-----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, CGckvOKf/rQkfubm/936O86j9OL/WlM8Vld2c+eYM4NoV9Msk+2gZv0i5Jdrkita 9eBcNHJLdcec02PTEWHSrg== 0000950137-97-001558.txt : 19970418 0000950137-97-001558.hdr.sgml : 19970418 ACCESSION NUMBER: 0000950137-97-001558 CONFORMED SUBMISSION TYPE: SC 14D9 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19970417 SROS: NASD 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 14D9 SEC ACT: 1934 Act SEC FILE NUMBER: 005-43468 FILM NUMBER: 97582759 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: 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 14D9 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 SC 14D9 1 SCHEDULE 14 D-9 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ SCHEDULE 14D-9 SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO SECTION 14(D)(4) OF THE SECURITIES EXCHANGE ACT OF 1934 ------------------ ERO, INC. (NAME OF SUBJECT COMPANY) COMMON STOCK, PAR VALUE $0.01 PER SHARE (TITLE OF CLASS OF SECURITIES) ------------------ 268911104 (COMMON STOCK) (CUSIP NUMBER OF CLASS OF SECURITIES) ------------------ D. RICHARD RYAN, JR. CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER ERO, INC. 585 SLAWIN COURT MOUNT PROSPECT, ILLINOIS 60056 (847) 803-9200 (NAME, ADDRESS, AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF THE PERSON(S) FILING STATEMENT) ------------------ COPY TO: H. KURT VON MOLTKE KIRKLAND & ELLIS 200 EAST RANDOLPH DRIVE CHICAGO, ILLINOIS 60601 (312) 861-2000 ================================================================================ 2 ITEM 1. SECURITY AND SUBJECT COMPANY. The name of the subject company is ERO, Inc., a Delaware corporation (the "Company"), and the address of the principal executive office of the Company is 585 Slawin Court, Mount Prospect, Illinois 60056. The title of the class of equity securities to which this statement relates is the common stock, par value $0.01 per share, of the Company (the "Shares"). ITEM 2. TENDER OFFER OF THE PURCHASER. This statement relates to a cash tender offer by HC Acquisition Corp., a Delaware corporation (the "Purchaser") and a direct wholly owned subsidiary of Hedstrom Corporation, a Delaware corporation ("Parent"), disclosed in a Tender Offer Statement on Schedule 14D-1 (the "Schedule 14D-1") dated April 17, 1997, to purchase all outstanding Shares at $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 in the related Letter of Transmittal (which, together with any amendments or supplements thereto, collectively constitute the "Offer"). The Offer is being made by the Purchaser pursuant to an Agreement and Plan of Merger, dated as of April 10, 1997, among the Company, the Purchaser, and Parent (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 (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 not have voted in favor of the Merger or consented thereto in writing and who shall have demanded properly 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 taxes. Certain terms and conditions of the Merger Agreement are described below in Item 3. A copy of the Merger Agreement is attached hereto as Exhibit 1 and is incorporated herein by reference. In connection with the execution of the Merger Agreement, the Purchaser and Parent entered into a Stockholders Agreement, dated as of April 10, 1997 (the "Stockholders Agreement"), with Golder, Thoma, Cressey Fund III Limited Partnership (the "Stockholder"), pursuant to which, among other things, the Stockholder has agreed with the Purchaser to tender into the Offer all 3,940,000 outstanding Shares beneficially owned by it, representing approximately 33.6% of the outstanding Shares calculated on a fully-diluted basis, and not withdraw them, except under limited circumstances. Certain terms and conditions of the Stockholders Agreement are described below in Item 3. A copy of the Stockholders Agreement is attached hereto as Exhibit 2 and is incorporated herein by reference. Based on the information in the Offer to Purchase, the principal executive offices of the Purchaser are located at 300 Corporate Center Drive, Suite 100, Coraopolis, Pennsylvania 15108. ITEM 3. IDENTITY AND BACKGROUND. (a) The name and address of the Company, which is the person filing this statement, are set forth in Item 1 above which information is incorporated herein by reference. (b)(1) Certain contracts, agreements, arrangements and understandings between the Company and certain of its directors and executive officers are described in the Company's Information Statement dated April 17, 1997 under "Directors and Executive Officers of the Company," "Executive Compensation," "Performance Graph," and "Security Ownership." The Information Statement is attached hereto as Schedule I, filed as Exhibit 3 to this Schedule 14D-9 and incorporated herein by reference. In addition, certain contracts, agreements, arrangements and understandings relating to the Company and/or the Company's 1 3 directors and executive officers are contained in the Merger Agreement and are described below under "The Merger Agreement." Director Liability and Indemnification. Under the Delaware General Corporation Law ("DGCL"), a corporation has the power to indemnify any director or officer against expenses, judgments, fines, and settlements incurred in a proceeding, other than an action by or in the right of the corporation, if the person acted in good faith and in a manner that the person reasonably believed to be in the best interests of the corporation or not opposed to the best interests of the corporation, and, in the case of a criminal proceeding, had no reason to believe the conduct of the person was unlawful. In the case of an action by or in the right of the corporation, the corporation has the power to indemnify any officer or director against expenses incurred in defending or settling the action if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation; provided, however, that no indemnification may be made when a person is adjudged liable to the corporation, unless a court determines such person is entitled to indemnity for expenses, and then such indemnification may be made only to the extent such court shall determine. The DGCL requires that to the extent an officer or director of a corporation is successful on the merits or otherwise in defense of any third-party or derivative proceeding, or in defense of any claim, issue, or matter therein, the corporation must indemnify the officer or director against expenses incurred in connection therewith. Under the DGCL, a corporation may adopt a provision in its certificate of incorporation that eliminates or limits the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director; provided, however, that such provision may not eliminate or limit director monetary liability for: (i) breaches of the director's duty of loyalty to the corporation or its stockholders; (ii) acts or omissions not in good faith or involving intentional misconduct or knowing violations of laws; (iii) the payment of unlawful dividends or unlawful stock repurchases or redemptions; or (iv) transactions in which the director received an improper personal benefit. The Company's Certificate of Incorporation includes such a provision. The Company's By-Laws provide that the Company will, to the fullest extent permitted by the DGCL, indemnify all persons whom it has the power to indemnify against all of the costs, expenses, and liabilities incurred by them by reason of having been officers or directors of the Company, or any subsidiary of the Company or any other corporation for which such persons acted as officer or director at the request of the Company. The Merger Agreement also contains covenants that will require the Surviving Corporation to maintain the Company's current director and officer liability coverage (or replacement insurance with similar coverage) for a period of six years after the Effective Time. See "The Merger Agreement -- Indemnification" and "The Merger Agreement -- Directors' and Officers' Insurance." (2) Arrangements with the Purchaser or its Affiliates. THE MERGER AGREEMENT The following is a summary of the Merger Agreement. Such summary is qualified in its entirety by reference to the text of the Merger Agreement, a copy of which is filed as Exhibit 1 hereto and is incorporated herein by reference. 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 ("on a fully-diluted basis" having the following meaning, as of any date: the number of Shares outstanding, together with Shares which the Company may be required to issue pursuant to options, warrants, or other obligations outstanding on that 2 4 date), (iii) extend the expiration date of the Offer (except the Purchaser 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 "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 promptly upon the purchase by Parent or any of its subsidiaries of such number of Shares which represents 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 Securities Exchange Act of 1934 (the "Exchange Act"), 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. At the request of Parent, the Company has agreed to 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 this Schedule 14D-9. Parent is to 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. 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 Directors" 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 and in accordance with the DGCL, Purchaser will be merged with and into the Company. In the Merger, at the Effective Time, by virtue of the Merger and without any action on the part of the holders of any of the Shares, the Purchaser, or the Company, each Share issued and outstanding immediately prior to the Effective Time (excluding Shares owned directly or indirectly by (i) the Company or by Parent, Purchaser, or any other subsidiary of Parent and (ii) stockholders of the Company who shall not have voted in favor of the Merger or consented thereto in writing and who shall have 3 5 demanded properly appraisal for such Shares under Delaware law (such Shares to be referred to as "Dissenting Shares")) shall be converted into the right to receive the actual amount per Share in cash paid to holders in the Offer, 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. Preparation of the Proxy Statement; Merger Without a Company Stockholders Meeting. The Merger Agreement provides that in the event that Parent or any Subsidiary of Parent shall acquire at least a majority of the outstanding Shares (on a fully diluted basis) in the Offer or otherwise, the Parent, Purchaser, and the Company have agreed, at the request of the Purchaser, to take all necessary and appropriate action to cause the Merger to become effective, as soon as practicable after the expiration of the Offer, in accordance with Section 251 of the DGCL. Such action shall include the prompt preparation and distribution of a proxy statement (if required by applicable law) relating to a meeting of Stockholders approving the Merger (such proxy statement as amended or supplemented from time to time referred to herein as the "Proxy Statement"). The Company has agreed to use all commercially reasonable efforts to cause the Proxy Statement to be mailed to the Company's Stockholders at the earliest practicable date. Notwithstanding the foregoing, the Merger Agreement provides that in the event that Parent or any subsidiary of Parent acquires at least 90% of the outstanding Shares in the Offer, the Merger may be effected 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 hereto. 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 financial advisor, vote required, labor matters, intangible property, environmental matters, real property, board recommendation, material contracts, related party transactions, indebtedness, liens, and other matters. Parent and Purchaser have also made certain representations and warranties with respect to corporate existence and power, corporate authorization, consent and approvals, noncontravention, 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, 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 relationships with customers, suppliers and others having business dealings with it. The Company has further agreed that it shall not nor shall it permit any of its subsidiaries to: (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 (A) as contemplated by Section 3.5 of the Merger Agreement with respect to certain outstanding options and (B) 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 Section 3.5 of the Merger Agreement with respect to certain outstanding options, 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 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 issuances of Shares upon the exercise of options or warrants that are 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 By-laws; (viii) merge or consolidate with, or acquire any equity 4 6 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 operation 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 for 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 or any of its subsidiaries; (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 respects 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, (A) grant any increases in the compensation of any of its directors, officers, or key employees, (B) 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 of the Merger Agreement to any such director, officer or key employee, whether past or present, (C) enter into any new, or materially amend any existing, employment, severance, or termination agreement with any such director, officer, or key employee, or (D) except as may be required by 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 prior written 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 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 a 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 except for 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, by and among the Company, the financial institutions party thereto and the First National Bank of Chicago, as agent, indebtedness incurred to fund capital expenditures permitted under Section 5.1(n) of the Merger Agreement and 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 be unreasonably withheld), (A) enter into any contracts involving aggregate annual payments 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; (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 5 7 necessary, proper, or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by the Merger Agreement subject to approval of the Company's stockholders, 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 Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations thereunder (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 obligations; 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, confidentiality and the continuation of employee benefits. 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. The Merger Agreement provides that 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 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 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, 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 to approve the Merger Agreement (which may include making any statement required by Rule 14e-2 under the Exchange Act) 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 6 8 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, the Offer or the Merger 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. 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 (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. Fees and Expenses. Except as provided below, the Merger Agreement provides that all costs and expenses 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 any of the following events occurs (each, a "Trigger Event"): (i) the Board shall have (A) withdrawn or adversely modified, or taken a public position materially inconsistent with its approval or recommendation of the Offer, the Merger or the Merger 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 making a "stop-look-and-listen" communication with respect to an Acquisition Proposal, the Offer or the Merger 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, 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 the Merger Agreement) with respect to an Acquisition Proposal. The 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 accordance with the terms thereof 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 that the debt financing sources for Parent and Purchaser shall not have provided the applicable debt financing to Parent and Purchaser pursuant to the Financing Commitments. Any amounts payable 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 (as defined in the Merger Agreement) of the following conditions: (i) the Merger 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 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 7 9 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 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 term and conditions of the Offer. The obligation of Parent and Purchaser to consummate the Merger are subject to the following additional conditions: (i) Parent and Purchaser shall have received the debt and equity financing contemplated by the Merger Agreement on terms substantially as outlined in the Financing Commitments, and (ii) no more than ten percent (10%) of the Shares outstanding immediately prior to the Effective Time shall be Dissenting Shares. Holders of Shares should carefully review the Schedule 14D-1 for a discussion of the commitment letters obtained by Parent for the financing of the Offer and the Merger, and the terms and conditions of such financing. 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 (a) mutual written consent of the Company and Parent or by mutual action of their respective Board of Directors; (b) either the Company or Parent, (i) 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," "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 any covenant or agreement set forth in Article I, Section 4.2(e) or Section 5.1(e) of 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" (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) on the Company or (2) materially adversely affect the ability of the parties thereto to consummate the transactions contemplated thereby, or (ii) if any permanent injunction or other order of a court or other competent authority preventing the consummation of the Merger shall have become final and non-appealable; (c) 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; (d) Parent, in the event that a Trigger Event has occurred prior to the consummation of the Offer (see "Fees and Expenses" above); (e) 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 and the Merger 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 under the Merger Agreement; (f) either the Company or Parent, if the Offer terminates, is withdrawn, abandoned, or expires by reason of the failure to satisfy any of the conditions described in Exhibit A to the Merger Agreement; (g) the Company, if the Offer shall have expired or shall 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; (h) the Company, if (1) 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 8 10 for the Board of Directors of the Company to comply with its fiduciary duties to holders of Shares under applicable law, and (2) 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 (i) 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 (i) the Confidentiality Agreement, dated as of December 10, 1996, by and between Parent and the Company shall apply with respect to information furnished thereunder or under the Merger Agreement and any other activities contemplated by the Confidentiality Agreement; (ii) all costs and expenses in connection with the Merger Agreement and the transactions contemplated thereby shall be paid as set forth in the "Fees and Expenses" section of this Schedule 14D-9; and (iii) that no such termination shall relieve any party from liability for a material breach of the Merger Agreement. In addition, in the event that the Merger Agreement is validly terminated, Parent and Purchaser have agreed that, immediately following such termination (and, in the event Parent is entitled to be paid a fee in connection with such termination, immediately following receipt by Parent of such fees), Parent and Purchaser shall terminate the Offer and not purchase any Shares pursuant to the Offer or otherwise, and Parent has further agreed that following such termination, it shall continue to be bound by all of the terms and conditions contained in the Confidentiality 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 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 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 9 11 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 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 and acts or omissions occurring or existing at or prior to the Effective Time including the transactions contemplated by the Merger 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 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 Date with respect to any of the terms contained therein; provided, however, that after the consummation of the Offer, no term or condition contained in the Merger 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). 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 (or as soon as practicable thereafter following satisfaction or waiver of such conditions). The Merger shall become effective upon such filing or at such time thereafter as may be provided in the certificate of merger to be filed with the Secretary of State of the State of Delaware, as provided in the DGCL, on the date of the closing of the Merger or as soon as practicable thereafter. 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, Parent and the Company entered into a Confidentiality Agreement (the "Confidentiality Agreement") pursuant to which the Company has agreed to supply certain information to Parent and Parent has 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. Parent has 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 Parent or its affiliates, of any securities or assets of, or a merger or business combination with, the Company. The foregoing is a summary of the Confidentiality Agreement. Such summary is qualified in its entirety by reference to the text of the Confidentiality Agreement, a copy of which is filed as Exhibit 4 hereto, and is incorporated herein by reference. 10 12 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 is filed as Exhibit 2 hereto. Tender of Shares. Simultaneously with the execution of the Merger Agreement, Parent, Purchaser and the Stockholder entered into the Stockholders Agreement. Upon the terms and subject to the conditions of such agreement, the Stockholder has agreed to (i) 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) 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 the Proxy Statement relating thereto (including all documents and schedules filed with the Commission). Voting. The 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 the termination of the Merger Agreement in accordance with its terms, at any meeting of the Stockholders, however called, the 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 By-Laws; (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 Stockholder has 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 Stockholder has granted to Parent a proxy to vote the Shares of the Stockholder in accordance with the provisions and agreements described above and revoked any proxy previously granted by the Stockholder with respect to Shares owned by it. Representations, Warranties, Covenants and Other Agreements. In connection with the Stockholders Agreement, the 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. In addition, each of Parent and the Purchaser has made certain customary representations, warranties and covenants, including with respect to (i) its authority to enter into and perform its obligations under the Stockholders Agreement and the Merger Agreement, (ii) noncontravention and enforceability, (iii) absence of conflicts, and (iv) the delivery to the Company true and complete copies of the Financing Commitments. 11 13 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 Stockholder also has the absolute right, exercisable in its sole discretion, to terminate the Stockholders 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. ITEM 4. THE SOLICITATION OR RECOMMENDATION. (a) Recommendation of the Board of Directors. The Board of Directors has unanimously approved the Merger Agreement and the transactions contemplated thereby and recommends that the stockholders of the Company tender their Shares pursuant to the Offer. (b) Background; Reasons for the Recommendation. 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, Tate & Furst, Inc. ("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 Parent and Hicks, Muse on several occasions. Negotiations among the Company, 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 Parent completed 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 of Directors discussed the proposed Offer and Merger and all transactions contemplated thereby. The Board of Directors unanimously approved the Offer, the Merger, and the Merger Agreement, recommended 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, Hicks Muse Equity Fund II, L.P. delivered its commitment to purchase up to $40 million of Holding's common equity, Credit Suisse First Boston Corporation delivered each of the other Financing Commitments, and Parent delivered copies of the Financing Commitments to 12 14 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, Parent commenced the Offer. A copy of the press release of the Company announcing the execution of the Merger Agreement is attached hereto as Exhibit 5 and is incorporated herein by reference. A copy of a letter to stockholders of the Company, which accompanies this Schedule 14D-9, is attached hereto as Exhibit 6 and is incorporated herein by reference. In reaching its conclusion and recommendation described above, the Board of Directors considered a number of factors, including the following: (1) The financial condition and results of operations of the Company, including the relatively high amount of indebtedness currently outstanding. (2) The projected financial condition, results of operations, prospects and strategic objectives of the Company, as well as the risks involved in achieving those prospects and objectives in the children's leisure products industry with the current economic and market conditions. (3) The relationship of the Offer Price to the historical market prices of the shares of Common Stock. (4) Discussions described above in this Item 4(b) with other parties as to possible transactions. (5) The Board's view, after consultation with management and Dean Witter, regarding the likelihood of the existence of other viable buyers on terms as favorable as those in the Offer and Merger. (6) The availability of appraisal rights under Section 262 of the DGCL for Dissenting Shares. (7) The terms and conditions of the Merger Agreement and the course of the negotiations resulting in the execution thereof (including the terms of the Merger Agreement that permit the Company's Board of Directors, in the exercise of its fiduciary duties, to furnish information to or enter into discussions or negotiations with any third party (subject to verification of financing) that requests such information or initiates such discussions or negotiations, pursuant to appropriate confidentiality agreements, in connection with any proposal or offer for a tender or exchange offer, a merger, consolidation or other business combination involving the Company or any proposal to acquire in any manner a substantial equity interest in, or a substantial portion of the assets of, the Company (although the Company is not permitted by the Merger Agreement to initiate, solicit or encourage any such third party proposal or offer or initiate discussions or negotiations regarding the same), and under certain circumstances to terminate the Merger Agreement). (8) The likelihood that the proposed acquisition would be consummated, including the likelihood of satisfaction of the regulatory approvals required pursuant to, and the other conditions to, the Offer and the Merger contained in the Merger Agreement, the experience, reputation and financial condition of the Parent and Hicks, Muse and the risks to the Company if the acquisition were not consummated. (9) The requirement by Parent, as a condition to a transaction, that the Stockholder enter into a binding agreement for the tender of their Shares into the Offer; the stated desire of the Stockholder to proceed with the Merger, and the decision of the Stockholder to enter into the Stockholders Agreement. (10) The recommendation of the Company's management with respect to the proposed transaction. (11) Presentations to the Board of Directors by Dean Witter, which included valuation analyses of the Company, and the opinion of Dean Witter to the effect that, as of the date of its opinion and based 13 15 upon and subject to certain matters stated therein, the cash consideration to be paid for the Shares in the Offer and the Merger was fair, from a financial point of view, to such holders. The full text of Dean Witter's written opinion, which sets forth the assumptions made, matters considered, and limitations on the review undertaken by Dean Witter, is attached hereto as Exhibit 7 and is incorporated herein by reference. HOLDERS OF SHARES ARE URGED TO READ THE OPINION OF DEAN WITTER CAREFULLY IN ITS ENTIRETY; (12) The fact that the $11.25 per Share to be paid pursuant to the Offer represents a premium over the trading prices of the Shares since July 1994; (13) The provisions of the Merger Agreement that require the Company to pay the Purchaser a termination fee of $3,000,000 under certain circumstances as described above under "Merger Agreement -- Fees and Expenses"; and (14) The structure of the transaction, including the fact that the Offer will permit stockholders to receive cash for their Shares and the terms and conditions of the Financing Commitment Letters. The Board of Directors did not assign relative weights to the factors or determine that any factor was of particular importance. Rather, the Board of Directors viewed their position and recommendations as being based on the totality of the information presented to and considered by them. ITEM 5. PERSONS RETAINED, EMPLOYED, OR TO BE COMPENSATED. Dean Witter has been retained by the Board of Directors to act as a financial advisor to the Company with respect to the Offer and the Merger. Pursuant to an engagement letter with Dean Witter, the Company has agreed to pay Dean Witter (a) a non-refundable retainer fee of $75,000 for its services, one-half of which was paid upon the execution of the engagement letter and the remainder of which was paid on January 1, 1997, (b) a fee of $200,000 upon delivery by Dean Witter to the Company of its written opinion as to the consideration to be received by holders of Shares pursuant to the Offer and the Merger and (c) a fee equal to 1% of the Aggregate Value (as defined in the letter agreement) paid in connection with the Offer and Merger (less the amounts paid pursuant to clauses (a) and (b)). No portion of the fee payable pursuant to clause (b) was contingent upon the consummation of the Offer or the Merger or the conclusions reached in the opinion. The Company has also agreed to reimburse Dean Witter for its reasonable out-of-pocket expenses (up to $15,000), and to indemnify Dean Witter and certain related parties against certain liabilities, including liabilities under the federal securities laws. Dean Witter has provided certain financial advisory and investment banking services to the Company in the past, for which services Dean Witter has received customary compensation. Neither the Company nor any person acting on its behalf currently intends to employ, retain, or compensate any other person to make solicitations or recommendations to security holders on its behalf concerning the Offer. ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES. (a) Except as set forth in Item 3(b) (the provisions of which are hereby incorporated by reference) and the immediately following sentence, no transactions in the Shares have been effected during the past 60 days by the Company or, to the best of the Company's knowledge, by any executive officer, director, affiliate, or subsidiary of the Company. On February 18, 1997, Michael S. Pace, Senior Vice President of ERO Industries, Inc., sold 2,000 Shares at $9.00 per Share, and on February 21, 1997, Richard F. Schaub, Jr., President of Priss Prints, Inc., purchased 1,000 Shares at $9.25 per Share. (b) To the best of the Company's knowledge, each executive officer and director of the Company who holds Options intends, at the Effective Time, to cancel and settle such Options in consideration for an amount equal to the difference between $11.25 per Share underlying such Option and the per Share exercise price of such Option in accordance with the terms and conditions of Section 3.5 of the Merger Agreement, a copy of which is attached hereto as Exhibit 1 and is incorporated herein by reference. To the best of the Company's knowledge, all of the executive officers, directors, and affiliates of the Company currently intends to tender, 14 16 pursuant to the Offer, all Shares over which such person exercises complete discretionary power to the Purchaser. ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY SUBJECT COMPANY. (a) Except as set forth above or in Items 3(b) and 4(b) (the provisions of which are hereby incorporated herein by reference), the Company is not engaged in any negotiation in response to the Offer which relates to or would result in (i) an extraordinary transaction, such as a merger or reorganization, involving the Company or any subsidiary of the Company; (ii) a purchase, sale, or transfer of a material amount of assets by the Company or any subsidiary of the Company; (iii) a tender offer for or other acquisition of securities by or of the Company; or (iv) any material change in the present capitalization or dividend policy of the Company. (b) Except as described above or in Items 3(b) or 4 above (the provisions of which are hereby incorporated herein by reference), there are no transactions, Board of Directors' resolutions, agreements in principle, or signed contracts in response to the Offer that relate to or would result in one or more of the events referred to in Item 7(a) above. ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED. The Information Statement attached as Schedule I hereto is being furnished in connection with the possible designation by the Purchaser, pursuant to the Merger Agreement, of certain persons to be appointed to the Board of the Company other than at a meeting of the Company's stockholders. ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
EXHIBIT NO. - ----------- Exhibit 1 Agreement and Plan of Merger, dated as of April 10, 1997, by and among ERO, Inc., Hedstrom Corporation, and HC Acquisition Corp. Exhibit 2 Stockholders Agreement, dated as of April 10, 1997, by and among Hedstrom Corporation, HC Acquisition Corp., and Golder, Thoma, Cressey Fund III Limited Partnership. Exhibit 3 The Company's Information Statement pursuant to Section 14(f) of the Securities Exchange Act of 1934, as amended and Rule 14f-1 thereunder (Schedule I to the Company's Schedule 14D-9).* Exhibit 4 Confidentiality Agreement, dated as of December 10, 1996, by and between ERO, Inc. and Hedstrom Corporation. Exhibit 5 Press Release issued by ERO, Inc. on April 10, 1997. Exhibit 6 Form of Letter to Stockholders dated April 17, 1997.* Exhibit 7 Opinion of Dean Witter Reynolds Inc. dated April 10, 1997.*
- ------------------------- * Included in copies mailed to stockholders. 15 17 SIGNATURE After reasonable inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete, and correct. ERO, INC. By: /s/ D. RICHARD RYAN, JR. ------------------------------------ D. Richard Ryan, Jr. Chairman, President and Chief Executive Officer Dated: April 17, 1997 16 EX-1 2 AGREEMENT & PLAN OF MERGER 1 EXHIBIT 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 i 3 Page 5.1 Covenants of the Company 34 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 47 the Merger 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 ii 4 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 iii 5 GLOSSARY OF DEFINED TERMS Term: Page: Agreement 1 Acquisition Proposal 37 Benefit Plans 21 Board Percentage 6 CERCLA 25 Certificate of Merger 7 Certificates 10 Closing 7 Closing Date 7 Code 21 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 17 Company Voting Debt 13 Confidentiality Agreement 41 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 iv 6 Term: Page: HSR Act 16 Indebtedness 30 Indemnified Liabilities 42 Indemnified Parties 42 Injunction 47 IRSA 26 Laws 15 Material Adverse Effect 13 Material Contracts 29 Merger 1 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 v 7 Term: Page: Trigger Event 41 Violation 15 WARN Act 24 vi 8 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 9 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; 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 2 10 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 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. 3 11 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 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 4 12 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 5 13 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. 6 14 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 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 7 15 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 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. 8 16 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. (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. 9 17 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) 10 18 representing such share of Company Common Stock. As used in this Agreement, the word "Subsidiary", with respect to any party, 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 11 19 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 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, 12 20 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 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. 13 21 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 necessary consents or releases from holders of Options under the Stock 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 14 22 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. 15 23 ARTICLE IV REPRESENTATIONS AND WARRANTIES 4.1 Representations and Warranties of the Company. The Company represents and warrants to Parent and Sub as follows: (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 16 24 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 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 17 25 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, 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 18 26 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 Section 1 of Article Nine of the Company's Amended and Restated Certificate of Incorporation does not, and will not, apply to the 19 27 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 20 28 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 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 21 29 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, 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 22 30 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 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 23 31 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 24 32 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. 25 33 (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. (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 26 34 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 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 27 35 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. (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. 28 36 (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): 29 37 (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 30 38 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. (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, 31 39 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 (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 32 40 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 (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; 33 41 (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; 34 42 (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 35 43 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 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 36 44 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 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 37 45 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 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 38 46 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 39 47 executed and delivered by each of Parent and Sub and 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 40 48 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, 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. 41 49 (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 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 42 50 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 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 43 51 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 44 52 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 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 45 53 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. 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 46 54 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 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. 47 55 (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 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 48 56 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 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. 49 57 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. 50 58 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 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"): 51 59 (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. (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). 52 60 (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 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 53 61 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 54 62 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. 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 55 63 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 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 56 64 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. 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. 57 65 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, 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 58 66 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. 59 67 (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 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; 60 68 (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 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 61 69 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 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 62 70 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. 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 63 71 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 64 72 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. 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 65 73 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 (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. 66 74 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. 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] 67 75 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:_____________________________ Name:___________________________ Title:__________________________ SUB: HC ACQUISITION CORP. By:_____________________________ Name:___________________________ Title:__________________________ COMPANY: ERO, INC. By:_____________________________ Name:___________________________ Title:__________________________ 68 76 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 A-1 77 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 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 A-2 78 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; (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 A-3 79 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 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 A-4 80 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-5 81 EXHIBIT B AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF TARGET (A Delaware Corporation) FIRST: The name of the Corporation is "_________________". SECOND: The registered office of the Corporation in the State of Delaware is located at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of the registered agent of the Corporation at such address is The Corporation Trust Company. THIRD: The purpose for which the Corporation is organized is to engage in any and all lawful acts and activity for which corporations may be organized under the General Corporation Law of Delaware. The Corporation will have perpetual existence. FOURTH: The total number of shares of capital stock which the Corporation shall have authority to issue is 1,000 shares, par value $0.01 per share, designated Common Stock. FIFTH: Directors of the Corporation need not be elected by written ballot unless the bylaws of the Corporation otherwise provide. SIXTH: The directors of the Corporation shall have the power to adopt, amend, and repeal the bylaws of the Corporation. SEVENTH: No contract or transaction between the Corporation and one or more of its directors, officers, or stockholders or between the Corporation and any person (as used herein "person" means other corporation, partnership, association, firm, trust, joint venture, political subdivision, or instrumentality) or other organization in which one or more of its directors, officers, or stockholders are directors, officers, or stockholders, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because his, her, or their votes are counted for such purpose, if: (i) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board of directors or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to his or her relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (iii) the contract or transaction is fair as to the 82 Corporation as of the time it is authorized, approved, or ratified by the board of directors, a committee thereof, or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction. EIGHTH: The Corporation shall indemnify any person who was, is, or is threatened to be made a party to a proceeding (as hereinafter defined) by reason of the fact that he or she (i) is or was a director or officer of the Corporation or (ii) while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise, to the fullest extent permitted under the General Corporation Law of Delaware, as the same exists or may hereafter be amended. Such right shall be a contract right and as such shall run to the benefit of any director or officer who is elected and accepts the position of director or officer of the Corporation or elects to continue to serve as a director or officer of the Corporation while this Article Eighth is in effect. Any repeal or amendment of this Article Eighth shall be prospective only and shall not limit the rights of any such director or officer or the obligations of the Corporation with respect to any claim arising from or related to the services of such director or officer in any of the foregoing capacities prior to any such repeal or amendment to this Article Eighth. Such right shall include the right to be paid by the Corporation expenses incurred in defending any such proceeding in advance of its final disposition to the maximum extent permitted under the General Corporation Law of Delaware, as the same exists or may hereafter be amended. If a claim for indemnification or advancement of expenses hereunder is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim, and if successful in whole or in part, the claimant shall also be entitled to be paid the expenses of prosecuting such claim. It shall be a defense to any such action that such indemnification or advancement of costs of defense are not permitted under the General Corporation Law of Delaware, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its board of directors or any committee thereof, independent legal counsel, or stockholders) to have made its determination prior to the commencement of such action that indemnification of, or advancement of costs of defense to, the claimant is permissible in the circumstances nor an actual determination by the Corporation (including its board of directors or any committee thereof, independent legal counsel, or stockholders) that such indemnification or advancement is not permissible shall be a defense to the action or create a presumption that such indemnification or advancement is not permissible. In the event of the death of any person having a right of indemnification under the foregoing provisions, such right shall inure to the benefit of his or her heirs, executors, administrators, and personal representatives. The rights conferred above shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, bylaw, resolution of stockholders or directors, agreement, or otherwise. The Corporation may additionally indemnify any employee or agent of the Corporation to the fullest extent permitted by law. 2 83 As used herein, the term "proceeding" means any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, arbitrative, or investigative, any appeal in such an action, suit, or proceeding, and any inquiry or investigation that could lead to such an action, suit, or proceeding. NINTH: A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (iii) under Section 174 of the General Corporation Law of Delaware, or (iv) for any transaction from which the director derived an improper personal benefit. Any repeal or amendment of this Article Ninth by the stockholders of the Corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of the Corporation arising from an act or omission occurring prior to the time of such repeal or amendment. In addition to the circumstances in which a director of the Corporation is not personally liable as set forth in the foregoing provisions of this Article Ninth, a director shall not be liable to the Corporation or its stockholders to such further extent as permitted by any law hereafter enacted, including without limitation any subsequent amendment to the General Corporation Law of Delaware. TENTH: The Corporation expressly elects not to be governed by Section 203 of the General Corporation Law of Delaware. 3 84 EXHIBIT C AMENDED AND RESTATED BYLAWS OF TARGET A Delaware Corporation 85 ARTICLE ONE: OFFICES 1.1 Registered Office and Agent 1 1.2 Other Offices 1 ARTICLE TWO: MEETINGS OF STOCKHOLDERS 2.1 Annual Meeting 1 2.2 Special Meeting 2 2.3 Place of Meetings 2 2.4 Notice 2 2.5 Voting List 2 2.6 Quorum 3 2.7 Required Vote; Withdrawal of Quorum 3 2.8 Method of Voting; Proxies 3 2.9 Record Date 4 2.10 Conduct of Meeting 5 2.11 Inspectors 5 ARTICLE THREE: DIRECTORS 3.1 Management 6 3.2 Number; Qualification; Election; Term 6 3.3 Change in Number 6 3.4 Removal 6 3.5 Vacancies 7 3.6 Meetings of Directors 7 3.7 First Meeting 7 3.8 Election of Officers 7 3.9 Regular Meetings 7 3.10 Special Meetings 8 3.11 Notice 8 3.12 Quorum; Majority Vote 8 3.13 Procedure 8 3.14 Presumption of Assent 8 3.15 Compensation 9 i 86 ARTICLE FOUR: COMMITTEES 4.1 Designation 9 4.2 Number; Qualification; Term 9 4.3 Authority 9 4.4 Committee Changes 9 4.5 Alternate Members of Committees 9 4.6 Regular Meetings 10 4.7 Special Meetings 10 4.8 Quorum; Majority Vote 10 4.9 Minutes 10 4.10 Compensation 10 4.11 Responsibility 10 ARTICLE FIVE: NOTICE 5.1 Method 11 5.2 Waiver 11 ARTICLE SIX: OFFICERS 6.1 Number; Titles; Term of Office 11 6.2 Removal 12 6.3 Vacancies 12 6.4 Authority 12 6.5 Compensation 12 6.6 Chairman of the Board 12 6.7 President 12 6.8 Vice Presidents 12 6.9 Treasurer 13 6.10 Assistant Treasurers 13 6.11 Secretary 13 6.12 Assistant Secretaries 13 ii 87 ARTICLE SEVEN: CERTIFICATES AND SHAREHOLDERS 7.1 Certificates for Shares 14 7.2 Replacement of Lost or Destroyed Certificates 14 7.3 Transfer of Shares 14 7.4 Registered Stockholders 14 7.5 Regulations 15 7.6 Legends 15 ARTICLE EIGHT: MISCELLANEOUS PROVISIONS 8.1 Dividends 15 8.2 Reserves 15 8.3 Books and Records 15 8.4 Fiscal Year 15 8.5 Seal 16 8.6 Resignations 16 8.7 Securities of Other Corporations 16 8.8 Telephone Meetings 16 8.9 Action Without a Meeting 16 8.10 Invalid Provisions 17 8.11 Mortgages, etc. 17 8.12 Headings 18 8.13 References 18 8.14 Amendments 18 iii 88 AMENDED AND RESTATED BYLAWS OF TARGET A Delaware Corporation PREAMBLE These bylaws are subject to, and governed by, the General Corporation Law of the State of Delaware (the "Delaware General Corporation Law") and the certificate of incorporation (as amended to the date hereof, the "Certificate of Incorporation") of Target, a Delaware corporation (the "Corporation"). In the event of a direct conflict between the provisions of these bylaws and the mandatory provisions of the Delaware General Corporation Law or the provisions of the Certificate of Incorporation of the Corporation, such provisions of the Delaware General Corporation Law or the Certificate of Incorporation of the Corporation, as the case may be, will be controlling. ARTICLE ONE: OFFICES 1.1 Registered Office and Agent. The registered office and registered agent of the Corporation shall be as designated from time to time by the appropriate filing by the Corporation in the office of the Secretary of State of the State of Delaware. 1.2 Other Offices. The Corporation may also have offices at such other places, both within and without the State of Delaware, as the board of directors may from time to time determine or as the business of the Corporation may require. ARTICLE TWO: MEETINGS OF STOCKHOLDERS 2.1 Annual Meeting. An annual meeting of stockholders of the Corporation shall be held each calendar year on such date and at such time as shall be designated from time to time by the board of directors and stated in the notice of the meeting or in a duly executed waiver of 89 notice of such meeting. At such meeting, the stockholders shall elect directors and transact such other business as may properly be brought before the meeting. 2.2 Special Meeting. A special meeting of the stockholders may be called at any time by the Chairman of the Board, the President, the board of directors, and shall be called by the President or the Secretary at the request in writing of the stockholders of record of not less than ten percent of all shares entitled to vote at such meeting or as otherwise provided by the certificate of incorporation of the Corporation. A special meeting shall be held on such date and at such time as shall be designated by the person(s) calling the meeting and stated in the notice of the meeting or in a duly executed waiver of notice of such meeting. Only such business shall be transacted at a special meeting as may be stated or indicated in the notice of such meeting or in a duly executed waiver of notice of such meeting. 2.3 Place of Meetings. An annual meeting of stockholders may be held at any place within or without the State of Delaware designated by the board of directors. A special meeting of stockholders may be held at any place within or without the State of Delaware designated in the notice of the meeting or a duly executed waiver of notice of such meeting. Meetings of stockholders shall be held at the principal office of the Corporation unless another place is designated for meetings in the manner provided herein. 2.4 Notice. Written or printed notice stating the place, day, and time of each meeting of the stockholders and, in case of a special meeting, the purpose or purposes for which the meeting is called shall be delivered not less than ten nor more than 60 days before the date of the meeting, either personally or by mail, by or at the direction of the President, the Secretary, or the officer or person(s) calling the meeting, to each stockholder of record entitled to vote at such meeting. If such notice is to be sent by mail, it shall be directed to such stockholder at his address as it appears on the records of the Corporation, unless he shall have filed with the Secretary of the Corporation a written request that notices to him be mailed to some other address, in which case it shall be directed to him at such other address. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy and shall not, at the beginning of such meeting, object to the transaction of any business because the meeting is not lawfully called or convened, or who shall, either before or after the meeting, submit a signed waiver of notice, in person or by proxy. 2.5 Voting List. At least ten days before each meeting of stockholders, the Secretary or other officer of the Corporation who has charge of the Corporation's stock ledger, either directly or through another officer appointed by him or through a transfer agent appointed by the board of directors, shall prepare a complete list of stockholders entitled to vote thereat, arranged in alphabetical order and showing the address of each stockholder and number of shares 90 registered in the name of each stockholder. For a period of ten days prior to such meeting, such list shall be kept on file at a place within the city where the meeting is to be held, which place shall be specified in the notice of meeting or a duly executed waiver of notice of such meeting or, if not so specified, at the place where the meeting is to be held and shall be open to examination by any stockholder during ordinary business hours. Such list shall be produced at such meeting and kept at the meeting at all times during such meeting and may be inspected by any stockholder who is present. 2.6 Quorum. The holders of a majority of the outstanding shares entitled to vote on a matter, present in person or by proxy, shall constitute a quorum at any meeting of stockholders, except as otherwise provided by law, the certificate of incorporation of the Corporation, or these bylaws. If a quorum shall not be present, in person or by proxy, at any meeting of stockholders, the stockholders entitled to vote thereat who are present, in person or by proxy, or, if no stockholder entitled to vote is present, any officer of the Corporation may adjourn the meeting from time to time, without notice other than announcement at the meeting (unless the board of directors, after such adjournment, fixes a new record date for the adjourned meeting), until a quorum shall be present, in person or by proxy. At any adjourned meeting at which a quorum shall be present, in person or by proxy, any business may be transacted which may have been transacted at the original meeting had a quorum been present; provided that, if the adjournment is for more than 30 days or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting. 2.7 Required Vote; Withdrawal of Quorum. When a quorum is present at any meeting, the vote of the holders of at least a majority of the outstanding shares entitled to vote who are present, in person or by proxy, shall decide any question brought before such meeting, unless the question is one on which, by express provision of statute, the certificate of incorporation of the Corporation, or these bylaws, a different vote is required, in which case such express provision shall govern and control the decision of such question. The stockholders present at a duly constituted meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. 2.8 Method of Voting; Proxies. Except as otherwise provided in the certificate of incorporation of the Corporation or by law, each outstanding share, regardless of class, shall be entitled to one vote on each matter submitted to a vote at a meeting of stockholders. Elections of directors need not be by written ballot. At any meeting of stockholders, every stockholder having the right to vote may vote either in person or by a proxy executed in writing by the stockholder or by his duly authorized attorney-in-fact. Each such proxy shall be filed with the Secretary of the Corporation before or at the time of the meeting. No proxy shall be valid after 91 three years from the date of its execution, unless otherwise provided in the proxy. If no date is stated in a proxy, such proxy shall be presumed to have been executed on the date of the meeting at which it is to be voted. Each proxy shall be revocable unless expressly provided therein to be irrevocable and coupled with an interest sufficient in law to support an irrevocable power or unless otherwise made irrevocable by law. 2.9 Record Date. (a) For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders, or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion, or exchange of stock or for the purpose of any other lawful action, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, for any such determination of stockholders, such date in any case to be not more than 60 days and not less than ten days prior to such meeting nor more than 60 days prior to any other action. If no record date is fixed: (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. (iii) A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. (b) In order that the Corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the board of directors. If no record date has been fixed by the board of directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by law or these bylaws, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered 92 to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office in the State of Delaware, principal place of business, or such officer or agent shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the board of directors and prior action by the board of directors is required by law or these bylaws, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the board of directors adopts the resolution taking such prior action. 2.10 Conduct of Meeting. The Chairman of the Board, if such office has been filled, and, if not or if the Chairman of the Board is absent or otherwise unable to act, the President shall preside at all meetings of stockholders. The Secretary shall keep the records of each meeting of stockholders. In the absence or inability to act of any such officer, such officer's duties shall be performed by the officer given the authority to act for such absent or non-acting officer under these bylaws or by some person appointed by the meeting. 2.11 Inspectors. The board of directors may, in advance of any meeting of stockholders, appoint one or more inspectors to act at such meeting or any adjournment thereof. If any of the inspectors so appointed shall fail to appear or act, the chairman of the meeting shall, or if inspectors shall not have been appointed, the chairman of the meeting may, appoint one or more inspectors. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector at such meeting with strict impartiality and according to the best of his ability. The inspectors shall determine the number of shares of capital stock of the Corporation outstanding and the voting power of each, the number of shares represented at the meeting, the existence of a quorum, and the validity and effect of proxies and shall receive votes, ballots, or consents, hear and determine all challenges and questions arising in connection with the right to vote, count and tabulate all votes, ballots, or consents, determine the results, and do such acts as are proper to conduct the election or vote with fairness to all stockholders. On request of the chairman of the meeting, the inspectors shall make a report in writing of any challenge, request, or matter determined by them and shall execute a certificate of any fact found by them. No director or candidate for the office of director shall act as an inspector of an election of directors. Inspectors need not be stockholders. 93 ARTICLE THREE: DIRECTORS 3.1 Management. The business and property of the Corporation shall be managed by the board of directors. Subject to the restrictions imposed by law, the certificate of incorporation of the Corporation, or these bylaws, the board of directors may exercise all the powers of the Corporation. 3.2 Number; Qualification; Election; Term. The number of directors which shall constitute the entire board of directors shall be not less than one. The first board of directors shall consist of the number of directors named in the certificate of incorporation of the Corporation or, if no directors are so named, shall consist of the number of directors elected by the incorporator(s) at an organizational meeting or by unanimous written consent in lieu thereof. Thereafter, within the limits above specified, the number of directors which shall constitute the entire board of directors shall be determined by resolution of the board of directors or by resolution of the stockholders at the annual meeting thereof or at a special meeting thereof called for that purpose. Except as otherwise required by law, the certificate of incorporation of the Corporation, or these bylaws, the directors shall be elected at an annual meeting of stockholders at which a quorum is present. Directors shall be elected by a plurality of the votes of the shares present in person or represented by proxy and entitled to vote on the election of directors. Each director so chosen shall hold office until the first annual meeting of stockholders held after his election and until his successor is elected and qualified or, if earlier, until his death, resignation, or removal from office. None of the directors need be a stockholder of the Corporation or a resident of the State of Delaware. Each director must have attained the age of majority. 3.3 Change in Number. No decrease in the number of directors constituting the entire board of directors shall have the effect of shortening the term of any incumbent director. 3.4 Removal. Except as otherwise provided in the certificate of incorporation of the Corporation or these by-laws, at any meeting of stockholders called expressly for that purpose, any director or the entire board of directors may be removed, with or without cause, by a vote of the holders of a majority of the shares then entitled to vote on the election of directors; provided, however, that so long as stockholders have the right to cumulate votes in the election of directors pursuant to the certificate of incorporation of the Corporation, if less than the entire board of directors is to be removed, no one of the directors may be removed if the votes cast against his removal would be sufficient to elect him if then cumulatively voted at an election of the entire board of directors. 94 3.5 Vacancies. Vacancies and newly-created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by the sole remaining director, and each director so chosen shall hold office until the first annual meeting of stockholders held after his election and until his successor is elected and qualified or, if earlier, until his death, resignation, or removal from office. If there are no directors in office, an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly-created directorship, the directors then in office shall constitute less than a majority of the whole board of directors (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least 10% of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly-created directorships or to replace the directors chosen by the directors then in office. Except as otherwise provided in these bylaws, when one or more directors shall resign from the board of directors, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in these bylaws with respect to the filling of other vacancies. 3.6 Meetings of Directors. The directors may hold their meetings and may have an office and keep the books of the Corporation, except as otherwise provided by statute, in such place or places within or without the State of Delaware as the board of directors may from time to time determine or as shall be specified in the notice of such meeting or duly executed waiver of notice of such meeting. 3.7 First Meeting. Each newly elected board of directors may hold its first meeting for the purpose of organization and the transaction of business, if a quorum is present, immediately after and at the same place as the annual meeting of stockholders, and no notice of such meeting shall be necessary. 3.8 Election of Officers. At the first meeting of the board of directors after each annual meeting of stockholders at which a quorum shall be present, the board of directors shall elect the officers of the Corporation. 3.9 Regular Meetings. Regular meetings of the board of directors shall be held at such times and places as shall be designated from time to time by resolution of the board of directors. Notice of such regular meetings shall not be required. 95 3.10 Special Meetings. Special meetings of the board of directors shall be held whenever called by the Chairman of the Board, the President, or any director. 3.11 Notice. The Secretary shall give notice of each special meeting to each director at least 24 hours before the meeting. Notice of any such meeting need not be given to any director who shall, either before or after the meeting, submit a signed waiver of notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of notice to him. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. 3.12 Quorum; Majority Vote. At all meetings of the board of directors, a majority of the directors fixed in the manner provided in these bylaws shall constitute a quorum for the transaction of business. If at any meeting of the board of directors there be less than a quorum present, a majority of those present or any director solely present may adjourn the meeting from time to time without further notice. Unless the act of a greater number is required by law, the certificate of incorporation of the Corporation, or these bylaws, the act of a majority of the directors present at a meeting at which a quorum is in attendance shall be the act of the board of directors. At any time that the certificate of incorporation of the Corporation provides that directors elected by the holders of a class or series of stock shall have more or less than one vote per director on any matter, every reference in these bylaws to a majority or other proportion of directors shall refer to a majority or other proportion of the votes of such directors. 3.13 Procedure. At meetings of the board of directors, business shall be transacted in such order as from time to time the board of directors may determine. The Chairman of the Board, if such office has been filled, and, if not or if the Chairman of the Board is absent or otherwise unable to act, the President shall preside at all meetings of the board of directors. In the absence or inability to act of either such officer, a chairman shall be chosen by the board of directors from among the directors present. The Secretary of the Corporation shall act as the secretary of each meeting of the board of directors unless the board of directors appoints another person to act as secretary of the meeting. The board of directors shall keep regular minutes of its proceedings which shall be placed in the minute book of the Corporation. 3.14 Presumption of Assent. A director of the Corporation who is present at the meeting of the board of directors at which action on any corporate matter is taken shall be presumed to have assented to the action unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as secretary of the meeting before the adjournment thereof or shall forward any dissent by certified 96 or registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. 3.15 Compensation. The board of directors shall have the authority to fix the compensation, including fees and reimbursement of expenses, paid to directors for attendance at regular or special meetings of the board of directors or any committee thereof; provided, that nothing contained herein shall be construed to preclude any director from serving the Corporation in any other capacity or receiving compensation therefor. ARTICLE FOUR: COMMITTEES 4.1 Designation. The board of directors may, by resolution adopted by a majority of the entire board of directors, designate one or more committees. 4.2 Number; Qualification; Term. Each committee shall consist of one or more directors appointed by resolution adopted by a majority of the entire board of directors. The number of committee members may be increased or decreased from time to time by resolution adopted by a majority of the entire board of directors. Each committee member shall serve as such until the earliest of (i) the expiration of his term as director, (ii) his resignation as a committee member or as a director, or (iii) his removal as a committee member or as a director. 4.3 Authority. Each committee, to the extent expressly provided in the resolution establishing such committee, shall have and may exercise all of the authority of the board of directors in the management of the business and property of the Corporation except to the extent expressly restricted by law, the certificate of incorporation of the Corporation, or these bylaws. 4.4 Committee Changes. The board of directors shall have the power at any time to fill vacancies in, to change the membership of, and to discharge any committee. 4.5 Alternate Members of Committees. The board of directors may designate one or more directors as alternate members of any committee. Any such alternate member may replace any absent or disqualified member at any meeting of the committee. If no alternate committee members have been so appointed to a committee or each such alternate committee member is absent or disqualified, the member or members of such committee present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. 97 4.6 Regular Meetings. Regular meetings of any committee may be held without notice at such time and place as may be designated from time to time by the committee and communicated to all members thereof. 4.7 Special Meetings. Special meetings of any committee may be held whenever called by any committee member. The committee member calling any special meeting shall cause notice of such special meeting, including therein the time and place of such special meeting, to be given to each committee member at least two days before such special meeting. Neither the business to be transacted at, nor the purpose of, any special meeting of any committee need be specified in the notice or waiver of notice of any special meeting. 4.8 Quorum; Majority Vote. At meetings of any committee, a majority of the number of members designated by the board of directors shall constitute a quorum for the transaction of business. If a quorum is not present at a meeting of any committee, a majority of the members present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present. The act of a majority of the members present at any meeting at which a quorum is in attendance shall be the act of a committee, unless the act of a greater number is required by law, the certificate of incorporation of the Corporation, or these bylaws. 4.9 Minutes. Each committee shall cause minutes of its proceedings to be prepared and shall report the same to the board of directors upon the request of the board of directors. The minutes of the proceedings of each committee shall be delivered to the Secretary of the Corporation for placement in the minute books of the Corporation. 4.10 Compensation. Committee members may, by resolution of the board of directors, be allowed a fixed sum and expenses of attendance, if any, for attending any committee meetings or a stated salary. 4.11 Responsibility. The designation of any committee and the delegation of authority to it shall not operate to relieve the board of directors or any director of any responsibility imposed upon it or such director by law. 98 ARTICLE FIVE: NOTICE 5.1 Method. Whenever by statute, the certificate of incorporation of the Corporation, or these bylaws, notice is required to be given to any committee member, director, or stockholder and no provision is made as to how such notice shall be given, personal notice shall not be required and any such notice may be given (a) in writing, by mail, postage prepaid, addressed to such committee member, director, or stockholder at his address as it appears on the books or (in the case of a stockholder) the stock transfer records of the Corporation, or (b) by any other method permitted by law (including but not limited to overnight courier service, telegram, telex, or telefax). Any notice required or permitted to be given by mail shall be deemed to be delivered and given at the time when the same is deposited in the United States mail as aforesaid. Any notice required or permitted to be given by overnight courier service shall be deemed to be delivered and given at the time delivered to such service with all charges prepaid and addressed as aforesaid. Any notice required or permitted to be given by telegram, telex, or telefax shall be deemed to be delivered and given at the time transmitted with all charges prepaid and addressed as aforesaid. 5.2 Waiver. Whenever any notice is required to be given to any stockholder, director, or committee member of the Corporation by statute, the certificate of incorporation of the Corporation, or these bylaws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be equivalent to the giving of such notice. Attendance of a stockholder, director, or committee member at a meeting shall constitute a waiver of notice of such meeting, except where such person attends for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. ARTICLE SIX: OFFICERS 6.1 Number; Titles; Term of Office. The officers of the Corporation shall be a President, a Secretary, and such other officers as the board of directors may from time to time elect or appoint, including a Chairman of the Board, one or more Vice Presidents (with each Vice President to have such descriptive title, if any, as the board of directors shall determine), and a Treasurer. Each officer shall hold office until his successor shall have been duly elected and shall have qualified, until his death, or until he shall resign or shall have been removed in the manner hereinafter provided. Any two or more offices may be held by the same person. None of the officers need be a stockholder or a director of the Corporation or a resident of the State of Delaware. 99 6.2 Removal. Any officer or agent elected or appointed by the board of directors may be removed by the board of directors whenever in its judgment the best interest of the Corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights. 6.3 Vacancies. Any vacancy occurring in any office of the Corporation (by death, resignation, removal, or otherwise) may be filled by the board of directors. 6.4 Authority. Officers shall have such authority and perform such duties in the management of the Corporation as are provided in these bylaws or as may be determined by resolution of the board of directors not inconsistent with these bylaws. 6.5 Compensation. The compensation, if any, of officers and agents shall be fixed from time to time by the board of directors; provided, however, that the board of directors may delegate the power to determine the compensation of any officer and agent (other than the officer to whom such power is delegated) to the Chairman of the Board or the President. 6.6 Chairman of the Board. The Chairman of the Board, if elected by the board of directors, shall have such powers and duties as may be prescribed by the board of directors. Such officer shall preside at all meetings of the stockholders and of the board of directors. Such officer may sign all certificates for shares of stock of the Corporation. 6.7 President. The President shall be the chief executive officer of the Corporation and, subject to the board of directors, he shall have general executive charge, management, and control of the properties and operations of the Corporation in the ordinary course of its business, with all such powers with respect to such properties and operations as may be reasonably incident to such responsibilities. If the board of directors has not elected a Chairman of the Board or in the absence or inability to act of the Chairman of the Board, the President shall exercise all of the powers and discharge all of the duties of the Chairman of the Board. As between the Corporation and third parties, any action taken by the President in the performance of the duties of the Chairman of the Board shall be conclusive evidence that there is no Chairman of the Board or that the Chairman of the Board is absent or unable to act. 6.8 Vice Presidents. Each Vice President shall have such powers and duties as may be assigned to him by the board of directors, the Chairman of the Board, or the President, and (in order of their seniority as determined by the board of directors or, in the absence of such determination, as determined by the length of time they have held the office of Vice President) shall exercise the powers of the President during that officer's absence or inability to act. As 100 between the Corporation and third parties, any action taken by a Vice President in the performance of the duties of the President shall be conclusive evidence of the absence or inability to act of the President at the time such action was taken. 6.9 Treasurer. The Treasurer shall have custody of the Corporation's funds and securities, shall keep full and accurate account of receipts and disbursements, shall deposit all monies and valuable effects in the name and to the credit of the Corporation in such depository or depositories as may be designated by the board of directors, and shall perform such other duties as may be prescribed by the board of directors, the Chairman of the Board, or the President. 6.10 Assistant Treasurers. Each Assistant Treasurer shall have such powers and duties as may be assigned to him by the board of directors, the Chairman of the Board, or the President. The Assistant Treasurers (in the order of their seniority as determined by the board of directors or, in the absence of such a determination, as determined by the length of time they have held the office of Assistant Treasurer) shall exercise the powers of the Treasurer during that officer's absence or inability to act. 6.11 Secretary. Except as otherwise provided in these bylaws, the Secretary shall keep the minutes of all meetings of the board of directors and of the stockholders in books provided for that purpose, and he shall attend to the giving and service of all notices. He may sign with the Chairman of the Board or the President, in the name of the Corporation, all contracts of the Corporation and affix the seal of the Corporation thereto. He may sign with the Chairman of the Board or the President all certificates for shares of stock of the Corporation, and he shall have charge of the certificate books, transfer books, and stock papers as the board of directors may direct, all of which shall at all reasonable times be open to inspection by any director upon application at the office of the Corporation during business hours. He shall in general perform all duties incident to the office of the Secretary, subject to the control of the board of directors, the Chairman of the Board, and the President. 6.12 Assistant Secretaries. Each Assistant Secretary shall have such powers and duties as may be assigned to him by the board of directors, the Chairman of the Board, or the President. The Assistant Secretaries (in the order of their seniority as determined by the board of directors or, in the absence of such a determination, as determined by the length of time they have held the office of Assistant Secretary) shall exercise the powers of the Secretary during that officer's absence or inability to act. 101 ARTICLE SEVEN: CERTIFICATES AND SHAREHOLDERS 7.1 Certificates for Shares. Certificates for shares of stock of the Corporation shall be in such form as shall be approved by the board of directors. The certificates shall be signed by the Chairman of the Board or the President or a Vice President and also by the Secretary or an Assistant Secretary or by the Treasurer or an Assistant Treasurer. Any and all signatures on the certificate may be a facsimile and may be sealed with the seal of the Corporation or a facsimile thereof. If any officer, transfer agent, or registrar who has signed, or whose facsimile signature has been placed upon, a certificate has ceased to be such officer, transfer agent, or registrar before such certificate is issued, such certificate may be issued by the Corporation with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. The certificates shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued and shall exhibit the holder's name and the number of shares. 7.2 Replacement of Lost or Destroyed Certificates. The board of directors may direct a new certificate or certificates to be issued in place of a certificate or certificates theretofore issued by the Corporation and alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate or certificates representing shares to be lost or destroyed. When authorizing such issue of a new certificate or certificates the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond with a surety or sureties satisfactory to the Corporation in such sum as it may direct as indemnity against any claim, or expense resulting from a claim, that may be made against the Corporation with respect to the certificate or certificates alleged to have been lost or destroyed. 7.3 Transfer of Shares. Shares of stock of the Corporation shall be transferable only on the books of the Corporation by the holders thereof in person or by their duly authorized attorneys or legal representatives. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment, or authority to transfer, the Corporation or its transfer agent shall issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction upon its books. 7.4 Registered Stockholders. The Corporation shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. 102 7.5 Regulations. The board of directors shall have the power and authority to make all such rules and regulations as they may deem expedient concerning the issue, transfer, and registration or the replacement of certificates for shares of stock of the Corporation. 7.6 Legends. The board of directors shall have the power and authority to provide that certificates representing shares of stock bear such legends as the board of directors deems appropriate to assure that the Corporation does not become liable for violations of federal or state securities laws or other applicable law. ARTICLE EIGHT: MISCELLANEOUS PROVISIONS 8.1 Dividends. Subject to provisions of law and the certificate of incorporation of the Corporation, dividends may be declared by the board of directors at any regular or special meeting and may be paid in cash, in property, or in shares of stock of the Corporation. Such declaration and payment shall be at the discretion of the board of directors. 8.2 Reserves. There may be created by the board of directors out of funds of the Corporation legally available therefor such reserve or reserves as the directors from time to time, in their discretion, consider proper to provide for contingencies, to equalize dividends, or to repair or maintain any property of the Corporation, or for such other purpose as the board of directors shall consider beneficial to the Corporation, and the board of directors may modify or abolish any such reserve in the manner in which it was created. 8.3 Books and Records. The Corporation shall keep correct and complete books and records of account, shall keep minutes of the proceedings of its stockholders and board of directors and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of the shares held by each. 8.4 Fiscal Year. The fiscal year of the Corporation shall be fixed by the board of directors; provided, that if such fiscal year is not fixed by the board of directors and the selection of the fiscal year is not expressly deferred by the board of directors, the fiscal year shall be the calendar year. 8.5 Seal. The seal of the Corporation shall be such as from time to time may be approved by the board of directors. 103 8.6 Resignations. Any director, committee member, or officer may resign by so stating at any meeting of the board of directors or by giving written notice to the board of directors, the Chairman of the Board, the President, or the Secretary. Such resignation shall take effect at the time specified therein or, if no time is specified therein, immediately upon its receipt. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 8.7 Securities of Other Corporations. The Chairman of the Board, the President, or any Vice President of the Corporation shall have the power and authority to transfer, endorse for transfer, vote, consent, or take any other action with respect to any securities of another issuer which may be held or owned by the Corporation and to make, execute, and deliver any waiver, proxy, or consent with respect to any such securities. 8.8 Telephone Meetings. Stockholders (acting for themselves or through a proxy), members of the board of directors, and members of a committee of the board of directors may participate in and hold a meeting of such stockholders, board of directors, or committee by means of a conference telephone or similar communications equipment by means of which persons participating in the meeting can hear each other, and participation in a meeting pursuant to this section shall constitute presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened. 8.9 Action Without a Meeting. (a) Unless otherwise provided in the certificate of incorporation of the Corporation, any action required by the Delaware General Corporation Law to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders (acting for themselves or through a proxy) of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which the holders of all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Every written consent of stockholders shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required by this Section 8.9(a) to the Corporation, written consents signed by a sufficient number of holders to take action are delivered to the Corporation by delivery to its registered office in the State of Delaware, its principal place of business, or an officer or agent 104 of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation's registered office, principal place of business, or such officer or agent shall be by hand or by certified or registered mail, return receipt requested. (b) Unless otherwise restricted by the certificate of incorporation of the Corporation or by these bylaws, any action required or permitted to be taken at a meeting of the board of directors, or of any committee of the board of directors, may be taken without a meeting if a consent or consents in writing, setting forth the action so taken, shall be signed by all the directors or all the committee members, as the case may be, entitled to vote with respect to the subject matter thereof, and such consent shall have the same force and effect as a vote of such directors or committee members, as the case may be, and may be stated as such in any certificate or document filed with the Secretary of State of the State of Delaware or in any certificate delivered to any person. Such consent or consents shall be filed with the minutes of proceedings of the board or committee, as the case may be. 8.10 Invalid Provisions. If any part of these bylaws shall be held invalid or inoperative for any reason, the remaining parts, so far as it is possible and reasonable, shall remain valid and operative. 8.11 Mortgages, etc. With respect to any deed, deed of trust, mortgage, or other instrument executed by the Corporation through its duly authorized officer or officers, the attestation to such execution by the Secretary of the Corporation shall not be necessary to constitute such deed, deed of trust, mortgage, or other instrument a valid and binding obligation against the Corporation unless the resolutions, if any, of the board of directors authorizing such execution expressly state that such attestation is necessary. 8.12 Headings. The headings used in these bylaws have been inserted for administrative convenience only and do not constitute matter to be construed in interpretation. 8.13 References. Whenever herein the singular number is used, the same shall include the plural where appropriate, and words of any gender should include each other gender where appropriate. 8.14 Amendments. These bylaws may be altered, amended, or repealed or new bylaws may be adopted by the stockholders or by the board of directors at any regular meeting of the stockholders or the board of directors or at any special meeting of the stockholders or the board of directors if notice of such alteration, amendment, repeal, or adoption of new bylaws be contained in the notice of such special meeting. 105 The undersigned, the Secretary of the Corporation, hereby certifies that the foregoing bylaws were adopted by the stockholders of the Corporation as of __________, 1997. ______________________________ ______________, Secretary EX-2 3 STOCKHOLDER'S AGREEMENT 1 EXHIBIT 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 2 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 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 2 3 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 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 3 4 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 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 4 5 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 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 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 5 6 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 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, 6 7 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. (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 7 8 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 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 8 9 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. 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, 9 10 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, 10 11 without limitation, the Stockholder's heirs, guardians, 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 11 12 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. 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. 12 13 (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. (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 13 14 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. 14 15 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:_______________________________ HC ACQUISITION CORP. BY:_______________________________ STOCKHOLDER: GOLDER, THOMA, CRESSEY FUND III LIMITED PARTNERSHIP By: GOLDER, THOMA, CRESSEY & RAUNER, L.P., its General Partner By: _______________________ Name: Title: General Partner AGREED TO AND ACKNOWLEDGED (with respect to Section 5): ERO, INC. 15 16 By: __________________________ Name: Title: 16 17 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 17 EX-3 4 INFORMATION STATEMENT 1 EXHIBIT 3 ERO, INC. 585 SLAWIN COURT MOUNT PROSPECT, ILLINOIS 60056 INFORMATION STATEMENT PURSUANT TO SECTION 14(F) OF THE SECURITIES EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER This Information Statement is being mailed on or about April 17, 1997 as part of the Solicitation/ Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9") of ERO, Inc., a Delaware corporation (the "Company"), to holders of record of shares of Common Stock, par value $.01 per share, of the Company (the "Shares") at the close of business on or about April 11, 1997. You are receiving this Information Statement in connection with the possible election or appointment of persons designated by HC Acquisition Corp., a Delaware corporation (the "Purchaser"), to a majority of the seats on the Board of Directors of the Company. On April 10, 1997, the Company, the Purchaser and Hedstrom Corporation, a Delaware corporation (the "Parent"), entered into an Agreement and Plan of Merger (the "Merger Agreement") in accordance with the terms and subject to the conditions of which (i) the Parent will cause the Purchaser to commence a tender offer (the "Offer") for all outstanding Shares at a price of $11.25 per Share, net to the seller in cash, and (ii) the Purchaser will be merged with and into the Company (the "Merger"). As a result of the Offer and the Merger, the Company will become a wholly owned subsidiary of the Parent. The Merger Agreement requires the Company to use all reasonable efforts to cause the Purchaser's designees to be elected or appointed to the Board of Directors of the Company under the circumstances described therein. This Information Statement is required by Section 14(f) of the Securities Exchange Act of 1934, as amended, and Rule 14f-1 promulgated thereunder. See "RIGHT TO DESIGNATE DIRECTORS; THE PURCHASER DESIGNEES." You are urged to read this Information Statement carefully. You are not, however, required to take any action in connection with the matters herein discussed. Capitalized terms used herein and not otherwise defined herein have the meanings set forth in the Schedule 14D-9. Pursuant to the Merger Agreement, the Purchaser commenced the Offer on April 17, 1997. The Offer is scheduled to expire at 12:00 midnight, New York City time, on June 2, 1997, unless the Offer is extended. The information contained in this Information Statement concerning the Parent, the Purchaser and the Purchaser's designees for the Company's Board of Directors (the "Purchaser Designees") has been furnished to the Company by the Parent and the Purchaser, and the Company assumes no responsibility for the accuracy or completeness of such information. RIGHT TO DESIGNATE DIRECTORS; THE PURCHASER DESIGNEES Pursuant to the Merger Agreement, promptly following the purchase by and payment for Shares by the Purchaser pursuant to the terms, and subject to the conditions of the Offer, the Purchaser will be entitled to designate such number of directors as will give the Purchaser representation on the Board of Directors of the Company 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. The Merger Agreement requires that the Company will, upon request by and at the option of the Parent, either increase the size of the Board of Directors and/or secure the resignation of current directors to enable the Purchaser Designees to be elected or appointed to the Board of Directors and to constitute a majority of the Company's Board of Directors. The I-1 2 Board of Directors of the Company currently consists of six members. The Board of Directors of the Company expects that several directors will resign from the Board following the consummation of the Offer or, if necessary, the Board will increase the size of the Board by resolutions to satisfy this requirement. The Purchaser Designees may assume office at any time following the purchase by the Purchaser of Shares pursuant to the terms, and subject to the conditions of the Offer, which purchase cannot be earlier than June 2, 1997. None of the Purchaser Designees (a) is currently a director of, or holds any position with, the Company, (b) has a familial relationship with any of the directors or executive officers of the Company or (c) to the best knowledge of the Purchaser, beneficially owns any securities (or rights to acquire any securities) of the Company. The Company has been advised by the Purchaser that, to the best of the Purchaser's knowledge, none of the Purchaser Designees has been involved in any transactions with the Company or any of its directors, executive officers or affiliates which are required to be disclosed pursuant to the rules and regulations of the Securities and Exchange Commission, except as may be disclosed herein or in the Schedule 14D-9. The Purchaser has informed the Company that it will choose the Purchaser Designees from the Purchaser's directors and executive officers listed below. The Purchaser has informed the Company that each of the Purchaser Designees has consented to act as a director, if so designated. The names of the Purchaser Designees, their ages as of April 16, 1997, and certain other information about them are set forth below. All of the Purchaser Designees are executive officers and directors of the Purchaser and the business address of each such executive officer and director is 300 Corporate Center Drive, Suite 100, Coraopolis, Pennsylvania 15108. Unless otherwise indicated below, each occupation set forth opposite an individual's name refers to employment with the Parent.
NAME OF THE PURCHASER DESIGNEE AGE PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS ------------------------------ --- ----------------------------------------------- John R. Muse...................... (45) Chairman of the Board, Parent (1995-present); Managing Director and Principal, Hicks Muse (1989-present) Arnold E. Ditri................... (60) Director and President, Parent (1995-present); Chairman of Board, Parent (1991-1995) Robert H. Elman................... (57) Director, Parent (1995-present); Chairman of the Board, DESA International, Inc. (1985-present) Alan B. Menkes.................... (37) Director and Vice President, Parent (1995-present); Managing Director and Principal, Hicks Muse (April 1996-present); The Carlyle Group (1988-1992)
DIRECTORS OF THE COMPANY The Board of Directors is currently comprised of six directors divided into three classes. The term of each class expires in different years. The following sets forth information as to each director, including age, as of April 17, 1997, principal occupation and employment during the past five years, directorships in other publicly held companies, membership on committees of the Board of Directors and period of service as a director of the Corporation. D. Richard Ryan, Jr., 57, joined the Corporation in 1993, was elected to the Board of Directors in 1994 and currently serves as Chairman, President and Chief Executive Officer. Prior to joining the Corporation, Mr. Ryan was President and Chief Executive Officer of Dansk International Designs, Ltd. from November of 1985 through August of 1991, President and Chief Executive Officer of Marley Holdings, Inc. from 1981 through 1985 and President of General Housewares Corp.'s Cookware Group from 1974 through 1981. Robert J. Lipsig, 54, has served as a director of the Corporation since 1988 and was Chairman from 1992 through April of 1994. Mr. Lipsig has been a Principal of Core Financial Corporation, a private investment and business development firm, since April of 1994. Mr. Lipsig joined the Corporation as Senior Vice President in 1978 and served as the Corporation's President from 1985 through October of 1993. Mr. Lipsig is also a director of Elek-Tek, Inc. Mr. Lipsig also serves on the Corporation's Compensation Committee. Arthur S. Nicholas, 67, has served as a director of the Corporation since 1988. Mr. Nicholas served as President of Nicholas, Feder & Jaffe, an investment firm, from 1987 to 1992 and is currently President of The Antech Group, a private investment and business development firm. Mr. Nicholas also serves on the Corporation's Audit and Compensation Committees. I-2 3 Thomas M. Gasner, 51, joined the Corporation in 1981 and currently serves as Executive Vice President of Operations where his responsibilities include production, inventory control and purchasing. Mr. Gasner has been a member of the Board of Directors since 1988. Bruce V. Rauner, 41, has served as a director of the Corporation since 1988. Mr. Rauner has been a Principal of Golder, Thoma, Cressey, Rauner, Inc., an investment firm, since 1984. Mr. Rauner is also a general partner of Golder, Thoma, Cressey & Rauner, L.P., which is the general partner of GTC Fund III, the Corporation's largest stockholder. Mr. Rauner is also a director of CORE Staff, Inc., Coinmach Laundry Corporation, Polymer Group, Inc. and Lason Systems, Inc., Mr. Rauner also serves on the Corporation's Compensation and Audit Committees. Lee M. Mitchell, 54, has served as a director of the Corporation since October of 1996. Mr. Mitchell has been a principal of Golder, Thoma, Cressey, Rauner, Inc., an investment firm, since May of 1994. From May of 1992 through May of 1994, Mr. Mitchell served as a director of numerous corporations. Mr. Mitchell was President and Chief Executive Officer of The Field Corporation until May of 1992. Mr. Mitchell is also a director of American Medserve Corp., Washington National Corporation and Paging Network, Inc. There are no family relationships among the foregoing persons. BOARD AND COMMITTEE MEETINGS The Board of Directors held five meetings (exclusive of committee meetings) during the preceding fiscal year. The Board of Directors has established the following committees, the functions and current members of which are noted below. Each current director, except Mr. Rauner who did not attend two meetings and Mr. Mitchell who was not appointed to the Board of Directors until October 17, 1996, attended 75% or more of the number of meetings held during the preceding fiscal year of the Board of Directors and any committees on which such director served. Compensation Committee. The Compensation Committee of the Board of Directors consists of Messrs. Lipsig, Nicholas and Rauner. The Compensation Committee reviews and makes recommendations to the Board of Directors regarding salaries, compensation and benefits of executive officers and key employees of the Corporation and grants options to purchase Common Stock of the Corporation. The Compensation Committee met twice during the preceding fiscal year. Audit Committee. The Audit Committee of the Board of Directors consists of Messrs. Nicholas and Rauner. The Audit Committee, among other duties, reviews the internal and external financial reporting of the Corporation, reviews the scope of the independent audit and considers comments by the auditors regarding internal controls and accounting procedures and management's response to those comments. The Audit Committee met once during the preceding fiscal year. The Corporation does not have a nominating committee. COMPENSATION OF DIRECTORS Management directors are not entitled to receive any fees for their service on the Board of Directors. Nonmanagement directors are eligible to receive grants of options to purchase shares of Common Stock pursuant to the Corporation's 1992 Directors' Stock Option Plan and are also reimbursed for out-of-pocket expenses incurred in connection with attending meetings. In addition, all non-management directors received $1,000 per meeting attended for service on the Board of Directors during 1996. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), requires the Corporation's officers, directors and persons who beneficially own more than ten percent of a registered class of the Corporation's equity securities to file reports of securities ownership and changes in such ownership with the Securities and Exchange Commission (the "SEC"). Officers, directors and greater than ten-percent beneficial owners also are required by rules promulgated by the SEC to furnish the Corporation with copies of all Section 16(a) forms they file. Based solely upon a review of the copies of such forms furnished to the Corporation, or written representations that no Form 5 filings were required, the Corporation believes that during the period from I-3 4 January 1, 1996 through December 31, 1996 all Section 16(a) filing requirements applicable to its officers, directors and greater than ten-percent beneficial owners were complied with except that Barry J. Ryan, President of ERO Industries, Inc., filed two Form 4s late. SECURITY OWNERSHIP The following information with respect to the outstanding shares of Common Stock beneficially owned by each director and nominee for director of the Corporation, the chief executive officer and the four other most highly compensated executive officers, all beneficial owners of more than five percent of the Common Stock known by the Corporation and the directors and executive officers as a group is furnished as of March 3, 1997, except as described below.
COMMON STOCK ----------------------- NUMBER OF PERCENT NAME SHARES(1) OF CLASS(2) ---- --------- ----------- GTC Fund III(3,4)........................................... 3,940,000 38.4% D. Richard Ryan, Jr.(5)..................................... 180,000 1.8 Barry J. Ryan(5)............................................ 10,000 * Richard F. Schaub, Jr.(5)................................... 1,000 * Kenneth E. Litvack(5)....................................... 3,000 * Amos Sochaczevski(5)........................................ -- -- Bruce V. Rauner(4,6)........................................ 3,968,337 38.7 Thomas M. Gasner(4,5)....................................... 283,500 2.8 Robert J. Lipsig(4,5)....................................... 202,100 2.0 Arthur S. Nicholas(4,5)..................................... 38,670 * Lee M. Mitchell(7).......................................... -- -- T. Rowe Price Associates, Inc.(8)........................... 1,223,800 11.9 Putnam Investments, Inc.(9)................................. 765,100 7.5 Heartland Advisors Inc.(10)................................. 541,500 5.3 All directors and executive officers as a group (11 persons)(11).............................................. 4,686,607 45.7
- ------------------------- (1) Each holder has sole voting and investment power with respect to the shares listed unless otherwise indicated. (2) Percentages less than one percent are denoted by an asterisk. (3) All such shares are held by GTC Fund III, of which Golder, Thoma, Cressey & Rauner, L.P., is the general partner. The address for GTC Fund III is c/o Golder, Thoma, Cressey, Rauner, Inc., 6100 Sears Tower, Chicago, Illinois 60606-6402. (4) All of these parties have entered into an agreement providing for the election of directors. Each such party disclaims beneficial ownership of the shares of Common Stock owned by each other party. (5) The address for these individuals is c/o ERO, Inc., 585 Slawin Court, Mount Prospect, Illinois 60056. (6) Includes 3,940,000 shares held by GTC Fund III, of which Golder, Thoma, Cressey & Rauner, L.P. is the general partner. Mr. Rauner is a general partner of Golder, Thoma, Cressey & Rauner, L.P., but disclaims beneficial ownership of such shares. The address for Mr. Rauner is c/o Golder, Thoma, Cressey, Rauner, Inc., 6100 Sears Tower, Chicago, Illinois 60606-6-402. (7) The address for Mr. Mitchell is c/o Golder, Thoma, Cressey, Rauner, Inc., 6100 Sears Tower, Chicago, Illinois 60606-6402. (8) The information set forth herein is based solely on a Form 13G filed by such entity for the year ended December 31, 1996. The address for such entity, as so reported, was 100 E. Pratt Street, Baltimore, MD 21202. (9) The information set forth herein is based solely on a Form 13G filed by such entity for the year ended December 31, 1996. The address for such entity, as so reported, was One Post Office Square, Boston, MA 02109. (10) The information set forth herein is based solely on a Form 13G filed by such entity for the year ended December 31, 1996. The address for such entity, as so reported, was 790 N. Milwaukee St., Milwaukee, WI 53202. (11) Includes shares held by GTC Fund III. I-4 5 EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following summary compensation table specifies the components of the Corporation's chief executive officer and four other most highly compensated executive officers (the "named executive officers") compensation packages for the years ended December 31, 1996, December 31, 1995 and December 31, 1994. The Corporation does not maintain any long-term compensation plans.
ANNUAL COMPENSATION LONG TERM COMPENSATION -------------------- -------------------------------- ALL OTHER SALARY BONUS STOCK RESTRICTED STOCK COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($)(1) ($)(2) OPTIONS(#)(3) AWARDS($) ($)(4) --------------------------- ---- ------ ------ ------------- ---------------- ------------ D. Richard Ryan, Jr. ............. 1996 $250,000 -- -- -- 1,350 (Chairman, President and 1995 250,000 25,000 -- -- 1,350 Chief Executive Officer) 1994 247,763 375,000 -- -- 110,044 Barry J. Ryan(5).................. 1996 116,242 16,000 125,000 -- 99,207 (President of ERO Industries, Inc.) 1995 -- -- -- -- -- 1994 -- -- -- -- -- Richard F. Schaub, Jr.(6)......... 1996 120,000 62,500 -- -- 93 (President of Priss Prints, Inc.) 1995 120,000 -- 12,500 -- 6,741 1994 25,384 35,000 30,000 -- 20 Kenneth E. Litvack(7)............. 1996 140,000 -- -- -- 810 (President of Impact, Inc.) 1995 143,860 -- 7,500 -- 807 1994 129,051 227,000 40,000 -- 388 Amos Sochaczevski(8).............. 1996 147,000 -- 30,000 -- -- (President of Amav 1995 37,000 -- -- -- -- Industries, Inc.) 1994 -- -- -- -- --
- ------------------------- (1) Includes the following amounts deferred by Messrs. D. Ryan, Schaub and Litvack, respectively, pursuant to the Company's 401(k) plan for the following fiscal years: 1996, $9,135, $6,139 and $5,115; 1995, $9,240, $0 and $6,993; and 1994, $0, $0 and $5,308. (2) Amounts include bonuses accrued during each year but paid shortly thereafter. (3) All stock option grants were made pursuant to the Corporation's 1992 Key Employee Stock Option Plan. (4) Represents premiums paid by the Corporation under a group term life insurance plan, the reimbursement of Mr. D. Ryan's relocation expenses in 1994, the reimbursement of Mr. Schaub's relocation expenses in 1995 and the reimbursement of Mr. B. Ryan's relocation expenses in 1996. (5) Mr. B. Ryan was named President of ERO Industries, Inc. effective May 1, 1996. (6) Mr. Schaub was named President of Priss Prints, Inc. effective October 10, 1994. (7) Impact, Inc. ("Impact") was acquired by the Corporation effective January 1, 1994. Mr. Litvack was named President of Impact on February 11, 1994. (8) Amav Industries, Inc. ("Amav") was acquired by the Corporation effective October 1, 1995. I-5 6 The following tables disclose, for the named executive officers, information regarding stock options granted or exercised during, or held at the end of, 1996. OPTION GRANT TABLE OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATE OF STOCK PRICE % OF TOTAL APPRECIATION FOR OPTIONS GRANTED OPTION TERM OPTIONS TO EMPLOYEES IN EXERCISE PRICE --------------------------- NAME GRANTED(#) FISCAL YEAR ($/SH) EXPIRATION DATE 5%($)(1) 10%($)(1) ---- ---------- --------------- -------------- --------------- -------- --------- D. Richard Ryan, Jr.... -- -- -- -- -- -- Barry J. Ryan.......... 125,000 39.4% $6.375 Aug. 21, 2006 $502,031 $1,267,031 Richard F. Schaub, Jr. ................. -- -- -- -- -- -- Kenneth E. Litvack..... -- -- -- -- -- -- Amos Sochaczevski...... 30,000 9.5% $5.750 Feb. 7, 2006 $108,675 $ 274,295
- ------------------------- (1) Amounts reflect certain assumed rates of appreciation set forth in the SEC's executive compensation disclosure rules. Actual gains, if any, on stock option exercises depend on future performance of the Common Stock and overall stock market conditions. No assurance can be made that the amounts reflected in these columns will be achieved. OPTION EXERCISES AND YEAR-END OPTION VALUE TABLE AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR, AND YEAR-END OPTION VALUES
VALUE OF UNEXERCISED NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT SHARES OPTIONS AT FY-END(#) FY-END($) ACQUIRED ON VALUE --------------------------- --------------------------- NAME EXERCISE(1) REALIZED($)(1) UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE ---- ----------- -------------- ------------- ----------- ------------- ----------- D. Richard Ryan, Jr. .... -- -- -- 540,000 -- $1,425,600 Barry J. Ryan............ -- -- 125,000 -- $296,875 -- Richard F. Schaub, Jr. ................... -- -- 28,000 14,500 $ 7,250 $ 29,000 Kenneth E. Litvack....... -- -- 30,000 17,500 $ 48,000 $ 25,750 Amos Sochaczevski........ -- -- 30,000 -- $ 90,000 --
- ------------------------- (1) None of the options which were granted to the named executives, as described in footnote 3 to the Summary Compensation Table, has been exercised. EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Pursuant to employment agreements (the "Employment Agreements") dated December 14, 1995, the Corporation agreed to employ Amos Sochaczevski as President of Amav Industries Ltd. ("Amav"), a wholly owned subsidiary of the Corporation, and Avi Sochaczevski as Executive Vice President of Amav for a period of two years with automatic one year renewals unless either party provides written notice to the other party of his or its intention not to renew (a) at least 120 days prior to the end of the initial two year term or (b) at least 90 days prior to the end of any renewal term. The Employment Agreements provide each party with an annual salary of C$200,000. In addition, both parties are bound by a non-competition clause for a period of five years from the date of the agreement. The Corporation has entered into an employment agreement with Kenneth E. Litvack which guarantees Mr. Litvack a minimum annual salary of $130,000 through December 31, 1998. In addition, the agreement I-6 7 includes a non-competition clause for a period of two years following Mr. Litvack's termination from the Corporation. Barry J. Ryan has entered into an agreement with the Corporation pursuant to which he is guaranteed an annual minimum bonus of $16,000 through 1998. In addition, if he is terminated prior to May 1, 1999, he is entitled to severance amounting to one year of base salary. Finally, the Corporation agreed to reimburse Mr. Ryan for certain costs incurred during his relocation. Named Executive Officers have deferred compensation and receive benefits under the Corporation's Nonqualified Deferred Compensation Plan (the "Plan"). Beginning in 1997, Executives are allowed to defer up to 20% of their annualized base salary (less any contributions to the Corporation's 401(k) plan). In addition, the Corporation matches 50% of the Executive's contribution to the Plan up to 3% of the Executive's Salary (less the Corporation's contribution to the 401(k) plan). This contribution vests immediately. The Corporation has not entered into written employment contracts with any of its other executive officers. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The members of the Corporation's Compensation Committee are Messrs. Lipsig, Nicholas and Rauner. Mr. Rauner, a director of the Corporation, is also a general partner of Golder, Thoma, Cressey & Rauner, L.P. Golder, Thoma, Cressey & Rauner, L.P. is the general partner of GTC Fund III, which owns 38.4% of the Corporation's Common Stock. No officers of the Corporation serve on the Compensation Committee. COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee of the Board of Directors (the "Committee") is pleased to present its report on executive compensation. The Committee reviews and makes recommendations to the Board of Directors regarding salaries, compensation and benefits of executive officers and key employees of the Corporation and grants options to purchase Common Stock of the Corporation. This Committee report documents the components of the Corporation's executive officer compensation programs and describes the bases upon which compensation will be determined by the Committee with respect to the executive officers of the Corporation, including the executive officers that are named in the compensation tables (the "Named Executives"). This Committee report shall not be deemed incorporated by reference by any general statement incorporating by reference this Proxy Statement into any filing under the Securities Act of 1933 or under the Exchange Act, except to the extent that the Corporation specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts. Compensation Philosophy. The compensation philosophy of the Corporation is to endeavor to directly link executive compensation to continuous improvements in corporate performance and increases in shareholder value. The Committee has adopted the following objectives as guidelines for compensation decisions. - Display a willingness to pay levels of compensation that are necessary to attract and retain highly qualified executives. - Be willing to compensate executive officers in recognition of superior individual performance, new responsibilities or new positions within the Corporation. - Take into account historical levels of executive compensation and the overall competitiveness of the market for high quality executive talent. - Implement a balance between short- and long-term compensation to complement the Corporation's annual and long-term business objectives and strategy and encourage executive performance in furtherance of the fulfillment of those objectives. - Provide variable compensation opportunities based on the performance of the Corporation, encourage stock ownership by executives and align executive remuneration with the interests of stockholders. Compensation Program Components. The Committee regularly reviews the Corporation's compensation program to ensure that pay levels and incentive opportunities are competitive with the market and reflect the I-7 8 performance of the Corporation. The particular elements of the compensation program for executive officers are further explained below. Base Salary. The Corporation's base pay levels are largely determined by evaluating the responsibilities of the position held and the experience of the individual and by comparing the salary scale with companies of similar size and complexity. Actual base salaries are kept within a competitive salary range for each position that is established through job evaluation and market comparisons and approved by the Committee as reasonable and necessary. D. Richard Ryan, Jr.'s salary has been set at $250,000 per year, a level which is equal to his salary last year and comparable to salaries paid for executives holding positions with comparable responsibilities. Annual Incentives. The 1996 Incentive Compensation Plan (the "1996 Incentive Compensation Plan") provides for the granting of cash awards to certain salaried employees (including the Named Executives) of the Corporation, approved for participation by the Committee. The objective of the 1996 Incentive Compensation Plan is to enhance management's contribution to stockholder returns through increased stock prices by providing competitive levels of compensation for the attainment of financial objectives. In particular, the 1996 Incentive Compensation Plan aims to focus corporate behavior on consistent and steady earnings growth by examining such performance indicators as (A) a comparison of actual earnings before interest, taxes, depreciation and amortization ("EBITDA") to budgeted EBITDA or (B) a comparison of actual sales to budgeted sales. Targeted awards for the Corporation's employees under the 1996 Incentive Compensation Plan are intended to be consistent with targeted awards of companies of similar size and complexity. Actual awards, however, are subject to decrease or increase on the basis of the Corporation's performance. As a result of the Corporation's performance in 1996, the amounts presented in the Executive Compensation table were payable under the 1996 Incentive Compensation Plan. The Compensation Committee approved a similar program for 1997. Stock Option Program. The Committee strongly believes that by providing those persons who have substantial responsibility over the management and growth of the Corporation with an opportunity to increase their ownership of the Corporation's stock, the interests of stockholders and executives will be closely aligned. Therefore, the Corporation's key employees (including the Named Executives) are eligible to receive either incentive stock options or nonqualified stock options as the Committee may determine from time to time, giving them the right to purchase shares of the Corporation's Common Stock at an exercise price equal to 100% of the fair market value of such Common Stock at the date of grant. The number of stock options granted to executive officers is based on competitive practices. Currently, the Corporation does not intend to grant any additional stock options to any Named Executive in the next year, except in recognition of new responsibilities or positions. Certain Tax Considerations. Recently enacted Section 162(m) of the Code generally limits the corporate tax deduction for compensation paid to the Named Executives to $1,000,000 in any given taxable year, unless certain requirements are met. The Compensation Committee has carefully considered the impact of this new tax code provision. The Committee currently intends to structure compensation plans for the Named Executives as necessary in order to maximize the Corporation's corporate tax deduction without limiting the Corporation's ability to attract and retain qualified executives. Summary. After its review of all existing programs, the Committee continues to believe that the total compensation program for executives of the Corporation is focused on increasing values for stockholders and enhancing corporate performance. The Committee currently believes that the compensation of executive officers is properly tied to stock appreciation through the 1992 Key Employee Stock Option Plan and through the options granted to Mr. D. Ryan when he joined the Corporation. The Committee believes that executive compensation levels at the Corporation are competitive with the compensation programs provided by other corporations with which the Corporation competes. The foregoing report has been approved by all members of the Committee. COMPENSATION COMMITTEE Robert J. Lipsig Arthur S. Nicholas Bruce V. Rauner I-8 9 PERFORMANCE GRAPH The following graph compares the Corporation's cumulative total stockholder return since the Common Stock became publicly traded on April 7, 1992 with the Nasdaq National Market Index and with a peer group comprised of the following companies, Acclaim Entertainment, Inc., Empire of Carolina, Inc., Equity Marketing, Inc., Galoob Toys, Inc., Hasbro, Inc., Mattel, Inc., Russ Berrie and Company, Inc., The Ohio Art Company, Safety 1st, Inc., Toy Biz, Inc., Tyco Toys, Inc., and Yes! Entertainment Corporation.(1) The Corporation selected the aforementioned companies to align its peer group with that used by analysts covering the industry. COMPARISON OF TOTAL RETURN* ERO, INC., NASDAQ NATIONAL MARKET INDEX AND PEER GROUP
MEASUREMENT PERIOD NASDAQ NATIONAL (FISCAL YEAR COVERED) ERO, INC. PEER GROUP MARKET INDEX APRIL 7, 1992 100.00 100.00 100.00 DECEMBER 31, 1992 61.19 116.24 106.08 DECEMBER 31, 1993 43.28 129.77 127.25 DECEMBER 31, 1994 49.25 119.80 133.60 DECEMBER 31, 1995 35.82 150.82 173.29 DECEMBER 31, 1996 52.24 172.67 215.34
- ------------------------- (1) This peer group is identical to the peer group referenced in the Corporation's 1997 Proxy Statement. * Total Return assumes reinvestment of dividends. I-9 EX-4 5 CONFIDENTIALITY AGREEMENT 1 EXHIBIT 4 [DEAN WITTER REYNOLDS INC. LETTERHEAD] December 10, 1996 Hedstrom Corp. 300 Corporate Center Drive Suite 100 Coraopolis, PA 15108 Attn: Mr. Arnold Ditri Gentlemen: In connection with your consideration of a possible transaction involving Hedstrom Corporation ("you") and ERO, Inc., a Delaware corporation (collectively with its subsidiaries, the "Company"), you have requested certain oral and written information concerning the Company from officers, directors, employees and/or agents of the Company (all such information collectively referred to as the "Evaluation Material"). In consideration of furnishing you with the Evaluation Material the Company requests your agreement to the following (it being understood that you are also agreeing to cause all of your affiliates to comply with the provisions hereof): 1. Except as hereinafter set forth, the Evaluation Material for a period of two years from the date of this agreement will be used only by you and solely for the purpose of evaluating or implementing the possible transaction with the Company, which may include the acquisition of all of the Common Stock or all of the assets of the Company (the "Transaction"), and not in any way directly or indirectly detrimental to the Company and such information will be kept confidential by you and your advisors and not disclosed to any third parties, except that you may disclose the Evaluation Material or portions thereof to those of your directors, officers, employees, advisors, lenders and representatives of your advisors (the persons to whom such disclosure is permissible being collectively called "Representatives") who need to know such information for the purpose of evaluating the Transaction (it being understood that, before disclosing the Evaluation Material or any portion thereof to such Representatives, those Representatives will be informed of the confidential nature of the Evaluation Material and will agree to be bound by this agreement and not to disclose the information to any other individual or entity). A failure by your Representatives to abide by the terms of this agreement will be deemed a breach of the agreement by you and you agree to be responsible for any breach of this agreement by your Representatives, provided that your affiliates and their Representatives shall not be deemed your Representatives unless (but solely to the extent that) you have furnished Evaluation Material to them. Evaluation Material may also be disclosed to any management firm which assists you in evaluating or implementing a transaction. Notwithstanding anything to the contrary in this letter, you shall not be responsible for any breach by any person (including any such management firm) that 2 DEAN WITTER REYNOLDS INC. has, with the Company's reasonable consent, entered into a separate confidentiality agreement with the Company (either directly or through its Representatives). In the event that you or any or your Representatives become legally compelled (by deposition, interrogatory, request for documents, subpoena, civil investigative demand, judicial, governmental or similar process) to disclose any of the Evaluation Material, you shall provide the Company with prompt prior written notice of such requirement, which notice shall be given prior to disclosing any of the Evaluation material so that the Company may seek a protective order or other appropriate remedy. You or your representative shall not be liable for disclosure pursuant to such requests or requirement made in accordance with the terms of this Agreement. In the event that such protective order or other remedy is not obtained, you agree to furnish only that portion of the Evaluation Material which you are advised by counsel is legally required to be furnished and to exercise best efforts to obtain assurance that confidential treatment will be afforded such Evaluation Material. 2. The term "Evaluation Material" does not include any information which (i) at the time of disclosure or thereafter is generally available to and known by the public (other than as a result of a disclosure directly or indirectly by you or your Representatives in violation of this agreement), (ii) was available to you or your Representatives on a nonconfidential basis from a source other than the Company or its advisors, provided that such source is not and was not bound by a confidentiality agreement with the Company or (iii) has been independently acquired or developed by you or your Representatives without violating any of your obligations under this agreement. 3. If the Transaction is not consummated by you or if the Company so requests, you promptly will return to the Company all copies of the Evaluation Material in your possession or in the possession of your Representatives, and you will destroy all copies of any analyses, compilations, studies or other documents prepared by you or for your use containing or reflecting any Evaluation Material. 4. Without the prior written consent of the Company, neither you nor your Representatives will disclose to any person (i) the fact that any investigations, discussions or negotiations are taking place concerning the Transaction, (ii) that you have requested or received Evaluation Material from the company or (iii) any of the terms, conditions or other facts with respect to any Transaction, including the status thereof. The term "person" in this agreement will be interpreted broadly to include, without limitation, any corporation, company, partnership or individual. 5. Until two years from the date of this agreement, you agree not to initiate or maintain contact (except for contacts made in the ordinary course of business consistent with past practice) with any officer, director, member of management, employee or agent of the Company regarding its business, operation, prospects or finances, or to solicit the employment of any such individual, except after first requesting and receiving the permission of the Company, provided, however, that this agreement shall not prohibit any advertisement or general solicitation (or employment as a result thereof) that is not specifically targeted at such persons nor shall it prohibit the solicitation or employment of any such person who is not employed by the Company on the date you first solicit such person 3 DEAN WITTER REYNOLDS INC. Hedstrom Corp. December 10, 1996 Page 3 6. You understand and acknowledge that the Company is not making any representation or warranty, express or implied, as to the accuracy or completeness of the Evaluation Material, and none of the Company or any of its respective officers, directors, employees, stockholders, owners, affiliates, agents or representatives will have any liability to you or any other person resulting from your use of the Evaluation Material. 7. You also agree that unless and until a definitive contract or contracts covering the Transaction shall have been executed and delivered, there shall not be any legal obligation whatsoever on the Company to facilitate, cooperate with you or any other party with respect to, or participate in, any Transaction by virtue of this agreement or any other written or oral expression with respect to such Transaction except, in the case of this agreement, for the matters specifically agreed to herein. 8. You agree that until the expiration of one year from the date of this agreement, neither you (including any person or entity directly or indirectly, through one or more intermediaries, controlling you or controlled by you or under common control with you) nor your Representatives shall, nor shall you permit any of your "associates" or "affiliates" (as such terms are defined in Rule 12b-2 under the Securities Exchange Act of 1934 (the "Exchange Act")) to, acting alone or as part of any group except pursuant to the possible transaction described in this agreement (a) in any manner acquire, agree to acquire or make any proposal or offer to acquire, directly or indirectly, any securities or property of the Company, (b) except at the specific written request of the Company, propose to enter into, directly or indirectly, any merger or business combination involving the Company or to purchase, directly or indirectly, a material portion of the assets of the Company, (c) make, or in any way participate, directly or indirectly, in any "solicitation" of "proxies" or become a "participant" in any "election contest" (as such terms are defined or used in the proxy rules of the Securities and Exchange commission) with respect to the Company, or execute or solicit any written consents in lieu of a meeting of holders of the Company's voting securities or any class thereof, or otherwise seek to advise or influence any person with respect to the voting of, any voting securities of the Company, including by public announcement or written statement broadly disseminated, (d) form, join or in any way participate in a "group" (within the meaning of Section 13(d)(3) of the Exchange Act) with respect to any voting securities of the Company except with respect to securities owned on December 10, 1996, (e) otherwise act, alone or in concert with others, to seek to control or influence the management, Board of Directors or policies or affairs of the Company, (f) disclose any intention, plan or arrangement inconsistent with the foregoing or (g) advise, assist or encourage any other persons in connection with any of the foregoing. You also agree during such period not to (i) request the Company (or its directors, officers, employees' or agents), directly or indirectly, to amend or waive any provision of this paragraph (including this sentence) unless another party has made a proposal inconsistent with the foregoing, or (ii) take any action which might require you or the Company to make a public announcement regarding the possibility of any Transaction or any other business combination or merger with the Company, without the consent of a duly authorized representative of the Company. 4 DEAN WITTER REYNOLDS INC. Hedstrom Corp. December 10, 1996 Page 4 9. You agree that, in the event of any breach of the provisions of this agreement, the Company shall be entitled to seek equitable relief upon proper showing, including injunction and specific performance, in addition to all other remedies available to the Company at law or in equity. It is further understood and agreed that no failure or delay by the Company in exercising any right, power or privilege hereunder will operate as a waiver thereof, nor will any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any right, power or privilege hereunder. This agreement is for the benefit of the Company, and will be governed by and construed in accordance with the internal laws of the State of Delaware. Your obligations under this agreement will expire on the earlier of two years from the date of this agreement or the closing of the possible transaction by you or any of your affiliates. If you agree with the foregoing, please sign and return two copies of this letter, which will constitute our agreement with respect to the subject matter of this letter. Very truly yours, DEAN WITTER REYNOLDS INC. As authorized Agent on behalf of ERO, Inc. By:/s/ Russell K. Mayerfeld -------------------------- Name: Russell K. Mayerfeld Title: Managing Director CONFIRMED AND AGREED as of the date written above: Hedstrom Corp. By:/s/ A.E. Ditri ------------------------ Name: Title: EX-5 6 PRESS RELEASE 1 EXHIBIT 5 (PRESS RELEASE) April 11, 1997 ERO, INC. AND HEDSTROM CORPORATION ENTER INTO DEFINITIVE MERGER AGREEMENT -------------------------------------- Mount Prospect, IL (PRNewswire) -- ERO, Inc. (NASDAQ: EROI) and Hedstrom Corporation announced today that they have entered into a definitive merger agreement. The agreement calls for Hedstrom to acquire ERO, a leading consolidator and marketer of children's leisure products. Under the merger agreement, Hedstrom will promptly commence a cash tender offer for all of the outstanding shares of ERO common stock for $11.25 per share. ERO has approximately 11.7 million fully diluted shares outstanding. Including funded debt, the transaction is valued at approximately $203 million. D. Richard Ryan, Jr., Chairman, President and CEO of ERO stated, "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. ERO has been growing about 20% per year over the last three years by acquiring businesses with dominant positions in their respective markets. Adding ERO's slumber, back-to-school, arts & crafts, water sports and children's room decor business to Hedstrom's play balls and outdoor play equipment businesses should create an even stronger company, better able to serve its customers and provide now opportunities for employees." 1 2 ERO's largest investor, the private equity fund of Golder, Thoma, Cressey, Rauner, Inc., holds approximately 38 percent of the total outstanding shares of the Company and has agreed to tender its shares into the tender offer. Hedstrom's controlling shareholder is Hicks, Muse, Tate & Furst, Inc. The Boards of Directors of both ERO and Hedstrom have give approval to the acquisition and the Board of ERO recommends that ERO stockholders accept Hedstrom's cash tender offer. Consummation of the acquisition is contingent upon the tender of a majority of ERO's outstanding shares on a fully diluted basis, the expiration or termination of any applicable waiting periods under the federal Hart-Scott-Rodino Antitrust Act, the funding of committed debt financing which has been obtained by Hedstrom, and other customary conditions. As a result of this transaction, ERO also announced that it was postponing its Annual Meeting of Stockholders that had been previously scheduled for April 17, 1997. ERO has grown significantly through acquisitions in the last five years. The company now 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 sells its art, craft and activity products in toy and craft departments. Impact sells licensed and branded back-to-school products to stationery buyers. Priss Prints markets a range of children's room decor products through juvenile, paint and wallpaper and domestic departments. Contact: Mark D. Renfree Chief Financial Officer 847/803-9200 ext. 315 2 EX-6 7 LETTER TO STOCKHOLDERS 1 EXHIBIT 6 585 Slawin Court Mount Prospect, Illinois 60656 (847) 803-9200 April 17, 1997 To Our Stockholders: On behalf of the Board of Directors of ERO, Inc. (the "Company"), we are pleased to inform you that on April 10, 1997, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Hedstrom Corporation and HC Acquisition Corp. (the "Purchaser"). Pursuant to the Merger Agreement, the Purchaser has today commenced a cash tender offer (the "Offer") to purchase all of the issued and outstanding shares of Common Stock of the Company (the "Shares") at $11.25 net per Share in cash (the "Offer Consideration"). Pursuant to the terms and conditions of the Merger Agreement, the Offer will be followed by a merger of the Company and the Purchaser whereby each Share will be converted into the right to receive the actual amount per Share in cash paid to holders in the Offer. THE COMPANY'S BOARD OF DIRECTORS HAS APPROVED THE OFFER AND MERGER AND HAS UNANIMOUSLY DETERMINED THAT THE OFFER AND MERGER ARE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE STOCKHOLDERS OF THE COMPANY TENDER THEIR SHARES PURSUANT TO THE OFFER. In arriving at its recommendation, the Board of Directors gave careful consideration to the factors described in the attached Schedule 14D-9 that is being filed today with the Securities and Exchange Commission, including the written opinion dated April 10, 1997 of Dean Witter Reynolds Inc., the Company's financial advisor, to the effect that, as of such date and based upon and subject to certain matters stated therein, the cash consideration to be paid for the Shares in the Offer and Merger is fair, from a financial point of view, to such holders. The Schedule 14D-9 contains other important information relating to the Offer, and you are encouraged to read the Schedule 14D-9 carefully. In addition to the attached Schedule 14D-9, enclosed also is the Offer to Purchase dated April 17, 1997, together with related materials, including a Letter of Transmittal, to be used for tendering your Shares in the Offer. These documents state the terms and conditions of the Offer and provide instructions on how to tender your Shares. We urge you to read these documents carefully in making your decisions with respect to tendering your Shares pursuant to the Offer. On behalf of the Board of Directors, D. Richard Ryan, Jr. Chairman of the Board, President and Chief Executive Officer EX-7 8 OPINION OF DEAN WITTER 1 EXHIBIT 7 DEAN WITTER REYNOLDS INC. 6000 SEARS TOWER CHICAGO, ILLINOIS 60606 (312) 984-4321 April 10, 1997 Board of Directors ERO, Inc. 585 Slawin Court Mt. Prospect, Illinois 60056 Gentlemen: ERO, Inc., a Delaware corporation ("ERO"), and Hedstrom Corporation, a Delaware corporation ("Hedstrom"), contemplate entering into an acquisition agreement (the "Acquisition Agreement"), dated as of the date hereof, providing for the acquisition by Newco, a wholly owned subsidiary of Hedstrom through a tender offer ("Tender Offer") and subsequent merger ("Merger") pursuant to which the holders (the "Public Shareholders") of the issued and outstanding shares of common stock (the "Common Shares") of ERO would receive $11.25 per share in cash (the "Cash Consideration"). Golder, Thoma, Cressey Fund III Limited Partnership owns 3,940,000 shares or approximately 38% of the Common Shares and has entered into an agreement ("Stockholders Agreement") pursuant to which it has agreed to tender its shares into the Tender Offer. You have requested Dean Witter Reynolds Inc.'s opinion ("Dean Witter"), as investment bankers, as to the fairness, from a financial point of view, of the Cash Consideration, taken as a whole, to the Public Shareholders. In arriving at the opinion set forth below, we have, among other things: (1) reviewed the Acquisition Agreement and the Stockholders Agreement; (2) reviewed the Annual Report on Form 10-K and related publicly available financial information of ERO for the two most recent fiscal years ended December 31, 1995 and 1996, the Quarterly Reports on Form 10-Q of ERO for the periods ended March 31, 1996, June 30, 1996 and September 30, 1996, and the definitive Proxy Statement on Form 14A, dated March 10, 1997; (3) reviewed ERO management's financial model of the income statement and certain cash flow items for calendar year 1997, and balance sheet for calendar year ended December 31, 1997 created as the 1997 budget; 2 DEAN WITTER REYNOLDS INC. ERO, Inc. Board of Directors April 10, 1997 Page 2 (4) reviewed the current Analyst estimates of earnings per share for fiscal year 1997 and 1998, and current Analyst estimates of average annual industry growth rates for earnings per share for calendar years 1999 through 2002; (5) conducted discussions with the Chief Executive Officer and Chief Financial Officer of ERO concerning the past and current business, operations, assets, present financial condition and future prospects of ERO; (6) reviewed the historical reported market prices and trading activity for ERO's Common Shares; (7) compared certain financial information, operating statistics, and trading multiples relating to ERO with published financial information, operating statistics, and trading multiples relating to selected public companies that we deemed to be most comparable to ERO; (8) compared the proposed Cash Consideration with the financial terms, to the extent publicly available, of selected other acquisitions that we deemed to be relevant; (9) reviewed certain other information, including publicly available information relating to the business, earnings, cash flow, assets and prospects of ERO; and (10) reviewed such other financial studies and analyses and performed such other investigations and took into account such other matters as we deemed necessary. In preparing our opinion, we have assumed and relied upon the accuracy and completeness of all financial and other information supplied to us by ERO, or that is publicly available, and we have not independently verified such information. We also have relied upon the management of ERO, as to the reasonableness and achievability of their financial results projected for fiscal year 1997. We have not been requested to make, and we have not made, an independent appraisal or evaluation of the assets, properties, facilities or labilities of ERO, and we have not been furnished with any such appraisal or evaluation. It should be noted that this opinion necessarily is based upon prevailing market conditions and other circumstances and conditions as they exist and can be evaluated at this time, and does not represent our opinion as to what the actual value of the Common Shares will be after the date hereof. 3 DEAN WITTER REYNOLDS INC. ERO, Inc. Board of Directors April 10, 1997 Page 3 We have acted as financial advisor to the Board of Directors of ERO in connection with this transaction and will receive a fee for our services, a portion of which is contingent upon the consummation of the transaction and delivery of this opinion. On the basis of, and subject to the foregoing and other matters that we consider pertinent, we are of the opinion that as of the date hereof the Cash Consideration to be paid for the Common Shares in the Tender Offer and the Merger, is fair, from a financial point of view, to the Public Shareholders. Very truly yours, /s/ DEAN WITTER REYNOLDS ------------------------------------------------------ DEAN WITTER REYNOLDS INC. -----END PRIVACY-ENHANCED MESSAGE-----