surviving Corporation) shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received; and (ii) the Company (or after the Effective Time, the Surviving Corporation) will use all reasonable best efforts to assist in the vigorous defense of any such matter, provided that neither the Company nor the Surviving Corporation shall be liable for any settlement effected without its prior written consent which consent shall not unreasonably be withheld. Any Indemnified Party wishing to claim indemnification under this Section 6.6, upon learning of any such claim, action, suit, proceeding or investigation, shall notify the Company (or after the Effective Time, the Surviving Corporation) (but the failure so to notify shall not relieve a party from any liability which it may have under this Section 6.6 except to the extent such failure materially prejudices such party's position with respect to such claims), and shall deliver to the Company (or after the Effective Time, the Surviving Corporation) the undertaking contemplated by Section 145(e) of the DGCL. The Indemnified Parties as a group may retain only one law firm to represent them with respect to each such matter unless there is, under applicable standards of professional conduct, a conflict on any significant issue between the positions of any two or more Indemnified Parties in which case such additional counsel as may be required (as shall be reasonably determined by the Indemnified Parties and the Company or the Surviving Corporation, as the case may be) may be retained by the Indemnified Parties at the cost and expense of the Company (or Surviving Corporation). The Company and Sub agree that the foregoing rights to indemnification, including provisions relating to advances of expenses incurred in defense of any action or suit, existing in favor of the Indemnified Parties with respect to matters occurring through the Effective Time, shall survive the Merger and shall continue in full force and effect for a period of not less than six years from the Effective Time; provided, however, that all rights to indemnification in respect of any Indemnified 43 47 Liabilities asserted or made within such period shall continue until the disposition of such Indemnified Liabilities. Furthermore, the provisions with respect to indemnification set forth in the certificate of incorporation of the Surviving Corporation shall not be amended for a period of six years following the Effective Time if such amendment would materially and adversely affect the rights thereunder of individuals who at any time prior to the Effective Time were directors, officers, employees or agents of the Company in respect of actions or omissions occurring at or prior to the Effective Time. (b) Parent and Sub hereby unconditionally waive and release the Indemnified Parties from and agrees to indemnify, defend and hold harmless the Indemnified Parties from and against any and all claims, demands, causes of action, liabilities, costs or expenses, whether arising under contract, statute, common law or otherwise, with respect to environmental matters (including without limitation any of the foregoing arising under CERCLA or any other Environmental Laws). (c) For a period of six years after the Effective Time, the Surviving Corporation shall cause to be maintained in effect the current policies of directors' and officers' liability insurance maintained by the Company and its Subsidiaries (provided that Parent may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are no less advantageous in any material respect to the Indemnified Parties) with respect to matters arising before and acts or omissions occurring or existing at or prior to the Effective Time including the transactions contemplated by this Agreement, provided that Parent shall not be required to pay an annual premium for such insurance in excess of 200% of the last annual premium paid by the Company prior to the date hereof, but in such case shall purchase as much coverage as possible for such amount. The last annual premium paid by the Company was $85,000. (d) The provisions of this Section 6.6 are intended to be for the benefit of, and shall be enforceable by, each Indemnified Party, his heirs and his personal representatives and shall be binding on all successors and assigns of Sub, the Company and the Surviving Corporation. 6.7 Commercially Reasonable Efforts. Subject to the terms and conditions of this Agreement, each of the parties hereto agrees to use all commercially reasonable efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable, under applicable laws and regulations or otherwise, to consummate and make effective 44 48 the transactions contemplated by this Agreement and the Stockholders Agreement, subject, as applicable, to the Company Stockholder Approval, including cooperating fully with the other party, including by provision of information and making of all necessary filings in connection with, among other things, approvals under the HSR Act. The Company will use its reasonable efforts to assist Parent, at Parent's expense, in obtaining any consent from third parties necessary to allow the Company to continue operating its business as presently conducted as a result of the consummation of the transactions contemplated hereby. In case at any time after the Effective Time, any further action is necessary or desirable to carry out the purposes of this Agreement or to vest the Surviving Corporation with full title to all properties, assets, rights, approvals, immunities and franchises of either of the Constituent Corporations, the proper officers and directors of each party to this Agreement shall take all such necessary action. Without limiting the generality of the foregoing, the Company agrees to cooperate with Parent's and Sub's efforts to secure the financing contemplated by the Financing Commitments, such cooperation to include providing such information to Parent's and Sub's financing sources as Parent or Sub may reasonably request and making available to such financing sources senior officers and such other employees of the Company as Parent and Sub may reasonably request to assist in the preparation of one or more offering documents and other appropriate marketing materials and to otherwise participate in such marketing and sales efforts relating to the Financing Commitments as Parent and Sub may reasonably request upon reasonable notice and consistent with such officers' and employees' other business responsibilities to the Company; provided, that the Company shall incur no liability hereunder as a result of any participation by any officer or employee in such financing efforts. 6.8 Conduct of Business of Sub. During the period of time from the date of this Agreement to the Effective Time, Sub shall not engage in any activities of any nature except as provided in or contemplated by this Agreement. 6.9 Publicity. The parties will consult with each other and will mutually agree upon any press release or public announcement pertaining to the Offer and the Merger and shall not issue any such press release or make any such public announcement prior to such consultation and agreement, except as may be required by applicable law, in which case the party proposing to issue such press release or make such public announcement shall use reasonable efforts to consult in good faith with the other party before issuing any such press release or making any such public announcement. 45 49 6.10 Withholding Rights. Sub and the Surviving Corporation, as applicable, shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Company Common Stock such amounts as Sub or the Surviving Corporation, as applicable, is required to deduct and withhold with respect to the making of such payment under the Code or any provision of state, local or foreign tax law. To the extent that amounts are so withheld by Sub or the Surviving Corporation, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Company Common Stock in respect of which such deduction and withholding was made by Sub or the Surviving Corporation, as applicable. 6.11 Continuation of Employee Benefits. Until at least December 31, 1997, Parent shall maintain or cause to be maintained employee benefits and programs for retirees, directors, officers and employees of the Company and its Subsidiaries that are no less favorable in the aggregate than those set forth on Schedule 4.1(i) taking into account that the Company will be a private company without stock options and the like; provided, however, that Parent shall not be obligated to continue (i) the Company's Nonqualified Deferred Compensation Plan and the Company agrees that it shall cause such plan to be terminated prior to the consummation of the Offer or (ii) any individual employment agreement. On or after January 1, 1998, the retirees, directors, officers and employees of the Company and its Subsidiaries shall be eligible for employee benefits, plans and programs (including but not limited to incentive compensation, deferred compensation, pension, life insurance, medical, profit sharing (including 401(k)), severance salary continuation and fringe benefits) which are no less favorable in the aggregate than those generally available to similarly situated retirees, directors, officers and employees of the Parent and its significant Subsidiaries. For purposes of eligibility to participate in and vesting in all benefits provided to retirees, directors, officers and employees, the retirees, directors, officers and employees of the Company and its Subsidiaries will be credited with their years of service with prior employers to the extent service with prior employers is taken into account under plans of the Company. Upon termination of any medical plan of the Company, individuals who were directors, officers or employees of the Company or its Subsidiaries at the Effective Time shall become eligible to participate in the medical plan of Parent, provided that no condition that was eligible for coverage under any medical plan of the Company at the time of such termination shall be excluded from coverage under the medical plan of Parent as a pre-existing condition. Amounts paid before the Effective Time by retirees, 46 50 directors, officers and employees of the Company under any medical plans of the Company shall after the Effective Time be taken into account in applying deductible and out-of-pocket limits applicable under the medical plan of Parent provided as of the Effective Time to the same extent as if such amounts had been paid under such medical plan of Parent. ARTICLE VII CONDITIONS PRECEDENT 7.1 Conditions to Each Party's Obligation to Effect the Merger. The respective obligation of each party to effect the Merger shall be subject to the satisfaction prior to the Closing Date of the following conditions: (a) Stockholder Approval. This Agreement and the Merger shall have been approved and adopted by the affirmative vote of the holders of a majority of the outstanding Shares entitled to vote thereon if such vote is required by applicable law; provided that the Parent and Sub shall vote all Shares purchased pursuant to the Offer or the Stockholders Agreement in favor of the Merger. (b) HSR Act. The waiting period (and any extension thereof) applicable to the Merger under the HSR Act shall have been terminated or shall have expired, and no restrictive order or other requirements shall have been placed on the Company, Parent, Sub or the Surviving Corporation in connection therewith. (c) No Injunctions or Restraints. No temporary restraining order, preliminary or permanent injunction or other order issued by any court of competent jurisdiction or other legal restraint or prohibition (an "Injunction") preventing the consummation of the Merger shall be in effect; provided, however, that prior to invoking this condition, each party shall use all commercially reasonable efforts to have any such decree, ruling, injunction or order vacated. (d) Statutes. No statute, rule, order, decree or regulation shall have been enacted or promulgated by any government or governmental agency or authority which prohibits the consummation of the Merger. (e) Payment for Shares. Sub shall have accepted for payment and paid for the shares of Company Common Stock tendered in the Offer such that, after such acceptance and payment, Parent and its affiliates shall own, at consummation of the Offer, a majority of the outstanding shares of the Company Common Stock on 47 51 a fully diluted basis; provided that this condition shall be deemed to have been satisfied if Sub fails to accept for payment and pay for Shares pursuant to the Offer in violation of the terms and conditions of the Offer. 7.2 Conditions to Obligation of Parent and Sub. The obligations of Parent and Sub to effect the Merger shall be subject to the satisfaction prior to the Closing Date of the following conditions, any or all of which may be waived in whole or in part by Parent and Sub: (a) Financing. Holdings and Parent shall have received the debt and equity financing for the transactions contemplated hereby on terms substantially as outlined in the Financing Commitments. (b) Dissenting Shares. No more than ten percent (10%) of the shares of Company Common Stock outstanding immediately prior to the Effective Time shall be Dissenting Shares. ARTICLE VIII TERMINATION AND AMENDMENT 8.1 Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, whether before or after approval of the matters presented in connection with the Merger by the stockholders of the Company or by Parent: (a) by mutual written consent of the Company and Parent, or by mutual action of their respective Boards of Directors; (b) by either the Company or Parent (i) if any permanent injunction or other order of a court or other competent authority preventing the consummation of the Offer or the Merger shall have become final and non- appealable, or (ii) so long as such party is not then in material breach of its obligations hereunder, if there has been a breach of any representation, warranty, covenant or agreement (determined without giving effect to any "Material Adverse Effect", "materiality" or similar qualifications contained therein) on the part of the other set forth in this Agreement which breach (other than a breach of any covenant or agreement set forth in Article I, Section 4.2(e) or Section 5.1(e)) has not been cured within ten calendar days following receipt by the breaching party of notice of such breach, unless such breach could not, individually or in the aggregate with other breaches, be reasonably expected to (A) have 48 52 a Material Adverse Effect on the Company or (B) materially adversely affect the ability of the parties hereto to consummate the transactions contemplated hereby; (c) by either the Company or Parent, so long as such party is not then in material breach of its obligations hereunder, if the Merger shall not have been consummated on or before the 135th calendar day following the consummation of the Offer; provided, that the right to terminate this Agreement under this Section 8.1(c) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of or resulted in the failure of the Merger to occur on or before such date; (d) by Parent in the event that a Trigger Event has occurred under Section 6.4(b) prior to the consummation of the Offer; (e) by Parent in the event an Acquisition Proposal has been made to the Company prior to the expiration of the Offer and the Company shall fail to publicly reaffirm its approval or recommendation of the Offer, the Merger, this Agreement and the Stockholders Agreement on or before the earlier to occur of (i) the tenth business day following the date on which such Acquisition Proposal shall have been made or (ii) the third business day prior to the latest possible expiration date of the Offer hereunder; (f) by either the Company or Parent, if the Offer terminates, is withdrawn, abandoned or expires by reason of the failure to satisfy any condition set forth in Exhibit A hereto; (g) by the Company, if the Offer shall have expired or shall have been withdrawn, abandoned or terminated without any shares of Company Common Stock being purchased by Sub thereunder on or prior to the 60th calendar day after the date of commencement of the Offer pursuant to Section 1.2 hereof; (h) by the Company, if (i) the Board of Directors of the Company shall take any of the actions permitted by Section 5.1(e)(ii) of this Agreement and (ii) the Company shall have paid a termination fee to Parent or Parent's designee in the amount of $3,000,000; provided, however, that if the excess of (A) the sum of (1) the average balance of the Company's cash on hand for the ten day period preceding the date the Company seeks to terminate this Agreement under this paragraph (h) plus (2) the average available capacity under the Company Credit Agreement (as defined in Section 5.1(l)) over the ten day period preceding the date the Company wishes to terminate this Agreement under this 49 53 paragraph (h) over (B) $2,000,000 (such excess being referred to hereinafter as the "Available Cash"), is less than $3,000,000, then in lieu of having paid the $3,000,000 termination fee, the Company shall have (x) paid the entire amount of the Available Cash to Parent or Parent's designee and (y) delivered to Parent a written commitment by the Company (in a form satisfactory to Parent), unconditionally guaranteed by a financially responsible and reputable entity (as determined by Parent in its sole discretion), acknowledging the Company's obligation to pay the difference between the $3,000,000 termination fee and the amount of Available Cash paid by the Company to Parent or Parent's designee in connection with the termination of this Agreement (together with interest at the prime rate accruing from the date on which payment of the termination fee contemplated by this paragraph (h) would have been due and payable) on the earlier of (i) such date as the Company shall have additional Available Cash sufficient to pay such difference, (ii) the closing of the tender offer relating to the Acquisition Proposal with respect to which the Company terminated this Agreement (the "Competing Offer"), (iii) the expiration of the Competing Offer, or (iv) the date which is 60 calendar days after the date on which the Offer was commenced; or (i) by the Company if Sub shall not have commenced the Offer within 10 business days after the execution and delivery of this Agreement by Parent and Sub. 8.2 Effect of Termination. In the event of termination of this Agreement by either the Company or Parent as provided in Section 8.1, this Agreement shall forthwith become void and there shall be no liability or obligation on the part of Parent, Sub or the Company or their respective affiliates, officers, directors or shareholders except (i) with respect to this Section 8.2, the second sentence of Section 6.2, and Section 6.4, and (ii) that no such termination shall relieve any party from liability for a material breach hereof. In addition, in the event that this Agreement is validly terminated, Parent and Sub agree that, immediately following such termination (and, in the event Parent is entitled to be paid a fee in connection with such termination pursuant to Section 6.4(b) or Section 8.1(h) hereof, immediately following receipt by Parent of such fee) Parent and Sub shall terminate the Offer and not purchase any Shares pursuant to the Offer or otherwise, and Parent further agrees that following such termination, it shall continue to be bound by all of the terms and conditions contained in the Confidentiality Agreement dated December 10, 1996 between Parent and the Company. 50 54 8.3 Amendment. Subject to applicable law, this Agreement may be amended, modified or supplemented only by written agreement of Parent, Sub and the Company at any time prior to the Effective Date with respect to any of the terms contained herein; provided, however, that, after the consummation of the Offer, no term or condition contained in this Agreement shall be amended or modified in any manner adverse to the holders of the Company Common Stock (including, without limitation, by reducing the amount of or changing the form of the Merger Consideration). 8.4 Extension; Waiver. Subject to Section 1.4(b), at any time prior to the Effective Time, the parties hereto, by action taken or authorized by their respective Boards of Directors, may, to the extent legally allowed: (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto; (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant hereto; and (iii) waive compliance with any of the agreements or conditions contained herein; provided, however, that, after the consummation of the Offer, no term or condition contained in this Agreement shall be amended, modified or waived in any manner adverse to the holders of the Company Common Stock. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in a written instrument signed on behalf of such party. The failure of any party hereto to assert any of its rights hereunder shall not constitute a waiver of such rights. ARTICLE IX GENERAL PROVISIONS 9.1 Nonsurvival of Representations, Warranties and Agreements. None of the representations and warranties in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the acceptance for payment of, and the payment for the Shares by Sub in the Offer or the expiration of the Offer. None of the covenants and agreements in this Agreement or in any instrument delivered pursuant to this Agreement shall survive the Effective Time, except for the covenants and agreements contained in Article III, Section 6.6 and Section 6.11 hereof and any other covenant or agreement that contemplates performance after the Effective Date. The Confidentiality Agreement shall survive the execution and delivery of this Agreement, and the provisions of the Confidentiality Agreement shall apply to all information and material delivered by any party hereunder. 51 55 9.2 Notices. Any notice or communication required or permitted hereunder shall be in writing and either delivered personally, telegraphed or telecopied or sent by certified or registered mail, postage prepaid, and shall be deemed to be given, dated and received when so delivered personally, telegraphed or telecopied or, if mailed, five business days after the date of mailing to the following address or telecopy number, or to such other address or addresses as such person may subsequently designate by notice given hereunder: (a) if to Parent or Sub, to: Hedstrom Corporation 300 Corporate Center Drive, Suite 110 Coraopolis, Pennsylvania 15108 Attn: David Crowley Telephone: (412) 269-9530 Telecopy: (412) 269-9655 with copies to: Hicks, Muse, Tate & Furst Incorporated 1325 Avenue of the Americas, 25th Floor New York, New York 10019 Attn: Alan B. Menkes Telephone: (212) 424-1400 Telecopy: (212) 424-1450 Hicks, Muse, Tate & Furst Incorporated 200 Crescent Court, Suite 1600 Dallas, Texas 75201 Attn: Lawrence D. Stuart, Jr. Telephone: (214) 740-7300 Telecopy: (214) 740-7313 Weil, Gotshal & Manges LLP 100 Crescent Court Suite 1300 Dallas, Texas 75201-6950 Attn: Glenn D. West Telephone: (214) 746-7738 Telecopy: (214) 746-7777 52 56 (b) if to the Company, to: ERO, Inc. 585 Slawin Court Mount Prospect, Illinois Attn: Mark Renfree Telephone: (847) 803-9200 Telecopy: (847) 803-1971 with a copy to: Kirkland & Ellis 200 East Randolph Drive Chicago, Illinois 60601 Attention: H. Kurt von Moltke Telephone: (312) 861-2000 Telecopy: (312) 861-2200 9.3 Interpretation. When a reference is made in this Agreement to Articles or Sections, such reference shall be to an Article or Section of this Agreement unless otherwise indicated. The table of contents, glossary of defined terms and headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Whenever the word "include", "includes" or "including" are used in this Agreement, they shall be deemed to be followed by the words "without limitation". The phrase "made available" in this Agreement shall mean that the information referred to has been made available if requested by the party to whom such information is to be made available. 9.4 Counterparts. 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 two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that all parties need not sign the same counterpart. 9.5 Entire Agreement; No Third Party Beneficiaries; Rights of Ownership. This Agreement (together with the Confidentiality Agreement, the Stockholders Agreement and any other documents and instruments referred to herein) constitutes the entire agreement and supersedes all prior agreements and understandings, both written and oral, among the parties with respect to the subject matter hereof and, except as provided in Section 6.6, is not intended to confer upon any person other than the parties hereto any rights or remedies hereunder. 53 57 9.6 Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware, without giving effect to the principles of conflicts of law thereof. 9.7 Assignment. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the parties hereto (whether by operation of law or otherwise) without the prior written consent of the other parties, except that Sub may assign, in its sole discretion, any or all of its rights, interests and obligations hereunder (i) to any newly-formed direct wholly-owned Subsidiary of Parent or Sub or (ii) in the form of a collateral assignment to any institutional lender who provides funds to Purchaser for the consummation of the transactions contemplated hereby. Subject to the preceding sentence, this Agreement will be binding upon, inure to the benefit of and be enforceable by the parties and their respective successors and assigns. [Remainder of page intentionally left blank] 54 58 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their respective officers thereunto duly authorized, all as of the date first written above. PARENT: ------ HEDSTROM CORPORATION By: /s/ ANDREW S. ROSEN ------------------------------------------ Name: Andrew S. Rosen ---------------------------------------- Title: Vice President --------------------------------------- SUB: --- HC ACQUISITION CORP. By: /s/ ANDREW S. ROSEN ------------------------------------------ Name: Andrew S. Rosen ---------------------------------------- Title: Vice President --------------------------------------- COMPANY: ------- ERO, INC. By: /s/ D. R. Ryan ------------------------------------------ Name: D. R. Ryan ---------------------------------------- Title: Chairman, CEO & President --------------------------------------- 59 EXHIBIT A The capitalized terms used in this Exhibit A shall have the respective meanings given to such terms in the Agreement and Plan of Merger, dated as of April 10, 1997 (the "Merger Agreement"), by and among Hedstrom Corporation, a Delaware corporation ("Parent"), HC Acquisition Corp., a Delaware corporation and wholly owned subsidiary of Parent ("Sub"), and ERO, Inc., a Delaware corporation (the "Company"), to which this Exhibit A is attached. CONDITIONS TO THE OFFER Notwithstanding any other provision of the Offer, Sub shall not be required to accept for payment or, subject to any applicable rules and regulations of the SEC, including Rule 14e-1(c) under the Exchange Act (relating to Sub's obligation to pay for or return tendered Shares promptly after expiration or termination of the Offer), to pay for any Shares tendered, and may postpone the acceptance for payment or, subject to the restriction referred to above, payment for any Shares tendered, and may amend or terminate the Offer (whether or not any Shares have theretofore been purchased or paid for), if (i) there have not been validly tendered and not withdrawn prior to the time the Offer shall otherwise expire a number of Shares which constitutes a majority of the Shares outstanding on a fully-diluted basis on the date of purchase ("on a fully-diluted basis" having the following meaning, as of any date: the number of Shares outstanding, together with Shares the Company may be required, now or in the future, to issue pursuant to options, warrants, or other obligations outstanding at that date); (ii) any applicable waiting periods under the HSR Act shall not have expired or been terminated prior to the expiration of the Offer; (iii) the debt financing sources for Parent and Holdings shall not have provided the applicable debt financing to Parent and Holdings pursuant to the Financing Commitments; or (iv) at any time on or after the date of the Merger Agreement and before acceptance for payment of, or payment for, such Shares any of the following events shall have occurred: (A) there shall be pending, as of the expiration of the Offer or at any time thereafter, any litigation that seeks to (1) challenge the acquisition by Parent, Sub or any of their respective affiliates or Subsidiaries of Shares pursuant to the Offer or restrain, prohibit or delay the making or consummation of the Offer or the Merger, (2) make the purchase of or payment for some or all of the Shares pursuant to the Offer or the Merger illegal, (3) impose A-1 60 limitations on the ability of Parent, Sub, or any of their respective affiliates or Subsidiaries effectively to acquire or hold, or to require Parent, Sub, the Company or any of their respective affiliates or Subsidiaries to dispose of or hold separate, any material portion of their assets or business, (4) impose material limitations on the ability of Parent, Sub, the Company or any of their respective affiliates or Subsidiaries to continue to conduct, own or operate, as heretofore conducted, owned or operated, all or any material portion of their businesses or assets; (5) impose or result in material limitations on the ability of Parent, Sub or any of their respective affiliates or Subsidiaries to exercise full rights of ownership of the Shares purchased by them, including, without limitation, the right to vote the Shares purchased by them on all matters properly presented to the stockholders of the Company; or (6) prohibit or restrict in a material manner the financing of the Offer; (B) there shall have been promulgated, enacted, entered, enforced or deemed applicable to the Offer or the Merger, any Law, or there shall have been issued any decree, order or injunction, that results in any of the consequences referred to in subsection (A) above; (C) except as set forth on Exhibit D or Schedule 4.1(j) to the Merger Agreement, any event or events shall have occurred that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect on the Company; (D) there shall have occurred (1) any general suspension of trading in, or limitation on prices for, securities on any national securities exchange or in the over-the-counter market in the United States for a period in excess of 48 hours, (2) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (3) the commencement of a war, armed hostilities or other international or national calamity, directly or indirectly involving the United States, (4) any limitations (whether or not mandatory) imposed by any governmental authority on the nature or extension of credit or further extension of credit by banks or other lending institutions, or (5) in the case of clauses (3) and (4) of this paragraph (D), a material acceleration or worsening thereof; A-2 61 (E) the representations and warranties of the Company contained in the Merger Agreement (without giving effect to any "Material Adverse Effect", "materiality" or similar qualifications contained therein) shall not be true and correct in all respects as of the date of consummation of the Offer as though made on and as of such date except (1) for changes specifically permitted by the Merger Agreement, (2) that those representations and warranties which address matters only as of a particular date shall remain true and correct as of such date, and (3) for breaches or inaccuracies which, individually or in the aggregate, could not reasonably be expected to (a) have a Material Adverse Effect on the Company or (b) materially adversely affect the ability of the parties hereto to consummate the transactions contemplated hereby; (F) the obligations of the Company contained in the Merger Agreement (without giving effect to any "Material Adverse Effect", "materiality" or similar qualifications contained therein) to be performed at or prior to the consummation of the Offer shall not have been performed or complied with in all respects by the Company prior to the consummation of the Offer except for failures to perform or comply which, individually or in the aggregate, could not reasonably be expected to (a) have a Material Adverse Effect on the Company or (b) materially adversely affect the ability of the parties hereto to consummate the transactions contemplated hereby; (G) the Merger Agreement shall have been terminated in accordance with its terms; (H) prior to the purchase of Shares pursuant to the Offer, an Acquisition Proposal for the Company exists and the Board shall have withdrawn or materially modified or changed (including by amendment of the Schedule 14D-9) in a manner adverse to Sub its recommendation of the Offer, the Merger Agreement or the Merger; or (I) it shall have been publicly disclosed or Parent or Sub shall have otherwise learned that any person, entity or "group" (as defined in Section 13(d)(3) of the Exchange Act, other than Parent or its affiliates or Subsidiaries, or any group of which any of such persons or entities is a member, or any party to the Stockholders Agreement, shall have acquired beneficial ownership (determined pursuant to Rule 13d-3 promulgated under the Exchange Act) of more than 20% of any class or series of capital stock of the Company (including, without limitation, the Shares), through the A-3 62 acquisition of stock, the formation of a group or otherwise, or shall have been granted an option, right or warrant (conditional or otherwise) to acquire beneficial ownership of more than 20% of any class or series of capital stock of the Company (including, without limitation, the Shares). The foregoing conditions are for the sole benefit of Sub and its affiliates and may be asserted by Sub regardless of the circumstances (including, without limitation, any action or inaction by Sub or any of its affiliates) giving rise to any such condition or may be waived by Sub, in whole or in part, from time to time in its sole discretion, except as otherwise provided in the Agreement. The failure by Sub at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right and may be asserted at any time and from time to time. Any determination by Sub concerning any of the events described herein shall be final and binding. A-4 63 GLOSSARY OF DEFINED TERMS
Term: Page: - ---- ---- Agreement 1 Acquisition Proposal 37 Benefit Plans 21 Board Percentage 6 CERCLA 26 Certificate of Merger 7 Certificates 10 Closing 7 Closing Date 7 Code 21, 45 Company 1 Company Common Stock 1 Company Intangible Property 25 Company Litigation 19 Company Order 19 Company Permits 18 Company SEC Documents 17 Company Stockholder Approval 16 Company Voting Debt 13 Confidentiality Agreement 40 Constituent Corporations 7 Continuing Directors 6 DGCL 4 Dissenting Shares 12 Effective Time 7 Employee Arrangements 21 Environmental Costs and Liabilities 25 Environmental Law 25 Exchange Act 2 Financial Advisor 4 Financing Commitments 34 GAAP 17 Gains and Transfer Taxes 16 Governmental Entity 16 Hazardous Material 26 HSR Act 16 Indebtedness 30 Indemnified Liabilities 42 Indemnified Parties 42 Injunction 46 IRSA 26 Laws 15 Material Adverse Effect 13 Material Contracts 29 Merger 1
A-5 64
TERM: PAGE: - ---- ---- Merger Consideration 8 Offer 2 Offer Consideration 2 Offer Documents 3 On a fully-diluted basis 2 Option Consideration 11 Options 11 OSHA 26 Parent 1 Paying Agent 9 Payment Fund 9 Preferred Stock 13 Proxy Statement 16 Real Property Leases 28 Release 26 Remedial Action 26 Representatives 35 Schedule 14D-1 3 Schedule 14D-9 4 SEC 2 Securities Act 17 Shares 1 Stock Option Plans 11 Stockholders Agreement 1 Sub 1 Subsidiary 8 Surviving Corporation 7 Tax Returns 21 Taxes 21 Trigger Event 41 Violation 15 WARN Act 25
A-6 65 EXHIBIT D Amav returns in the first quarter of 1997. Impact close-outs in the first quarter of 1997. Estimated first quarter results on the following schedule. The Company's business is highly cyclical in nature with substantially all of the Company's net income produced in the third and fourth quarters. 66 (ERO, INC. LETTERHEAD) CONFIDENTIAL March 27, 1997 TO: ERO, Inc. Board of Directors; Thomas M. Gasner Arthur S. Nicholas Robert J. Lipsig Bruce V. Rauner Lee M. Mitchell D. R. Ryan FROM: Mark D. Renfree RE: FIRST QUARTER FLASH REPORT Gentlemen: Our preliminary look at the first quarter results indicates the following:
Forecast Budget Prior Year -------- ------ ---------- - - Sales $19.6 $21.6 $18.9 - - Margins 6.5 7.2 5.6 % 33.1% 33.3% 29.8% - - Operating Expenses 8.0 8.8 7.6 - - EBIT (1.5) (1.6) (1.9) - - Net Income (2.1) (2.1) (2.2) - - EPS $(.20) $(.20) $(.21) Analyst EPS Estimate $(.20)
67 ERO, INC. Page 2 First Quarter Flash Report SALES: ERO Industries - will outperform budget and prior year on strong Slumber Shoppe sales. Water Sports in line with expectations. AMAV - sales decline driven by: on-time holiday season deliveries have eliminated traditional carryover of backlog into first quarter; $1 million special arts and crafts promo for Walmart in 1996 not repeated; and first quarter returns of bulk toys higher than anticipated. PRISS PRINTS - strong performance continues with sales expected to outperform budget and prior year. February revenues of $1.9 million, largest month ever. IMPACT - should surpass last year but fall short of budget this quarter. Strong order position for second quarter. MARGINS: Manufacturing and purchase price variances at Hazelhurst have generated $450,000 in favorable variances vs. a budget of $150,000 unfavorable variances. OPERATING Up from last year but under budget as a result of sales EXPENSES: shortfall. ERO Industries and AMAV posting significant savings to budget. NET INCOME: $(.20) per share - loss will be on line with analyst estimate. 68 ERO, INC. 3/27/97 1997 PROJECTION 5:24 PM INCOME STATEMENTS (Dollars in thousands)
QUARTER ENDED MARCH 31, ----------------------- 1997 1997 1996 PROJECTED BUDGET ACTUAL --------- ------ ------ SALES - SLUMBER SHOPPE $3,131 $2,400 $1,199 SALES - WATER SPORTS 5,920 5,900 5,374 SALES - OTHER (INCLUDES INTERNATIONAL) 220 338 303 SALES - AMAV INDUSTRIES, INC. 5,721 7,500 6,435 SALES - IMPACT, INC. 614 1,517 487 SALES - PRISS PRINTS, INC. 3,744 3,569 2,947 SALES - ERO CANADA, INC. 229 332 138 ------------------------------------ NET SALES 19,579 21,556 18,883 COST OF SALES 13,098 14,359 13,284 ------------------------------------ GROSS PROFIT 6,481 7,196 5,619 33.10% 33.38% 29.76% S, G, & A EXPENSE 6,000 8,845 7,552 ------------------------------------ OPERATING EARNINGS (1,519) (1,649) (1,933) -7.78% -7.65% -10.24% INTEREST EXPENSE 2,000 1,875 1,846 ------------------------------------ INCOME BEFORE TAXES (3,519) (3,524) (3,779) INCOME TAX PROVISION (1,442) (1,444) (1,551) ------------------------------------ NET INCOME ($2,077) ($2,080) ($2,228) ==================================== NET INCOME PER SHARE ($0.20) ($0.20) ($0.21) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (IN THOUSANDS) 10,650 10,500 10,364 ANALYST ESTIMATE ($0.20)
69 ERO, INC. 3/27/97 1997 PROJECTION 5:27 PM INCOME STATEMENTS (Dollars in thousands)
ACTUAL PROJECTION ---------------------------------------------------- JANUARY FEBRUARY MARCH TOTAL 1997 1997 1997 1997 --------------------------------------------------------------------- SALES - SLUMBER SHOPPE $686 $395 $1,550 $3,131 SALES - WATER SPORTS 2,100 1,745 2,075 5,920 SALES - OTHER (43) 143 120 220 SALES - AMAV INDUSTRIES, INC. 2,518 1,703 1,500 5,721 SALES - IMPACT, INC. 238 176 200 614 SALES - PRISS PRINTS, INC. 581 1,863 1,300 3,744 SALES - ERO CANADA, INC. 49 60 100 229 --------------------------------------------------------------------- TOTAL SALES 6,129 6,605 6,845 19,579 COST OF SALES @ STANDARD 4,327 4,589 4,640 13,556 --------------------------------------------------------------------- GROSS PROFIT @ STANDARD 1,802 2,016 2,205 6,023 29.4% 30.5% 32.2% 30.8% VARIANCES (51) (280) (127) (458) --------------------------------------------------------------------- NET GROSS PROFIT 1,853 2,296 2,331 6,481 30.2% 34.8% 34.1% 33.1% ROYALTIES AND GUARANTEES 312 479 504 1,295 --------------------------------------------------------------------- TOTAL CONTRIBUTION TO PROFIT 1,541 1,817 1,828 5,186 --------------------------------------------------------------------- 25.1% 27.5% 26.7% 26.5% COMMISSIONS 86 153 150 389 SALES AND MARKETING EXPENSE 1,075 1,160 1,061 3,296 GENERAL & ADMINISTRATIVE 889 786 813 2,488 ALLOCATED G&A - - - - --------------------------------------------------------------------- TOTAL S, G & A EXPENSE 2,050 2,099 2,025 6,174 --------------------------------------------------------------------- OPERATING EARNINGS (509) (282) (197) (987) -8.3% -4.3% -2.9% PURCHASE ACCOUNTING 190 190 190 570 INTEREST EXPENSE (INCOME) 721 628 651 2,000 MISCELLANEOUS EXPENSE (INCOME) (19) (22) 3 (38) --------------------------------------------------------------------- INCOME (LOSS) BEFORE TAXES (1,401) (1,078) (1,041) (3,519) INCOME TAX PROVISION (BENEFIT) (575) (441) (426) (1,442) --------------------------------------------------------------------- NET INCOME (LOSS) ($826) ($637) ($615) ($2,077) ===================================================================== NET INCOME (LOSS) PER SHARE ($0.08) ($0.06) ($0.06) ($0.20) WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (IN THOUSANDS) 10,316 10,316 10,650 10,650
70 ERO Industries, Inc. 27-Mar-97 1997 Projection 05:27 PM Profit & Loss Statements (Dollars In Thousands)
ACTUAL PROJECTION ----------------------------- Jan Feb Mar Total -------------------------------------- Slumber $737 $930 $1,565 $3,232 Water Sports 2,132 1,896 2,180 6,208 Other (126) (43) - (169) -------------------------------------- Total Net Sales 2,743 2,783 3,745 9,271 -------------------------------------- Slumber 269 181 569 1,019 Water Sports 519 527 582 1,628 Other (144) (56) - (200) -------------------------------------- Total GM 644 652 1,151 2,447 -------------------------------------- Slumber 36.5% 19.5% 35.4% 38.0% Water Sports 24.3% 27.8% 26.7% 24.8% Other 114.3% 130.2% 100.0% 100.0% -------------------------------------- Total GM % 23.5% 23.4% 30.7% 34.2% -------------------------------------- Variances (Fav)/Unfav 7 (276) (117) (386) -------------------------------------- Net Gross Profit 637 928 1,268 2,833 -------------------------------------- 23.2% 33.3% 33.9% 30.6% Royalties & Guarantees 180 217 284 681 -------------------------------------- 6.6% 7.8% 7.6% 7.3% Net Contribution 457 711 985 2,153 -------------------------------------- Commissions 51 84 110 245 Sales & Marketing 330 392 392 1,114 G&A Allocation 225 225 225 675 -------------------------------------- Total G&A 606 701 727 2,034 -------------------------------------- % 22.1% 26.2% 19.4% 21.9% Operating Income (149) 10 256 119 -------------------------------------- % -5.4% 0.4% 6.9% 1.3% Interest Expense 246 213 185 644 Purchase Accounting 70 70 70 210 Misc. Expense/(Income) 8 12 - 20 -------------------------------------- Income Before Taxes (473) (285) 3 (755) Income Taxes (194) (117) 1 (310) -------------------------------------- Net Income ($279) ($158) $2 ($445) ====================================== Earnings per Share ($0.03) ($0.02) $0.00 ($0.04)
71 AMAV Industries, Inc. 27-Mar-97 Profit & Loss Statements 05:24 PM 1997 Projection (Dollars in Thousands)
ACTUAL PROJECTION ------------------------------- Jan Feb Mar Total --------------------------------------- Total Net Sales $2,518 $1,703 $1,500 $5,721 Total GM 777 541 396 1,714 --------------------------------------- Total GM % 30.9% 31.8% 26.4% 30.0% Variances (Fav)/Unfav - - - - --------------------------------------- Net Gross Profit 777 541 396 1,714 30.9% 31.8% 26.4% 30.0% Royalties & Guarantees - - - - --------------------------------------- Net Contribution 777 541 398 1,714 30.9% 31.8% 26.4% 30.0% Commissions 19 18 11 48 Sales & Marketing 248 233 233 714 G&A 349 340 340 1,029 G&A Allocation 75 75 75 225 --------------------------------------- Total G&A 691 666 659 2,016 --------------------------------------- % 27.4% 39.1% 43.9% 35.2% Operating Income 86 (125) (263) (302) --------------------------------------- % 3.4% -7.3% -17.5% -5.3% Interest Expense 475 415 486 1,356 Purchase Accounting 94 94 94 282 Misc. Expense/(Income) (23) (38) - (61) --------------------------------------- Income Before Taxes (480) (596) (823) (1,879) Income Taxes (189) (244) (337) (770) --------------------------------------- Net Income ($271) ($352) ($486) ($1,109) ======================================= Earnings per Share ($0.03) ($0.03) ($0.05) ($0.11)
72 Impact, Inc. 27-Mar-97 Profit & Loss Statements 05:27 PM 1997 Projection (Dollars in Thousands)
ACTUAL PROJECTION ------------------------------- Jan Feb Mar Total --------------------------------------- Total Net Sales $238 $176 $200 $614 Total GM 87 (26) 50 111 --------------------------------------- Total GM % 36.6% -14.8% 25.0% 18.1% Variances (Fav)/Unfav 43 19 48 110 --------------------------------------- Net Gross Profit 44 (45) 2 1 18.5% -25.6% 1.0% 0.2% Royalties & Guarantees 54 44 24 122 --------------------------------------- Net Contribution (10) (89) (22) (121) -4.2% -50.6% -11.2% -19.5% Commissions 5 2 2 9 Sales & Marketing 307 262 265 834 G&A 0 0 0 - G&A Allocation 29 29 29 87 --------------------------------------- Total G&A 341 293 296 930 --------------------------------------- % 143.3% 166.5% 148.1% 151.5% Operating Income (351) (382) (319) (1,052) --------------------------------------- % -147.5% -217.0% -159.5% -171.3% Interest Expense - - - - Purchase Accounting 21 21 21 63 Misc. Expense/(Income) 1 2 2 5 --------------------------------------- Income Before Taxes (373) (405) (342) (1,120) Income Taxes (153) (166) (140) (459) --------------------------------------- Net Income ($220) ($239) ($202) ($661) ======================================= Earnings per Share ($0.02) ($0.02) ($0.02) ($0.06)
73 Priss Prints, Inc. 27-Mar-97 Profit & Loss Statements 05:27 PM 1997 Projection (Dollars In Thousands)
ACTUAL PROJECTION ----------------------------- Jan Feb Mar Total -------------------------------------- Total Net Sales $711 $1,898 $1,300 $3,909 Total GM 335 851 567 1,753 -------------------------------------- Total GM % 47.1% 44.8% 43.7% 44.9% Variances (Fav)/Unfav (103) (34) (63) (200) -------------------------------------- Net Gross Profit 438 885 630 1,953 61.6% 45.5% 48.5% 50.0% Royalties & Guarantees 86 216 183 485 -------------------------------------- Net Contribution 352 669 447 1,468 49.5% 35.2% 34.4% 37.6% Commissions 19 55 25 99 Sales & Marketing 169 254 153 576 G&A 0 0 0 0 G&A Allocation 25 25 25 75 -------------------------------------- Total G&A 213 334 203 750 -------------------------------------- % 63.6% 39.2% 35.8% 42.8% Operating Income 139 335 244 718 -------------------------------------- % 41.5% 39.4% 43.0% 41.0% Interest Expense - - - 0 Purchase Accounting 5 5 5 15 Misc. Expense/(Income) (1) 1 1 1 -------------------------------------- Income Before Taxes 135 329 238 702 Income Taxes 55 135 98 288 -------------------------------------- Net Income $80 $194 $140 $414 ====================================== Earnings per Share $0.01 $0.02 $0.01 $0.04
EX-99.(C)(2) 16 STOCKHOLDERS AGREEMENT 1 EXHIBIT 99.(c)(2) STOCKHOLDERS AGREEMENT THIS STOCKHOLDERS AGREEMENT, dated as of April 10, 1997, is made and entered into by Hedstrom Corporation, a Delaware corporation ("Parent"), HC Acquisition Corp., a Delaware corporation and a direct wholly-owned subsidiary of Parent ("Sub"), and Golder, Thoma, Cressey Fund III Limited Partnership (the "Stockholder"). W I T N E S S E T H: WHEREAS, concurrently herewith, Parent, Sub and ERO, Inc., a Delaware corporation (the "Company"), are entering into an Agreement and Plan of Merger (as such agreement may hereafter be amended from time to time, the "Merger Agreement"; capitalized terms used and not defined herein have the respective meanings ascribed to them in the Merger Agreement), pursuant to which Sub will be merged with and into the Company (the "Merger"); WHEREAS, in furtherance of the Merger, Parent and the Company desire that, as soon as practicable (and not later than five business days) after the execution and delivery of the Merger Agreement, Sub commence a cash tender offer to purchase any and all outstanding shares of Company Common Stock (as defined in Section 1), including all of the Shares (as defined in Section 2) owned beneficially by the Stockholder; and WHEREAS, as an inducement and a condition to entering into the Merger Agreement, Parent has required that the Stockholder agree, and the Stockholder has agreed, to enter into this Agreement; NOW, THEREFORE, in consideration of the foregoing and the representations, warranties, covenants and agreements contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. Definitions. For purposes of this Agreement: (a) "Beneficially Own" or "Beneficial Ownership" with respect to any securities shall mean having "beneficial ownership" of such securities (as determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), including pursuant to any agreement, arrangement or understanding, whether or not in writing. Without duplicative counting of the same securities by the same holder, securities Beneficially Owned by a Person shall include securities Beneficially Owned by all other Persons with whom such 2 Person would constitute a "group" as within the meanings of Section 13(d)(3) of the Exchange Act. (b) "Company Common Stock" shall mean at any time the common stock, $.01 par value, of the Company. (c) "Person" shall mean an individual, corporation, partnership, joint venture, association, trust, unincorporated organization or other entity. 2. Tender of Shares. (a) The Stockholder hereby agrees to validly tender (and not to withdraw) pursuant to and in accordance with the terms of the Offer, not later than the fifth business day after commencement of the Offer pursuant to Section 1.1 of the Merger Agreement and Rule 14d-2 under the Exchange Act, the number of shares of Company Common Stock set forth opposite the Stockholder's name on Schedule I hereto (the "Existing Shares", and together with any shares of Company Common Stock acquired by the Stockholder after the date hereof and prior to the termination of this Agreement whether upon the exercise of options, warrants or rights, the conversion or exchange of convertible or exchangeable securities, or by means of purchase, dividend, distribution or otherwise, the "Shares"), Beneficially Owned by him or it. The Stockholder shall satisfy its obligations hereunder to the extent that it tenders or causes to be tendered Shares which it Beneficially Owns and over which it has the legal and unconditional right to dispose of. The Stockholder hereby acknowledges and agrees that Sub's obligation to accept for payment and pay for Shares in the Offer, including the Shares Beneficially Owned by the Stockholder, is subject to the terms and conditions of the Offer. (b) The Stockholder hereby agrees to permit Parent and Sub to publish and disclose in the Offer Documents and, if Company Stockholder Approval is required under applicable law, the Proxy Statement (including all documents and schedules filed with the SEC) his or its identity and ownership of Company Common Stock and the nature of his or its commitments, arrangements and understandings under this Agreement. 3. Provisions Concerning Company Common Stock. (a) The Stockholder hereby agrees that during the period commencing on the date hereof and continuing until the first to occur of the Effective Time, the termination of this Agreement or termination of the Merger Agreement in accordance with its terms, at any meeting of the holders of Company Common Stock, however called, the Stockholder shall vote (or cause to be 2 3 voted) the Shares held of record or Beneficially Owned by the Stockholder, whether issued, heretofore owned or hereafter acquired, (i) in favor of the Merger, the execution and delivery by the Company of the Merger Agreement and the approval of the terms thereof and each of the other actions contemplated by the Merger Agreement and this Agreement and any actions required in furtherance thereof and hereof; (ii) against any action or agreement that would result in a breach in any respect of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement or this Agreement; and (iii) except as otherwise agreed to in writing in advance by Parent, against the following actions (other than the Merger and the transactions contemplated by the Merger Agreement): (A) any extraordinary corporate transaction, such as a merger, consolidation or other business combination involving the Company or its Subsidiaries; (B) a sale, lease or transfer of a material amount of assets of the Company or its Subsidiaries, or a reorganization, recapitalization, dissolution or liquidation of the Company or its Subsidiaries; (C) (1) any change in a majority of the persons who constitute the board of directors of the Company; (2) any change in the present capitalization of the Company or any amendment of the Company's Certificate of Incorporation or Bylaws; (3) any other material change in the Company's corporate structure or business; or (4) any other action which, in the case of each of the matters referred to in clauses C (1), (2), (3) or (4), is intended, or could reasonably be expected, to impede, interfere with, delay, postpone, or materially adversely affect the Merger and the transactions contemplated by this Agreement and the Merger Agreement, and during such period the Stockholder shall not enter into any agreement or understanding with any person or entity the effect of which would be inconsistent or violative of the provisions and agreements contained in this Section 3. (b) The Stockholder hereby grants to Parent a proxy to vote the Shares of the Stockholder as indicated in Section 3(a). The Stockholder intends such proxy to be irrevocable and coupled with an interest and will take such further action or execute such other instruments as may be necessary to effectuate the intent of this proxy and hereby revokes any proxy previously granted by the Stockholder with respect to such Shares. 4. Other Covenants, Representations and Warranties. (A) The Stockholder hereby represents and warrants to Parent as follows: (a) Ownership of Shares. The Stockholder is either (i) the record and Beneficial Owner of, or (ii) the Beneficial Owner but not the record holder of, the number of Shares set forth opposite the Stockholder's name on Schedule I hereto. On 3 4 the date hereof, except for such Shares that may be deemed to be Beneficially Owned by the Stockholder as a result of that certain Voting Agreement, dated as of July 15, 1988, by and among the Company, the Stockholder and the other parties thereto, as amended, the Existing Shares set forth opposite the Stockholder's name on Schedule I hereto constitute all of the Shares owned of record or Beneficially Owned by the Stockholder. The Stockholder has sole voting power and sole power to issue instructions with respect to the matters set forth in Sections 2 and 3 hereof, sole power of disposition, sole power of conversion, sole power to demand appraisal rights and sole power to agree to all of the matters set forth in this Agreement, in each case with respect to all of the Existing Shares set forth opposite the Stockholder's name on Schedule I hereto, with no material limitations, qualifications or restrictions on such rights, subject to applicable securities laws and the terms of this Agreement. (b) Power; Binding Agreement. The Stockholder has the legal capacity, power and authority to enter into and perform all of the Stockholder's obligations under this Agreement. The execution, delivery and performance of this Agreement by the Stockholder will not violate any other agreement to which the Stockholder is a party including, without limitation, any voting agreement, stockholders agreement or voting trust. This Agreement has been duly and validly executed and delivered by the Stockholder and constitutes a valid and binding agreement of the Stockholder, enforceable against the Stockholder in accordance with its terms. There is no beneficiary or holder of a voting trust certificate or other interest of any trust of which the Stockholder is trustee whose consent is required for the execution and delivery of this Agreement or the consummation by the Stockholder of the transactions contemplated hereby. (c) No Conflicts. Except for filings under the HSR Act, if applicable, and the filings required under the Merger Agreement (A) no filing with, and no permit, authorization, consent or approval of, any state or federal public body or authority is necessary for the execution of this Agreement by the Stockholder and the consummation by the Stockholder of the transactions contemplated hereby, except where the failure to obtain such consent, permit, authorization, approval or filing would not interfere with the Stockholder's ability to perform its obligations hereunder, and (B) none of the execution and delivery of this Agreement by the Stockholder, the consummation by the Stockholder of the transactions contemplated hereby or compliance by the Stockholder with any of the provisions hereof shall (1) conflict with or result in any breach of any applicable organizational documents applicable to the Stockholder, (2) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise 4 5 to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which the Stockholder is a party or by which such Stockholder or any of the Stockholder's properties or assets may be bound, or (3) violate any order, writ, injunction, decree, judgment, order, statute, rule or regulation applicable to the Stockholder or any of the Stockholder's properties or assets, in each such case except to the extent that any conflict, breach, default or violation would not interfere with the ability of the Stockholder to perform its obligations hereunder. (d) No Encumbrances. Except as required by Section 2 and for the proxy granted under Section 3(b), the Stockholder's Shares and the certificates representing such Shares are now, and at all times during the term hereof will be, held by the Stockholder, or by a nominee or custodian for the benefit of the Stockholder, free and clear of all liens, claims, security interests, proxies, voting trusts or agreements, understandings or arrangements or any other encumbrances whatsoever. (e) No Solicitation. The Stockholder shall, in its capacity as such, comply with the terms of Section 5.1(e) of the Merger Agreement. (f) Restriction on Transfer, Proxies and Non-Interference. Except as required by Section 2 or Section 3(b), at any time during the period beginning on the date hereof and ending upon the earlier to occur of the Effective Time or the termination of this Agreement, the Stockholder shall not, directly or indirectly: (i) offer for sale, sell, transfer, tender, pledge, encumber, assign or otherwise dispose of, or enter into any contract, option or other arrangement or understanding with respect to or consent to the offer for sale, sale, transfer, tender, pledge, encumbrance, assignment or other disposition of, any or all of the Stockholder's Shares or any interest therein; (ii) grant any proxies or powers of attorney, deposit any Shares into a voting trust or enter into a voting agreement with respect to any Shares; or (iii) take any action that could reasonably be expected to have the effect of preventing or disabling the Stockholder from performing the Stockholder's obligations under this Agreement. (g) Waiver of Appraisal Rights. The Stockholder hereby waives any rights of appraisal or rights to dissent from the Merger that the Stockholder may have. 5 6 (h) Reliance by Parent. The Stockholder understands and acknowledges that Parent is entering into, and causing Sub to enter into, the Merger Agreement in reliance upon the Stockholder's execution and delivery of this Agreement. (i) Further Assurances. From time to time, at the other party's request and without further consideration, each party hereto shall execute and deliver such additional documents and take all such further action as may be necessary or desirable to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement. (B) Parent and Sub hereby represent and warrant to Stockholder as follows: (a) Power; Binding Agreement. Each of Parent and Sub has the legal capacity, power and authority to enter into and perform all of its obligations under this Agreement and the Merger Agreement. The execution, delivery and performance of this Agreement and the Merger Agreement by Parent and Sub will not violate any other agreement to which Parent or Sub is a party. This Agreement and the Merger Agreement has been duly and validly executed and delivered by each of Parent and Sub and constitutes a valid and binding agreement of Parent and Sub enforceable against each of them in accordance with its terms. (b) No Conflicts. Except for filings under the HSR Act, if applicable, and the filings required under the Merger Areement (A) no filing with, and no permit, authorization, consent or approval of, any state or federal public body or authority is necessary for the execution of this Agreement and the Merger Agreement by Parent or Sub and the consummation by Parent or Sub of the transactions contemplated hereby, except where the failure to obtain such consent, permit, authorization, approval or filing would not interfere with Parent or Sub's ability to perform its obligations hereunder, and (B) none of the execution and delivery of this Agreement and the Merger Agreement by Parent or Sub, the consummation by Parent or Sub of the transactions contemplated hereby or compliance by Parent or Sub with any of the provisions hereof shall (1) conflict with or result in any breach of any applicable organizational documents applicable to Parent or Sub, (2) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which Parent or Sub is a party or by which Parent or Sub or any of Parent's or Sub's properties or 6 7 assets may be bound, or (3) violate any order, writ, injunction, decree, judgment, order, statute, rule or regulation applicable to Parent or Sub or any of its properties or assets, in each such case except to the extent that any conflict, breach, default or violation would not interfere with the ability of Parent or Sub to perform its obligations hereunder. (c) Financing. Parent and Sub have delivered to the Company a true and complete copy of (i) a letter of commitment obtained by Parent from Credit Suisse First Boston to provide debt financing for the transactions contemplated hereby pursuant to a senior credit facility; (ii) a letter of commitment obtained by Parent from Credit Suisse First Boston with respect to senior subordinated debt financing for the transactions contemplated hereby pursuant to the sale by Parent of senior subordinated notes; (iii) a letter of commitment obtained by Hedstrom Holdings, Inc., the sole stockholder of Parent ("Holdings"), from Credit Suisse First Boston with respect to senior debt financing for the transactions contemplated hereby pursuant to the sale by Holdings of senior notes; and (iv) from Hicks Muse Equity Fund II, L.P. to provide certain equity financing pursuant to the sale by Holdings of shares of its common stock (collectively, the "Financing Commitments"). Assuming that the financing contemplated by the Financing Commitments is consummated in accordance with the terms thereof, the funds to be borrowed and/or provided thereunder by Parent and Holdings will provide sufficient funds to pay the Offer Consideration, the Merger Consideration and all related fees and expenses. As of the date of this Agreement, Parent is not aware of any facts or circumstances that create a reasonable basis for Parent to believe that Parent and Holdings will not be able to obtain financing in accordance with the terms of the Financing Commitments. 5. Stop Transfer. The Stockholder agrees with, and covenants to, Parent that, except with respect to the tender of the Stockholder's Shares into the Offer, the Stockholder shall not request that the Company register the transfer (book-entry or otherwise) of any certificate or uncertificated interest representing any of the Stockholder's Shares, unless such transfer is made in compliance with this Agreement (including the provisions of Section 2 hereof). In the event of a stock dividend or distribution, or any change in the Company Common Stock by reason of any stock dividend, split-up, recapitalization, combination, exchange of shares or the like, the term "Shares" shall be deemed to refer to and include the Shares as well as all such stock dividends and distributions and any shares into which or for which any or all of the Shares may be changed or exchanged. 7 8 6. Termination. Except as otherwise provided herein, the covenants and agreements contained herein with respect to the Shares shall terminate upon the termination of the Merger Agreement in accordance with its terms by Parent or the Company. Notwithstanding anything contained herein to the contrary, the Stockholder shall have the absolute right, exercisable in its sole discretion, to terminate this Agreement if the Merger Agreement is amended in any respect in a manner that is adverse to the Stockholder or if the Offer is terminated, withdrawn, abandoned, expires or is modified in any manner that is adverse to the Stockholder. 7. Stockholder Capacity. No person executing this Agreement who is or becomes during the term hereof a director of the Company makes any agreement or understanding herein in his or her capacity as such director. The Stockholder signs solely in his or her capacity as the record and beneficial owner of, or the trustee of a trust whose beneficiaries are the beneficial owners of, the Stockholder's Shares. 8. Confidentiality. The Stockholder recognizes that successful consummation of the transactions contemplated by this Agreement may be dependent upon confidentiality with respect to the matters referred to herein. In this connection, pending public disclosure thereof, the Stockholder hereby agrees not to disclose or discuss such matters with anyone not a party to this Agreement (other than the Stockholder's counsel and advisors, if any) without the prior written consent of Parent, except for filings required pursuant to the Exchange Act and the rules and regulations thereunder or disclosures the Stockholder's counsel advises are necessary in order to fulfill the Stockholder's obligations imposed by law, in which event the Stockholder shall give notice of such disclosure to Parent as promptly as practicable so as to enable Parent to seek a protective order from a court of competent jurisdiction with respect thereto. 9. Miscellaneous. (a) Entire Agreement. This Agreement and the Merger Agreement constitute the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof. (b) Certain Events. The Stockholder agrees that this Agreement and the obligations hereunder shall attach to the Stockholder's Shares and shall be binding upon any person or entity to which legal or beneficial ownership of such Shares shall pass, whether by operation of law or otherwise, including, without limitation, the Stockholder's heirs, guardians, 8 9 administrators or successors. Notwithstanding any transfer of Shares, the transferor shall remain liable for the performance of all obligations under this Agreement of the transferor. (c) Assignment. This Agreement shall not be assigned by operation of law or otherwise without the prior written consent of the other party, provided that Parent may assign, in its sole discretion, its rights and obligations hereunder to any direct or indirect wholly owned subsidiary of Parent, but no such assignment shall relieve Parent of its obligations hereunder if such assignee does not perform such obligations. (d) Amendments, Waivers, Etc. This Agreement may not be amended, changed, supplemented, waived or otherwise modified or terminated, except upon the execution and delivery of a written agreement executed by the parties hereto; provided that Schedule I hereto may be supplemented by Parent by adding the name and other relevant information concerning any stockholder of the Company who agrees to be bound by the terms of this Agreement without the agreement of any other party hereto, and thereafter such added stockholder shall be treated as a "Stockholder" for all purposes of this Agreement. (e) Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly received if so given) by hand delivery, telegram, telex or telecopy, or by mail (registered or certified mail, postage prepaid, return receipt requested) or by any courier service, such as Federal Express, providing proof of delivery. All communications hereunder shall be delivered to the respective parties at the following addresses: If to Stockholder: At the addresses set forth on Schedule I hereto If to Parent: Hedstrom Corporation 300 Corporate Center Drive, Suite 110 Coraopolis, Pennsylvania 15108 Telecopy: (412) 269-9655 Attn: David Crowley copies to: Hicks, Muse, Tate & Furst Incorporated 200 Crescent Court Suite 1600 Dallas, Texas 75201 Telecopy: (214) 740-7313 Attention: Lawrence D. Stuart, Jr. 9 10 Hicks, Muse, Tate & Furst Incorporated 1325 Avenue of the Americas, 25th Floor New York, New York 10019 Telecopy: (212) 424-1450 Attn: Alan B. Menkes Weil, Gotshal & Manges 100 Crescent Court Suite 1300 Dallas, Texas 75201 Telecopy: (214) 746-7777 Attention: Glenn D. West or to such other address as the person to whom notice is given may have previously furnished to the others in writing in the manner set forth above. (f) Severability. Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law but if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any other provision or portion of any provision in such jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein. (g) Specific Performance. Each of the parties hereto recognizes and acknowledges that a breach by it of any covenants or agreements contained in this Agreement will cause the other party to sustain damages for which it would not have an adequate remedy at law for money damages, and therefore each of the parties hereto agrees that in the event of any such breach the aggrieved party shall be entitled to the remedy of specific performance of such covenants and agreements and injunctive and other equitable relief in addition to any other remedy to which it may be entitled, at law or in equity. (h) Remedies Cumulative. All rights, powers and remedies provided under this Agreement or otherwise available in respect hereof at law or in equity shall be cumulative and not alternative, and the exercise of any thereof by any party shall not preclude the simultaneous or later exercise of any other such right, power or remedy by such party. 10 11 (i) No Waiver. The failure of any party hereto to exercise any right, power or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon compliance by any other party hereto with its obligations hereunder, and any custom or practice of the parties at variance with the terms hereof, shall not constitute a waiver by such party of its right to exercise any such or other right, power or remedy or to demand such compliance. (j) No Third Party Beneficiaries. This Agreement is not intended to be for the benefit of, and shall not be enforceable by, any person or entity who or which is not a party hereto. (k) Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of Delaware, without giving effect to the principles of conflicts of law thereof. (l) Jurisdiction. Each party hereby irrevocably submits to the exclusive jurisdiction of the Court of Chancery in the State of Delaware in any action, suit or proceeding arising in connection with this Agreement, and agrees that any such action, suit or proceeding shall be brought only in such court (and waives any objection based on forum non conveniens or any other objection to venue therein); provided, however, that such consent to jurisdiction is solely for the purpose referred to in this paragraph (l) and shall not be deemed to be a general submission to the jurisdiction of said Court or in the State of Delaware other than for such purposes. Each party hereto hereby waives any right to a trial by jury in connection with any such action, suit or proceeding. (m) Descriptive Headings. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. (n) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which, taken together, shall constitute one and the same Agreement. (o) Nonsurvival of Representations and Warranties. None of the representations and warranties in this Agreement shall survive the acceptance for payment of, and the payment for the Shares by Sub in the Offer or the expiration of the Offer. 11 12 IN WITNESS WHEREOF, Parent and the Stockholder have caused this Agreement to be duly executed as of the day and year first above written. HEDSTROM CORPORATION By: /s/ ANDREW S. ROSEN ------------------------------ Andrew S. Rosen, Vice President HC ACQUISITION CORP. BY: /s/ ANDREW S. ROSEN -------------------------------- Andrew S. Rosen, Vice President STOCKHOLDER: GOLDER, THOMA, CRESSEY FUND III LIMITED PARTNERSHIP By: GOLDER, THOMA, CRESSEY & RAUNER, L.P., its General Partner By: /s/ ILLEGIBLE ------------------------ Name: Title: General Partner AGREED TO AND ACKNOWLEDGED (with respect to Section 5): ERO, INC. By: /s/ D. R. Ryan ------------------------ Name: Title: 12 13 SCHEDULE 1 TO STOCKHOLDERS AGREEMENT
Name and Address of Stockholder Number of Shares Owned - ------------------------------- ---------------------- 1. Golder, Thoma, Cressey 3,940,000 Fund III Limited Partnership c/o Golder, Thoma, Cressey, Rauner, Inc. 6100 Sears Tower Chicago, Illinois 60606 with a copy to: Kirkland & Ellis 200 East Randolph Drive Chicago, Illinois 60601 Attention: H. Kurt von Moltke Telephone: (312) 861-2000 Telecopy: (312) 861-2200
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