<PAGE>

                                                                  EXHIBIT 2



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                         AGREEMENT AND PLAN OF MERGER


                                BY AND BETWEEN


                                HK MERGER CORP.


                                      AND


                                HAPPY KIDS INC.



                              September 17, 1999



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                                      -1-
<PAGE>

                                TABLE OF CONTENTS

<TABLE>
<S>                                                                         <C>
ARTICLE 1         THE MERGER..................................................2
         Section 1.1       The Merger.........................................2
         Section 1.2       Closing and Effective Time.........................2
         Section 1.3       Effects of the Merger..............................2
         Section 1.4       Certificate of Incorporation and Bylaws
                              of the Surviving Corporation....................2
         Section 1.5       Directors..........................................2
         Section 1.6       Officers...........................................3

ARTICLE 2         EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE COMPANY....3
         Section 2.1       Effect on Capital Stock............................3
                  (a)      Merger Consideration...............................3
                  (b)      Conversion of Shares...............................3
                  (c)      Cancellation of Treasury Stock.....................4
         Section 2.2       Options; Stock Plan................................4
         Section 2.3       Payment for Common Shares..........................4

ARTICLE 3         REPRESENTATIONS AND WARRANTIES OF THE COMPANY...............6
         Section 3.1       Organization and Qualification;
                              Subsidiaries; Investments.......................6
         Section 3.2       Capitalization; Subsidiaries.......................7
         Section 3.3       Authority Relative to this Agreement...............7
         Section 3.4       SEC Reports and Financial Statements...............8
         Section 3.5       Compliance with Applicable Laws....................9
         Section 3.6       Litigation........................................10
         Section 3.7       Information.......................................10
         Section 3.8       Employee Benefit Plans............................10
         Section 3.9       Taxes.............................................11
         Section 3.10      Environmental Matters.............................13
         Section 3.11      Absence of Certain Changes........................15
         Section 3.12      Brokers...........................................17
         Section 3.13      Opinion of Investment Banker......................17
         Section 3.14      Material Contracts................................17
         Section 3.15      Board Recommendation..............................20
         Section 3.16      Required Company Vote.............................20
         Section 3.17      Intellectual Property.............................20
         Section 3.18      Related Party Transactions........................21
         Section 3.19      State Takeover Statutes...........................21
         Section 3.20      Labor Relations and Employment....................22
         Section 3.21      Year 2000.........................................23
         Section 3.22      Real Estate.......................................23
</TABLE>

                                       -i-
<PAGE>

<TABLE>
<S>                                                                         <C>
                  (a)      Owned Properties..................................23
                  (b)      Leased Properties.................................23
                  (c)      Real Property Disclosure..........................24
                  (d)      No Proceedings....................................24
                  (e)      Current Use.......................................24
                  (f)      Condition and Operation of Improvements...........24
                  (g)      Permits...........................................24
         Section 3.23      International Trade Laws and Regulations..........25

ARTICLE 4         REPRESENTATIONS AND WARRANTIES OF HK.......................26
         Section 4.1       Organization and Qualification....................26
         Section 4.2       Authority Relative to this Agreement..............26
         Section 4.3       No Violation......................................27
         Section 4.4       Information.......................................27
         Section 4.5       Financing.........................................27
         Section 4.6       Beneficial Ownership of Shares....................27
         Section 4.7       Brokers...........................................28
         Section 4.8       Formation of HK; No Prior Activities..............28
         Section 4.9       Litigation........................................28
         Section 4.10      Confidentiality...................................28

ARTICLE 5         COVENANTS..................................................28
         Section 5.1       Conduct of Business of the Company................28
         Section 5.2       Access to Information.............................30
         Section 5.3       Efforts...........................................31
         Section 5.4       Public Announcements..............................32
         Section 5.5       Employee Benefit Arrangements.....................32
         Section 5.6       Indemnification; Directors' and
                              Officers' Insurance............................33
         Section 5.7       Notification of Certain Matters...................34
         Section 5.8       State Takeover Laws...............................34
         Section 5.9       No Solicitation...................................34
         Section 5.10      Interim Liabilities...............................36
         Section 5.11      Reports...........................................36
         Section 5.12      Shareholders' Meeting.............................36
         Section 5.13      Letters of Accountants............................37
         Section 5.15      Delisting.........................................37

ARTICLE 6         CONDITIONS TO CONSUMMATION OF THE MERGER ..................37
         Section 6.1       Conditions........................................37
                  (a)      Shareholder Approval..............................37
                  (b)      Illegality........................................37
                  (c)      HSR Act...........................................37
         Section 6.2       Conditions to Obligations of HK...................37
</TABLE>

                                      -ii-
<PAGE>

<TABLE>
<S>                                                                         <C>
                  (a)      Representations and Warranties....................38
                  (b)      Performance of Obligations of the Company.........38
                  (c)      Consents, etc.....................................38
                  (d)      No Injunction.....................................38
                  (e)      Financing.........................................38
                  (f)      No Material Adverse Effect........................38
                  (g)      Options...........................................39
                  (h)      Directors.........................................39
                  (i)      Opinion of the Company's Counsel..................39
         Section 6.3       Conditions to Obligation of the Company...........39
                  (a)      Representations and Warranties....................39
                  (b)      Performance of Obligations of HK..................39
                  (c)      Opinion of HK's Counsel...........................39
                  (e)      No Injunction.....................................39

ARTICLE 7         TERMINATION; AMENDMENTS; WAIVER............................40
         Section 7.1       Termination.......................................40
         Section 7.2       Effect of Termination.............................41
         Section 7.3       Fees and Expenses.................................41
         Section 7.4       Amendment.........................................42
         Section 7.5       Extension; Waiver.................................42

ARTICLE 8         MISCELLANEOUS..............................................42
         Section 8.1       Non-Survival of Representations and Warranties....42
         Section 8.2       Entire Agreement; Assignment......................42
         Section 8.3       Validity..........................................43
         Section 8.4       Notices...........................................43
         Section 8.5       Governing Law; Exclusive Jurisdiction.............44
         Section 8.6       Descriptive Headings..............................44
         Section 8.7       Counterparts......................................44
         Section 8.8       Parties in Interest...............................44
         Section 8.9       Certain Definitions...............................44
         Section 8.10      Specific Performance..............................46
</TABLE>

                                      -iii-
<PAGE>

                          AGREEMENT AND PLAN OF MERGER


     AGREEMENT AND PLAN OF MERGER (this "Agreement"),  dated as of September 17,
1999, by and between HK Merger Corp., a New York corporation  ("HK"),  and Happy
Kids Inc., a New York corporation (the "Company").

     WHEREAS,  the  respective  Boards of  Directors  of HK and the Company have
approved  the merger of HK with and into the  Company,  as set forth  below (the
"Merger"),  in accordance with the New York Business Corporation Law (the "BCL")
and upon the terms and subject to the  conditions  set forth in this  Agreement,
holders of shares of common stock, par value $.01 per share, of the Company (the
"Common Shares") issued and outstanding  immediately prior to the Effective Time
(as defined below) will be entitled,  subject to the terms hereof and other than
as set forth herein,  to receive cash pursuant to this Agreement or, in the case
of certain specifically designated holders of Common Shares listed on Schedule I
attached  hereto (the  "Affliates"),  to receive  shares of common  stock of the
Surviving Corporation (as defined below);

     WHEREAS, the Board of Directors of the Company (the "Company Board"),  upon
the  recommendation  of its special  committee of  disinterested  Directors (the
"Special  Committee"),  has, in light of and subject to the terms and conditions
set forth herein:  (i) determined that (A) the consideration to be paid for each
Common Share held by shareholders other than the Affiliates (the "Non-Affiliated
Shares") in the Merger (as hereinafter  defined) is fair to such shareholders of
the  Company,  and (B) the  Merger is  otherwise  in the best  interests  of the
Company  and its  shareholders,  and (ii)  resolved  to  approve  and adopt this
Agreement and the transactions contemplated hereby and to recommend approval and
adoption by the shareholders of the Company of this Agreement;

     WHEREAS,  the Merger  requires the vote of  two-thirds of the votes cast by
all of the  issued  and  outstanding  Common  Shares  entitled  to vote  for the
approval thereof (the "Company Shareholder Approval");

     WHEREAS,  in order to  induce  HK to enter  into  this  agreement,  certain
shareholders  of the Company have entered into a Support  Agreement of even date
herewith;

     WHEREAS,  HK and  the  Company  desire  to  make  certain  representations,
warranties,  covenants and agreements in connection with the Merger, and also to
prescribe various conditions to the Merger; and

     WHEREAS,  it is intended that the Merger be recorded as a  recapitalization
for financial reporting purposes.

                                       -1-
<PAGE>

     NOW,  THEREFORE,  in  consideration  of the  foregoing  and the  respective
representations,  warranties,  covenants and agreements set forth herein, HK and
the Company agree as follows:

                                    ARTICLE 1
                                   THE MERGER

     Section 1.1 The Merger.  Upon the terms and subject to the  satisfaction or
waiver  of  the  conditions  hereof,  and  in  accordance  with  the  applicable
provisions  of this  Agreement  and the BCL, at the  Effective  Time HK shall be
merged with and into the Company.  Following the Merger,  the separate corporate
existence  of HK shall cease and the  Company  shall  continue as the  surviving
corporation (the "Surviving Corporation").

     Section  1.2  Closing and  Effective  Time.  The closing of the Merger (the
"Closing") will take place at 10:00 a.m.,  local time, on the fifth business day
after  satisfaction or waiver of all of the conditions set forth in Article 4 of
this Agreement  (other than  conditions that are to be satisfied at the Closing,
which shall be  satisfied  or waived at the Closing) or such other date and time
as HK and the Company  may agree upon (the  "Closing  Date"),  at the offices of
Kirkland & Ellis,  New York, New York.  Immediately  following the Closing,  the
parties  hereto  shall  cause  the  Merger  to  become  effective  by  filing  a
Certificate of Merger with the New York  Department of State in accordance  with
the relevant  provisions  of the BCL, and the parties  shall take such other and
further actions as may be required by law to make the Merger effective. The time
the Merger becomes  effective in accordance  with  applicable law is referred to
herein as the "Effective Time."

     Section 1.3 Effects of the  Merger.  The Merger  shall have the effects set
forth in the BCL. Without limiting the generality of the foregoing,  and subject
thereto, at the Effective Time, all the properties,  rights, privileges,  powers
and  franchises of the Company and HK shall vest in the  Surviving  Corporation,
and all debts,  liabilities  and duties of the Company  and HK shall  become the
debts, liabilities and duties of the Surviving Corporation.

     Section  1.4  Certificate  of  Incorporation  and  Bylaws of the  Surviving
Corporation.

          (a) The Certificate of Incorporation,  as amended,  of the Company, as
in effect  immediately  prior to the  Effective  Time and as further  amended to
provide for the number and types of shares of capital  stock  designated  on the
Rollover  Schedule  (as  hereinafter  defined),  shall  be  the  Certificate  of
Incorporation  of  the  Surviving   Corporation  until  thereafter   amended  in
accordance with the provisions thereof and hereof and applicable law.

          (b) The Bylaws of the Company in effect at the Effective Time shall be
the Bylaws of the Surviving Corporation until amended, subject to the provisions
of Section 5.6 of this Agreement,  in accordance with the provisions thereof and
applicable law.

                                       -2-
<PAGE>

     Section 1.5  Directors.  Subject to  applicable  law,  the  directors of HK
immediately  prior to the Effective  Time shall be the initial  directors of the
Surviving  Corporation and shall hold office until their  respective  successors
are duly elected and qualified, or their earlier death, resignation or removal.

     Section 1.6 Officers.  The officers of the Company immediately prior to the
Effective Time shall be the initial  officers of the Surviving  Corporation  and
shall hold  office  until  their  respective  successors  are duly  elected  and
qualified,  or their earlier death,  resignation or removal.  Section 1.6 of the
Disclosure  Schedule  sets  forth the names and  titles of each  officer  of the
Company and each of its Subsidiaries as of the date hereof.

                                    ARTICLE 2
            EFFECT OF THE MERGER ON THE CAPITAL STOCK OF THE COMPANY

     Section 2.1 Effect on Capital Stock. As of the Effective Time, by virtue of
the Merger and without any action on the part of the holder of any Common Shares
or any shares of capital stock of HK:

          (a) Merger  Consideration.  The Merger Consideration shall be equal to
$12.00 per share, except for those Common Shares held by those holders of record
listed  in  the  Rollover   Schedule   (attached   hereto)   under  the  heading
"Non-Rollover  Shares," in which case the Merger Consideration shall be equal to
$7.164 per share for such Common Shares (i.e.  $49.25  million in the aggregate)
(as  applicable,   the  "Merger   Consideration").   In  addition,  the  parties
acknowledge  that the shares listed on the Rollover  Schedule  under the heading
"Rollover  Shares" (the  "Rollover  Shares") shall be retained by the holders of
such shares.

          (b) Conversion of Shares.

               (i) Each issued and  outstanding  Common Share  (except for those
Common Shares held by those  holders of record listed in the Rollover  Schedule,
but only up to the levels indicated in such Rollover  Schedule under the heading
"Rollover  Shares") shall, by virtue of the Merger and without any action on the
part of the holder  thereof,  be converted into the right to receive from HK the
Merger  Consideration,  as  applicable,  without  interest upon surrender of the
certificate formerly  representing such Common Shares in the manner provided in,
and otherwise in accordance  with,  Section 2.3 hereof.  All such Common Shares,
when so converted,  shall no longer be outstanding  and shall  automatically  be
canceled and retired and shall cease to exist,  and each holder of a certificate
representing  any such Common Shares shall cease to have any rights with respect
thereto,  except the right to receive the Merger Consideration therefor upon the
surrender of such certificate in the manner provided in, and in accordance with,
Section 2.3 hereof.

               (ii) At the Effective Time, (i) each Rollover Share and (ii) each
share of common stock,  par value $.01 per share,  of HK issued and  outstanding
immediately  prior to the  Effective  Time  shall,  by virtue of the  Merger and
without any action on the part of the holder

                                       -3-
<PAGE>

thereof,  be  converted  into and  become  one  validly  issued,  fully paid and
non-assessable share of common stock, par value $.01 per share, of the Surviving
Corporation.

          (c) Cancellation of Treasury Stock. Each Common Share that is owned by
the Company or by any wholly owned subsidiary of the Company shall automatically
be  canceled  and  retired  and  shall  cease  to  exist,  and no cash or  other
consideration shall be delivered or deliverable in exchange therefor.

     Section 2.2 Options;  Stock Plan.  Immediately prior to the Effective Time,
each holder of a  then-outstanding  employee  stock  option to  purchase  Common
Shares (an "Option")  granted  under the  Company's  1997 Stock Plan (the "Stock
Plan") will be entitled to receive in  settlement  of such Option a cash payment
(the "Option  Consideration")  from the Company  equal to the product of (i) the
total number of Common Shares previously subject to such Option, but only to the
extent  such  Option  is   exercisable  as  of  the  Closing  Date  (except  for
non-employee  holders of an Option, in which case this shall be the total number
of Common Shares previously subject to such Option whether or not such Option is
fully  exercisable  as of the  Closing  Date) and (ii) the  excess of the Merger
Consideration  over the exercise  price per Common Share subject to such Option,
subject to any required  withholding of taxes. 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.
Immediately  prior to the Effective Time, the Company will cause each Option (or
portion thereof) which is  non-exercisable  to be canceled.  The amounts payable
pursuant  to this  Section 2.2 shall be paid as soon as  reasonably  practicable
following  the  Closing  Date  and  shall  be  subject  to and  made  net of all
applicable withholding taxes.

     Section 2.3 Payment for Common Shares.

          (a) Prior to the Effective  Time,  HK and the Company shall  designate
the Company's  registrar and transfer  agent or such other bank or trust company
as may be approved by HK and the Company Board, to act as exchange agent for the
holders of Common Shares in connection with the Merger, pursuant to an agreement
providing  for the matters set forth in this Section 2.3 and such other  matters
as may be appropriate and the terms of which shall be reasonably satisfactory to
the Company and HK (the "Exchange Agent"), to receive the funds to which holders
of Common Shares shall become entitled pursuant to Section 2.1(b) hereof. At the
Effective Time, HK shall deposit, or HK shall otherwise take all steps necessary
to cause to be deposited, in trust with the Exchange Agent in an account for the
benefit of holders of Common Shares (the "Exchange  Fund") the aggregate  Merger
Consideration  to which  holders  of  Common  Shares  shall be  entitled  at the
Effective Time pursuant to Section 2.1(b) hereof.

          (b) Promptly after the Effective Time, and in any event not later than
three  business days  following the Effective  Time, HK shall cause the Exchange
Agent to mail to each record holder of certificates  (the  "Certificates")  that
immediately  prior to the Effective Time  represented  Common Shares (other than
Rollover  Shares) 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

                                       -4-
<PAGE>

upon proper delivery of the Certificates or an Affidavit of Loss in Lieu of Lost
Certificate (as defined below) to the Exchange Agent and instructions for use in
surrendering such Certificates and receiving the Merger Consideration in respect
thereof.

          (c) In effecting the payment of the Merger Consideration in respect of
Common Shares (other than Rollover Shares) represented by Certificates  entitled
to payment of the Merger  Consideration  pursuant to Section 2.1(b) hereof, upon
the surrender of each such  Certificate,  together with a letter of  transmittal
duly  executed,  the Exchange Agent shall  promptly,  and in any event not later
than three business days following  receipt of such  Certificates  and letter of
transmittal,  pay  the  holder  of such  Certificate  the  Merger  Consideration
multiplied  by  the  number  of  Common  Shares  (other  than  Rollover  Shares)
represented by such Certificate,  in consideration  therefor.  Upon such payment
such Certificate shall forthwith be canceled.

          (d) Until  surrendered in accordance  with  paragraph (c) above,  each
such Certificate (other than Certificates  representing Common Shares held by HK
or any of its affiliates,  in the treasury of the Company or by any wholly owned
subsidiary of the Company or Rollover  Shares) shall represent  solely the right
to receive the aggregate Merger  Consideration  relating thereto. No interest or
dividends  shall be paid or accrued on the Merger  Consideration.  If the Merger
Consideration  (or any portion  thereof) is to be  delivered to any person other
than the  person in whose  name the  Certificate  formerly  representing  Common
Shares surrendered therefor is registered, it shall be a condition to such right
to receive such Merger  Consideration  that the Certificate so surrendered shall
be properly  endorsed or  otherwise  be in proper form for transfer and that the
person  surrendering  such Common  Shares  shall pay to the  Exchange  Agent any
transfer  or other  taxes  required  by  reason  of the  payment  of the  Merger
Consideration  to a person other than the registered  holder of the  Certificate
surrendered,  or shall establish to the  satisfaction of the Exchange Agent that
such tax has been paid or is not applicable.

          (e) In the event any  Certificate  shall  have  been  lost,  stolen or
destroyed, upon the making of an affidavit of that fact by the Person (who shall
be the record owner of such  Certificate)  claiming such Certificate to be lost,
stolen or destroyed (an  "Affidavit of Loss in Lieu of Lost  Certificate"),  the
Exchange  Agent  will  issue in  exchange  for such  lost,  stolen or  destroyed
Certificate the Merger  Consideration  deliverable in respect thereof,  provided
that the Person to whom the Merger  Consideration  is paid may,  as a  condition
precedent to the payment thereof, be required to give the Surviving  Corporation
a bond in such sum as it may direct or may  otherwise  be required to  indemnify
the Surviving  Corporation in a manner satisfactory to it against any claim that
may be made against the Surviving  Corporation  with respect to the  Certificate
claimed to have been lost, stolen or destroyed.

          (f) No dividends or other  distributions with respect to Common Shares
with a record date after the  Effective  Time shall be paid to the holder of any
unsurrendered  Certificate with respect to the Common Shares represented thereby
until the surrender of such  Certificates or delivery of an Affidavit of Loss in
Lieu of Lost Certificate in accordance with this Section 2.3.

                                       -5-
<PAGE>

          (g) Promptly  following the date which is 180 days after the Effective
Time,  the Exchange Agent shall deliver to the Surviving  Corporation  all cash,
Certificates and other documents in its possession  relating to the transactions
described in this Agreement,  and the Exchange  Agent's duties shall  terminate.
Thereafter,  each holder of a Certificate  formerly  representing a Common Share
(other than the Rollover Shares) may surrender such Certificate to the Surviving
Corporation and (subject to applicable  abandoned property,  escheat and similar
laws)  receive in  consideration  therefor the  aggregate  Merger  Consideration
relating thereto, without any interest or dividends thereon.

          (h) After the Effective Time, there shall be no transfers on the stock
transfer  books of the  Surviving  Corporation  of any Common  Shares which were
outstanding  immediately  prior to the Effective  Time.  If, after the Effective
Time,  Certificates formerly representing Common Shares (other than the Rollover
Shares) are presented to the Surviving  Corporation or the Exchange Agent,  they
shall be  surrendered  and  canceled in return for the payment of the  aggregate
Merger Consideration relating thereto, as provided in this Article 2.

          (i) None of HK, the Company or  Exchange  Agent shall be liable to any
person in  respect  of any cash from the  Exchange  Fund  delivered  to a public
official pursuant to any applicable abandoned property,  escheat or similar law.
If any Certificates  shall not have been surrendered  prior to seven years after
the Effective Time, any such shares, cash, dividends or distributions in respect
of such Certificate shall, to the extent permitted by applicable law, become the
property of the Surviving Corporation,  free and clear of all claims or interest
of any person previously entitled thereto.

                                    ARTICLE 3
                  REPRESENTATIONS AND WARRANTIES OF THE COMPANY

     The Company represents and warrants to HK as follows:

     Section 3.1 Organization and Qualification;  Subsidiaries; Investments. The
Company and each of its Subsidiaries  (as hereinafter  defined) is a corporation
duly  organized,  validly  existing and in good  standing  under the laws of its
state or jurisdiction of incorporation and has all requisite corporate power and
corporate authority to own, lease and operate its properties and to carry on its
business as now being conducted and is in good standing as a foreign corporation
in each  jurisdiction  where the properties  owned,  leased or operated,  or the
business conducted,  by it require such qualification and where failure to be in
good  standing  or to so qualify  would have a  Material  Adverse  Effect on the
Company.  The term  "Material  Adverse  Effect on the  Company," as used in this
Agreement,  means any effect, event,  occurrence,  change or state of facts that
is, or when  aggregated  with other  effects,  events,  occurrences,  changes or
states of facts, is, or is reasonably  likely to be,  materially  adverse to (i)
the assets, liabilities,  business, property,  operations or financial condition
of the Company and its Subsidiaries taken as a whole, or (ii) the ability of the
Company and its  Subsidiaries,  taken as a whole,  to perform their  obligations
under this Agreement. The Company has heretofore made available to HK a complete
and correct copy of its Certificate of

                                       -6-
<PAGE>

Incorporation, as amended, and Bylaws. Except as set forth on Section 3.1 of the
Disclosure  Schedule,  there  is  no  corporation,  limited  liability  company,
partnership or other business  organization  or entity of which the Company owns
either directly or through its Subsidiaries,  (a) more than 50% of (i) the total
combined voting power of all classes of voting  securities of such entity,  (ii)
the total  combined  equity  interests  therein,  or (iii) the capital or profit
interests  therein,  in the case of a  partnership;  or (b) or otherwise has the
power to vote or direct the voting of sufficient  securities to elect a majority
of the  board  of  directors  or  similar  governing  body of such  entity  (the
"Subsidiaries"). Except as set forth on Schedule 3.1 of the Disclosure Schedule,
neither the Company  nor any  Subsidiary  owns or holds the right to acquire any
shares of stock or any other security or interest in any other person.

     Section 3.2 Capitalization;  Subsidiaries.  The authorized capital stock of
the  Company  consists  of  30,000,000  Common  Shares and  5,000,000  shares of
preferred stock, par value $.01 per share ("Preferred  Stock").  As of the close
of business on September  17,  1999,  10,375,693  Common  Shares were issued and
outstanding,  all of which are  entitled  to vote on this  Agreement  except for
those  shares held in  treasury.  The Company has no shares of  Preferred  Stock
issued and  outstanding.  As of September  17, 1999,  except for 305,000  Common
Shares reserved for issuance pursuant to outstanding  Options and rights granted
under the Stock Plan,  there are not now, and at the  Effective  Time there will
not be, any existing options, warrants, calls,  subscriptions,  or other rights,
or other agreements or commitments, obligating the Company to issue, transfer or
sell any shares of  capital  stock of the  Company  or any of its  Subsidiaries.
Section 3.2 of the Disclosure  Schedule sets forth the name of each holder of an
outstanding Option under the Stock Plan, and with respect to each Option held by
any such holder, the grant date, vesting schedule,  exercise price and number of
Common Shares for which such Option is  exercisable.  All issued and outstanding
Common  Shares are, and all Common  shares  which may be issued  pursuant to the
exercise of  outstanding  Options  will be, when issued in  accordance  with the
respective terms thereof,  validly issued, fully paid, nonassessable and free of
preemptive rights. All of the outstanding shares of capital stock of each of the
Company's  Subsidiaries  have  been  validly  issued  and  are  fully  paid  and
non-assessable  and,  except  as set  forth  on  Section  3.2 of the  Disclosure
Schedule,  are owned by either the Company or another of its  Subsidiaries  free
and  clear  of  all  liens,  charges,  claims  or  encumbrances.  There  are  no
outstanding options, warrants, calls,  subscriptions,  or other rights, or other
agreements or  commitments,  obligating  any Subsidiary of the Company to issue,
transfer or sell any shares of its capital stock.

     Section 3.3 Authority Relative to this Agreement.

          (a) The Company has all  necessary  corporate  power and  authority to
execute  and  deliver  this  Agreement  and,  except  for the  approval  of this
Agreement by the  shareholders  of the Company,  to consummate the  transactions
contemplated  hereby.  The  execution  and  delivery of this  Agreement  and the
consummation of the transactions  contemplated hereby have been duly and validly
authorized by the Company Board upon the recommendation of the Special Committee
and no other corporate  proceedings on the part of the Company or on the part of
the  shareholders of the Company are necessary to authorize this Agreement or to
consummate the

                                       -7-
<PAGE>

transactions  so  contemplated,  other than the  approval of this  Agreement  by
two-thirds  of the issued and  outstanding  Common  Shares of the Company.  This
Agreement has been duly and validly  executed and delivered by the Company,  and
this  Agreement  constitutes  a valid  and  binding  agreement  of the  Company,
enforceable against the Company in accordance with its terms.

          (b) Except as set forth in Section 3.3 of the Disclosure Schedule, the
execution and delivery of this Agreement does not, and the  consummation  of the
transactions  contemplated  by this Agreement and compliance with the provisions
of this  Agreement  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 consent,  termination,  purchase,  cancellation or acceleration of
any obligation or to loss of any property,  rights or benefits under,  result in
the imposition of any additional  obligation under, or result in the creation of
any Lien (as defined herein) upon any of the properties or assets of the Company
or any of its  Subsidiaries  under or require the consent from, or the giving of
notice to, a third party  pursuant to (i) the  organizational  documents  of the
Company  or any of its  Subsidiaries,  (ii) any  contract,  instrument,  permit,
concession,  franchise, license, loan or credit agreement, note, bond, mortgage,
indenture,  lease or other  property  agreement,  partnership  or joint  venture
agreement or other  legally  binding  agreement or  obligation,  whether oral or
written (a "Contract"),  applicable to the Company or any of its Subsidiaries or
their  respective  properties  or assets or (iii)  subject  to the  governmental
filings and other matters referred to in the following paragraph,  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,
other  than,  in the  case of  clauses  (ii)  and  (iii),  any  such  conflicts,
violations or defaults that would not, individually or in the aggregate,  have a
Material Adverse Effect on the Company, or those rights that if exercised, Liens
that if imposed,  consents  that if not  obtained  or notices  that if not given
would not,  individually or in the aggregate,  have a Material Adverse Effect on
the Company. For purposes of this Agreement,  "Lien" shall mean, with respect to
any  asset,  any  imperfection  of  title,  lien,  lease,  pledge,  encumbrance,
mortgage,   claim,   option,   voting  trust,   preemptive  right,   attachment,
encroachment or other charge or security interest in or on such asset.

          (c)  Other  than  in  connection  with,  or in  compliance  with,  the
provisions of the BCL with respect to the transactions  contemplated hereby, the
Securities Exchange Act of 1934 (the "Exchange Act"), the securities laws of the
various states and the Hart-Scott-Rodino  Antitrust Improvements Act of 1976, as
amended  (the "HSR Act"),  no  authorization,  consent or approval of, or filing
with,  any  Governmental  Entity (as  hereinafter  defined) is necessary for the
consummation by the Company of the  transactions  contemplated by this Agreement
other than  authorizations,  consents and  approvals  the failure to obtain,  or
filings the failure to make, which would not, in the aggregate,  have a Material
Adverse Effect on the Company. As used in this Agreement, the term "Governmental
Entity"  means any  government  or  subdivision  thereof,  domestic,  foreign or
supranational  or any  administrative,  governmental  or  regulatory  authority,
agency, commission, tribunal or body, domestic, foreign or supranational.

     Section 3.4 SEC Reports and Financial Statements.

                                       -8-
<PAGE>

          (a) The  Company  has filed all forms,  reports  and  documents  ("SEC
Reports")  with  the SEC  required  to be filed by it  pursuant  to the  federal
securities laws and the SEC rules and regulations thereunder. Copies of all such
SEC Reports  have been made  available  to HK by the  Company.  None of such SEC
Reports (as of their respective  filing dates) contained any untrue statement of
a  material  fact or  omitted to state a  material  fact  required  to be stated
therein or necessary in order to make the  statements  therein,  in light of the
circumstances  under  which they were made,  not  misleading.  The  audited  and
unaudited  consolidated  financial statements of the Company included in the SEC
Reports have been  prepared in accordance  with  generally  accepted  accounting
principles  applied on a consistent  basis  (except as otherwise  stated in such
financial  statements,  including  the  related  notes) and fairly  present  the
financial  position of the Company and its  consolidated  Subsidiaries as of the
dates thereof and the results of their  operations  and changes in cash flow for
the  periods  then  ended,  subject,  in the  case  of the  unaudited  financial
statements,  to  year-end  audit  adjustments.  Except  as set  forth in the SEC
Reports and except as disclosed in Section 3.4(a) of the Disclosure Schedule, at
the date of the most recent audited financial statements of the Company included
in the SEC  Reports,  neither the Company nor any of its  Subsidiaries  had, and
since such date neither the Company nor any of such  Subsidiaries  has incurred,
any  liabilities  or  obligations  of any  nature  (whether  accrued,  absolute,
contingent  or  otherwise)  which,  individually  or  in  the  aggregate,  would
reasonably  be expected to have a Material  Adverse  Effect with  respect to the
Company except liabilities incurred in the ordinary and usual course of business
and consistent  with past practice and  liabilities  incurred in connection with
the transactions contemplated by this Agreement.

          (b) All accounts receivable of the Company (the "Accounts Receivable")
represent or will represent  valid  obligations  arising from services  actually
performed  in the  ordinary  course  of  business  and are  subject  to no valid
counterclaims  or setoffs.  Unless paid prior to the Closing Date,  the Accounts
Receivable are or will be as of the Closing Date current and  collectible net of
reserves.  Subject to such reserves,  each of the Accounts Receivable either has
been or will be  collected in full,  without any set-off,  within 120 days after
the day on which it first  becomes  due and  payable.  Except  as  disclosed  in
Section 3.4(b) of the Disclosure  Schedule,  since December 31, 1998, there have
been no material returns, allowances or charge-backs.

          (c) All  inventory  of the  Company  consists  or will  consist of raw
materials  and  supplies,  manufactured  and purchased  parts,  goods,  goods in
process, and finished goods, which is in all material respects  merchantable and
fit for the purpose for which it was procured and manufactured,  and no material
amount of which is obsolete, damaged, or defective.

     Section 3.5 Compliance with Applicable Laws. Except as set forth on Section
3.5 of the Disclosure Schedule, (i) the Company and its Subsidiaries possess all
permits,   licenses,   certifications   and  other  governmental  or  regulatory
authorizations   and   approvals   necessary  to  enable  the  Company  and  its
Subsidiaries to carry on their business as presently conducted or as proposed to
be  conducted,  except  for  such  failures  to  have  such  permits,  licenses,
certifications  or  regulatory  authorizations  or  approvals  that  would  not,
individually  or in the  aggregate,  reasonably  be  expected to have a Material
Adverse Effect on the Company, and all such permits are valid, and in full force

                                       -9-
<PAGE>

and effect and there exists no default thereunder and (ii) the operations of the
Company and its  Subsidiaries  have been conducted in compliance  with all laws,
ordinances,  regulations,  judgments  and  decrees  of any  Governmental  Entity
applicable to the Company or such Subsidiary or by which it may be bound, except
for possible violations which would not, individually or in the aggregate,  have
a Material Adverse Effect on the Company.

     Section  3.6  Litigation.  Except  as  set  forth  on  Section  3.6  of the
Disclosure   Schedule,   there  is  no  suit,  claim,   action,   proceeding  or
investigation pending or, to the knowledge of the Company, threatened, at law or
in equity, or before any Governmental Entity,  against the Company or any of its
Subsidiaries,  individually  or in the  aggregate,  which  would have a Material
Adverse  Effect on the  Company and its  Subsidiaries  taken as a whole or could
prevent or materially delay the consummation of the transactions contemplated by
this  Agreement.  Except as disclosed in the SEC Reports filed prior to the date
of this Agreement, neither the Company nor any of its Subsidiaries is subject to
any outstanding order, writ, injunction or decree which,  individually or in the
aggregate,  would have a Material Adverse Effect on the Company or could prevent
or materially delay the consummation of the transactions contemplated hereby.

     Section 3.7 Information. None of the information supplied by the Company in
writing  specifically  for  inclusion or  incorporation  by reference in (i) the
Proxy Statement (as defined in Section 5.12 below) or (ii) any other document to
be filed with the SEC or any other  Governmental  Entity in connection  with the
transactions  contemplated by this Agreement (the "Other  Filings") will, at the
respective  times  filed  with  the SEC or other  Governmental  Entity  and,  in
addition, in the case of the Proxy Statement, at the date it or any amendment or
supplement  is mailed to  shareholders,  at the time of the Special  Meeting (as
defined in Section  5.12 below) and 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  made therein,  in
light of the circumstances under which they were made, not misleading;  provided
that the  representations  and  warranties  in this  Section 3.7 do not apply to
information  supplied by HK to the Company for inclusion in the Proxy  Statement
or the Other Filings.

     Section 3.8 Employee Benefit Plans.

          (a)  Section  3.8(a) of the  Disclosure  Schedule  includes a true and
complete  list of all material  employee  benefit  plans and programs  providing
benefits to any employee or former employee of the Company and its  Subsidiaries
sponsored or maintained  by the Company,  any of its  Subsidiaries  or any ERISA
Affiliate (as defined below) or to which the Company or any of its  Subsidiaries
contributes,  is obligated to  contribute  or with respect to which there exists
any liability ("Plans").  Without limiting the generality of the foregoing,  the
term "Plans"  includes all employee  welfare benefit plans within the meaning of
Section 3(1) of the Employee Retirement Income Security Act of 1974, as amended,
and the regulations thereunder ("ERISA"), and all employee pension benefit plans
within the meaning of Section 3(2) of ERISA.

                                      -10-
<PAGE>

          (b) With respect to each Plan,  the Company has made available to HK a
true,  correct and complete copy of: (i) all plan documents,  benefit schedules,
trust agreements,  and insurance contracts and other funding vehicles;  (ii) the
most recent Annual Report (Form 5500 Series) and accompanying  schedule, if any;
(iii) the current summary plan description,  if any; (iv) the most recent annual
financial report, if any; (v) the most recent actuarial report, if any; and (vi)
the most recent  determination  letter from the United States  Internal  Revenue
Service (the "IRS"), if any.

          (c) The Company and each of its Subsidiaries has complied,  and is now
in  compliance,  in all material  respects  with all  provisions  of ERISA,  the
Internal  Revenue Code of 1986, as amended,  including the Treasury  Regulations
thereunder  (the "Code") and all laws and  regulations  applicable to the Plans.
With respect to each Plan that is intended to be a  "qualified  plan" within the
meaning of Section 401(a) of the Code  ("Qualified  Plans"),  (i) such Plan is a
Qualified Plan within the meaning of Section 401(a) of the Code,  (ii) except to
the extent that such Qualified Plans are within an applicable remedial amendment
period,  each  such  Plan has been  amended  on a timely  basis to  comply  with
applicable laws and has received a favorable  determination letter on such Plan,
as amended.

          (d) All  contributions  required to be made to any Plan by  applicable
law or regulation or by any plan document or other contractual undertaking,  and
all premiums due or payable with respect to insurance policies funding any Plan,
for any period through the date hereof have been timely made or paid in full or,
to the extent not required to be made or paid on or before the date hereof, have
been fully reflected in the financial  statements of the Company included in the
SEC  Reports  to  the  extent  required  under  generally  accepted   accounting
principles.

          (e) Except as set forth on Section 3.8(e) of the Disclosure  Schedule,
no Plan is subject to Title IV or Section 302 of ERISA or Section 412 or 4971 of
the  Code.  Without  limiting  the  generality  of the  foregoing,  no Plan is a
"multiemployer  plan"  within  the  meaning of  Section  4001(a)(3)  of ERISA (a
"Multiemployer  Plan") or a plan that has two or more  contributing  sponsors at
least two of whom are not under  common  control,  within the meaning of Section
4063 of ERISA and which is  subject to Title IV of ERISA (a  "Multiple  Employer
Plan").

          (f) Except as set forth on Section 3.8(f) of the Disclosure  Schedule,
there does not now exist, nor do any  circumstances  exist that could result in,
any material unfunded liability under (i) Title IV of ERISA, (ii) Section 302 of
ERISA,  (iii) Sections 412 and 4971 of the Code, (iv) the continuation  coverage
requirements  of section 601 et seq. of ERISA and Section  4980B of the Code, or
(v) other  applicable  laws or  regulations  that  would be a  liability  of the
Company  or  any of its  Subsidiaries  following  the  Effective  Time.  Without
limiting the generality of the foregoing,  none of the Company, its Subsidiaries
nor any ERISA Affiliate of the Company or any of its Subsidiaries has engaged in
any  transaction  described in Section 4069 or Section 4204 or 4212 of ERISA. An
"ERISA  Affiliate"  means any entity,  trade or business  that is, or during the
relevant period was, a member of a group  described in Section 414(b),  (c), (m)
or (o) of the Code or Section  4001(b)(1)  of ERISA that includes the Company or
any of its Subsidiaries, or that is a

                                      -11-
<PAGE>

member of the same "controlled group" as the Company or any of its Subsidiaries,
pursuant to Section 4001(a)(14) of ERISA.

     Section 3.9 Taxes.

          (a) The  Company  and each of its  Subsidiaries  has timely  filed all
federal,  state,  local and foreign income Tax Returns (as hereinafter  defined)
required  to be filed by it in all  jurisdictions  in which it is required to do
so, and all other material Tax Returns required to be filed by it, each such Tax
Return has been prepared in compliance with all applicable laws and regulations,
and such Tax Returns are true and  complete in all  material  respects,  and the
Company and each of its  Subsidiaries has paid or caused to be paid all material
Taxes (as  hereinafter  defined)  required  to be paid in respect of the periods
covered  by such  returns  and has  made  adequate  provision  in the  Company's
financial statements including the SEC Reports for payment of all material Taxes
that have not been  paid,  whether  or not shown as due and  payable  on any Tax
Return in respect of all taxable periods or portions thereof ending on or before
the  Closing  Date.  All Tax Returns for the Company in respect of all years not
barred by the statute of limitations  have heretofore been made available by the
Company to HK and are listed in Section 3.9 of the  Disclosure  Schedule.  There
are no  outstanding  agreements,  waivers or requests for waivers  extending the
statutory  period of  limitation  applicable to any Tax Return of the Company or
any of its  Subsidiaries.  There are no liens for Taxes  (other than for current
Taxes not yet due and  payable)  upon the  assets of the  Company  or any of its
Subsidiaries. HK will not be required to deduct and withhold any amount pursuant
to Code ss.  1445(a)  upon  consummation  of the Merger.  Except as set forth on
Section  3.9 of the  Disclosure  Schedule,  neither  the  Company nor any of its
Subsidiaries  (i) has been a member of an Affiliated Group (except for the group
of which the  Company  is the common  parent),  or filed or been  included  in a
combined, consolidated or unitary income Tax Return (other than one filed by the
Company),  (ii) is a party to or has any liability  pursuant to a Tax sharing or
Tax indemnity  agreement or any other agreement of a similar nature that remains
in effect or (iii) has any liability for the Taxes of any person (other than any
of the Company or its  Subsidiaries)  under  Treas.  Reg.  ss.  1.1502-6 (or any
similar  provision  of  state,  local,  or  foreign  law),  as a  transferee  or
successor, by contract, or otherwise.  Except as set forth in Section 3.9 of the
Disclosure  Schedule,  (A) except to the Knowledge of the Company,  no claim has
ever been made by a taxing authority in a jurisdiction  where the Company or any
of its  Subsidiaries  does not file Tax  Returns  that such  person is or may be
subject  to  taxation  by  such  jurisdiction;  (B) no  deficiency  or  proposed
adjustment  which has not been settled or  otherwise  resolved for any amount of
Tax has been proposed,  asserted or assessed by any taxing authority against the
Company  or any of its  Subsidiaries;  (C)  there  is no  action,  suit,  taxing
authority  proceeding  or audit now in progress,  pending,  or, to the Company's
Knowledge,  threatened  against  or with  respect  to the  Company or any of its
Subsidiaries  with  respect to any income  Taxes;  and (D) none of the  property
owned or used by the Company or any of its  Subsidiaries  is subject to a lease,
other than a "true" lease for federal  income tax purposes.  None of the Company
or its  Subsidiaries  will be  required  to  include  any item of income  in, or
exclude any item of deduction  from,  taxable  income for any taxable period (or
portion  thereof) ending after the Closing Date as a result of any (w) change in
method of accounting for a taxable period ending on or prior to the Closing Date
under Code ss. 481(c) (or any corresponding or similar provision of state, local
or foreign  income Tax law);  (x) "closing  agreement"  as described in Code ss.
7121 (or any

                                      -12-
<PAGE>

corresponding or similar  provision of state,  local or foreign income Tax law);
(y) deferred  intercompany gain or any excess loss account described in Treasury
Regulations  under Code ss. 1502 (or any  corresponding or similar  provision of
state,  local or foreign income Tax law); or (z) installment  sale made prior to
the  Closing  Date.  None of the Company or its  Subsidiaries  is a party to any
agreement,  contract,  arrangement  or plan that has  resulted or would  result,
separately or in the aggregate, in the payment of any "excess parachute payment"
within the meaning of Code ss. 280G (or any  corresponding  provision  of state,
local or foreign income Tax law).

          (b) For purposes of this Agreement,  the term "Affiliated Group" means
an  affiliated  group as defined in Code  ss.1504  (or any  analogous  combined,
consolidated  or unitary group defined under state,  local or foreign income Tax
law) of which the  Company or any of its  Subsidiaries  is or has been a member.
For purposes of this Agreement,  the term "Code" means the Internal Revenue Code
of 1986, as amended. For purposes of this Agreement,  the term "Taxes" means all
taxes,  charges,   fees,  levies  or  other  assessments,   including,   without
limitation,  income, gross receipts, excise, property, sales, transfer, license,
payroll,  withholding,  capital stock and franchise taxes, imposed by the United
States or any  state,  local or  foreign  government  or  subdivision  or agency
thereof, including any interest, penalties or additions thereto. For purposes of
this  Agreement,  the term "Tax Return" means  returns,  declarations,  reports,
claims for refund, information returns or other documents (including any related
or  supporting  schedules,  statements or  information)  filed or required to be
filed in connection with the determination, assessment or collection of Taxes of
any party or the  administration  of any  laws,  regulations  or  administrative
requirements relating to any Taxes.

     Section 3.10 Environmental Matters.

     Except as set forth on  Section  3.10 of the  Disclosure  Schedule,  to the
Knowledge of the Company:

          (a) with  respect to the  Business,  the Company and its  Subsidiaries
have  complied  and  are  in  compliance  with  all   Environmental  and  Safety
Requirements;

          (b) without limiting the generality of the foregoing,  the Company and
its  Subsidiaries  have obtained and complied with, and are in compliance  with,
all permits,  licenses and other authorizations that may be required pursuant to
Environmental and Safety Requirements for the occupation of their facilities and
the operation of the Business and all such permits,  licenses and authorizations
may be relied upon for the lawful  operation of the Business and such facilities
on and after the Closing  without  transfer,  reissuance  or other  governmental
action;

          (c) neither the Company nor any Subsidiary has received any written or
oral  notice,  report or other  information  regarding  any  actual  or  alleged
violation  of  Environmental  and Safety  Requirements,  or any  liabilities  or
potential liabilities (whether accrued,  absolute,  contingent,  unliquidated or
otherwise),  including any  investigatory,  remedial or corrective  obligations,
relating to the  Business or its past or current  facilities  and arising  under
Environmental and Safety Requirements;

                                      -13-
<PAGE>

          (d) none of the following  exists at any property or facility owned or
operated by the Company or any Subsidiary in connection  with the Business:  (i)
underground  storage  tanks;  (ii)  asbestos-containing  material in any form or
condition; (iii) materials or equipment containing polychlorinated biphenyls; or
(iv) landfills, surface impoundments, or disposal areas;

          (e)  with  respect  to the  Business,  neither  the  Company  nor  any
Subsidiary  has  treated,  stored,  disposed of,  arranged for or permitted  the
disposal of, transported,  handled, or released any substance, including without
limitation  any  hazardous  substance,  or owned or  operated  any  property  or
facility  (and  no  such  property  or  facility  is  contaminated  by any  such
substance)  in a manner  that  has  given or  would  give  rise to  liabilities,
including any liability for response costs,  corrective  action costs,  personal
injury,  property  damage,  natural  resources  damages or attorney fees, or any
investigative, corrective or remedial obligations, pursuant to the Comprehensive
Environmental  Response,  Compensation  and  Liability  Act of 1980,  as amended
("CERCLA")  or the Solid Waste  Disposal  Act, as amended  ("SWDA") or any other
Environmental and Safety Requirements;

          (f) no facts,  events or  conditions  relating  to the past or present
facilities,  properties or operations of the Company, any Subsidiary,  or any of
their respective affiliates or predecessors the Business will prevent, hinder or
limit  continued  compliance  by the  Business  with  Environmental  and  Safety
Requirements, give rise to any investigatory, remedial or corrective obligations
pursuant to  Environmental  and Safety  Requirements,  or give rise to any other
liabilities (whether accrued, absolute,  contingent,  unliquidated or otherwise)
pursuant to Environmental and Safety Requirements,  including without limitation
any relating to onsite or offsite  releases or threatened  releases of hazardous
materials,  substances or wastes,  personal  injury,  property damage or natural
resources damage;

          (g) neither this  Agreement nor the  consummation  of the  transaction
that is the subject of this  Agreement will result in any  obligations  for site
investigation or cleanup,  or notification to or consent of government  agencies
or third parties,  pursuant to any of the so-called  "transaction-triggered"  or
"responsible property transfer" Environmental and Safety Requirements;

          (h)  with  respect  to the  Business,  neither  the  Company  nor  any
Subsidiary has, either  expressly or by operation of law,  assumed or undertaken
any  liability,  including  without  limitation any obligation for corrective or
remedial  action,  of any other  person  relating  to  Environmental  and Safety
Requirements; and

          (i)  for  purposes  of  this  Agreement,   "Environmental  and  Safety
Requirements"  shall  mean all  federal,  state,  local  and  foreign  statutes,
regulations,  ordinances  and similar  provisions  having the force or effect of
law, all judicial and administrative orders and determinations,  all contractual
obligations  and all common law  concerning  public  health and  safety,  worker
health and safety,  and pollution or protection  of the  environment,  including
without  limitation  all  those  relating  to  the  presence,  use,  production,
generation,    handling,    transportation,    treatment,   storage,   disposal,
distribution, labeling, testing, processing, discharge, release, threatened

                                      -14-
<PAGE>

release,  control, or cleanup of any hazardous materials,  substances or wastes,
chemical substances or mixtures,  pesticides,  pollutants,  contaminants,  toxic
chemicals,   petroleum   products  or  byproducts,   asbestos,   polychlorinated
biphenyls,  noise or  radiation,  as such of the  foregoing  are  enacted  or in
effect, prior to, on, or after the Closing Date.

     Section  3.11  Absence of Certain  Changes.  Except as set forth in Section
3.11 of the Disclosure Schedule, or except as disclosed in the SEC Reports, from
March  31,  1999,  through  the  date  of this  Agreement  the  Company  and its
Subsidiaries  (a)  have  conducted  its  Business  only in the  ordinary  course
consistent with past practice and (b) have not:

          (i) incurred any  indebtedness for borrowed money,  except  borrowings
     from banks (or other  financial  institutions)  necessary to meet  ordinary
     course working capital  requirements and to finance ordinary course capital
     expenditures;

          (ii) mortgaged, pledged or subjected to any Lien, any asset or related
     group of assets having a net book value in excess of $50,000;

          (iii) sold,  leased,  assigned or  transferred  any tangible  asset or
     related group of assets having a net book value in excess of $50,000 except
     for the sale of inventory  and obsolete or used  machinery and equipment in
     the ordinary course of business consistent with past practice;

          (iv) sold, purchased,  leased, assigned or transferred any interest in
     real estate having a net book value in excess of $50,000;

          (v) sold, licensed,  assigned or transferred any patents,  trademarks,
     trade names, copyrights,  trade secrets or other intangible assets having a
     fair market value in excess of $50,000 individually or in the aggregate;

          (vi)  waived or  relinquished  any right or claim or related  group of
     rights or claims except any such item which the Company believes has a fair
     value of less than $50,000 individually or in the aggregate;

          (vii) (a)  issued  or sold any of its  Common  Shares or other  equity
     securities or any  warrants,  options or other rights to acquire its Common
     Shares or other securities of the Company,  or (b) purchased or redeemed or
     agreed to purchase or redeem any Common Shares or other equity securities;

          (viii)  made or  entered  into a binding  commitment  for any  capital
     expenditures  or  related  group  of  capital  expenditures  in  excess  of
     $100,000;

          (ix)  modified or amended in any  material  manner or  terminated  any
     Material Contract (as defined in Section 3.14 below);

                                      -15-
<PAGE>

          (x)    granted any increase in the base compensation of, or made any
     other material change in the employment terms for, any of its directors,
     officers, and employees other than normal periodic increases or changes
     reflecting or based upon changed responsibilities or duties made in the
     ordinary course of business consistent with past practice or changes made
     pursuant to any collective bargaining agreements or existing contracts;

          (xi)   adopted, modified, or terminated any bonus, profit-sharing,
     incentive, severance or other plan or contract for the benefit of any of
     its directors, officers, and employees, other than for changes which do not
     materially increase the aggregate cost of such plan or contract or which
     are required by law or a collective bargaining agreement;

          (xii)  declared or paid any dividend or other distribution with
     respect to the Common Shares;

          (xiii) issued any notes, bonds or other debt securities or any capital
     stock  or  other  equity   securities   or  any   securities   convertible,
     exchangeable  or  exercisable  into  any  capital  stock  or  other  equity
     securities;

          (xiv)  discharged  or  satisfied  any Lien or paid any  obligation  or
     liability in excess of $100,000,  other than  obligations  and  liabilities
     paid in the ordinary course of business;

          (xv)   suffered any extraordinary losses or waived any rights valued
     in excess of $100,000, whether or not in the ordinary course of business or
     consistent with past practice;

          (xvi)  delayed or postponed the payment of any accounts or commissions
     payable or any other liability or obligations or agreed or negotiated with
     any party to extend the payment date of any accounts or commissions payable
     or accelerated the collection of any notes, accounts or commissions
     receivable, other than in the ordinary course of business;

          (xvii) suffered any damage,  destruction or casualty loss exceeding in
     the aggregate $50,000 whether or not covered by insurance;

          (xviii) made any loans or advances to,  investments  in, or guarantees
     for  the  benefit  of,  any  Person  or  taken  steps  to  incorporate  any
     Subsidiary;

          (xix)  made any  change in any  method  of  accounting  or  accounting
     policies, other than those required by GAAP;

                                      -16-
<PAGE>

          (xx)   entered into any other transaction, other than in the ordinary
     course of business, or entered into any material transactions, whether or
     not in the ordinary course of business;

          (xxi)  entered into or agreed to enter into any new or amended
     contract with any labor unions representing employees of the Company;

          (xxii) made any  payments  for  political  contributions  or made any
     bribes,  kickback  payments  or  other  illegal  payments  of cash or other
     consideration,  including,  without  limitation,  payments to  customers or
     employees of customers for purposes of doing business with such customers;

          (xxiii) committed or agreed,  whether orally or in writing,  to do any
     of the foregoing; and

          (xxiv) been  notified  that  any of its  licenses  or  private  label
     programs have been terminated, canceled or repudiated.

     Section 3.12 Brokers. Except as set forth on Section 3.12 of the Disclosure
Schedule and except for the engagement of the  Investment  Banker (as defined in
Section 3.13 hereof),  none of the Company,  any of its Subsidiaries,  or any of
their  respective  officers,  directors or employees  has employed any broker or
finder or incurred any liability for any brokerage fees, commissions or finder's
fees in connection with the transactions contemplated by this Agreement.

     Section  3.13  Opinion of  Investment  Banker.  The Special  Committee  has
received the opinion of CIBC World Markets Corp.  (the  "Investment  Banker") to
the effect that, as of the date hereof,  the consideration to be received by the
holders of Non-Affiliated  Shares pursuant to the Merger is fair to such holders
from a financial point of view.

     Section 3.14 Material Contracts.

          (a)  Except as set forth on Section 3.14(a) of the Disclosure
Schedule, neither the Company nor any of its Subsidiaries is a party to any:

               (i)    collective bargaining agreement or contract with any labor
union;

               (ii)   bonus, pension, profit sharing, retirement, severance or
other form of deferred compensation plan;

               (iii)  stock purchase, stock option, stock appreciation or
similar plan;

                                      -17-
<PAGE>

               (iv)   contract for the employment of any officer, individual
employee or other person on a full-time or consulting basis involving an annual
compensation commitment by the Company or a Subsidiary in excess of $75,000;

               (v)    agreement or indenture relating to the borrowing of money
or to mortgaging, pledging or otherwise placing a Lien (other than a Permitted
Lien (as defined herein)) on any material portion of the Company's assets;

               (vi)   guaranty of any obligation for borrowed money;

               (vii)  lease, sublease or agreement under which it is lessee of
or sublesee of, or holds or operates any personal property owned by any other
party, for which the annual rental exceeds $50,000;

               (viii) contract or group of related contracts with the same party
for  the  purchase  of  inventories,  supplies  or  services,  under  which  the
undelivered  balance of such  inventories,  supplies or  services  has a selling
price in excess of $50,000  (other than  purchase  orders for  inventory  in the
ordinary course of business);

               (ix)   contract or group of related contracts with the same party
for the sale of products or services under which the undelivered balance of such
products or services has a sales price in excess of $50,000;

               (x)    agreement pertaining to Intellectual Property (as
hereinafter defined) including license agreements or similar arrangements;

               (xi)   contract which prohibits or materially limits the Company
or any of its Subsidiaries in any material respect from freely engaging in
business in the United States or anywhere else in the world;

               (xii)  contract  under which the Company has advanced,  loaned or
invested or agreed to advance loan or invest monies to or in any other Person;

               (xiii) lease,  sublease or agreement  under which the Company is
lessor or  sublessor  of or  permits  any  third  party to hold or  operate  any
property, real or personal, owned, leased or controlled by the Company involving
annual consideration in excess of $50,000;

               (xiv)  agreement  or contract or group of related  agreements  or
contracts with the same party or group of affiliated  parties the performance of
which involves consideration in excess of $75,000 annually;

               (xv)   warranty agreement with respect to its services rendered
or products sold or leased;

                                      -18-
<PAGE>

               (xvi)  agreement  under  which  it has  granted  any  Person  any
registration  rights  (including,   without  limitation,  demand  and  piggyback
registration rights);

               (xvii) management,  sales representative,  sales, distribution or
franchise agreement;

               (xviii) outstanding power of attorney or other agency agreement;

               (xix)  nondisclosure or confidentiality agreement;

               (xx)   contract relating to the marketing, advertising or
promotion of its services or products;

               (xxi)  agreement with a term of more than six (6) months which is
not terminable by the Company upon 30 days notice without penalty;

               (xxii) contract, agreement or other arrangement with any officer,
director,  stockholder,  employee or Affiliate or any  Affiliate of any officer,
director,  stockholder or employee, or any individual related by blood, marriage
or  adoption  to any such  Person  or any  entity  in which  any such  Person or
individual owns a beneficial interest;

               (xxiii)   contract   or   agreement   with  any   entity  or  the
stockholder(s) of any entity with which the Company has a management  agreement,
services and support agreement, or other similar agreement or arrangement;

               (xxiv) contract or agreement that is not on arm's-length terms;

               (xxv)  contract or agreement  that by its terms may be terminated
upon the  consummation  of the  Merger  or the other  transactions  contemplated
hereby; or

               (xxvi) any other  agreement  which is material to its  operations
and  business  prospects  or  involves  a  consideration  in excess  of  $50,000
annually.

     All such contracts and agreements, "Material Contracts."

          (b)  Except  as set  forth  on  Schedule  3.14(b)  of  the  Disclosure
Schedule,   all  of  the  Material  Contracts  are  valid,  legal,  binding  and
enforceable  in  accordance  with  their  respective   terms,   except  as  such
enforcement may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium,  fraudulent transfer or other laws (whether statutory, regulatory or
decisional),  now or hereafter in effect, relating to or affecting the rights of
creditors generally or by equitable  principles,  and shall be in full force and
effect without penalty in accordance  with their terms upon  consummation of the
transactions contemplated hereby. Except as set forth on Schedule 3.14(b) of the
Disclosure Schedule, the Company has performed all material obligations required

                                      -19-
<PAGE>

to be  performed  by it under  each  Material  Contract  and is not in  material
default under or in material breach of nor in receipt of any claim of default or
breach under any Material Contract; no event has occurred which with the passage
of time or the  giving of notice or both  would  result in a  material  default,
breach or event of noncompliance by the Company under any Material Contract; the
Company has no present expectation or intention of not fully performing all such
obligations; the Company has no Knowledge of any breach or anticipated breach by
the other  parties to any Material  Contract;  and the Company is not a party to
any materially adverse or illegal contract or commitment.

          (c) To the Knowledge of the Company,  except as specifically disclosed
in Section 3.14(c) of the Disclosure Schedule,  since December 31, 1998, none of
the Company's  customers,  suppliers,  licensors,  outside service  providers or
sources of referral has indicated  that it will stop or materially  decrease the
rate of business done with or referred to the Company.

          (d)  Except  as set forth on the  Section  3.14(d)  of the  Disclosure
Schedule,  the Company is not obligated to (i) purchase any property or services
at a price greater than the prevailing  market price,  (ii) sell any property or
services at a price less than the prevailing market price,  (iii) pay rentals or
royalties  at a rate  greater  than the  prevailing  market price or (iv) act as
lessor or licensor at a rate less than the prevailing market price.

          (e) The Company  has  provided  or made  available  to HK (i) true and
complete copies of all written Material Contracts,  or (ii) with respect to such
Material Contracts that have not been reduced to writing, a written  description
thereof, each of which is listed on Section 3.16 of the Disclosure Schedule. For
purposes of this  Agreement,  "Permitted  Liens"  shall mean (i) Liens for Taxes
(other  than  those  pursuant  to  Section  412 of  the  Code)  or  governmental
assessments,  charges or  claims,  the  payment of which is not yet due,  or for
Taxes,  the validity of which are being  contested in good faith by  appropriate
proceedings;  (ii) statutory  Liens incurred in the ordinary  course of business
for sums not yet due or being  contested in good faith;  (iii) Liens relating to
deposits  made in the ordinary  course of business;  and (iv) Liens which do not
individually or in the aggregate  materially interfere with or materially impair
the conduct of the Business,  or the value,  marketability,  use or ownership of
the assets to which such Liens attach.

     Section   3.15  Board   Recommendation.   The  Company   Board,   upon  the
recommendation of the Special Committee,  at a meeting duly called and held, has
(a) determined  that this Agreement and the  transactions  contemplated  hereby,
taken  together,  are advisable and in the best interests of the Company and the
holders  of  Non-Affiliated  Shares,  and (b)  subject  to the other  provisions
hereof, resolved to recommend that the holders of the Common Shares approve this
Agreement and the transactions contemplated hereby, including the Merger.

     Section 3.16 Required Company Vote. The Company Shareholder Approval, being
the affirmative vote of two-thirds of the Common Shares, is the only vote of the
holders of any class or series of the Company's  securities necessary to approve
this Agreement, the Merger and the other transactions contemplated hereby,

                                      -20-
<PAGE>

     Section 3.17 Intellectual Property.

          (a)  Section 3.17 of the Disclosure Schedule contains a complete and
accurate list of all (i) patented or registered Intellectual Property owned or
used by the Company or any Subsidiary, (ii) pending patent applications and
applications for registration of other Intellectual Property filed by or on
behalf of the Company or any Subsidiary, (iii) material unregistered trade
names, corporate names, Internet domain names or other material unregistered
Intellectual Property owned or used by the Company or any Subsidiary, (iv)
material unregistered trademarks, service marks, copyrights and mask works owned
or used by the Company or any Subsidiary, (v) all computer software owned and/or
used by the Company or any of its Subsidiaries (other than mass-marketed
software with a license fee of less than $5,000) that is material to the
Business, and (vi) all licenses, sublicenses, or similar agreements or
arrangements pertaining to Intellectual Property to which the Company or any of
its Subsidiaries is a party, either as licensee or licensor.

          (b)  Except as set forth on Section 3.17 of the Disclosure Schedule,
(i) the Company or one of its Subsidiaries owns all right, title and interest
to, or has a valid and enforceable license to use free and clear of all Liens or
other encumbrances or restrictions, all Intellectual Property necessary for the
operation of the Business; (ii) no claim by any other Person contesting the
validity, enforceability, use or ownership of any of the Intellectual Property
owned or used by the Company or any of its Subsidiaries (the "Company
Intellectual Property"), is currently pending or to the Knowledge of the
Company, is threatened, and to the Knowledge of the Company and its
Subsidiaries, there are no grounds for the same; (iii) the Company Intellectual
Property comprises all of the Intellectual Property necessary for the operation
of the Business; (iv) neither the Company nor any of its Subsidiaries have
received any notices of, nor has Knowledge of any facts which indicate a
likelihood of, any infringement or misappropriation by, or conflict with, any
third Person with respect to the Company Intellectual Property (including,
without limitation, any demand or request that the Company or its Subsidiaries
license any rights from a third Person); (v) to the Knowledge of the Company,
neither the Company nor its Subsidiaries have infringed, misappropriated, or
otherwise conflicted with any Intellectual Property or other rights of any third
Persons; (vi) to the Knowledge of the Company, no loss or expiration of any of
the Company Intellectual Property is threatened; (vii) the transactions
contemplated by this Agreement will have no Material Adverse Effect on the
right, title and interest in and to the Company Intellectual Property; and
(viii) the Company and its Subsidiaries have taken all reasonably necessary
action to maintain and protect the Company Intellectual Property.

     Section 3.18  Related  Party  Transactions.  Except as set forth in Section
3.18 of the  Disclosure  Schedule  hereto,  to the Knowledge of the Company,  no
director,  officer,  partner,  "affiliate"  or  "associate"  (as such  terms are
defined  in Rule  12b-2  under the  Exchange  Act) of the  Company or any of its
Subsidiaries   (i)  has  borrowed  any  monies  from  or  has   outstanding  any
indebtedness  or  other  similar  obligations  to  the  Company  or  any  of its
Subsidiaries;  (ii) owns any direct or indirect interest of any kind in, or is a
director,  officer, employee,  partner, affiliate or associate of, or consultant
or  lender  to,  or  borrower  from,  or has the  right  to  participate  in the
management,  operations  or  profits  of,  any  person or entity  which is (1) a
competitor, supplier,

                                      -21-
<PAGE>

customer, distributor,  lessor, tenant, creditor or debtor of the Company or any
of its  Subsidiaries,  (2) engaged in a business  related to the  Business,  (3)
participating in any transaction to which the Company or any of its Subsidiaries
is a  party  or  (iii)  otherwise  a  party  to  any  contract,  arrangement  or
understanding with the Company or any of its Subsidiaries.

     Section  3.19 State  Takeover  Statutes.  The Company  Board has taken such
action so that no state takeover statute or similar statute or regulation of the
State of New York  applies to this  Agreement,  the Merger,  or any of the other
transactions  contemplated  hereby.  Except as set forth in Section  3.19 of the
Disclosure  Schedule,  neither the Company nor any of its  Subsidiaries  has any
rights  plan,  preferred  stock or  similar  arrangement  which  have any of the
aforementioned consequences in respect of the transactions contemplated hereby.

     Section 3.20 Labor Relations and Employment.

          (a) Except as set forth on Section 3.20(a) of the Disclosure Schedule,
(i) there is no labor strike,  dispute,  slowdown,  stoppage or lockout pending,
or, to the  Knowledge of the Company,  threatened  against the Company or any of
its  Subsidiaries,  and during the past three  years there has not been any such
action;  (ii) to the Knowledge of the Company,  no union claims to represent the
employees of the Company or any of its  Subsidiaries;  (iii) neither the Company
nor any of its Subsidiaries is a party to or bound by any collective  bargaining
or similar  agreement  with any labor  organization,  or work rules or practices
agreed to with any labor  organization  or employee  association  applicable  to
employees of the Company or any of its Subsidiaries;  (iv) none of the employees
of the  Company  or  any  of  its  Subsidiaries  is  represented  by  any  labor
organization  and the Company does not have any  Knowledge of any current  union
organizing  activities  among  the  employees  of  the  Company  or  any  of its
Subsidiaries,  nor does any question concerning  representation exist concerning
such employees;  (v) the Company and its Subsidiaries are, and have at all times
been, in material compliance with all applicable laws respecting  employment and
employment practices,  terms and conditions of employment,  wages, hours of work
and  occupational  safety and health,  and are not  engaged in any unfair  labor
practices  as defined in the  National  Labor  Relations  Act;  (vi) there is no
unfair  labor  practice  charge or  complaint  against the Company or any of its
Subsidiaries pending or, to the Knowledge of the Company,  threatened before the
National Labor  Relations  Board or any similar state or foreign  agency;  (vii)
there is no  grievance  arising out of any  collective  bargaining  agreement or
other grievance procedure;  (viii) no charges with respect to or relating to the
Company or any of its  Subsidiaries  are  pending  before  the Equal  Employment
Opportunity  Commission or any other agency  responsible  for the  prevention of
unlawful  employment  practices;  (ix)  neither  the  Company  nor  any  of  its
Subsidiaries has received notice of the intent of any federal,  state,  local or
foreign agency  responsible  for the  enforcement of labor or employment laws to
conduct an  investigation  with  respect to or relating to the Company or any of
its Subsidiaries and no such investigation is in progress;  and (x) there are no
complaints,  lawsuits or other  proceedings  pending or to the  Knowledge of the
Company  threatened  in any  forum by or on  behalf  of any  present  or  former
employee  of the  Company  or any of its  Subsidiaries  alleging  breach  of any
express or implied contract of employment, any law or regulation governing

                                      -22-
<PAGE>

employment  or the  termination  thereof or other  discriminatory,  wrongful  or
tortious conduct in connection with the employment relationship.

          (b)  Since the  enactment  of the  Worker  Adjustment  and  Retraining
Notification  ("WARN") Act, there has not been (i) a "plant closing" (as defined
in the WARN Act)  affecting any site of employment or one or more  facilities or
operating  units within any site of employment or facility of the Company or any
of its  Subsidiaries;  or (ii) a "mass  layoff"  (as  defined  in the WARN  Act)
affecting  any site of  employment  or  facility  of the  Company  or any of its
Subsidiaries;  nor has the Company or any of its Subsidiaries engaged in layoffs
or employment  terminations  sufficient in number to trigger  application of any
similar  state or local  law.  Except as set  forth in  Section  3.20(b)  of the
Disclosure Schedule, to the best Knowledge of the Company, none of the employees
of the Company or any of its Subsidiaries has suffered an "employment  loss" (as
defined in the WARN Act) since three months prior to the date of this Agreement.

          (c) Except as set forth on Section 3.20(c) of the Disclosure Schedule,
there are no employment,  consulting,  severance or indemnification arrangements
or agreements or  understandings  between the Company,  on the one hand, and any
directors, officers or other employees of the Company.

     Section  3.21 Year  2000.  To the  Knowledge  of the  Company,  none of the
computer  software,  computer  firmware,  computer  hardware (whether general or
special purpose) or other similar or related items of automated, computerized or
software  systems  that are used or  relied on by the  Company  or by any of the
Subsidiaries in the conduct of their  respective  businesses  will  malfunction,
cease to function, generate incorrect data or produce incorrect results having a
Material Adverse Effect when processing, providing or receiving (i) date-related
data from,  into and between the  twentieth and  twenty-first  centuries or (ii)
data-related  data in  connection  with  any  valid  date in the  twentieth  and
twenty-first centuries.

     Section 3.22 Real Estate.

          (a) Owned  Properties.  Section 3.22 of the  Disclosure  Schedule sets
forth a list of all owned real property (the "Owned Real  Property") used by the
Company in the  operation of the  Business.  With respect to each such parcel of
Owned  Real  Property:  (i) such  parcel is free and  clear of all  encumbrances
(except for  Permitted  Liens);  (ii) except as disclosed in Section 3.22 of the
Disclosure Schedule, there are no leases, subleases,  licenses,  concessions, or
other  agreements,  written or oral,  granting to any person the right of use or
occupancy  of any portion of such  parcel;  and (iii)  there are no  outstanding
actions or rights of first refusal to purchase such parcel.

          (b) Leased  Properties.  Section 3.22 of the Disclosure  Schedule sets
forth a list of all of the leases and subleases  ("Leases")  and each leased and
subleased  parcel of real  property  in which the  Company  has a  leasehold  or
subleasehold  interest or to which the Company is a party  either as landlord or
sublandlord (the "Leased Real  Property").  Each of the Leases are in full force
and effect, and the Company holds a valid and existing leasehold or subleasehold
interest or

                                      -23-
<PAGE>

Landlord  or  Sublandlord  interest  as  applicable,  under  each of the  Leases
described in Section 3.22 of the Disclosure Schedule.  The Company has delivered
to HK true,  correct,  complete and accurate copies of each of the Leases.  With
respect to each Lease set forth on Section 3.22 of the Disclosure Schedule:  (i)
the Lease is legal,  valid,  binding,  enforceable and in full force and effect;
(ii) to the Knowledge of the Company the Lease will continue to be legal, valid,
binding,  enforceable  and in full force and effect on identical terms following
the Closing;  (iii)  neither the Company,  nor, to the Knowledge of the Company,
any other party to the Lease, is in breach or default, and no event has occurred
which,  with notice or lapse of time,  would constitute such a breach or default
by the Company or permit  termination,  modification or  acceleration  under the
Lease by any  other  party  thereto;  (iv) the  Company  has  not,  and,  to the
Knowledge of the Company,  no third party has  repudiated  any  provision of the
Lease; (v) there are no disputes,  oral agreements,  or forbearance  programs in
effect as to the Lease;  (vi) the Lease has not been  modified  in any  respect,
except to the extent that such  modifications  are  disclosed  by the  documents
delivered  to HK;  (vii) the Company has not  assigned,  transferred,  conveyed,
mortgaged,  deeded in trust or encumbered  any interest in the Lease (except for
Permitted  Liens);  and (viii) the Lease is fully  assignable  to HK without the
necessity  of any consent or the Company  shall  obtain all  necessary  consents
prior to the Closing.

          (c) Real Property  Disclosure.  Except as disclosed on Section 3.22 of
the  Disclosure  Schedule,  there  is no Real  Property  leased  or owned by the
Company that is used in the  Business.  The Owned Real  Property and Leased Real
Property are referred to collectively herein as the "Real Property."

          (d) No  Proceedings.  There are no  proceedings  in eminent  domain or
other  similar  proceedings  pending  or,  to  the  Knowledge  of  the  Company,
threatened,  affecting  any portion of the Real  Property  (except for Permitted
Liens). There exists no writ, injunction, decree, order or judgment outstanding,
nor any  litigation,  pending or to the  Knowledge of the  Company,  threatened,
relating to the ownership,  lease, use,  occupancy or operation by any person of
the Real Property (except for Permitted Liens).

          (e) Current Use. The current use of the Real Property does not violate
in any material  respect any  instrument of record or agreement  affecting  such
Real Property.  There is no violation of any covenant,  condition,  restriction,
easement,  agreement or order of any governmental  authority having jurisdiction
over any of the Real  Property  that  affects  such real  property or the use or
occupancy  thereof  (except for Permitted  Liens).  No damage or destruction has
occurred with respect to any of the Real Property that,  individually  or in the
aggregate, has had or resulted in, or is reasonably likely to have or result in,
a Material Adverse Effect on the Company.

          (f) Condition and Operation of  Improvements.  All buildings and other
improvements  included within the Real Property (the "Improvements") are in good
condition and repair and adequate to operate such  facilities as currently used,
and, to the Company's Knowledge,  there are no facts or conditions affecting any
of the Improvements which would, individually or in the aggregate,  interfere in
any  significant  respect with the current use,  occupancy or operation  thereof
which  interference  would,  individually  or in the  aggregate,  reasonably  be
expected to have

                                      -24-
<PAGE>

a Material  Adverse Effect on the Company.  No Improvement or portion thereof is
dependent  for its access,  operation or utility on any land,  building or other
improvement not included in the Real Property.

          (g) Permits.  All required or appropriate  certificates  of occupancy,
permits, licenses, franchises,  approvals and authorizations (collectively,  the
"Real Property  Permits") of all governmental  authorities  having  jurisdiction
over the Real  Property,  the  absence of which  could  have a Material  Adverse
Effect on the  Company,  have  been  issued to the  Company  to enable  the Real
Property to be lawfully  occupied  and used for all of the purposes for which it
is currently occupied and used have been lawfully issued and are, as of the date
hereof, in full force and effect. The Company has delivered complete and correct
copies of the Real Property  Permits to HK. The Company has not received or been
informed by a third party of the receipt by it of any notice  which could have a
Material  Adverse Effect on the Company from any  governmental  authority having
jurisdiction  over the  Real  Property  threatening  a  suspension,  revocation,
modification  or  cancellation  of any Real  Property  Permit  and,  to the best
Knowledge of the Company,  there is no basis for the issuance of any such notice
or the taking of any such action.

     Section 3.23 International Trade Laws and Regulations.  Except as disclosed
on Section 3.23 of the Disclosure Schedule:

          (a) The Company and each of its  Subsidiaries  has, to the best of its
Knowledge,  complied and is in compliance with all International  Trade Laws and
Regulations  applicable  in  connection  with the  conduct  of their  respective
businesses (including as the same relates to recordkeeping requirements), except
for possible violations which would not, individually or in the aggregate,  have
a Material Adverse Effect on the Company.

          (b) Neither the Company nor any of its Subsidiaries is or has been the
subject of any civil or  criminal  investigation,  litigation,  audit,  penalty,
proceeding or assessment,  liquidated damages proceeding or claim, forfeiture or
forfeiture  action,  claim for additional customs duties or fees, denial orders,
suspension of export privileges,  governmental  sanctions,  or any other action,
proceeding or claim by any foreign,  federal, state or local governmental agency
involving  or  otherwise   relating  to  any  alleged  or  actual  violation  of
International  Trade Laws and  Regulations  or relating to any alleged or actual
underpayment  of customs duties,  fees,  taxes or other amounts owed pursuant to
any  International  Trade Laws and  Regulations  and,  to the  Knowledge  of the
Company and its Subsidiaries, there is no basis for any of the foregoing, except
for possible proceedings,  claims or actions which would not, individually or in
the aggregate, have a Material Adverse Effect on the Company.

          (c)  Neither  the  Company  nor any of its  Subsidiaries  has,  to its
Knowledge, made or provided any false statement or omission to any agency of any
federal,  state or local  government,  purchaser  of  products or  services,  or
foreign  government or foreign  agency,  in connection  with the  exportation of
merchandise  (including  with respect to export  licenses,  exceptions and other
export  authorizations and any filings required for or related to exportation of
any item), the importation of

                                      -25-
<PAGE>

merchandise  (including the valuation or classification of imported merchandise,
the  duty  treatment  of  imported  merchandise,  the  eligibility  of  imported
merchandise   for   favorable   duty   rates   or   other   special   treatment,
country-of-origin   marking,   NAFTA   Certificates   or  other   statements  or
certificates  concerning  origin,  quota  or visa  rights)  or  other  approvals
required by a foreign government or agency or any other requirement  relating to
any International Trade Laws and Regulations,  except for possible statements or
omissions  which would not,  individually  or in the aggregate,  have a Material
Adverse Effect on the Company.

          (d)  Neither  the  Company  nor any of its  Subsidiaries  has made any
payment,  offer,  gift,  promise to give,  or  authorized  or  otherwise  to its
Knowledge  participated  in, assisted or facilitated any payment or gift that is
prohibited by the United States Foreign Corrupt Practices Act.

          (e)  Neither  the  Company  nor  any  of its  Subsidiaries  has to its
Knowledge  engaged in or otherwise  participated in, assisted or facilitated any
transaction  that is  prohibited  by any  applicable  embargo or  related  trade
restriction imposed by the United States Office of Foreign Assets Control or any
other agency of the United States government.

          (f) Set forth on Section 3.23 of the Disclosure  Schedule is a list of
each  foreign  jurisdiction  to which  the  Company  or any of its  Subsidiaries
exports  any  products,   equipment,   services  or  technology,   each  foreign
jurisdiction  from which the  Company  or any of its  Subsidiaries  imports  any
products,  equipment,  services or technology and each foreign  jurisdiction  to
which the Company's or any of its Subsidiaries' products, equipment, services or
technology (or products of such technology) are reexported. The Company and each
of its  Subsidiaries  has complied and is in compliance  with all  International
Trade Laws and  Regulations  applicable in connection  with the conduct of their
respective   businesses   (including  as  the  same  relates  to   recordkeeping
requirements),  except for possible violations which would not,  individually or
in the aggregate, have a Material Adverse Effect on the Company.

          (g) To the Knowledge of the Company and its Subsidiaries,  each of its
suppliers is in  compliance  with all  applicable  International  Trade Laws and
Regulations (including,  but not limited to, any quota regulations  administered
by the United States Customs Service and any child  labor-related  International
Trade Laws and  Regulations),  except for possible  violations  which would not,
individually or in the aggregate, have a Material Adverse Effect on the Company.
The  Company's  business  relationships  with its  suppliers  hold  the  Company
harmless,  and may be canceled by the Company without penalty or forfeiture,  in
the event that its suppliers  violate any such  applicable  International  Trade
Laws and Regulations.


                                    ARTICLE 4
                      REPRESENTATIONS AND WARRANTIES OF HK

                  HK represents and warrants to the Company as follows:

                                      -26-
<PAGE>

     Section  4.1  Organization  and  Qualification.  HK is a  corporation  duly
organized,  validly existing and in good standing under the laws of its state or
jurisdiction of incorporation  and is in good standing as a foreign  corporation
in each other  jurisdiction where the properties owned,  leased or operated,  or
the business conducted, by it require such qualification and where failure to be
in good  standing or to so qualify would have a Material  Adverse  Effect on HK.
The term "Material  Adverse Effect on HK", as used in this Agreement,  means (i)
any  effect,  event,  occurrence,  change  or state of  facts  that is,  or when
aggregated with other effects, events,  occurrences,  changes or states of facts
is, or is reasonably likely to be materially adverse to the assets, liabilities,
business,  property,  condition  (financial  or  otherwise),  or  operations  or
prospects of HK or (ii) the ability of HK to perform its obligations  under this
Agreement. HK has no Subsidiaries. HK is controlled,  directly or indirectly, by
affiliates of H.I.G. Capital, LLC ("HIG").

     Section 4.2 Authority Relative to this Agreement.

          (a) HK has full  corporate  power and authority to execute and deliver
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 and validly  authorized by the
Board of Directors of HK and no other  corporate  proceedings  on the part of HK
are necessary to authorize this Agreement or to consummate the  transactions  so
contemplated. This Agreement has been duly and validly executed and delivered by
HK and,  assuming this Agreement  constitutes a valid and binding  obligation of
the Company,  this  Agreement  constitutes a valid and binding  agreement of HK,
enforceable against HK in accordance with its terms.

          (b)  Other  than  in  connection  with,  or in  compliance  with,  the
provisions of the BCL with respect to the transactions  contemplated hereby, the
Exchange  Act,  the  securities  laws of the various  states and the HSR Act, no
authorization,  consent or approval of, or filing with, any Governmental  Entity
is necessary for the consummation by HK of the transactions contemplated by this
Agreement  other than  authorizations,  consents  and  approvals  the failure to
obtain, or filings the failure to make, which would not, in the aggregate,  have
a Material Adverse Effect on HK.

     Section  4.3 No  Violation.  Neither  the  execution  or  delivery  of this
Agreement  by HK nor the  consummation  by HK of the  transactions  contemplated
hereby  will (i)  constitute  a breach  or  violation  of any  provision  of the
Certificate of  Incorporation,  as amended,  or Bylaws of HK, (ii)  constitute a
breach,  violation or default (or any event which,  with notice or lapse of time
or both,  would constitute a default) under, or result in the termination of, or
accelerate  the  performance  required by, or result in the creation of any Lien
upon any of the  properties  or assets of HK under,  any note,  bond,  mortgage,
indenture, deed of trust, license, lease, agreement or other instrument to which
HK is a party or by which it or any of its  properties  or  assets  are bound or
(iii) any judgment, order, decree, statute, law, ordinances,  rule or regulation
applicable to HK or its properties or assets other than, with respect to clauses
(ii) and (iii), breaches, violations, defaults,  terminations,  accelerations or
creation of Liens  which,  in the  aggregate  would not have a Material  Adverse
Effect on HK.

                                      -27-
<PAGE>

     Section 4.4 Information.  None of the information supplied by HK in writing
(other  than  projections  of future  financial  performance)  specifically  for
inclusion or  incorporation  by reference in (i) the Proxy Statement or (ii) the
Other  Filings  will,  at the  respective  times  filed  with  the SEC or  other
Governmental Entity and, in addition, in the case of the Proxy Statement, at the
date it or any amendment or supplement is mailed to shareholders, at the time of
the Special Meeting and 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  made  therein,  in light of the
circumstances  under which they were made, not misleading.  Notwithstanding  the
foregoing,  no  representation  is made by HK with respect to statements made in
any of the foregoing documents based upon information supplied by the Company.

     Section 4.5 Financing.  True and complete copies of commitment letters from
Bankers Trust Company and its affiliates and from Bankers Trust  Corporation and
its affiliates,  which provide for financing in amounts sufficient to consummate
the  transactions  contemplated  hereby as contemplated  by Section 6.2(e),  are
attached hereto as Exhibit A.

     Section 4.6 Beneficial  Ownership of Shares. As of the date hereof, HK does
not  "beneficially  own" (as defined in Rule 13d-3 under the Exchange  Act) more
than 1% of the outstanding shares of Common Shares or any securities convertible
into, or  exchangeable  for,  Common Shares.  HK will not buy additional  Common
Shares between the date of this Agreement and the Closing.

     Section 4.7 Brokers.  Except as set forth on Schedule 4.7 of the Disclosure
Schedule,  no broker,  finder or investment banker is entitled to any brokerage,
finder's  or  other  fee or  commission  in  connection  with  the  transactions
contemplated by this Agreement based upon  arrangements  made by or on behalf of
HK, that is or will be payable by the Company or any of its Subsidiaries. No fee
is due to any  such  person  if the  transactions  contemplated  hereby  are not
consummated.

     Section 4.8 Formation of HK; No Prior Activities.  HK was formed solely for
the purpose of engaging in the transactions  contemplated by this Agreement.  As
of the date  hereof  and the  Effective  Time,  except  for (a)  obligations  or
liabilities  incurred in connection with its  incorporation  or organization and
the transactions  contemplated by this Agreement, and (b) this Agreement and any
other   agreements  or  arrangements   contemplated  by  this  Agreement  or  in
furtherance  of the  transactions  contemplated  hereby,  HK has  not  incurred,
directly or indirectly,  through any subsidiary or affiliate, any obligations or
liabilities,  owned any assets or engaged in any business activities of any type
or kind  whatsoever  or entered into any  agreements  or  arrangements  with any
Person.

     Section 4.9  Litigation.  There is no suit,  claim,  action,  proceeding or
investigation  pending  or, to the  Knowledge  of HK,  threatened,  at law or in
equity,  or before any Governmental  Entity,  against HK, which could prevent or
materially  delay the  consummation  of the  transactions  contemplated  by this
Agreement.

                                      -28-
<PAGE>

     Section 4.10 Confidentiality.  Neither HK nor any affiliate or associate of
HK has  breached in any  material  respect  the  Confidentiality  Agreement  (as
defined in Section 5.2).

                                    ARTICLE 5
                                    COVENANTS

     Section 5.1 Conduct of Business of the Company.  Except as  contemplated by
this  Agreement  or as expressly  agreed to in writing by HK,  during the period
from the date of this  Agreement to the Effective  Time,  the Company will,  and
will cause each of its Subsidiaries to, conduct its operations  according to its
ordinary and usual course of business and consistent  with past practice and use
its and their  respective  commercially  reasonable  efforts to preserve  intact
their  current  business  organizations,  keep  available  the services of their
current officers and employees and preserve their  relationships with customers,
suppliers,  licensors,  licensees,  advertisers,  distributors and others having
business  dealings  with them and to preserve  goodwill.  Without  limiting  the
generality of the foregoing,  and except as (x) otherwise  expressly provided in
this  Agreement,  (y)  required  by law,  or (z) set forth on Section 5.1 of the
Disclosure Schedule, prior to the Effective Time, the Company will not, and will
cause its  Subsidiaries  not to,  without the consent of HK (which consent shall
not be unreasonably withheld):

          (a) except with respect to annual bonuses made in the ordinary  course
of  business  consistent  with  past  practice,  adopt or amend in any  material
respect any bonus, profit sharing, compensation,  severance,  termination, stock
option,  stock  appreciation  right,  pension,  retirement,  employment or other
employee benefit agreement,  trust, plan or other arrangement for the benefit or
welfare  of any  director,  officer  or  employee  of the  Company or any of its
Subsidiaries  or increase in any manner the  compensation  or fringe benefits of
any director,  officer or employee of the Company or any of its  Subsidiaries or
pay any benefit not  required by any  existing  agreement or place any assets in
any trust for the benefit of any director, officer or employee of the Company or
any of its  Subsidiaries  (in each case,  except with respect to  employees  and
directors in the ordinary course of business consistent with past practice);

          (b) incur any indebtedness for borrowed money, other than indebtedness
under  existing  lines of  credit  drawn to fund  working  capital  (defined  as
accounts receivable plus inventory minus accounts payable) up to $3 million;

          (c) expend funds for capital expenditures in excess of $50,000;

          (d) sell, lease, license, mortgage or otherwise encumber or subject to
any Lien or  otherwise  dispose of any of its  properties  or assets  other than
immaterial  properties  or assets  (or  immaterial  portions  of  properties  or
assets),  except  in the  ordinary  course  of  business  consistent  with  past
practice;

                                      -29-
<PAGE>

          (e) (x) declare,  set aside or pay any dividends on, or make any other
distributions in respect of, any of its capital stock (except for dividends paid
by  Subsidiaries  to the  Company  with  respect to capital  stock),  (y) split,
combine  or  reclassify  any of its  capital  stock or issue  or  authorize  the
issuance of any other  securities  in respect of, in lieu of or in  substitution
for shares of its capital stock or (z) purchase, redeem or otherwise acquire any
shares of capital stock of the Company or any of its  Subsidiaries  or any other
securities thereof or any rights, warrants or options to acquire any such shares
or other securities;

          (f) authorize for issuance, issue, deliver, sell or agree or commit to
issue,  sell,  grant or deliver  (whether  through  the  issuance or granting of
options, warrants, commitments, subscriptions, rights to purchase or otherwise),
pledge,  dispose of or otherwise encumber any shares of its capital stock or the
capital  stock of any of its  Subsidiaries,  any other voting  securities or any
securities  convertible  into, or any rights,  warrants,  calls,  commitments or
options to acquire, any such shares, voting securities or convertible securities
or any other  securities or equity  equivalents  (including  without  limitation
stock  appreciation  rights)  (other than  issuances upon exercise of Options or
pursuant to the Stock Plan);

          (g) amend its  Certificate  of  Incorporation,  as amended,  Bylaws or
equivalent  organizational  documents  or  alter  through  merger,  liquidation,
reorganization, restructuring or in any other fashion the corporate structure or
ownership of any Subsidiary of the Company;

          (h) make or agree to make any  acquisition of assets which is material
to the Company and its Subsidiaries,  taken as a whole, except for (x) purchases
of  inventory  in the  ordinary  course of business or (y)  pursuant to purchase
orders  entered  into in the ordinary  course of business  which do not call for
payments in excess of $100,000 per annum;

          (i) settle or compromise any shareholder  derivative suits arising out
of the transactions  contemplated hereby or any other litigation (whether or not
commenced prior to the date of this Agreement) or settle,  pay or compromise any
claims not required to be paid;

          (j) take any  action  which is not set  forth on  Section  3.11 of the
Disclosure  Schedule,  if taken  after  March  31,  1999,  but prior to the date
hereof, that would have caused the  representations and warranties  contained in
Section 3.11 hereof to be untrue; or

          (k) make or change any election,  change an annual accounting  period,
adopt or change any accounting method,  file any amended Tax Return,  enter into
any  closing  agreement,  settle  any Tax claim or  assessment  relating  to the
Company  or any  Subsidiary,  surrender  any  right to claim a refund  of Taxes,
consent to any extension or

                                      -30-
<PAGE>

waiver  of the  limitation  period  applicable  to any Tax  claim or  assessment
relating to the Company or any Subsidiary,  or take any other similar action, or
omit to take any action  relating to the filing of any Tax Return or the payment
of  any  Tax,  if  such  election,   adoption,  change,  amendment,   agreement,
settlement, surrender, consent or other action or omission would have the effect
of increasing  the present or future Tax liability or decreasing  any present or
future Tax asset of the Company, any Subsidiary, HK or any Affiliate of HK.

     Section 5.2 Access to  Information.  From the date of this Agreement  until
the Effective Time, the Company will, and will cause its Subsidiaries,  and each
of  their   respective   officers,   directors,   employees,   agents  or  other
representatives (including,  without limitation, any investment banker, attorney
or  accountant  retained  by the  Company  or its  Subsidiaries)  (the  "Company
Representatives") to, give HK and their respective officers,  employees,  agents
or other representatives (including,  without limitation, any investment banker,
attorney  or  accountant  retained  by  HK)  (the  "HK   Representatives")   and
representatives of financing sources  identified by HK reasonable  access,  upon
reasonable  notice and during normal  business  hours,  to the offices and other
facilities and to the books and records of the Company and its  Subsidiaries and
will cause the Company Representatives and the Company's Subsidiaries to furnish
HK  and  the  HK  Representatives   and  representatives  of  financing  sources
identified  by HK  with  such  financial  and  operating  data  and  such  other
information with respect to the Business as HK and  representatives of financing
sources  identified by HK may from time to time  reasonably  request.  HK agrees
that any information  furnished by the Company  pursuant to this Section 5.2 (or
otherwise in compliance  with this  Agreement) will be subject to the provisions
of the letter agreement dated March 3, 1999, between H.I.G. Capital,  L.L.C. and
BDO Seidman, LLP (the "Confidentiality Agreement").

     Section 5.3 Efforts.

          (a) Each of the Company and HK shall, and the Company shall cause each
of its Subsidiaries to, use commercially  reasonable efforts to take all actions
and do all things  necessary to consummate and make  effective the  transactions
contemplated by this Agreement  (including the satisfaction,  but not waiver, of
the  closing  conditions  set forth in  Article  5). In  furtherance  and not in
limitation of the foregoing,  each of the Company and HK shall,  and the Company
shall  cause  each of its  Subsidiaries  to,  make all  necessary  filings  with
Governmental  Entities as promptly as practicable in order to facilitate  prompt
consummation of the  transactions  contemplated by this Agreement.  In addition,
each  of HK and  the  Company  will  use  its  commercially  reasonable  efforts
(including, without limitation, payment of any required fees) and will cooperate
fully  with  each  other to (i)  comply  as  promptly  as  practicable  with all
governmental  requirements  applicable to the transactions  contemplated by this
Agreement,  including  the  making of all  filings  necessary  or  proper  under
applicable   laws  and   regulations   to  consummate  and  make  effective  the
transactions contemplated by this Agreement,  including, but not limited to, the
Proxy  Statement or other foreign  filings and any amendments to any thereof and
(ii) obtain promptly all consents, waivers, approvals, authorizations or permits
of, or  registrations  or filings with or notifications to (any of the foregoing
being a "Consent"),  any  Governmental  Entity necessary for the consummation of
the  transactions  contemplated by this Agreement  (except for such Consents the
failure  of  which  to  obtain  would  not  prevent  or  materially   delay  the
consummation of the Merger). Subject to the Confidentiality

                                      -31-
<PAGE>

Agreement,  HK and the  Company  shall  furnish to one and other such  necessary
information  and  reasonable  assistance  as HK or the  Company  may  reasonably
request in connection with the foregoing.

          (b) Without limiting  Section 5.3(a) hereof,  HK and the Company shall
each (i)  promptly  make or cause to be made the filings  required of such party
under the HSR Act with respect to the Merger; (ii) use its best efforts to avoid
the entry of, or to have vacated or terminated,  any decree,  order, or judgment
that would restrain,  prevent or delay the consummation of the Merger, including
without limitation defending through litigation on the merits any claim asserted
in any court by any third party; and (iii) take any and all steps which, in such
party's  judgment,  are  commercially  reasonable to avoid or eliminate each and
every impediment under any antitrust,  competition, or trade regulation law that
may be asserted by any  Governmental  Entity with respect to the Merger so as to
enable consummation thereof to occur as soon as reasonably possible.  Each party
hereto shall  promptly  notify the other  parties of any  communication  to that
party from any Governmental Entity with respect to the transactions contemplated
by this Agreement and permit the other parties to review in advance any proposed
communication  to any  Governmental  Entity.  HK and the Company  shall not (and
shall cause their  respective  affiliates and  representatives  not to) agree to
participate  in any  meeting  with any  Governmental  Entity in  respect  of any
filings,  investigation or other inquiry unless it consults with the other party
in advance and, to the extent permitted by such Governmental  Entity,  gives the
other party the  opportunity to attend and participate  thereat.  Subject to the
Confidentiality  Agreement,  each of the  parties  hereto  will  coordinate  and
cooperate fully with the other parties hereto in exchanging such information and
providing  such  assistance  as such other  parties  may  reasonably  request in
connection with the foregoing and in seeking early termination of any applicable
waiting periods under the HSR Act or in connection with other Consents.  Each of
the  Company  and HK agrees to respond  promptly  to and  comply  fully with any
request for additional  information or documents  under the HSR Act.  Subject to
the Confidentiality  Agreement, the Company will provide HK, and HK will provide
the Company,  with copies of all  correspondence,  filings or communications (or
memoranda setting forth the substance  thereof) between such party or any of its
representatives,  on the one hand, and any Governmental Entity or members of its
staff,  on the other hand,  with respect to this Agreement and the  transactions
contemplated hereby.

          (c) The  Company  and HK each  agree to  provide,  and to cause  their
respective  officers,  employees and advisors to provide, and the Company agrees
to cause its Subsidiaries and their respective officers,  employees and advisors
to provide,  all  commercially  reasonable  cooperation  in connection  with the
arrangement of any financing in respect of the transactions contemplated by this
Agreement,  including,  without limitation,  (i) participation in meetings,  due
diligence  sessions and road shows,  (ii) assisting the  preparation of offering
memoranda, private placement memoranda,  prospectuses and similar documents, and
(iii) the  execution and delivery of any  commitment  letters,  underwriting  or
placement agreements,  pledge and security documents, other definitive financing
documents,  or other  requested  certificates  or documents as may be reasonably
requested.

                                      -32-
<PAGE>

     Section 5.4 Public Announcements.  The Company, on the one hand, and HK, on
the other hand,  agree to consult  promptly with each other prior to issuing any
press release or  announcement  or otherwise  making any public  statement  with
respect to the Merger and the other transactions  contemplated  hereby, agree to
provide  to the  other  party for  review a copy of any such  press  release  or
statement,  and shall not issue any such press  release or make any such  public
statement prior to such  consultation and review,  unless required by applicable
law or any listing  agreement  with a  securities  exchange or the Nasdaq  Stock
Market, Inc.

     Section 5.5 Employee Benefit Arrangements.

          (a) HK agrees that the Company  will  honor,  and,  from and after the
Effective Time, the Surviving  Corporation  will honor, in accordance with their
respective terms as in effect on the date hereof, the employment,  severance and
bonus  agreements and arrangements to which the Company is a party which are set
forth on Section 5.5 of the Disclosure Schedule.

          (b) The  Company  agrees that for a period of one year  following  the
Effective Time, the Surviving  Corporation  shall continue the (i)  compensation
(including  bonus and  incentive  awards)  programs and plans and (ii)  employee
benefit  and  welfare  plans,  programs,  contracts,   agreements  and  policies
(including  insurance and pension plans),  fringe benefits and vacation policies
which are  currently  provided by the  Company;  provided  that  notwithstanding
anything in this Agreement to the contrary the Surviving  Corporation  shall not
be required to maintain  any  individual  plan or program so long as the benefit
plan  and  agreements  maintained  by  the  Surviving  Corporation  are,  in the
aggregate,  not less favorable  than those  provided by the Company  immediately
prior to the date of this Agreement;  and,  provided,  further,  that nothing in
this  sentence  shall be deemed to limit or  otherwise  affect  the right of the
Surviving  Corporation  to  terminate  employment  or change  the place of work,
responsibilities, status or designation of any employee or group of employees as
the Surviving Corporation may determine in the exercise of its business judgment
and in compliance with applicable laws.

     Section 5.6 Indemnification; Directors' and Officers' Insurance.

          (a) The Company and, from and after the Effective  Time, the Surviving
Corporation,  shall  indemnify,  defend and hold harmless the present and former
officers,  directors,  employees and agents of the Company and its  Subsidiaries
(the  "Indemnified  Parties")  against all  judgments,  fines,  losses,  claims,
damages, costs or expenses (including reasonable attorneys' fees) or liabilities
arising out of or related to matters, actions or omissions or alleged actions or
omissions  occurring  at or prior to the  Effective  Time  whether  asserted  or
claimed prior to or after the Effective Time (i) to the full extent permitted by
New York law or, if the protections  afforded  thereby to an Indemnified  Person
are  greater,  (ii) to the same  extent  and on the same  terms  and  conditions
(including  with  respect  to  advancement  of  expenses)  provided  for  in the
Company's Certificate of Incorporation, as amended, and Bylaws and agreements in
effect at the date hereof (to the extent  consistent with applicable law), which
provisions  shall survive the Merger and continue in full force and effect after
the Effective  Time.  Without  limiting the foregoing,  (i) HK shall,  and shall
cause the

                                      -33-
<PAGE>

Surviving  Corporation to, periodically  advance expenses (including  attorney's
fees) as incurred by an Indemnified  Person with respect to the foregoing to the
full extent permitted under applicable law, and (ii) any determination  required
to be made with  respect to whether an  Indemnified  Party  shall be entitled to
indemnification  shall,  if  requested  by such  Indemnified  Party,  be made by
independent  legal counsel selected by the Surviving  Corporation and reasonably
satisfactory to such Indemnified Party.

          (b) HK agrees  that the  Company,  and,  from and after the  Effective
Time, the Surviving Corporation,  shall cause to be maintained in effect for not
less than six years from the Effective  Time the policies of the  directors' and
officers'  liability  insurance  maintained  by the  Company and in effect as of
September  1, 1999;  provided  that the  Surviving  Corporation  may  substitute
therefor other policies of at least the same coverage  amounts and which contain
terms and conditions not less  advantageous to the  beneficiaries of the current
policies and, provided further,  that such substitution  shall not result in any
gaps or lapses in coverage with respect to matters  occurring on or prior to the
Effective Time; and provided further,  that the Surviving  Corporation shall not
be  required  to pay an annual  premium  in  excess  of 200% of the last  annual
premium  paid by the  Company  prior to the  date  hereof  and if the  Surviving
Corporation is unable to obtain the insurance required by this Section 5.6(b) it
shall obtain as much  comparable  insurance  as possible  for an annual  premium
equal to such maximum amount.

          (c) This Section 5.6 shall survive the  consummation  of the Merger at
the  Effective  Time,  is  intended  to  benefit  the  Company,   the  Surviving
Corporation and the Indemnified Parties,  shall be binding on all successors and
assigns of HK and the Surviving  Corporation,  and shall be  enforceable  by the
Indemnified Parties.

     Section 5.7  Notification  of Certain  Matters.  HK and the  Company  shall
promptly notify each other of (i) the occurrence or  non-occurrence  of any fact
or event which would be  reasonably  likely (A) to cause any  representation  or
warranty  contained in this Agreement to be untrue or inaccurate in any material
respect at any time from the date hereof to the  Effective  Time or (B) to cause
any  covenant,  condition or agreement  under this  Agreement not to be complied
with or satisfied  and (ii) any failure of the  Company,  or HK, as the case may
be, to comply  with or  satisfy  any  covenant,  condition  or  agreement  to be
complied  with or satisfied by it  hereunder;  provided,  however,  that no such
notification shall affect the  representations or warranties of any party or the
conditions to the obligations of any party hereunder. Each of the Company and HK
shall  give  prompt  notice to the other  parties  hereof of any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the  transactions  contemplated by this
Agreement.

     Section 5.8 State Takeover Laws. The Company shall, upon the request of HK,
take all  reasonable  steps to assist in any  challenge by HK to the validity or
applicability to the transactions contemplated by this Agreement,  including the
Merger, of any state takeover law.

                                      -34-
<PAGE>

     Section 5.9 No Solicitation.

          (a) The parties  acknowledge and agree that prior to October 15, 1999,
the  Company  and  its  affiliates  and the  Company  Representatives  shall  be
permitted to take the actions proscribed in clauses (b)(i) through (v) below.

          (b) From and after  October  15,  1999 until the  termination  of this
Agreement,  the Company and its  affiliates  shall not,  and shall  instruct the
Company Representatives not to:

                    (i) directly or indirectly solicit,  initiate,  or encourage
          (including by way of furnishing nonpublic  information or assistance),
          or take any other  action to  facilitate,  any  inquiries or proposals
          from any person that constitute, or may reasonably be expected to lead
          to, an acquisition,  purchase, merger, consolidation,  share exchange,
          recapitalization,  business  combination or other similar  transaction
          involving any material portion of the assets or any securities of, any
          merger,  consolidation  or business  combination  with,  or any public
          announcement  of a  proposal,  plan,  or  intention  to do  any of the
          foregoing   by,  the  Company  or  any  of  its   Subsidiaries   (such
          transactions being referred to herein as "Acquisition Proposals");

                    (ii)  enter  into,  maintain,  or  continue  discussions  or
          negotiations  with any person in  furtherance  of such inquiries or to
          obtain an Acquisition Proposal;

                    (iii) agree to or endorse any Acquisition Proposal;

                    (iv) enter into any agreement,  arrangement or understanding
          requiring it to abandon, terminate or fail to consummate the Merger or
          any other transaction contemplated by this Agreement, or

                    (v) authorize or permit the Company  Representatives to take
          any such action;



               provided,  however,  that prior to the  approval of the Merger by
the  shareholders  of the Company  nothing in this Agreement  shall prohibit the
Company Board or the Special  Committee from (A) furnishing  information to, and
engaging in discussions or negotiations with, any person or entity that makes an
unsolicited  written,  bona fide  proposal  to acquire  the  Company  and/or its
Subsidiaries pursuant to a merger, consolidation,  share exchange, tender offer,
recapitalization,  business  combination  or other similar  transaction,  or any
transaction  involving  the sale of a  material  portion  of the  assets  of the
Company,  but only to the extent that the Company Board or the Special Committee
determines in good faith, after consulting with independent legal counsel (which
may be the Company's  regularly  engaged outside legal  counsel),  that it has a
fiduciary  obligation to furnish such  information or engage in such discussions
or  negotiations  with such person or entity  (any such  proposal  meeting  such
criteria, a "Superior Proposal"), provided,

                                      -35-
<PAGE>

that prior to taking such action,  the Company notifies HK of its intentions and
obtains an  executed  confidentiality  agreement  from the  appropriate  parties
substantially similar to the Confidentiality  Agreement,  (B) failing to make or
withdrawing or modifying its  recommendation  referred to in Section 5.12 hereof
if  the  Company  Board  or  the  Special  Committee,  after  consultation  with
independent  legal counsel (who may be the Company's  regularly  engaged outside
legal counsel),  determines in good faith that it has a fiduciary  obligation to
do so,  provided  that  HK is  given  two  days'  prior  written  notice  of its
intentions to do so, and (C) disclosing to the Company's shareholders a position
contemplated  by Rules 14d-9 and 14e-2  promulgated  under the Exchange Act with
respect to any tender offer, or taking any other legally required action, or any
action  required by the rules or regulations of any  self-regulating  securities
exchange,  market or other body (including,  without  limitation,  the making of
public  disclosure as may be necessary or advisable under applicable  securities
laws); and, provided further,  that notwithstanding  anything to the contrary in
this Agreement,  the Company Board's or the Special Committee's  exercise of its
rights under  clause (A), (B) or (C) above shall not  constitute a breach by the
Company of this Agreement.

          (c) The Company will  promptly  notify HK of the receipt of any Formal
Acquisition Proposal, the terms and conditions of such proposal and the identity
of the person making it. The Company also will promptly  notify HK of any change
to or  modification  of such  Formal  Acquisition  Proposal  and the  terms  and
conditions thereof.

          (d) To the extent that,  as of October 15, 1999,  the Company,  any of
its  affiliates  or any  Company  Representative  is engaged in  discussions  or
negotiations  with any  person or entity  (other  than HK) with  respect  to any
proposal that does not at such time constitute a Superior Proposal as defined in
(b) above,  the Company  shall,  and shall cause its  affiliates and the Company
Representatives to, cease any and all activities, discussions or negotiations as
of such date.  Nothing in this Section 5.9(d) is intended to prevent,  deter, or
prohibit  the  Company  Board or the  Special  Committee  from taking any action
permitted  by Section  5.9(b)  above and the taking of any such action shall not
constitute a breach of this provision.

     Section 5.10  Interim  Liabilities.  The  Surviving  Corporation  will pay,
consistent with past practice,  all liabilities,  including all accounts payable
and other expenses,  which arise in the ordinary course of business prior to the
Closing Date.

     Section 5.11 Reports.  The Company shall provide HK with monthly  financial
statements,  broken out by business segment (including  management reports which
are prepared in the ordinary course of business and related  thereto),  no later
than the fifth business day following the end of each calendar  month  following
the date of this Agreement until the Effective Date.

     Section 5.12 Shareholders' Meeting.

          (a)  The  Company,   acting  through  the  Company  Board,  shall,  in
accordance with applicable law:

                                      -36-
<PAGE>

                    (i)    subject to the fiduciary duties of the Company Board,
          duly call, give notice of, convene and hold a special meeting of its
          shareholders (the "Special Meeting") as soon as practicable following
          the execution of this Agreement for the purpose of considering and
          taking action upon this Agreement;

                    (ii)   prepare and file with the SEC a preliminary proxy
          statement relating to this Agreement, and use its reasonable efforts
          (A) to obtain and furnish the information required to be included by
          the SEC in a definitive proxy statement (the "Proxy Statement") and,
          after consultation with HK, to respond promptly to any comments made
          by the SEC with respect to the preliminary proxy statement and cause
          the Proxy Statement to be mailed to its shareholders and (B) subject
          to the fiduciary duties of the Company Board, to obtain the necessary
          approvals of the Merger and this Agreement by its shareholders; and

                    (iii)  subject to the fiduciary duties of the Company Board,
          include in the Proxy Statement the recommendation of the Company Board
          that shareholders of the Company vote in favor of the approval of this
          Agreement.

          (b) The Company  covenants that the Proxy Statement will comply in all
material respects with the provisions of applicable federal securities laws and,
on the date filed with the SEC and on the date first published, sent or given to
the Company's shareholders, shall not 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  made  therein,  in  light of the
circumstances  under  which  they were  made,  not  misleading,  except  that no
representation is made by the Company with respect to information supplied by HK
in writing for inclusion in the Proxy Statement. Each of the Company, on the one
hand,  and HK, on the other hand,  agree  promptly  to correct  any  information
provided by either of them for use in the Proxy  Statement  if and to the extent
that it shall have become false or misleading, and the Company further agrees to
take all steps  necessary  to cause the Proxy  Statement  as so  corrected to be
filed with the SEC and to be  disseminated  to the  holders  of Shares,  in each
case, as and to the extent required by applicable federal securities laws.

     Section 5.13 Letters of Accountants. The Company shall use its commercially
reasonable efforts to cause to be delivered to HK from the Company's independent
accountants a letter dated within two business days prior to the Effective  Time
stating that the Merger may be recorded for financial  accounting  purposes as a
recapitalization if the Merger is consummated in accordance with this Agreement.

     Section 5.14  Conveyance  Taxes.  HK and the Company shall cooperate in the
preparation,  execution and filing of all returns, questionnaires,  applications
or other documents  regarding any real property  transfer or gains,  sales, use,
transfer,  value-added, stock transfer and stamp taxes, any transfer, recording,
registration  and other fees or any similar  taxes which  become  payable by the
Company  or  any  of  its  Subsidiaries  in  connection  with  the  transactions
contemplated  by this Agreement that are required or permitted to be filed on or
before the Effective Time.

                                      -37-
<PAGE>

     Section 5.15  Delisting.  Each of the parties agrees to cooperate with each
other in taking,  or causing to be taken,  all actions  necessary  to delist the
Common Shares from NASDAQ and to terminate  registration under the Exchange Act,
provided that such delisting and termination  shall not be effective until after
the Effective Time of the Merger.


                                    ARTICLE 6
                    CONDITIONS TO CONSUMMATION OF THE MERGER

     Section 6.1 Conditions. The respective obligations of HK and the Company to
consummate  the  Merger  are  subject  to the  satisfaction,  at or  before  the
Effective Time, of each of the following conditions:

          (a) Shareholder Approval.  The Company Shareholder Approval shall have
been obtained.

          (b) Illegality. There shall not have been any United States federal or
state statute,  rule or regulation enacted or promulgated after the date of this
Agreement  that would result in the  imposition of material  limitations  on the
ability of HK effectively to acquire or hold the business of the Company and its
Subsidiaries taken as a whole.

          (c) HSR Act. Any waiting period (and any extension  thereof) under the
HSR Act applicable to the Merger shall have expired or been terminated.

     Section 6.2  Conditions  to  Obligations  of HK. The  obligations  of HK to
effect the Merger are further subject to the following conditions:

          (a) Representations and Warranties. The representations and warranties
of the Company set forth in this  Agreement  shall be true and correct as of the
date of this  Agreement  and as of the Closing  Date as though made on and as of
the  Closing  Date in all  respects  (except  where the  failure  to be true and
correct  does not have a Material  Adverse  Effect on the  Company),  other than
representations  and  warranties  of the Company that relate to a specific  date
which shall be true and correct in all  respects as of such date.  HK shall have
received a  certificate  signed on behalf of the Company by the chief  executive
officer and the chief  financial  officer of the Company to the effect set forth
in this paragraph.

          (b) Performance of Obligations of the Company.  The Company shall have
performed the  obligations  required to be performed by it under this  Agreement
prior to the Closing in all material respects.

          (c)  Consents,  etc.  HK shall  have  received  evidence,  in form and
substance reasonably satisfactory to it, that all licenses,  permits,  consents,
approvals, authorizations,

                                      -38-
<PAGE>

qualifications  and orders of Governmental  Entities and other third parties set
forth in Section 3.3 of the Disclosure  Schedule and identified with an asterisk
shall have been obtained.

          (d) No Injunction.  No court of competent  jurisdiction  in the United
States or other United States  Governmental  Entity shall have issued any order,
decree or ruling or taken any other action  restraining,  enjoining or otherwise
(i) prohibiting the consummation of the Merger or any of the other  transactions
contemplated  by this Agreement,  (ii)  prohibiting or limiting the ownership or
operation by the Company or any of its  Subsidiaries of any material  portion of
the business or assets of the Company or any of its Subsidiaries,  or to dispose
of or hold  separate  any  material  portion  of the  business  or assets of the
Company  or any of its  Subsidiaries,  as a result  of the  Merger or any of the
other transactions  contemplated by this Agreement or (iii) imposing limitations
on the ability of HK (or any shareholder of HK), to acquire or hold, or exercise
full rights of ownership of, any Common Shares,  including,  without limitation,
the  right to vote  Common  Shares  on all  matters  properly  presented  to the
shareholders of the Company.

          (e)  Financing.  HK shall have  received  proceeds of financing on the
terms and  conditions  and in the amounts  described in the  commitment  letters
(each, a "Commitment  Letter") attached hereto as Exhibit A; provided,  however,
that if the failure to receive  such  financing  is caused by HK's breach in any
material respect of any representation,  warranty, covenant or agreement made by
HK and solely within the control of HK in any  Commitment  Letter,  then in such
event HK's  obligation  to  consummate  the  Merger  shall not be subject to the
satisfaction of this condition.

          (f) No Material  Adverse  Effect.  There shall not after the execution
hereof have occurred a Material Adverse Effect on the Company, provided that (i)
no event relating to the disclosures  made by the Company to, or the discussions
had by the Company with, HIG, HK or any of their respective  affiliates prior to
the date hereof with  respect to matters  disclosed  by the Company in its press
releases dated July 1, 1999 and August 12, 1999 and (ii) no suit, claim, action,
or proceeding  disclosed on Schedule 3.6  hereto(or any suit or action  alleging
facts  or  stating  claims  of a  similar  nature  or that  could  otherwise  be
reasonably  expected to arise out of or in connection  with the  negotiation and
consummation of this transaction)  shall constitute a Material Adverse Effect on
the Company.

          (g)  Options.  Upon  payment of the Option  Consideration  pursuant to
Section 2.02  hereof,  all Options  pursuant to any existing  Option Plans shall
have been canceled and there shall be not other plans,  programs or arrangements
which  obligate  the Company or the  Surviving  Corporation  to issue any equity
securities or any securities with equity-like features.

          (h)  Directors.  All  existing  directors  of the  Company  shall have
tendered  resignations  from  the  Board  which  shall  be  effective  as of the
Effective Time.

          (i) Opinion of the  Company's  Counsel.  HK shall have  received  from
Proskauer  Rose LLP,  counsel for the Company,  an opinion in form and substance
satisfactory to HK,

                                      -39-
<PAGE>

addressed to HK, dated as of the Closing Date, and HK's lenders shall have been
allowed to rely thereon.

     Section 6.3 Conditions to Obligation of the Company.  The obligation of the
Company to effect the Merger is further subject to the following conditions:

          (a) Representations and Warranties. The representations and warranties
of HK set forth in this  Agreement  shall be true and  correct  in all  material
respects  (except for  representations  and  warranties  which are  qualified by
"materiality,"  "Material Adverse Effect," or terms of similar import or effect,
in which case such  representations  and warranties shall be true and correct in
all  respects),  in each  case as of the  date of this  Agreement  and as of the
Closing  Date  as  though  made  on and  as of  the  Closing  Date,  other  than
representations  and warranties of HK that relate to a specific date which shall
be true and  correct in all  respects as of such date.  The  Company  shall have
received  certificates  signed  on  behalf  of HK by  the  President  or a  Vice
President of HK to the effect set forth in this paragraph.

          (b)  Performance  of  Obligations  of HK. HK shall have  performed the
obligations  required to be performed by it under this Agreement in all material
respects.

          (c) Opinion of HK's  Counsel.  The Company  shall have  received  from
Kirkland & Ellis, counsel for HK, an opinion in form and substance  satisfactory
to the Company, addressed to the Company, dated as of the Closing Date.

          (d) Payment of Notes. At the Closing, the Surviving  Corporation shall
have paid in full the four-year 5.7% promissory notes in an aggregate  principal
amount of  approximately  $5.57  million,  issued  to  certain  shareholders  in
connection with the termination of the Company's S Corporation status.

          (e) No Injunction.  No court of competent  jurisdiction  in the United
States or other United States  Governmental  Entity shall have issued any order,
decree or ruling or taken any other action  restraining,  enjoining or otherwise
(i) prohibiting the consummation of the Merger or any of the other  transactions
contemplated  by this Agreement,  (ii)  prohibiting or limiting the ownership or
operation by the Company or any of its  Subsidiaries of any material  portion of
the business or assets of the Company or any of its Subsidiaries,  or to dispose
of or hold  separate  any  material  portion  of the  business  or assets of the
Company  or any of its  Subsidiaries,  as a result  of the  Merger or any of the
other transactions  contemplated by this Agreement or (iii) imposing limitations
on the ability of HK (or any shareholder of HK), to acquire or hold, or exercise
full rights of ownership of, any Common Shares,  including,  without limitation,
the  right to vote  Common  Shares  on all  matters  properly  presented  to the
shareholders of the Company.

                                      -40-
<PAGE>

                                    ARTICLE 7
                         TERMINATION; AMENDMENTS; WAIVER

     Section 7.1  Termination.  This  Agreement may be terminated and the Merger
contemplated  hereby may be abandoned at any time prior to the  Effective  Time,
notwithstanding approval thereof by the shareholders of the Company:

          (a) by the mutual written consent of HK and the Company,  by action of
their respective Boards of Directors;

          (b) by HK or the Company if the Merger shall not have been consummated
on or before  February  15,  2000;  provided,  however,  that neither HK nor the
Company may terminate  this  Agreement  pursuant to this Section  7.1(b) if such
party shall have materially breached this Agreement;

          (c) by HK or the Company if any court of competent jurisdiction in the
United  States or other United States  Governmental  Entity has issued an order,
decree or ruling or taken any other action  restraining,  enjoining or otherwise
prohibiting the Merger and such order, decree, ruling or other action shall have
become final and  nonappealable;  provided,  however,  that the party seeking to
terminate this Agreement shall have used its commercially  reasonable efforts to
remove or lift such order, decree, ruling or other action;

          (d) by the Company if,  prior to the  Effective  Time,  any person has
made a bona fide Formal Acquisition  Proposal (defined in Section 8.9(a) below),
or has  commenced  a tender or  exchange  offer for the Common  Shares,  and the
Company Board or Special  Committee  determines in good faith that its fiduciary
duties  require  it  to  accept  such   proposal;   provided,   however,   that,
notwithstanding  anything in this Agreement to the contrary,  the termination of
this  Agreement by the Company in compliance  with this Section 7.1(d) shall not
be deemed to violate any other  obligations of the Company under this Agreement,
and, provided further,  that the Company shall have notified HK of its intent to
terminate  at  least  two  business  days  prior to the  effective  date of such
termination;

          (e) by HK, if the Company  Board shall have (i) failed to recommend to
the shareholders of the Company that they give the Company Shareholder Approval,
(ii)  withdrawn  or  modified  in  a  manner  adverse  to  HK  its  approval  or
recommendation of this Agreement or the Merger, (iii) approved or recommended an
Acquisition Proposal or (iv) resolved to effect any of the foregoing;

          (f) by either HK or the Company, if the Company  Shareholder  Approval
shall not have been  obtained  by reason of the  failure to obtain the  required
vote  upon  a vote  held  at a  duly  held  meeting  of  shareholders  or at any
adjournment thereof; or

                                      -41-
<PAGE>

          (g) by  either  HK or the  Company,  if the  other  party  shall be in
material  breach of this  Agreement,  and such breach  shall not have been cured
within 20 days of receipt of written notice from the non-breaching party of such
breach.

     Section 7.2 Effect of Termination.  In the event of the termination of this
Agreement pursuant to Section 7.1 hereof,  this Agreement shall forthwith become
void and have no effect,  without any  liability on the part of any party or its
directors, officers or shareholders, except that the terms and conditions of the
Confidentiality Agreement with respect to matters addressed by the last sentence
of Section 5.2 hereof and the  provisions of this Section 7.2 and Section 7.3 of
this Agreement  shall survive any such  termination.  Nothing  contained in this
Section  7.2  shall  relieve  any party  from  liability  for any  breach of any
covenant of this Agreement or any breach of warranty or misrepresentation.

     Section 7.3 Fees and Expenses.

          (a)  Subject  to (b)  below,  in the  event  that  this  Agreement  is
terminated  pursuant  to Section  7.1(g) or is  terminated  pursuant  to Section
7.1(b) based at least in part upon a material breach of this Agreement by one of
the parties  hereto  (while the other party is not in material  breach) and such
breach has not been previously waived by the non-breaching  party, the breaching
party  shall  promptly  reimburse  the  non-breaching  party for all  reasonable
out-of-pocket expenses and fees (including,  without limitation, fees payable to
all banks, investment banking firms and other financial institutions,  and their
respective agents and counsel, and all fees of counsel,  accountants,  financial
printers,  experts  and  consultants  to HK  and  its  affiliates,  collectively
referred to as "Costs"),  whether incurred prior to, on or after the date hereof
(but prior to the date this  Agreement is  terminated),  in connection  with the
Merger and the consummation of all transactions  contemplated by this Agreement,
and the financing thereof.

          (b) In the event that this Agreement is terminated pursuant to Section
7.1(d) hereof,  or by HK pursuant to Section 7.1(b) hereof based upon a material
breach of this Agreement by the Company, or by HK pursuant to Sections 7.1(e) or
7.1(g) hereof and prior to such termination HK has not materially  breached this
Agreement, the Company will, within three business days of such termination, pay
to HK in cash by wire  transfer  in  immediately  available  funds to an account
designated  by HK a payment in an amount equal to $4 million  (the  "Termination
Fee"), and no amount will be owed to HK pursuant to clause (a) above.

          (c) The  prevailing  party in any legal action  undertaken  to enforce
this  Agreement  or any  provision  hereof shall be entitled to recover from the
other party the costs and  expenses  (including  attorneys'  and expert  witness
fees) incurred in connection with such action.

          (d) Except as otherwise  specifically provided for herein,  whether or
not the Merger is  consummated,  all costs and expenses  incurred in  connection
with this Agreement and the transactions contemplated by this Agreement shall be
paid by the party incurring such expenses.

                                      -42-
<PAGE>

     Section 7.4 Amendment.  This Agreement may be amended by the Company and HK
at any time before or after any approval of this  Agreement by the  shareholders
of the Company but,  after any such approval,  no amendment  shall be made which
decreases the Merger  Consideration or which adversely affects the rights of the
Company's shareholders hereunder without the approval of such shareholders. This
Agreement may not be amended except by an instrument in writing signed on behalf
of all the parties.

     Section 7.5 Extension; Waiver. At any time prior to the Effective Time, HK,
on the one  hand,  and the  Company,  on the  other  hand,  may but shall not be
obligated to (i) extend the time for the  performance of any of the  obligations
or other acts of the other,  (ii) waive any inaccuracies in the  representations
and warranties contained herein of the other or in any document,  certificate or
writing delivered  pursuant hereto by the other or (iii) waive compliance by the
other with any of the agreements or conditions. Any agreement on the part of any
party to any such  extension  or waiver  shall be valid  only if set forth in an
instrument in writing signed on behalf of such party.

                                    ARTICLE 8
                                  MISCELLANEOUS

     Section  8.1   Non-Survival  of   Representations   and   Warranties.   The
representations  and warranties  made in this Agreement shall not survive beyond
the Effective Time.


     Section 8.2 Entire Agreement; Assignment.

          (a)  This  Agreement  (including  the  documents  and the  instruments
referred  to herein) and the  Confidentiality  Agreement  constitute  the entire
agreement and supersede all prior  agreements and  understandings,  both written
and oral,  among the  parties  with  respect to the  subject  matter  hereof and
thereof.

          (b)  Neither  this  Agreement  nor  any of the  rights,  interests  or
obligations  hereunder will be assigned by any of the parties hereto (whether by
operation of law or otherwise)  without the prior  written  consent of the other
party  (except that HK may assign its rights,  interest and  obligations  to any
affiliate or Subsidiary of HK without the consent of the Company,  provided that
no such  assignment  shall  relieve HK of any  liability  for any breach by such
assignee).  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.

     Section 8.3 Validity.  The invalidity or  unenforceability of any provision
of this Agreement shall not affect the validity or  enforceability  of any other
provision  of this  Agreement,  each of which  shall  remain  in full  force and
effect.

                                      -43-
<PAGE>

          Section 8.4 Notices. All notices,  requests, claims, demands and other
communications  hereunder  shall be in writing  and shall be deemed to have been
duly given when delivered in person,  by overnight  courier or telecopier to the
respective parties as follows:

                    If to HK:               HK Merger Corp.
                                            c/o H.I.G. Capital, LLC
                                            1001 Brickell Bay Drive
                                            27th Floor
                                            Miami, FL 33137
                                            Attention:  John R. Black
                                            Rick Rosen
                                            Telecopier: (305) 379-2013

                    with a copy to:         Kirkland & Ellis
                                            200 East Randolph Drive
                                            Chicago, IL 60601
                                            Attention:  James L. Learner, P.C.
                                            Telecopier:  (312) 861-2200


                    If to the Company:      Happy Kids Inc.
                                            100 West 33rd Street
                                            Suite 1100
                                            New York, NY 10001
                                            Attention:  Jack M. Benun
                                            Telecopier:  (212) 967-1357

                    with a copy to:         Proskauer Rose LLP
                                            1585 Broadway
                                            New York, NY 10036
                                            Attention: Jeffrey A. Horwitz, Esq.
                                            Telecopier:  (212) 969-3229

or to such  other  address  as the  person  to whom  notice  is  given  may have
previously  furnished  to the other in writing  in the  manner set forth  above;
provided  that  notice of any change of  address  shall be  effective  only upon
receipt thereof.

     Section 8.5 Governing Law; Exclusive Jurisdiction.  This Agreement shall be
governed by and construed in accordance  with the laws of the State of New York,
regardless of the laws that might otherwise govern under  applicable  principles
of  conflicts  of laws  thereof.  HK and the Company  each hereby  submit to the
exclusive  jurisdiction  of the United  States  District  Court for the Southern
District of New York and the Supreme  Court of the State of New York,  County of
New York, for the purpose of all legal proceedings arising out of or relating to
this Agreement or the

                                      -44-
<PAGE>

transactions contemplated hereby. HK and the Company each irrevocably waive, to
the fullest extent permitted by law, any objection which either of them may now
or hereafter have to the laying of the venue of any such proceeding brought in
such a court and any claim that any such proceeding brought in such a court has
been brought in an inconvenient forum.

     Section 8.6  Descriptive  Headings.  The  descriptive  headings  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.

     Section 8.7  Counterparts.  This  Agreement  may be executed in two or more
counterparts,  each of which shall be deemed to be an original, but all of which
shall constitute one and the same agreement.

     Section 8.8 Parties in Interest.  Except with respect to Sections  2.2, 5.5
and 5.6  hereof  (which  are  intended  to be for  the  benefit  of the  persons
identified therein,  and may be enforced by such persons),  this Agreement shall
be  binding  upon and inure  solely to the  benefit of each  party  hereto,  and
nothing in this  Agreement,  express or implied,  is intended to confer upon any
other person any rights or remedies of any nature  whatsoever under or by reason
of this Agreement.

     Section 8.9 Certain Definitions. As used in this Agreement:

          (a) "Formal Acquisition Proposal" means a formal written proposal from
any person for the  purpose  of  arranging  an  acquisition,  purchase,  merger,
consolidation, share exchange,  recapitalization,  business combination or other
similar  transaction  involving  all or  substantially  all of the assets of the
Company or a majority of the outstanding  Common Shares or all or  substantially
all of  the  Common  Shares  held  by the  public  shareholders  or any  merger,
consolidation or business combination with the Company.

          (b) Other than with  respect to the term "ERISA  Affiliate,"  the term
"affiliate",  as applied to any person,  shall mean any other person directly or
indirectly  controlling,  controlled  by, or under  common  control  with,  that
person.  For  the  purposes  of  this  definition,  "control"  (including,  with
correlative meanings, the terms "controlling," "controlled by" and "under common
control  with"),  as applied to any person,  means the  possession,  directly or
indirectly,  of the power to direct or cause the direction of the management and
policies of that person, whether through the ownership of voting securities,  by
contract or otherwise;

          (c)  "Business"  shall  mean the  businesses  of the  Company  and its
Subsidiaries as currently conducted;

          (d) "Intellectual Property" means (i) all patents, patent applications
and patent disclosures and all inventions (whether or not patentable and whether
or not  reduced  to  practice,  including  but  not  limited  to  any  reissues,
continuations,   continuations-in-part,   divisions,  revisions,  extensions  or
reexaminations thereof); (ii) all trademarks, service marks, trade names,

                                      -45-
<PAGE>

trade dress, logos,  slogans,  corporate names and Internet domain names and Web
sites,  and all the goodwill  associated  with each of the foregoing;  (iii) all
mask works and  registrations  and applications for registry  thereof;  (iv) all
registered  and  unregistered  statutory  and  common  law  copyrights;  (v) all
registrations,  applications  and  renewals for any of the  foregoing;  (vi) all
trade  secrets,   confidential  information,   ideas,  formulae,   compositions,
know-how,  manufacturing  and  production  processes  and  techniques,  research
information, drawings, specifications,  designs, plans, improvements, proposals,
technical and computer data, documentation and software,  financial business and
marketing  plans,  customer  and  supplier  lists and  related  information  and
marketing  materials  and all  other  proprietary  rights;  and  (vii) all other
intellectual property rights;

          (e)  "International  Trade Laws and  Regulations"  means all  federal,
state, local and foreign statutes, executive orders, proclamations, regulations,
rules, directives,  decrees,  ordinances and similar provisions having the force
or  effect  of  law  and  all  judicial  and  administrative  orders,   rulings,
determinations  and common law concerning the  importation of  merchandise,  the
export or reexport of products,  services and technology,  the terms and conduct
of international  transactions,  making or receiving  international payments and
the  authorization  to hold an  ownership  interest  in a business  located in a
country  other  than the  United  States,  including  the  Tariff Act of 1930 as
amended  and other laws  administered  by the  United  States  Customs  Service,
regulations issued or enforced by the United States Customs Service,  the Export
Administration Act of 1979 as amended,  the Export  Administration  Regulations,
the  International  Emergency  Economic Powers Act, the Arms Export Control Act,
the  International  Traffic  in Arms  Regulations,  any  other  export  controls
administered by an agency of the United States  government,  Executive Orders of
the President  regarding  embargoes and  restrictions  on trade with  designated
countries and Persons, the embargoes and restrictions administered by the United
States Office of Foreign Assets Control,  the Foreign Corrupt Practices Act, the
antiboycott  regulations   administered  by  the  United  States  Department  of
Commerce,  the  antiboycott  regulations   administered  by  the  United  States
Department of the Treasury, legislation and regulations of the United States and
other countries  implementing  the North American Free Trade Agreement  (NAFTA),
antidumping and countervailing  duty laws and regulations,  laws and regulations
by other countries  concerning the ability of U.S. Persons to own businesses and
conduct business in those countries,  restrictions by other countries on holding
foreign currency and repatriating  funds and other laws and regulations  adopted
by the governments or agencies of other  countries  relating to the same subject
matter as the United States statutes and regulations described above.

          (f)  the  term  "Person"  or  "person"   shall  include   individuals,
corporations,  partnerships, trusts, other entities and groups (which term shall
include a "group" as such term is defined in Section  13(d)(3)  of the  Exchange
Act); and

          (g)  "Knowledge  of the Company" or words of similar  import means the
actual knowledge of the following  members of the Company's  senior  management:
Jack M. Benun, Mark J. Benun, Isaac Levy, Stuart Bender and Andrew Glasgow.

                                      -46-
<PAGE>

     Section  8.10  Specific   Performance.   The  parties   hereto  agree  that
irreparable  damage would occur in the event that any of the  provisions of this
Agreement  were not performed in accordance  with their  specific  terms or were
otherwise breached.  It is accordingly agreed that the parties shall be entitled
to an injunction or  injunctions  to prevent  breaches of this  Agreement and to
enforce  specifically the terms and provisions hereof in any court of the United
States or any state  having  jurisdiction,  this being in  addition to any other
remedy to which they are entitled at law or in equity.

                  [REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
                            [SIGNATURE PAGE FOLLOWS]

                                      -47-
<PAGE>

          IN WITNESS WHEREOF,  each of the parties has caused this Agreement and
Plan of Merger to be executed on its behalf by its respective  officer thereunto
duly authorized, all as of the day and year first above written.

                                             HAPPY KIDS INC.



                                                  /s/ Jack M. Benun
                                             By: -------------------------------
                                                  Name:  Jack M. Benun
                                                  Title: President


                                             HK MERGER CORP.



                                                  /s/ Sami Mnaymneh
                                             By: ----------------------------
                                                  Name:  Sami Mnaymneh
                                                  Title: President
<PAGE>

                                   Schedule I
                                   ----------

                                Rollover Schedule
                                -----------------


Holder of Record   Pre-Closing Shares   Non-Rollover Shares   Rollover Shares
----------------- -------------------- --------------------- -----------------
Jack M. Benun         3,293,750             2,921,727             372,023
Mark J. Benun         3,293,750             2,921,727             372,023
Isaac Levy            1,162,500             1,031,198             131,302
Total                 7,750,000             6,874,652             875,348
<PAGE>

EXHIBIT A
                              BANKERS TRUST COMPANY
                               130 LIBERTY STREET
                            NEW YORK, NEW YORK 10006




                                                              September 13, 1999



H.I.G. Capital LLC
1001 Brickell Bay Drive
Suite 2708
Miami, FL 33131

Attention:  Sami Mnaymneh


re  Commitment Letter


Gentlemen:

         You have advised Bankers Trust Company ("BTCo") that H.I.G. Capital LLC
("HIG") is considering a  recapitalization  transaction (the  "Acquisition")  of
Happy  Kids Inc.  (the  "Company")  pursuant  to which HIG,  certain  management
shareholders  of the Company and other  investors  reasonably  acceptable  to us
(collectively, the "Equity Investors") would own 100% (on a fully diluted basis)
of the equity of the Company.  We understand that (i) the purchase price for the
equity  of the  Company  will be  $81,100,000  and  (ii)  concurrently  with the
consummation of the Acquisition,  the Company will refinance  $14,200,000 of its
existing debt (the  "Refinancing"  and,  together with the  Acquisition  and the
incurrence  of the  financings  described  below,  the  "Transaction").  We also
understand  that  the  Acquisition  will  be  structured  as a  one-step  merger
transaction  pursuant to which a company  newly  formed by the Equity  Investors
would  merge with and into the  Company,  with the Company  being the  surviving
corporation.

         BTCo  understands  that  the  aggregate  funds  needed  to  effect  the
Acquisition  and the  Refinancing  will be  $95,300,000  and  that  the fees and
expenses  incurred in  connection  with the  Transaction  will be  approximately
$5,500,000.  BTCo further  understands  that the funding  required to effect the
Acquisition  and the  Refinancing,  to pay fees and expenses owing in connection
with the  Transaction  and to provide  working  capital to the  Company  and its
subsidiaries shall be provided solely as follows: (i) a cash equity contribution
(the "Equity  Financing") from the Equity Investors in the amount of $26,575,000
(of which up to $6,275,000  may be in the form of roll-over  equity  retained by
certain   existing   management   shareholders   of  the  Company  (the  "Equity
Rollover")),  (ii) the  issuance  by the  Company  of  subordinated  notes
<PAGE>

(the  "Subordinated  Notes")  generating  gross cash proceeds of $10,000,000 and
(iii) the incurrence by the Company of the Senior  Secured  Financing as defined
and described below.

         BTCo  understands  that the senior bank financing (the "Senior  Secured
Financing")  required by the Company to effect the foregoing  transactions  will
consist of (i) a $60,000,000  term loan facility (the "Term Loan  Facility") and
(ii) a $50,000,000  revolving  credit facility (the "Revolving  Credit Facility"
and, together with the Term Loan Facility,  the "Credit  Facilities"),  it being
understood that  approximately  $10,500,000 of the Revolving Credit Facility may
be utilized to effect the  Acquisition  and the  Refinancing and to pay any fees
and expenses owing in connection with the  Transaction.  A summary of certain of
the terms and  conditions  of the  Credit  Facilities  is set forth on Exhibit A
hereto (the "Term Sheet").

         BTCo is pleased to confirm that (i) it commits to provide, on the terms
and conditions set forth herein and in the Term Sheet, all of the Senior Secured
Financing,  (ii) it will act as sole  Administrative  Agent for a  syndicate  of
financial institutions (the "Lenders") party to the Senior Secured Financing and
(iii) Deutsche Bank Securities Inc. ("DBSI"),  an affiliate of BTCo, will act as
sole Lead Arranger and sole Book Manager for the Senior Secured  Financing.  You
agree that no other agents,  co-agents or arrangers will be appointed,  no other
titles  will  be  awarded  and  no  compensation   (other  than  that  expressly
contemplated  by the Term Sheet and the Fee Letter  referred  to below)  will be
paid in connection with the Senior Secured  Financing unless you and we shall so
agree.

         BTCo reserves the right,  prior to or after execution of the definitive
credit documentation for the Senior Secured Financing,  to syndicate all or part
of its  commitment  for the  Senior  Secured  Financing  to one or more  Lenders
pursuant to a syndication to be managed by BTCo. BTCo shall commence syndication
efforts  promptly after your acceptance of this letter and you agree to actively
assist BTCo in  achieving  a  syndication  that is  satisfactory  to BTCo.  Such
syndication will be accomplished by a variety of means, including direct contact
during the  syndication  between  senior  management  and  advisors of HIG,  the
Company and the proposed  syndicate  members.  To assist BTCo in its syndication
efforts,  you hereby  agree,  both  before  and after the  closing of the Senior
Secured  Financing,  (i) to provide and cause your  advisors to provide BTCo and
the other syndicate members upon request with all information  reasonably deemed
necessary  by  BTCo to  complete  syndication,  including  but  not  limited  to
information and evaluations  prepared by HIG and the Company or by your or their
respective  advisors  relating  to the  Transaction  and the other  transactions
contemplated  hereby,  (ii) to assist BTCo upon request in the preparation of an
Information  Memorandum to be used in  connection  with the  syndication  of the
Senior Secured Financing and (iii) to make available officers of each of HIG and
the Company from time to time and to attend and make presentations regarding the
business  and  prospects  of the  Company and its  subsidiaries  at a meeting or
meetings of Lenders or prospective Lenders.

         If BTCo discovers  information  not  previously  known to it which BTCo
reasonably  believes is  materially  negative  information  with  respect to the
Transaction  or the condition  (financial or otherwise),  business,  operations,
assets, liabilities or prospects of the Company or any of its subsidiaries, BTCo
may, in its sole discretion, suggest alternative

                                      -2-
<PAGE>

financing  amounts or  structures  that  assure  adequate  protection  for it or
decline to provide or participate in the proposed financing.

         You hereby agree to pay all  reasonable  costs and expenses of BTCo and
its affiliates  (including the reasonable  fees and expenses of White & Case LLP
and other counsel to BTCo and BTCo's and its affiliates' out-of-pocket expenses)
arising in  connection  with the  preparation,  execution  and  delivery of this
letter and the definitive financing arrangements (and BTCo's and its affiliates'
due diligence and syndication  efforts in connection  herewith),  whether or not
the Transaction is consummated,  the Senior Secured  Financing is made available
or definitive  credit documents are executed.  In addition,  you hereby agree to
indemnify and hold  harmless  each of the Lenders  (including in any event BTCo)
and each director,  officer,  employee, agent and affiliate thereof (each of the
foregoing  entities  an  "indemnified  person") in  connection  with any losses,
claims, damages, liabilities or other expenses to which such indemnified persons
may become subject,  insofar as such losses,  claims,  damages,  liabilities (or
actions or other  proceedings  commenced or  threatened  in respect  thereof) or
other  expenses  arise  out  of or in any  way  relate  to or  result  from  the
Transaction  or this letter or the  extension  of the Senior  Secured  Financing
contemplated by this letter, or in any way arise from any use or intended use of
this letter or the proceeds of the Senior Secured Financing contemplated by this
letter,  and you agree to  reimburse  each  indemnified  person for any legal or
other  expenses  incurred  in  connection  with   investigating,   defending  or
participating  in any such loss,  claim,  damage,  liability  or action or other
proceeding  (whether or not such indemnified  person is a party to any action or
proceeding  out of which such expenses  arise),  provided that you shall have no
obligation  to indemnify any  indemnified  person for any loss,  claim,  damage,
expense or liability to the extent that same resulted  primarily  from the gross
negligence or willful  misconduct of such indemnified person (as determined by a
court of competent  jurisdiction in a final and non-appealable  decision).  This
letter is  furnished  for your  benefit  only and may not be relied  upon by any
other  person  or  entity.  Neither  BTCo  nor any of its  affiliates  shall  be
responsible or liable to you or any other person or entity for any consequential
damages  which may be  alleged as a result of this  letter or BTCo's  failure to
provide the Senior Secured  Financing.  You also hereby agree to pay to BTCo the
fees set forth in the  separate  fee letter  (the "Fee  Letter")  dated the date
hereof  with  respect  to the  Senior  Secured  Financing,  with such fees to be
payable in accordance with the terms of the Fee Letter.

         BTCo  reserves  the right to employ  the  services  of its  affiliates,
including  DBSI,  in providing the services  contemplated  by this letter and to
allocate,  in whole or in part, to such affiliates  certain fees payable to BTCo
in such manner as BTCo and its  affiliates  may agree in their sole  discretion.
You  acknowledge  that  BTCo  may  share  with any of its  affiliates,  and such
affiliates may share with BTCo, any  information  relating to the Transaction or
HIG, the Company and their respective subsidiaries and affiliates, including any
information  as to the  creditworthiness  of any such  entities.  BTCo agrees to
treat,  and  cause  any such  affiliate  to treat,  all  non-public  information
provided  to it by you with  respect  to the  Transaction  and the  Company  and
identified as  confidential,  as  confidential  information  in accordance  with
customary banking industry practices.

                                      -3-
<PAGE>

         The  provisions  of the  immediately  preceding  two  paragraphs  shall
survive any termination of this letter.

         No amendment,  waiver or  modification of any provision of this letter,
the Term Sheet or the Fee Letter shall be effective  unless the same shall be in
writing and signed by each of the parties hereto.

         BTCo  shall  have  the  right  to  review   and   approve   all  public
announcements  and filings relating to the Transaction which refer to it, any of
its affiliates or any other Lender before they are made (such approval not to be
unreasonably withheld).

         Except as and to the extent  required by law, you are not authorized to
show or circulate this letter to any other person or entity (other than (i) your
legal and financial  advisors in connection with your evaluation hereof and (ii)
the  Company  and its legal and  financial  advisors  in  connection  with their
evaluation of your proposal for the  Transaction),  provided that after you have
accepted this letter as provided in the immediately succeeding paragraph you may
disclose a copy of this  letter and the Term Sheet (but not the Fee  Letter) as,
and to the extent,  required in any public  filing made in  connection  with the
Transaction (but otherwise subject to the immediately preceding  paragraph).  If
this letter is not  accepted by you as  provided in the  immediately  succeeding
paragraph,  you are to immediately return this letter (and any copies hereof) to
the  undersigned.  This letter may be executed in any number of counterparts and
by the  different  parties  hereto  on  separate  counterparts,  each  of  which
counterparts  shall be an original,  but all of which shall together  constitute
one and the same instrument.

         If you are in agreement with the  foregoing,  please sign and return to
BTCo the enclosed  copy of this letter,  together with a copy of the Fee Letter.
This offer shall  terminate at 5:30 P.M.,  New York time,  on September 17, 1999
unless a signed  copy of this  letter,  together  with a signed  copy of the Fee
Letter, have been delivered to BTCo (including by way of facsimile transmission)
by such time.

                                      * * *

                                      -4-
<PAGE>

         THIS LETTER AND THE FEE LETTER SHALL BE GOVERNED  BY, AND  CONSTRUED IN
ACCORDANCE  WITH,  THE LAW OF THE STATE OF NEW  YORK,  AND ANY RIGHT TO TRIAL BY
JURY WITH RESPECT TO ANY CLAIM,  ACTION,  SUIT OR  PROCEEDING  ARISING OUT OF OR
CONTEMPLATED  BY THIS LETTER AND/OR THE FEE LETTER IS HEREBY WAIVED.  YOU HEREBY
SUBMIT TO THE  NON-EXCLUSIVE  JURISDICTION  OF THE  FEDERAL  AND NEW YORK  STATE
COURTS LOCATED IN THE CITY OF NEW YORK IN CONNECTION WITH ANY DISPUTE RELATED TO
THIS LETTER AND/OR THE FEE LETTER OR ANY MATTERS CONTEMPLATED HEREBY OR THEREBY.

                                     Very truly yours,

                                     BANKERS TRUST COMPANY



                                     By /s/ Ryan Zanin
                                        --------------------------------
                                        Name:  Ryan Zanin
                                        Title: Managing Director


Agreed to and Accepted this
_____ day of __________, 1999:


H.I.G. CAPITAL LLC



By  /s/ Sami Mnaymneh
    --------------------------
    Name:  Sami Mnaymneh
    Title: President
<PAGE>

                                                                       Exhibit A
                                                                       ---------

                 SUMMARY OF CERTAIN TERMS AND CONDITIONS OF THE
                 ----------------------------------------------
                               CREDIT FACILITIES1
                               ------------------



I.        Description of the Credit Facilities
          ------------------------------------

A.        Term Loan Facility
          ------------------

Amount:                    $60,000,000   term  loan  facility  (the  "Term  Loan
                           Facility").

Maturity:                  The final  maturity  date for the Term Loan  Facility
                           shall  be  five   years  from  the  date  of  initial
                           borrowing  under the Senior  Secured  Financing  (the
                           "Closing  Date").  The  loans  under  the  Term  Loan
                           Facility (the "Term  Loans") shall  amortize in equal
                           quarterly installments in aggregate annual amounts as
                           follows:

                                                          Amortization
                                                          ------------
                                    Loan Year                Amount
                                    ---------                ------
                                        1                          $0
                                        2                  $6,000,000
                                        3                  $9,000,000
                                        4                 $15,000,000
                                        5                 $30,000,000
                                                          -----------
                                      Total               $60,000,000
                                                          ===========


Use of Proceeds:           The  Term  Loans  shall  be  utilized  solely  to (x)
                           finance the  Acquisition  and the Refinancing and (y)
                           pay the fees and expenses incurred in connection with
                           the Transaction.

Availability:              Term Loans may only be incurred on the Closing  Date.
                           No  amount  of the  Term  Loans  once  repaid  may be
                           reborrowed.

----------

1     Unless otherwise defined herein, capitalized terms used herein and defined
      in the  Commitment  Letter  to which  this  Term  Sheet is  attached  (the
      "Commitment Letter") are used herein as therein defined.
<PAGE>

                                                                       Exhibit A
                                                                          Page 2

B.        Revolving Credit Facility
          -------------------------

Amount:                    $50,000,000 revolving credit facility (the "Revolving
                           Credit  Facility")  with a  $30,000,000  sublimit for
                           standby  and   commercial   letters  of  credit  (the
                           "Letters of Credit")  to support  obligations  of the
                           Borrower  (as  defined  below)  and its  subsidiaries
                           satisfactory to the Agent (as defined below).

Maturity:                  The date  occurring five years from the Closing Date,
                           with all loans made pursuant to the Revolving  Credit
                           Facility (the  "Revolving  Loans" and,  together with
                           the Term Loans, the "Loans") to be repaid as a bullet
                           on such date and all  Letters of Credit to  terminate
                           by such date.

Use of Proceeds:           The Revolving Loans shall be utilized for the working
                           capital  and  general   corporate   purposes  of  the
                           Borrower and its  subsidiaries,  it being  understood
                           (i) that approximately $10,500,000 of Revolving Loans
                           may be used for the same  purposes  as the Term Loans
                           and  (ii) no part of the  Revolving  Credit  Facility
                           shall be used to finance acquisitions.

Availability:              Revolving   Loans  may  be   borrowed,   repaid   and
                           reborrowed  on or after the Closing Date and prior to
                           the maturity of the Revolving  Credit  Facility.  The
                           Borrower's  utilization  under the  entire  Revolving
                           Credit  Facility for both Revolving Loans and Letters
                           of Credit will be subject to a  borrowing  base ( the
                           "Borrowing  Base")  equal  to the  sum of (I)  85% of
                           Eligible  Receivables  and  (II)  50  %  of  Eligible
                           Inventory  (in each  case,  to be defined in a manner
                           satisfactory to the Agent).



II.       Terms Applicable to all of the Credit Facilities
          ------------------------------------------------

Borrower:                  The Company (the "Borrower").

Administrative
Agent:                     BTCo (the "Agent").

Lead Arranger and
Book Manager:              DBSI.

Lenders:                   A syndicate  of lenders  agented by BTCo and arranged
                           by DBSI (the "Lenders").

Guaranties:                All amounts and obligations  under the Senior Secured
                           Financing  shall be  unconditionally  guaranteed (the
                           "Guaranty") by each of the direct
<PAGE>

                                                                       Exhibit A
                                                                          Page 3


                           and  indirect   subsidiaries  of  the  Borrower  (the
                           "Guarantors"),  subject to customary  exceptions  for
                           transactions of this type.

Security:                  All amounts owing by the Borrower and the  Guarantors
                           under the Senior Secured Financing will be secured by
                           (i) a  first  priority  perfected  pledge  of (x) all
                           notes owned by the  Borrower and the  Guarantors  and
                           (y) all  capital  stock  and other  equity  interests
                           owned by the Borrower and the  Guarantors  and (ii) a
                           first  priority  perfected  security  interest in all
                           other   assets   owned  by  the   Borrower   and  the
                           Guarantors,     including,     without    limitation,
                           receivables,  securities,  inventory, equipment, real
                           estate,   leasehold   interests,   cash,   contracts,
                           contract  rights,  licenses,   patents,   copyrights,
                           trademarks and other general intangibles,  subject to
                           customary exceptions for transactions of this type.

Interest Rates:            At the  Borrower's  option,  Loans may be  maintained
                           from time to time as (x) Base Rate Loans, which shall
                           bear interest at the Base Rate (as defined  below) in
                           effect from time to time plus the  Applicable  Margin
                           (as defined below) or (y) Reserve Adjusted Eurodollar
                           Loans,  which shall bear  interest at the  Eurodollar
                           Rate (as  determined  by the Agent,  and adjusted for
                           maximum reserves) for the respective  interest period
                           plus the Applicable Margin, provided that, (A) except
                           as  provided  in  succeeding  clause  (B), no Reserve
                           --------  Adjusted  Eurodollar  Loans may be incurred
                           prior to the  earlier  of (i) the 90th day  following
                           the  Closing  Date and (ii) that date upon which BTCo
                           determines  in its sole  discretion  that the primary
                           syndication of the Senior Secured  Financing has been
                           completed and (B) prior to the earlier date set forth
                           in clause  (A)  above,  the  Borrower  may  select an
                           interest  period  of one  week  so  long  as (i)  all
                           outstanding  Reserve  Adjusted  Eurodollar  Loans are
                           subject  to the  same  interest  period  and (ii) the
                           selection  of  such  an  interest   period  will  not
                           interfere  with the  Agent's  closing of the  primary
                           syndication  of  the  Senior  Secured   Financing  as
                           determined by the Agent in its sole discretion.

                           "Base  Rate"  shall  mean the  higher of (x) the rate
                           that  BTCo  announces  from time to time as its prime
                           lending  rate  and  (y)  1/2 of 1% in  excess  of the
                           overnight federal funds rate.

                           "Applicable  Margin"  shall  mean  (i) in the case of
                           Base Rate  Loans,  2.25% per  annum,  and (ii) in the
                           case of Reserve Adjusted  Eurodollar Loans, 3.25% per
                           annum,  subject to quarterly  pricing stepdowns to be
                           agreed based upon leverage ratios to be agreed upon.

                           Interest  periods  of 1, 2, 3 and 6  months  shall be
                           available in the case of Reserve Adjusted  Eurodollar
                           Loans,  provided that an interest  period of
<PAGE>

                                                                       Exhibit A
                                                                          Page 4


                           one week  shall  be  available  as and to the  extent
                           provided in the third proceeding paragraph.

                           The  Credit   Facilities   shall  include   customary
                           protective  provisions for such matters as defaulting
                           banks,  capital  adequacy,  increased costs,  funding
                           losses, illegality and withholding taxes.

                           Interest  in  respect  of Base  Rate  Loans  shall be
                           payable quarterly in arrears on the last business day
                           of each  quarter.  Interest  in  respect  of  Reserve
                           Adjusted Eurodollar Loans shall be payable in arrears
                           at the  end of the  applicable  interest  period  and
                           every three months in the case of interest periods in
                           excess of three months. Interest will also be payable
                           at the time of  repayment  of Loans and at  maturity.
                           All  interest,  commitment  commission  and other fee
                           calculations  shall be based  on a  360-day  year and
                           actual days elapsed.

                           Overdue  principal  and, to the extent  permitted  by
                           law,  overdue  interest and all other overdue amounts
                           shall bear  interest at a rate per annum equal to the
                           greater  of (i) the rate which is 2% in excess of the
                           rate otherwise applicable to the Base Rate Loans from
                           time to time and (ii) the rate  which is 2% in excess
                           of the  rate  then  borne  by such  borrowings.  Such
                           interest shall be payable on demand.

Commitment Fees:           1/2 of 1% per  annum  of the  unutilized  commitments
                           under the Senior Secured Financing, as in effect from
                           time to time,  commencing  on the Closing Date to and
                           including  the  termination  of  the  Senior  Secured
                           Financing,  payable quarterly in arrears and upon the
                           termination of the Senior Secured Financing.

Letter of
Credit Fees:               The Applicable  Margin as in effect from time to time
                           for Revolving  Loans  maintained as Reserve  Adjusted
                           Eurodollar Loans to be shared  proportionately by the
                           Lenders in accordance with their participation in the
                           respective Letter of Credit,  and a facing fee of 1/8
                           of 1% per annum (but not less than $500 per --- -----
                           annum per  Letter of Credit) to be paid to the issuer
                           of the Letter of Credit for its own account,  in each
                           case calculated on the aggregate stated amount of all
                           Letters of Credit for the stated duration thereof. In
                           addition,  the  issuer of a Letter of Credit  will be
                           paid  its   customary   administrative   charges   in
                           connection with each Letter of Credit issued by it.

Voluntary Prepayments
and Commitment
Reductions:                Permitted  in whole or in part with prior  notice but
                           without  premium or penalty,  provided  that  Reserve
                           Adjusted Eurodollar Loans that are
<PAGE>

                                                                       Exhibit A
                                                                          Page 5

                           prepaid  on any day  other  than  the  last day of an
                           interest   period   applicable   thereto   shall   be
                           accompanied by customary  breakage  costs.  Voluntary
                           prepayments  of Term Loans shall be applied to reduce
                           the then  remaining  scheduled  amortizations  of the
                           Term Loans on a pro rata basis.

Mandatory Prepayments
and Commitment
Reductions:                Mandatory  repayments  of Term  Loans  (and after all
                           Term Loans have been repaid,  mandatory reductions to
                           the commitments  under the Revolving  Credit Facility
                           except with  respect to clause  (iv) below)  shall be
                           required  in an  amount  equal to (i) 100% of the net
                           cash  proceeds  from any  issuance or  incurrence  of
                           funded   debt   by  the   Borrower   or  any  of  its
                           subsidiaries,  subject to customary  exceptions to be
                           agreed upon,  (ii) 100% of the net cash proceeds from
                           equity issuances and capital  contributions,  subject
                           to customary exceptions to be agreed upon, (iii) 100%
                           of the net  sale  proceeds  from  asset  sales by the
                           Borrower  or  any  of its  subsidiaries,  subject  to
                           customary  exceptions to be agreed upon,  (iv) 75% of
                           annual  excess  cash  flow  (to  be  defined  to  the
                           satisfaction  of BTCo) and (v) 100% of insurance  and
                           condemnation  proceeds,   with  certain  reinvestment
                           rights to be agreed upon. Mandatory repayments of the
                           Term  Loans  shall  be  applied  to  reduce  the then
                           remaining  scheduled  amortizations of the Term Loans
                           on pro rata basis.

                           In addition, (x) Revolving Loans shall be required to
                           be   prepaid    (and    Letters   of   Credit    cash
                           collateralized)   if  at  any  time   the   aggregate
                           principal  amount  thereof  exceeds  either the total
                           Revolving   Credit   Facility   commitments   or  the
                           Borrowing  Base,  in each case  with such  prepayment
                           (and/or  cash  collateralization)  to be in an amount
                           equal to such  excess  and (y)  unless  the  Required
                           Lenders  otherwise agree, all Loans shall be required
                           to be repaid in full and all  commitments  in respect
                           of the Credit  Facilities  shall  terminate  upon the
                           occurrence  of a "change of control" of the  Borrower
                           (to be defined to the satisfaction of BTCo).

Assignments and
Participations:            The Borrower may not assign its rights or obligations
                           under the Credit Facilities without the prior written
                           consent of the  Lenders.  Any Lender may assign,  and
                           may  sell   participations   in,   its   rights   and
                           obligations under the Credit Facilities,  subject (x)
                           in  the   case  of   participations,   to   customary
                           restrictions on the voting rights of the participants
                           and  (y)  in  the  case  of   assignments,   to  such
                           limitations as may be established by BTCo,  including
                           the  consent of the Agent and,  so long as no default
                           or  event  of   default   exists   under  the  Credit
                           Facilities, the consent of the
<PAGE>

                                                                       Exhibit A
                                                                          Page 6

                           Borrower   (each  of  which  consents  shall  not  be
                           unreasonably   withheld  or   delayed).   The  Credit
                           Facilities  shall provide for a mechanism  which will
                           allow each  assignee to become a direct  signatory to
                           the Credit  Facilities and will relieve the assigning
                           Lender  of  its  obligations   with  respect  to  the
                           assigned portion of its commitment.

Documentation:             The  Lenders'  commitments  will  be  subject  to the
                           negotiation,  execution  and  delivery of  definitive
                           financing    agreements    (and   related    security
                           documentation,  guaranties, etc.) consistent with the
                           terms of this letter,  in each case prepared by White
                           & Case LLP, counsel to the Agent, and satisfactory to
                           the Agent and the Required Lenders (including without
                           limitation    as   to    the    terms,    conditions,
                           representations,  covenants  and  events  of  default
                           contained   therein).   All  documentation  shall  be
                           governed   by   New   York   law   (except   security
                           documentation  that the  Agent  determines  should be
                           governed by local law).

Commitment
Termination:               The  commitment of BTCo under the  Commitment  Letter
                           shall  terminate  on December 15, 1999 (or earlier in
                           the event that HIG has  terminated the agreement with
                           respect  to  the  Acquisition)  unless  a  definitive
                           credit agreement for the Senior Secured Financing has
                           been executed and delivered, the Transaction has been
                           consummated  and the Closing  Date has occurred on or
                           prior to such date.

Conditions
Precedent:                 In addition to conditions precedent typical for these
                           types  of   facilities   and  any  other   conditions
                           appropriate   in  the   context   of   the   proposed
                           transaction,   the  following   conditions,   without
                           limitation, shall apply:


A.  Conditions to the Initial Loans
-----------------------------------

                           (i)     The  structure  and  all  terms  of,  and the
                                   documentation  for, the Transaction  shall be
                                   reasonably satisfactory in form and substance
                                   to the Agent and the  Required  Lenders,  and
                                   such documentation shall be in full force and
                                   effect.  All  conditions   precedent  to  the
                                   consummation  of the Transaction as set forth
                                   in the  documentation  relating thereto shall
                                   have been satisfied (including the receipt of
                                   waivers of the  change of control  provisions
                                   in  the  Borrower's  and  its   subsidiaries'
                                   licensing agreements),  and not waived except
                                   with  the   consent  of  the  Agent  and  the
                                   Required Lenders,  to the satisfaction of the
                                   Agent   and   the   Required   Lenders.   The
                                   Transaction  shall have been  consummated  in
                                   accordance with the respective  documentation
                                   therefor and all applicable laws.
<PAGE>

                                                                       Exhibit A
                                                                          Page 7

                           (ii)    The Borrower  shall have received  gross cash
                                   proceeds   from  the  Equity   Financing   of
                                   $26,575,000 (of which up to $6,275,000 may be
                                   in the  form  of the  Equity  Rollover).  All
                                   terms and conditions (and the  documentation)
                                   of, or  relating  to,  the  Equity  Financing
                                   shall be reasonably satisfactory to the Agent
                                   and the Required Lenders.

                           (iii)   The Borrower  shall have received  gross cash
                                   proceeds of $10,000,000  from the issuance of
                                   a like principal  amount of the  Subordinated
                                   Notes.  The   Subordinated   Notes  shall  be
                                   unsecured.  All terms and conditions (and the
                                   documentation)   of,  or  relating   to,  the
                                   Subordinated   Notes   (including,    without
                                   limitation,     amortization,     maturities,
                                   interest    rates,    covenants,    defaults,
                                   remedies,  mandatory  prepayments,  offer  to
                                   purchase,     sinking    fund     provisions,
                                   limitations   on   cash   interest   payable,
                                   subordination  provisions  and  other  terms)
                                   shall be reasonably satisfactory to the Agent
                                   and the Required Lenders.

                           (iv)    The   Borrower   shall  have  used  all  cash
                                   proceeds  received by it from the  financings
                                   described  in clauses (ii) and (iii) above to
                                   make payments  owing in  connection  with the
                                   Transaction  before utilizing any proceeds of
                                   Loans   pursuant   to  the   Senior   Secured
                                   Financing for such purpose.

                           (v)     The   corporate,    capital   and   ownership
                                   structure    of   the    Borrower   and   its
                                   subsidiaries  shall  be  satisfactory  to the
                                   Agent and the Required Lenders.

                           (vi)    All  necessary   governmental  (domestic  and
                                   foreign)  and third  party  approvals  and/or
                                   consents in connection  with the  Transaction
                                   and the other  transactions  contemplated  by
                                   the Senior  Secured  Financing  and otherwise
                                   referred to herein  shall have been  obtained
                                   and  remain  in  effect,  and all  applicable
                                   waiting  periods  shall have expired  without
                                   any  action  being  taken  by  any  competent
                                   authority   which   restrains,   prevents  or
                                   imposes  materially  adverse conditions upon,
                                   the  consummation  of the  Transaction or the
                                   other transactions contemplated by the Senior
                                   Secured  Financing or  otherwise  referred to
                                   herein.  Additionally,  there shall not exist
                                   any  judgment,  order,  injunction  or  other
                                   restraint  prohibiting or imposing materially
                                   adverse  conditions  upon the  Transaction or
                                   the  transactions  contemplated by the Senior
                                   Secured Financing.

                           (vii)   The  Lenders  shall  have a  perfected  first
                                   priority  security  interest in all assets of
                                   the Borrower and the  Guarantors  as required
<PAGE>

                                                                       Exhibit A
                                                                          Page 8

                                   above.  The Guaranty shall have been executed
                                   by the Guarantors as required above.

                           (viii)  Nothing  shall have occurred (and neither the
                                   Agent  nor  any of  the  Lenders  shall  have
                                   become aware of any facts or  conditions  not
                                   previously  known,  whether  as a  result  of
                                   their   due   diligence   investigations   or
                                   otherwise)  which the  Agent or the  Required
                                   Lenders  shall  determine  has had,  or could
                                   reasonably  be expected  to have,  a material
                                   adverse  effect on the rights or  remedies of
                                   the  Lenders or the Agent,  or on the ability
                                   of the Borrower or any of its subsidiaries to
                                   perform  its  respective  obligations  to the
                                   Lenders or which has had, or could reasonably
                                   be  expected  to  have,  a  material  adverse
                                   effect on the Transaction or on the business,
                                   operations,  property,  assets,  liabilities,
                                   condition   (financial   or   otherwise)   or
                                   prospects  of  the  Borrower  or  any  of its
                                   subsidiaries.

                           (ix)    No  litigation  by  any  entity  (private  or
                                   governmental)  shall be pending or threatened
                                   with respect to the Transaction or the Senior
                                   Secured   Financing   or  any   documentation
                                   executed in  connection  therewith  which the
                                   Agent or the  Required  Lenders in their sole
                                   discretion determine to be material, or which
                                   the  Agent  or  the  Required  Lenders  shall
                                   determine  could  reasonably  be  expected to
                                   have  a  material   adverse   effect  on  the
                                   Transaction  or on the business,  operations,
                                   property,  assets,   liabilities,   condition
                                   (financial  or otherwise) or prospects of the
                                   Borrower or any of its subsidiaries.

                           (x)     The  Lenders   shall  have   received   legal
                                   opinions from counsel,  and covering matters,
                                   reasonably  acceptable  to the  Agent and the
                                   Required Lenders.

                           (xi)    All Loans and other financing to the Borrower
                                   shall   be  in  full   compliance   with  all
                                   applicable   requirements   of   the   margin
                                   regulations.

                           (xii)   The  Lenders  shall have  received a solvency
                                   certificate from the chief financial  officer
                                   of  the  Borrower,   in  form  and  substance
                                   reasonably  acceptable  to the  Agent and the
                                   Required    Lenders,    setting   forth   the
                                   conclusions  that, after giving effect to the
                                   Transaction  and  the  incurrence  of all the
                                   financings  contemplated  herein, each of the
                                   Borrower  on a  stand-alone  basis,  and  the
                                   Borrower  and  its  subsidiaries  taken  as a
                                   whole,  are not  insolvent  and  will  not be
                                   rendered   insolvent   by  the   indebtedness
                                   incurred in  connection  therewith,  and will
                                   not be
<PAGE>

                                                                       Exhibit A
                                                                          Page 9

                                   left with  unreasonably  small  capital  with
                                   which to engage in their  businesses and will
                                   not have incurred  debts beyond their ability
                                   to pay such debts as they mature.

                           (xiii)  There  shall  have been no  material  adverse
                                   change to the  syndication  market for credit
                                   facilities  similar  in nature to the  Senior
                                   Secured  Financing  contemplated  herein  and
                                   there   shall  not  have   occurred   and  be
                                   continuing  a  disruption  of or  an  adverse
                                   change in financial, banking, capital or loan
                                   syndication   markets   that   would  have  a
                                   material adverse effect on the syndication of
                                   the Senior Secured Financing, in each case as
                                   determined   by  the   Agent   in  its   sole
                                   discretion.  HIG and the Borrower  shall have
                                   fully  cooperated in the Agent's  syndication
                                   efforts,   including  without  limitation  by
                                   promptly   providing   the  Agent   with  all
                                   information  deemed necessary by the Agent to
                                   successfully complete the syndication.

                           (xiv)   The Agent and the Required  Lenders  shall be
                                   satisfied with the management of the Borrower
                                   and   its   subsidiaries   and   with   their
                                   employment     and     other     compensation
                                   arrangements.

                           (xv)    The Agent shall have  received,  and shall be
                                   satisfied  with, an opening pro forma balance
                                   sheet of, and  projections  for, the Borrower
                                   and  its  subsidiaries,  in each  case  after
                                   giving effect to the Transaction.

                           (xvi)   All costs, fees, expenses (including, without
                                   limitation,  legal  fees  and  expenses)  and
                                   other   compensation    contemplated   hereby
                                   payable  to the  Lenders  or the Agent  shall
                                   have been paid to the extent due.

                           (xvii)  After giving  effect to the  Transaction  and
                                   the   financings   incurred   in   connection
                                   therewith,  the Borrower and its subsidiaries
                                   shall  have no  outstanding  indebtedness  or
                                   preferred  stock  other  than (x) the  Senior
                                   Secured Financing, (y) the Subordinated Notes
                                   and (z) such other  indebtedness,  if any, as
                                   is reasonably acceptable to the Agent and the
                                   Required Lenders.

                           (xviii) Neither the  consummation of the Transaction,
                                   nor  the   entering   into   of  the   Credit
                                   Facilities  shall conflict with, or give rise
                                   to a default under,  any material  agreements
                                   of the  Borrower or any of its  subsidiaries.
                                   In   addition,   the   Borrower's   and   its
                                   subsidiaries' factoring arrangements with CIT
                                   shall   have   been   amended   on  a   basis
                                   satisfactory  to the Agent to provide,  inter
                                   alia,  (i) that CIT shall only have a lien on
                                   the receivables
<PAGE>

                                                                       Exhibit A
                                                                         Page 10

                                   purchased by it and (ii) that the Lenders are
                                   entitled   to  a  first   priority   security
                                   interest in all other  assets of the Borrower
                                   and its subsidiaries as provided herein.

B.  Conditions To all Loans
---------------------------

                           Absence  of  default  or event of  default  under the
                           Credit   Facilities   and   continued   accuracy   of
                           representations   and   warranties  in  all  material
                           respects.

Covenants:                 Those typical for these types of  facilities  and any
                           additional  covenants  appropriate  in the context of
                           the proposed transaction. Although the covenants have
                           not yet been specifically  determined,  we anticipate
                           that the covenants shall in any event include:

                           (i)     Restrictions on other indebtedness.

                           (ii)    Restrictions against mergers,  consolidations
                                   and     acquisitions,     joint     ventures,
                                   partnerships     and     acquisitions     and
                                   dispositions of assets.

                           (iii)   Restrictions on sale-leaseback transactions.

                           (iv)    Restrictions    on   dividends    and   stock
                                   purchases.

                           (v)     Restrictions  on  voluntary   prepayments  of
                                   other debt and amendments thereto.

                           (vi)    Restrictions on transactions  with affiliates
                                   and formation of subsidiaries.

                           (vii)   Restrictions on investments.

                           (viii)  Absence of liens,  with customary  exceptions
                                   to be negotiated.

                           (ix)    Various financial  covenants  customary for a
                                   transaction of this type (including,  without
                                   limitation,  maximum total leverage,  minimum
                                   interest   coverage,   minimum  fixed  charge
                                   coverage (including cash earn-out payments as
                                   a fixed  charge),  minimum EBITDA and minimum
                                   asset value ratio).

                           (x)     Restrictions on capital expenditures.

                           (xi)    Adequate insurance coverage.

                           (xii)   ERISA covenants.
<PAGE>

                                                                       Exhibit A
                                                                         Page 11

                           (xiii)  The obtaining of interest rate  protection in
                                   amounts and for periods to be determined.

                           (xiv)   Restrictions   on  material   amendments   of
                                   organizational documents.

                           (xv)    Maintenance of properties.

                           (xvi)   Restrictions on changes in business.

Representations
and Warranties:            The Credit Facilities and related documentation shall
                           contain  representations  and warranties  typical for
                           these types of facilities,  as well as any additional
                           ones  appropriate  in the  context  of  the  proposed
                           transaction.

Events of  Default:        Those typical for these types of  facilities  and any
                           additional  ones  appropriate  in the  context of the
                           proposed transaction,  including, without limitation,
                           a  default  in the event of a change  of  control  or
                           ownership of the Borrower.

Required Lenders:          Majority
<PAGE>

EXHIBIT A                                                    [Commitment Letter]


                            BANKERS TRUST CORPORATION
                               130 LIBERTY STREET
                               NEW YORK, NY 10006


                                                              September 16, 1999
H.I.G. Capital LLC
1001 Brickell Bay Drive
Suite 2708
Miami, Florida  33131

Attention:  Sami Mnaymneh


          Re: Happy Kids Recapitalization Financing
              -------------------------------------

Gentlemen:

          We understand that you intend to consummate a recapitalization (the
"Recapitalization") of Happy Kids, Inc. (the "Company"), to be accomplished by
merger of a newly formed company ("Acquisition Corp.") owned by you and/or your
affiliates and other investors reasonably satisfactory to the Lender (the
"Equity Investors") with and into the Company, with the Company as the surviving
entity. We further understand that the cash requirements for the
Recapitalization, the refinancing of approximately $14.2 million of existing
debt of the Company and its subsidiaries (the "Refinancing") and related fees
and expenses will be approximately $100.8 million and will be provided solely
from (i) term loan facilities (the "Term Loan Facilities") of up to $60 million,
(ii) a revolving credit facility (the "Revolving Credit Facility" and, together
with the Term Loan Facilities, the "Bank Financing") of up to $50 million of
which it is estimated approximately $10.5 million will be drawn as of the
closing date of the Recapitalization (the "Closing Date"), (iii) a common equity
contribution to the Company of at least $26.575 million, $20.3 million of which
will be contributed in cash by the Equity Investors and up to $6.275 million of
which may be in the form of rollover equity of existing shareholders of the
Company (the "Equity Financing") and (iv) up to $10 million from the issuance of
senior subordinated debt of the Company. The Recapitalization, the Bank
Financing, the Equity Financing, the Refinancing and the issuance of senior
subordinated debt are herein collectively referred to as the "Transaction".
<PAGE>

                                      -2-

          You have requested that Bankers Trust Corporation (the "Lender")
commit to provide to the Company funds in the amount of up to $10 million in the
form of a senior subordinated loan (or note issuance) to be made available as
described in Section 1 hereof (the "Senior Subordinated Financing").

          Accordingly, subject to the terms and conditions set forth or
incorporated in this letter, the Lender agrees with you as follows:

          Section 1. Senior Subordinated Financing. The Lender hereby commits,
subject to the terms and conditions hereof and in the Summary Term Sheet
attached hereto as Exhibit A (the "Term Sheet"), to provide to the Company a
senior subordinated loan (which at the option of the Lender may take the form of
senior subordinated notes) in the aggregate principal amount of up to $10
million. The proceeds of the Senior Subordinated Financing shall be used,
together with the proceeds of the Bank Financing and the Equity Financing,
solely to finance the Recapitalization, to consummate the Refinancing and to pay
fees and expenses incurred in connection with the Recapitalization. The
principal terms of the Senior Subordinated Financing are summarized in the Term
Sheet.

          Unless the Lender's commitment hereunder shall have been terminated
pursuant to Section 6, the Lender or its affiliates shall have the exclusive
right to provide the Senior Subordinated Financing or other mezzanine financing
required in connection with the Transaction.

          You hereby represent and covenant that based on your review and
analysis, to the best of your knowledge (a) all information other than
Projections (as defined below), which has been or is hereafter made available to
the Lender by you or your representatives, advisors or affiliates in connection
with the transactions contemplated hereby (the "Information") has been reviewed
and analyzed by you in connection with the performance of your own due diligence
and is, or in the case of Information made available after the date hereof will
be, complete and correct in all material respects and does not and will not
contain any untrue statement of a material fact or omit to state a material fact
known to you and necessary to make the statements contained therein, in the
light of the circumstances under which such statements were or are made, not
misleading and (b) all financial projections concerning the Company that have
been or are hereafter made available to the Lender by you or your
representatives, advisors or affiliates in connection with the transactions
contemplated hereby (the
<PAGE>

                                      -3-

"Projections") have been or, in the case of Projections made available after the
date hereof, will be prepared in good faith based upon reasonable assumptions
(it being understood that the Projections are subject to significant
uncertainties and contingencies, many of which are beyond your control and that
no assurance can be given that such Projections will be realized). You agree to
supplement the Information and the Projections from time to time until the
termination of the Lender's commitment hereunder so that the representation and
warranty made in the preceding sentence is correct as of such date. In arranging
and syndicating the Senior Subordinated Financing, the Lender will be using and
relying on the Information and the Projections without independent verification
thereof. The representations and covenants contained in this paragraph shall
remain effective until a definitive financing agreement is executed and
thereafter the disclosure representations contained herein shall be terminated
and of no further force and effect.

          Section 2. Financing Documentation. The making of the Senior
Subordinated Financing will be governed by definitive loan (or an indenture or
note agreement in the case of a note financing) and related agreements and
documentation (collectively, the "Financing Documentation") in form and
substance reasonably satisfactory to the Lender. The Financing Documentation
shall be prepared by Cahill Gordon & Reindel, special counsel to the Lender. The
Financing Documentation shall contain such covenants, terms and conditions as
are consistent with this letter and the Term Sheet and such other covenants,
terms, conditions, representations, warranties, events of default and remedies
provisions as shall be satisfactory to the Lender and you and which are typical
for mezzanine financings.

          Section 3. Conditions. The obligation of the Lender under Section 1 of
this letter to provide the Senior Subordinated Financing is subject to
fulfillment of the following conditions:

          (a) Acquisition Agreement. The Company and Acquisition Corp. shall
     have entered into a merger agreement or other acquisition agreement (the
     "Acquisition Agreement") on terms and in form and substance reasonably
     satisfactory to the Lender. The Acquisition Agreement shall not have been
     amended in any material respect without the Lender's consent, which consent
     shall not be unreasonably withheld. All conditions precedent to the
     Recapitalization contained in the Acquisition Agreement shall have been
     performed or complied with substantially on the terms set forth therein and
     not waived without the Lender's consent, which consent
<PAGE>

                                      -4-

     shall not be unreasonably  withheld,  and the  Recapitalization  shall have
     been consummated  simultaneously with the making of the Senior Subordinated
     Financing.

          (b)  Financing Documentation. The Company and the Lender shall have
     entered into the Financing Documentation relating to the Senior
     Subordinated Financing and the transactions contemplated thereby, on terms
     and in form and substance reasonably satisfactory to the Lender.

          (c)  Bank Financing. The Company shall have entered into definitive
     documentation on terms and in form and substance reasonably satisfactory to
     the Lender with respect to the Bank Financing (collectively with all
     documents and instruments related thereto or delivered in connection
     therewith, the "Bank Documents") with a commercial lender or lenders or a
     syndicate of commercial lenders in form and substance reasonably
     satisfactory to the Lender. The Bank Documents shall be in full force and
     effect and the parties thereto shall be in compliance with all material
     agreements thereunder.

          (d)  Equity Financing. On or prior to the Closing Date, the Company
     shall have received cash proceeds of not less than $26.575 million from the
     Equity Financing (up to $6.275 million of which may be in the form of
     rollover equity). The terms of the Equity Financing shall be reasonably
     satisfactory to the Lender.

          (e)  No Adverse Change or Development, Etc. (i) Nothing shall have
     occurred since December 31, 1998 (and the Lender shall have become aware of
     no facts or conditions not previously known to the Lender) which the Lender
     shall, in its reasonable discretion, determine could have a material
     adverse effect on the rights or remedies of the Lender, or on the ability
     of the Company to perform its obligations to the Lender or which could have
     a materially adverse effect on the business, property, assets, liabilities,
     condition (financial or otherwise), results of operations or prospects of
     the Company (a "Material Adverse Effect"); (ii) trading in securities
     generally on the New York or American Stock Exchange shall not have been
     suspended and minimum or maximum prices shall not have been established on
     any such exchange; (iii) a banking moratorium shall not have been declared
     by New York or United States authorities; and (iv) there shall not have
     been (A) an outbreak or escalation of hostilities between the United States
     and any foreign power,
<PAGE>

                                      -5-

     or (B) an outbreak or escalation of any other insurrection or armed
     conflict involving the United States or any other national or international
     calamity or emergency, or (C) any material change in the general financial
     markets of the United States which, in each case, in the reasonable
     judgment of the Lender would have a material adverse effect on the ability
     to syndicate loans or sell or place securities, as the case may be, such as
     the Senior Subordinated Financing.

          (f)  Capital Structure. The pro forma consolidated capital structure
     of the Company, after giving effect to the Recapitalization, shall be
     consistent with the capital structure contemplated herein, and other than
     the Senior Subordinated Financing, the Bank Financing and other
     indebtedness reasonably satisfactory to the Lender, the Company, after
     giving effect to, and upon consummation of, the Recapitalization, shall
     have no outstanding indebtedness for money borrowed.

          (g)  Opinions. As of the Closing Date, the Lender shall have received
     legal and other opinions (including all reports and certificates as to
     solvency received by the lenders under the Bank Financing) from persons,
     and covering matters, reasonably acceptable to the Lender.

          (h)  Litigation. There shall exist no action, suit, investigation,
     litigation or proceeding pending or threatened in any court or before any
     arbitrator or governmental or regulatory agency or authority that could
     reasonably be expected to have a Material Adverse Effect.

          Section 4. Indemnification and Contribution. You, together with
certain of your affiliates, agree to indemnify the Lender and its affiliates and
each person in control of the Lender and its affiliates and the respective
officers, directors, employees, agents and representatives of the Lender and its
affiliates and control persons, as provided in the Indemnity Letter dated the
date hereof (the "Indemnity Letter") and attached hereto.

          Section 5. Expenses. In addition to any fees that may be payable to
the Lender hereunder and regardless of whether any of the transactions
contemplated by this letter are consummated, if this letter agreement is
terminated, the Senior Subordinated Financing is made available or the Financing
Documentation is executed and delivered, you hereby agree to reimburse the
Lender upon demand for all reasonable fees and dis-
<PAGE>

                                      -6-

bursements of legal counsel, including but not limited to the reasonable fees
and disbursements of Cahill Gordon & Reindel, the Lender's special counsel, and
all of the Lender's travel and other reasonable and documented out-of-pocket
expenses incurred in connection with the Transaction or otherwise arising out of
the Lender's commitment hereunder; provided that if Lender fails to fulfill its
obligations hereunder, no such fees or expenses shall be payable to the Lender.

          Section 6. Termination. The Lender's commitment hereunder to provide
the Senior Subordinated Loan shall terminate, unless expressly agreed to by the
Lender in its sole discretion to be extended to another date, on the earlier of
(A) December 15, 1999 if the Senior Subordinated Financing has not been funded
(other than as a result of failure of the Lender to fulfill its obligations
hereunder), and (B) the termination of the Acquisition Agreement in accordance
with its terms. No such termination of such commitment shall affect your
obligations under Sections 4 and 5 hereof or this Section 6, which shall survive
any such termination.

          Section 7. Assignment. This letter shall not be assignable by any
party hereto without the prior written consent of the other parties (other than,
in the case of the Lender, to an affiliate of the Lender, it being understood
that any such affiliate shall be subject to the restrictions set forth in this
Section 7); provided, however, that the Lender shall have the right, in its sole
discretion, to syndicate the Senior Subordinated Financing among banks or other
financial institutions pursuant to the Financing Documentation or otherwise and
to sell, transfer or assign all or any portion of, or interests or
participations in, the Senior Subordinated Financing and any notes issued in
connection therewith. You agree to use your reasonable best efforts, whether
prior to or after the funding date of the Senior Subordinated Financing, to
assist the Lender in syndicating the Senior Subordinated Financing or its
commitment with respect thereto, including, without limitation, in connection
with (x) the preparation of an information package regarding the Transaction,
including the Information and the Projections described in Section 1 hereof, and
(y) meetings and other communications with prospective Lenders, including making
senior management of the Company and other representatives of the Company
available (at mutually agreeable times) to participate in such meetings.

            Section 8. Miscellaneous. THIS LETTER SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO THE PRINCIPLES GOVERNING
<PAGE>

                                      -7-

CONFLICTS OF LAWS, AND ANY RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY CLAIM,
ACTION, SUIT OR PROCEEDING ARISING OUT OF OR CONTEMPLATED BY THIS COMMITMENT
LETTER IS HEREBY WAIVED. YOU HEREBY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF
THE FEDERAL AND NEW YORK STATE COURTS LOCATED IN THE CITY OF NEW YORK IN
CONNECTION WITH ANY DISPUTE RELATED TO THIS COMMITMENT LETTER OR ANY MATTERS
CONTEMPLATED HEREBY. This letter (including the provisions of the Indemnity
Letter and the Fee Letter dated the date hereof specifically incorporated
herein) embodies the entire agreement and understanding between you and the
Lender and supersedes all prior agreements and understandings relating to the
subject matter hereof. This letter may be executed in any number of
counterparts, each of which shall be an original, but all of which shall
constitute one instrument.

          The Lender reserves the right to employ the services of its affiliates
in providing services contemplated by this letter and to allocate, in whole or
in part, to its affiliates certain fees payable to the Lender in such manner as
the Lender and its affiliates may agree in their discretion. You acknowledge
that the Lender may share with any of its affiliates, and such affiliates may
share with the Lender (in each case, subject to any confidentiality agreements
applicable thereto), any information related to you or your affiliates and the
Company (including information relating to creditworthiness) or the Transaction.
<PAGE>

                                      -8-

          If you are in agreement with the foregoing, please sign and return to
the Lender to Bankers Trust Corporation at 130 Liberty Street, New York, New
York 10006 the enclosed copy of this letter no later than 5:00 p.m., New York
time, on September 17, 1999, whereupon the undertakings of the parties shall
become effective to the extent and in the manner provided hereby. This offer
shall terminate if not so accepted by you on or prior to that time.


                                        Very truly yours,

                                        BANKERS TRUST CORPORATION



                                        By: /s/ W.W. Archer
                                            ------------------------------------
                                            Name:  W.W. Archer
                                            Title: Managing Director


Accepted and Agreed to as of
the date first above written:

H.I.G. CAPITAL LLC



By: /s/ Sami Mnaymneh
    ------------------------------------
    Name:  Sami Mnaymneh
    Title: President
<PAGE>

                                                                EXHIBIT A

                              Summary Term Sheet1


Borrower:                        Happy Kids, Inc. (the "Borrower").

Guarantors:                      All obligations of the Borrower under the
                                 Senior Subordinated Financing shall be
                                 unconditionally guaranteed on a senior
                                 subordinated basis by each of the Borrower's
                                 subsidiaries that guarantees the Bank Financing
                                 (the "Guarantors").

Lender:                          Bankers Trust Corporation.

Amount:                          $10 million senior subordinated loan or
                                 note issuance (the "Senior Subordinated
                                 Financing").

Maturity:                        The commitment shall automatically expire
                                 on December 15, 1999 if no portion of the
                                 Senior Subordinated Financing has been
                                 funded (other than as a result of failure
                                 of the Lender to fulfill its obligations
                                 hereunder).  Any outstanding amount under
                                 the Senior Subordinated Financing will be
                                 required to be repaid in full on the
                                 earlier of (a) a change of control of the
                                 Borrower (to be defined) or (b) nine years
                                 from the Closing Date.

Commitment and                   As provided in the Fee Letter from
  Funding Fees:                  the Lenders to you dated the date hereof
                                 (the "Fee Letter").

Investor Fee:                    As provided in the Fee Letter.

----------------------------
1    Capitalized terms used herein and not defined herein shall have the
     meanings provided in the commitment letter to which this summary term sheet
     is attached.
<PAGE>

                                      -2-

Use of Proceeds:                 To fund in part the Transaction and to pay
                                 related fees and expenses.

Interest Rate:                   As provided in the Fee Letter.

Ranking:                         The obligations of the Borrower and the
                                 Guarantors under the Senior Subordinated
                                 Financing will be senior subordinated
                                 obligations of the Borrower and the
                                 Guarantors and will rank (i) junior in
                                 right of payment to all senior
                                 indebtedness of the Borrower or such
                                 Guarantor, as the case may be, (ii) pari
                                 passu with all other senior subordinated
                                 indebtedness of the Borrower or such
                                 Guarantor, as the case may be, and (iii)
                                 senior to any subordinated indebtedness of
                                 the Borrower or such Guarantor, as the
                                 case may be.

Optional Redemption:             As provided in the Fee Letter.

Mandatory Redemption:            None.

Participation/Assign-            The Lender may participate out or
  ment or Syndication:           sell or assign, or syndicate to other
                                 lenders or financial institutions, the Senior
                                 Subordinated Financing, in whole or in part, at
                                 any time, subject to compliance with applicable
                                 securities laws.

Covenants:                       The Financing Documentation will contain
                                 customary affirmative and negative
                                 covenants for mezzanine financings (with
                                 customary carve-outs and exceptions),
                                 including without limitation, restrictions
                                 on the ability of the Borrower and its
                                 Subsidiaries to incur additional
                                 indebtedness and to incur indebtedness
                                 which is subordinated to senior
                                 indebtedness and senior to the Senior
                                 Subordinated Financing, pay dividends and
                                 make certain other restricted payments and
                                 investments,
<PAGE>

                                      -3-

                                 impose restrictions on the ability of the
                                 Borrower's subsidiaries to pay dividends or
                                 make certain other payments to the Borrower,
                                 create liens, enter into transactions with
                                 affiliates, consummate certain asset sales, and
                                 merge, consolidate or transfer all or
                                 substantially all of their assets, and also
                                 including a minimum interest coverage ratio
                                 maintenance test.

Representations and              Customary for transactions of this
  Warranties:                    type.

Conditions Precedent:            Customary for transactions of this type as
                                 set forth in Section 3 of the commitment
                                 letter.

Events of Default:               Customary for transactions of this type,
                                 including, without limitation, payment
                                 defaults, covenant defaults, bankruptcy
                                 and insolvency, judgments,
                                 cross-acceleration of and failure to pay
                                 at final maturity other indebtedness
                                 aggregating $5 million or more and
                                 foreclosure under the Bank Financing,
                                 subject to, in certain cases, notice and
                                 grace provisions.

Equity Participation:            As provided in the Fee Letter.

Visitation Rights:               The Lender will be entitled to board
                                 visitation rights as are mutually agreed
                                 upon.


Governing Law and Forum:         The State of New York.

Indemnification and              Customary for transactions of this
  Expense Reimbursement:         type.
<PAGE>

                   AMENDMENT TO AGREEMENT AND PLAN OF MERGER


     AMENDMENT TO AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
October 4, 1999, by and between HK Merger Corp., a New York corporation ("HK")
and Happy Kids, Inc., a New York corporation (the "Company").


     WHEREAS, HK and the Company are parties to that certain Agreement and Plan
of Merger (the "Merger Agreement"), dated as of September 17, 1999;


     WHEREAS, HK and the Company desire to amend the Merger Agreement;


     NOW, THEREFORE, Section 2.2 of the Merger Agreement is hereby deleted in
its entirety and restated as follows:


          Options; Stock Plan.  Immediately prior to the Effective Time, each
     holder of a then-outstanding employee stock option to purchase Common
     Shares (an "Option") granted under the Company's 1997 Stock Plan (the
     "Stock Plan") will be entitled to receive in settlement of such Option a
     cash payment (the "Option Consideration") from the Company equal to the
     product of (i) the total number of Common Shares previously subject to such
     Option, but only to the extent such Option is exercisable as of the Closing
     Date (except for non-employee holders of an Option, in which case this
     shall be the total number of Common Shares previously subject to such
     Option whether or not such Option is fully exercisable as of the Closing
     Date) and (ii) the excess of the Merger Consideration over the exercise
     price per Common Share subject to such Option, subject to any required
     withholding of taxes.  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 of may have had in respect of such Option.  After
     the Effective Time, the Surviving Corporation will continue the Stock Plan.
     The amounts payable pursuant to this Section 2.2 shall be paid as soon as
     practicable following the Closing Date and shall be subject to and made net
     of all applicable withholding taxes.


                                     *****
<PAGE>

     IN WITNESS WHEREOF, each of the parties has caused this Amendment to
Agreement and Plan of Merger to be executed on its behalf by its respective
officer thereunto duly authorized, all as of the day and year first written
above.


                                    HAPPY KIDS, INC.


                                    By:         /s/ Jack M. Benun
                                         ----------------------------
                                           Name: Jack M. Benun
                                           Title: President


                                    HK MERGER CORP.


                                    By:        /s/ Sami Mnaymneh
                                        ----------------------------
                                           Name:  Sami Mnaymneh
                                           Title:  President

                                       2