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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9
Solicitation/Recommendation Statement Pursuant to
Section 14(d)(4) of the Securities Exchange Act of 1934
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HI-LO AUTOMOTIVE, INC.
(Name of Subject Company)
HI-LO AUTOMOTIVE, INC.
(Name of Person Filing Statement)
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class of Securities)
428939D 10 0
(CUSIP Number of Class of Securities)
K. GRANT HUTCHINS
VICE PRESIDENT AND GENERAL COUNSEL
HI-LO AUTOMOTIVE, INC.
2575 WEST BELLFORT
HOUSTON, TEXAS 77054
(713) 663-9257
(Name, address and telephone number of person authorized to receive notice
and communications on behalf of person filing statement)
With a copy to:
Jeffery B. Floyd, Esq.
Vinson & Elkins L.L.P.
1001 Fannin, Suite 2300
Houston, Texas 77002
(713) 758-2222
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ITEM 1. SECURITY AND SUBJECT COMPANY.
The name of the subject company is Hi-Lo Automotive, Inc., a Delaware
corporation (the "Company"). The address of the principal executive offices of
the Company is 2575 West Bellfort, Houston, Texas 77054. The title of the
class of equity securities to which this statement relates is the Common
Stock, par value $.01 per share (the "Common Stock"), including the associated
preferred stock purchase rights (the "Rights," and together with the Common
Stock, the "Shares") of the Company.
ITEM 2. TENDER OFFER OF THE PURCHASER.
This statement relates to a tender offer by Shamrock Acquisition, Inc., a
Delaware corporation ("Purchaser") and a wholly owned subsidiary of O'Reilly
Automotive, Inc., a Missouri corporation ("Parent"), disclosed in a Tender
Offer Statement on Schedule 14D-1, dated December 24, 1997 (the "Schedule 14D-
1"), whereby the Purchaser has offered to purchase all of the outstanding
Shares at a price of $4.35 per Share (such price, or any such higher price as
may be paid in the Offer (as defined below), being referred to herein as the
"Offer Price"), net to the seller in cash, without interest thereon, upon the
terms and subject to the conditions set forth in the Offer to Purchase, dated
December 24, 1997 (the "Offer to Purchase"), and in the related Letter of
Transmittal (which together constitute the "Offer"), which are incorporated by
reference herein.
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, THERE BEING VALIDLY
TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER A NUMBER OF
SHARES WHICH, TOGETHER WITH ANY SHARES BENEFICIALLY OWNED BY PARENT OR
PURCHASER, REPRESENT AT LEAST A MAJORITY OF THE SHARES OUTSTANDING ON A FULLY
DILUTED BASIS (AS DEFINED HEREIN) (THE "MINIMUM CONDITION"). The Company has
represented and warranted to the Purchaser and Parent in the Merger Agreement
that, as of December 15, 1997, 10,775,109 Shares were issued and outstanding,
and 507,223 Shares were issuable pursuant to options ("Options"), excluding
587,566 Shares issuable upon exercise of Options which the Company's directors
and executive officers have agreed not to exercise, granted under the
Company's option plans and pursuant to the Associate Purchase Plan (as defined
in Section 12). Based on the foregoing and assuming no additional Shares (or
options, warrants or rights exercisable for, or convertible securities
convertible into Shares) have been issued since December 15, 1997 (other than
Shares issued pursuant to the exercise of the stock options referred to
above), if 5,641,167 Shares were validly tendered and not withdrawn prior to
the Expiration Date (as hereinafter defined) pursuant to the terms of the
Offer, the Minimum Condition would be satisfied.
The Offer is being made pursuant to the Agreement and Plan of Merger, dated
as of December 23, 1997 (the "Merger Agreement"), among Parent, Purchaser and
the Company, pursuant to which, as promptly as practicable following the
Expiration Date and the satisfaction or waiver of certain conditions,
Purchaser will be merged with and into the Company (the "Merger"), with the
Company surviving as a wholly owned subsidiary of Parent (the "Surviving
Corporation"). The Merger Agreement is incorporated by reference herein and is
summarized in Item 3.
According to the Schedule 14D-1, the address of the principal executive
offices of Parent and Purchaser is 233 South Patterson, Springfield, Missouri
65802.
ITEM 3. IDENTITY AND BACKGROUND.
(a) The name and address of the Company, which is the person filing this
statement, is set forth in Item 1 above. All information contained in this
Statement or incorporated herein by reference concerning Parent, Purchaser or
their respective officers, directors, representatives or affiliates, or
actions or events with respect to any of them, was provided by Parent or
Purchaser, respectively, and the Company takes no responsibility for such
information.
(b) The Company maintains the 1990 Stock Option Plan which provides for the
grants of stock options to purchase Shares to certain employees and non-
employee directors of the Company ("Options"). Pursuant to existing option
agreements between the Company and each of its executive officers, each
outstanding Option
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held by an executive officer will automatically become fully exercisable upon
the purchase of Shares pursuant to the Offer. In order to facilitate the
transactions contemplated by the Merger Agreement, prior to entering into the
Merger Agreement, the Company and each of its non-employee directors entered
into Deferral Agreements pursuant to which each non-employee director agreed
not to exercise outstanding options and the Company amended each Option held
by a non-employee director to provide that each outstanding Option will become
fully exercisable immediately upon the purchase of Shares pursuant to the
Offer. The description of the Deferral Agreements is qualified by reference to
the text of the form of Deferral Agreement, a copy of which is filed as
Exhibit (c)(3) hereto and is incorporated herein by reference. Certain other
contracts, agreements, arrangements or understandings between the Company or
its affiliates and its executive officers, directors or affiliates are
described in the Company's Information Statement (the "Information Statement")
pursuant to Section 14(f) of the Securities Exchange Act of 1934, as amended,
which is attached as Annex A hereto and incorporated by reference, under the
captions "Directors and Committees," "Security Ownership of Management" and
"Information about Executive Officers."
Except as described herein, there are no material contracts, agreements,
arrangements or understandings between the Company or its affiliates and
Parent, Purchaser or any of their respective executive officers, directors or
affiliates.
MERGER AGREEMENT
The Merger Agreement. The following summary of the Merger Agreement is
qualified by reference to the Merger Agreement. Capitalized terms used but not
defined herein shall have the meaning given to them in the Merger Agreement.
The Offer. The Merger Agreement provides that the Purchaser will commence
the Offer and that, upon the terms and subject to prior satisfaction or waiver
of the conditions of the Offer, the Purchaser will purchase all Shares validly
tendered and not properly withdrawn pursuant to the Offer. The Offer is
conditioned upon, among other things, there being tendered and not withdrawn
prior to the Expiration Date, a number of Shares which, together with any
Shares beneficially owned by Parent and Purchaser, represent a majority of the
outstanding Shares on a Fully Diluted Basis. The Merger Agreement provides
that, without the written consent of the Company, the Purchaser will not
decrease the Offer Price, change the form of consideration to be paid in the
Offer, reduce the maximum number of Shares to be purchased in the Offer or the
Minimum Condition, impose additional conditions to the Offer or amend any
condition of the Offer in a manner adverse to the holders of Shares. In the
event that all conditions of the Offer have not been satisfied or waived by
the Expiration Date, January 26, 1998, the Purchaser is required, at the
request of the Company, to extend the Offer from time to
time until 90 days after the commencement of the Offer. Additionally, the
Merger Agreement provides that notwithstanding that all conditions are
satisfied or waived prior to the scheduled Expiration Date, the Purchaser may
extend the Offer, subject to certain conditions, (i) for a period not to
exceed 10 business days if the Shares tendered pursuant to the Offer are less
than 90% of the outstanding Shares and (ii) for a period not to exceed five
business days if an Adverse Market Change shall have occurred and be
continuing on the scheduled Expiration Date. The Purchaser will, on the terms
and subject to the prior satisfaction or waiver of the conditions of the
Offer, accept for payment and pay for Shares validly tendered and not properly
withdrawn as soon as practicable after expiration of the Offer.
As used in the Merger Agreement, the following terms shall have the meanings
set forth below:
"Adverse Market Change" means (i) any general suspension of trading in, or
limitation on prices for, securities on the NYSE or the Nasdaq National
Market, (ii) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States (whether or not mandatory),
(iii) a commencement or escalation of a war, armed hostilities or other
international or national calamity directly involving the United States and
having an adverse effect on the financial markets in the United States, (iv)
any material limitation (whether or not mandatory) by any governmental
authority, agency or commission on the extension of credit by banks or other
lending institutions in the United States, and (v) in the case of any of the
foregoing existing at the time of the commencement of the Offer, a material
acceleration or worsening thereof; and
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"Fully Diluted Basis" means as of any time, all of the Shares plus all
shares of the Common Stock issuable upon exercise of outstanding options to
acquire the Common Stock minus 587,566 shares of Common Stock issuable upon
exercise of options which the holders thereof have irrevocably agreed in
writing, in a form satisfactory to Parent, not to exercise.
Certain Conditions of the Offer. Notwithstanding any other provision of the
Offer, and in addition to (and not in limitation of) Purchaser's rights to
extend the Offer under certain circumstances (subject to the provisions of the
Merger Agreement), Purchaser shall not be required to accept for payment or,
subject to the applicable rules and regulations of the Commission, pay for,
and may delay the acceptance for payment of or, subject to the applicable
rules and regulations of the Commission, payment for, any Shares tendered
pursuant to the Offer, and may terminate the Offer and not accept for payment
any Shares, if (x) any applicable waiting period under the HSR Act has not
expired or terminated prior to the expiration of the Offer, (y) the Minimum
Condition has not been satisfied or (z) at any time on or after the date of
the Merger Agreement and before the time of acceptance of Shares pursuant to
the Offer, any of the following events shall have occurred:
(a) there shall be any statute, rule, regulation, judgment, order or
injunction enacted, entered, enforced, promulgated, or deemed applicable,
pursuant to an authoritative interpretation by or on behalf of a
governmental authority, agency or commission ("Governmental Entity"), to
the Offer or the Merger, that (i) prohibits or imposes any material
limitations on Parent's or Purchaser's ownership or operation (or that of
any of their respective subsidiaries or affiliates) of all or a portion of
their or the Company's businesses or assets, or to compel Parent or
Purchaser or their respective subsidiaries and affiliates to dispose of or
hold separate any portion of the business or assets of the Company or
Parent and their respective subsidiaries, which prohibition, limitation,
disposition or hold separate obligation could reasonably be expected to
have a Material Adverse Effect on Parent, (ii) restrains or prohibits the
making or consummation of the Offer or the Merger or the performance of any
of the other transactions contemplated by the Merger Agreement, (iii)
imposes material limitations on the ability of Purchaser, or render
Purchaser unable, to accept for payment, pay for or purchase some or all of
the Shares pursuant to the Offer and the Merger, or (iv) imposes material
limitations on the ability of Purchaser or Parent effectively to exercise
full rights of ownership of the Shares, including, without limitation, the
right to vote the Shares purchased by it on all matters properly presented
to the Company's stockholders; or
(b) (i) the Company Board (or any committee thereof) shall have
withdrawn, modified or changed in any adverse manner to Parent and
Purchaser its approval or recommendation of the Offer or the Merger or the
Merger Agreement, or shall have endorsed, approved or recommended any other
Takeover Proposal or (ii) the Company shall have entered into any agreement
with respect to any Superior Proposal pursuant to the provision described
in clause (iv) under the heading "Termination Fees" in Section 12 hereof or
(c) the representations and warranties of the Company set forth in the
Merger Agreement shall not be true and correct, in each case (i) as of the
date referred to in any representation or warranty which addresses matters
as of a particular date, or (ii) as to all other representations and
warranties, as of the date of the Merger Agreement and as of the scheduled
expiration of the Offer, and with respect to any representations and
warranties not qualified by "Material Adverse Effect," unless the
inaccuracies under such representation and warranties, taking all the
inaccuracies under all such representations and warranties together in
their entirety, do not, individually or in the aggregate, result in a
Material Adverse Effect on the Company; or
(d) the Company shall have failed to perform any obligation or to comply
with any agreement or covenant to be performed or complied with by it under
the Merger Agreement other than any failure which would not have, either
individually or in the aggregate, a Material Adverse Effect on the Company;
or
(e) the Merger Agreement shall have been terminated by the Company or
Parent or Purchaser in accordance with its terms or Parent or Purchaser
shall have reached an agreement or understanding in writing with the
Company providing for termination or amendment of the Offer or delay in
payment for the Shares;
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which, in the reasonable judgment of Parent and Purchaser, in any such
case, and regardless of the circumstances giving rise to any such
conditions, makes it inadvisable to proceed with the Offer and/or with such
acceptance for payment of or payment for Shares.
The foregoing conditions (other than the Minimum Condition) are for the sole
benefit of Parent and Purchaser and, subject to the Merger Agreement, may be
asserted by Parent or Purchaser regardless of the circumstances giving rise to
such condition or may be waived by Parent or Purchaser in whole or in part at
any time and from time to time in its sole discretion. The failure by Parent
or Purchaser at any time to exercise any of the foregoing rights shall not be
deemed a waiver of any such right and each such right shall be deemed an
ongoing right which may be asserted at any time and from time to time.
The Merger. Following the consummation of the Offer, the Merger Agreement
provides that, subject to the terms and conditions thereof, and in accordance
with Delaware law, as soon as practicable, the Purchaser will be merged with
and into the Company. As a result of the Merger, the separate corporate
existence of the Purchaser will cease and the Company will continue as the
Surviving Corporation.
The respective obligations of Parent and the Purchaser, on the one hand, and
the Company, on the other hand, to effect the Merger are subject to the
satisfaction on or prior to the Closing Date (as defined in the Merger
Agreement) of each of the following conditions: (i) the Merger Agreement shall
have been approved and adopted by the requisite vote of the holders of Shares,
if required by applicable law, in order to consummate the Merger; (ii) no
statute, rule, regulation, executive order, decree, ruling or injunction shall
have been enacted, entered, promulgated or enforced by any court or other
tribunal or governmental body or authority which prohibits the consummation of
the transactions contemplated therein substantially on the terms contemplated
thereby; (iii) any waiting periods applicable to the consummation of the
Merger under the HSR Act shall have expired or been terminated; and (iv)
Purchaser shall have purchased Shares pursuant to the Offer.
At the Effective Time of the Merger (i) each issued and outstanding Share
(other than Dissenting Shares and Shares that are owned by the Company or any
wholly owned subsidiary of the Company, any Shares owned by Parent or any
wholly owned subsidiary of Parent, or any Shares which are held by
stockholders exercising dissenters' rights, if any, under Delaware law) will
be converted into the right to receive the Merger Consideration, and (ii) each
issued and outstanding share of capital stock of the Purchaser will be
converted into one share of common stock of the Surviving Corporation.
The Company Board. The Merger Agreement provides that upon the purchase and
payment by Parent or the Purchaser of Shares representing at least a majority
of the outstanding Shares on a fully diluted basis, Parent shall be entitled
to designate such number of directors (rounded up to the next whole number) on
the Company Board so that the percentage of Parent's nominees on the Company
Board equals the percentage of outstanding Shares beneficially owned by Parent
and its affiliates. The Company shall, at such time, upon the request of
Purchaser promptly use its best efforts to take all action necessary to cause
such persons designated by Parent to be elected to the Company Board, if
necessary by increasing the size of the Company Board or securing resignations
of incumbent directors or both. At such time, the Company shall also cause
persons designated by Parent to constitute at least the same percentage
(rounded up to the next whole number) as is on the Company Board of (i) each
committee of the Company Board, (ii) each board of directors (or similar body)
of each subsidiary of the Company and (iii) each committee (or similar body)
of each such subsidiary board of directors.
The Merger Agreement further provides that, notwithstanding the provisions
of the foregoing paragraph, until the Effective Time of the Merger, the
Company Board shall include at least two directors who were directors on the
date of the Merger Agreement (the "Independent Directors"). From and after the
time, if any, that Parent's designees constitute a majority of the Company
Board, the affirmative vote of a majority of Independent Directors shall be
required and shall be sufficient to authorize any termination of the Merger
Agreement by the Company, any amendment of the Merger Agreement requiring
action by the Company Board, any extension of time for the performance of any
of the obligations or other acts of Parent or Purchaser under the Merger
Agreement, any waiver of compliance with any of the agreements or conditions
under the Merger
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Agreement for the benefit of the Company, any action to seek to enforce any
obligation of Parent or Purchaser under the Merger Agreement and any other
action by the Company Board under or in connection with the Merger Agreement.
The Independent Directors shall be appointed as a Special Committee of the
Company Board and have full power and authority solely with respect to the
matters set forth in the previous sentence.
Stockholders' Meeting. Pursuant to the Merger Agreement, the Company will,
if required by applicable law in order to consummate the Merger: (i) duly
call, give notice of, convene and hold a special meeting of its stockholders
(the "Special Meeting") as soon as practicable following the purchase of
Shares by the Purchaser pursuant to the Offer for the purpose of considering
and taking action upon the Merger and the adoption of the Merger Agreement;
(ii) prepare and file with the Commission a preliminary proxy or information
statement relating to the Merger and the Merger Agreement and include in any
preliminary or definitive proxy statement or information statement with
respect to the Special Meeting (the "Proxy Statement"), the recommendation of
the Company Board that stockholders of the Company vote in favor of the
approval of the Merger Agreement and the transactions contemplated thereby
unless the Company Board determines in good faith, based on advice of its
outside counsel, that not taking any such action is necessary in order for the
Company Board to comply with its obligations or duties to the Company and its
stockholders under applicable law; and (iii) use all reasonable efforts (A) to
obtain and furnish the information required to be included by it in the Proxy
Statement and, after consultation with the Parent and the Purchaser, respond
promptly to any comments made by the Commission with respect to the Proxy
Statement and any preliminary version thereof and cause the Proxy Statement to
be mailed to its stockholders at the earliest practicable time following the
expiration or termination of the Offer and (B) obtain the necessary approvals
by its stockholders of the Merger Agreement and the transactions contemplated
thereby unless the Company Board determines in good faith, based on advice of
its outside counsel, that not taking any such action is necessary in order for
the Company Board to comply with its obligations or duties to the Company and
its stockholders under applicable law. Purchaser and Parent have agreed to use
commercially reasonable efforts to cause the Special Meeting to occur within
90 days after the purchase of Shares pursuant to the Offer and Parent has
agreed that it will vote, or cause to be voted, all of the Shares then owned
by it, the Purchaser or any of its other subsidiaries and affiliates in favor
of the approval of the Merger and the adoption of the Merger Agreement. IF THE
PURCHASER ACQUIRES, THROUGH THE OFFER OR OTHERWISE, AT LEAST A MAJORITY OF THE
OUTSTANDING SHARES, THE PURCHASER WILL HAVE SUFFICIENT VOTING POWER TO APPROVE
THE MERGER, EVEN IF NO OTHER STOCKHOLDERS VOTE IN FAVOR OF THE MERGER.
The Merger Agreement provides that in the event that Purchaser shall acquire
at least 90% of the then outstanding Shares, the parties agree to take all
necessary and appropriate action to cause the Merger to become effective, in
accordance with Section 253 of the DGCL, as soon as practicable after such
acquisition, without a meeting of the stockholders of the Company.
Options. Each option granted to the Company's employees, consultants or
directors to acquire shares of Common Stock (each an "Option") that is
outstanding immediately prior to the purchase of Shares pursuant to
the Offer (irrespective of whether such Option is then exercisable) shall, on
the fifth business day after the purchase by Purchaser of Shares pursuant to
the Offer, be cancelled in exchange for a single lump sum cash payment equal
to the product of (i) the number of shares of Common Stock subject to such
Option and (ii) the excess of the Offer Price over the exercise price per
share of such Option. Subject to the previous sentence, each Option that is
outstanding immediately prior to the Effective Time, whether or not then
vested or exercisable, shall, effective as of the Effective Time, be cancelled
and no payments shall be made with respect thereto.
Outstanding purchase rights under the Company's 1991 Associate Stock
Purchase Plan (the "Associate Purchase Plan") (i) shall be exercised at the
next scheduled date of exercise under the Associate Purchase Plan or (ii)
shall be terminated. No purchase rights shall be granted or exercised under
the Associate Purchase Plan, following such exercise date, and the Associate
Purchase Plan shall be terminated as soon as practicable thereafter.
Interim Operations. Pursuant to the Merger Agreement, the Company has agreed
that, except as expressly contemplated by the Merger Agreement or agreed to in
writing by Parent, prior to the time the directors of the
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Parent constitute a majority of the Company Board, the Company shall (a)
cause, and cause each of its subsidiaries to, conduct its operations in all
material respects according to their ordinary and usual course of business in
substantially the same manner as heretofore conducted; (b) use its reasonable
best efforts, and cause each of its subsidiaries to use its reasonable best
efforts, to preserve intact its business organization in all material
respects, keep available the services of its executive officers and key
employees as a group, subject to changes in the ordinary course, and maintain
satisfactory relationships with suppliers, distributors, customers and others
having business relationships with them; (c) confer at such times as Parent
may reasonably request with one or more representatives of Parent to report
material operational matters and the general status of ongoing operations (in
each case to the extent Parent reasonably requires such information) and to
consult with Parent regarding material operational decisions; (d) promptly
notify Parent of any emergency or other change in the normal course of its or
its subsidiaries' respective businesses or in the operation of its or its
subsidiaries' respective properties and of any complaints, investigations or
hearings (or communications indicating that the same may be contemplated) of
any governmental body or authority if such emergency, change, complaint,
investigation or hearing is reasonably likely to have a Material Adverse
Effect on the Company; (e) not authorize or pay any dividends on or make any
distribution with respect to its outstanding shares of stock; (f) not, and
shall not permit any of its subsidiaries to, except as otherwise contemplated
by the Merger Agreement or as may be required by applicable law, enter into or
amend any employment, severance or similar agreements or arrangements with any
of their respective directors or executive officers; (g) not, and shall not
permit any of its subsidiaries to, subject to the provisions described below
under the heading "--No Solicitation," authorize, or announce an intention to
authorize, or enter into an agreement with respect to, any merger,
consolidation or business combination, any acquisition of a material amount of
assets or securities, any disposition of a material amount of assets or
securities or any release or relinquishment of any material contract rights,
in each case, not in the ordinary course of business; (h) not propose or adopt
any amendments to its corporate charter or by-laws, except pursuant to the
Merger as provided in the Merger Agreement; (i) not, and shall not permit any
of its subsidiaries to, issue any shares of their capital stock, except upon
exercise of rights or options issued pursuant to existing employee plans,
programs or arrangements and non-employee director plans; (j) not, and shall
not permit any of its subsidiaries to, grant, confer or award any options,
warrants, conversion rights or other rights, not existing on the date of the
Merger Agreement, to acquire any shares of its capital stock; (k) not, and
shall not permit any of its subsidiaries to, purchase or redeem or offer to
purchase or redeem any shares of its stock or any securities convertible into
or exchangeable for shares of stock, except for the deemed repurchase of
options in accordance with the terms of the Merger Agreement, or purchases,
redemptions and offers to purchase in the ordinary course of business in
connection with employee incentive and benefit plans, programs or arrangements
in existence on the date of the Merger Agreement; (l) not, and shall not
permit any of its subsidiaries to, except as contemplated by the Merger
Agreement or as may be required by applicable law, amend in any material
respect the terms of their respective employee benefit plans, programs or
arrangements or any severance or similar agreements or arrangements in
existence on the date of the Merger Agreement, enter into or amend any
employment or consulting agreement, adopt or enter into any new employee
benefit plans, programs or arrangements or any severance or similar
agreements or arrangements or increase the base salary of any person who is a
party to a Change of Control Employment Agreement or make any payments under
any benefit plan to any director, employee, independent contractor or
consultant (except in the ordinary course of business and in amounts and in a
manner consistent with past practice or as otherwise required by law or the
provisions of such benefit plan); (m) not, and shall not permit any of its
subsidiaries to, (i) enter into any material loan agreement or incur any
indebtedness in excess of an aggregate of $100,000 other than pursuant to
additional draws resulting in not in excess of an aggregate amount outstanding
of $60,000,000 under the Company's credit facility with the CIT Group or amend
the Company's credit facility with the CIT Group to increase the amount that
may be borrowed thereunder, (ii) make or enter into any agreement or contract
for capital expenditures in excess of $50,000, (iii) enter into any lease for
any new store site or for real property in excess of $50,000 or any lease for
personal property in excess of $20,000 or (iv) enter into any agreement or
contract outside of the ordinary course of business of the Company or any of
the Company's subsidiaries that involves performance of services or delivery
of goods or materials by or to the Company or any of the Company's
subsidiaries of an amount or value in excess of $50,000; (n) not, and shall
not permit any of its subsidiaries to, make or change any material Tax
election, file any amendment to any federal income Tax Return unless required
by law, enter into any closing agreement, settle or compromise
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any material Tax liability; (o) not adjust, split, combine or reclassify its
capital stock; (p) not enter into any agreement, understanding or arrangement
with respect to the sale or voting of its capital stock; (q) not, and shall
not permit any of its subsidiaries to, create any new subsidiaries; (r) except
as required by the Merger Agreement, not take any action which could
reasonably be expected to adversely affect or delay the ability of any of the
parties to obtain any approval of any governmental or regulatory body required
to consummate the transactions contemplated hereby; (s) not, and shall not
permit any of its subsidiaries to, directly or indirectly sell, transfer,
lease, pledge, mortgage, encumber or otherwise dispose of any material
property or assets other than in the ordinary course of business; (t) not
enter into any financial derivative contracts; (u) not change in any material
respect its accounting policies, methods or procedures except as required by
GAAP; (v) except as may be required by the Merger Agreement or applicable law,
not do any act or omit to do any act which would cause a breach of any
contract, commitment or obligation if the result is reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on the
Company; (w) except as otherwise permitted, not take any action with the
intent of causing the conditions to the Offer set forth in the Merger
Agreement to not be satisfied; (x) not, other than pursuant to the Merger
Agreement, take any action to cause the Common Stock to cease to be quoted on
any of the stock exchanges on which the Common Stock is now quoted; (y)
continue to provide training for employees of the Company and its subsidiaries
commensurate with the training provided by the Company and its subsidiaries
over the past twelve months; (z) subject to the limitations contained in the
Merger Agreement, continue the level of recruiting activity and process
employed by the Company and its subsidiaries over the past twelve months; (aa)
not, and shall not permit any of its subsidiaries to, agree in writing or
otherwise, to take any of the foregoing actions or take any action which would
make any representation or warranty contained in the Merger Agreement (except
for representations and warranties made as of a specified date) untrue and
incorrect in any material respect as of the Effective Time; (bb) not pay,
discharge or satisfy any claim, liability or obligation (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction, in the ordinary course of business and consistent
with past practice, of liabilities reflected or reserved against in the
September 30, 1997 balance sheet or subsequently incurred in the ordinary
course of business and consistent with past practice; or (cc) not settle or
compromise any pending or threatened suit, action or claim not covered by
insurance (without giving effect to deductibles in determining whether
coverage exists) that is material or which relates to the Merger Agreement and
the transactions contemplated thereby, including the Offer and the Merger; or
(dd) not modify, amend or waive any terms or provisions of the Rights
Agreement.
No Solicitation. Pursuant to the Merger Agreement, the Company shall not,
and shall not authorize or permit, any of its officers, directors, employees,
attorneys, financial advisors, agents or other representatives or those of any
of its subsidiaries to, directly or indirectly, (a) solicit, initiate or
knowingly encourage any Takeover Proposal (as hereinafter defined), including
without limitation by disclosure of non-public information, or (b) engage in
discussions or negotiations relating to or accept any Takeover Proposal;
provided, however, that nothing shall prohibit the Company and its Board from
(i) taking and disclosing a position with respect to a
tender offer by a third party pursuant to Rules 14d-9 and 14e-2(a) promulgated
by the Commission under the Exchange Act, or (ii) at any time prior to the
purchase of Shares pursuant to the Offer, engaging in discussions or
negotiations with, and furnishing information (including non-public
information) concerning the Company and its subsidiaries, businesses,
properties or assets to, any third party which makes a Takeover Proposal
(without any solicitation or initiation or knowing encouragement, directly or
indirectly, by the Company or any of its representatives after the date of the
Merger Agreement) if the Company Board determines in good faith, based on
advice of its outside counsel (who may be its regularly engaged outside
counsel), that the failure to take such action will violate its obligations or
duties to the Company and its stockholders under applicable law, or (iii)
provided the Merger Agreement is terminated as described below in clause (iv)
under the heading "--Termination; Fees," accepting a Superior Proposal (as
hereinafter defined). Prior to furnishing information to or entering into
discussions or negotiations with any person, the Company shall receive from
such person or entity an executed confidentiality agreement in reasonably
customary form on terms not in the aggregate materially more favorable to such
person or entity than the terms contained in the Confidentiality Agreement (as
defined below) unless the same terms are granted to Parent. The Company shall
immediately cease and cause to be terminated any existing solicitation,
initiation, encouragement, activity, discussion or negotiation with any
8
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person conducted heretofore by the Company or any of its representatives with
respect to any Takeover Proposal existing on the date hereof. The Company
agrees not to release any third party from, or waive any provision of, any
standstill agreement to which it is a party or any confidentiality agreement
between it and another person who has made, or who may reasonably be
considered likely to make, or who was given access in order to consider
making, a Takeover Proposal, unless the Company Board determines in good
faith, based on advice of its outside counsel (who may be its regularly
engaged outside counsel), that failure to take such action will violate its
obligations or duties to the Company and its stockholders under applicable
law. The Company shall notify Parent orally and in writing of any such
Takeover Proposal received (including, without limitation, the terms and
conditions of any such proposal and the identity of the person making it),
within 24 hours of the receipt thereof, and shall keep Parent informed of the
general status and any material changes in the terms and conditions of such
Takeover Proposal. The Company agrees to promptly provide to Parent any
information concerning the Company, its subsidiaries, business, properties or
assets furnished to any third party which makes a Takeover Proposal and which
has not previously been provided to Parent. As used in this Agreement, (i)
"Takeover Proposal" shall mean any written proposal or offer, in each case
made prior to the stockholder vote at the Special Meeting, other than a
proposal or offer by Parent or any of its subsidiaries, for a tender offer,
recapitalization, merger, consolidation or other business combination
involving, or any purchase of, all or substantially all of the assets or more
than 50% of the voting securities of, the Company, and (ii) "Superior
Proposal" shall mean a bona fide Takeover Proposal made by a third party on
terms that a majority of the members of the Company Board determines in their
good faith reasonable judgment is more favorable to the Company and its
stockholders than the transactions contemplated by the Merger Agreement.
Termination; Fees. The Merger Agreement may be terminated and the Merger
abandoned at any time prior to the Effective Time, whether before or after
approval of the stockholders of the Company, (i) by mutual written consent of
Parent and the Company; (ii) by (a) either the Company or Parent if Shares
have not been purchased pursuant to the Offer on or before June 30, 1998 and
(b) the Company if after 90 days following the commencement of the Offer the
conditions to the Offer have not been satisfied or waived and the Purchaser
shall not have elected to extend the Offer; provided, that such right to
terminate pursuant to clause (i) or (ii) will not be available to any party
whose failure in any material respect to fulfill its obligation under the
Merger Agreement proximately contribute to, or resulted in, the failure of
Parent or the Purchaser to purchase the Shares pursuant to the Offer on or
before such date; (iii) by either the Company or Parent if (a) a statute,
rule, regulation or executive order shall have been enacted, entered or
promulgated prohibiting the purchase of Shares pursuant to the Offer or the
consummation of the Merger substantially on the terms contemplated by the
Merger Agreement or (b) an order, decree, ruling or injunction shall have been
entered permanently restraining, enjoining or otherwise prohibiting the
purchase of Shares pursuant to the Offer or the consummation of the Merger
substantially on the terms contemplated by the Merger Agreement and such
order, decree, ruling or injunction shall have become final and non-
appealable; provided, that the party seeking to terminate the Merger Agreement
shall have used its reasonable best efforts to remove such injunction, order
or decree; (iv) by the Company prior to the purchase of Shares pursuant to the
Offer if the Company Board determines in good faith based upon advice of its
outside counsel (a) that a Takeover Proposal constitutes a Superior Proposal and
(b) that failure to accept such Superior Proposal will violate its obligations
or duties to the Company and the Company's stockholders under applicable law,
provided, that the Merger Agreement shall not terminate unless (Y) the Company
has provided Parent with two business days' prior written notice of its
intention to accept such Superior Proposal, together with a detailed description
of the terms and conditions of such Superior Proposal and (Z) simultaneously
with such termination the Company enters into a definitive acquisition, merger
or similar agreement to effect such Superior Proposal and pays the Termination
Fee (as defined below); (v) by either the Company or Parent prior to the
purchase of any Shares pursuant to the Offer if the other party shall have
breached, or failed to comply with, in any material respect any of its
obligations under the Merger Agreement or any representation or warranty made by
such other party shall have been untrue when made or as of the time of such
termination as if made on and as of such time (except for representations and
warranties made as of a specified date, which need be true only as of the
specified date), provided such breach, failure or misrepresentation is not cured
within thirty days after notice thereof from the other party and with respect to
any representation or warranty not qualified by "Material Adverse Effect," such
breaches, failures or misrepresentations individually or in the aggregate,
result
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<PAGE>
or are reasonably likely to result in a Material Adverse Effect on the Company
or Parent, as the case may be; (vi) by Parent if the Company Board or any
committee of the Company Board, (a) shall withdraw, modify or change in any
adverse manner (including by amendment of the Schedule 14D-9) its approval or
recommendation of the Merger Agreement, the Offer or the Merger, (b) shall
approve or recommend any Takeover Proposal, other than by Parent or an
affiliate of Parent, or (c) shall resolve to take any of the actions specified
in clause (a) or (b) above; (vii) by the Company if Purchaser fails to
commence the Offer on or prior to five business days following the date of
initial public announcement of the Offer, provided that the Company may not
terminate the Merger Agreement pursuant to this provision if the Company is at
such time in breach in any material respect of its obligations under the
Merger Agreement; or (viii) by either of the Company or Parent if the Offer
shall have been terminated, or the Offer has expired without any Shares being
purchased therein; provided, however, that the right to terminate the Merger
Agreement pursuant to this provision shall not be available to any party whose
failure to fulfill any obligation under the Merger Agreement has been the
cause of, or resulted in, the termination of the Offer or the failure of
Parent or Purchaser, as the case may be, to purchase Shares pursuant to the
Offer on or prior to such date. Notwithstanding the foregoing, no termination
by the Company shall be effective pursuant to clause (vii) above under
circumstances in which a Termination Fee would be payable by the Company
unless concurrently with such termination, such Termination Fee is paid in
full by the Company in accordance with the provisions of the Merger Agreement.
In the event that (i) prior to the termination of the Merger Agreement any
person shall have commenced, publicly proposed or communicated to the Company
a Takeover Proposal and (a) the Offer shall have remained open for at least 20
business days, (b) the Minimum Condition shall not have been satisfied, (c)
the Merger Agreement shall have been terminated pursuant to the provisions
described in clause (ii), (iii), (v) or (vii) of the preceding paragraph and
(d) prior to the first anniversary of such termination, the Company shall
consummate such Takeover Proposal; or (ii) if the Merger Agreement is
terminated by the Company or Parent pursuant to clauses (iv) and (vi) of the
preceding paragraph then in such event the Company shall pay Parent a
termination fee of $4.75 million (the "Termination Fee"), which amount shall
be paid by wire transfer of immediately available funds to an account
designated by Parent.
Indemnification. Pursuant to the Merger Agreement, for six years after the
Effective Time, the Parent and the Surviving Corporation (or any successor to
the Surviving Corporation) will indemnify the present and former officers and
directors of the Company and its subsidiaries with respect to matters
occurring at or prior to the Effective Time to the full extent permitted under
Delaware law, the terms of the Company's charter, by-laws and indemnification
agreements, each as in effect as of the date of the Merger Agreement. For six
years from the Effective Time, Parent shall maintain in effect the Company's
directors' and officers' liability insurance policies and shall purchase such
policy at or prior to the Closing Date.
Representations and Warranties. Pursuant to the Merger Agreement, the
Company has made customary representations and warranties to Parent and the
Purchaser with respect to, among other things, its organization,
capitalization, authority, financial statements, need for consents or
approvals, public filings, conduct of business, employee benefit plans,
intellectual property, employment matters, compliance with laws, tax matters,
insurance, litigation, title to properties, environmental matters, vote
required to approve the Merger Agreement, undisclosed liabilities, information
to be contained in the Proxy Statement, the opinion of its financial advisor
and significant vendor arrangements.
Pursuant to the Merger Agreement, Parent and the Purchaser have made
substantially similar representations and warranties as to their organization,
authority, need for consents or approvals and information to be contained in
the Proxy Statement.
Confidentiality Agreement. Pursuant to the Confidentiality Agreement entered
into on November 26, 1997 by Parent and the Company (the "Confidentiality
Agreement"), the Company and Parent agreed to provide, among other things, for
the confidential treatment of their discussions regarding the Offer and the
Merger and the exchange of certain confidential information concerning the
Company. The Confidentiality Agreement is incorporated herein by reference and
a copy of it has been filed with the Commission as an exhibit to the
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Schedule 14D-1. Parent further agreed that, for a period of 12 months from the
date of the Confidentiality Agreement, neither Parent nor any of its
affiliates will knowingly, as a result of knowledge or information obtained
from the Evaluation Material (as defined therein) or otherwise in connection
with a possible transaction: (i) divert or attempt to divert any business or
customer of the Company or any of its affiliates; nor (ii) employ or attempt
to employ or divert a managerial, professional or executive employee of the
Company or any of its affiliates.
ITEM 4. THE SOLICITATION OR RECOMMENDATION.
(a) Recommendation of the Board of Directors.
On December 22, 1997, the Board of Directors of the Company (the "Company
Board"), after considering, among other factors, the opinion of SBC Warburg
Dillon Read Inc. ("SBC Warburg Dillon Read") that the proposed consideration
to be received by holders of Shares pursuant to the Merger Agreement is fair,
from a financial point of view, to the holders of Shares, unanimously approved
the Offer, the Merger and the Merger Agreement. In addition, the Company Board
determined that the terms of the Offer and the Merger are fair to, and in the
best interests of, the Company and the stockholders of the Company, and
recommends acceptance of the Offer. The Company Board also approved an
amendment to the Rights Agreement, dated as of August 28, 1996, between the
Company and ChaseMellon Shareholder Services, L.L.C. as Rights Agent, as
amended on October 17, 1997 (the "Rights Agreement"), to provide that no
purchase rights under such agreement will become exercisable as a result of
the approval, execution or delivery of the Merger Agreement or the
consummation of the transactions contemplated thereby (including the Offer and
the Merger).
A copy of a letter to all stockholders of the Company communicating the
recommendations of the Company Board is filed as Exhibit (a)(3) hereto and is
incorporated by reference.
(b) Background.
In the spring of 1997, a group of dissident stockholders commenced but then
abandoned a proxy solicitation with the intention of replacing certain members
of the Company Board and adopting a proposal calling for the sale of the
Company. In the course of its discussions with stockholders regarding the
proxy contest, management became aware of the sentiment of certain of the
Company's stockholders that the Company be sold or combined with another auto
parts chain. Following discussions at the meeting of the Company Board after
the Company's Annual Meeting on May 20, 1997, the Company Board concluded that
entering into a business combination with a complementary auto parts chain or
selling the Company would likely return value to the Company's stockholders
sooner and with more certainty than continuing the Company's strategy
independently. After receiving presentations from two investment banking firms
on June 4, 1997, the Company Board selected and engaged SBC Warburg Dillon
Read to assist and advise the Company Board in seeking a potential merger
partner or acquiror of the Company.
During June and July of 1997, SBC Warburg Dillon Read contacted 29 potential
acquirors, including Parent. Parent indicated that it was not interested in
pursuing a transaction with the Company at that time. The Company entered into
confidentiality agreements and provided information to nine potential
acquirors, including Discount Auto Parts, Inc. ("Discount"). On September 10,
1997, the Company received from Discount a written proposal indicating
Discount's willingness to consider a business combination with the Company.
The Company and Discount began negotiations on September 22, 1997, at which
time the Company agreed to negotiate exclusively with Discount until October
13, 1997, subsequently extended to October 17, 1997.
On October 15, 1997, the Company received an unsolicited letter from another
potential bidder expressing an interest in pursuing a business combination.
There was no specific value, however, included in the letter. By letter dated
October 16, 1997, the Company informed the potential acquiror that the terms
of its exclusivity agreement prohibited discussions until October 17, 1997.
The Company received no further communication from this potential acquiror.
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After completing due diligence and final negotiations, on October 17, 1997,
the Company and Discount entered into a definitive merger agreement (the
"Discount Merger Agreement") providing for each of the Shares to be converted
into 0.1485 shares of Common Stock of Discount, (subject to adjustment under
certain circumstances) representing $3.375 per Share based on the closing
price of Discount's common stock on the last trading day before the public
announcement.
On October 29, 1997, Parent contacted Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ"), a financial advisor that has provided services
to Parent from time to time to discuss the potential benefits of an
acquisition of the Company by Parent. Shortly thereafter, DLJ contacted the
Company's financial advisor, SBC Warburg Dillon Read, to discuss the procedure
for Parent to pursue a transaction with the Company.
During the week of November 3, Parent and DLJ conducted a preliminary
analysis, based on publicly available information, of a transaction between
Parent and the Company. Parent and DLJ had various teleconferences and
meetings during this period to review the benefits of a potential transaction
with the Company. On November 6, 1997, at a regularly scheduled meeting of the
Board of Directors of Parent (the "Parent Board"), senior management presented
the results of its preliminary analysis of the Company and the Parent Board
discussed the merits of a potential business combination with the Company.
Following these discussions, the Parent Board authorized senior management to
pursue a transaction with the Company. During the weeks of November 10 and
November 17, the Company and DLJ continued to review the merits of the
transaction.
On November 25, 1997, Parent submitted a written proposal to the Company to
acquire all Shares of the Company at a per Share price of $4.25, subject to
the satisfactory completion of its due diligence investigation and reaching a
definitive agreement. On November 26, 1997, the Company Board convened a
special meeting to evaluate the transaction proposal submitted by Parent. On
November 26, 1997, representatives of the Company notified Discount of
Parent's proposal and indicated to Parent that the Company would be interested
in pursuing further discussions regarding a potential transaction with Parent.
The Company and Parent entered into a Confidentiality Agreement on November
26, 1997 agreeing to keep certain information provided by the Company
confidential.
Discussions between representatives of the Company and representatives of
Parent commenced on December 1, 1997, with respect to a potential acquisition
of the Company by Parent, and certain information about the Company was
provided to Parent.
During the weeks of December 1 and 8, 1997, various due diligence meetings
and conference calls were conducted between Parent, the Company and their
respective advisors. During the week of December 8, 1997, representatives of
Parent conducted on-site reviews of the Company's operations. On December 16,
1997, counsel to Parent provided an initial draft of the Merger Agreement to
the Company and its counsel. Commencing December 17, 1997, and continuing
through December 22, 1997, extensive negotiations were conducted with respect
to the Merger Agreement and revised drafts were exchanged.
On December 18, 1997, the Company received a written proposal from a new
potential acquiror proposing to purchase of all of the Company's outstanding
Shares for $4.00 per share, subject to satisfactory completion of its due
diligence investigation and execution of a definitive agreement. On December
18, 1997, the Company Board met telephonically to consider the new proposal
and receive an update on the status of negotiations with Parent. After the
board meeting, the Company notified Discount of the new proposal and notified
the new potential acquiror of its desire to pursue discussions but that the
Company was currently negotiating a transaction with a higher price per share
than their proposal. From December 19, 1997 through December 21, 1997, various
due diligence meetings and conferences were conducted between the Company and
the new potential acquiror and on-site visits were conducted by the new
potential acquiror. On December 21, 1997, counsel to the new potential
acquiror provided the Company and its counsel with a draft merger agreement,
and negotiations regarding the merger agreement were conducted late that
evening.
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On the morning of December 22, 1997, Discount indicated to the Company that
it would not propose any amendment to the terms of its Merger Agreement to
increase its offer in response to the proposal by Parent or the new potential
acquiror. Later in that same day, the new potential acquiror contacted the
Company and indicated that it would not make a formal offer for consideration
by the Company Board. Negotiations between Parent and the Company continued
throughout the day and resulted in an increase in Parent's proposed price to
$4.35 per share. After the markets closed on December 22, 1997, the Company
Board met and considered presentations from, and reviewed the terms and
conditions of the current draft of the Merger Agreement with, among others,
senior management of the Company, its legal advisor and SBC Warburg Dillon
Read. SBC Warburg Dillon Read delivered its opinion as to the fairness, from a
financial point of view, of the consideration to be paid in the Offer and the
Merger to the holders of the outstanding Shares. The Company Board then
unanimously authorized termination of the Discount Merger Agreement after
payment of the required termination fee, approved and adopted the Merger
Agreement and approved the transactions contemplated thereby subject to
termination of the Discount Merger Agreement.
The Discount Merger Agreement was terminated and a termination fee of $4.0
million was paid by the Company during the morning of December 23, 1997.
Immediately thereafter, Parent, Purchaser and the Company entered into the
Merger Agreement and the parties issued a press release announcing the
transaction immediately thereafter. A copy of the press release has been filed
with the Commission as an exhibit to the Schedule 14D-1.
On December 24, 1997, Purchaser and Parent commenced the Offer.
Reasons for the Board of Directors' Recommendation
In approving the Offer, the Merger, the Merger Agreement and the other
transactions contemplated thereby, and recommending that stockholders accept
the Offer and vote for adoption of the Merger Agreement and approval of the
transactions contemplated thereby, the Company Board consulted with the
Company's legal and financial advisors, as well as the Company's management.
The following are material factors considered by the Company Board, certain of
which contain both positive and negative elements:
. The fact that the $4.35 Offer Price represents a premium of
approximately 34% over the closing sale price of $3.25 per Share as
reported on the New York Stock Exchange on December 22, 1997, the last
trading day prior to the date the Company first publicly announced it
had executed the Merger Agreement;
. The belief on the part of the members of the Company Board, based on
their familiarity with its businesses, its current financial condition
and results of operations, and its future prospects, and current and
anticipated developments in its businesses (including increasing
competition), as well as the results of the Company's solicitation of
interest from other potential acquirors, that the consideration to be
received by the Company's stockholders in the Offer and the Merger
represents, in their belief, the best value reasonably obtainable by the
stockholders in a sale of the Company.
. The historical market prices and recent trading activity of the Shares
and the Company's book value per Share;
. The opinion of SBC Warburg Dillion Read to the Company Board dated
December 22, 1997 (the "SBC Warburg Dillion Read Opinion") to the effect
that, considering the strategic alternatives, as of such date and based
upon and subject to the assumptions, limitations and qualifications set
forth therein, the consideration offered to the stockholders of the
Company pursuant to the Merger Agreement is fair to such holders from a
financial point of view; the full text of the SBC Warburg Dillion Read
Opinion is attached as Annex B hereto and should be read in its
entirety;
. A review of the strategic alternatives available to the Company
(including continuing the Company's business in its present
configuration without significant changes, conducting acquisitions, and
merging or consolidating with a party or parties other than Purchaser),
none of which the Company Board believed to be as favorable to the
Company stockholders as the Offer and the Merger;
. The fact that the Offer provides for a prompt cash tender offer for all
Shares, thereby enabling stockholders of the Company to receive cash in
exchange for their Shares at the earliest possible time;
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. The likelihood that the Offer and the Merger would be consummated,
including the ability of Parent to finance the Offer and the Merger, and
the effects on the Company's business, operations and financial
condition (including payment of the $4.0 million termination fee to
Discount) should it not be possible to consummate the Merger following
public announcement that the Merger Agreement had been entered into;
. The terms and conditions of the Offer and the Merger, the Merger
Agreement and the transactions contemplated thereby, which were the
product of arm's-length negotiations, including the parties'
representations, warranties and covenants, the conditions to their
respective obligations, and the limited ability of Parent and Purchaser
to terminate the Offer or the Merger Agreement;
. The Company Board's recognition that certain members of the Company
Board and management have interests in the Offer and the Merger that are
in addition to, and not necessarily aligned with, the interests in the
Offer and the Merger of other holders of Shares; and
. The provisions of the Merger Agreement relating to potential competing
transactions, including the ability of the Company to entertain
unsolicited competing bids (provided that the Company Board determines
that such is required by its obligations to the Company and its
stockholders), to provide information to such competing bidders, to
negotiate with such competing bidders, to withdraw its recommendation
with respect to the Offer and the Merger, and to terminate the Merger
Agreement in favor of a superior transaction with a competing bidder
upon payment of the termination fee.
The foregoing discussion of the factors considered by the Company Board is
not intended to be exhaustive. In view of the wide variety of factors
considered in connection with its evaluation of the Offer and the Merger, the
Company Board did not find it practicable to, and did not, quantify or
otherwise attempt to assign relative weights to the specific factors
considered in reaching its determinations. Rather, the Company Board made its
determination based on the total mix of information available to it, and the
judgments of individual directors may have been influenced to a greater or
lesser degree by differing factors.
ITEM 5. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
Pursuant to a letter agreement between the Company and SBC Warburg Dillon
Read dated June 17, 1997, the Company agreed to pay SBC Warburg Dillon Read:
(i) $50,000 upon execution of the letter agreement; (ii) $200,000 upon the
earlier of the date SBC Warburg Dillon Read advises the Company or the Company
Board that it is prepared to render a fairness opinion orally or in writing,
or the Company executes a merger agreement; and (iii) if a transaction,
including the Merger, is consummated, an additional fee equal to $500,000. In
addition to the foregoing compensation, the Company agreed to reimburse SBC
Warburg Dillon Read for its expenses, including reasonable fees and expenses
of its counsel, and to indemnify SBC Warburg Dillon Read for liabilities and
expenses arising out of the engagement and the transactions in connection
therewith, including liabilities under federal securities laws.
In the ordinary course of business, SBC Warburg Dillon Read and its
affiliates may actively trade or hold the securities of the Company and Parent
for their own account or for the account of customers and, accordingly, may at
any time hold a long or short position in such securities. SBC Warburg Dillon
Read or its predecessors have in the past provided investment banking and
financial advisory services to the Company unrelated to the proposed Merger,
for which SBC Warburg Dillon Read or its predecessors received customary
compensation. In addition, SBC Warburg Dillon Read or its predecessors have
been an integral part of the Company's history, having sponsored the corporate
buy-out of several predecessors to the Company in 1987, through Saratoga
Partners, L.P., an investment partnership managed by a predecessor to SBC
Warburg Dillon Read. In addition, Charles P. Durkin, Jr., a Managing Director
of SBC Warburg Dillon Read, is a director of the Company.
SBC Warburg Dillon Read is a nationally recognized investment banking firm
and was selected by the Company based on its experience, expertise and
familiarity with the Company and its business. SBC Warburg Dillon Read
regularly engages in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings,
competitive bids, secondary distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
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Except as described herein, neither the Company nor any person acting on its
behalf currently intends to employ, retain or compensate any other person to
make solicitations or recommendations to stockholders on its behalf concerning
the Offer.
ITEM 6. RECENT TRANSACTIONS AND INTENT WITH RESPECT TO SECURITIES.
(a) During the past 60 days, no transactions in the Shares have been
effected by the Company or, to the best of the Company's knowledge, by any
executive officer, director, affiliate or subsidiary of the Company.
(b) To the best of the Company's knowledge, to the extent permitted by
applicable securities laws, rules or regulations, all of the Company's
executive officers, directors and affiliates who own Shares currently intend
to tender such Shares to Purchaser pursuant to the Offer.
ITEM 7. CERTAIN NEGOTIATIONS AND TRANSACTIONS BY THE SUBJECT COMPANY.
(a) Except as described in this Schedule 14D-9, or as set forth in the Offer
to Purchase, no negotiation is being undertaken or is under way by the Company
in response to the Offer which relates to or would result in: (i) an
extraordinary transaction such as a merger or reorganization, involving the
Company or any subsidiary of the Company, (ii) a purchase, sale or transfer of
a material amount of assets by the Company or any subsidiary of the Company,
(iii) a tender offer for or other acquisition of securities by or of the
Company, or (iv) any material change in the present capitalization or dividend
policy of the Company.
(b) There are no transactions, board resolutions, agreements in principle,
or a signed contract in response to the Offer, other than as described in Item
3(b) and Item 4 above, which relates or would result in one or more of the
matters referred to in Item 7(a).
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED.
The Information Statement attached as Annex A hereto is being furnished in
connection with the possible designation by Purchaser, pursuant to the Merger
Agreement, of certain persons to be appointed to the Company Board other than
at a meeting of the Company's stockholders. The information contained in the
Exhibits referred to in Item 9 below is incorporated herein by reference.
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ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO.
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<C> <S>
(a)(1)* Offer to Purchase (incorporated by reference to Exhibit (a)(1) to
the Tender Offer Statement on Schedule 14D-1, filed with the
Securities and Exchange Commission (the "Commission") by Parent
and Purchaser on December 24, 1997).
(a)(2)* Letter of Transmittal (incorporated by reference to Exhibit (a)(2)
to the Tender Offer Statement on Schedule 14D-1, filed with the
Commission by Parent and Purchaser on December 24, 1997).
(a)(3)*+ Letter to Company stockholders, dated December 24, 1997.
(a)(4)* Notice of Guaranteed Delivery (incorporated by reference to
Exhibit (a)(3) to the Tender Offer Statement on Schedule 14D-1,
filed with the Commission by Parent and Purchaser on December 24,
1997).
(a)(5) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees (incorporated by reference to Exhibit (a)(4) to the
Tender Offer Statement on Schedule 14D-1, filed with the
Commission by Parent and Purchaser on December 24, 1997).
(a)(6)* Letter to Clients for use by Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees (incorporated by reference to
Exhibit (a)(6) to the Tender Offer Statement on Schedule 14D-1,
filed with the Commission by Parent and Purchaser on December 24,
1997).
(a)(7)* Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 (incorporated by reference to Exhibit (a)(6)
to the Tender Offer Statement on Schedule 14D-1, filed with the
Commission by Parent and Purchaser on December 24, 1997).
(a)(8) Form of Summary Advertisement, dated December 24, 1997
(incorporated by reference to Exhibit (a)(7) to the Tender Offer
Statement on Schedule 14D-1, filed with the Commission by Parent
and Purchaser on December 24, 1997).
(a)(9) Text of Joint Press Release, dated December 23, 1997, issued by
Parent and the Company (incorporated by reference to Exhibit
(a)(7) to Tender Offer Statement on Schedule 14D-1, filed with the
Commission on December 24, 1995).
(c)(1) Agreement and Plan of Merger dated as of December 23, 1997, among
Parent, the Purchaser and the Company (incorporated by reference
to Exhibit (c)(1) to the Tender Offer Statement on Schedule 14D-1,
filed with the Commission by Parent and Purchaser on December 24,
1997).
(c)(2)*+ Opinion of SBC Warburg Dillon Read dated December 22, 1997.
(c)(3)+ Form of Deferral Agreement with Non-employee Directors.
(c)(4) Confidentiality Agreement, dated as of November 26, 1997, among
Parent and the Company (incorporated by reference to Exhibit
(c)(2) to the Tender Offer Statement on Schedule 14D-1, filed with
the Commission by Parent and Purchaser on December 24, 1997).
</TABLE>
- --------
* Included in documents mailed to stockholders.
+ Filed herewith.
16
<PAGE>
SIGNATURE
AFTER REASONABLE INQUIRY AND TO THE BEST OF MY KNOWLEDGE AND BELIEF, I
CERTIFY THAT THE INFORMATION SET FORTH IN THIS STATEMENT IS TRUE, COMPLETE AND
CORRECT.
Hi-Lo Automotive, Inc.
/s/ T. Michael Young
By: _________________________________
T. Michael Young Chairman,
President and Chief Executive
Officer
Dated: December 23, 1997
17
<PAGE>
ANNEX A
HI-LO AUTOMOTIVE, INC.
2575 WEST BELLFORT
HOUSTON, TEXAS 77054
INFORMATION STATEMENT PURSUANT TO
SECTION 14(F) OF THE SECURITIES
EXCHANGE ACT OF 1934 AND RULE 14F-1 THEREUNDER
This Information Statement ("Information Statement") is being mailed on or
about December 24, 1997, as a part of the Company's
Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-9")
to the holders of record of shares of common stock, par value $.01 per share,
of the Company (the "Shares") at the close of business on or about December
17, 1997. You are receiving this Information Statement in connection with the
possible election of persons designated by Purchaser to a majority of the
seats on the Company's Board of Directors.
Pursuant to the Merger Agreement, the Purchaser commenced the Offer on
December 24, 1997. The Offer is scheduled to expire at 12:00 midnight, New
York City Time, on Monday, January 26, 1998, unless the Offer is extended.
You are urged to read this Information Statement carefully. You are not,
however, required to take any action. Capitalized terms used herein and not
otherwise defined herein shall have the meaning set forth in the Schedule 14D-
9.
The following information is based on the Company's Proxy Statement, dated
as of April 18, 1997, and, except as indicated, such information is given as
of such date.
The information contained in this Information Statement or incorporated by
reference herein concerning Parent, Purchaser, or their respective officers,
directors, representatives or affiliates or actions or events with respect to
any of them, was provided by Parent or Purchaser, and the Company takes no
responsibility for such information.
INFORMATION WITH RESPECT TO THE COMPANY
OUTSTANDING VOTING STOCK
As of December 17, 1997, there were (i) 10,775,109 Shares issued and
outstanding, all of which were validly issued, fully paid and nonassessable,
(ii) 1,400,000 Shares reserved for future issuance pursuant to the Company's
1990 Stock Option Plan, of which 1,054,666 Shares were reserved for issuance
upon exercise of outstanding options, and (iii) 42,730 Shares reserved for
future issuance pursuant to the Company's 1991 Associate Stock Purchase Plan.
As of December 17, 1997, T. Michael Young, the Company's Chairman of the
Board, President and Chief Executive Officer owned 420,641 Shares, or
approximately 3.9% of the Shares, and no other Executive Officer or Director
owned 1% or more of the Shares. All Directors and current Executive Officers
as a group (10 persons) owned beneficially 721,273 Shares constituting
approximately 6.5% of outstanding voting securities.
PURCHASER'S RIGHT TO DESIGNATE DIRECTORS; PURCHASER'S DESIGNEES
The Merger Agreement provides that, upon the Purchaser's acquisition of a
majority of the outstanding Shares pursuant to the Offer, the Purchaser shall
be entitled to designate such number of Directors, rounded up to the next
whole number, on the Board of Directors as shall give the Purchaser
representation on the Board of Directors equal to the product of the total
number of Directors on the Board of Directors multiplied by the percentage
that the aggregate number of Shares beneficially owned by the Purchaser at
such time bears to the
A-1
<PAGE>
total number of Shares then outstanding (the "Purchaser Designees"), and the
Company shall, at such time, upon the request of Purchaser, promptly use its
best efforts to take all actions necessary to cause the Purchaser's Designees
to be elected as Directors of the Company, including increasing the size of
the Board of Directors or securing the resignations of incumbent directors or
both. Notwithstanding the foregoing, at all times prior to the Effective Time,
the Board of Directors shall include at least two Directors who held office as
of the date of the Merger Agreement (any such director remaining in office
being an "Independent Director"). Following the election or appointment of the
Purchaser's Designees and, prior to the Effective Time, the approval of a
majority of the Independent Directors shall be required to authorize and shall
be sufficient to authorize, any termination of the Merger Agreement by the
Company, any amendment of the Merger Agreement requiring action by the Board
of Directors, any extension of time for the performance of any of the
obligations or other acts of Parent or Purchaser under the Merger Agreement,
any waiver of compliance with any of the agreements or conditions under the
Merger Agreement for the benefit of the Company and any action to seek to
enforce any obligation of Parent or Purchaser under the Merger Agreement and
any other action by the Board of Directors under or in connection with the
Merger Agreement. The Independent Directors shall be appointed as a Special
Committee of the Board of Directors and shall have full power solely with
respect to the matters set forth in the previous sentence.
The Purchaser Designees will be selected by the Purchaser from among the
individuals listed below. Each of the following individuals has consented to
serve as a Director of the Company if appointed or elected. None of the
following individuals owns any Shares. In addition, none of the following
individuals is a Director of, or holds any position with, the Company. The
name, age, present principal occupation or employment and five-year employment
history of each of the following individuals are set forth below. Each person
is a citizen of the United States and the business address of each person is
233 South Patterson, Springfield, Missouri 65802.
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR EMPLOYMENT;
MATERIAL POSITIONS HELD DURING THE PAST FIVE
NAME AGE YEARS
---------------------------- --- --------------------------------------------
<C> <C> <S>
Jay D. Burchfield........... 54 Chairman of the Board and Director of City
Bancorp in Springfield, Missouri from
January 1997 to present; Chairman of the
Board and CEO of Boatman's National Bank of
Oklahoma in Tulsa, Oklahoma from January
1996 to January 1997; Chairman, President
and CEO of Boatman's Bank of Southern
Missouri in Springfield, Missouri from April
1987 to January 1996.
Joe C. Greene............... 61 Attorney-At-Law and managing partner of the
Springfield, Missouri firm of Greene &
Curtis, LLP; Mr. Greene has been engaged in
the private practice of law for more than 30
years.
Charles H. O'Reilly, Sr..... 84 Chairman Emeritus since March 1993 and a co-
founder of Parent; Chairman of the Board
from 1975 to March 1993
Charles H. O'Reilly, Jr..... 58 Chairman of the Board since March 1993;
President and Chief Executive Officer of
Parent from 1975 to March 1993
David E. O'Reilly........... 48 President and Chief Executive Officer of
Parent since March 1993; Vice President of
Parent from 1975 to March 1993
Lawrence P. O'Reilly........ 51 President and Chief Operating Officer of
Parent since March 1993; Vice President of
Parent from 1975 to March 1993
Rosalie O'Reilly Wooten..... 56 Executive Vice-President of Parent since
1980
</TABLE>
BOARD OF DIRECTORS
The Board of Directors currently consists of six members, and there are
currently no vacancies on the Board of Directors. Each Director holds office
until such Director's successor is elected and qualified or until such
Director's earlier resignation, death or removal.
Set forth below is information with respect to standing members of the Board
of Directors as of December 19, 1997. Each of the current members of the Board
of Directors was elected to a one-year term at the Company's 1997 annual
meeting of stockholders.
A-2
<PAGE>
RICHARD C. ADKERSON, 50, has been a director of the Company since July 1993.
He is Executive Vice President, since July 1995, and Chief Financial Officer,
since December 1994, of Freeport-McMoRan Copper & Gold Inc., a publicly owned
company engaged in mineral exploration and mining, having previously served as
Senior Vice President since February 1994. Since August 1995, he has also
served in the positions of Vice Chairman and a member of the Board of
Directors of Freeport-McMoRan Inc. ("Freeport-McMoRan"), a publicly owned
natural resource company. Previously, he was Senior Vice President and Chief
Financial Officer of Freeport-McMoRan, having held this position since May
1992. He became a Vice President of Freeport-McMoRan in May 1989. In addition,
since its creation in March 1992, he has served as Chairman of the Board and,
since May 1996, as Chief Executive Officer of FM Properties Inc., a publicly
owned company engaged in the development and operation of real estate
properties in Texas. Since its creation in April 1994, he has served as Co-
Chairman of the Board and Chief Executive Officer of McMoRan Oil & Gas Co., a
publicly owned company engaged in oil and gas exploration.
RICHARD Q. ARMSTRONG, 62, has been a director of the Company since July
1991. He is the principal of RQA Enterprises, an independent marketing
consulting firm. From October 1993 to March 1995, Mr. Armstrong served as
Chairman and Chief Executive Officer of Adirondack Beverages, a leading
independent soft drink manufacturer and distributor in the northeastern United
States. From December 1992 to October 1993, he was a principal of The New
England Consulting Group, a management consulting firm. From April 1991 to
December 1992, he was principal of RQA Enterprises. Mr. Armstrong is also a
director or trustee of six investment companies for which PaineWebber
Incorporated, or its wholly owned subsidiary, Mitchell Hutchins Asset
Management, Inc., serves as investment advisor.
CHARLES P. DURKIN, JR., 59, has been a director of the Company since January
1988. Mr. Durkin is a Managing Director of SBC Warburg Dillon Read, an
investment banking firm, where he has been employed since 1966. Mr. Durkin is
a director of Viking Office Products, Inc.
E. JAMES LOWREY, 69, has been a director of the Company since February 1995.
He retired as Executive Vice President-Finance and Administration and as a
director of SYSCO Corporation on December 31, 1993. He was an executive
officer of SYSCO Corporation, which is engaged in the marketing and
distribution of food and related products, for over 20 years and served as a
director for over 12 years. Mr. Lowrey is a Distinguished Tenure Director of
SYSCO, which is a non-voting position. He is also a director of Riviana Foods
Inc. and The Profit Recovery Group International, Inc.
EDWARD T. STORY, JR., 54, has been a director of the Company since January
1988. Mr. Story has been President and Chief Executive Officer, since its
formation in August 1991, of SOCO International, Inc., a majority-owned
subsidiary of Snyder Oil Corporation, which is engaged in international oil
and gas operations. Mr. Story is a director of Snyder Oil Corporation, First
Banks America, Inc., and Hallwood Realty Corporation, general partner of
Hallwood Realty MLP.
T. MICHAEL YOUNG, 53, has been a director and the President and Chief
Executive Officer since October 1987. In March 1992, he was elected to the
additional position of Chairman of the Board.
A-3
<PAGE>
DIRECTORS AND COMMITTEES
ATTENDANCE AND FEES
The Company's Board of Directors held six meetings in 1996. Each director
attended at least 75% of the total number of meetings of the Board of
Directors and the committees on which he served.
All non-employee directors of the Company are entitled to receive an annual
retainer of $12,000, paid quarterly in arrears, and are reimbursed for
ordinary and necessary expenses incurred in attending Board or committee
meetings. Each committee chairman also receives an additional annual retainer
of $500, and each director receives a $1,000 meeting fee for each Board
meeting attended and a $300 meeting fee for each committee meeting attended.
Directors also receive a $500 meeting fee for each Board meeting, and a $150
meeting fee for each committee meeting, held by telephonic communication. In
addition, each non-employee director of the Company received a one-time
initial grant of a non-qualified option to purchase 5,000 shares of Common
Stock pursuant to the Company's 1990 Stock Option Plan and receives annual
non-qualified options under the 1990 Stock Option Plan. The annual options,
granted on the date of each annual meeting of stockholders, are for a number
of shares of the Company's Common Stock determined by dividing 1.5 times the
director's annual retainer by the fair market value of the Common Stock on the
date of option grant, and rounding upward to the nearest 50 shares, with the
option exercise price being equal to that fair market value.
The table below sets forth the compensation received by each non-employee
director for service as a director in 1996.
NON-EMPLOYEE DIRECTOR COMPENSATION FOR LAST FISCAL YEAR
<TABLE>
<CAPTION>
CASH COMPENSATION
--------------------------------
ANNUAL AGGREGATE STOCK OPTION GRANTS
NAME AND PRINCIPAL RETAINER MEETING CASH -------------------
POSITION FEE($) FEES($) COMPENSATION($) NUMBER OF SHARES(1)
- ------------------ -------- ------- --------------- -------------------
<S> <C> <C> <C> <C>
Richard C. Adkerson....... 12,500 5,150 17,650 3,350
Chairman, Audit Committee
Richard Q. Armstrong...... 12,000 6,350 18,350 3,350
Audit Committee
Compensation Committee
Charles P. Durkin,
Jr.(2)................... 6,250 3,300 9,550 0
Chairman, Compensation
Committee
Nominating Committee
E. James Lowrey........... 12,000 6,050 18,050 3,350
Audit Committee
Nominating Committee
Edward T. Story, Jr....... 12,500 5,000 17,500 3,350
Chairman, Nominating
Committee
Compensation Committee
</TABLE>
- --------
(1) Includes, with respect to Messrs. Adkerson, Armstrong, Lowrey and Story an
annual option grant on May 14, 1996, at an exercise price of $5.4375. See
Note (2) below for information regarding compensation to Mr. Durkin.
(2) In accordance with the policy of SBC Warburg Dillon Read, until August
1996, Mr. Durkin received no cash compensation or stock options from the
Company for his service as a director other than reimbursement of his
expenses.
A-4
<PAGE>
COMMITTEES
The Board of Directors has established the following standing committees:
Audit Committee. The Audit Committee annually reviews and recommends to
the full Board of Directors the firm to be engaged to audit the accounts of
the Company and its subsidiaries. Additionally, the Audit Committee reviews
with such independent auditors the plan and results of the auditing
engagement and the scope and results of the Company's procedures for
internal auditing, inquires as to the adequacy of internal accounting
controls, and considers the independence of the auditors. During 1996, the
Audit Committee held two meetings. The Audit Committee is currently
comprised of three directors: Richard C. Adkerson (Chairman), Richard Q.
Armstrong and E. James Lowrey.
Compensation Committee. The Compensation Committee's responsibility is to
approve the compensation arrangements for senior management of the Company,
including establishment of salaries and bonuses and other compensation for
executive officers of the Company; approve any compensation plans in which
officers and directors of the Company are eligible to participate, and
administer such plans, including the granting of stock options or other
benefits under any such plans; and review significant issues that relate to
changes in benefit plans. The Compensation Committee held four meetings
(including one by written consent) in 1996. The Compensation Committee is
currently comprised of three directors: Charles P. Durkin, Jr. (Chairman),
Richard Q. Armstrong, and Edward T. Story, Jr.
Nominating Committee. The Nominating Committee recommends to the full
Board of Directors nominees for election to the Board; makes
recommendations regarding responsibilities, memberships and coordination of
the committees of the Board; and recommends to the full Board a successor
to the chief executive officer when a vacancy occurs. The Nominating
Committee held two meetings in 1996. The Nominating Committee is currently
comprised of three directors: Edward T. Story, Jr. (Chairman), Charles P.
Durkin, Jr., and E. James Lowrey.
SECURITY OWNERSHIP OF MANAGEMENT
The table below sets forth the ownership of the Company's Common Stock, as
of December 19, 1997, by (i) each of the Company's directors, (ii) each
executive officer named in the Summary Compensation Table included under
"Information About Executive Officers--Compensation of Executive Officers,"
and (iii) all directors and executive officers of the Company as a group.
Except as otherwise indicated, the persons listed below have sole voting power
and investment power over the shares beneficially held by them.
<TABLE>
<CAPTION>
SHARES OWNED BENEFICIALLY
----------------------------
NAME NUMBER PERCENT
- ---- -------------- -------------
<S> <C> <C>
Richard C. Adkerson(1)............................ 17,900 *
Richard Q. Armstrong(1)........................... 8,600 *
Charles P. Durkin, Jr............................. 15,782 *
E. James Lowrey(1)................................ 19,500 *
Edward T. Story, Jr.(1)........................... 15,100 *
T. Michael Young(1)............................... 420,641 3.9
Daniel T. Bucaro(1)............................... 28,061 *
K. Grant Hutchins(1).............................. 81,243 *
Conley P. Kyle(1)(2).............................. 34,699 *
Gary D. Walther(1)(3)............................. 79,747 *
All directors and executive officers as a group
(10 persons)(1).................................. 721,273 6.5
</TABLE>
- --------
* Less than 1%
(1) Includes shares issuable upon exercise of stock options exercisable within
60 days as follows: Mr. Adkerson-11,900; Mr. Armstrong-8,100; Mr. Lowrey-
9,500; Mr. Story-8,100; Mr. Young-111,182; Mr. Bucaro-26,157; Mr.
Hutchins-73,213; Mr. Kyle-31,333; Mr. Walther-77,973; and all directors
and executive officers as a group-347,458.
(2) Mr. Kyle disclaims ownership of 25 of these shares, which are owned by his
adult son.
(3) Mr. Walther is custodian of 1,774 of these shares for his daughter and his
son under the Texas Uniform Gift to Minors Act.
A-5
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information concerning each person
known by the Company to own beneficially more than 5% of the outstanding
shares of the Company's Common Stock.
<TABLE>
<CAPTION>
SHARES OWNED
BENEFICIALLY
--------------------
NAME NUMBER PERCENT(1)
- ---- --------- ----------
<S> <C> <C>
Dimensional Fund Advisors Inc.(2).......................... 702,156 6.5
Franklin Advisory Services, Inc.(3)........................ 1,067,700 9.9
Hwang Family Ltd. Partnership group(4)..................... 1,051,950 9.8
</TABLE>
- --------
(1) Based on the 10,775,109 shares outstanding on December 15, 1997.
(2) The information is based on a Schedule 13G dated February 5, 1997, filed
with the Securities and Exchange Commission by Dimensional Fund Advisors
Inc. ("Dimensional"), a registered investment advisor, which is deemed to
have beneficial ownership of all of such shares as of December 31, 1996.
All of such shares are held in portfolios of DFA Investment Dimensions
Group Inc., a registered open-end investment company, or in series of the
DFA Investment Trust Company, a Delaware business trust, or the DFA Group
Trust and DFA Participation Group Trust, investment vehicles for qualified
employee benefit plans, all of which Dimensional serves as investment
manager. Dimensional, which has sole voting power with respect to 478,200
of such shares and sole dispositive power with respect to all of such
shares, disclaims beneficial ownership of all such shares. The address of
Dimensional is 1299 Ocean Avenue, 11th Floor, Santa Monica, CA 90401.
(3) The information is based on a Schedule 13G, dated February 12, 1997, filed
with the Securities and Exchange Commission by Franklin Resources, Inc.
("Franklin"), Franklin Advisory Services, Inc. ("Franklin Advisory"), and
two principal shareholders of Franklin. The shares are beneficially owned
by one or more open or closed-end investment companies or managed accounts
that are advised by direct and indirect investment advisory subsidiaries
of Franklin. Franklin Advisory has sole voting and dispositive power with
respect to all such shares. The address of Franklin is 777 Mariners Island
Blvd., San Mateo, CA 94404.
(4) The information is based on Amendment No. 4 to a Schedule 13D, dated
February 13, 1997, and Amendment No. 7 to a Schedule 13D dated July 28,
1997, both filed with the Securities and Exchange Commission by Hwang
Family Ltd. Partnership, which reports to have sole voting and dispositive
power with respect to all such shares. The address of Hwang Family Ltd.
Partnership is 2432 Keyhole Dr., Irving, TX 75062.
INFORMATION ABOUT EXECUTIVE OFFICERS
EXECUTIVE OFFICERS
The following table sets forth certain information about the executive
officers of the Company on December 19, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
T. Michael Young........ 53 Director, Chairman of the Board, President and Chief Executive Officer
Daniel T. Bucaro........ 37 Vice President--Merchandising
K. Grant Hutchins....... 55 Vice President, General Counsel and Secretary
Conley P. Kyle.......... 47 Vice President--Store Operations
Gary D. Walther......... 42 Vice President--Finance, Chief Financial Officer and Treasurer
</TABLE>
T. Michael Young--see "Information with Respect to the Company--Board of
Directors" above.
Daniel T. Bucaro was elected Vice President--Merchandising in May 1996. He
joined the Company in August 1994 as Commercial Sales and Marketing Manager.
Before joining the Company he had over ten years of service with Goodyear Tire
and Rubber Company, most recently as Manager of Associate Brands.
A-6
<PAGE>
K. Grant Hutchins joined the Company in September 1990 as Vice President,
General Counsel and Secretary.
Conley P. Kyle joined the Company in May 1991 as Retail Sales Manager. He
was promoted to Division Manager in January 1993 and was elected Vice
President--Store Operations in August 1995.
Gary D. Walther joined the Company in October 1990 as Vice President--
Finance, Chief Financial Officer and Treasurer.
The Company's executive officers are elected annually and serve at the
discretion of the Board of Directors.
COMPENSATION OF EXECUTIVE OFFICERS
The table below sets forth the compensation paid or accrued for services
rendered in all capacities to the Company during the last three fiscal years
to the Company's Chief Executive Officer and each of the Company's other most
highly compensated executive officers (the "Named Executives") who earned more
than $100,000 in salary and bonus compensation in 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
-------------------------- -----------------------------
AWARDS PAYOUT
---------- ----------
RESTRICTED ALL OTHER
STOCK OPTIONS LTP COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($)(1) BONUS($) AWARDS($) (#) PAYOUTS($) ($)(2)
- --------------------------- ---- ------------ -------- ---------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
T. Michael Young........
Chairman of the Board, 1996 316,300 0 -- -- -- 1,750
President and Chief 1995 316,300 0 -- 55,400 -- 3,855
Executive Officer 1994 295,342 147,671 -- 39,200 -- 4,657
Daniel T. Bucaro........ 1996 102,788 10,944(4) -- 10,000 --
Vice President--
Merchandising(3) 1,497
K. Grant Hutchins....... 1996 148,500 0 -- -- -- 2,264
Vice President, General 1995 148,500 0 -- 22,300 -- 3,813
Counsel and Secretary 1994 138,708 69,354 -- 15,800 -- 3,792
Conley P. Kyle.......... 1996 120,000 3,885(6) -- -- -- 1,265
Vice President--Store
Operations(5)
Gary D. Walther.........
Vice President--
Finance, Chief 1996 146,000 0 -- -- -- 2,228
Financial Officer and 1995 146,000 0 -- 21,900 -- 3,741
Treasurer 1994 134,125 67,063 -- 15,200 -- 3,656
</TABLE>
- --------
(1) Includes portion of salary deferred under the Company's Profit Sharing
Plan.
(2) Represents the aggregate value of the Company's contributions during each
year under the Company's Profit Sharing Plan.
(3) Mr. Bucaro was elected Vice President--Merchandising on May 14, 1996.
(4) Performance bonus paid to Mr. Bucaro in March 1996.
(5) Mr. Kyle was elected Vice President--Store Operations on August 16, 1995.
(6) Cash bonus for winning special achievement award.
A-7
<PAGE>
The following table contains information concerning the grant of a stock
option under the Company's 1990 Stock Option Plan to Mr. Daniel T. Bucaro, who
is the only Named Executive to receive a stock option grant in 1996.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATE OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM(2)
- ------------------------------------------------------------------------ -----------------
% OF TOTAL
OPTIONS GRANTED EXERCISE
OPTIONS TO EMPLOYEES PRICE PER EXPIRATION
NAME GRANTED(1) IN FISCAL YEAR SHARE DATE 5% 10%
---- ---------- --------------- --------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Daniel T. Bucaro........ 10,000 16.0% $5.4375 11/14/01 $ 16,758 $ 37,575
</TABLE>
- --------
(1) The options were granted on May 14, 1996, and expire 5 1/2 years from the
date of grant.
(2) The potential realizable value reflects price appreciation above the stock
option exercise price of $5.4375 per share. On December 18, 1997, the
closing per share price of the Company's stock on the New York Stock
Exchange was $2.9375.
The table below sets forth the aggregate option exercises during the last
fiscal year and the value of outstanding options at year end held by the Named
Executives.
AGGREGATED OPTION EXERCISES DURING 1996
AND OPTION VALUES AT YEAR END
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
YEAR END(#) YEAR END($)(*)
------------- --------------
SHARES
ACQUIRED ON VALUE EXERCISABLE/ EXERCISABLE/
EXERCISE (#) REALIZED ($) UNEXERCISABLE UNEXERCISABLE
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
T. Michael Young......... -- -- 63,920/53,480 0/0
Daniel T. Bucaro......... -- -- 11,080/16,620 0/0
K. Grant Hutchins........ -- -- 54,293/21,840 0/0
Conley P. Kyle........... -- -- 15,720/13,280 0/0
Gary D. Walther.......... -- -- 59,453/21,280 0/0
</TABLE>
- --------
* Based on the difference between the closing sale price of the Common Stock
of $2.50 on December 31, 1996 (the last trading day of 1996), and the
exercise price.
The Company's 1990 Stock Option Plan provides that, upon a change of
control, the Compensation Committee may accelerate the vesting of options,
cancel options and make payments in respect thereof in cash in accordance with
the Stock Option Plan, adjust the outstanding options as appropriate to
reflect such change of control, or provide that each option shall thereafter
be exercisable for the number and class of securities or property that the
optionee would have been entitled to had the option already been exercised.
The Stock Option Plan provides that a change of control occurs if any person,
entity or group acquires or gains ownership or control of more than 50% of the
outstanding Common Stock or, if after certain enumerated transactions, the
persons who were directors before such transaction cease to constitute a
majority of the Board of Directors.
A-8
<PAGE>
TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL ARRANGEMENTS
In 1995, the Company entered into Change of Control Employment Agreements
with each of its executive officers, including Messrs. Young, Bucaro,
Hutchins, Kyle and Walther, which provide that from and after a "Change of
Control" (as defined therein) until the second anniversary of the effective
date of the Change of Control, if (i) Hi/LO terminates employment of the
executive officer for any reason other than for "Cause" (as defined therein),
death or disability, (ii) the executive officer terminates employment for
"Good Reason" (as defined therein), or (iii) the executive officer terminates
employment after the first anniversary for any reason or no reason, such
executive officer will be entitled to a payment equal to two years' base
salary (two and one-half years' base salary, in the case of Mr. Young),
continued health coverage for one year from the date of termination or through
the end of the second anniversary of the Effective Date of the Change of
Control, whichever is longer, and the extension of certain rights under the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA").
The Change of Control Employment Agreements also provide that for a two-year
period following termination of employment of the executive officer, the
executive officer (x) will not act in any manner or capacity in or for any
business entity that competes with the Company, (y) will not divulge any
confidential information of the Company to a third party, and (z) will not
solicit or hire away any person who was an employee of the Company on the
Effective Date of the Change of Control. For purposes of the Change of Control
Employment Agreements, a Change of Control occurs if (i) Hi/LO is not the
surviving entity in any merger or consolidation (or survives only as a
subsidiary of an entity other than a previously wholly-owned subsidiary of
Hi/LO), (ii) Hi/LO sells, leases or exchanges or agrees to sell, lease or
exchange all or substantially all of its assets to any other person or entity
(other than a wholly-owned subsidiary of Hi/LO), (iii) Hi/LO is to be
dissolved and liquidated, (iv) any person or entity, including a "group" as
contemplated by Section 13(d)(3) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), (other than Saratoga Partners, L.P., Dillon,
Read & Co. Inc., or any of their respective affiliates) acquires or gains
ownership or control (including, without limitation, power to vote) of more
than 50% of the outstanding shares of capital stock of Hi/LO, or (v) as a
result of or in connection with any cash tender or exchange offer, merger or
other business combination, sales of assets or a contested election for the
Board of Directors, or any combination of the foregoing transactions (a
"Transaction"), the persons who were directors of Hi/LO before such
Transaction cease to constitute a majority of the Board. Election of the
proposed director nominees of the Hwang Partnership and Mr. Ward would
constitute a Change of Control for purposes of these agreements.
The Company and Dirk A. Hoyt entered into a Consulting and Severance
Agreement on February 28, 1996, when Mr. Hoyt resigned as an executive officer
of the Company, which provides that Mr. Hoyt would render consultant services
to the Company, at such times as are mutually agreeable, in consideration for
(a) an initial payment to Mr. Hoyt of $15,000, (b) the payment to Mr. Hoyt of
a semi-monthly consulting fee of $7,558 during the Consultation Period (as
defined in the agreement), (c) continued participation in the Company's group
insurance plans during the Consultation Period, and (d) continuation of the
stock options previously granted to Mr. Hoyt until 90 days after expiration of
the Consultation Period. The Consultation Period expired on February 28, 1997.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors is responsible for
establishing the Company's compensation philosophy for executive officers,
approving and administering the Company's incentive and benefit plans,
monitoring the performance and compensation of executive officers and other
key employees, and setting compensation and making awards under the Company's
incentive plans that are consistent with the Company's compensation philosophy
and the performance of the Company and its executive officers. Total
compensation for the Company's Chief Executive Officer is based upon the same
factors and determined in the same manner as the Company's other executive
officers.
The Company's executive compensation program consists of three principal
elements: (1) base salary, (2) the Company's Incentive Cash Bonus Plan, which
provides for cash bonuses based on overall Company
A-9
<PAGE>
performance, as well as individual performance, and (3) the Company's Stock
Option Plan, which provides long-term incentives that are intended to align
the interests of executive officers with those of stockholders. The Incentive
Cash Bonus Plan and the Stock Option Plan constitute the performance-based
portion of total compensation.
Base Salary: Historically, the Compensation Committee has established base
salary levels of the Chief Executive Officer and other executive officers
after review of published executive compensation salary survey data of other
companies having annual sales or revenues similar in size to the Company, with
particular emphasis given to those engaged in retail or headquartered in the
same geographic area as the Company. By reviewing such salary survey data, the
Compensation Committee has tried to ensure that the base salaries established
by the Compensation Committee are generally within the middle range of base
salaries paid by those companies included in the salary survey for equivalent
executive positions. The base salary established for each executive officer
also takes into account the executive's particular experience and level of
responsibility. Base salaries of the executive officers are reviewed annually,
with adjustments made based on the salary data reviewed, increases in the cost
of living, job performance of the executive officer, the expansion of duties
and responsibilities, if any, of the executive officer, and the Company's
financial performance. In view of the Company's financial results in 1995 and
anticipated results in 1996, no salary increases were awarded to the Chief
Executive Officer and the other Named Executives in 1996, except with respect
to Mr. Bucaro, who received a salary increase at the time he was elected Vice
President--Merchandising in May 1996.
Incentive Cash Bonuses: The Incentive Cash Bonus Plan was established in
1989 by the Board of Directors to enable executive officers and other key
employees of the Company to earn annual cash bonuses, based upon the Company
attaining earnings targets for the particular year as established by the
Compensation Committee. Both a minimum target necessary to be achieved before
any bonus is paid, and a maximum target necessary to be achieved for a maximum
bonus award, are established after review and consideration of the Company's
Business Plan for the particular year.
Prior to 1996, each year the Compensation Committee established a
performance target, with earnings per share used as the basis of measurement
for the performance target. If the performance target was met, there was an
incentive opportunity at the executive officer level of 50% of base salary. A
maximum bonus at the executive officer level of up to 80% of base salary was
available if earnings performance exceeded the performance target by a certain
percentage, and the potential for a lesser bonus if earnings performance did
not meet the performance target but came within a certain percentage of that
target. Those percentage levels were established each year by the Compensation
Committee. Due to anticipated financial results of the Company for 1996, no
performance targets were established under the Incentive Cash Bonus Plan for
1996 for executive officers, and no incentive cash bonuses were paid under the
Incentive Cash Bonus Plan to executive officers for 1996.
Stock Options: The long-term incentive portion of the Company's executive
compensation program is administered through the Company's Stock Option Plan,
established in 1990 by the Board of Directors to provide a means by which
certain employees of the Company, including executive officers, could develop
an economic interest in the financial success of the Company through ownership
in the Company's Common Stock. The exercise price of each option granted under
the Stock Option Plan is equal to the fair market value of the shares subject
to the option on the date of the option grant. Appreciation in value of the
stock option is entirely dependent on the market performance of the Company's
Common Stock. In December 1992, the Compensation Committee made the
determination that, commencing in 1993, stock option grants would be awarded
annually to the Chief Executive Officer, other executive officers, and other
key employees, in order to ensure that the Company's long-term incentives
better matched the Company's long-term results and to enhance recipients'
desire to remain with the Company and devote their best efforts to its
business. The Compensation Committee has adopted option grant guidelines,
which provide that the number of option shares to be awarded each year are to
be determined by dividing the market price of the Company's Common Stock at
the time of grant into a percentage of the optionee's annualized base salary,
as adjusted for the job performance of the optionee. The guidelines, which
were adopted in 1993, are based on the recommendations of the compensation and
employee
A-10
<PAGE>
benefits consulting firm of William M. Mercer, Incorporated, which was engaged
by the Compensation Committee in 1993 to review the Company's executive
compensation program and to advise the Compensation Committee on whether any
changes were needed to ensure that the Company's executive compensation
program remained competitive and appropriately related executive compensation
to the Company's performance.
The percent of salary guidelines adopted by the Compensation Committee are
140% of base salary for the Chief Executive Officer, 120% of base salary for
other executive officers, 70% of base salary for non-officer senior
management, and 40% of base salary for other key employees. The Compensation
Committee has retained the flexibility to make adjustments upward by as much
as one-half of the guideline and downward to zero, depending on individual job
performance.
In 1996, no stock options were granted to executive officers of the Company
other than options for 10,000 shares granted to Mr. Bucaro, at the time he was
elected Vice President--Merchandising. See "Compensation of Executive
Officers--Option Grants in Last Fiscal Year." On April 1, 1997, stock options
were granted at an exercise price of $3.4375 per share to each of the Named
Executives as follows: Mr. Young-50,000; Mr. Bucaro-40,000; Mr. Hutchins-
30,000; Mr. Kyle-40,000; and Mr. Walther-30,000.
Other Matters: The Omnibus Budget Reconciliation Act of 1993 (the "Act")
imposes a limit of $1 million, with certain exceptions, on the amount that a
publicly held corporation may deduct in any year for the compensation paid or
accrued with respect to each of its five most highly compensated officers.
None of the Company's executive officers currently receives compensation
exceeding the limits imposed by the Act. While the Compensation Committee
cannot predict with certainty how the Company's executive compensation might
be affected in the future by the Act or applicable tax regulations issued
thereunder, the Compensation Committee intends to try to preserve the tax
deductibility of all executive compensation, while maintaining the Company's
executive compensation program as described in this report.
Compensation Committee
Charles P. Durkin, Jr. (Chairman)
Richard Q. Armstrong
Edward T. Story, Jr.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
The Company believes that, during 1996, its directors and officers complied
with all filing requirements under Section 16(a) of the Securities Exchange
Act of 1934.
A-11
<PAGE>
SBC WARBURG DILLON READ ANNEX B
SBC Warburg
Dillon Read Inc.
535 Madison
Avenue
New York, NY
10022
Tel. 212-906-7000
December 22, 1997
Board of Directors
Hi-Lo Automotive, Inc.
2575 West Bellfort
Houston, TX 77054
Gentlemen:
We understand that Hi-Lo Automotive, Inc. (the "Company"), O'Reilly
Automotive, Inc. ("O'Reilly") and Shamrock Acquisition, Inc., a wholly owned
subsidiary of O'Reilly ("Purchaser"), will enter into an Agreement and Plan of
Merger dated as of December 23, 1997 (the "Merger Agreement") which provides,
among other things, for (i) the commencement by Purchaser of a tender offer
for all outstanding shares of the Company's Common Stock, $.01 par value (the
"Company Common Stock") for $4.35 per share net to the seller in cash, and
(ii) the subsequent merger of Purchaser with and into the Company (the
"Merger") pursuant to which each outstanding share of Company Common Stock
will be converted into the right to receive $4.35 in cash (the consideration
to be received in the tender offer and the merger are collectively referred to
as the "Consideration" and the tender offer and the merger are collectively
referred to as the "Transaction"). Pursuant to the Transaction, the Company
will become a wholly owned subsidiary of O'Reilly. The terms and conditions of
the Transaction are more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the Consideration offered to
the holders of Company Common Stock is fair from a financial point of view to
such holders.
SBC Warburg Dillon Read Inc., a subsidiary of Swiss Bank Corporation
("SBCWDR"), has acted as financial advisor to the Board of Directors of the
Company in connection with the Transaction and will receive a fee for its
services, a material portion of which is contingent upon the consummation of
the Transaction. In the past, SBCWDR and Dillon, Read & Co. Inc., the
predecessor firm to SBCWDR, and their affiliates have provided investment
banking services to the Company and have received customary compensation for
such services. Certain employees of SBCWDR own shares of the Company Common
Stock. Mr. Charles P. Durkin, Jr., a Managing Director of SBCWDR, is a
Director of the Company. SBCWDR may in the course of its normal trading
activities from time to time effect transactions and hold long or short
positions in the securities of the Company and O'Reilly.
Our opinion does not address the Company's underlying business decision to
effect the Transaction or constitute a recommendation to any stockholder of
the Company as to whether to tender such holder's Company Common Stock or as
to how to vote in the Merger.
In arriving at our opinion, among other things, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company;
(ii) reviewed certain internal financial information and operating data
concerning the Company prepared by the management of the Company;
(iii) reviewed certain limited financial projections prepared by the
management of the Company;
(iv) discussed the past and current operations and financial condition and
the prospects of the Company with senior executives of the Company;
(v) reviewed the prices and trading activity of the securities of certain
other generally comparable publicly traded securities;
(vi) reviewed certain publicly available financial information of certain
other generally comparable publicly traded companies;
SBC Warburg Dillon Read Inc. is a subsidiary of Swiss Bank Corporation and a
member of the New York Stock Exchange.
B-1
<PAGE>
SBC WARBURG DILLON READ
(vii) reviewed the reported prices and trading activity for the Company
Common Stock;
(viii) reviewed the pro forma effects of the Transaction on O'Reilly's
financial position;
(ix) reviewed the Merger Agreement;
(x) discussed other strategic alternatives available to the Company
including, but not limited to, the responses to SBCWDR's solicitation
of proposals for purchase of the Company; and
(xi) reviewed such other information as we have deemed appropriate.
In connection with our review, we have not, with your consent, assumed any
responsibility for independent verification of any of the information reviewed
by us for the purposes of this opinion and have, with your consent, relied on
its being complete and accurate in all material respects. In addition, we have
not, with your consent, made any independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of the Company or O'Reilly,
nor have we been furnished with any such appraisals. With respect to the
financial projections provided to or otherwise reviewed or discussed with us,
we have assumed, at your direction, that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
Company's management as to the future financial performance of the Company.
Our opinion is necessarily based on economic, monetary, market and other
conditions as in effect on, and the information made available to us as of,
the date hereof.
Based upon and subject to the foregoing, and considering the strategic
alternatives available to the Company and its current capital structure, it is
our opinion that, as of the date hereof, the Consideration offered to the
holders of shares of Company Common Stock is fair, from a financial point of
view, to such holders.
Very Truly Yours,
/s/ SBC Warburg Dillon Read Inc.
-------------------------------------
SBC Warburg Dillon Read Inc.
B-2
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<C> <S>
(a)(1)* Offer to Purchase (incorporated by reference to Exhibit (a)(1) to
the Tender Offer Statement on Schedule 14D-1, filed with the
Securities and Exchange Commission (the "Commission") by Parent
and Purchaser on December 24, 1997).
(a)(2)* Letter of Transmittal (incorporated by reference to Exhibit (a)(2)
to the Tender Offer Statement on Schedule 14D-1, filed with the
Commission by Parent and Purchaser on December 24, 1997).
(a)(3)*+ Letter to Company stockholders, dated December 24, 1997.
(a)(4)* Notice of Guaranteed Delivery (incorporated by reference to
Exhibit (a)(3) to the Tender Offer Statement on Schedule 14D-1,
filed with the Commission by Parent and Purchaser on December 24,
1997).
(a)(5) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and
Other Nominees (incorporated by reference to Exhibit (a)(4) to the
Tender Offer Statement on Schedule 14D-1, filed with the
Commission by Parent and Purchaser on December 24, 1997).
(a)(6)* Letter to Clients for use by Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees (incorporated by reference to
Exhibit (a)(6) to the Tender Offer Statement on Schedule 14D-1,
filed with the Commission by Parent and Purchaser on December 24,
1997).
(a)(7)* Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9 (incorporated by reference to Exhibit (a)(6)
to the Tender Offer Statement on Schedule 14D-1, filed with the
Commission by Parent and Purchaser on December 24, 1997).
(a)(8) Form of Summary Advertisement, dated December 24, 1997
(incorporated by reference to Exhibit (a)(7) to the Tender Offer
Statement on Schedule 14D-1, filed with the Commission by Parent
and Purchaser on December 24, 1997).
(a)(9) Text of Joint Press Release, dated December 23, 1997, issued by
Parent and the Company (incorporated by reference to Exhibit
(a)(7) to Tender Offer Statement on Schedule 14D-1, filed with the
Commission on December 24, 1995).
(c)(1) Agreement and Plan of Merger dated as of December 23, 1997, among
Parent, the Purchaser and the Company (incorporated by reference
to Exhibit (c)(1) to the Tender Offer Statement on Schedule 14D-1,
filed with the Commission by Parent and Purchaser on December 24,
1997).
(c)(2)*+ Opinion of SBC Warburg Dillon Read dated December 22, 1997.
(c)(3)+ Form of Deferral Agreement with Non-employee Directors.
(c)(4) Confidentiality Agreement, dated as of November 26, 1997, among
Parent and the Company (incorporated by reference to Exhibit
(c)(2) to the Tender Offer Statement on Schedule 14D-1, filed with
the Commission by Parent and Purchaser on December 24, 1997).
</TABLE>
- --------
* Included in documents mailed to stockholders.
+ Filed herewith.
<PAGE>
EXHIBIT (A)(3)
[LOGO OF HI/LO AUTOMOTIVE, INC APPEARS HERE] 2575 W. BELLFORT
HOUSTON, TEXAS
77054-5025
(713) 663-6700
December 24, 1997
Dear Stockholder:
On behalf of the Board of Directors of Hi-Lo Automotive, Inc. (the
"Company"), I am pleased to inform you that the Company entered into an
Agreement and Plan of Merger, dated as of December 23, 1997 (the "Merger
Agreement"), with O'Reilly Automotive, Inc. ("Parent") and Shamrock
Acquisition, Inc., its wholly owned subsidiary (the "Purchaser"), pursuant to
which the Purchaser has today commenced a cash tender offer (the "Offer") to
purchase all outstanding shares of common stock, including the associated
preferred stock purchase rights, of the Company (the "Shares") at a price of
$4.35 per share, net to the seller in cash, without interest. The Offer is
conditioned upon, among other things, the tender of at least a majority of the
Shares.
Following the successful completion of the Offer, upon the terms and subject
to the conditions contained in the Merger Agreement, the Purchaser will be
merged with and into the Company (the "Merger"), with the Company as the
surviving corporation. At the effective time of the Merger, each remaining
issued and outstanding Share will be converted into the right to receive $4.35
in cash, subject to dissenter's rights.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE OFFER AND THE MERGER
AND THE MERGER AGREEMENT, HAS DETERMINED THAT THE TERMS OF THE OFFER AND THE
MERGER ARE FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY AND THE
COMPANY'S STOCKHOLDERS, AND RECOMMENDS THAT STOCKHOLDERS ACCEPT THE OFFER AND
TENDER THEIR SHARES.
In arriving at its recommendation, the Board of Directors gave careful
consideration to the factors described in the enclosed
Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule 14D-
9"), which is being filed today with the Securities and Exchange Commission,
including, among other things, the written opinion of SBC Warburg Dillon Read
Inc., the Company's financial advisor, that the consideration to be received
by the stockholders of the Company pursuant to the Offer and the Merger is
fair to such stockholders from a financial point of view.
Additional information with respect to the Board's decision is continued in
the enclosed Schedule 14D-9, and we urge you to consider this information
carefully.
In addition to the attached Schedule 14D-9, also enclosed is the Purchaser's
Offer to Purchase dated December 24, 1997, together with related materials,
including a Letter of Transmittal to be used for tendering your Shares in the
Offer. These documents set forth the terms and conditions of the Offer and
provide instructions on how to tender your Shares. I urge you to read and
consider the enclosed materials carefully before making your decision with
respect to tendering your Shares pursuant to the Offer.
Very truly yours,
T. Michael Young
Chairman of the Board, President and
Chief Executive Officer
<PAGE>
EXHIBIT (C)(2)
SBC WARBURG DILLON READ SBC Warburg
Dillon Read Inc.
535 Madison
Avenue
New York, NY
10022
Tel. 212-906-7000
December 22, 1997
Board of Directors
Hi-Lo Automotive, Inc.
2575 West Bellfort
Houston, TX 77054
Gentlemen:
We understand that Hi-Lo Automotive, Inc. (the "Company"), O'Reilly
Automotive, Inc. ("O'Reilly") and Shamrock Acquisition, Inc., a wholly owned
subsidiary of O'Reilly ("Purchaser"), will enter into an Agreement and Plan of
Merger dated as of December 23, 1997 (the "Merger Agreement") which provides,
among other things, for (i) the commencement by Purchaser of a tender offer
for all outstanding shares of the Company's Common Stock, $.01 par value (the
"Company Common Stock") for $4.35 per share net to the seller in cash, and
(ii) the subsequent merger of Purchaser with and into the Company (the
"Merger") pursuant to which each outstanding share of Company Common Stock
will be converted into the right to receive $4.35 in cash (the consideration
to be received in the tender offer and the merger, are collectively referred
to as the "Consideration" and the tender offer and the merger are collectively
referred to as, the "Transaction"). Pursuant to the Transaction, the Company
will become a wholly owned subsidiary of O'Reilly. The terms and conditions of
the Transaction are more fully set forth in the Merger Agreement.
You have asked for our opinion as to whether the Consideration offered to
the holders of Company Common Stock is fair from a financial point of view to
such holders.
SBC Warburg Dillon Read Inc., a subsidiary of Swiss Bank Corporation
("SBCWDR"), has acted as financial advisor to the Board of Directors of the
Company in connection with the Transaction and will receive a fee for its
services, a material portion of which is contingent upon the consummation of
the Transaction. In the past, SBCWDR and Dillon, Read & Co. Inc., the
predecessor firm to SBCWDR, and their affiliates have provided investment
banking services to the Company and have received customary compensation for
such services. Certain employees of SBCWDR own shares of the Company Common
Stock. Mr. Charles P. Durkin, Jr., a Managing Director of SBCWDR, is a
Director of the Company. SBCWDR may in the course of its normal trading
activities from time to time effect transactions and hold long or short
positions in the securities of the Company and O'Reilly.
Our opinion does not address the Company's underlying business decision to
effect the Transaction or constitute a recommendation to any stockholder of
the Company as to whether to tender such holder's Company Common Stock or as
to how to vote in the Merger.
In arriving at our opinion, among other things, we have:
(i) reviewed certain publicly available financial statements and other
information of the Company;
(ii) reviewed certain internal financial information and operating data
concerning the Company prepared by the management of the Company;
(iii) reviewed certain limited financial projections prepared by the
management of the Company;
(iv) discussed the past and current operations and financial condition and
the prospects of the Company with senior executives of the Company;
(v) reviewed the prices and trading activity of the securities of certain
other generally comparable publicly traded securities;
(vi) reviewed certain publicly available financial information of certain
other generally comparable publicly traded companies;
SBC Warburg Dillon Read Inc. is a subsidiary of Swiss Bank Corporation and a
member of the New York Stock Exchange.
<PAGE>
SBC WARBURG DILLON READ
(vii) reviewed the reported prices and trading activity for the Company
Common Stock;
(viii) reviewed the pro forma effects of the Transaction on O'Reilly's
financial position;
(ix) reviewed the Merger Agreement;
(x) discussed other strategic alternatives available to the Company
including, but not limited to, the responses to SBCWDR's solicitation
of proposals for purchase of the Company; and
(xi) reviewed such other information as we have deemed appropriate.
In connection with our review, we have not, with your consent, assumed any
responsibility for independent verification of any of the information reviewed
by us for the purposes of this opinion and have, with your consent, relied on
its being complete and accurate in all material respects. In addition, we have
not, with your consent, made any independent evaluation or appraisal of the
assets or liabilities (contingent or otherwise) of the Company or O'Reilly,
nor have we been furnished with any such appraisals. With respect to the
financial projections provided to or otherwise reviewed or discussed with us,
we have assumed, at your direction, that they have been reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
Company's management as to the future financial performance of the Company.
Our opinion is necessarily based on economic, monetary, market and other
conditions as in effect on, and the information made available to us as of,
the date hereof.
Based upon and subject to the foregoing, and considering the strategic
alternatives available to the Company and its current capital structure, it is
our opinion that, as of the date hereof, the Consideration offered to the
holders of shares of Company Common Stock is fair, from a financial point of
view, to such holders.
Very Truly Yours,
/s/ SBC Warburg Dillon Read Inc.
-------------------------------------
SBC Warburg Dillon Read Inc.
<PAGE>
Exhibit (c)(3)
December 23, 1997
Hi-Lo Automotive, Inc.
2575 West Bellfort
Houston, TX 77054
Ladies and Gentlemen:
Reference is made to the Hi-Lo Automotive, Inc. 1990 Stock Option Plan (the
"Plan") and to that certain Agreement and Plan of Merger dated as of December
23, 1997 among Hi-Lo Automotive, Inc. (the "Company"), O'Reilly Automotive,
Inc. and Shamrock Acquisition, Inc. (the "Merger Agreement"). In order to
facilitate the transactions comtemplated by the Merger Agreement and in
consideration for the direct and indirect benefits to be received by the
undersigned as a result thereof, the receipt and sufficiency of which are hereby
acknowledged, the Company and the undersigned director of the Company hereby
agree as follows:
1. Each option agreement between the Company and the undersigned
director is hereby amended to provide for automatic acceleration of vesting of
options granted pursuant to such agreements upon a corporate change of control
by deleting the first sentence of the second full paragraph of Section 3 thereof
and replacing such sentence with the following sentence so that the first
sentence of the second full paragraph of Section 3 reads in its entirety as
follows:
"Notwithstanding the foregoing, this Option shall become fully
exercisable upon a Corporate Change (as such term is defined in the Plan),
which acceleration shall not limit the authority of the committee appointed
by the Board of Directors to administer the Plan to effect such other
actions as are provided for in the Plan in the event of a Corporate
Change".
2. Notwithstanding any rights which the undersigned may have under the
Plan or any option agreement granting options under the Plan to purchase shares
of common stock, par value $.01 per share (the "Common Stock"), of the Company
("Options"), the undersigned hereby covenants, promises and agrees that the
undersigned will not exercise, or provide notice of exercise with respect to,
any Options beneficially owned by the undersigned (_______ Options as of the
date hereof) prior to the earlier of (i) the termination of the Merger Agreement
and (ii) six days after the consummation of the Offer (as defined in the Merger
Agreement).
3. The undersigned acknowledges that on the fifth day after the
consummation of the Offer, each Option that is outstanding immediately prior to
the consummation of the Offer will be canceled in exchange for a single lump sum
payment equal to the product of (i) the number of shares
<PAGE>
of Common Stock subject to such Option and (ii) the excess of the Per Share
Amount (as defined in the Merger Agreement) over the exercise price per share of
such Option.
This letter agreement shall be effective as of the time of its acceptance
by the Company.
Very truly yours,
________________________________
Name:
Agreed and Accepted as of
___:00 __.m., this _____
date of December, 1997
HI-LO AUTOMOTIVE, INC.
By: ___________________________
K. Grant Hutchins
Vice President and General Counsel
