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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
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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.
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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
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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
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(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.
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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 -- -- -- -- --
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(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 $5,308.
(2) Amounts include bonuses accrued during each year but paid shortly
thereafter.
(3) All stock option grants were made pursuant to the Corporation's 1992 Key
Employee Stock Option Plan.
(4) Represents premiums paid by the Corporation under a group term life
insurance plan, the reimbursement of Mr. D. Ryan's relocation expenses in
1994, the reimbursement of Mr. Schaub's relocation expenses in 1995 and the
reimbursement of Mr. B. Ryan's relocation expenses in 1996.
(5) Mr. B. Ryan was named President of ERO Industries, Inc. effective May 1,
1996.
(6) Mr. Schaub was named President of Priss Prints, Inc. effective October 10,
1994.
(7) Impact, Inc. ("Impact") was acquired by the Corporation effective January 1,
1994. Mr. Litvack was named President of Impact on February 11, 1994.
(8) Amav Industries, Inc. ("Amav") was acquired by the Corporation effective
October 1, 1995.
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The following tables disclose, for the named executive officers,
information regarding stock options granted or exercised during, or held at the
end of, 1996.
OPTION GRANT TABLE
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATE
OF STOCK PRICE
% OF TOTAL APPRECIATION FOR
OPTIONS GRANTED OPTION TERM
OPTIONS TO EMPLOYEES IN EXERCISE PRICE ---------------------------
NAME GRANTED(#) FISCAL YEAR ($/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
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(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 --
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(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
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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
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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
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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
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(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