<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 24, 1997
REGISTRATION STATEMENT NO.
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
DISCOUNT AUTO PARTS, INC.
(Exact name of Registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
FLORIDA 5531 59-1447420
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
</TABLE>
---------------------
4900 FRONTAGE ROAD SOUTH
LAKELAND, FLORIDA 33815
(941) 687-9226
(Address, including zip code, and telephone number
including area code, of Registrant's principal executive offices)
---------------------
WILLIAM C. PERKINS, PRESIDENT
DISCOUNT AUTO PARTS, INC.
4900 FRONTAGE ROAD SOUTH
LAKELAND, FLORIDA 33815
(941) 687-9226
(Name, address, including zip code, and telephone number
including area code, of agent for service)
COPIES OF COMMUNICATIONS TO:
<TABLE>
<C> <C>
GARY I. TEBLUM, ESQUIRE JEFFERY B. FLOYD, ESQUIRE
TRENAM, KEMKER, SCHARF, BARKIN VINSON & ELKINS L.L.P.
FRYE, O'NEILL & MULLIS, P.A. 2300 FIRST CITY TOWER
P.O. BOX 1102 1001 FANNIN STREET
TAMPA, FLORIDA 33601-1102 HOUSTON, TEXAS 77002-6760
(813) 223-7474
(813) 229-6553 (FAX)
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box, and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock...................... 1,855,000 shs. $16.35 $30,327,107 $9,190.00
======================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) and Rule 457(c), based on the average of the low
and high sales prices of Hi/LO Common Stock on The New York Stock Exchange
on November 20, 1997 of $2 21/32.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
[HI-LO AUTOMOTIVE, INC. LOGO](R)
HI-LO AUTOMOTIVE, INC.
2575 WEST BELLFORT
HOUSTON, TEXAS 77054
, 1997
Dear Fellow Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of Hi-Lo Automotive, Inc. ("Hi/LO") to be held at the
, , Houston, Texas, on , 1998, at 9:00 a.m.,
local time.
At the Special Meeting you will be asked to approve and adopt an Agreement
and Plan of Merger dated as of October 17, 1997 (the "Merger Agreement")
providing for the merger (the "Merger") of a wholly owned subsidiary of Discount
Auto Parts, Inc. ("Discount Auto Parts") with and into Hi/LO. If the merger is
effected, Hi/LO will become a wholly owned subsidiary of Discount Auto Parts and
Hi/LO stockholders will be entitled to receive for each share of Hi/LO common
stock 0.1485 of one share of Discount Auto Parts common stock, subject to
adjustment based on the market price of Discount Auto Parts common stock
immediately prior to the Special Meeting; provided that the portion of a share
of Discount Auto Parts common stock to which Hi/LO stockholders are entitled to
receive for each share of Hi/LO common stock shall not exceed 0.1624 (the
"Exchange Ratio"). Accompanying this letter, you will find a Notice of Special
Meeting of Stockholders, a Proxy Statement/Prospectus relating to the actions to
be taken by Hi/LO stockholders at the Special Meeting and a proxy card. DETAILED
INFORMATION REGARDING THE MERGER, THE MERGER AGREEMENT, DISCOUNT AUTO PARTS AND
HI/LO IS SET FORTH IN THE PROXY STATEMENT/PROSPECTUS AND THE APPENDICES THERETO,
WHICH YOU ARE URGED TO READ CAREFULLY IN THEIR ENTIRETY.
THE HI/LO BOARD OF DIRECTORS, AFTER CAREFUL CONSIDERATION OF THE OPTIONS
AVAILABLE TO HI/LO, HAS APPROVED THE MERGER AGREEMENT AND THE TRANSACTIONS
RELATED THERETO AND FOR THE REASONS SET FORTH IN THE PROXY STATEMENT/PROSPECTUS
DETERMINED THAT THE TERMS OF THE MERGER AND THE TRANSACTIONS RELATED THERETO ARE
FAIR TO AND IN THE BEST INTERESTS OF HI/LO AND ITS STOCKHOLDERS. YOUR BOARD OF
DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR ADOPTION AND APPROVAL OF THE
MERGER AGREEMENT.
In connection with its approval of the Merger Agreement, the Hi/LO Board of
Directors received a written opinion dated October 17, 1997, from SBC Warburg
Dillon Read Inc. ("SBCWDR"), its financial advisor, that, as of the date of such
opinion and based on certain matters stated in the opinion, the Exchange Ratio
was fair from a financial point of view to the stockholders of Hi/LO. A copy of
the written opinion of SBCWDR, which sets forth a description of the assumptions
made, matters considered and limitations on the review undertaken, is attached
to the accompanying Proxy Statement/Prospectus as Appendix B and should be read
carefully in its entirety.
We believe that the Merger represents a sound strategic fit between two
companies with similar operating philosophies and complementary geographic
locations. Please take the time to carefully review the enclosed materials and
return your proxy to us.
If you have any questions about the Merger, please contact
who is assisting in the solicitation of the proxies, at 1-800- - .
<PAGE> 3
Whether or not you plan to attend the Special Meeting, please complete,
sign, date and return the enclosed proxy card. It is important that your shares
be represented and voted at the Special Meeting. Failure to vote will have the
same effect as a vote against approval and adoption of the Merger Agreement.
Sincerely,
T. Michael Young
Chairman of the Board, President
and Chief Executive Officer
<PAGE> 4
HI-LO AUTOMOTIVE, INC.
2575 WEST BELLFORT
HOUSTON, TEXAS 77054
---------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON , 1998
To the Stockholders of Hi-Lo Automotive, Inc.:
A Special Meeting of Stockholders of Hi-Lo Automotive, Inc., a Delaware
corporation ("Hi/LO"), will be held on , , 1998, at 9:00
a.m., local time, at the , , Houston, Texas, for
the following purposes:
1. To consider and vote upon approval and adoption of the Agreement
and Plan of Merger dated as of October 17, 1997 (the "Merger Agreement")
among Discount Auto Parts, Inc., a Florida corporation ("Discount Auto
Parts"), HLA Acquisition, Inc., a Delaware corporation and a wholly owned
subsidiary of Discount Auto Parts ("Merger Sub"), and Hi/LO. Pursuant to
the Merger Agreement, (a) Merger Sub will be merged with and into Hi/LO
(the "Merger"), (b) Hi/LO will become a wholly owned subsidiary of Discount
Auto Parts, and (c) each share of Hi/LO common stock outstanding at the
effective time of the Merger will be converted into a portion of one share
of Discount Auto Parts common stock, all as more fully set forth in the
accompanying Proxy Statement/Prospectus and in the Merger Agreement, a copy
of which is included as Appendix A to the Proxy Statement/Prospectus.
2. To transact such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
Only Hi/LO stockholders of record at the close of business on ,
1997 are entitled to notice of, and to vote at, the Special Meeting. A list of
the stockholders entitled to vote at the Special Meeting will be available for
examination by any Hi/LO stockholder, for any purpose germane to the Special
Meeting, at the offices of Hi/LO in Houston, Texas during normal business hours
for a period of 10 days prior to the Special Meeting. Hi/LO stockholders will
not be entitled to dissenters' or appraisal rights under the Delaware General
Corporation Law or any other statute in respect of the Merger.
Your vote is important. The affirmative vote of a majority of the shares of
Hi/LO common stock entitled to vote at the Special Meeting is required for
approval and adoption of the Merger Agreement. Even if you plan to attend the
Special Meeting in person, we request that you sign and return the enclosed
proxy card and thus ensure that your shares will be represented at the Special
Meeting in case you are unable to attend. If you do attend the Special Meeting
and are a stockholder of record or hold a valid proxy from a stockholder of
record, you may withdraw your proxy and vote in person.
FOR THE REASONS SET FORTH IN THE PROXY STATEMENT/PROSPECTUS, YOUR BOARD OF
DIRECTORS HAS DETERMINED THAT THE TERMS OF THE MERGER AND THE TRANSACTIONS
RELATED THERETO ARE FAIR TO AND IN THE BEST INTERESTS OF HI/LO AND ITS
STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE ADOPTION AND
APPROVAL OF THE MERGER AGREEMENT.
By Order of the Board of Directors
K. Grant Hutchins
Vice President and Secretary
Houston, Texas
, 1997
PLEASE DO NOT SEND ANY STOCK CERTIFICATES AT THIS TIME.
<PAGE> 5
THIS PRELIMINARY PROXY STATEMENT/PROSPECTUS AND THE INFORMATION CONTAINED
HEREIN ARE SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT
RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY
BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
UNDER NO CIRCUMSTANCES SHALL THIS PRELIMINARY PROXY STATEMENT/PROSPECTUS
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR
SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY JURISDICTION IN WHICH
SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH JURISDICTION.
PRELIMINARY PROXY STATEMENT/PROSPECTUS,
SUBJECT TO COMPLETION, DATED NOVEMBER 24, 1997
PROXY STATEMENT
OF
HI-LO AUTOMOTIVE, INC.
PROSPECTUS
OF
DISCOUNT AUTO PARTS, INC.
This Proxy Statement/Prospectus is being furnished to holders of shares of
common stock, $0.01 par value per share ("Hi/LO Common Stock"), of Hi-Lo
Automotive, Inc., a Delaware corporation ("Hi/LO"), in connection with the
solicitation of proxies by the Board of Directors of Hi/LO for use at the
Special Meeting of stockholders of Hi/LO to be held on , ,
1998 (the "Special Meeting").
At the Special Meeting, stockholders of Hi/LO Common Stock as of the close
of business on , 1997 (the "Record Date") will be asked to consider
and vote upon approval and adoption of the Agreement and Plan of Merger dated
October 17, 1997 (the "Merger Agreement"), providing for the merger (the
"Merger") of HLA Acquisition, Inc. ("Merger Sub"), a Delaware corporation and a
wholly owned subsidiary of Discount Auto Parts, Inc., a Florida corporation
("Discount Auto Parts"), with and into Hi/LO. This Proxy Statement/Prospectus
and the accompanying form of proxy are first being mailed to stockholders of
Hi/LO on or about , 1997. The Merger will be consummated on the
terms and subject to the conditions set forth in the Merger Agreement, and as a
result of the Merger, (i) Hi/LO will become a wholly owned subsidiary of
Discount Auto Parts and (ii) Hi/LO stockholders will be entitled to receive for
each share of Hi/LO Common Stock 0.1485 of one share of common stock, par value
$0.01 per share, of Discount Auto Parts ("Discount Auto Parts Common Stock"),
subject to adjustment based on the market price of Discount Auto Parts Common
Stock immediately prior to the Special Meeting; provided that the portion of a
share of Discount Auto Parts Common Stock to which Hi/LO stockholders are
entitled for each share of Hi/LO Common Stock shall not exceed 0.1624 (the
"Exchange Ratio"). See "Certain Terms of the Merger Agreement -- Merger
Consideration."
This Proxy Statement/Prospectus also constitutes a prospectus of Discount
Auto Parts with respect to up to 1,855,000 shares of Discount Auto Parts Common
Stock to be issued pursuant to the Merger Agreement in exchange for currently
outstanding shares of Hi/LO Common Stock and additional shares of Hi/LO Common
Stock that may become outstanding prior to the Merger upon the exercise of
outstanding options to purchase Hi/LO Common Stock and remain outstanding on the
date of the Merger Agreement. Shares of Discount Auto Parts Common Stock are
quoted on the New York Stock Exchange, Inc. (the "NYSE") under the symbol "DAP."
On , 1997, the last sale price of the Discount Auto Parts Common
Stock on the NYSE Composite Tape was $ . Shares of Hi/LO Common Stock
are quoted on the NYSE under the symbol "HLO." On , 1997, the last
sale price of the Hi/LO Common Stock on the NYSE Composite Tape was $ .
Hi/LO stockholders should obtain current quotes for the Discount Auto Parts
Common Stock and the Hi/LO Common Stock.
SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY HI/LO STOCKHOLDERS.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/ PROSPECTUS
HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION
OR ANY OTHER STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is , 1997.
<PAGE> 6
AVAILABLE INFORMATION
Discount Auto Parts and Hi/LO are subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (File
Nos. 1-11276 and 1- 10823, respectively), and, in accordance therewith, file
periodic reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). Such reports, proxy statements and other
information filed by Discount Auto Parts and Hi/LO can be inspected and copied
at the public reference facilities maintained by the Commission at Room 1024,
450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and at the
Commission's Regional Offices at Seven World Trade Center, 13th Floor, New York,
New York 10048 and CitiCorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained by mail
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Commission also maintains a Web
site at http://www.sec.gov that contains reports, proxy and information
statements and other information filed electronically by Discount Auto Parts and
Hi/LO. In addition, reports, proxy statements and other information concerning
Discount Auto Parts and Hi/LO may be inspected at the offices of the NYSE, 20
Broad Street, New York, New York 10005.
Discount Auto Parts has filed with the Commission a Registration Statement
on Form S-4 (together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the offering, sale and delivery of the
Discount Auto Parts Common Stock to be issued pursuant to the Merger Agreement,
certain parts of which were omitted from this Proxy Statement/Prospectus in
accordance with the rules and regulations of the Commission. For further
information, reference is hereby made to the Registration Statement. Statements
contained herein concerning the provisions of any document are necessarily
summaries of such documents and not complete and, in each instance, reference is
made to the copy of such document attached hereto or filed as an exhibit to the
Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference.
All information contained in this Proxy Statement/Prospectus or
incorporated herein by reference with respect to Discount Auto Parts was
supplied by Discount Auto Parts, and all information contained in this Proxy
Statement/Prospectus or incorporated herein by reference with respect to Hi/LO
was supplied by Hi/LO.
FORWARD-LOOKING INFORMATION
This Proxy Statement/Prospectus includes and incorporates by reference
forward-looking statements based on current plans and expectations of Discount
Auto Parts, Hi/LO and Merger Sub relating to, among other matters, analyses,
including the opinion from the independent financial advisor to Hi/LO's Board of
Directors, as to the fairness from a financial point of view of the Exchange
Ratio to Hi/LO stockholders, based upon forecasts of future results, and
estimates of amounts that are not yet determinable. Such forward-looking
statements are contained in the sections entitled "Summary," "Summary -- Summary
Historical and Pro Forma Financial Information," "Risk Factors," "The Merger,"
"Certain Terms of the Merger Agreement," "Hi-Lo Automotive, Inc.," and
"Unaudited Pro Forma Combined Condensed Financial Statements" and other sections
of this Proxy Statement/Prospectus. All of the forward-looking information
contained or incorporated by reference in this Proxy Statement/Prospectus
involves a number of risks and uncertainties. While it is impossible to identify
all factors that could cause actual results to differ materially from those
estimated herein, such factors include increased competition, extent of the
market demand for auto parts, availability of inventory supply, propriety of
inventory mix, adequacy and perception of customer service, product quality and
defect experience, availability of and ability to take advantage of vendor
pricing programs and incentives, sourcing availability, rate of new store
openings, cannibalization of store sites, mix of types of merchandise sold,
governmental regulation, new store development, performance of information
systems, effectiveness of deliveries from the distribution center, ability to
hire, train and retain qualified team members, availability of quality store
sites, ability to complete timely expansion of the Discount Auto Parts
distribution center, ability to successfully roll-out the Discount Auto Parts
commercial delivery service, credit risk
i
<PAGE> 7
associated with the Discount Auto Parts commercial delivery service,
environmental risks, availability of expanded and extended credit facilities,
legal expenses associated with material litigation matters and disputes,
expenses associated with investigations concerning freon matters, potential for
liability with respect to these matters, ability to successfully integrate the
business of Discount Auto Parts with that of Hi/LO, ability to achieve operating
and financial synergies, other factors described elsewhere in the Proxy
Statement/Prospectus and other risks. For additional detail concerning these
factors, see the documents incorporated herein by reference and listed under the
heading "Incorporation of Certain Documents by Reference."
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by Discount Auto Parts with
the Commission pursuant to the Exchange Act (Commission File No. 1-11276), are
incorporated herein by reference:
(a) The description of Discount Auto Parts Common Stock contained in
Discount Auto Parts' Prospectus dated August 18, 1992, as filed with the
Commission under Rule 424(b) of the Securities Act, which was a part of
Discount Auto Parts' Registration Statement on Form S-1 (Registration
Statement No. 33-49400), as amended, and any amendment or report filed for
the purpose of updating such description;
(b) Discount Auto Parts' Annual Report on Form 10-K for the fiscal
year ended June 3, 1997 and Annual Report to Stockholders for the fiscal
year ended June 3, 1997;
(c) The information contained in Discount Auto Parts' Proxy Statement
dated August 27, 1997 for its Annual Meeting of Stockholders held on
October 7, 1997 that has been incorporated by reference in the 1997
Discount Auto Parts Form 10-K and was filed with the Commission on Schedule
14A on September 2, 1997;
(d) Discount Auto Parts' Quarterly Report on Form 10-Q for the quarter
ended September 2, 1997; and
(e) Discount Auto Parts' Current Reports on Form 8-K filed with the
Commission on July 29, 1997 and October 22, 1997, respectively.
The following documents, which have been filed by Hi/LO with the Commission
pursuant to the Exchange Act (Commission File No. 1-10823), are incorporated
herein by reference:
(a) The description of Hi/LO Common Stock contained in Hi/LO's
Registration Statement on Form 8-A dated August 2, 1991, and any amendment
or report filed for the purpose of updating such description;
(b) Hi/LO's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996;
(c) The information contained in Hi/LO's Proxy Statement dated April
18, 1997 for its Annual Meeting of Stockholders held on May 20, 1997 that
has been incorporated by reference in the 1996 Hi/LO Form 10-K and was
filed with the Commission on Schedule 14A on April 18, 1997;
(d) Hi/LO's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997; and
(e) Hi/LO's Current Reports on Form 8-K filed with the Commission on
October 22, 1997.
All documents filed by Discount Auto Parts or Hi/LO pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Proxy Statement/Prospectus and prior to the date of the Special Meeting of the
Hi/LO stockholders shall be deemed to be incorporated by reference herein and to
be a part hereof from the date of filing of such documents. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently
ii
<PAGE> 8
filed document that also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WITH
RESPECT TO DISCOUNT AUTO PARTS AND HI/LO THAT ARE NOT PRESENTED HEREIN OR
DELIVERED HEREWITH. COPIES OF THESE DOCUMENTS (NOT INCLUDING EXHIBITS TO SUCH
DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE IN
SUCH DOCUMENTS OR HEREIN) ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON TO WHOM
THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED UPON WRITTEN OR ORAL REQUEST TO THE
FOLLOWING:
<TABLE>
<S> <C>
DISCOUNT AUTO PARTS HI/LO DOCUMENTS
DOCUMENTS Hi-Lo Automotive, Inc.
Discount Auto Parts, Inc. 2575 West Bellfort
4900 Frontage Road South Houston, Texas 77054
Lakeland, Florida 33815 Attention: K. Grant Hutchins
Attention: C. Michael Moore Vice President and Secretary
Secretary
</TABLE>
IN ORDER TO ENSURE TIMELY DELIVERY, ANY REQUEST FOR DOCUMENTS SHOULD BE
MADE BY , 1998.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS IN
CONNECTION WITH THE SOLICITATION OF PROXIES OR THE OFFERING OF SECURITIES MADE
HEREBY AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY DISCOUNT AUTO PARTS OR HI/LO. NEITHER
THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION OF THE
SECURITIES OFFERED HEREBY SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF DISCOUNT AUTO PARTS OR HI/LO
SINCE THE DATE HEREOF OR THAT THE INFORMATION SET FORTH OR INCORPORATED BY
REFERENCE HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO PURCHASE, ANY SECURITIES, OR THE SOLICITATION OF A PROXY, IN ANY
JURISDICTION IN WHICH, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION OF AN OFFER OR PROXY SOLICITATION.
iii
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................
Forward-Looking Information...........
Incorporation of Certain Documents by
Reference...........................
Summary...............................
The Companies.......................
The Special Meeting.................
Recommendation of the Hi/LO Board of
Directors........................
The Merger and the Merger
Agreement........................
Opinion of Financial Advisor........
Interests of Certain Persons in the
Merger...........................
Certain Federal Income Tax
Consequences.....................
Exchange Procedures.................
Comparative Rights of Hi/LO and
Discount Auto Parts
Stockholders.....................
Summary Historical and Pro Forma
Financial Information............
Discount Auto Parts Summary
Historical Financial
Information....................
Hi/LO Selected Historical
Financial Information..........
Unaudited Pro Forma Combined
Summary Financial
Information....................
Comparative Per Share Data..........
Market Price and Dividend Data......
Risk Factors..........................
Risks Relating to the Merger........
Risks Relating to Operations........
The Special Meeting...................
General; Date, Time and Place.......
Purposes of the Special Meeting.....
Record Date and Outstanding
Shares...........................
Voting and Revocation of Proxies....
Quorum and Vote Required............
Solicitation of Proxies.............
Recommendation of the Hi/LO Board of
Directors........................
No Dissenters' or Appraisal
Rights...........................
The Merger............................
Background of the Merger............
Hi/LO's Reasons for the Merger;
Recommendation of the Hi/LO Board
of Directors.....................
Discount Auto Parts' Reasons for the
Merger...........................
Opinion of Financial Advisor to
Hi/LO............................
Interests of Certain Persons in the
Merger...........................
Accounting Treatment................
Governmental Approvals..............
Restriction on Resales by
Affiliates.......................
Certain Federal Income Tax
Consequences.....................
Certain Terms of the Merger
Agreement...........................
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Merger; Effective Time..........
Merger Consideration................
Exchange Procedures.................
Conditions to the Merger............
Representations and Warranties......
Certain Covenants; Conduct of
Business Prior to the Merger.....
No Solicitation.....................
Certain Post-Merger Matters.........
Employee Benefits...................
Hi/LO Stockholders Rights Plan......
Termination; Effect of
Termination......................
Amendment and Waiver................
Expenses and Termination Fee........
New York Stock Exchange Listing.....
Discount Auto Parts, Inc..............
Hi-Lo Automotive, Inc.................
General.............................
Business Strategy...................
Store Operations....................
Commercial Program..................
Product Line and Pricing............
Properties..........................
Legal Proceedings...................
Management's Discussion and Analysis
of Financial Condition and
Results of Operations............
Security Ownership by Certain
Beneficial Owners...................
Unaudited Pro Forma Combined Condensed
Financial Statements................
Description of Discount Auto Parts
Capital Stock.......................
General.............................
Discount Auto Parts Common Stock....
Discount Auto Parts Preferred
Stock............................
Certain Provisions of the Amended
and Restated Articles of
Incorporation of Discount Auto
Parts............................
Certain Provisions of Florida Law...
Transfer Agent and Registrar........
Comparison of Stockholder Rights......
Legal Matters.........................
Experts...............................
Stockholder Proposals.................
Index to Consolidated Financial
Statements of Hi/LO................. F-1
Appendices:
A -- Agreement and Plan of Merger
B -- Opinion of SBC Warburg Dillon
Read Inc.
</TABLE>
iv
<PAGE> 10
SUMMARY
A substantial portion of the following information is a summary of
information contained elsewhere in this Proxy Statement/Prospectus. Reference is
made to, and this summary is qualified in its entirety by, the more detailed
information contained in or incorporated by reference in this Proxy
Statement/Prospectus and the Appendices hereto. Stockholders are urged to read
carefully this Proxy Statement/Prospectus and the Appendices hereto in their
entirety. As used in this Proxy Statement/Prospectus, unless otherwise required
by the context, the term "Discount Auto Parts" means Discount Auto Parts, Inc.
and its consolidated subsidiaries and the term "Hi/LO" means Hi-Lo Automotive,
Inc. and its consolidated subsidiaries. Capitalized terms used herein without
definition are, unless otherwise indicated, defined in the Merger Agreement and
used herein with such meanings.
THE COMPANIES
Discount Auto Parts and Merger Sub. Discount Auto Parts is one of the
Southeast's leading specialty retailers of automotive replacement parts,
maintenance items and accessories for the "Do-It-Yourself" ("DIY") consumer. As
of November 4, 1997, Discount Auto Parts operated a chain of 413 Discount Auto
Parts stores, with 334 stores located throughout Florida, 49 stores in Georgia,
16 stores in Alabama, 4 stores in South Carolina and 10 stores in Mississippi.
Each Discount Auto Parts store carries an extensive line of brand name
replacement "hard" parts, such as starters, alternators, brake pads, brake shoes
and water pumps, for domestic and imported cars, vans and light trucks, as well
as brand name maintenance items and accessories. Discount Auto Parts is not in
the business of selling tires or performing automotive repairs or installations.
Discount Auto Parts has achieved significant growth in each of its five
latest fiscal years. Net sales have increased to $405.2 million in fiscal 1997
from $176.8 million in fiscal 1993 and income from operations has increased to
$47.2 million in fiscal 1997 from $21.8 million in fiscal 1993. The number of
stores had increased to 400 as of the end of fiscal 1997 from 158 at the
beginning of fiscal 1993 and stands at 413 as of November 4, 1997. At September
2, 1997, Discount Auto Parts had consolidated total assets of approximately
$460.5 million and consolidated stockholders' equity of approximately $235.5
million and employed approximately 3,800 persons.
Discount Auto Parts was founded in 1971 with a single 800 square foot store
in Winter Haven, Florida by Herman Fontaine, his son, Denis L. Fontaine, and
other members of the Fontaine family. Since the Company's inception, members of
the Fontaine family, including Herman Fontaine, Denis L. Fontaine and Peter J.
Fontaine, managed the Company and played key roles in formulating and carrying
out its business strategies. Discount Auto Parts completed its initial public
offering in August 1992, and the Fontaine family continues to control
approximately 48% of the outstanding Discount Auto Parts Common Stock. After the
Merger, the Fontaine family will control approximately 43% of the outstanding
Discount Auto Parts Common Stock.
HLA Acquisition, Inc. ("Merger Sub") is a newly formed, wholly owned
subsidiary of Discount Auto Parts incorporated in the State of Delaware for the
purpose of effecting the Merger. Discount Auto Parts and Merger Sub maintain
their principal executive offices at 4900 Frontage Road South, Lakeland, Florida
33815. Their telephone number at such offices is (941) 687-9226.
Hi/LO. Hi/LO sells automotive aftermarket parts, products and accessories
for domestic and imported cars, vans and light trucks to DIY consumers and
commercial auto repair outlets. DIY consumers purchase parts, products and
accessories and perform their own installation and maintenance. Commercial
repair outlets include professional mechanics, auto repair shops, auto dealers,
fleet owners, and mass and general merchandisers with auto repair facilities
that perform installation and maintenance work for a fee. At September 30, 1997,
Hi/LO had 187 stores, 70 located in the greater Houston metropolitan area, 31 in
the Dallas/Fort Worth area, 9 in the Austin area, 8 in San Antonio, 45 located
in other cities and communities in Texas, 17 located in Louisiana, and 7 located
in Southern California. Hi/LO has closed 8 stores since June 30, 1996 and
through September 30, 1997. At September 30, 1997, Hi/LO had consolidated total
assets of $142.8 million and consolidated stockholders' equity of $61.2 million
and employed approximately 2,560 persons.
1
<PAGE> 11
Since the opening of the first Hi/LO store in 1956, Hi/LO has targeted the
DIY consumer by offering a large selection of repair and replacement parts,
friendly customer service and high quality parts at low, discount prices. The
DIY market segment accounted for approximately 65% of Hi/LO's sales in 1996 and
for the first nine months of 1997. Hi/LO's commercial sales program, marketed
under the trade name First Call(R), is targeted at professional mechanics, auto
repair shops, auto dealers, fleet owners, mass and general merchandisers with
auto repair facilities, and other commercial repair outlets located near Hi/LO's
stores. In addition, during 1997, the first phase of Hi/LO's centralized
commercial call center has been implemented and enables Hi/LO to provide faster
and more outstanding service to its commercial customers on a more consistent
basis.
Hi/LO was incorporated under the laws of the State of Delaware in 1987 and
maintains its principal executive offices at 2575 West Bellfort, Houston, Texas
77054. Hi/LO's telephone number is (713) 663-6700.
THE SPECIAL MEETING
Date, Time and Place. The Special Meeting of stockholders of Hi/LO will be
held on , 1998, at the , , Houston,
Texas, commencing at 9:00 a.m. local time.
Purposes. The purposes of the Special Meeting are (i) to consider and vote
upon approval and adoption of the Merger Agreement; and (ii) to transact such
other business as may properly come before the Special Meeting.
Record Date; Shares Entitled to Vote. Only holders of record of Hi/LO
Common Stock at the close of business on , 1997 (the "Record Date")
are entitled to notice of and to vote at the Special Meeting. On such date,
there were shares of Hi/LO Common Stock outstanding, each of which will
be entitled to one vote on each matter to be acted upon at the Special Meeting.
Vote Required. The affirmative vote of a majority of all shares of Hi/LO
Common Stock entitled to vote thereon at the Special Meeting is required under
the Delaware General Corporation Law (the "DGCL" or the "Delaware Law") to
approve and adopt the Merger Agreement. In determining whether the Merger
Agreement has received the requisite number of affirmative votes, abstentions
and broker non-votes will have the same effect as a vote against the Merger
Agreement.
Security Ownership of Hi/LO Management. At the Record Date, the directors
and executive officers of Hi/LO beneficially owned approximately 6.5% of the
outstanding shares of Hi/LO Common Stock entitled to vote at the Special
Meeting.
Revocability of Proxies. Any proxy given pursuant to this solicitation may
be revoked by (i) filing with the Secretary of Hi/LO, before the taking of the
vote at the Special Meeting, a written notice of revocation bearing a later date
than the date of the proxy or any later-dated proxy relating to the same shares,
or (ii) attending the Special Meeting and voting in person.
No Dissenters' or Appraisal Rights. Hi/LO stockholders will not be
entitled to any dissenters' or appraisal rights in connection with the Merger.
See "The Special Meeting -- No Dissenters' or Appraisal Rights."
RECOMMENDATION OF THE HI/LO BOARD OF DIRECTORS
The Hi/LO Board of Directors believes that the Merger represents a sound
strategic fit between two companies with similar operating philosophies and
complementary geographic markets and that the combined companies will have
greater financial strength, operational efficiencies, earning power and growth
potential than Hi/LO would have on its own. See "The Special
Meeting -- Recommendation of the Hi/LO Board of Directors," and "The
Merger -- Hi/LO's Reasons for the Merger; Recommendation of the Hi/LO Board of
Directors."
THE BOARD OF DIRECTORS OF HI/LO HAS DETERMINED THAT THE MERGER IS FAIR TO
AND IN THE BEST INTERESTS OF HI/LO AND ITS STOCKHOLDERS AND UNANIMOUSLY
2
<PAGE> 12
RECOMMENDS THAT THE STOCKHOLDERS OF HI/LO VOTE FOR THE APPROVAL AND ADOPTION OF
THE MERGER AGREEMENT.
THE MERGER AND THE MERGER AGREEMENT
General; Exchange Ratio; Adjustments. At the Effective Time (see,
"Effective Time of the Merger"), Merger Sub will be merged with and into Hi/LO,
with Hi/LO being the surviving corporation and continuing as a wholly owned
subsidiary of Discount Auto Parts (the "Surviving Corporation"). In the Merger,
each share of Hi/LO Common Stock outstanding at the Effective Time (other than
shares held directly or indirectly by Discount Auto Parts or Hi/LO) will be
converted into a fraction of a share of Discount Auto Parts Common Stock equal
to the Exchange Ratio.
The Exchange Ratio is equal to 0.1485; provided, however, that (i) if the
Discount Average Share Price (as defined below) is greater than $26.148, then
the Exchange Ratio shall be equal to the product (rounded to the nearest
ten-thousandth) of (x) 0.1485 times (y) the quotient of $26.148 divided by the
Discount Average Share Price, or (ii) if the Discount Average Share Price is
less than $22.727, then the Exchange Ratio shall be equal to the lesser of (1)
0.1624 and (2) the product (rounded to the nearest ten-thousandth) of (x) 0.1485
times (y) the quotient of $22.727 divided by the Discount Average Share Price.
Pursuant to the Merger Agreement, Hi/LO has the right to terminate the Merger
Agreement if the Discount Average Share Price is less than $19.55. The Board of
Directors of Hi/LO has not determined what actions it would take or what factors
it would consider if circumstances changed such that the Discount Average Share
Price was less than $19.55. The term "Discount Average Share Price" means the
average of the closing sales prices of Discount Auto Parts Common Stock (or, if
Discount Auto Parts Common Stock should not trade on any trading day, the
average of the bid and asked prices therefor on such day), rounded to the
nearest thousandth (.0005 being rounded to .001), as reported on the New York
Stock Exchange Composite Tape ("NYSE Composite Tape") on each of the last ten
consecutive trading days ending on the third trading day prior to the Special
Meeting.
The following table sets forth the Exchange Ratio and the "value" of the
consideration to be received by Hi/LO stockholders for each share of Hi/LO
Common Stock, assuming various Discount Average Share Prices between $19.00 and
$28.00:
<TABLE>
<CAPTION>
"VALUE" PER SHARE
DISCOUNT OF HI/LO
AVERAGE SHARE PRICE EXCHANGE RATIO COMMON STOCK*
- ------------------- -------------- -------------------
<C> <C> <C>
$19.00 0.1624 $3.09
20.00 0.1624 3.25
21.00 0.1607 3.37
22.00 0.1534 3.37
23.00 0.1485 3.42
24.00 0.1485 3.56
25.00 0.1485 3.71
26.00 0.1485 3.86
27.00 0.1438 3.88
28.00 0.1387 3.88
</TABLE>
- ---------------
* Calculated by multiplying the Discount Average Share Price by the Exchange
Ratio. The actual value of a share of Discount Auto Parts Common Stock on
the Closing Date of the Merger, which will be based upon the market value
on a particular date of the fraction of the share of Discount Auto Parts
Common Stock received, may be higher or lower than the value indicated
above, which is based on the average market value of a share of Discount
Auto Parts Common Stock over a period of several days prior to the Special
Meeting.
For example, if the Discount Average Share Price is $ (the closing price
of Discount Auto Parts Common Stock on , 1997), the Exchange Ratio
will be and the "value" per share of Hi/LO Common Stock will be
$ . Hi/LO stockholders should obtain current quotes for the Discount Auto
Parts Common Stock.
3
<PAGE> 13
Based on the number of shares of Hi/LO Common Stock outstanding as of the
Record Date and assuming an Exchange Ratio of , approximately
shares of Discount Auto Parts Common Stock will be issuable pursuant
to the Merger Agreement (assuming no exercise prior to the Effective Time of
Hi/LO Stock Options), representing approximately % of the total Discount
Auto Parts Common Stock to be outstanding after such issuance.
Effective Time of the Merger. The Merger will become effective (the
"Effective Time") upon the filing of a Certificate of Merger with the Secretary
of State of the State of Delaware or at such later time as is specified in the
Certificate of Merger. Assuming all conditions to the Merger contained in the
Merger Agreement are satisfied or, if permissible, waived prior thereto, it is
anticipated that the Effective Time of the Merger will occur as soon as
practicable following the Special Meeting.
Certain Conditions to the Consummation of the Merger. The respective
obligations of Discount Auto Parts and Hi/LO to consummate the Merger are
subject to the satisfaction of certain conditions, including the following: (i)
approval of the Merger Agreement by the stockholders of Hi/LO; (ii) no statute,
rule, regulation, executive order, decree, ruling or injunction having been
enacted, entered, promulgated or enforced by any court or other tribunal or
governmental body or authority which prohibits the consummation of the Merger;
(iii) the Commission having declared the Registration Statement effective and,
at the Effective Time, no stop order suspending such effectiveness having been
issued; (iv) receipt by each of Hi/LO and Discount Auto Parts of legal opinions
to the effect that the Merger will qualify as a tax-free reorganization for
federal income tax purposes; (v) the accuracy of the representations and
warranties of each party (except to the extent that the aggregate of any
inaccuracies would not have a material adverse effect on such party) and
compliance in all material respects with all agreements and covenants by each
party; and (vi) the listing, subject to official notice of issuance, on the NYSE
of the Discount Auto Parts Common Stock to be issued in the Merger.
Discount Auto Parts and Hi/LO anticipate that all of the conditions to the
consummation of the Merger (other than obtaining the required approval of the
stockholders of Hi/LO) will be satisfied prior to or at the time of the Special
Meeting. Either Discount Auto Parts or Hi/LO may extend the time for performance
of any of the obligations of the other party or, in certain instances, may waive
compliance with those obligations at its discretion. See "Certain Terms of the
Merger Agreement -- Conditions to the Merger."
Governmental Approvals. Prior to November 13, 1997, Discount Auto Parts
and Hi/LO each filed a notification and report, together with requests for early
termination of the waiting period, under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act") with the Federal Trade
Commission and the Antitrust Division of the Department of Justice in respect of
the Merger. Early termination was granted on November 18, 1997. See "The
Merger -- Governmental Approvals." Neither Discount Auto Parts nor Hi/LO is
aware of any other governmental or regulatory approval required for consummation
of the Merger, other than compliance with applicable securities laws.
No Solicitation. Pursuant to the Merger Agreement, Hi/LO has agreed that
it will not, directly or indirectly, solicit from or provide information to or
engage in discussion with third parties with respect to specified business
combinations or similar transactions, subject to certain exceptions that would
permit discussions with third parties regarding such transactions if necessary
to comply with the fiduciary duties of the Hi/LO Board of Directors. See
"Certain Terms of the Merger Agreement -- No Solicitation."
Termination of the Merger Agreement. Under certain circumstances, the
Merger Agreement may be terminated prior to the Effective Time by Discount Auto
Parts or by Hi/LO, before or after approval of the Merger Agreement by the Hi/LO
stockholders. See "Certain Terms of the Merger Agreement -- Termination; Effect
of Termination."
Termination Fee. If the Merger Agreement is terminated for specified
reasons involving a competing business transaction relating to Hi/LO, Hi/LO will
be required to pay to Discount Auto Parts a termination fee of $4.0 million. See
"Certain Terms of the Merger Agreement -- Termination; Effect of Termination."
4
<PAGE> 14
Hi/LO Stock Options. The Merger Agreement provides that at the Effective
Time, automatically and without any action on the part of the holder thereof,
but in certain cases as a result of action to be taken by Hi/LO, the vesting of
each Hi/LO stock option ("Hi/LO Stock Options") outstanding at the Effective
Time will be accelerated and each such stock option will become the right to
receive an amount of cash per share represented by such option equal to the
greater of (A) $.01 or (B) the excess, if any, of (x) the Exchange Ratio
multiplied by the Discount Average Share Price over (y) the exercise price per
share under such Hi/LO Stock Option. For information as to the holdings of Hi/LO
Stock Options by directors and executive officers of Hi/LO, see "The
Merger -- Interests of Certain Persons in the Merger."
Employee Benefits. Discount Auto Parts has agreed that it will take the
actions necessary or appropriate to permit each employee of Hi/LO or any of its
subsidiaries who continue as such after the Effective Time (a "Hi/LO Employee")
at the sole election of Discount Auto Parts, to either (i) continue to
participate in the employee benefit plans and programs maintained by Hi/LO
immediately prior to the Effective Time, other than Hi/LO's stock option plan
and Hi/LO's stock purchase plan or (ii) participate in the employee benefit
plans and programs maintained by Discount Auto Parts for its employees generally
(the "Discount Plans"), other than Discount's stock option plans or any employee
stock purchase plan meeting the requirements of Section 423 of the Code (as
defined below). In the event Discount Auto Parts decides to terminate or
discontinue Hi/LO's group health plan, Discount Auto Parts will permit each
Hi/LO Employee and his or her eligible dependents to be covered under a Discount
Plan that provides medical and dental benefits, and credits such Hi/LO Employee,
for the year during which coverage under such Discount Plan begins, with any
deductibles and co-payments already incurred during such year under Hi/LO's
group health plan, and waive any pre-existing condition restrictions to the
extent necessary to provide immediate coverage. In addition, Discount Auto Parts
has agreed to give each Hi/LO Employee credit for all years of service with
Hi/LO for purposes of terms of employment and benefits.
Accounting Treatment. The Merger will be accounted for as a purchase for
accounting and financial reporting purposes with Discount Auto Parts being the
acquiring party and Hi/LO being the acquired party.
OPINION OF FINANCIAL ADVISOR
SBC Warburg Dillon Read Inc. ("SBCWDR") was retained by Hi/LO to act as its
financial advisor in connection with the Merger and related matters based on
SBCWDR's experience and expertise. At the meeting of the Board of Directors of
Hi/LO held on October 17, 1997, SBCWDR rendered to the Board of Directors of
Hi/LO an opinion subsequently confirmed in writing to the effect that, as of
such date and based on certain matters stated therein, the Exchange Ratio
pursuant to the Merger Agreement was fair from a financial point of view to the
holders of shares of Hi/LO Common Stock. The full text of the SBCWDR opinion
(the "SBCWDR Opinion" or its "Opinion"), setting forth the assumptions made,
matters considered and limitations on the review undertaken, is attached as
Appendix B to this Proxy Statement/Prospectus and is incorporated herein by
reference. Holders of Hi/LO Common Stock should read the SBCWDR Opinion
carefully in its entirety. The SBCWDR Opinion addresses the fairness of the
Exchange Ratio from a financial point of view to the holders of shares of Hi/LO
Common Stock and does not address any other aspect of the Merger, nor does it
constitute a recommendation to any holder of Hi/LO Common Stock as to how to
vote at the Special Meeting. See "The Merger -- Opinion of Financial Advisor to
Hi/LO." For information regarding the fees to be paid to SBCWDR for its services
as financial advisor to Hi/LO, see "The Merger -- Opinion of Financial Advisor
to Hi/LO."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of Hi/LO's Board of Directors with
respect to the Merger Agreement, Hi/LO stockholders should be aware that certain
officers and directors of Hi/LO have interests in the Merger that are different
from and in addition to the interests of Hi/LO stockholders generally. These
interests include, but are not limited to, the fact that: (i) each of the
executive officers and directors of Hi/LO currently holds Hi/LO Stock Options,
the vesting of which will be accelerated as a result of the Merger and which
will be cashed out based on the Exchange Ratio upon consummation of the Merger;
(ii) each of Hi/LO's five executive officers are parties to Change of Control
Employment Agreements under which such
5
<PAGE> 15
executive officers may become entitled to significant lump-sum payments upon the
occurrence of certain termination events on or following the consummation of the
Merger; and (iii) Discount Auto Parts has agreed, from and after the Effective
Time and for a period of six years thereafter, to assume the existing
obligations to indemnify and hold harmless present and former officers and
directors of Hi/LO in respect of acts or omissions occurring prior to the
Effective Time to the extent provided under the Amended and Restated Certificate
of Incorporation of Hi/LO (the "Hi/LO Charter") and the Bylaws of Hi/LO, as
amended (the "Hi/LO Bylaws") in effect on the date of the Merger Agreement, and
also has agreed to maintain in effect after the Effective Time Hi/LO's current
policies of directors' and officers' liability insurance for a period of six
years, but subject to maximum aggregate premium cost equal to 200% of the annual
premiums previously being paid by Hi/LO. The Board of Directors of Hi/LO was
aware of these interests and took these interests into account in approving the
Merger Agreement and the transactions contemplated thereby. See "The
Merger -- Interests of Certain Persons in the Merger."
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
It is intended that the Merger qualify as a reorganization under Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and that,
accordingly, for federal income tax purposes, no gain or loss will be recognized
by Discount Auto Parts, Merger Sub or Hi/LO as a result of the Merger. A holder
of Hi/LO Common Stock generally will not recognize any gain or loss for federal
income tax purposes by reason of the conversion of Hi/LO Common Stock into
Discount Auto Parts Common Stock, except to the extent of cash received, if any,
in lieu of fractional shares of Discount Auto Parts Common Stock. For a
discussion of material federal income tax considerations in connection with the
Merger and the opinions received from counsel to Discount Auto Parts and Hi/LO,
see "The Merger -- Certain Federal Income Tax Consequences." HOLDERS OF HI/LO
COMMON STOCK ARE ADVISED AND EXPECTED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER IN LIGHT OF THE
PERSONAL CIRCUMSTANCES OF SUCH HOLDERS AND THE CONSEQUENCES UNDER STATE, LOCAL
AND FOREIGN TAX LAWS.
EXCHANGE PROCEDURES
If the Merger is consummated, as soon as practicable after the Effective
Time, a letter of transmittal will be mailed or delivered to each Hi/LO
stockholder to be used in forwarding certificates evidencing such holder's
shares of Hi/LO Common Stock ("Hi/LO Stock Certificates") for surrender and
exchange for certificates evidencing shares of Discount Auto Parts Common Stock
to which such holder has become entitled and, if applicable, cash in lieu of
fractional shares of Discount Auto Parts Common Stock. After receipt of such
letter of transmittal, each holder of Hi/LO Stock Certificates should surrender
such certificates to ChaseMellon Shareholder Services, the exchange agent for
the Merger, pursuant to and in accordance with the instructions accompanying
such letter of transmittal, and each holder will receive in exchange therefor
certificates evidencing the whole number of shares of Discount Auto Parts Common
Stock to which he is entitled and any cash which may be payable in lieu of
fractional shares of Discount Auto Parts Common Stock. See "Certain Terms of the
Merger Agreement -- Exchange Procedures." HI/LO STOCKHOLDERS SHOULD NOT SEND IN
THEIR HI/LO STOCK CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL.
COMPARATIVE RIGHTS OF HI/LO AND DISCOUNT AUTO PARTS STOCKHOLDERS
The stockholders of Hi/LO are being asked to approve and adopt the Merger
Agreement pursuant to which each share of Hi/LO Common Stock (the rights of
which are governed by the DGCL and Hi/LO's Charter and By-Laws), will be
converted into the right to receive a fractional share of Discount Auto Parts
Common Stock (the rights of which are governed by Discount Auto Parts' Amended
and Restated Articles of Incorporation and Amended and Restated Bylaws and by
the Florida Business Corporation Act (the "FBCA"or the "Florida Law")).
6
<PAGE> 16
There are various differences between the rights of Hi/LO stockholders and
the rights of Discount Auto Parts stockholders. These differences result from
differences between Florida Law and the DGCL and differences between the
governing instruments of Hi/LO and Discount Auto Parts. For a discussion of the
material differences, see "Comparison of Stockholder Rights" and "Description of
Discount Auto Parts Capital Stock."
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION
DISCOUNT AUTO PARTS SUMMARY HISTORICAL FINANCIAL INFORMATION
The following summary historical financial information for each of the
fiscal years in the three fiscal year period ended June 3, 1997 has been derived
from Discount Auto Parts' Consolidated Financial Statements, which have been
audited by Ernst & Young LLP, independent certified public accountants. The
historical financial information as of September 2, 1997 and for the thirteen
week periods ended August 27, 1996 and September 2, 1997 has been derived from
the unaudited consolidated financial statements of Discount Auto Parts, has been
prepared on the same basis as the other financial statements of Discount Auto
Parts and, in the opinion of Discount Auto Parts, includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations of Discount
Auto Parts for such periods. The information set forth below is qualified by
reference to and should be read in conjunction with the consolidated financial
statements and related notes included in Discount Auto Parts' Annual Report on
Form 10-K for the fiscal year ended June 3, 1997, its Annual Report to
Stockholders for the fiscal year ended June 3, 1997 and its Quarterly Report on
Form 10-Q for the quarter ended September 2, 1997, incorporated by reference in
this Proxy Statement/Prospectus. Operating results for prior years and for the
thirteen weeks ended September 2, 1997 are not necessarily indicative of the
results that may be expected for future periods.
SUMMARY HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THIRTEEN WEEKS ENDED
------------------------------------------ -------------------------
MAY 30, 1995 MAY 28, 1996 JUNE 3, 1997 AUGUST 27, SEPTEMBER 2,
(52 WEEKS) (52 WEEKS) (53 WEEKS) 1996 1997
------------ ------------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales..................................... $253,700 $307,476 $405,186 $ 90,101 $109,737
Income from operations........................ 30,909 40,469 47,204 11,459 12,825
Net income.................................... 20,563(1) 22,463 12,741(2) 6,414 6,450
Net income per share.......................... $ 1.48(1) $ 1.44 $ .77(2) $ .39 $ .39
Weighted average shares outstanding........... 13,907 15,647 16,581 16,575 16,594
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 2,
MAY 30, 1995 MAY 28, 1996 JUNE 3, 1997 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Inventories............................................... $ 91,187 $111,408 $151,644 $156,538
Working capital........................................... 46,420 59,801 80,573 96,286
Property and equipment, net............................... 166,169 208,094 265,589 274,749
Total assets.............................................. 270,832 338,263 443,066 460,521
Long-term debt, excluding current maturities.............. 94,550 50,400 114,117 134,000
Stockholders' equity...................................... 117,895 216,046 229,061 235,516
</TABLE>
- ---------------
(1) Includes a gain of $4.8 million or $.35 per share from life insurance
proceeds as a result of the death of Denis L. Fontaine.
(2) Includes a $12.8 million or $.77 per share after tax charge associated with
the settlement of certain litigation.
7
<PAGE> 17
HI/LO SELECTED HISTORICAL FINANCIAL INFORMATION
The following selected historical financial information for each of the
years ended December 31, 1992 through 1996 has been derived from Hi/LO's
Consolidated Financial Statements, which have been audited by Arthur Andersen
LLP, independent certified public accountants. The historical financial
information as of September 30, 1996 and 1997 and for the nine-month periods
then ended, has been derived from the unaudited consolidated financial
statements of Hi/LO, has been prepared on the same basis as the other financial
statements of Hi/LO and, in the opinion of Hi/LO, includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the financial position and results of operations of Hi/LO for
such periods. The information set forth below is qualified by reference to and
should be read in conjunction with the consolidated financial statements and
related notes included elsewhere in this Proxy Statement/Prospectus.
SELECTED HISTORICAL FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
------------------------------------------------------------------------ -----------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1992 1993 1994(1) 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net sales.......... $187,182 $205,235 $235,384 $262,486 $248,599 $192,323 $184,559
Income (loss) from
operations....... 17,580 13,378 17,508 8,429 (59,316)(2) (57,541)(2) 6,344
Net income (loss).. 8,660 6,712 9,133 1,688 (53,723) (51,905) 1,933
Net income (loss)
per share........ $ .89 $ .64 $ .85 $ .16 $ (4.99) $ (4.83) $ 0.18
Weighted average
shares
outstanding...... 9,784 10,543 10,736 10,733 10,756 10,756 10,775
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Inventories...................... $ 63,176 $ 64,527 $ 84,117 $ 96,900 $ 91,401 $ 92,381
Working capital.................. 51,411 54,237 72,167 78,392 $ 73,291 $ 74,641
Property and equipment, net...... 32,427 44,707 50,114 47,823 31,980 29,716
Total assets..................... 139,532 154,627 186,182 198,973 144,088 142,835
Long-term debt, excluding current
maturities..................... 39,663 28,444 43,373 44,132 45,612 42,654
Stockholders' equity............. 77,095 101,792(3) 111,176 112,978 59,294(2) 61,227
</TABLE>
- ---------------
(1) Includes the results of operations of the former Wesco stores from their
acquisition date in November 1994.
(2) A provision for asset impairment and store closings of $51.4 million was
recorded in the third quarter of 1996. The provision included a $37.7
million charge for intangibles, primarily cost in excess of net assets
acquired (goodwill), and a $13.7 million charge for store closings, write
offs of certain store fixed assets and of certain assets at the Hi/LO
distribution center, and liquidation of real estate previously acquired for
future expansion.
(3) During 1993, Hi/LO sold 1.0 million shares at $19.25 per share as part of a
3.1 million share offering.
8
<PAGE> 18
UNAUDITED PRO FORMA COMBINED SUMMARY FINANCIAL INFORMATION
The following unaudited pro forma combined summary financial information
presents the combined financial data of Discount Auto Parts and Hi/LO for the
fiscal year ended June 3, 1997, and as of and for the thirteen weeks ended
September 2, 1997. The unaudited pro forma combined income statement data gives
effect to the Merger as if it had occurred on May 29, 1996, and the unaudited
pro forma combined balance sheet data gives effect to the Merger as if it had
occurred on September 2, 1997. Discount Auto Parts will account for the Merger
as a purchase. The unaudited pro forma summary combined financial data have been
derived from the unaudited pro forma combined financial statements included
herein and should be read in conjunction with those statements, the related
notes thereto and with the separate historical financial statements of Hi/LO
attached hereto and of Discount Auto Parts incorporated herein by reference. See
"Incorporation of Certain Documents by Reference." The pro forma data is not
necessarily indicative of the actual or future results of operations or
financial condition that would have been reported had the Merger occurred on the
dates assumed.
For purposes of the pro forma income statement data, Hi/LO's historical
operations for the twelve months ended June 30, 1997 was combined with Discount
Auto Parts' historical income statement for the fiscal year ended June 3, 1997,
and Hi/LO's historical income statement for the three months ended September 30,
1997 was combined with Discount Auto Parts' historical income statement for the
thirteen weeks ended September 2, 1997. For pro forma balance sheet data
purposes, Hi/LO's historical balance sheet as of September 30, 1997 was combined
with Discount Auto Parts' historical balance sheet as of September 2, 1997.
PRO FORMA COMBINED SUMMARY FINANCIAL INFORMATION
(UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED THIRTEEN WEEKS
JUNE 3, 1997 ENDED
(53 WEEKS) SEPTEMBER 2, 1997
------------ -----------------
<S> <C> <C>
INCOME STATEMENT DATA
Net sales................................................. $645,123 $175,030
Income (loss) from operations............................. (9,815)(1) 16,355
Net income (loss)......................................... (38,767)(1) 8,106
Net income (loss) per share............................... $ (2.13) $ .45
Weighted average shares outstanding....................... 18,181 18,194
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 2,
1997
------------
<S> <C> <C>
BALANCE SHEET DATA
Inventories............................................... $240,919
Working capital........................................... 151,602
Property and equipment, net............................... 284,520
Total assets.............................................. 589,949
Long-term debt, excluding current portion................. 176,654
Stockholders' equity...................................... 272,136
</TABLE>
- ---------------
(1) Hi/LO recorded a provision for asset impairment and store closings of $51.4
million in the third quarter of 1996. The provision included a $37.7 million
charge for the write down of intangibles, primarily cost in excess of net
assets acquired (goodwill), and a $13.7 million charge for store closings,
write offs of certain store fixed assets and of certain assets at Hi/LO's
distribution center, and liquidation of real estate previously acquired for
future expansion. Discount Auto Parts recorded a $12.8 million after tax
charge in the fourth quarter of fiscal 1997 associated with the settlement
of certain litigation.
9
<PAGE> 19
COMPARATIVE PER SHARE DATA
Set forth below are the net income (loss) and book value per common share
data for each of Discount Auto Parts and Hi/LO on an historical basis and
similar data on a pro forma basis for Discount Auto Parts and on an equivalent
pro forma basis for Hi/LO. The Discount Auto Parts pro forma data was derived by
combining historical consolidated financial information of Discount Auto Parts
and Hi/LO using the purchase method of accounting for business combinations. The
equivalent pro forma data for Hi/LO was calculated by multiplying the Discount
Auto Parts pro forma per common share data by an assumed Exchange Ratio of
0.1485.
The per share information set forth below should be read in conjunction
with the respective historical consolidated financial statements and related
notes of Discount Auto Parts and Hi/LO incorporated by reference or included
elsewhere in this Proxy Statement/Prospectus and the unaudited pro forma
combined condensed balance sheet and notes thereto included elsewhere in this
Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR THIRTEEN WEEKS
ENDED ENDED
JUNE 3, 1997 SEPTEMBER 2, 1997
------------ ------------------
<S> <C> <C>
HISTORICAL -- DISCOUNT AUTO PARTS
Net income................................................ $ 0.77 $0.39
====== ======
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 2, 1997
-----------------
<S> <C>
Book value................................................ $14.19
======
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR THREE MONTHS
ENDED ENDED
DECEMBER 31, 1996 SEPTEMBER 30, 1997
----------------- ------------------
<S> <C> <C>
HISTORICAL -- HI/LO
Net income (loss)......................................... $(4.99) $0.18
=======
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1997
------------------
<S> <C>
Book value................................................ $5.68
=====
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR THIRTEEN WEEKS
ENDED ENDED
JUNE 3, 1997 SEPTEMBER 2, 1997
------------ ------------------
<S> <C> <C>
PRO FORMA COMBINED
Net income (loss)......................................... $(2.13) $0.45
====== ======
Net income (loss) per equivalent Hi/LO share.............. $(0.32) $0.07
====== ======
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 2, 1997
-----------------
<S> <C>
Book value................................................ $14.96
======
Book value per equivalent Hi/LO share..................... $ 2.22
======
</TABLE>
10
<PAGE> 20
MARKET PRICE AND DIVIDEND DATA
Discount Auto Parts Common Stock is traded on the NYSE under the symbol
"DAP" and Hi/LO Common Stock is traded on the NYSE under the symbol "HLO." The
following table sets forth, for the periods indicated, the range of high and low
per share sales prices for Discount Auto Parts Common Stock and Hi/LO Common
Stock as reported on the NYSE Composite Tape. For purposes of comparison, the
Hi/LO Common Stock price information is presented for the fiscal periods of
Discount Auto Parts rather than for Hi/LO's historical quarterly periods.
<TABLE>
<CAPTION>
DISCOUNT AUTO PARTS HI/LO
COMMON STOCK COMMON STOCK
------------------- -----------------
HIGH LOW HIGH LOW
-------- -------- ------- -------
<S> <C> <C> <C> <C>
FISCAL 1995
First Quarter........................................... $24.125 $20.000 $14.625 $10.375
Second Quarter.......................................... 23.250 13.875 12.000 10.125
Third Quarter........................................... 22.500 15.875 11.625 9.500
Fourth Quarter.......................................... 26.875 20.000 10.500 7.875
FISCAL 1996
First Quarter........................................... 32.000 24.500 10.875 7.250
Second Quarter.......................................... 33.875 26.250 8.125 5.375
Third Quarter........................................... 31.125 21.250 6.125 3.375
Fourth Quarter.......................................... 30.875 24.750 6.250 4.875
FISCAL 1997
First Quarter........................................... 26.250 22.375 5.250 3.125
Second Quarter.......................................... 25.875 21.250 3.750 2.250
Third Quarter........................................... 26.375 12.875 4.375 2.375
Fourth Quarter.......................................... 19.250 14.250 3.875 2.500
FISCAL 1998
First Quarter........................................... 20.938 17.625 3.313 2.500
Second Quarter (through November 20, 1997).............. 24.938 19.688 5.500 2.625
</TABLE>
On October 17, 1997, the last trading day before the public announcement of
the Merger Agreement, the closing sale prices of Discount Auto Parts Common
Stock and Hi/LO Common Stock as reported on the NYSE Composite Tape were $22.50
per share and $3.563 per share, respectively. The equivalent per share value of
Hi/LO Common Stock on any date should equal the closing sale price of Discount
Auto Parts Common Stock on such date, as reported on the NYSE Composite Tape,
multiplied by the Exchange Ratio. Based on an Exchange Ratio of , the
equivalent per share value of Hi/LO Common Stock on October 17, 1997 was $3.37
per share. On December , 1997, the closing sale prices of Discount Auto Parts
Common Stock and Hi/LO Common Stock as reported on the NYSE Composite Tape were
$ per share and $ per share, respectively. Hi/LO stockholders
are urged to obtain current quotations for the market prices of Discount Auto
Parts Common Stock and Hi/LO Common Stock.
Following the Merger, Discount Auto Parts Common Stock will continue to be
traded on the NYSE, Hi/LO Common Stock will cease to be traded on the NYSE, and
there will be no further market for the Hi/LO Common Stock.
Discount Auto Parts has not paid any cash dividends since its initial
public offering in 1992. Discount Auto Parts does not intend to pay any cash
dividends for the foreseeable future and intends to retain earnings, if any, for
the future operation and expansion of its business. Any determination to pay
dividends in the future will be at the discretion of the Discount Auto Parts
Board of Directors and will be dependent upon Discount Auto Parts' results of
operations, financial condition, contractual restrictions and other factors
deemed relevant by the Discount Auto Parts Board of Directors. Discount Auto
Parts' existing credit facilities contain restrictions on the payment of cash
dividends on the Discount Auto Parts Common Stock. At September 2, 1997,
approximately $25.9 million of Discount Auto Parts' retained earnings were
available for dividend distribution.
No cash dividends have ever been declared or paid on the Hi/LO Common
Stock. Pursuant to the Merger Agreement, Hi/LO has agreed that, during the
period from the date of the Merger Agreement to the Effective Time, Hi/LO will
not make, declare or pay any dividend or distribution on the Hi/LO Common Stock.
11
<PAGE> 21
RISK FACTORS
The following risk factors, in addition to the other information contained
or incorporated by reference in this Proxy Statement/Prospectus, should be
considered by holders of Hi/LO Common Stock in evaluating whether to approve and
adopt the Merger Agreement and thereby become holders of Discount Auto Parts
Common Stock.
RISKS RELATING TO THE MERGER
Integration of Operations. Discount Auto Parts, which is headquartered in
Florida, operates over 400 auto parts stores throughout Florida, Georgia,
Alabama, South Carolina and Mississippi. Hi/LO, which is headquartered in Texas,
operates over 180 auto parts stores in Texas, Louisiana and California.
Integrating the operations (including product purchasing, distribution of
product to stores, marketing plans and activities, employee hiring and training,
and expansion strategy) and management of the two companies will be a time
consuming process, and there can be no assurance that this integration will
result in the achievement of the synergies and other benefits expected to be
realized from the Merger. Moreover, the integration of these organizations will
require the dedication of management resources, which may temporarily distract
attention from the day-to-day business of the combined company. The inability of
management to successfully integrate the operations of the two companies on a
timely basis could have a material adverse effect on the business and operating
results of Discount Auto Parts. See "The Merger -- Hi/LO's Reasons for the
Merger; Recommendation of the Hi/LO Board of Directors" and "-- Discount Auto
Parts' Reasons for the Merger."
Exchange Ratio Does Not Reflect Changes in Stock Prices in Certain
Cases. The number of shares of Discount Auto Parts Common Stock into which each
share of Hi/LO Common Stock is to be converted in the Merger is fixed at 0.1485
if the Discount Average Share Price is between $22.727 and $26.148 and is fixed
at 0.1624 if the Discount Average Share Price falls below $20.78. The market
value of Discount Auto Parts Common Stock and Hi/LO Common Stock at the
Effective Time may vary significantly from the prices at the date of the
execution of the Merger Agreement, the date hereof or the date on which
stockholders vote on the Merger due to, among other factors, market perception
of the synergies expected to be achieved by the Merger, changes in the business,
operations or prospects of Discount Auto Parts or Hi/LO, market assessments of
the likelihood that the Merger will be consummated and the timing thereof, and
general market and economic conditions. Because the Exchange Ratio in certain
circumstances will not be adjusted to reflect certain of the changes in the
market value of Discount Auto Parts Common Stock or Hi/LO Common Stock, the
market value of the Discount Auto Parts Common Stock issued in the Merger, and
the market value of the Hi/LO Common Stock surrendered in the Merger, may be
higher or lower than the value of such shares at the time the Merger was
negotiated or approved by stockholders.
RISKS RELATING TO OPERATIONS
Because of the similar nature of the business of Discount Auto Parts and
Hi/LO, the risks set forth below apply to the operations of each company
individually, as well as to the operations of the combined company following the
Merger.
Competition. Both Discount Auto Parts and Hi/LO operate in highly
competitive marketplaces, in which they compete with a variety of retailers,
dealers and distributors. Each competes in many of its geographic markets with
AutoZone, Pep Boys, Western Auto, NAPA, independent dealers, wholesale clubs,
mass merchandisers, local retail chains and others. Some of the current and
potential competitors of Discount Auto Parts and Hi/LO in the auto parts
industry are larger and have greater financial resources than Discount Auto
Parts and Hi/LO (even as a combined company). No assurance can be given that
competition will not have an adverse effect on the business of Discount Auto
Parts in the future.
Growth Strategy. An important part of the business plan of Discount Auto
Parts is an aggressive store growth strategy. Discount Auto Parts opened 86
stores in fiscal 1997 and has announced plans to open approximately 70 to 90 new
stores in fiscal 1998. Management of Discount Auto Parts anticipates that this
aggressive store growth strategy will continue to be pursued following the
consummation of the Merger although it is likely that Discount Auto Parts will
need to slow its planned growth somewhat over the short
12
<PAGE> 22
term in order to give adequate attention to the integration of the Hi/LO stores.
There can be no assurance that Discount Auto Parts will be able to identify and
acquire favorable store sites, hire, train and integrate employees, and adapt
its management and operational systems to the extent necessary to fulfill its
expansion plans. The failure to open new stores in accordance with its plans
could have a material adverse impact on Discount Auto Parts' future net sales
and net income. Moreover, the addition of new stores in existing markets to take
advantage of economies of scale in marketing, distribution and supervision costs
can result in the "cannibalization" of sales of existing stores. In addition,
there can be no assurance that the new stores opened will achieve sales or
profit levels commensurate with those of existing stores.
Fluctuations in Quarterly Operating Results. Both Discount Auto Parts and
Hi/LO have experienced in the past, and following the Merger, Discount Auto
Parts may experience in the future, fluctuations in its quarterly operating
results. Moreover, there can be no assurance that Discount Auto Parts will
continue to realize the earnings growth experienced over recent years, or that
earnings in any particular quarter will not fall short of either a prior fiscal
quarter or investors' expectations. Factors such as the number of new store
openings (pre-opening expenses are expensed as incurred, and newer stores are
less profitable than mature stores), the extent to which new stores
"cannibalize" sales of existing stores, the mix of products sold, actions of
competitors, the level of advertising and promotional expenses, seasonality, and
one-time charges associated with acquisitions or other events could contribute
to quarterly variability in operating results. In addition, expense levels are
based in part on expectations of future sales levels, and a shortfall in
expected sales could therefore result in a disproportionate percentage decrease
in net income.
Future Cash Needs. Discount Auto Parts currently expects that the cash and
cash equivalents of the combined company, together with the funds available
under Discount Auto Parts' $175 million revolving credit agreement, will be
sufficient to fund the planned store opening and other operating cash needs of
Discount Auto Parts for at least the next twelve months. However, there can be
no assurance that Discount Auto Parts will not require additional sources of
financing prior to such time, as a result of unanticipated cash needs or
opportunities, an expanded growth strategy or disappointing operating results.
There also can be no assurance that the additional funds required, whether
within the next twelve months or thereafter, will be available on satisfactory
terms.
THE SPECIAL MEETING
GENERAL; DATE, TIME AND PLACE
This Proxy Statement/Prospectus is being furnished to Hi/LO stockholders in
connection with the solicitation of proxies by the Board of Directors of Hi/LO
for use at the Special Meeting to be held on , ,
, 1998, at the , Houston, Texas, commencing at 9:00
a.m. local time, and at any adjournment or postponement thereof.
This Proxy Statement/Prospectus, the letter to Hi/LO stockholders, the
Notice of the Special Meeting and the form of proxy for use at the Special
Meeting are first being mailed to Hi/LO stockholders on or about ,
1997.
PURPOSES OF THE SPECIAL MEETING
The purposes of the Special Meeting are (i) to consider and vote upon
approval and adoption of the Merger Agreement; and (ii) to transact such other
business as may properly come before the Special Meeting.
RECORD DATE AND OUTSTANDING SHARES
The Board of Directors of Hi/LO has fixed , 1997 as the Record
Date for determination of Hi/LO stockholders entitled to notice of and to vote
at the Special Meeting. Accordingly, only holders of record of Hi/LO Common
Stock at the close of business on , 1997 are entitled to notice of,
and to vote at, the Special Meeting. There were approximately holders of
record of Hi/LO Common Stock on the Record Date, with shares of Hi/LO
Common Stock issued and outstanding. Each share of Hi/LO
13
<PAGE> 23
Common Stock entitles the holder thereof to one vote on each matter submitted
for stockholder approval. See "Security Ownership by Certain Beneficial Owners"
for information regarding certain beneficial owners.
VOTING AND REVOCATION OF PROXIES
All properly executed proxies received prior to or at the Special Meeting,
and not revoked, will be voted at the Special Meeting in accordance with the
instructions contained therein. If a holder of Hi/LO Common Stock executes and
returns a proxy and does not specify otherwise, the shares represented by such
proxy will be voted "FOR" approval and adoption of the Merger Agreement. If any
other matters are properly presented at the Special Meeting for consideration,
including, among other things, consideration of a motion to adjourn the meeting
to another time or place (including for the purpose of soliciting additional
proxies), the persons named in the enclosed form of proxy, and acting
thereunder, will have discretion to vote on such matters in accordance with
their best judgment (unless authorization to use such discretion is withheld).
Hi/LO is not aware of any matters expected to be presented at the Special
Meeting other than approval and adoption of the Merger Agreement.
A Hi/LO stockholder who has executed and returned a proxy may revoke it at
any time before it is voted at the Special Meeting by (i) executing and
returning a proxy bearing a later date, (ii) filing written notice of such
revocation with the Secretary of Hi/LO, stating that the proxy is revoked, or
(iii) if such person is a Hi/LO stockholder of record or holds a valid proxy
from a stockholder of record, attending the Special Meeting and voting in
person. In order to vote in person Hi/LO stockholders must attend the Special
Meeting and cast their votes in accordance with the voting procedures
established for the meeting. Attendance at the Special Meeting will not in and
of itself constitute a revocation of a proxy. Any written notice of revocation
or subsequent proxy must be sent so as to be delivered at, or before the taking
of the vote at, the Special Meeting.
QUORUM AND VOTE REQUIRED
The presence at the Special Meeting, in person or by proxy, of the holders
of a majority of the outstanding shares of Hi/LO Common Stock entitled to vote
at the meeting will constitute a quorum for the transaction of business, and
approval and adoption of the Merger Agreement requires the affirmative vote of a
majority of the shares of Hi/LO Common Stock outstanding and entitled to vote
thereon. On the Record Date, there were shares of Hi/LO Common Stock
outstanding. In determining whether the Merger Agreement has received the
requisite number of affirmative votes, abstentions and broker non-votes will
have the same effect as a vote against the Merger Agreement.
SOLICITATION OF PROXIES
In addition to solicitation by mail, the directors, officers, employees and
agents of Hi/LO and Discount Auto Parts may solicit proxies from Hi/LO's
stockholders by personal interview, telephone, telegram or otherwise. These
persons will receive no additional compensation for solicitation of proxies, but
may be reimbursed for reasonable out-of-pocket expenses in connection with such
solicitations. Hi/LO will bear the costs of the solicitation of proxies from its
stockholders, except that Discount Auto Parts and Hi/LO will each pay one-half
of the cost of filing, printing and mailing this Proxy Statement/Prospectus.
Arrangements will also be made with brokerage firms and other custodians,
nominees and fiduciaries who hold of record Hi/LO Common Stock for the
forwarding of solicitation materials to the beneficial owners thereof. Hi/LO
will reimburse such brokers, custodians, nominees and fiduciaries for the
reasonable out-of-pocket expenses incurred by them in connection therewith.
Hi/LO has retained the services of to distribute proxy solicitation
materials to brokers, banks and other nominees and to assist in the solicitation
of proxies from Hi/LO stockholders for a fee estimated not to exceed
$ , plus payment of out-of-pocket costs and expenses.
RECOMMENDATION OF THE HI/LO BOARD OF DIRECTORS
The Board of Directors of Hi/LO has determined that the terms of the Merger
Agreement and the transactions contemplated thereby are fair to, and in the best
interests of, Hi/LO and the Hi/LO stockholders.
14
<PAGE> 24
Accordingly, the Hi/LO Board of Directors unanimously recommends that Hi/LO
stockholders vote "FOR" the approval and adoption of the Merger Agreement.
NO DISSENTERS' OR APPRAISAL RIGHTS
Hi/LO stockholders will not be entitled to any dissenters' or appraisal
rights under the DGCL or any other statute in connection with the Merger.
THE MERGER
BACKGROUND OF THE MERGER
Since the termination of the proposed sale of Hi/LO to Chief Auto Parts in
1995, the management and Board of Directors of Hi/LO (sometimes herein referred
to as the "Hi/LO Board") have reviewed regularly the strategic alternatives
available to maximize stockholder value. In recent years, the automotive
aftermarket parts, products and accessories industry has become more competitive
as regional and national chains have expanded significantly. Several of these
chains, including Hi/LO, have been experiencing a significant increase in
competition as larger competitors continue to expand. Management of Hi/LO and
the Hi/LO Board believe that the industry is beginning a consolidation phase and
that a few of the strongest and best capitalized firms will lead in this
consolidation. Thus, in the view of Hi/LO's management and the Hi/LO Board,
Hi/LO is faced with the choice of trying to expand its operations significantly
by adding new stores and entering new markets, either through internal growth or
acquisitions, or pursuing a strategic combination or sale of the Company. Hi/LO
has been unable to grow in recent years in part due to poor operating results
and insufficient financing sources.
In the view of Hi/LO's management and the Hi/LO Board, Hi/LO's increasing
leverage, together with the relatively low price of Hi/LO Common Stock, would
increase the financial risk to existing stockholders if Hi/LO continued to
pursue a strategy of independence. Management and the Hi/LO Board believe that
this could result in a further decline in value in the near-term as Hi/LO
increased leverage or issued stock that would be dilutive to existing
stockholders. Management and the Hi/LO Board also believe that growth through
internal expansion is not likely to address the current and anticipated
competitive conditions in Hi/ LO's marketplace or to impact positively its
results of operations. More specifically, it has become impossible to match the
store and operations growth of the national chains, particularly given Hi/LO's
limited access to financing. In addition, this approach is not believed to be
likely to have a positive impact on Hi/LO's stock value in the near-term.
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 Hi/LO Board and adopting a proposal calling for the sale of Hi/LO. In the
course of its discussions with stockholders regarding the proxy contest,
management became even more aware of the sentiment of the Hi/LO stockholders
that Hi/LO be sold or combined with another auto parts chain.
At the regularly scheduled meeting of the Hi/LO Board on May 20, 1997,
following the Annual Meeting of Stockholders, the Hi/LO Board again discussed
the need to maximize stockholder value, possible approaches that were available
to do so and the results of management's discussions with stockholders in
connection with the proxy contest. As a result of these discussions, management
and the Hi/LO Board concluded that entering into a business combination with a
complimentary auto parts chain or selling Hi/LO would likely return value to the
stockholders sooner and with more certainty than continuing Hi/LO's strategy
independently. Management was then authorized to seek proposals from potential
financial advisors who could assist and advise the Hi/LO Board in seeking out a
potential merger partner or acquirer of Hi/LO. On June 4, 1997, at a special
meeting of the Hi/LO Board, and after receiving presentations from two
investment banking firms, Hi/LO selected and engaged SBCWDR as its financial
advisor.
During June and July of 1997, SBCWDR contacted 29 potential acquirers.
Hi/LO entered into confidentiality agreements and provided information to nine
of these potential acquirers, including Discount Auto Parts.
15
<PAGE> 25
In late August 1997, representatives of Discount Auto Parts visited Houston
to collect information concerning Hi/LO and its operations. Following that
visit, Hi/LO provided additional information to Discount Auto Parts regarding
the operations, assets, liabilities and commitments of Hi/LO. On September 10,
1997, representatives of Discount Auto Parts delivered to representatives of
Hi/LO a written proposal indicating that Discount Auto Parts would be willing to
consider a business combination with Hi/LO in which all of the outstanding
shares of Hi/LO Common Stock would be exchanged for Discount Auto Parts Common
Stock in a transaction structured to qualify as a tax-free reorganization under
the Code and accounted for as a purchase. In its letter, Discount Auto Parts
proposed to issue a total of 1.5 million shares of Discount Auto Parts Common
Stock in exchange for all outstanding shares of Hi/LO Common Stock, subject to
final due diligence and further negotiations.
On September 11, 1997, the Hi/LO Board met to receive a preliminary
presentation on Discount Auto Parts and to discuss the terms of a possible
transaction as indicated by the letter from Discount Auto Parts as well as to
receive a presentation from SBCWDR regarding other possible transactions with
other parties. Based on its review at the meeting and the presentations made,
the Hi/LO Board authorized its representatives to pursue a potential business
combination with Discount Auto Parts. On September 12, 1997, representatives of
Hi/LO contacted representatives of Discount Auto Parts and indicated their
willingness to pursue further negotiation of a combination.
On September 22, 1997, representatives of Discount Auto Parts and Hi/LO,
including Discount Auto Parts' Chairman, Peter J. Fontaine, and Hi/LO's
Chairman, T. Michael Young, met in Houston to negotiate the terms of the
potential business combination. The representatives of Discount Auto Parts
indicated to the representatives of Hi/LO that they were prepared to increase
the number of shares of Discount Auto Parts Common Stock to be issued to Hi/LO's
stockholders under certain circumstances provided that the terms of any
transaction included a termination fee in the event the combination was not
consummated, even as a result of the Hi/LO stockholders voting against the
proposed combination. During these negotiations, representatives of Discount
Auto Parts indicated that Discount Auto Parts would not be interested in
pursuing any additional discussions unless Hi/LO agreed to negotiate exclusively
with Discount Auto Parts. After significant discussion, Hi/LO agreed to
negotiate exclusively with Discount Auto Parts until the earlier of October 13,
1997, or the termination of discussions. In addition, the representatives of
Hi/LO and Discount Auto Parts agreed to present to their respective Boards of
Directors a proposed method for determining an exchange ratio subject to
satisfactory negotiation of the other terms and conditions of the Merger
Agreement, including a termination fee and a "no solicitation" provision. During
the ensuing days, representatives of Hi/LO and Discount Auto Parts negotiated
the terms of the proposed Merger Agreement and exchanged information concerning
their respective operations. On October 8 and 9, 1997, representatives of Hi/LO
met with representatives of Discount Auto Parts in Tampa and received
presentations regarding the operations and business plans of Discount Auto Parts
and further investigated the financial, operating and legal affairs of Discount
Auto Parts.
The Hi/LO Board met again on October 10, 1997, at which meeting management
made presentations regarding their legal, financial and business due diligence
review of Discount Auto Parts, SBCWDR made a preliminary presentation regarding
the proposed business combination, and legal counsel reviewed for the Hi/LO
Board the proposed terms of the merger agreement and related documents,
including the terms of the termination fee required by Discount Auto Parts. The
Hi/LO Board determined that negotiations should be continued in an attempt to
reach terms that the Hi/LO Board would find acceptable.
From October 10 to October 17, 1997, senior members of Hi/LO management who
had been authorized by the Hi/LO Board to negotiate with Discount Auto Parts,
conferred with representatives of Discount Auto Parts and Discount Auto Parts'
senior management and continued to negotiate the detailed terms, provisions and
conditions of the Merger Agreement. During this time, representatives of
Discount Auto Parts and Hi/LO completed their investigation of each other's
businesses. On October 13, 1997, at the request of Discount Auto Parts and
because significant progress had been made in negotiating the terms of the
proposed business combination, Hi/LO agreed to extend the exclusivity agreement
until the close of business on October 17, 1997.
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In response to unusual activity and a significant increase in the market
price of Hi/LO Common Stock, Hi/LO issued a press release after the market close
on October 14, 1997, indicating that Hi/LO was in exclusive merger negotiations
for a transaction that would offer stock of the acquirer worth between $3.27 and
$3.76. On October 15, 1997, Hi/LO received an unsolicited letter from another
potential acquirer who had previously signed a confidentiality agreement
expressing an interest in pursuing a business combination in which the Hi/LO
stockholders would retain an interest in the combined entity. There was no
specific value included in the letter, which also indicated that any transaction
would be subject to a number of conditions, including due diligence, regulatory
approvals and lenders' consent. On October 16, 1997, representatives of Hi/LO
sent a response to the potential acquirer indicating that it had apprised the
Hi/LO Board of the potential acquirer's letter and that Hi/LO was prohibited
from having any discussions concerning the potential acquirer's interest until
after its exclusivity agreement with Discount Auto Parts expired at 5:00 p.m. on
October 17, 1997. Hi/LO received no further communications from this potential
acquirer.
A special meeting of the Discount Auto Parts Board was held on October 16,
1997 to consider the terms of the proposed transaction with Hi/LO. At this
meeting, the Discount Auto Parts Board discussed in detail the terms of the
possible transaction with Hi/LO, approved the transaction subject to negotiation
of definitive documentation and authorized Discount Auto Parts management to
continue due diligence and to negotiate definitive documentation, subject to
approval of the final terms by the senior officers of Discount Auto Parts. After
further negotiations between management and advisors of both companies, the
authorized senior officers of Discount Auto Parts approved the final terms.
At a special meeting held on October 17, 1997, the Hi/LO Board received
detailed reports of the status of the continuing negotiations with Discount Auto
Parts and the terms and provisions of the Merger Agreement, as negotiated by
Hi/LO's representatives, including the proposed exchange ratio and the
termination fee proposed by representatives of Discount Auto Parts. In addition,
the Hi/LO Board considered the unsolicited indication of interest received by
Hi/LO on October 15, 1997. In light of the indication of interest and other
factors, including the size of the termination fee being required by Discount
Auto Parts, the Hi/LO Board determined that it should not proceed with the
transaction unless Discount Auto Parts were willing to increase its offer and
forego any termination right based upon a material change in Hi/LO's business or
operations and directed management of Hi/LO to contact representatives of
Discount Auto Parts with their decision, at which time the Hi/LO Board adjourned
its meeting.
Mr. Young then contacted Mr. Fontaine and after additional negotiations,
Mr. Fontaine indicated that if the Hi/LO Board would agree to the termination
fee required by Discount Auto Parts, including a provision that it be paid in
certain circumstances if the Hi/LO stockholders did not approve the combination,
Discount Auto Parts would agree to increase the number of shares of Discount
Common Stock to be issued in the merger to the Hi/LO stockholders and to forego
the termination right based upon a material change in Hi/LO's business or
operations absent specified breaches of warranties or covenants. The Hi/LO Board
was then reconvened, and after receiving additional presentations from Hi/LO's
financial and legal advisors, the Hi/LO Board received the oral opinion of
SBCWDR (which opinion was subsequently confirmed by delivery of a written
opinion dated October 17, 1997) to the effect that, as of October 17, 1997, and
based upon and subject to certain matters stated in such opinion, the Exchange
Ratio was fair, from a financial point of view, to the Hi/LO stockholders. The
Hi/LO Board then determined that the terms of the Merger Agreement and the
transactions contemplated thereby were fair to, and in the best interests of
Hi/LO and its stockholders, and accordingly, the Hi/LO Board members present at
the meeting unanimously approved the Merger Agreement and resolved to recommend
that the Hi/LO stockholders vote for the approval and adoption of the Merger
Agreement at a special meeting of Hi/LO stockholders to be held for that
purpose. See "-- Hi/LO's Reasons for the Merger; Recommendation of the Hi/LO
Board of Directors" and "Certain Terms of the Merger Agreement."
Later that day, after the special meeting of the Hi/LO Board, the Merger
Agreement was executed, and the parties issued a joint press release before the
markets opened on October 20, 1997 announcing the Merger.
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HI/LO'S REASONS FOR THE MERGER; RECOMMENDATION OF THE HI/LO BOARD OF DIRECTORS
FOR THE REASONS DISCUSSED BELOW, THE BOARD OF DIRECTORS OF HI/LO HAS
DETERMINED THAT THE TERMS OF THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY ARE FAIR TO AND IN THE BEST INTERESTS OF HI/LO AND ITS
STOCKHOLDERS. ACCORDINGLY, THE HI/LO BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS
THAT HI/LO STOCKHOLDERS VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT.
The Hi/LO Board of Directors believes that the Merger represents a sound
strategic fit, combining two companies with similar operating philosophies and
complementary geographic markets, and offers Hi/LO and its stockholders an
opportunity to participate in the creation of a leading auto parts retailer
which can provide sufficient size and financial strength to compete effectively
in the increasingly competitive environment. The Hi/LO Board of Directors
believes that the combined revenues of Hi/LO and Discount Auto Parts, the
complementary nature of their business strategies, as well as the broadened
geographic presence that will result from the Merger, are compelling reasons for
the combination of Hi/LO and Discount Auto Parts.
In deciding to accept Discount Auto Parts' proposal and to unanimously
recommend the Merger to the stockholders of Hi/LO, the Hi/LO Board consulted
with Hi/LO's legal and financial advisors, as well as Hi/LO's management, and
considered an extensive amount of information and a number of additional
factors. The following are material factors considered by the Hi/LO Board,
certain of which contain both positive and negative elements:
(1) The Hi/LO Board's understanding of the present and anticipated
environment in the auto parts industry, including the increasing
competition expected in Hi/LO's markets, as well as current economic and
market conditions.
(2) The terms of the proposed Merger Agreement, particularly the
limited circumstances under which Discount Auto Parts would not be required
to consummate the Merger.
(3) Information concerning the financial condition, results of
operations, prospects and businesses of Hi/LO and Discount Auto Parts,
including the revenues of the companies, their complementary businesses,
geographic compatibility, the consensus of research analysts' 1997 earnings
per share estimates for Hi/LO and Discount Auto Parts, the recent stock
market performance of the Hi/LO Common Stock and the Discount Auto Parts
Common Stock and the ratio of the Hi/LO Common Stock price to the Discount
Auto Parts Common Stock price over various periods.
(4) The relationship between the value of the Discount Auto Parts
Common Stock to be received by the Hi/LO stockholders as a result of the
Merger and the market prices and recent trading activity of the Hi/LO
Common Stock and book value per share of the Hi/LO Common Stock.
(5) The opinion of SBCWDR dated October 17, 1997, and the supporting
presentation given to the Hi/LO Board that the Exchange Ratio was fair,
from a financial point of view, to the Hi/LO stockholders.
(6) The belief on the part of the members of the Hi/LO Board, based on
their familiarity with Hi/LO's businesses, its current financial condition
and results of operations, and its future prospects, and current and
anticipated developments in Hi/LO's businesses (including increasing
competition), as well as the results of Hi/LO's solicitation of interest
from other potential acquirers, that the consideration to be received by
Hi/LO's stockholders in the Merger represents, in their belief, the best
value reasonably obtainable by the stockholders in a sale of Hi/LO.
(7) A review of possible other strategic options available to Hi/LO,
including remaining an independent company, conducting acquisitions, and
merging or consolidating with a party or parties other than Discount Auto
Parts and their relative advantages and disadvantages vis-a-vis the Merger.
(8) A determination by Hi/LO's management that the long-term growth
potential with Discount Auto Parts is believed to be superior to Hi/LO
remaining an independent public company.
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(9) The opportunity for stockholders of Hi/LO to maintain a continuing
equity interest in the combined company and to benefit from ownership in a
higher growth business.
(10) Discount Auto Parts' plans for entering the Louisiana and Texas
markets.
(11) The treatment of the transaction as a tax-free reorganization.
(12) The financial and business prospects for the combined business,
including general information relating to possible synergies, cost
reductions, and operating efficiencies.
(13) Presentations from, and discussions with, senior executives of
Hi/LO, representatives of its outside legal counsel and representatives of
SBCWDR regarding the business, financial, accounting and legal
investigation with respect to Discount Auto Parts and the terms and
conditions of the Merger Agreement.
(14) The Hi/LO Board's recognition that certain members of the Hi/LO
Board and management have interests in the Merger that are in addition to,
and not necessarily aligned with, the interests in the Merger of other
holders of Hi/LO Common Stock.
(15) The Hi/LO Board's view that larger companies will be better able
to compete effectively in the rapidly changing and increasingly competitive
auto parts retailing industry.
(16) The provisions of the Merger Agreement relating to potential
competing transactions, including the ability of Hi/LO to entertain
unsolicited competing bids (provided that the Hi/LO Board of Directors
determines that such bid may reasonably be expected to result in a Superior
Proposal (as defined in the Merger Agreement)), to provide information to
such competing bidders, to negotiate with such competing bidders, and to
withdraw its recommendation with respect to the Merger and to terminate the
Merger Agreement in favor of a superior transaction with a competing bidder
upon payment of the termination fee.
(17) The difficulty and management distraction inherent in integrating
two medium sized and geographically dispersed operations and the risk that
the synergies and benefits sought in the Merger would not be fully
achieved.
(18) The risk that the Merger would not be consummated.
The foregoing discussion of the factors by the Hi/LO Board is not intended
to be exhaustive. In view of the wide variety of factors considered in
connection with its evaluation of the Merger, the Hi/LO 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 Hi/LO 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.
DISCOUNT AUTO PARTS' REASONS FOR THE MERGER
In the course of reaching its decision to approve the Merger Agreement and
the transactions contemplated thereby, the Board of Directors of Discount Auto
Parts consulted with Discount Auto Parts' legal and financial advisors as well
as with Discount Auto Parts' management, and considered a number of factors. In
particular, the Board of Directors of Discount Auto Parts believes that the
Merger will represent a significant step in achieving several important
objectives of Discount Auto Parts: to continue its growth into contiguous states
in the southern United States (such as Texas and Louisiana) and to become a
strong competitor in the business of supplying auto parts to commercial
installers. The Discount Auto Parts Board of Directors also considered the
following factors, among others:
(1) Hi/LO's prominence in the Texas marketplace and relatively strong
position in the southern Louisiana marketplace, both being markets where
Discount Auto Parts has no presence and which, in the view of management,
represent markets targeted for future expansion.
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(2) management's view that the Merger would result in significant
efficiencies, operating benefits and other synergies that would benefit
Discount Auto Parts, its customers and its stockholders through their
continued interest in the combined company.
(3) the compatibility of the business and operating strategies of
Hi/LO and Discount Auto Parts.
(4) the treatment of the transaction as a tax-free reorganization.
(5) the friendly and cooperative working relationships between Hi/LO
and Discount Auto Parts.
(6) the terms of the Merger Agreement and related agreements,
including price, structure and protections from potential competing
transactions, which were considered by both management and the Board of
Directors of Discount Auto Parts to provide an equitable basis for the
Merger.
(7) the historical market prices and trading information with respect
to the Discount Auto Parts Common Stock and the Hi/LO Common Stock.
(8) the cost effectiveness of entering the Texas and Louisiana Markets
through acquisition as opposed to through new store growth.
The Discount Auto Parts Board of Directors also evaluated the risks,
inherent in any transaction such as the Merger, that currently unanticipated
difficulties could arise in integrating the operations and that the synergies
expected from combining the operations of Hi/LO with those of Discount Auto
Parts may not be realized or, if realized, may not be realized within the period
expected. The Discount Auto Parts Board of Directors believed that these risks
were outweighed by the potential benefits to be realized from the Merger.
In analyzing the proposed Merger, the Board of Directors of Discount Auto
Parts did not view any single factor as determinative and did not quantify or
assign weight to any of the factors. Rather, the Board of Directors of Discount
Auto Parts made its determination based on the total mix of information
available to it.
OPINION OF FINANCIAL ADVISOR TO HI/LO
General. SBCWDR was retained by Hi/LO to act as its financial advisor in
connection with the Merger and related matters based upon SBCWDR's experience
and expertise and its past integral involvement with Hi/LO. At the October 17,
1997 meeting of the Board of Directors of Hi/LO, SBCWDR made a presentation
which included an historical trading analysis of the Hi/LO Common Stock and the
Discount Auto Parts Common Stock; a comparable company trading analysis; a
contribution analysis of the combination of Hi/LO and Discount Auto Parts; and a
pro forma analysis of the combined company. At the October 17, 1997 meeting of
the Board of Directors of Hi/LO, SBCWDR rendered to the Board of Directors of
Hi/LO its written opinion, to the effect that, as of such date and based on
certain matters stated therein and considering the strategic alternatives
available to Hi/LO and its current capital structure, the Exchange Ratio
pursuant to the Merger Agreement was fair, from a financial point of view, to
the holders of shares of Hi/LO Common Stock. SBCWDR has consented to the
inclusion of its written opinion in this Proxy Statement/Prospectus.
A COPY OF THE SBCWDR OPINION DATED OCTOBER 17, 1997, WHICH SETS FORTH THE
ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE SCOPE OF REVIEW
UNDERTAKEN BY SBCWDR, IS ATTACHED AS APPENDIX B TO THIS PROXY
STATEMENT/PROSPECTUS. SBCWDR ADDRESSED ITS OPINION TO THE BOARD OF DIRECTORS OF
HI/LO AND SUCH OPINION IS DIRECTED ONLY TO THE FAIRNESS OF THE EXCHANGE RATIO
FROM A FINANCIAL POINT OF VIEW AND DOES NOT ADDRESS THE MERITS OF THE UNDERLYING
DECISION OF HI/LO TO ENGAGE IN THE MERGER OR CONSTITUTE A RECOMMENDATION TO ANY
STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD VOTE ON THE MERGER. THE SUMMARY OF
THE SBCWDR OPINION SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE SBCWDR OPINION WHICH IS
ATTACHED HERETO AS APPENDIX B.
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In arriving at its Opinion, SBCWDR (i) reviewed certain publicly available
business and financial information relating to Hi/LO; (ii) reviewed certain
publicly available business and financial information relating to Discount Auto
Parts; (iii) reviewed certain financial information and other data provided to
SBCWDR by Hi/LO that is not publicly available relating to the business and
prospects of Hi/LO, including certain limited financial projections prepared by
the management of Hi/LO; (iv) discussed the past and current business operations
and financial condition and the prospects of Hi/LO with senior executives of
Hi/LO; (v) reviewed certain financial information and other data provided to
SBCWDR by Discount Auto Parts that is not publicly available relating to the
business and prospects of Discount Auto Parts, including financial projections
of Discount Auto Parts prepared by the management of Discount Auto Parts; (vi)
discussed the past and current business operations and financial condition and
the prospects of Discount Auto Parts with senior executives of Discount Auto
Parts and its advisors; (vii) reviewed publicly available financial and stock
market data with respect to certain other companies in lines of business SBCWDR
believed to be generally comparable to those of Hi/LO and Discount Auto Parts;
(viii) reviewed the historical market prices and trading volumes for the Hi/LO
Common Stock; (ix) reviewed the historical market prices and trading volumes for
the Discount Auto Parts Common Stock; (x) considered the pro forma effects of
the Merger on the financial statements of Discount Auto Parts; (xi) discussed
other strategic alternatives available to Hi/LO including a review of responses
to SBCWDR's solicitation of proposals for the purchase of Hi/LO; (xii)
participated in discussions and negotiations among representatives of Hi/LO,
Discount Auto Parts and certain other parties and their financial and legal
advisors; (xiii) reviewed the Merger Agreement and certain related documents;
and (xiv) performed such other financial studies, analyses and investigations as
it deemed appropriate.
In rendering its Opinion, SBCWDR assumed and relied upon, without
independent verification, the accuracy and completeness of the information
reviewed by SBCWDR for purposes of its opinion. With respect to financial
projections, SBCWDR assumed that they had been reasonably prepared on bases
reflecting the best currently available estimates and judgments of the future
financial performance of Hi/LO. SBCWDR did not make an independent valuation or
appraisal of the assets or liabilities of Hi/LO or Discount Auto Parts, nor was
SBCWDR furnished with any such appraisals. SBCWDR assumed that the Merger will
be accounted for as a "purchase" in accordance with generally accepted
accounting principles ("GAAP"). SBCWDR also assumed that the Merger will be
consummated in accordance with the terms set forth in the Merger Agreement. The
SBCWDR Opinion is necessarily based on economic, market and other conditions as
in effect on, and the information made available to SBCWDR as of, the date
thereof.
Brief Summary of Certain Analyses Performed by SBCWDR. In forming its
view, SBCWDR considered a variety of valuation methods. The material analyses
performed by SBCWDR are summarized below and were reviewed with the Hi/LO Board
of Directors at its meeting on October 17, 1997:
Historical Trading Analysis. SBCWDR reviewed the performance of the
per share market price of Hi/LO Common Stock and Discount Auto Parts Common
Stock over the period from their respective initial public offerings on May
9, 1991 and August 19, 1992 to October 16, 1997. SBCWDR also calculated the
ratio of the per share market price of Hi/LO Common Stock to the per share
market price of Discount Auto Parts Common Stock over the twelve month
period ending October 16, 1997. This analysis showed that over the period,
Hi/LO Common Stock traded at a ratio as high as 0.289 and as low as 0.092
compared to the price of Discount Auto Parts Common Stock. This analysis
was utilized to provide historical perspective for the manner in which the
public trading market had valued Hi/LO and Discount Auto Parts relative to
each other.
Comparable Company Trading Analysis. Using publicly available
information, SBCWDR compared, based on current market prices, multiples of
certain financial criteria (such as earnings before depreciation,
amortization, interest and taxes ("EBITDA"), earnings before depreciation,
amortization, operating rent expense, interest and taxes ("EBITDAR"),
earnings before interest and taxes ("operating income") and net income) of
Hi/LO to certain other companies which, in SBCWDR's judgment, were
generally comparable to Hi/LO for purposes of SBCWDR's analysis. The
companies used in the comparison consisted of: AutoZone, Inc.; Discount
Auto Parts, Inc.; O'Reilly Automotive, Inc.; and The Pep Boys -- Manny, Moe
& Jack.
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SBCWDR determined the equity market value, derived an "enterprise
value" (defined as equity market value adjusted by adding total debt and
subtracting cash and cash equivalents) and derived an "adjusted enterprise
value" (defined as equity market value adjusted by adding total debt and
operating rent expense multiplied by 8 and subtracting cash and cash
equivalents). The range and mean for the equity market value as a multiple
of each of the indicated statistics for the group of comparable companies
were as follows: (i) net income for the twelve month period ended June 30,
1997 -- 14.8x to 26.9x with a mean of 20.8x; and (ii) projected Calendar
Year 1997 net income based on the mean estimate of net income provided by
First Call Corp., an independent provider of financial information -- 15.2x
to 24.1x with a mean of 19.7x. The range and mean for enterprise value as a
multiple of each of the indicated statistics for the group of comparable
companies were as follows: (i) EBITDA for the 12 month period ended June
30, 1997 -- 8.2x to 14.3x with a mean of 11.2x; (ii) projected Calendar
Year 1997 EBITDA as estimated by investment bank research reports -- 7.9x
to 12.3x with a mean of 10.2x; (iii) operating income for the 12 month
period ended June 30, 1997 -- 10.4x to 17.0x with a mean of 14.0x; and (iv)
projected Calendar Year 1997 operating income as provided by investment
bank research reports -- 10.1x to 15.4x with a mean of 13.0x. The range and
mean for adjusted enterprise value as a multiple of each of the indicated
statistics for the group of comparable companies were as follows: (i)
EBITDAR for the 12 month period ended June 30, 1997 -- 8.2x to 13.8x with a
mean of 10.9x; (ii) projected Calendar Year 1997 EBITDAR as provided by
investment bank research reports -- 8.3x to 12.0x with a mean of 10.0x.
On October 17, 1997, the date when SBCWDR's opinion was delivered to
Hi/LO's Board in connection with the Merger Agreement, and based upon the
appropriate financial operating results at the time, the proposed
transaction value yielded multiples as follows: (i) the multiple of net
income for the twelve month period ended June 30, 1997 was not meaningful
because of the net loss for Hi/LO during the period; (ii) the multiple of
projected Calendar Year 1997 net income based on the estimate of net income
provided by management of Hi/LO was 24.2x; (iii) the multiple of EBITDA for
the 12 month period ended June 30, 1997 was not meaningful because of the
negative EBITDA for the period; (iv) the multiple of projected Calendar
Year 1997 EBITDA based on the estimate of EBITDA provided by Hi/LO
management was 7.6x; (v) the multiple of operating income for the 12 month
period ended June 30, 1997 was not meaningful because of the operating loss
for the period; (vi) the multiple of projected Calendar Year 1997 operating
income based on the estimate of operating income provided by Hi/LO
management was 12.4x; (vii) the multiple of EBITDAR for the 12 month period
ended June 30, 1997 was 17.6x; (viii) the multiple of projected Calendar
Year 1997 EBITDAR based on the estimate of EBITDAR provided by Hi/LO
management was 7.8x. SBCWDR believed that the calculated multiples
supported SBCWDR's view that the consideration to be received by Hi/LO's
stockholders is fair, from a financial point of view, because the ratios
described above were within the range of the comparable company multiples
based on certain measures. While the consideration to be received is below
the range of comparable companies on certain other measures, SBCWDR noted
that the historical financial performance of Hi/LO was weaker than that of
the comparable companies.
Contribution Analysis. SBCWDR calculated the contribution of each of
Hi/LO and Discount Auto Parts to the combined company with respect to
sales, EBITDA, operating income, EBITDAR and net income for projected
Calendar Year 1997 and book value for the latest balance sheet date. In
addition, SBCWDR calculated the relative valuation contribution of each of
Hi/LO and Discount Auto Parts to the combined company with respect to the
enterprise value, adjusted enterprise value and equity value as of October
16, 1997. This analysis showed that Hi/LO was contributing 35.8% of the
combined company's sales, 15.2% of the EBITDA and 12.4% of the operating
income and was receiving 14.8% of the combined company's value on an
enterprise value basis. After adjusting for the operating rents at both
companies, Hi/LO was contributing 27.7% of the EBITDAR and receiving 27.5%
of the combined adjusted enterprise value. Hi/LO was also contributing 5.7%
of the net income and 20.7% of the book value and was receiving
approximately 8.8% of the combined company's equity value.
Pro Forma Analysis. SBCWDR developed for its own use certain pro
forma financial information for the combined entity resulting from the
Merger based on historical results and Hi/LO's and Discount
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Auto Parts' managements' respective projections for their respective
current fiscal years. SBCWDR compared Discount Auto Parts' stand-alone
balance sheet to a pro forma Discount Auto Parts balance sheet for the
period ended June 3, 1997. SBCWDR observed that the purchase would result
in additional reserves or lower depreciable asset values of $27.4 million.
An analysis of the pro forma income statement concluded that earnings per
share resulting from a share exchange at the Exchange Ratio of 0.1485 would
be dilutive to Discount Auto Parts shareholders for projected Calendar Year
1997 assuming no synergies. The analysis showed that synergies of
approximately $1.1 million would be needed to result in no dilution.
SBCWDR believes that its analyses must be considered as a whole and
that selecting portions of its analyses and other factors considered by it,
without considering all factors and analyses, could create a misleading
view of the process underlying its opinion. SBCWDR did not quantify the
effect of each factor upon its opinion. SBCWDR made numerous assumptions
with respect to industry performance, general business and economic
conditions and other matters discussed herein, many of which are beyond
Hi/LO's and SBCWDR's control. Any estimates contained in SBCWDR's analyses
are not necessarily indicative of actual values, which may be significantly
more or less favorable than as set forth therein. Estimates of the
financial value of companies do not purport to be appraisals or necessarily
reflect the prices at which companies actually may be sold. In rendering
its opinion, SBCWDR did not render any opinion as to the value of Hi/LO as
a whole or make any recommendation to the stockholders with respect to the
advisability of the disposing of or retaining shares held in Hi/LO. In
addition, SBCWDR did not make any recommendation regarding whether or not
it is advisable for stockholders to vote in favor of the Merger Agreement.
Financial Advisor Fees. Pursuant to a letter agreement between Hi/LO and
SBCWDR dated June 17, 1997, Hi/LO agreed to pay SBCWDR: (i) $50,000 upon
execution of the letter agreement; (ii) $200,000 upon the earlier of the date
SBCWDR advises Hi/LO or the Hi/LO Board of Directors 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,
Hi/LO has agreed to reimburse SBCWDR for its expenses, including reasonable fees
and expenses of its counsel, and to indemnify SBCWDR 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, SBCWDR and its affiliates may actively
trade or hold the securities of Hi/LO and Discount Auto Parts 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. SBCWDR has in the past provided
investment banking and financial advisory services to Hi/LO unrelated to the
proposed Merger, for which SBCWDR received customary compensation. In addition,
SBCWDR has been an integral part of Hi/LO's history, having sponsored the
corporate buy-out of several predecessors to Hi/LO in 1987, through Saratoga
Partners, L.P., an investment partnership managed by a predecessor to SBCWDR. In
addition, Charles P. Durkin, Jr., a Managing Director of SBCWDR, is a director
of Hi/LO.
SBCWDR is a nationally recognized investment banking firm and was selected
by Hi/LO based on its experience, expertise and familiarity with Hi/LO and its
business. SBCWDR 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.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
General. In considering the recommendation of the Hi/LO Board of Directors
with respect to the Merger Agreement, Hi/LO stockholders should be aware that
certain officers and directors of Hi/LO (or their affiliates) have interests in
the Merger that are different from and in addition to the interests of Hi/LO
stockholders generally. In addition, SBCWDR, Hi/LO's financial advisor that
rendered its opinion to the Board of Directors that the Exchange Ratio was fair
from a financial point of view to the holders of Hi/LO Common Stock will receive
additional compensation if the Merger is effected. See "The Merger -- Opinion of
Financial Advisor to Hi/LO -- Financial Advisor Fees." The Board of Directors of
Hi/LO was aware of
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these interests and took these interests into account in approving the Merger
Agreement and the transactions contemplated thereby.
Hi/LO Stock Options. Prior to the Effective Time, Discount Auto Parts and
Hi/LO (and the appropriate committees of the Hi/LO Board) will take all actions
necessary to cause each unexpired and unexercised option under stock option
plans of Hi/LO in effect on the date of the Merger Agreement which has been
granted (other than pursuant to the Hi/LO 1991 Associate Stock Purchase Plan) to
current or former directors, officers or employees of Hi/LO and which remain
outstanding at the Effective Time of the Merger to be mandatorily surrendered to
Hi/LO in exchange for the payment to the optionee of an amount of cash per share
equal to the greater of (a) $.01 or (b) the excess, if any, of (x) the Exchange
Ratio multiplied by the Discount Average Share Price over (y) the exercise price
per share under such stock option. In addition, at the Effective Time,
automatically and without any action by any Person, each Hi/LO Stock Option will
become immediately and fully exercisable. As of the Record Date, shares of
Hi/LO Common Stock were issuable upon the exercise of outstanding Hi/LO Stock
Options, which options, will be surrendered in exchange for a maximum aggregate
of approximately $ at the Effective Time. Each of the executive
officers and directors of Hi/LO currently hold Hi/LO Stock Options which will be
surrendered in exchange for cash. Pursuant to the terms of the stock option
agreements under which the Hi/LO Stock Options were issued to employees,
including directors and executive officers of Hi/LO, the unvested portion of
each Hi/LO Stock Option will automatically vest upon consummation of the Merger.
The maximum amount of cash which could become payable to the directors and
executive officers of Hi/LO with respect to Hi/LO Stock Options after the
Effective Time as a result of the required mandatory surrender based upon the
terms of the Merger Agreement is as follows: T. Michael Young -- $23,299; Gary
D. Walther -- $14,082; K. Grant Hutchins -- $14,036; Conley P. Kyle -- $17,955;
Daniel T. Bucaro -- $17,977; Richard C. Adkerson -- $6,450; Richard Q.
Armstrong -- $6,412; Charles P. Durkin, Jr. -- $6,331; E. James
Lowery -- $6,436; and Edward T. Story -- $6,412.
Change of Control Employment Agreements. Prior to 1997, Hi/LO entered into
Change of Control Employment Agreements with each of its five executive
officers, including T. Michael Young, Daniel T. Bucaro, K. Grant Hutchins,
Conley P. Kyle and Gary D. Walther, which agreements 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 the 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 described below) or (iii) the executive officer terminates
employment after the first anniversary of the change in control 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").
All of the Change of Control Employment Agreements define termination for "good
reason" to include (i) diminution in the executive management functions, duties
or responsibilities, (ii) geographic relocation, (iii) modification to the
rights to indemnification or directors' and officers' liability insurance, or
(iv) any continuing breach of the agreement by Hi/LO or its successors. 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 Hi/LO, (y) will not divulge any confidential information of
Hi/LO to a third party, and (z) will not solicit or hire away any person who was
an employee of Hi/LO on the effective date of the change of control. For
purposes of the Change of Control Employment Agreements, the consummation of the
Merger would constitute a change in control. If any payments or benefits
(including payments and benefits under the Change of Control Employment
Agreement) to the executive are determined to be "excess parachute payments"
under Section 4999 of the Code, the payments and benefits payable to the
executive officer shall be reduced to the extent of the excess and such
reduction shall be applied to the payments and benefits due to be otherwise
provided to the executive officer latest in time.
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<PAGE> 34
Accordingly, depending upon the decision Discount Auto Parts makes
concerning the continued employment of these five executive officers of Hi/LO,
such executive officers may become entitled to significant lump sum payments
upon the occurrence of the specified events on or following the consummation of
the Merger. In essence, absent actions which would give rise to a for cause
termination, these five executive officers are assured of either continued
employment for a period of two years at their current base salary or an earlier
lump sum payout. If the employment of the named executive officers (the five
most highly compensated executive officers of Hi/LO) were terminated upon or
following the Merger under circumstances entitling them to benefits under the
Change of Control Employment Agreements, the approximate total amount of the
cash termination lump sum payment, for the named executive officers would be as
follows: Mr. Young $790,750; Mr. Bucaro $230,000; Mr. Hutchins $297,000; Mr.
Kyle $250,000; and Mr. Walther $292,000.
Indemnification; Directors' and Officers' Insurance. In the Merger
Agreement, Discount Auto Parts has agreed that all rights to exculpation and
indemnification for acts or omissions occurring prior to the Effective Time now
existing in favor of the current or former directors or officers (the
"Indemnified Parties") of Hi/LO as provided in its charter or by-laws or in any
agreement will survive the Merger and will continue in full force and effect in
accordance with their terms. Discount Auto Parts has agreed that, for six years
from the Effective Time, it will indemnify the Indemnified Parties to the same
extent as such Indemnified Parties are entitled to indemnification pursuant to
the preceding sentence.
Discount Auto Parts has also agreed that, for six years from the Effective
Time, it will maintain in effect Hi/LO's current directors' and officers'
liability insurance covering those persons who are currently covered by Hi/LO's
directors' and officers' liability insurance policy; provided, however, that in
no event will Discount Auto Parts be required to expend an aggregate amount for
the entire six year period in excess of an amount equal to 200% of the annual
premium currently being paid by Hi/LO for such insurance.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase for financial reporting
purposes in accordance with generally accepted accounting principles. Discount
Auto Parts will be the acquiring party and Hi/LO will be the acquired party.
Under the purchase method of accounting, the assets and liabilities of Hi/LO
will be recorded at their fair values at the Effective Time. After the
consummation of the Merger, the results of operations of Hi/LO will be included
in the consolidated financial statements of Discount Auto Parts. No goodwill is
expected to be recorded on the consolidated financial statements of Discount
Auto Parts as a result of the Merger.
GOVERNMENTAL APPROVALS
Under the HSR Act and the rules that have been promulgated thereunder by
the Federal Trade Commission, the Merger may not be consummated unless certain
filings have been submitted to the Department of Justice and the Federal Trade
Commission and certain waiting period requirements have been satisfied. Discount
Auto Parts and Hi/LO filed notification reports, together with requests for
early termination of the waiting period, with the Department of Justice and the
Federal Trade Commission under the HSR Act prior to November 13, 1997. Early
termination of the waiting period was granted on November 18, 1997.
Other than as described in this Proxy Statement/Prospectus, consummation of
the Merger does not require the approval of any federal or state agency.
RESTRICTION ON RESALES BY AFFILIATES
All shares of Discount Auto Parts Common Stock issued in connection with
the Merger will be freely transferable, except that any shares of Discount Auto
Parts Common Stock received by persons who are deemed to be "affiliates" (as
such term is defined under the Securities Act) of Discount Auto Parts or Hi/LO
prior to the Merger may be sold by them only in transactions permitted by the
resale provisions of Rule 145 under the Securities Act with respect to
affiliates of Discount Auto Parts or Hi/LO, or Rule 144 under the
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<PAGE> 35
Securities Act with respect to persons who are or become affiliates of Discount
Auto Parts, or as otherwise permitted under the Securities Act. Persons who may
be deemed to be affiliates of Discount Auto Parts or Hi/LO generally include
individuals or entities that control, are controlled by or are under common
control with, such entity and generally include the executive officers and
directors as well as principal stockholders of such entity.
Persons who are deemed to be affiliates may not sell their shares of
Discount Auto Parts Common Stock acquired in connection with the Merger, except
pursuant to an effective registration statement under the Securities Act
covering such shares or in compliance with Rule 145 under the Securities Act (or
Rule 144 under the Securities Act in the case of persons who become affiliates
of Discount Auto Parts) or another applicable exemption from the registration
requirements of the Securities Act. In general, Rule 145 under the Securities
Act provides that for a period of two years following the Effective Time an
affiliate (together with certain related persons) would be entitled to sell
shares of Discount Auto Parts Common Stock acquired in connection with the
Merger only through unsolicited "broker transactions" or in transactions
directly with a "market maker," as such terms are defined in Rule 144.
Additionally, the number of shares to be sold by an affiliate (together with
certain related persons and certain persons acting in concert) within any
three-month period for purposes of Rule 145 under the Securities Act may not
exceed the greater of 1% of the outstanding shares of Discount Auto Parts Common
Stock or the average weekly trading volume of such shares during the four
calendar weeks preceding such sale. No affiliate of Hi/LO is expected to receive
shares of Discount Auto Parts Common Stock in the Merger which exceed 1% of the
outstanding shares of Discount Auto Parts Common Stock. Rule 145 under the
Securities Act will remain available only if Discount Auto Parts remains current
with its informational filings with the Commission under the Exchange Act. One
year after the Effective Time, an affiliate will be able to sell such shares of
Discount Auto Parts Common Stock without being subject to such manner of sale or
volume limitations provided that Discount Auto Parts is current with its
Exchange Act informational filings and such person is not then an affiliate of
Discount Auto Parts. Two years after the Effective Time, an affiliate will be
able to sell such shares of Discount Auto Parts Common Stock without any
restrictions so long as such person had not been an affiliate of Discount Auto
Parts for at least three months prior to the date of such sale.
Pursuant to the Merger Agreement, Hi/LO has agreed to use its reasonable
best efforts to cause each of its officers and directors who are "affiliates" of
Hi/LO to deliver a written agreement to Discount Auto Parts (the "Affiliate
Letters") with respect to the shares of Discount Auto Parts Common Stock to be
received by such affiliate pursuant to the Merger (the "Affiliate Shares"). It
is intended that, pursuant to the Affiliate Letters, each affiliate will agree
not to offer to sell, sell, transfer, pledge, hypothecate or otherwise dispose
of any shares of Discount Auto Parts Common Stock beneficially owned by such
affiliate as a result of the Merger except in compliance with Rule 145, pursuant
to a registration statement under the Securities Act or under certain
circumstances in a transaction which is not required to be registered under the
Securities Act. Pursuant to the Affiliate Letters, Discount Auto Parts has
agreed that, for so long as any party to an Affiliate Letter holds any shares of
Discount Auto Parts Common Stock which is subject to the limitations of Rule
145, Discount Auto Parts will use its reasonable efforts to file all reports
required to be filed by it pursuant to the Exchange Act and the rules and
regulations thereunder so as to satisfy the requirements of paragraph (c) of
Rule 144 under the Securities Act that there be available current public
information with respect to Discount Auto Parts, and to that extent to make
available to such affiliate the exemption afforded by Rule 145 with respect to
the sale, transfer or other disposition of the Affiliate Shares.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of the material federal income tax
consequences of the Merger to the holders of Hi/LO Common Stock and is based
upon current provisions of the Code, existing regulations thereunder and current
administrative rulings and court decisions, all of which are subject to change.
No attempt has been made to comment on all federal income tax consequences of
the Merger that may be relevant to particular holders, including holders that
are subject to special tax rules such as dealers in securities, foreign persons,
mutual funds, insurance companies, tax-exempt entities and holders who do not
hold their shares as capital assets. HOLDERS OF HI/LO COMMON STOCK ARE ADVISED
AND EXPECTED TO CONSULT
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<PAGE> 36
THEIR OWN TAX ADVISERS REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF THE
MERGER IN LIGHT OF THEIR PERSONAL CIRCUMSTANCES AND THE CONSEQUENCES UNDER
STATE, LOCAL AND FOREIGN TAX LAWS.
No ruling from the Internal Revenue Service (the "IRS") has been or will be
requested in connection with the Merger. Discount Auto Parts has received from
its counsel, Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis,
Professional Association, an opinion to the effect that the Merger will be
treated for federal income tax purposes as a reorganization within the meaning
of Section 368(a) of the Code, that Discount Auto Parts, Merger Sub and Hi/LO
will each be a party to the reorganization within the meaning of Section 368(b)
of the Code, and that Discount Auto Parts, Merger Sub and Hi/LO will not
recognize any gain or loss as a result of the Merger. Hi/LO has received from
its counsel, Vinson & Elkins L.L.P., an opinion to the effect that the Merger
will be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code, that Discount Auto Parts, Merger Sub and
Hi/LO will each be a party to the reorganization within the meaning of Section
368(b) of the Code, and that:
(i) no gain or loss will be recognized by a holder of Hi/LO Common
Stock upon the exchange of all of such holder's shares of Hi/LO Common
Stock solely for shares of Discount Auto Parts Common Stock in the Merger;
(ii) the aggregate basis of the shares of Discount Auto Parts Common
Stock received by a Hi/LO stockholder in the Merger (including any
fractional share deemed received) will be the same as the aggregate basis
of the shares of Hi/LO Common Stock surrendered in exchange therefor;
(iii) the holding period of the shares of Discount Auto Parts Common
Stock received by a Hi/LO stockholder in the Merger (including any
fractional share deemed received) will include the holding period of the
shares of Hi/LO Common Stock surrendered in exchange therefor, provided
that such shares of Hi/LO Common Stock are held as capital assets at the
Effective Time; and
(iv) a stockholder of Hi/LO who receives cash in lieu of a fractional
share will recognize gain or loss equal to the difference, if any, between
such stockholder's basis in the fractional share (as described in paragraph
(ii) above) and the amount of cash received. Such gain or loss will be a
capital gain or loss if the Hi/LO Common Stock is held by such stockholder
as a capital asset at the Effective Time, with the tax rate applicable to
such capital gain or loss depending on the holding period for the
fractional share (as described in paragraph (iii) above) as of that time.
The foregoing opinions cover all of the material federal income tax
consequences of the Merger to the participants to the Merger and to the
stockholders of Hi/LO. Such opinions are based upon the Merger Agreement, the
facts set forth in the Registration Statement (including this Proxy
Statement/Prospectus), written representations of officers of Hi/LO and Discount
Auto Parts (in general, payment of expenses incurred in connection with the
Merger; no intercorporate indebtedness existing between Discount Auto Parts and
Hi/LO that was issued, acquired or will be settled at a discount; Hi/LO is not
an investment company as defined in the Code; Hi/LO is not in bankruptcy,
receivership or a similar proceeding; following the Merger the Surviving
Corporation will hold a certain percentage of the net and gross assets of Hi/LO
and Merger Sub; no plan or intention on the part of Discount Auto Parts to
liquidate, merge or dispose of shares of the Surviving Corporation (subject to
certain exceptions), to issue shares of capital stock of the Surviving
Corporation such that Discount Auto Parts would lose control (as defined in the
Code) of the Surviving Corporation, to dispose of assets of the Surviving
Corporation (subject to certain exceptions) or to reacquire any shares of
Discount Auto Parts Common Stock issued in the Merger; the Surviving Corporation
will continue the historic business of Hi/LO or use a significant portion of its
assets in a business; and Discount Auto Parts has not owned during the past five
years any shares of capital stock of Hi/LO, current provisions of the Code,
existing regulations thereunder, current administrative rulings of the IRS,
court decisions and the assumption that the transaction contemplated by the
Merger Agreement will be carried out strictly in accordance with the terms
thereof. Stockholders of Hi/LO should be aware that such opinions are not
binding on the IRS and no assurance can be given that the IRS will not adopt a
contrary position or that a contrary IRS position would not be sustained by a
court. Each of such opinions has been filed with the Commission as an exhibit to
the Registration Statement.
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<PAGE> 37
CERTAIN TERMS OF THE MERGER AGREEMENT
The following is a brief summary of certain of the provisions of the Merger
Agreement, a copy of which is included as Appendix A to this Proxy
Statement/Prospectus. This summary is qualified in its entirety by reference to
the Merger Agreement, which is incorporated herein by reference. Stockholders of
Hi/LO are urged to read the Merger Agreement in its entirety for a more complete
description of the terms and conditions of the Merger.
THE MERGER; EFFECTIVE TIME
The Merger Agreement provides that Merger Sub will be merged with and into
Hi/LO with the result that Hi/LO, as the Surviving Corporation, will become a
wholly owned subsidiary of Discount Auto Parts, subject to the requisite
approval of Hi/LO stockholders and the satisfaction or waiver of the other
conditions to the Merger. The Merger will become effective at the Effective Time
upon the filing of a duly executed Certificate of Merger with the Delaware
Secretary of State or at such later time as shall be agreed upon by Discount
Auto Parts and Hi/LO and specified in the Certificate of Merger. This filing is
to be made on a date specified by Discount Auto Parts and Hi/LO, which date will
be as soon as possible following the date upon which all conditions set forth in
the Merger Agreement have been satisfied or waived, as the case may be, or such
other time as the parties may mutually agree upon. It is currently anticipated
that the Effective Time will occur shortly after the date of the Special
Meeting, assuming the Merger Agreement and the Merger are approved at such
meeting and all other conditions to the Merger have been satisfied or waived.
MERGER CONSIDERATION
Exchange Ratio. Upon consummation of the Merger pursuant to the Merger
Agreement, each share of Hi/LO Common Stock issued and outstanding immediately
prior to the Effective Time (other than shares held in the treasury of Hi/LO, if
any, which will be canceled) will be converted into and represent a fraction of
a share of Discount Auto Parts Common Stock equal to the Exchange Ratio. The
Exchange Ratio will be equal to 0.1485; provided, however, that (i) if the
Discount Average Share Price (as defined below) is greater than $26.148, then
the Exchange Ratio shall be equal to the product (rounded to the nearest
ten-thousandth) of (x) 0.1485 times (y) the quotient of $26.148 divided by the
Discount Average Share Price, or (ii) if the Discount Average Share Price is
less than $22.727, then the Exchange Ratio shall be equal to the lesser of (1)
0.1624 and (2) the product (rounded to the nearest ten-thousandth) of (x) 0.1485
times (y) the quotient of $22.727 divided by the Discount Average Share Price.
Pursuant to the Merger Agreement, Hi/LO has the right to terminate the Merger
Agreement if the Discount Average Share Price is less than $19.55. The Board of
Directors of Hi/LO has not determined what actions it would take or what factors
it would consider if circumstances changed such that the Discount Average Share
Price was less than $19.55. The term "Discount Average Share Price" shall mean
the average of the closing sales prices of Discount Auto Parts Common Stock (or,
if Discount Auto Parts Common Stock should not trade on any trading day, the
average of the bid and asked prices therefor on such day), rounded to the
nearest thousandth (.0005 being rounded to .001), as reported on the NYSE
Composite Tape on each of the last ten consecutive trading days ending on the
third trading day prior to the Special Meeting.
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The following table sets forth the Exchange Ratio and the "value" of the
consideration to be received by Hi/LO stockholders for each share of Hi/LO
Common Stock, assuming various Discount Average Share Prices between $19.00 and
$28.00:
<TABLE>
<CAPTION>
"VALUE" PER SHARE
DISCOUNT OF HI/LO
AVERAGE SHARE PRICE EXCHANGE RATIO COMMON STOCK*
- ------------------- -------------- -------------------
<C> <C> <C>
$19.00 0.1624 $3.09
20.00 0.1624 3.25
21.00 0.1607 3.37
22.00 0.1534 3.37
23.00 0.1485 3.42
24.00 0.1485 3.56
25.00 0.1485 3.71
26.00 0.1485 3.86
27.00 0.1438 3.88
28.00 0.1387 3.88
</TABLE>
- ---------------
* Calculated by multiplying the Discount Average Share Price by the Exchange
Ratio. The actual value of a share of Discount Auto Parts Common Stock on
the Closing Date of the Merger, which will be based upon the market value on
a particular date of the fraction of the share of Discount Auto Parts Common
Stock received, may be higher or lower than the value indicated above, which
is based on the average market value of a share of Discount Auto Parts
Common Stock over a period of several days prior to the Special Meeting.
For example, if the Discount Average Share Price is $ (the closing
price of Discount Auto Parts Common Stock on , 1997), the Exchange
Ratio will be and the "value" per share of Hi/LO Common Stock will be
$ . Hi/LO stockholders should obtain current quotes for the Discount
Auto Parts Common Stock.
Based on the number of shares of Hi/LO Common Stock outstanding as of the
Record Date and assuming an Exchange Ratio of , approximately
shares of Discount Auto Parts Common Stock will be issuable pursuant
to the Merger Agreement (assuming no exercise prior to the Effective Time of
Hi/LO Stock Options), representing approximately % of the total Discount
Auto Parts Common Stock to be outstanding after such issuance.
Fractional Shares. No certificates representing fractional shares of
Discount Auto Parts Common Stock will be issued in the Merger, but in lieu of
any such fractional shares, each holder of an outstanding share of Hi/LO Common
Stock shall be entitled to receive an amount of cash equal to the product
obtained by multiplying (i) the fractional share interest to which such holder
(after taking into account all shares of Hi/LO Common Stock held at the
Effective Time by such holder) would otherwise be entitled by (ii) the closing
price for a share of Discount Auto Parts Common Stock as reported on the NYSE
Composite Tape on the last full trading date before the Effective Time.
Conversion of Merger Sub Common Stock. Each share of common stock, $1.00
par value per share, of Merger Sub issued and outstanding immediately prior to
the Effective Time will be converted into one share of common stock, $0.01 par
value per share, of Hi/LO as the Surviving Corporation. Such newly issued shares
will thereupon constitute all of the issued and outstanding capital stock of the
Surviving Corporation.
EXCHANGE PROCEDURES
HOLDERS OF SHARES OF HI/LO COMMON STOCK SHOULD NOT SEND IN THEIR HI/LO
STOCK CERTIFICATES UNTIL THEY RECEIVE A LETTER OF TRANSMITTAL.
As soon as practicable after the Effective Time, a letter of transmittal
will be mailed to each holder of record of a certificate or certificates (the
"Certificates") which immediately prior to the Effective Time represented
outstanding shares of Hi/LO Common Stock whose shares were converted into the
right to receive shares of Discount Auto Parts Common Stock. This letter of
transmittal must be used in forwarding
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<PAGE> 39
Certificates for surrender in exchange for certificates evidencing shares of
Discount Auto Parts Common Stock to which a holder of shares of Hi/LO Common
Stock prior to the Effective Time has become entitled and, if applicable, cash
in lieu of any fractional share of Discount Auto Parts Common Stock. Such letter
of transmittal will be accompanied by instructions specifying other details of
the exchange.
After receipt of such letter of transmittal, each holder of Certificates
should surrender such Certificates to ChaseMellon Shareholder Services, the
exchange agent for the Merger, pursuant to and in accordance with the
instructions accompanying such letter of transmittal, and each such holder will
receive in exchange therefor a certificate evidencing the whole number of shares
of Discount Auto Parts Common Stock to which he is entitled and a check
representing the amount of cash payable in lieu of any fractional share of
Discount Auto Parts Common Stock, if any, which such holder has the right to
receive pursuant to the Merger Agreement, after giving effect to any required
withholding tax. No interest will be paid or accrued on the amount of cash
payable in lieu of fractional shares, if any, and unpaid dividends and
distributions, if any, payable to holders of Certificates. Certificates
surrendered for exchange by any person constituting an "affiliate" of Hi/LO for
purposes of Rule 145(c) under the Securities Act shall not be exchanged until
Discount Auto Parts has received an executed Affiliate Letter from such person
as prescribed under the Merger Agreement.
After the Effective Time, each Certificate, until so surrendered and
exchanged, will be deemed, for all purposes, to represent only the right to
receive upon surrender a certificate representing shares of Discount Auto Parts
Common Stock and cash in lieu of fractional shares, if any, as provided above.
The holder of such unexchanged Certificates will not be entitled to receive any
dividends or other distributions declared or made by Discount Auto Parts having
a record date on or after the Effective Time until the Certificate is
surrendered. Subject to applicable laws, upon surrender of such unexchanged
Certificates, such dividends and distributions, if any, will be paid without
interest and less the amount of any withholding taxes which may be required
thereon.
CONDITIONS TO THE MERGER
The respective obligations of Discount Auto Parts and Hi/LO to consummate
the Merger are subject to the satisfaction of certain conditions, including the
following: (i) approval of the Merger Agreement by the stockholders of Hi/LO;
(ii) no statute, rule, regulation, executive order, decree, ruling or injunction
having been enacted, entered, promulgated or enforced by any court or other
tribunal or governmental body or authority which prohibits the consummation of
the Merger substantially on the terms contemplated by the Merger Agreement,
(iii) the Commission having declared the Registration Statement effective, and
at the Effective Time, no stop order suspending such effectiveness shall have
been issued and remain in effect; (iv) expiration or termination of all waiting
periods under the "HSR Act"; and (v) receipt by each of Hi/LO and Discount Auto
Parts of legal opinions from their counsel, in form and substance reasonably
satisfactory to them, to the effect (a) that the Merger will qualify as a
reorganization for federal income tax purposes under Section 368(a) of the Code
and (b) none of Hi/LO, the Hi/LO stockholders, Discount Auto Parts or Merger Sub
will recognize gain or loss for federal income tax purposes as a result of the
Merger (other than with respect to cash paid in lieu of fractional shares).
The obligations of Hi/LO to consummate the Merger are further subject to
the receipt of certain closing certificates and fulfillment of the following
conditions: (i) the representations and warranties of Discount Auto Parts
contained in the Merger Agreement shall be true and correct in all respects as
of the Effective Time with the same effect as though made as of the Effective
Time except (a) for changes contemplated by the terms of the Merger Agreement,
(b) that the accuracy of representations and warranties that by their terms
speak as of the date of the Merger Agreement or some other date will be
determined as of such date, (c) where any failure of the representation or
warranty to be true and correct in all respects would not have a material
adverse effect on Discount Auto Parts; (ii) the shares of Discount Auto Parts
Common Stock issuable in the Merger shall have been approved for listing on the
NYSE, subject only to official notice of issuance; and (iii) Discount Auto Parts
shall have performed in all material respects all obligations and covenants
required by the Merger Agreement to be performed or complied with by it prior to
the Effective Date.
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The obligations of Discount Auto Parts to consummate the Merger are further
subject to the receipt of certain closing certificates and fulfillment of the
following conditions: (i) the representations and warranties of Hi/LO contained
in the Merger Agreement shall be true and correct in all respects as of the
Effective Time with the same effect as though made as of the Effective Time
except (a) for changes contemplated by the terms of the Merger Agreement, (b)
that the accuracy of representations and warranties that by their terms speak as
of the date of the Merger Agreement or some other date will be determined as of
such date, (c) where any failure of the representation or warranty to be true
and correct in all respects would not have a material adverse effect on Discount
Auto Parts; and (ii) Hi/LO shall have performed in all material respects all
obligations and covenants required by the Merger Agreement to be performed or
complied with by it prior to the Effective Date.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
each of Hi/LO and Discount Auto Parts relating to, among other things, (i) its
organization and similar corporate matters, (ii) its capitalization, (iii) the
authorization, execution, delivery, performance and enforceability of the Merger
Agreement and the absence of conflicts, violations and defaults under its
charter and bylaws and certain other agreements and documents, (iv) the
documents and reports filed by it with the Commission and the accuracy of the
information contained therein, (v) the absence of undisclosed liabilities, (vi)
compliance with laws, (vii) certain environmental matters, (viii) its employee
benefit plans, (ix) absence of certain changes and events, (x) investigations
and litigation, (xi) accuracy of information provided for this Proxy Statement/
Prospectus, (xii) its taxes, (xiii) its brokers or investment bankers involved
in the transaction, (xiv) certain labor matters, (xv) its material contracts and
agreements and matters relating thereto, (xvi) the title to its assets and
properties and liens thereon, (xvii) its insurance policies, and (xviii) its
intellectual property. In addition, the Merger Agreement contains (A)
representations and warranties by Hi/LO relating to (1) its stockholders rights
plan, (2) steps taken with respect to takeover and similar laws, (3) the
required vote of Hi/LO stockholders to approve the Merger, and (4) significant
vendor relationships, and (B) representations and warranties by Discount Auto
Parts relating to (1) the absence of any ownership by Discount Auto Parts of
Hi/LO Common Stock or securities convertible into same, and (2) the purpose of
the formation of Merger Sub.
The representations and warranties of Hi/LO and Discount Auto Parts also
extend in many respects to their respective subsidiaries and, in the case of
Discount Auto Parts, Merger Sub joins in the representations and warranties. The
representations and warranties expire at the Effective Time.
CERTAIN COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
Business Maintenance. Hi/LO has agreed that, prior to the Effective Time,
unless expressly contemplated by the Merger Agreement or otherwise consented to
in writing by Discount Auto Parts, Hi/LO will, and will cause its subsidiaries
to, (i) conduct its operations in all material respects in the ordinary and
usual course of business in substantially the same manner as before the
execution of the Merger Agreement; (ii) use 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, and maintain
satisfactory relationships with customers and suppliers; (iii) continue to
provide training for employees commensurate with the training provided over the
past 12 months; and (iv) subject to the limitations contained in the Merger
Agreement, continue the level of recruiting activity and process employed over
the past 12 months.
Discount Auto Parts has agreed that, prior to the Effective Time, unless
expressly contemplated by the Merger Agreement or otherwise consented to in
writing by Hi/LO, Discount Auto Parts will, and will cause its subsidiaries to,
(i) conduct its operations in all material respects in the ordinary and usual
course of business consistent in substantially the same manner as before the
execution of the Merger Agreement and (ii) use 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,
and maintain satisfactory relationships with customers and suppliers.
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Negative Covenants. Hi/LO has agreed that, prior to the Effective Time,
subject to certain exceptions and unless expressly contemplated by the Merger
Agreement, required by applicable law or otherwise consented to in writing by
Discount Auto Parts, it will not, and will not permit any of its subsidiaries
to, (i) authorize or pay any dividends or make any distribution with respect to
its stock, (ii) enter into or amend any employment, severance or similar
agreements or arrangements with any of their respective directors or executive
officers, (iii) authorize, or announce an intention to authorize, or enter into
an agreement with respect to, any merger, consolidation or business combination
(other than the Merger), 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, (iv) propose or adopt any amendments to its
corporate charter or by-laws, (v) 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, (vi) 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, (vii) 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 purchase of the Reddi Brake Promissory Note and
purchases, redemptions and offers to purchase in the ordinary course of business
in connection with certain employee incentive and benefit plans, programs or
arrangements, (viii) amend in any material respect the terms of their respective
employee benefit plans, programs or arrangements or any severance or similar
agreements or arrangements, (ix) enter into or amend any employment or
consulting agreement, (x) 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, (xi) make any payments under any Hi/LO 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 Hi/LO benefit plan,
(xii) enter into any material loan agreement or incur any indebtedness in excess
of an aggregate of $500,000 other than pursuant to additional draws resulting in
not in excess of an aggregate amount outstanding of $60,000,000 under Hi/LO's
credit facility with the CIT Group or amend Hi/LO's credit facility with the CIT
Group to increase the amount that may be borrowed thereunder, (xiii) make any
material tax election or settle or compromise any material tax liability, (xiv)
adjust, split, combine or reclassify its capital stock, (xv) enter into any
agreement, understanding or arrangement with respect to the sale or voting of
its capital stock, (xvi) create any new subsidiaries, (xvii) take any action
which could reasonably be expected to adversely affect or delay the ability of
any of the parties hereto to obtain any approval of any governmental or
regulatory body required to consummate the transactions contemplated by the
Merger Agreement, (xviii) 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, (xix) enter into any financial
derivative contracts, (xx) change in any material respect its accounting
policies, methods or procedures except as required by GAAP, (xxi) 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 Hi/LO, (xxii) take any action that would
prevent or impede the Merger from qualifying as a tax-free reorganization under
Section 368 of the Code, (xxiii) take any action to cause the shares of the
Hi/LO Common Stock to cease to be quoted on any of the stock exchanges on which
such shares are quoted, or (xxiv) agree in writing or otherwise, to take any of
the foregoing actions or take any action which would make any representation or
warranty of Hi/LO 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.
Discount Auto Parts has agreed that, prior to the Effective Date, subject
to certain exceptions and unless expressly contemplated by the Merger Agreement,
required by applicable law or otherwise consented to in writing by Hi/LO, it
will not, and will not permit any of its corporate subsidiaries to, (i) declare
or pay any dividends or make any distribution with respect to its stock, except
for dividends by subsidiaries to Discount Auto Parts in the ordinary course of
business consistent with past practice, (ii) authorize, propose or announce an
intention to authorize, propose or enter into an agreement with respect to, any
merger, consolidation or business combination (other than the Merger), any
acquisition of a material amount of assets or securities, any release or
relinquishment of any material contract rights, in each case, not in the
ordinary course of
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<PAGE> 42
business and which is reasonably likely to have a material adverse effect on
Discount Auto Parts or materially and adversely affect the transactions
contemplated by the Merger Agreement, (iii) propose or adopt any amendments to
its corporate charter or by-laws, (iv) 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, (v) 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 except pursuant to employee incentive or benefit plans, programs
or arrangements and non-employee director plans in existence on the date of the
Merger Agreement in the ordinary course of business and consistent with past
practice covering not in excess of 500,000 shares of Discount Auto Parts Common
Stock, (vi) 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 Discount
Auto Parts, (vii) take any action that would prevent or impede the Merger from
qualifying as a tax-free reorganization under Section 368 of the Code, (viii)
take any action which could reasonably be expected to adversely affect or delay
the ability of any of the parties hereto to obtain any approval of any
governmental or regulatory body required to consummate the transactions
contemplated by the Merger Agreement, (ix) take any action to cause the shares
of the Discount Auto Parts Common Stock to cease to be quoted on any of the
stock exchanges on which such shares are quoted, or (x) agree in writing or
otherwise, to take any of the foregoing actions or take any action which would
make any representation or warranty of Discount Auto Parts 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.
Access to Business of Other Party. During the pendency of the Merger
Agreement, Discount Auto Parts and Hi/LO have each agreed to afford, and to
cause its subsidiaries to afford, to the other party and its representatives
access at reasonable times to the officers, employees, agents, properties,
offices and other facilities of such party and its subsidiaries and to their
books and records. Each of them has also agreed to furnish, and to cause its
subsidiaries to furnish, to the other party and its representatives such
information concerning the business, properties, contracts, records and
personnel of such party and its subsidiaries as may be reasonably requested. If
the Merger Agreement is terminated in accordance with its terms, a party that
has received information pursuant to the Merger Agreement is obligated to return
or destroy such information after a request therefor by the other party. All
information furnished by either party pursuant to the Merger Agreement is
subject to a confidentiality agreement executed and delivered by Discount Auto
Parts and Hi/LO prior to negotiation of the Merger Agreement.
NO SOLICITATION
As an inducement to Discount Auto Parts to enter into the Merger Agreement,
Hi/LO has agreed that during the term of the Merger Agreement, it will not, and
will not authorize or permit any of its or its subsidiaries' officers,
directors, employees, attorneys, financial advisors, agents or other
representatives ("Hi/LO's Representatives") to, directly or indirectly, (a)
solicit, initiate or knowingly encourage any Takeover Proposal (as defined
below), 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 contained in the Merger Agreement
shall prohibit Hi/LO and its Board of Directors 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 SEC under the Exchange Act, or (ii) at any time
prior to the time Hi/LO's stockholders shall have voted to approve the Merger,
engaging in discussions or negotiations with, and furnishing information
(including non-public information) concerning Hi/LO 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 Hi/LO or any of Hi/LO's Representatives after the
date of the Merger Agreement) if the Board of Directors of Hi/LO concludes in
good faith based upon advice of its outside counsel (who may be its regularly
engaged outside counsel) that the failure to take such action is reasonably
likely to violate the obligations of the Hi/LO Board to Hi/LO or to Hi/LO's
stockholders under applicable law, or (iii) provided the Merger Agreement is
terminated pursuant to Section 7.1(e) of the Merger Agreement (which relates to
termination when Hi/LO has received a Superior Proposal (as defined below)),
accepting a Superior Proposal. Hi/LO is required to notify Discount Auto Parts
orally and in
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<PAGE> 43
writing of any 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 is required to keep Discount
Auto Parts informed of the general status and any material changes in the terms
and conditions of such Takeover Proposal. Hi/LO is also required to promptly
provide to Discount Auto Parts any information concerning Hi/LO, its
subsidiaries, business, properties or assets furnished to any third party which
makes a Takeover Proposal and which has not previously been provided to Discount
Auto Parts. For these purposes, (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 Discount Auto Parts or any of
its subsidiaries, for a 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, Hi/LO, 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 Board of Directors of Hi/LO
determines in their good faith reasonable judgment is more favorable to Hi/LO
and to its stockholders than the transactions contemplated by the Merger
Agreement.
CERTAIN POST-MERGER MATTERS
Once the Merger is consummated, Merger Sub will cease to exist as a
corporation, and Hi/LO, as the Surviving Corporation, will succeed to all of the
assets, rights and obligations of Hi/LO and Merger Sub.
Pursuant to the Merger Agreement, the amended and restated certificate of
incorporation and the bylaws (as amended) of Hi/LO, each as in effect
immediately prior to the Effective Time, will be the certificate of
incorporation and bylaws of the Surviving Corporation until amended as provided
therein and pursuant to the Delaware General Corporation Law.
EMPLOYEE BENEFITS
Discount Auto Parts has agreed that it will take the actions necessary or
appropriate to permit each Hi/LO Employee to either, at the sole election of
Discount Auto Parts, (i) continue to participate from and after the Effective
Time in the employee benefit plans and programs maintained by Hi/LO immediately
prior to the Effective Time other than Hi/LO's stock option plan and Hi/LO's
employee stock purchase plan or (ii) permit the Hi/LO Employees to participate
in the employee benefit plans or programs maintained by Discount Auto Parts for
its employees generally (the "Discount Plans") other than Discount's stock
option plans or any employee stock purchase plan meeting the requirements of
Section 423 of the Code. In the event Discount Auto Parts decides to terminate
or discontinue Hi/LO's group health plan, Discount Auto Parts will permit each
Hi/LO Employee and his or her eligible dependents to be covered under a Discount
Plan that provides medical and dental benefits, credits such Hi/LO Employee for
the year during which such coverage under such Discount Plan begins with any
deductibles and co-payments already incurred during such year under Hi/LO's
group health plan, and waives any pre-existing condition restrictions to the
extent necessary to provide immediate coverage. Discount Auto Parts has also
agreed that, following the Merger, Discount Auto Parts, Hi/LO, their respective
subsidiaries, and the Discount Plans shall recognize each Hi/LO Employee's years
of service and level of seniority with Hi/LO and its subsidiaries for purposes
of terms of employment and eligibility, vesting and benefit determination under
the Discount Plans.
HI/LO STOCKHOLDERS RIGHTS PLAN
In August of 1996, the Hi/LO Board of Directors adopted a preferred share
rights plan (the "Hi/LO Rights Plan") pursuant to which holders of Hi/LO Common
Stock were issued rights (exercisable after certain triggering events) to
purchase shares of a series of Hi/LO Preferred Stock. The Hi/LO Rights Plan was
amended as of October 17, 1997 to provide that the transactions contemplated by
the Merger Agreement will not trigger the provisions of the Hi/LO Rights Plan.
Discount Auto Parts does not have a stockholders rights plan in effect.
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<PAGE> 44
TERMINATION; EFFECT OF TERMINATION
By Either Party. The Merger Agreement may be terminated at any time prior
to the Effective Time, whether before or after approval of the Merger Agreement
by the stockholders of Hi/LO, (i) by mutual consent of Discount Auto Parts and
Hi/LO, or (ii) by either Discount Auto Parts or Hi/LO if the Merger has not been
consummated before April 30, 1998; provided that the party seeking to terminate
has not breached in any material respect its obligations under the Merger
Agreement in any manner that has proximately contributed to the failure to
consummate the Merger on or before such date, or (iii) by either Discount Auto
Parts or Hi/LO if (a) a statute, rule, regulation or executive order has been
enacted, entered or promulgated prohibiting the consummation of the Merger
substantially on the terms contemplated by the Merger Agreement or (b) an order,
decree, ruling or injunction permanently restraining, enjoining or otherwise
prohibiting the consummation of the Merger becomes final and non-appealable, or
(iv) by either Discount Auto Parts or Hi/LO if the required approval of the
stockholders of Hi/LO is not obtained at the Special Meeting.
By Discount Auto Parts. Discount Auto Parts may terminate the Merger
Agreement at any time prior to the Effective Time, whether before or after
approval of the Merger Agreement by the Hi/LO stockholders, (i) if Hi/LO
breaches, or fails to comply with, in any material respect any of its
obligations under the Merger Agreement or any representation or warranty made by
Hi/LO was 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 30 days after notice
thereof from Discount Auto Parts and such breaches, failures or
misrepresentations, individually or in the aggregate, results or is reasonably
likely to result in a material adverse effect on Hi/LO, or (ii) if the Hi/LO
Board of Directors or any committee thereof withdraws or modifies in any adverse
manner, or resolves to withdraw or modify, its approval or recommendation of the
Merger or the Merger Agreement, or shall approve or recommend any acquisition of
Hi/LO or a material portion of Hi/LO's assets or any tender offer for shares of
Hi/LO's capital stock other than by Discount Auto Parts or an affiliate of
Discount Auto Parts.
By Hi/LO. Hi/LO may terminate the Merger Agreement at any time prior to
the Effective Time, whether before or after approval of the Merger Agreement by
the Hi/LO stockholders, (i) if Discount Auto Parts breaches, or fails to comply
with, in any material respect, any of its obligations under the Merger Agreement
or any representation or warranty made by Discount Auto Parts was 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 30 days after notice thereof from Hi/LO
and such breaches, failures or misrepresentations, individually or in the
aggregate, results or is reasonably likely to result in a material adverse
effect on Discount Auto Parts, or (ii) if prior to the approval of the Merger
Agreement by the Hi/LO stockholders, the Hi/LO Board of Directors reasonably
determines that a Takeover Proposal constitutes a Superior Proposal (provided
that Hi/LO may not terminate the Merger Agreement under such circumstances
unless simultaneously with such termination Hi/LO enters into a definitive
acquisition, merger or similar agreement to effect the Superior Proposal and
pays a $4.0 million termination fee (the "Termination Fee") to Discount Auto
Parts) or (iii) if the Discount Average Share Price is less than $19.55 and the
Hi/LO Board of Directors determines to terminate by a vote of a majority of the
members of the entire Hi/LO Board.
Subject to limited exceptions, including the survival of Hi/LO's agreement
to pay a termination fee to Discount Auto Parts under certain circumstances, as
discussed below, in the event of the termination of the Merger Agreement, the
Merger Agreement shall become void, there shall be no liability on the part of
Discount Auto Parts, Merger Sub or Hi/LO to the other, and all rights and
obligations of the parties thereto shall cease, except that no party will be
relieved from its obligations with respect to any breach of the Merger
Agreement.
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AMENDMENT AND WAIVER
The Merger Agreement may be amended in writing by the parties thereto by
action taken or authorized by their respective Boards of Directors at any time
prior to the Effective Time; provided, however, that after approval of the
Merger Agreement by the stockholders of Hi/LO, no amendment or change may be
made to the provisions of the Merger Agreement with respect to the conversion of
shares of Hi/LO Common Stock or that under applicable law requires further
approval or authorization by Hi/LO stockholders.
At any time prior to the Effective Time, any party to the Merger Agreement
may (i) extend the time for the performance of any of the obligations or other
acts of the other party thereto, (ii) waive any inaccuracies in the
representations and warranties of the other party contained in the Merger
Agreement or in any document delivered pursuant thereto, and (iii) waive
compliance by the other party with any of the agreements or conditions contained
in the Merger Agreement. Any such extension or waiver shall be valid only if set
forth in a writing signed by the party or parties to be bound thereby. Neither
Discount Auto Parts nor Hi/LO, however, intends to enter into any amendment to
the Merger Agreement or to waive compliance by the other with the terms of the
Merger Agreement if such amendment or waiver would be material to the
consideration and vote of the stockholders of Hi/LO upon the proposal to adopt
the Merger Agreement without resoliciting the votes of such stockholders.
EXPENSES AND TERMINATION FEE
Discount Auto Parts and Hi/LO will pay their own costs and expenses in
connection with the Merger except Discount Auto Parts and Hi/LO shall each pay
one-half of all expenses related to printing, filing and mailing this Proxy
Statement/Prospectus and filing fees incurred in connection with the
Registration Statement and under the HSR Act; provided that in the event that
Hi/LO is required to pay the Termination Fee, then all such expenses shall be
paid by Discount Auto Parts.
The Merger Agreement provides that Hi/LO will pay to Discount Auto Parts a
Termination Fee equal to $4.0 million if: (1) the Merger Agreement is terminated
by Hi/LO or Discount Auto Parts because the required vote of the Hi/LO
stockholders is not obtained at the Special Meeting of Hi/LO stockholders and
prior to the date of such meeting a Takeover Proposal shall have been made and
prior to the first anniversary of the date of such meeting Hi/LO shall have
consummated a 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 Hi/LO, directly or
indirectly, by the entity that made such Takeover Proposal; (2) the Merger
Agreement is terminated by Hi/LO prior to the approval of the Merger Agreement
by the Hi/LO stockholders because the Hi/LO Board, in accordance with the terms
of the Merger Agreement, enters into a definitive acquisition, merger or similar
agreement to effect a Superior Proposal; or (3) the Merger Agreement is
terminated by Discount Auto Parts because the Hi/LO Board or any committee of
the Hi/LO Board, (i) withdraws or modifies in any adverse manner its approval or
recommendation of the Merger Agreement or the Merger, (ii) approves or
recommends any acquisition of Hi/LO or a material portion of Hi/LO's assets or
any tender offer for shares of Hi/LO's capital stock, in each case, other than
by Discount Auto Parts or an affiliate of Discount Auto Parts, or (iii) resolves
to take any of the actions specified in clause (i) above.
In the case the Termination Fee is payable as provided in clause (1) above,
such Termination Fee shall be paid prior to the consummation of the Takeover
Proposal. In the case the Termination Fee is payable as provided in clause (2)
above, such Termination Fee shall be paid concurrently with the termination of
the Merger Agreement. In the case the Termination Fee is payable as provided in
clause (3) above, such Termination Fee shall be paid within three business days
after notice of the termination of the Merger Agreement.
NEW YORK STOCK EXCHANGE LISTING
Pursuant to the Merger Agreement, Discount Auto Parts will cause the shares
of Discount Auto Parts Common Stock to be issued in the Merger to be approved
for listing on the NYSE, subject to official notice of issuance, prior to the
Effective Time.
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DISCOUNT AUTO PARTS, INC.
Discount Auto Parts is one of the Southeast's leading specialty retailers
of automotive replacement parts, maintenance items and accessories for the
"Do-It-Yourself" ("DIY") consumer. As of November 4, 1997, Discount Auto Parts
operated a chain of 413 Discount Auto Parts stores, with 334 stores located
throughout Florida, 49 stores in Georgia, 16 stores in Alabama, 4 stores in
South Carolina and 10 stores in Mississippi. Each Discount Auto Parts store
carries an extensive line of brand name replacement "hard" parts, such as
starters, alternators, brake pads, brake shoes and water pumps, for domestic and
imported cars, vans and light trucks, as well as brand name maintenance items
and accessories. Discount Auto Parts is not in the business of selling tires or
performing automotive repairs or installations.
Discount Auto Parts has achieved significant growth in each of its five
latest fiscal years. Net sales have increased to $405.2 million in fiscal 1997
from $176.8 million in fiscal 1993 and income from operations has increased to
$47.2 million in fiscal 1997 from $21.8 million in fiscal 1993. The number of
stores had increased to 400 as of the end of fiscal 1997 from 158 at the
beginning of fiscal 1993 and stands at 413 as of November 4, 1997. Comparable
store sales have increased an average of 5.7% during the past five fiscal years,
but declined 0.6% in fiscal 1997, when excluding bulk commercial sales of R-12
freon.
At September 2, 1997, Discount Auto Parts had consolidated total assets of
approximately $460.5 million and consolidated stockholders' equity of
approximately $235.5 million and employed approximately 3,800 persons.
Discount Auto Parts was founded in 1971 with a single 800 square foot store
in Winter Haven, Florida by Herman Fontaine, his son, Denis L. Fontaine, and
other members of the Fontaine family. Since the Company's inception, members of
the Fontaine family, including Herman Fontaine, Denis L. Fontaine and Peter J.
Fontaine, managed the Company and played key roles in formulating and carrying
out its business strategies. Herman Fontaine served as President from 1972 until
1978 and as the Chairman of the Board from 1972 until 1986, at which time he
became Chairman Emeritus. Denis L. Fontaine assumed the roles of Chief Executive
Officer and President in 1978 and held such positions until his death in June
1994. Peter J. Fontaine, who has been with the Company for over 22 years and
previously served as Chief Operating Officer, was elected as President and Chief
Executive Officer in 1994. Effective February 1, 1997, William (Bill) C. Perkins
assumed the position of President from Peter J. Fontaine while Peter J. Fontaine
remained Chief Executive Officer. Bill Perkins has served and also continues to
serve as Chief Operating Officer. He also served as Chief Financial Officer from
1992 to 1996.
Discount Auto Parts completed its initial public offering in August 1992,
and the Fontaine family continues to control approximately 48% of the
outstanding Discount Auto Parts Common Stock. After the Merger, the Fontaine
family will control approximately 43% of the outstanding Discount Auto Parts
Common Stock.
In July 1997, Discount Auto Parts entered into a settlement agreement to
resolve certain litigation related to commercial sales of R-12 freon, and
recorded a related pre-tax charge to earnings of approximately $20.5 million in
the fourth quarter of fiscal 1997. The provisions of the settlement agreement
have been substantially performed by Discount Auto Parts.
HI-LO AUTOMOTIVE, INC.
GENERAL
Hi/LO sells automotive aftermarket parts, products and accessories for
domestic and imported cars, vans and light trucks to DIY consumers and
commercial auto repair outlets. DIY consumers purchase parts, products and
accessories and perform their own installation and maintenance. Commercial
repair outlets include professional mechanics, auto repair shops, auto dealers,
fleet owners, and mass and general merchandisers with auto repair facilities
that perform installation and maintenance work for a fee. Hi/LO stores are not
engaged in the business of selling tires or performing automotive repairs or
installations.
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Since the opening of the first Hi/LO store in 1956, Hi/LO has targeted the
DIY consumer by offering a large selection of repair and replacement parts,
friendly customer service and high quality parts at low, discount prices. The
DIY market segment accounted for approximately 65% of Hi/LO's sales in 1996, and
in the first nine months of 1997.
Although Hi/LO stores have always served commercial customers, Hi/LO
initiated a formal commercial sales program in 1989 to increase such sales. As a
result, Hi/LO's participation in the commercial segment of the automotive
aftermarket has changed from a retail-related walk-in business to a
delivery-oriented commercial business. Sales to the commercial market segment
accounted for approximately 35% of Hi/LO's 1996 sales and 34% in the first three
quarters of 1997.
In early 1992, Hi/LO adopted an everyday low price strategy to strengthen
its reputation with DIY customers as a price leader. To support its strategy,
Hi/LO regularly reviews its vendor relationships to evaluate and compare price,
quality and service, and, as appropriate, may change vendors.
At September 30, 1997, Hi/LO had 187 stores, 70 located in the greater
Houston metropolitan area, 31 in the Dallas/Fort Worth area, 9 in the Austin
area, 8 in San Antonio, 45 located in other cities and communities in Texas, 17
located in Louisiana, and 7 located in Southern California. Hi/LO has closed 8
stores since June 30, 1996.
The following table sets forth Hi/LO's store activities during the past
five years and through September 30, 1997:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Beginning stores.................................... 191 194 178 150 129 114
New stores.......................................... 1 -- 8 20 21 15
Acquired stores..................................... -- -- 8 8 -- --
Closed stores....................................... 5 3 -- -- -- --
Ending stores....................................... 187 191 194 178 150 129
</TABLE>
BUSINESS STRATEGY
Hi/LO's strategy is to serve both the DIY and commercial market segments of
the automotive aftermarket through its store network. By serving both market
segments through its stores, Hi/LO is able to serve a larger customer base at
its stores. As a result, greater store productivity can be attained and a more
extensive product selection can be maintained at the stores. Hi/LO believes its
business strategy positions it to sell replacement parts to both the DIY
consumer market and the professional mechanic market, thus reducing the
sensitivity of Hi/LO's sales to shifts in demand between the two market
segments.
Hi/LO believes that additional benefits result from serving both market
segments. In the DIY segment, Hi/LO has found that the product knowledge gained
by its associates from serving the more technically-oriented commercial
customers has improved their handling of overall product selection. In the
commercial segment, Hi/LO believes that the merchandising capabilities resulting
from serving the DIY segment enable it to market its products to commercial
customers more effectively than traditional commercial suppliers.
Hi/LO's business strategy is supported by the following key merchandising
and marketing elements:
Selection. Hi/LO stores generally carry 15,000 to 30,000 Stock Keeping
Units ("SKUs"), depending on store size and location. An additional 50,000 SKUs
are available from Hi/LO's distribution center. In total, Hi/LO stocks
approximately 80,000 SKUs, reflecting primarily a larger selection of repair or
replacement "hard parts" than most of its retail competitors. As a result of its
broad product selection, Hi/LO believes it has established a reputation with its
customers as being more likely than its competitors to have in stock the parts
requested by the customer.
Everyday Low Prices. Hi/LO has an everyday low price strategy. Hi/LO seeks
to maintain retail prices that are comparable to those of its major retail
competitors and to maintain commercial (delivered) prices comparable to or below
those of its major commercial competitors. Hi/LO supplements its everyday low
price
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<PAGE> 48
strategy with special promotional pricing on selected products. To assure DIY
consumers of its competitive prices, Hi/LO maintains a "match any price" policy.
In addition, Hi/LO commercial customers are offered reduced prices on hard parts
based on the volume of sales to those customers. Hi/LO's pricing strategy is
communicated to customers through newsprint, radio and television advertising,
as well as in-store promotional signage and displays designed to highlight
Hi/LO's everyday low price strategy.
Availability. To assure superior parts availability at the store level,
Hi/LO makes regularly scheduled deliveries to all stores at least once each week
from its distribution center in Houston, Texas. To meet customers' product
requests, special order deliveries are made as often as twice a day, Monday
through Saturday, to most of Hi/LO's greater Houston metropolitan area stores,
and usually by the next day to other Hi/LO stores. Commercial customers are
serviced through store-based delivery trucks that generally make deliveries from
in-store inventories in less than 60 minutes after receipt of an order.
Knowledgeable Associates. Hi/LO emphasizes customer service, technical
knowledge and experience in its store associates, who are trained to be
professional, courteous and responsive to customers. Hi/LO seeks to hire store
sales associates with prior auto parts experience. Customer service is enhanced
through the use of a computerized point-of-sale system that assists store
associates in selecting the correct parts for customers' needs and in
recommending other related parts and products.
STORE OPERATIONS
Hi/LO stores are generally located on or near major traffic arteries and
offer ample parking and easy customer access. Forty-three of Hi/LO's stores in
operation on September 30, 1997, were located in multi-tenant facilities, and
144 were freestanding. Hi/LO bases site selection on demographic data, including
population density, vehicle traffic counts, and number and type of auto repair
facilities located within a three to five mile radius. Current and anticipated
competition is also evaluated. To date, Hi/LO has encountered no significant
difficulties in locating suitable store sites.
Hi/LO's stores generally range in size from approximately 5,000 square feet
to 17,000 square feet (averaging approximately 8,300 square feet) of ground
floor space, including selling, office, stockroom and receiving areas. Many
Hi/LO stores contain an additional second floor or mezzanine area. Hi/LO
believes the square footage of its stores is larger than many of its retail
competitors' auto parts stores and enables Hi/LO to stock a broader selection of
"hard parts."
Over the past five years, Hi/LO has remodeled 26 stores and relocated 10
stores.
Although store layout varies slightly among stores based on the physical
facilities, emphasis at each store is placed on a clean, bright and
well-organized appearance. Exterior and interior signage is highly visible in
contrasting yellow and black, and all store associates wear attractive Hi/LO
uniforms. Merchandise is displayed in a manner designed to provide ready
customer access and to draw the customer through the store. High turnover
products and accessories generally are positioned to encourage impulse
purchases. In all stores, accessories, maintenance and appearance products are
displayed on gondolas using a "plan-o-gram" system to provide uniform and
consistent merchandise presentation. Aisle and counter displays are generally
used to feature high demand seasonal merchandise, new items and advertised
specials. Hi/LO stores offer free testing of starters, alternators and batteries
and a liberal policy on returns. Most Hi/LO stores also make available tools and
technical manuals and provide minor machining services in order to assist DIY
customers in repairing their vehicles.
Hi/LO considers customer relations and the product knowledge of store
associates to be critical to its marketing approach and in developing customer
loyalty. Store sales associates use a computerized point-of-sale system to
assist in selecting the correct product for customers' needs, recommending other
related parts and products, and pricing transactions. Hi/LO stores typically
have one manager, one assistant manager, and may have 5 to 27 additional
associates. The store manager is responsible for recruiting, hiring and training
store associates, establishing work schedules and maintaining displays and
inventory.
Hi/LO conducts training programs and is continuously developing additional
training programs and improvements to existing programs. These programs
encompass both self-study and group presentation
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<PAGE> 49
formats. The supervisory programs help region managers, store managers and
assistant store managers acquire and maintain the skills necessary to carry out
their responsibilities professionally and efficiently. Other programs are used
to train new store associates in basic job related skills and to address the
developmental needs of associates desiring to progress in Hi/LO.
Hi/LO stores are generally open Monday through Saturday, 8:00 A.M. to 9:00
P.M., and Sunday, 9:00 A.M. to 8:00 P.M., with extended hours during the summer
season. Hi/LO stores accept cash, checks and major credit cards and offer
short-term credit to selected commercial customers who satisfy the Company's
credit requirements.
COMMERCIAL PROGRAM
The commercial sales program, marketed under the trade name First Call(R),
is targeted at professional mechanics, auto repair shops, auto dealers, fleet
owners, mass and general merchandisers with auto repair facilities, and other
commercial repair outlets located near Hi/LO's stores. As part of its commercial
sales program, Hi/LO maintains a commercial manager in many of its stores, whose
primary responsibility is to service commercial accounts. In addition, Hi/LO's
commercial sales force assists the commercial managers in developing commercial
sales. At September 30, 1997, the commercial sales force numbered 25 people.
Over the past two years, Hi/LO has continued to improve its service to
commercial customers by centralizing commercial operations for groups of stores.
This concept was expanded in 1997 when a centralized commercial call center was
opened. In addition, the regional call center operations are being combined into
this state of the art call center. The former store commercial managers and a
number of senior sales associates are dedicated to serving the commercial
accounts for all stores in designated areas from this new call center which
currently serves approximately 42 stores. Delivery of product to commercial
customers from the nearest store location is also arranged for by these
associates. Hi/LO believes that by centrally serving customers, service levels
improve.
Deliveries of in-store inventories are generally made to commercial
customers in less than 60 minutes after receipt of an order. Hi/LO believes it
can offer its commercial customers an advantage over most traditional commercial
suppliers in parts selection and availability due to the greater breadth of its
in-store and distribution center inventories together with more convenient store
locations.
PRODUCT LINE AND PRICING
Hi/LO's product line consists of approximately 80,000 SKUs, providing a
wide selection of items for domestic and imported cars, vans and light trucks.
Hi/LO's larger SKU count relative to its retail competitors reflects primarily
the broader selection of "hard parts" carried by Hi/LO, such as engine and
transmission parts, chassis parts, brake parts, batteries, shock absorbers and
struts, mufflers and other exhaust system parts. In addition, Hi/LO's product
line includes accessories, such as tools and hardware, seat covers, floor mats,
gauges, mirrors, and car radios and speakers; maintenance products, such as
motor oils, filters, antifreeze, paints, and oil and fuel additives; and
appearance products, such as polishes, waxes, and cleaners. Hi/LO's product mix
includes both nationally recognized brand names and quality private label
products.
Hi/LO has an everyday low price strategy. Hi/LO seeks to maintain retail
prices that are comparable to those of its major retail competitors and to
maintain commercial prices comparable to or below those of its major commercial
competitors. Hi/LO supplements its everyday low price strategy with special
promotional pricing on selected products. To assure DIY consumers of its
competitive prices, Hi/LO maintains a "match any price" policy. In addition,
Hi/LO's commercial customers may be offered reduced prices on selected items.
PROPERTIES
Hi/LO owns a warehouse facility of approximately 384,700 square feet
(including approximately 10,100 square feet of office space) and a separate
office building of approximately 10,600 square feet in Houston. Hi/LO leases an
office building in Houston of approximately 57,500 square feet, where Hi/LO's
headquarters have been located since May 1993. Hi/LO occupies approximately
37,300 square feet of the building, and the remainder is subleased or available
for sublease by Hi/LO to other tenants.
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<PAGE> 50
Of Hi/LO's 187 store sites at September 30, 1997, 13 are owned and 174
leased. Generally, Hi/LO leases store sites for a 15-year initial period with
two five-year renewal options. As of September 30, 1997, minimum commitments on
all noncancelable long-term leases were $81,311,000. Leases on 92 stores,
assuming exercise of all renewal options, expire on or before December 31, 2002.
LEGAL PROCEEDINGS
In July 1997, Hi/LO's operating subsidiary, Hi-Lo Auto Supply, L.P., was
served with a purported class action petition styled "Charles Beresky vs. Hi-Lo
Auto Supply, L.P.," Cause No. B-157-070 in the District Court of Jefferson
County, Texas, 60th Judicial District. The petition alleges that Hi/LO Auto
Supply developed a scheme to promote, offer and sell "old," "used" and "out of
warranty" batteries as if the batteries were new and seeks certification as a
class action on behalf of all persons and entities in the United States that
have purchased a battery from Hi/LO during the period May 5, 1990 to the
present. In the petition, the plaintiff purports to state causes of action for
deceptive trade practices violations, breach of contract, negligence, fraud,
negligent misrepresentation and breach of warranty, and the plaintiff seeks
actual damages, treble damages, punitive damages, attorneys' fees and pre- and
post-judgment interest.
This lawsuit is similar to class action litigation brought against a number
of retail auto parts chains and other retailers of aftermarket automotive
batteries. While it is too early to predict the impact of this litigation, Hi/LO
believes the claims are without merit and intends to vigorously defend this
action.
Hi/LO is also party to various routine claims and lawsuits arising in the
normal course of Hi/LO's business. Hi/LO does not believe that such claims and
lawsuits, individually or in the aggregate, will have a material adverse effect
on Hi/LO's results of operations or financial position.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Hi/LO sells automotive aftermarket parts, products and accessories to
retail and commercial customers in Texas, Louisiana and California. During the
third quarter of 1997, Hi/LO opened one store and closed two stores reducing its
total store count to 187. Hi/LO's store openings generally have been in markets
where existing national competitors already have and/or are opening stores.
Certain national competitors have also continued to open new stores in Hi/LO's
existing markets. Management of Hi/LO believes that the markets in which Hi/LO
operates will continue to see increasing competition in the foreseeable future.
New store competition has a significant short-term impact on retail sales of
Hi/LO's nearby stores. Future successful financial results are dependent upon
Hi/LO's ability to compete effectively with these national competitors.
To respond to increased competition, Hi/LO is continuing to remodel older
stores located near recently opened competitor stores, improve customer service,
reduce operating, selling, general and administrative costs when appropriate,
and improve distribution efficiencies. These initiatives are being supported by
changes in product assortment, including more high-quality product offerings and
increased sales and marketing efforts in the commercial markets. Additionally,
Hi/LO has plans to open two to four additional new stores during 1997 and is
focusing on the performance of its existing stores to improve profitability.
Hi/LO identified up to 11 underperforming stores during 1996, three of which
were closed in 1996 and five of which have been closed through September 30,
1997. The commercial program is also in the process of being streamlined and
consolidated, including through the opening of the centralized call center for
receiving commercial orders.
Management of Hi/LO believes that Hi/LO is regaining its momentum and, as a
result of the initiatives begun in response to increased competition, as well as
expected seasonal increases in sales and profitability, Hi/LO's financial
results have continued to improve in the third quarter of 1997. Historically,
Hi/LO's second and third quarters are strongest because of seasonal sales volume
increases. Hi/LO cannot, however, provide any assurance that its results will
continue to improve or even remain at current levels.
In the third quarter of 1996, Hi/LO recorded a $37.7 million charge to
write off its goodwill. Cash flow projections prepared by Hi/LO indicated that
it would not be able to realize its goodwill through future operations. In
addition, Hi/LO recorded $13.7 million in charges for future store closings, the
impairment of certain fixed assets in underperforming stores and of certain
assets at Hi/LO's distribution center, and the
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<PAGE> 51
liquidation of real estate held for future store expansion. Hi/LO also recorded
to cost of goods sold and buying and distribution $3.7 million in write-downs of
certain inventory items and $4.3 million to operating, selling, general and
administrative expenses.
The following discussion of Hi/LO's results of operations and financial
condition should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto included elsewhere in this Proxy
Statement/Prospectus.
Results of Operations -- Three Months and Nine Months Ended September 30, 1997
The following table sets forth the income statement data of Hi/LO expressed
as a percentage of sales and the percentage change in such income statement data
from period to period.
<TABLE>
<CAPTION>
NINE MONTHS PERCENTAGE
QUARTER ENDED ENDED CHANGE
SEPTEMBER 30, SEPTEMBER 30, ----------------
------------- ------------- NINE
1997 1996 1997 1996 QUARTER MONTHS
----- ----- ----- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Sales....................................... 100.0% 100.0% 100.0% 100.0% 1.4% (4.0)%
Cost of sales............................... 60.3 69.4 60.2 63.9 (11.7) (9.4)
----- ----- ----- -----
Gross profit................................ 39.7 30.6 39.8 36.1 31.0 5.5
Operating, selling, general and
administrative expenses................... 34.8 44.1 36.4 39.3 (19.9) (11.4)
Provision for asset impairment and store
closings.................................. -- 79.7 -- 26.7 (100.0) (100.0)
----- ----- ----- -----
Operating income (loss)..................... 4.9 (93.2) 3.4 (29.9) 105.2 111.0
Interest expense............................ 1.8 1.7 1.8 1.6 0.4 5.0
Other expense, net.......................... 0.1 0.3 0.1 0.4 (66.3) (92.5)
----- ----- ----- -----
Income (loss) before taxes (benefit) on
income.................................... 3.0 (95.2) 1.5 (31.9) 103.2 104.8
Taxes (benefit) on income (loss)............ 1.0 (15.0) 0.5 (4.9) 106.9 110.9
----- ----- ----- -----
Net income (loss)........................... 2.0% (80.2)% 1.0% (27.0)% 102.5 103.7
===== ===== ===== =====
</TABLE>
Three Months Ended September 30, 1997 (Third Quarter), Compared to Three
Months Ended September 30, 1996. Sales increased for the third quarter of 1997
by $0.9 million, or 1.4%, from the comparable 1996 quarter. The increase was due
primarily to same-store sales increases of $1.7 million, or 2.8% of sales, and
new store sales increases of $0.1 million, which were partially offset by store
closings through the end of the third quarter of 1997. Same-store sales
represent a comparison of sales by the same stores between corresponding full
periods. At the end of the third quarter of 1997, Hi/LO had 187 stores in
operation compared to 192 at the end of the third quarter of 1996.
Gross profit for the third quarter of 1997 was $25.9 million, or 39.7% of
sales, compared with $19.7 million, or 30.6% of sales, for the third quarter of
1996. The increase in gross profit dollars was attributable to higher sales and
improved product margins together with a shift in the mix of sales to the higher
margin retail business compared to 1996. In addition, the third quarter of 1996
included $3.8 million in expense related to the write-down of certain inventory
to net realizable value.
Operating, selling, general and administrative expenses for the third
quarter of 1997 were $22.7 million, or 34.8% of sales, compared to $28.4
million, or 44.1% of sales, for the third quarter of 1996. This 19.9% decrease
is primarily the result of cost reductions in store operating costs in 1997 and
the inclusion in the third quarter of 1996 of a $4.3 million charge related to
store costs and the costs of improving Hi/LO's information systems.
A provision for asset impairment and store closings of $51.4 million was
recorded in the third quarter of 1996. The provision included a $37.7 million
charge for intangibles, primarily costs in excess of net assets acquired
(goodwill), and a $13.7 million charge for store closings, write-offs of certain
store fixed assets and of
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<PAGE> 52
certain assets at Hi/LO's distribution center, and liquidation of real estate
previously acquired for future expansion.
Operating income for the third quarter of 1997 was $3.1 million, or 4.9% of
sales, compared to an operating loss of $60.0 million in the third quarter of
1996 as a result of the factors discussed above.
Interest expense for the third quarter of 1997 was $1.1 million, or 1.8% of
sales, compared to $1.1 million, or 1.7% of sales, for the third quarter of
1996.
Hi/LO's effective income tax rate for the third quarter of 1997 was 33.8%
of pre-tax income compared to an income tax benefit of (15.7)% of pre-tax loss
for the third quarter of 1996. This expense increase as a percent of pre-tax
income in the third quarter of 1997 is primarily the result of the factors
discussed above. The relatively small tax benefit as a percent of pre-tax loss
in the third quarter of 1996 is a result of the $37.7 million provision for
asset impairment relating to costs in excess of net assets acquired (goodwill).
Hi/LO did not receive a tax benefit from writing off these costs in excess of
net assets acquired as they are not deductible for federal income tax purposes.
Net income of $1.3 million in the third quarter of 1997 compares to a net
loss of $51.7 million in the third quarter of 1996, due to the factors
previously discussed.
Nine Months Ended September 30, 1997 (1997 Period), Compared to Nine Months
Ended September 30, 1996. Sales for the 1997 Period of $184.6 million decreased
by $7.8 million, or 4.0%, from $192.3 million for the comparable period in 1996.
The decrease resulted from same-store sales decreases of 2.8% of sales and five
store closings during the period.
Gross profit for the 1997 Period was $73.4 million, or 39.8% of sales,
compared with $69.5 million, or 36.1% of sales, in 1996. The 5.5% increase in
gross profit was attributable primarily to the shift in mix of sales to the
higher margin retail business compared to 1996. Additionally, in the third
quarter of 1996, Hi/LO recorded a charge of $3.8 million to cost of goods sold
relating to the write-down of certain inventories to their net realizable
values.
Operating, selling, general and administrative expenses for the 1997 Period
decreased by $8.7 million, or 2.9% of sales, over 1996 levels. This was
primarily the result of labor cost reductions in store operating costs and
better cost control. Additionally, the decrease reflects the impact of a $4.3
million charge related to store costs and the costs of improving Hi/LO's
information systems, in the third quarter of 1996. Operating, selling, general
and administrative expenses decreased as a percent of sales to 36.4% in the 1997
Period from 39.3% in 1996.
A provision for asset impairment and store closings of $51.4 million was
recorded in the third quarter of 1996. The provision included $37.7 million of
intangibles, primarily costs in excess of net assets acquired (goodwill), and a
$13.7 million charge for store closings, write-offs of certain store fixed
assets and of certain assets at Hi/LO's distribution center, and liquidation of
real estate previously acquired for future expansion.
Operating income in the 1997 Period was $6.3 million, or 3.4% of sales,
compared to an operating loss of $57.5 million, or (29.9)% of sales, during 1996
due to the factors discussed previously.
Interest expense for the 1997 Period was $3.3 million, or 1.8% of sales,
compared to $3.2 million, or 1.6% of sales, in 1996 because of higher interest
rates during the 1997 Period.
Hi/LO's effective income tax rate for the 1997 Period was 34.9% of pre-tax
income compared to a benefit of (15.5)% of pre-tax loss for 1996. The increase
in expense as a percent of pre-tax income is a result of the increase in pre-tax
income during the 1997 Period. The relatively small tax benefit as a percent of
the pre-tax loss in 1996 is a result of the $37.7 million provision for asset
impairment relating to costs in excess of net assets acquired (goodwill). Hi/LO
did not receive a tax benefit for writing off these costs in excess of net
assets acquired as they were not deductible for federal income tax purposes.
Net income for the 1997 Period was $1.9 million, or 1.0% of sales, compared
to the 1996 net loss of $51.9 million, or (27.0)% of sales, due primarily to the
write-offs recorded in the third quarter of 1996.
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<PAGE> 53
Results of Operations -- Years ended December 31, 1996, 1995 and 1994
The following table sets forth the income statement data of Hi/LO expressed
as a percentage of sales and the percentage change in such income statement data
from period to period.
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
PERCENTAGE OF SALES INCREASE (DECREASE)
------------------------ --------------------
1996 1995 1994 1996-95 1995-94
----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C>
Sales......................................... 100.0% 100.0% 100.0% (5.3)% 11.5%
Cost of sales................................. 63.3 60.6 59.3 (1.0) 13.9
----- ----- -----
Gross profit.................................. 36.7 39.4 40.7 (11.8) 8.0
Operating, selling, general and administrative
expenses.................................... 39.9 36.2 33.2 4.4 21.4
Provision for asset impairment and store
closings.................................... 20.7 -- -- NM --
----- ----- -----
Operating income (loss)....................... (23.9) 3.2 7.5 NM (51.9)
Interest expense.............................. 1.7 1.6 1.0 3.0 88.3
Other expense, net............................ .2 0.5 0.4 (61.3) 28.5
----- ----- -----
Income (loss) before taxes (benefit) on
income...................................... (25.8) 1.1 6.1 NM (78.6)
Taxes on income (benefit from loss)........... (4.2) 0.5 2.2 NM (73.6)
----- ----- -----
Net income (loss)............................. (21.6)% 0.6% 3.9% NM (81.5)
===== ===== =====
</TABLE>
- ---------------
NM = Not Meaningful
1996 Compared to 1995. Sales for the year ended December 31, 1996, were
$248.6 million, reflecting a decrease of 5.3% from 1995 sales of $262.5 million,
while a net loss of $53.7 million, or $4.99 per share, was recorded, compared to
net income of $1.7 million, or $.16 per share, in 1995.
The $13.9 million decrease in sales resulted from same-store sales
decreases of $17.5 million, or 7.0%, and decreases of $.8 million due to closed
stores, partially offset by sales increases of $4.4 million for the 16 stores
opened or acquired after the beginning of 1995. Same-store sales represent sales
at stores opened during corresponding full periods of both the current and
previous years. Same-store sales were adversely affected primarily by increased
competition.
Gross profit for 1996 was $91.1 million, or 36.7% of sales, compared with
$103.4 million, or 39.4% of sales, for 1995. The $12.3 million (11.8%) decrease
in gross profit was attributable primarily to lower sales at existing stores.
The 2.7% decline in gross profit as a percent of sales was the result of product
margins decreasing by approximately 0.3%, a reduction in vendor incentives of
0.4%, third-quarter charges previously discussed of 1.5%, and distribution costs
increasing by approximately 0.5% over the prior year. The product margins were
impacted by sales mix and the slow-down in store openings that eliminated
certain product pricing incentives that had been made available by certain
suppliers.
Operating, selling, general and administrative expenses were $99.1 million,
or 39.9% of sales, for 1996, compared to $95.0 million, or 36.2% of sales, for
1995. The $4.1 million increase was primarily related to the third-quarter
charge of $4.3 million discussed above. Store openings during 1995, together
with reduced leveraging because of lower same-store sales, resulted in operating
expenses increasing by 3.7% as a percent of sales.
A provision for asset impairment and store closings of $51.4 million was
recorded in the third quarter of 1996. The $51.4 million provision includes a
$37.7 million charge, relating primarily to cost in excess of net assets
acquired (goodwill) and a $13.7 million charge for future store closings, the
impairment of certain assets in underperforming stores and at Hi/LO's
distribution center, and the write-down of the cost of real estate previously
held for future expansion.
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<PAGE> 54
Operating loss in 1996 of $59.3 million, or 23.9% of sales, decreased from
operating income in 1995 of $8.4 million, or 3.2% of sales, due to the factors
discussed previously.
Interest expense was $4.3 million, or 1.7% of sales, compared to $4.1
million, or 1.6% of sales, for 1995. The increase of $0.2 million, or 3.0%, was
due to higher average debt levels outstanding and higher interest rates in 1996.
Hi/LO's effective income tax rate was 16.1% of the pre-tax loss in 1996,
compared to 44.9% of pre-tax income, for 1995. The small benefit as a percent of
pre-tax loss results from the write-off of goodwill which is not deductible for
federal income tax purposes.
Hi/LO recorded a net loss in 1996 of $53.7 million, or 21.6% of sales, a
decrease from net income of $1.7 million, or 0.6% of sales, in 1995, due to the
factors discussed previously.
1995 Compared to 1994. Sales for the year ended December 31, 1995, were
$262.5 million, reflecting an increase of 11.5% over 1994, while net income
decreased to $1.7 million, or $.16 per share, compared to $9.1 million, or $.85
per share in 1994.
The $27.1 million increase in sales resulted from sales of $36.1 million
for the 44 stores opened or acquired after the beginning of 1994 and same-store
sales decreases of $9.0 million, or 4.1%. Hi/LO's California stores acquired in
1994 contributed $19.4 million of sales in 1995. Same-store sales represent
sales at stores opened during corresponding full periods of both the current and
previous years. Same-store sales were adversely affected by mild weather during
the summer of 1995 (hot weather causes a higher incidence of auto parts
failures) and competition.
Gross profit for 1995 was $103.4 million, or 39.4% of sales, compared to
$95.7 million, or 40.7% of sales, for 1994. The $7.7 million (8.0%) increase in
gross profit was attributable to sales at new stores. The 1.3% decline in gross
profit as a percent of sales was the result of product margins decreasing by
approximately 0.7% and distribution costs increasing by approximately 0.6% over
the prior year. The product margins were impacted by sales mix and the slow-down
in store openings that eliminated some extra product pricing incentives that had
been made available by certain suppliers.
Operating, selling, general and administrative expenses were $95.0 million,
or 36.2% of sales, for 1995, compared to $78.2 million, or 33.2% of sales, for
1994. The $16.8 million increase was primarily due to the increase in store
operating costs related to increased sales, together with expenses, related to
new store openings and Hi/LO's California stores. New store openings, together
with reduced leveraging because of lower same-store sales, resulted in operating
expenses increasing by 3% as a percent of sales.
Operating income in 1995 of $8.4 million, or 3.2% of sales, decreased 51.9%
from operating income in 1994 of $17.5 million, or 7.5% of sales, due to the
factors discussed previously.
Interest expense was $4.1 million, or 1.6% of sales, compared to $2.2
million, or 1.0% of sales, for 1994. The increase of $1.9 million, or 88.3%, was
due to higher average debt levels outstanding and higher interest rates.
Hi/LO's effective income tax rate increased to 44.9% of pre-tax income, as
compared to 36.4% for 1994, primarily as a result of lower pre-tax income that
increased the impact of the amortization of cost in excess of net assets
acquired, which is a permanent book-tax difference, and the elimination of the
jobs tax credit.
Net income in 1995 of $1.7 million, or 0.6% of sales, decreased $7.4
million, or 81.5%, over the 1994 level of $9.1 million, or 3.9% of sales, due to
the factors discussed previously.
LIQUIDITY AND CAPITAL RESOURCES
Hi/LO's operating activities provided net cash of $3.0 million and $2.2
million during the first nine months of 1997 and the year ended December 31,
1996, respectively. Investing activities utilized $0.6 million and $4.1 million
of cash during the first nine months of 1997 and the year ended December 31,
1996, respectively, principally related to Hi/LO's capital expenditures.
Financing activities utilized $3.1 million of cash during the first nine months
of 1997, principally to reduced indebtedness under Hi/LO's credit
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<PAGE> 55
agreement. During 1996, financing activities provided $1.3 million of cash,
principally resulting from net borrowings under Hi/LO's credit agreement.
Inventories increased $1.0 million from December 31, 1996 to September 30,
1997 and decreased $5.5 million during 1996. The increase since December 31,
1996 is primarily a result of seasonal variances. Inventories at September 30,
1997, were $7.4 million less than inventories at September 30, 1996. The
decrease in 1996 was primarily a result of a decrease in existing store and
distribution center inventories to reduce inventory investments and to improve
turnover. Average Hi/LO inventories per store, including distribution center
inventories, were approximately $494,000 at the end of September 30, 1997,
compared to approximately $479,000 at December 31, 1996, and $520,000 at
September 30, 1996.
Hi/LO has historically financed its growth and operations through a
combination of internally generated funds, bank borrowings, sale and leaseback
transactions, and issuance of Hi/LO Common Stock. Capital expenditures were $1.3
million during the first nine months of 1997 compared to $3.6 million for the
same period of 1996. Prior to 1997, capital expenditures, which principally
related to new, remodeled or relocated stores, were $4.3 million in 1996, $12.1
million in 1995 and $22.0 million in 1994. From the beginning of 1994 through
the end of 1996, Hi/LO opened or acquired 44 stores and closed three stores and
total merchandise inventories increased by approximately $26.9 million. Hi/LO
has financed this growth through a combination of equity, sale-leaseback
transactions, borrowings and internally generated funds. Most of Hi/LO's store
sites are leased.
Hi/LO opened one store during the third quarter of 1997 and plans to open
two to four stores during the remainder of the year. Hi/LO also plans to remodel
or relocate approximately five additional stores prior to the end of 1997.
Planned capital expenditures for the remainder of 1997, including those
associated with remodels, relocations and conversions, will be approximately
$3.9 million to $4.6 million before sale and leaseback and direct lease
transactions. Hi/LO evaluates all capital expenditures on a case-by-case basis
to determine whether such expenditures are prudent under current market
conditions. Hi/LO did not open any new stores during 1996. Hi/LO remodeled or
relocated 10 stores during 1996.
Hi/LO's existing credit facility contains covenants relating to Hi/LO's
working capital, net worth, leverage, liquidity and certain acquisitions. Hi/LO
funds its capital and liquidity needs through existing working capital, cash
flows from operations, bank borrowings and sale and leaseback of real
properties. For a more detailed description of Hi/LO's credit facilities see the
Notes to Hi/LO's Consolidated Financial Statements included elsewhere herein.
On October 23, 1996, Hi/LO entered into a financing agreement with a new
lender. Initial funding under this financing agreement was used to repay amounts
outstanding under Hi/LO's prior credit facility. The new financing agreement
provides for a borrowing of up to $60.0 million of availability under a
revolving credit facility, which matures October 22, 1999, with annual renewals
at the option of Hi/LO and the lender. Credit availability is limited to 60% of
the value of saleable inventory and 85% of accounts receivable, subject to
certain adjustments and reserves which may be made at the discretion of the
lender. The facility is secured by all inventories, receivables and fixed assets
of Hi/LO and its subsidiaries. The borrowings may be priced, at Hi/LO's option,
at the lender's prime rate, plus 1/4 of 1%, or London Interbank Offered Rates
(LIBOR) plus 2.25%. Hi/LO pays a commitment fee of 3/8 of 1% per annum on all
unused portions of the credit facility. Loan covenants relate to Hi/LO's net
worth and cash flow, and also restrict capital expenditures. Capital
expenditures are limited to $5.9 million for 1997 and $5.0 million for 1998 and
1999. Additionally, operating lease payments are restricted to $16.0 million per
annum through 1999. Hi/LO was in compliance with this financing agreement as of
September 30, 1997.
Future compliance with the financial covenants of Hi/LO's financing
agreement is dependent on its ability to generate sufficient earnings and cash
flow to meet such covenants. In the event Hi/LO is not able to remain in
compliance with the provisions of the financing agreement, it will attempt to
renegotiate the terms of the financing agreement so as to remain in compliance
or to refinance amounts outstanding under the credit facility. However, there
can be no assurance that Hi/LO would be successful in such negotiations, in
which case Hi/LO's funds available for its operating needs would be limited to
internally generated funds.
46
<PAGE> 56
At September 30, 1997, Hi/LO had $41.8 million outstanding under the credit
facility and total unutilized credit facilities of approximately $13.6 million.
Hi/LO believes that existing working capital, cash flows from operations,
bank borrowings, sale-leasebacks of retail properties and sales of excess real
estate will be sufficient to fund both capital and liquidity needs of Hi/LO for
the next year. However, Hi/LO's ability to access capital, due to its operating
results in recent periods, could have an adverse impact on Hi/LO's ability to
compete effectively in its markets.
The book values of cash, trade accounts receivable and accounts payable
approximate their fair values principally because of the short-term maturities
of these instruments. The estimated fair value of long-term debt approximates
the book value as the note payable to a bank is priced based upon a floating
rate.
Hi/LO accepts payment for sales by cash, including checks and major credit
cards, and offers accounts to commercial customers.
SEASONALITY
Hi/LO's business tends to be somewhat seasonal in nature, with store sales
and profits historically running higher in the second and third quarters (April
through September) of each year than in Hi/LO's first and fourth quarters. Sales
for the combined second and third quarters of 1996 were 52.9% of annual sales.
Hi/LO's business is also influenced by weather conditions. Weather extremes tend
to enhance sales by causing a higher incidence of parts failure, thus increasing
sales of seasonal products. Rainy weather, however, tends to reduce sales by
causing deferral of elective maintenance.
INSURANCE
Hi/LO maintains insurance for on-the-job injuries to its associates and
other coverages for normal business risks. A substantial portion of Hi/LO's
current- and prior-year insurance coverages are "high deductible" policies in
which Hi/LO, in many cases, is responsible for the payment of incurred claims up
to specified individual and aggregate limits, over which a third-party insurer
is contractually liable for any additional payment on such claims. Accordingly,
Hi/LO bears certain economic risks related to these coverages. On a continual
basis, and as of each balance sheet date, Hi/LO records an accrual equal to the
estimated costs expected to result from incurred claims plus an estimate of
claims incurred but not reported as of such date based on the best available
information at such date. However, the nature of these claims is such that
actual development of the claims may vary from the estimated accruals. All
changes in the accrual estimates are accounted for on a prospective basis. The
impact on Hi/LO's financial position and results of operations will accordingly,
be recorded in those future periods.
47
<PAGE> 57
SECURITY OWNERSHIP BY CERTAIN BENEFICIAL OWNERS
DISCOUNT AUTO PARTS
The following table sets forth information with respect to beneficial share
holdings of each director and each of the five most highly compensated executive
officers of Discount Auto Parts, as well as holdings of each stockholder of
Discount Auto Parts who were believed by management of Discount Auto Parts to
own more than 5% of the Discount Auto Parts Common Stock outstanding as of the
Record Date. The information set forth below is based solely upon information
furnished by such stockholders or contained in filings made by such persons with
the Commission and is as of the dates specified below.
<TABLE>
<CAPTION>
SHARES OWNED
BENEFICIALLY(1)
NAME OF BENEFICIAL OWNER --------------------------
OR NUMBER IN GROUP NUMBER PERCENT
- ------------------------------------------------------------ ------------- -------
<S> <C> <C>
Fontaine Industries Limited Partnership(2).................. 4,098,255 24.7
3305 W. Spring Mountain Road #60
Las Vegas, Nevada 89012
Fontaine Enterprises Limited Partnership(3)................. 3,749,664 22.6
3305 W. Spring Mountain Road #60
Las Vegas, Nevada 89012
Peter J. Fontaine(4)........................................ 7,899,919 47.6
c/o Discount Auto Parts, Inc.
4900 Frontage Road South
Lakeland, Florida 33815
Glenda A. Fontaine Marital Trust under
Agreement dated July 8, 1993(5)............................. 3,749,664 22.6
c/o Discount Auto Parts, Inc.
4900 Frontage Road South
Lakeland, Florida 33815
William C. Perkins(6)....................................... 15,430 *
Warren Shatzer(7)........................................... 151,000 *
C. Michael Moore............................................ 1,000 *
Clifford J. Wiley(8)........................................ 4,525 *
E. E. Wardlow(9)............................................ 7,500 *
A Gordon Tunstall(10)....................................... 3,500 *
David P. Walling(11)........................................ 5,540 *
FMR Corp(12)................................................ 1,158,900 7.0
82 Devonshire Street
Boston, Massachusetts 02109
Fidelity Management & Research Company(12).................. 1,131,300 6.8
82 Devonshire Street
Boston, Massachusetts 02109
Edward C. Johnson 3d(12).................................... 1,158,900 7.0
82 Devonshire Street
Boston, Massachusetts 02109
Abigail P. Johnson(12)...................................... 1,158,900 7.0
82 Devonshire Street
Boston, Massachusetts 02109
</TABLE>
48
<PAGE> 58
<TABLE>
<CAPTION>
SHARES OWNED
BENEFICIALLY(1)
NAME OF BENEFICIAL OWNER --------------------------
OR NUMBER IN GROUP NUMBER PERCENT
- ------------------------------------------------------------ ------------- -------
<S> <C> <C>
T. Rowe Price Associates, Inc.(13).......................... 1,192,500 7.2
100 E. Pratt Street
Baltimore, Maryland 21202
T. Rowe Price New Horizons Fund, Inc.(13)................... 1,000,000 6.0
100 E. Pratt Street
Baltimore, Maryland 21202
All directors and executive officers as a group (13
persons).................................................. -- --
</TABLE>
- ---------------
* Less than one percent
(1) Beneficial ownership of shares, as determined in accordance with applicable
Commission rules, includes shares as to which a person has or shares voting
power and/or investment power. Except as otherwise indicated, all shares
are held of record with sole voting and investment power.
(2) Fontaine Industries Limited Partnership ("Industries L.P.") is a Nevada
Limited Partnership. A revocable trust established by Peter J. Fontaine and
under which Mr. Fontaine is the trustee, is the sole general partner and is
one of two limited partners of Industries L.P., owning an aggregate of 99%
of the partnership interests. Peter J. Fontaine is a limited partner and
owns the remaining 1% of the partnership interests. Although not reflected
in the table, Industries L.P. may be considered, for beneficial ownership
purposes, part of a group which also includes Fontaine Enterprises Limited
Partnership, Peter J. Fontaine Revocable Trust, Glenda A. Fontaine Marital
Trust, certain trusts established for the benefit of the children of Denis
L. Fontaine, Peter J. Fontaine and Merritt A. Gardner as Trustee;
therefore, Industries L.P. may be considered as beneficially owning the
same aggregate number of shares shown in the table as being beneficially
owned by Peter J. Fontaine.
(3) Fontaine Enterprises Limited Partnership ("Enterprises L.P.") is a Nevada
Limited Partnership. The Glenda A. Fontaine Marital Trust (the "Glenda
Fontaine Trust"), of which Peter J. Fontaine and Merritt A. Gardner are the
trustees, is the sole general partner and a limited partner of Enterprises
L.P., owning an aggregate of 81.5% of the partnership interests. Certain
trusts established for the benefit of the children of Denis L. Fontaine
(the "Children's Trusts"), of which Peter J. Fontaine and Merritt A.
Gardner are also the trustees, are limited partners of Enterprises L.P. and
in such capacity own the remaining 18.5% of the partnership interests.
Although not reflected in the table, Enterprises L.P. may be considered,
for beneficial ownership purposes, part of a group which also includes
Fontaine Industries Limited Partnership, Peter J. Fontaine Revocable Trust,
Glenda A. Fontaine Marital Trust, certain trusts established for the
benefit of the children of Denis L. Fontaine, Peter J. Fontaine and Merritt
A. Gardner as Trustee; therefore, Enterprises L.P. may be considered as
beneficially owning the same aggregate number of shares shown in the table
as being beneficially owned by Peter J. Fontaine.
(4) Peter J. Fontaine does not directly own any shares. Beneficial ownership by
Mr. Fontaine reflects (i) 4,098,255 shares owned by Industries L.P., (ii)
3,749,664 shares owned by Enterprises L.P., (iii) 50,000 shares owned by
the Peter J. Fontaine Revocable Trust, (iv) 1,000 shares owned by Debra
Fontaine, Mr. Fontaine's wife and (v) 1,000 shares owned by Mr. Fontaine's
daughter. See Notes (2) and (3) above.
(5) The Glenda Fontaine Trust does not directly own any shares. Beneficial
ownership by the Glenda Fontaine Trust reflects shares owned by Enterprises
L.P. See Note (3) above.
(6) The number of shares shown includes 13,558 shares deemed to be beneficially
owned by Mr. Perkins by virtue of certain stock options that are currently
exercisable or become exercisable within 60 days. Also includes 272 shares
owned by Gina Perkins, his wife, and 200 additional shares (100 owned by
each of his two sons).
(7) The number of shares shown for Warren Shatzer includes all of the shares
held by Shatzer Enterprises Limited Partnership, a Nevada limited
partnership. A revocable trust established by Mr. Shatzer and under which
Mr. Shatzer is the trustee, is the sole general partner and is one of two
limited partners of Shatzer Enterprises Limited Partnership, owning an
aggregate of 99% of the partnership interests, with Warren Shatzer being a
limited partner and owning the remaining 1% of the partnership interests.
The number of shares also includes 1,000 shares owned by his son.
(8) The number of shares shown includes 4,525 shares deemed to be beneficially
owned by Mr. Wiley by virtue of certain stock options that are currently
exercisable or become exercisable within 60 days.
(9) The number of shares shown includes 2,500 shares deemed to be beneficially
owned by Mr. Wardlow by virtue of certain stock options that are currently
exercisable or become exercisable within 60 days. Also includes 5,000
shares that are held in a revocable trust established by Mr. Wardlow and
under which Mr. Wardlow is the Trustee.
(10) The number of shares shown includes 2,500 shares deemed to be beneficially
owned by Mr. Tunstall by virtue of certain stock options that are currently
exercisable or become exercisable within 60 days.
49
<PAGE> 59
(11) The number of shares shown includes 250 shares deemed to be beneficially
owned by Mr. Walling by virtue of certain stock options that are currently
exercisable or become exercisable within 60 days. Also includes 245 shares
owned by Elizabeth Walling, his wife.
(12) This information is derived from a Schedule 13G dated February 14, 1997,
filed by FMR Corp., Edward C. Johnson 3d. and Abigail P. Johnson. FMR
Corp., Edward C. Johnson 3d and Abigail P. Johnson are each shown to have
sole dispositive power with respect to all 1,158,900 shares. Fidelity
Management & Research Company is a wholly owned subsidiary of FMR Corp. and
is deemed the beneficial owner with respect to 1,131,300 shares as a result
of acting as investment adviser to several investment companies registered
under Section 8 of the Investment Company Act of 1940. Neither FMR Corp.,
Edward C. Johnson, 3d, or Abigail P. Johnson has the sole power to vote or
direct the voting of any of the 1,158,900 shares shown. This power resides
with the Board of Trustees of the various institutions for which FMR
Corp.'s wholly owned subsidiaries act as investment advisers.
(13) The number of shares shown are owned by various individual and
institutional investors including the T. Rowe Price Horizons Fund, Inc.
(which owns 1,000,000 shares, representing 6.0% of the shares outstanding),
for which T. Rowe Price Associates, Inc. ("Price Associates") serves as
investment adviser with power to direct investments and/or sole power to
vote the securities. For purposes of the reporting requirements of the
Securities Exchange Act of 1934, Price Associates is deemed to be a
beneficial owner of such securities; however, Price Associates expressly
disclaims that it is, in fact, the beneficial owner of such securities.
This information is derived from a Schedule 13G dated February 14, 1997
filed by Price Associates and T. Rowe Price Horizons Fund, Inc.
50
<PAGE> 60
HI/LO
The following table sets forth, as of the close of business on the Record
Date unless otherwise indicated, certain information with respect to the
beneficial share holdings of each director and each of the five most highly
compensated executive officers of Hi/LO and all executive officers and directors
as a group, as well as the holdings of each stockholder who was known to Hi/LO
to be the beneficial owner, as defined in Rule 13d-3 under the Exchange Act, of
more than 5% of the Hi/LO Common Stock, based upon information furnished by such
stockholders or contained in filings with the Commission.
<TABLE>
<CAPTION>
SHARES OWNED
BENEFICIALLY
-------------------
NAME NUMBER PERCENT
---- --------- -------
<S> <C> <C>
Richard C. Adkerson(1)(3)................................... 17,900 *
Richard Q. Armstrong(1)(3).................................. 8,600 *
Charles P. Durkin, Jr.(1)................................... 15,782 *
E. James Lowrey(1)(3)....................................... 19,500 *
Edward T. Story, Jr.(1)(3).................................. 15,100 *
T. Michael Young(1)(2)(3)................................... 420,641 3.9
Daniel T. Bucaro(2)(3)...................................... 28,061 *
K. Grant Hutchins(2)(3)..................................... 81,243 *
Conley P. Kyle(2)(3)(4)..................................... 34,699 *
Gary D. Walther(2)(3)(5).................................... 79,747 *
All directors and executive officers as a group (10
persons)(3)............................................... 721,273 6.5
Dimensional Fund Advisors Inc.(6)........................... 702,156 6.5
Franklin Advisory Services, Inc.(7)......................... 1,067,700 9.9
Hwang Family Ltd. Partnership(8)............................ 1,051,950 9.8
</TABLE>
- ---------------
* Less than 1%
(1) A director of Hi/LO.
(2) An officer of Hi/LO.
(3) 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 -- 357,458.
(4) Mr. Kyle disclaims ownership of 25 of these shares, which are owned by his
adult son.
(5) Mr. Walther is custodian of 1,774 of these shares for his daughter and his
son under the Texas Uniform Gift to Minors Act.
(6) The information is based on a Schedule 13G dated February 5, 1997, filed
with the 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.
(7) The information is based on a Schedule 13G, dated February 12, 1997, filed
with the 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.
(8) 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 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, Texas
75062.
51
<PAGE> 61
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
have been prepared to give effect to the Merger using the purchase method of
accounting.
The unaudited pro forma combined condensed financial statements reflect
certain assumptions regarding the proposed Merger and are based on the
historical consolidated financial statements of the respective companies. These
unaudited pro forma combined condensed financial statements, including the notes
thereto, are qualified in their entirety by reference to, and should be read in
conjunction with, the audited financial statements and the unaudited interim
financial statements, including the notes thereto, of Discount Auto Parts and
Hi/LO which are incorporated by reference or included elsewhere in this Proxy
Statement/Prospectus.
The pro forma combined condensed balance sheet as of September 2, 1997
gives effect to the Merger as if it had occurred on September 2, 1997 and
combines the unaudited balance sheet of Discount Auto Parts as of that date with
the unaudited balance sheet of Hi/LO as of September 30, 1997.
The pro forma combined condensed statement of operations for the year ended
June 3, 1997 reflects the combination of the statement of operations of Discount
Auto Parts for the year ended June 3, 1997, with the results of operations of
Hi/LO for the twelve-month period ended June 30, 1997.
The pro forma combined condensed statement of operations for the
thirteen-week period ended September 2, 1997 reflects the combination of the
unaudited statement of operations of Discount Auto Parts for the thirteen-week
period ended September 2, 1997 with the unaudited results of operations of Hi/LO
for the three-month period ended September 30, 1997.
The purchase accounting information included herein is preliminary and has
been made solely for the purposes of developing the unaudited pro forma combined
condensed financial information. The unaudited pro forma information is
presented for illustrative purposes only and is not necessarily indicative of
the financial position or results of operations which would have actually been
reported had any of the transactions occurred as of September 2, 1997, or May
29, 1996, nor is it necessarily indicative of future financial position or
results of operations. Although cost savings and other benefits from the
synergies of the combined companies are expected, no such benefits are reflected
in these pro forma combined condensed financial statements.
52
<PAGE> 62
DISCOUNT AUTO PARTS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
SEPTEMBER 2, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
DISCOUNT AUTO HI-LO
PARTS, INC. AUTOMOTIVE, INC.
AS OF AS OF PRO FORMA PRO FORMA
SEPTEMBER 2, 1997 SEPTEMBER 30, 1997 ADJUSTMENTS COMBINED
----------------- ------------------ ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents............ $ 7,889 $ 420 $ (125)(a) $ 8,184
Accounts receivable.................. -- 13,645 -- 13,645
Inventories.......................... 156,538 92,381 (8,000)(b) 240,919
Deferred income taxes................ 6,081 -- -- 6,081
Prepaid and other current assets..... 12,704 3,261 -- 15,965
-------- -------- -------- --------
Total current assets....... 183,212 109,707 (8,125) 284,794
Property and equipment, net.......... 274,749 29,716 (1,450)(c) 284,520
(18,495)(d)
Deferred income taxes................ -- 2,300 14,868(e) 17,168
Other assets......................... 2,560 1,112 (205)(f) 3,467
-------- -------- -------- --------
Total assets............... $460,521 $142,835 $(13,407) $589,949
======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable..................... $ 50,949 $ 18,639 $ -- $ 69,588
Other current liabilities............ 14,577 15,853 6,500(g) 41,630
2,500(h)
2,200(i)
Accrued litigation settlement........ 19,000 -- -- 19,000
Current maturities of long-term
debt............................... 2,400 574 -- 2,974
-------- -------- -------- --------
Total current
liabilities.............. 86,926 35,066 11,200 133,192
Long-term debt....................... 134,000 42,654 -- 176,654
Deferred income taxes................ 4,079 -- -- 4,079
Other liabilities.................... -- 3,888 -- 3,888
Stockholders' Equity:
Preferred stock...................... -- -- -- --
Common stock......................... 166 108 (108)(j) 182
16(k)
Additional paid-in capital........... 140,524 68,316 (68,316)(j) 177,128
36,604(k)
Retained earnings (deficit).......... 94,826 (7,197) 7,197(j) 94,826
-------- -------- -------- --------
235,516 61,227 (24,607) 272,136
-------- -------- -------- --------
Total liabilities and
stockholders' equity..... $460,521 $142,835 $(13,407) $589,949
======== ======== ======== ========
</TABLE>
53
<PAGE> 63
DISCOUNT AUTO PARTS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED JUNE 3, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DISCOUNT AUTO
PARTS, INC. HI-LO
FOR THE FIFTY-THREE AUTOMOTIVE, INC.
WEEKS ENDED FOR THE TWELVE MONTHS ENDED PRO FORMA PRO FORMA
JUNE 3, 1997 JUNE 30, 1997 ADJUSTMENTS COMBINED
------------------- --------------------------- ----------- ---------
<S> <C> <C> <C> <C>
Sales........................... $405,186 $ 239,937 $ -- $645,123
Cost of sales, including
distribution costs............ 256,646 151,069 -- 407,715
-------- ------------- ------- --------
Gross profit.................. 148,540 88,868 -- 237,408
Selling, general &
administrative expenses....... 101,336 96,111 (1,576)(l) 195,871
Other costs, including
restructuring charges......... -- 51,352 -- 51,352
-------- ------------- ------- --------
Operating profit (loss)....... 47,204 (58,595) 1,576 (9,815)
Litigation settlement........... (20,545) -- -- (20,545)
Other income, net............... 187 67 -- 254
Interest expense................ (6,125) (4,422) 601(m) (9,946)
-------- ------------- ------- --------
Income (loss) before income
taxes......................... 20,721 (62,950) 2,177 (40,052)
Income tax expense (benefit).... 7,980 (10,092) 827(e) (1,285)
-------- ------------- ------- --------
Net income (loss)............... $ 12,741 $ (52,858) $ 1,350 $(38,767)
======== ============= ======= ========
Net income (loss) per common
share......................... $ 0.77 $ (2.13)
======== ========
Weighted average shares
outstanding................... 16,581 1,600(k) 18,181
======== ======= ========
</TABLE>
54
<PAGE> 64
DISCOUNT AUTO PARTS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
THIRTEEN WEEKS ENDED SEPTEMBER 2, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DISCOUNT AUTO HI-LO
PARTS, INC. AUTOMOTIVE, INC.
FOR THE THIRTEEN FOR THE THREE
WEEKS ENDED MONTHS ENDED PRO FORMA PRO FORMA
SEPTEMBER 2, 1997 SEPTEMBER 30, 1997 ADJUSTMENTS COMBINED
----------------- ------------------ ----------- ---------
<S> <C> <C> <C> <C>
Sales................................ $109,737 $65,293 $ -- $175,030
Cost of sales, including distribution
costs.............................. 67,335 39,430 -- 106,765
-------- ------- ----- --------
Gross profit....................... 42,402 25,863 -- 68,265
Selling, general & administrative
expenses........................... 29,577 22,727 (394)(l) 51,910
-------- ------- ----- --------
Income from operations............. 12,825 3,136 394 16,355
Other expense, net................... (276) (62) -- (338)
Interest expense..................... (2,053) (1,090) 159(m) (2,984)
-------- ------- ----- --------
Income before income taxes........... 10,496 1,984 553 13,033
Income taxes......................... 4,046 671 210(e) 4,927
-------- ------- ----- --------
Net income........................... $ 6,450 $ 1,313 $ 343 $ 8,106
======== ======= ===== ========
Net income per common share.......... $ 0.39 $ 0.45
======== ========
Weighted average shares
outstanding........................ 16,594 1,600(k) 18,194
======== ===== ========
</TABLE>
55
<PAGE> 65
DISCOUNT AUTO PARTS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Acquisition cost and the preliminary purchase accounting adjustments are set
forth below (in thousands):
<TABLE>
<S> <C> <C>
Estimated purchase price.................................... $ 36,620
Options to be purchased for cash............................ 125
Transaction costs........................................... 1,200
--------
Total acquisition cost............................ 37,945
Book value of net assets acquired........................... $ 61,227
Preliminary purchase accounting adjustments:
Write down of inventory................................ (8,000)
Reserve for store closures............................. (6,500)
Reserve for employee severance......................... (2,500)
Write down of property and equipment................... (1,450)
Other assumed liabilities.............................. (1,205)
Deferred tax asset..................................... 14,868
Book value of net assets acquired after preliminary purchase
accounting adjustment..................................... 56,440 56,440
-------- --------
Net excess of net assets acquired over acquisition cost..... 18,495
Write down of property and equipment................... (18,495)
-------- --------
$ --
======== ========
</TABLE>
The estimated purchase price is based on an estimate of 1,600,000 shares of
Discount Auto Parts Common Stock to be issued at a market value of $22.89 per
share, the market price of the Discount Auto Parts Common Stock for a reasonable
period before and after the signing of the Merger Agreement.
Discount Auto Parts estimates it will incur aggregate transaction costs of
approximately $1.2 million associated with the Merger. Such transaction costs
include legal, printing, accounting and financial advisory services as well as
other related expenses attributable to such transactions.
(a) Reflects the cash payment to holders of Hi/LO stock options for the
excess of the fair market value of the underlying stock over the options'
exercise price.
(b) Reflects the write down of inventories to fair value in connection with
the remerchandising of Hi/LO's product lines to conform with Discount Auto
Parts' merchandising strategy. This conversion will entail the disposal of
certain Hi/LO inventories which are not carried in the Discount Auto Parts
product lines. Such inventories will be disposed of through a combination of
returns to vendors and sales to liquidators and, to a lesser extent, retail
sales at discounted prices.
(c) Reflects the write down of certain existing Hi/LO property and
equipment to fair value.
(d) Reflects the write down of property and equipment due to the fair value
of net assets acquired exceeding total acquisition cost.
(e) Represents the related income tax effect of the pro forma adjustments
utilizing a combined statutory federal and state tax rate of 38%.
(f) Reflects the write off of Hi/LO deferred loan costs applicable to Hi/LO
debt which is expected to be refinanced by Discount Auto Parts upon completion
of the Merger.
(g) Reflects the estimated cost of closure of certain existing Hi/LO
stores.
(h) Reflects the estimated cost of employee severance related to employees
that are expected to be terminated subsequent to the Merger.
(i) Reflects other miscellaneous accruals for costs to be incurred as a
result of the Merger.
(j) Reflects the elimination of the historical stockholders' equity of
Hi/LO.
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(k) Reflects issuance of 1,600,000 shares of Discount Auto Parts common
stock with a par value and market value of $0.01 and $22.89 per share,
respectively, for all of the outstanding shares of Hi/LO Common Stock.
(l) Reflects the estimated reduction in depreciation and amortization of
property and equipment based on the reduction in historical cost as a result of
the purchase accounting adjustments.
(m) Reflects the estimated reduction in interest expense resulting from the
anticipated refinancing of Hi/LO debt with borrowings by Discount Auto Parts at
an assumed interest rate of 6.5%.
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DESCRIPTION OF DISCOUNT AUTO PARTS CAPITAL STOCK
GENERAL
The following description of certain material provisions of the Amended and
Restated Articles of Incorporation and the Amended and Restated Bylaws of
Discount Auto Parts is necessarily general and does not purport to be complete
and is qualified in its entirety by reference to such documents, which are
included as exhibits to the Registration Statement of which this Proxy
Statement/Prospectus is a part.
The authorized capital stock of Discount Auto Parts consists of 50,000,000
shares of common stock, par value $.01 per share (the "Discount Auto Parts
Common Stock"), and 5,000,000 shares of preferred stock, par value $.01 per
share (the "Discount Auto Parts Preferred Stock"). As of , 1997,
there were shares of Discount Auto Parts Common Stock outstanding and
no shares of Discount Auto Parts Preferred Stock outstanding. The following
descriptions of the Discount Auto Parts Common Stock and the Discount Auto Parts
Preferred Stock are based on the Amended and Restated Articles of Incorporation
of Discount Auto Parts.
DISCOUNT AUTO PARTS COMMON STOCK
Each holder of Discount Auto Parts Common Stock is entitled to one vote for
each share owned of record on all matters voted upon by stockholders, and,
except as described under "Certain Provisions of the Amended and Restated
Articles of Incorporation of Discount Auto Parts" below, a majority vote is
required for all actions to be taken by stockholders. In the event of a
liquidation, dissolution or winding-up of Discount Auto Parts, the holders of
Discount Auto Parts Common Stock are entitled to share equally and ratably in
the assets of Discount Auto Parts, if any, remaining after the payment of all
debts and liabilities of Discount Auto Parts and the liquidation preference of
any outstanding Discount Auto Parts Preferred Stock. The Discount Auto Parts
Common Stock has no preemptive rights, no cumulative voting rights and no
redemption, sinking fund or conversion provisions.
Holders of Discount Auto Parts Common Stock are entitled to receive
dividends if, as and when declared by the Discount Auto Parts Board of Directors
out of funds legally available therefor, subject to the dividend and liquidation
rights of any Discount Auto Parts Preferred Stock that may be issued and
outstanding and subject to the dividend restrictions in Discount Auto Parts'
credit facilities. No dividend or other distribution (including redemptions or
repurchases of shares of capital stock) may be made if after giving effect to
such distribution, Discount Auto Parts would not be able to pay its debts as
they become due in the usual course of business, or Discount Auto Parts' total
assets would be less than the sum of its total liabilities plus the amount that
would be needed at the time of a liquidation to satisfy the preferential rights
of any holders of Discount Auto Parts Preferred Stock.
DISCOUNT AUTO PARTS PREFERRED STOCK
The Board of Directors of Discount Auto Parts is authorized, without
further stockholder action, to divide any or all shares of the authorized
Discount Auto Parts Preferred Stock into series and to fix and determine the
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions thereon, of any series
so established, including voting powers, dividend rights, liquidation
preferences, redemption rights and conversion privileges. As of the date of this
Proxy Statement/Prospectus, the Discount Auto Parts Board of Directors has not
authorized any series of Discount Auto Parts Preferred Stock, and there are no
plans, agreements or understandings for the authorization or issuance of any
shares of Discount Auto Parts Preferred Stock.
CERTAIN PROVISIONS OF THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF
DISCOUNT AUTO PARTS
The Amended and Restated Articles of Incorporation of Discount Auto Parts
provide that special meetings of stockholders may be called only by (i) holders
of not less than 25% of the outstanding Discount Auto Parts Common Stock or (ii)
the Chairman of the Board, the President or by a majority of the Discount Auto
Parts Board of Directors.
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The Amended and Restated Articles of Incorporation of Discount Auto Parts
provide for a classified Board of Directors.
The Amended and Restated Articles of Incorporation of Discount Auto Parts
establish an advance notice procedure for the nomination, other than by or at
the direction of the Discount Auto Parts Board of Directors or a committee
thereof, of candidates for election as directors as well as for other
stockholder proposals to be considered at stockholders' meetings. Notice of
stockholder proposals and director nominations must be given timely in writing
to the Secretary of Discount Auto Parts prior to the meeting at which such
matters are to be acted upon or directors are to be elected. Such notice, to be
timely, must be received at the principal executive offices of Discount Auto
Parts with respect to stockholder proposals and elections to be held at the
annual meeting, not less than 60 days prior to the date of the meeting at which
the director(s) are to be elected; provided, however, if less than 70 days'
notice or prior public disclosure of the date of the scheduled meeting is given
or made, notice by the stockholder, to be timely, must be so delivered or
received, not later than the close of business on the tenth day following the
earlier of the day on which notice of the date of such meeting is mailed to
stockholders or public disclosure of the date of such meeting is made.
Notice to Discount Auto Parts from a stockholder who intends to present a
proposal or to nominate a person for election as a director at a meeting must
contain certain information about the stockholder giving such notice and, in the
case of director nominations, all information that would be required to be
included in a proxy statement soliciting proxies for the election of the
proposed nominee (including such person's written consent to serve as a director
if so elected). If the presiding officer of the meeting determines that a
stockholder's proposal or nomination is not made in accordance with the
procedures set forth in the Amended and Restated Articles of Incorporation of
Discount Auto Parts, such proposal or nomination, at the direction of such
presiding officer, may be disregarded. The notice requirement for stockholder
proposals contained in Discount Auto Parts' Bylaws does not restrict a
stockholder's right to include proposals in Discount Auto Parts' annual proxy
materials pursuant to rules promulgated under the Securities Exchange Act of
1934, as amended.
These provisions of the Amended and Restated Articles of Incorporation of
Discount Auto Parts may be changed only upon the affirmative vote of holders of
66 2/3% of the outstanding Discount Auto Parts Common Stock.
The provisions of the Amended and Restated Articles of Incorporation of
Discount Auto Parts summarized in the preceding paragraphs and the provisions of
the Florida Business Corporation Act described in "Description of Discount Auto
Parts Capital Stock -- Certain Provisions of Florida Law" may have certain
anti-takeover effects. Such provisions, individually or in combination, may
discourage other persons from or make it more difficult for other persons to
make a tender offer or acquisitions of substantial amounts of Discount Auto
Parts Common Stock or from launching other takeover attempts that a stockholder
might consider in such stockholder's best interest, including those attempts
that might result in the payment of a premium over the market price for the
Discount Auto Parts Common Stock held by such stockholder.
CERTAIN PROVISIONS OF FLORIDA LAW
Under Florida law, several anti-takeover provisions apply to a public
corporation organized under Florida law unless the corporation has elected to
opt out of such provisions in its Articles of Incorporation or (depending on the
provision in question) its Bylaws. Discount Auto Parts has not elected to opt
out of these provisions. The Florida Business Corporation Act contains a
provision that prohibits the voting of shares in a publicly held Florida
corporation which are acquired in a "control share acquisition" unless the
holders of a majority of the corporation's voting shares (exclusive of shares
held by officers of the corporation, inside directors or the acquiring party)
approve the granting of voting rights as to the shares acquired in the control
share acquisition. A "control share acquisition" is defined as an acquisition
that immediately thereafter entitled the acquiring party to vote in the election
of directors within each of the following ranges of voting power: (i) one-fifth
or more but less than one third of such voting power; (ii) one third or more but
less than a majority of such voting power; and (iii) more than a majority of
such voting power.
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The Florida Business Corporation Act also contains an "affiliated
transaction" provision that prohibits a publicly held Florida corporation from
engaging in a broad range of business combinations or other extraordinary
corporate transactions with an "interested stockholder" unless: (i) the
transaction is approved by a majority of disinterested directors before the
person becomes an interested stockholder; and (ii) the interested stockholder
has owned at least 80% of the corporation's outstanding voting shares other than
those owned by the interested stockholder. An interested stockholder is defined
as a person who together with affiliates and associates beneficially owns more
than 10% of the corporation's outstanding voting shares.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Discount Auto Parts Common Stock
is ChaseMellon Shareholders Services, L.L.C.
COMPARISON OF STOCKHOLDER RIGHTS
As a result of the Merger, Hi/LO stockholders will receive shares of common
stock of Discount Auto Parts, a Florida corporation, in exchange for their
shares of Common Stock in Hi/LO, a Delaware corporation. The following is a
summary of certain material differences between the rights of holders of Hi/LO
Common Stock and the rights of holders of Discount Auto Parts Common Stock.
These differences arise in part from the differences between the Florida
Business Corporation Act (the "Florida Law") and the Delaware General
Corporation Law (the "Delaware Law"). Additional differences arise from the
governing instruments of the two companies (in the case of Hi/LO, the Amended
and Restated Certificate of Incorporation of Hi/LO (the "Hi/LO Charter") and the
Bylaws of Hi/LO (the "Hi/LO Bylaws"), and, in the case of Discount Auto Parts,
the Amended and Restated Articles of Incorporation of Discount Auto Parts (the
"Discount Auto Parts Restated Articles") and the Amended and Restated By-Laws of
Discount Auto Parts (the "Discount Auto Parts Bylaws")).
The Florida Law and the Delaware Law are similar in many respects. However,
there are a number of differences between the two statutes that should be
carefully considered by Hi/LO stockholders in evaluating the proposed Merger.
Although it is impractical to compare all of the aspects in which the Florida
Law and the Delaware Law and the companies' governing instruments differ with
respect to stockholders' rights, the following discussion summarizes certain
material differences between them.
AUTHORIZED CAPITAL STOCK; BLANK CHECK PREFERRED
Discount Auto Parts. As indicated above, Discount Auto Parts Restated
Articles authorize the issuance of up to 50,000,000 shares of Discount Auto
Parts Common Stock and 5,000,000 shares of Discount Auto Parts Preferred Stock.
As of , 1997, there were shares of Discount Auto Parts
Common Stock outstanding and no shares of Discount Auto Parts Preferred Stock
outstanding. The Discount Auto Parts Board of Directors has the authority to
issue Discount Auto Parts Preferred Stock in one or more classes or series and,
by filing the appropriate articles of amendment with the Department of State of
the State of Florida, to establish the designation of each series and the
variations in rights, preferences, and limitations for each series, without any
further vote or action by the Discount Auto Parts stockholders, unless such
action is required by applicable rules or regulations or by the terms of other
outstanding series of Discount Auto Parts Preferred Stock.
Hi/LO. The Hi/LO Charter authorizes the issuance of up to 30,000,000
shares of Hi/LO Common Stock and 5,000,000 shares of preferred stock, par value
$.01 per share (the "Hi/LO Preferred Stock"). On the Record Date, there were
shares of Hi/LO Common Stock outstanding and no shares of Hi/LO
Preferred Stock outstanding. The Hi/LO Board of Directors has the authority to
establish, designate and issue Hi/LO Preferred Stock in one or more series, and
to fix the voting powers (full, limited or none) and such other relative rights,
powers and preferences, including, without limitation, the dividend rate,
conversion rights, if any, redemption price and liquidation preference, without
any further vote or action by the stockholders, unless such action is required
by applicable rules or regulations or by the terms of other outstanding series
of Hi/LO Preferred Stock. Although as of the Record Date there were no shares of
Hi/LO
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Preferred Stock outstanding, the Hi/LO Board of Directors has acted to establish
a series of Hi/LO Preferred Stock which has been designated as Series A Junior
Participating Preferred Stock (and which was established in connection with the
adoption by Hi/LO of its Stockholders Rights Plan).
DIRECTORS; REMOVAL; VACANCIES
Discount Auto Parts. Discount Auto Parts Restated Articles and Bylaws
provide for a Board of Directors of not less than three nor more than nine
directors, the number to be fixed by the stockholders at any annual or special
meeting; the current number is set at six. The Florida Law permits up to three
classes of directors, and the Discount Auto Parts Restated Articles and the
Discount Auto Parts Bylaws establishes a classified board with three classes
(each class currently with two members).
Under the Florida Law and under the Discount Auto Parts Restated Articles,
stockholders may remove one or more directors with or without cause. If one
voting group of stockholders elects a particular director, only the stockholders
of that voting group may participate in removing him or her. A director may be
removed by the stockholders at a meeting of the stockholders provided that the
notice of the meeting states that one of its purposes is removal of the
director.
Any vacancy occurring in the Board of Directors of Discount Auto Parts,
including any vacancy created by reason of an increase in the number of
directors, may be filled by the affirmative vote of a majority of the remaining
directors, though less than a quorum of the Board of Directors, or by a sole
remaining director, or by the stockholders.
Hi/LO. The Delaware Law provides that the board of directors shall consist
of one or more members and that the number of directors shall be fixed by, or in
the manner provided in, the bylaws, unless the certificate of incorporation
fixes the number of directors, in which case a change in the number of directors
shall be made only by amendment of the certificate of incorporation. The Hi/LO
Bylaws provide that the number of directors which shall constitute the whole
Hi/LO Board of Directors shall be determined from time to time by resolution of
the Hi/LO Board of Directors (provided that no decrease in the number of
directors which would have the effect of shortening the term of an incumbent
director may be made by the Hi/LO Board of Directors). The current number of
directors on the Hi/LO Board of Directors is set at six. Although the Delaware
Law permits up to three classes of directors, Hi/LO has not elected to establish
a classified board.
The Hi/LO Bylaws provide that any director or the entire Hi/LO Board of
Directors may be removed, with or without cause, by the holders of a majority of
the shares then entitled to vote at an election of directors.
The Hi/LO Bylaws provide that vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be filled
by a majority of the directors then in office, although less than a quorum, or
by a sole remaining director. If there are no directors in office, then a
special meeting of the stockholders for the election of directors may be called
and held in the manner provided for by the Delaware Law.
SPECIAL MEETINGS OF STOCKHOLDERS
Discount Auto Parts. The Florida Law provides that special meetings of
stockholders may be called by a corporation's board of directors or any other
person as may be authorized by the corporation's articles or bylaws, or by the
holders of not less than ten percent (unless a higher percentage not to exceed
50 percent is called for by the corporation's articles) of all votes entitled to
be cast on any issue at the proposed special meeting who sign, date, and deliver
to the corporation's secretary one or more written demands for the meeting,
describing the purpose or purposes for which it is to be held. The Discount Auto
Parts Bylaws provide that special meetings of the stockholders may be called at
any time only by the Board of Directors, the Chairman of the Board or the
President and shall be called by the President or the Secretary if the holders
of not less than 25% of all votes entitled to be cast on any issue proposed to
be considered at the proposed special meeting sign, date and deliver to the
Secretary of Discount Auto Parts one or more written demands for a special
meeting, describing the purpose(s) for which it is to be held.
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Hi/LO. The Delaware Law provides that special meetings of stockholders may
be called by the board of directors or any other person as may be authorized by
the corporation's certificate of incorporation or bylaws. The Hi/LO Bylaws
provide that special meetings of the stockholders may be called at any time only
by the Chairman of the Board, the President, a majority of the Hi/LO Board, or
by a majority of the executive committee (if any).
STOCKHOLDER NOTICE PROCEDURES
Discount Auto Parts. The Discount Auto Parts Restated Articles provide
that any stockholder nomination for director or proposal for action at a
stockholder annual meeting must be delivered in writing to the Secretary of
Discount Auto Parts not less than 60 days prior to the date of the meeting at
which the director(s) are to be elected or not less than 60 days prior to the
scheduled annual meeting regardless of any postponements, deferrals or
adjournments of that meeting to a later date; provided, however, that if less
than 70 days' notice or prior public disclosure of the date of the scheduled
meeting is given or made, notice by the stockholder, to be timely, must be so
delivered or received not later than the close of business on the tenth day
following the earlier of the day on which notice was given or such public
disclosure was made. The presiding officer at any such meeting is not required
to recognize any nomination or proposal which does not comply with the notice
requirements set forth in the Articles.
Hi/LO. The Hi/LO Bylaws establish an advance notice procedure for the
nomination, other than by or at the direction of the Hi/LO Board, of candidates
for election as directors as well as for stockholder proposals to be considered
at meetings of stockholders (the "Stockholder Notice Procedure"). Notice of
stockholder proposals and director nominations must be given timely in writing
to the Secretary of Hi/LO prior to the meeting at which such matters are to be
acted upon or directors are to be elected. Under the Stockholder Notice
Procedure, for notice of stockholder proposals or director nominations to be
timely, such notice must be delivered to, or mailed and received at, the
principal executive offices of Hi/LO (i) in the case of an annual meeting, not
less than ninety days prior to the anniversary date of the immediately preceding
annual meeting of stockholders of Hi/LO, and (ii) in the case of a special
meeting of stockholders called for the purpose of nominating directors, not
later than the close of business on the tenth day following the day on which
notice of the date of the meeting was mailed or public disclosure of the date of
the meeting was made, whichever occurs first. The Hi/LO Bylaws also specify
certain requirements for a stockholders' notice to be in proper written form.
The Stockholder Notice Procedure may have the effect of precluding a contest for
the election of directors or the consideration of stockholder proposals if the
proper procedures are not followed, and of discouraging or deterring a third
party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its own proposal, without regard to whether
consideration of such nominees or proposals might be harmful or beneficial to
Hi/LO and its stockholders.
ADJOURNMENT OF MEETINGS OF STOCKHOLDERS
Discount Auto Parts. The Discount Auto Parts Bylaws provide that when a
stockholder meeting is convened, and a quorum has not been established to
transact business, the holders of the majority of the shares represented and who
would be entitled to vote at the meeting if a quorum were present, may adjourn
such meeting from time to time without further notice.
Hi/LO. The Hi/LO Bylaws provide that, notwithstanding the other provisions
of the certificate of incorporation or the bylaws, the chairman of the meeting
or the holders of a majority of the issued and outstanding stock, present in
person or represented by proxy, at any meeting of stockholders, whether or not a
quorum is present, may adjourn the meeting from time to time, without any notice
other than announcement at the meeting of the time and place of the holding of
the adjourned meeting. This provision may, under certain circumstances, delay
proposals or actions brought by stockholders opposed by the Hi/LO Board or make
the adoption of such proposals more difficult.
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AMENDMENTS TO GOVERNING DOCUMENTS
Discount Auto Parts. Pursuant to the Florida Law, amendments to a
corporation's articles of incorporation relating to (i) the extension of the
duration of the corporation, (ii) the deletion of the names and addresses of the
initial directors and the initial registered agent, (iii) the deletion of
information solely of historical interest, (iv) certain changes in the number of
issued and outstanding shares, (v) the deletion of authorization for a class or
series of shares, (vi) certain changes in the corporation's name, (vii) the
change of the par value for a class or series of shares, (viii) providing that
if the corporation acquires its own shares, such shares may belong to the
corporation and constitute treasury shares until disposed of or canceled by the
corporation; and (ix) any other change permitted by the Florida Law without
stockholder approval, may be made by the board of directors without stockholder
approval, unless the corporation's articles of incorporation provide otherwise.
The Discount Auto Parts Restated Articles do not provide otherwise. All other
amendments to the articles of incorporation must be recommended by the board of
directors to the stockholders and approved by a majority of the stockholders
entitled to vote on the amendment, unless a greater percentage is provided for
in the articles of incorporation or in the resolution of the board of directors
proposing such amendment. In addition, the Florida Law provides that the holders
of the outstanding shares of a class shall be entitled to vote as a single class
if the holders of such a class would be adversely or particularly affected by
the amendment. Except for the requirement that there be an affirmative vote of
at least 66 2/3% of the outstanding shares of Discount Auto Parts Common Stock
in order to amend or repeal provisions relating to Directors, Stockholder
Meetings, and Amendment of Articles of Incorporation or to adopt any provision
inconsistent therewith, the Discount Auto Parts Restated Articles do not
otherwise alter the majority vote requirement.
Under the Florida Law and Discount Auto Parts Restated Articles and Bylaws,
the Board of Directors or the stockholders of Discount Auto Parts may amend or
repeal the Discount Auto Parts Bylaws except that the board of directors may not
so amend or repeal the Discount Auto Parts Bylaws in those circumstances where a
statute in Florida specifically reserves the power to amend the bylaws of a
corporation to the stockholders, or unless the stockholders, in amending or
repealing the bylaws, provide expressly that the board of directors may not
amend or repeal the bylaws or that bylaw provision. The Florida Law permits a
corporation's stockholders to amend or repeal the corporation's bylaws even
though the bylaws may also be amended or repealed by its board of directors.
Hi/LO. Under the Delaware Law, unless a corporation's certificate of
incorporation or bylaws otherwise provide, the amendment of a corporation's
certificate of incorporation generally requires the approval of the holders of a
majority of the outstanding stock entitled to vote thereon, and if such
amendment would increase or decrease the number of authorized shares of any
class or series or the par value of such shares or would adversely affect the
shares of such class or series, the amendment requires the approval of the
holders of a majority of the outstanding stock of such class or series. The
Hi/LO Charter further requires the affirmative vote of at least 66 2/3% of the
outstanding shares of the Series A Junior Participating Preferred Stock to amend
the sections of the Hi/LO Charter which address certain voting rights of the
Series A Junior Participating Preferred Stock.
The Hi/LO Charter authorizes the Hi/LO Board to amend the Hi/LO Bylaws.
Under the provisions of the Hi/LO Bylaws and the Delaware Law, the Hi/LO
stockholders entitled to vote also are permitted to amend the Hi/LO Bylaws.
INDEMNIFICATION AND DIRECTOR EXCULPATION
Discount Auto Parts. Article VI of the Discount Auto Parts Bylaws entitles
but does not obligate Discount Auto Parts, to the fullest extent permitted by
the Florida Law, to indemnify any person who is or was a party, or is threatened
to be made a party, to any threatened, pending or completed action, suit or
other type of proceeding (other than an action by or in the right of the
corporation), by reason of the fact that such person (i) is or was a director or
officer of Discount Auto Parts or (ii) is or was serving at the request of
Discount Auto Parts as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
judgments, amounts paid in settlement, penalties, fines (including an excise tax
assessed with respect to any employee benefit plan) and expenses (including
attorneys' fees, paralegals'
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fees and court costs) actually and reasonably incurred. The Florida Law entitles
but does not obligate Discount Auto Parts to also indemnify other employees and
agents of Discount Auto Parts if certain standards are satisfied. Both the
Florida Law and the Discount Auto Parts Bylaws permit such indemnification for
amounts actually and reasonably incurred in connection with any such action,
suit or other proceeding, including any appeal thereof, if the person to be
indemnified acted in good faith and in a manner such person reasonably believed
to be in, or not opposed to, the best interests of Discount Auto Parts and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful. However, the Florida Law also provides that a
person may not be indemnified nor may expenses be advanced if a judgment or
final adjudication establishes that his or her actions, or omissions to act,
were material to the cause of action so adjudicated and constitute: (i) a
violation of criminal law, unless he or she had reasonable cause to believe his
or her conduct was lawful or had no reasonable cause to believe his or her
conduct was unlawful; (ii) actions or omissions to act in connection with a
transaction from which such person derived improper personal benefit; (iii) an
unlawful distribution under Florida law; or (iv) willful misconduct or conscious
disregard for the best interests of Discount Auto Parts in a proceeding by or in
the right of Discount Auto Parts to procure a judgment in its favor or in a
proceeding by or in the right of a stockholder.
The right to provide indemnification under the Discount Auto Parts Bylaws
is not exclusive of any other rights to which a person may be entitled under any
law, by-law, agreement, vote of stockholders or disinterested directors, or
otherwise, both as to action in such person's official capacity and as to action
in any other capacity while holding office with Discount Auto Parts, and shall
continue as to any person who has ceased to be a director or officer and shall
inure to the benefit of such person's heirs and personal representatives.
To the extent that any director, officer, employee, or agent of Discount
Auto Parts has been successful on the merits or otherwise in defense of any
proceeding, such person shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
The Discount Auto Parts Bylaws also provide that Discount Auto Parts may
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of Discount Auto Parts, or who is or was
serving at the request of Discount Auto Parts as a director, officer, employee
or agent of another corporation, partnership, joint venture trust or other
enterprise against any liability asserted against such person and incurred by
such person in any such capacity or arising out of such person's status as such,
whether or not Discount Auto Parts would have the power to indemnify such person
against the liability under the provisions of the Discount Auto Parts Bylaws.
Discount Auto Parts has purchased and maintains insurance to protect certain
directors, officers, employees or other agents and Discount Auto Parts from
certain liabilities asserted against them for acts taken or omissions occurring
in their capacities as such.
According to the Florida Law, a director is not personally liable for
monetary damages to Discount Auto Parts or any other person for any statement,
vote, decision or failure to act, regarding corporate management or policy,
unless the director breached or failed to perform his duties as a director and
the director's breach of, or failure to perform those duties constitutes: (i) a
violation of criminal law, unless the director had reasonable cause to believe
his conduct was lawful or had no reason to believe his conduct was unlawful;
(ii) a transaction from which the director derived improper personal benefit;
(iii) a violation of Section 607.0834 of the Florida Law, which concerns
unlawful payment of dividends; (iv) in a proceeding by or in the right of the
corporation or a stockholder, conscious disregard for the best interests of the
corporation, or willful misconduct; or (v) in a proceeding by or in the right of
someone other than the corporation or a stockholder, recklessness or an act or
omission which was committed in bad faith or with malicious purpose or in a
manner exhibiting wanton and willful disregard of human rights, safety or
property.
Hi/LO. The Hi/LO Bylaws provide that Hi/LO shall indemnify and hold
harmless to the fullest extent authorized by the Delaware Law each person who
was or is made a party to or is involved in any action, suit or proceeding,
whether civil, criminal, administrative or investigative (a "proceeding"), by
reason of the fact that such person or another of whom such person is the legal
representative, is or was or has agreed to become a director or officer of Hi/LO
or is or was serving or has agreed to serve at the request of Hi/LO as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise,
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including service with respect to employee benefit plans, whether the basis of
such proceeding is an alleged action in an official capacity as a director or
officer or in any other capacity while serving or having agreed to serve as a
director or officer, against all expense, liability and loss (including without
limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties
and amount paid or to be paid in settlement) reasonably incurred or suffered by
such person in connection therewith. Such indemnification shall continue as to a
person who has ceased to serve in the capacity which initially entitled such
person to indemnity and shall inure to the benefit of such person's heirs,
executors and administrators, provided, however that Hi/LO shall indemnify any
such person seeking indemnification in connection with a proceeding initiated by
such person only if such proceeding was authorized by the board of directors of
Hi/LO. The Hi/LO Bylaws provide that, to the extent future amendments of the
Delaware Law permit broader indemnification rights than were previously
permitted, such indemnification rights shall be in accordance with such future
amendments.
Under Section 145 of the Delaware Law, Hi/LO may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action or suit by or in the right of Hi/LO to procure a judgment in
its favor against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection with the defense or settlement of such
action or suit but only if the indemnitee acted in good faith and in a manner
such indemnitee reasonably believed to be in or not opposed to the best
interests of Hi/LO; provided, however, no indemnification shall be made in
respect of any claim, issue or matter as to which such person is adjudged liable
to Hi/LO unless (and then only to the extent that) the Court of Chancery or the
court in which such action or suit was brought determines upon application that,
despite the adjudication of liability but in view of all the circumstances of
the case, such person is fairly and reasonably entitled to indemnity for such
expenses as the court deems proper.
To the extent that any director, officer, employee, or agent of Hi/LO has
been successful on the merits or otherwise in defense of any proceeding, such
person shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
Any indemnification made pursuant to Section 145 of the Delaware Law as
currently in effect, other than in actions brought by or in the right of Hi/LO,
shall be made by Hi/LO only as authorized in the specific case upon a
determination (i) by a majority vote of the directors who are not parties to
such action, suit or proceeding, even though less than a quorum, or (ii) if
there are not such directors, or if such directors so direct, by independent
legal counsel in a written opinion, or (iii) by the stockholders of Hi/LO, that
indemnification of such indemnitee is proper in the circumstances because such
indemnitee has acted in good faith and in a manner such indemnitee reasonably
believed to be in or not opposed to the best interests of Hi/LO and, with
respect to any criminal action or proceeding, if such indemnitee had no
reasonable cause to believe that such indemnitee's conduct was unlawful.
The Hi/LO Bylaws provide that the right to indemnification shall be a
contract right and shall include the right to be paid by Hi/LO the expenses
incurred in defending any such proceeding in advance of its final disposition;
provided, however, that, if the Delaware Law requires, the payment of such
expenses incurred by a current, former or proposed director or officer in such
person's capacity as a director or officer or proposed director or officer (and
not in any other capacity in which service was or is or has been agreed to be
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to Hi/LO of an
undertaking, by or on behalf of such indemnified person, to repay all amounts so
advanced if it shall ultimately be determined that such indemnified person is
not entitled to be indemnified.
The Hi/LO Bylaws also provide that Hi/LO may maintain insurance to protect
itself and any person who is or was serving as a director, officer, employee or
agent of Hi/LO, or is or was serving at the request of Hi/LO as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
Hi/LO would have the power to indemnify such person against such expense,
liability or loss under the Delaware Law. Hi/LO has purchased and maintains
insurance to protect certain directors, officers, employees or other agents and
Hi/LO from certain liabilities asserted against them for acts taken or omissions
occurring in their capacities as such. If the Merger is consummated, Discount
Auto Parts has agreed to maintain, to a certain extent, such director and
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officer insurance. See, "The Merger -- Interests of Certain Persons in the
Merger -- Indemnification; Directors' and Officers' Insurance."
The Hi/LO Charter also limits or eliminates, to the fullest extent that the
Delaware Law permits, the personal liability of a director to Hi/LO or its
stockholders for monetary damages for breach of fiduciary duty as a director.
The Delaware Law permits a Delaware corporation, through such a provision in a
corporation's certificate of incorporation, to eliminate and limit the personal
liability of a director to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for (1) any breach of
the director's duty of loyalty to the corporation or its stockholders, (2) acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (3) the unlawful payment of a dividend or the
authorization of an unlawful stock purchase or redemption, or (4) any
transaction from which the director derived an improper personal benefit.
ACTIONS BY STOCKHOLDERS WITHOUT A MEETING
Discount Auto Parts. Under the Florida Law and the Discount Auto Parts
Bylaws, any action that is required or permitted to be taken at an annual or
special meeting of stockholders may be taken without a meeting, without prior
notice and without a vote, if one or more consents in writing, setting forth the
action so taken, are signed by the holders of outstanding stock having not less
than the minimum number of votes that would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote thereon were
present and voted.
Hi/LO. The Delaware Law generally provides that, unless otherwise provided
in the corporation's certificate of incorporation, any action that is required
to be taken or that may be taken at a meeting of stockholders may be taken
without a meeting, without prior notice and without a vote, with the written
consent of stockholders having not less than the minimum number of votes that
would be necessary to authorize the action at a meeting at which all shares
entitled to vote were present and voted. The Hi/LO Charter, however, provides
that any action required or permitted to be taken by stockholders of Hi/LO must
be effected at a duly called meeting of stockholders and may not be effected by
any written consent of stockholders.
PAYMENT OF DIVIDENDS
Discount Auto Parts. Under the Florida Law, a dividend may be paid, unless
after giving it effect, (i) the corporation would not be able to pay its debts
as they become due in the usual course of business or (ii) the corporation's
total assets would be less than the sum of its total liabilities plus the amount
needed to satisfy the preferential rights of any preferred stockholders of the
corporation.
Hi/LO. The Delaware Law provides that, subject to any restrictions in a
corporation's certificate of incorporation, dividends may be declared from a
corporation's surplus or, if there is no surplus, from its net profits for the
fiscal year in which the dividend is declared and/or the preceding fiscal year.
However, if the corporation's capital (generally defined in the Delaware Law as
the sum of the aggregate par value of all shares of the corporation's capital
stock, where all such shares have a par value and the board of directors has not
established a higher level of capital) has been diminished to an amount less
than the aggregate amount of the capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets, dividends may not be declared and paid out of such net profits until the
deficiency in such capital has been repaired. The Hi/LO Charter does not impose
any additional restrictions on the payment of dividends.
STOCK REPURCHASES
Discount Auto Parts. The Florida Law permits a corporation to redeem any
and all classes of its shares and treats such redemption or repurchase like a
dividend, subject to the same limitations described under "-- Payment of
Dividends."
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Hi/LO. Under the Delaware Law, a corporation may not purchase or redeem
its own shares when the capital of the corporation is impaired or when such
purchase or redemption would cause an impairment of the capital of the
corporation. A Delaware corporation may, however, purchase or redeem out of
capital any of its preferred shares if such shares will be retired upon
acquisition, thereby reducing the capital of the corporation.
MERGER, CONSOLIDATION, AND SALES OF ASSETS
Discount Auto Parts. The Florida Law provides that a vote of the board of
directors and of a majority of the shares of each class of Discount Auto Parts
stock outstanding and entitled to vote thereon is required to authorize a merger
or consolidation involving Discount Auto Parts, unless the articles of
incorporation require a greater vote. The sale, lease, or exchange of all or
substantially all of Discount Auto Parts' property and assets other than in the
regular course of business is permitted under the Florida Law with the approval
of a majority of the Board of Directors and of a majority of all shares entitled
to be cast on the transaction, unless the articles of incorporation require a
greater vote or a vote by classes. The Discount Auto Parts Restated Articles do
not require greater votes or, except to the extent required by applicable law,
votes by classes.
Hi/LO. The Delaware Law requires the approval of the board of directors
and the holders of a majority of the outstanding stock of Hi/LO entitled to vote
thereon for mergers or consolidations, and for sales, leases, or exchanges of
substantially all of Hi/LO's property and assets. The Delaware Law permits a
corporation to merge with another corporation without obtaining the approval of
its stockholders if: (i) such corporation is the surviving corporation of the
merger; (ii) the merger agreement does not require an amendment to such
corporation's certificate of incorporation; (iii) each share of such
corporation's capital stock outstanding immediately prior to the effective date
of the merger is to be an identical outstanding or treasury share of such
corporation after the merger; and (iv) any authorized but unissued shares or
treasury shares of common stock to be issued or delivered under the plan of
merger plus those initially issuable upon conversion of any other securities or
obligations to be issued or delivered under such plan do not exceed 20% of the
shares of common stock outstanding immediately prior to the effective date of
the merger.
DISSENTERS' RIGHTS OF APPRAISAL
Discount Auto Parts. The Florida Law sets forth procedures under which
stockholders may dissent from, and receive payment of the fair value of their
shares in connection with most mergers, consolidations and exchanges or sales of
substantially all or all of a corporation's assets. Such dissenters' rights are
not available with respect to a plan of merger, consolidation or sale or
exchange of assets, to holders of shares of any class or series which were
either registered on a national securities exchange, designated as a national
market system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc., or held of record by more than 2,000
stockholders.
Hi/LO. Pursuant to the Delaware Law, any stockholder has the right to
dissent from any merger or consolidation of which Hi/LO is a constituent
corporation and to exercise dissenters' rights except as described below. No
such dissenters' rights are available for the shares of any class or series of
Hi/LO capital stock if (i) as of the record date fixed to determine the
stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, such shares
were either listed on a national securities exchange, designated as a national
market system security on an interdealer quotation system operated by a national
securities association, or held of record by more than 2,000 stockholders or
(ii) Hi/LO is the surviving corporation of a merger and the merger did not
require the approval of Hi/LO's stockholders, unless, in either case, the
holders of such stock are required by an agreement of merger or consolidation to
accept for that stock something other than: (a) shares of stock of the
corporation surviving or resulting from the merger or consolidation; (b) shares
of stock of any other corporation that, at the effective date of the merger,
will be listed on a national securities exchange, designated as a national
market system security on a interdealer quotation system operated by a national
securities association, or held of record by more than 2,000 stockholders; (c)
cash in lieu of fractional shares of a corporation described in clause (a) or
(b) above; or (d) any combination of the shares of stock and cash in lieu of
fractional shares described in clauses (a) through (c) above. As the Hi/LO
Common Stock is listed on the NYSE, holders of Hi/LO Common Stock do not have
dissenters' rights with respect to the Merger.
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CONTROL SHARE ACQUISITIONS
Discount Auto Parts. As a Florida corporation, Discount Auto Parts is
subject to provisions of Section 607.0902 of the Florida Law, which provides
that shares acquired in a "control share acquisition" shall have the same voting
rights as were accorded such shares before the control share acquisition only to
the extent granted by resolution approved by the holders of a majority of
Discount Auto Parts' voting shares (exclusive of shares held by officers of
Discount Auto Parts, inside directors or the acquiring party). A "control share
acquisition" is defined to mean an acquisition that immediately thereafter
entitles the acquiring party to vote in the election of directors within any of
the following ranges of voting power: (i) one-fifth or more but less than
one-third of such voting power; (ii) one-third or more but less than a majority
of such voting power; and (iii) a majority or more of such voting power.
Hi/LO. The Delaware Law does not have a statute comparable to Florida's
control share acquisition statute.
CERTAIN BUSINESS COMBINATIONS
Discount Auto Parts. Section 607.0901 of the Florida Law would prohibit an
"affiliated transaction" (defined generally to include mergers, sales and leases
of assets, issuances of securities and other similar transactions) by Discount
Auto Parts or any subsidiary with an "interested stockholder" (defined generally
to be the beneficial owner of 10% or more of Discount Auto Parts' voting stock)
unless: (i) the affiliate transaction shall have been approved by a majority of
the disinterested directors of Discount Auto Parts before the person became an
interested stockholder; (ii) the interested stockholder has owned at least 80%
of Discount Auto Parts' outstanding voting shares for at least five years or is
the owner of at least 90% of Discount Auto Parts' outstanding voting shares
(excluding shares acquired directly from Discount Auto Parts in a transaction
not approved by the disinterested directors); (iii) the consideration to be paid
to Discount Auto Parts' stockholders satisfies certain fair price and form
requisites; or (iv) the affiliate transaction is approved by the holders of at
least two-thirds of the outstanding voting stock of Discount Auto Parts,
excluding shares held by the interested stockholder.
Hi/LO. Section 203 of the Delaware Law would prohibit a "business
combination" (defined generally to include mergers, sales and leases of assets,
issuances of securities and similar transactions) by Hi/LO or a subsidiary with
an "interested stockholder" (defined generally to be the beneficial owner of 15%
or more of Hi/LO's voting stock) within three years after the person or entity
becomes an interested stockholder, unless: (i) prior to the person or entity
becoming an interested stockholder, the business combination or the transaction
pursuant to which such person or entity became an interested stockholder shall
have been approved by the Hi/LO Board; (ii) upon the consummation of the
transaction in which the person or entity became an interested stockholder, the
interested stockholder holds at least 85% of the voting stock of Hi/LO
(excluding shares held by persons who are both officers and directors of Hi/LO
and shares held by certain employee benefit plans); or (iii) the business
combination is approved by the Hi/LO Board and by the holders of at least
two-thirds of the outstanding voting stock of Hi/LO, excluding shares held by
the interested stockholder. The Merger is not subject to the limitations set
forth in Section 203 of the Delaware Law.
CONSIDERATION OF SOCIETAL FACTORS
Discount Auto Parts. The Florida Law expressly provides that in
determining what a director reasonably believes to be in the best interests of
the corporation, such director may consider the long-term interests and
prospects of the corporation and its stockholders, and the social, economic,
legal or other effects of any action on the employees, suppliers, customers of
the corporation or its subsidiaries, the communities and society in which the
corporation or its subsidiaries operate, and the economy of the state and the
nation. Thus, these interests could be considered even in connection with, or
after, a decision to sell a corporation. The Discount Auto Parts Restated
Articles and Bylaws do not discuss the consideration of societal factors.
Hi/LO. The Delaware Law does not explicitly provide for the consideration
of societal interests by a corporation's board of directors in making decisions.
The Delaware Supreme Court has, however, held that, in
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discharging their responsibilities to a corporation, directors may consider
constituencies other than stockholders, such as creditors, customers, employees
and perhaps even the community in general, as long as there are rationally
related benefits accruing to stockholders as well. The Delaware Supreme Court
has held, however, that concern for non-stockholder interests is inappropriate
when a sale of a company is inevitable and an auction among active bidders is in
progress. The Hi/LO Charter does not directly discuss consideration of societal
factors.
STOCKHOLDERS RIGHTS PLAN
Hi/LO. Hi/LO has a preferred share rights plan pursuant to which holders
of Hi/LO Common Stock were issued rights (exercisable after certain triggering
events) to purchase shares of a series of Hi/LO Preferred Stock. The Hi/LO
Rights Plan was amended as of October 17, 1997 to provide that the transactions
contemplated by the Merger Agreement will not trigger the provisions of the
Hi/LO Rights Plan.
Discount Auto Parts. Discount Auto Parts does not have a stockholders
rights plan in effect.
LEGAL MATTERS
The validity of the Discount Auto Parts Common Stock to be issued in the
Merger has been passed upon for Discount Auto Parts by Trenam, Kemker, Scharf,
Barkin, Frye, O'Neill & Mullis, Professional Association, Tampa, Florida.
Certain federal income tax consequences of the Merger have been passed upon for
Discount Auto Parts by Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis,
Professional Association, Tampa, Florida, and for Hi/LO by Vinson & Elkins
L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of Discount Auto Parts, Inc.
incorporated by reference in Discount Auto Parts, Inc.'s Annual Report (Form
10-K) for the year ended June 3, 1997, have been audited by Ernst & Young LLP,
independent certified public accountants, as set forth in their report thereon
incorporated by reference therein and incorporated herein by reference. Such
consolidated financial statements are incorporated herein by reference in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
The consolidated financial statements and schedule of Hi-Lo Automotive,
Inc., and subsidiaries included in this Registration Statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
Representatives of Arthur Andersen LLP are expected to be present at the
Special Meeting and will have the opportunity to make a statement if they desire
to do so and will also be available to respond to appropriate questions from
Hi/LO stockholders.
STOCKHOLDER PROPOSALS
DISCOUNT AUTO PARTS
Pursuant to the General Rules under the Securities Exchange Act of 1934,
proposals of stockholders intended to be presented at the 1998 Annual Meeting of
Stockholders must be received by management of Discount Auto Parts at its
executive offices by April 27, 1998 (i.e., 120 days prior to August 27, 1998).
The Amended and Restated Articles of Incorporation of Discount Auto Parts
also contain requirements concerning advance notice to Discount Auto Parts of
any stockholder proposal and of any nominations by stockholders of persons to
stand for election as directors at a stockholders' meeting. Notice of
stockholder proposals and of director nominations must be timely given in
writing to the Secretary of Discount Auto Parts prior to the meeting at which
the directors are to be elected. To be timely, notice must be received at the
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principal executive offices of Discount Auto Parts not less than 60 days prior
to the meeting of stockholders; provided, however, that in the event that less
than 70 days' notice prior to public disclosure of the date of the meeting is
given or made to the stockholders, notice by the stockholder, in order to be
timely, must be so delivered or received not later than the close of business on
the tenth day following the day on which such notice of the date of the annual
meeting was mailed or public disclosure of the date of the annual meeting was
made, whichever first occurs.
A stockholder's notice with respect to a proposal to be brought before the
annual meeting must set forth (i) a brief description of the proposal and the
reasons for conducting such business at the annual meeting, (ii) the name and
address, as they appear on Discount Auto Parts' books, of the stockholder
proposing such business and any other stockholders known by such stockholder to
be supporting such proposal, (iii) the class and number of shares of Discount
Auto Parts stock which are beneficially owned by such stockholder on the date of
such stockholder notice and by any other stockholders known by such stockholder
to be supporting such proposal on the date of such stockholder notice, and (iv)
any financial interest of the stockholder in such proposal.
A stockholder's notice with respect to a director nomination must set forth
(i) as to each nominee:
(1) the name, age, business address and residence address of the
person, the principal occupation or employment of the person;
(2) the class and number of shares of Discount Auto Parts which are
beneficially owned by such person; and
(3) all information that would be required to be included in a proxy
statement soliciting proxies for the election of the nominee director
(including such person's written consent to serve as a director if so
elected)
and (ii) as to the stockholder providing such notice (a) the name and address,
as they appear on Discount Auto Parts' books, of the stockholder and (b) the
class and number of shares of Discount Auto Parts which are beneficially owned
by such stockholder on the date of such stockholder notice.
The complete Discount Auto Parts Amended and Restated Articles of
Incorporation provisions governing these requirements are available to any
stockholder without charge upon request from the Secretary of Discount Auto
Parts.
HI/LO
If the Merger is not consummated, any proposals of stockholders of Hi/LO
intended to be presented at the Annual Meeting of Stockholders of Hi/LO to be
held in 1998 must be received by Hi/LO, addressed to the Secretary of Hi/LO at
2575 West Bellfort, Houston, Texas 77054 no later than December 19, 1997 to be
considered for inclusion in the proxy statement and form of proxy relating to
that meeting.
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HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
UNAUDITED INTERIM INFORMATION TO SEPTEMBER 30, 1997
Consolidated Balance Sheets............................... F-2
Consolidated Statements of Income (Loss).................. F-3
Consolidated Statements of Stockholders' Equity........... F-4
Consolidated Statements of Cash Flow...................... F-5
Notes to Consolidated Financial Statements................ F-6
ANNUAL INFORMATION TO DECEMBER 31, 1996
Report of Independent Public Accountants.................. F-10
Consolidated Balance Sheets............................... F-11
Consolidated Statements of Income (Loss).................. F-12
Consolidated Statements of Stockholders' Equity........... F-13
Consolidated Statements of Cash Flow...................... F-14
Notes to Consolidated Financial Statements................ F-15
</TABLE>
F-1
<PAGE> 81
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 420 $ 1,180
Accounts receivable --
Trade, net of allowance for doubtful accounts of $511
and $929.............................................. 7,800 5,651
Other (includes a federal income tax receivable of
$2,862)............................................... 5,845 6,878
Inventories............................................... 92,381 91,401
Prepaids and other assets................................. 3,261 3,281
-------- --------
Total current assets.............................. 109,707 108,391
PROPERTY AND EQUIPMENT, net................................. 29,716 31,980
DEFERRED INCOME TAXES AND OTHER............................. 3,412 3,717
-------- --------
$142,835 $144,088
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 574 $ 750
Accounts payable and accrued liabilities.................. 34,492 34,350
-------- --------
Total current liabilities......................... 35,066 35,100
LONG-TERM DEBT, net of current maturities................... 42,654 45,612
OTHER LIABILITIES........................................... 3,888 4,082
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized, none issued................................ -- --
Common Stock, $.01 par value, 30,000,000 shares
authorized, 10,775,109 and 10,775,109 shares issued and
outstanding............................................ 108 108
Additional paid-in capital................................ 68,316 68,316
Retained earnings (deficit)............................... (7,197) (9,130)
-------- --------
Total stockholders' equity........................ 61,227 59,294
-------- --------
$142,835 $144,088
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE> 82
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales........................................... $ 65,293 $ 64,396 $ 184,559 $ 192,323
Costs and expenses:
Cost of goods sold, buying and distribution..... 39,430 44,665 111,195 122,822
Operating, selling, general and
administrative................................ 22,727 28,406 67,020 75,690
Provision for asset impairment and store
closings...................................... -- 51,352 -- 51,352
---------- ---------- ---------- ----------
Operating income (loss)......................... 3,136 (60,027) 6,344 (57,541)
Interest expense................................ 1,090 1,085 3,320 3,161
Other expense, net.............................. 62 184 53 714
---------- ---------- ---------- ----------
Income (loss) before taxes (benefit) on income
(loss)........................................ 1,984 (61,296) 2,971 (61,416)
Taxes (benefit) on income (loss)................ 671 (9,637) 1,038 (9,511)
---------- ---------- ---------- ----------
Net income (loss)............................... $ 1,313 $ (51,659) $ 1,933 $ (51,905)
========== ========== ========== ==========
Net income (loss) per common and common
equivalent share.............................. $ 0.12 $ (4.80) $ 0.18 $ (4.83)
========== ========== ========== ==========
Weighted average common and common equivalent
shares outstanding............................ 10,775,000 10,756,000 10,775,000 10,756,000
</TABLE>
See Notes to Consolidated Financial Statements
F-3
<PAGE> 83
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
------------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS
---------- ------ ---------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1995............................. 10,756,350 $108 $68,277 $44,593
Issuance of Common Stock............................... 18,759 -- 39 --
Net loss............................................... -- -- -- (53,723)
---------- ---- ------- -------
Balance, December 31, 1996............................. 10,775,109 108 68,316 (9,130)
Net income............................................. -- -- -- 1,933
---------- ---- ------- -------
Balance, September 30, 1997............................ 10,775,109 $108 $68,316 $(7,197)
========== ==== ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 84
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1997 1996
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 1,933 $(51,905)
------- --------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Depreciation and amortization.......................... 3,066 5,272
Cost in excess of net assets acquired.................. -- 37,668
Provision for impairment of assets and other........... -- 21,774
Deferred tax benefit................................... (1,751) (9,682)
Gain on sale of fixed assets........................... (22) (17)
Changes in assets and liabilities --
Accounts receivable, net of allowances for doubtful
accounts............................................ (1,774) (525)
Inventories.......................................... (980) (5,671)
Prepaids and other assets............................ 20 540
Accounts payable and other accrued liabilities....... 1,234 5,309
Income taxes payable/receivable...................... 1,315 (2,032)
------- --------
Total adjustments................................. 1,108 52,636
------- --------
Net cash provided by operating activities......... 3,041 731
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (1,287) (3,551)
Proceeds from the sale of fixed assets.................... 649 20
------- --------
Net cash used in investing activities............. (638) (3,531)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (payments) proceeds from indebtedness................. (3,163) 1,374
------- --------
Net cash provided by (used in) financing
activities....................................... (3,163) 1,374
------- --------
INCREASE (DECREASE) IN CASH................................. (760) (1,426)
CASH AT BEGINNING OF PERIOD................................. 1,180 1,800
------- --------
CASH AT END OF PERIOD....................................... $ 420 $ 374
======= ========
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 85
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
without audit pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes the disclosures are adequate to make
the information presented not misleading. In the opinion of management, all
adjustments (consisting of only normal recurring adjustments) necessary for a
fair presentation of the financial position and results of operations for the
periods presented have been included. Operating results for the current quarter
and year-to-date period ended September 30, 1997, are not necessarily indicative
of the results that may be expected for the year ending December 31, 1997. For
further information, reference should be made to the annual consolidated
financial statements and notes thereto for the year ended December 31, 1996.
Balance sheet information for December 31, 1996, has been derived from the
1996 annual audited financial statements. Certain reclassifications of amounts
previously reported have been made to conform to the current-year presentation.
The Company costs its inventory on the last-in, first-out (LIFO) method.
Had the first-in, first-out (FIFO) inventory costing method been used,
inventories would have been equal to the LIFO balance at December 31, 1996 and
1995; March 31, 1997 and 1996; June 30, 1997 and 1996; and September 30, 1997
and 1996.
B. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Net income per common and common equivalent share is based on the weighted
average number of common shares outstanding and assumes exercise of outstanding
options for Common Stock which are dilutive, using the treasury stock method.
In March 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." SFAS No.
128 revises the standards for computing earnings per share previously prescribed
by Accounting Principles Board (APB) Opinion No. 15. SFAS No. 128 will be
effective for the Company for the year ending December 31, 1997. The earnings
per share in the accompanying financial statements were computed pursuant to APB
Opinion No. 15 and are the same that would be required for basic earnings per
share under SFAS No. 128, which is determined using only the weighted average
shares outstanding. The Company also has outstanding options that would not be
included in the computation of diluted earnings per share under SFAS No. 128
because to do so would be antidilutive.
C. DEBT
Borrowings
Debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Note payable to a bank...................................... $41,816
Long-term debt.............................................. 1,263
Capital lease obligations................................... 149
-------
43,228
Less -- Current maturities.................................. 574
-------
$42,654
=======
</TABLE>
F-6
<PAGE> 86
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
At September 30, 1997, the weighted average interest rate on the note
payable to a bank was 7.9%.
On October 23, 1996, the Company entered into a financing agreement with a
new lender. Initial funding under this financing agreement was used to repay
amounts outstanding under the Company's prior credit facility. The new financing
agreement provides for up to $60.0 million of borrowings under a revolving
credit facility, which matures October 22, 1999, with annual renewals at the
option of the Company and the lenders. Credit availability is limited to 60% of
the value of saleable inventory and 85% of accounts receivable, subject to
certain adjustments and reserves which may be made at the discretion of the
lender. The facility is secured by all inventories, receivables and fixed assets
of the Company and its subsidiaries. The borrowings may be priced, at the
Company's option, at the lender's prime rate, plus 1/4 of 1%, or London
Interbank Offered Rates (LIBOR) plus 2.25%. The Company pays a commitment fee of
3/8 of 1% per annum on all unused portions of the credit facility. Loan
covenants relate to the Company's net worth, cash flow, liquidity and
acquisitions; restrict capital expenditures to $5.9 million for 1997 and $5.0
million for 1998 and 1999; and restrict operating lease payments to $16.0
million per annum through 1999. The Company was in compliance with this
financing agreement as of September 30, 1997.
At September 30, 1997, the Company had $41.8 million outstanding under the
credit facility and total unutilized credit facilities of approximately $13.6
million.
The Company has established irrevocable letters of credit totaling $1.2
million as security for various insurance contracts.
The book values of cash, trade accounts receivable and accounts payable
approximate their face values principally because of the short-term maturities
of these instruments. The estimated fair value of long-term debt approximates
the book value as the debt is priced based upon a floating rate.
D. SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
---------------
1997 1996
------ ------
<S> <C> <C>
Cash paid during the period for:
Interest.................................................. $3,478 $3,067
Income taxes.............................................. $ 400 $ --
</TABLE>
E. STOCKHOLDERS' EQUITY
The board of directors and the Company's stockholders have approved the
Hi-Lo Automotive, Inc. 1990 Stock Option and 1991 Associate Stock Purchase
Plans, as amended. The 1990 Stock Option Plan reserves 1,400,000 shares of the
Company's Common Stock for issuance to directors, officers and employees. At
September 30, 1997, options for 1,081,066 shares were outstanding, options for
39,723 shares had been exercised, and 279,211 shares were available for
issuance.
Under the Purchase Plan, each eligible employee has the right to purchase
shares as determined by the plan formula. As of September 30, 1997, of the
175,000 shares of the Company's Common Stock reserved for issuance under this
plan, 132,270 shares had been issued and 42,730 shares of the Company's Common
Stock remained reserved for issuance.
Preferred Share Purchase Rights
On August 23, 1996, the Company's board of directors adopted a stockholder
rights plan to help assure that all of the Company's stockholders receive fair
and equal treatment in the event of a proposed takeover of
F-7
<PAGE> 87
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
the Company. The rights plan was effected by issuing one preferred share
purchase right for each outstanding share of common stock. These rights are not
currently exercisable and will become exercisable only upon the occurrence of
specified events related to a change in control of the Company. When
exercisable, each right will entitle the holder to purchase 1/1000 of a share of
the Company's Series A Junior Participating Preferred Stock at an initial
exercise price of $14.00 per right. The rights expire on September 2, 2006,
unless extended or redeemed.
F. IMPAIRMENT OF ASSETS
In the third quarter of 1996, the Company concluded that a short-term
recovery in sales volume and operating profits was unlikely. Therefore, the
Company, which incurred a net loss in the third quarter before such charges,
recorded pre-tax charges in the amount of $59.4 million.
These charges included a $37.7 million impairment charge, with no
associated tax benefit, relating primarily to cost in excess of net assets
acquired (goodwill), and a $13.7 million charge for future store closings, the
impairment of certain assets in underperforming stores and at the Company's
distribution center, and the write-down of the cost of real estate held for
future expansion.
The charge for store closings was for future occupancy and leasehold
improvement costs related to planned store closings of approximately 11 stores,
including three closed in 1996 and five closed during the first nine months of
1997. Certain store and distribution center assets and real estate held for
future expansion were written down to their estimated realizable values.
In determining the amount of the asset reserves and impairment charges that
were made, the Company developed its best estimate of future operating cash
flows. Undiscounted cash flows were compared to the carrying value of the assets
to ascertain that an impairment had occurred. Estimated future cash flows,
excluding interest charges, then were discounted using an estimated 8.0%
discount rate. Sales were estimated to increase 2.0% annually, and operating
expenses were held constant as a percent of sales. These projections resulted in
discounted cash flows that supported the amounts recorded. These projections
were prepared solely to determine the appropriate amount of write-off, based on
assumptions that management believed to be reasonable at the time; however, no
assurance can be given that such projections will be accurate.
These analyses contained forward-looking information that involve a number
of risks, uncertainties and assumptions including, but not limited to, customer
demand and trends in the auto parts, products and accessories industry, related
inventory risks due to shifts in customer demand, the effect of economic
conditions, the impact of competitors' locations and pricing, difficulties with
respect to new technologies such as point-of-sales systems, parts catalogs,
supply constraints or difficulties, and the results of financing efforts. Should
one or more of these or other risks or uncertainties materialize or should the
underlying assumptions prove incorrect, actual outcomes could vary materially.
G. SUBSEQUENT EVENTS
On October 17, 1997, the Company entered into an agreement and plan of
merger (Merger Agreement) with Discount Auto Parts, Inc. (Discount). The Merger
Agreement contemplates that, subject to the satisfaction of certain conditions
set forth therein, including the approval and adoption of the Merger Agreement
by the requisite vote of the Company's stockholders, the Company would become a
wholly owned subsidiary of Discount. Pursuant to the Merger Agreement, each
outstanding share of the Company's Common Stock would be exchanged for 0.1485 of
a share of the common stock of Discount so long as the market price of
Discount's common stock is between $22.727 and $26.148 (based on the average
closing prices of Discount's common stock during the 10 trading days ending
three days before the Company's stockholders' meeting held to consider the
merger). If the average price of Discount's common stock during
F-8
<PAGE> 88
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)
the specified period is less than $22.727 but above $20.78, then the exchange
ratio will be increased to provide the Company's stockholders with $3.37 of
Discount's common stock for each share of the Company Common Stock, but if the
average price of Discount's common stock during the specified period is less
than $20.78, the Company's stockholders will receive 0.1624 of a share of
Discount's common stock for each outstanding share of the Company's Common
Stock. If the average price of Discount's common stock during the specified
period is more than $26.148, then the exchange ratio will be reduced to provide
the Company's stockholders with $3.88 of Discount's common stock for each share
of the Company Common Stock. The merger is intended to be a tax-free
reorganization and is intended to be accounted for as a purchase.
The board of directors of each company has approved the merger. In
connection with approving the Merger Agreement, the board of directors of the
Company also approved an amendment to the Company's stockholder rights plan to
prevent the proposed merger from triggering the stockholder rights plan. The
merger, which is expected to be completed by February 1998, is subject to
approval by the Company's stockholders and certain other conditions, including
the termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended.
F-9
<PAGE> 89
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hi-Lo Automotive, Inc.:
We have audited the accompanying consolidated balance sheets of Hi-Lo
Automotive, Inc. (a Delaware corporation), and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income (loss),
stockholders' equity and cash flows for each of the three years ended December
31, 1996. These financial statements and the schedule referred to below are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Hi-Lo Automotive, Inc., and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and cash flows for each of the three years ended December 31, 1996,
in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II which is a part of the
Registration Statement is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Houston, Texas
January 23, 1997
F-10
<PAGE> 90
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 1,180 $ 1,800
Accounts receivable --
Trade, net of allowance for doubtful accounts of $929
and $1,459............................................ 5,651 5,685
Other.................................................. 6,878 4,118
Inventories............................................... 91,401 96,900
Prepaids and other assets................................. 3,281 3,532
-------- --------
Total current assets.............................. 108,391 112,035
PROPERTY AND EQUIPMENT, net................................. 31,980 47,823
INTANGIBLE ASSETS AND OTHER................................. 3,717 39,115
-------- --------
$144,088 $198,973
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 750 $ 742
Accounts payable and accrued liabilities.................. 34,350 32,901
-------- --------
Total current liabilities......................... 35,100 33,643
LONG-TERM DEBT, net of current maturities................... 45,612 44,132
DEFERRED INCOME TAXES PAYABLE AND OTHER..................... 4,082 8,220
COMMITMENTS AND CONTINGENCIES...............................
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized, none issued................................ -- --
Common Stock, $.01 par value, 30,000,000 shares
authorized, 10,775,109 and 10,756,350 shares issued and
outstanding............................................ 108 108
Additional paid-in capital................................ 68,316 68,277
Retained earnings (deficit)............................... (9,130) 44,593
-------- --------
Total stockholders' equity........................ 59,294 112,978
-------- --------
$144,088 $198,973
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-11
<PAGE> 91
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1996 1995 1994
----------- ---------- ----------
<S> <C> <C> <C>
Sales..................................................... $ 248,599 $ 262,486 $ 235,384
Costs and expenses:
Cost of goods sold, buying and distribution............. 157,461 159,102 139,688
Operating, selling, general and administrative.......... 99,102 94,955 78,188
Provision for asset impairment and store closings....... 51,352 -- --
----------- ---------- ----------
Operating income (loss)................................... (59,316) 8,429 17,508
Interest expense.......................................... 4,268 4,145 2,201
Other expense, net........................................ 471 1,218 948
----------- ---------- ----------
Income (loss) before taxes on income...................... (64,055) 3,066 14,359
Taxes on income (benefit from loss)....................... (10,332) 1,378 5,226
----------- ---------- ----------
Net income (loss)......................................... $ (53,723) $ 1,688 $ 9,133
=========== ========== ==========
Earnings (loss) per common share:
Net income (loss) per common and common equivalent
share................................................ $ (4.99) $ .16 $ .85
=========== ========== ==========
Weighted average common and common equivalent shares
outstanding.......................................... 10,756,000 10,733,000 10,736,000
</TABLE>
See Notes to Consolidated Financial Statements.
F-12
<PAGE> 92
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT)
---------- ------ ---------- ---------
<S> <C> <C> <C> <C>
Balance, December 31, 1993............................. 10,702,516 $107 $67,913 $ 33,772
Issuance of Common Stock............................. 30,090 -- 251 --
Net income........................................... -- -- -- 9,133
---------- ---- ------- --------
Balance, December 31, 1994............................. 10,732,606 107 68,164 42,905
Issuance of Common Stock............................. 23,744 1 113 --
Net income........................................... -- -- -- 1,688
---------- ---- ------- --------
Balance, December 31, 1995............................. 10,756,350 108 68,277 44,593
Issuance of Common Stock............................. 18,759 -- 39 --
Net loss............................................. -- -- -- (53,723)
---------- ---- ------- --------
Balance, December 31, 1996............................. 10,775,109 $108 $68,316 $ (9,130)
========== ==== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-13
<PAGE> 93
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(53,723) $ 1,688 $ 9,133
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Depreciation and amortization........................ 6,588 6,737 6,262
Write-off of cost in excess of net assets acquired... 37,668 -- --
Provision for impairment of assets and other......... 21,774 -- --
Deferred tax provision (benefit)..................... (9,134) 829 392
(Gain) loss on sales of fixed assets................. (138) 96 (6)
Changes in assets and liabilities --
Accounts receivable, net of allowance for doubtful
accounts........................................ (4) 118 (3,018)
Inventories....................................... 2,694 (11,783) (13,972)
Prepaids and other assets......................... 380 (261) (344)
Accounts payable and other accrued liabilities.... (741) 8,566 6,374
Income taxes receivable/payable................... (3,206) (460) 941
-------- -------- --------
Total adjustments............................ 55,881 3,842 (3,371)
-------- -------- --------
Net cash provided by operating activities......... 2,158 5,530 5,762
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (4,301) (12,088) (22,005)
Proceeds from sale-leaseback of real estate............... -- 9,071 13,280
Payments for acquisitions, net of cash acquired........... -- (2,633) (6,567)
Proceeds from real estate sold............................ 240 -- --
-------- -------- --------
Net cash used in investing activities............. (4,061) (5,650) (15,292)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) debt, net..................... 1,598 869 8,800
Proceeds from issuance of Common Stock.................... 39 114 251
Repayments of capital lease obligations................... (110) (97) (219)
Payments for loan acquisition costs....................... (244) -- --
-------- -------- --------
Net cash provided by financing activities......... 1,283 886 8,832
-------- -------- --------
INCREASE (DECREASE) IN CASH................................. (620) 766 (698)
CASH AT BEGINNING OF YEAR................................... 1,800 1,034 1,732
-------- -------- --------
CASH AT END OF YEAR......................................... $ 1,180 $ 1,800 $ 1,034
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements
F-14
<PAGE> 94
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's business consists principally of the sale of automotive
aftermarket parts, products and accessories.
Consolidated financial statements include all subsidiaries. All significant
intercompany transactions have been eliminated.
Cash includes cash on hand, cash held in banks and certificates of deposit
with an initial maturity of three months or less.
Accounts receivable -- trade are for commercial accounts only and are
classified as current assets. Finance charges are not assessed on commercial
accounts.
Inventories are stated at the lower of cost or market. Substantially all
inventories represent finished goods, which are costed using the last-in,
first-out (LIFO) method.
Property and equipment are carried at cost. Maintenance, repairs and minor
renewals are expensed as incurred.
Impairment of long-lived assets reflects that effective January 1, 1995,
Statement of Financial Accounting Standards (SFAS) No. 121 was adopted.
Accordingly, in the event that facts and circumstances indicate that the cost in
excess of net assets acquired or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset would be compared to
the asset carrying amount to determine if a write-down to market value or
discounted cash flow value is required. See Note D for the impact of the
Company's impairment analysis for the year ended December 31, 1996.
Preopening expenses, which consist primarily of payroll and occupancy
costs, are expensed as incurred.
Depreciation and amortization are computed using the straight-line method
over the estimated useful lives of the assets or remaining lease lives,
whichever is shorter. Gains or losses on disposition of property and equipment
are included in income in the period of disposal. Intangible assets consisted
primarily of the cost in excess of net assets acquired (goodwill) which was
amortized on a straight-line basis over 40 years (see Note D). Loan costs are
amortized using the effective interest method over the life of the loan.
Deferred income taxes payable includes deferred taxes arising from the
recognition of revenues and expenses in different periods for income tax and
financial statement purposes.
Net income (loss) per common and common equivalent share is based on the
weighted average number of common shares outstanding and Common Stock options
which are dilutive, using the treasury stock method.
Risks due to use of estimates in the financial statements are inherent in
the preparation of financial statements in conformity with generally accepted
accounting principles and require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
B. SUPPLEMENTAL CASH FLOW INFORMATION
Cash interest paid was $4,082,000, $4,187,000 and $2,268,000 during the
years ended December 31, 1996, 1995 and 1994, respectively. Income tax payments
were $0, $1,039,000 and $4,701,000 during the years ended December 31, 1996,
1995 and 1994, respectively.
F-15
<PAGE> 95
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
C. INVENTORIES
The Company believes that the LIFO method of inventory valuation results in
a better matching of current costs and revenues. Current replacement cost of
inventories on hand was the same as recorded costs at December 31, 1996, 1995
and 1994.
D. IMPAIRMENT OF ASSETS
In the third quarter of 1996, the Company concluded that a short-term
recovery in sales volume and operating profits was unlikely. Therefore, the
Company, which incurred a net loss in the third quarter before such charges,
recorded pre-tax charges in the amount of $59.4 million.
These charges included a $37.7 million impairment charge, with no
associated tax benefit, relating primarily to cost in excess of net assets
acquired (goodwill), and a $13.7 million charge for future store closings, the
impairment of certain assets in underperforming stores and at the Company's
distribution center, and the write-down of the cost of real estate held for
future expansion.
The charge for store closings is for future occupancy and leasehold
improvement costs related to planned store closings of approximately 11 stores,
including three closed in 1996. Certain store and distribution center assets and
real estate held for future expansion were written down to their estimated
realizable values.
In determining the amount of the asset reserves and impairment charges that
were made, the Company developed its best estimate of future operating cash
flows. Undiscounted cash flows were compared to the carrying value of the assets
to ascertain that an impairment had occurred. Estimated future cash flows,
excluding interest charges, then were discounted using an estimated 8.0%
discount rate. Sales were estimated to increase 2.0% annually, and operating
expenses were held constant as a percent of sales. These projections resulted in
discounted cash flows that supported the amounts recorded. These projections
were prepared solely to determine the appropriate amount of write-off, based on
assumptions that management believed to be reasonable at the time; however, no
assurance can be given that such projections will be accurate.
These analyses contain forward-looking information that involve a number of
risks, uncertainties and assumptions including, but not limited to, customer
demand and trends in the auto parts, products and accessories industry, related
inventory risks due to shifts in customer demand, the effect of economic
conditions, the impact of competitors' locations and pricing, difficulties with
respect to new technologies such as point-of-sales systems, parts catalogs,
supply constraints or difficulties and the results of financing efforts. Should
one or more of these or other risks or uncertainties materialize or should the
underlying assumptions prove incorrect, actual outcomes could vary materially.
E. PROPERTY AND EQUIPMENT
The Company's property and equipment consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
ASSET -------------------
LIFE 1996 1995
- ---------- -------- --------
<S> <C> <C> <C>
5-30 years Land, buildings and improvements...................... $ 38,805 $ 37,078
3-15 years Furniture and equipment............................... 36,738 35,682
Construction in progress.............................. 1,105 2,347
-------- --------
76,648 75,107
Accumulated depreciation and amortization............. (44,668) (27,284)
-------- --------
$ 31,980 $ 47,823
======== ========
</TABLE>
Land, buildings and improvements included $1,975,000 leased under capital
leases at December 31, 1996 and 1995. Accumulated amortization under these
arrangements aggregated $1,738,000, $1,628,000 and
F-16
<PAGE> 96
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$1,531,000 at December 31, 1996, 1995 and 1994, respectively. Depreciation and
amortization of these assets was $5,673,000, $5,558,000 and $5,197,000 for the
years ended December 31, 1996, 1995 and 1994, respectively.
Accumulated depreciation and amortization of these assets in 1996 was also
increased by $12,727,000 as a result of the impairment previously discussed in
Note D.
F. INTANGIBLE ASSETS AND OTHER
The Company's intangible assets and other consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------ -------
<S> <C> <C>
Cost in excess of net assets acquired....................... $ -- $46,665
Loan acquisition costs...................................... 244 200
Other, net.................................................. 3,492 498
------ -------
3,736 47,363
Accumulated amortization.................................... (19) (8,248)
------ -------
$3,717 $39,115
====== =======
</TABLE>
As discussed in Note D to the Consolidated Financial Statements, the
Company evaluated the carrying value of its cost in excess of net assets
acquired and concluded an impairment occurred during 1996. Accordingly, those
assets were written off. The other assets are primarily real estate held for
sale and deferred income tax assets.
Amortization of cost in excess of net assets acquired was $872,000,
$1,148,000 and $1,036,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Amortization of loan acquisition costs was $43,000, $31,000 and $29,000 for
the years ended December 31, 1996, 1995 and 1994, respectively. In the third
quarter of 1996, the unamortized portion of the loan acquisition costs
associated with the Company's revolving credit agreement with prior lenders was
written off.
G. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
The Company's accounts payable and accrued liabilities consisted of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
Accounts payable............................................ $16,685 $19,823
Accrued salaries and bonuses................................ 3,294 2,635
Accrued property taxes...................................... 4,294 4,009
Other accrued liabilities................................... 10,077 6,434
------- -------
$34,350 $32,901
======= =======
</TABLE>
The Company is insured for employee indemnity, automobile, general and
product liability losses through a risk retention program. The Company accrues
for the estimated losses occurring from both asserted and unasserted claims. The
estimate of the liability for unasserted claims arising from unreported
incidents is based on an analysis of historical claims data.
F-17
<PAGE> 97
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
H. LEASES
The Company leases store locations, certain equipment and office space
under noncancelable long-term capital and operating leases which extend through
2014.
Total rental expense on all operating leases was approximately $12,939,000,
$12,043,000 and $7,967,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
As of December 31, 1996, minimum commitments on all noncancelable long-term
leases were as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDED DECEMBER 31, LEASES LEASES
- ----------------------- ------- ---------
<S> <C> <C>
1997........................................................ $144 $13,678
1998........................................................ 104 12,317
1999........................................................ 25 9,234
2000........................................................ -- 7,881
2001........................................................ -- 7,516
Thereafter.................................................. -- 37,898
---- -------
Total minimum lease payments................................ 273 $88,524
=======
Amount representing interest................................ 36
----
Present value of net minimum lease payments................. 237
Less -- Current portion................................... 118
----
Capital lease obligations................................... $119
====
</TABLE>
I. DEBT
Long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
Notes payable to a bank..................................... $44,230 $42,000
Long-term debt.............................................. 1,895 2,527
Capital lease obligations................................... 237 347
------- -------
46,362 44,874
Less -- Current maturities.................................. 750 742
------- -------
$45,612 $44,132
======= =======
</TABLE>
The long-term debt outstanding at December 31, 1996, matures as follows:
$750,000 in 1997, $95,000 in 1998 and $45,517,000 in 1999. At December 31, 1996,
the weighted average interest rate on the notes payable to a bank was 7.8%.
On October 23, 1996, the Company entered into a financing agreement with a
new lender. Initial funding under this financing agreement was used to repay
amounts outstanding under the Company's prior credit facility. The new financing
agreement provides for a borrowing of up to $60.0 million of availability under
a revolving credit facility, which matures October 22, 1999, with annual
renewals at the option of the Company and the lender. Credit availability is
limited to 60% of the value of saleable inventory and 85% of accounts
receivable, subject to certain adjustments and reserves which may be made at the
discretion of the lender. The facility is secured by all inventories,
receivables and fixed assets of the Company and its subsidiaries. The borrowings
may be priced, at the Company's option, at the lender's prime rate, plus 1/4 of
1%, or London Interbank Offered Rates (LIBOR) plus 2.25%. The Company pays a
commitment fee of 3/8 of 1% per annum
F-18
<PAGE> 98
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
on all unused portions of the credit facility. Loan covenants relate to the
Company's net worth and cash flow; restrict capital expenditures to $6.0 million
for 1996, $5.9 million for 1997 and $5.0 million for 1998 and 1999; and restrict
operating lease payments to $16.0 million per annum through 1999. The Company
was in compliance with this new financing agreement as of December 31, 1996.
At December 31, 1996, the Company had $44.2 million outstanding under the
credit facility and total unutilized credit facilities of approximately $7.4
million.
The Company has established irrevocable letters of credit totaling $900,000
as security for various insurance contracts.
The book values of cash, trade accounts receivable and accounts payable
approximate their fair values principally because of the short-term maturities
of these instruments. The estimated fair value of long-term debt approximates
the book value as the debt is priced based upon a floating rate.
J. INCOME TAXES
Federal and state income tax provision (benefit) consisted of the following
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- ------ ------
<S> <C> <C> <C>
Current provision (benefit)................................ $ (2,948) $ 549 $4,834
Deferred provision (benefit)............................... (7,384) 829 392
-------- ------ ------
$(10,332) $1,378 $5,226
======== ====== ======
</TABLE>
A reconciliation of the statutory federal income tax rate to the effective
tax rate follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Income tax, statutory rate.................................. 34% 34% 34%
Amortization of cost in excess of net assets acquired....... (50) 10 2
Other, net.................................................. -- 1 --
---- --- ---
Income tax, effective rate.................................. (16)% 45% 36%
==== === ===
</TABLE>
Deferred income taxes resulted from temporary differences as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
------- -------
<S> <C> <C>
Inventories................................................. $ (757) $ (294)
Property and equipment...................................... (2,198) 3,990
Intangible assets and other................................. 235 2,077
Accounts payable and accrued liabilities.................... (1,828) (1,187)
------- -------
Net (asset) liability....................................... $(4,548) $ 4,586
======= =======
</TABLE>
K. STOCKHOLDERS' EQUITY
The Company has one stock option plan (the 1990 Stock Option Plan)
originally adopted on December 11, 1990, and amended thereafter, for which a
total of 1,400,000 shares of Common Stock has been reserved for issuance;
474,611 of those shares were available for grant to directors and associates of
the Company at December 31, 1996. The 1990 Stock Option Plan provides for the
granting of both incentive and nonqualified stock options. Options granted under
the 1990 Stock Option Plan have a maximum term of 10
F-19
<PAGE> 99
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
years and are exercisable under the terms of the respective option agreements at
fair market value of the Common Stock at the date of grant. Payment of the
exercise price must be made in cash or, in whole or in part, by delivery of
shares of the Company's Common Stock.
Incentive stock options for 709,175 shares and nonqualified stock options
for 176,491 shares of the Company's Common Stock were outstanding at December
31, 1996. Additional information with respect to the 1990 Stock Option Plan is
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
--------------------------------
NUMBER OPTIONS
OF SHARES PRICE PER SHARE EXERCISABLE
--------- -------------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1993............................... 739,263 $ 6.00 -- 19.88 363,011
Granted................................................ 331,400 10.25 -- 12.94 --
Became exercisable..................................... -- 6.00 -- 19.88 207,352
Exercised.............................................. (1,000) 9.63 (1,000)
Canceled............................................... (161,097) 10.25 -- 19.31 (76,357)
--------- ------ ----- --------
Balance, December 31, 1994............................... 908,566 6.00 -- 19.88 493,006
Granted................................................ 488,000 4.94 -- 10.63 --
Became exercisable..................................... -- 6.00 -- 19.88 178,200
Exercised.............................................. (1,920) 10.25 (1,920)
Canceled............................................... (132,480) 8.06 -- 19.88 (73,860)
--------- ------ ----- --------
Balance, December 31, 1995............................... 1,262,166 4.94 -- 19.31 595,426
Granted................................................ 75,800 3.31 -- 5.44 --
Became exercisable..................................... -- 4.94 -- 19.31 255,760
Exercised.............................................. -- --
Canceled............................................... (452,300) 3.31 -- 19.31 (351,800)
--------- ------ ----- --------
Balance, December 31, 1996............................... 885,666 3.31 -- 19.31 499,386
========= ========
</TABLE>
At December 31, 1996, the Company has two stock-based compensation plans,
its 1990 Stock Option Plan, which is described above, and its 1991 Associate
Stock Purchase Plan, which is described in Note L below. The Company applies
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations in accounting for its plans. Accordingly,
no compensation cost has been recognized for its 1990 Stock Option Plan and its
stock purchase plan. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with the method of SFAS No. 123,
Accounting for Stock-Based Compensation, the Company's net income (loss) and net
income (loss) per share would have been reduced to the pro forma amounts
indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1995
-------- ------
<S> <C> <C> <C>
Net income (loss) As reported................................. $(53,723) $1,688
Pro forma................................... (54,178) 1,391
Net income (loss) per share As reported................................. (4.99) .16
Pro forma................................... (5.04) .13
</TABLE>
F-20
<PAGE> 100
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's 1990 Stock Option Plan as of
December 31, 1996, 1995 and 1994, and changes during the years ending on those
dates is presented below:
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
SHARES WEIGHTED AVERAGE SHARES WEIGHTED AVERAGE
FIXED OPTIONS (000) EXERCISE PRICE (000) EXERCISE PRICE
- ------------- ------ ----------------- ------ -----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year...... 1,262 $10.54 909 $12.13
Granted............................... 76 4.50 488 7.99
Exercised............................. -- -- (2) 10.25
Canceled.............................. (452) 11.72 (133) 12.12
------ -----
Outstanding at end of year............ 886 9.41 1,262 10.54
====== =====
Options exercisable at year-end....... 499 595
Weighted average fair value of options
granted during the year............. $10.26 $7.99
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- ------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<C> <C> <C> <C> <C> <C> <C>
1) $ 3.31-5.94 101,900 4.72years $ 5.08 20,820 $ 5.78
2) 6.00 60,666 4.0 6.00 60,666 6.00
3) 8.06-12.95 584,500 3.41 9.10 299,940 9.54
4) 13.13-19.88 138,600 1.65 15.42 117,960 16.41
------- -------
3.31-19.88 885,666 3.33 9.41 499,386 10.57
======= =======
</TABLE>
The fair value of each grant was estimated on the date of the grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996, 1995 and 1994, respectively: dividend yield
of nil for all years; expected volatility of 46%, 49% and 32%; risk-free
interest rates of 6.5% for all years; and expected lives of 5.5, 5.5 and 5.5
years.
PREFERRED SHARE PURCHASE RIGHTS
On August 23, 1996, the Company's board of directors adopted a stockholder
rights plan (the Rights Plan) to help assure that all of the Company's
stockholders receive fair and equal treatment in the event of certain changes of
control of the Company. The Rights Plan was effected by issuing one preferred
share purchase right for each outstanding share of Common Stock. These rights
are not currently exercisable and will become exercisable only upon the
occurrence of specified events related to a change in control of the Company.
When exercisable, each right will entitle the holder to purchase 1/1000 of a
share of the Company's Series A Junior Participating Preferred Stock at an
initial exercise price of $14.00 per right. The rights expire on September 2,
2006, unless extended or redeemed.
L. ASSOCIATE STOCK PURCHASE PLAN
The Company's 1991 Associate Stock Purchase Plan (the Purchase Plan)
assists associates in acquiring stock ownership in the Company. Under the
Purchase Plan, an eligible associate authorizes payroll deductions to be made
during a 12-month period (the Option Period), which amounts are used at the end
of the Option Period to acquire shares of Common Stock at 85% of the fair market
value of the Common Stock on the first or the last day of the Option Period,
whichever is lower. Associates who have completed one year of service as of the
commencement date of an applicable Option Period may participate in the Purchase
Plan. Associates have discretion to determine the amount of their payroll
deduction under the Purchase Plan, subject to certain
F-21
<PAGE> 101
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
limitations. The Purchase Plan terminates on April 4, 2001, and the maximum
number of shares of Common Stock that may be issued under the Purchase Plan is
175,000.
At the close of the 1993 Option Period, an aggregate of 15,920 shares of
Common Stock was acquired by 123 participants at a price of $8.40 per share. At
the close of the 1994 Option Period, an aggregate of 29,090 shares of Common
Stock was acquired by 137 participants at a price of $8.29 per share. At the
close of the 1995 Option Period, an aggregate of 22,169 shares of Common Stock
was acquired by 71 participants at a price of $4.36 per share. At the close of
the 1996 Option Period, an aggregate of 18,759 shares of Common Stock was
acquired by 31 associates at a price of $2.13 per share, and 42,730 shares
remained available for issuance under the Purchase Plan.
M. COMMITMENTS AND CONTINGENCIES
INSURANCE
The Company maintains insurance for on-the-job injuries to its associates
and other coverages for normal business risks. A substantial portion of the
Company's current- and prior-year insurance coverages are "high deductible"
policies in which the Company, in many cases, is responsible for the payment of
incurred claims up to specified individual and aggregate limits, over which a
third-party insurer is contractually liable for any additional payment of such
claims. Accordingly, the Company bears certain economic risks related to these
coverages. On a continual basis, and as of each balance sheet date, the Company
records an accrual equal to the estimated costs expected to result from incurred
claims plus an estimate of claims incurred but not reported as of such date
based on the best available information at such date. However, the nature of
these claims is such that actual development of the claims may vary from the
estimated accruals. All changes in the accrual estimates are accounted for on a
prospective basis and could have a significant impact on the Company's financial
position or results of operations.
LITIGATION
The Company is a party to various legal proceedings, which involve routine
claims and lawsuits arising in the normal course of the Company's business. The
Company does not believe that such claims and lawsuits, individually or in the
aggregate, will have a material adverse effect on the Company's results of
operations and financial position.
PROFIT-SHARING AND SALARY DEFERRAL PLAN
The Company has a combination profit-sharing and salary deferral plan
(401(k) plan) for the benefit of its associates. The 401(k) plan covers
substantially all associates who have completed one year of service and are at
least 19 years old. Under the salary deferral portion of the 401(k) plan,
participants may defer up to 15% of their eligible compensation and the Company
may, at the discretion of the board of directors, elect to match a portion of
the deferred compensation. During the years ended December 31, 1996, 1995 and
1994, associates deferred $632,000, $630,000 and $750,000, respectively, and the
Company made matching contributions totaling $127,000, $130,000, and $140,000,
respectively.
Under the profit-sharing portion of the 401(k) plan, the Company may, at
the discretion of the board of directors, contribute to the 401(k) plan from its
profits. The Company recorded as an expense profit-sharing contributions of $0,
$0 and $316,000 for the years ended December 31, 1996, 1995 and 1994,
respectively.
INCENTIVE COMPENSATION PLANS
The Company has various incentive compensation plans covering officers and
other key associates which are based upon the achievement of specified earnings
goals. All awards are payable in cash. Charges to
F-22
<PAGE> 102
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
expense for current and future distributions under the plans amounted to
$254,000, $168,000, and $1,030,000 for the years ended December 31, 1996, 1995
and 1994, respectively.
N. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summarized quarterly financial data for the Company for the years ended
December 31, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
1996
Sales................................. $ 60,835 $ 67,092 $ 64,396 $ 56,276
Gross profit.......................... 23,762 26,008 19,731 21,637
Net income (loss)..................... (431) 185 (51,659) (1,818)
========== ========== ========== ==========
Net income (loss) per weighted average
common and common equivalent
share.............................. $ (.04) $ .02 $ (4.80) $ (.17)
========== ========== ========== ==========
Weighted average common and common
equivalent shares outstanding...... 10,756,000 10,756,000 10,756,000 10,756,000
1995
Sales................................. $ 60,236 $ 70,996 $ 72,198 $ 59,056
Gross profit.......................... 24,709 28,224 27,641 22,810
Net income (loss)..................... 678 1,560 636 (1,186)
========== ========== ========== ==========
Net income (loss) per weighted average
common and common equivalent
share.............................. $ .06 $ .15 $ .06 $ (.11)
========== ========== ========== ==========
Weighted average common and common
equivalent shares outstanding......... 10,757,000 10,754,000 10,753,000 10,734,000
</TABLE>
The Company's business is seasonal in nature, primarily as a result of the
impact of weather conditions. Sales and gross profits have historically been
higher in the second and third quarters (April through September) of each year
than in the first and fourth quarters. Weather extremes tend to enhance sales by
causing a higher incidence of parts failures and increasing sales of seasonal
products. Rainy weather, however, tends to reduce sales by causing deferral of
elective maintenance.
O. BUSINESS COMBINATIONS
On November 1, 1994, the Company purchased inventory and operating assets
and assumed certain lease liabilities of Wesco, a division of Reddi Brake Supply
Company, Inc. (Reddi Brake). Leases and inventory for eight auto parts stores
were acquired. These stores serve the retail and commercial automotive
aftermarket in the greater Los Angeles, California, area. The Company paid
approximately $9.8 million in cash and notes and assumed certain lease
obligations of the Wesco division. Approximately $6.6 million of the purchase
price was paid in cash, which was financed under the Company's credit agreement
with commercial banks. The balance of the purchase price is payable over up to
five years. From November 1, 1996, through October 31, 1999, Reddi Brake will
have the right to convert $1,263,347 of the deferred portion of the purchase
price into 93,859 shares of the Company's Common Stock.
F-23
<PAGE> 103
HI-LO AUTOMOTIVE, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited pro forma summary presents information as if the
acquisition had occurred at January 1, 1994. The pro forma information is
provided for information purposes only. It is based on historical information
and does not necessarily reflect the actual results that would have occurred nor
is it necessarily indicative of future results of operations of the combined
enterprise (in thousands except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
-----------------
(UNAUDITED)
<S> <C>
Pro forma sales............................................. $255,932
Pro forma net income........................................ 8,738
Pro forma net income per common and common equivalent
share..................................................... .81
</TABLE>
F-24
<PAGE> 104
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AMONG
DISCOUNT AUTO PARTS, INC.,
HLA ACQUISITION, INC.
AND
HI-LO AUTOMOTIVE, INC.
Dated as of October 17, 1997
<PAGE> 105
TABLE OF CONTENTS
AGREEMENT AND PLAN OF MERGER
<TABLE>
<S> <C> <C>
ARTICLE I
THE MERGER................................................................
Section 1.1 The Merger..................................................
Section 1.2 Closing.....................................................
Section 1.3 Effective Time..............................................
Section 1.4 Effects of the Merger.......................................
Section 1.5 Charter and By-laws.........................................
Section 1.6 Directors...................................................
ARTICLE II
EFFECT OF THE MERGER ON THE STOCK OF THE CONSTITUENT CORPORATIONS;
EXCHANGE OF CERTIFICATES..................................................
Section 2.1 Effect on Stock.............................................
Section 2.2 Exchange of Certificates....................................
Section 2.3 Treatment of Stock Options..................................
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HI/LO...................................
Section 3.1 Organization, Qualification, Etc............................
Section 3.2 Capital Stock...............................................
Section 3.3 Corporate Authority Relative to this Agreement; No
Violation; No Conflict......................................
Section 3.4 Reports and Financial Statements; Corporate Records.........
Section 3.5 No Undisclosed Liabilities..................................
Section 3.6 No Violation of Law.........................................
Section 3.7 Environmental Laws and Regulations..........................
Section 3.8 Employee Matters; ERISA.....................................
Section 3.9 Absence of Certain Changes or Events........................
Section 3.10 Investigations; Litigation..................................
Section 3.11 Proxy Statement/Prospectus; Registration Statement; Other
Information.................................................
Section 3.12 Hi/Lo Rights Plan...........................................
Section 3.13 Takeover Laws...............................................
Section 3.14 Tax Matters.................................................
Section 3.15 Opinion of Financial Advisor................................
Section 3.16 Required Vote of Hi/Lo Stockholders.........................
Section 3.17 Labor Matters...............................................
Section 3.18 Certain Agreements..........................................
Section 3.19 Title to Assets; Liens......................................
Section 3.20 Insurance...................................................
Section 3.21 Intellectual Property.......................................
Section 3.22 Significant Vendor Arrangements.............................
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DISCOUNT AND SUB........................
Section 4.1 Organization, Qualification, Etc............................
Section 4.2 Capital Stock...............................................
Section 4.3 Corporate Authority Relative to this Agreement; No
Violation; No Conflict......................................
Section 4.4 Reports and Financial Statements............................
Section 4.5 No Undisclosed Liabilities..................................
</TABLE>
A-i
<PAGE> 106
Section 4.6 No Violation of Law.........................................
Section 4.7 Environmental Laws and Regulations..........................
Section 4.8 Employee Matters; ERISA.....................................
Section 4.9 Absence of Certain Changes or Events........................
Section 4.10 Investigations; Litigation..................................
Section 4.11 Proxy Statement/Prospectus; Registration Statement; Other
Information.................................................
Section 4.12 Lack of Ownership of Hi/Lo Common Stock.....................
Section 4.13 Tax Matters.................................................
Section 4.14 Opinion of Financial Advisor................................
Section 4.15 Sub's Operations............................................
Section 4.16 Labor Matters...............................................
Section 4.17 Certain Agreements..........................................
Section 4.18 Title to Assets; Liens......................................
Section 4.19 Insurance...................................................
Section 4.20 Intellectual Property.......................................
ARTICLE V
COVENANTS AND AGREEMENTS..................................................
Section 5.1 Conduct of Business by Hi/Lo or Discount....................
Section 5.2 Investigation...............................................
Section 5.3 Cooperation.................................................
Section 5.4 Affiliate Agreements........................................
Section 5.5 Employee Benefit Plans......................................
Section 5.6 Filings; Other Action.......................................
Section 5.7 Further Assurances..........................................
Section 5.8 No Solicitation.............................................
Section 5.9 Public Announcements........................................
Section 5.10 Indemnification and Insurance...............................
Section 5.11 Additional Reports..........................................
Section 5.12 Stockholder Approval........................................
Section 5.13 Purchase Accounting.........................................
Section 5.14 Amendments to Change of Control Agreements..................
Section 5.15 Notifications...............................................
Section 5.16 Indemnifications............................................
ARTICLE VI
CONDITIONS TO THE MERGER..................................................
Section 6.1 Conditions to Each Party's Obligation to Effect the
Merger......................................................
Section 6.2 Conditions to Obligations of Hi/Lo to Effect the Merger.....
Section 6.3 Conditions to Obligations of Discount to Effect the
Merger......................................................
ARTICLE VII
TERMINATION, WAIVER, AMENDMENT AND CLOSING................................
Section 7.1 Termination or Abandonment..................................
Section 7.2 Effect of Termination.......................................
Section 7.3 Amendment or Supplement.....................................
Section 7.4 Extension of Time, Waiver, Etc..............................
ARTICLE VIII
MISCELLANEOUS.............................................................
Section 8.1 No Survival of Representations and Warranties...............
Section 8.2 Expenses....................................................
A-ii
<PAGE> 107
Section 8.3 Counterparts; Effectiveness.................................
Section 8.4 Governing Law...............................................
Section 8.5 Notices.....................................................
Section 8.6 Assignment; Binding Effect..................................
Section 8.7 Severability................................................
Section 8.8 Enforcement of Agreement....................................
Section 8.9 Miscellaneous...............................................
Section 8.10 Headings....................................................
Section 8.11 Subsidiaries; Affiliates....................................
Section 8.12 Finders or Brokers..........................................
A-iii
<PAGE> 108
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of October 17, 1997 (this
"Agreement"), is among DISCOUNT AUTO PARTS, INC. ("Discount"), HLA ACQUISITION,
INC. ("Sub") and HI-LO AUTOMOTIVE, INC. ("Hi/Lo").
WHEREAS, Hi/Lo is a corporation duly organized and existing under the laws
of the State of Delaware, Discount is a corporation duly organized and existing
under the laws of the State of Florida and Sub is a corporation duly organized
and existing under the laws of the State of Delaware;
WHEREAS, the respective Boards of Directors of Discount, Sub and Hi/Lo have
approved and have declared advisable the merger of Sub with and into Hi/Lo (the
"Merger"), upon the terms and subject to the conditions set forth herein,
whereby each issued and outstanding share of Hi/Lo Common Stock (as defined in
Section 3.2) not owned directly by Hi/Lo or Discount will be converted into the
right to receive a fraction of a share of Discount Common Stock (as defined in
Section 4.2) as more particularly set forth herein, and have determined that the
Merger and the other transactions contemplated hereby are consistent with, and
in furtherance of, their respective business strategies and goals and in the
best interests of their respective stockholders;
WHEREAS, the parties desire to make certain representations, warranties,
covenants and agreements in connection with the Merger and also to prescribe
various conditions to the Merger; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
will qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code").
NOW, THEREFORE, in consideration of the mutual agreements, provisions and
covenants contained in this Agreement, the parties hereby agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the Delaware General Corporation
Law (the "DGCL"), Sub shall be merged with and into Hi/Lo at the Effective Time
(as defined in Section 1.3). Following the Effective Time, the separate
corporate existence of Sub shall cease and Hi/Lo shall be the surviving
corporation (the "Surviving Corporation") and shall succeed to and assume all
the rights and obligations of Sub in accordance with the DGCL.
Section 1.2 Closing. The closing of the Merger (the "Closing") will take
place at a location mutually acceptable to the parties hereto at 10:00 a.m. on a
date to be specified by the parties (the "Closing Date"), which shall be no
later than the first business day after satisfaction or waiver of the conditions
set forth in Article VII, unless another time or date is agreed to by the
parties hereto.
Section 1.3 Effective Time. Subject to the provisions of this Agreement,
as soon as practicable on or after the Closing Date, the parties shall file a
certificate of merger or other appropriate documents (in any such case, the
"Certificate of Merger") executed in accordance with the relevant provisions of
the DGCL and shall make all other filings or recordings required under the DGCL.
The Merger shall become effective at such time as the Delaware Secretary of
State accepts the Certificate of Merger for record, or at such subsequent date
or time as Discount and Hi/Lo shall agree and specify in the Certificate of
Merger (the time the Merger becomes effective being hereinafter referred to as
the "Effective Time").
Section 1.4 Effects of the Merger. The Merger shall have the effects set
forth in the applicable provisions of the DGCL.
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Section 1.5 Charter and By-laws. (a) The charter of Hi/Lo, as in effect
immediately prior to the execution of this Agreement, shall be the charter of
the Surviving Corporation until thereafter changed or amended as provided
therein or by applicable law.
(b) The by-laws of Hi/Lo, as in effect immediately prior to the execution
of this Agreement, shall be the by-laws of the Surviving Corporation until
thereafter changed or amended as provided therein or by applicable law.
Section 1.6 Directors and Officers. The directors of Sub at the Effective
Time shall be the directors of the Surviving Corporation and the officers of
Hi/Lo at the Effective Time shall be the officers of the Surviving Corporation,
in each case until their respective successors are duly elected and qualified.
ARTICLE II
EFFECT OF THE MERGER ON THE STOCK OF THE
CONSTITUENT CORPORATIONS; EXCHANGE OF CERTIFICATES
Section 2.1 Effect on Stock. As of the Effective Time, by virtue of the
Merger and without any action on the part of Sub, Hi/Lo or the holders of any
securities of Hi/Lo, Discount or Sub:
(a) Cancellation of Hi/Lo-Owned Stock and Discount-Owned Stock. Each
share of Hi/Lo Common Stock that is owned directly by Hi/Lo or by Discount
shall automatically be canceled and retired and shall cease to exist, and
no consideration shall be delivered in exchange therefor.
(b) Conversion of Hi/Lo Common Stock. Subject to Section 2.2(e), each
issued and outstanding share of Hi/Lo Common Stock (other than shares to be
canceled in accordance with Section 2.1(a)) shall be converted into and
represent a fully paid and nonassessable fraction of a share of Discount
Common Stock equal to the Exchange Ratio (as defined and determined below)
(the "Merger Consideration"). As of the Effective Time, all such shares of
Hi/Lo Common Stock shall no longer be outstanding and shall automatically
be canceled and retired and shall cease to exist, and each holder of a
certificate or certificates which immediately prior to the Effective Time
represented outstanding shares of Hi/Lo Common Stock (the "Certificates")
shall cease to have any rights with respect thereto, except the right to
receive (x) certificates representing the number of whole shares of
Discount Common Stock into which such shares have been converted ("Discount
Certificates"), (y) certain dividends and other distributions in accordance
with Section 2.2(c) and (z) cash in lieu of fractional shares of Discount
Common Stock in accordance with Section 2.2(e), without interest. The
"Exchange Ratio" shall be equal to 0.1485; provided, however, that (i) if
the Discount Average Share Price is greater than $26.148, then the Exchange
Ratio shall be equal to (rounded to the near ten-thousandth) the product of
(x) 0.1485 times (y) the quotient of $26.148 divided by the Discount
Average Share Price, or (ii) if the Discount Average Share Price is less
than $22.727, then the Exchange Ratio shall be equal to the lesser of (1)
0.1624 and (2) the product of (x) 0.1485 times (y) the quotient of $22.727
divided by the Discount Average Share Price. The term "Discount Average
Share Price" shall mean the average of the closing sales prices of Discount
Common Stock (or, if Discount Common Stock should not trade on any trading
day, the average of the bid and the asked prices therefor on such day),
rounded to the nearest thousandth (.0005 being rounded to .001), as
reported on the New York Stock Exchange ("NYSE") Composite Tape on each of
the last ten consecutive trading days ending on the third trading day prior
to the meeting of Hi/Lo Stockholders held for the purpose of approving the
Merger (the "Hi/Lo Meeting").
(c) Conversion of Common Stock of Sub. Each issued and outstanding
share of common stock, par value $1.00 per share, of Sub shall be converted
into one validly issued, fully paid and nonassessable share of common stock
of the Surviving Corporation.
Section 2.2 Exchange of Certificates. (a) Exchange Agent. At or prior to
the Effective Time, Discount shall enter into an agreement with such bank or
trust company as may be designated by Discount and as shall be reasonably
satisfactory to Hi/Lo (the "Exchange Agent"), which shall provide that Discount
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shall deposit with the Exchange Agent as of the Effective Time, for the benefit
of the holders of shares of Hi/Lo Common Stock, for exchange in accordance with
this Article II, through the Exchange Agent, Discount Certificates representing
the number of whole shares of Discount Common Stock (such shares of Discount
Common Stock, together with any dividends or distributions with respect thereto
with a record date after the Effective Time, any cash payable in lieu of any
fractional shares of Discount Common Stock being hereinafter referred to as the
"Exchange Fund") issuable pursuant to Section 2.1 in exchange for outstanding
shares of Hi/Lo Common Stock.
(b) Exchange Procedures. Promptly after the Effective Time, but in
any event no later than five business days thereafter, the Exchange Agent
shall mail to each holder of record of a Certificate whose shares were
converted into the Merger Consideration, pursuant to Section 2.1, (i) a
letter of transmittal (which shall specify that delivery shall be effected,
and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent and shall be in such
form and have such other customary provisions as Discount and Hi/Lo may
reasonably specify) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for the Merger Consideration.
Upon surrender of a Certificate for cancellation to the Exchange Agent,
together with such letter of transmittal, duly executed, and such other
documents as may reasonably be required by the Exchange Agent, the holder
of such Certificate shall be entitled to receive in exchange therefor a
Discount Certificate representing that number of whole shares of Discount
Common Stock which such holder has the right to receive pursuant to the
provisions of this Article II, certain dividends or other distributions in
accordance with Section 2.2(c) and cash in lieu of any fractional share in
accordance with Section 2.2(e), and the Certificate so surrendered shall
forthwith be canceled. In the event of a transfer of ownership of Hi/Lo
Common Stock which is not registered in the transfer records of Hi/Lo, a
Discount Certificate representing the proper number of shares of Discount
Common Stock may be issued to a person other than the person in whose name
the Certificate so surrendered is registered if such Certificate shall be
properly endorsed or otherwise be in proper form for transfer and the
person requesting such issuance shall pay any transfer or other nonincome
taxes required by reason of the issuance of shares of Discount Common Stock
to a person other than the registered holder of such Certificate or
establish to the satisfaction of Discount that such tax has been paid or is
not applicable. Until surrendered as contemplated by this Section 2.2, each
Certificate shall be deemed at any time after the Effective Time to
represent only the right to receive upon such surrender Discount
Certificates representing the number of whole shares of Discount Common
Stock into which the shares of Hi/Lo Common Stock formerly represented by
such Certificate have been converted, certain dividends or other
distributions in accordance with Section 2.2(c) and cash in lieu of any
fractional share in accordance with Section 2.2(e). No interest will be
paid or will accrue on any cash payable to holders of Certificates pursuant
to the provisions of this Article II.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to Discount Common Stock with a record
date after the Effective Time shall be paid to the holder of any
unsurrendered Certificate with respect to the shares of Discount Common
Stock represented thereby, and no cash payment in lieu of fractional shares
shall be paid to any such holder pursuant to Section 2.2(e), and all such
dividends, other distributions and cash in lieu of fractional shares of
Discount Common Stock shall be paid by Discount to the Exchange Agent and
shall be included in the Exchange Fund, in each case until the surrender of
such Certificate in accordance with this Article II. Subject to the effect
of applicable escheat or similar laws, following surrender of any such
Certificate there shall be paid to the holder of the Discount Certificate
representing whole shares of Discount Common Stock issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount
of dividends or other distributions with a record date after the Effective
Time theretofore paid with respect to such whole shares of Discount Common
Stock and the amount of any cash payable in lieu of a fractional share of
Discount Common Stock to which such holder is entitled pursuant to Section
2.2(e) and (ii) at the appropriate payment date, the amount of dividends or
other distributions with a record date after the Effective Time but prior
to such surrender and with a payment date subsequent to such surrender
payable with respect to such whole shares of Discount Common Stock.
Discount shall make available to the Exchange Agent cash for these
purposes.
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(d) No Further Ownership Rights in Hi/Lo Common Stock. All shares of
Discount Common Stock issued upon the surrender for exchange of
Certificates in accordance with the terms of this Article II (including any
cash paid pursuant to this Article II) shall be deemed to have been issued
(and paid) in full satisfaction of all rights pertaining to the shares of
Hi/Lo Common Stock theretofore represented by such Certificates, subject,
however, to the Surviving Corporation's obligation to pay any dividends or
make any other distributions with a record date prior to the Effective Time
which may have been authorized or made by Hi/Lo on such shares of Hi/Lo
Common Stock which remain unpaid at the Effective Time, and there shall be
no further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of Hi/Lo Common Stock which were
outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation or
the Exchange Agent for any reason, they shall be canceled and exchanged as
provided in this Article II, except as otherwise provided by law.
(e) No Fractional Shares. No Discount Certificates or scrip
representing fractional shares of Discount Common Stock shall be issued
upon the surrender for exchange of Certificates but in lieu of any such
fractional shares, each holder of Hi/Lo Common Stock shall be entitled to
receive an amount in cash equal to the product obtained by multiplying (A)
the fractional share interest to which such holder (after taking into
account all shares of Hi/Lo Common Stock held at the Effective Time by such
holder) would otherwise be entitled by (B) the closing price for a share of
Discount Common Stock as reported on the NYSE Composite Tape (as reported
in The Wall Street Journal, or, if not reported thereby, any other
authoritative source) on the last full trading day before the Closing Date.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund
which remains undistributed to the holders of the Certificates as of the
date which is one year after the date of the mailing required by Section
2.2(b) shall be delivered to Discount, upon demand, and any holders of the
Certificates who have not theretofore complied with this Article II shall
thereafter look only to Discount for payment of their claim for Merger
Consideration or shares, any cash in lieu of fractional shares of Discount
Common Stock and any dividends or distributions with respect to Discount
Common Stock.
(g) No Liability. None of Discount, Hi/Lo, Sub or the Exchange Agent
shall be liable to any person in respect of any shares of Discount Common
Stock (or dividends or distributions with respect thereto) or cash from the
Exchange Fund in each case delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any Certificate
shall not have been surrendered prior to seven years after the Effective
Time (or immediately prior to such earlier date on which any Merger
Consideration, any cash payable to the holder of such Certificate pursuant
to this Article II or any dividends or distributions payable to the holder
of such Certificate would otherwise escheat to or become the property of
any governmental body or authority) any such Merger Consideration or cash,
dividends or distributions in respect of such Certificate shall, to the
extent permitted by applicable law, become the property of the Surviving
Corporation, free and clear of all claims or interest of any person
previously entitled thereto.
(h) Investment of Exchange Fund. The Exchange Agent shall invest any
cash included in the Exchange Fund, as directed by Discount, on a daily
basis. Any interest and other income resulting from such investments shall
be paid to Discount.
(i) Lost Certificates. If any Certificate shall have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen or destroyed and, if
required by the Surviving Corporation, the posting by such person of a bond
in such reasonable amount as the Surviving Corporation may direct as
indemnity against any claim that may be made against it with respect to
such Certificate, the Exchange Agent will issue in exchange for such lost,
stolen or destroyed Certificate the Merger Consideration and, if
applicable, any cash in lieu of fractional shares, and unpaid dividends and
distributions on shares of Discount Common Stock deliverable in respect
thereof, pursuant to this Agreement.
(j) Certificates From Affiliates. Notwithstanding anything herein to
the contrary, to the fullest extent permitted by law, certificates
surrendered for exchange by any person or entity included on the list
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provided to Discount pursuant to Section 5.4 hereof shall not be exchanged
until Discount shall have received a signed agreement in substantially the
form of Exhibit 5.4 hereto from such person or entity.
Section 2.3 Treatment of Stock Options. Prior to the Effective Time,
Discount and Hi/Lo shall take all such actions as may be necessary to cause each
unexpired and unexercised option under stock option plans of Hi/Lo in effect on
the date hereof which has been granted (other than pursuant to the Hi/Lo 1991
Associate Stock Purchase Plan) to current or former directors, officers or
employees of Hi/Lo and which remain outstanding on the Closing Date (each, a
"Hi/Lo Option") to be mandatorily surrendered to the Company within 10 days
after the Effective Time in exchange for the payment to the optionee of an
amount of cash per share equal to the greater of (A) $.01 or (B) the excess, if
any, of (x) the Exchange Ratio multiplied by the Discount Average Share Price
over (y) the exercise price per share under such Hi/Lo Option. At the Effective
Time, automatically and without any action by any Person, each Hi/Lo Option
shall become immediately and fully exercisable.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HI/LO
Hi/Lo represents and warrants to Discount and Sub that:
Section 3.1 Organization, Qualification, Etc. (a) Hi/Lo is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the corporate power and authority to own its
properties and assets and to carry on its business as it is now being conducted
and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its properties or the conduct of its
business requires such qualification, except for jurisdictions in which such
failure to be so qualified or to be in good standing would not, individually or
in the aggregate, have a Material Adverse Effect (as hereinafter defined) on
Hi/Lo. As used in this Agreement, any reference to any state of facts, event,
change or effect having a "Material Adverse Effect" on or with respect to Hi/Lo
or Discount, as the case may be, means a material adverse effect on the
business, results of operations or financial condition of Hi/Lo and its
Subsidiaries (as defined in Section 8.11), taken as a whole, or Discount and its
Subsidiaries, taken as a whole, as the case may be. Hi/Lo has heretofore
furnished, or otherwise made available, to Discount a complete and correct copy,
as applicable, of the Certificate or Articles of Incorporation, the Bylaws, the
Certificate of Limited Partnership, and/or the Limited Partnership Agreement,
each as amended to, and in full force and effect as of, the date hereof, of
Hi/Lo and each of its Subsidiaries. Neither Hi/Lo nor any of its Subsidiaries is
in violation of any of the provisions of its respective Certificate or Articles
of Incorporation, Bylaws, Certificate of Limited Partnership, or Limited
Partnership Agreement.
(b) Hi/Lo does not own, directly or indirectly, any equity or other
ownership interest in any corporation, partnership, joint venture or other
entity or enterprise, except for the Subsidiaries. Hi/Lo is not subject to any
corporate or contractual obligation or requirement to make any investment, loan
or capital contribution to any corporation, partnership, joint venture or other
entity or enterprise, other than its Subsidiaries. Each of Hi/Lo's Subsidiaries
is duly organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or organization, has the corporate and/or
partnership power and authority to own its properties and to carry on its
business as it is now being conducted, and is duly qualified to do business and
is in good standing in each jurisdiction in which the ownership of its property
or the conduct of its business requires such qualification, except for
jurisdictions in which such failure to be so qualified or to be in good standing
would not, individually or in the aggregate, have a Material Adverse Effect on
Hi/Lo. All the outstanding shares of capital stock of, or other ownership
interests in, Hi/Lo's Subsidiaries are validly issued, fully paid and
non-assessable and are owned by Hi/Lo, directly or indirectly, free and clear of
all liens, claims, charges or encumbrances, except such as are contained in
credit agreements and similar instruments to which Hi/Lo is a party under which
no event of default exists and no event has occurred which with the giving of
notice or passage of time would constitute an event of default thereunder. There
are no existing subscriptions, options, warrants, rights of first refusal,
preemptive rights, calls, commitments, agreements or conversion rights of any
character relating to the issued or unissued capital stock or other securities
of, or other ownership interests in, any Subsidiary of Hi/Lo.
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Section 3.2 Capital Stock. (a) The authorized stock of Hi/Lo consists of
30,000,000 shares of common stock, par value $.01 per share ("Hi/Lo Common
Stock"), and 5,000,000 shares of preferred stock, par value $.01 per share
("Hi/Lo Preferred Stock"), of which 50,000 shares have been designated as Series
A Junior Participating Preferred Stock ("Hi/Lo Series A Preferred Stock"). As of
October 17, 1997, 10,775,109 shares of Hi/Lo Common Stock and no shares of Hi/Lo
Preferred Stock were issued and outstanding. All the outstanding shares of Hi/Lo
Common Stock have been validly issued and are fully paid and non-assessable and
have not been issued in violation of any preemptive or similar rights. As of
October 17, 1997, there were no outstanding subscriptions, options, warrants,
rights or other arrangements or commitments obligating Hi/Lo to issue any shares
of its capital stock nor are there outstanding any securities which are
convertible into or exchangeable for any shares of capital stock of Hi/Lo, and
Hi/Lo has no obligations of any kind to issue any additional securities other
than:
(i) rights to acquire shares of Hi/Lo Series A Preferred Stock
pursuant to the Rights Agreement, dated as of August 28, 1996, between
Hi/Lo and ChaseMellon Shareholder Services, L.L.C. (the "Hi/Lo Rights
Plan");
(ii) options and other rights to receive or acquire not in excess of
1,118,054 shares of Hi/Lo Common Stock granted on or prior to October 17,
1997, pursuant to employee incentive or benefit plans, programs and
arrangements and non-employee director plans; and
(iii) shares issuable upon conversion of that certain Convertible
Promissory Note dated November 1, 1994 to the order of Reddi Brake Supply
Company, Inc. ("Reddi Brake Promissory Note").
(b) Except for the issuance of shares of Hi/Lo Common Stock pursuant to the
options and other rights referred to in clause 3.2(a)(iii) and except as
permitted in clause 5.1(a)(viii) and (ix), since September 30, 1997, no shares
of Hi/Lo Common Stock or Hi/Lo Preferred Stock have been issued.
(c) Except as disclosed in the letter so designated and executed by Hi/Lo
dated the date hereof and delivered to Discount on the date hereof ("Hi/Lo's
Disclosure Letter") the issuance and sale of all of the outstanding shares of
capital stock described in Section 3.2 have been in compliance with federal and
state securities laws. Except pursuant to the terms of that certain
Shareholder's Agreement dated October 7, 1987, as amended, Hi/Lo has not agreed
to register any securities under the Securities Act of 1933, as amended (the
"Securities Act") or under any state securities law or granted registration
rights to any persons or entity. Except as disclosed in Hi/Lo's Disclosure
Letter, there are no outstanding obligations of Hi/Lo or any of Hi/Lo's
Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital
stock of Hi/Lo and no person has any right to cause Hi/Lo or any of its
Subsidiaries to repurchase, redeem or otherwise acquire any shares of capital
stock of Hi/Lo.
Section 3.3 Corporate Authority Relative to this Agreement; No Violation;
No Conflict. Hi/Lo has the corporate power and authority necessary to enter
into this Agreement and to carry out its obligations hereunder. The execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors of Hi/Lo and, except for the approval of its stockholders, no other
corporate proceedings on the part of Hi/Lo are necessary to authorize this
Agreement and the transactions contemplated hereby. The Board of Directors of
Hi/Lo has (i) determined that the transactions contemplated by this Agreement
are advisable and in the best interest of Hi/Lo and its stockholders, (ii)
approved the Merger in accordance with Section 251 of the DGCL (iii) and
determined to recommend to such stockholders that they vote in favor thereof.
This Agreement has been duly and validly executed and delivered by Hi/Lo and,
assuming this Agreement constitutes a valid and binding Agreement of the other
parties hereto, this Agreement constitutes a valid and binding agreement of
Hi/Lo, enforceable against Hi/Lo in accordance with its terms (except insofar as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors' rights generally,
or by principles governing the availability of equitable remedies). Other than
in connection with or in compliance with the provisions of the DGCL (including
the approval of the stockholders of Hi/Lo), the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act"), (collectively, the "Hi/Lo Required
Approvals"), no authorization, consent or approval of, or filing by Hi/Lo with,
any governmental body or authority or other
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person is necessary for the execution and delivery of this Agreement or for the
consummation by Hi/Lo of the transactions contemplated by this Agreement except
where the failure to obtain such authorizations, consents or approvals or make
such filings is not reasonably likely to have a Material Adverse Effect on
Hi/Lo. Except as disclosed in Hi/Lo's Disclosure Letter, neither the execution
and delivery of this Agreement by Hi/Lo nor the consummation by Hi/Lo of the
transactions contemplated by this Agreement will (a) result in a breach or
violation of the organizational documents of Hi/Lo or of any of Hi/Lo's
Subsidiaries, (b) result in a breach or violation of any provision of, or
constitute a default (or an event which, with the giving of notice, the passage
of time or otherwise, would constitute a default), under, or entitle any party
(with the giving of notice, the passage of time or otherwise) to terminate,
accelerate or modify, or result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties or assets of Hi/Lo or any of
Hi/Lo's Subsidiaries under, any of the terms, conditions or provisions of any
note, bond, mortgage, indenture, deed of trust, contract, agreement, lease or
other instrument or obligation to which Hi/Lo or any of its Subsidiaries is a
party, (c) subject to the matters set forth in the preceding sentence violate
any order, writ, injunction, decree, statute, rule or regulation applicable to
Hi/Lo or any of its Subsidiaries or any of their respective properties or
assets, (d) give any governmental body the right to challenge the transaction
contemplated by this Agreement or exercise any remedy or seek any relief under
any law to which Hi/Lo or any of its Subsidiaries, or any of their respective
assets, are subject, or (e) give any governmental body the right to revoke,
withdraw, suspend, cancel, terminate or modify any governmental authorization
held by Hi/Lo or any of its Subsidiaries, except as otherwise disclosed to
Discount in Hi/Lo's Disclosure Letter or that are not, individually or in the
aggregate, reasonably likely to have a Material Adverse Effect on Hi/Lo.
Section 3.4 Reports and Financial Statements; Corporate
Records. (a) Hi/Lo has previously made available to Discount true and complete
copies of: (i) Hi/Lo's Annual Reports on Form 10-K filed with the Securities and
Exchange Commission (the "SEC") for each of the years ended December 31, 1994
through 1996 (the "Annual Reports"); (ii) Hi/Lo's Quarterly Reports on Form 10-Q
filed with the SEC for the quarters ended March 31 and June 30, 1997 (the
"Quarterly Reports"); (iii) each definitive proxy statement filed by Hi/Lo with
the SEC from December 31, 1994 until the date of this Agreement; (iv) each final
prospectus filed by Hi/Lo with the SEC from December 31, 1994 until the date of
this Agreement; and (v) all Current Reports on Form 8-K filed by Hi/Lo with the
SEC since the end of its last fiscal year until the date of this Agreement.
(b) All of the Annual Reports, Quarterly Reports, proxy statements and
prospectuses filed with the SEC since December 31, 1994 (collectively, the
"Hi/Lo SEC Reports") at the time filed (and in the case of registration
statements and proxy statements, on the dates of their effectiveness and the
dates of mailing, respectively) (i) complied in all material respects with the
applicable requirements of the Securities Act, the Exchange Act and the rules
and regulations promulgated thereunder and (ii) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The audited
consolidated financial statements and unaudited consolidated interim financial
statements included in the Hi/Lo SEC Reports (including any related notes and
schedules) fairly present the financial position of Hi/Lo and its consolidated
Subsidiaries as of the dates thereof and the results of operations and cash
flows for the periods then ended (subject, where appropriate, to normal year-end
adjustments), in each case in accordance with past practice and generally
accepted accounting principles in the United States ("GAAP") consistently
applied during the periods involved (except as otherwise disclosed in the notes
thereto or in the case of unaudited statements, as permitted by the rules of the
SEC or Form 10-Q). The condensed consolidated balance sheet of Hi/Lo at
September 30, 1997 and the consolidated statement of income of Hi/Lo for the
period ended September 30, 1997, included in Hi/Lo's Disclosure Letter (the
"September Statements") fairly present the financial position of Hi/Lo and its
consolidated subsidiaries as of the date thereof and the results of operations
for the period (subject to normal year-end adjustments), in each case in
accordance with past practice and GAAP consistently applied during the periods
involved except as permitted by the rules of the SEC or Form 10-Q and except
that such statements are condensed, do not include required statements of
stockholders' equity and cash flow and do not include the required footnotes.
Since December 31, 1994, Hi/Lo has timely filed all material reports,
registration statements and other filings required to be filed by it with the
SEC under the Exchange Act, the Securities Act and the rules and regulations of
the SEC.
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(c) The minute books of Hi/Lo and each of Hi/Lo's corporate Subsidiaries
contain accurate records of all meetings held of, and corporate action taken by,
the stockholders and the Board of Directors of such companies, and no meeting of
any such stockholders or Board of Directors has been held for which minutes have
not been prepared and are not contained in such minute books except as disclosed
in Hi/Lo's Disclosure Letter.
Section 3.5 No Undisclosed Liabilities. As of the date hereof neither
Hi/Lo nor any of its Subsidiaries has any liabilities or obligations of any
nature, whether or not accrued, contingent or otherwise, that would be required
by GAAP to be reflected on a consolidated balance sheet of Hi/Lo, except
liabilities or obligations (a) reflected in any of the Hi/Lo SEC Reports filed
prior to the date of this Agreement (b) incurred in the ordinary course of
business since December 31, 1996, or (c) liabilities or obligations which are
not reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect on Hi/Lo.
Section 3.6 No Violation of Law. The businesses of Hi/Lo and its
Subsidiaries are not being conducted in violation of any law, ordinance or
regulation of any governmental body or authority or any judgment, decision or
order entered by any governmental authority (provided that no representation or
warranty is made in this Section 3.6 with respect to Environmental Laws (as
hereinafter defined)) except (a) as described in any of the Hi/Lo SEC Reports
filed prior to the date of this Agreement and (b) for violations or possible
violations which are not reasonably likely, individually or in the aggregate, to
have a Material Adverse Effect on Hi/Lo.
Section 3.7 Environmental Laws and Regulations. Except as described in
any of the Hi/Lo SEC Reports filed prior to the date of this Agreement, as of
the date hereof (a) Hi/Lo and each of its Subsidiaries is in compliance with all
applicable federal, state, local and foreign laws and regulations relating to
pollution or protection of human health or the environment (including, without
limitation, ambient air, surface water, ground water, land surface or subsurface
strata) (collectively, "Environmental Laws"), except for non-compliance which
are not reasonably likely, individually or in the aggregate, to have a Material
Adverse Effect on Hi/Lo, which compliance includes, but is not limited to, the
possession by Hi/Lo and its Subsidiaries of material permits and other
governmental authorizations required under applicable Environmental Laws, and
compliance with the terms and conditions thereof; (b) neither Hi/Lo nor any of
its Subsidiaries has received written notice of, or, to the knowledge of Hi/Lo,
is the subject of, any actions, causes of action, claims, investigations,
demands or notices by any Person alleging liability under or non-compliance with
any Environmental Law ("Environmental Claims") which are reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on Hi/Lo;
and (c) to the knowledge of Hi/Lo, there are no circumstances that are
reasonably likely to prevent or interfere with such compliance in the future.
Section 3.8 Employee Matters; ERISA. (a) Set forth in Hi/Lo's Disclosure
Letter is a true and complete list of all material employee benefit plans
maintained or contributed to as of the date hereof by Hi/Lo or any of its
Subsidiaries covering their present and former employees or directors or their
beneficiaries, or providing benefits to such persons in respect of services
provided to any such entity, including, but not limited to, any employee benefit
plans within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), any deferred compensation, bonuses,
stock options, restricted stock plans, incentive compensation, severance or
change in control agreements and any other material benefit arrangements or
payroll practices (collectively, the "Hi/Lo Benefit Plans").
(b) Except for contributions and other payments that are not reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect on
Hi/Lo, all contributions and other payments required to be made by Hi/Lo or any
of its Subsidiaries to or under any Hi/Lo Benefit Plan (or to any person
pursuant to the terms thereof) have been made or the amount of such payment or
contribution obligation has been reflected in the Hi/Lo SEC Reports.
(c) Each of the Hi/Lo Benefit Plans intended to be "qualified" within the
meaning of Section 401(a) of the Code has received a favorable determination
letter from the Internal Revenue Service (the "IRS") as to such qualified
status.
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(d) Except as described in any of the Hi/Lo SEC Reports filed prior to the
date of this Agreement, all Hi/Lo Benefit Plans are in compliance with all
applicable provisions of ERISA and the Code, and Hi/Lo and its Subsidiaries do
not have any liabilities or obligations with respect to any Hi/Lo Benefit Plan,
whether or not accrued, contingent or otherwise, except (i) as described in any
of the Hi/Lo SEC Reports or disclosed in writing to Discount in Hi/Lo's
Disclosure Letter and (ii) for instances of non-compliance or liabilities or
obligations that are not reasonably likely, individually or in the aggregate, to
have a Material Adverse Effect on Hi/Lo.
(e) With respect to the Hi/Lo Benefit Plans, individually and in the
aggregate, no event has occurred and, to Hi/Lo's knowledge, there does not now
exist any condition or set of circumstances, that could subject Hi/Lo or any of
its Subsidiaries to any material liability arising under ERISA or the Code
(including, without limitation, any liability to any such plan or the Pension
Benefit Guaranty Corporation (the "PBGC")), or under any indemnity agreement to
which Hi/Lo or any of its Subsidiaries is a party, excluding (1) liability for
benefit claims and funding obligations payable in the ordinary course and (2)
liabilities that are not reasonably likely, individually or in the aggregate, to
have a Material Adverse Effect on Hi/Lo.
(f) Except as disclosed in writing to Discount in Hi/Lo's Disclosure
Letter, none of the Hi/Lo Benefit Plans that are "welfare plans" within the
meaning of Section 3(1) of ERISA provides for any retiree benefits other than
continuation coverage required to be provided under Section 4980B of the Code or
Part 6 of Title I of ERISA.
(g) Except (i) as contemplated in this Agreement, (ii) as provided in the
termination benefit agreements listed and identified as such in Hi/Lo's
Disclosure Letter which are in effect on the date hereof (the "Change of Control
Employment Agreements"), (iii) as described in any of the Hi/Lo SEC Reports or
(iv) as disclosed in writing to Discount in Hi/Lo's Disclosure Letter, the
consummation or announcement of any transaction contemplated by this Agreement
will not (whether alone or upon the occurrence of any additional or further acts
or events) result in any (A) payment (whether of severance pay or otherwise)
becoming due from Hi/Lo or any of its Subsidiaries to any officer, employee,
former employee or director thereof or to the trustee under any "rabbi trust" or
similar arrangement, or (B) benefit under any Hi/Lo Benefit Plan being
established or becoming accelerated, vested or payable. Except as disclosed in
Hi/Lo's Disclosure Letter or as described in any of the Hi/Lo SEC Reports,
neither Hi/Lo nor any of its Subsidiaries is a party to (A) any management,
employment, deferred compensation, severance (including any payment, right or
benefit resulting from a change in control), bonus or other contract for
personal services with any current or former officer, director or employee
(whether or not characterized as a plan for purposes of ERISA), (B) any material
consulting contract with any person who prior to entering into such contract was
a director or officer of Hi/Lo or any of its Subsidiaries, or (C) any plan,
agreement, arrangement or understanding similar to any of the items described in
clause (A) or (B) of this sentence.
(h) The consummation or announcement of any transaction contemplated by
this Agreement will not (either alone or upon the occurrence of any additional
or further acts or events) result in the disqualification of any of the Hi/Lo
Benefit Plans intended to be qualified under, result in a prohibited transaction
or breach of fiduciary duty under, or otherwise violate, ERISA or the Code.
(i) Neither Hi/Lo nor any of its Subsidiaries nor any of their directors,
officers, employees or agents, nor any "party in interest" or "disqualified
person," as such terms are defined in Section 3 of ERISA and Section 4975 of the
Code has, with respect to any Hi/Lo Benefit Plan, engaged in or been a party to
any "prohibited transaction," as such term is defined in Section 4975 of the
Code or Section 406 of ERISA which is not otherwise exempt, which could result
in the imposition of either a penalty assessed pursuant to Section 502(i) of
ERISA or a tax imposed by Section 4975 of the Code or which could constitute a
breach of fiduciary duty, in each case applicable to Hi/Lo and which is
reasonably likely to have a Material Adverse Effect on Hi/Lo.
(j) No Hi/Lo Benefit Plan subject to Section 412 of the Code has incurred
any now existing "accumulated funding deficiency" (as defined in ERISA), whether
or not waived. Neither Hi/Lo nor any of its Subsidiaries has incurred, and none
of such entities reasonably expects to incur, any material liability to the PBGC
with respect to any Hi/Lo Benefit Plan. Neither Hi/Lo nor any of its
Subsidiaries is a party to, and
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neither has incurred or reasonably expects to incur, any withdrawal liability
with respect to any "multiemployer plan" (as defined in Section 3(37) of ERISA)
for which there is any outstanding liability.
(k) None of the assets of any of Hi/Lo Benefit Plans which hold assets are
invested in securities of the Hi/Lo.
(l) Hi/Lo is in material compliance with the notice provisions and all
other provisions of COBRA and the Health Insurance Portability and
Accountability Act of 1996, except for instances of non-compliance that are not
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on Hi/Lo.
(m) Except as disclosed in writing to Discount in Hi/Lo's Disclosure Letter
or as described in any of the Hi/Lo SEC Reports, since December 31, 1996, no
change has occurred in the base salary of any person who is a party to a Change
of Control Employment Agreement.
Section 3.9 Absence of Certain Changes or Events. Except as disclosed in
the Hi/Lo SEC Reports filed prior to the date of this Agreement, in Hi/Lo's
Disclosure Letter or the September Statements, from December 31, 1996 to the
date of this Agreement, the businesses of Hi/Lo and its Subsidiaries have been
conducted in all material respects in the ordinary course and there has not been
any event, occurrence, development or state of circumstances or facts that has
had or is reasonably likely to have a Material Adverse Effect on Hi/Lo. Since
December 31, 1996, neither Hi/Lo nor any of its Subsidiaries has engaged in any
transaction which, if done after the execution of this Agreement, would violate
Section 5.1(a)(v) through (xi), 5.1(a)(xiv) through (xvii), or 5.1(a)(xix)
through (xxi) hereof, except as disclosed in Hi/Lo's SEC Reports filed prior to
the date of this Agreement or disclosed in Hi/Lo's Disclosure Letter.
Section 3.10 Investigations; Litigation. As of the date of this
Agreement, except as described in any of the Hi/Lo SEC Reports filed prior to
the date of this Agreement or disclosed in Hi/Lo's Disclosure Letter:
(a) no investigation or review by any governmental body or authority
with respect to Hi/Lo or any of its Subsidiaries is pending nor has any
governmental body or authority notified Hi/Lo in writing of an intention to
conduct the same and, to the knowledge of Hi/Lo no such investigation or
review has been threatened in each case which is reasonably likely,
individually or in the aggregate, to have a Material Adverse Effect on
Hi/Lo; and
(b) there are no actions, suits or proceedings pending (or, to Hi/Lo's
knowledge, threatened) against or affecting Hi/Lo or its Subsidiaries, or
any of their respective properties at law or in equity, or before any
federal, state, local or foreign governmental body or authority, which,
individually or in the aggregate, are reasonably likely to have a Material
Adverse Effect on Hi/Lo.
Section 3.11 Proxy Statement/Prospectus; Registration Statement; Other
Information. None of the information with respect to Hi/Lo or its Subsidiaries
provided by Hi/Lo in writing for inclusion in the Proxy Statement/Prospectus or
the Registration Statement (as defined in Section 6.3(a)) will, in the case of
the Proxy Statement/Prospectus or any amendments thereof or supplements thereto,
at the time of the mailing of the Proxy Statement/Prospectus or any amendments
or supplements thereto, and at the time of the Hi/Lo Meeting, or, in the case of
the Registration Statement, at the time it becomes effective, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Proxy
Statement/Prospectus, except for such portions thereof that relate only to
Discount and its Subsidiaries, will comply as to form in all material respects
with the provisions of the Exchange Act and the rules and regulations
promulgated thereunder. The letters to stockholders, notices of meeting, Proxy
Statement/Prospectus and forms of proxies to be distributed to stockholders in
connection with the Merger and any schedules required to be filed with the SEC
in connection therewith are collectively referred to herein as the "Proxy
Statement/Prospectus."
Section 3.12 Hi/Lo Rights Plan. The Hi/Lo Rights Plan has not been
amended except to provide that the Hi/Lo Rights Plan is not applicable to the
execution and delivery of this Agreement and the transactions contemplated
hereby. No "Distribution Date" has occurred within the meaning of the Hi/Lo
Rights Plan, and the consummation of the transactions contemplated hereby will
not result in the occurrence
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of a Distribution Date. Hi/Lo has taken all action required to render the Hi/Lo
Rights Plan (and the "Rights" thereunder) inapplicable to this Agreement and the
transactions contemplated hereby and any other agreement executed and delivered
in connection herewith.
Section 3.13 Takeover Laws. Prior to the date hereof, the Board of
Directors of Hi/Lo has taken all necessary action to exempt under or make not
subject to Section 203 of the DGCL or any other state law that purports to limit
or restrict business combinations or the ability to acquire shares of capital
stock (i) the execution of this Agreement and (ii) the Merger and the
transaction contemplated hereby.
Section 3.14 Tax Matters. (a) Except for matters that are not reasonably
likely to have a Material Adverse Effect on the Hi/Lo or are disclosed in
Hi/Lo's Disclosure Letter: (i) all returns and reports of or with respect to any
federal, state or other Tax which are required to be filed on or before the
Closing Date by or with respect to the Hi/Lo or any of its Subsidiaries ("Hi/Lo
Tax Returns") have been or will be duly and timely filed and reflect all tax
liabilities of Hi/Lo and its Subsidiaries required to be shown thereon; (ii) all
Taxes which are shown to be due on such Hi/Lo Tax Returns have been or will be
timely paid in full; (iii) all withholding tax requirements imposed on or with
respect to the Hi/Lo or any of its Subsidiaries have been satisfied in full in
all respects; (iv) no assessment, deficiency or adjustment has been asserted or
assessed with respect to any Hi/Lo Tax Return; (v) neither Hi/Lo nor any of its
Subsidiaries has any liability for any Taxes in excess of amounts paid or
reserves established therefor; and (vi) there is not in force any extension of
time with respect to the due date for the filing of any Hi/Lo Tax Return or any
waiver or agreement for any extension of time for the assessment or payment of
any tax due with respect to the period covered by any Hi/Lo Tax Return and no
requests for such waivers or agreements are pending. Except as disclosed in
writing in Hi/Lo's Disclosure Letter, neither Hi/Lo nor any of its Subsidiaries
is the subject of any currently ongoing tax audit which is reasonably likely to
have a Material Adverse Effect on Hi/Lo. With respect to any taxable period
ended prior to December 31, 1993, all federal income Hi/Lo Tax Returns have been
audited by the Internal Revenue Service or are closed by the applicable statute
of limitations.
There are no material liens with respect to Taxes upon any of the
properties or assets, real or personal, tangible or intangible of Hi/Lo or any
of its Subsidiaries (other than liens with respect to Taxes not yet due). No
material claim made in writing by an authority in a jurisdiction where none of
Hi/Lo or its Subsidiaries files tax returns that Hi/Lo or any of its
Subsidiaries is or may be subject to taxation by that jurisdiction is currently
pending. Hi/Lo has not filed an election under Section 341(f) of the Internal
Revenue Code to be treated as a consenting corporation. Neither Hi/Lo nor any of
its Subsidiaries is obligated by any contract, agreement or other arrangement to
indemnify any other person with respect to any material Taxes.
(b) Neither Hi/Lo nor any of its Subsidiaries knows of any fact or has
taken any action that could reasonably be expected to prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the Code.
For purposes of this Agreement: (i) "Taxes" means any and all federal,
state, local, foreign or other taxes of any kind (together with any and all
interest, penalties, additions to tax and additional amounts imposed with
respect thereto) imposed by any taxing authority, including, without limitation,
taxes or other charges on or with respect to income, franchises, windfall or
other profits, gross receipts, property, sales, use, capital stock, payroll,
employment, social security, workers' compensation, unemployment compensation,
or net worth, and taxes or other charges in the nature of excise, withholding,
ad valorem or value added, and (ii) "Tax Return" means any return, report or
similar statement (including the attached schedules) required to be filed with
respect to any Tax, including, without limitation, any information return, claim
for refund, amended return or declaration of estimated Tax.
Section 3.15 Opinion of Financial Advisor. The Board of Directors of
Hi/Lo has received the opinion of SBC Warburg Dillon Read Inc., dated the date
of this Agreement, to the effect that, as of such date, the Exchange Ratio is
fair to Hi/Lo's stockholders from a financial point of view. A copy of the
written opinion of SBC Warburg Dillon Read Inc. will be delivered to Discount as
soon as practicable after the date of this Agreement.
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Section 3.16 Required Vote of Hi/Lo Stockholders. The affirmative vote of
the holders of a majority of the outstanding shares of Hi/Lo Common Stock is
required to approve the Merger. No other vote of the stockholders of Hi/Lo is
required by law, the charter or by-laws of Hi/Lo or otherwise in order for Hi/Lo
to consummate the Merger and the transactions contemplated hereby.
Section 3.17 Labor Matters. No labor organization or group of employees
of the Hi/Lo or any of its Subsidiaries has made a pending demand for
recognition or certification, and there are no representation or certification
proceedings or petitions seeking a representation proceeding presently pending
or to the knowledge of Hi/Lo threatened to be brought or filed, with the
National Labor Relations Board or any other labor relations tribunal or
authority except for demands, proceedings or petitions which are not reasonably
likely to have a Material Adverse Effect on Hi/Lo. There are no strikes, work
stoppages, lockouts, material arbitrations or material grievances, or other
material labor disputes pending or to the knowledge of Hi/Lo threatened against
or involving Hi/Lo or any of its Subsidiaries except such as are not reasonably
likely to have a Material Adverse Effect on Hi/Lo. None of Hi/Lo or any of its
Subsidiaries is a party to or bound by any collective bargaining or similar
agreement with any labor organization.
Section 3.18 Certain Agreements. Except as disclosed in Hi/Lo's
Disclosure Letter or in Hi/Lo's SEC Reports filed prior to the date of this
Agreement, neither Hi/Lo nor any of its Subsidiaries is a party or subject to
any oral or written agreement, contract, policy, license, document, instrument,
arrangement or commitment relating to or constituting (i) Indebtedness (as
defined below) in an amount exceeding $500,000 other than pursuant to Hi/Lo's
revolving credit facility with the CIT Group which would in no event cause the
aggregate amount outstanding under such facility to exceed $60,000,000, (ii)
leases for real or personal property in which the amounts of payments which the
Hi/Lo or any Subsidiary is required to make on an annual basis exceeds $250,000,
(iii) agreement, contract, policy, license document, instrument, arrangement or
commitment that limits in any material respect the freedom of Hi/Lo or any
Subsidiary of Hi/Lo to compete in any line of business or with any person or in
any geographical area or which would so limit the freedom of Hi/Lo or any
Subsidiary of Hi/Lo after the Effective Time, (iv) agreement or contract outside
of the ordinary course of business of Hi/Lo or any of Hi/Lo's Subsidiaries that
involves performance of services or delivery of goods or materials by or to
Hi/Lo or any of Hi/Lo's Subsidiaries of an amount or value in excess of $250,000
(v) joint venture or partnership agreements involving a sharing of profits,
losses, costs, or liabilities by Hi/Lo or any of Hi/Lo's Subsidiaries with any
person other than Hi/Lo and its Subsidiaries, (vi) power of attorney granted by
Hi/Lo or any of Hi/Lo's Subsidiaries that is currently effective and
outstanding, (vii) agreement or contract entered into other than in the ordinary
course of business that contains or provides for an express undertaking by Hi/Lo
or any of Hi/Lo's Subsidiaries to be responsible for consequential damages,
(viii) agreement or contract for capital expenditures in excess of $500,000,
(ix) a written warranty, guaranty, and/or other similar undertaking with respect
to contractual performance extended by Hi/Lo or any of Hi/Lo's Subsidiaries
other than in the ordinary course of business; or (x) which, after giving effect
to the transactions contemplated by this Agreement, purports to restrict or bind
Discount or any of its Subsidiaries other than the Surviving Corporation and its
Subsidiaries in any respect. "Indebtedness" means any liability in respect of
(A) borrowed money, (B) capitalized lease obligations, (C) the deferred purchase
price of property or services (other than trade payables in the ordinary course
of business) and (D) guarantees of any of the foregoing. Except as disclosed in
Hi/Lo's Disclosure Letter, neither Hi/Lo nor any of its Subsidiaries is in
default (or would be in default with notice or lapse of time, or both) under any
indenture, note, credit agreement, loan document, lease, contract, policy,
license, document, instrument, arrangement or commitment, whether or not such
default has been waived, which default, alone or in the aggregate with other
such defaults, is reasonably likely to have a Material Adverse Effect on Hi/Lo.
Section 3.19 Title to Assets; Liens. Hi/Lo owns or holds through valid
leases, directly or through its Subsidiaries, all of its inventory, accounts
receivable, property, equipment and other assets except where the failure to own
or hold such property is not reasonably likely to have a Material Adverse Effect
on Hi/Lo, and except as disclosed in Hi/Lo's SEC Reports filed prior to the date
of this Agreement, such assets are free and clear of any mortgages, liens,
charges, encumbrances, or title defects of any nature whatsoever, except for
such mortgages, liens, charges, encumbrances or title defects which are not
reasonably likely to adversely affect the value of such property as carried on
Hi/Lo's financial statements contained in Hi/Lo's SEC Reports filed
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prior to the date of this Agreement and would not have a Material Adverse Effect
on Hi/Lo. Hi/Lo and its Subsidiaries have valid and enforceable leases for the
premises and the equipment, furniture and fixtures purported to be leased by
them, except for leases, the failure of which to have or be enforceable, are not
reasonably likely to have a Material Adverse Effect on Hi/Lo.
Section 3.20 Insurance. Except as disclosed in Hi/Lo's Disclosure Letter,
Hi/Lo and each of its Subsidiaries are insured, and during each of the past five
calendar years have been insured with insurers whose current rating by A M Best
is at least B+6 against such risks and in such amounts as companies engaged in a
similar business would, in accordance with good business practice, customarily
be insured. Except as disclosed in Hi/Lo's Disclosure Letter, the policies of
fire, theft, liability and other insurance maintained with respect to the assets
or businesses of the Hi/Lo and its Subsidiaries (copies of which have been made
available to Discount) (i) provide coverage which Hi/Lo deems to be adequate
coverage against loss, (ii) are sufficient for Hi/Lo and its Subsidiaries to be
in compliance with all legal requirements applicable to Hi/Lo or any of its
Subsidiaries and all agreements and contracts to which Hi/Lo or any of its
Subsidiaries is a party or by which any of them are bound, except where such
insufficiency is not reasonably likely, individually or in the aggregate, to
have a Material Adverse Effect on Hi/Lo, (iii) will continue (absent affirmative
action by Discount to cancel such policies) in full force and effect following
consummation of the Merger and (iv) do not provide for any retrospective premium
adjustment or other experienced-based liability on the part of Hi/Lo or any of
Hi/Lo's Subsidiaries. Except as disclosed in Hi/Lo's Disclosure Letter, neither
Hi/Lo nor any of its Subsidiaries has received written notice of cancellation or
termination with respect to any material insurance policy of Hi/Lo or its
Subsidiaries or will not be renewed or that the issuer of any material insurance
policy is not willing or able to perform its obligations thereunder. The
insurance policies of Hi/Lo and its Subsidiaries are valid and enforceable
policies. Hi/Lo and Hi/Lo's Subsidiaries have paid all premiums due, and have
otherwise performed all of their respective material obligations, under each
material insurance policy and Hi/Lo and Hi/Lo's Subsidiaries have given notice
to the respective insurer of all material claims that may be insured by any
material insurance policy.
Section 3.21 Intellectual Property. To Hi/Lo's knowledge, neither Hi/Lo
nor any of its Subsidiaries utilizes or has utilized any patent, trademark,
tradename, service mark, copyright, software, trade secret or know-how, except
for those which are owned, possessed or lawfully used by Hi/Lo or its
Subsidiaries in their operations, and, to the knowledge of Hi/Lo, neither Hi/Lo
nor any of its Subsidiaries infringes upon or unlawfully or wrongfully uses any
patent, trademark, tradename, service mark, copyright or trade secret owned or
validly claimed by another, where such infringement or unlawful or wrongful use
is reasonably likely to have a Material Adverse Effect on Hi/Lo.
Section 3.22 Significant Vendor Arrangements. Except as set forth in a
list which is included as part of Hi/Lo's Disclosure Letter, neither Hi/Lo nor
any of its Subsidiaries is a party to any contract or arrangement with any
supplier or vendor which represents a commitment in excess of $300,000. The list
of such contracts and arrangements which is included as part of Hi/Lo's
Disclosure Letter accurately identifies each such supplier or vendor and the
significant terms concerning termination, term of the agreement, and the amount
of up-front vendors' allowances that would need to be repaid upon early
termination as of October 1, 1997.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DISCOUNT AND SUB
Discount and Sub represent and warrant to Hi/Lo that:
Section 4.1 Organization, Qualification, Etc. (a) Each of Discount and
Sub is a corporation duly organized, validly existing and of active status or in
good standing under the laws of its jurisdiction of organization and has the
corporate power and authority to own its properties and assets and to carry on
its business as it is now being conducted and is duly qualified to do business
and is of active status or in good standing in each jurisdiction in which the
ownership of its properties or the conduct of its business requires such
qualification, except for jurisdictions in which such failure to be so qualified
or to be in good standing
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would not, individually or in the aggregate, have a Material Adverse Effect on
Discount. The copies of Discount's Restated Articles of Incorporation and
by-laws and Sub's certificate of incorporation and by-laws which have been made
available to Hi/Lo are complete and correct and in full force and effect on the
date hereof. Neither Discount nor Sub is in violation of any of the provisions
of its respective Articles or Certificate of Incorporation or Bylaws.
(b) Discount does not own directly or indirectly, any equity or other
ownership interest in any corporation, partnership, joint venture or other
entity or enterprise, except for the Discount Subsidiaries. Discount is not
subject to any corporate or contractual obligation or requirement to make any
investment, loan or capital contribution to any corporation, partnership, joint
venture or other entity or enterprise, except pursuant to this Agreement and to
its Subsidiaries. Each of Discount's Corporate Subsidiaries is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
organization, has the corporate power and authority to own its properties and to
carry on its business as it is now being conducted, and is duly qualified to do
business and is in good standing in each jurisdiction in which the ownership of
its property or the conduct of its business requires such qualification, except
for jurisdictions in which such failure to be so qualified or to be in good
standing would not, individually or in the aggregate, have a Material Adverse
Effect on Discount. All the outstanding shares of capital stock of, or other
ownership interests in, Discount's Corporate Subsidiaries and Sub are validly
issued, fully paid and non-assessable and are owned by Discount, directly or
indirectly, free and clear of all liens, claims, charges or encumbrances, except
for restrictions contained in credit agreements and similar instruments to which
Discount is a party under which no event of default exists and no event has
occurred which with the giving of notice or passage of time would constitute an
event of default thereunder. There are no existing subscriptions, options,
warrants, rights of first refusal, preemptive rights, calls, commitments,
agreements or conversion rights of any character relating to the issued or
unissued capital stock or other securities of, or other ownership interests in,
any Corporate Subsidiary of Discount or Sub.
Section 4.2 Capital Stock. (a) The authorized capital stock of Discount
consists of 50,000,000 shares of common stock, par value $.01 per share
("Discount Common Stock"), and 5,000,000 shares of preferred stock, par value
$.01 per share ("Discount Preferred Stock"). The shares of Discount Common Stock
to be issued in the Merger or upon the exercise of Hi/Lo stock options,
warrants, conversion rights or other rights or vesting or payment of other Hi/Lo
equity-based awards thereafter will, when issued, be validly issued fully paid
and non-assessable and have not been issued in violation of any preemptive or
similar rights. As of September 30, 1997, 16,595,671 shares of Discount Common
Stock and no shares of Discount Preferred Stock were issued and outstanding. All
the outstanding shares of Discount Common Stock have been validly issued and are
fully paid and non-assessable. As of September 30, 1997, there were no
outstanding subscriptions, options, warrants, rights or other arrangements or
commitments obligating Discount to issue any shares of its capital stock nor are
there outstanding any securities which are convertible into or exchangeable for
any shares of capital stock of Discount, and Discount has no obligations of any
kind to issue any additional securities other than: options and other rights to
receive or acquire 1,196,739 shares of Discount Common Stock granted on or prior
to September 30, 1997, pursuant to benefit plans, programs and arrangements and
non-employee director plans.
(b) Except for the issuance of shares of Discount Common Stock pursuant to
the options and other rights referred to in this Section 4.2 and except as
provided for in clause 5.1(b)(viii), since September 30, 1997, no shares of
Discount Common Stock or Discount Preferred Stock have been issued.
(c) Except as disclosed in the letter so designated and signed by Discount
dated the date hereof and delivered to Hi/Lo ("Discount's Disclosure Letter"),
(i) the issuance and sale of all the outstanding shares of capital stock
described in Section 4.2 have been in compliance with federal and state
securities laws, (ii) there are no outstanding obligations of Discount or any of
Discount's Subsidiaries to repurchase, redeem or otherwise acquire any shares of
capital stock of Discount and (iii) Discount has not agreed to register any
Securities under the Securities Act or under any State Securities laws or
granted registration rights to any person or entity.
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Section 4.3 Corporate Authority Relative to this Agreement; No Violation;
No Conflict. Each of Discount and Sub has the corporate power and authority
necessary to enter into this Agreement and to carry out its obligations
hereunder. The execution and delivery of this Agreement and the consummation of
the transactions contemplated hereby have been duly and validly authorized by
the Boards of Directors of Discount and Sub and, no other corporate proceedings
on the part of Discount or Sub are necessary to authorize this Agreement and the
transactions contemplated hereby. The Boards of Directors of Discount and Sub
have (i) determined that the transactions contemplated by this Agreement are
advisable and in the best interest of Discount and its stockholders and (ii)
approved the Merger in accordance with Section 251 of the DGCL and the issuance
of the shares of Discount Common Stock in the Merger. This Agreement has been
duly and validly executed and delivered by Discount and Sub and, assuming this
Agreement constitutes a valid and binding Agreement of the other parties hereto,
this Agreement constitutes a valid and binding agreement of Discount and Sub,
enforceable against each of them in accordance with its terms (except insofar as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting creditors' rights generally,
or by principles governing the availability of equitable remedies). Other than
in connection with or in compliance with the provisions of the DGCL, the Florida
Business Corporation Act, the Securities Act, the Exchange Act, the HSR Act, the
securities or blue sky laws of the various states (collectively, the "Discount
Required Approvals"), no authorization, consent or approval of, or filing by
Discount or Sub with, any governmental body or authority or other person is
necessary for the execution and delivery of this Agreement or for the
consummation by Discount or Sub of the transactions contemplated by this
Agreement except for consents from the parties listed in Section 4.3 of
Discount's Disclosure Letter that Discount reasonably expects to obtain and
except where the failure to obtain such authorizations, consents or approvals or
make such filing is not reasonably likely to have a Material Adverse Effect on
Discount. Except as disclosed in Discount's Disclosure Letter, neither the
execution and delivery of this Agreement by Discount and Sub nor the
consummation by Discount and Sub of the transactions contemplated by this
Agreement will (a) result in a breach or violation of the organizational
documents of Discount or Sub or of any of Discount's Subsidiaries, (b) result in
a breach or violation of any provision of, or constitute a default (or an event
which, with the giving of notice, the passage of time or otherwise, would
constitute a default), under, or entitle any party (with the giving of notice,
the passage of time or otherwise) to terminate, accelerate or modify, or result
in the creation of any lien, security interest, charge or encumbrance upon any
of the properties or assets of Discount or Sub or any of Discount's Subsidiaries
under, any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, contract, agreement, lease or other instrument or
obligation to which Discount or Sub or any of its Discount's Subsidiaries is a
party, (c) subject to the matters set forth in the preceding sentence violate
any order, writ, injunction, decree, statute, rule or regulation applicable to
Discount or Sub or any of Discount's Subsidiaries or any of their respective
properties or assets, (d) give any governmental body the right to challenge the
transaction contemplated by this Agreement or exercise any remedy or seek any
relief under any laws to which Discount or any of its Subsidiaries, or their
respective assets, are subject, or (e) give any governmental body the right to
revoke, withdraw, suspend, cancel, terminate or modify any governmental
authorization held by Discount or any of its Subsidiaries, except in the case of
matters covered by (a), (b), (c), (d) or (e) that are not, individually or in
the aggregate, reasonably likely to have a Material Adverse Effect on Discount.
Section 4.4 Reports and Financial Statements. (a) Discount has previously
made available to Hi/Lo true and complete copies of: (i) Discount's Annual
Reports on Form 10-K filed with the SEC for each of the fiscal years ended 1995
through 1997; (ii) Discount's Quarterly Reports on Form 10-Q filed with the SEC
for the quarter ended September 2, 1997; (iii) each definitive proxy statement
filed by Discount with the SEC since May 30, 1995; (iv) each final prospectus
filed by Discount with the SEC since May 30, 1995; and (v) all Current Reports
on Form 8-K filed by Discount with the SEC since the end of its last fiscal
year.
(b) Except as disclosed in Discount's Disclosure Letter, all of Discount's
Annual Reports, Quarterly Reports, proxy statements and prospectuses filed with
the SEC since May 30, 1995 (collectively, "Discount SEC Reports") at the time
filed (and in the case of registration statements and proxy statements, on the
dates of their effectiveness and the dates of mailing, respectively) (i)
complied as to form in all material respects with the applicable requirements of
the Securities Act, the Exchange Act, and the rules and regulations promulgated
thereunder and (ii) did not contain any untrue statement of a material fact or
omit to state a
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material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The audited consolidated financial statements and unaudited
consolidated interim financial statements included in the Discount SEC Reports
(including any related notes and schedules) fairly present the financial
position of Discount and its consolidated Subsidiaries as of the dates thereof
and the results of their operations and their cash flows for the periods or as
of the dates then ended (subject, where appropriate, to normal year-end
adjustments), in each case in accordance with past practice and GAAP
consistently applied during the periods involved (except as otherwise disclosed
in the notes thereto or in the case of unaudited statements, as permitted by
Form 10-Q). Since May 30, 1995, Discount has timely filed all material reports,
registration statements and other filings required to be filed by it with the
SEC under the Exchange Act, the Securities Act and the rules and regulations of
the SEC.
Section 4.5 No Undisclosed Liabilities. As of the date hereof, neither
Discount nor any of its Subsidiaries has any liabilities or obligations of any
nature, whether or not accrued, contingent or otherwise, that would be required
by GAAP to be reflected on a consolidated balance sheet of Discount except
liabilities or obligations (a) reflected in any of the Discount SEC Reports
filed prior to the date of this Agreement, (b) incurred in the ordinary course
of business since the end of the Discount's last fiscal year, or (c) liabilities
or obligations which are not, individually or in the aggregate, likely to have a
Material Adverse Effect on Discount.
Section 4.6 No Violation of Law. The businesses of Discount and its
Subsidiaries are not being conducted in violation of any law, ordinance or
regulation of any governmental body or authority or any judgment, decision or
order entered by any governmental authority (provided that no representation or
warranty is made in this Section 4.6 with respect to Environmental Laws) except
(a) as described in any of the Discount SEC Reports filed prior to the date of
this Agreement and (b) for violations or possible violations which are not
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on Discount.
Section 4.7 Environmental Laws and Regulations. Except as described in
any of the Discount SEC Reports filed prior to the date of this Agreement, as of
the date hereof, (a) Discount and each of its Subsidiaries is in compliance with
all applicable Environmental Laws, except for non-compliance which are not
reasonably likely, individually or in the aggregate, to have a Material Adverse
Effect on Discount, which compliance includes, but is not limited to, the
possession by Discount and its Subsidiaries of material permits and other
governmental authorizations required under applicable Environmental Laws, and
compliance with the terms and conditions thereof; (b) neither Discount nor any
of its Subsidiaries has received written notice of, or, to the knowledge of
Discount, is the subject of, any Environmental Claims which are reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect on
Discount; and (c) to the knowledge of Discount, there are no circumstances that
are reasonably likely to prevent or interfere with such compliance in the
future.
Section 4.8 Employee Matters; ERISA. (a) Set forth on Discount's
Disclosure Letter is a true and complete list of all material employee benefit
plans maintained or contributed to as of the date hereof by Discount or any of
its Subsidiaries covering their employees or directors or their beneficiaries,
or providing benefits to such persons in respect of services provided to any
such entity, including, but not limited to, any employee benefit plans within
the meaning of Section 3(3) of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), any deferred compensation bonuses, stock options,
restricted stock plans, incentive compensation, severance or change in control
agreements (collectively, the "Discount Benefit Plans").
(b) Except for contributions and other payments that would not,
individually or in the aggregate, have a Material Adverse Effect on Discount,
all contributions and other payments required to be made by Discount or any of
its Subsidiaries to or under any Discount Benefit Plan (or to any person
pursuant to the terms thereof) have been made or the amount of such payment or
contribution obligation has been reflected in the Discount SEC Reports.
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(c) Each of the Discount Benefit Plans intended to be "qualified" within
the meaning of Section 401(a) of the Code has received a favorable determination
letter from the Internal Revenue Service (the "IRS") as to such qualified
status.
(d) Except as described in any of the Discount SEC Reports filed prior to
the date of this Agreement, all Discount Benefit Plans are in compliance with
all applicable provisions of ERISA and the Code, and Discount and its
Subsidiaries do not have any liabilities or obligations with respect to any
Discount Benefit Plan, whether or not accrued, contingent or otherwise, except
(i) as described in any of the Discount SEC Reports or disclosed in writing to
Hi/Lo in Discount's Disclosure Letter and (ii) for instances of non-compliance
or liabilities or obligations that would not individually or in the aggregate,
have a Material Adverse Effect on Discount.
(e) With respect to the Discount Benefit Plans, individually and in the
aggregate, no event has occurred and, to Discount's knowledge, there does not
now exist any condition or set of circumstances, that could subject Discount or
any of its Subsidiaries to any material liability arising under ERISA or the
Code (including, without limitation, any liability to any such plan or the
PBGC), or under any indemnity agreement to which Discount or any of its
Subsidiaries is a party, excluding (1) liability for benefit claims and funding
obligations payable in the ordinary course and (2) liabilities that would not,
individually or in the aggregate, have a Material Adverse Effect on Hi/Lo.
(f) Except as disclosed in Discount's Disclosure Letter, none of the
Discount Benefit Plans that are "welfare plans" within the meaning of Section
3(1) of ERISA provides for any retiree benefits other than continuation coverage
required to be provided under Section 4980B of the Code or Part 6 of Title I of
ERISA.
(g) Except as disclosed in Discount's Disclosure Letter, the consummation
or announcement of any transaction contemplated by this Agreement will not
(either alone or upon the occurrence of any additional or further acts or
events) result in any (A) payment (whether of severance pay or otherwise)
becoming due from Discount or any of its Subsidiaries to any officer, employee,
former employee or director thereof or to the trustee under any "rabbi trust" or
similar arrangement, or (B) benefit under any Discount Benefit Plan being
established or becoming accelerated, vested or payable. Except as disclosed in
Discount's Disclosure Letter or as described in any of the Discount SEC Reports,
neither Discount nor any of its Subsidiaries is a party to (A) any management,
employment, deferred compensation, severance (including any payment, right or
benefit resulting from a change in control), bonus or other contract for
personal services with any current or former officer, director or employee
(whether or not characterized as a plan for purposes of ERISA), (B) any material
consulting contract with any person who prior to entering into such contract was
a director or officer of Discount or any of its Subsidiaries, or (C) any plan,
agreement, arrangement or understanding similar to any of the items described in
clause (A) or (B) of this sentence.
(h) The consummation or announcement of any transaction contemplated by
this Agreement will not (either alone or upon the occurrence of any additional
or further acts or events) result in the disqualification of any of the Discount
Benefit Plans intended to be qualified under, result in a prohibited transaction
or breach of fiduciary duty under, or otherwise violate, ERISA or the Code.
(i) Neither Discount nor any of its Subsidiaries nor any of their
directors, officers, employees or agents, nor any "party in interest" or
"disqualified person," as such terms are defined in Section 3 of ERISA and
Section 4975 of the Code has, with respect to any Discount Benefit Plan, engaged
in or been a party to any "prohibited transaction," as such term is defined in
Section 4975 of the Code or Section 406 of ERISA which is not otherwise exempt,
which could result in the imposition of either a penalty assessed pursuant to
Section 502(i) of ERISA or a tax imposed by Section 4975 of the Code or which
could constitute a breach of fiduciary duty, in each case applicable to Discount
and which could result in a Material Adverse Effect on Discount.
(j) No Discount Benefit Plan subject to Section 412 of the Code has
incurred any now existing "accumulated funding deficiency" (as defined in
ERISA), whether or not waived. Neither Discount nor any of its Subsidiaries has
incurred, and none of such entities reasonably expects to incur, any material
liability to the PBGC with respect to any Discount Benefit Plan. Neither
Discount nor any of its Subsidiaries is a party
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to, and neither has incurred or reasonably expects to incur, any withdrawal
liability with respect to any "multiemployer plan" (as defined in Section 3(37)
of ERISA) for which there is any outstanding liability.
(k) Discount is in material compliance with the notice provisions and all
other provisions of COBRA and the Health Insurance Portability and
Accountability Act of 1996, except for instances of non-compliance that would
not, individually or in the aggregate, have a Material Adverse Effect on
Discount.
Section 4.9 Absence of Certain Changes or Events. Except as disclosed in
the Discount SEC Reports filed prior to the date of this Agreement or disclosed
in Discount's Disclosure Letter, from June 3, 1997 to the date of this
Agreement, the businesses of Discount and its Subsidiaries have been conducted
in all material respects in the ordinary course and there has not been any
event, occurrence, development or state of circumstances or facts that is
reasonably likely to have a Material Adverse Effect on Discount.
Section 4.10 Investigations; Litigation. As of the date of this
Agreement, except as described in any of the Discount SEC Reports filed prior to
the date of this Agreement or disclosed in Discount's Disclosure Letter:
(a) no investigation or review by any governmental body or authority
with respect to Discount or any of its Subsidiaries which is reasonably
likely, individually or in the aggregate, to have a Material Adverse Effect
on Discount is pending nor has any governmental body or authority notified
Discount in writing of an intention to conduct the same; and
(b) there are no actions, suits or proceedings pending (or, to
Discount's knowledge, threatened) against or affecting Discount or its
Subsidiaries, or any of their respective properties at law or in equity, or
before any federal, state, local or foreign governmental body or authority
which, individually or in the aggregate, are reasonably likely to have a
Material Adverse Effect on Discount.
Section 4.11 Proxy Statement/Prospectus; Registration Statement; Other
Information. None of the information included in the Proxy Statement/Prospectus
or the Registration Statement will, in the case of the Proxy
Statement/Prospectus or any amendments thereof or supplements thereto, at the
time of the mailing of the Proxy Statement/Prospectus or any amendments or
supplements thereto, and at the time of the Hi/Lo Meeting or, in the case of the
Registration Statement, at the time it becomes effective, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading, except that no
representation is made by Discount with respect to information supplied in
writing by Hi/Lo or any affiliate of Hi/Lo specifically for inclusion in the
Proxy Statement/Prospectus. The Proxy Statement/Prospectus will comply as to
form in all material respects with the provisions of the Securities Act,
Exchange Act and the rules and regulations promulgated thereunder.
Section 4.12 Lack of Ownership of Hi/Lo Common Stock. Neither Discount
nor any of its Subsidiaries owns any shares of Hi/Lo Common Stock or other
securities convertible into shares of Hi/Lo Common Stock.
Section 4.13 Tax Matters. (a) Except for matters that are not reasonably
likely to have a Material Adverse Effect on the Discount or as previously
disclosed in writing to Hi/Lo in Discount's Disclosure Letter: (i) all returns
and reports of or with respect to any federal, state or other Tax which are
required to be filed on or before the Closing Date by or with respect to the
Discount or any of its Subsidiaries ("Discount Tax Returns") have been or will
be duly and timely filed and reflect all tax liabilities of Discount and its
Subsidiaries required to be shown thereon; (ii) all Taxes which are shown to be
due on such Discount Tax Returns have been or will be timely paid in full; (iii)
all withholding tax requirements imposed on or with respect to the Discount or
any of its Subsidiaries have been satisfied in full in all respects; (iv) no
assessment, deficiency or adjustment has been asserted or assessed with respect
to any Discount Tax Return; (v) neither Discount nor any of its Subsidiaries has
any liabilities for any Taxes in excess of amounts paid or reserves established
therefor; and (vi) there is not in force any extension of time with respect to
the due date for the filing of any Tax Return or any waiver or agreement for any
extension of time for the assessment or payment of any tax due with respect to
the period covered by any Discount Tax Return and no requests for such waivers
or agreements are pending. Except as disclosed in writing to Hi/Lo in Discount's
Disclosure Letter, neither
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Discount nor any of its Subsidiaries is the subject of any currently ongoing
federal income tax audit. With respect to any taxable period ended prior to
June, 1986, all federal income Discount Tax Returns have been audited by the
Internal Revenue Service or are closed by the applicable statute of limitations.
Neither Discount nor any of its Subsidiaries is obligated by any contract,
agreement or other arrangement to indemnify any other person with respect to any
material Taxes.
(b) Neither Discount nor any of its Subsidiaries knows of any fact or has
taken any action that could reasonably be expected to prevent the Merger from
qualifying as a reorganization within the meaning of Section 368(a) of the Code.
Section 4.14 Opinion of Financial Advisor. The Board of Directors of
Discount has received the opinion of Smith Barney Inc., dated the date of this
Agreement to the effect that, as of such date, the Exchange Ratio is fair to
Discount from a financial point of view. A copy of the written opinion of Smith
Barney Inc. will be delivered to Hi/Lo as soon as practicable after the date of
this Agreement.
Section 4.15 Sub's Operations. Sub was formed solely for the purpose of
engaging in the transactions contemplated hereby and has not engaged in any
business activities or conducted any operations other than in connection with
the transactions contemplated hereby.
Section 4.16 Labor Matters. As of the date of this Agreement, no labor
organization or group of employees of Discount or any of its Subsidiaries has
made a pending demand for recognition or certification, and there are no
representation or certification proceedings or petitions seeking a
representation proceeding presently pending or to the knowledge of Discount
threatened to be brought or filed, with the National Labor Relations Board or
any other labor relations tribunal or authority except for demands, proceedings
or petitions which are not reasonably likely to have a Material Adverse Effect
on Discount. As of the date of this Agreement, there are no strikes, work
stoppages, lockouts, material arbitrations or material grievances, or other
material labor disputes pending or to the knowledge of Discount threatened
against or involving Discount or any of its Subsidiaries except such as are not
reasonably likely to have a Material Adverse Effect on Discount. None of
Discount or any of its Subsidiaries is a party to or bound by any collective
bargaining or similar agreement with any labor organization.
Section 4.17 Certain Agreements. Except as disclosed in Discount's
Disclosure Letter or in Discount's SEC Reports filed prior to the date of this
Agreement, neither Discount nor any of its Subsidiaries is a party or subject to
any oral or written agreement, contract, policy, license, document, instrument,
arrangement or commitment relating to or constituting (i) Indebtedness (as
defined below) in an amount exceeding $5,000,000 other than pursuant to
additional draws up to the limits existing as of the date of this Agreement
(including the increases in such limit expressly contemplated in such agreement)
under Discount's revolving credit facility with a syndicate lead by SunTrust
Bank, Central Florida, National Association, (ii) leases for real or personal
property in which the amounts of payments which the Discount or any Subsidiary
is required to make on an annual basis exceeds $1,000,000, (iii) agreement,
contract, policy, license document, instrument, arrangement or commitment that
limits in any material respect the freedom of Discount or any Subsidiary of
Discount to compete in any line of business or with any person or in any
geographical area or which would so limit the freedom of Discount or any
Subsidiary of Discount after the Effective Time, or (iv) agreement or contract
outside of the ordinary course of business of Discount or any of Discount's
Subsidiaries that involves performance of services or delivery of goods or
materials by or to Discount or any of Discount's Subsidiaries of an amount or
value in excess of $1,000,000 (v) joint venture or partnership agreements
involving a sharing of profits, losses, costs, or liabilities by Discount or any
of Discount's Subsidiaries with any person other than Discount and its
Subsidiaries, (vi) a written warranty, guaranty, and or other similar
undertaking with respect to contractual performance extended by Discount or any
of Discount's Subsidiaries other than in the ordinary course of business except
for such warranties, guaranties and other similar undertakings as are not
reasonably likely to have a Material Adverse Effect on Discount; or (vii) which,
after giving effect to the transactions contemplated by this Agreement, purports
to restrict or bind Hi/Lo or any of its Subsidiaries other than the Surviving
Corporation and its Subsidiaries in any respect. "Indebtedness" means any
liability in respect of (A) borrowed money, (B) capitalized lease obligations,
(C) the deferred purchase price of property or services (other than trade
payables in the ordinary course of
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business) and (D) guarantees of any of the foregoing. Neither Discount nor any
of its Subsidiaries is in default (or would be in default with notice or lapse
of time, or both) under any indenture, note, credit agreement, loan document,
lease, contract, policy, license, document, instrument, arrangement or
commitment, whether or not such default has been waived, which default, alone or
in the aggregate with other such defaults, is reasonably likely to have a
Material Adverse Effect on Discount.
Section 4.18 Title to Assets; Liens. Discount owns or holds through valid
leases all of its inventory, accounts receivable, property, equipment and other
assets except where the failure to own or hold such property is not reasonably
likely to have a Material Adverse Effect on Discount, and except as disclosed in
Discount's SEC Reports filed prior to the date of this Agreement, such assets
are free and clear of any mortgages, liens, charges, encumbrances, or title
defects of any nature whatsoever, except for such mortgages, liens, charges,
encumbrances or title defects which are not reasonably likely to adversely
affect the value of such property as carried on Discount's financial statements
contained in Discount's SEC Reports filed prior to the date of this Agreement
and would not have a Material Adverse Effect on Discount. Discount and its
Subsidiaries have valid and enforceable leases for the premises and the
equipment, furniture and fixtures purported to be leased by them, except for
leases, the failure of which to have or be enforceable, are not reasonably
likely to have a Material Adverse Effect on Discount.
Section 4.19 Insurance. Discount and each of its Subsidiaries are
insured, and during each of the past five calendar years have been insured with
insurers whose current A M Best rating on the date such policies were issued is
at least B+6 against such risks and in such amounts as companies engaged in a
similar business would, in accordance with good business practice, customarily
be insured. The policies of fire, theft, liability and other insurance
maintained with respect to the assets or businesses of the Discount and its
Subsidiaries (copies of which have been made available to Hi/Lo) provide
coverage which Discount deems to be adequate coverage against loss. Except as
disclosed in Discount's Disclosure Letter, neither Discount nor any of its
Subsidiaries has received written notice of cancellation or termination with
respect to any material insurance policy of Discount or its Subsidiaries or will
not be renewed or that the issuer of any material insurance policy is not
willing or able to perform its obligations thereunder. The insurance policies of
Discount and its Subsidiaries are valid and enforceable policies. Discount and
Discount's Subsidiaries have paid all premiums due, and have otherwise performed
all of their respective material obligations, under each material insurance
policy and Discount and Discount's Subsidiaries have given notice to the
respective insurer of all material claims that may be insured by any material
insurance policy.
Section 4.20 Intellectual Property. To Discount's knowledge, neither
Discount nor any of its Subsidiaries utilizes or has utilized any patent,
trademark, tradename, service mark, copyright, software, trade secret or
know-how, except for those which are owned, possessed or lawfully used by
Discount or its Subsidiaries in their operations, and, to the knowledge of
Discount, neither Discount nor any of its Subsidiaries infringes upon or
unlawfully or wrongfully uses any patent, trademark, tradename, service mark,
copyright or trade secret owned or validly claimed by another, where such
infringement or unlawful or wrongful use is reasonably likely to have in a
Material Adverse Effect on Discount.
ARTICLE V
COVENANTS AND AGREEMENTS
It is further agreed as follows:
Section 5.1 Conduct of Business by Hi/Lo or Discount. Prior to the
Effective Time or the date, if any, on which this Agreement is earlier
terminated pursuant to Section 7.1 (the "Termination Date"), and except as may
be agreed to by the other parties hereto or as may be permitted pursuant to this
Agreement:
(a) Hi/Lo:
(i) shall, and shall 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;
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(ii) all 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;
(iii) shall confer at such times as Discount may reasonably request
with one or more representatives of Discount to report material
operational matters and the general status of ongoing operations (in
each case to the extent Discount reasonably requires such information)
and to consult with Discount regarding material operational decisions;
(iv) shall promptly notify Discount 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 Hi/Lo;
(v) shall not authorize or pay any dividends on or make any
distribution with respect to its outstanding shares of stock;
(vi) shall not, and shall not permit any of its Subsidiaries to,
except as contemplated by Section 5.5 or 5.14 hereof 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;
(vii) shall not (subject to the provisions of Section 5.8), and
shall not permit any of its Subsidiaries to, authorize, or announce an
intention to authorize, or enter into an agreement with respect to, any
merger, consolidation or business combination (other than the Merger),
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;
(viii) except pursuant to the Merger as provided for in Section
1.5, shall not propose or adopt any amendments to its corporate charter
or by-laws;
(ix) shall 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;
(x) shall 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 hereof, to acquire any shares of its
capital stock;
(xi) shall 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 purchase of Reddi Brake Promissory Note, deemed
repurchase of options in accordance with Section 2.3 of this 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 hereof;
(xii) shall not, and shall not permit any of its Subsidiaries to,
except as contemplated by this Agreement or as may be required by
applicable law, (w) 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
hereof, (x) enter into or amend any employment or consulting agreement,
(y) 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 (z) make any payments under any Hi/Lo
Benefit Plan to any director, employee, independent
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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 Hi/Lo Benefit Plan;
(xiii) shall not, and shall not permit any of its Subsidiaries to,
enter into any material loan agreement or incur any indebtedness in
excess of an aggregate of $500,000 other than pursuant to additional
draws resulting in not in excess of an aggregate amount outstanding of
$60,000,000 under the Hi/Lo's credit facility with the CIT Group or
amend Hi/Lo's credit facility with the CIT Group to increase the amount
that may be borrowed thereunder;
(xiv) shall not, and shall not permit any of its Subsidiaries to
make any material Tax election or settle or compromise any material Tax
liability;
(xv) shall not adjust, split, combine or reclassify its capital
stock;
(xvi) shall not enter into any agreement, understanding or
arrangement with respect to the sale or voting of its capital stock;
(xvii) shall not, and shall not permit any of its Subsidiaries to,
create any new subsidiaries;
(xviii) except as required by this Agreement, shall not take any
action which could reasonably be expected to adversely affect or delay
the ability of any of the parties hereto to obtain any approval of any
governmental or regulatory body required to consummate the transactions
contemplated hereby;
(xix) shall 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;
(xx) shall not enter into any financial derivative contracts;
(xxi) shall not change in any material respect its accounting
policies, methods or procedures except as required by GAAP;
(xxii) except as may be required by this Agreement or applicable
law, shall 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 Hi/Lo;
(xxiii) shall not take any action that would prevent or impede the
Merger from qualifying as a tax-free reorganization under Section 368 of
the Code;
(xxiv) shall not, other than pursuant to this Agreement, take any
action to cause the shares of the Hi/Lo Common Stock to cease to be
quoted on any of the stock exchanges on which such shares are now
quoted;
(xxv) shall continue to provide training for employees of Hi/Lo and
its Subsidiaries commensurate with the training provided by Hi/Lo and
its Subsidiaries over the past twelve months;
(xxvi) subject to the limitations contained in this Agreement,
shall continue the level of recruiting activity and process employed by
Hi/Lo and its Subsidiaries over the past twelve months; and
(xxvii) shall 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 Article III hereof (except for representations and
warranties made as of a specified date) untrue and incorrect in any
material respect as of the Effective Time.
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(b) Discount:
(i) shall, and shall 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;
(ii) shall 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;
(iii) shall confer at such times as Hi/Lo may reasonably request
with one or more representatives of Hi/Lo to report material operational
matters and the general status of ongoing operations (to the extent
Hi/Lo reasonably requires such information);
(iv) shall promptly notify Hi/Lo 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 expected to have a Material Adverse Effect on
Discount;
(v) shall not, and shall not (except for dividends to Discount in
the ordinary course of business consistent with past practice) permit
any of its Corporate Subsidiaries that is not wholly owned, to declare
or pay any dividends on or make any distribution with respect to their
outstanding shares of capital stock or effect a stock split,
reclassification, combination or change in the Discount Common Stock or
purchase, redeem or offer to purchase or redeem any of its capital stock
or any security convertible into or exchangeable for its capital stock;
(vi) shall not, and shall not permit any of its Subsidiaries to,
authorize, propose or announce an intention to authorize or propose, or
enter into an agreement with respect to, any merger, consolidation or
business combination (other than the Merger), any acquisition 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 and which is reasonably likely to have a
Material Adverse Effect on Discount or materially and adversely affect
the transactions contemplated by this Agreement;
(vii) shall not propose or adopt any amendments to its corporate
charter or by-laws;
(viii) shall not, and shall not permit any of its Subsidiaries to,
issue any shares of their capital stock or securities convertible into
or exchangeable for their capital stock, except upon exercise of rights
or options issued pursuant to existing employee plans, programs or
arrangements and non-employee director plans outstanding on September
30, 1997 (except as contemplated herein);
(ix) shall 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 hereof, to acquire any shares of its
capital stock, except pursuant to employee incentive or benefit plans,
programs or arrangements and non-employee director plans in existence on
the date hereof in the ordinary course of business and consistent with
past practice covering not in excess of 500,000 shares of Discount
Common Stock;
(x) shall 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 Discount;
(xi) shall not and shall not permit any Subsidiary to take any
action that would prevent or impede the Merger from qualifying as a
tax-free reorganization under Section 368 of the Code;
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(xii) shall not take any action which could reasonably be expected
to adversely affect or delay the ability of any of the parties hereto to
obtain any approval of any governmental or regulatory body required to
consummate the transactions contemplated hereby;
(xiii) shall not take any action to cause the shares of the
Discount Common Stock to cease to be quoted on any of the stock
exchanges on which such shares not now quoted; and
(xiv) shall 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 Article IV hereof (except for representations and
warranties made as of a specified date) untrue and incorrect in any
material respect as of the Effective Time.
Section 5.2 Investigation. Each of Hi/Lo and Discount shall afford to one
another and to one another's officers, employees, accountants, counsel and other
authorized representatives full and complete access during normal business
hours, throughout the period prior to the earlier of the Effective Time or the
date of termination of this Agreement, to its and its Subsidiaries' facilities,
properties, contracts, commitments, books, and records (including but not
limited to tax returns) and any report, schedule or other document filed or
received by it pursuant to the requirements of federal or state securities laws
and shall use their reasonable best efforts to cause their respective
representatives to furnish promptly to one another such additional financial and
operating data and other information as to its and its Subsidiaries' respective
businesses and properties as the other or its duly authorized representatives
may from time to time reasonably request; provided, that nothing herein shall
require either Hi/Lo or Discount or any of their respective Subsidiaries to
disclose any information to the other that would cause a violation of any
contractual confidentiality obligation. The parties hereby agree that each of
them will treat any such information in accordance with the Confidentiality
Agreement, dated as of July 22, 1997, between Hi/Lo and Discount (the "Hi/Lo
Confidentiality Agreement") and the Confidentiality Agreement, dated as of
September 30, 1997 between Discount and Hi/Lo (the "Discount Confidentiality
Agreement"), as the case may be. Notwithstanding any provision of this Agreement
to the contrary, no party shall be obligated to make any disclosure in violation
of applicable laws or regulations.
Section 5.3 Cooperation. (a) Hi/Lo and Discount shall together, or
pursuant to an allocation of responsibility to be agreed upon between them:
(i) prepare and file with the SEC as soon as is reasonably practicable
the Proxy Statement/Prospectus and a registration statement on Form S-4
under the Securities Act with respect to the Discount Common Stock issuable
in the Merger (the "Registration Statement"), and shall use their
reasonable best efforts to have the Proxy Statement/Prospectus cleared by
the SEC under the Exchange Act and the Registration Statement declared
effective by the SEC under the Securities Act;
(ii) as soon as is reasonably practicable take all such action as may
be required under state blue sky or securities laws in connection with the
transactions contemplated by this Agreement;
(iii) promptly prepare and file with the NYSE listing applications
covering the shares of Discount Common Stock issuable in the Merger or upon
exercise of Hi/Lo stock options, and use its reasonable best efforts to
obtain, prior to the Effective Time, approval for the listing of such
Common Stock, subject only to official notice of issuance;
(iv) cooperate with one another in order to lift any injunctions or
remove any other impediment to the consummation of the transactions
contemplated herein; and
(v) cooperate with one another in obtaining opinions of Trenam,
Kemker, Scharf, Barkin, Frye, O'Neill & Mullis, P.A. ("TKS"), counsel to
Discount, and Vinson & Elkins L.L.P., counsel to Hi/Lo, dated as of the
Effective Time, to the effect that the Merger qualifies as a reorganization
under the provisions of Section 368(a) of the Code. In connection
therewith, each of Hi/Lo and Discount shall deliver to TKS and Vinson &
Elkins L.L.P. customary representation letters, and Hi/Lo shall use its
reasonable best efforts to obtain customary representation letters from
appropriate stockholders and shall deliver any such letters obtained to TKS
and Vinson & Elkins L.L.P.
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(b) Subject to the limitations contained in Section 6.2, Hi/Lo and Discount
shall each furnish to one another and to one another's counsel all such
information as may be reasonably required in order to effect the foregoing
actions.
Section 5.4 Affiliate Agreements. Hi/Lo shall, prior to the Effective
Time, deliver to Discount a list (reasonably satisfactory to counsel for
Discount), setting forth the names and addresses of each officer and director
who is, at the time of the Hi/Lo Meeting, in Hi/Lo's reasonable judgment, an
"affiliate" of Hi/Lo for purposes of Rule 145 under the Securities Act. Hi/Lo
shall furnish such information and documents as Discount may reasonably request
for the purpose of reviewing such list. Hi/Lo shall use its reasonable best
efforts to cause each person who is identified as an "affiliate" in the list
furnished pursuant to this Section 5.4 to execute a written agreement on or
prior to the Effective Time, in substantially the form of Exhibit 5.4 hereto.
Section 5.5 Employee Benefit Plans. (a) Simultaneously with the Merger,
Discount shall assume each Change of Control Employment Agreement then in effect
and all of Hi/Lo's rights and obligations under each such agreement.
(b) Discount shall take all actions necessary or appropriate to permit each
individual who is employed by Hi/Lo or any of its Subsidiaries as of the Closing
Date (a "Hi/Lo Employee") to either, at the sole election of Discount, (i)
continue to participate from and after the Closing Date in the employee benefit
plans and programs maintained by Hi/Lo immediately prior to the Closing Date
other than the 1990 Stock Option Plan and the 1991 Associate Stock Purchase Plan
or (ii) permit the Hi/Lo Employees to immediately thereafter participate in the
employee benefit plans or programs maintained by Discount or any of its
Subsidiaries for their employees generally (the "Discount Plans") other than
Discount's stock option plans or any employee stock purchase plan meeting the
requirements of Section 423 of the Code; provided, however, that, if Hi/Lo's
group health plan is terminated or discontinued, Discount shall permit each
Hi/Lo Employee and his or her eligible dependents (including, without
limitation, all such Hi/Lo Employee's dependents covered by Hi/Lo's group health
plan as of the time such coverage ceases) to be covered under a Discount Plan
that (i) provides medical and dental benefits to the Hi/Lo Employee and such
eligible dependents effective immediately upon the cessation of coverage of such
individuals under Hi/Lo's group health plan, (ii) credits such Hi/Lo Employee,
for the year during which such coverage under such Discount Plan begins, with
any deductibles and co-payments already incurred during such year under Hi/Lo's
group health plan, and (iii) waives any preexisting condition restrictions to
the extent necessary to provide immediate coverage. Discount, the Surviving
Corporation, their respective Subsidiaries, and the Discount Plans shall
recognize each Hi/Lo Employee's years of service and level of seniority with
Hi/Lo and its Subsidiaries for purposes of terms of employment and eligibility,
vesting and benefit determination under the Discount Plans. The provisions of
this Section 5.5(b) shall be applicable only during an employee's employment
with Hi/Lo, Discount or one of their Subsidiaries and shall not constitute an
agreement to employ or continue the employment of any person.
Section 5.6 Filings; Other Action. Subject to the terms and conditions
herein provided, Hi/Lo and Discount shall (a) promptly, and in any event with 20
business days after the date hereof, make their respective filings and
thereafter make any other required submissions under the HSR Act, (b) use
reasonable efforts to cooperate with one another in (i) determining whether any
filings are required to be made with, or consents, permits, authorizations or
approvals are required to be obtained from any third party, governmental or
regulatory bodies or authorities of federal, state and local jurisdictions in
connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and thereby and (ii) timely
making all such filings and timely seeking all such consents, permits,
authorizations or approvals, and (c) use reasonable efforts to take, or cause to
be taken, all other actions and do, or cause to be done, all other things
necessary, proper or advisable to consummate and make effective the transactions
contemplated hereby, including, without limitation, taking all such further
action as reasonably may be necessary to resolve such objections, if any, as the
Federal Trade Commission, the Antitrust Division of the Department of Justice,
state antitrust enforcement authorities or any other person may assert under
relevant antitrust or competition laws with respect to the transactions
contemplated hereby.
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Section 5.7 Further Assurances. Each of the Parties shall use its
reasonable best efforts to take all action and to do all things necessary,
proper or advisable to consummate the Merger and the transactions contemplated
by this Agreement (including, without limitation, using its reasonable efforts
to cause the conditions set forth in Article VI for which they are responsible
to be satisfied as soon as reasonably practicable and to prepare, execute and
deliver such further instruments and take or cause to be taken such other and
further action as any other party hereto shall reasonably request).
Section 5.8 No Solicitation. From the date hereof until the termination
of this Agreement, Hi/Lo will 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 ("Hi/Lo's Representatives")
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 contained in this Section 5.8 shall prohibit Hi/Lo and its Board of
Directors 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
SEC under the Exchange Act, or (ii) at any time prior to the time Hi/Lo's
stockholders shall have voted to approve the Merger, engaging in discussions or
negotiations with, and furnishing information (including non-public information)
concerning Hi/Lo 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 Hi/Lo or any of
Hi/Lo's Representatives after the date of this Agreement) if the Board of
Directors of Hi/Lo concludes in good faith based upon advice of its outside
counsel (who may be its regularly engaged outside counsel) that the failure to
take such action is reasonably likely to violate their obligations of such Board
to Hi/Lo or to Hi/Lo's stockholders under applicable law, or (iii) provided this
Agreement is terminated pursuant to Section 7.1(e), accepting a Superior
Proposal. Prior to furnishing information to or entering into discussions or
negotiations with any person, Hi/Lo 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 Hi/Lo Confidentiality Agreement (as defined in Section 5.2
hereof). Hi/Lo shall immediately cease and cause to be terminated any existing
solicitation, initiation, encouragement, activity, discussion or negotiation
with any person conducted heretofore by Hi/Lo or any Hi/Lo Representative with
respect to any Takeover Proposal existing on the date hereof. Hi/Lo 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
its Board of Directors shall conclude in good faith based upon advice of outside
counsel that failure to take such action is reasonably likely to violate their
obligations to Hi/Lo or Hi/Lo's Stockholders under applicable law. Hi/Lo shall
notify Discount 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 Discount informed of the general status and any material
changes in the terms and conditions of such Proposal. Hi/Lo agrees to promptly
provide to Discount any information concerning Hi/Lo, its Subsidiaries,
business, properties or assets furnished to any third party which makes a
Takeover Proposal and which has not previously been provided to Discount. 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 Hi/Lo Meeting,
other than a proposal or offer by Discount or any of its Subsidiaries, for a
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, Hi/Lo, 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 Board of Directors of Hi/Lo determines in their good faith
reasonable judgment is more favorable to Hi/Lo and to its stockholders than the
transactions contemplated hereby.
Section 5.9 Public Announcements. Hi/Lo and Discount will consult with
each other before issuing any press release relating to this Agreement or the
transactions contemplated herein and shall not issue any such press release
prior to such consultation except as may be required by law or by obligations
pursuant to any listing agreement with any national securities exchange.
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Section 5.10 Indemnification and Insurance. (a) Discount and Sub agree
that all rights to exculpation and indemnification for acts or omissions
occurring prior to the Effective Time now existing in favor of the current or
former directors or officers (the "Indemnified Parties") of Hi/Lo as provided in
its charter or by-laws or in any agreement shall survive the Merger and shall
continue in full force and effect in accordance with their terms. For six years
from the Effective Time, Discount shall indemnify the Indemnified Parties to the
same extent as such Indemnified Parties are entitled to indemnification pursuant
to the preceding sentence.
(b) For six years from the Effective Time, Discount shall, maintain in
effect Hi/Lo's current directors' and officers' liability insurance covering
those persons who are currently covered by Hi/Lo's directors' and officers'
liability insurance policies and shall purchase such policy on or prior to the
Closing Date; provided, however, that in no event shall Discount be required to
expend in the aggregate an amount in excess of 200% of the annual premiums
currently paid by Hi/Lo for such insurance, and, provided, further, that if the
aggregate premiums of such insurance coverage exceed such amount, Discount shall
be obligated to obtain a policy with the greatest coverage available for a cost
not exceeding such amount.
Section 5.11 Additional Reports. Hi/Lo and Discount shall each furnish to
the other copies of any reports of the type referred to in Sections 3.4 and 4.4
which it files with the SEC on or after the date hereof, and Hi/Lo and Discount,
as the case may be, represents and warrants that as of the respective dates
thereof, such reports will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statement therein, in light of the circumstances under which they were
made, not misleading. Any unaudited consolidated interim financial statements
included in such reports (including any related notes and schedules) will fairly
present the financial position of Hi/Lo and its consolidated Subsidiaries or
Discount and its consolidated Subsidiaries, as the case may be, as of the dates
thereof and the results of operations and changes in financial position or other
information included therein for the periods or as of the date then ended
(subject, where appropriate, to normal year-end adjustments), in each case in
accordance with past practice and GAAP consistently applied during the periods
involved (except as otherwise disclosed in the notes thereto).
Section 5.12 Stockholder Approval. Subject to the terms and conditions
contained herein and the prior termination of this Agreement pursuant to Section
7.1, this Agreement shall be submitted for approval to the holders of shares of
Hi/Lo Common Stock at the Hi/Lo Meeting. Hi/Lo and Discount shall coordinate and
cooperate with respect to the timing of such meeting and shall endeavor to hold
such meeting as soon as practicable after the date hereof.
Section 5.13 Purchase Accounting. Hi/Lo, Discount and Sub will each use
its reasonable best efforts to cause the transactions contemplated by this
Agreement to be accounted for as a purchase in accordance with GAAP, and such
accounting treatment to be accepted by Discount's independent certified public
accountants, by the NYSE and by the SEC, respectively, and each of Hi/Lo,
Discount and Sub agrees that it will take no action that would cause such
accounting treatment not to be obtained.
Section 5.14 Amendments to Change of Control Agreements. Hi/Lo has
secured a commitment to amend from each employee who is a party to a Change of
Control Employment Agreement and shall cause to be amended each Change of
Control Employment Agreement to provide that it shall be a condition to the
receipt of any lump sum payment payable thereunder that the employee execute and
deliver to Hi/Lo a general release by the employee of all claims against Hi/Lo,
its predecessors, parents, subsidiaries, divisions, related or affiliated
companies, officers, directors, stockholders, members, employees, heirs,
successors, assigns, representatives, agents and counsel, including without
limitation a release of (i) any and all claims arising out of or relating to the
employee's employment by or service with Hi/Lo and its Subsidiaries and the
employee's termination of employment, (ii) any and all claims of discrimination,
including but not limited to claims of discrimination on the basis of sex, race,
age, national origin, marital status, religion or handicap, including,
specifically, but without limiting the generality of the foregoing, any claims
under the Age Discrimination in Employment Act, as amended, Title VII of the
Civil Rights Act of 1964, as amended, and the Americans with Disabilities Act,
and (iii) any and all claims of wrongful or unjust discharge or breach of any
contract or promise, express or implied, provided that such release shall not
release claims of such person
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under the Change of Control Agreements or pursuant to any indemnification rights
or under any directors and officers insurance policies.
Section 5.15 Notifications. (a) Between the date of this Agreement and
the Closing Date, Hi/Lo will promptly notify Discount in writing if Hi/Lo
becomes aware that any of Hi/Lo's representations and warranties were materially
untrue as of the date of this Agreement or if Hi/Lo shall become aware of any
fact or condition that causes any of Hi/Lo's representations or warranties to be
materially untrue as of such date as if made on and as of such date (except for
representations and warranties made as of a specified date, which need be true
only as of such specified date). During the same period, Hi/Lo will promptly
notify Discount of the occurrence of any material breach of any covenant of
Hi/Lo in this Article V or of the occurrence of any event that may make the
satisfaction of the conditions in Article VI impossible or unlikely.
(b) Between the date of this Agreement and the Closing Date, Discount will
promptly notify Hi/Lo in writing if Discount becomes aware that any of
Discount's representations and warranties were materially untrue as of the date
of this Agreement or if Discount shall become aware of any fact or condition
that causes any of Discount's representations or warranties to be materially
untrue as of such date as if made on and as of such date (except for
representations and warranties made as of a specified date, which need be true
only as of such specified date). During the same period, Discount will promptly
notify Hi/Lo of the occurrence of any material breach of any covenant of
Discount in this Article V or of the occurrence of any event that may make the
satisfaction of the conditions in Article VI impossible or unlikely.
Section 5.16 Indemnifications. Neither Discount nor any of its
Subsidiaries or any of their respective officers, directors or employees shall
be liable to Hi/Lo or any of its Subsidiaries for any losses, claims, damages or
liabilities suffered as a result of any actions taken or any omission to take
action by Hi/Lo at the request of Discount or its affiliates provided such
request is not made with willful intent to cause harm to Hi/Lo or its
Subsidiaries. Hi/Lo agrees to indemnify and hold harmless Discount, its
subsidiaries and their respective officers, directors and employees against any
losses, claims, damages or liabilities to which they may become subject to third
parties insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of any action or failure to act in connection with
the operation of Hi/Lo or its Subsidiaries after the date of this Agreement and
prior to the earlier of the Termination of this Agreement or the Closing Date
hereunder taken or not taken as the case may be, at the request of Discount;
provided, however, that Hi/Lo shall not be liable in any such case to the extent
such loss, claim, damage or liability arises out of requests by Discount made
with willful intent to cause harm to Hi/Lo or its Subsidiaries.
ARTICLE VI
CONDITIONS TO THE MERGER
Section 6.1 Conditions to Each Party's Obligation to Effect the
Merger. The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Effective Time of the following
conditions:
(a) The holders of issued and outstanding shares of Hi/Lo Common Stock
shall have duly approved the Merger in the manner required by applicable
law.
(b) 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 Merger substantially on the terms contemplated
hereby. In the event any order, decree or injunction shall have been
issued, each party shall use its reasonable efforts to remove any such
order, decree or injunction.
(c) The Registration Statement shall have become effective in
accordance with the provisions of the Securities Act and no stop order
suspending such effectiveness shall have been issued and remain in effect.
(d) Any applicable waiting period under the HSR Act shall have expired
or been terminated and any other Hi/Lo Required Approvals and Discount
Required Approvals shall have been obtained, except
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where the failure to obtain such other Hi/Lo Required Approvals and
Discount Required Approvals would not have a Material Adverse Effect on
Hi/Lo or Discount, as the case may be.
(e) Each of Hi/Lo and Discount shall have received an opinion of its
tax counsel, Vinson & Elkins L.L.P., and TKS respectively, in form and
substance reasonably satisfactory to it, and dated within five days of the
date of the Proxy Statement/Prospectus, to the effect that the Merger will
qualify for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code and that none of Hi/Lo, its
stockholders, Discount and Sub shall recognize gain or loss for federal
income tax purposes as a result of the Merger (other than, with respect to
any cash paid in lieu of fractional shares of Discount Common Stock). In
rendering such opinions, Vinson & Elkins L.L.P. and TKS may rely upon
representations of officers of Hi/Lo and Discount and stockholders of
Hi/Lo.
Section 6.2 Conditions to Obligations of Hi/Lo to Effect the Merger. The
obligation of Hi/Lo to effect the Merger is further subject to the conditions
that (a) the representations and warranties of Discount contained herein shall
be true and correct in all respects as of the Effective Time with the same
effect as though made as of the Effective Time except (i) for changes
contemplated by the terms of this Agreement, (ii) that the accuracy of
representations and warranties that by their terms speak as of the date of this
Agreement or some other date will be determined as of such date, (iii) where any
such failure of the representation or warranty to be true and correct in all
respects would not have a Material Adverse Effect on Discount, and (b) the
shares of Discount Common Stock issuable in the Merger shall have been approved
for listing on the NYSE, subject only to official notice of issuance; (c)
Discount shall have performed in all material respects all obligations and
covenants required by this Agreement to be performed or complied with by it
prior to the Effective Time; (d) Discount shall have delivered to Hi/Lo a
certificate, dated the Effective Time and signed by its Chief Executive Officer
or a Vice President, certifying to the effects in clause (c) and (d).
Section 6.3 Conditions to Obligations of Discount to Effect the
Merger. The obligation of Discount to effect the Merger is further subject to
the conditions that (a) the representations and warranties of Hi/Lo contained
herein shall be true and correct in all respects as of the Effective Time with
the same effect as though made as of the Effective Time except (i) for changes
contemplated by the terms of this Agreement, (ii) that the accuracy of
representations and warranties that by their terms speak as of the date of this
Agreement or some other date will be determined as of such date, and (iii) where
any such failure of the representation or warranty to be true and correct in all
respects would not have a Material Adverse Effect on Hi/Lo; (b) Hi/Lo shall have
performed in all material respects all obligations and covenants required by
this Agreement to be performed or complied with by it prior to the Effective
Time; and (c) Hi/Lo shall have delivered to Discount a certificate, dated the
Effective Time and signed by its Chief Executive Officer or a Vice President,
certifying to both such effects. In the event that Discount shall so request to
Hi/Lo in writing at any time prior to the mailing of the Proxy
Statement/Prospectus, it shall be a further condition to the obligation of
Discount to effect the Merger that Hi/Lo shall provide Discount with the
resignation of each of its officers from their position as officers or proof
satisfactory to Discount of the valid removal of each of such officers at the
Effective Time, provided that such resignation or removal shall be deemed a
termination of such officer's position by Hi/Lo after the "Effective Date" (as
defined in the Change of Control Employment Agreement for purposes of such
officer's Change of Control Employment Agreement).
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<PAGE> 137
ARTICLE VII
TERMINATION, WAIVER, AMENDMENT AND CLOSING
Section 7.1 Termination or Abandonment. Notwithstanding anything
contained in this Agreement to the contrary, this Agreement may be terminated
and abandoned at any time prior to the Effective Time, whether before or after
any approval of the matters presented in connection with the Merger by the
stockholders of Hi/Lo and Discount:
(a) by the mutual written consent of Hi/Lo and Discount;
(b) by either Hi/Lo or Discount if the Effective Time shall not have
occurred on or before April 30, 1998; provided, that the party seeking to
terminate this Agreement pursuant to this clause 7.1(b) shall not have
breached in any material respect its obligations under this Agreement in
any manner that shall have proximately contributed to the failure to
consummate the Merger on or before such date;
(c) by either Hi/Lo or Discount if (i) a statute, rule, regulation or
executive order shall have been enacted, entered or promulgated prohibiting
the consummation of the Merger substantially on the terms contemplated
hereby or (ii) an order, decree, ruling or injunction shall have been
entered permanently restraining, enjoining or otherwise prohibiting the
consummation of the Merger substantially on the terms contemplated hereby
and such order, decree, ruling or injunction shall have become final and
non-appealable; provided, that the party seeking to terminate this
Agreement pursuant to this clause 7.1(c)(ii) shall have used its reasonable
best efforts to remove such injunction, order or decree;
(d) by either Hi/Lo or Discount if the approval of the stockholders of
Hi/Lo contemplated by this Agreement shall not have been obtained by reason
of the failure to obtain the required vote at a duly held meeting of
stockholders or of any adjournment thereof;
(e) by Hi/Lo prior to the approval of this Agreement by the
Stockholders if the Board of Directors of Hi/Lo reasonably determines that
a Takeover Proposal constitutes a Superior Proposal provided, that this
Agreement shall not terminate pursuant to this clause 7.1(e) unless
simultaneously with such termination Hi/Lo enters into a definitive
acquisition, merger or similar agreement to effect the Superior Proposal
and pays the Termination Fee (as defined in Section 7.2(b)) required
pursuant to Section 7.2(b);
(f) by either Hi/Lo or Discount if the other shall have breached, or
failed to comply with, in any material respect any of its obligations under
this 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 30 days after notice thereof from the other party and such breaches,
failures or misrepresentations, individually or in the aggregate, results
or is reasonably likely to result in a Material Adverse Effect on Hi/Lo or
Discount, as the case may be;
(g) by Discount if the Board of Directors of Hi/Lo or any committee of
the Board of Directors of Hi/Lo, (i) shall withdraw or modify in any
adverse manner its approval or recommendation of this Agreement or the
Merger, (ii) shall approve or recommend any acquisition of Hi/Lo or a
material portion of Hi/Lo's assets or any tender offer for shares of
Hi/Lo's capital stock, in each case, other than by Discount or an affiliate
of Discount, or (iii) shall resolve to take any of the actions specified in
clause (i) above; or
(h) by Hi/Lo, in the event that the Discount Average Share Price is
less than $19.55, but only if Hi/Lo's Board of Directors determines to so
terminate by a vote of a majority of the members of its entire Board of
Directors;
provided, however, that no termination shall be effective pursuant to Section
7.1(e) under circumstances in which a Termination Fee is payable by Hi/Lo under
Section 7.2 unless concurrently with such termination, such Termination Fee is
paid in full by Hi/Lo in accordance with the provisions of Section 7.2.
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<PAGE> 138
Section 7.2 Effect of Termination. (a) In the event of termination of
this Agreement as provided in section 7.1 hereof, and subject to the provisions
of Section 8.1 hereof, this Agreement (except for the Confidentiality Agreements
referred to in Section 5.2) shall forthwith become void and there shall be no
liability on the part of any of the Parties, except (i) as set forth in this
Section 7.2 and in Sections 3.11, 4.11, 5.16, 8.2 and 8.12 hereof, and (ii)
nothing herein shall relieve any Party from liability for any willful breach
hereof.
(b) If this Agreement is terminated (i) by Hi/Lo or Discount pursuant to
Section 7.1(d) and prior to the date of such meeting a Takeover Proposal shall
have been made and prior to the first anniversary of the date of such meeting
Hi/Lo shall have consummated a 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 Hi/Lo, directly or
indirectly by the entity that made such Takeover Proposal, (ii) by Hi/Lo
pursuant to Section 7.1(e) hereof, or (iii) by Discount pursuant to Section
7.1(g) hereof, Hi/Lo shall pay to Discount a termination fee of $4.0 million
(the "Termination Fee").
(c) The Termination Fee payable to Discount under Section 7.2(b) above (i)
in the case of a termination by Discount pursuant to 7.1(g) shall be paid within
three business days after notice of termination, (ii) in the case of a
termination by Hi/Lo pursuant to Section 7.1(e) shall be paid concurrently with
such termination, and (iii) in the case of a termination pursuant to Section
7.1(d) shall be paid prior to the consummation of the Takeover Proposal, and in
each case shall be paid by wire transfer in immediately available funds to an
account designated by Discount.
(d) Hi/Lo and Discount agree that the agreements contained in Section
7.2(b) above are an integral part of the transactions contemplated by this
Agreement. If Hi/Lo fails to promptly pay to Discount or Hi/Lo, respectively any
fee due under such Section 7.2(b), the non-paying party shall pay the costs and
expenses (including legal fees and expenses) in connection with any action,
including the filing of any lawsuit or other legal action, taken to collect
payment, together with interest on the amount of any unpaid fee at the publicly
announced prime rate of SunTrust Bank, Central Florida, National Association
from the date such fee was required to be paid. In the event Discount receives
any fee pursuant to Section 7.2(b), Discount shall not assert or pursue in any
manner, directly or indirectly, any claim or cause of action against Hi/Lo or
any of its affiliates, officers or directors based in whole or in part upon a
breach of this Agreement by them (except for breaches of the Discount
Confidentiality Agreement or Section 5.16) or their receipt, consideration,
negotiation, recommendation, or approval of a Takeover Proposal or the exercise
by Hi/Lo of its right of termination under Section 7.1(e).
Section 7.3 Amendment or Supplement. At any time before or after approval
of the matters presented in connection with the Merger by the respective
stockholders of Hi/Lo and Discount and prior to the Effective Time, this
Agreement may be amended or supplemented in writing by Hi/Lo and Discount with
respect to any of the terms contained in this Agreement, except that following
approval by the stockholders of Hi/Lo and Discount there shall be no amendment
or change to the provisions hereof with respect to the conversion ratio of
shares of Hi/Lo Common Stock into shares of Discount Common Stock as provided
herein nor any amendment or change not permitted under applicable law, without
further approval by the stockholders of Hi/Lo and Discount.
Section 7.4 Extension of Time, Waiver, Etc. At any time prior to the
Effective Time, Hi/Lo and Discount may to the extent legally allowed: (a) extend
the time for the performance of any of the obligations or acts of the other
party; (b) waive any inaccuracies in the representations and warranties of the
other party contained herein or in any document delivered pursuant hereto; or
(c) waive compliance with any of the agreements or conditions of the other party
contained herein.
Notwithstanding the foregoing, no failure or delay by Hi/Lo or Discount in
exercising any right hereunder shall operate as a waiver thereof nor shall any
single or partial exercise thereof preclude any other or further exercise
thereof or the exercise of any other right hereunder. Any agreement on the part
of a party hereto to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed each of the parties.
A-31
<PAGE> 139
ARTICLE VIII
MISCELLANEOUS
Section 8.1 No Survival of Representations and Warranties. None of the
representations, warranties and agreements in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Merger, except
for the agreements set forth in Article I and Article II, the agreements of
"affiliates" of Hi/Lo to be delivered pursuant to Section 5.4, the provisions of
Sections 5.5, 5.7 and 5.10 and this Article VIII.
Section 8.2 Expenses. Whether or not the Merger is consummated, all costs
and expenses incurred in connection with this Agreement and the transactions
contemplated hereby and thereby shall be paid by the party incurring such
expenses, except that the expenses incurred in connection with the printing and
mailing of the Proxy Statement/Prospectus (including the registration statement)
and the filing fee required in connection with the premerger notification under
the HSR Act and pursuant to the Securities Act, shall be shared equally by Hi/Lo
and Discount, provided, however, that in the event Hi/Lo is required to pay a
Termination Fee pursuant to Section 7.2(b) then such expenses shall be borne by
Discount.
Section 8.3 Counterparts; Effectiveness. This Agreement may be executed
in two or more counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument,
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered (by telecopy or otherwise) to the other
parties.
Section 8.4 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware, without regard
to the principles of conflicts of laws thereof.
Section 8.5 Notices. All notices and other communications which are
required or may be given under this Agreement shall be in writing and shall be
deemed to have been duly given when received if personally delivered; when
transmitted and the appropriate telecopy confirmation is received if transmitted
by telecopy or similar electronic transmission method; one working day after it
is sent, if sent by recognized expedited delivery service; and five days after
it is sent, if mailed, first class mail, certified mail, return receipt
requested, with postage prepaid. In each case notice shall be sent to:
To Hi/Lo:
Hi/Lo Automotive, Inc.
2575 West Bellfort
Houston, TX 77054
Attention: K. Grant Hutchins
Telecopy: (713) 663-9296
copy to:
Vinson & Elkins L.L.P.
2300 First City Tower
1001 Fannin
Houston, Texas 77002
Attention: Jeffery B. Floyd
Telecopy: (713) 615-5660
To Discount:
Discount Auto Parts, Inc.
4900 Frontage Road South
Lakeland, Florida 33815
Attention: Peter J. Fontaine
Telecopy: (941) 284-2063
A-32
<PAGE> 140
copy to:
Trenam, Kemker, Scharf, Barkin, Frye, O'Neill & Mullis, P.A.
2700 Barnett Plaza
101 East Kennedy Boulevard
Tampa, Florida 33601-1102
Attention: Gary I. Teblum
Telecopy: (813) 229-6553
or to such other address as either party may have specified in writing to the
other using the procedures specified above in this Section 8.5.
Section 8.6 Assignment; Binding Effect. Neither this Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns.
Section 8.7 Severability. Any term or provision of this Agreement which
is invalid or unenforceable in any jurisdiction shall, as to that jurisdiction,
be ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement in any other jurisdiction. If any provision of this Agreement is so
broad as to be unenforceable, such provision shall be interpreted to be only so
broad as is enforceable.
Section 8.8 Enforcement of Agreement. The parties hereto agree that money
damages or other remedy at law would not be sufficient or adequate remedy for
any breach or violation of, or a default under, this Agreement by them and that
in addition to all other remedies available to them, each of them shall be
entitled to the fullest extent permitted by law to an injunction restraining
such breach, violation or default or threatened breach, violation or default and
to any other equitable relief, including, without limitation, specific
performance, without bond or other security being required.
Section 8.9 Miscellaneous. This Agreement:
(a) along with the Hi/Lo Confidentiality Agreement and the Discount
Confidentiality Agreement constitutes the entire agreement, and supersedes
all other prior agreements and understandings, both written and oral,
between the parties, or any of them, with respect to the subject matter
hereof and thereof; and
(b) except for the provisions of Sections 5.5 and 5.10 hereof, is not
intended to confer upon any Person other than the parties hereto any rights
or remedies hereunder.
Section 8.10 Headings. Headings of the Articles and Sections of this
Agreement are for convenience of the parties only, and shall be given no
substantive or interpretive effect whatsoever.
Section 8.11 Subsidiaries; Affiliates. References in this Agreement to
"Subsidiaries" of Hi/Lo or Discount shall mean any corporation or other form of
legal entity of which more than 50% of the outstanding voting securities or
ownership are on the date hereof directly or indirectly owned by Hi/Lo or
Discount, as the case may be. Hi/Lo's Disclosure Letter contains a full and
complete list of Hi/Lo's Subsidiaries as of the date hereof and Discount's
Disclosure Letter contains a complete list of Discount's Subsidiaries as of the
date hereof. References in this Agreement (except as specifically otherwise
defined) to "affiliates" shall mean, as to any person, any other person which,
directly or indirectly, controls, or is controlled by, or is under common
control with, such person. As used in this definition, "control" (including,
with its correlative meanings, "controlled by" and "under common control with")
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of management or policies of a person, whether through the
ownership of securities or partnership of other ownership interests, by contract
or otherwise. References in the Agreement to "person" shall mean an individual,
a corporation, a partnership, an association, a trust or any other entity or
organization, including, without limitation, a governmental body or authority.
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<PAGE> 141
Section 8.12 Finders or Brokers. Except for SBC Warburg Dillon Read Inc.
with respect to Hi/Lo and Smith Barney, Inc. with respect to Discount, neither
Hi/Lo nor Discount nor any of their respective Subsidiaries has employed any
investment banker, broker, finder or intermediary in connection with the
transactions contemplated hereby who might be entitled to any fee or any
commission in connection with or upon consummation of the Merger.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first above written.
HI-LO AUTOMOTIVE, INC.
By: /s/ T. MICHAEL YOUNG
------------------------------------
T. Michael Young
Chairman, President and Chief
Executive Officer
DISCOUNT AUTO PARTS, INC.
By: /s/ PETER J. FONTAINE
------------------------------------
Peter J. Fontaine
Chief Executive Officer
HLA ACQUISITION, INC.
By: /s/ WILLIAM C. PERKINS
------------------------------------
William C. Perkins
President
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<PAGE> 142
Appendix B
[LOGO -- SBC WARBURG DILLON READ]
October 17, 1997
Board of Directors
Hi-Lo Automotive, Inc.
2575 West Bellfort
Houston, TX 77054
Gentlemen:
We understand that Hi-Lo Automotive, Inc. (the "Company") is undertaking a
transaction whereby HLA Acquisition, Inc. ("HLA"), a wholly owned subsidiary of
Discount Auto Parts, Inc. ("Discount"), will be merged with and into the Company
pursuant to the terms of an Agreement and Plan of Merger among the Company, HLA
and Discount, dated as of October 17, 1997 (the "Merger Agreement"), with the
result that the Company will become a wholly owned subsidiary of Discount (the
"Transaction"). Pursuant to the Transaction, each outstanding share of the
Company's Common Stock, $.01 par value ("the Company Common Stock"), shall be
converted, subject to adjustment as provided for in the Merger Agreement, into
approximately 0.1485 shares of Discount's Common Stock, par value $.01 per share
(the "Exchange Ratio"). The terms and conditions of the Transaction are more
fully set forth in the Merger Agreement.
You have requested our opinion as to whether the Exchange Ratio is fair
from a financial point of view to the shareholders of the Company.
SBC Warburg Dillon Read Inc., a subsidiary of Swiss Bank Corporation
("SBCWDR"), has acted as financial advisor to 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. As you know, SBCWDR has
provided investment banking services to the Company in the past and has 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 Discount.
In arriving at our opinion, we have, among other things: (i) reviewed
certain publicly available business and historical financial information
relating to the Company and Discount, (ii) reviewed certain financial
information and other data provided to us by the Company that is not publicly
available relating to the business and prospects of the Company, including
certain limited financial projections prepared by the management of the Company,
(iii) reviewed certain financial information and other data provided to us by
Discount that is not publicly available relating to the business and prospects
of Discount, including financial projections prepared by the management of
Discount, (iv) conducted discussions with members of the senior managements of
the Company and Discount, (v) reviewed publicly available financial and stock
market data with respect to certain other companies in lines of business we
believe to be generally comparable to those of the Company and Discount, (vi)
considered the pro forma effects of the Transaction on Discount's financial
statements, (vii) reviewed the historical market prices and trading volumes of
the common stocks of the Company and Discount, (viii) reviewed the Merger
Agreement in the form provided to us, (ix) discussed other strategic
alternatives available to the Company including a review of responses to
SBCWDR's solicitation of proposals for the purchase of the Company, and (x)
conducted such other financial studies, analyses and investigations, and
considered such other information as we deemed necessary or appropriate.
In connection with our review, we have, with your consent, not assumed any
responsibility for independent verification of any of the foregoing information
and have, with your consent, relied on its being complete and accurate in all
material respects. In addition, we have, with your consent, not made any
evaluation or appraisal of any of the assets or liabilities (contingent or
otherwise) of the Company or Discount, nor have we been furnished with any such
evaluation or appraisal. With respect to the financial projections
B-1
<PAGE> 143
[LOGO -- SBC WARBURG DILLON READ]
referred to above, 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 and Discount's management as to the future
financial performance of each company. Further, our opinion is based on
economic, monetary and market conditions existing on the date hereof. In
rendering this opinion, we are not making any recommendation to the shareholders
of the Company with respect to the advisability of disposing or retaining the
shares of Discount Common Stock received pursuant to the Transaction.
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 Exchange Ratio is fair from a
financial point of view to the shareholders of the Company.
<TABLE>
<S> <C>
Very Truly Yours,
SBC WARBURG DILLON READ INC.
By: /s/ WILLIAM P. POWELL
--------------------------------
William P. Powell
Managing Director
By: /s/ JONATHAN WEINTRAUB
--------------------------------
Jonathan Weintraub
Executive Director
</TABLE>
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<PAGE> 144
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Florida Business Corporation Act, as amended (the "Florida Act"),
provides that, in general, a business corporation may indemnify any person who
is or was a party to any proceeding (other than an action by, or in the right
of, the corporation) by reason of the fact that he or she is or was a director
or officer of the corporation, against liability incurred in connection with
such proceeding, including any appeal thereof, provided certain standards are
met, including that such officer or director acted in good faith and in a manner
he or she reasonably believed to be in, or not opposed to, the best interests of
the corporation, and provided further that, with respect to any criminal action
or proceeding, the officer or director had no reasonable cause to believe his or
her conduct was unlawful. In the case of proceedings by or in the right of the
corporation, the Florida Act provides that, in general, a corporation may
indemnify any person who was or is a party to any such proceeding by reason of
the fact that he or she is or was a director or officer of the corporation
against expenses and amounts paid in settlement actually and reasonably incurred
in connection with the defense or settlement of such proceeding, including any
appeal thereof, provided that such person acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best interests of
the corporation, except that no indemnification shall be made in respect of any
claim as to which such person is adjudged liable unless a court of competent
jurisdiction determines upon application that such person is fairly and
reasonably entitled to indemnity. To the extent that any officers or directors
are successful on the merits or otherwise in the defense of any of the
proceedings described above, the Florida Act provides that the corporation is
required to indemnify such officers or directors against expenses actually and
reasonably incurred in connection therewith. However, the Florida Act further
provides that, in general, indemnification or advancement of expenses shall not
be made to or on behalf of any officer or director if a judgment or other final
adjudication establishes that his or her actions, or omissions to act, were
material to the cause of action so adjudicated and constitute: (i) a violation
of the criminal law, unless the director or officer had reasonable cause to
believe his or her conduct was lawful or had no reasonable cause to believe it
was unlawful; (ii) a transaction from which the director or officer derived an
improper personal benefit; (iii) in the case of a director, a circumstance under
which the director has voted for or assented to a distribution made in violation
of the Florida Act or the corporation's articles of incorporation; or (iv)
willful misconduct or a conscious disregard for the best interests of the
corporation in a proceeding by or in the right of the corporation to procure a
judgment in its favor or in a proceeding by or in the right of a stockholder.
Article VI of the Amended and Restated Bylaws of Discount Auto Parts provides
that Discount Auto Parts may indemnify any director, officer or employee or any
former director, officer or employee to the full extent permitted by law.
Discount Auto Parts has purchased insurance with respect to, among other
things, the liabilities that may arise under the statutory provisions referred
to above. The directors and officers of Discount Auto Parts also are insured
against certain liabilities, including certain liabilities arising under the
Securities Act of 1933, which might be incurred by them in such capacities and
against which they are not indemnified by Discount Auto Parts.
Discount Auto Parts has entered into indemnity agreements with each of its
directors and certain of its executive officers which provide that Discount Auto
Parts will indemnify each director and each such executive officer against any
costs and expenses, judgments, settlements and fines incurred in connection with
any claim involving him by reason of his position as director or executive
officer provided that he meets certain standards of conduct.
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<PAGE> 145
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
2.1 -- Agreement and Plan of Recapitalization dated August 20, 1992
(Filed as Exhibit 10.21 to the Company's Form 10-Q for the
quarter ended September 1, 1992, as filed with the SEC on
October 15, 1992, and hereby incorporated by reference)
2.2 -- Agreement and Plan of Merger dated as of October 17, 1997
(Filed as Exhibit 2.1 to the Company's Form 8-K, as filed
with the SEC on October 22, 1997, and hereby incorporated by
reference)
3.1 -- Amended and Restated Articles of Incorporation (Filed as
Exhibit 3.2 to the Company's Form 10-Q for the quarter ended
September 1, 1992, as filed with the SEC on October 15,
1992, and hereby incorporated by reference)
3.2 -- Amended and Restated Bylaws (Filed as Exhibit 3.4 to the
Company's Form 10-Q for the quarter ended September 1, 1992,
as filed with the SEC on October 15, 1992, and hereby
incorporated by reference)
4.1 -- Specimen of Common Stock Certificate (Filed as Exhibit 4 to
the Company's Registration Statement on Form S-1 (No.
33-49400) as filed with the SEC on July 8, 1992, and hereby
incorporated by reference)
4.2 -- Note Agreement dated as of December 15, 1987 between
Discount Auto Parts, Inc. and Massachusetts Mutual Life
Insurance Company together with amendment dated as of
October 30, 1989 (Filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (No. 33-49400) as filed
with the SEC on July 8, 1992, and hereby incorporated by
reference)
4.3 -- Second Amendment to Note Agreement effective as of August
26, 1992 between Discount Auto Parts, Inc. and Massachusetts
Mutual Life Insurance Company (Filed as Exhibit 4.4 to the
Company's Form 10-K for the year ended May 30, 1995 as filed
with the SEC on August 16, 1995, and hereby incorporated by
reference)
4.4 -- Note Agreement dated as of October 30, 1989 between Discount
Auto Parts, Inc. and Massachusetts Mutual Life Insurance
Company (Filed as Exhibit 10.2 to the Company's Registration
Statement on Form S-1 (No. 33-49400) as filed with the SEC
on July 8, 1992, and hereby incorporated by reference)
4.5 -- Amendment Agreement to Note Agreement effective as of August
26, 1992 between Discount Auto Parts, Inc. and Massachusetts
Mutual Life Insurance Company (Filed as Exhibit 4.4 to the
Company's Form 10-K for the year ended May 30, 1995 as filed
with the SEC on August 16, 1995, and hereby incorporated by
reference)
4.6 -- Note Purchase Agreement dated as of July 15, 1997 between
Discount Auto Parts, Inc. and the Identified Purchasers
(Filed as Exhibit 4.7 to the Company's Form 10-K for the
fiscal year ended June 3, 1997, as filed with the SEC on
September 2, 1997, and hereby incorporated by reference)
5* -- Opinion of Trenam, Kemker, Scharf, Barkin, Frye, O'Neill &
Mullis, P.A.
8.1* -- Form of Opinion of Trenam, Kemker, Scharf, Barkin, Frye,
O'Neill & Mullis, P.A.
8.2* -- Form of Opinion of Vinson & Elkins L.L.P.
10.1 -- Revolving Credit Agreement dated as of July 16, 1997 by and
among Discount Auto Parts, Inc. and SunTrust Bank, Central
Florida, National Association, individually and as Agent,
AmSouth Bank, Barnett Bank, N.A., First Union National Bank
and The Fuji Bank and Trust Company (Filed as Exhibit 10.4
to the Company's Form 10-K for the fiscal year ended June 3,
1997, as filed with the SEC on September 2, 1997, and hereby
incorporated by reference)
</TABLE>
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<PAGE> 146
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.2 -- Amendment and Restatement of the Discount Auto Parts Team
Members' Profit Sharing Plan and Trust dated May 31, 1994
(Filed as Exhibit 10.12 to the Company's Form 10-K for the
fiscal year ended May 31, 1994, as filed with the SEC on
August 29, 1994, and hereby incorporated by reference)
10.3 -- Discount Auto Parts, Inc. Supplemental Executive Profit
Sharing Plan (Filed as Exhibit 10.5 to the Company's Form
10-K for the year ended May 30, 1995, as filed with the SEC
on August 26, 1995, and hereby incorporated by reference)
10.4 -- Incentive compensation plans for Peter J. Fontaine, William
C. Perkins and Warren Shatzer (Filed as Exhibit 10.7 to the
Company's Form 10-K for the year ended June 3, 1997, as
filed with the SEC on September 2, 1997, and hereby
incorporated by reference)
10.5 -- Discount Auto Parts, Inc., 1992 Stock Option Plan (Filed as
Exhibit 10.16 to the Company's Form 10-Q for the quarter
ended September 1, 1992, as filed with the SEC on October
15, 1992, and hereby incorporated by reference)
10.6 -- Discount Auto Parts, Inc., Amended and Restated 1992 Team
Member Stock Purchase Plan (Filed as Exhibit 10.9 to the
Company's Form 10- K for the fiscal year ended June 3, 1997,
as filed with the SEC on September 2, 1997, and hereby
incorporated by reference)
10.7 -- Discount Auto Parts, Inc., Non-Employee Directors' Stock
Option Plan (Filed as Exhibit 4.1 to the Company's
Registration Statement on Form S-8 (No. 33-84058) as filed
with the SEC on September 16, 1994, and hereby incorporated
by reference)
10.8 -- Discount Auto Parts, Inc. Amended and Restated 1995 Stock
Option Plan (Filed as Exhibit 10.12 to the Company's Form
10-K for the fiscal year ended June 3, 1997, as filed with
the SEC on September 2, 1997, and hereby incorporated by
reference)
10.9 -- Indemnification Agreements for Peter J. Fontaine, Warren
Shatzer, William C. Perkins, E.E. Wardlow and A Gordon
Tunstall (Filed as Exhibit 10.18 to the Company's Form 10-Q
for the quarter ended September 1, 1992, as filed with the
SEC on October 15, 1992, and hereby incorporated by
reference)
10.10 -- Indemnification Agreement for C. Michael Moore (Filed as
Exhibit 10.14 to the Company's Form 10-K for the fiscal year
ended June 3, 1997, as filed with the SEC on September 2,
1997, and hereby incorporated by reference)
10.11 -- Indemnification Agreement for David P. Walling (Filed as
Exhibit 10.15 to the Company's Form 10-K for the fiscal year
ended June 3, 1997, as filed with the SEC on September 2,
1997, and hereby incorporated by reference)
10.12 -- S Corporation Tax Allocation and Indemnification Agreement
dated August 20, 1992 (Filed as Exhibit 10.19 to the
Company's Form 10-Q for the quarter ended September 1, 1992,
as filed with the SEC on October 15, 1992, and hereby
incorporated by reference)
10.13 -- Master Joint Business Agreement of Q-Lube, Inc. and Discount
Auto Parts, Inc. dated as of January 1, 1997 (Filed as
Exhibit 10.16 to the Company's Form 10-Q for the quarter
ended March 4, 1997, as filed with the SEC on April 17,
1997, and hereby incorporated by reference)
10.14 -- General Partnership Agreement of DAP/LUBECO Partnership
(Filed as Exhibit 10.18 to the Company's Form 10-K for the
fiscal year ended June 3, 1997, as filed with the SEC on
September 2, 1997, and hereby incorporated by reference)
11.1 -- Schedule of Computation of Earnings Per Share -- Hi-Lo
Automotive, Inc.
13 -- Discount Auto Parts 1997 Annual Report to Stockholders
(Included as Exhibit 13 to the Company's Form 10-K for the
fiscal year ended June 3, 1997, as filed with the SEC on
September 2, 1997, and hereby incorporated by reference)
21 -- Subsidiaries of the Registrant
23.1 -- Consent of Ernst & Young LLP
</TABLE>
II-3
<PAGE> 147
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
23.2 -- Consent of Arthur Andersen LLP
23.3* -- Consent of Trenam, Kemker, Scharf, Barkin, Frye, O'Neill &
Mullis, P.A. (included in Exhibit 5)
23.4* -- Consent of Vinson & Elkins L.L.P. (included in Exhibit 8.2)
23.5 -- Consent of SBC Warburg Dillon Read, Inc.
24 -- Power of Attorney (included in the Signature Page to this
Registration Statement)
99.1 -- Form of Proxy for Hi-Lo Automotive, Inc. Special Meeting
</TABLE>
- ---------------
* To be filed by amendment.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 20, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this form within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment, all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by
II-4
<PAGE> 148
any person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the issuer undertakes that such reoffering prospectus will contain
the information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
The registrant undertakes that every prospectus: (i) that is filed pursuant
to the immediately preceding paragraph, or (ii) that purports to meet the
requirements of Section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-5
<PAGE> 149
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Lakeland, State of
Florida, on the 24th day of November, 1997.
DISCOUNT AUTO PARTS, INC.
By: /s/ PETER J. FONTAINE
------------------------------------
Peter J. Fontaine
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of the undersigned officers and
directors of Discount Auto Parts, Inc. (the "Company"), a Florida corporation,
for himself and not for one another, does hereby constitute and appoint Peter J.
Fontaine, William C. Perkins and C. Michael Moore, and each of them, a true and
lawful attorney in his name, place and stead, in any and all capacities, to sign
his name to any and all amendments, including post-effective amendments, to this
registration statement, and to sign a Registration Statement pursuant to Section
462(b) of the Securities Act of 1933, and to cause the same (together with all
Exhibits thereto) to be filed with the Securities and Exchange Commission,
granting unto said attorneys and each of them full power and authority to do and
perform any act and thing necessary and proper to be done in the premises, as
fully to all intents and purposes as the undersigned could do if personally
present, and each of the undersigned for himself hereby ratifies and confirms
all that said attorneys or any one of them shall lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ PETER J. FONTAINE Chief Executive Officer and November 24, 1997
- ----------------------------------------------------- Director (Principal
Peter J. Fontaine Executive Officer)
/s/ WILLIAM C. PERKINS President, Chief Operating November 24, 1997
- ----------------------------------------------------- Officer and Director
William C. Perkins
/s/ WARREN SHATZER Executive Vice President -- November 24, 1997
- ----------------------------------------------------- Merchandising and Director
Warren Shatzer
/s/ C. MICHAEL MOORE Chief Financial Officer November 24, 1997
- ----------------------------------------------------- (Principal Financial
C. Michael Moore Officer and Principal
Accounting Officer)
Director , 1997
- -----------------------------------------------------
A Gordon Tunstall
/s/ E.E. WARDLOW Director November 24, 1997
- -----------------------------------------------------
E.E. Wardlow
/s/ DAVID P. WALLING Director November 24, 1997
- -----------------------------------------------------
David P. Walling
</TABLE>
II-6
<PAGE> 150
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ----------------------------------------- --------- ----------------------- ---------- ---------
ADDITIONS
-----------------------
CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER END OF
CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
-------------- --------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
Allowance for doubtful accounts
receivable.......................... $1,459 632 -- 1,162(1) $ 929
Allowance for uncollectible vendor
credits............................. $ 319 87 -- -- $ 406
Year ended December 31, 1995
Allowance for doubtful accounts
receivable.......................... $ 918 1,172 -- 631(1) $1,459
Allowance for uncollectible vendor
credits............................. $ 208 111 -- -- $ 319
Year ended December 31, 1994
Allowance for doubtful accounts
receivable.......................... $ 688 674 -- 444(1) $ 918
Allowance for uncollectible vendor
credits............................. $ 170 120 -- 82(1) $ 208
</TABLE>
- ---------------
(1) Charge off of uncollectible accounts.
S-1
<PAGE> 151
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. EXHIBIT
- ------- -------
<C> <S> <C> <C>
11.1 -- Schedule of Computation of Earnings Per Share -- Hi-Lo
Automotive, Inc.
21 -- Subsidiaries of the Registrant
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Arthur Andersen LLP
23.5 -- Consent of SBC Warburg Dillon Read Inc.
99.1 -- Form of Proxy for Hi-Lo Automotive, Inc. Special Meeting
</TABLE>
<PAGE> 1
EXHIBIT 11.1
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average common shares outstanding............... 10,775,109 10,756,350 10,775,109 10,756,350
Common equivalent shares resulting from stock
options issued................................ 0 0 0 0
---------- ---------- ---------- ----------
Average common and common equivalent shares
outstanding................................... 10,775,109 10,756,350 10,775,109 10,756,350
========== ========== ========== ==========
Net income (loss)............................... $ 1,313 $ (51,659) $ 1,933 $ (51,905)
========== ========== ========== ==========
Earnings per common share:
Net income (loss) per common and common
equivalent share........................... $ 0.12 $ (4.80) $ 0.18 $ (4.83)
========== ========== ========== ==========
</TABLE>
Earnings per share have been computed by dividing net income by the average
number of common and common equivalent shares outstanding. Common equivalent
shares outstanding were computed using the treasury stock method. The difference
between shares for primary and fully diluted earnings per share was not
significant in any period. On November 1, 1994, a note was issued that is
convertible, effective November 1, 1996, into 93,859 shares of the Company's
Common Stock. Since September 30, 1997, this note had no significant effect on
earnings per share.
<PAGE> 2
EXHIBIT 11.1
(CONTINUED)
HI-LO AUTOMOTIVE, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COLUMN B
------------------------------------
DECEMBER 31,
------------------------------------
COLUMN A 1996 1995 1994
- -------- ---------- ---------- ----------
<S> <C> <C> <C>
Weighted average common shares outstanding................. 10,756,000 10,733,000 10,703,000
Common equivalent shares resulting from stock options
issued................................................... -- -- 33,000
---------- ---------- ----------
Total weighted average common and common equivalent shares
outstanding.............................................. 10,756,000 10,733,000 10,736,000
========== ========== ==========
Net income (loss).......................................... $ (53,723) $ 1,688 $ 9,133
========== ========== ==========
Earnings (loss) per common and common equivalent share..... $ (4.99) $ .16 $ .85
========== ========== ==========
</TABLE>
Earnings (loss) per common and common equivalent share have been computed
by dividing net income (loss) by the weighted average number of common and
common equivalent shares outstanding. Common equivalent shares outstanding were
computed using the treasury stock method. The difference between shares for
primary and fully diluted earnings per share was not significant in any year. On
November 1, 1994, a note was issued that is convertible, effective November 1,
1996, into 93,859 shares of the companies Common Stock. As of December 31, 1996,
this note had no significant effect on earnings per share.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME STATE OF ORGANIZATION
- ---- ---------------------
<S> <C>
DAP/LUBECO Corporation................................... Nevada
DAP/LUBECO Partnership................................... Nevada
HLA Acquisition, Inc..................................... Delaware
</TABLE>
All subsidiaries conduct business under their respective legal names.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and in the
caption "Discount Auto Parts Summary Historical Financial Information" in the
Registration Statement (Form S-4) and related Proxy Statement/Prospectus of
Discount Auto Parts, Inc. for the registration of 1,855,000 shares of its
common stock and to the incorporation by reference therein of our report dated
August 8, 1997, with respect to the consolidated financial statements of
Discount Auto Parts, Inc. incorporated by reference in its Annual Report (Form
10-K) for the year ended June 3, 1997, filed with the Securities and Exchange
Commission and in its Annual Report to Shareholders, included as Exhibit 13 to
this Registration Statement.
/s/ Ernst & Young LLP
Tampa, Florida
November 21, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated January 23, 1997 (and to all references to our Firm) included in or
made a part of this registration statement.
/s/ ARTHUR ANDERSEN LLP
Houston, Texas
November 21, 1997
<PAGE> 1
EXHIBIT 23.5
CONSENT OF SBC WARBURG DILLON READ INC.
We hereby consent to the (i) inclusion of our opinion letter to the Board
of Directors of Hi/Lo Automotive, Inc. ("Hi/LO") as Appendix B to the Proxy
Statement/Prospectus of Hi/LO and Discount Auto Parts, Inc. ("Discount Auto
Parts") relating to the proposed merger transaction involving Hi/LO and Discount
Auto Parts, and (ii) references made to our firm and such opinion in such Proxy
Statement/Prospectus under the captions entitled "Summary -- Recommendation of
the Hi/LO Boards of Directors" and "-- Opinion of Financial Advisor" and "THE
MERGER -- Background of the Merger," -- "Hi/LO's Reasons for the Merger;
Recommendation of the Hi/LO Board of Directors" and "-- Opinion of Financial
Advisor." In giving such consent, we do not admit that we come within the
category of persons whose consent is required under, and we do not admit that we
are "experts" for purposes of, the Securities Act of 1933, as amended, and the
rules and regulations promulgated thereunder.
By:
/s/ SBC WARBURG DILLON READ INC.
------------------------------------
SBC WARBURG DILLON READ INC.
New York, New York
November 24, 1997
<PAGE> 1
EXHIBIT 99.1
[Front Side of Proxy Card]
HI-LO AUTOMOTIVE, INC.
SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ________, _______, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints T. Michael Young, K. Grant
Hutchins, Gary D. Walther, and each of them, attorneys and proxies, with full
power of substitution, to vote as proxy all the shares of Common Stock standing
in the name of the undersigned at the Special Meeting of Stockholders of Hi-Lo
Automotive, Inc. ("Hi/LO") to be held at ______________________________
________________, Houston, Texas, at 9:00 A.M., Houston time, on _________,
______, 1998, and at any adjournment or postponement thereof, in accordance with
the instructions below. Receipt of the notice of meeting and Proxy
Statement/Prospectus dated _____________, 1997 related to the Special Meeting,
is hereby acknowledged.
The undersigned hereby revokes any proxies heretofore given and directs
said attorneys to act or vote as follows:
(PLEASE DATE AND SIGN ON REVERSE SIDE)
[Reverse Side of Proxy]
1. To approve and adopt the Agreement and Plan of Merger dated as of
October 17, 1997 by and among Discount Auto Parts, Inc., HLA
Acquisition, Inc. and Hi-Lo Automotive, Inc., as set forth in
Appendix A attached to the proxy statement/prospectus.
____ FOR ____ AGAINST ____ ABSTAIN
2. In their discretion, the Proxies are authorized to vote upon such
other business as may properly be brought before the meeting or
any adjournment or postponement thereof.
This proxy is solicited by the Board of Directors and will be voted in
accordance with the stockholder's specifications hereon. In the absence of such
specifications, the proxy will be voted FOR approval and adoption of the
Agreement and Plan of Merger dated as of October 17, 1997.
Dated _________________, 1998 ______________________________
______________________________
Signature of Stockholder(s)*
*Please sign exactly as name
appears on this proxy. Joint
owners each should sign. If
held by a corporation or
partnership, please sign in
the full corporate or
partnership name, by an
authorized corporate officer
or, if a partnership, by an
authoried person. When
signing as an authorized
officer or person, attorney,
trustee, administrator,
executor, etc., please
indicate your full tile as
such.
PLEASE MARK, DATE, SIGN AND RETURN YOUR PROXY PROMPTLY.
PLEASE DO NOT FOLD THIS PROXY.
