<PAGE>
SCHEDULE 14A/A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. 2)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement (revised) [_] Confidential, for Use of the
Commission Only (as permitted
by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
LESLIE'S POOLMART
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
-------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
-------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
-------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
-------------------------------------------------------------------------
(5) Total fee paid:
-------------------------------------------------------------------------
[X] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
$19,517.16
-------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
Schedule 14A
-------------------------------------------------------------------------
(3) Filing Party:
Leslie's Poolmart
-------------------------------------------------------------------------
(4) Date Filed:
March 17, 1997
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Notes:
<PAGE>
[LOGO OF LESLIE'S POOLMART]
LESLIE'S POOLMART
20630 PLUMMER STREET
CHATSWORTH, CALIFORNIA 91311
To Our Shareholders:
You are cordially invited to attend a Special Meeting of Shareholders
("Special Meeting") of Leslie's Poolmart (the "Company" or "Leslie's
California") to be held on June 10, 1997, at 11:00 a.m., local time, at the
Company's headquarters, located at 20630 Plummer Street, Chatsworth,
California.
The purpose of the Special Meeting is to consider and vote upon (i) a merger
(the "Reincorporation") changing the state of incorporation of Leslie's
California from California to Delaware, and (ii) a merger (the "Merger") of
the resulting Delaware corporation with Poolmart USA Inc. ("Poolmart"), a
newly-formed company. If the Merger is consummated, each outstanding share of
Common Stock will be cancelled and converted automatically into the right to
receive $14.50 in cash, payable to the holder thereof, without interest, other
than 359,505 shares (the "Continuing Shares") held primarily by members of
management (the "Continuing Stockholders") which shall remain outstanding
(currently representing approximately 5.5% of the outstanding Common Stock of
Leslie's California) and other than shares held by shareholders who are
entitled to and who have perfected their dissenters' rights. The Continuing
Stockholders will receive $14.50 per share for their remaining outstanding
946,182 shares, and the difference between $14.50 and the option exercise
prices for their options covering 259,938 shares.
Consummation of the Reincorporation is a condition to consummating the
Merger. Consummation of the Merger is subject to a number of conditions,
including Poolmart obtaining the necessary financing. Accordingly, even if the
shareholders approve both the Reincorporation and the Merger (collectively,
the "Merger Transaction"), there can be no assurance that the Merger will be
consummated. If the Reincorporation is approved by shareholders but the
conditions to the Merger are not satisfied, Leslie's California intends to
consummate the Reincorporation without the Merger. In such event, each
outstanding share of Common Stock of Leslie's California will automatically be
converted into one share of Common Stock of LPM Holdings, Inc., a wholly-owned
Delaware subsidiary of the Company, that will be the surviving corporation in
the Reincorporation and will change its name to Leslie's Poolmart, Inc.
A special committee of the Board of Directors (the "Special Committee"),
consisting of two independent directors who are not Continuing Stockholders,
was formed on November 11, 1996 to investigate, consider, evaluate and act
upon any possible business combination that may be proposed to Leslie's
California, including any proposal that may be made by management. In
connection with such consideration, the Special Committee engaged Donaldson,
Lufkin & Jenrette Securities Corporation ("DLJ") to act as its financial
advisor, and Dillon, Read & Co. Inc. ("Dillon Read") to review any such
business combination and render its opinion. Both DLJ and Dillon Read have
rendered their opinions that, as of the effective date of their respective
opinions, based upon and subject to the assumptions, limitations and
qualifications set forth in such opinions, the cash merger consideration to be
received in the Merger Transaction is fair, from a financial point of view, to
the shareholders of the Company other than the Continuing Stockholders. The
written opinions of DLJ and Dillon Read, both dated February 26, 1997, are
attached as Appendices C and D to the enclosed Proxy Statement and should be
read carefully and in their entirety by shareholders. The Special Committee
has unanimously recommended to the Board of Directors that the principal terms
of the Merger Transaction and related agreements be approved.
<PAGE>
The Special Committee and the Board of Directors believe that the terms of
the Merger Transaction are fair to, and in the best interests of, the Company's
shareholders and unanimously recommend that shareholders approve the
Reincorporation and the Merger. It should be noted that certain directors have
conflicts of interest in connection with this recommendation.
Approval of both proposals for the Reincorporation and the Merger will
require (i) the affirmative vote of holders of a majority of the outstanding
shares of Common Stock entitled to vote at the Special Meeting and (ii) the
affirmative vote of holders of a majority of the shares of Common Stock voting
at the Special Meeting and owned by the shareholders other than the Continuing
Stockholders. Shareholders (including the Continuing Stockholders), who on the
record date collectively owned approximately 22% of the outstanding shares of
Common Stock, have agreed to vote their shares of the Company's Common Stock
for approval of the Merger Transaction.
The accompanying Proxy Statement provides you with a summary of the proposed
Merger Transaction and certain additional information. Please give all this
information your careful attention.
Whether or not you plan to attend, it is important that your shares are
represented at the Special Meeting. Accordingly, you are requested to promptly
complete, sign and date the enclosed proxy and return it in the envelope
provided.
Very truly yours,
/s/ Michael J. Fourticq
Michael J. Fourticq
Chairman of the Board
May 9, 1997
2
<PAGE>
LOGO
LESLIE'S POOLMART
20630 PLUMMER STREET
CHATSWORTH, CALIFORNIA 91311
----------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD JUNE 10, 1997
----------------
To Our Shareholders:
Notice is Hereby Given that a Special Meeting of Shareholders (the "Special
Meeting") of Leslie's Poolmart, a California corporation (the "Company" or
"Leslie's California"), will be held on June 10, 1997, at 11:00 a.m., local
time, at the Company's headquarters, located at 20630 Plummer Street,
Chatsworth, California, for the following purposes:
(i) To consider and vote on a proposal to change Leslie's California's
state of incorporation from California to Delaware by approving an
Agreement of Merger providing for the merger (the "Reincorporation") of
Leslie's California with and into LPM Holdings, Inc., a wholly-owned
Delaware subsidiary of Leslie's California ("Leslie's Delaware"). A copy of
the Agreement of Merger is attached as Appendix A to and is described in
the accompanying Proxy Statement.
(ii) To consider and vote on a proposal to approve an Agreement and Plan
of Merger pursuant to which Poolmart USA Inc. ("Poolmart"), a newly-formed
company, will be merged (the "Merger") with and into Leslie's Delaware and
each shareholder of the Company would become entitled to receive $14.50 in
cash for each outstanding share of Common Stock owned immediately prior to
the effective date of the Merger (other than certain shareholders who will
continue to hold 359,505 shares of Leslie's Delaware and will receive
$14.50 per share for the balance of their shares and other than
shareholders who are entitled to and have perfected their dissenters'
rights). A copy of the Agreement and Plan of Merger is attached as Appendix
B to and is described in the accompanying Proxy Statement.
(iii) To consider and act upon such other matters as may properly come
before the Special Meeting or any adjournment or adjournments thereof.
The Board of Directors determined that only holders of the Company's Common
Stock of record at the close of business on April 22, 1997, will be entitled
to notice of, and to vote at, the Special Meeting or any adjournment or
adjournments thereof.
By Order of the Board of Directors
/s/ Cynthia G. Watts
Cynthia G. Watts
Vice President, General Counsel and
Secretary
May 9, 1997
<PAGE>
LOGO
LESLIE'S POOLMART
----------------
PROXY STATEMENT
----------------
INTRODUCTION
This Proxy Statement is being furnished to the shareholders of Leslie's
Poolmart, a California corporation (the "Company" or "Leslie's California"),
in connection with the solicitation by its Board of Directors (the "Board") of
proxies to be used at Special Meeting of Shareholders (the "Special Meeting")
to be held on June 10, 1997 at 11:00 a.m. (local time) at the Company's
headquarters, and at any adjournment or adjournments thereof. This Proxy
Statement, the Notice of Special Meeting of Shareholders and the enclosed form
of Proxy are first being mailed to shareholders of Leslie's California on or
about May 9, 1997.
The Special Meeting of Shareholders has been called to consider and vote on
(a) a proposal to change Leslie's California's state of incorporation from
California to Delaware by approving an Agreement of Merger (the
"Reincorporation Agreement") (attached to this Proxy Statement as Appendix A),
providing for the merger (the "Reincorporation") of Leslie's California with
and into LPM Holdings, Inc., a wholly-owned Delaware subsidiary of Leslie's
California ("Leslie's Delaware"); and (b) a proposal to approve an Agreement
and Plan of Merger (the "Merger Agreement") (attached to this Proxy Statement
as Appendix B) pursuant to which Poolmart USA Inc. ("Poolmart"), a newly-
formed company, will be merged with and into Leslie's Delaware (the "Merger")
and each outstanding share of Common Stock will be cancelled and converted
automatically into the right to receive $14.50 in cash, payable to the holder
thereof, without interest, other than 359,505 shares (the "Continuing Shares")
held primarily by members of management of Leslie's California (the
"Continuing Stockholders") which shall remain outstanding (currently
representing approximately 5.5% of the outstanding Common Stock) and other
than shares held by shareholders who are entitled to and who have perfected
their dissenters' rights. The Continuing Stockholders will receive $14.50 per
share for their remaining outstanding 946,182 shares, and the difference
between $14.50 and the option exercise prices for their options covering
259,938 shares.
Consummation of the Reincorporation is a condition to consummating the
Merger. Consummating the Merger is subject to a number of additional
conditions, including Poolmart obtaining the necessary financing. Accordingly,
even if shareholders approve both the Reincorporation and the Merger
(collectively, the "Merger Transaction"), there can be no assurance that the
Merger will be consummated. If the additional conditions to the Merger are not
satisfied following shareholder approval of the Merger Transaction, Leslie's
California intends to consummate the Reincorporation. In such event, each
outstanding share of Common Stock of Leslie's California will automatically be
converted into one share of Common Stock of LPM Holdings, Inc., a wholly-owned
subsidiary of the Company that will be the surviving corporation in the
Reincorporation and will change its name to Leslie's Poolmart, Inc.
----------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS
OF SUCH TRANSACTIONS NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION
CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
i
<PAGE>
The Board of Directors has fixed the close of business on April 22, 1997 as
the record date (the "Record Date") for the determination of shareholders
entitled to notice of, and to vote at, the Special Meeting and any adjournment
or adjournments thereof. Each holder of record of Leslie's California Common
Stock at the close of business on the Record Date is entitled to one vote for
each share then held on each matter submitted to a vote of shareholders. At
the Record Date, there were 6,554,672 shares of Leslie's California Common
Stock outstanding. The holders of a majority of the outstanding shares
entitled to vote at the Special Meeting must be present in person or
represented by proxy to constitute a quorum for the transaction of business.
Abstentions are counted for purposes of determining the presence or absence of
a quorum for the transaction of business.
Approval of the principal terms of the Reincorporation Agreement and of the
Merger Agreement will require the affirmative vote of the holders of (i) a
majority of the outstanding shares of Leslie's California Common Stock
entitled to vote at the Special Meeting pursuant to California law and (ii) a
majority of the shares of Leslie's California Common Stock voting at the
Special Meeting and owned by shareholders other than the Continuing
Stockholders (the "Public Shareholders") pursuant to the Merger Agreement. A
failure to vote or a vote to abstain will have the same legal effect as a vote
cast against approval.
Brokers and, in many cases, nominees will not have discretionary power to
vote on proposals to be presented at the Special Meeting. Accordingly,
beneficial owners of shares should instruct their brokers or nominees how to
vote.
A shareholder giving a proxy has the power to revoke it at any time before
it is exercised by filing with the Secretary of Leslie's California an
instrument revoking it or a duly executed proxy bearing a later date or by
voting in person at the Special Meeting. Subject to such revocation, all
shares represented by each properly executed proxy received by Leslie's
California will be voted in accordance with the instructions indicated
thereon, and if no instructions are indicated, will be voted to approve the
Reincorporation and the Merger.
Shareholders of Leslie's California will be entitled to require Leslie's
California to purchase their shares for cash at their fair market value as of
November 11, 1996, the day before the terms of the merger to acquire the
shares of Leslie's California for cash at $14.50 per share were announced,
excluding any appreciation or depreciation as a consequence of the merger
("Dissenters' Rights"), if demands for payment are filed with respect to 5% or
more of the outstanding shares of Leslie's California Common Stock. The
obligation of Poolmart to effect the Merger is subject to the condition, which
may be waived by Poolmart, that holders of 5% or more of Leslie's California
Common Stock not exercise their Dissenters' Rights. See "Rights of Dissenting
Shareholders."
THE BOARD RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR" THE APPROVAL OF THE
PRINCIPAL TERMS OF THE REINCORPORATION AGREEMENT AND THE MERGER AGREEMENT. IT
SHOULD BE NOTED THAT CERTAIN DIRECTORS HAVE CONFLICTS OF INTEREST IN
CONNECTION WITH THIS RECOMMENDATION. SEE "SPECIAL FACTORS--CONFLICTS OF
INTEREST."
ii
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY................................................................... 1
Date, Time and Place of the Special Meeting............................. 1
Purpose of the Special Meeting.......................................... 1
Record Date and Quorum.................................................. 1
Vote Required........................................................... 1
Parties to the Merger Transaction....................................... 2
The Proposals........................................................... 2
Effective Date of the Merger; Payment for Shares........................ 3
Background of the Merger Transaction.................................... 3
The Special Committee's and Board's Recommendation...................... 4
Opinions of Investment Bankers.......................................... 4
Purpose and Reasons of the Hancock Group and LGP for the Merger
Transaction............................................................ 4
Position of the Hancock Group as to Fairness of the Merger Transaction.. 5
Conflicts of Interest................................................... 5
Certain Effects of the Merger........................................... 6
Conditions to the Merger; Termination; Expenses......................... 7
Federal Income Tax Consequences......................................... 8
Accounting Treatment.................................................... 8
Financing of the Merger................................................. 8
Market Prices for Common Stock and Dividends............................ 8
Rights of Dissenting Shareholders....................................... 9
Summary of Selected Consolidated Financial Data......................... 10
First Quarter Results................................................... 10
Certain Forward Looking Information..................................... 11
SPECIAL FACTORS........................................................... 12
Background of the Merger Transaction.................................... 12
The Special Committee's and Board's Recommendation...................... 17
Opinion of DLJ.......................................................... 20
Opinion of Dillon Read.................................................. 23
Purpose and Reasons of Hancock Group and LGP for the Merger
Transaction............................................................ 27
Position of Hancock Group as to Fairness of the Merger Transaction...... 27
Conflicts of Interest................................................... 27
Certain Effects of the Merger........................................... 32
Conduct of Leslie's Delaware's Business After the Merger................ 33
THE PROPOSALS............................................................. 33
Vote Required; Record Date.............................................. 33
Effective Date.......................................................... 34
THE REINCORPORATION....................................................... 35
Conversion of Securities................................................ 35
Public Market for Securities............................................ 35
Approval of New Charter and Bylaws...................................... 35
Effective Time.......................................................... 35
Dissenters' Rights...................................................... 36
Principal Reasons for the Proposed Reincorporation...................... 36
Possible Disadvantages.................................................. 37
Effect on Leslie's California........................................... 38
The Charters and Bylaws of Leslie's California and Leslie's Delaware.... 38
Significant Differences Between the Corporation Laws of California and
Delaware............................................................... 38
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE MERGER............................................................... 39
Conversion of Securities............................................... 39
Treatment of Stock Options............................................. 39
Payment for Shares..................................................... 39
Transfer of Shares..................................................... 40
Conditions............................................................. 40
Representations and Warranties......................................... 41
Covenants.............................................................. 41
Nonsolicitation Covenant............................................... 42
Indemnification and Insurance.......................................... 43
Expenses............................................................... 43
Termination, Amendment and Waiver...................................... 43
Termination Fee........................................................ 44
Financing.............................................................. 45
Regulatory Approvals................................................... 48
Accounting Treatment................................................... 49
Dissenters' Rights..................................................... 49
FEDERAL INCOME TAX CONSEQUENCES.......................................... 49
Reincorporation........................................................ 49
Merger................................................................. 49
BUSINESS OF THE COMPANY.................................................. 51
MARKET PRICES OF COMMON STOCK AND DIVIDENDS.............................. 52
RIGHTS OF DISSENTING SHAREHOLDERS........................................ 54
SELECTED CONSOLIDATED FINANCIAL DATA..................................... 56
First Quarter Results.................................................. 56
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 57
Results of Operations.................................................. 57
Financial Condition, Liquidity and Capital Resources................... 59
CERTAIN FORWARD LOOKING INFORMATION...................................... 61
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT................. 63
CERTAIN INFORMATION CONCERNING HANCOCK GROUP AND GREEN................... 64
PROXY SOLICITATION....................................................... 65
SHAREHOLDER PROPOSALS.................................................... 65
INDEPENDENT PUBLIC ACCOUNTANTS........................................... 65
OTHER MATTERS............................................................ 65
INCORPORATION BY REFERENCE............................................... 66
INDEX TO FINANCIAL STATEMENTS............................................ FS-1
APPENDIX A--AGREEMENT OF MERGER.......................................... A-1
APPENDIX B--AGREEMENT AND PLAN OF MERGER................................. B-1
APPENDIX C--OPINION OF DONALDSON, LUFKIN & JENRETTE SECURITIES
CORPORATION................................................. C-1
</TABLE>
iv
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
APPENDIX D--OPINION OF DILLON, READ & CO. INC............................ D-1
APPENDIX E--SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF
CALIFORNIA AND DELAWARE..................................... E-1
APPENDIX F--CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW......... F-1
APPENDIX G--CERTIFICATE OF INCORPORATION OF LESLIE'S DELAWARE............ G-1
APPENDIX H--BYLAWS OF LESLIE'S DELAWARE.................................. H-1
APPENDIX I--DIRECTORS AND EXECUTIVE OFFICERS OF LESLIE'S CALIFORNIA AND
CERTAIN OTHER PERSONS....................................... I-1
</TABLE>
v
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement. Reference is made to, and this Summary is qualified in its
entirety by, the more detailed information contained elsewhere in this Proxy
Statement. Shareholders are urged to read this Proxy Statement and its
appendices in their entirety before voting.
DATE, TIME AND PLACE OF THE SPECIAL MEETING
A Special Meeting of Shareholders (the "Special Meeting") of Leslie's
Poolmart (the "Company" or "Leslie's California") will be held on June 10,
1997, at 11:00 a.m., local time, at the Company's headquarters, located at
20630 Plummer Street, Chatsworth, California.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, the shareholders will consider and vote on (a) a
proposal to approve a change in Leslie's California's state of incorporation
from California to Delaware (the "Reincorporation") by approving an Agreement
of Merger (the "Reincorporation Agreement") (attached to the Proxy Statement as
Appendix A), providing for the merger of Leslie's California with and into LPM
Holdings, Inc., a wholly-owned Delaware subsidiary of Leslie's California
("Leslie's Delaware"); and (b) a proposal to approve an Agreement and Plan of
Merger (the "Merger Agreement") (attached to the Proxy Statement as Appendix B)
pursuant to which Poolmart USA Inc. ("Poolmart"), a newly-formed company, will
be merged with and into Leslie's Delaware (the "Merger") and each outstanding
share of Common Stock will be converted automatically into the right to receive
$14.50 in cash payable to the holders thereof, without interest (the "Cash
Merger Consideration"), other than 359,505 shares (the "Continuing Shares")
held primarily by members of management of the Company (the "Continuing
Stockholders") which shall remain outstanding (representing approximately 5.5%
of the outstanding Common Stock) and other than shares held by shareholders who
are entitled to and who have perfected their dissenters' rights. In addition,
946,182 shares held by the Continuing Stockholders will be converted into the
right to receive $14.50 in cash per share and, with respect to 259,938 shares
subject to stock options, the difference between $14.50 per share and the
option exercise prices. See "The Proposals," "The Reincorporation" and "The
Merger."
RECORD DATE AND QUORUM
The Board of Directors of the Company (the "Board") has fixed the close of
business on April 22, 1997 as the record date (the "Record Date") for the
determination of shareholders entitled to notice of, and to vote at, the
Special Meeting and any adjournment or adjournments thereof. Each holder of
record of Leslie's California Common Stock at the close of business on the
Record Date is entitled to one vote for each share then held on each matter
submitted to a vote of shareholders. At the Record Date, there were 6,554,672
shares of Leslie's California Common Stock outstanding. The holders of a
majority of the outstanding shares entitled to vote at the Special Meeting must
be present in person or represented by proxy to constitute a quorum for the
transaction of business. See "The Proposals--Vote Required; Record Date."
VOTE REQUIRED
The affirmative vote of the holders of a majority of (i) the outstanding
shares of Leslie's California Common Stock entitled to vote at the Special
Meeting pursuant to California law and (ii) the shares of Leslie's California
Common Stock voting at the Special Meeting and owned by shareholders who are
not Continuing Stockholders (the "Public Shareholders") pursuant to the Merger
Agreement, is required to approve the principal terms of both the
Reincorporation Agreement and the Merger Agreement. Thus, a failure to vote or
a vote to abstain will have the same legal effect as a vote cast against
approval. In addition, brokers who hold shares of Leslie's
1
<PAGE>
California Common Stock as nominees will not have discretionary authority to
vote such shares in the absence of instructions from the beneficial owners. See
"The Proposals--Vote Required; Record Date."
At the Record Date, there were 6,554,672 shares of Leslie's California Common
Stock outstanding. Shareholders (including the Continuing Stockholders), who
collectively owned approximately 22% of the outstanding shares of Leslie's
California Common Stock, have agreed to vote their shares for approval of the
Merger Transaction. The Company has been advised that all of the other
directors and executive officers also intend to vote all their shares in favor
of approval. See "The Proposals--Vote Required; Record Date."
PARTIES TO THE MERGER TRANSACTION
The Company. The Company is the country's leading specialty retailer of
swimming pool supplies and related products, marketing its products under the
trade name Leslie's Swimming Pool Supplies through 278 retail stores in 27
states and a nationwide mail-order catalog. The principal executive offices of
the Company are located at 20630 Plummer Street, Chatsworth, California 91311.
The Company's telephone number is(818) 993-4212. See "Business of the Company."
Leslie's Delaware. Leslie's Delaware is a wholly-owned subsidiary of Leslie's
California and has not conducted any prior business. The principal executive
offices of and telephone number for Leslie's Delaware are the same as the
Company.
Poolmart. Poolmart was recently formed by Leonard Green & Partners, L.P.
("LGP") for the sole purpose of effecting the Merger and has not conducted any
prior business. The principal executive offices of Poolmart are located at
11111 Santa Monica Boulevard, Suite 2000, Los Angeles, California 90025.
Poolmart's telephone number is (310) 954-0444. See "Certain Information
Concerning Hancock Group and Green."
THE PROPOSALS
The Reincorporation Agreement provides that Leslie's California will be
merged with and into Leslie's Delaware and that following the Reincorporation,
the separate existence of Leslie's California will cease and Leslie's Delaware
will continue as the surviving corporation and will continue to operate the
business of Leslie's California under the name "Leslie's Poolmart, Inc." Upon
consummation of the Reincorporation, each outstanding share of Leslie's
California Common Stock will be automatically converted into one share of
Leslie's Delaware Common Stock. See "The Reincorporation." Alternatively, if
the applicable statutory conditions are met, holders of Leslie's California
Common Stock may exercise dissenters' rights. See "Rights of Dissenting
Shareholders."
The principal reasons for the Reincorporation are to cause Delaware corporate
law rather than California corporate law to be applicable to Leslie's
California's corporate matters including the Merger. In contrast to California
law, Delaware law allows the Continuing Stockholders to retain their Continuing
Shares in the Merger and to have all other shares of the same class converted
into the right to receive cash. See "The Reincorporation--Principal Reasons for
the Proposed Reincorporation" and "The Reincorporation--Significant Differences
Between the Corporation Laws of California and Delaware." If the
Reincorporation is approved by the Company's shareholders, but the conditions
to the Merger are not satisfied, the Company intends to consummate the
Reincorporation without the Merger. For a comparison of shareholders rights and
the powers of management under California and Delaware law, see "Appendix E--
Significant Differences Between the Corporation Laws of California and
Delaware."
2
<PAGE>
The Merger Agreement provides that immediately following the Reincorporation
and subject to satisfaction of certain additional conditions, Poolmart, a
privately owned Delaware corporation organized by LGP, will be merged into
Leslie's Delaware, and that following the Merger, the separate existence of
Poolmart will cease and Leslie's Delaware will continue as the surviving
corporation. At the Effective Date of the Merger and subject to the conditions
and procedures set forth in the Merger Agreement, each share of issued and
outstanding Common Stock (other than 359,505 shares owned by the Continuing
Stockholders and shares as to which statutory dissenter's rights are properly
perfected and not withdrawn) will, by virtue of the Merger, be converted into
the right to receive $14.50 in cash, without interest. As a result of the
Merger, Leslie's California's Common Stock will no longer be publicly traded
and will be privately owned by the Continuing Stockholders, an affiliate of LGP
and certain other investors. See "The Merger."
The Reincorporation and the Merger are sometimes collectively referred to
herein as the "Merger Transaction."
EFFECTIVE DATE OF THE MERGER; PAYMENT FOR SHARES
The Merger will become effective (the "Effective Date") at the time and date
when a copy of a certificate of merger is filed with the Secretary of State of
the State of Delaware pursuant to the Delaware General Corporation Law. The
time of such filing is currently expected to occur as soon as practicable after
the Special Meeting, subject to approval of the principal terms of the
Reincorporation Agreement and the Merger Agreement at the Special Meeting and
satisfaction or waiver of the terms and conditions of the Merger Agreement. See
"The Proposals--Effective Date" and "The Merger--Conditions." Detailed
instructions with regard to the surrender of certificates, together with a
letter of transmittal, will be forwarded to shareholders by Chase Mellon
Shareholder Services (the "Disbursing Agent") promptly following the Effective
Date. Shareholders should not submit their certificates to the Disbursing Agent
until they have received such materials. Payment for shares will be made to
shareholders as promptly as practical following receipt by the Disbursing Agent
of their certificates and other required documents. No interest will be paid or
accrued on the cash payable upon the surrender of certificates. See "The
Merger--Payment for Shares." SHAREHOLDERS SHOULD NOT SEND ANY SHARE
CERTIFICATES AT THIS TIME.
BACKGROUND OF THE MERGER TRANSACTION
In December 1995, the Company engaged Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ") to serve as its financial advisor in an exploration of
strategic alternatives, including a sale of the Company. The marketing of the
Company was deferred until August 1996, when an offering memorandum was
prepared and contact was made with potential buyers. The Board was advised in
November 1996 that this effort had resulted in the receipt of only two
indications of interest, both from potential financial buyers, at prices
ranging from $13.00 to $14.50 in cash per share. Thereafter, a management group
led by Hancock Park Associates II, L.P. ("HPA"), the general partners of which
are Michael J. Fourticq, Chairman of the Company's Board, and Brian P.
McDermott, its President and Chief Executive Officer, presented an offer to
purchase Leslie's California Common Stock for a cash price of $14.50 per share.
The offer was publicly announced on November 12, 1996.
On November 11, 1996, a special committee of newly elected independent
members of the Board (the "Special Committee"), consisting of Dann V. Angeloff
and Clarence T. Schmitz, was appointed to evaluate proposals for business
combinations, including that submitted by HPA. The Special Committee engaged
DLJ as its financial advisor to negotiate with HPA as well as to seek other
proposals and render a fairness opinion. The Special Committee also retained
Dillon, Read & Co. Inc. ("Dillon Read") to review any proposed business
combination and to render its opinion. LGP, one of the financial buyers that
had indicated interest, was encouraged to make a proposal. In December, LGP
clarified its earlier indication of interest and stated its desire to sponsor a
leveraged recapitalization which would deliver $15.00 in cash per share to the
existing shareholders. LGP stated that the indicated transaction was subject to
completion of due diligence, the availability of financing,
3
<PAGE>
including preferred stock financing from Occidental Petroleum Corporation
("Occidental"), negotiation and completion of transaction documentation and
endorsement of this transaction by management and the Board. After completing
its due diligence and engaging in discussions with certain potential sources of
financing, LGP concluded that it would not participate in a transaction valuing
the Company at more than $14.50 per share. Further discussions led eventually
to a combined proposal by HPA and LGP for the Merger Transaction.
For a more complete discussion of the background, see "Special Factors--
Background of the Merger Transaction."
THE SPECIAL COMMITTEE'S AND BOARD'S RECOMMENDATION
The Special Committee considered the proposal for the Merger Transaction and
actively negotiated the terms of the Reincorporation Agreement and the Merger
Agreement. The seasonality of the Company's business, its dependence upon
weather, the thin trading market for Leslie's California Common Stock, the very
limited analyst following for the stock and the difficulty of predicting future
financial performance, all contributed to the Special Committee's belief that
the alternative of remaining a public company was not in the best interests of
the shareholders and that the proposed transaction was the best alternative to
enhance shareholder value under present circumstances.
Both DLJ and Dillon Read rendered their opinions that, as of the dates of
such opinions, and subject to the assumptions, limitations and qualifications
set forth in such opinions, the Cash Merger Consideration to be received in the
Merger Transaction by the Public Shareholders was fair, from a financial point
of view. The Special Committee has determined that the Merger Transaction is
fair to, and in the best interests of, the shareholders of Leslie's California
and unanimously recommended to the Board that the Reincorporation Agreement and
the Merger Agreement be approved. See "Special Factors--The Special Committee's
and Board of Directors' Recommendation."
On February 26, 1997, the Board met and, after considering the recommendation
of the Special Committee and the fairness opinions of DLJ and Dillon Read,
unanimously approved the Reincorporation Agreement and the Merger Agreement and
determined that the Merger Transaction is fair to, and in the best interests
of, the shareholders of Leslie's California. THE SPECIAL COMMITTEE AND THE
BOARD RECOMMEND THAT THE LESLIE'S CALIFORNIA SHAREHOLDERS VOTE TO APPROVE THE
PRINCIPAL TERMS OF THE REINCORPORATION AGREEMENT AND THE MERGER AGREEMENT. See
"Special Factors--The Special Committee's and Board of Directors'
Recommendation." Certain members of the management, the Special Committee and
the Board have certain interests which present them with potential or actual
conflicts of interest in connection with this recommendation and the Merger
Transaction. See "Special Factors--Conflicts of Interest."
OPINIONS OF INVESTMENT BANKERS
The Special Committee retained DLJ to act as its financial advisor and Dillon
Read to review any proposed business combination and render its opinion. Both
DLJ and Dillon Read provided opinions dated February 26, 1997 to the Special
Committee and the Board that, as of that date, and subject to the assumptions,
limitations and qualifications set forth in such opinions, the Cash Merger
Consideration to be received in the Merger Transaction by the Public
Shareholders was fair, from a financial point of view. The full text of the
written opinions of DLJ and Dillon Read, which set forth a description of
assumptions made, matters considered and limitations on the review undertaken
by DLJ and Dillon Read, are attached as Appendix C and Appendix D,
respectively, to this Proxy Statement. Shareholders are urged to read such
opinions carefully in their entirety. See "Special Factors--Opinion of DLJ" and
"--Opinion of Dillon Read."
PURPOSE AND REASONS OF THE HANCOCK GROUP AND LGP FOR THE MERGER TRANSACTION
The purpose of Michael J. Fourticq, Brian P. McDermott, Gregory Fourticq,
Richard H. Hillman and Robert D. Olsen (collectively, the "Hancock Group") and
Green Equity Investors II, L.P., an affiliate of LGP
4
<PAGE>
("Green"), for engaging in the transactions contemplated by the Merger
Agreement is to acquire 100% ownership of the Company, before giving effect to
the grant of options and the issuance of warrants described below. Upon
consummation of the Merger, members of the Hancock Group will continue a
portion of their investment in the Company through ownership of the Continuing
Shares and, along with the Public Shareholders, will be able to receive
substantial cash proceeds from the Merger for the remainder of their investment
in the Company on the same terms as the Public Shareholders. Additionally,
certain members of Leslie's California's management will receive options to
purchase Leslie's Delaware Common Stock. As a result of the Merger, Green will,
for an investment of $15.3 million, acquire shares of Leslie's Delaware that
will represent approximately 73.6% of the Leslie's Delaware Common Stock
outstanding upon consummation of the Merger, and the Hancock Group and current
management will, for an investment of $5.5 million (representing the Continuing
Shares together with the purchase of additional shares of Leslie's Delaware
Common Stock), own approximately 26.4% of the outstanding shares. After giving
effect to the issuance, and exercise, of stock options to members of the
Hancock Group and management of the Company and the issuance, and exercise, of
warrants to purchase Leslie's Delaware Common Stock to Occidental, Green would
own 50.1% of the outstanding shares of Leslie's Delaware Common Stock, members
of the Hancock Group and current management would own 34.9% of the outstanding
shares and Occidental would own 15.0% of the outstanding shares of Leslie's
Delaware Common Stock. See "Special Factors--Purpose and Reasons of Hancock
Group and Green for the Merger Transaction."
As a private company, the Company will have greater operating flexibility to
focus on its long-term value by emphasizing continuing growth and operating
cash flow without the constraint of the public market's emphasis on quarterly
earnings and the potentially disruptive effect of the Company's seasonality and
impact of weather conditions.
POSITION OF THE HANCOCK GROUP AS TO FAIRNESS OF THE MERGER TRANSACTION
The members of the Hancock Group have considered the factors examined by the
Special Committee and the Board (described in detail in "Special Factors--The
Special Committee's and Board of Directors' Recommendation") and members of the
Hancock Group believe that these factors, when considered together, provide a
reasonable basis for them to believe, as they do, that the Merger Transaction
is fair to the Company's shareholders. This belief should not, however, be
construed as a recommendation to the Company's shareholders by the members of
the Hancock Group in their capacity as shareholders to vote to approve the
principal terms of the Reincorporation Agreement or the Merger Agreement. See
"Special Factors--Position of Hancock Group as to Fairness of the Merger
Transaction." Certain members of the Hancock Group are directors and executive
officers of the Company and have an interest in the contemplated Merger
Transaction. See "Special Factors--Conflicts of Interest."
CONFLICTS OF INTEREST
In considering the recommendation of the Board with respect to the Merger
Transaction, shareholders should be aware that certain officers and directors
of Leslie's California and affiliates and persons related to these officers and
directors have interests in connection with the Merger Transaction which may
present them with actual or potential conflicts of interest (described in more
detail under "Special Factors--Conflicts of Interest"). These interests include
those described below.
After consummation of the Merger, members of the Hancock Group will own the
Continuing Shares and members of that group and continuing management will
receive options to purchase Leslie's Delaware Common Stock, all of which could
in the aggregate represent as much as 34.9% of the total common stock ownership
of Leslie's Delaware.
Occidental is currently a holder of $10 million in principal amount of
subordinated debentures issued by the Company in 1995 that are convertible,
upon 91 days' prior notice, into Leslie's California Common Stock at a price of
$20.95 per share. It is expected that Occidental will provide $28 million of
preferred stock financing
5
<PAGE>
(with warrants) for the Merger, for consideration consisting of cash and the
exchange of these debentures. See "The Merger--Financing." Additionally, a
subsidiary of Occidental supplies substantially all of the Company's
requirements for chemical chlorine, and it is expected that after consummation
of the Merger, this agreement will be extended upon terms that will be mutually
satisfactory to the parties. An officer and a director of Occidental is a
director of Leslie's California.
Under the terms of a management agreement to be entered into between Leslie's
Delaware and LGP, (i) upon consummation of the Merger, Leslie's Delaware will
pay LGP a transaction fee in the amount of $1.4 million, one-half of which will
be paid to HPA for distribution among HPA, Michael J. Fourticq, the Chairman of
the Board, Brian P. McDermott, the President and Chief Executive Officer, and
Robert D. Olsen, the Chief Financial Officer of Leslie's California, and (ii)
Leslie's Delaware will pay LGP an annual management fee equal to 1.6% of the
total sums invested in Leslie's Delaware by Green.
After consummation of the Merger, Leslie's Delaware, Green, the members of
the Hancock Group, Occidental and other stockholders and option holders of
Leslie's Delaware will be parties to a Stockholders Agreement that will provide
for certain rights and obligations of the parties. See "The Merger--Financing."
Certain members of the Board and the Special Committee beneficially own
Leslie's California Common Stock or options to purchase Leslie's California
Common Stock which will be converted into the Cash Merger Consideration or a
cash payment for cancellation of stock options (see "The Merger--Treatment of
Stock Options") in the aggregate amount of $16,001,442 upon consummation of the
Merger. For their duties on the Special Committee, the members of the Special
Committee each received the sum of $50,000. See "Special Factors--Conflicts of
Interest."
The Merger Agreement provides that the current and former directors and
officers of the Company (including the members of the Special Committee) and,
after the Reincorporation, of Leslie's Delaware, will be indemnified by the
Company and Leslie's Delaware, to the full extent permitted by applicable law,
against any costs, expenses, losses, damages, liabilities, claims, fines,
judgments and amounts paid in settlement, and will be advanced reasonable costs
and expenses (including fees and disbursements of legal counsel), in connection
with any claim, action, suit, proceeding or investigation arising out of or
pertaining to the approval and consummation of the transactions contemplated by
the Merger Agreement. In addition, the directors and executive officers of the
Company and Leslie's Delaware will be provided with continuing directors' and
officers' liability insurance coverage following the Merger, subject to certain
limitations. See "Special Factors--Conflicts of Interest."
CERTAIN EFFECTS OF THE MERGER
As a result of the Merger, the entire equity interest in the Company will be
owned by Green, the members of the Hancock Group, Occidental and certain
members of the Company's management. The Public Shareholders will no longer
have any interest in, and will not be shareholders of, the Company, and
therefore will not participate in its future earnings and growth. Instead, each
such holder of Common Stock will have the right to receive $14.50 in cash,
without interest, for each share held (other than the Continuing Shares and
shares in respect of which dissenters' rights have been perfected). Although an
equity investment in Leslie's Delaware following the Merger involves
substantial risk resulting from the limited liquidity of any such investment
and the high debt-to-equity ratio and consequent substantial fixed charges that
will apply to Leslie's Delaware after the Merger, if the Company's projections
are realized, the value of such an equity investment would be considerably
greater than the original cost thereof. Further, even if the projections are
not met, the investors in Leslie's Delaware may earn a substantial return on
their investment. See "Special Factors--Conflicts of Interest," and "Certain
Forward Looking Information." In addition, the Company's Common Stock will no
longer be traded on the Nasdaq National Market, price quotations will no longer
be available and the registration of the Leslie's California Common Stock under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), will be
terminated. See "Special Factors--Certain Effects of the Merger."
6
<PAGE>
CONDITIONS TO THE MERGER; TERMINATION; EXPENSES
Each party's obligation to effect the Merger is subject to satisfaction of a
number of conditions, most of which may be waived by a specified party or
parties. The most significant conditions to consummating the Merger include (i)
obtaining the vote by holders of a majority of the shares of Leslie's
California Common Stock and by holders of a majority of shares of Leslie's
California Common Stock voted at the Special Meeting and held by the Public
Shareholders, (ii) obtaining all consents and approvals, (iii) the completion
of the Reincorporation, (iv) Poolmart obtaining the necessary financing for the
Merger, (v) that the representations and warranties of the parties shall be
true and correct in all material respects as of February 26, 1997 and as of the
Effective Date of the Merger except for certain changes that are specifically
permitted, and (vi) the Merger being accounted for as a recapitalization. See
"The Merger--Conditions." Even if the shareholders approve both the
Reincorporation and the Merger, there can be no assurance that the Merger will
be consummated.
At any time prior to the Effective Date, the Merger Agreement may be
terminated by the mutual consent of the boards of directors of Leslie's
California, Leslie's Delaware and Poolmart. In addition, any of the parties may
terminate the Merger Agreement prior to the Effective Date (i) if the Merger
has not been effected on or before June 30, 1997 (which failure to become
effective shall not be caused by the party desiring to terminate, and which
date will be extended automatically for up to 60 days during the pendency of
any nonfinal ruling or order prohibiting the Merger or the holding of the
Special Meeting) or (ii) if a court or other governmental entity permanently
enjoins, restrains or prohibits the Merger and such action is final and non-
appealable. See "The Merger--Termination, Amendment and Waiver."
The Merger Agreement may be terminated by Poolmart if (i) the Board or
Special Committee withdraws or modifies its recommendations concerning the
Merger Transaction or approves an alternative proposal not involving Poolmart,
(ii) there is a material adverse change in the Company's business, (iii) the
vote at the Special Meeting to approve the Reincorporation or the Merger is not
obtained, (iv) Leslie's California fails to perform its obligations to notify
Poolmart and to refrain from soliciting or initiating any other acquisition
proposal not involving Poolmart or (v) Leslie's California fails to hold the
Special Meeting by June 16, 1997 and either an entity or group other than
Poolmart becomes the beneficial owner of 15% of the Leslie's California Common
Stock or a third person makes an alternative acquisition proposal, unless
Leslie's California can show that the failure to hold the Special Meeting was
caused by factors other than the knowledge of an alternative acquisition
proposal. See "The Merger--Termination, Amendment and Waiver."
Leslie's California may terminate the Merger Agreement if the Board or
Special Committee determines the continued recommendation is likely to be a
breach of fiduciary duty to Leslie's California and its shareholders under
California law or the required vote of shareholders at the Special Meeting is
not obtained. See "The Merger--Termination, Amendment and Waiver."
Leslie's California has agreed to pay a termination fee in the amount of
$1,750,000 to LGP if the Merger Agreement is terminated due to a determination
by the Board or Special Committee not to continue to recommend the Merger
because to do so would be reasonably likely to be a breach of the Board's
fiduciary duty or if the required shareholder vote at the Special Meeting is
not obtained. The termination fee shall also be due if Poolmart terminates the
Merger due to (i) a withdrawal or modification of the recommendation by the
Board or the Special Committee, (ii) the failure to obtain the required
shareholder vote at the Special Meeting, (iii) a material breach by Leslie's
California of its nonsolicitation covenant or (iv) a failure to hold the
Special Meeting by June 16, 1997 and either a third person becomes a 15% holder
of Leslie's California Common Stock or an alternative acquisition proposal is
made known to certain affiliates of Leslie's California unless Leslie's
California can show that such failure to hold a meeting is due primarily to
factors other than the alternative acquisition proposal. An additional $750,000
termination fee payment will become due to LGP if, within twelve months of any
termination of the Merger Agreement described in this paragraph, either
Leslie's Delaware or Leslie's California consummates an alternative acquisition
proposal transaction. Any termination fee will be paid by Leslie's Delaware if
the Reincorporation has occurred. See "The Merger--Termination Fee."
7
<PAGE>
Each of the parties has agreed to pay its own costs and expenses in
connection with the Merger Transaction; however, Leslie's California has agreed
to pay or reimburse HPA for up to $1 million of its out-of-pocket expenses
actually incurred in connection with the Merger Transaction. In addition, if
the Merger is not consummated by reason other than a material failure by
Poolmart to perform its obligations under the Merger Agreement, Poolmart shall
be reimbursed up to $750,000 for its out-of-pocket expenses incurred in
connection with the Merger Transaction. See "The Merger--Expenses."
FEDERAL INCOME TAX CONSEQUENCES
The conversion of Leslie's California Common Stock into Leslie's Delaware
Common Stock pursuant to the Reincorporation should not be a taxable event to
the holders of Leslie's California Common Stock. See "Federal Income Tax
Consequences."
The receipt of the Cash Merger Consideration by holders of Common Stock
pursuant to the Merger will be a taxable transaction for federal income tax
purposes. For a more detailed discussion of the federal income tax consequences
of the Merger, see "Federal Income Tax Consequences." All holders of Leslie's
California Common Stock are urged to consult their tax advisors to determine
the effect of the Merger Transaction on such holders under federal, state,
local and foreign tax laws. The receipt of the Cash Merger Consideration by
members of the Hancock Group for shares of Common Stock which will be converted
in the Merger into the Cash Merger Consideration will be a taxable transaction
for federal income tax purposes. See "Federal Income Tax Consequences."
ACCOUNTING TREATMENT
The Merger will be treated as a recapitalization for accounting purposes.
FINANCING OF THE MERGER
It is estimated that approximately $178.8 million will be required to
consummate the Merger and provide current and future working capital for
Leslie's Delaware. This sum will be provided by (i) the Continuing Shares ($5.2
million), (ii) Green ($15.3 million), (iii) issuance of certain shares of
Leslie's Delaware to management ($0.3 million), (iv) issuance to Occidental of
preferred stock and warrants to purchase Leslie's Delaware Common Stock ($28.0
million), (v) the sale of senior notes ($90.0 million) and (vi) a revolving
credit facility ($40.0 million). HPA and LGP have received proposals and
letters from various sources to provide this financing, but these proposals and
letters are subject to numerous conditions and are not legally enforceable. See
"The Merger--Financing."
MARKET PRICES FOR COMMON STOCK AND DIVIDENDS
Leslie's California Common Stock is traded on the Nasdaq National Market
(symbol: LESL). The following table sets forth the high and low sales prices
for each quarterly period for the two most recent fiscal years. The stock
prices have been adjusted to give effect to a 5% stock dividend effective in
August 1995.
<TABLE>
<CAPTION>
1996 1995
---------------- ---------------
HIGH LOW HIGH LOW
------- -------- ------- -------
<S> <C> <C> <C> <C>
First Quarter............................... $14 1/2 $12 1/2 $15 $12 3/8
Second Quarter.............................. 19 1/2 13 1/4 16 5/8 12 1/8
Third Quarter............................... 17 1/4 10 7/16 16 1/4 12 1/2
Fourth Quarter.............................. 14 1/2 10 1/2 16 1/4 12 1/2
</TABLE>
During the first quarter of 1997, the high and low sales prices were $14.00 and
$12.75, respectively.
8
<PAGE>
On November 11, 1996, the last trading day prior to the issuance of a press
release by Leslie's California stating that it had received a proposal from a
group led by management for the purchase of the Company, the closing price per
share of the Leslie's California Common Stock as reported by Nasdaq was $11.50.
On February 26, 1997, the last trading day prior to the announcement of the
execution of the Reincorporation Agreement and the Merger Agreement, the
closing price per share of the Leslie's California Common Stock as reported by
Nasdaq was $13. On May 6, 1997, the last trading day prior to printing of this
Proxy Statement, the closing price per share of Leslie's California Common
Stock as reported by Nasdaq was $13.625.
At April 22, 1997, there were approximately 1,900 beneficial holders of the
Leslie's California Common Stock.
The Company does not currently pay cash dividends on the Leslie's California
Common Stock and intends to retain earnings for use in the operation and
expansion of its business. However, in August, 1995 and April, 1994 Leslie's
California declared 5% stock dividends for shareholders of record as of August
31, 1995 and April 29, 1994, respectively.
RIGHTS OF DISSENTING SHAREHOLDERS
The Merger Agreement contemplates that the shareholders may be entitled to
require the Company to purchase their shares for cash at their fair market
value as of the day before the first announcement of the terms of the merger,
excluding any appreciation or depreciation in consequence of the merger
("Dissenters' Rights") if demands for payment are filed with respect to 5% or
more of the outstanding shares of Common Stock ("Dissenting Shares"). The
obligation of Poolmart to effect the Merger is subject to the condition, which
may be waived by Poolmart, that holders of 5% or more of the Leslie's
California Common Stock not exercise their Dissenters' Rights.
A dissenting shareholder who wishes to exercise dissenters' rights and
require the Company to purchase his or her shares of Common Stock must:
(1) vote against the Reincorporation any or all of the shares of Leslie's
California Common Stock entitled to be voted (shares of Leslie's California
Common Stock not voted are not considered to be voted against the
Reincorporation for purposes of this requirement and will not be counted
toward the 5% minimum for Dissenters' Rights to exist); provided that if a
shareholder votes part of the shares entitled to be voted in favor of the
Reincorporation, and fails to specify the number of shares voted, it is
conclusively presumed that such shareholder's approving vote is with
respect to all shares entitled to be voted;
(2) make written demand upon the Company or its transfer agent, which is
received not later than the date of the Special Meeting, setting forth the
number of shares of Common Stock demanded to be purchased by the Company
and a statement as to claimed fair market value of such shares at November
11, 1996; and
(3) submit for endorsement, within 30 days after the date on which the
notice of approval by the shareholders is mailed to such shareholders, to
the Company or its transfer agent the certificates representing any shares
in regard to which demand for purchase is being made, or to be exchanged
for certificates of appropriate denominations so endorsed, with a statement
that the shares are Dissenting Shares.
Dissenters' Rights are technical in nature and complex. Shareholders desiring
to exercise Dissenters' Rights and to obtain appraisal of the fair value of
their shares should consult counsel, since the failure to comply strictly with
the provisions of California law may result in a waiver or forfeiture of their
Dissenters' Rights. A copy of Chapter 13 of the California Corporations Code,
which describes requirements and procedures for dissenters' rights, is attached
hereto as Appendix F. See "Rights of Dissenting Shareholders."
9
<PAGE>
SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents certain summary selected consolidated financial
data of the Company as of and for each of the five years in the period ended
December 28, 1996. This financial data was derived from the audited historical
consolidated financial statements of the Company and should be read in
conjunction with the historical consolidated financial statements of the
Company and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31,
DEC. 28, DEC. 30, ---------------------------
1996 1995 1994 1993 1992
---------- ---------- -------- -------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
Net Sales.................. $191,640 $162,456 $141,553 $119,955 $96,337
Gross Profit............... 72,760 60,399 55,469 48,289 39,017
Gross Margin............... 38.0% 37.2% 39.2% 40.3% 40.5%
Loss (Gain) on Disposition
of Fixed Assets........... 750 27 (106) 120 26
Depreciation and
Amortization.............. 4,326 3,374 2,393 2,389 2,423
Income from Operations..... 9,400 6,691 9,569 6,350 4,330
Interest Expense........... 2,786 2,708 1,733 1,189 829
Net Income................. 3,869 3,407 4,584 3,035 2,146
PER SHARE DATA(1)
Net Income Per Share....... $ .57 $ .52 $ .70 $ .47 $ .34
Book Value Per Share....... $ 5.55 $ 4.91 $ 4.18 $ 3.41 $ 2.90
Weighted Average Shares
Outstanding............... 6,790 6,614 6,515 6,464 6,399
BALANCE SHEET DATA
Working Capital............ $ 12,718 $ 13,007 $ 8,072 $ 8,957 $ 7,387
Total Assets............... 83,157 79,529 61,717 49,532 44,888
Current Ratio.............. 1.45 1.47 1.38 1.73 1.56
Long-term Debt............. 15,581 17,843 11,272 12,751 10,220
Stockholders' Equity....... 36,315 31,921 26,339 21,041 17,820
SELECTED OPERATING DATA
Capital Expenditures....... $ 8,807 $ 9,550 $ 7,394 $ 5,532 $ 3,343
EBITDA(2).................. 14,476 10,092 11,856 8,859 6,779
EBITDA (FIFO basis)(3)..... 14,960 10,472 11,476 8,612 6,779
EBITDA (FIFO basis)
Margin(4)................. 7.81% 6.45% 8.11% 7.18% 7.04%
Number of Employees at
Year-end.................. 1,055 780 678 565 533
Stores Operated at Year-
end....................... 259 224 180 158 143
Comparable Store Sales
Growth.................... 9.9% 6.0% 12.9% 11.7% 2.4%
</TABLE>
- --------
(1) Prior year amounts have been adjusted to reflect the 5% stock dividends
effective in April 1994 and August 1995.
(2) EBITDA represents earnings before interest, taxes, depreciation,
amortization and loss (gain) on disposition of fixed assets.
(3) EBITDA (FIFO basis) represents EBITDA plus the LIFO provision.
(4) EBITDA (FIFO basis) Margin represents EBITDA (FIFO basis) as a percentage
of sales.
FIRST QUARTER RESULTS
The Company announced that net sales for the first quarter of 1997 (three
months ended March 28, 1997) were $23,816,000 as compared with $18,064,000 for
the first quarter of 1996 (three months ended March 30, 1996), income (loss)
from operations was $(9,628,000) as compared with $(8,610,000) for the first
quarter of
10
<PAGE>
1996, net income (loss) was $(6,101,000) as compared with $(5,525,000) for the
first quarter of 1996 and net income (loss) per share was $(.90) as compared
with $(.82) for the first quarter of 1996. The weighted average shares
outstanding was 6,789,000 for the first quarter of 1997 and 6,769,000 for the
first quarter of 1996. The Company typically incurs losses in the first and
fourth quarters. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Accordingly, the results of operations
for the Company's first quarter are not necessarily indicative of the results
of operations for the full year.
CERTAIN FORWARD LOOKING INFORMATION
The Company does not as a matter of course make public forecasts or
projections as to future financial performance. However, management has
prepared and presented projections to LGP, representatives of the Special
Committee, DLJ, Dillon Read and various financing sources. See "Certain Forward
Looking Information."
11
<PAGE>
SPECIAL FACTORS
BACKGROUND OF THE MERGER TRANSACTION
The Board and management have from time to time considered strategic
alternatives for the Company, including acquisitions within its industry,
diversification of its business into strategically complementary areas and a
sale of the Company. In December 1995, at the Board's direction, the Company
engaged DLJ to serve as its financial advisor in an exploration of strategic
alternatives, including a sale of the Company.
In early 1996, representatives of DLJ advised management that it would be
preferable to defer active marketing of the Company until the summer of 1996.
Because the Company's operations are highly seasonal and it typically incurs
losses in the fourth and first quarters, and because its 1995 operating
results had been disappointing, DLJ believed that the Company would be more
attractive to potential buyers when sales results from its second quarter in
1996 became available. DLJ's recommendation was accepted by management and the
Board.
In August 1996, an offering memorandum was prepared and DLJ was authorized
to contact potential strategic and financial buyers identified by DLJ and
management. Contact was made with 49 prospects, including 37 potential
strategic buyers and 12 potential financial buyers. A total of 12 prospects
signed confidentiality agreements and received information concerning the
Company.
Consistent with the Board's prior discussions, management also looked for
appropriate acquisitions of the Company from among certain of the potential
strategic buyers. Messrs. Fourticq and McDermott contacted and/or met with
certain potential strategic buyers of the Company.
At a meeting on November 6, 1996, representatives of DLJ advised the Board
that DLJ's efforts had not generated any significant interest in the purchase
of the Company by a strategic buyer and had not located an available strategic
acquisition candidate or business. The result of their efforts with potential
financial buyers had been the receipt of two preliminary indications of
interest, which they proceeded to review and discuss with the Board. Each of
these financial buyers, one of which was LGP, indicated that it would be
interested in further exploration, possibly leading to a firm offer to
purchase the Company. Each of these preliminary indications of interest was
subject to various contingencies, including due diligence and financing. LGP
mentioned a possible price of $14.50 per share and the other mentioned a range
of $13.00 to $14.00 per share.
The DLJ representatives also engaged the Board in a discussion regarding the
Company, including its historical trading performance, valuation
methodologies, its performance relative to other comparable public companies
and comparable mergers and acquisitions. They also informed the Board that
other types of transactions designed to increase shareholder value, including
a leveraged recapitalization, had been considered, but no compelling
alternative to remaining a public company or seeking a potential buyer had
been identified.
The Board concluded that the two indications of interest, though
preliminary, were both from credible buyout firms and in a price range that
DLJ had advised was appropriate in light of the efforts to market the Company,
a review of the marketplace for comparable companies and the Company's
performance. Accordingly, the Board believed that these preliminary
indications of interest should receive further consideration.
After the DLJ representatives were excused from the November 6 Board
meeting, Mr. McDermott stated that he and Mr. Fourticq, together with certain
other members of the Company's senior management, were considering making an
offer to purchase the Company. He also stated that Mr. Hillman was likely to
participate in the transaction and the participation of Mr. Canning and of
Occidental (of which Dr. Laurance is President) would be sought. He stated
that while the management group was not able to present an offer at that time,
they hoped to be ready to do so within the next seven to ten days.
After consulting counsel and discussing the matter, the Board determined
that it was in the Company's best interest to add two outside directors to the
Board. These new Board members would then be appointed to a
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special committee to evaluate and negotiate the indications of interest and
any other indications of interest or offers received, and to make a
recommendation to the full Board. The Board determined that Mr. Canning and
Dr. Laurance were the Board members whose interests in a possible management
buyout transaction were the most remote and appointed them to take the lead on
an interim basis in the selection of new directors to serve as a special
committee.
A provision in the Company's bylaws limits the size of the Board to seven
members. At the time, there were six directors and one vacancy. It was,
therefore, determined that one of the Board members would need to resign to
accommodate the addition of two new Board members. Mr. Canning and Dr.
Laurance suggested that it would be most appropriate for Mr. Dashe, as the
lower ranking officer on the Board, to resign in order to create a second
vacant position. Mr. Dashe was amenable to the suggestion, and submitted his
resignation after the conclusion of the November 6 Board meeting.
Mr. Canning and Dr. Laurance then directed the Company's General Counsel,
Ms. Cynthia G. Watts, to retain outside special counsel experienced in
transactions of this sort to advise the Company in selecting the new Board
members and establishing a special committee. They directed Ms. Watts to work
with them in identifying and contacting potential Board members who might be
qualified to serve in such a situation and agreed to notify the Board members
when the candidates had been selected for their approval.
Over the next few days, several candidates were identified and Dann V.
Angeloff and Clarence T. Schmitz were selected as well-qualified individuals
with extensive experience in transactions of the sort proposed. Their names
and qualifications were presented to the Board and, on November 11, 1996, they
were unanimously elected to the Board and appointed to be the Special
Committee charged with considering any possible business combination that
might be proposed, including any proposal that might be made by management of
the Company.
After the close of business on November 11, 1996, the Company received an
offer for the purchase of all of the outstanding stock of the Company from a
management group led by HPA. The Company issued a press release on November
12, 1996, stating that the Company had received the offer, as well as two
preliminary indications of interest regarding purchase of the Company. The
press release also stated that Messrs. Angeloff and Schmitz had been elected
to the Board and had been appointed to a Special Committee to consider the
offer, the indications of interest and any other proposals that might be
received.
The full text of the press release is set forth below:
LESLIE'S POOLMART ANNOUNCES IT HAS RECEIVED
AN OFFER TO ACQUIRE OUTSTANDING SHARES
CHATSWORTH, California, November 12, 1996--Leslie's Poolmart (the
"Company") (Nasdaq/LESL) today announced that it has received an offer
from Hancock Park Associates II, L.P. ("Hancock Park"), a partnership
consisting of Michael J. Fourticq and Brian P. McDermott, the Chairman
of the Board and Chief Executive Officer, respectively, of the Company,
to acquire in a cash merger all the outstanding shares of Common Stock
of the Company for a cash purchase price of $14.50 per share. The
Company currently has approximately 6,550,000 shares of Common Stock
outstanding and 960,000 shares subject to employee and director stock
options.
The proposed acquisition would be effected through a transaction
between the Company and a newly organized corporation that will be
owned and controlled by Hancock Park. Certain of the directors of the
Company and certain of their affiliated entities would also be
stockholders of the new corporation. Hancock Park indicated that
certain additional officers of the Company will also be invited to
invest in the new corporation. Some of the Company shares held by Mr.
Fourticq and Mr. McDermott and the other participants in the new
corporation would also be cashed out along with the shares of the other
Company stockholders in the merger.
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The offer from Hancock Park is conditioned upon, among other things,
the receipt by Hancock Park of sufficient and satisfactory financing in
order to complete the transaction, approval of the transaction by the
Board of Directors of the Company and receipt by the Board of Directors
of an opinion of an independent investment banking firm that the $14.50
per share price is fair to the Company's stockholders from a financial
point of view.
The Company announced that it had also received preliminary
indications of interest from two other firms to acquire the Company in
a cash-for-shares transaction at prices equal to or less than the
Hancock Park offer. Such indications of interest contemplate that
certain members of the Company's management would participate as
stockholders of the acquiring company, and are subject to significant
contingencies, including due diligence and financing. The Board stated
that the Company has been engaged in a process of evaluating
alternatives to maximize shareholder value with the assistance of a
financial advisor, and that the offer, as well as the indications of
interest from the other parties, have arisen as a result of that
process.
The Company also announced that it has expanded its Board of
Directors to include Dann Angeloff and Clarence Schmitz. Mr. Angeloff
is President of The Angeloff Company, a corporate financial advisory
firm based in Los Angeles, California. Mr. Schmitz is Executive Vice
President of Jefferies & Company, Inc., a Los Angeles, California-based
investment banking firm. To accommodate the addition of the two new
board members, Mr. Murray Dashe has resigned his position as a
Director, but will remain in his role as the Company's Chief Operating
Officer.
The Company explained that a special committee of its Board of
Directors, comprised of Mr. Angeloff and Mr. Schmitz, has been
established to consider the Hancock Park offer, the two indications of
interest, and any other proposals which may be received. The special
committee is empowered to evaluate and negotiate such proposals and to
make a recommendation to the Board of Directors with respect to any
proposed transaction. Neither member of the special committee would
have any financial or other interest in the acquiring companies for any
of the possible transactions under consideration. There can be no
assurance that any transaction will be consummated.
Founded in 1963, Leslie's Poolmart is the country's leading specialty
retailer of swimming pool supplies and related products. The Company
currently markets its products through 259 retail stores in 27 states
and a nationwide mail-order catalog.
On November 18, 1996, the Special Committee met with special counsel to the
Company and Ms. Watts. The Special Committee discussed the selection of
counsel and was advised as to the background and efforts of DLJ as financial
advisor to the Company, the offer presented by HPA and other indications of
interest, and an expense reimbursement agreement requested by HPA. They then
discussed the engagement of a financial advisor and the process for gathering
additional information concerning the Company. Mr. McDermott and Robert D.
Olsen, the Company's Chief Financial Officer, made a presentation to the
Special Committee about the Company.
On November 26, 1996, the Special Committee conducted interviews with
several law firms and retained Heller Ehrman White & McAuliffe to act as its
counsel.
On December 2, 1996, the Special Committee met with its counsel. The members
reviewed the activities prior to the meeting and dealt with some
organizational matters. The terms of the Company's earlier engagement of DLJ
as its financial advisor were described and discussed, and the Special
Committee members reported on inquiries that had been made by other investment
bankers. Ms. Watts joined the meeting and Mr. McDermott was reached by
telephone to further explore the relationship with DLJ, the structure and
financing of the HPA offer and the background of discussions leading to the
offer. Following the call, the Special Committee discussed the other
indications of interest and determined to defer consideration of the requested
reimbursement of HPA's expenses. Following the meeting, the Special Committee
members contacted two other investment banking firms to determine their
availability and the cost of reviewing any proposed business combination and
rendering an opinion as to fairness.
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On December 4, 1996, the Special Committee and its counsel met with DLJ. The
engagement of DLJ by the Company was reviewed, as well as the general
relationship with the Company. The DLJ representatives described the process
and timing of soliciting interest for purchase of the Company, the preliminary
indications of interest received, the prospects for securing financing and the
presentation it had made to the Board of Directors. They commented on the
status of DLJ's engagement, which had expired, and the computation of its
transaction fee. After they left the meeting, the Special Committee determined
to engage DLJ as its financial advisor and, since DLJ had a prior relationship
with members of management, to seek an additional fairness opinion from
another investment banking firm in the event that the HPA offer were to be
accepted. The Special Committee and its counsel then met with DLJ and
agreement was reached on the terms of its engagement. Following the meeting,
the Special Committee selected Dillon, Read & Co. Inc. ("Dillon Read") and
made arrangements for its engagement for the purpose of reviewing any proposed
business combination and rendering an opinion as to fairness.
On December 5, 1996, the Special Committee and its counsel met by conference
telephone with DLJ to discuss the various actions to be taken and the timing.
Another conference call was held on December 11, 1996, for the purpose of DLJ
updating the Special Committee as to the work that it had done, and in
particular the results of its due diligence meeting with the Company's
management and communications with the two financial buyers that had submitted
indications of interest. DLJ found in its meeting with management that, based
largely on the results for the third quarter being below budget, the Company's
revised estimates for 1996 of sales, EBITDA (earnings before interest, taxes,
depreciation, amortization and loss (gain) on the disposition of fixed
assets), and earnings per share were all significantly less than those
projected in the August, 1996 offering memorandum and in earlier discussions
with management. It was agreed that contact would be made by DLJ with several
other potential strategic buyers; such contact was made and none expressed any
interest in a transaction with the Company.
On December 16, 1996, the Special Committee and its counsel met by
conference telephone with Dillon Read to review the status of its due
diligence concerning the Company. Later that day, a conference call was held
with DLJ to review the status of its contacts with those that had submitted
preliminary indications of interest and to discuss contacts that were to be
made with HPA's financing sources and other potential buyers. The Special
Committee and its counsel then spoke by telephone with Mr. McDermott to
discuss contacting the financing sources, the terms of the DLJ engagement and
the projected financial results of the Company.
On December 17, 1996, the Special Committee and its counsel received a
report by conference telephone from DLJ as to its contacts with the financing
sources for the HPA offer and discussions with other potential buyers that had
been contacted about the Company.
At a regular meeting of the Board on December 18, 1996, the Special
Committee reported to the Board on its progress, including the terms of
engagement of DLJ and Dillon Read, the status of negotiation of a merger
agreement with HPA and contact being made with the other parties indicating an
interest in the Company. The Special Committee again deferred entering into
any expense reimbursement agreement with HPA, but recommended that the Company
advance HPA's legal fees for the preparation of proxy materials. The
recommendation was adopted by the Board.
On December 20, 1996, the Special Committee and its counsel met by
conference telephone to discuss a draft of a merger agreement that had been
submitted by counsel for HPA. The Special Committee had earlier received a
copy of a merger agreement that contained some preliminary changes made by
counsel to HPA after negotiations with counsel to the Special Committee. DLJ
advised the Special Committee that it was urging LGP to clarify its position
prior to the December 25th holiday and that the other financial buyer that had
earlier expressed some interest in a transaction had determined that it did
not have an interest at the price level being discussed.
On December 24, 1996, a conference call was held with the Special Committee,
its counsel and DLJ to discuss a letter that had been received earlier that
day from LGP. DLJ agreed to distribute the LGP letter to other Board members
and to contact Occidental and senior management. The letter from LGP clarified
an earlier indication of interest and stated a desire to sponsor a leveraged
recapitalization which would deliver $15.00 in cash per share to existing
shareholders. The letter outlined the sources and uses of funds, including $10
million
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of common stock and $50 million of two classes of preferred stock. The LGP
letter assumed that Occidental would provide the senior preferred stock
investment and that the common stock and junior preferred stock would be held
by LGP, management and existing shareholders, with existing shareholders
retaining 5% of the outstanding stock and management purchasing $1 million of
common stock. The indication of interest was subject to the availability of
financing, completion of its due diligence investigation, endorsement by
management and the Board and negotiation of documentation that would be
satisfactory to LGP and the Company.
On January 3, 1997, the Special Committee and Board received from HPA a
letter comparing the LGP indication of interest to its offer and urging the
acceptance of its offer.
The Special Committee met on January 6, 1997, by conference telephone with
its counsel and DLJ. DLJ reported on its conversations with LGP, which
indicated a continuing strong interest. To move the process along, the Special
Committee determined to set dates for final bids and financing commitments,
being January 15th and 20th, respectively. These dates were then communicated
to HPA and LGP. On January 8, 1997, DLJ sent a letter to LGP requesting the
submission of a definitive proposal, describing the terms of the proposal and
forwarding a form of merger agreement for comment in connection with any
proposal to be made.
On January 10, 1997, the Special Committee met with Mr. McDermott and HPA's
counsel with a view to finalizing the terms of a merger agreement should the
HPA offer be approved by the Special Committee and recommended to the Board.
The language was agreed to and the status of financing was explored by the
Special Committee. A request was made to increase the $14.50 price offered by
HPA, which was rejected by Mr. McDermott. The Special Committee indicated its
agreement to a $1 million expense reimbursement provision with no termination
fee.
During the weeks of January 6th and 13th, LGP conducted a due diligence
investigation of the Company, including evaluation of its business plan and
projected operating results, engaged in discussions with potential financing
sources and thereafter concluded it would not participate in a transaction
valuing the Company at more than $14.50 per share.
The Special Committee, through DLJ, monitored the status of discussions
involving LGP, HPA, management, Occidental and others. On January 20, 1997,
the Special Committee was advised that LGP had indicated an agreement with
management whereby it would assume HPA's position with respect to some of the
equity investment and would propose a price of $14.50 per share to the
shareholders. The Special Committee determined to wait to respond until a
definitive proposal was presented.
The Special Committee and Board received a letter from HPA dated January 20,
1997 urging action on its pending offer. During that week, members of the
Special Committee and DLJ engaged in discussions with HPA, management and LGP
to determine the status of their negotiations.
On February 3, 1997, the Special Committee met by conference telephone and
discussed with DLJ the action that should be taken with respect to the status
of the matter. A letter dated February 5, 1997 was directed by the Special
Committee to HPA setting forth what would be necessary for the Special
Committee to further consider the HPA offer, including the receipt of letters
from LGP, Occidental and the other financing sources and finalization of a
merger agreement. At this time, LGP accelerated its due diligence examination
and retained counsel to represent it in connection with the transaction. Some
time was spent by LGP in meetings with management and arriving at a workable
structure for the proposed transaction, which led to proposing the
Reincorporation and the Merger. Counsel for LGP also presented changes it
would require in the merger agreement that had previously been negotiated with
HPA and proposed a $2.5 million termination fee and a $750,000 increase in the
expense reimbursement allowance. HPA, LGP and their financing sources each
provided letters as to the equity and debt financing for the Merger
Transaction.
On February 21, 1997 and February 24, 1997, the Special Committee met by
conference telephone with its counsel and DLJ to discuss the closing
conditions, termination fee and expense reimbursement provisions. It
authorized a response to LGP on these issues and discussions continued until
they were resolved in a conference call with Mr. Angeloff, representing the
Special Committee, Mr. McDermott, representatives of LGP and their respective
counsel on February 24, 1997.
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On February 26, 1997, the Special Committee met with its advisors. Mr.
Schmitz was present by telephone. The Special Committee's counsel outlined the
legal and accounting considerations leading to the structure of the
transaction and the terms of the proposed Reincorporation Agreement and the
Merger Agreement. DLJ and Dillon Read then made separate presentations to the
Special Committee summarizing the information discussed under "Special
Factors--Opinion of DLJ" and "--Opinion of Dillon Read", following which each
stated orally that they were in a position to render an opinion to the effect
that the Cash Merger Consideration to be received by the Public Shareholders
in the Merger Transaction was fair to such shareholders from a financial point
of view. At the conclusion of these presentations and after discussion, the
Special Committee approved the Merger Agreement and Reincorporation Agreement,
stated its belief that the Merger Transaction is in the best interests of the
Company's shareholders and recommended to the Board that it adopt and approve
the Merger Agreement and the Reincorporation Agreement.
At a meeting of the Board held later on February 26, 1997, the Board
reviewed and discussed the 1996 financial results, the status of the audit and
the proposed budget for 1997. The Board then received a report of the Special
Committee, which summarized the process employed by the Special Committee and
its advisors, the chronology of events, the financing of the Merger
Transaction and the Special Committee's analysis. Counsel for the Special
Committee outlined for the Board the structure of the Merger Transaction and
the principal terms of the Merger Agreement, including the significant
covenants and conditions, and the provisions for termination, payment of a
termination fee and expense reimbursement. Separate presentations were then
made by DLJ and Dillon Read summarizing the information discussed under
"Special Factors--Opinion of DLJ" and "--Opinion of Dillon Read." DLJ and
Dillon Read again stated orally that they were prepared to render their
opinions as to fairness. The Board, after some discussion, approved the Merger
Agreement and the Reincorporation Agreement, stated its belief that the Merger
Transaction is in the best interests of the shareholders, recommended to the
shareholders that they approve and adopt the principal terms of the Merger
Agreement and the Reincorporation Agreement, and authorized the officers to
sign the Merger Agreement and the Reincorporation Agreement subject to Green
and management entering into a commitment to execute a Stockholders Agreement
among the equity participants. Certain directors have conflicts of interest in
connection with this action and recommendation. See "Special Factors--
Conflicts of Interest."
On February 26, 1997, Messrs. Fourticq and McDermott delivered a letter to
the Board under which they agreed to vote their shares in favor of the Merger
Transaction, and Green and Messrs. Fourticq and McDermott executed a
commitment letter to enter into a Stockholders Agreement substantially in the
form attached to such commitment letter.
THE SPECIAL COMMITTEE'S AND BOARD'S RECOMMENDATION
The Board, based on the recommendation of the Special Committee, unanimously
determined that the Merger Transaction is fair to, and in the best interests
of, the Company's shareholders and recommends that the shareholders vote to
approve the principal terms of the Merger Agreement and the Reincorporation
Agreement. Because of the appointment of the Special Committee, composed of
two directors who will not have any continuing interest in Leslie's Delaware
after the Merger, and its active role in the negotiation of the terms of the
Merger Transaction, aided by DLJ and counsel to the Special Committee, it was
not considered necessary to appoint an unaffiliated representative to act
solely on behalf of the Public Shareholders for purposes of negotiating the
terms of the Merger Agreement and the Reincorporation Agreement.
Special Committee. The Special Committee held 23 meetings in person and by
conference telephone, and individual members of the Special Committee were
updated on developments from time to time by its counsel, DLJ and Dillon Read
by telephone and correspondence. From November 11, 1996 to February 26, 1997,
the Special Committee evaluated and negotiated the offer by HPA, explored
through DLJ the interest of other potential buyers, encouraged LGP's
participation in the process and negotiated agreements with HPA, LGP and the
management group. At its February 26, 1997 meeting, the Special Committee
received presentations by DLJ and Dillon Read with respect to the fairness of
the Cash Merger Consideration to be received by the Public
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Shareholders in the Merger Transaction from a financial point of view.
Following their presentations, DLJ and Dillon Read stated orally they were
prepared to render their opinions that the Cash Merger Consideration to be
received by the Public Shareholders in the Merger Transaction was fair from a
financial point of view to such shareholders. DLJ and Dillon Read subsequently
delivered their written opinions dated as of February 26, 1997 to that effect.
THE SPECIAL COMMITTEE HAS UNANIMOUSLY DETERMINED THAT THE MERGER TRANSACTION
IS FAIR TO, AND IN THE BEST INTERESTS OF, THE PUBLIC SHAREHOLDERS AND
RECOMMENDS THAT THE COMPANY'S SHAREHOLDERS VOTE IN FAVOR OF THE APPROVAL OF
THE PRINCIPAL TERMS OF THE MERGER AGREEMENT AND THE REINCORPORATION AGREEMENT.
In reaching its conclusion to recommend that the Board approve the principal
terms of the Merger Agreement and the Reincorporation Agreement, the Special
Committee was favorably influenced by the following factors:
(i) the analysis presented by DLJ and the opinion of DLJ to the effect
that, as of the date of such opinion, and based upon and subject to the
assumptions, limitations and qualifications set forth in such opinion, the
Cash Merger Consideration to be received by the Public Shareholders in the
Merger Transaction was fair to such holders from a financial point of view;
(ii) the analysis presented by Dillon Read and the opinion of Dillon Read
to the effect that, as of the date of such opinion, and based upon and
subject to the assumptions, limitations and qualifications set forth in
such opinion, the Cash Merger Consideration to be received by the Public
Shareholders in the Merger Transaction was fair to such holders from a
financial point of view;
(iii) the extensive solicitation process conducted by DLJ in seeking a
buyer for the Company;
(iv) the fact that the Company had issued a press release on November 12,
1996, announcing the receipt of an offer for a cash merger at a price of
$14.50 per share, and no credible prospective buyer had offered to complete
a transaction with a price exceeding that amount;
(v) the arm's-length negotiations with representatives of HPA and LGP;
(vi) the condition that the Merger Agreement and the Reincorporation
Agreement be approved by a majority of the shares held by the Public
Shareholders voted at the Special Meeting;
(vii) in light of the disappointing results for the third quarter of
fiscal 1996 and the outlook for the remainder of that year, the prospect of
the market price for the Leslie's California Common Stock falling to the
price level during the three months preceding the November 12th
announcement in the event that the proposed transaction were to be
withdrawn; and
(viii) the likelihood of completing the Merger Transaction with the
combined resources of HPA and Green and with the nature and sources of
financing, including that to be provided by Occidental, contemplated to
complete the Merger Transaction.
The Special Committee did not attempt to determine the liquidation value of
the Company and gave little consideration to the book value of the Company
(which was $5.55 per share at December 28, 1996) because it believed that
those measures of asset value were not relevant in determining the value of a
going concern, such as that of the Company.
In view of the wide variety of factors considered in connection with its
consideration of the proposed transaction, the Special Committee 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
determination.
The fairness opinions and analyses of DLJ and Dillon Read provided the
Special Committee with relevant data and comment as to fairness, the
historical market prices for the Leslie's California Common Stock supported
the position that the shares are being sold at a premium over market
unaffected by the proposed transaction, and the solicitation process and
absence of other offers after public announcement satisfied the Special
Committee that a sale was on favorable terms. The seasonality of the Company's
business, its dependence upon weather, the
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thin trading market for Leslie's California Common Stock, the very limited
analyst following for its stock, and the difficulty in predicting future
financial performance, all contributed to the Special Committee's belief that
the alternative of remaining a public company was not in the best interests of
the shareholders and that the proposed transaction was the best alternative to
enhance shareholder value under present circumstances. The Special Committee
was also advised by Dillon Read that a leveraged recapitalization by paying a
one-time cash dividend financed with debt would generally result in lower
values.
The Special Committee considered that, although the Merger Agreement
provides that the Company may not solicit or encourage any Acquisition
Proposal (as defined in the Merger Agreement), the Company may, if the Board's
fiduciary responsibilities under applicable law (as advised by counsel) so
require, participate in negotiations with third parties with respect to a
superior Acquisition Proposal before the Merger is consummated, and it
considered that the Merger Agreement, among other things, permits the Company
to terminate the Merger Agreement upon a determination that the Board's
continued recommendation to the shareholders would be reasonably likely to
breach its fiduciary duties. In this connection, the Special Committee
considered the effect on offers or proposals for an Acquisition Proposal that
could be caused by the provisions of the Merger Agreement that provide for the
payment or reimbursement of HPA's and Poolmart's expenses and payment of a
termination fee to LGP under certain circumstances. See "The Merger--
Termination Fee" and "--Expenses." The Special Committee believed that the
solicitation process that had taken place made it unlikely that an Acquisition
Proposal with another party would materialize. The Board also believed that
the preliminary proposals received by HPA and LGP from the financing sources
enhanced the probability of closing the transaction. On balance, it was
thought that the $1,750,000 expense reimbursement and $2,500,000 termination
fee required by HPA and LGP were not unreasonable and, while they might
somewhat deter a third party from making an Acquisition Proposal, the Company
still would be able to entertain a superior Acquisition Proposal that would
benefit the shareholders.
In approving the transaction, the Special Committee was aware of and
considered as a negative factor that as a result of the Merger, the Public
Shareholders would no longer participate in the future growth and earnings of
the Company. It considered that if the projections set forth under "Certain
Forward Looking Information" are realized, the Common Stock could
significantly increase in value. However, taking into account the Company's
disappointing results compared with investor expectations and analysts'
estimates, the seasonality of its business, the unpredictability of weather
and its importance to the Company's financial results, the relative
illiquidity of its Common Stock and small market capitalization, the thin and
volatile trading market for the Common Stock and a lack of success in
obtaining more extensive analysts' following of the Company, the Special
Committee believed that a sale of the Company would achieve greater value at
this time for the Public Shareholders as compared with remaining a public
company.
The Special Committee was also aware of and considered as a negative factor
that the price per share for the Leslie's California Common Stock was less
than the trading prices from April 11, 1996 to July 12, 1996, reaching a high
of $19.50 on June 14, 1996. However, the Special Committee was advised by
Dillon Read that the significant increase in price from $16.25 to $19.125 on
May 31, 1996 may have been due to misinformation in the market place
concerning the acquisition of a company with a similar name. The Special
Committee also took into account historical trading data indicating that 70%
of the trading volume in the 12 months ended February 21, 1997 was at or below
$14.50 per share, Leslie's California Common Stock substantially
underperformed both the S&P 400 Index and an index of comparable companies in
the 24 months ended February 21, 1997 and its valuation was at the bottom of
its peer group at that time. See "Opinion of DLJ" and "Opinion of Dillon Read"
below. Given the thin and volatile trading market for the Common Stock and the
foregoing factors, the Special Committee believed that the trading prices in
the three months before the November 12th announcement were more indicative of
the price level for the Common Stock uninfluenced by a proposed sale.
Board of Directors. The Board based its determination that the Merger
Transaction is fair to, and in the best interests of, the Company's
shareholders primarily on the analyses and conclusions of the Special
Committee (which were adopted by the Board as its own); the DLJ and Dillon
Read opinions delivered to it and
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to the Special Committee to the effect that, as of the dates of such opinions,
and based upon and subject to the assumptions, limitations and qualifications
set forth in such opinions, the Cash Merger Consideration to be received by
the Public Shareholders in the Merger Transaction was fair to such
shareholders from a financial point of view; the analyses of DLJ and Dillon
Read presented to the Board; and the other factors set forth above. The Board
did not find it practicable to, and did not, quantify or otherwise assign
relative weights to the specific factors considered in reaching its
determination.
OPINION OF DLJ
DLJ, as part of its investment banking services, is regularly engaged in the
valuation of businesses and securities in connection with mergers,
acquisitions, underwritings, sales and distributions of listed and unlisted
securities, private placements and valuations for estate, corporate and other
purposes. The Special Committee selected DLJ as its financial advisor because
it is an internationally recognized investment banking firm and DLJ
has substantial experience in transactions similar to the Merger Transaction
and is familiar with Leslie's California and its business.
As part of its role as financial advisor to the Special Committee, DLJ was
asked by the Special Committee to render an opinion to the Special Committee
as to whether the consideration to be received by the Public Shareholders is
fair to the Public Shareholders from a financial point of view. On February
26, 1997, DLJ rendered to the Special Committee and the Board an oral opinion,
which was confirmed in a written opinion of the same date, that, as of such
date, and based upon and subject to the assumptions, limitations and
qualifications set forth in such opinion, the Cash Merger Consideration to be
received by the Public Shareholders in the Merger Transaction was fair to such
shareholders from a financial point of view.
THE FULL TEXT OF THE OPINION OF DLJ IS ATTACHED HERETO AS APPENDIX C.
SHAREHOLDERS OF LESLIE'S CALIFORNIA ARE URGED TO READ THE OPINION OF DLJ IN
ITS ENTIRETY FOR ASSUMPTIONS MADE, PROCEDURES FOLLOWED, OTHER MATTERS
CONSIDERED AND THE LIMITS OF THE REVIEW BY DLJ.
The opinion of DLJ was prepared for the Special Committee and the Board and
is directed only to the fairness of the Cash Merger Consideration to be
received by the Public Shareholders in the Merger Transaction. The opinion of
DLJ does not constitute a recommendation to any shareholder of Leslie's
California as to how such shareholder should vote on the Merger Transaction.
The opinion of DLJ does not address (i) the relative merits of the Merger
Transaction and the other business strategies considered by the Board, (ii)
the Board's decision to proceed with the Merger Transaction or (iii) the value
of the shares of Leslie's California Common Stock held by the Continuing
Stockholders or fairness of any consideration being received by the Continuing
Stockholders in the Merger Transaction.
DLJ was not requested by the Special Committee to make, nor did DLJ make,
any recommendation as to the amount of the consideration to be received by the
Public Shareholders. No restrictions or limitations were imposed by the
Special Committee upon DLJ with respect to the investigation made or the
procedures followed by DLJ in rendering its opinion.
In arriving at its opinion, DLJ reviewed the Reincorporation Agreement and
the Merger Agreement, as well as certain financial and other information that
was publicly available or furnished to DLJ by Leslie's California, including
information provided during discussions with management. Included in the
information provided during discussions with management were certain financial
projections of Leslie's California for the period beginning December 31, 1996
and ending December 31, 2001 prepared by the management of Leslie's
California. In addition, DLJ compared certain financial and securities data of
Leslie's California with various other companies whose securities are traded
in public markets, reviewed prices and premiums paid in certain other business
combinations and conducted such other financial studies, analyses and
investigations as DLJ deemed appropriate for purposes of its opinion.
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In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to it from public sources, that was provided to it by Leslie's California or
its representatives, or that was otherwise reviewed by it. With respect to the
financial projections supplied to DLJ, DLJ assumed that they have been
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the management of Leslie's California as to the
future operating and financial performance of Leslie's California. DLJ did not
assume any responsibility for making an independent evaluation of Leslie's
California's assets or liabilities or for making any independent verification
of any of the information reviewed by it.
The opinion of DLJ is necessarily based on economic, market, financial and
other conditions as they exist on, and on the information made available to it
as of, the date of the opinion. The following is a summary of certain
financial analyses performed by DLJ and presented to the Special Committee and
the Board at their February 26, 1997 meetings.
Leslie's Common Stock Performance. DLJ's analysis of Leslie's California
Common Stock performance consisted of a historical analysis of closing prices
and trading volumes for the twelve months ended February 21, 1997. In
addition, DLJ compared the performance of Leslie's California Common Stock
from February 21, 1995 through February 21, 1997 to (i) the S&P 400 Index and
(ii) an index comprised of nine specialty retailer companies deemed to be
reasonably comparable to Leslie's California because they possess general
business, operating and financial characteristics similar to Leslie's
California (collectively, the "Comparable Companies"). The Comparable
Companies consisted of Central Tractor Farm & Country, Discount Auto Parts,
Inc., Eagle Hardware & Garden, Inc., Friedman's, Inc., Garden Ridge Corp.,
O'Reilly Automotive, Inc., SCP Pool Corp., Tractor Supply Co. and West Marine,
Inc. In the twelve months ended February 21, 1997, Leslie's California Common
Stock reached a high of $19.50 per share and a low of $10.50 per share. On
February 21, 1997, the closing price of Leslie's California Common Stock was
$13.125 per share. In the two years ended February 21, 1997, Leslie's
California Common Stock substantially underperformed both the S&P 400 Index
and the Comparable Companies index. DLJ's data showed that a $100.00
investment on February 22, 1995, in each of the Company's Common Stock, the
S&P 400 Index and the Comparable Companies index (assuming that all dividends
were reinvested), would have amounted on February 21, 1997 to $95.04 for the
Company's Common Stock, $163.72 for the S&P 400 Index and $129.64 for the
Comparable Companies index. The two-year period was chosen for the comparison
because of the volatility in the price of Leslie's California Common Stock in
the twelve months ended February 21, 1997 and because the Company had
substantially fewer stores prior to that two-year period.
Premium Analysis. DLJ reviewed publicly available information to determine
the premiums paid in 100 selected transactions ranging in size from $50.0
million to $250.0 million announced subsequent to January 1, 1996 (the
"Selected Transactions"). DLJ reviewed the percentage premium in each
transaction represented by the offer prices over the trading prices one day,
one week and one month prior to the announcement date of each respective
transaction. The median percentage amount by which the offer prices exceeded
the closing stock prices one day, one week and one month prior to the
announcement date for the Selected Transactions, was approximately 19.0%,
24.6% and 28.4%, respectively. This compares to the percentage amounts by
which the Cash Merger Consideration exceeded the closing stock price of
Leslie's California one day, one week and one month prior to November 12,
1996, the date of the press release announcing receipt of the offer from HPA,
of 26.1%, 31.8% and 34.9%, respectively.
Comparison of Selected Publicly Traded Comparable Companies. DLJ analyzed
the operating performance of Leslie's California relative to the Comparable
Companies. DLJ compared certain market trading statistics for Leslie's
California with the Comparable Companies including total enterprise value
(defined as market value of common equity plus book value of total debt less
cash and cash equivalents) (based on reported closing prices for the
Comparable Companies on February 21, 1997) as a multiple of latest twelve
months ("LTM") revenues, LTM earnings before interest, taxes, depreciation,
amortization and loss (gain) on the disposition of fixed assets ("EBITDA"),
LTM earnings before interest and taxes ("EBIT"), price to earnings ratios
("P/E") based on the LTM earnings per share ("EPS") and estimated calendar
years ending 1996 and 1997 EPS (as estimated by First Call Corporation). As of
February 21, 1997 this analysis resulted in (i) a range of 0.5x to 1.4x and a
median of 0.7x total enterprise value to LTM revenues compared to 0.7x for
Leslie's
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California based on the Cash Merger Consideration and using Leslie's
California LTM revenues and 0.7x for Leslie's California based on the Cash
Merger Consideration and using Leslie's California's 1996 estimated revenues,
(ii) a range of 6.2x to 19.7x and a median of 8.0x total enterprise value to
LTM EBITDA compared to 8.2x for Leslie's California based on the Cash Merger
Consideration and using Leslie's California's LTM EBITDA and 9.2x attributable
for Leslie's California based on the Cash Merger Consideration and using
Leslie's California's 1996 estimated EBITDA, (iii) a range of 7.8x to 24.6x
and a median of 9.8x total enterprise value to LTM EBIT compared to 11.6x for
Leslie's California based on the Cash Merger Consideration and using Leslie's
California's LTM EBIT and 13.2x for Leslie's California based on the Cash
Merger Consideration and using Leslie's California's 1996 estimated EBIT, (iv)
a range of 10.2x to 51.1x and a median of 16.5x P/E based on LTM EPS compared
to 21.7x for Leslie's California based on the Cash Merger Consideration and
using Leslie's California's LTM EPS and 23.0x for Leslie's California based on
the Cash Merger Consideration and using Leslie's California's estimated 1996
EPS, (v) a range of 8.8x to 38.6x and a median of 16.7x P/E based on 1996 EPS
estimates compared to 23.0x for Leslie's California based on the Cash Merger
Consideration and using Leslie's California's estimated 1996 EPS, and (vi) a
range of 7.1x to 27.1x and a median of 12.5x P/E based on 1997 EPS estimates
compared to 17.1x for Leslie's California based on the Cash Merger
Consideration and using Leslie's California's estimated 1997 EPS.
Analysis of Selected Transactions in the Specialty Retail Sector. DLJ
reviewed publicly available information for nine selected merger and
acquisition transactions in the specialty retailing industry and announced
subsequent to April 18, 1991 (the "Selected Specialty Retailer Transactions").
The Selected Specialty Retailer Transactions reviewed were: (i) J.W. Childs
Equity Partners/Central Tractor Farm & Country, (ii) Sears, Roebuck &
Co./Orchard Supply Hardware Stores, (iii) Proffitt's Inc./Parisian Inc., (iv)
Associated Stationers Inc./United Stationers Inc., (v) Rite Aid
Corporation/Perry Drug Stores, Inc., (vi) General Nutrition Companies,
Inc./Nature Food Centres, Inc., (vii) Software Etc. Inc./Babbage's Inc.,
(viii) House of Fabrics/Fabricland Inc. and (ix) ValCom Inc./Inacomp Computer
Centers, Inc. DLJ reviewed the consideration paid in such transactions in
terms of the total enterprise value as a multiple of LTM revenues, EBITDA and
EBIT of the acquired entity prior to its acquisition as well as the equity
value (defined as market value of common equity) as a multiple of LTM net
income of the acquired entity prior to its acquisition. The analysis resulted
in (i) a range of 0.2x to 0.9x and a median of 0.6x total enterprise value to
LTM revenues compared to 0.7x for Leslie's California based on the Cash Merger
Consideration and using Leslie's California's LTM revenues and 0.7x for
Leslie's California based on the Cash Merger Consideration and using Leslie's
California's 1996 estimated revenues, (ii) a range of 7.6x to 12.3x and a
median of 9.4x total enterprise value to LTM EBITDA compared to 8.2x for
Leslie's California based on the Cash Merger Consideration and using Leslie's
California's LTM EBITDA and 9.2x for Leslie's California based on the Cash
Merger Consideration and using Leslie's California's 1996 estimated EBITDA,
(iii) a range of 10.4x to 27.9x and a median of 13.1x total enterprise value
to LTM EBIT compared to 11.6x for Leslie's California based on the Cash Merger
Consideration and using Leslie's California's LTM EBIT and 13.2x for Leslie's
California based on the Cash Merger Consideration and using Leslie's
California's 1996 estimated EBIT and (iv) a range of 11.2x to 48.8x and a
median of 22.4x P/E based on LTM net income compared to 21.8x for Leslie's
California based on the Merger Cash Consideration and using Leslie's
California's LTM net income and 21.8x for Leslie's California based on the
Cash Merger Consideration and using Leslie's California's 1996 estimated net
income.
Discounted Cash Flow Analysis. For purposes of this analysis, DLJ performed
a discounted cash flow analysis for Leslie's California on a stand-alone basis
based on projections provided by management (the "Management Case"). The
material assumptions underlying the management projections are described under
"Certain Forward Looking Information." In addition, DLJ performed a discounted
cash flow analysis for Leslie's California which adjusted the Management Case
to reflect a 20% shortfall from projected results (the "Adjusted Case"). In
performing its analysis, DLJ calculated the "Free Cash Flow" for Leslie's
California based on projected EBIT adjusted for projected: (i) taxes; (ii)
depreciation and amortization; (iii) changes in working capital and (iv)
capital expenditures. DLJ discounted the stream of Free Cash Flows from fiscal
1997 to fiscal 2001 to present value using discount rates ranging from 12.0%
to 18.0% based on DLJ's experience and the weighted average cost of capital
for companies similar to Leslie's California. To estimate the residual value
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of Leslie's California at the end of the forecast period, DLJ applied a range
of multiples from 6.5x to 8.5x to Leslie's California's projected fiscal 2001
EBITDA, and discounted those estimates of residual value to present value
using the same range of discount rates. DLJ then aggregated the present value
of the Free Cash Flows and the present value of the residual value of Leslie's
California to derive a range of implied total enterprise value for Leslie's
California. To arrive at a per share value DLJ then subtracted Leslie's
California's net debt and divided the result by Leslie's California's fully-
diluted shares. The Management Case indicated a range of value of $11.70 to
$22.32 per share. The Adjusted Case indicated a range of value of $8.29 to
$17.08 per share.
The summary set forth above does not purport to be a complete description of
the analyses performed by DLJ, but describes in summary form the principal
elements of the presentations made by DLJ to the Special Committee and the
Board on February 26, 1997. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant methods of
financial analysis and the application of those methods to the particular
circumstances and, therefore, such an opinion is not readily summarized. Each
of the analyses conducted by DLJ was carried out in order to provide a
different perspective on the transaction and add to the total mix of
information available. DLJ did not form a conclusion as to whether any
individual analysis, considered in isolation, supported or failed to support
an opinion as to fairness from a financial point of view. Rather, in reaching
its conclusion, DLJ considered the results of each analysis in light of each
other and ultimately reached its opinion based on the results of all analyses
taken as a whole. Accordingly, notwithstanding the separate factors summarized
above, DLJ believes that its analyses must be considered as a whole and that
selecting portions of its analyses and the factors considered by it, without
considering all analyses and factors, could create an incomplete or misleading
view of the evaluation process underlying its opinion. In performing its
analyses, DLJ made numerous assumptions with respect to industry performance,
business and economic conditions and other matters. The analyses performed by
DLJ are not necessarily indicative of actual values or future results, which
may be significantly more or less favorable than suggested by such analyses.
Pursuant to the terms of an engagement letter dated December 17, 1996,
Leslie's California agreed to pay DLJ (i) a retainer fee of $50,000, payable
upon execution of the letter (the "DLJ Retainer Fee"), (ii) a fee of $250,000
at the time DLJ notified the Special Committee that it was prepared to deliver
DLJ's opinion and $25,000 for each additional or updated opinion delivered by
DLJ with respect to a transaction (the "DLJ Opinion Fee") and (iii) a
transaction fee equal to $1.33 million to be paid upon consummation of the
Merger Transaction less the DLJ Retainer Fee and the DLJ Opinion Fee. Leslie's
California has agreed to reimburse DLJ for certain out-of-pocket expenses and
to indemnify DLJ and certain related persons for certain potential liabilities
and expenses relating to its services provided to the Special Committee.
DLJ has performed investment banking and other services for Leslie's
California in the past and has received usual and customary compensation for
such services. In December 1995, DLJ was engaged by Leslie's California to
assist the Company in evaluating strategic alternatives. As part of such
engagement, DLJ conducted an extensive solicitation process in the summer and
fall of 1996 seeking a buyer for the Company. A fee of $50,000 was received by
DLJ for services rendered in connection with such engagement. Certain
employees of DLJ own, in the aggregate, less than 0.5% of the common stock of
Leslie's California. An employee of DLJ is also a limited partner of several
investment partnerships of which Michael J. Fourticq is the general partner,
including a partnership that provided part of the financing to acquire
Leslie's California in 1988. In addition, an affiliate of DLJ owns less than a
2.0% limited partnership interest in Green. DLJ also performs merchant and
investment banking services for LGP and its affiliates from time to time, for
which it receives customary compensation.
In the ordinary course of its business, DLJ may trade securities of Leslie's
California for its own account or for the account of its customers and,
accordingly, may at any time hold long or short positions in such securities.
OPINION OF DILLON READ
On February 26, 1997, Dillon Read rendered its oral opinion, which was
confirmed by its written opinion dated February 26, 1997, to the Board to the
effect that, based upon and subject to certain matters stated therein, as of
the date of such opinion, the Cash Merger Consideration is fair to the Public
Shareholders from a financial point of view.
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The full text of Dillon Read's opinion dated February 26, 1997, which sets
forth a description of the assumptions made, general procedures followed,
matters considered and limitations on the review undertaken, is attached
hereto as Appendix D. Dillon Read's opinion is directed only to the fairness,
from a financial point of view, of the Cash Merger Consideration and does not
constitute a recommendation to any holder of Leslie's California Common Stock
as to how such stockholder should vote on the Merger Transaction. Moreover,
Dillon Read did not make any recommendation as to the amount of the
consideration to be received by the Public Shareholders. Holders of Leslie's
California Common Stock are urged to read the opinion carefully in its
entirety.
In arriving at its opinion, Dillon Read, among other things: (i) reviewed
certain publicly available business and historical financial information
relating to the Company, (ii) reviewed certain financial information and other
data provided to Dillon Read by the Company that is not publicly available
relating to the business and prospects of the Company, including financial
projections prepared by the management of the Company, (iii) conducted
discussions with members of the senior management of the Company, (iv)
reviewed publicly available financial and stock market data with respect to
certain other companies in lines of business Dillon Read believed to be
generally comparable to those of the Company, (v) reviewed the historical
market prices and trading volumes of Leslie's California Common Stock, (vi)
compared the financial terms of this transaction with the financial terms of
certain other transactions which Dillon Read believed to be generally
comparable to this transaction, (vii) reviewed the Merger Agreement and
Reincorporation Agreement, and (viii) conducted such other financial studies,
analyses and investigations, and considered such other information as Dillon
Read deemed necessary or appropriate.
In connection with its review, Dillon Read did not assume any responsibility
for independent verification of any of the foregoing information and, with the
Company's consent, relied on it being complete and accurate in all material
respects. In addition, Dillon Read did not make any evaluation or appraisal of
any of the assets or liabilities (contingent or otherwise) of the Company, nor
was Dillon Read furnished with any such evaluation or appraisal. With respect
to the financial projections referred to above, Dillon Read assumed, with the
Company's consent, that they were reasonably prepared on bases reflecting the
best currently available estimates and judgments of the Company's management
as to the future financial performance of the Company. Further, Dillon Read's
opinion was based on economic, monetary and market conditions existing on
February 26, 1997.
In arriving at its opinion, Dillon Read did not assign any particular weight
to any analysis or factor considered by it, but rather made qualitative
judgments based on its experience in rendering such opinions and on then
existing economic, monetary and market conditions as to the significance and
relevance of each analysis and factor. Accordingly, Dillon Read believes that
its analyses must be considered as a whole and that selecting portions of its
analyses and the factors considered, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying such analyses and its opinion. In its analyses, Dillon Read made
numerous assumptions with respect to industry performance, general business
and economic conditions and other matters, many of which are beyond the
Company's control. Any estimates contained in Dillon Read's analyses are not
necessarily indicative of actual values or predictive of future results or
values, which may be significantly more or less favorable than as set forth
therein. In addition, analyses relating to the value of a business or
securities do not purport to be appraisals or to reflect the actual prices at
which businesses or securities might be sold.
The following summarizes the material quantitative analyses relating to the
Company performed by Dillon Read in arriving at the opinion dated February 26,
1997 presented to the Board.
Historical Trading Analysis. Dillon Read reviewed the stock market
performance of Leslie's California Common Stock. The Company initially went
public at a price per share of $10 (adjusted for stock dividends) on April 19,
1991. Leslie's California Common Stock reached a low of $4.54 on July 15, 1992
and a high of $19.50 on June 14, 1996, based on the daily closing prices of
the Nasdaq National Market. On May 31, 1996 Leslie's California Common Stock
increased $2.875 to $19.125 from $16.250 on May 30, 1996. On May 31, 1996,
Danka Business Systems publicly announced an acquisition of Leslie's Supply
Systems, a private distributor of office equipment. Dillon Read believes the
$2.875 increase in the price per share of Leslie's California Common Stock
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and the high of $19.50 on June 14, 1996 may have been as a result of a
misinterpretation by investors about the target of this acquisition.
Disregarding this aberration, Dillon Read believes the high of the Company's
Common Stock is $16.67 on May 1, 1995, based on the daily closing prices of
the Nasdaq National Market.
Summary of Comparable Companies Analysis. Using publicly available
information, Dillon Read reviewed the stock prices and market multiples of
common stocks of the following companies: West Marine, Inc., SCP Pool
Corporation, Home Depot, Inc., Lowe's Companies, Inc., Wickes Lumber Company,
The Sports Authority, Inc., OfficeMax, Inc., Toys "R" Us, Inc., PETsMART, Inc.
and Bed Bath & Beyond, Inc. Dillon Read believes these companies are engaged
in businesses with certain criteria generally comparable to those of the
Company.
Dillon Read considered three-year historical compounded annual net sales and
net income growth rates for these comparable companies and calculated a range
of values. Three-year historical compounded annual net sales and net income
growth ranged from 7.2% to 54.7% and (17.6%) to 122.4%. Dillon Read noted that
for the Company, three-year historical compounded annual net sales and net
income growth was 16.4% and (3.0%). Dillon Read also considered three-year
historical average gross margin and latest 12 months gross margin for these
comparable companies and calculated a range of values. Three-year historical
average gross margin and latest 12 months gross margin ranged from 21.9% to
41.7% and 21.5% to 41.5%. Dillon Read noted that for the Company, three-year
historical average gross margin and latest 12 months gross margin was 38.1%
and 37.9%. Dillon Read also considered three-year historical average earnings
before interest and taxes margin and latest 12 months earnings before interest
and taxes margin for these comparable companies and calculated a range of
values. Three-year historical average earnings before interest and taxes
margin and latest 12 months earnings before interest and taxes margin ranged
from 1.3% to 11.7% and 1.2% to 10.9%. Dillon Read noted that for the Company,
three-year historical average earnings before interest and taxes margin and
latest 12 months earnings before interest and taxes margin was 5.4% and 5.3%,
within the range for these comparable companies.
Dillon Read determined the equity market value and derived an "enterprise
value" (defined as equity market value adjusted by adding total debt and
subtracting cash and cash equivalents) for each of these comparable companies,
and calculated a range of such enterprise values as a multiple of the latest
12 months earnings before interest and taxes and earnings before interest,
taxes and depreciation and amortization. Enterprise value as a multiple of the
latest 12 months earnings before interest and taxes ranged from 11.1x to
29.6x. Enterprise value as a multiple of the latest 12 months earnings before
interest, taxes and depreciation and amortization ranged from 8.2x to 22.1x.
Dillon Read also considered the equity value for each of these comparable
companies and calculated a range of equity values as a multiple of latest 12
months earnings per share and calendar year 1996 and 1997 earnings per share
estimates based on publicly available analyst financial forecasts. Equity
value to latest 12 months earnings per share for these comparable companies
ranged from 15.3x to 47.7x. Equity value to calendar year 1996 earnings per
share estimates for these comparable companies ranged from 14.8x to 48.5x.
Equity value to calendar year 1997 earnings per share estimates ranged from
12.8x to 33.8x.
Dillon Read noted that the Cash Merger Consideration was 13.1x preliminary
1996 earnings before interest and taxes and 9.2x preliminary 1996 earnings
before interest, taxes and depreciation and amortization, within the range for
these comparable companies. Dillon Read also noted that the Cash Merger
Consideration was 22.3x latest 12 months earnings per share, 23.0x 1996
estimated earnings per share and 18.1x 1997 estimated earnings per share,
within the range for the comparable companies.
Summary of Comparable Mergers and Acquisitions Analysis. Using publicly
available information, Dillon Read reviewed the purchase prices and multiples
paid in selected mergers and acquisitions of specialty retail companies which
Dillon Read believed to be generally comparable to the transaction. Dillon
Read reviewed the acquisition of Central Tractor Farm & Country, Inc. by J.W.
Childs Equity Partners LP; the acquisition of Baby Superstores, Inc. by Toys
"R" Us, Inc.; the acquisition of Office Depot, Inc. by Staples, Inc.; the
acquisition of Orchard Supply Hardware Stores Corporation by Sears, Roebuck
and Co.; the acquisition of Parisian Inc. by Proffitt's, Inc.; the acquisition
of Younkers, Inc. by Proffitt's, Inc.; and the acquisition of Petstuff, Inc.
by PETsMART, Inc.
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The multiples of unlevered value of the transactions (consideration offered
for the equity plus the book value of debt less the cash and cash equivalents)
to the sales of the acquired businesses for the 12 months preceding the
acquisition announcement of the comparable transactions ranged from 0.5x to
1.6x with a median multiple of 0.7x. Dillon Read noted that the implied price
per share of the Company based on the median multiple and preliminary 1996
results was $14.53 per share. The multiples of unlevered value of the
transactions to the earnings before interest and taxes of the acquired
businesses for the 12 months preceding the acquisition announcement of the
comparable transactions ranged from 11.4x to 16.5x with a median multiple of
12.2x. Dillon Read noted that the implied price per share of the Company based
on the median multiple and preliminary 1996 results was $13.57 per share. The
multiples of unlevered value of the transactions to the earnings before
interest, taxes and depreciation and amortization of the acquired businesses
for the 12 months preceding the acquisition announcement of the comparable
transactions ranged from 7.4x to 12.8x with a median multiple of 9.3x. Dillon
Read noted that the implied price per share of the Company based on the median
multiple and preliminary 1996 results was $14.61 per share.
Dillon Read also considered the multiples of equity value of the comparable
transactions to book value of equity and the latest 12 months net income
preceding the acquisition of the acquired businesses. The multiples of equity
value of the transactions to the book value of equity of the acquired
businesses ranged from 1.4x to 4.2x with a median multiple of 2.6x. Dillon
Read noted that the implied price per share of the Company based on the median
multiple and preliminary 1996 results was $14.33 per share. The multiples of
equity value of the transactions to latest 12 months net income of the
acquired businesses ranged from 17.5x to 27.5x with a median multiple of
24.4x. Dillon Read noted that the implied price per share of the Company based
on the median multiple and preliminary 1996 results was $15.37 per share.
Discounted Cash Flow Analysis. Dillon Read performed a discounted cash flow
analysis of the Company based upon the Company financial forecast provided by
Company management. The financial forecast provided by Company management did
not take into account any poor weather conditions whereas two out of the
previous five fiscal years have been negatively impacted by poor weather.
Utilizing the Company's financial projections, Dillon Read calculated the
theoretical discounted present value of equity for the Company by adding
together the present value of (i) the future stream of unlevered free cash
flow through the year 2001, (ii) the future value of the Company at the end of
the year 2001 (the "Terminal Value"), and (iii) the preliminary cash at year-
end 1996 less total debt. The Terminal Value was calculated based on a
multiple of earnings before interest, taxes and depreciation and amortization
for 2001 of 6.0x. The cash flow stream and terminal value were then discounted
to present values using a range of discount rates from 11.0% to 13.0%.
The theoretical equity value of the Company based on the set of projections
provided by Company management produced a range of value per share of the
Common Stock of $13.78 to $15.36, with a median value of $14.55; such
theoretical valuation based on a second version of projections adjusted by
Dillon Read taking into account poor financial performance due to poor weather
conditions produced a range of value per share of the Common Stock of $11.91
to $13.31. Dillon Read noted that the Cash Merger Consideration was within the
range of the theoretical value based on the first set of projections and above
the range of the theoretical value based on the second version of projections.
No company, transaction or business used in the analyses described under
Summary of Comparable Mergers and Acquisitions Analysis and Summary of
Comparable Companies Analysis is identical to the Company. Accordingly, an
analysis of the results thereof necessarily involves complex considerations
and judgments concerning differences in financial and operating
characteristics and other factors that could affect the transaction or the
public trading or other values of the company or companies to which they are
being compared.
Dillon Read is an internationally recognized investment banking firm which,
as a part of its investment banking business, regularly is engaged in the
evaluation 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. In the ordinary course of
its business, Dillon Read trades the securities of the Company for its own
account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
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Pursuant to an engagement letter dated December 9, 1996, the Company agreed
to pay Dillon Read a fee of $250,000 for services rendered in connection with
the preparation of its fairness opinion, plus $25,000 for any additional or
updated opinion. The Company has also agreed to reimburse Dillon Read for the
expenses reasonably incurred by it in connection with its engagement
(including reasonable counsel fees) and to indemnify Dillon Read and its
officers, directors, employees, agents and controlling persons against certain
expenses, losses, claims, damages or liabilities in connection with its
services.
PURPOSE AND REASONS OF HANCOCK GROUP AND LGP FOR THE MERGER TRANSACTION
The purpose of the Hancock Group and LGP for engaging in the transactions
contemplated by the Merger Agreement is to acquire 100% ownership of Leslie's
California, before taking into account the dilutive effect of the stock
options and warrants described below. Upon consummation of the Merger
Transaction, members of the Hancock Group will continue a portion of their
investment through ownership of the Continuing Shares and will be able to
receive substantial cash proceeds from the Merger for the remainder of their
investment in the Company on the same terms as the Public Shareholders.
Moreover, as described below, certain members of Leslie's California's current
management will have the opportunity to purchase additional shares of Leslie's
Delaware Common Stock and will receive options to purchase Leslie's Delaware
Common Stock. As a result of the merger of Poolmart with and into Leslie's
Delaware, Green, an affiliate of LGP, will acquire shares of Leslie's Delaware
that will represent approximately 73.6% of the Leslie's Delaware Common Stock
outstanding immediately after the effectiveness of the Merger, leaving the
Hancock Group and current management with shares representing approximately
26.4% of the outstanding shares, in each case before giving effect to the
exercise of warrants and options to purchase Leslie's Delaware Common Stock
that will be issued and granted at the time of the Merger. In addition, in
connection with providing preferred stock financing (see "The Merger--
Financing") Occidental will receive warrants to purchase approximately 15.0%
of the shares of Common Stock of Leslie's Delaware outstanding and underlying
options and warrants upon consummation of the Merger. Assuming the exercise of
all such options and warrants, Green would own approximately 50.1%, the
members of the Hancock Group and current management would own approximately
34.9% and Occidental would own approximately 15.0% of the outstanding shares
of Leslie's Delaware Common Stock.
As a private company, Leslie's California will have greater operating
flexibility to focus on its long-term value by emphasizing continuing growth
and operating cash flow without the constraint of the public market's emphasis
on quarterly earnings and the potentially disruptive effect of the seasonality
of the Company's business and impact of weather conditions.
POSITION OF HANCOCK GROUP AS TO FAIRNESS OF THE MERGER TRANSACTION
The members of the Hancock Group have considered the analyses of and the
factors examined by the Special Committee and the Board (described in detail
in "Special Factors--The Special Committee's and Board of Directors'
Recommendation"), and the members of the Hancock Group believe these analyses
and factors, when considered together with the establishment of the Special
Committee to evaluate and negotiate possible business combinations involving
Leslie's California and the opinions of DLJ and Dillon Read (see "Special
Factors--Opinion of DLJ" and "--Opinion of Dillon Read"), provide a reasonable
basis for them to believe, as they do, that the Merger Transaction is fair to
the shareholders of Leslie's California. Their belief is enhanced by the
requirement that the principal terms of the Merger Agreement and the
Reincorporation Agreement be approved by holders of a majority of shares
voting at the Special Meeting and owned by the Public Shareholders. This
belief should not, however, be construed as a recommendation to Leslie's
California's shareholders by the members of the Hancock Group in their
capacity as shareholders to vote to approve the principal terms of the Merger
Agreement and the Reincorporation Agreement. No member of the Hancock Group
has assigned specific relative weights to the factors considered in reaching
its belief as to fairness.
CONFLICTS OF INTEREST
In considering the recommendations of the Board with respect to the Merger
Transaction, shareholders should be aware that certain officers and directors
of Leslie's California and affiliates, and associates and persons
27
<PAGE>
related to the officers and directors are members of the Hancock Group or
otherwise have interests in connection with the Merger Transaction which may
present them with actual or potential conflicts of interest as summarized
below. The Special Committee and the Board were aware of these interests and
considered them among the other matters described under "Special Factors--The
Special Committee's and Board of Directors' Recommendation."
Post-Merger Transaction Ownership of Leslie's Delaware. It is anticipated
that the following individuals and entities will hold the indicated number of
fully diluted shares of Common Stock or other securities of Leslie's Delaware
shown in the following table immediately after the Merger:
<TABLE>
<CAPTION>
NUMBER OF FULLY- NUMBER OF SHARES OF PERCENTAGE OF FULLY-
DILUTED SHARES OF LESLIE'S DELAWARE DILUTED LESLIE'S
NAME OF LESLIE'S DELAWARE SERIES A DELAWARE
INDIVIDUAL OR ENTITY COMMON STOCK PREFERRED STOCK(1) COMMON STOCK(2)
-------------------- ----------------- ------------------- --------------------
<S> <C> <C> <C>
Michael J.
Fourticq(3)(4)......... 165,515 7.9%
Brian P.
McDermott(4)(5)........ 243,552 11.6
Gregory Fourticq(4)..... 10,000 0.5
Richard H. Hillman(4)... 22,414 1.1
Occidental
Petroleum(6)(7)........ 316,092 28,000 15.0
Robert D. Olsen(4)(8)... 117,529 5.6
</TABLE>
- --------
(1) For terms of the Leslie's Delaware Series A Preferred Stock see "The
Merger--Financing."
(2) Computed based upon the total number of shares of Leslie's Delaware Common
Stock outstanding and the number of shares of Leslie's Delaware Common
Stock underlying warrants and options outstanding immediately after the
Effective Date. See "NQ Option Plan and ISO Option Plan" for a description
of the terms of options being granted to certain of the indicated
individuals.
(3) Includes 4,976 shares subject to options exercisable within 60 days after
the consummation of the Merger.
(4) Member of the Hancock Group, which in the aggregate with management will
own 34.9% of the fully diluted shares of Leslie's Delaware Common Stock.
(5) Includes 77,000 shares subject to stock options issued under the ISO
Option Plan described below.
(6) Pursuant to Rule 14a-1(a), Occidental is an associate of Dr. Laurance, a
director of Leslie's California.
(7) Common Stock shown is obtainable upon the exercise of warrants. See "The
Merger--Financing."
(8) Includes 52,761 shares subject to stock options issued under the NQ Option
Plan described below and 50,000 shares subject to stock options issued
under the ISO Option Plan.
The information appearing below with respect to beneficial ownership of
Leslie's California Common Stock has been determined as of April 1, 1997 and
includes options exercisable within 60 days of that date. However, information
as to the receipt of Cash Merger Consideration for shares subject to
outstanding options has been determined after giving effect to acceleration of
the vesting of all outstanding options as a result of the Merger, and
therefore may reflect a higher total number.
Mr. Michael J. Fourticq, Chairman of the Board, had beneficial ownership
directly or indirectly of 842,338 shares of Leslie's California Common Stock
(approximately 12.8% of Leslie's California Common Stock). Certain of these
shares are held by partnerships of which Mr. Fourticq is a general partner and
certain of these shares are subject to stock options. Mr. Fourticq's brother,
Gregory Fourticq, is a partner of one of these partnerships which holds
334,141 of these shares. Out of his total beneficial holdings, Mr. Fourticq
will retain 160,539 Continuing Shares of Leslie's Delaware Common Stock which
will not be converted into the right to receive the Cash Merger Consideration
in the Merger. Certain of Mr. Fourticq's options will be cancelled immediately
prior to the Effective Date, and he will receive a ten-year option to purchase
4,976 shares of Leslie's Delaware at an exercise price of $5.00 per share (an
"NQ Option") under the Leslie's Delaware Non-Qualified Stock Option Plan (the
"NQ Option Plan"). Mr. Fourticq and his affiliated partnerships will receive
the Cash Merger Consideration (or, with respect to shares subject to options,
the Cash Merger Consideration less the option exercise price) with respect to
approximately 667,350 shares of Leslie's Delaware Common Stock.
28
<PAGE>
Mr. Brian P. McDermott, a Director and the President and Chief Executive
Officer of the Company, had beneficial ownership directly or indirectly of
378,974 shares of Leslie's California Common Stock (approximately 5.6% of
Leslie's California Common Stock). Certain of these shares are subject to
stock options. Out of his total beneficial holdings, Mr. McDermott will retain
166,552 Continuing Shares of Leslie's Delaware Common Stock which will not be
converted into the right to receive the Cash Merger Consideration in the
Merger. Mr. McDermott will receive the Cash Merger Consideration (or, with
respect to shares that are subject to options, the Cash Merger Consideration
less the option exercise price) with respect to approximately 236,441 shares
of Leslie's Delaware Common Stock. Mr. McDermott will receive options to
purchase 77,000 shares of Leslie's Delaware under the Leslie's Delaware
incentive stock option plan (the "ISO Option Plan").
Mr. Gregory Fourticq had beneficial ownership indirectly of 446,596 shares
of Leslie's California Common Stock (approximately 7.0% of the Leslie's
California Common Stock). Of these shares, 334,141 are held by a partnership
of which each of Mr. Fourticq and his brother, Michael J. Fourticq, is a
general partner. Out of these beneficial holdings, Mr. Gregory Fourticq will
retain 10,000 Continuing Shares of Leslie's Delaware Common Stock which will
not be converted into the right to receive the Cash Merger Consideration in
the Merger. Mr. Fourticq's affiliated partnership will receive the Cash Merger
Consideration with respect to approximately 324,141 shares of Leslie's
Delaware Common Stock, including shares attributable to the ownership interest
of Mr. Michael J. Fourticq in such partnership. The remaining shares
beneficially owned by Mr. Gregory Fourticq are held in trusts for which he is
trustee for the benefit of his nephews and niece. All such shares will receive
the Cash Merger Consideration.
Mr. Richard H. Hillman, a Director of Leslie's California, had beneficial
ownership directly or indirectly of 322,758 shares of Leslie's California
Common Stock (approximately 4.9% of the Leslie's California's Common Stock).
Certain of these shares are subject to stock options. Out of his total
beneficial holdings, Mr. Hillman will retain 22,414 Continuing Shares of
Leslie's Delaware Common Stock which will not be converted into the right to
receive the Cash Merger Consideration in the Merger. Mr. Hillman will receive
the Cash Merger Consideration (or, with respect to shares subject to options,
the Cash Merger Consideration less the option exercise price) with respect to
approximately 303,652 shares of Leslie's Delaware Common Stock, which includes
1,323 shares held in a trust for the benefit of his son.
Mr. Robert D. Olsen, Chief Financial Officer of Leslie's California, had
beneficial ownership of 127,988 shares of Leslie's California Common Stock.
All such shares are subject to stock options. Certain of Mr. Olsen's options
will be cancelled immediately prior to the Effective Date. Mr. Olsen will
receive the Cash Merger Consideration less the option exercise price with
respect to 72,545 shares of Leslie's Delaware Common Stock subject to options.
He will receive a ten-year NQ Option to purchase 52,761 shares of Leslie's
Delaware Common Stock under the NQ Option Plan and an option to purchase
50,000 shares under the ISO Option Plan. Mr. Olsen will also purchase 14,768
shares of Leslie's Delaware Common Stock (the "Subscription Stock") at $14.50
per share.
Occidental, of which Dr. Dale R. Laurance is an officer and a director, is a
holder of $10 million of 8% Convertible Subordinated Debentures issued by
Leslie's California that are due in 2001 and bear interest at the rate of 8%
per annum, payable semi-annually, and are convertible, upon 91 days' prior
notice, into Leslie's California Common Stock at $20.95 per share (the
"Debentures"). Occidental has agreed to invest a total of $28 million in
Leslie's Delaware on the Effective Date in exchange for 28,000 shares of
Leslie's Delaware Series A Preferred Stock and warrants to purchase up to
316,092 shares of Leslie's Delaware Common Stock which will represent 15% of
the Fully-Diluted Shares. The consideration for these securities will consist
of cash and the exchange of the Debentures. See "The Merger--Financing."
In addition to the foregoing, as of April 22, 1997, other directors,
officers and employees of Leslie's California held options to purchase a total
of 560,700 shares of Leslie's California Common Stock at prices ranging from
$0.907 to $14.047 per share issued under the Leslie's California 1990 Stock
Option Plan and the Leslie's California 1992 Directors' Stock Incentive Plan
or otherwise. As described under "The Merger--
29
<PAGE>
Treatment of Stock Options," upon the effectiveness of the Merger, the holders
of all of these options (other than options that are exercised or cancelled
prior to the Effective Date) will each be entitled to receive in respect of
each option cash equal to the Cash Merger Consideration per option share less
the exercise price of the applicable option multiplied by the total number of
shares that are subject to the option. Any option not exercised prior to the
Effective Date or for which no such payment is due will automatically be
cancelled.
NQ Option Plan and ISO Option Plan. Immediately prior to the Merger,
Leslie's Delaware will adopt the NQ Option Plan and the ISO Option Plan and
will reserve 83,599 shares and 273,946 shares, respectively, of Leslie's
Delaware Common Stock for issuance upon the exercise of options to be granted
to certain employees of Leslie's Delaware upon consummation of the Merger and
thereafter. It is expected that options to purchase Leslie's Delaware Common
Stock will be granted to the following individuals at an exercise price of
$5.00 per share for options granted under the NQ Option Plan ("NQ Options")
and $14.50 per share in the case of options granted under the ISO Option Plan
("ISO Options") (or $15.95 in the case of ISO options granted to any holder of
10% or more of the outstanding Leslie's Delaware Common Stock):
<TABLE>
<CAPTION>
NAME OF RECIPIENT NQ OPTION SHARES ISO OPTION SHARES
----------------- ---------------- -----------------
<S> <C> <C>
Michael J. Fourticq....................... 4,976 --
Brian P. McDermott........................ -- 77,000
Robert D. Olsen........................... 52,761 50,000
Other members of management............... 25,862 146,946
</TABLE>
Leslie's Delaware will reserve 83,599 shares of Leslie's Delaware Common
Stock for the NQ Option Plan. Under the NQ Option Plan, NQ Options vest
immediately. However, Leslie's Delaware (and in some instances Green and
certain members of the Hancock Group) will have a right ("Call Option") to
repurchase a portion of each NQ Option (and a portion of any shares of
Leslie's Delaware Common Stock issued upon the exercise of any NQ Option ("NQ
Option Shares")) upon the option holder or stockholder ceasing to provide
services to Leslie's Delaware. If the NQ Option holder's service termination
occurs prior to the first anniversary of the Effective Date, two-thirds of the
NQ Option and two-thirds of any NQ Option Shares may be repurchased; if the
termination occurs on or after the first anniversary and before the second
anniversary, the Call Option applies to one-third of the NQ Options and NQ
Option Shares; and the Call Option will not apply to any NQ Options or NQ
Option Shares if termination occurs on or after the second anniversary of the
Effective Date. The per share Call Option exercise price is (i) for NQ
Options, (x) if the termination is voluntary, the amount by which the Cash
Merger Consideration exceeds $5.00, and (y) if the termination is other than
voluntary ("Other Termination"), the greater of (A) the amount by which the
Cash Merger Consideration exceeds $5.00, or (B) the amount by which the fair
market value of a share of the Leslie's Delaware Common Stock on the date of
termination, as determined by the Board of Directors of Leslie's Delaware,
exceeds $5.00; and (ii) for NQ Option Shares, (x) if the termination is
voluntary, the Cash Merger Consideration, and (y) in the case of an Other
Termination, the greater of (A) the Cash Merger Consideration, or (B) the fair
market value of a share of Leslie's Delaware Common Stock on the date of
termination, as determined by the Leslie's Delaware Board of Directors. NQ
Options have a term of ten years and remain exercisable without regard to any
termination of employment of the holder, subject to the exercise of the Call
Option as described above.
Leslie's Delaware will reserve 273,946 shares of Leslie's Delaware Common
Stock for the ISO Option Plan. Under the ISO Option Plan, ISO Options vest in
one-third increments on the first, second and third anniversaries of the
Effective Date, except for options to purchase 71,647 shares ("Performance
Options") which will also be subject to a further vesting condition based upon
Leslie's Delaware achieving certain operating and store-opening goals. Options
intended to qualify as "incentive stock options" and options not intended to
so qualify may be granted under the ISO Option Plan. Pursuant to law, options
intended to qualify as "incentive stock options" are subject to limitations on
aggregate amounts granted and must be issued to any holder of 10% or more of
the issuer's outstanding common stock at 110% of fair market value.
Vested ISO Options may be exercised for 90 days post termination of
employment, except in the case of the death of the option holder, in which
case the vested portion may be exercised within twelve months from the date of
termination. ISO Options will have a term of ten years.
30
<PAGE>
Subscription Stock. Immediately after the consummation of the Merger, Mr.
Robert D. Olsen, as described above, will purchase 14,768 shares of Leslie's
Delaware Common Stock at a price of $14.50 per share, and one or more
additional members of Leslie's California's current management will purchase a
total of an additional 4,198 shares of Subscription Stock at the same per
share price. The shares of Subscription Stock will be subject to the same Call
Option as described above for the NQ Option Shares.
Management Agreement. Pursuant to the terms of a Management Agreement (the
"Management Agreement") to be entered into between LGP and Leslie's Delaware,
(i) upon consummation of the Merger Leslie's Delaware will pay LGP a
transaction fee in the amount of $1.4 million, one-half of which will be paid
to HPA for distribution among HPA, Michael Fourticq, Brian McDermott and
Robert Olsen, and (ii) Leslie's Delaware will agree to pay LGP an annual
management fee equal to 1.6% of the total sum invested by Green in Leslie's
Delaware.
Stockholders Agreement. Upon consummation of the Merger, Leslie's Delaware,
all holders of Leslie's Delaware Common Stock and of options to purchase
Leslie's Delaware Common Stock and Occidental, as the holder of Leslie's
Delaware Series A Preferred Stock and warrants to purchase up to 316,092
shares of Leslie's Delaware Common Stock, will become parties to a
Stockholders Agreement ("Stockholders Agreement"), which is described below
under "The Merger--Financing."
Occidental Supply Agreement. Prior to its purchase of the Debentures, as
described above, a wholly-owned subsidiary of Occidental was and continues to
be a party to a supply agreement with Leslie's California under which that
subsidiary supplies all of Leslie's California's requirements for certain
chemical chlorine compounds. It is expected that after the Effective Date
Leslie's Delaware and this subsidiary will extend this supply agreement upon
terms and conditions that will be mutually satisfactory.
Indemnification and Insurance. The Merger Agreement requires that Leslie's
California, Leslie's Delaware as the surviving corporation in the
Reincorporation and Leslie's Delaware as the surviving corporation in the
Merger provide indemnification to the current and prior directors and officers
of Leslie's California and Leslie's Delaware against costs, expenses, suits,
claims and proceedings arising out of or pertaining to, or the approval and
consummation of the transactions contemplated by, the Merger Agreement and the
Reincorporation Agreement. In addition, Leslie's Delaware is obligated for a
period of at least eighteen months from the Effective Date to continue in
effect (or provide insurance coverage that, subject to Leslie's Delaware's
ability to obtain higher levels of deductibles, is comparable to) the
directors and officers liability insurance that is currently in place with
respect to claims arising from facts or events which occurred at or before the
Effective Date, provided that Leslie's Delaware is not obligated to expend
annually more than 150% of the current cost of such coverage.
Treatment of Stock Options. Certain of the directors and executive officers
of Leslie's California hold options to purchase Leslie's California Common
Stock that will be terminated upon the effectiveness of the Merger and, as to
a portion of which, such persons will receive cash pursuant to the terms of
the Merger Agreement. Prior to the Effective Date, Leslie's California has
agreed, pursuant to the terms of the Merger Agreement, to take all necessary
action to cancel all outstanding options to purchase Leslie's California
Common Stock, whether or not exercisable. Upon the surrender and cancellation
of each such option, unless another arrangement is made with the holder (see
"NQ Option Plan and ISO Option Plan" above) each holder thereof shall be
entitled to receive an amount in cash equal to the product of (i) the excess
of $14.50 over the exercise price per share of Leslie's Delaware Common Stock
purchasable pursuant to such option after the same has been converted into an
option to purchase Leslie's Delaware Common Stock upon the effectiveness of
the Reincorporation and (ii) the number of shares of Leslie's Delaware Common
Stock subject to such option at the time of such termination. See "The
Merger--Treatment of Stock Options" and "Principal Shareholders and Stock
Ownership of Management." As of April 22, 1997, there were options outstanding
to purchase an aggregate of 974,759 shares of Leslie's California Common Stock
at a weighted average exercise price of $8.66 per share, which options were
held by 71 persons.
31
<PAGE>
The following table sets forth information as to the options outstanding on
April 1, 1997 for which cash payment will be received upon consummation of the
Merger, and the proceeds to be received upon termination of such options by
the members of the Hancock Group and by all directors and executive officers
of Leslie's California as a group:
<TABLE>
<CAPTION>
OUTSTANDING CASH PAYMENT TO BE
OPTIONS FOR WHICH CASH RECEIVED UPON
NAME PAYMENT WILL BE RECEIVED CONSUMMATION OF THE MERGER
---- ------------------------ --------------------------
<S> <C> <C>
Michael J. Fourticq....... 12,091 $ 30,252
Brian P. McDermott........ 225,794 1,854,892
Richard H. Hillman........ 22,053 108,503
Robert D. Olsen........... 72,545 263,797
All directors and
executive officers as a
group (10 persons)....... 553,042 3,415,933
</TABLE>
Special Committee. For their service as members of the Special Committee,
Messrs. Angeloff and Schmitz each received from Leslie's California the sum of
$50,000. No further compensation is payable on a per meeting basis or
otherwise for service on the Special Committee, but they will receive a
retainer of $1,500 per month and per meeting fee of $750 for meetings of the
Board, including those at which the Merger Transaction is considered. These
payments to Messrs. Angeloff and Schmitz are not dependent upon the successful
consummation of the Merger Transaction. Each of the members of the Special
Committee, as an outside director, automatically received stock options to
purchase 8,513 shares of Leslie's California Common Stock, of which options to
purchase 5,513 shares are exercisable at $11.50 per share and options to
purchase 3,308 shares are exercisable at $12.875 per share. Under the terms of
the Merger Agreement, each of these options will, upon consummation of the
Merger, be terminated, and Messrs. Angeloff and Schmitz will each receive
$21,915. See "The Merger--Treatment of Stock Options."
CERTAIN EFFECTS OF THE MERGER
As a result of the Merger, other than the Continuing Stockholders, the
current shareholders of Leslie's California will not have an opportunity to
continue their equity interest in Leslie's California or Leslie's Delaware as
an ongoing corporation and therefore will not share in the future earnings and
potential growth of Leslie's Delaware. Upon consummation of the Merger
Transaction, the Common Stock will no longer be traded in the over-the-counter
market, price quotations will no longer be available and the registration of
the Common Stock under the Exchange Act will be terminated. The termination of
registration of the Common Stock under the Exchange Act will reduce the
information required to be furnished to the Securities and Exchange Commission
and will make certain of the provisions of the Exchange Act, such as the
short-swing profit recovery provisions of Section 16(b) and the requirement of
furnishing a proxy or information statement in connection with shareholders
meetings, no longer applicable.
In contrast to the foregoing, the 359,505 Continuing Shares held by certain
members of the Hancock Group will remain outstanding and will not be
converted, exchanged or cancelled in the Merger. Thus, the holders of the
Continuing Shares will share in the future earnings and potential growth of
Leslie's Delaware. Although an investment in Leslie's Delaware following the
consummation of the Merger involves substantial risk resulting from the
limited liquidity of any such investment and the high debt-to-equity ratio and
consequent substantial fixed charges that will apply to Leslie's Delaware
subsequent to the Merger, if the projections made by Leslie's California are
realized, the value of such an equity investment would be considerably greater
than the original cost thereof. Further, even if the projections are not met,
the investors in Leslie's Delaware may earn a substantial return on their
investment. See "Certain Forward Looking Information."
The receipt of cash pursuant to the Merger will be a taxable transaction.
See "Federal Income Tax Consequences."
32
<PAGE>
CONDUCT OF LESLIE'S DELAWARE'S BUSINESS AFTER THE MERGER
Certain members of the Hancock Group and LGP are continuing to evaluate
Leslie's California's business, assets, practices, operations, properties,
corporate structure, capitalization, management and personnel and discussing
with management of Leslie's California what further changes, if any, will be
desirable. Subject to the foregoing, members of the Hancock Group and LGP
expect that the day to day business and operations of Leslie's Delaware will
be conducted substantially as they are currently being conducted by Leslie's
California. Neither the Hancock Group nor LGP currently intends to dispose of
any assets of Leslie's Delaware, other than in the ordinary course of
business. Additionally, neither LGP nor the Hancock Group currently
contemplates any material change in the composition of Leslie's California's
or Leslie's Delaware's current management, although after the Merger, the
board of directors of Leslie's Delaware will consist of Michael J. Fourticq,
Brian P. McDermott and individuals designated by LGP and by Occidental. LGP,
Michael J. Fourticq and Brian P. McDermott have negotiated the Stockholders
Agreement that will be executed immediately prior to the consummation of the
Merger. See "The Merger--Financing."
THE PROPOSALS
The Merger Transaction consists of the Reincorporation and the Merger. The
terms of the Reincorporation are contained in the Reincorporation Agreement
which is included in full as Appendix A to this Proxy Statement. The terms of
and conditions to the Merger are contained in the Merger Agreement which is
included in full as Appendix B to this Proxy Statement. The discussion in this
Proxy Statement of the Reincorporation and Merger and the summary description
of the principal terms of the Reincorporation Agreement and the Merger
Agreement are subject to and qualified in their entirety by reference to the
more complete information set forth in the Reincorporation Agreement and the
Merger Agreement.
VOTE REQUIRED; RECORD DATE
A majority of the outstanding shares of Leslie's California Common Stock
entitled to vote represented in person or by proxy, is required for a quorum
at the Special Meeting. Pursuant to the terms of the Merger Agreement, the
affirmative vote of holders of a majority of the outstanding shares of
Leslie's California Common Stock entitled to vote at the Special Meeting and
the affirmative vote of holders of a majority of the shares of Leslie's
California Common Stock voting at the Special Meeting and owned by the Public
Shareholders is required to approve the principal terms of both the
Reincorporation Agreement and the Merger Agreement. According to information
provided to Leslie's California in a Schedule 13D Report filed under Section
13(d) of the Exchange Act, Michael J. Fourticq, Brian P. McDermott, Richard H.
Hillman and Liberty West Partners (a partnership controlled by Michael J.
Fourticq and his brother Gregory Fourticq) collectively beneficially own
approximately 22% of the outstanding shares of Leslie's California Common
Stock, and such persons have stated that they presently intend to vote all
such shares held of record or outstanding and beneficially owned by such
persons in favor of the Merger Transaction. The Company has been advised that
all other directors and executive officers also intend to vote all of their
shares in favor of approval. See "Special Factors--Conflicts of Interest."
Except for the recommendation of the Board contained in this Proxy
Statement, to the knowledge of Leslie's California after reasonable inquiry,
no executive officer, director or affiliate of Leslie's California has made a
recommendation in support of or opposed to the Merger Transaction.
Only shareholders of record on the Record Date are entitled to vote at the
Special Meeting or any adjournment or adjournments thereof. At the close of
business on such date, there were 6,554,672 shares of Leslie's California
Common Stock issued and outstanding, each of which is entitled to one vote at
the Special Meeting. As of the Record Date, all directors and executive
officers of Leslie's California beneficially owned an aggregate of 1,322,554
shares (exclusive of shares that are subject to outstanding stock options
which cannot be voted), or approximately 20% of the shares outstanding as of
the Record Date.
33
<PAGE>
Shares of Leslie's California Common Stock represented by a properly signed,
dated and returned proxy will be treated as present at the Special Meeting for
purposes of determining the existence of a quorum, without regard to whether
the proxy is marked as casting a vote or abstaining. Brokers who hold shares
as nominees will not have discretionary authority to vote such shares in the
absence of instructions from the beneficial owners. Accordingly, beneficial
owners of such shares should instruct their brokers or nominees on how to
vote. For purposes of determining whether the requisite approval of the
principal terms of the Reincorporation Agreement and the Merger Agreement has
been obtained, abstentions and broker non-votes are treated as not voting in
favor of approval; provided, however, that abstentions and broker non-votes
are not treated as votes against approval for purposes of identifying
Dissenting Shares. See "Rights of Dissenting Shareholders."
As contemplated by the Merger Agreement, shareholders of Leslie's California
may be entitled to Dissenters' Rights. See "Rights of Dissenting
Shareholders." A copy of the text of Chapter 13 of the California Law, which
governs dissenters' rights, is attached to this Proxy Statement as Appendix F.
EFFECTIVE DATE
The Reincorporation will be effective as soon as practicable following
shareholder approval of the principal terms of the Reincorporation Agreement
and the required filings with the California and Delaware Secretaries of
State. The Merger will become effective following the Reincorporation and upon
the filing of a certificate of merger with the Secretary of State of Delaware.
The date and time of effectiveness of the Merger is referred to generally in
this Proxy Statement as the "Effective Date." The Effective Date is currently
expected to occur as soon as practicable after the Special Meeting, subject to
approval of the principal terms of the Reincorporation Agreement and the
Merger Agreement at the Special Meeting and satisfaction or waiver of the
terms and conditions set forth in the Merger Agreement. See "The Merger--
Conditions."
34
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THE REINCORPORATION
The Board believes that the best interests of Leslie's California and its
shareholders will be served by changing the state of incorporation of Leslie's
California from California to Delaware. As discussed below, the principal
reason for the Reincorporation is to cause Delaware corporate law rather than
California corporate law to be applicable to Leslie's California's corporate
matters including the Merger. If, for some reason, the Merger is not
consummated, the Board intends to proceed with the Reincorporation to take
advantage of the greater flexibility of Delaware corporate law, the
substantial body of case law interpreting that law, and the increased ability
of Leslie's Delaware, the surviving corporation, to attract and obtain
qualified directors.
The Reincorporation Agreement provides that Leslie's California will be
merged with and into Leslie's Delaware and that following the Reincorporation,
the separate existence of Leslie's California will cease and Leslie's Delaware
will continue as the surviving corporation and will continue to operate the
business of Leslie's California under the name "Leslie's Poolmart, Inc."
CONVERSION OF SECURITIES
Pursuant to the Reincorporation Agreement, at the effective time of the
Reincorporation, and without any action on the part of the holder thereof,
each outstanding share of Leslie's California Common Stock will automatically
be converted into one share of Leslie's Delaware Common Stock. Each stock
certificate representing issued and outstanding shares of Leslie's California
Common Stock will continue to represent the same number of shares of Leslie's
Delaware Common Stock. IT WILL NOT BE NECESSARY FOR SHAREHOLDERS TO EXCHANGE
THEIR EXISTING STOCK CERTIFICATES FOR STOCK CERTIFICATES OF LESLIE'S DELAWARE.
However, if the Merger is effected, shareholders will be required to surrender
their share certificates in order to receive payment of the Cash Merger
Consideration (see "The Merger--Payment for Shares"). If the Merger is not
consummated, shareholders may exchange their certificates if they so choose.
PUBLIC MARKET FOR SECURITIES
As discussed above in "Special Factors--Certain Effects of Merger," upon
completion of the Merger, Leslie's California Common Stock will be delisted
from trading on the Nasdaq National Market and Leslie's Delaware Common Stock
will not be listed. However, if the Merger is not consummated, Leslie's
California intends to proceed with the Reincorporation, in which case from and
after the Reincorporation, Leslie's Delaware Common Stock will be traded on
the Nasdaq National Market without interruption under the same symbol ("LESL")
as the shares of Leslie's California Common Stock were traded on such system
prior to the Reincorporation.
APPROVAL OF NEW CHARTER AND BYLAWS
Approval of the principal terms of the Reincorporation Agreement includes
approval of the certificate of incorporation and bylaws of Leslie's Delaware
which will be substantially in the forms set forth in Appendices G and H to
this Proxy Statement, and approval of the assumption of Leslie's California's
employee benefit plans and stock option plans by Leslie's Delaware.
EFFECTIVE TIME
The Reincorporation will become effective upon the filing of an agreement of
merger and officers' certificates with the Secretary of State of the State of
California pursuant to California law and the filing of a certificate of
merger with the Secretary of State of the State of Delaware pursuant to
Delaware law. The date and time of effectiveness of the Reincorporation is
referred to generally in this Proxy Statement as the "Effective Time." The
Effective Time is currently expected to occur as soon as practicable after the
Special Meeting, subject to approval of the principal terms of the
Reincorporation Agreement and the Merger Agreement at the Special Meeting.
Pursuant to the Reincorporation Agreement, the Reincorporation may be
abandoned or the Reincorporation Agreement may be amended either before or
after shareholder approval has been obtained and prior to the Effective Time
of the Reincorporation. However, the conversion ratio cannot be amended
without shareholder approval.
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DISSENTERS' RIGHTS
Although shareholders of Leslie's California will have dissenters rights
with respect to the Reincorporation, shareholders of Leslie's California will
have no dissenters' rights or appraisal rights with respect to the Merger. For
a description of the dissenters' rights that may be available to the
shareholders of Leslie's California in connection with the Reincorporation,
see "Rights of Dissenting Shareholders" below.
PRINCIPAL REASONS FOR THE PROPOSED REINCORPORATION
The discussion set forth below is qualified in its entirety by reference to
the Reincorporation Agreement, the certificate of incorporation of Leslie's
Delaware and the bylaws of Leslie's Delaware.
Application of Delaware Law/Effectuation of the Merger Transaction. The
Board has concluded that it is essential that Leslie's California
reincorporate in order that Delaware corporate law rather than California
corporate law apply to Leslie's California's corporate matters. By way of
background, as a condition to participating in the Merger, Poolmart has
required (i) that the Merger be treated as a recapitalization for accounting
purposes, (ii) that Michael J. Fourticq, Brian P. McDermott, Richard H.
Hillman and Gregory Fourticq retain a portion of their Leslie's California
shareholdings and (iii) that there be no public ownership of Leslie's Delaware
Common Stock upon consummation of the Merger. Based upon the advice of
Leslie's California's counsel and accountants, the Board has concluded that
these requirements cannot be implemented if California law were to be applied
to the Merger.
The Board has been advised by Arthur Andersen LLP that in order to achieve
recapitalization accounting treatment it will be necessary for shareholders of
Leslie's California to retain a continuing ownership interest in Leslie's
California (and in Leslie's Delaware as the surviving corporation in the
Reincorporation) without any interruption in such ownership. However, in order
to meet this requirement while satisfying the other conditions imposed by LGP,
it will be necessary to treat some holders of Leslie's California Common Stock
differently than other holders, i.e., some holders will receive only cash for
their shares and others (the Continuing Stockholders) will be able to retain
some of their shares and receive cash for the balance of their shares. The
Board has been advised by counsel that California law does not permit
differing treatment of holders of the same class of shares in a merger
transaction unless all holders of that class of shares approve the differing
treatment. In addition, the Board has been advised that it is unclear under
California law whether the statutory restrictions on a corporation's payment
of cash dividends and repurchase of its stock would apply to the payment of
consideration for shares in a cash merger. If California law so applied to a
cash merger involving the Company and the transaction were accounted for as a
recapitalization, it is probable that cash merger payments would not be
permitted under current circumstances. Moreover, under California law, under
certain circumstances it is possible that the directors of Leslie's California
approving such transaction could be personally liable for the total payments
made.
Leslie's California has concluded that, if Leslie's California were
reincorporated in Delaware, the desired cash merger could be accomplished as
required by Poolmart because the applicable Delaware merger statutes do not
require that all shareholders of Leslie's Delaware receive the same
consideration in a merger. Moreover, Delaware's statutory restrictions on the
payment of dividends and stock reacquisitions would not apply to the merger
consideration payments when the Merger is effected pursuant to the provisions
of Delaware's merger statutes. In light of the Board's desire to effect a
transaction that would be fair to the shareholders of Leslie's California by
the payment of $14.50 per share in cash, it was decided to consider
reincorporating Leslie's California in Delaware in a manner that would enable
the Merger to be completed and, if completion were not feasible for any
reason, that would provide the general advantages, weighed against the general
disadvantages, of becoming a Delaware corporation.
Flexibility of Delaware Law. For many years Delaware has followed a policy
of encouraging incorporation in that state and, in furtherance of that policy,
has been a leader in adopting, construing and implementing comprehensive,
flexible corporate laws responsive to the legal and business needs of
corporations
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organized under its laws. Many corporations have initially chosen Delaware for
their state of incorporation or have subsequently changed their corporate
domicile to Delaware in a manner similar to that proposed by Leslie's
California. Because of Delaware's prominence as the state of incorporation for
many major corporations, both the legislature and courts in Delaware have
demonstrated an ability and a willingness to act quickly and effectively to
meet changing business needs. The Delaware courts have developed considerable
expertise in dealing with corporate issues, and a substantial body of case law
has developed construing Delaware law and establishing public policies with
respect to corporate legal affairs.
Attraction and Retention of Qualified Directors. Both California and
Delaware law permit a corporation to include a provision in its certificate of
incorporation which reduces, limits or eliminates the monetary liability of
directors for breaches of fiduciary duty in certain circumstances. The
increasing frequency of claims and litigation directed against directors and
officers has greatly expanded the risks facing directors and officers of
corporations in exercising their respective duties. The amount of time and
money required to respond to such claims and to defend such litigation can be
substantial. It is Leslie's California's desire to reduce such risks to its
directors and officers and to limit situations in which monetary damages can
be recovered against directors so that Leslie's California may continue to
attract and retain qualified directors who might otherwise be unwilling to
serve because of the increased risks involved.
In accordance with current California law, Leslie's California's articles of
incorporation include a provision which limits director liability in certain
circumstances. In general, however, the ability to limit liability may be
somewhat broader under Delaware law, and Delaware case law is also more
developed to provide guidance in this regard. It should be noted, however,
that neither California nor Delaware law permits a corporation to limit or
eliminate the liability of its directors for intentional misconduct, bad faith
conduct or any transaction from which the director derives an improper
personal benefit. In addition, liability for violations of federal laws such
as the federal securities laws may not be subject to any such limitations. See
"Appendix E--Significant Differences Between the Corporation Laws of
California and Delaware."
In addition, Delaware law permits a corporation to adopt a number of
measures, through amendment of the corporate charter or bylaws or otherwise,
designed to reduce a corporation's vulnerability to unsolicited takeover
attempts. The Board has no present intention following the proposed
Reincorporation to amend the certificate of incorporation or bylaws of
Leslie's Delaware to include additional provisions which might deter an
unsolicited takeover attempt. However, if the Merger is not consummated, in
the discharge of its fiduciary obligations to shareholders, the Board will
evaluate Leslie's Delaware's vulnerability to potential unsolicited bids to
acquire Leslie's Delaware on unfavorable terms. In the process of this
evaluation, the Board may consider in the future, certain anti-takeover
strategies which may enhance the Board's ability to negotiate with an
unsolicited bidder.
POSSIBLE DISADVANTAGES
Despite the unanimous belief of the Board that the Reincorporation is in the
best interests of Leslie's California and its shareholders, it should be noted
that Delaware law has been criticized by some commentators on the grounds that
it does not afford minority shareholders the same substantive rights and
protections as are available in a number of other states. For a comparison of
shareholders' rights and the powers of management under Delaware and
California law, see "Appendix E--Significant Differences Between the
Corporation Laws of California and Delaware."
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EFFECT ON LESLIE'S CALIFORNIA
The Reincorporation will effect only a change in the legal domicile of
Leslie's California and other changes of a legal nature, certain of which are
described in this Proxy Statement. The proposed Reincorporation will NOT
result in any change in the name, business, management, fiscal year, location
of the principal facilities, assets or liabilities of Leslie's California. The
directors and officers of Leslie's California will become the directors and
officers of Leslie's Delaware. All employee benefit, stock option and other
such plans of Leslie's California will be continued by Leslie's Delaware, and
each option or right issued pursuant to any such plan will automatically be
converted into an option or right to purchase the same number of shares of
Leslie's Delaware Common Stock, at the same price per share, upon the same
terms, and subject to the same conditions, as set forth in such plan.
Shareholders should note that approval of the Reincorporation Agreement will
also constitute approval of the assumption of these plans by Leslie's
Delaware. Leslie's California's other officer and employee benefit
arrangements will also be continued by Leslie's Delaware upon the terms, and
subject to the conditions, currently in effect.
As noted above, if the Merger is not consummated and the Board nevertheless
proceeds with the Reincorporation, the shares of Leslie's Delaware Common
Stock will continue to be traded, without interruption, on the Nasdaq National
Market under the same symbol ("LESL").
THE CHARTERS AND BYLAWS OF LESLIE'S CALIFORNIA AND LESLIE'S DELAWARE
Except as described herein, the provisions of the Leslie's Delaware
certificate of incorporation and bylaws are similar to those of the Leslie's
California articles of incorporation and bylaws in most respects. Delaware law
does permit the implementation of certain provisions in a corporation's
certificate of incorporation or bylaws which would alter some of the rights of
shareholders and the powers of management of a California company. Although
the Board has no current plan to implement these changes, certain changes
could be implemented in the future by amendment of the certificate of
incorporation of Leslie's Delaware following stockholder approval, and certain
changes could be implemented by amendment of the bylaws of Leslie's Delaware
without stockholder approval. For a discussion of such changes, as well as
certain changes in the rights of shareholders that result from the application
of Delaware law, see "Appendix E--Significant Differences Between the
Corporation Laws of California and Delaware." This discussion of the
certificate of incorporation and bylaws of Leslie's Delaware is qualified in
its entirety by reference to Appendices G and H hereto, respectively.
Authorized Stock. The articles of incorporation of Leslie's California
authorize 40,000,000 shares of Leslie's California Common Stock and 1,000,000
shares of undesignated preferred stock. The proposed certificate of
incorporation of Leslie's Delaware authorizes Leslie's Delaware to issue
12,000,000 shares of Leslie's Delaware Common Stock, $0.001 par value, as well
as 2,000,000 shares of undesignated preferred stock, $0.001 par value.
Number of Directors. The bylaws of Leslie's California authorize the
directors to fix the number of directors within a range from four to seven,
with the number of directors currently set at seven. The bylaws of Leslie's
Delaware authorize the directors to fix the number of directors at any number
greater than or equal to one, with the number of directors currently set at
seven. In contrast to the bylaws of Leslie's California, the bylaws of
Leslie's Delaware provide that the exact number of directors may be changed by
the Board of Directors of Leslie's Delaware without further shareholder
approval while the bylaws of Leslie's California only provide for such change
by the Board within the specified range. See "Appendix E--Significant
Differences Between the Corporation Laws of California and Delaware."
Monetary Liability of Directors. The articles of incorporation of Leslie's
California and the certificate of incorporation of Leslie's Delaware both
provide for the elimination of personal monetary liability of directors to the
fullest extent permissible under the laws of each corporation's respective
state of incorporation.
SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF CALIFORNIA AND
DELAWARE
Before voting on the Merger Transaction the Leslie's California shareholders
should carefully consider the significant differences between the corporations
laws of California and Delaware which are summarized in Appendix E to this
Proxy Statement.
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THE MERGER
The Merger Agreement provides that, immediately following the
Reincorporation and subject to satisfaction of certain additional conditions,
Poolmart, a privately held Delaware corporation organized by LGP, will be
merged with and into Leslie's Delaware and that following the Merger, the
separate existence of Poolmart will cease and Leslie's Delaware will continue
as the surviving corporation.
CONVERSION OF SECURITIES
At the Effective Date, subject to the terms, conditions and procedures set
forth in the Merger Agreement, each share of issued and outstanding Common
Stock immediately prior to the Effective Date (other than the Continuing
Shares and Dissenting Shares) will, by virtue of the Merger, be converted into
the right to receive the Cash Merger Consideration. Except for the right to
receive the Cash Merger Consideration, from and after the Effective Date, all
shares (other than the Continuing Shares), by virtue of the Merger and without
any action on the part of the holders, will no longer be outstanding and will
be cancelled and retired and will cease to exist. Each holder of a certificate
formerly representing any shares (other than those representing the Continuing
Shares or shares as to which dissenters' rights have been perfected) will
after the Effective Date cease to have any rights with respect to such shares
other than the right to receive the Cash Merger Consideration for such shares
upon surrender of the certificate.
TREATMENT OF STOCK OPTIONS
At or prior to the Effective Date, Leslie's California's 1990 Stock Option
Plan and Leslie's California's 1992 Directors Stock Incentive Plan and all
options to purchase Leslie's California Common Stock will be terminated. To
the extent such options have not been previously exercised or cancelled, on
the Effective Date, Leslie's Delaware will pay, at or as promptly as possible
after the Effective Date, each option holder (other than holders who have
agreed to accept NQ Options), cash equal to the difference between the option
exercise price and the Cash Merger Consideration multiplied by the number of
shares subject to such options held by such option holder. Such payment will
be contingent upon consummation of the Merger and will be subject to
withholding of applicable income and other taxes.
PAYMENT FOR SHARES
At the Effective Date, Leslie's Delaware will make available or cause to be
made available to the Disbursing Agent amounts sufficient in the aggregate to
provide all funds necessary for the Disbursing Agent to make payments pursuant
to the Merger Agreement in consideration of shares issued and outstanding
immediately prior to the Effective Date to those who are to receive the Cash
Merger Consideration. Promptly after the Effective Date, Leslie's Delaware
will cause to be mailed to each person who was, at the Effective Date, a
holder of record of shares a letter of transmittal and instructions for use in
effecting the surrender of the certificates which, immediately prior to the
Effective Date, represented any of such shares in exchange for payment of the
Cash Merger Consideration. SHAREHOLDERS SHOULD NOT FORWARD SHARE CERTIFICATES
WITH THE ENCLOSED PROXY CARD. SHAREHOLDERS SHOULD SURRENDER CERTIFICATES
REPRESENTING SHARES OF COMMON STOCK ONLY AFTER RECEIVING INSTRUCTIONS FROM THE
DISBURSING AGENT. Upon surrender to the Disbursing Agent of such certificates,
together with such letter of transmittal duly executed and completed in
accordance with the instructions thereto, and only upon such surrender, the
Disbursing Agent will promptly cause to be paid to the persons entitled
thereto a check in the amount to which such persons are entitled, after giving
effect to any required tax withholdings. The Disbursing Agent will be
authorized to pay to the persons entitled thereto the Cash Merger
Consideration attributable to any certificates representing shares outstanding
prior to the Effective Date, which have been lost or destroyed, upon receipt
of evidence satisfactory to the Disbursing Agent of ownership of the shares
represented thereby and of appropriate indemnification.
No interest will be paid or accrued on the amount payable upon the surrender
of any certificate. Payment to be made to a person other than the registered
holder of the certificate surrendered is conditioned upon the
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certificate so surrendered being properly endorsed and otherwise in proper
form for transfer, as determined by the Disbursing Agent. Further, the person
requesting such payment will be required to pay any transfer or other taxes
required by reason of the payment to a person other than the registered holder
of the certificate surrendered or establish to the satisfaction of the
Disbursing Agent that such tax has been paid or is not payable. One year
following the Effective Date, Leslie's Delaware will be entitled to cause the
Disbursing Agent to deliver to it any funds (including any interest received
with respect thereto) made available to the Disbursing Agent which have not
been disbursed to holders of certificates formerly representing shares
outstanding prior to the Effective Date, and thereafter such holders will be
entitled to look to Leslie's Delaware only as general creditors thereof with
respect to cash payable upon due surrender of their certificates.
Notwithstanding the foregoing, neither the Disbursing Agent nor any party to
the Merger Agreement will be liable to any holder of certificates formerly
representing shares for any amount paid to a public official pursuant to any
applicable abandoned property, escheat or similar law. Except as described in
this paragraph, Leslie's Delaware will pay all charges and expenses, including
those of the Disbursing Agent, in connection with the exchange of shares for
the Cash Merger Consideration.
TRANSFER OF SHARES
No transfers of shares subject to the Cash Merger Consideration will be made
on the stock transfer books at or after the Effective Date. If, after the
Effective Date, certificates representing such shares are presented to
Leslie's Delaware, such shares will be cancelled and exchanged for the Cash
Merger Consideration.
CONDITIONS
Each party's respective obligation to effect the Merger is subject to the
satisfaction, at or prior to the Effective Date, of each of the following
conditions, any or all of which may be waived at the appropriate party's
discretion, to the extent permitted by applicable law: (i) the Merger
Agreement and the transactions contemplated therein shall have been approved,
in the manner required by applicable law, (A) by the holders of a majority of
the outstanding shares entitled to vote thereon, and (B) by the holders of a
majority of the shares voting thereon held by the Public Shareholders, (ii)
there is no action, suit or proceeding pending before any court or
governmental body that may have the effect of making illegal or otherwise
preventing, prohibiting or substantially delaying consummation of the Merger
or would result in an award of damages that would have a material adverse
effect on Leslie's California, (iii) all consents, approvals or notices to any
governmental authority or other person or entity whose consent or approval or
to whom notice is required in connection with the execution or delivery and
performance of the Reincorporation Agreement and the Merger Agreement and the
transactions contemplated by those agreements shall have been obtained or
made; (iv) the waiting period applicable to the consummation of the Merger
under the Hart-Scott-Rodino Antitrust Improvements Act of 1978, as amended
(the "HSR Act"), shall have expired or terminated, (v) the previously rendered
opinions of DLJ and Dillon Read to the effect that the consideration to be
received by the Public Shareholders in the Merger is fair to the Public
Shareholders from a financial point of view, shall not have been withdrawn or
materially adversely modified; and (vi) the Merger Transaction shall be
approved and Leslie's California shall be reincorporated which reincorporation
shall become effective in accordance with California and Delaware laws.
The obligations of Leslie's California and Leslie's Delaware to effect the
Merger are subject to the satisfaction, at or prior to the Effective Date, of
each of the following conditions, unless waived by Leslie's California or,
after the effective time of the Reincorporation, by Leslie's Delaware: (i) the
representations and warranties of Poolmart in the Merger Agreement shall be
true and correct in all material respects as of February 26, 1997 and as of
the Effective Date as though made on the Effective Date, except for changes
specifically permitted by the Merger Agreement, (ii) Poolmart shall have
performed in all material respects its agreements contained in the Merger
Agreement required to be performed on or prior to the Effective Date, and
(iii) Leslie's Delaware shall have received a certificate of the President and
a Vice President of Poolmart certifying to the effect of the preceding clauses
(i) and (ii).
The obligations of Poolmart to effect the Merger are subject to the
satisfaction at or prior to the Effective Date, of each of the following
conditions, unless waived by Poolmart: (i) the representations and warranties
of
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Leslie's California and Leslie's Delaware contained in the Merger Agreement
shall be true and correct in all material respects as of February 26, 1997
and, except as contemplated by the Reincorporation Agreement and the Merger
Agreement, as of the Effective Date, as though all of such representations
were made by Leslie's Delaware, (ii) Leslie's California and Leslie's Delaware
shall have performed in all material respects its agreements contained in the
Merger Agreement required to be performed on or prior to the Effective Date,
(iii) Poolmart shall have received a certificate of the respective President
and a Vice President of Leslie's California and Leslie's Delaware certifying,
as applicable, to the effect of the preceding clauses (i) and (ii), (iv)
Poolmart shall have obtained the financing for the Merger on terms
satisfactory to Poolmart, (v) treatment of the Merger as a recapitalization
for accounting purposes shall not have been disapproved, and (vi) the
aggregate number of shares of Leslie's California Common Stock at the
Effective Time of the Reincorporation, the holders of which have demanded
dissenter's rights in accordance with the provisions of Division 1, Chapter 13
of the California Law, shall not equal 5% or more of the shares outstanding as
of the Record Date for the Special Meeting.
REPRESENTATIONS AND WARRANTIES
Leslie's California has made representations and warranties in the Merger
Agreement regarding, among other things, its organization and good standing,
authority to enter the transaction, its capitalization, its financial
statements, the absence of certain changes in the business of Leslie's
California since September 28, 1996, the content and submission of forms and
reports required to be filed by Leslie's California with the Securities and
Exchange Commission, requisite governmental and other consents and approvals,
compliance with all applicable laws, absence of litigation to which Leslie's
California is a party, brokers and finders, requisite tax filings, employee
benefits and environmental matters. Leslie's Delaware has made representations
and warranties in the Merger Agreement regarding, among other things, its
organization and good standing, authority to enter into the transaction, its
capitalization, compliance with all applicable laws, requisite governmental
and other consents and approvals, absence of prior activities and absence of
litigation to which Leslie's Delaware is a party. The Merger Agreement
provides that Leslie's California and Leslie's Delaware will have no liability
to Poolmart, and Poolmart will have no claim for damages, as a result of any
breach of any of the representations and warranties of Leslie's California or
Leslie's Delaware contained in the Merger Agreement.
Poolmart has made representations and warranties in the Merger Agreement
regarding, among other things, its organization and good standing, authority
to enter the transaction, its capitalization, compliance with all applicable
laws, requisite governmental and other consents and approvals, accuracy of
information supplied by Poolmart for submission on forms and reports required
to be filed by Leslie's California with the Securities and Exchange
Commission, financing for the Merger, brokers and finders, the absence of
prior activities and absence of litigation to which Poolmart is a party.
The representations and warranties of the parties in the Merger Agreement
will expire upon consummation of the Merger, and upon such expiration none of
such parties or their respective officers, directors or principals will have
any liability whatsoever with respect to any such representations or
warranties.
COVENANTS
In the Merger Agreement, Leslie's California has agreed that prior to the
Effective Date, unless otherwise agreed to in writing by Poolmart or as
otherwise contemplated by the Merger Agreement, Leslie's California and each
of its subsidiaries will conduct business only in the ordinary and usual
course consistent with past practice and will not, (i) enter into any
agreement outside the ordinary course of business which would be material to
the condition (financial or otherwise), results of operations, properties,
assets, liabilities or business of Leslie's California, (ii) purchase, sell or
encumber (or enter into any agreement to do so), or enter into a merger or
consolidation which would affect, any material properties or assets of
Leslie's California, or (iii) except in the ordinary course of business, enter
into any other agreement or arrangement involving payments in excess of
$100,000 in the aggregate with respect to the business or operations of
Leslie's California.
Further, Leslie's California has agreed that neither Leslie's California nor
any of its subsidiaries will take any of the following actions, or enter into
any agreement to take any of the following actions: (i) amend its
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articles of incorporation or bylaws or the organizational documents of any of
Leslie's California's subsidiaries; (ii) change the number of authorized or
outstanding shares of capital stock (except for Leslie's California Common
Stock issued upon the exercise of options outstanding on the date of the
Merger Agreement); (iii) declare, set aside or pay any dividend or make any
other distribution in respect of any of its shares of capital stock; (iv)
issue, grant, sell, pledge, or transfer any shares of its capital stock, stock
options, warrants, securities or rights to acquire any such shares, securities
or rights of Leslie's California or propose or agree to do any of the
foregoing (except for Leslie's California Common Stock issued upon the
exercise of options outstanding on the date of the Merger Agreement), or
acquire directly or indirectly any shares of its capital stock or make any
other changes in its equity capital structure; (v) incur any indebtedness,
directly or through guarantees or otherwise, other than under existing credit
facilities for current operations in the ordinary course of its business; or
(vi) acquire directly or indirectly by redemption or otherwise any shares of
the capital stock of Leslie's California of any class or any options, warrants
or other rights to purchase any such shares.
Additionally, Leslie's California has agreed that it and its subsidiaries
will (i) use their reasonable best efforts to conduct their relations with
employees and their employee benefit plans only in the ordinary and usual
course consistent with past practices, (ii) not amend, or enter into any
additional, employment agreements with officers or directors of Leslie's
California or make increases in employee compensation or benefits except as
permitted by the Merger Agreement, (iii) use their reasonable best efforts to
keep in place its current insurance policies which are material, (iv) not
assume, guarantee or endorse or become responsible for the obligations of any
other person except in the ordinary and usual course of business, (v) not make
any investment of a capital nature or otherwise enter into any material
transaction, (vi) not make any material tax election or settle or compromise
any material tax liability, (vii) not make any change in its accounting
principles or methods except insofar as may be required by a change in
generally accepted accounting principles, (viii) take all steps necessary to
cause the Leslie's California 1990 Stock Option Plan and Leslie's California
1992 Directors' Stock Incentive Plan to be terminated prior to the Effective
Date, and, if not otherwise terminated by their terms upon the effectiveness
of the Merger, obtain prior to the Effective Date the written consent of each
holder of options to purchase Leslie's California Common Stock to the
cancellation of such options, (ix) grant to Poolmart and their
representatives, on a confidential basis, access to the records and facilities
of Leslie's California, and (ix) use its reasonable best efforts to cooperate
with and assist Poolmart in obtaining the necessary financing.
The Merger Agreement also provides that Poolmart will use its reasonable
best efforts to obtain the financing necessary to effect the Merger, refinance
outstanding debt of Leslie's California, provide adequate ongoing working
capital to Leslie's Delaware and pay the expenses related to the Merger. See
"The Merger--Financing."
Leslie's California has agreed to provide prompt notice to Poolmart upon
obtaining knowledge of (i) material litigation and claims, (ii) notices of
default under agreements and instruments where the default would have a
material adverse effect, (iii) notice from a third party claiming that its
consent is required in connection with the transactions contemplated by the
Merger Agreement, and (iv) any material adverse change in the condition
(financial or otherwise), results of operations, properties, assets,
liabilities or business of Leslie's California and its subsidiaries, taken as
a whole, or the occurrence of an event which could result in any such change.
NONSOLICITATION COVENANT
Leslie's California has agreed that it shall, and shall use its reasonable
best efforts to cause each of its officers, directors or affiliates to,
promptly notify Poolmart of any direct or indirect contact by any entity or
person concerning any Acquisition Proposal, shall promptly provide Poolmart
with a summary of all material terms and conditions of any such Acquisition
Proposal and shall give Poolmart not less than three business days' written
notice prior to providing any confidential information to any person
concerning the business and properties of Leslie's California in connection
with any Acquisition Proposal.
Under the terms of the Merger Agreement, Leslie's California has agreed to
not permit any of its officers, directors, affiliates, representatives or
agents to take any action to solicit, initiate or, subject to Leslie's
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<PAGE>
California's rights to provide confidential information in connection with an
Acquisition Proposal, knowingly encourage or participate in any Acquisition
Proposal, except with respect to an unsolicited Acquisition Proposal from a
third party to the extent that the Board or the Special Committee concludes
that such Acquisition Proposal is superior to the Merger and, based upon
advice of counsel, that such negotiations are necessary to discharge the
Board's fiduciary duty under applicable law. Leslie's California and Poolmart
each has further agreed to (i) consult with each other and obtain the approval
of the other parties in advance of issuing any written release to the public
of information relating to the Merger, and (ii) use its reasonable best
efforts to take such other action as is necessary or appropriate to effect the
Merger, including obtaining any third party consents required by the Merger
Agreement. The Merger Agreement also provides that, subject to the fiduciary
duties of the Board, the Board will take all action necessary to convene the
Special Meeting and to recommend and solicit approval of the Merger Agreement
at such meeting.
INDEMNIFICATION AND INSURANCE
The Merger Agreement provides that the current and former directors and
officers of Leslie's California and any of its subsidiaries and each director
and officer of Leslie's Delaware (including the members of the Special
Committee) will be indemnified by Leslie's California (and, after the
Effective Time of the Reincorporation by Leslie's Delaware), to the fullest
extent permitted by applicable law, against any costs, expenses, judgments,
fines, losses, claims, damages, liabilities and amounts paid in settlement in
connection with any pending, threatened or completed claim, action, suit,
proceeding or investigation, and will be advanced reasonable costs and
expenses (including attorneys' fees), in connection with any claim, action,
suit, proceeding or investigation arising out of or pertaining to the approval
and consummation of the transactions contemplated by the Reincorporation
Agreement and the Merger Agreement. In addition, Leslie's Delaware is required
to use reasonable commercial efforts to maintain in effect for a period of
eighteen months after the Effective Date, Leslie's Delaware's policies of
directors' and officers' liability insurance (provided that Leslie's Delaware
may substitute therefor policies of at least the same amounts and comparable
coverage). However, in no event will Leslie's Delaware be required to pay
premiums for such insurance in excess of 150% of premiums currently paid by
Leslie's California.
EXPENSES
The parties have agreed to pay their own costs and expenses in connection
with the Merger Agreement and the transactions contemplated thereby. However,
Leslie's California has agreed to pay or reimburse HPA up to $1,000,000 in the
aggregate for reasonable out-of-pocket expenses actually incurred by or on
behalf of it in connection with the Merger Transaction. If the Merger is not
consummated in accordance with the Merger Agreement, Leslie's California has
agreed to reimburse Poolmart for all reasonable out-of-pocket expenses
incurred by or on behalf of Poolmart in connection with the Merger Transaction
up to $750,000 in the aggregate, provided that this payment and reimbursement
arrangement will not be available to Poolmart if it fails, in any material
respect, to perform any of its material obligations under the Merger
Agreement, and this failure in performance is not cured within 20 days after
receiving notice of the non-performance or Poolmart has intentionally and
materially breached any of the material representations and warranties and
such breach is not cured within 20 days after Poolmart has received written
notice from Leslie's California specifying the nature of such breach.
TERMINATION, AMENDMENT AND WAIVER
At any time prior to the Effective Date, the Merger Agreement may be
terminated by the mutual consent of the Boards of Directors of Leslie's
California, Leslie's Delaware and Poolmart.
Any of the parties may terminate the Merger Agreement prior to the Effective
Date by written notice to the other parties if (i) the Merger has not become
effective on or before June 30, 1997 (which date will be extended
automatically for up to 60 days during the pendency of any non-final ruling,
decree or order restraining or prohibiting the consummation of the Merger or
the calling or holding of the Special Meeting), or (ii) if any court
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<PAGE>
of competent jurisdiction or other governmental entity has issued an order,
decree or ruling or taken any other action permanently enjoining, restraining
or otherwise prohibiting the Merger and such order, decree, ruling or other
action has become final and nonappealable. The right of termination under
clause (i) of the preceding sentence is not available to any party whose
failure to fulfill any obligation under the Merger Agreement has been the
cause of, or resulted in the failure of, the Effective Date to occur on or
before June 30, 1997.
In addition, Poolmart may terminate the Merger Agreement prior to the
Effective Date by written notice to Leslie's California if (i) prior to the
date of the Special Meeting, the Board or the Special Committee has
(A) withdrawn or modified its approval or recommendation of the Merger in any
manner adverse to Poolmart, or (B) approved or recommended any Acquisition
Proposal by parties other than Poolmart, or resolved to do either of the
foregoing (A) or (B), (ii) if after the date of the Merger Agreement there has
been a material adverse change in the condition (financial or otherwise),
results of operations, properties, assets, liabilities, or business of
Leslie's California and its subsidiaries, taken as a whole, (iii) upon a vote
at the Special Meeting, the approval of shareholders of Leslie's California
required by law and by the Merger Agreement to effectuate the Merger is not
obtained, (iv) there is a material breach by Leslie's California of its
nonsolicitation covenant in connection with other Acquisition Proposals
described above, (v) Leslie's California shall have failed to hold the Special
Meeting by June 16, 1997 and either of the following shall have occurred prior
to June 16, 1997: (A) any third person shall have become the "beneficial
owner" (as defined in the Exchange Act) of more than 15% of the outstanding
Leslie's California Common Stock or (B) any third person shall have made,
proposed, communicated or disclosed in a manner which is or becomes known by
shareholders beneficially owning at least 5% of the outstanding Leslie's
California Common Stock or by any director or officer of Leslie's California
an intention to make a bona fide Acquisition Proposal, unless Leslie's
California is able to sustain the burden of showing that the failure to hold
the Special Meeting was caused primarily by factors other than knowledge of
such intention to make an Acquisition Proposal.
Leslie's California may terminate the Merger Agreement prior to the
Effective Date by written notice to Poolmart if (i) the Board or the Special
Committee, in its good faith exercise of its business judgment (based on the
written advice of counsel), determines that the continued recommendation of
the Merger to the shareholders is reasonably likely to be a breach of the
fiduciary duties of the Board to the Company and its shareholders under
California law, or (ii) if upon a vote at the Special Meeting, the approval of
shareholders of Leslie's California as required by law and by the Merger
Agreement to effectuate the Merger Transaction is not obtained.
Subject to the provisions of applicable law, the Merger Agreement may be
modified or amended, and provisions thereof waived, by written agreement of
the parties. However, (i) after approval of the principal terms of the Merger
Agreement by the shareholders of Leslie's California, no amendment or waiver
of a provision may be made which reduces the amount or changes the form of the
Cash Merger Consideration to be received by the shareholders or that would
adversely affect the shareholders of Leslie's California unless such amendment
or waiver of a provision is approved by the shareholders, and (ii) after the
Effective Date, no amendment or waiver of a provision may be made with respect
to the indemnification and insurance provisions in the Merger Agreement.
TERMINATION FEE
In the event that the Merger Agreement is terminated by Leslie's California
due to (i) a determination by the Board or the Special Committee not to
continue to recommend the Merger because to do so would reasonably likely be a
breach of the Board's fiduciary duty under California law or (ii) if upon a
vote at the Special Meeting, the approval of shareholders of Leslie's
California as required by law and the Merger Agreement to effectuate the
Merger Transaction is not obtained, Leslie's California or, if the
Reincorporation has occurred, Leslie's Delaware shall promptly pay $1,750,000
to LGP, as a termination fee. A termination fee in that amount shall also be
due in the event that the Merger Agreement is terminated by Poolmart due to
(i) a withdrawal or modification of the recommendation by the Board or the
Special Committee, (ii) the failure to obtain the required vote of the
shareholders of Leslie's California at the Special Meeting, (iii) a material
breach by Leslie's California of its nonsolicitation covenant in connection
with Acquisition Proposals as described above or (iv) a
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<PAGE>
failure to hold the Special Meeting by June 16, 1997 and the occurrence prior
to such date of either (A) a third person becoming the beneficial owner of
more than 15% of Leslie's California Common Stock or (B) a third person making
known to a 5% shareholder, officer or director of Leslie's California an
intention to make an Acquisition Proposal unless Leslie's California can show
that the failure to hold the Special Meeting was caused primarily by factors
other than knowledge of such third person's Acquisition Proposal. In addition,
in the event that within twelve months after a termination resulting in
payment of a fee to Poolmart, Leslie's California or Leslie's Delaware
consummates a transaction that falls within the definition of Acquisition
Proposal, Leslie's California or Leslie's Delaware shall promptly pay an
additional $750,000 to LGP.
FINANCING
General. Financing for the Merger and the working capital needs of Leslie's
Delaware after the Merger will be provided by a combination of debt and equity
as follows:
<TABLE>
<S> <C>
Continuing Shares............................................. $ 5,200,000
Green......................................................... 15,300,000
Issuance of Subscription Stock to Management of Leslie's
California................................................... 300,000
Sale of Series A Preferred Stock (and Warrants) to
Occidental................................................... 28,000,000
Sale of Senior Notes.......................................... 90,000,000
Revolving Credit Facility..................................... 40,000,000
------------
Total....................................................... $178,800,000
</TABLE>
Continuing Shares Financing. Members of the Hancock Group will retain
Continuing Shares in the amounts shown below and thereby relieve Leslie's
Delaware of the need to finance the payment of Cash Merger Consideration for
these shares totalling approximately $5.2 million.
<TABLE>
<CAPTION>
CASH MERGER NUMBER OF PERCENTAGE OF
NAME OF CONSIDERATION PAYMENT LESLIE'S DELAWARE FULLY-DILUTED
INDIVIDUAL OR ENTITY AVOIDED SHARES SHARES
-------------------- --------------------- ----------------- -------------
<S> <C> <C> <C>
Michael J. Fourticq....... $2,327,816 160,539 7.6
Brian P. McDermott........ 2,415,004 166,552 7.9
Gregory Fourticq(/1/)..... 145,000 10,000 0.5
Richard H. Hillman........ 325,003 22,414 1.1
</TABLE>
- --------
(/1/) Shares held by Gregory Fourticq will be received as a distribution from
Liberty West Partners, a general partnership of which Gregory Fourticq and
his brother Michael Fourticq, are the sole partners.
Green Financing. LGP has committed that, subject to the satisfaction of
certain conditions, immediately prior to the consummation of the Merger, Green
will contribute $15.3 million in cash to Poolmart in exchange for 1,055,172
shares of Poolmart Common Stock. As a result of the Merger, Leslie's Delaware
will receive the $15.3 million, and Green will receive 1,055,172 shares of
Leslie's Delaware Common Stock in exchange for its Poolmart Common Stock which
will automatically be converted into Leslie's Delaware Common Stock by virtue
of the Merger.
Subscription Stock. As described above under "Special Factors--Conflicts of
Interest," immediately after the Merger, certain members of management will
purchase approximately 19,000 shares of Subscription Stock in Leslie's
Delaware for cash consideration in the aggregate amount of approximately
$300,000.
Preferred Stock Financing. Occidental has addressed a letter to Michael J.
Fourticq describing the circumstances under which it is prepared to provide
preferred stock financing for the Merger (the "Occidental Letter"). The
Occidental Letter is filed as an exhibit to the Schedule 13E-3 and is
available for inspection and copying by any holder of Leslie's California
Common Stock or a representative of such person who has been so designated in
writing, at the principal executive offices of Leslie's California. The
following constitutes only a summary of the Occidental Letter and is qualified
in its entirety by reference to the actual terms of the Occidental
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<PAGE>
Letter. In the Occidental Letter, Occidental has agreed, subject to certain
terms and conditions, to purchase 28,000 shares of Series A Preferred Stock of
Leslie's Delaware, par value $0.001 per share ("Preferred Shares"), at $1,000
per share for a total consideration of $28 million, consisting of cash and an
exchange of the $10 million Convertible Subordinated Debentures held by
Occidental. In connection with this transaction, Occidental will receive
warrants to purchase up to 316,092 shares of Leslie's Delaware Common Stock at
a purchase price of $0.01 per share (subject to adjustment) for a period of
ten years ("Warrants"). The Preferred Stock Purchase Agreement, including the
terms of the Preferred Shares and the Warrants, has not been finalized. The
final terms may vary from those described below.
The Preferred Shares will be entitled to an annual cumulative dividend
(which will be payable at the option of Leslie's Delaware either in cash or in
additional Preferred Shares for the first five years) equal to 50 basis points
over the implied interest rate on the Bonds described below (adjusted to a
bond equivalent yield if the Bonds are sold at a discount or premium below or
above par) multiplied by the per share purchase price of the Preferred Shares.
The annual dividend is payable quarterly at the annual rate divided by four.
Dividends that become due but are not paid after the quarterly dividend
payment date will bear interest at the annual dividend rate plus 5%.
The Preferred Shares will have a preference and priority in liquidation over
the Leslie's Delaware Common Stock equal to $1,000 per share plus accumulated
and unpaid dividends. The Preferred Shares may be redeemed at the option of
Leslie's Delaware at any time at $1,010 per share plus accumulated and unpaid
dividends. Leslie's Delaware is required to redeem Preferred Shares in three
equal installments terminating on the tenth anniversary of the Effective Date.
At the option of Leslie's Delaware, the Preferred Shares are exchangeable
into subordinated debt of Leslie's Delaware having the same interest coupon
and maturity characteristics as the Preferred Shares. Leslie's Delaware's
right to pay dividends (or interest) by the issuance of additional securities
will terminate if it exercises its right to exchange subordinated debt for
Preferred Shares. It is expected that the subordinated debt will have standard
subordination provisions which will obligate Leslie's Delaware to make
interest payments.
The holder of the Preferred Shares will be entitled to elect one-fifth of
the members of the Board of Directors of Leslie's Delaware. However, if
Leslie's Delaware fails to meet the Coverage Test, described below, for four
continuous quarters, the holder of the Preferred Shares will have the right to
elect 40% of the Board of Directors of Leslie's Delaware. If the Coverage Test
is not met for eight consecutive quarters or if Leslie's Delaware fails to pay
four consecutive quarterly dividends on the Preferred Shares, the holder of
the Preferred Shares will have the right to elect a majority of the Board of
Directors of Leslie's Delaware. If either Leslie's Delaware fails to satisfy
the mandatory redemption requirement or becomes subject to an event of
insolvency, the holder of the Preferred Shares will be entitled to elect all
of the directors. The "Coverage Test" requires that the sum of Leslie's
Delaware's cumulative earnings before interest, taxes, depreciation and
amortization be greater than its fixed charges for each four and eight fiscal
quarterly period. Leslie's Delaware may cure any failure to meet the Coverage
Test by issuing capital stock for consideration equal to the shortfall.
Leslie's Delaware will also be subject to a number of negative covenants
including those prohibiting certain transactions without the approval of the
holder of the Preferred Shares. Additionally, Occidental will be a party to
the Stockholders Agreement and have the rights and be subject to the
obligations and restrictions described therein.
Bond Financing. HPA and LGP have received from BT Securities Corporation
("BTSC") a letter dated February 4, 1997 ("BTSC Letter") indicating that,
based upon market conditions existing at the time of delivery of the BTSC
Letter and subject to certain terms and conditions, BTSC was highly confident
of its ability to sell or place senior debt securities of Leslie's Delaware
(as successor to Leslie's California in the Reincorporation and as the
surviving corporation in the Merger) in the aggregate principal amount of $90
million ("Notes"). The BTSC Letter is filed as an exhibit to the Schedule 13E-
3 and is available for inspection and copying by any holder of Leslie's
California Common Stock or representative of such person who has been so
designated in writing, at the principal executive offices of Leslie's
California. The following description of the BTSC Letter is qualified in its
entirety by reference to the actual terms of the BTSC Letter. The interest
rate on the Notes, and
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<PAGE>
the other terms of the Notes, will depend upon interest rate and market
conditions at the time the Notes are placed. However, it is anticipated that
the Notes will have the following features: (i) a maturity of seven years from
issue date, (ii) unsecured and rank on a parity in right of payment with
Leslie's Delaware's other senior indebtedness, (iii) senior to all subordinate
indebtedness of Leslie's Delaware, (iv) subordinated to any secured
indebtedness of Leslie's Delaware, and (v) non-callable for four years and
thereafter callable at a redemption premium to be determined. The Notes will
provide for optional redemption of $25 million of aggregate principal amount
of the Notes based upon certain future equity financings (including an initial
public offering) completed by Leslie's Delaware within three years after
original issuance, at redemption prices to be determined. Leslie's Delaware
will be obligated to offer to purchase the outstanding Notes at 101% of their
face amount plus accrued interest in the event of certain changes in control.
The Notes will also contain covenants that are customary for this type of
financing including restrictions on dividends, stock repurchases, liens,
indebtedness, affiliate transactions, asset sales and mergers. The BTSC Letter
states that BTSC's conclusion is subject to specified customary conditions.
BTSC has recently advised HPA and LGP that conditions in the high-yield bond
market have changed since the date the Merger Transaction was approved by the
Board of Directors of Leslie's California. Accordingly, the terms of the high-
yield financing for the Merger could be substantially different than those
described in the BTSC Letter. Nevertheless, while these changed terms could
adversely affect the interests of the Continuing Stockholders, LGP and the
management of the Company, they would not affect the Cash Merger Consideration
to be received by the stockholders of Leslie's Delaware or the other terms and
conditions of the Merger.
Revolving Credit Facility. The Company has received a proposal letter from
Wells Fargo Bank National Association ("Wells Fargo") dated March 13, 1997
("Wells Fargo Letter") to provide working capital financing to Leslie's
Delaware upon consummation of the Merger pursuant to the terms of a revolving
credit facility ("Credit Facility"). The Wells Fargo Letter is filed as an
exhibit to the Schedule 13E-3 and is available for inspection and copying by
any holder of Leslie's California Common Stock or representative of such
person who has been so designated in writing, at the principal executive
offices of Leslie's California. It is expected that the Credit Facility will
have the following features: (i) maximum availability of $40 million subject
to requirements that the level of outstanding borrowing be limited to
specified levels of inventories and accounts receivable, (ii) five-year term,
(iii) collateralized by inventories, accounts receivable, equipment and other
assets, (iv) interest at alternative fluctuating rates, as selected by
Leslie's Delaware, of either a prime rate or LIBOR rate, in each case plus an
applicable margin, (v) required payment of various commitment and other fees,
and (vi) customary financial and other credit document covenants including
restrictions on the payment of dividends, stock repurchases, additional debt
(except for the Bonds), guaranties, liens and loans. The availability of the
credit contemplated by the Wells Fargo Letter is dependent upon satisfaction
of a number of conditions including negotiation and execution of
documentation, receipt of the financing to be provided by Green, the
Continuing Stockholders and Occidental, as described above, completion of the
Bond financing described above upon terms and documentation that are
acceptable to Wells Fargo, and there not having been any material adverse
change in the financial condition or business of the borrower. It is expected
that BT Commercial Corporation will participate in this Credit Facility.
Stockholders Agreement. Immediately prior to the consummation of the Merger,
Leslie's Delaware, Green, the Continuing Stockholders, Brian P. McDermott and
Manette J. McDermott, as Co-Trustees of the McDermott Family Trust, and
Occidental (collectively, "Class I Stockholders") and the holders of the
Subscription Stock, NQ Options and ISO Options described above (collectively,
"Class II Stockholders," and, together with the Class I Stockholders, the
"Stockholders") will enter into a Stockholders Agreement (the "Stockholders
Agreement"). A draft of the Stockholders Agreement is filed as an exhibit to
the Schedule 13E-3 and is available for inspection and copying by any holder
of Leslie's California Common Stock or representative of such person who has
been so designated in writing, at the principal executive offices of Leslie's
California. The following constitutes only a summary of the principal terms of
the Stockholders Agreement and is qualified in its entirety by reference to
the actual terms of the Stockholders Agreement.
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<PAGE>
The draft Stockholders Agreement provides for the subscription of
approximately 19,000 shares of Leslie's Delaware Common Stock at $14.50 per
share by certain of the Class II Stockholders and establishes the Call Option
described above (see "Special Factors--Conflicts of Interest") as to the
Subscription Stock, NQ Options, and NQ Option Shares. The Stockholders
Agreement restricts the transferability of securities of Leslie's Delaware
("Securities") held by certain of the Stockholders and establishes a right of
first refusal, in the event certain Stockholders seek to transfer any of their
Securities to a third party pursuant to a bona fide offer, in favor of the
Class I Stockholders. In addition, Green has certain "drag-along" rights and
if Green desires to sell any Securities, other Stockholders have certain "tag-
along" rights to participate in such sale. The Stockholders Agreement also
grants demand registration rights to each group of Class I Stockholders (with
each of Green, Occidental and all other Class I Stockholders representing a
separate group) and piggyback registration rights for all Stockholders. In the
Stockholders Agreement, Michael Fourticq and Mr. McDermott are given certain
rights to be elected as directors of Leslie's Delaware.
Expenses of the Transaction. The estimated costs and fees in connection with
the Merger Transaction, financing and the related transactions, which will be
paid by Leslie's California (and Leslie's Delaware as successor in the
Reincorporation) are as follows:
<TABLE>
<S> <C>
Financial advisory fees.......................................... $1,700,000
Placement agent fees and expenses................................ 2,800,000
Bank commitment fees............................................. 300,000
Other financing fees............................................. 1,400,000
Legal fees....................................................... 1,200,000
Accounting fees.................................................. 200,000
Printing and mailing fees........................................ 60,000
Solicitation expenses............................................ 20,000
SEC filing fees.................................................. 40,000
Other regulatory filing fees..................................... 45,000
Miscellaneous.................................................... 35,000
----------
Total.......................................................... $7,800,000
==========
</TABLE>
See "Special Factors--Opinion of DLJ" and "--Opinion of Dillon Read" for a
description of the fees to be paid to DLJ and Dillon Read in connection with
their engagement. For a description of certain fees payable to the members of
the Special Committee, see "Special Factors--Conflicts of Interest."
For a description of Leslie's California's obligation to pay or reimburse
HPA and Poolmart for expenses incurred by them in connection with the Merger
Transaction, see "The Merger--Expenses."
REGULATORY APPROVALS
Under the HSR Act, and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Merger Transaction and the Occidental preferred
stock financing cannot be consummated until certain notifications are given
and certain information furnished to the FTC and the Antitrust Division of the
Department of Justice (the "Antitrust Division"), and specified waiting period
requirements were satisfied. Leslie's California, Poolmart and Occidental
filed premerger notification and report forms with the FTC and the Antitrust
Division in April, 1997. In the notification and report forms, the parties
requested early termination of the waiting period under the HSR Act.
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<PAGE>
Leslie's California is not aware of any license, regulatory permit or lease
which is material to the business of Leslie's California and which is likely
to be adversely affected by the Merger Transaction of any approval or other
action by any state, federal or foreign government or governmental agency that
would be required prior to effecting the Merger Transaction.
ACCOUNTING TREATMENT
The Merger will be treated as a recapitalization for accounting purposes.
DISSENTERS' RIGHTS
Although shareholders of Leslie's California will become stockholders of
Leslie's Delaware by virtue of the Reincorporation, they will not be entitled
to appraisal rights under Delaware law in connection with the Merger because
they will not be stockholders of Leslie's Delaware at the time of the vote on
the Merger.
FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the material federal income tax
considerations relevant to the Reincorporation and the Merger that are
generally applicable to holders of Leslie's California Common Stock and
Leslie's Delaware Common Stock, respectively. This discussion is based on
currently existing provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), existing and proposed Treasury Regulations thereunder and
current administrative rulings and court decisions, all of which are subject
to change. Any such change, which may or may not be retroactive, could alter
the tax consequences to the holders of Leslie's California Common Stock and
Leslie's Delaware Common Stock as described herein. Special tax consequences
not described below may be applicable to particular classes of taxpayers,
including financial institutions, broker-dealers, persons who are not citizens
or residents of the United States or who are foreign corporations, foreign
partnerships or foreign estates or trusts as to the United States and holders
who acquired their stock through the exercise of an employee stock option or
otherwise as compensation.
REINCORPORATION
The receipt by the holders of Leslie's California Common Stock of Leslie's
Delaware Common Stock pursuant to the Reincorporation should not be a taxable
event to the holders of Leslie's California Common Stock. The receipt by the
holders of Leslie's California Common Stock of any payment pursuant to
Dissenters' Rights will be a taxable transaction for federal income tax
purposes.
MERGER
The receipt of the Cash Merger Consideration in the Merger by holders of
Leslie's Delaware Common Stock will be a taxable transaction for federal
income tax purposes. Except as provided in the following paragraph, each
holder's gain or loss per share will be equal to the difference between $14.50
and the holder's basis per share in the Leslie's Delaware Common Stock, which
would be the same as the holder's basis per share in the Leslie's California
Stock. If a holder holds Leslie's Delaware Common Stock as a capital asset,
the gain or loss from the exchange will be a capital gain or loss. This gain
or loss will be long-term if the holder's holding period (which would include
the period during which the Leslie's California Common Stock was held) is more
than one year. Under current law, net long-term capital gains of individuals
are subject to a maximum federal income tax rate of 28% (not taking into
account any phaseout of personal exemptions and certain itemized deductions)
whereas, the maximum federal income tax rate on ordinary income (and net
short-term capital gains) of an individual is currently 39.6% (not taking into
account any phaseout of personal exemptions and certain itemized deductions).
For corporations, capital gains and ordinary income are taxed at the same
maximum rate of 35%. Capital losses are currently deductible only to the
extent of capital gains plus, in the case of taxpayers other than
corporations, $3,000 of ordinary income. In the case of individuals and other
noncorporate taxpayers, capital losses that are not currently deductible may
be carried forward to other years, subject to certain
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<PAGE>
limitations. In the case of corporations, capital losses that are not
currently deductible may generally be carried back to each of the three years
preceding the loss year and forward to each of the five years succeeding the
loss year, subject to certain limitations.
A holder of Leslie's Delaware Common Stock who receives the Cash Merger
Consideration for a portion of the holder's Leslie's Delaware Common Stock in
the Merger, and who also continues to own stock (either directly or
constructively) in Leslie's Delaware, generally will not recognize gain or
loss in the foregoing manner, but instead will be subject to dividend or
capital gain treatment on the Cash Merger Consideration received in the
transaction depending on the specific facts and circumstances with respect to
such holder. Therefore, any holder of Leslie's Delaware Common Stock who will
continue to own shares of Leslie's Delaware Common Stock after the Merger,
either directly or constructively by reason of the ownership of Leslie's
Delaware Common Stock by a related person or entity, should consult his or her
own tax advisor in connection with the proposed Merger.
A holder of Leslie's Delaware Common Stock may be subject to backup
withholding at the rate of 31% with respect to payments of Cash Merger
Consideration received pursuant to the Merger, unless the holder (a) is a
corporation or comes within certain other exempt categories and, when
required, demonstrates this fact or (b) provides a correct taxpayer
identification number ("TIN"), certifies as to no loss of exemption from
backup withholding and otherwise complies with applicable requirements of the
backup withholdings rules. To prevent the possibility of backup federal income
tax withholding on payments made to certain holders with respect to shares of
Leslie's Delaware Common Stock pursuant to the Merger, each holder must
provide the Disbursing Agent with his correct TIN by completing a Form W-9 or
Substitute Form W-9. A holder of Leslie's Delaware Common Stock who does not
provide Leslie's Delaware with his or her correct TIN may be subject to
penalties imposed by the Internal Revenue Service (the "IRS"), as well as
backup withholding. Any amount withheld under these rules will be creditable
against the holder's federal income tax liability. Leslie's Delaware (or its
agent) will report to the holders of Leslie's Delaware Common Stock and the
IRS the amount of any "reportable payments," as defined in Section 3406 of the
Code, and the amount of tax, if any, withheld with respect thereto.
THE FOREGOING TAX DISCUSSION IS INCLUDED FOR GENERAL INFORMATION ONLY AND IS
BASED UPON PRESENT LAW. EACH HOLDER OF LESLIE'S CALIFORNIA COMMON STOCK SHOULD
CONSULT SUCH HOLDER'S OWN TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF
THE REINCORPORATION AND THE MERGER TO SUCH HOLDER, INCLUDING THE APPLICATION
AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECT
OF CHANGES IN SUCH TAX LAWS.
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BUSINESS OF THE COMPANY
Leslie's California is the leading national specialty retailer of swimming
pool supplies and related products. These products primarily consist of
regularly purchased, non-discretionary pool maintenance items such as
chemicals, equipment, cleaning accessories and parts, and also include fun,
safety and fitness-oriented recreational items. The Company currently markets
its products under the trade name Leslie's Swimming Pool Supplies through 278
company-owned retail stores in 27 states and through mail order catalogs sent
to selected pool owners nationwide. From 1992 to 1996, the Company increased
its sales at a compound annual growth rate of 18.8%, from $96.3 million to
$191.6 million. During the same period, EBITDA (FIFO basis) increased at a
compound annual growth rate of 21.9%, from $6.8 million to $15.0 million. The
Company's growth reflects a store count that increased from 1992 to 1996 at a
rate of 16.0% annually and comparable store sales increases that averaged
10.1% annually during the same time frame.
The Company provides its customers a comprehensive selection of high quality
products, competitive every day low prices ("EDLP") and superior customer
service through knowledgeable and responsive sales personnel who offer a high
level of technical assistance at convenient store locations. The EDLP offered
by the Company are comparable to or better than those offered by any of its
competitors, including mass merchandisers and home centers. The typical
Leslie's store contains 4,000 square feet of space, is located either in a
strip center or on a freestanding site in an area of heavy retail activity,
and draws its customers primarily from an approximately three-mile trade area.
The Company maintains a proprietary mailing list of more than 4.5 million
addresses, including approximately 90% of the residential in-ground pools in
the U.S. This highly focused list of target customers is central to the
Company's direct mail marketing efforts, which support both its retail store
and mail order operations. Management believes that the Leslie's name is one
of the most recognized brands in pool supplies and represents an image of
quality to consumers. In fiscal 1996, Leslie's brand name products accounted
for approximately 60% of the Company's total sales.
Leslie's California's successful execution of its business strategy has
generated a 33-year history of consistently increasing sales. Management
intends to continue increasing sales and profits by further expanding its
store base at the rate of 12% to 15% annually and continuing to achieve
positive comparable store sales increases. The Company attributes its strong
historical results and its positive outlook for growth and profitability to
the following factors:
Leadership Position in a Highly Fragmented Market. Leslie's California's
current store count of 278 locations is approximately equal to the sum of the
next fifteen largest specialty retail competitors combined. However, despite
its large relative size, Leslie's California presently accounts for only
approximately 5% of the estimated $3.7 billion annual pool and spa supply
market. Since 1989, Leslie's California has accelerated the pace of its new
store openings and consequently has gained market share. Management believes
that this growth has come primarily at the expense of independent local and
regional pool supply retailers, which accounted for over two-thirds of
industry sales in 1996.
Attractive Store Economics. Leslie's California's results reflect extremely
attractive store-level economics. The Company estimates that cash required to
open each new store, including inventory net of trade payables, averages
approximately $125,000. Based upon the Company's past experience, new stores
generally break even in their first year of operation, pay back their initial
investments after three years, and in their fifth year of operation,
contribute approximately $181,000 of store operating profit, yielding a return
on average initial cash investment of 145% for this period. In 1996, the
Company's mature stores (stores open for five years or longer) averaged
approximately $900,000 of sales, generated approximately $200,000 of store
operating profit per location and posted a comparable store sales increase of
5.8%.
Growth Potential of Recently Opened Stores. Leslie's California's new stores
have historically grown dramatically in sales and store operating profit
during their first five years of operation. In 1996, stores open since the end
of 1992 averaged $519,000 in sales and $50,000 of store operating profit per
location. Management expects these stores generally to follow the Company's
historical pattern of maturation and believes there exists a large potential
for sales and store operating profit increases from these new stores.
51
<PAGE>
Large Sales Volume of Non-Discretionary Products. The consistency of
Leslie's California's sales growth and profitability is due in large part to
the sale of non-discretionary and regularly consumed products such as pool
chemicals, cleaning accessories, major pool equipment (pumps and heaters) and
replacement parts. Pool owners must purchase such products to maintain their
pools' water quality and physical appearance and, in the Company's experience,
do so regardless of the economic environment. In fiscal 1996, non-
discretionary and regularly consumed products comprised approximately 74% of
the Company's sales, with pool chemicals representing 44% of the Company's
total sales.
Proprietary Database of Pool Locations. Through ongoing research as well as
the conduct of its retail and mail order business, Leslie's California has
developed a proprietary database of over 4.5 million addresses. The list
includes approximately 90% of the residential in-ground pools in the U.S. This
proprietary database allows Leslie's California to execute cost-effective and
highly targeted direct mail marketing. When combined with the Company's mail
order sales results and computerized mapping capability, this database also
gives Leslie's California a sophisticated store site selection capability.
Management believes that the scope and accuracy of its proprietary database
are unique in the pool supply industry.
Purchasing Power and Vertical Integration. Due to its size and sales volume,
Leslie's California purchases more chemicals and other pool supplies than any
other specialty retailer. In addition, Leslie's California operates a
repackaging facility which provides the Company with significant cost savings,
as well as greater control over product availability and quality, offers
greater flexibility when sourcing products, and provides vital information
when negotiating with third-party providers. Further, unlike most of its
competitors, the Company does not rely upon third-party distribution, but has
its own highly efficient distribution system. Management believes that these
factors permit Leslie's California to achieve a lower cost of goods than any
of its competitors, including mass merchandisers and home centers.
Superior Level of Customer Service. Leslie's California believes that its
superior level of customer service, including its comprehensive product
selection, gives it a significant advantage over its competitors in winning
the loyalty of customers. Due to the complicated nature of pool chemistry and
pool equipment maintenance, and consistent with its philosophy of being a full
service swimming pool supply retailer, Leslie's California offers a high level
of technical assistance to its customers. The Company has developed a
comprehensive training program educating all store employees on the subjects
of maintenance techniques, water chemistry and equipment testing and repair.
As part of its regular customer service program the Company offers free
detailed water testing, pamphlets on pool maintenance, and in-store equipment
repairs, generally free of labor or bench charges.
MARKET PRICES OF COMMON STOCK AND DIVIDENDS
Leslie's California Common Stock is traded on the Nasdaq National Market
(symbol: LESL). The following table sets forth the high and low sales prices
for each quarterly period for the two most recent fiscal years. The stock
prices have been adjusted to give effect to a 5% stock dividend effective in
August 1995.
<TABLE>
<CAPTION>
1996 1995
---------------- ---------------
HIGH LOW HIGH LOW
------- -------- ------- -------
<S> <C> <C> <C> <C>
First Quarter.................................. $14 1/2 $12 1/2 $15 $12 3/8
Second Quarter................................. 19 1/2 13 1/4 16 5/8 12 1/8
Third Quarter.................................. 17 1/4 10 7/16 16 1/4 12 1/2
Fourth Quarter................................. 14 1/2 10 1/2 16 1/4 12 1/2
</TABLE>
During the first quarter of 1997, the high and low sales prices were $14.00
and $12.75, respectively.
On November 11, 1996, the last trading day prior to the issuance of a press
release by Leslie's California stating that it had received a proposal from a
group led by management for the purchase of the entire company, the closing
price per share of the Leslie's California Common Stock as reported by Nasdaq
was $11.50. On February 26, 1997, the last trading day prior to the
announcement of the execution of the Reincorporation
52
<PAGE>
Agreement and the Merger Agreement, the closing price per share of the
Leslie's California Common Stock as reported by Nasdaq was $13. On May 6,
1997, the last trading day prior to the mailing of this Proxy Statement, the
closing price per share of Leslie's California Common Stock as reported by
Nasdaq was $13.625.
At April 22, 1997, there were approximately 1,900 beneficial holders of the
Leslie's California Common Stock.
The Company does not currently pay cash dividends on Leslie's California
Common Stock and intends to retain earnings for use in the operation and
expansion of its business. In August 1995 and April 1994, 5% stock dividends
were declared for shareholders of record as of August 31, 1995 and April 29,
1994, respectively.
53
<PAGE>
RIGHTS OF DISSENTING SHAREHOLDERS
As contemplated in the Merger Agreement, pursuant to Chapter 13 of the
California Law ("Chapter 13"), a holder of shares of Leslie's California
Common Stock may, in some instances, be entitled to require the Company to
purchase his or her shares for cash at their fair market value as of the day
before the first announcement of the terms of the merger, excluding any
appreciation or depreciation in consequence of the merger ("Dissenters'
Rights"). The general terms of the merger were first announced on November 12,
1996. The following is a summary, complete in all material respects, of the
procedures to be followed by a shareholder in order to perfect his or her
right, if any, to payment under Chapter 13 and is qualified in its entirety by
reference to the text of Chapter 13 attached to this Proxy Statement as
Appendix F, to which reference is hereby made for a definitive statement of
the rights of dissenting shareholders (the "Dissenting Shareholders") and the
procedures to be followed. Any reference to a "Dissenting Shareholder" herein
means the record holder of "Dissenting Shares" and includes a transferee of
record.
Shares of Leslie's California Common Stock will qualify as Dissenting Shares
only if demands for payment are filed with respect to 5% or more of the
outstanding shares of Leslie's California Common Stock. This 5% requirement is
applicable because the Leslie's California Common Stock is listed on the list
of OTC margin stocks issued by the Board of Governors of the Federal Reserve
System, as provided in Section 1300(b)(1) of Chapter 13. The obligation of
Poolmart to effect the Merger is subject to the condition, which may be waived
by Poolmart, that holders of 5% or more of Leslie's California Common Stock do
not exercise their Dissenter's Rights.
Although shareholders of Leslie's California will have dissenters' rights
with respect to the Reincorporation, shareholders of Leslie's California will
have no dissenters' rights or appraisal rights with respect to the Merger.
A Dissenting Shareholder who wishes to require the Company to purchase his
or her shares of Leslie's California Common Stock must:
(1) vote against the Reincorporation any or all of the shares of Leslie's
California Common Stock entitled to be voted (shares of Leslie's California
Common Stock not voted are not considered to be voted against the
Reincorporation for purposes of this requirement and will not be counted
toward the 5% minimum for Dissenters' Rights to exist); provided that if a
shareholder votes part of the shares entitled to be voted in favor of the
Reincorporation, and fails to specify the number of shares voted, it is
conclusively presumed that such shareholder's approving vote is with
respect to all shares entitled to be voted;
(2) make written demand upon the Company or its transfer agent, which is
received not later than the date of the Special Meeting, setting forth the
number of shares of Leslie's California Common Stock demanded to be
purchased by Leslie's California and a statement as to claimed fair market
value of such shares at November 11, 1996 (the date immediately prior to
the announcement of the proposed reorganization), excluding any
appreciation or depreciation in consequence of the proposed merger; and
(3) submit for endorsement, within 30 days after the date on which the
notice of approval of the Reincorporation by shareholders described below
is mailed to such shareholders, to the Company or its transfer agent the
certificates representing any shares in regard to which demand for purchase
is being made, or to be exchanged for certificates of appropriate
denominations so endorsed, with a statement that the shares are Dissenting
Shares.
The statement of fair market value in clause (2) above will constitute an
offer by the Dissenting Shareholder to sell his or her shares at a price equal
to such fair market value. Neither a vote against approval of the
Reincorporation nor the giving of a proxy directing a negative vote will be
sufficient to constitute the demand described in clause (2) above. A proxy
which fails to include instructions with respect to approval of the principal
terms of the Reincorporation will be voted in favor of approval. Accordingly,
shares covered by such a proxy will not be Dissenting Shares. In addition, a
vote in favor of the Reincorporation, or a failure to vote at all, will
nullify any previously filed written demand for payment.
54
<PAGE>
If the holders of 5% or more of the outstanding shares of Leslie's
California Common Stock have made demands for payment on or prior to the date
of the Special Meeting and have voted against the Reincorporation at the
Special Meeting, within 10 days after the date of the approval of the
Reincorporation, the Company will mail to each Dissenting Shareholder who
holds Leslie's California Common Stock notice of such approval together with a
statement of the price determined by the Company to represent the fair market
value of Dissenting Shares, a copy of certain sections of Chapter 13, and a
brief description of the procedure to be followed if the shareholder desires
to exercise Dissenters' Rights. The statement of price will constitute an
offer by the Company to purchase at the price stated therein any Dissenting
Shares.
If the Company and the Dissenting Shareholder agree that any shares of
Leslie's California Common Stock are Dissenting Shares and agree upon the
price of the shares, the Dissenting Shareholder will be entitled to the agreed
price plus interest thereon at the legal rate on judgments from the date of
such agreement. Subject to the provisions of California law, payment of the
fair market value of the Dissenting Shares will be made within 30 days after
such agreement or within 30 days after any statutory or contractual conditions
to the Reincorporation are satisfied, whichever is later. If the Company
denies that the shares are Dissenting Shares or if the Company and the
Dissenting Shareholder fail to agree upon the fair market value of the shares,
then the Dissenting Shareholder, within six months after the date on which
notice of approval of the Reincorporation by the shareholders of the Company
is mailed to such shareholder, and not thereafter, may file a complaint in the
Superior Court of Los Angeles County, California, requiring the court to
determine whether the shares are Dissenting Shares, or the fair market value
of the Dissenting Shares, or both, or may intervene in any pending action for
the appraisal of any shares of Common Stock. If the status of the shares as
Dissenting Shares is in issue, the court will first determine that issue. If
the fair market value of the Dissenting Shares is in issue, the court will
determine, or will appoint one or more impartial appraisers to determine, the
fair market value of the shares. In California, existing case law suggests
that market quotations will be given almost conclusive weight as the measure
of fair market value if the market is active and informed, unless it can be
demonstrated that the market has been manipulated. The court will direct
payment of the appraised value of the shares, together with interest thereon
at the legal rate on judgments from the date on which the judgment was
entered, by the Company to the shareholder upon the surrender of the
certificates representing such shares to the Company. The costs of the
proceeding shall be apportioned as the court considers equitable, but if the
appraisal exceeds the price offered by the Company, the Company shall pay the
costs, and if the appraisal is more than 125% of the price offered by the
Company, the Company may be required to pay attorneys' and other fees and
interest at the legal rate on judgments from the date the shareholder complied
with Sections 1300-1302 of Chapter 13.
A Dissenting Shareholder may not withdraw demand for purchase of Dissenting
Shares without the Company's consent. Written demands for payment and
submissions for endorsement with respect to Common Stock must be addressed to
Leslie's Poolmart, 20630 Plummer Street, Chatsworth, California 91313, or to
the Company's transfer agent, Chase Mellon Shareholder Services, 400 South
Hope Street, 4th Floor, Los Angeles, California 90071.
THE PROVISIONS OF CHAPTER 13 ARE TECHNICAL IN NATURE AND COMPLEX.
SHAREHOLDERS DESIRING TO EXERCISE DISSENTERS' RIGHTS AND TO OBTAIN APPRAISAL
OF THE FAIR MARKET VALUE OF THEIR SHARES SHOULD CONSULT COUNSEL, SINCE THE
FAILURE TO COMPLY STRICTLY WITH THE PROVISIONS OF CHAPTER 13 MAY RESULT IN A
WAIVER OR FORFEITURE OF THEIR DISSENTER'S RIGHTS.
55
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of the
Company as of and for each of the five fiscal years in the period ended
December 28, 1996. This financial data was derived from the audited historical
consolidated financial statements of the Company and should be read in
conjunction with the financial statements of the Company and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
elsewhere in this Proxy Statement.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEARS ENDED DECEMBER 31,
DEC. 28, DEC. 30, ---------------------------
1996 1995 1994 1993 1992
---------- ---------- -------- -------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF INCOME
Net Sales.................. $191,640 $162,456 $141,553 $119,955 $96,337
Gross Profit............... 72,760 60,399 55,469 48,289 39,017
Gross Margin............... 38.0% 37.2% 39.2% 40.3% 40.5%
Loss (Gain) on Disposition
of Fixed Assets........... 750 27 (106) 120 26
Depreciation and
Amortization.............. 4,326 3,374 2,393 2,389 2,423
Income from Operations..... 9,400 6,691 9,569 6,350 4,330
Interest Expense........... 2,786 2,708 1,733 1,189 829
Net Income................. 3,869 3,407 4,584 3,035 2,146
PER SHARE DATA/(1)/
Net Income Per Share....... $ .57 $ .52 $ .70 $ .47 $ .34
Book Value Per Share....... $ 5.55 $ 4.91 $ 4.18 $ 3.41 $ 2.90
Weighted Average Shares
Outstanding............... 6,790 6,614 6,515 6,464 6,399
BALANCE SHEET DATA
Working Capital............ $ 12,718 $ 13,007 $ 8,072 $ 8,957 $ 7,387
Total Assets............... 83,157 79,529 61,717 49,532 44,888
Current Ratio.............. 1.45 1.47 1.38 1.73 1.56
Long-term Debt............. 15,581 17,843 11,272 12,751 10,220
Stockholders' Equity....... 36,315 31,921 26,339 21,041 17,820
SELECTED OPERATING DATA
Capital Expenditures....... $ 8,807 $ 9,550 $ 7,394 $ 5,532 $ 3,343
EBITDA/(2)/................ 14,476 10,092 11,856 8,859 6,779
EBITDA (FIFO basis)/(3)/... 14,960 10,472 11,476 8,612 6,779
EBITDA (FIFO basis)
Margin/(4)/............... 7.81% 6.45% 8.11% 7.18% 7.04%
Number of Employees at
Year-end.................. 1,055 780 678 565 533
Stores Operated at Year-
end....................... 259 224 180 158 143
Comparable Store Sales
Growth.................... 9.9% 6.0% 12.9% 11.7% 2.4%
</TABLE>
- -------
/(1)/ Prior year amounts have been adjusted to reflect the 5% stock dividends
effective in April 1994 and August 1995.
/(2)/ EBITDA represents earnings before interest, taxes, depreciation,
amortization and loss (gain) on disposition of fixed assets.
/(3)/ EBITDA (FIFO basis) represents EBITDA plus the LIFO provision.
/(4)/ EBITDA (FIFO basis) Margin represents EBITDA (FIFO basis) as a percentage
of sales.
FIRST QUARTER RESULTS
The Company announced that net sales for the first quarter of 1997 (three
months ended March 28, 1997) were $23,816,000 as compared with $18,064,000 for
the first quarter of 1996 (three months ended March 30, 1996), income (loss)
from operations was $(9,628,000) as compared with $(8,610,000) for the first
quarter of 1996, net income (loss) was $(6,101,000) as compared with
$(5,525,000) for the first quarter of 1996 and net income (loss) per share was
$(.90) as compared with $(.82) for the first quarter of 1996. The weighted
average shares outstanding was 6,789,000 for the first quarter of 1997 and
6,769,000 for the first quarter of 1996. The Company typically incurs losses
in the first and fourth quarters. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Accordingly, the results of
operations for the Company's first quarter are not necessarily indicative of
the results of operations for the full year.
56
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
document (as well as information included in oral statements or other written
statements made or to be made by the Company) contains statements that are
forward-looking, such as statements relating to plans for future activities.
Such forward-looking information involves important risks and uncertainties
that could significantly affect anticipated results in the future and,
accordingly, such results may differ from those expressed in any forward-
looking statements made by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, those relating to domestic
economic conditions, activities of competitors, changes in federal or state
tax laws and of the administration of such laws and the general condition of
the economy and its effect on the securities market.
RESULTS OF OPERATIONS
The Company is the leading specialty retailer of swimming pool supplies and
related products in the United States. At December 28, 1996 the Company
marketed its products through 259 Company-owned retail stores in 27 states and
through a nationwide mail order catalog. The Company is vertically integrated,
operating a chemical repackaging facility in Los Angeles, California. In 1996,
the Company supplied its retail stores from three distribution facilities,
located in Chatsworth, California; Dallas, Texas; and Bridgeport, New Jersey.
For the year ended December 28, 1996, sales increased 18.0% to $191,640,000
from $162,456,000 in 1995. The sales increase is attributable to comparable
store sales growth of 9.9% and 35 (net) new store additions in 1996. Income
from operations for the period increased 40.5% to $9,400,000 or 4.9% of sales,
from $6,691,000 or 4.1% of sales in 1995. Net income for 1996 increased 13.6%
to $3,869,000 or $.57 per share, as compared to $3,407,000 or $.52 per share
in 1995. In August 1995, a 5% stock dividend was effected and the 1995
earnings per share have been adjusted to reflect the impact of the stock
dividend.
The 18.0% sales growth and improved gross margin produced a 40.5% increase
in operating profits to $9,400,000 or 4.9% of sales in 1996. The $9,400,000
operating income in 1996 reflects charges totaling $750,000 associated with
the disposition of certain fixed assets in 1996. Excluding the impact of these
charges, the 1996 operating income margin would have been expanded to 5.3% of
sales versus the 4.1% operating income margin realized in 1995, and after tax
net income would have equaled $4,308,000 or $.63 per share.
During 1996, the Company expanded its business by opening 37 new stores.
Additionally, two stores were closed and three relocated in 1996. This
resulted in a net increase of 35 stores at the end of December 1996 as
compared to December 1995.
1996 compared to 1995
<TABLE>
<CAPTION>
SALES
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Retail Stores................................................ $179,119 $150,263
Mail Order Catalog........................................... 7,723 7,945
Service Departments and Other................................ 4,798 4,248
-------- --------
$191,640 $162,456
======== ========
</TABLE>
Sales for the year ended December 28, 1996 increased 18% over the same
period in 1995. Retail store sales, which are comprised of residential sales
and commercial sales, grew 19.2%, reflecting increases in comparable store
sales of 9.9% as well as an increase in the total number of stores in
operation from 224 in 1995 to 259 for most of the 1996 selling season. The
increased growth rate of comparable store sales (9.9% in 1996) as compared to
the prior year (6.0% in 1995) was the result of improved weather experienced
in most market areas, and the commercial sales program, which continued to
show solid growth of approximately 20% in 1996.
57
<PAGE>
Mail order catalog sales declined 2.8% to $7,723,000 from $7,945,000 in
1995. New store openings in a number of strong mail order markets continued to
cannibalize mail order sales. Service department sales increased 12.9% in 1996
due to an increased number of service technicians operating in existing
service areas, including a significant expansion in Houston, Texas, as well as
generally improved execution.
Gross profit for the year ended December 28, 1996 increased to 38.0% of
sales, from 37.2% in 1995. Gross profit represents sales less the cost of
services and purchased goods, chemical repackaging costs, and non-
administrative occupancy costs. The gross margin increase in 1996 reflects
increased retail pricing taken in early 1996, offsetting some product cost
increases seen in 1995 and again in 1996.
In 1996, selling, general and administrative expenses equaled $62,358,000,
versus $53,442,000 in 1995, an increase of 16.6%, largely the result of the
15.6% increase in the number of stores. As a percentage of sales, selling,
general and administrative expenses decreased 0.4% to 32.5%, compared to 32.9%
of sales in 1995, due to the improved comparable store sales performance in
1996.
EBITDA (FIFO basis) was $15.0 million in 1996, representing an increase of
$4.5 million, or 42.9%, as compared to $10.5 million for 1995. EBITDA (FIFO
basis) margin increased to 7.8% of sales in 1996 as compared to 6.4% of sales
in 1995. The increase in EBITDA (FIFO basis) and EBITDA (FIFO basis) margin
was primarily due to the Company's higher sales volume in 1996 and an increase
in the Company's gross margin.
Amortization of acquisition costs, which represents the amortization of
goodwill, equalled $252,000 in 1996, essentially flat as compared to 1995.
In 1996 the Company recognized losses on the disposition of fixed assets
totaling approximately $750,000. This was primarily comprised of a $650,000
write off of leasehold improvements related to the relocations of its
corporate offices, Southern California distribution operations and Pool Brite
chemical repackaging operation in early 1997. Additionally a $100,000 loss was
realized on the sale of an excess property located in Oklahoma City.
Income from operations for the period increased 40.5% to $9,400,000 or 4.9%
of sales, from $6,691,000 or 4.1% of sales in 1995.
Interest expense equalled $2,786,000 in 1996, up slightly from $2,708,000 in
1995. The increase was primarily the result of slightly increased borrowings
due to the capital spending and working capital requirements associated with
the continued growth of the business.
The tax provision increased to $2,745,000 in 1996, an effective rate of
41.5%, from $576,000 and an effective tax rate of 14.5% in 1995. The lower
effective tax rate in 1995 as compared to 1996 reflects the reversal in 1995
of certain tax reserves which were no longer needed.
1995 compared to 1994
<TABLE>
<CAPTION>
SALES
-----------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Retail Stores................................................ $150,263 $129,545
Mail Order Catalog........................................... 7,945 8,283
Service Departments and Other................................ 4,248 3,725
-------- --------
$162,456 $141,553
======== ========
</TABLE>
Sales for the year ended December 30, 1995 increased 14.8% over the same
period in 1994. Retail store sales grew 16.0%, reflecting increases in
comparable store sales of 6.0% as well as an increase in the total number of
stores in operation from 180 in 1994 to 223 for most of the 1995 selling
season. The lower growth
58
<PAGE>
rate of comparable store sales (6.0%) as compared to prior years (12.9% in
1994 and 11.7% in 1993) was the result of the cool, wet weather experienced in
most market areas in the March through June timeframe. Despite the reduced
growth in residential sales, the commercial sales program continued to show
strong growth of approximately 45% throughout 1995.
Mail order catalog sales declined 4.1% to $7,945,000 from $8,283,000 in
1994. The poor spring weather impacted mail order sales as did new store
openings in a number of strong mail order markets which continued to
cannibalize mail order sales. Service department sales increased 14.0% in 1995
due to an increased number of service technicians operating in existing
service areas, as well as generally improved execution.
Gross profit for the year ended December 30, 1995 declined as a percentage
of sales, to 37.2% from 39.2% in 1994. Gross profit represents sales less the
cost of services and purchased goods, chemical repackaging costs, and non-
administrative occupancy costs. The decrease in gross margin in 1995 was the
result of higher occupancy costs associated with the opening of 44 new stores
plus the new northeast distribution center, increased merchandise costs in a
variety of product categories, and the strong growth of commercial sales,
which generate a somewhat lower gross margin.
In 1995, selling, general and administrative expenses equaled $53,442,000,
versus $45,764,000 in 1994, an increase of 16.8%, largely the result of the
24.4% increase in the number of stores. As a percentage of sales, selling,
general and administrative expenses increased 0.6% to 32.9%, compared to 32.3%
of sales in 1994, due to the lower than expected comparable store sales
performance in 1995. It is management's objective to grow selling, general and
administrative expenses at a rate lower than the rate of store growth and, as
a result, reduce these expenses as a percentage of sales over time.
EBITDA (FIFO basis) was $10.5 million in 1995, representing a decrease of
$1.0 million, or 8.7%, as compared to $11.5 million for 1994. EBITDA (FIFO
basis) margin decreased to 6.4% of sales in 1995 as compared to 8.1% of sales
in 1994. The decrease in EBITDA (FIFO basis) and EBITDA (FIFO basis) margin
was primarily due to the Company's lower gross margin and higher selling,
general and administrative expenses as a percent of sales.
Amortization of acquisition costs, which represents the amortization of
goodwill, equaled $239,000 in 1995, essentially flat as compared to 1994.
Income from operations was $6.7 million in 1995, representing a decrease of
$2.9 million, or 30.2%, as compared to $9.6 million for 1994. Income from
operations as a percentage of net sales decreased to 4.1% in 1995 as compared
to 6.8% in 1994. The decrease was primarily due to the Company's lower gross
margin and higher selling, general and administrative expenses as a percent of
sales.
Interest expense equaled $2,708,000 in 1995, up from $1,733,000 in 1994. The
increase was primarily the result of increased borrowings associated with
higher capital spending and working capital requirements due to continued
growth in the business, and the lower earnings realized in 1995.
The tax provision declined to $576,000 in 1995, an effective rate of 14.5%,
from $3,252,000 and an effective tax rate of 41.5% in 1994. The lower
effective tax rate in 1995 as compared to 1994 reflects the third quarter
reversal of certain tax reserves which were no longer needed.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Changes in Financial Condition. From December 30, 1995 to December 28, 1996,
total current assets increased $71,000 from $40,809,000 to $40,880,000. The
slight overall increase in current assets results from decreases in
inventories offset by increases in accounts receivable and deferred tax
assets. The principal component of current assets is inventory, which
decreased $355,000 from $34,303,000 to $33,948,000. The inventory decrease
results mainly from a decrease in the average store inventory, partially
offset by an increase in the number of stores. Average store inventories were
higher in 1995 compared to 1996 primarily due to an oversupply of some
winterizing and recreational items which the Company sold through in 1996.
59
<PAGE>
Total current liabilities increased $360,000 between December 30, 1995 and
December 28, 1996. The increase is due principally to the $1,840,000 increase
in accounts payable from $4,215,000 at December 30, 1995 to $6,055,000 at
December 28, 1996. The increase in accounts payable is generally attributable
to improved payment terms received from the Company's vendors.
Liquidity and Capital Resources. For the year ended December 28, 1996, net
cash provided by operating activities was $11,970,000 compared with cash used
in operating activities of $4,144,000 in the prior year. Higher earnings and
decreased per store inventory balances resulted in increased cash flow from
operations in 1996.
In 1996, cash used in investing activities was $8,586,000 compared with
$9,229,000 in the prior year. This decrease resulted primarily from reduced
capital expenditures in 1996 as compared to 1995 due to the slightly lower
number of new store openings.
Cash used in financing activities was $3,371,000 in 1996 compared with cash
provided of $13,384,000 in 1995. In the second quarter of 1995, the Company
completed a private placement of its $10 million 8% Convertible Subordinated
Debentures. The debentures have a six-year term, and are convertible into
Leslie's California Common Stock at $20.95 per share. The debentures are
unsecured and subordinated to the present and future senior debt of the
Company. The proceeds were used to refinance some existing long-term debt and
provide capital for continued growth of the Company.
Line-of-credit borrowings decreased $1,516,000 since December 30, 1995
primarily as a result of the higher cash flow from operations. In January of
1997 the company amended its credit agreement with Wells Fargo Bank to
consolidate the existing line of credit facility, the project financing
facility, and the term loan into one expanded $38,000,000 line of credit
facility. The term of the expanded line of credit facility was extended
through February 16, 2000. Interest accrues at the lender's reference rate
(8.25% at December 28, 1996) or at LIBOR plus 1.75%, at the Company's
election.
The Company believes that its internally generated funds, as well as its
borrowing capacity, are adequate to meet its working capital needs, maturing
obligations and capital expenditure requirements, including those relating to
the opening of new stores.
Seasonality and Quarterly Fluctuations. The Company's business exhibits
substantial seasonality which the Company believes is typical of the swimming
pool supply industry. In general, sales and net income are highest during the
second and third quarters, which represent the peak months of swimming pool
use. Sales are substantially lower during the first and fourth quarters when
the Company will typically incur net losses. The principal external factor
affecting the Company's business is weather. Hot weather and the higher
frequency of pool usage in such weather create a need for more pool chemicals
and supplies. Unseasonably early or late warming trends can increase or
decrease the length of the pool season. In addition, unseasonably cool weather
and/or extraordinary amounts of rainfall in the peak season decrease swimming
pool use. The likelihood that unusual weather patterns will severely impact
the Company's results is lessened by the geographical diversification of the
Company's store locations.
The Company expects that its quarterly results of operations will fluctuate
depending on the timing and amount of revenue contributed by new stores and,
to a lesser degree, the timing of costs associated with the opening of new
stores. The Company attempts to open its new stores primarily in the first
quarter in order to position itself for the following peak season. As
additional stores and the resultant operating expenses are added, the Company
expects its usual losses incurred in the first and fourth quarters to
increase.
60
<PAGE>
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
MARCH 30 JUNE 29 SEPT. 28 DEC. 28
-------- ------- -------- -------
<S> <C> <C> <C> <C>
1996
Sales............................ $18,064 $88,835 $63,657 $21,084
Gross Profit..................... 4,258 38,236 25,868 4,398
(Loss) Income from Operations.... (8,610) 17,265 7,712 (6,967)/(1)/
Net (Loss) Income................ (5,525) 9,658 4,176 (4,440)
Net (Loss) Income Per Common
Equivalent Share................ $ (.82) $ 1.41 $ .62 $ (.66)
Weighted Average Common
Equivalent Shares............... $ 6,769 6,867 6,776 6,756
EBITDA (FIFO basis)/(2)/......... (7,564) 18,534 8,919 (4,929)
Comparable Store Sales Growth.... 6.6% 16.1% 4.2% 6.4%
<CAPTION>
THREE MONTHS ENDED
--------------------------------------
APRIL 1 JULY 1 SEPT. 30 DEC. 30
-------- ------- -------- -------
<S> <C> <C> <C> <C>
1995
Sales............................ $15,360 $71,945 $56,862 $18,289
Gross Profit..................... 3,826 29,883 22,230 4,460
(Loss) Income from Operations.... (6,921) 12,138 6,974 (5,500)
Net (Loss) Income................ (4,416) 6,692 4,817 (3,686)
Net (Loss) Income Per Common
Equivalent Share/(3)/........... $ (.67) $ 1.01 $ .73 $ (.56)
Weighted Average Common
Equivalent Shares/(3)/.......... $ 6,592 6,622 6,618 6,624
EBITDA (FIFO basis)/(2)/......... (6,257) 12,846 7,791 (3,908)
Comparable Store Sales Growth.... (0.6)% (0.3)% 16.0% 9.5%
</TABLE>
- --------
/(1)/ The quarter ended December 28, 1996 loss from operations included
approximately a $650,000 loss on disposition of fixed assets.
/(2)/ EBITDA (FIFO basis) represents income before interest expense,
depreciation and amortization expense, the LIFO provision, (gains) and
losses on disposition of fixed assets and the provision for income taxes.
/(3)/ The 1995 amounts have been adjusted to reflect a 5% stock dividend
effective August 1995.
Recent Accounting Pronouncement. The Company adopted Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121") in the first
quarter of 1996. The adoption of SFAS 121 did not impact the Company's
financial position or its results of operations. In addition, in 1996 the
Company adopted the disclosures required by Statement of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). The
disclosures required by SFAS 123 are presented below in Note 12 of Notes to
the Consolidated Financial Statements.
CERTAIN FORWARD LOOKING INFORMATION
The Company does not, as a matter of course, make public forecasts or
projections as to future financial results. However, management of the
Company, in connection with the possible sale of the Company, prepared and
provided to LGP, representatives of the Special Committee, DLJ, Dillon Read
and various financing sources certain projections for fiscal years 1997
through 2001. The projections do not reflect the debt to be incurred in
connection with the Merger Transaction. See "The Merger--Financing."
None of these projections were prepared with a view to public disclosure or
compliance with published guidelines of the Securities and Exchange Commission
or the guidelines established by the American Institute of Certified Public
Accountants regarding projections. Arthur Andersen LLP, the Company's
independent public
61
<PAGE>
accountants, have not performed any procedures with respect to the projections
and assume no responsibility for them. None of the Company, the Board nor any
of their advisors, agents or representatives assumes any responsibility for
the accuracy of any of these projections and each believes that, because
projections of this type are based on a number of significant uncertainties
and contingencies, all of which are difficult to predict and most of which
will be beyond the control of the Company, there can be no assurance that any
of these projections will be realized. Nevertheless, the Company has no reason
to doubt the reasonableness of the assumptions underlying these projections.
The projections are based on sales and operating assumptions that include
(1) an increase in sales from $191.6 million in 1996 to $382.6 million in
2001, and (2) an increase in the operating margin from 4.9% of sales in 1996
to 7.4% of sales in 2001. The sales growth results from an increase in the
number of stores from 259 at the end of 1996 to 454 in the year 2001, and the
maturing of the stores opened over the last several years. The expansion of
the operating margin to 7.4% of sales in 2001 is due primarily to the
projected selling, general and administrative expenses declining as a
percentage of sales. The 1997 projections reflect the Company's detailed
operating plan while the projections for the remaining years were developed by
senior management in contemplation of seeking and implementing a transaction
to enhance shareholder value. The projections assume normal weather patterns
for the five year period.
PROJECTED INCOME STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER:
--------------------------------------------
1997E 1998E 1999E 2000E 2001E
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales......................... $223,300 $260,100 $298,600 $338,800 $382,600
Cost of sales..................... 137,700 159,900 183,600 208,700 236,000
-------- -------- -------- -------- --------
Gross profit...................... 85,600 100,200 115,000 130,100 146,600
Total operating expenses.......... 73,100 83,200 94,000 105,600 118,600
-------- -------- -------- -------- --------
Income from operations............ 12,500 17,000 21,000 24,500 28,000
Income before taxes............... 9,500 13,900 18,100 21,800 25,700
Income tax provision.............. 3,900 5,700 7,400 8,800 10,400
-------- -------- -------- -------- --------
Net income........................ $ 5,600 $ 8,200 $ 10,700 $ 13,000 $ 15,300
Weighted average shares
outstanding...................... 7,100 7,200 7,400 7,600 7,800
Net income per share.............. $ 0.79 $ 1.14 $ 1.45 $ 1.71 $ 1.96
Earnings before interest, taxes,
depreciation and amortization,
and loss (gain) on disposition of
fixed assets..................... $ 18,100 $ 22,700 $ 27,000 $ 30,900 $ 34,800
</TABLE>
PROJECTED CASH FLOW STATEMENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER:
-------------------------------------------
1997E 1998E 1999E 2000E 2001E
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net cash provided by operating
activities...................... $ 3,500 $ 9,800 $12,000 $14,200 $16,300
Net cash used in investing
activities...................... (7,700) (7,200) (7,800) (8,400) (8,400)
Net cash provided (used) by
financing activities............ 4,200 (2,600) (4,200) (5,800) (7,900)
------- ------- ------- ------- -------
Net increase (decrease) in cash.. 0 0 0 0 0
Cash at beginning of period...... 100 100 100 100 100
------- ------- ------- ------- -------
Cash at end of period............ $ 100 $ 100 $ 100 $ 100 $ 100
</TABLE>
62
<PAGE>
PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth information as of April 1, 1997 with respect
to (i) all persons known by the Company to be the beneficial owner of more
than 5% of the Company's Common Stock; (ii) all executive officers of the
Company; (iii) all directors; and (iv) all directors and executive officers as
a group. The address for the directors and executive officers is in care of
the Company.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL
OWNERSHIP OF
NAME AND ADDRESS COMMON PERCENT
OF BENEFICIAL OWNER STOCK(1)(2) OF CLASS
------------------- ------------ --------
<S> <C> <C>
Michael J. Fourticq (3)(4)(5)........................... 842,338 12.8
David L. Babson & Co. Inc. ............................ 686,124 10.5
One Memorial Drive
Cambridge, MA 02142
Liberty West Partners (6)............................... 334,141 5.1
1925 Century Park East, Suite 810
Los Angeles, CA 90067
Richard H. Hillman (3)(7)............................... 322,758 4.9
Wellington Management Company........................... 397,112 6.1
75 State Street
Boston, MA 02109
Brian P. McDermott (3)(5)(8)............................ 378,974 5.6
Robert D. Olsen (5)(9).................................. 127,988 1.9
Murray A. Dashe (5)(10)................................. 123,826 1.9
Cynthia G. Watts (5)(11)................................ 43,268 *
John A. Canning, Jr. (3)(12)............................ 16,538 *
Dr. Dale R. Laurance (3)(13)............................ 8,513 *
Dann V. Angeloff (3).................................... 0 *
Clarence T. Schmitz (3)................................. 0 *
All Directors and Executive Officers as a Group (10
persons) (14).......................................... 1,864,203 26.3
Hancock Group (15)...................................... 1,770,430 25.7
</TABLE>
- --------
* Amount represents less than one percent of the Common Stock.
(1) Information with respect to beneficial ownership is based upon the
Company's stock records and data supplied to the Company by the holders.
(2) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission, and includes generally voting power
and/or investment power with respect to securities. Shares of Common
Stock subject to options currently exercisable or exercisable within 60
days are deemed outstanding for computing the percentage of the person
holding such options but are not deemed outstanding for computing the
percentage of any other person. Except as indicated by footnote, and
subject to joint ownership with spouses and community property laws where
applicable, the persons named in the table above have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
(3) Director.
(4) Includes 444,842 shares owned outright by Mr. Fourticq; 623 shares owned
by Mr. Fourticq's spouse; 46,192 shares held by Hancock Park Associates,
a partnership of which Mr. Fourticq is the sole general partner; and
334,141 shares held by Liberty West Partners, a partnership of which Mr.
Fourticq is a general partner; all of which shares Mr. Fourticq may be
deemed to beneficially own; and 16,540 shares subject to options
exercisable within 60 days.
63
<PAGE>
(5) Executive officer.
(6) All such shares may be deemed to be beneficially owned by Mr. Fourticq.
See footnote (4).
(7) Includes 1,323 shares held in trust for the benefit of Mr. Hillman's son
and 18,745 shares subject to options exercisable within 60 days.
(8) Shares are held through a trust. Includes 201,775 shares subject to
options exercisable within 60 days.
(9) All shares are subject to options exercisable within 60 days.
(10) Includes 123,358 shares subject to options exercisable within 60 days.
(11) Includes 42,217 shares subject to options exercisable within 60 days.
(12) Includes 11,025 shares held by Mr. Canning's spouse and 5,513 shares
subject to options exercisable within 60 days.
(13) Shares are held through a trust. Includes 5,513 shares subject to options
exercisable within 60 days.
(14) Includes 541,649 shares subject to options exercisable within 60 days.
(15) Hancock Group consists of Hancock Park Associates II, L.P., a Delaware
limited partnership ("HPA"), and Michael J. Fourticq and Brian P.
McDermott who are the general partners of HPA, Richard H. Hillman,
Gregory Fourticq and Robert D. Olsen. According to information appearing
in a Schedule 13D filed with the Securities and Exchange Commission and
delivered to the Company, the Hancock Group beneficially owns 1,770,430
shares of Common Stock. According to an amendment to this Schedule 13D
received by the Company and a separate Schedule 13D from Green Equity
Investors II, L.P. ("Green"), as a result of certain activities described
in these filings that involve Hancock Group and Green, Hancock Group and
Green may be deemed to be a group within the meaning of Section 13(d) of
the Exchange Act. According to the Schedule 13D filed by Green, although
Green itself does not own any Common Stock of the Company, if such group
exists, such group beneficially owns 1,770,430 shares of Common Stock.
CERTAIN INFORMATION CONCERNING HANCOCK GROUP AND GREEN
The Hancock Group consists of Hancock Park Associates II, L.P. ("HPA"), a
Delaware limited partnership, Liberty West Partners ("Liberty"), a California
general partnership, Michael J. Fourticq, Brian P. McDermott, Richard H.
Hillman, Gregory Fourticq and Robert D. Olsen. HPA is an investment
partnership of which Michael J. Fourticq and Mr. McDermott are general
partners. Liberty is a general partnership of which Michael Fourticq and
Gregory Fourticq are general partners, and Liberty's principal activity is to
hold 334,141 shares of Leslie's California Common Stock. The principal
executive offices of HPA and Liberty are 1925 Century Park East, Suite 810,
Los Angeles, California 90067.
Michael Fourticq, Mr. McDermott and Mr. Olsen are, respectively, the
Chairman of the Board, the President and Chief Executive Officer and the Chief
Financial Officer of Leslie's California. Michael Fourticq and Messrs.
McDermott and Hillman are directors of Leslie's California. Mr. Gregory
Fourticq is the brother of Michael Fourticq. Michael Fourticq's principal
occupation is acting as the general partner of HPA, as Chairman of the Board
of Leslie's California and as Chairman of the Board of various companies owned
or controlled by various investment partnerships. His business address is 1925
Century Park East, Suite 810, Los Angeles, California 90067. Mr. McDermott's
principal occupation is as President and Chief Executive Officer of Leslie's
California and as a general partner of HPA. Mr. Olsen's principal occupation
is as Chief Financial Officer of Leslie's California. Mr. McDermott's and Mr.
Olsen's principal business address is Leslie's California's executive offices
at 20630 Plummer Street, Chatsworth, California 91311. Mr. Hillman's principal
occupation is as President of Hillman Capital Partners. He is also a director
of Leslie's California. His principal business address is 2665 Main Street,
Suite 260, Santa Monica, California 90405. Mr. Gregory Fourticq's principal
occupation is as President of Cascade Sawing and Drilling, and his principal
business address is P.O. Box 3157, Kent, Washington 98032.
The following information has been taken from a report on Schedule 13D
received by the Company from Green. Green is a Delaware limited partnership.
The general partner of Green is Grand Avenue Capital Partners, L.P., a
Delaware limited partnership ("GACP"). LGP is a Delaware limited partnership
that is an affiliate of GACP. The principal place of business of each of these
entities is 11111 Santa Monica Boulevard, Suite 2000,
64
<PAGE>
Los Angeles, California 90025. Green is an investment partnership. Leonard I.
Green, Jonathan D. Sokoloff, John G. Danhakl, Gregory J. Annick and Jennifer
Holden Dunbar, either directly or through one or more intermediaries, may be
deemed to control LGP and GACP.
PROXY SOLICITATION
All expenses incurred in connection with solicitation of the enclosed proxy
will be paid by the Company. In addition to solicitation by mail, officers,
directors and regular employees of the Company, who will receive no additional
compensation for their services, may solicit proxies by mail, telephone,
telegraph or personal call. In addition, the Company has retained the Herman
Group, Inc. to solicit proxies for a fee of $5,000 plus expenses. The cost of
soliciting proxies will be borne by the Company. The Company has requested
brokers and nominees who hold stock in their names to furnish this proxy
material to their customers and the Company will reimburse such brokers and
nominees for their related out-of-pocket expenses.
SHAREHOLDER PROPOSALS
It is expected that the Annual Meeting of Shareholders will be held in
September 1997. If the Merger Transaction is not consummated, proposals of
shareholders intended to be presented at the 1997 Annual Meeting of
Shareholders must be submitted, by registered or certified mail, to the
attention of the Company's secretary at its principal executive offices by
July 1, 1997 in order to be considered for inclusion in the Company's proxy
statement and form of proxy for such meeting. If the Merger Transaction is
consummated, the Annual Meeting of Shareholders may be scheduled for an
earlier or later date consistent with the Company's organizational documents.
INDEPENDENT PUBLIC ACCOUNTANTS
The Consolidated Balance Sheets as of December 28, 1996 and December 30,
1995, and the related Consolidated Statements of Income, Shareholders' Equity
and Cash Flows for each of the three fiscal years in the period ended December
28, 1996, included in this Proxy Statement, have been audited by Arthur
Andersen LLP, independent public accountants, as stated in their report. A
representative of Arthur Andersen LLP will be at the Special Meeting to answer
questions from shareholders and will have the opportunity to make a statement
if so desired.
OTHER MATTERS
Management knows of no other business to be presented at the Special
Meeting. If other matters do properly come before the meeting, or any
adjournment or adjournments thereof, it is the intention of the persons named
in the proxy to vote on such matters according to their best judgment.
65
<PAGE>
INCORPORATION BY REFERENCE
The following documents filed with the Securities and Exchange Commission by
the Company (File No. 0-19096) pursuant to the Exchange Act are incorporated
herein by this reference:
1. The Company's Annual Report on Form 10-K for the fiscal year ended
December 28, 1996 (as amended);
2. The Company's Current Report on Form 8-K dated March 3, 1997.
All documents filed by the Company with the Securities and Exchange
Commission pursuant to Sections 13(a), 13(c), 14 or 15 (d) of the Exchange Act
subsequent to the date hereof and prior to the date of the Special Meeting are
hereby incorporated by reference into this Proxy Statement and shall be deemed
a part hereof from the date of filing such documents or reports. 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 to the extent that a statement contained herein or in any other
subsequently filed document which 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.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO
SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT IS DELIVERED, ON WRITTEN OR
ORAL REQUEST TO THE COMPANY AT 20630 PLUMMER STREET, CHATSWORTH, CALIFORNIA
91311, ATTN: CYNTHIA G. WATTS, SECRETARY (TELEPHONE NUMBER (818) 993-4212).
SUCH DOCUMENTS WILL BE PROVIDED TO SUCH PERSON BY FIRST CLASS MAIL OR OTHER
EQUALLY PROMPT MEANS WITHIN ONE BUSINESS DAY OF RECEIPT OF SUCH REQUEST. IN
ORDER TO ENSURE DELIVERY OF THE DOCUMENTS PRIOR TO THE SPECIAL MEETING,
REQUESTS SHOULD BE RECEIVED BY JUNE 4, 1997.
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants................................. FS-2
Management's Report...................................................... FS-3
Consolidated Balance Sheets--December 28, 1996 and December 30, 1995..... FS-4
Consolidated Statements of Income--Years Ended December 28, 1996,
December 30, 1995 and December 31, 1994................................. FS-5
Consolidated Statements of Shareholders' Equity--Years Ended December 28,
1996, December 30, 1995 and December 31, 1994........................... FS-6
Consolidated Statements of Cash Flows--Years Ended December 28, 1996,
December 30, 1995 and December 31, 1994................................. FS-7
Notes to Consolidated Financial Statements............................... FS-8
</TABLE>
FS-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Leslie's Poolmart:
We have audited the accompanying consolidated balance sheets of Leslie's
Poolmart (a California corporation) and subsidiaries as of December 28, 1996
and December 30, 1995 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended December 28, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements 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 Leslie's Poolmart and
subsidiaries as of December 28, 1996 and December 30, 1995, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended December 28, 1996, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Los Angeles, California
March 6, 1997
FS-2
<PAGE>
MANAGEMENT'S REPORT
Management is responsible for the preparation and integrity of the financial
statements appearing in this Proxy Statement. The financial statements were
prepared in accordance with generally accepted accounting principles and
include certain amounts based on management's best estimates and judgments.
The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded and that transactions
are executed as authorized and are recorded and reported properly. Management
believes that existing internal accounting control systems are achieving their
objectives and that they provide reasonable assurance concerning the accuracy
of the financial statements.
Arthur Andersen LLP, independent public accountants, has audited the
Company's financial statements and their report is presented herein.
The Board of Directors has an Audit Committee composed entirely of outside
Directors. Arthur Andersen LLP has direct access to the Audit Committee and
periodically meets with the Committee to discuss accounting, auditing and
financial reporting matters.
Robert D. Olsen
Chief Financial Officer
FS-3
<PAGE>
LESLIE'S POOLMART
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DEC. 28, 1996 DEC. 30, 1995
------------- -------------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash............................................. $ 87 $ 74
Accounts and other receivables, net.............. 2,550 2,235
Inventories, net................................. 33,948 34,303
Prepaid expenses and other....................... 1,693 1,876
Deferred tax assets.............................. 2,602 2,321
------- -------
Total current assets........................... 40,880 40,809
------- -------
PROPERTY, PLANT AND EQUIPMENT:..................... 46,058 39,550
Less--Accumulated depreciation and amortization.. 12,751 10,005
------- -------
Net property, plant and equipment................ 33,307 29,545
------- -------
OTHER ASSETS:
Goodwill, net.................................... 8,298 8,550
Other............................................ 672 625
------- -------
Total other assets............................. 8,970 9,175
------- -------
$83,157 $79,529
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable................................. $ 6,055 $ 4,215
Accrued liabilities.............................. 4,480 4,546
Short-term borrowings............................ 15,440 16,956
Current portion of long-term debt................ 2,187 2,085
------- -------
Total current liabilities...................... 28,162 27,802
------- -------
DEFERRED TAX LIABILITIES........................... 3,099 1,963
LONG-TERM DEBT, net of current portion............. 5,581 7,843
CONVERTIBLE SUBORDINATED DEBENTURES................ 10,000 10,000
COMMITMENTS AND CONTINGENCIES...................... -- --
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 1,000,000 shares;
none issued and outstanding..................... -- --
Common stock, no par value:
Authorized--40,000,000 shares
Issued and outstanding--6,547,928 and 6,507,074
at Dec. 28,1996 and Dec. 30, 1995,
respectively................................... 32,625 32,100
Retained earnings (deficit)...................... 3,690 (179)
------- -------
Total shareholders' equity..................... 36,315 31,921
------- -------
$83,157 $79,529
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
FS-4
<PAGE>
LESLIE'S POOLMART
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------
DEC. 28, 1996 DEC. 30, 1995 DEC. 31, 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net sales........................... $191,640 $162,456 $141,553
Cost of sales....................... 118,880 102,057 86,084
-------- -------- --------
Gross profit........................ 72,760 60,399 55,469
Selling, general and administrative
expenses........................... 62,358 53,442 45,764
Amortization of acquisition costs... 252 239 242
Loss (gain) on disposition of fixed
assets............................. 750 27 (106)
-------- -------- --------
Income from operations.............. 9,400 6,691 9,569
Interest expense, net............... 2,786 2,708 1,733
-------- -------- --------
Income before taxes................. 6,614 3,983 7,836
Income tax provision................ 2,745 576 3,252
-------- -------- --------
Net income.......................... $ 3,869 $ 3,407 $ 4,584
======== ======== ========
Net income per share................ $ .57 $ .52 $ .70
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
FS-5
<PAGE>
LESLIE'S POOLMART
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
------------------ RETAINED TOTAL
NUMBER OF (DEFICIT) SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
--------- -------- --------- -------------
<S> <C> <C> <C> <C>
Balance, at December 31, 1993....... 5,603,131 $ 21,467 $ (426) $ 21,041
Stock dividend.................... 283,853 3,447 (3,447) --
Issuance of common stock.......... 1,650 17 -- 17
Stock options exercised........... 107,101 292 -- 292
Tax benefit from stock options
exercised........................ -- 405 -- 405
Net income........................ -- -- 4,584 4,584
--------- -------- ------- --------
Balance, at December 31, 1994....... 5,995,735 25,628 711 26,339
Stock dividend.................... 300,793 4,297 (4,297) --
Issuance of common stock.......... 2,050 27 -- 27
Stock options exercised........... 82,735 514 -- 514
Exercise of convertible
securities....................... 125,761 1,383 -- 1,383
Tax benefit from stock options
exercised........................ -- 251 -- 251
Net income........................ -- -- 3,407 3,407
--------- -------- ------- --------
Balance, at December 30, 1995....... 6,507,074 32,100 (179) 31,921
Issuance of common stock.......... 50 1 -- 1
Stock options exercised........... 40,804 304 -- 304
Tax benefit from stock options
exercised........................ -- 220 -- 220
Net income........................ -- -- 3,869 3,869
--------- -------- ------- --------
Balance, at December 28, 1996....... 6,547,928 $ 32,625 $ 3,690 $ 36,315
========= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
FS-6
<PAGE>
LESLIE'S POOLMART
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED
-----------------------------------------
DEC. 28, 1996 DEC. 30, 1995 DEC. 31, 1994
------------- ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income......................... $ 3,869 $ 3,407 $ 4,584
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization...... 4,326 3,374 2,393
Loss (gain) on disposition of fixed
assets............................ 750 27 (106)
(Increase) decrease in:
Accounts and other receivables..... (315) (902) (339)
Inventories, net................... 355 (10,114) (6,309)
Prepaid expenses and other......... 183 (231) (989)
Other assets....................... (47) (290) 262
Increase (decrease) in:
Accounts payable and accrued
liabilities....................... 1,774 2,121 1,725
Income taxes....................... 1,075 (1,536) (680)
------- -------- -------
Net cash provided by (used in)
operating activities.............. 11,970 (4,144) 541
------- -------- -------
INVESTING ACTIVITIES:
Purchase of property, plant and
equipment......................... (8,807) (9,550) (7,394)
Proceeds from dispositions of
property, plant and equipment..... 221 321 583
------- -------- -------
Net cash used in investing
activities........................ (8,586) (9,229) (6,811)
------- -------- -------
FINANCING ACTIVITIES:
Net line-of-credit borrowings...... (1,516) 7,435 3,151
Additions to long-term debt........ -- 10,000 4,890
Payments of long-term debt......... (2,160) (4,592) (2,055)
Issuance of common stock and stock
options exercised................. 305 541 292
------- -------- -------
Net cash (used in) provided by
financing activities.............. (3,371) 13,384 6,278
------- -------- -------
NET INCREASE IN CASH................. 13 11 8
CASH AT BEGINNING OF PERIOD.......... 74 63 55
------- -------- -------
CASH AT END OF PERIOD................ $ 87 $ 74 $ 63
======= ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
FS-7
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND OPERATIONS
Leslie's Poolmart (the Company) is a specialty retailer of swimming pool
supplies and related products. As of December 28, 1996, the Company marketed
its products under the trade name Leslie's Swimming Pool Supplies through 259
retail stores in 27 states and through mail order catalogs sent to selected
swimming pool owners nationwide. The Company also repackages certain bulk
chemical products for retail sale. The Company's business is highly seasonal
as the majority of its sales (79% in 1996 and 1995) and all of its operating
profits are generated in the second and third quarters.
The Company purchased the capital stock of Sandy's Pool Supply, Inc.
(Sandy's) effective August 31, 1992. The adjusted purchase price for Sandy's
was approximately $1,189,000. The Company paid cash of $730,000 (net of
Sandy's cash on hand of approximately $120,000) at August 31, 1992, and in
1993 the Company received a refund of $75,000 upon the settlement of the
purchase price. The remainder of the purchase price will be paid in
installments through 2002.
2. STOCK DIVIDEND
In August 1995 and April 1994, 5% stock dividends were declared for
shareholders of record as of August 31, 1995 and April 29, 1994, respectively.
The fair market value of the stock dividends was transferred from retained
earnings to common stock in the accompanying 1995 and 1994 consolidated
financial statements. The earnings per share, weighted average number of
shares outstanding, and the outstanding options reflect the impact of these
stock dividends.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The consolidated financial statements of the Company include Leslie's
Poolmart and Sandy's Pool Supply, Inc., its wholly-owned subsidiary.
b. Fiscal Periods
In January 1995, to be consistent with the reporting practices of many major
retailers, the Company changed its fiscal year from a calendar year to a 52-
or 53-week year which will end on the Saturday closest to December 31. Each
fiscal quarter will have 13 weeks and will close on the Saturday closest to
March 31, June 30 and September 30.
c. Cash
Line-of-credit borrowings include outstanding checks of $25,000 and excess
cash balances of $205,000 at December 28, 1996, and December 30, 1995,
respectively.
d. Accounts and Other Receivables, Net
Accounts and other receivables include allowances for doubtful accounts of
$49,000 and $70,000 at December 28, 1996 and December 30, 1995, respectively.
e. Inventories
Inventories are stated at the lower of cost or market. Cost is determined on
the last-in, first-out (LIFO) basis. The effect of utilizing this method
resulted in inventory balances which were $544,000 lower at December 28, 1996,
$60,000 lower at December 30, 1995, and $320,000 higher at December 31, 1994,
than would have been reported under the first-in, first-out (FIFO) method.
FS-8
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
f. Property, Plant and Equipment
Property, plant and equipment are stated at cost. Costs of normal
maintenance and repairs are charged to expense as incurred.
Major replacements or improvements of property, plant and equipment are
capitalized. When items are sold or otherwise disposed of, the cost and
related accumulated depreciation or amortization are removed from the
accounts, and any resulting gain or loss is included in the statements of
income.
Depreciation and amortization are computed using the straight-line method
(considering appropriate salvage values) based on the following estimated
average useful lives:
<TABLE>
<S> <C>
Buildings and improvements....................................... 15-30 years
Vehicles, machinery and equipment................................ 3-10 years
Office furniture and equipment................................... 3-10 years
Leasehold improvements........................................... 4-10 years
</TABLE>
g. Goodwill
The excess of the acquisition price over the fair value of the net assets at
the date of acquisition is included in the accompanying consolidated balance
sheets as "Goodwill." Goodwill is being amortized (straight-line) over forty
years. The Company continually evaluates whether later events and
circumstances have occurred that indicate the remaining estimated useful life
of goodwill may warrant revision or that the remaining balance of goodwill may
not be recoverable. When factors indicate that goodwill should be evaluated
for possible impairment, the Company uses an estimate of the related business
segment's undiscounted net income over the remaining life of the goodwill in
measuring whether the goodwill is recoverable. The balance recorded at
December 28, 1996 and December 30, 1995 was net of accumulated amortization of
$1,397,000 and $1,145,000, respectively.
h. Income Taxes
The Company provides for deferred income taxes relating to timing
differences in the recognition of income and expense items (primarily
depreciation and amortization) for financial and tax reporting purposes. Also,
differences between the tax basis and the financial reporting basis of various
assets were created when the Company was acquired in 1988 and when the Company
purchased Sandy's in 1992; deferred tax assets and liabilities were provided
related to these differences. Deferred taxes at December 28, 1996 and December
30, 1995 include a provision for the differences between tax and financial
asset values except that deferred taxes were not provided with respect to
amounts allocated to goodwill. As the difference between tax and financial
reporting basis changes, appropriate charges/credits are made to the deferred
tax account.
i. Mail Order Catalog Sales
Revenue on mail order catalog sales is recognized at the time goods are
shipped.
j. Cost of Sales
Included in cost of sales are the costs of services and purchased goods,
direct manufacturing and chemical repackaging costs and non-administrative
occupancy costs.
k. Advertising
Advertising costs are recognized as the advertising expense is incurred. The
net advertising expense incurred was $5,812,000 for the year ended December
28, 1996; $4,344,000 for the year ended December 30, 1995; and $4,223,000 for
the year ended December 31, 1994.
FS-9
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
l. Use of Estimates in the Preparation of Consolidated Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires 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 expenses during the reporting period.
Actual results could differ from those estimates.
m. Recent Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standard No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" (SFAS 121) in the first quarter of 1996. The adoption of
SFAS 121 did not impact the Company's financial position or its results of
operations. In addition, in 1996 the Company adopted Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). The disclosures required by SFAS 123 are presented in Note 12.
n. Reclassifications
Certain prior period amounts in the consolidated financial statements have
been reclassified to conform to the 1996 presentations.
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
Raw materials and supplies......................... $ 1,659,000 $ 1,433,000
Finished goods..................................... 32,289,000 32,870,000
----------- -----------
$33,948,000 $34,303,000
=========== ===========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
Land.............................................. $ 6,578,000 $ 6,734,000
Buildings and improvements........................ 6,868,000 6,716,000
Equipment......................................... 1,785,000 1,484,000
Leasehold improvements............................ 14,796,000 12,836,000
Office furniture, equipment and other............. 15,118,000 11,278,000
Construction-in-process........................... 913,000 502,000
----------- -----------
46,058,000 39,550,000
Less--Accumulated depreciation and amortization... 12,751,000 10,005,000
----------- -----------
$33,307,000 $29,545,000
=========== ===========
</TABLE>
6. BANK CREDIT AGREEMENT
Effective June 30, 1995, the Company entered into a Second Amended and
Restated Credit Agreement with Wells Fargo Bank which has three facilities: a
Line-of-Credit, a Revolving Term Loan, and a Project financing
FS-10
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
facility, which may be drawn to finance specific real estate development
projects undertaken in connection with the addition of new retail stores. The
Credit Agreement contains certain financial covenants and requires that certain
other debts of the Company be subordinated in right of repayment to the lender.
As of December 28, 1996 the Company was in compliance with these covenants.
As of December 28, 1996, the Line-of-Credit's outstanding principal balance
was $15,440,000. The Credit Agreement was amended in November 1995, increasing
the amount of borrowings allowed under the line-of-credit up to $19,000,000. In
early 1996, the line of credit was amended and temporarily expanded (to
$22,000,000 through May 15, 1996 and $19,000,000 thereafter) and the term was
extended through October 1, 1997. Subsequent to year-end, the Company amended
its Credit Agreement to consolidate the existing line of credit facility, the
project financing facility, and the revolving term loan into one expanded
$38,000,000 line of credit facility. The term of the expanded line of credit
facility was extended through February 16, 2000.
Interest is payable monthly on all borrowings. The amended Line-of-Credit
accrues interest at the lender's reference rate (8.25% at December 28, 1996) or
at LIBOR plus 1.75%, at the borrower's election.
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 28, DECEMBER 30,
1996 1995
------------ ------------
<S> <C> <C>
Revolving Loan................................... $6,000,000 $8,000,000
Notes payable collateralized by security
interests in certain assets, with maturities
from March, 1999 to September, 2002. Interest
accrues at rates of 6.5% to 8.25%............... 719,000 860,000
Notes payable collateralized by security interest
in various properties, due in monthly
installments with maturities from December 2003
to December 2009. Interest accrues at the rate
of 7.625% to 9.125%............................. 1,049,000 1,068,000
---------- ----------
7,768,000 9,928,000
Less--Current portion............................ 2,187,000 2,085,000
---------- ----------
$5,581,000 $7,843,000
========== ==========
</TABLE>
Principal maturities of long-term debt as of December 28, 1996 are as
follows:
<TABLE>
<S> <C>
1997.............................................................. $2,187,000
1998.............................................................. 4,193,000
1999.............................................................. 124,000
2000.............................................................. 106,000
2001.............................................................. 113,000
Thereafter........................................................ 1,045,000
----------
$7,768,000
==========
</TABLE>
FS-11
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Convertible Subordinated Debentures
On May 25, 1995, the Company completed a private placement of its $10
million 8% convertible subordinated debentures. Interest is payable semi-
annually. The debentures have a six-year term, expiring May 15, 2001 and are
convertible into the Company's common stock at $20.95 per share. The
debentures are unsecured and subordinated to the present and future senior
debt of the Company.
7 1/2% Convertible Notes
In conjunction with the Company's initial public offering in April, 1991,
the Company and one of its former shareholders agreed to terminate the
shareholder's covenant not to compete in exchange for $2,767,000 of the
Company's 7 1/2% convertible notes. In December, 1993, approximately
$1,384,000 of these 7 1/2% convertible notes was repaid. The remaining portion
of the 7 1/2% convertible notes was converted to shares of the Company's
common stock at a conversion price of $11.00 per share on December 29, 1995.
8. LEASES
The Company leases certain store, office, distribution and manufacturing
facilities under operating leases which expire at various dates through 2007.
Lease agreements generally provide for increases related to cost of living
indices and require the Company to pay for property taxes, repairs and
insurance. Future minimum lease payments at December 28, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................. $13,798,000
1998............................................................. 11,286,000
1999............................................................. 10,030,000
2000............................................................. 7,597,000
2001............................................................. 5,320,000
Thereafter....................................................... 10,205,000
-----------
$58,236,000
===========
</TABLE>
As of March 3, 1997, the Company had entered into operating leases for
additional new store sites which have future minimum lease payment
requirements of approximately $677,000 in 1997, $1,016,000 in 1998, 1999, and
2000, $976,000 in 2001, and $1,434,000 thereafter.
Certain leases are renewable at the option of the Company for periods of one
to ten years. Rent expense charged against income totaled $16,024,000,
$13,397,000, and $10,119,000, in 1996, 1995 and 1994, respectively.
9. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
Federal:
Current............................... $2,386,000 $ 2,263,000 $3,074,000
Deferred.............................. (222,000) (1,750,000) (567,000)
---------- ----------- ----------
2,164,000 513,000 2,507,000
---------- ----------- ----------
State:
Current............................... 641,000 610,000 858,000
Deferred.............................. (60,000) (547,000) (113,000)
---------- ----------- ----------
581,000 63,000 745,000
---------- ----------- ----------
$2,745,000 $ 576,000 $3,252,000
========== =========== ==========
</TABLE>
FS-12
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of the provision for income taxes to the amount computed at
the federal statutory rate is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------- ----------- ----------
<S> <C> <C> <C>
Federal income tax at statutory rate..... $2,248,000 $ 1,354,000 $2,664,000
Reversal of tax reserves no longer need-
ed...................................... -- (1,100,000) --
Effect of differences created by
acquisition accounting including
amortization of differences between fair
values assigned in purchase accounting
and historical tax values............... 146,000 96,000 96,000
State taxes, net of federal benefit...... 351,000 226,000 492,000
---------- ----------- ----------
$2,745,000 $ 576,000 $3,252,000
========== =========== ==========
</TABLE>
The tax effect of temporary differences which give rise to significant
portions of the deferred tax liability are summarized below.
<TABLE>
<CAPTION>
1996 1995
------------------------- -------------------------
DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Property, plant and
equipment differences.. $ -- $ 1,857,000 $ -- $ 941,000
State income taxes...... 197,000 -- 207,000 --
Inventory overhead
differences............ 1,942,000 -- 1,834,000 --
Difference in timing of
certain deductions..... 463,000 1,242,000 280,000 1,022,000
---------- ----------- ---------- ----------
$2,602,000 $ 3,099,000 $2,321,000 $1,963,000
========== =========== ========== ==========
</TABLE>
The Company has net operating losses (NOL) available for offset against
future tax liabilities at December 28, 1996 of $7,452,000, extending through
2007, limited to approximately $83,000 per year. As this NOL is utilized, such
amounts will reduce goodwill.
10. CONTINGENCIES
The Company is a defendant in lawsuits or potential claims encountered in
the normal course of business, such matters are being vigorously defended. In
the opinion of management, the resolutions of these matters will not have a
material effect on the Company's financial position or results of operations.
The Company's general liability insurance program and employee group medical
plan have self-insurance retention features of $100,000 and $75,000 per
incident, respectively. The Company's liability is limited to $600,000 per
year for the general liability program.
11. 401(k) PLAN
The Company provides for the benefit of its employees a voluntary retirement
plan under Section 401(k) of the Internal Revenue Code. During 1996, the plan
covered all eligible employees and provided for a matching contribution by the
Company of 50% of each participant's contribution up to 4% of the individual's
compensation as defined. The expenses related to this program were $263,000,
$212,000, and $199,000 for 1996, 1995 and 1994, respectively.
FS-13
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. STOCK BASED COMPENSATION PLANS
The Company has granted stock options to various employees and directors.
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized.
Had compensation cost for these plans been determined consistent with SFAS
123, the Company's net income and earnings per share would have been reduced
to the following proforma amounts:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Net income
As Reported.......................................... $3,869,000 $3,407,000
Pro forma............................................ $3,490,000 $3,362,000
Primary EPS
As Reported.......................................... $ 0.57 $ 0.52
Pro forma............................................ $ 0.50 $ 0.51
</TABLE>
Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: risk free interest rates of 5.8%
and 6.5%, respectively; expected volatility of 49% and 50%, respectively;
weighted average fair value of options of $7.55 and $7.88 in 1996 and 1995,
respectively; expected lives of 7 years for both years and no expected
dividend yield for either year.
In June 1990, the Company adopted a stock option plan which provided for the
issuance of up to 165,375 common shares at an option price equal to at least
100 percent (incentive options) or at least 85 percent (nonqualified options)
of the fair value of the common stock at the date of grant. In May 1993, May
1994 and May 1996, the shareholders approved the reservation of an additional
165,375 shares, 330,750 shares and 600,000 shares, respectively, for options
issuable under the 1990 plan. Options granted vest ratably over a three-year
period, and all expire after 10 years.
In March 1992, the Board of Directors adopted the 1992 Directors' Stock
Option Plan (which was approved by the shareholders in May 1992) which
provides for the issuance to non-employee directors of up to 110,250 common
shares at an option price equal to 100 percent of fair market value of the
common stock at the date of grant. Options are granted pursuant to a formula
under which such directors and the Company's Chairman receive an option to
purchase 5,513 shares of stock upon becoming an eligible director and 3,308
shares on the first business day of each succeeding year on which such person
is an eligible director.
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- ------------------
WTD AVG WTD AVG WTD AVG
SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE
------- -------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beg. of
year................... 833,166 $ 7.58 859,947 $ 7.06 782,696 $ 5.08
Granted................. 208,168 12.92 71,332 13.02 201,497 12.16
Exercised............... (40,804) (7.44) (83,640) (6.15) (116,342) (2.51)
Cancelled............... (28,463) (11.68) (14,473) (11.61) (7,904) (7.66)
------- ------ ------- ------ -------- ------
Outstanding at end of
year................... 972,067 8.62 833,166 7.58 859,947 7.06
------- ------ ------- ------ -------- ------
Exercisable at end of
year................... 709,074 $ 9.94 565,431 $ 9.00 444,982 $ 8.74
</TABLE>
FS-14
<PAGE>
LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about all stock options
outstanding as of December 28, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
Less than $1.00....... 135,536 2.6 years $ 0.64 135,536 $ 0.64
$5.00 to $7.99........ 361,805 6.2 years 6.80 355,924 6.82
$8.00 to $10.99....... 89,484 7.4 years 9.20 57,229 8.49
$11.00 to $14.00...... 385,242 8.6 years 13.00 160,385 12.86
------- --------- ------ ------- ------
972,067 6.8 years $ 8.62 709,074 $ 7.14
------- --------- ------ ------- ------
</TABLE>
During 1996, 40,804 options were exercised at exercise prices ranging
between $5.44 and $12.62.
In December 1990, the Company adopted a stock bonus plan which provides for
the issuance of 20,000 shares of common stock at the fair market value at the
date of grant to employees in consideration for services rendered. At December
28, 1996, 12,348 shares of common stock had been issued pursuant to this plan.
13. CALCULATION OF PER SHARE AMOUNTS
Net income per share amounts are computed based on the weighted average
number of shares outstanding plus the shares that would be outstanding
assuming exercise of dilutive stock options, which are considered common stock
equivalents. The weighted average number of shares outstanding was 6,789,664;
6,614,497 and 6,515,558 for 1996, 1995 and 1994, respectively.
14. PREFERRED STOCK
The rights, preferences and privileges of the preferred stock authorized in
the Company's Articles of Incorporation are to be determined by the Board of
Directors and do not require shareholder approval. No preferred stock is
currently outstanding.
15. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company paid interest charges of $2,835,000, $2,419,000 and $1,538,000,
in 1996, 1995, and 1994, respectively. The Company paid income taxes of
$2,425,000, $2,086,000, and $4,041,000, in 1996, 1995 and 1994, respectively.
16. PROPOSED REINCORPORATION AND MERGER
On February 26, 1997, the Company's Board of Directors approved an Agreement
of Merger providing for the reincorporation of the Company in Delaware by
merger into a wholly-owned Delaware subsidiary, and an Agreement and Plan of
Merger providing for the merger of Poolmart USA Inc., a newly-formed
corporation, with and into the Company. Following consummation of the
reincorporation and upon effectiveness of the latter merger, (i) each
outstanding share of common stock of the Company would be converted into
$14.50 cash (other than 359,505 shares owned primarily by members of
management, including Michael Fourticq, the Chairman of the Company, and Brian
McDermott, the President and CEO of the Company and other than shares as to
which the holders perfect dissenters' rights) and (ii) outstanding options
covering approximately 846,000 shares of
FS-15
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LESLIE'S POOLMART
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
common stock, including those not yet vested, would be cancelled for payment
of the difference between the exercise price and $14.50 per share. The total
amount expected to be paid for these shares and options approximates $101
million. The proposed mergers are subject to various conditions, including
financing and approval by the Company's shareholders. The shareholders are
expected to vote on the mergers during the second quarter of 1997.
FS-16
<PAGE>
APPENDIX A
AGREEMENT OF MERGER
AGREEMENT OF MERGER (this "Merger Agreement") made and entered into this
26th day of February, 1997 by and between LESLIE'S POOLMART a California
corporation ("Leslie's California"), and LPM HOLDINGS, INC., a Delaware
corporation ("Leslie's Delaware");
WITNESSETH:
WHEREAS, Leslie's Delaware is a corporation duly organized and existing
under the laws of the State of Delaware;
WHEREAS, Leslie's California is a corporation duly organized and existing
under the laws of the State of California;
WHEREAS, on the date of this Merger Agreement, Leslie's Delaware has
authority to issue 5,000,000 shares of Common Stock, par value $.001 per share
(which class of shares is herein called the "Delaware Common Stock") of which
10,000 shares are issued and outstanding and owned by Leslie's California, and
2,000,000 shares of Preferred Stock, par value $.001 per share, of which no
shares are issued and outstanding; and prior to the Effective Date, the
authorized number of shares of Delaware Common Stock will be increased to
12,000,000;
WHEREAS, on the date of this Merger Agreement, Leslie's California has
authority to issue 40,000,000 shares of Common Stock, (the "California Common
Stock") of which 6,550,966 shares are issued and outstanding, and 1,000,000
shares of Preferred Stock, of which no shares are issued and outstanding;
WHEREAS, the respective boards of directors of Leslie's Delaware and
Leslie's California have determined that, for the purpose of effecting the
reincorporation of Leslie's California in the State of Delaware, it is
advisable and to the advantage of said two corporations and their shareholders
and sole stockholder, respectively, that Leslie's California merge with and
into Leslie's Delaware upon the terms and conditions herein provided; and
WHEREAS, the respective boards of directors of Leslie's Delaware and
Leslie's California have approved this Merger Agreement and the board of
directors of Leslie's California and Leslie's Delaware have directed that this
Merger Agreement be submitted to a vote of their shareholders and sole
stockholder, respectively;
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, Leslie's California and Leslie's Delaware hereby agree to merge
as follows:
(1) Merger. Leslie's California shall be merged with and into Leslie's
Delaware, and Leslie's Delaware shall survive the merger ("Merger"), effective
upon the date when this Merger Agreement is made effective in accordance with
applicable law (the "Effective Date").
(2) Directors and Officers and Governing Documents. The directors and
officers of Leslie's Delaware shall be the same upon the Effective Date as
they are immediately prior thereto. The certificate of incorporation of
Leslie's Delaware, as amended and in effect on the Effective Date, shall
continue to be the certificate of incorporation of Leslie's Delaware as the
surviving corporation without change or amendment until further amended in
accordance with the provisions thereof and applicable laws, except that on the
Effective Date Article I of said certificate of incorporation shall be amended
to read in its entirety as follows: "The name of this Corporation shall be:
Leslie's Poolmart, Inc." The bylaws of Leslie's Delaware, as amended and in
effect on the Effective Date, shall continue to be the bylaws of Leslie's
Delaware as the surviving corporation without change or amendment until
further amended in accordance with the provisions thereof and applicable laws.
(3) Succession. On the Effective Date, Leslie's Delaware shall succeed to
Leslie's California in the manner of and as more fully set forth in Section
259 of the General Corporation Law of the State of Delaware and Section 1107
of the General Corporation Law of the State of California.
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(4) Further Assurances. From time to time, as and when required by Leslie's
Delaware or by its successors and assigns, there shall be executed and
delivered on behalf of Leslie's California such deeds and other instruments,
and there shall be taken or caused to be taken by it such further and other
action, as shall be appropriate or necessary in order to vest, perfect or
confirm, of record or otherwise, in Leslie's Delaware the title to and
possession of all the property, interests, assets, rights, privileges,
immunities, powers, franchises and authority of Leslie's California, and
otherwise to carry out the purposes of this Merger Agreement, and the officers
and directors of Leslie's Delaware are fully authorized in the name and on
behalf of Leslie's California or otherwise to take any and all such action and
to execute and deliver any and all such deeds and other instruments.
(5) Common Stock of Leslie's California. Upon the Effective Date, by virtue
of the Merger and without any action on the part of the holder thereof, each
share of the California Common Stock outstanding immediately prior thereto
shall be changed and converted into one fully paid and nonassessable share of
Delaware Common Stock.
(6) Stock Certificates. On and after the Effective Date, all of the
outstanding certificates which prior to that time represented shares of
California Common Stock shall for all purposes evidence ownership of and
represent the shares of Delaware Common Stock into which the shares of
California Common Stock represented by such certificates have been converted
as herein provided. The registered owner on the books and records of Leslie's
Delaware or its transfer agent of any such outstanding stock certificate
shall, until such certificate shall have been surrendered for transfer or
otherwise accounted for to Leslie's Delaware or its transfer agent, have and
be entitled to exercise any voting and other rights with respect to and to
receive any dividend and other distributions upon the shares of Delaware
Common Stock evidenced by such outstanding certificate as above provided.
(7) Stock Options. Forthwith upon the Effective Date, each (i) outstanding
option to purchase shares of California Common Stock granted under the
Leslie's California 1990 Stock Option Plan and the Leslie's California 1992
Directors' Stock Incentive Plan (collectively, the "Plans") and (ii)
outstanding option to purchase California Common Stock not granted under the
Plans, shall be converted into and become an option to purchase the same
number of shares of Delaware Common Stock at the same option price per share
as in effect on the Effective Date and, in the case of options granted under
the Plans (collectively, the "Plan Options"), upon the same terms and subject
to the same conditions as set forth in the Plans, and, in the case of all
options not granted under the Plans (collectively, the "Non-Plan Options"),
upon the same terms and subject to the same conditions as set forth in the
agreements or instruments that govern the Non-Plan Options. A number of shares
of Delaware Common Stock shall be reserved for purposes of the Plans equal to
the number of shares of California Common Stock so reserved as of the
Effective Date. As of the Effective Date, Leslie's Delaware hereby assumes all
obligations of Leslie's California under the Plans, the outstanding Plan
Options or portions thereof granted pursuant to the Plans and all Non-Plan
Options.
(8) Other Employee Benefit Plans. As of the Effective Date, Leslie's
Delaware hereby assumes all obligations of Leslie's California under any and
all employee benefit plans in effect as of said date or with respect to which
employee rights or accrued benefits are outstanding as of said date.
(9) Common Stock of Leslie's Delaware. Forthwith upon the Effective Date,
the 10,000 shares of Delaware Common Stock presently issued and outstanding in
the name of Leslie's California shall be cancelled and retired and resume the
status of authorized and unissued shares of Delaware Common Stock, and no
shares of Delaware Common Stock or other securities of Leslie's Delaware shall
be issued in respect thereof.
(10) Covenants of Leslie's Delaware. Leslie's Delaware covenants and agrees
that it will, on or before the Effective Date:
(a) Qualify to do business as a foreign corporation in the State of
California, and in connection therewith irrevocably appoint an agent for
service of process as required under the provisions of Section 2105 of the
California Corporations Code.
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(b) File any and all documents with the California Franchise Tax Board
necessary to the assumption by Leslie's Delaware of all of the franchise
tax liabilities of Leslie's California.
(11) Book Entries. As of the Effective Date, entries shall be made upon the
books of Leslie's Delaware in accordance with the following:
(a) The assets and liabilities of Leslie's California shall be recorded
at the amounts at which they were carried on the books of Leslie's
California immediately prior to the Effective Date, with appropriate
adjustments to reflect the retirement of the 10,000 shares of Delaware
Common Stock presently issued and outstanding.
(b) There shall be credited to the common stock account of Leslie's
Delaware the aggregate amount of the par value of all shares of Delaware
Common Stock resulting from the conversion of the outstanding California
Common Stock pursuant to the Merger.
(c) There shall be credited to the capital surplus account of Leslie's
Delaware the aggregate of the amounts shown in the common stock and capital
surplus accounts of Leslie's California immediately prior to the Effective
Date, less the amount credited to the common stock account of Leslie's
Delaware pursuant to Paragraph (b) above.
(d) There shall be credited to the retained earnings account of Leslie's
Delaware an amount equal to that carried in the retained earnings account
of Leslie's California immediately prior to the Effective Date.
(12) Amendment. At any time before or after approval and adoption by the
shareholders of Leslie's California, this Merger Agreement may be amended in
any manner (except that Paragraph (5) may not be amended without the approval
of the shareholders of Leslie's California), as may be determined in the
judgment of the respective boards of directors of Leslie's Delaware and
Leslie's California to be necessary, desirable or expedient in order to
clarify the intention of the parties hereto or to effect or facilitate the
purposes and intent of this Merger Agreement.
(13) Abandonment. At any time before the Effective Date, this Merger
Agreement may be terminated and the Merger may be abandoned by the board of
directors of either Leslie's California or Leslie's Delaware with the approval
of the board of directors of the other corporation, notwithstanding approval
of this Merger Agreement by the stockholders of Leslie's Delaware or the
shareholders of Leslie's California or both.
(14) Counterparts. In order to facilitate the filing and recording of this
Merger Agreement, the same may be executed in any number of counterparts, each
of which shall be deemed to be an original.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, this Merger Agreement, having first been duly approved
by resolution of the boards of directors of Leslie's California and Leslie's
Delaware, is hereby executed on behalf of each said two corporations by their
respective officers thereunto duly authorized.
LPM Holdings, Inc.,
a Delaware corporation
/s/ Brian P. McDermott
By: _________________________________
Brian P. McDermott,
President
/s/ Robert D. Olsen
By: _________________________________
Robert D. Olsen,
Secretary
Leslie's Poolmart
a California corporation
/s/ Brian P. McDermott
By: _________________________________
Brian P. McDermott,
President and Chief Executive
Officer
/s/ Cynthia G. Watts
By: _________________________________
Cynthia G. Watts
Secretary
A-4
<PAGE>
CERTIFICATE OF THE SECRETARY OF LPM HOLDINGS, INC.
I, Robert D. Olsen, Secretary of LPM HOLDINGS, INC., a Delaware corporation,
("Leslie's Delaware"), do hereby certify, as such Secretary, in accordance
with the General Corporation Law of the State of Delaware, that the Agreement
of Merger to which this Certificate is attached, after having been first duly
adopted and executed by Leslie's Delaware and Leslie's Poolmart, a California
corporation, was duly submitted to the sole stockholder of Leslie's Delaware
at a special meeting of stockholders called for the purpose of acting on said
Agreement of Merger, notice of the time, place and purpose of said meeting
having been waived by the sole stockholder of Leslie's Delaware, and that at
said meeting the Agreement of Merger was considered and a vote taken for its
adoption or rejection and that at said meeting all of the outstanding stock of
Leslie's Delaware entitled to vote thereon was voted for the adoption of said
Agreement of Merger and that thereby said Agreement of Merger was at said
meeting duly adopted as the act of the stockholders of Leslie's Delaware and
as the agreement and act of Leslie's Delaware.
IN WITNESS WHEREOF, the undersigned has executed this certificate this
day of , 1997.
-------------------------------------
Robert D. Olsen,
Secretary
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<PAGE>
CERTIFICATE OF THE SECRETARY OF LESLIE'S POOLMART
I, Cynthia G. Watts, Secretary of LESLIE'S POOLMART, a California
corporation ("Leslie's California"), do hereby certify, as such Secretary, in
accordance with the General Corporation Law of the State of Delaware, that the
Agreement of Merger to which this Certificate is attached, after having been
first duly adopted and executed by Leslie's California and LPM Holdings, Inc.,
a Delaware corporation, was duly submitted to the shareholders at a meeting of
shareholders called for the purpose of acting on said Agreement of Merger
after due notice of the time, place and purpose of said meeting was mailed to
each holder of Common Stock of Leslie's California at his, her or its address
as it appears on the records of Leslie's California in the manner provided
under the provisions of Section 601 of the California Corporations Code and
that at said meeting the Agreement of Merger was considered and a vote taken
for its adoption or rejection and that at said meeting a majority of the
outstanding Common Stock of Leslie's California entitled to vote thereon was
voted for the adoption of said Agreement of Merger and that thereby said
Agreement of Merger was at said meeting duly adopted as the act of the
shareholders of Leslie's California and as the agreement and act of Leslie's
California.
IN WITNESS WHEREOF, the undersigned has executed this certificate this
day of , 1997.
-------------------------------------
Cynthia G. Watts,
Secretary
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<PAGE>
APPENDIX B
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (the "Agreement") dated as of February 26, 1997
by and among LESLIE'S POOLMART, a California corporation ("Leslie's
California"), LPM HOLDINGS, INC., a Delaware corporation and wholly owned
subsidiary of Leslie's California ("Leslie's Delaware"), and POOLMART USA
INC., a Delaware corporation ("Poolmart").
RECITALS
The respective boards of directors of Leslie's California and Leslie's
Delaware deem it advisable for the mutual benefit of Leslie's California and
Leslie's Delaware and their shareholders and stockholder, respectively, that
Leslie's California be merged with and into Leslie's Delaware (the
"Reincorporation Merger") upon the terms and subject to the conditions set
forth in the Agreement of Merger substantially in the form attached hereto as
Exhibit A (the "Reincorporation Merger Agreement") and in accordance with the
General Corporation Law of the State of California (the "California Law") and
the Delaware General Corporation Law (the "Delaware Law"). The board of
directors and sole stockholder of Leslie's Delaware have approved and adopted
the Reincorporation Merger Agreement. The board of directors of Leslie's
California has approved the Reincorporation Merger Agreement and has resolved
to recommend to the shareholders of Leslie's California to vote to approve the
principal terms of the Reincorporation Merger Agreement.
The respective boards of directors of Leslie's Delaware and Poolmart deem it
advisable for the mutual benefit of Leslie's Delaware and Poolmart, and their
stockholder and stockholders, respectively, that Poolmart be merged with and
into Leslie's Delaware (the "Recapitalization Merger") upon the terms and
subject to the conditions set forth herein and in accordance with the Delaware
Law. The board of directors and sole stockholder of Leslie's Delaware have
approved and adopted this Agreement. The board of directors and sole
stockholder of Poolmart have approved and adopted this Agreement. The board of
directors of Leslie's California has approved this Agreement and has resolved
to recommend to the shareholders of Leslie's California to vote to approve the
principal terms of this Agreement in conjunction with their approval of the
principal terms of the Reincorporation Merger Agreement and the
Reincorporation Merger. The Reincorporation Merger and the Recapitalization
Merger are sometimes collectively referred to herein as the "Merger
Transaction."
In consideration of the mutual covenants, agreements, representations and
warranties contained herein, and for the purpose of setting forth certain
terms and conditions of the Recapitalization Merger, and the mode of carrying
the same into effect, Leslie's Delaware, Leslie's California and Poolmart
hereby agree as follows:
ARTICLE 1
Merger and Organization
Section 1.1 The Recapitalization Merger. Poolmart shall be merged with and
into Leslie's Delaware as soon as practicable following the execution of this
Agreement, upon the terms and subject to the conditions hereinafter set forth,
as permitted by and in accordance with the Delaware Law. Leslie's Delaware and
Poolmart are herein sometimes referred to as the "Constituent Corporations."
Leslie's Delaware shall be the surviving corporation following the
effectiveness of the Recapitalization Merger (sometimes referred to herein as
the "Surviving Corporation").
Section 1.2 Effect of Recapitalization Merger. The parties agree to the
following provisions with respect to the Recapitalization Merger:
(a) Name of Surviving Corporation. The name of the Surviving Corporation
shall from and after the Effective Date (as hereinafter defined) be and
continue to be "Leslie's Poolmart, Inc." until changed in accordance with
applicable law.
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(b) Certificate of Incorporation. The certificate of incorporation of
Leslie's Delaware as in effect immediately prior to the Effective Date shall
from and after the Effective Date be and continue to be the certificate of
incorporation of the Surviving Corporation until changed or amended in
accordance with the provisions of applicable law.
(c) Bylaws. The bylaws of Leslie's Delaware as in effect immediately prior
to the Effective Date shall from and after the Effective Date be and continue
to be the bylaws of the Surviving Corporation until changed or amended in
accordance with the provisions of applicable law.
(d) Corporate Organization. On the Effective Date, the separate corporate
existence of Poolmart shall cease, and Leslie's Delaware as the surviving
corporation and successor and shall succeed to Poolmart in the manner of and
as more fully set forth in Section 259 of the Delaware Law.
(e) Directors and Officers. The directors of Leslie's Delaware immediately
prior to the Effective Date will be the initial directors of the Surviving
Corporation, and the officers of Leslie's Delaware immediately prior to the
Effective Date will be the initial officers of the Surviving Corporation, in
each case until their successors are elected and qualified. However, it is
expected that immediately after the Effective Date, all of the directors of
the Surviving Corporation other than Michael J. Fourticq and Brian P.
McDermott will resign.
(f) Filing of Certificate of Merger. If this Agreement is not terminated
pursuant to Article 7 hereof, as soon as practicable after all conditions to
the Recapitalization Merger set forth in Article 6 hereof shall have been
satisfied or waived, Leslie's Delaware and Poolmart shall cause the
Certificate of Merger attached hereto as Exhibit B ("Certificate of Merger")
to be executed and acknowledged and, as required by the Delaware Law, filed
with the Secretary of State of the State of Delaware as provided in the
Delaware Law. The Recapitalization Merger shall be consummated and the closing
of the transactions contemplated by this Agreement (the "Closing") shall occur
immediately upon the filing of the Certificate of Merger with the Secretary of
State of the State of Delaware (the date and time of such filing and Closing
being referred to herein as the "Effective Date"). The Recapitalization Merger
shall occur immediately following the effective time of the Reincorporation
Merger. The Closing shall take place at the offices of Paul, Hastings,
Janofsky & Walker, 555 South Flower Street, Los Angeles, California 90071, or
at such other place as the parties may mutually agree.
(g) Further Assurances. If at any time after the Effective Date, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments or assurances or any other acts or things are necessary,
desirable or proper (i) to vest, perfect or confirm, of record or otherwise,
in the Surviving Corporation, its right, title or interest in, to or under any
of the rights, properties or assets of the Constituent Corporations acquired
or to be acquired as a result of the Recapitalization Merger, or (ii)
otherwise to carry out the purposes of this Agreement, the Surviving
Corporation and its proper officers and directors or their designees shall be
authorized to execute and deliver, in the name and on behalf of the
Constituent Corporations, all such deeds, bills of sale, assignments and
assurances and do, in the name and on behalf of the Constituent Corporations,
all such other acts and things necessary, desirable or proper to vest, perfect
or confirm its right, title or interest in, to or under any of the rights,
properties or assets of the Constituent Corporations acquired or to be
acquired as a result of the Recapitalization Merger and otherwise to carry out
the purposes of this Agreement.
ARTICLE 2
Conversion of Securities on the Effective Date
Section 2.1 Conversion of Securities of Leslie's Delaware and Poolmart. At
the Effective Date, pursuant to this Agreement and by virtue of the
Recapitalization Merger and without any action on the part of Leslie's
Delaware, Poolmart or the holders of any of the following securities:
(a) Each share of common stock, par value $.001 per share, of Leslie's
Delaware ("Leslie's Common Stock") (shares of Leslie's Common Stock being
hereinafter collectively referred to as "Leslie's Shares" and
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<PAGE>
individually as a "Leslie's Share") issued and outstanding immediately prior
to the Effective Date (other than any Leslie's Shares to be cancelled pursuant
to Section 2.1(b) and each Leslie's Share to remain outstanding pursuant to
Section 2.1(c)) shall be cancelled and shall be converted automatically into
the right to receive an amount equal to $14.50 in cash, without interest (the
"Cash Merger Consideration"), payable to the holder thereof upon surrender of
the certificate formerly representing such Other Common Stock in the manner
provided in Section 2.2; the Leslie's Shares being converted into the right to
receive the Cash Merger Consideration are hereinafter referred to as "Other
Common Stock";
(b) Each Leslie's Share held in the treasury of Leslie's Delaware and each
Leslie's Share owned by Poolmart, if any, immediately prior to the Effective
Date shall be cancelled without any conversion thereof and no payment or
distribution shall be made with respect thereto;
(c) 160,539 Leslie's Shares registered in the name of Michael J. Fourticq,
166,552 Leslie's Shares registered in the name of Brian P. McDermott and
Manette J. McDermott TR UA dated March 15, 1990 The McDermott Family Trust,
10,000 Leslie's Shares registered in the name of Greg Fourticq and 22,414
Leslie's Shares registered in the name of Richard H. Hillman (such persons are
collectively referred to herein as the "Continuing Stockholders" and such
shares are collectively referred to herein as the "Continuing Shares") shall
not be converted, exchanged or cancelled as provided above but shall remain
outstanding as required by the letter addressed from Hancock Park Associates
II, L.P. ("Hancock") to the board of directors of Leslie's California dated
February 19, 1997 referenced in Section 3.5; and
(d) Each share of Poolmart Common Stock (as hereinafter defined) that is
issued and outstanding immediately prior to the Effective Date shall be
converted into one newly issued, fully paid and nonassessable share of
Leslie's Common Stock (the "Share Exchange Ratio").
(e) If between the date of this Agreement and the Effective Date the number
of outstanding shares of Leslie's Common Stock or of the common stock of
Leslie's California (which common stock will automatically be converted into
Leslie's Common Stock upon the effectiveness of the Reincorporation Merger)
("California Common Stock") shall have been changed into a different number of
shares or a different class, by reason of any stock dividend, subdivision,
reclassification, recapitalization, split-up, combination, exchange of shares
or the like other than pursuant to the Reincorporation Merger, the amount of
the Cash Merger Consideration and the Share Exchange Ratio shall be
correspondingly adjusted.
Section 2.2 Payment of Cash for Other Common Stock.
(a) On the Effective Date, the Surviving Corporation shall irrevocably
deposit or cause to be deposited with a bank or trust company to be designated
by the Surviving Corporation which is organized and doing business under the
laws of the United States or any state thereof and has a combined capital and
surplus of at least $100,000,000 (the "Disbursing Agent"), as agent for the
holders of shares of Other Common Stock, cash in the aggregate amount required
with respect to the conversion of shares of Other Common Stock at the
Effective Date pursuant to Section 2.1(a) hereof. Pending distribution
pursuant to Section 2.2(b) hereof of the cash deposited with the Disbursing
Agent, such cash shall be held in trust for the benefit of the holders of
Other Common Stock and the fund shall not be used for any other purposes, and
the Surviving Corporation may direct the Disbursing Agent to invest such cash,
provided that such investments (i) shall be obligations of or guaranteed by
the United States of America, in commercial paper obligations receiving the
highest rating from either Moody's Investors Services, Inc. or Standard &
Poor's Corporation, or in certificates of deposit, bank repurchase agreements
or bankers acceptances of domestic commercial banks with capital exceeding
$250,000,000 (collectively "Permitted Investments") or in money market funds
which are invested solely in Permitted Investments and (ii) shall have
maturities that will not prevent or delay payments to be made pursuant to
Section 2.2(b) hereof. Each holder of a certificate or certificates
representing shares of Other Common Stock cancelled and extinguished on the
Effective Date pursuant to Section 2.1(a) hereof may thereafter surrender such
certificate or certificates to the Disbursing Agent, as agent for such holder
of shares of Other Common Stock, to effect the exchange of such certificate or
certificates on such holder's behalf for a period ending one year after the
Effective Date.
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(b) After surrender to the Disbursing Agent of any certificate which prior
to the Effective Date shall have represented any shares of Other Common Stock,
the Disbursing Agent shall promptly distribute to the person in whose name
such certificate shall have been registered, a check representing the amount
of cash into which such shares of Other Common Stock shall have been converted
at the Effective Date pursuant to Section 2.1(a) hereof. Until so surrendered
and exchanged, each such certificate shall, after the Effective Date, be
deemed to represent only the right to receive such cash, and until such
surrender and exchange, no cash shall be paid to the holder of such
outstanding certificate in respect thereof. The Surviving Corporation shall
promptly after the Effective Date cause to be distributed to such holders
appropriate materials to facilitate such surrender.
(c) If any cash deposited with the Disbursing Agent for purposes of payment
in exchange for shares of Other Common Stock remains unclaimed following the
expiration of one year after the Effective Date, such cash shall be delivered
to the Surviving Corporation by the Disbursing Agent, and thereafter the
Disbursing Agent shall not be liable to any persons claiming any amount of
such cash, and the surrender and exchange shall be effected directly with the
Surviving Corporation (subject to applicable abandoned property, escheat and
similar laws). No interest shall accrue or be payable with respect to any
amounts which any such holder shall be so entitled to receive. The Surviving
Corporation or the Disbursing Agent shall be authorized to pay the cash
attributable to any certificate theretofore issued which has been lost or
destroyed, upon receipt of satisfactory evidence of ownership of the shares of
Other Common Stock represented thereby and of appropriate indemnification.
(d) If payment is to be made to a person other than the person in whose name
a surrendered certificate, which prior to the Effective Date shall have
represented any shares of Other Common Stock, is registered, it shall be a
condition to such payment that the certificate so surrendered shall be
endorsed or shall otherwise be in proper form for transfer, and that the
person requesting such payment shall have paid any transfer and other taxes
required by reason of such payment in a name other than that of the registered
holder of the certificate surrendered or shall have established to the
satisfaction of the Surviving Corporation or the Disbursing Agent that such
tax either has been paid or is not payable.
(e) From and after the Effective Date, the holders of shares of Other Common
Stock outstanding immediately prior to the Effective Date shall cease to have
any rights with respect to such shares of Other Common Stock except as
otherwise provided herein or by law.
(f) After the Effective Date, there shall be no transfers on the stock
transfer books of the Surviving Corporation of any shares of Other Common
Stock which were outstanding immediately prior to the Effective Date. If,
after the Effective Date, certificates for shares of Other Common Stock are
presented to the Surviving Corporation, they shall be cancelled and promptly
exchanged for cash as provided in this Section 2.2.
Section 2.3 Exchange of Stock Certificates. Immediately after the Effective
Date, the Surviving Corporation shall deliver to the record holder of the
certificate which immediately prior to the Effective Date represented all the
outstanding shares of Poolmart Common Stock that were converted into the right
to receive shares of Leslie's Common Stock in accordance with Section 2.1(d),
in exchange for such certificate, duly endorsed in blank, a share certificate,
registered in the name of such record holder, representing the number of
shares of Leslie's Common Stock to which such record holder is so entitled by
virtue of Section 2.1(d). Such certificate will bear a legend restricting the
transferability of such shares of Leslie's Common Stock to the extent
contemplated by the Stockholders Agreement referred to in Section 6.3(e),
which restrictions include restrictions designed to assure the Surviving
Corporation that these shares will not be offered or sold in contravention of
any federal or state securities laws.
ARTICLE 3
Additional Agreements in Connection With
the Merger Transaction
Section 3.1 Shareholders' Approval. Leslie's California shall take all
actions reasonably necessary in accordance with applicable law and its
articles of incorporation and bylaws to convene a meeting of its
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shareholders as soon as reasonably practicable for the purpose of considering
and approving the principal terms of the Reincorporation Merger Agreement,
this Agreement and the Merger Transaction (the "Special Meeting"). In
connection with the Special Meeting, the board of directors of Leslie's
California shall recommend that the shareholders of Leslie's California vote
to approve the principal terms of the Reincorporation Merger Agreement, this
Agreement and the Merger Transaction.
Section 3.2 Proxy Materials and Schedule 13E-3.
(a) In connection with the Special Meeting, Leslie's California shall
prepare and file a preliminary proxy statement relating to the transactions
contemplated by the Reincorporation Merger Agreement, this Agreement and the
Merger Transaction (the "Preliminary Proxy Statement") with the Securities and
Exchange Commission (the "SEC") and shall use its reasonable best efforts to
respond to the comments of the SEC and to cause a definitive proxy statement
to be mailed to Leslie's California's shareholders (the "Definitive Proxy
Statement"), all as soon as reasonably practicable; provided, that prior to
the filing of each of the Preliminary Proxy Statement and the Definitive Proxy
Statement, Leslie's California shall consult with Poolmart with respect to
such filings and shall afford Poolmart reasonable opportunity to comment
thereon. Poolmart shall provide Leslie's California with any information for
inclusion in the Preliminary Proxy Statement and the Definitive Proxy
Statement which may be required under applicable law and which is reasonably
requested by Leslie's California. Leslie's California shall promptly notify
Poolmart of the receipt of the comments of the SEC and of any request from the
SEC for amendments or supplements to the Preliminary Proxy Statement or the
Definitive Proxy Statement or for additional information, and will promptly
supply Poolmart with copies of all correspondence between Leslie's California
or its representatives, on the one hand, and the SEC or members of its staff,
on the other hand, with respect to the Preliminary Proxy Statement, the
Definitive Proxy Statement or the Merger Transaction. If at any time prior to
the Special Meeting any event should occur which is required by applicable law
to be set forth in an amendment of, or a supplement to, the Definitive Proxy
Statement, Leslie's California will promptly inform Poolmart. In such case,
Leslie's California, with the cooperation of Poolmart, will, upon learning of
such event, promptly prepare and mail such amendment or supplement; provided,
that prior to such mailing, Leslie's California shall consult with Poolmart
with respect to such amendment or supplement and shall afford Poolmart
reasonable opportunity to comment thereon. Leslie's California will notify
Poolmart at least 24 hours prior to the mailing of the Definitive Proxy
Statement, or any amendment or supplement thereto, to the shareholders of
Leslie's California.
(b) Leslie's California shall prepare and file concurrently with the filing
of the Preliminary Proxy Statement, a Statement on Schedule 13E-3 ("Schedule
13E-3") with the SEC. If at any time prior to the Special Meeting any event
should occur which is required by applicable law to be set forth in an
amendment of, or supplement to, the Schedule 13E-3, Leslie's California shall
file such amendments or supplements.
Section 3.3 Termination of Leslie's California Stock Option Plans. Leslie's
California shall (i) take all steps necessary to cause Leslie's California's
1990 Stock Option Plan and Leslie's California's 1992 Directors' Stock
Incentive Plan (collectively, the "Stock Option Plans") to be terminated on or
prior to the Effective Date and (ii) if not otherwise terminated by their
terms upon the effectiveness of the Recapitalization Merger, obtain at the
earliest practicable date and prior to the Effective Date the written consent
of each holder of an issued and outstanding stock option issued pursuant to
the Stock Option Plans as well as the written consent of each holder of all
other options to purchase California Common Stock not granted under the Stock
Option Plans (collectively, the "Stock Options") to the cancellation of such
holders' Stock Options (irrespective of their exercise price and whether or
not then currently exercisable) to take effect on the Effective Date. On the
Effective Date, the Surviving Corporation shall pay each holder of Stock
Options, to the extent such Stock Options have not been previously exercised
or cancelled, (x) cash in an amount equal to the product of (i) the difference
between $14.50 and the exercise price of such Stock Options, multiplied by
(ii) the number of shares of Leslie's Common Stock subject to such Stock
Options, less, (y) the amount of all applicable withholding taxes; provided,
that those holders of Stock Options that have agreed to accept options to
purchase common stock of the Surviving Corporation shall not receive any cash
payment with respect to cancelled Stock Options. From and after the effective
time of the Reincorporation Merger, "Stock Option Plans" and "Stock Options"
shall refer to the
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Stock Option Plans and Stock Options as the same shall have been assumed by
Leslie's Delaware pursuant to the Reincorporation Merger.
Section 3.4 Reasonable Best Efforts. Upon the terms and subject to the
conditions herein provided, and subject to the fiduciary duties of the board
of directors of Leslie's California, as it, or a special committee thereof
that has been established to, among other things, consider the Reincorporation
Merger Agreement, this Agreement and the Merger Transaction (the "Special
Committee"), may be advised in writing by counsel, each party hereto shall use
its reasonable best efforts to take, or cause to be taken, all reasonable
action and to do, or cause to be done and to assist and cooperate with the
other parties hereto in doing, all things necessary, proper or advisable under
applicable laws and regulations and their respective articles or certificates
of incorporation and bylaws to consummate and make effective, as soon as
reasonably practicable, the transactions contemplated by the Reincorporation
Merger Agreement or this Agreement, subject, however, to the requisite vote of
shareholders of Leslie's California. Such actions shall include, without
limitation, using its reasonable best efforts to (a) obtain all consents,
amendments to or waivers from other parties under the terms of all leases and
other agreements between Leslie's California and such parties required as a
result of the transactions contemplated by the Reincorporation Merger
Agreement or this Agreement, if any, (b) obtain all necessary consents,
approvals and authorizations as are required to be obtained under any federal
or state law or regulation, (c) defend any lawsuits or other legal
proceedings, whether judicial or administrative and whether brought
derivatively or on behalf of third parties (including governmental agencies or
officials), challenging the Reincorporation Merger Agreement or this
Agreement, or the consummation of the transactions contemplated thereby or
hereby and (d) effect all necessary registrations and filings, including but
not limited to any filings required under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations
promulgated thereunder (the "HSR Act"), and submissions of information
requested by governmental authorities. Upon the terms and subject to the
conditions hereof, and subject to the fiduciary duties of the board of
directors of Leslie's California, as it, or the Special Committee, may be
advised in writing by counsel, each of the parties hereto shall use its
reasonable best efforts to take, or cause to be taken, all reasonable actions
and to do, or cause to be done, all things necessary to satisfy the other
conditions of Closing set forth herein.
Section 3.5 Financing. Poolmart shall use its reasonable best efforts to
obtain the financing on terms and conditions satisfactory to it to (a) effect
the Merger Transaction, (b) refinance outstanding debt of the Surviving
Corporation (c) provide adequate ongoing working capital to the Surviving
Corporation and (d) pay the expenses related to the Merger Transaction and
obtaining the financing and refinancing (the "Financing"). Leslie's California
shall use its reasonable best efforts to cooperate with and assist Poolmart in
obtaining the Financing. The parties acknowledge that the following letters
regarding the Financing have been delivered to the Special Committee:
Occidental Petroleum Corporation, dated December 27, 1996; BT Securities
Corporation, dated February 4, 1997; Hancock Park Associates II, L.P., dated
February 19, 1997; Leonard Green & Partners, L.P., dated February 20, 1997;
and BT Commercial Corporation, dated February 21, 1997 (collectively, the
"Financing Letters").
Section 3.6 Conduct of Business by Leslie's California Pending the
Recapitalization Merger. Leslie's California covenants and agrees that, prior
to the Effective Date, unless Poolmart shall otherwise agree in writing and
except as contemplated by the Reincorporation Merger Agreement or this
Agreement:
(a) the business of Leslie's California and its subsidiaries shall be
conducted only in the ordinary and usual course and consistent with past
practice; Leslie's California and its subsidiaries shall not, without the
prior written consent of Poolmart, (i) except in the ordinary course of its
business, enter into any agreement which would be material to the condition
(financial or otherwise), results of operations, properties, assets,
liabilities or business of Leslie's California, (ii) purchase, sell or
encumber (or enter into any agreement to purchase, sell or encumber), or enter
into a merger or consolidation which would affect, any material properties or
assets of Leslie's California, or (iii) except in the ordinary course of its
business, enter into any other agreement or arrangement involving payments in
excess of $100,000 in the aggregate with respect to the business or operations
of Leslie's California;
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(b) Leslie's California shall not (i) amend its articles of incorporation or
bylaws or the articles or certificates of incorporation or bylaws of any of
its subsidiaries, (ii) change the number of authorized or outstanding shares
of its capital stock (except for shares of California Common Stock issued upon
the exercise of Stock Options outstanding on the date hereof), or (iii)
declare, set aside or pay any dividend or other distribution or payment in
cash, stock or property in respect of any of its shares of capital stock;
(c) neither Leslie's California nor any of its subsidiaries shall (i) issue,
grant, sell, pledge or transfer or agree or propose to issue, grant, sell,
pledge or transfer any shares of capital stock, stock options, warrants,
securities or rights of any kind or rights to acquire any such shares,
securities or rights of Leslie's California, any of its subsidiaries or any
successor thereto (except for shares of California Common Stock issued upon
the exercise of Stock Options outstanding on the date hereof), (ii) incur any
indebtedness (other than borrowings under Leslie's California's existing
credit facilities incurred to finance current operations in the ordinary
course of business and short term indebtedness to trade creditors incurred in
the ordinary course of business), (iii) acquire directly or indirectly by
redemption or otherwise any shares of the capital stock of Leslie's California
of any class or any options, warrants or other rights to purchase any such
shares, or (iv) enter into or modify any contract, agreement, commitment or
arrangement with respect to any of the foregoing;
(d) Leslie's California and its subsidiaries shall use their reasonable best
efforts to conduct their relations with employees, including termination and
hiring practices, and their employee benefit plans only in the ordinary and
usual course and consistent with the past practices and policies of Leslie's
California, shall not amend, or enter into any additional, employment
agreements with officers or directors of Leslie's California, shall make no
increases in employee compensation or benefits (including severance
arrangements) except regularly scheduled periodic increases and customary
bonuses for the fiscal year ended December 28, 1996 under Leslie's
California's existing bonus plan, and shall not enter into any employment or
termination agreements or other material arrangements relating to employment
benefits;
(e) each of Leslie's California and its subsidiaries shall use its
reasonable best efforts to keep in place its current insurance policies which
are material (either individually or in the aggregate); and notwithstanding
such efforts, if any such policy is cancelled, Leslie's California shall use
its reasonable best efforts to replace such policy or policies;
(f) neither Leslie's California nor its subsidiaries shall assume,
guarantee, endorse or otherwise become responsible for the obligations of any
other individual, firm or corporation, except in the ordinary and usual course
of its business;
(g) except in the ordinary and usual course of business, neither Leslie's
California nor its subsidiaries shall make any investment of a capital nature
either by purchase of stock or securities, contributions to capital, property
transfers or otherwise, or by the purchase of any property or assets of any
individual, firm or corporation, or otherwise enter into any material
transaction;
(h) neither Leslie's California nor any of its subsidiaries shall make any
material tax election or settle or compromise any material federal, state,
local or foreign income tax liability;
(i) neither Leslie's California nor any of its subsidiaries shall make any
change in its accounting principles or methods except insofar as may be
required by a change in generally accepted accounting principles; and
(j) neither Leslie's California nor any of its subsidiaries shall enter into
an agreement or otherwise agree to do any of the things described in clauses
(a) through (i) or anything which, to Leslie's California's best knowledge at
the time of such action, would make any representation or warranty of Leslie's
California in this Agreement untrue or incorrect in any material respect as of
the date hereof and as of the Effective Date, as if made on such date, except
to the extent such representations and warranties expressly relate to a
specific date (in which case such representations and warranties shall be true
and correct as of such date).
Section 3.7 Leslie's California's Notification of Certain Matters. Leslie's
California shall, promptly upon obtaining knowledge of any of the following
occurring subsequent to the date of this Agreement and prior
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to the Effective Date, notify Poolmart of: (a) any material claims, actions,
proceedings, tax audits or investigations commenced or, to its knowledge,
threatened, involving or affecting Leslie's California or any of its
subsidiaries or any of their properties or assets, or, to its knowledge,
against any employee, consultant, director, officer or shareholder of Leslie's
California or any of its subsidiaries, in his, her or its capacity as such,
(b) any notice of, or other communication relating to, a default or event
which, with notice or lapse of time or both, would become a default, received
by Leslie's California or any of its subsidiaries, under any agreement, lease,
indenture or instrument to which Leslie's California or any of its
subsidiaries is a party or is subject where such a default would have a
material adverse effect on Leslie's California and its subsidiaries, taken as
a whole, (c) any notice or other communication from any third party alleging
that the consent of such third party is or may be required in connection with
the transactions contemplated by the Reincorporation Merger Agreement or this
Agreement, and (d) any material adverse change in the condition (financial or
otherwise), results of operations, properties, assets, liabilities or business
of Leslie's California and its subsidiaries, taken as a whole, or the
occurrence of an event known to Leslie's California which, so far as
reasonably can be foreseen at the time of its occurrence, could result in any
such change.
Section 3.8 Access to Leslie's California's Books and Records. Upon
reasonable notice, Leslie's California shall afford Poolmart and its
representatives and representatives of all prospective sources of Financing
reasonable access during normal business hours to the properties, books and
records of Leslie's California and its subsidiaries and such additional
information concerning the business and properties of Leslie's California and
its subsidiaries as Poolmart and its representatives may reasonably request,
including the permission of Leslie's California for Poolmart to contact key
suppliers and customers of Leslie's California. Unless and until Leslie's
California otherwise agrees, Poolmart will, and will cause their
representatives, and will obtain appropriate undertakings from the
representatives of all prospective sources of Financing to, hold in confidence
all confidential information and not use any confidential information except
in connection with the transactions contemplated hereby and the Financing,
until such time as (i) such information is otherwise publicly available or
(ii) as it is advised by counsel that any such information or document is
required by law to be disclosed, provided that in such event it shall promptly
notify Leslie's California of such requirement and cooperate in any effort
Leslie's California makes to seek a reasonable protective order to limit the
disclosure and use of such information. In the event of the termination of
this Agreement, Poolmart will, and will cause its representatives and the
representatives of all prospective sources of Financing to, either, at
Leslie's California's option, (a) deliver to Leslie's California all
documents, work papers and other material, and all copies thereof, obtained by
it or on its behalf from Leslie's California as a result of this Agreement or
in connection herewith, whether so obtained before or after the execution
hereof, or (b) destroy all such documents, work papers and other material, and
all copies thereof, and deliver an appropriate certificate of such destruction
to Leslie's California; provided, that in each case Poolmart may retain a
single set of copies for file purposes.
Section 3.9 Acquisition Proposals. Leslie's California shall, and shall use
its reasonable best efforts to cause each of its officers, directors or
affiliates to, notify Poolmart promptly of any direct or indirect contact by
any corporation, partnership, person or other entity or group concerning any
tender or exchange offer, proposal for a merger or consolidation or other
business combination involving Leslie's California or any of its subsidiaries
or divisions, or any proposal or offer (in each case, whether or not in
writing and whether or not communicated to the shareholders of Leslie's
California generally) to acquire in any manner, directly or indirectly, a
substantial equity interest in, or a substantial portion of the assets of,
Leslie's California or any of its subsidiaries or divisions, other than
pursuant to the transactions contemplated by this Agreement (an "Acquisition
Proposal") and shall promptly provide Poolmart with a summary of all material
terms and conditions of such Acquisition Proposal. In addition, Leslie's
California shall give Poolmart not less than three business days' written
notice prior to providing any confidential information to any person (other
than Poolmart, prospective sources of the Financing and their respective
representatives) concerning the business and properties of Leslie's California
or affording any other person access to the properties, books or records of
Leslie's California in connection with any Acquisition Proposal. Leslie's
California shall not, nor shall it permit any of its officers, directors,
affiliates, representatives or agents to, directly or indirectly, (i) take any
action to solicit, initiate or, subject to the rights of Leslie's California
to provide confidential information as provided in the
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immediately preceding sentence, knowingly encourage any Acquisition Proposal,
or (ii) participate in any negotiations with respect to an Acquisition
Proposal, except that Leslie's California or any such persons may participate
in such negotiations with respect to any unsolicited Acquisition Proposal from
a third party to the extent that the board of directors of Leslie's California
or the Special Committee concludes (A) that such Acquisition Proposal is
superior to the Merger Transaction and (B) based upon the advice of counsel,
that such negotiations are necessary to discharge its fiduciary duty under
applicable law.
Section 3.10 Financial Statements; Communications with Governmental
Authorities. Leslie's California shall deliver to Poolmart, as soon as
practicable (a) Leslie's California's financial statements for the year ended
December 28, 1996 (which statements may be unaudited), and (b) copies of all
filings and submissions by Leslie's California with, and all written and
material oral communications to, and all written and material oral
communications from, the SEC and each other federal, state and local
government agency with respect to the transactions and events contemplated by
the Reincorporation Merger Agreement or this Agreement. Leslie's California
shall deliver to Poolmart, as soon as available but in no event later than
March 31, 1997, Leslie's California's audited financial statements for the
year ended December 28, 1996; such audited financial statements (a) shall be
in accordance with the books and records of Leslie's California and its
subsidiaries, (b) shall present fairly the consolidated financial position,
results of operations, changes in shareholders' equity, and cash flow (as
applicable) of Leslie's California and its subsidiaries for the year ended
December 28, 1996, and (c) shall have been prepared in conformity with
generally accepted accounting principles applied in all material respects on a
consistent basis through the year ended December 28, 1996.
ARTICLE 4A
Representations and Warranties of Leslie's California
Except as disclosed in writing to Poolmart by Leslie's California, Leslie's
California represents and warrants to Poolmart as follows:
Section 4A.1 Organization and Good Standing. Each of Leslie's California and
its subsidiaries is a duly organized and validly existing corporation in good
standing under the laws of the state of its incorporation, with all requisite
power and authority (corporate and other) to own, lease and operate its
properties and conduct its business and is duly qualified and in good standing
as a foreign corporation authorized to do business in each of the
jurisdictions in which the character of the properties owned or held under
lease by it or the nature of the business transacted by it makes such
qualification necessary, except where the failure to be so qualified would not
have a material adverse effect on Leslie's California and its subsidiaries,
taken as a whole. Leslie's California has heretofore delivered to Poolmart
accurate and complete copies of its and its subsidiaries' certificates or
articles of incorporation and bylaws, as currently in effect.
Section 4A.2 Authorization; Binding Agreement. Leslie's California has all
requisite corporate power and authority to execute and deliver the
Reincorporation Merger Agreement and this Agreement and to consummate the
transactions contemplated thereby and hereby. The execution and delivery of
the Reincorporation Merger Agreement and this Agreement and the consummation
of the transactions contemplated thereby and hereby have been duly and validly
authorized by Leslie's California's board of directors and, except for the
approval of the principal terms of the Reincorporation Merger Agreement, this
Agreement and the Merger Transaction by the shareholders of Leslie's
California in accordance with the California Law and the articles of
incorporation and bylaws of Leslie's California, no other corporate
proceedings on the part of Leslie's California are necessary to authorize the
Reincorporation Merger Agreement, this Agreement and the transactions
contemplated thereby or hereby. The Reincorporation Merger Agreement and this
Agreement have been duly and validly executed and delivered by Leslie's
California, and subject to the requisite approval of the shareholders of
Leslie's California, constitute legal, valid and binding agreements of
Leslie's California, enforceable against Leslie's California in accordance
with their respective terms, except as such enforceability may be limited by
(a) bankruptcy, insolvency, reorganization, moratorium or other laws, now or
hereafter in
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effect, relating to or limiting creditors' rights generally, and (b) general
principles of equity (whether considered in an action in equity or at law)
which provide, among other things, that the remedies of specific performance
and injunctive and other forms of equitable relief are subject to equitable
defenses and to the discretion of the court before which any proceedings
therefor may be brought.
Section 4A.3 Capitalization. The authorized capital stock of Leslie's
California consists of 40,000,000 shares of California Common Stock, and
1,000,000 shares of Preferred Stock ("California Preferred Stock"). As of the
date hereof, 6,550,966 shares of California Common Stock and no shares of
California Preferred Stock were outstanding. As of the date hereof, 988,185
shares of California Common Stock were reserved for issuance upon exercise of
outstanding Stock Options. All of the outstanding shares of capital stock of
Leslie's California and the subsidiaries of Leslie's California have been duly
authorized and validly issued and are fully paid and nonassessable and free of
preemptive rights. All issued and outstanding shares of capital stock of the
subsidiaries of Leslie's California are owned by Leslie's California or a
wholly-owned subsidiary of Leslie's California free and clear of all liens,
charges, encumbrances, claims and options of any nature. Except as
contemplated by the Reincorporation Merger Agreement and this Agreement and
except for the Stock Options, neither Leslie's California nor any subsidiary
of Leslie's California has granted any outstanding option, warrant,
subscription or other right, or entered into any agreement or commitment which
either (a) obligates Leslie's California or any of its subsidiaries to issue,
sell or transfer any shares of the capital stock of Leslie's California or any
subsidiary of Leslie's California or (b) restricts the transfer of, or
otherwise encumbers, shares of California Common Stock.
Section 4A.4 Financial Statements. All consolidated financial statements of
Leslie's California and its subsidiaries (including the notes to such
financial statements) included in Leslie's California's Annual Report on Form
10-K for the year ended December 30, 1995 (the "Year End Financial
Statements") filed pursuant to the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the unaudited financial statements of Leslie's
California and its subsidiaries included in Leslie's California's Quarterly
Reports on Form 10-Q for the quarters ended March 30, June 29, and September
28, 1996 (the "Interim Financial Statements") filed pursuant to the Exchange
Act (a) are in accordance with the books and records of Leslie's California
and its subsidiaries, (b) present fairly the consolidated financial position,
results of operations, changes in shareholders' equity, and cash flow (as
applicable) of Leslie's California and its subsidiaries as of the respective
dates and for the respective periods indicated, except, in the case of the
Interim Financial Statements, for normal year-end audit adjustments, and (c)
except for the absence of footnotes in the Interim Financial Statements, have
been prepared in conformity with generally accepted accounting principles
applied in all material respects on a consistent basis through all the periods
involved. Leslie's California has no material liabilities that are required by
generally accepted accounting principles to be disclosed on a balance sheet
other than (i) those disclosed in the Year End Financial Statements or the
Interim Financial Statements, and (ii) those arising in the ordinary course of
business since September 28, 1996.
Section 4A.5 Absence of Certain Changes or Events. Since September 28, 1996,
(a) there has not been any change or any development which has had, or, to
Leslie's California's knowledge, would be likely to have, a material adverse
effect on Leslie's California and its subsidiaries, taken as a whole, except
for changes generally affecting the market for securities of publicly traded
companies and changes in general economic conditions, (b) there has not been
any damage, destruction or loss, whether covered by insurance or not, having a
material adverse effect upon Leslie's California and its subsidiaries, taken
as a whole, (c) Leslie's California and its subsidiaries have conducted their
respective businesses only in the ordinary course, (d) Leslie's California and
its subsidiaries have not entered into any material transactions other than as
approved by the board of directors of Leslie's California or as expressly
permitted by this Agreement, (e) Leslie's California has not changed its
accounting principles or methods except insofar as may be required by a change
in generally accepted accounting principles, (f) Leslie's California has not
declared, paid or set aside for payment any dividends, and (g) except for
customary periodic salary increases, automatic annual option grants to
directors of Leslie's California, and other increases expressly approved by
the Chief Executive Officer of Leslie's California, there have not been any
changes in executive compensation levels or in the manner in which other
employees of Leslie's California are compensated or the supplemental benefits
provided to such employees.
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Section 4A.6 SEC Reports and Other Documents. Each registration statement,
proxy statement or report filed with the SEC and not withdrawn by Leslie's
California since January 1, 1994 did not, on the date of effectiveness in the
case of such registration statements, or on the date of filing in the case of
such reports, or on the date of mailing in the case of such proxy statements,
contain an 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. Since January 1, 1994, Leslie's California has filed all reports
required to be filed by it with the SEC and all such reports complied as to
form in all material respects with the applicable requirements of law. All
financial statements and schedules included in the documents referred to in
the preceding sentence were prepared in accordance with generally accepted
accounting principles (except for the absence of footnotes in the Interim
Financial Statements included in such documents), applied in all material
respects on a consistent basis except as noted therein, and fairly present the
information purported to be shown therein.
Section 4A.7 Governmental and Other Consents and Approvals. Subject to the
approval of the Reincorporation Merger Agreement, this Agreement and the
Merger Transaction by the shareholders of Leslie's California, to Leslie's
California's knowledge, no consent, waiver, approval, license or authorization
of or designation, declaration or filing with any governmental agency or
authority or other public persons or entities in the United States is required
in connection with the execution or delivery by Leslie's California of the
Reincorporation Merger Agreement or this Agreement or the consummation by
Leslie's California of the transactions contemplated thereby or hereby, other
than (a) filings in the States of California and Delaware in accordance with
the California Law and the Delaware Law, respectively, (b) filings required
under the HSR Act, (c) filings required under the Exchange Act and (d) such
other consents, waivers, approvals, licenses or authorizations, the failure of
which to be obtained will not have a material adverse effect on Leslie's
California and its subsidiaries, taken as a whole, or on the ability of
Leslie's California to consummate the transactions contemplated thereby or
hereby.
Section 4A.8 No Violation. The execution and delivery of the Reincorporation
Merger Agreement and this Agreement, the filing by Leslie's California of a
certificate of ownership in connection with the Reincorporation Merger in the
States of California and Delaware in accordance with the California Law and
the Delaware Law, respectively, the consummation by Leslie's California of the
transactions contemplated thereby or hereby, or compliance by Leslie's
California with any of the provisions thereof or hereof, will not:
(a) violate any provision of the charter documents of Leslie's California or
any of its subsidiaries;
(b) cause Leslie's California to violate in any material respect (i) any
statute or law or any judgment, decree, order, regulation or rule of any court
or governmental authority applicable to Leslie's California or any of its
subsidiaries or any of their respective properties or (ii) the award of any
arbitrator or panel of arbitrators;
(c) cause the acceleration of the maturity of any material debt or
obligation of Leslie's California or any of its subsidiaries; or
(d) violate, or be in conflict with, or constitute a material default under,
or permit the termination of, or, except as contemplated by the
Reincorporation Merger Agreement or this Agreement, require the consent of any
person under, or result in the creation of any material lien upon any property
of Leslie's California or any of its subsidiaries under, any agreement,
indenture, lease or instrument to which Leslie's California or any of its
subsidiaries is a party or by which Leslie's California or any of its
subsidiaries (or their respective properties) may be bound, which individually
or in the aggregate would have a material adverse effect on Leslie's
California and its subsidiaries, taken as a whole.
Leslie's California is not in material noncompliance or default (without
giving effect to any grace or cure period or notice requirement) under any
agreement, indenture or instrument creating or evidencing indebtedness for
borrowed money or under any capital lease or under any agreement pursuant to
which any of its securities were sold. Leslie's California has valid leasehold
interests in all material real and personal property held under
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lease and is not in default of any of its material obligations under any lease
or sublease establishing such leasehold interests, except in those instances
in which such default, individually or in the aggregate, would not materially
and adversely affect Leslie's California and its subsidiaries taken as a
whole.
Section 4A.9 Litigation. There is no legal action, suit, arbitration or
other legal, administrative or other governmental investigation, inquiry or
proceeding (whether federal, state, local or foreign) pending or, to the
knowledge of Leslie's California, threatened against or affecting Leslie's
California or any of its properties, assets, business, franchises or
governmental approvals before any court or governmental department,
commission, board, bureau, agency, instrumentality or arbitrator, which,
individually or in the aggregate, could reasonably be expected (a) to have a
material adverse effect upon Leslie's California and its subsidiaries, taken
as a whole, or (b) to materially and adversely affect the ability of Leslie's
California to carry out, or prevent or make unduly burdensome, the Merger
Transaction or the transactions contemplated by the Reincorporation Merger
Agreement or this Agreement.
Section 4A.10 Governmental Approvals; Compliance with Law. Leslie's
California possesses from the appropriate agency, commission, board or
governmental authority, whether federal, state or local, all licenses,
permits, authorizations, approvals, franchises and rights ("Government
Approvals") that are necessary for Leslie's California to engage in the
business currently conducted by it, except in those instances in which failure
to possess Government Approvals, individually or in the aggregate, would not
materially and adversely affect Leslie's California and its subsidiaries,
taken as a whole; to the knowledge of Leslie's California, all Government
Approvals possessed by Leslie's California have been validly issued, are in
full force and effect and Leslie's California has no reason to believe such
Government Approvals are subject to revocation, cancellation, suspension or
termination. Leslie's California is in compliance with all applicable federal,
state and local laws, statutes, ordinances, rules and regulations, except in
those instances in which non-compliance, individually or in the aggregate,
would not materially and adversely affect Leslie's California and its
subsidiaries, taken as a whole.
Section 4A.11 Brokers and Finders. Except for (i) Dillon, Read Co. Inc.
("Dillon Read"), which has been engaged, pursuant to an engagement letter
dated December 17, 1996, a true and complete copy of which has been delivered
to Poolmart, to provide advice to the board of directors of Leslie's
California with respect to whether the consideration to be received by the
holders of Other Common Stock who are not Continuing Stockholders (the "Public
Stockholders") is fair to the Public Stockholders from a financial point of
view, and (ii) Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ")
which has been engaged by Leslie's California and the Special Committee to
provide financial advisory services to the Special Committee pursuant to an
engagement letter dated December 17, 1996, a true and complete copy of which
has been delivered to Poolmart, no broker, finder or investment banker is
entitled to any brokerage, finder's or other fee or commission in connection
with the Merger Transaction or in connection with any transaction involving
Leslie's California based upon arrangements made by or on behalf of Leslie's
California.
Section 4A.12 Fairness Opinions and Approval by Special Committee. On or
prior to the date hereof, the Special Committee approved the terms of the
Reincorporation Merger Agreement and this Agreement and received written
opinions from Dillon Read and DLJ as of such date, substantially to the effect
that, from a financial point of view, the consideration to be received by the
Public Stockholders in the Merger Transaction is fair to the Public
Stockholders (which opinions shall be updated on the date the Definitive Proxy
Statement is mailed to Leslie's California's shareholders), a true and
complete copy of which opinions have been or will promptly be delivered to
Poolmart.
Section 4A.13 Proxy and Schedule 13E-3 Information. The information
contained in the Definitive Proxy Statement and the Schedule 13E-3, or any
amendment or supplement thereto, or any other documents filed with the SEC by
Leslie's California in connection with the Merger Transaction, shall, with
respect to the Definitive Proxy Statement at the time the Definitive Proxy
Statement is mailed and at the time of the Special Meeting, and, with respect
to the Schedule 13E-3 and such other documents, at the time of filing with the
SEC and at the time of such Special Meeting, 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
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circumstances under which they were made, not misleading; provided, however,
that Leslie's California makes no representation or warranty, with respect to
any information contained in the Definitive Proxy Statement, the Schedule 13E-
3 or any such other document, which was furnished to Leslie's California by
Poolmart.
Section 4A.14 Taxes. All Returns (as hereinafter defined) required to be
filed by or with respect to Leslie's California and Tax Affiliates (as
hereinafter defined) have been properly and accurately prepared in all
material respects and filed on a timely basis. With respect to taxable periods
for which the statute of limitations on the assessment of Tax (as hereinafter
defined) remains open, the United States federal income tax Returns that have
been examined by the Internal Revenue Service ("IRS"), and any other Returns
that currently are the subject of an examination, or with respect to which
notice of a pending or threatened examination has been received, or for which
an examination has been conducted but not finally settled with all Taxes in
dispute paid, have been disclosed in writing to Poolmart. There are no
deficiencies for Taxes that have been proposed, asserted or assessed against
Leslie's California or Tax Affiliates that remain unpaid. No material
liability for Taxes has been incurred by Leslie's California or Tax Affiliates
since September 28, 1996 other than in the ordinary course of their business.
No director, officer or employee of Leslie's California or any of its
subsidiaries having responsibility for Tax matters has reason to believe that
any Tax authority has a valid basis to claim or assess any additional Tax with
respect to Leslie's California or any Tax Affiliate in amounts materially in
excess of the amounts shown on the balance sheet dated September 28, 1996 for
the period ending on such date and amounts incurred in the ordinary course of
business since that date. Neither Leslie's California nor any of its
subsidiaries is party to a closing agreement or similar agreement with any Tax
authority or is required to include in income any material adjustment pursuant
to Sections 263A or 481 of the Internal Revenue Code of 1986, as amended (the
"Code"), or comparable state or local tax law. The transactions contemplated
by this Agreement will not give rise to an "excess parachute payment" within
the meaning of Section 280G of the Code. As used in this Section 4A.14, the
term "Tax" or "Taxes" means (i) all federal, state, local, foreign and other
net income, gross income, gross receipts, franchise, sales, use, withholding,
employment, property or other taxes, fees, assessments or charges of any kind
whatsoever, together with any interest and any penalties, additions to tax or
additional amounts with respect thereto, (ii) any liability for payment of
amounts described in clause (i) whether as a result of transferee liability,
of being a member of an affiliated, consolidated, combined or unitary or other
similar group for any period, or otherwise through operation of law and (iii)
any liability for the payment of amounts described in clauses (i) or (ii) as a
result of any tax sharing, tax indemnity or tax allocation agreement or any
other express or implied agreement to indemnify any other person; the term
"Returns" means all returns, declarations, reports, statements and other
documents required to be filed in respect of Taxes; and the term "Tax
Affiliate" means any subsidiaries of Leslie's California and any individual or
entity for whose Taxes Leslie's California or any of its subsidiaries is or
could be held liable (whether by reason of being a member of an affiliated,
consolidated, combined, unitary, or other similar group for Tax purposes, by
reason of being a successor, by agreement, or otherwise) (but only with
respect to the Taxes and taxable periods(s) or portions thereof with respect
to which Leslie's California or such subsidiaries is or could be held liable
for such Taxes).
Section 4A.15 Employee Benefits. A list of all employee benefit plans
(within the meaning of Section 3(3) of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), which are maintained or contributed to by
Leslie's California or any of Leslie's California's subsidiaries (the "Company
Benefit Plans") has been disclosed in writing to Poolmart. Leslie's California
has provided to Poolmart (i) true and complete copies of all Company Benefit
Plans; (ii) the most recent annual actuarial evaluation, if any, prepared for
each Company Benefit Plan; (iii) the two most recent annual reports (series
5500), if any, required under ERISA with respect to each Company Benefit Plan,
including audited financial statements; (iv) the most recent determination
letter received from the IRS, if any, for each Company Benefit Plan, and (v)
the most recent Summary Plan Description, if any, required under ERISA with
respect to each Company Benefit Plan. Except as disclosed in writing to
Poolmart, (i) with respect to each Company Benefit Plan that is intended to be
qualified under Section 401(a) of the Code and is maintained by Leslie's
California or any of Leslie's California's subsidiaries for any of their
employees, (x) Leslie's California or such subsidiary has obtained a favorable
determination letter from the IRS and nothing has happened since such letter
that would adversely affect the tax qualification of such plan and (y) such
plan has been operated in compliance with ERISA and in accordance
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with the provisions of, and the rules and regulations covering, such plan
except where the failure to so comply does not individually or in the
aggregate, have a material adverse effect upon Leslie's California and its
subsidiaries, taken as a whole, (ii) with respect to each Company Benefit
Plan, Leslie's California and Leslie's California's subsidiaries are not, and
to Leslie's California's knowledge no other person is, engaged in a
transaction prohibited by Section 4975 of the Code or Section 406 of ERISA
which could result in a liability to Leslie's California and Leslie's
California's subsidiaries which would individually or in the aggregate, have a
material adverse effect upon Leslie's California and its subsidiaries, taken
as a whole, (iii) each Company Benefit Plan which is subject to Part III of
Subtitle B of Title I of ERISA or Section 412 of the Code has been maintained
in compliance with the minimum funding standards of ERISA and the Code, and no
reportable event, within the meaning of Section 4043 of ERISA has occurred
with respect to any Company Benefit Plan which is subject to Title IV of
ERISA, other than reportable events with respect to which notice has been
waived by the Pension Benefit Guaranty Corporation or which would not,
individually or in the aggregate, have a material adverse effect upon Leslie's
California and its subsidiaries, taken as a whole, and (iv) no benefit is
provided pursuant to a welfare benefit plan (as defined in ERISA Section 3(1))
to a former employee of Leslie's California or any Leslie's California
subsidiaries other than for continuation health coverage benefits provided
under Code Section 4980B.
Section 4A.16 Environmental Matters. Except as disclosed in filings with the
SEC under the Exchange Act since January 1, 1994, to the knowledge of Leslie's
California, (i) neither Leslie's California nor any of its subsidiaries has
generated, used, transported, treated, stored, released or disposed of, or has
permitted anyone else to generate, use, transport, treat, store, release or
dispose of any Hazardous Substance (as hereinafter defined), in violation of
any Laws (as hereinafter defined), (ii) there has not been any generation,
use, transportation, treatment, storage, release or disposal of any Hazardous
Substance in connection with the conduct of the business of Leslie's
California or any of its subsidiaries or the use of any property or facility
of Leslie's California or any of its subsidiaries which has created or could
reasonably be expected to create any material liability under any Laws that
would require reporting to or notification of any federal or state
governmental agency or authority, (iii) no asbestos or polychlorinated
biphenyl is contained in or located at any facility of Leslie's California or
any of its subsidiaries, and (iv) any Hazardous Substance handled or dealt
with in any way in connection with the businesses of Leslie's California and
its subsidiaries, whether before or during Leslie's California's ownership,
has been and is being handled or dealt with in all material respects in
compliance with applicable Laws; excepting, however, in each case any acts or
omissions referred to in any of the preceding clauses (i) through (iv) to the
extent that such acts or omissions, taken in the aggregate, would not have a
material adverse effect on Leslie's California and its subsidiaries, taken as
a whole. As used in this Section 4A.16, the term "Hazardous Substance" means
substances that are defined or listed in, or otherwise classified pursuant to,
any applicable Laws as "hazardous substances," "hazardous materials,"
"hazardous wastes" or "toxic substances," or any other formulation intended to
define, list or classify substances by reason of deleterious properties such
as ignitibility, corrosivity, reactivity, carcinogenicity, reproductive
toxicity or "EP toxicity," and petroleum and drilling fluids, produced waters
and other wastes associated with the exploration, development, or production
of crude oil, natural gas or geothermal energy. As used in this Section 4A.16,
the term "Laws" means any constitutional provision, statute or other law,
rule, regulation, or published interpretation of any thereof and any decree,
injunction, judgment, order, ruling, or writ.
Notwithstanding this Article 4A, neither Leslie's California nor any of its
officers, directors, employees or representatives shall have any liability to
Poolmart, nor shall Poolmart have any claim for damages, whether under this
Agreement or otherwise, as a result of any breach of any of the
representations or warranties contained in this Article 4A. For the avoidance
of doubt, the parties agree that the preceding sentence shall not affect the
rights of Poolmart under Section 6.3(a).
ARTICLE 4B
Representations and Warranties of Leslie's Delaware
Except as disclosed in writing to Poolmart by Leslie's California, Leslie's
Delaware hereby represents and warrants to Poolmart as follows:
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Section 4B.1 Organization and Good Standing. Leslie's Delaware is a duly
organized and validly existing corporation in good standing under the laws of
the state of Delaware. Leslie's Delaware has heretofore delivered to Poolmart
accurate and complete copies of its certificate of incorporation and bylaws as
currently in effect.
Section 4B.2 Authorization; Binding Agreement. Leslie's Delaware has all
requisite corporate power and authority to execute and deliver the
Reincorporation Merger Agreement and this Agreement and to consummate the
transactions contemplated thereby and hereby. The execution and delivery of
the Reincorporation Merger Agreement and this Agreement and the consummation
of the transactions contemplated thereby and hereby have been duly and validly
authorized by Leslie's Delaware's board of directors, and the Reincorporation
Merger Agreement and this Agreement have been adopted by the sole stockholder
of Leslie's Delaware in accordance with the Delaware Law and its certificate
of incorporation and bylaws. No other corporate proceedings on the part of
Leslie's Delaware are necessary to authorize the Reincorporation Merger
Agreement and this Agreement and the transactions contemplated thereby and
hereby. The Reincorporation Merger Agreement and this Agreement have been duly
and validly executed and delivered by Leslie's Delaware and constitute legal,
valid and binding agreements of Leslie's Delaware, enforceable against
Leslie's Delaware in accordance with their terms, except as such
enforceability may be limited by (a) bankruptcy, insolvency, reorganization,
moratorium or other laws, now or hereafter in effect, relating to or limiting
creditors' rights generally, and (b) general principles of equity (whether
considered in an action in equity or at law) which provide, among other
things, that the remedies of specific performance and injunctive and other
forms of equitable relief are subject to equitable defenses and to the
discretion of the court before which any proceedings therefor may be brought.
Section 4B.3 Capitalization. The authorized capital stock of Leslie's
Delaware consists of 5,000,000 shares of Leslie's Common Stock, and 2,000,000
shares of preferred stock, par value $.001 per share ("Delaware Preferred
Stock"). As of the date hereof, 10,000 shares of Leslie's Common Stock and no
shares of Delaware Preferred Stock were outstanding. All of the outstanding
shares of capital stock of Leslie's Delaware are owned by Leslie's California
and have been duly authorized and validly issued and are fully paid and
nonassessable and free of preemptive rights. Except as contemplated by the
Reincorporation Merger Agreement and this Agreement, Leslie's Delaware has not
granted any outstanding option, warrant, subscription or other right, or
entered into any agreement or commitment which either (a) obligates Leslie's
Delaware to issue, sell or transfer any shares of the capital stock of
Leslie's Delaware or (b) restricts the transfer of, or otherwise encumbers,
shares of Leslie's Common Stock. Prior to the Effective Date, the certificate
of incorporation of Leslie's Delaware shall be amended to increase the
authorized number of shares of Leslie's Common Stock to the number of shares
necessary to carry out the terms of the Reincorporation Merger Agreement.
Section 4B.4 No Violation. The execution and delivery of the Reincorporation
Merger Agreement and this Agreement, the filing by Leslie's Delaware of both a
certificate of ownership and merger in connection with the Reincorporation
Merger and the Certificate of Merger in connection with the Recapitalization
Merger in the State of Delaware in accordance with the Delaware Law, the
consummation by Leslie's Delaware of the transactions contemplated thereby or
hereby, or compliance by Leslie's Delaware with any of the provisions thereof
or hereof, will not:
(a) violate any provision of the charter documents of Leslie's Delaware or
any of its subsidiaries;
(b) violate any statute or law or any judgment, decree, order, regulation or
rule of any court or governmental authority applicable to Leslie's Delaware or
any of its properties;
(c) cause the acceleration of the maturity of any debt or obligation of
Leslie's Delaware; or
(d) violate, or be in conflict with, or constitute a default under, or
permit the termination of, or, except as contemplated by the Reincorporation
Merger Agreement or this Agreement, require the consent of any person under,
or result in the creation of any material lien upon any property of Leslie's
Delaware under, any agreement, indenture, lease or instrument to which
Leslie's Delaware is a party or by which Leslie's Delaware (or its properties)
may be bound, which in the aggregate would have a material adverse effect on
Leslie's Delaware.
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Leslie's Delaware is not in material default (without giving effect to any
grace or cure period or notice requirement) under any agreement for borrowed
money or under any agreement pursuant to which any of its securities were
sold.
Section 4B.5 Governmental and Other Consents and Approvals. To the knowledge
of Leslie's Delaware, no consent, waiver, approval, license or authorization
of or designation, declaration or filing with any governmental agency or
authority or other public persons or entities in the United States is required
in connection with the execution or delivery by Leslie's Delaware of the
Reincorporation Merger Agreement or this Agreement or the consummation by
Leslie's Delaware of the transactions contemplated thereby or hereby, other
than (a) filings in the States of California and Delaware in accordance with
the California Law and the Delaware Law, respectively, (b) filings required
under the HSR Act, (c) filings required under the Exchange Act, and (d) such
other consents, waivers, approvals, licenses or authorizations, the failure of
which to be obtained will not have a material adverse effect on Leslie's
Delaware or on the ability of Leslie's Delaware to consummate the transactions
contemplated hereby.
Section 4B.6 No Prior Activities. Leslie's Delaware has not incurred, and
will not incur, directly or through any subsidiary, any liabilities or
obligations, except those incurred in connection with its organization or with
the negotiation of the Reincorporation Merger Agreement or this Agreement.
Except as contemplated by the Reincorporation Merger Agreement, this Agreement
and the Financing Letters, Leslie's Delaware has not engaged in any business
activities of any type or kind whatsoever, or entered into any agreements or
arrangements with any person or entity, or become subject to or bound by any
obligation or undertaking.
Section 4B.7 Litigation. There is no legal action, suit, arbitration or
other legal, administrative or other governmental investigation, inquiry or
proceeding (whether federal, state, local or foreign) pending or, to the
knowledge of Leslie's Delaware, threatened against or affecting Leslie's
Delaware or any of its properties, assets, business, franchises or
governmental approvals before any court or governmental department,
commission, board, bureau, agency, instrumentality or arbitrator, which,
individually or in the aggregate, could reasonably be expected (a) to have a
material adverse effect upon Leslie's Delaware or (b) to materially and
adversely affect the ability of Leslie's Delaware to carry out, or prevent or
make unduly burdensome, the Merger Transaction or the transactions
contemplated by the Reincorporation Merger Agreement or this Agreement.
Notwithstanding this Article 4B, neither Leslie's Delaware nor any of its
officers, directors, employees or representatives shall have any liability to
Poolmart, nor shall Poolmart have any claim for damages, whether under this
Agreement or otherwise, as a result of any breach of any of the
representations or warranties contained in this Article 4B. For the avoidance
of doubt, the parties agree that the preceding sentence shall not affect the
rights of Poolmart under Section 6.3(a).
ARTICLE 5
Representations and Warranties of Poolmart
Except as disclosed in writing by Poolmart to Leslie's California and
Leslie's Delaware immediately prior to their execution and delivery of this
Agreement, Poolmart hereby represents and warrants to Leslie's California and
Leslie's Delaware as follows:
Section 5.1 Organization and Good Standing. Poolmart is a duly organized and
validly existing corporation in good standing under the laws of the state of
Delaware. Poolmart has heretofore delivered to Leslie's California accurate
and complete copies of its certificate of incorporation and bylaws as
currently in effect. Poolmart does not own or have any subsidiary or own or
hold any capital stock, security or investment in any other person or entity,
other than bank accounts, certificates of deposit, money market or similar
short-term investments.
Section 5.2 Authorization; Binding Agreement. Poolmart has all requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the Recapitalization Merger and the
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transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the Recapitalization Merger and the transactions
contemplated hereby have been duly and validly authorized by its board of
directors, and this Agreement has been adopted by the sole stockholder of
Poolmart in accordance with Delaware Law and its certificate of incorporation
and bylaws. No other corporate proceedings on the part of Poolmart are
necessary to authorize this Agreement, the Recapitalization Merger and the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by Poolmart and constitutes a legal, valid and binding
agreement of Poolmart, enforceable against Poolmart in accordance with its
terms except as such enforceability may be limited by (a) bankruptcy,
insolvency, reorganization, moratorium or other similar laws, now or hereafter
in effect, relating to or limiting creditors' rights generally, and (b)
general principles of equity (whether considered in an action in equity or at
law) which provide, among other things, that the remedies of specific
performance and injunctive and other forms of equitable relief are subject to
equitable defenses and to the discretion of the court before which any
proceedings therefor may be brought.
Section 5.3 Capitalization. The authorized capital stock of Poolmart
consists of a single class of 1,000 shares of common stock, par value $.001
per share, (which class of stock is herein called "Poolmart Common Stock").
Prior to the Effective Date the certificate of incorporation of Poolmart shall
be amended to increase the authorized number of shares of Poolmart Common
Stock to 1,055,172, all of which will be outstanding immediately prior to the
Effective Date. All of the shares of Poolmart Common Stock outstanding on the
Effective Date (i) will have been duly authorized and will be, validly issued,
fully paid and nonassessable and free of preemptive rights, and (ii) will be
beneficially owned, by Green Equity Investors II, L.P. Poolmart has not
granted any outstanding option, warrant, subscription or other right, or
entered into any agreement or commitment which either (a) obligates Poolmart
to issue, sell, repurchase or transfer any shares of the capital stock of
Poolmart or (b) restricts the transfer of, or otherwise encumbers, shares of
Poolmart Common Stock. Poolmart has no treasury stock.
Section 5.4 No Violation. Neither the execution and delivery of this
Agreement, the filing of the Certificate of Merger or the consummation by
Poolmart of the transactions contemplated hereby and thereby, nor compliance
by Poolmart with any of the provisions hereof or thereof, will:
(a) violate any provision of the charter documents of Poolmart;
(b) violate any statute or law or any judgment, decree, order, regulation or
rule of any court or governmental authority applicable to Poolmart or any of
its properties;
(c) cause the acceleration of the maturity of any debt or obligation of
Poolmart; or
(d) violate, or be in conflict with, or constitute a default under, or
permit the termination of, or except as contemplated by this Agreement,
require the consent of any person under, or result in the creation of any lien
upon any property of Poolmart under, any agreement, indenture, lease or
instrument to which Poolmart is a party or by which Poolmart (or its
properties) may be bound, which in the aggregate would have a material adverse
effect on Poolmart.
Poolmart is not in material default (without giving effect to any grace or
cure period or notice requirement) under any agreement for borrowed money or
under any agreement pursuant to which any of its securities were sold.
Section 5.5 Governmental and Other Consents and Approvals. To the knowledge
of Poolmart, no consent, waiver, approval, license or authorization of or
designation, declaration or filing with any governmental agency or authority
or other public persons or entities in the United States is required in
connection with the execution or delivery by Poolmart of this Agreement or the
consummation by Poolmart of the Recapitalization Merger or the transactions
contemplated hereby, other than (a) filings in the State of Delaware in
accordance with the Delaware Law, (b) filings required under the HSR Act, (c)
filings required under the Exchange Act and (d) such other consents, waivers,
approvals, licenses or authorizations, the failure of which to be obtained
will
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not have a material adverse effect on Poolmart or on the ability of Poolmart
to consummate the transactions contemplated hereby.
Section 5.6 Proxy and Schedule 13E-3 Information. The information furnished
to Leslie's California by Poolmart specifically for inclusion in the
Definitive Proxy Statement and the Schedule 13E-3, or any amendment or
supplement thereto, or specifically for inclusion in any other documents filed
with the SEC by Leslie's California in connection with the Merger Transaction,
shall, with respect to the Definitive Proxy Statement at the time the
Definitive Proxy Statement is mailed and at the time of the Special Meeting,
and, with respect to the Schedule 13E-3 and such other documents, at the time
of filing with the SEC and at the time of such Special Meeting, 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.
Section 5.7 Financing Letters. If the funds were provided pursuant to or as
described in the Financing Letters, there would be sufficient financing to
satisfy the condition set forth in Section 6.3(c) hereof.
Section 5.8 Brokers and Finders. Except to the extent contemplated by the
Financing Letters, Poolmart has not engaged any broker, finder or investment
banker which engagement would require the payment of any brokerage, finder's
or other fees by Leslie's California or Leslie's Delaware in connection with
the transaction contemplated hereby.
Section 5.9 No Prior Activities. Poolmart has not incurred, and will not
incur, directly or through any subsidiary, any liabilities or obligations,
except those incurred in connection with its organization or with the
negotiation of this Agreement and the Financing. Except as contemplated by
this Agreement and the Financing Letters, Poolmart has not engaged in any
business activities of any type or kind whatsoever, or entered into any
agreements or arrangements with any person or entity, or become subject to or
bound by any obligation or undertaking.
Section 5.10 Litigation. There is no legal action, suit, arbitration or
other legal, administrative or other governmental investigation, inquiry or
proceeding (whether federal, state, local or foreign) pending or, to the
knowledge of Poolmart, threatened against or affecting Poolmart or any of its
properties, assets, business, franchises or governmental approvals before any
court or governmental department, commission, board, bureau, agency,
instrumentality or arbitrator, which, individually or in the aggregate, could
reasonably be expected (a) to have a material adverse effect upon Poolmart or
(b) to materially and adversely affect the ability of Poolmart to carry out,
or prevent or make unduly burdensome, the Recapitalization Merger or the
transactions contemplated by this Agreement.
ARTICLE 6
Conditions
Section 6.1 Conditions to Each Party's Obligation to Effect the
Recapitalization Merger. The respective obligations of each party to effect
the Recapitalization Merger shall be subject to the satisfaction at or prior
to the Effective Date of the following conditions:
(a) Shareholder Approval. This Agreement, the Reincorporation Merger
Agreement and the Merger Transaction shall have been approved at or prior to
the Effective Date by the holders of a majority of (i) the outstanding shares
of California Common Stock entitled to vote thereon and (ii) the shares of
California Common Stock voting thereon and owned by persons other than persons
who, upon consummation of the Recapitalization Merger, will be the Continuing
Stockholders;
(b) Litigation. No action, suit or proceeding shall be pending before any
court or governmental body in which an unfavorable judgment or decree would
prevent or substantially delay the consummation of the
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Reincorporation Merger or the Recapitalization Merger, cause either such
transaction to be rescinded or, with respect to any litigation in connection
with the Reincorporation Merger or the Recapitalization Merger, result in an
award of damages that would have a material adverse effect on the condition
(financial or otherwise), results of operations, properties, assets,
liabilities, business or prospects of Leslie's California and its
subsidiaries, taken as a whole;
(c) Consents. Leslie's California and Poolmart shall have been furnished
with evidence satisfactory to them of the timely consent or approval of, or
notice to, each governmental authority or other person or entity whose consent
or approval, or to whom notice, is required in connection with the execution
or delivery by Leslie's California, Leslie's Delaware or Poolmart of the
Reincorporation Merger Agreement or this Agreement or consummation of the
transactions contemplated thereby or hereby;
(d) HSR Act. Any applicable waiting period under the HSR Act shall have
expired or early termination shall have been granted;
(e) Fairness Opinions. The fairness opinions delivered by Dillon Read and
DLJ pursuant to Section 4A.12 hereof shall not have been withdrawn or
materially and adversely modified; and
(f) Effectiveness of Reincorporation Merger. The Reincorporation Merger
shall have become effective in accordance with the California Law and the
Delaware Law.
Section 6.2 Conditions to Obligation of Leslie's California and Leslie's
Delaware to Effect the Recapitalization Merger. The obligations of Leslie's
California and Leslie's Delaware to effect the Reincorporation Merger and the
obligations of Leslie's Delaware to effect the Recapitalization Merger shall
be subject to the satisfaction at or prior to the Effective Date of the
following additional conditions, unless waived by Leslie's California or,
after the effective time of the Reincorporation Merger, Leslie's Delaware:
(a) Representations and Warranties. The representations and warranties of
Poolmart set forth in Article 5 hereof shall be true and correct in all
material respects as of the date of this Agreement and as of the Effective
Date as though made on and as of the Effective Date, except as otherwise
contemplated by this Agreement, and Leslie's Delaware shall have received a
certificate from Poolmart signed by its President and a Vice President to that
effect; and
(b) Performance of Obligations of Poolmart. Poolmart shall have performed in
all material respects all obligations required to be performed by it under
this Agreement prior to the Effective Date, and Leslie's Delaware shall have
received a certificate from Poolmart signed by its President and a Vice
President to that effect.
Section 6.3 Conditions to Obligations of Poolmart to Effect the
Recapitalization Merger. The obligations of Poolmart to effect the
Recapitalization Merger shall be subject to the satisfaction at or prior to
the Effective Date of the following additional conditions, unless waived by
Poolmart:
(a) Representations and Warranties. The representations and warranties of
Leslie's California set forth in Article 4A hereof and of Leslie's Delaware
set forth in Article 4B hereof shall be true and correct in all material
respects as of the date of this Agreement and, except as contemplated by the
Reincorporation Merger or as otherwise contemplated by this Agreement, as of
the Effective Date as though all of such representations were made on and as
of the Effective Date by Leslie's Delaware, and Poolmart shall have received
certificates of Leslie's California and Leslie's Delaware signed by the
President and a Vice President of Leslie's California and Leslie's Delaware,
respectively, to that effect;
(b) Performance of Obligations of Leslie's California and Leslie's
Delaware. Each of Leslie's California and Leslie's Delaware shall have
performed in all material respects all obligations required to be performed by
it under this Agreement prior to the Effective Date, and Poolmart shall have
received certificates of Leslie's
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California and Leslie's Delaware signed by the President and a Vice President
of Leslie's California and Leslie's Delaware, respectively, to that effect;
(c) Financing. Poolmart shall have obtained the Financing pursuant to
Section 3.5;
(d) Dissenters' Rights. The aggregate number of shares of California Common
Stock on the effective time of the Reincorporation Merger, the holders of
which have demanded purchase of their shares from Leslie's Delaware in
accordance with the provisions of Chapter 13 of the California Law, shall not
equal 5% or more of the shares of California Common Stock outstanding as of
the record date for the Special Meeting;
(e) Environmental Due Diligence. Poolmart shall have completed its
environmental due diligence and shall be reasonably satisfied with the results
of such due diligence; provided, however, that this condition shall be deemed
to have been satisfied in full by March 31, 1997 unless prior thereto Poolmart
shall have delivered a written notice to Leslie's California specifying in
reasonable detail the respects in which it has not been satisfied;
(f) Audited Financial Statements. When Leslie's California's audited
financial statements for the fiscal year ended December 28, 1996 have been
prepared, a copy thereof shall have been delivered to Poolmart;
(g) Accounting Treatment. The Definitive Proxy Statement shall contain a
statement to the effect that the Recapitalization Merger shall be treated as a
recapitalization for accounting purposes and the Securities and Exchange
Commission shall not have disapproved such statement in the Definitive Proxy
Statement; and
(h) Certification of Non-U.S. Real Property Holding Corporation
Status. Poolmart shall have received from Leslie's California and Leslie's
Delaware a certification described in Treasury Regulation Section
1.1445-2(c)(3), in form and substance reasonably acceptable to Poolmart, to
the effect that neither Leslie's Delaware nor Leslie's California was a U.S.
real property holding corporation during the period specified in Section
897(c)(1)(ii) of the Code, and shall have been provided evidence reasonably
satisfactory to Poolmart of compliance with the terms of Treasury Regulation
Section 1.897-2(h) with respect to such certificate.
ARTICLE 7
Termination; Non-Survival of Representations,
Warranties and Covenants; Waiver and Amendment
Section 7.1 Termination. This Agreement may be terminated, and the
Recapitalization Merger abandoned, at any time prior to the Effective Date,
by:
(a) mutual written consents of the boards of directors of the Constituent
Corporations;
(b) any of the parties, by written notice to the other parties, if the
Recapitalization Merger shall not have been consummated by June 30, 1997;
provided, however, that the right to terminate this Agreement under this
clause (b) shall not be available to any party whose failure to fulfill any
obligation under this Agreement has been the cause of, or resulted in, the
failure of the Effective Date to occur on or before this date; provided
further, however, that the passage of such period shall be tolled (and the
date for such consummation shall be correspondingly extended) for any part
thereof (but not exceeding 60 days in the aggregate) during which any party
shall be subject to a nonfinal order, decree, ruling or action restraining,
enjoining or otherwise prohibiting the consummation of the Reincorporation
Merger or the Recapitalization Merger or the calling or holding of the Special
Meeting;
(c) Poolmart, by written notice to Leslie's California, if prior to the
Special Meeting the board of directors of Leslie's California or the Special
Committee (i) shall withdraw or modify in any manner adverse to Poolmart its
approval or recommendation of this Agreement, the Reincorporation Merger
Agreement, the Recapitalization
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Merger or the Reincorporation Merger, (ii) shall approve or recommend any
Acquisition Proposal by a party other than Poolmart, or (iii) shall resolve to
take any of the actions specified in clause (i) or (ii);
(d) Poolmart, by written notice to Leslie's California, if after the date
hereof there shall have been a material adverse change in the condition
(financial or otherwise), results of operations, properties, assets,
liabilities or business of Leslie's California and its subsidiaries, taken as
a whole, whether by reason of operations in the ordinary course of business,
changes in general economic conditions, or otherwise;
(e) Leslie's California, by written notice to Poolmart, if the board of
directors of Leslie's California or the Special Committee, in its good faith
exercise of its business judgment (based on the written advice of counsel),
has determined that the board of directors of Leslie's California continuing
to recommend to the shareholders the approval of this Agreement or the
Reincorporation Merger Agreement would be reasonably likely to be a breach of
the fiduciary duties of the board of directors of Leslie's California to the
shareholders of Leslie's California under California law;
(f) Leslie's California or Poolmart, by written notice to the other, if upon
a vote at the Special Meeting, any approval of the shareholders of Leslie's
California necessary to consummate the Reincorporation Merger or the
Recapitalization Merger and the transactions contemplated thereby or hereby
shall not have been obtained, or by Poolmart if the vote at such Special
Meeting does not satisfy the condition in Section 6.1(a) and such condition is
not waived by Leslie's California;
(g) any of the parties, by written notice, if any court of competent
jurisdiction or other governmental entity shall have issued an order, decree
or ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting the Reincorporation Merger or the Recapitalization
Merger and such order, decree, ruling or other action shall have become final
and nonappealable;
(h) Poolmart, in the event that there shall have been a material breach of
Section 3.9.; or
(i) Poolmart, if Leslie's California shall have failed to hold the Special
Meeting by June 16, 1997 and either of the following shall have occurred prior
to such date: (A) any corporation (including Leslie's California or any of its
subsidiaries or affiliates), partnership, person, other entity or "group" (as
referred to in Section 13(d)(3) of the Exchange Act) other than Poolmart or
any of its affiliates (collectively, "Third Persons") shall have become the
beneficial owner (as defined in Rule 13d-3 promulgated under the Exchange Act)
of more than 15% of the outstanding California Common Stock; or (B) any Third
Person shall have made, proposed, communicated or disclosed in a manner which
is or becomes known by stockholders beneficially owning at least 5% of the
outstanding California Common Stock or by any director or officer of Leslie's
California an intention to make a bona fide Acquisition Proposal, unless in
the case of the condition in clause (B) Leslie's California is able to sustain
the burden of showing that the failure to hold the Special Meeting was caused
primarily by factors other than knowledge of such intention to make an
Acquisition Proposal.
Any action to be taken to terminate this Agreement under this Section shall
be taken by, or pursuant to authority granted by, the Boards of Directors of
Leslie's California or Poolmart as applicable. After the effectiveness of the
Reincorporation Merger, all references in this Section 7.1 to "Leslie's
California" shall be deemed to be a reference to Leslie's Delaware.
Section 7.2 Non-Survival of Representations, Warranties and Covenants. The
respective representations and warranties of Leslie's California, Leslie's
Delaware and Poolmart contained herein or in any certificate delivered
pursuant hereto shall expire with, and be terminated and extinguished upon,
consummation of the Recapitalization Merger, and thereafter none of Leslie's
California, Leslie's Delaware or Poolmart or any officer, director or
principal thereof shall be under any liability whatsoever with respect to any
such representation or warranty. This Section 7.2 shall have no effect upon
any other obligation of the parties hereto, whether to be performed before or
after the consummation of the Recapitalization Merger.
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Section 7.3 Amendment. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto;
provided, however, that (i) after approval of this Agreement by the
shareholders of Leslie's California, no amendment may be made which reduces
the amount or changes the form of consideration to be received in the
Recapitalization Merger or otherwise changes or effects any change which would
adversely affect either the shareholders of Leslie's California prior to the
effectiveness of the Reincorporation Merger or the stockholders of Leslie's
Delaware immediately after such effectiveness without the further approval of
the shareholders of Leslie's California, and (ii) after the Effective Date, no
amendment may be made to the indemnification and insurance provisions
contained in Section 8.3.
Section 7.4 Waiver. At any time prior to the Effective Date, whether before
or after the Special Meeting, any party hereto, by action taken by its board
of directors, may (i) extend the time for the performance of any of the
obligations or other acts of any other party hereto or (ii) subject to the
proviso contained in Section 7.3, waive compliance with any of the agreements
of any other party or with any conditions (other than those appearing in
Section 6.1(a), (e) or (f)) to its own obligations. Any agreement on the part
of a party hereto to any such extension or waiver shall be valid only if (i)
set forth in an instrument in writing signed on behalf of such party by a duly
authorized officer, and (ii) if signed by Poolmart.
Section 7.5 Effect of Termination. In the event of the termination of this
Agreement under Section 7.1, this Agreement shall thereafter become void and
have no effect and no party hereto shall have any liability to any other party
hereto or its shareholders or directors or officers in respect thereof, except
that the provisions of Section 3.8 (with respect to documents and confidential
information), Section 7.6 (with respect to a break fee under certain
circumstances), Section 8.3 (with respect to indemnification), and Section
8.12 (with respect to expenses) shall survive any such termination if such
obligations arose at or before the time of such termination.
Section 7.6 Additional Payments in Respect of Certain Terminations. In the
event that (i) this Agreement is terminated by Leslie's California pursuant to
Section 7.1(e) or (f); or (ii) this Agreement is terminated by Poolmart
pursuant to Section 7.1(c), (f), (h) or (i), then in addition to the expense
reimbursement provided for in Section 8.12, Leslie's California or Leslie's
Delaware (assuming the Reincorporation Merger has occurred) shall promptly
(and in any event within five business days of written notice that such amount
is due) pay to Leonard Green & Partners, L.P., in immediately available funds,
the amount of $1,750,000 as a termination fee. In addition, in the event that
within twelve months of any termination described in the immediately preceding
sentence Leslie's California or Leslie's Delaware, as the case may be,
consummates a transaction that falls within the definition of an Acquisition
Proposal, Leslie's California or Leslie's Delaware, as the case may be, shall
promptly and in no event later than five business days after the closing of
such transaction, pay to Leonard Green & Partners, L.P., in immediately
available funds, an additional $750,000.
ARTICLE 8
General Agreements
Section 8.1 Notice. All notices, requests and other communications to any
party shall be in writing (including telecopy or similar writing) and shall be
given,
(a) If to Poolmart:
c/o Hancock Park Associates II, L.P.
1925 Century Park East, Suite 810
Los Angeles, California 90067
Attention: Mr. Michael J. Fourticq
Facsimile No.: (310) 201-0403
and
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Leonard Green & Partners, L.P.
333 South Grand Avenue
Suite 5400
Los Angeles, California 90071
Attention: Mr. Gregory J. Annick
Facsimile No.: (213) 625-2043
with copies to:
Paul, Hastings, Janofsky & Walker LLP
555 South Flower Street, 23rd Floor
Los Angeles, California 90071-2371
Attention: Alan J. Barton, Esq.
Facsimile No.: (213) 627-0705
and
Gibson, Dunn & Crutcher LLP
333 South Grand Avenue
Los Angeles, California 90071-3197
Attention: Jennifer Bellah, Esq.
Facsimile No.: (213) 229-7520
(b) If to Leslie's California or Leslie's Delaware, to:
Leslie's Poolmart
20630 Plummer Street
Chatsworth, California 91311
Attention: General Counsel
Facsimile No.: (818) 993-1930
with a copy to:
Heller Ehrman White & McAuliffe
601 South Figueroa Street, 40th Floor
Los Angeles, California 90017-5704
Attention: Neal H. Brockmeyer, Esq.
Facsimile No.: (213) 614-1868
or to such other address or telecopier number as such party may hereafter
specify for the purpose of notice to the other parties. Any such notice,
request or other communication shall be deemed to have been given and received
on the day on which it is delivered or telecopied (or, if such day is not a
business day in California or if the notice or other communication is not
telecopied during business hours, at the place of receipt, on the next
following business day); provided that if notice or other communication is
given by telecopy, such notice or communication shall also be given by
certified mail or by overnight courier.
Section 8.2 Entire Agreement. This Agreement (including the documents and
instruments referred to herein) constitutes the entire agreement and
supersedes all other prior agreements and understandings, both written and
oral, among the parties with respect to the subject matter hereof.
Section 8.3 Indemnification.
(a) Indemnification by the Surviving Corporation. It is understood and
agreed that Leslie's California may, to the fullest extent permitted under
applicable law, indemnify and hold harmless, and after the effective time of
the Reincorporation Merger, Leslie's Delaware may, and after the Effective
Date the Surviving Corporation shall, indemnify and hold harmless, to the
fullest extent permitted under applicable law (and Leslie's
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<PAGE>
California, Leslie's Delaware and the Surviving Corporation, as the case may
be, will advance expenses to the full extent so permitted), each present and
former director and officer of Leslie's California or any of its subsidiaries
and each director and officer of Leslie's Delaware upon the effectiveness of
the Reincorporation Merger, and their respective heirs and personal and legal
representatives (collectively the "Indemnified Parties"), against any costs or
expenses (including attorneys' fees), judgments, fines, losses, claims,
damages, liabilities and amounts paid in settlement in connection with any
pending, threatened or completed claim, action, suit, proceeding or
investigation (whether civil, criminal, administrative or investigative)
arising out of or pertaining to this Agreement or the Reincorporation Merger
Agreement or the approval and consummation of the transactions contemplated
hereby and thereby in his or her capacity as such or in any other capacity on
behalf of a subsidiary, joint venture or any other entity in which he or she
served at the request of Leslie's California or Leslie's Delaware, and in the
event of any such claim, action, suit, proceeding or investigation (whether
arising before or after the Effective Date), (i) Leslie's California may prior
to the effective time of the Reincorporation Merger and thereafter Leslie's
Delaware may prior to the Effective Date, and after the Effective Date the
Surviving Corporation shall, pay the reasonable fees and expenses of counsel
selected by the Indemnified Parties, which counsel shall be reasonably
satisfactory to Leslie's California, Leslie's Delaware or the Surviving
Corporation, as the case may be, promptly after statements therefor are
received and (ii) Leslie's California, Leslie's Delaware and the Surviving
Corporation will cooperate in the defense of any such matter; provided,
however, that none of Leslie's California, Leslie's Delaware or the Surviving
Corporation shall be liable for any settlement effected without its written
consent (which consent shall not be unreasonably withheld) and provided
further that none of Leslie's California, Leslie's Delaware or the Surviving
Corporation shall have any obligation hereunder to any Indemnified Party when
and if a court of competent jurisdiction shall ultimately determine, after
exhaustion of all avenues of appeal, that such Indemnified Party is not
entitled to indemnification hereunder (it being agreed, however, that none of
Leslie's California, Leslie's Delaware or the Surviving Corporation shall
challenge a determination by any court which is favorable to an Indemnified
Party).
(b) Notice; Undertaking; Representations. Any Indemnified Party wishing to
claim indemnification under this Section 8.3 upon learning of any such claim,
action, suit, proceeding or investigation, shall notify the indemnifying party
thereof and shall, if required by applicable law, deliver to the indemnifying
party an undertaking to repay any amounts advanced pursuant hereto when and if
a court of competent jurisdiction shall ultimately determine, after exhaustion
of all avenues of appeal, that such Indemnified Party is not entitled to
indemnification hereunder. The Indemnified Parties shall as a group retain
only one law firm pursuant to this Section 8.3 to represent them with respect
to any such matter unless there is, in the opinion of counsel to the
Indemnified Parties, a conflict on any significant issue between the positions
of any two or more Indemnified Parties, in which case the Indemnified Parties
may retain, at the expense of Leslie's California, Leslie's Delaware or the
Surviving Corporation, as the case may be, but in each such case subject to
the terms of the undertaking referred to in this Section 8.3(b) such number of
additional counsel as are necessary to eliminate all conflicts of the type
referred to above.
(c) Assumption by Successors. In the event Leslie's Delaware or the
Surviving Corporation or any of their respective successors or assigns (i)
consolidates with or merges into any other person and shall not be the
continuing or surviving corporation or entity of such consolidation or merger,
or (ii) liquidates, dissolves or transfers all or substantially all of its
properties and assets to any person, then, and in each such case, proper
provisions shall be made so that the successors and assigns of Leslie's
Delaware or the Surviving Corporation, as the case may be, assume the
obligations set forth in this Section 8.3 to the maximum extent permitted
under the laws of such person's jurisdiction of incorporation, if such person
is a corporation, or under other applicable law.
(d) Survival; Third-Party Rights. The terms of this Section 8.3 shall
survive the consummation of the Recapitalization Merger at the Effective Date
and shall continue without time limit. This Section 8.3 is intended to be for
the benefit of, and to grant third-party rights to, the Indemnified Parties
whether or not parties to this Agreement, and each of the Indemnified Parties
shall be entitled to enforce the covenants contained herein.
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<PAGE>
(e) Adverse Amendments. Subject to applicable law, the certificate of
incorporation and bylaws of the Surviving Corporation shall not be amended in
a manner which adversely affects the rights of the Indemnified Parties under
this Section 8.3.
(f) Directors' and Officers' Liability Insurance. For a period of eighteen
months after the Effective Date, the Surviving Corporation shall use its
reasonable commercial efforts to maintain in effect the current policies of
directors' and officers' liability insurance maintained by Leslie's California
(provided that the Surviving Corporation may substitute therefor policies of
at least the same amounts and comparable coverage containing terms and
conditions which are comparable thereto; provided further that such policies
may have higher deductibles than the current policy) with respect to claims
arising from fact or events which occurred at or before the Effective Date;
provided, however, that the Surviving Corporation shall not be obligated to
make annual premium payments for such insurance to the extent such premiums
exceed 150% of the premiums paid as of the date of this Agreement by Leslie's
California for such insurance but in such event shall use reasonable
commercial efforts to provide the maximum coverage available at 150% of such
premiums. Notwithstanding anything to the contrary contained elsewhere in this
Agreement, the Surviving Corporation's and Leslie's Delaware's agreement set
forth in Section 8.3(a) shall be limited to cover claims only to the extent
that those claims are not covered, paid and extinguished pursuant to Leslie's
California's directors' and officers' insurance policies (or any substitute
policies permitted by this Section 8.3(f)).
Section 8.4 Parties in Interest. Except as otherwise provided in Section 8.3
and, with respect to Hancock, in Section 8.12, and, with respect to Leonard
Green & Partners, L.P., in Section 7.6, this Agreement shall be binding upon
and inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
Section 8.5 Material Events. At all times prior to the Effective Date, each
party shall promptly notify the other party or parties in writing of the
occurrence of any event of which it obtains knowledge which will or may
reasonably be expected to result in a failure to satisfy any of the conditions
specified in Article 6 hereof.
Section 8.6 Publicity. The written release to the public by any party of any
information relating to the Recapitalization Merger shall be approved in
advance by the other parties, which approval shall not be unreasonably
withheld or delayed.
Section 8.7 Headings. The headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 8.8 Interpretation. As used herein, "knowledge" of Leslie's
California or Leslie's Delaware shall mean actual knowledge of the officers of
Leslie's California or Leslie's Delaware, as the case may be, and "knowledge"
of Poolmart shall mean the actual knowledge of its officers or actual
knowledge of any partner, managing director or employee of Leonard Green &
Partners, L.P. ("LGP"). Any agreement or consent given or made by LGP shall be
considered to be an agreement or consent, as the case may be, of Poolmart.
Section 8.9 Subsidiaries. When a reference is made in this Agreement to
subsidiaries of Leslie's California, the word "subsidiaries" means any
corporation more than 50% of whose outstanding voting securities are directly
or indirectly owned by Leslie's California.
Section 8.10 Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of and be enforceable by the respective successors
and assigns of the parties hereto and, without limitation, shall be binding
upon and inure to the benefit of Leslie's Delaware as the successor to
Leslie's California by reason of the Reincorporation Merger.
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<PAGE>
Section 8.11 Governing Law. This Agreement shall be governed in all
respects, including validity, interpretation and effect, by the internal laws
of the State of California, without giving effect to the principles of
conflict of laws thereof, except (i) the laws of the state of incorporation of
a party shall govern its internal corporate affairs, and (ii) to the extent
that the Delaware Law would govern the validity, interpretation and effect of
this Agreement and the legal effect of the Recapitalization Merger in the
absence of this Section 8.11.
Section 8.12 Costs and Expenses.
(a) Subject to Section 8.12(b) and (c), all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall
be paid by the party incurring such expenses.
(b) Leslie's California hereby agrees to pay, or reimburse Hancock for, as
incurred, all Expenses (as hereinafter defined) incurred by or on behalf of
Hancock arising out of, in connection with or related to this Agreement, the
Reincorporation Merger Agreement, the Recapitalization Merger and the
Reincorporation Merger and the transactions contemplated herein and therein;
provided, that Leslie's California shall not be obligated to pay or reimburse
Hancock in excess of $1,000,000 in the aggregate.
(c) If the Recapitalization Merger is not consummated in accordance with
this Agreement, Leslie's California hereby agrees to reimburse Poolmart for
all Expenses incurred by or on behalf of Poolmart arising out of, in
connection with or related to this Agreement, the Reincorporation Agreement,
the Recapitalization Merger and the Reincorporation Merger and the
transactions contemplated herein and therein; provided, that Leslie's
California shall not be obligated to pay or reimburse Poolmart in excess of
$750,000 in the aggregate; and provided further, that Leslie's California
shall not be required to pay or reimburse Poolmart for Expenses if either (x)
Poolmart fails in any material respect to perform any of its material
obligations under this Agreement and has not cured such non-performance within
20 days after Poolmart has received written notice from Leslie's California
specifying the nature of such non-performance, or (y) Poolmart has materially
breached any of the material representations or warranties made by it in
Article 5, such breach occurred with the knowledge of Poolmart, and such
breach is not cured (if the same is susceptible of being cured) within 20 days
after Poolmart has received written notice from Leslie's California specifying
the nature of such breach.
(d) For purposes of Section 8.12(b) and (c), "Expenses" means all reasonable
out-of-pocket expenses actually incurred by or on behalf of Hancock or
Poolmart, as the case may be, supported by invoices, including, without
limitation, fees and expenses of accountants, financial advisors, attorneys,
consultants and appraisers engaged by Poolmart or Hancock, as the case may be,
or any person providing or proposing to provide Financing for the
Recapitalization Merger as well as commitment and other fees, charges and
expenses of any such person; provided, that "Expenses" shall not include
compensation paid or payable to any individual who is an officer or director
of Leslie's California.
Section 8.13 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement by their duly
authorized officers as of the date first above written.
LPM Holdings, Inc.
/s/ Brian P. McDermott
By: _________________________________
BRIAN P. MCDERMOTT,
President
Leslie's Poolmart
/s/ Brian P. McDermott
By: _________________________________
BRIAN P. MCDERMOTT,
President and Chief Executive
Officer
/s/ Cynthia G. Watts
By: _________________________________
CYNTHIA G. WATTS,
Vice President, General Counsel
and Secretary
Poolmart USA Inc.
/s/ John G. Danhakl
By: _________________________________
JOHN G. DANHAKL
President
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EXHIBIT A
AGREEMENT OF MERGER
AGREEMENT OF MERGER (this "Merger Agreement") made and entered into this
day of February, 1997 by and between LESLIE'S POOLMART a California
corporation ("Leslie's California"), and LPM HOLDINGS, INC., a Delaware
corporation ("Leslie's Delaware");
WITNESSETH:
WHEREAS, Leslie's Delaware is a corporation duly organized and existing
under the laws of the State of Delaware;
WHEREAS, Leslie's California is a corporation duly organized and existing
under the laws of the State of California;
WHEREAS, on the date of this Merger Agreement, Leslie's Delaware has
authority to issue 5,000,000 shares of Common Stock, par value $.001 per share
(which class of shares is herein called the "Delaware Common Stock") of which
10,000 shares are issued and outstanding and owned by Leslie's California, and
2,000,000 shares of Preferred Stock, par value $.001 per share, of which no
shares are issued and outstanding; and prior to the Effective Date, the
authorized number of shares of Delaware Common Stock will be increased to
12,000,000;
WHEREAS, on the date of this Merger Agreement, Leslie's California has
authority to issue 40,000,000 shares of Common Stock, (the "California Common
Stock") of which 6,550,966 shares are issued and outstanding, and 1,000,000
shares of Preferred Stock, of which no shares are issued and outstanding;
WHEREAS, the respective boards of directors of Leslie's Delaware and
Leslie's California have determined that, for the purpose of effecting the
reincorporation of Leslie's California in the State of Delaware, it is
advisable and to the advantage of said two corporations and their shareholders
and sole stockholder, respectively, that Leslie's California merge with and
into Leslie's Delaware upon the terms and conditions herein provided; and
WHEREAS, the respective boards of directors of Leslie's Delaware and
Leslie's California have approved this Merger Agreement and the board of
directors of Leslie's California and Leslie's Delaware have directed that this
Merger Agreement be submitted to a vote of their shareholders and sole
stockholder, respectively;
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, Leslie's California and Leslie's Delaware hereby agree to merge
as follows:
(1) Merger. Leslie's California shall be merged with and into Leslie's
Delaware, and Leslie's Delaware shall survive the merger ("Merger"), effective
upon the date when this Merger Agreement is made effective in accordance with
applicable law (the "Effective Date").
(2) Directors and Officers and Governing Documents. The directors and
officers of Leslie's Delaware shall be the same upon the Effective Date as
they are immediately prior thereto. The certificate of incorporation of
Leslie's Delaware, as amended and in effect on the Effective Date, shall
continue to be the certificate of incorporation of Leslie's Delaware as the
surviving corporation without change or amendment until further amended in
accordance with the provisions thereof and applicable laws, except that on the
Effective Date Article I of said certificate of incorporation shall be amended
to read in its entirety as follows: "The name of this Corporation shall be:
Leslie's Poolmart, Inc." The bylaws of Leslie's Delaware, as amended and in
effect on the Effective Date, shall continue to be the bylaws of Leslie's
Delaware as the surviving corporation without change or amendment until
further amended in accordance with the provisions thereof and applicable laws.
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(3) Succession. On the Effective Date, Leslie's Delaware shall succeed to
Leslie's California in the manner of and as more fully set forth in Section
259 of the General Corporation Law of the State of Delaware and Section 1107
of the General Corporation Law of the State of California.
(4) Further Assurances. From time to time, as and when required by Leslie's
Delaware or by its successors and assigns, there shall be executed and
delivered on behalf of Leslie's California such deeds and other instruments,
and there shall be taken or caused to be taken by it such further and other
action, as shall be appropriate or necessary in order to vest, perfect or
confirm, of record or otherwise, in Leslie's Delaware the title to and
possession of all the property, interests, assets, rights, privileges,
immunities, powers, franchises and authority of Leslie's California, and
otherwise to carry out the purposes of this Merger Agreement, and the officers
and directors of Leslie's Delaware are fully authorized in the name and on
behalf of Leslie's California or otherwise to take any and all such action and
to execute and deliver any and all such deeds and other instruments.
(5) Common Stock of Leslie's California. Upon the Effective Date, by virtue
of the Merger and without any action on the part of the holder thereof, each
share of the California Common Stock outstanding immediately prior thereto
shall be changed and converted into one fully paid and nonassessable share of
Delaware Common Stock.
(6) Stock Certificates. On and after the Effective Date, all of the
outstanding certificates which prior to that time represented shares of
California Common Stock shall for all purposes evidence ownership of and
represent the shares of Delaware Common Stock into which the shares of
California Common Stock represented by such certificates have been converted
as herein provided. The registered owner on the books and records of Leslie's
Delaware or its transfer agent of any such outstanding stock certificate
shall, until such certificate shall have been surrendered for transfer or
otherwise accounted for to Leslie's Delaware or its transfer agent, have and
be entitled to exercise any voting and other rights with respect to and to
receive any dividend and other distributions upon the shares of Delaware
Common Stock evidenced by such outstanding certificate as above provided.
(7) Stock Options. Forthwith upon the Effective Date, each (i) outstanding
option to purchase shares of California Common Stock granted under the
Leslie's California 1990 Stock Option Plan and the Leslie's California 1992
Directors' Stock Incentive Plan (collectively, the "Plans") and (ii)
outstanding option to purchase California Common Stock not granted under the
Plans, shall be converted into and become an option to purchase the same
number of shares of Delaware Common Stock at the same option price per share
as in effect on the Effective Date and, in the case of options granted under
the Plans (collectively, the "Plan Options"), upon the same terms and subject
to the same conditions as set forth in the Plans, and, in the case of all
options not granted under the Plans (collectively, the "Non-Plan Options"),
upon the same terms and subject to the same conditions as set forth in the
agreements or instruments that govern the Non-Plan Options. A number of shares
of Delaware Common Stock shall be reserved for purposes of the Plans equal to
the number of shares of California Common Stock so reserved as of the
Effective Date. As of the Effective Date, Leslie's Delaware hereby assumes all
obligations of Leslie's California under the Plans, the outstanding Plan
Options or portions thereof granted pursuant to the Plans and all Non-Plan
Options.
(8) Other Employee Benefit Plans. As of the Effective Date, Leslie's
Delaware hereby assumes all obligations of Leslie's California under any and
all employee benefit plans in effect as of said date or with respect to which
employee rights or accrued benefits are outstanding as of said date.
(9) Common Stock of Leslie's Delaware. Forthwith upon the Effective Date,
the 10,000 shares of Delaware Common Stock presently issued and outstanding in
the name of Leslie's California shall be cancelled and retired and resume the
status of authorized and unissued shares of Delaware Common Stock, and no
shares of Delaware Common Stock or other securities of Leslie's Delaware shall
be issued in respect thereof.
(10) Covenants of Leslie's Delaware. Leslie's Delaware covenants and agrees
that it will, on or before the Effective Date:
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(a) Qualify to do business as a foreign corporation in the State of
California, and in connection therewith irrevocably appoint an agent for
service of process as required under the provisions of Section 2105 of the
California Corporations Code.
(b) File any and all documents with the California Franchise Tax Board
necessary to the assumption by Leslie's Delaware of all of the franchise
tax liabilities of Leslie's California.
(11) Book Entries. As of the Effective Date, entries shall be made upon the
books of Leslie's Delaware in accordance with the following:
(a) The assets and liabilities of Leslie's California shall be recorded
at the amounts at which they were carried on the books of Leslie's
California immediately prior to the Effective Date, with appropriate
adjustments to reflect the retirement of the 10,000 shares of Delaware
Common Stock presently issued and outstanding.
(b) There shall be credited to the common stock account of Leslie's
Delaware the aggregate amount of the par value of all shares of Delaware
Common Stock resulting from the conversion of the outstanding California
Common Stock pursuant to the Merger.
(c) There shall be credited to the capital surplus account of Leslie's
Delaware the aggregate of the amounts shown in the common stock and capital
surplus accounts of Leslie's California immediately prior to the Effective
Date, less the amount credited to the common stock account of Leslie's
Delaware pursuant to Paragraph (b) above.
(d) There shall be credited to the retained earnings account of Leslie's
Delaware an amount equal to that carried in the retained earnings account
of Leslie's California immediately prior to the Effective Date.
(12) Amendment. At any time before or after approval and adoption by the
shareholders of Leslie's California, this Merger Agreement may be amended in
any manner (except that Paragraph (5) may not be amended without the approval
of the shareholders of Leslie's California), as may be determined in the
judgment of the respective boards of directors of Leslie's Delaware and
Leslie's California to be necessary, desirable or expedient in order to
clarify the intention of the parties hereto or to effect or facilitate the
purposes and intent of this Merger Agreement.
(13) Abandonment. At any time before the Effective Date, this Merger
Agreement may be terminated and the Merger may be abandoned by the board of
directors of either Leslie's California or Leslie's Delaware with the approval
of the board of directors of the other corporation, notwithstanding approval
of this Merger Agreement by the stockholders of Leslie's Delaware or the
shareholders of Leslie's California or both.
(14) Counterparts. In order to facilitate the filing and recording of this
Merger Agreement, the same may be executed in any number of counterparts, each
of which shall be deemed to be an original.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, this Merger Agreement, having first been duly approved
by resolution of the boards of directors of Leslie's California and Leslie's
Delaware, is hereby executed on behalf of each said two corporations by their
respective officers thereunto duly authorized.
LPM Holdings, Inc.,
a Delaware corporation
By: _________________________________
BRIAN P. MCDERMOTT,
President
By: _________________________________
ROBERT D. OLSEN,
Secretary
Leslie's Poolmart
a California corporation
By: _________________________________
BRIAN P. MCDERMOTT,
President and Chief Executive
Officer
By: _________________________________
CYNTHIA G. WATTS,
Secretary
B-31
<PAGE>
CERTIFICATE OF THE SECRETARY OF LPM HOLDINGS, INC.
I, Robert D. Olsen, Secretary of LPM HOLDINGS, INC., a Delaware corporation,
("Leslie's Delaware"), do hereby certify, as such Secretary, in accordance
with the General Corporation Law of the State of Delaware, that the Agreement
of Merger to which this Certificate is attached, after having been first duly
adopted and executed by Leslie's Delaware and Leslie's Poolmart, a California
corporation, was duly submitted to the sole stockholder of Leslie's Delaware
at a special meeting of stockholders called for the purpose of acting on said
Agreement of Merger, notice of the time, place and purpose of said meeting
having been waived by the sole stockholder of Leslie's Delaware, and that at
said meeting the Agreement of Merger was considered and a vote taken for its
adoption or rejection and that at said meeting all of the outstanding stock of
Leslie's Delaware entitled to vote thereon was voted for the adoption of said
Agreement of Merger and that thereby said Agreement of Merger was at said
meeting duly adopted as the act of the stockholders of Leslie's Delaware and
as the agreement and act of Leslie's Delaware.
IN WITNESS WHEREOF, the undersigned has executed this certificate this day
of , 1997.
-------------------------------------
Robert D. Olsen,
Secretary
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<PAGE>
CERTIFICATE OF THE SECRETARY OF LESLIE'S POOLMART
I, Cynthia G. Watts, Secretary of LESLIE'S POOLMART, a California
corporation ("Leslie's California"), do hereby certify, as such Secretary, in
accordance with the General Corporation Law of the State of Delaware, that the
Agreement of Merger to which this Certificate is attached, after having been
first duly adopted and executed by Leslie's California and LPM Holdings, Inc.,
a Delaware corporation, was duly submitted to the shareholders at a meeting of
shareholders called for the purpose of acting on said Agreement of Merger
after due notice of the time, place and purpose of said meeting was mailed to
each holder of Common Stock of Leslie's California at his, her or its address
as it appears on the records of Leslie's California in the manner provided
under the provisions of Section 601 of the California Corporations Code and
that at said meeting the Agreement of Merger was considered and a vote taken
for its adoption or rejection and that at said meeting a majority of the
outstanding Common Stock of Leslie's California entitled to vote thereon was
voted for the adoption of said Agreement of Merger and that thereby said
Agreement of Merger was at said meeting duly adopted as the act of the
shareholders of Leslie's California and as the agreement and act of Leslie's
California.
IN WITNESS WHEREOF, the undersigned has executed this certificate this day
of , 1997.
-------------------------------------
Cynthia G. Watts,
Secretary
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<PAGE>
EXHIBIT B
CERTIFICATE OF MERGER
OF
POOLMART USA INC.
INTO
LESLIE'S POOLMART, INC.
(Pursuant to 8 Del. C. (S) 251)
LESLIE'S POOLMART, INC., a Delaware corporation, hereby certifies that:
1. The name and state of incorporation of each of the constituent
corporations are:
(a) Poolmart USA Inc., a Delaware corporation; and
(b) Leslie's Poolmart, Inc., a Delaware corporation.
2. An Agreement and Plan of Merger has been approved, adopted, certified,
executed and acknowledged by each of the constituent corporations in
accordance with the provisions of Section 251 of the General Corporation Law
of the State of Delaware.
3. The surviving corporation shall be Leslie's Poolmart, Inc.
4. The Certificate of Incorporation of Leslie's Poolmart, Inc., as in effect
on the date on which the merger is effective, shall be the Certificate of
Incorporation of Leslie's Poolmart, Inc. as the surviving corporation without
change or amendment until further amended in accordance with the provisions
thereof and applicable law.
5. The executed Agreement and Plan of Merger is on file at the principal
place of business of Leslie's Poolmart, Inc. located at:
20630 Plummer St.
Chatsworth, California 91311
6. A copy of the Agreement and Plan of Merger will be furnished by Leslie's
Poolmart, Inc., on request and without cost, to any stockholder of any of the
constituent corporations.
IN WITNESS WHEREOF, LESLIE'S POOLMART, INC. has caused this certificate to
be executed by a duly authorized officer as of this day of , 1997.
Leslie's Poolmart, Inc.,
a Delaware corporation
By: _________________________________
BRIAN P. MCDERMOTT
President and Chief Executive
Officer
B-34
<PAGE>
APPENDIX C
[LOGO OF DONALDSON, LUFKIN & JENRETTE]
February 26, 1997
Special Committee of the Board of Directors
and the Board of Directors
of Leslie's Poolmart
20630 Plummer Street
Chatsworth, CA 91311
Dear Sirs:
Leslie's Poolmart, a California corporation (the "Company"), LPM Holdings,
Inc., a Delaware corporation ("Leslie's Delaware"), and Poolmart USA, Inc., a
Delaware corporation ("Poolmart"), have entered into an Agreement and Plan of
Merger dated as of February 26, 1997 (the "Agreement"), whereby the Company
would be merged into Leslie's Delaware followed by the merger of Poolmart into
Leslie's Delaware (collectively, the "Merger Transaction"). The Agreement
provides that at the Effective Date (as defined in the Agreement) each share
of common stock of Leslie's Delaware (into which the outstanding shares of
common stock of the Company shall have been converted), other than certain
shares to be canceled and certain shares registered in the names of the
persons named in the Agreement who will retain shares (the "Continuing
Stockholders"), shall be converted into the right to receive an amount equal
to $14.50 in cash, without interest (the "Cash Merger Consideration"). You
have requested our opinion as to the fairness from a financial point of view
to the holders of common stock other than the Continuing Stockholders (the
"Public Stockholders") of the Cash Merger Consideration to be received by the
Public Stockholders in the Merger Transaction.
In arriving at our opinion, we have reviewed the Agreement, as well as
certain financial and other information that was publicly available or
furnished to us by the Company including information provided during
discussions with management. Included in the information provided during
discussions with management were certain financial projections of the Company
for the period beginning December 31, 1996 and ending December 31, 2001
prepared by the management of the Company. In addition, we have compared
certain financial and securities data of the Company with various other
companies whose securities are traded in public markets, reviewed prices and
premiums paid in certain other business combinations and conducted such other
financial studies, analyses and investigations as we deemed appropriate for
purposes of this opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to us from public sources, that was provided to us by the Company or its
representatives, or that was otherwise reviewed by us. With respect to the
financial projections supplied to us, we have assumed that they have been
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
operating and financial performance of the Company. We have not assumed any
responsibility for making an independent evaluation of the Company's assets or
liabilities or for making any independent verification of any of the
information reviewed by us.
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<PAGE>
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as
of, the date of this letter. Our opinion does not address (i) the relative
merits of the Merger Transaction and the other business strategies being
considered by the Company's Board of Directors, (ii) the Board's decision to
proceed with the Merger Transaction or (iii) the value of the shares of Common
Stock held by the Continuing Stockholders or fairness of any consideration
being received by the Continuing Stockholders in the Merger Transaction. Our
opinion does not constitute a recommendation to any stockholder as to how such
stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for estate, corporate and other purposes.
Certain employees of DLJ own, in the aggregate, less than 0.5% of the common
stock of the Company. In addition, an affiliate of DLJ owns less than a 2.0%
limited partnership interest in Green Equity Investors II, L.P., an affiliate
of Poolmart.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Cash Merger Consideration to be received by the Public
Stockholders in the Merger Transaction is fair to such stockholders from a
financial point of view.
Very truly yours,
Donaldson, Lufkin & Jenrette
Securities Corporation
/s/ Martin Murrer
By: _________________________________
MARTIN MURRER
Managing Director
C-2
<PAGE>
APPENDIX D
[LOGO OF DILLON, READ & CO. INC.]
February 26, 1997
Board of Directors and
Special Committee of the Board of Directors
Leslie's Poolmart
20630 Plummer Street
Chatsworth, CA 91311
Gentlemen:
We understand that Leslie's Poolmart (the "Company") is undertaking a series
of transactions (the "Transactions"), pursuant to the terms of an Agreement and
Plan of Merger, dated as of February 26, 1997 (the "Merger Agreement"), at the
conclusion of which each holder of outstanding shares of common stock of the
Company (the "Company Common Stock") other than the Continuing Stockholders (as
defined in the Merger Agreement) as to their Continuing Shares (as defined in
the Merger Agreement), will receive an amount equal to $14.50 in cash for each
share of Company Common Stock (the "Consideration"). The terms and conditions
of the Merger Transaction are more fully set forth in the Merger Agreement.
You have requested our opinion as to whether the Consideration to be received
by the holders of Company Common Stock, other than the Continuing Stockholders,
is fair, from a financial point of view, to such shareholders.
For its services, Dillon, Read & Co. Inc. ("Dillon Read") will receive a fee.
In the ordinary course of business, Dillon Read trades the equity securities of
the Company for our own account and the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
In arriving at our opinion, we have, among other things: (i) reviewed certain
publicly available business and historical financial information relating to
the Company, (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 financial projections prepared
by the management of the Company, (iii) conducted discussions with members of
the senior management of the Company, (iv) 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, (v) reviewed the historical market prices and trading volumes of the
common stock of the Company, (vi) compared the financial terms of the
Transactions with the financial terms of certain other transactions which we
believe to be generally comparable to the Transactions, (vii) reviewed the
Merger Agreement and related agreements in the form provided to us, and (viii)
conducted such other financial studies, analyses and investigations, and
considered such other information as we deemed necessary or appropriate. Our
opinion does not address the Company's underlying business decision to effect
the Transactions or constitute a recommendation to any shareholder of the
Company as to how such shareholder should vote with respect to the
Transactions.
D-1
<PAGE>
In connection with our review, we have 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 not made any evaluation or appraisal of any of
the assets or liabilities (contingent or otherwise) of the Company, nor have
we been furnished with any such evaluation or appraisal. With respect to the
financial projections referred to above, we have assumed, with your consent,
that they have been reasonably prepared on bases reflecting the best currently
available estimates and judgments of the Company's management as to the future
financial performance of the Company. Further, our opinion is based on
economic, monetary and market conditions existing on the date hereof.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the Consideration to be received by the holders of Company Common
Stock, other than the Continuing Stockholders, is fair to such shareholders
from a financial point of view.
Very truly yours,
Dillon, Read & Co. Inc.
D-2
<PAGE>
APPENDIX E
SIGNIFICANT DIFFERENCES BETWEEN
THE CORPORATION LAWS OF CALIFORNIA AND DELAWARE
The General Corporation Laws of California and Delaware differ in many
respects. While not all of such differences are summarized in this Proxy
Statement, a number of the principal differences which could materially affect
the rights of shareholders are discussed below.
SIZE OF THE BOARD OF DIRECTORS
Under California law, although changes in the number of directors must in
general be approved by a majority of the outstanding shares, the board of
directors may fix the exact number of directors within a stated range set
forth in the articles of incorporation or bylaws, if that stated range has
been approved by the shareholders. Delaware law permits the board of directors
alone to change the authorized number, or the range, of directors by amendment
to the bylaws, unless the directors are not authorized to amend the bylaws or
the number of directors is fixed in the certificate of incorporation (in which
case a change in the number of directors may be made only by an amendment to
the certificate of incorporation approved by the stockholders). The
certificate of incorporation of Leslie's Delaware provides that the number of
directors shall be as specified in the bylaws and authorizes the board of
directors to make, alter, amend or repeal the bylaws. The board of directors
of Leslie's Delaware may therefore change the number of directors without
stockholder approval. If the Reincorporation is approved, the seven current
directors of Leslie's California will continue as directors of Leslie's
Delaware after the Reincorporation is consummated. However, it is expected
that immediately after consummation of the Merger, all of the current
directors other than Michael J. Fourticq and Brian P. McDermott will resign.
See "Special Factors--Conduct of Leslie's Delaware's Business After the
Merger."
CUMULATIVE VOTING
Under California law, if any shareholder gives notice of his or her
intention to cumulate votes for the election of directors, any other
shareholder of the corporation is also entitled to cumulate his or her votes
at such election unless the corporation is a "listed corporation" (as defined
below) and has a provision in its articles of incorporation or bylaws that
eliminates cumulative voting. The articles of incorporation of Leslie's
California eliminate cumulative voting. Under Delaware law, cumulative voting
in the election of directors is not mandatory. The certificate of
incorporation of Leslie's Delaware does not provide for cumulative voting, so
that unless the certificate of incorporation of Leslie's Delaware is amended
following the Reincorporation to specify cumulative voting (which may be done
only with stockholder approval), stockholders of Leslie's Delaware will have
no cumulative voting rights. The elimination of cumulative voting limits the
ability of minority stockholders to obtain representation on the board of
directors.
CLASSIFIED BOARD OF DIRECTORS
A classified board is one on which a certain number of the directors, but
not all, are elected on a rotating basis each year. California law prohibits a
classified board of directors unless the corporation is a "listed
corporation." A "listed corporation" is a corporation whose shares are either
(i) listed on the New York or American Stock Exchanges or (ii) designated for
trading on the Nasdaq National Market and held by at least 800 shareholders.
Leslie's California's articles of incorporation and bylaws do not provide for
a classified board of directors. Delaware law permits, but does not require, a
classified board of directors, with staggered terms under which one-half or
one-third of the directors are elected for terms of two or three years,
respectively. This method of electing directors makes changes in the
composition of the board of directors, and thus a change in control of a
corporation, a lengthier and more difficult process. The Leslie's Delaware
certificate of incorporation and bylaws do not provide for a classified board
of directors. The establishment of a classified board following the
Reincorporation would require the approval of the stockholders of Leslie's
Delaware.
E-1
<PAGE>
POWER TO CALL SPECIAL MEETING OF SHAREHOLDERS
Under California law, a special meeting of shareholders may be called by the
board of directors, the chairman of the board, the president, the holders of
shares entitled to cast not less than ten percent of the votes at such meeting
and such additional persons as are authorized by the articles of incorporation
or the bylaws. Under Delaware law, a special meeting of stockholders may be
called by the board of directors or by any other person authorized to do so in
the certificate of incorporation or the bylaws. The bylaws of Leslie's
Delaware do not grant stockholders the right to call a special meeting of
stockholders. The absence of the power of stockholders to call a special
meeting could make it more difficult for stockholders to initiate action that
is opposed by the board of directors.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS
In the last several years, a number of states (but not California) have
adopted special laws designed to make certain kinds of "unfriendly" corporate
takeovers, or other transactions involving a corporation and one or more of
its significant shareholders, more difficult. Under Section 203 of the
Delaware General Corporation Law ("Section 203"), certain "business
combinations" with "interested stockholders" of Delaware corporations are
subject to a three-year moratorium unless specified conditions are met.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the
time that such person becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person or group who or which owns
15% or more of the corporation's outstanding voting stock (including any
rights to acquire stock pursuant to an option, warrant, agreement, arrangement
or understanding, or upon the exercise of conversion or exchange rights, and
stock with respect to which the person has voting rights only), or is an
affiliate or associate of the corporation and was the owner of 15% or more of
such voting stock at any time within the previous three years.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately
with the corporation's other stockholders) of assets of the corporation or a
subsidiary equal to ten percent or more of the aggregate market value of the
corporation's consolidated assets or its outstanding stock; the issuance or
transfer by the corporation or a subsidiary of stock of the corporation or
such subsidiary to the interested stockholder (except for transfers in a
conversion or exchange or a pro rata distribution or certain other
transactions, none of which increase the interested stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock); or any receipt by the interested stockholder (except
proportionately as a stockholder), directly or indirectly, of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if: (i) prior to the time at which such stockholder becomes an
interested stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested stockholder; (ii) the interested stockholder owns at least 85% of
the corporation's voting stock upon consummation of the transaction which made
him or her an interested stockholder (excluding from the 85% calculation
shares owned by directors who are also officers of the target corporation and
shares held by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer); or (iii) on or
after the time such person becomes an interested stockholder, the board
approves the business combination and it is also approved at a stockholder
meeting by sixty-six and two-thirds percent (66 2/3%) of the voting stock not
owned by the interested stockholder.
Section 203 applies only to Delaware corporations which have a class of
voting stock that is listed on a national securities exchange, are quoted on
an interdealer quotation system such as Nasdaq (as is Leslie's California, and
as Leslie's Delaware would be in the event the Merger is not consummated and
the board of directors of Leslie's California nevertheless proceeds with the
Reincorporation) or are held of record by more than 2,000 stockholders.
However, a Delaware corporation may elect not to be governed by Section 203 by
a
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provision in its original certificate of incorporation or an amendment thereto
or to the bylaws, which amendment must be approved by a majority of the shares
entitled to vote and, in the case of a bylaw amendment, may not be further
amended by the board of directors. Leslie's Delaware does not intend to elect
not to be governed by Section 203; therefore, Section 203 will apply to
Leslie's Delaware if the Merger is not consummated and the board of directors
of Leslie's California nevertheless proceeds with the Reincorporation.
Leslie's California believes that if the Merger is not consummated, Section
203 will have the effect of encouraging any potential acquiror to negotiate
with Leslie' Delaware's board of directors. Section 203 may also discourage
certain potential acquirors unwilling to comply with its provisions.
REMOVAL OF DIRECTORS
Under California law, any director or the entire board of directors may be
removed, with or without cause, with the approval of a majority of the
outstanding shares entitled to vote; however, no individual director may be
removed (unless the entire board is removed) if the number of votes cast
against such removal would be sufficient to elect the director under
cumulative voting. Under Delaware law, a director of a corporation that does
not have a classified board of directors or cumulative voting may be removed
with or without cause with the approval of a majority of the outstanding
shares entitled to vote. In the case of a Delaware corporation having
cumulative voting, if less than the entire board is to be removed, a director
may not be removed without cause unless the shares voted against such removal
would not be sufficient to elect the director under such cumulative voting
procedures. A director of a corporation with a classified board of directors
may be removed only for cause, unless the certificate of incorporation
otherwise provides. The certificate of incorporation of Leslie's Delaware does
not provide for cumulative voting or for a classified board of directors.
Consequently, any director may be removed from office at any time with or
without cause upon the affirmative vote of the holders of a majority of the
then outstanding voting stock.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Under California law, any vacancy on the board of directors, other than one
created by removal of a director, may be filled by the board. If the number of
directors is less than a quorum, a vacancy may be filled by the unanimous
written consent of the remaining directors in office, or the affirmative vote
of a majority of the remaining directors at a meeting or by a sole remaining
director. A vacancy created by removal of a director may be filled by the
board only if so authorized by a corporation's articles of incorporation or by
a bylaw approved by the corporation's shareholders. Leslie's California's
bylaws do not permit directors to fill vacancies created by removal of a
director. Under Delaware law, vacancies and newly created directorships may be
filled by a majority of the directors then in office (even though less than a
quorum) unless otherwise provided in the certificate of incorporation or
bylaws. The bylaws of Leslie's Delaware provide that any vacancy resulting
from the removal or resignation of a director may be filled by a majority of
the directors then in office (even though less than a quorum) even if such
vacancy was created by removal of a director by the stockholders.
LOANS TO OFFICERS AND EMPLOYEES
Under California law, the directors of a California corporation are not
authorized to approve loans or guaranties to or on behalf of officers (whether
or not such officers are directors) unless the outstanding shares of the
Corporation are held by 100 or more shareholders, the corporation has a bylaw
approved by the outstanding shares authorizing the board alone to approve such
loans or guaranties and if the board determines (without counting the vote of
any interested director or directors) that such loans or guaranties may
reasonably be expected to benefit the corporation. Leslie's California does
not have a bylaw authorizing the board of directors to approve such loans or
guaranties. Under Delaware law, a corporation, its officers or other employees
may make loans to, guarantee the obligations of or otherwise assist its
officers or other employees and those of its subsidiaries (including directors
who are also officers or employees) when such action, in the judgment of the
directors, may reasonably be expected to benefit the corporation, even though
without approval of the stockholders.
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INDEMNIFICATION AND LIMITATION OF LIABILITY
California and Delaware have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws
of both states also permit a corporation to adopt a provision in its articles
of incorporation or certificate of incorporation eliminating the liability of
a director to the corporation or its shareholders for monetary damages for
breach of the director's fiduciary duty of care. There are nonetheless certain
differences between the laws of the two states respecting indemnification and
limitation of liability.
The articles of incorporation of Leslie's California eliminate the liability
of directors to the corporation to the fullest extent permissible under
California law, as such law exists currently or as it may be amended in the
future. California law does not permit the elimination of monetary liability
where such liability is based on: (i) acts or omissions that involve
intentional misconduct or a knowing and culpable violation of law; (ii) acts
or omissions that a director believes to be contrary to the best interests of
the corporation or its shareholders, or that involve the absence of good faith
on the part of the director; (iii) receipt of an improper personal benefit;
(iv) acts or omissions that show reckless disregard for the director's duty to
the corporation or its shareholders, where the director in the ordinary course
of performing a director's duties should be aware of a risk of serious injury
to the corporation or its shareholders; (v) acts or omissions that constitute
an unexcused pattern of inattention that amounts to an abdication of the
director's duty to the corporation and its shareholders; (vi) interested party
transactions between the corporation and a director in which a director has a
material financial interest; or (vii) liability for improper distributions,
loans or guarantees.
The certificate of incorporation of Leslie's Delaware also eliminates the
liability of directors to the fullest extent permissible under Delaware law,
as such law exists currently or as it may be amended in the future. Under
Delaware law, such a provision may not eliminate or limit director monetary
liability for: (i) breaches of the director's duty of loyalty to the
corporation or its stockholders; (ii) acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law; (iii) the
payment of unlawful dividends or unlawful stock repurchases or redemptions; or
(iv) transactions in which the director received an improper personal benefit.
Such a limitation of liability provision also may not limit a director's
liability for violation of, or otherwise relieve Leslie's Delaware or its
directors from the necessity of complying with, federal or state securities
laws or affect the availability of nonmonetary remedies such as injunctive
relief or rescission.
California law permits indemnification of expenses incurred in derivative or
third-party actions, except that with respect to derivative actions (i) no
indemnification may be made without court approval when a person is adjudged
liable to the corporation in the performance of that person's duty to the
corporation and its shareholders, unless a court determines that person is
entitled to indemnity for expenses, and then such indemnification may be made
only to the extent that the court so determines, and (ii) no indemnification
may be made without court approval in respect of amounts paid or expenses
incurred in settling or otherwise disposing of a threatened or pending action
or in respect of amounts incurred in defending a pending action which is
settled or otherwise disposed of without court approval.
Indemnification is permitted by California law only for acts taken in good
faith and believed to be in the best interests of the corporation and its
shareholders, as determined by a majority vote of a disinterested quorum of
the directors, independent legal counsel (if a quorum of independent directors
is not obtainable), a majority vote of a quorum of the shareholders (excluding
shares owned by the indemnified party), or the court handling the action.
California law requires indemnification when the individual has successfully
defended the action on the merits (as opposed to Delaware law which requires
indemnification relating to any successful defense, whether on the merits or
otherwise).
Delaware law generally permits indemnification of expenses (including
attorneys' fees) incurred in the defense or settlement of a derivative or
third-party action, provided there is a determination by a majority vote of
the disinterested directors even though less than a quorum, by independent
legal counsel or by stockholders that the person seeking indemnification acted
in good faith and in a manner reasonably believed to be in or (in contrast to
California law) not opposed to the best interests of the corporation. Without
court approval, however,
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no indemnification may be made in respect of any derivative action in which
such person is adjudged liable for negligence or misconduct in the performance
of his or her duty to the corporation. Delaware law also requires
indemnification of expenses when the individual being indemnified has
successfully defended the action on the merits or otherwise.
California corporations may include in their articles of incorporation a
provision which extends the scope of indemnification through agreements,
bylaws or other corporate action beyond that specifically authorized by
statute. The articles of incorporation of Leslie's California include such a
provision.
A provision of Delaware law states that the indemnification provided by
statute shall not be deemed exclusive of any other rights under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise. As a
result, Delaware law permits the indemnification agreements such as those
presently in effect between Leslie's California and its officers and
directors, and which such agreements will be assumed by Leslie's Delaware upon
completion of the Reincorporation.
The indemnification and limitations of liability provisions of California
law, and not Delaware law, will apply to actions of the directors and officers
of Leslie's California taken prior to the Reincorporation.
INSPECTION OF SHAREHOLDERS' LIST
Both California and Delaware law allow any shareholder to inspect a
corporation's shareholders' list for a purpose reasonably related to such
person's interest as a shareholder. California law provides, in addition, an
absolute right to inspect and copy the corporation's shareholders' list to
persons holding an aggregate of 5% or more of a corporation's voting shares,
or shareholders holding an aggregate of 1% or more of such shares who have
filed a Schedule 14A with the Securities and Exchange Commission relating to
the election of directors. Delaware law does not provide for any such absolute
right of inspection, and no such right is granted under the certificate of
incorporation or bylaws of Leslie's Delaware.
DIVIDENDS AND REPURCHASES OF SHARES
California law dispenses with the concepts of par value of shares as well as
statutory definitions of capital, surplus and the like. The concepts of par
value, capital and surplus are retained under Delaware law.
Under California law, a corporation may not make any distribution (including
dividends, whether in cash or other property, and repurchases of its shares)
unless either the corporation's retained earnings immediately prior to the
proposed distribution equal or exceed the amount of the proposed distribution
or, immediately after giving effect to such distribution, the corporation's
assets (exclusive of goodwill, capitalized research and development expenses
and deferred charges) would be at least equal to 1 1/4 times its liabilities
(not including deferred taxes, deferred income and other deferred credits),
and the corporation's current assets would be at least equal to its current
liabilities (or 1 1/4 times its current liabilities if the average earnings
before taxes on income and before interest expense for the preceding two
fiscal years were less than the average interest expense for such years).
Under California law, there are exceptions to the foregoing rules for
repurchases of shares in connection with certain rescission actions or
pursuant to certain employee stock plans.
Delaware law permits a corporation to declare and pay dividends out of
surplus or, if there is no surplus, out of net profits for the fiscal year in
which the dividend is declared and/or for the preceding fiscal year as long as
the amount of capital of the corporation following the declaration and payment
of the dividend is not 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. In addition, Delaware law
generally provides that a corporation may redeem or repurchase its shares only
if such redemption or repurchase would not impair the capital of the
corporation.
To date, Leslie's California has not paid cash dividends on its capital
stock. It is the current policy of the board of directors of Leslie's
California to retain earnings for use in the company's business, and
therefore, Leslie's California does not anticipate paying cash dividends on
Leslie's California Common Stock in the foreseeable future.
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SHAREHOLDER VOTING
Both California and Delaware law generally require that the holders of a
majority in voting power of the outstanding shares of stock of both acquiring
and target corporations entitled to vote approve statutory mergers. Delaware
law does not require a stockholder vote of the surviving corporation in a
merger (unless the corporation provides otherwise in its certificate of
incorporation) if (i) the merger agreement does not amend the existing
certificate of incorporation of such surviving corporation, (ii) each share of
the surviving corporation outstanding before the merger is an identical
outstanding or treasury share after the merger, and (iii) the number of shares
to be issued by the surviving corporation in the merger does not exceed 20% of
the shares outstanding immediately prior to the merger. California law
contains a similar exception to its voting requirements for reorganizations
where shareholders or the corporation itself, or both, immediately prior to
the reorganization will own immediately after the reorganization equity
securities constituting more than five-sixths of the voting power of the
surviving or acquiring corporation or its parent entity.
Both California and Delaware law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the outstanding voting shares of the corporation transferring such assets.
With certain exceptions, California law also requires that mergers,
reorganizations, certain sales of assets and similar transactions be approved
by a majority vote of each class of shares outstanding. By contrast, Delaware
law generally does not require class voting, except in certain transactions
involving an amendment to the certificate of incorporation which adversely
affects a specific class or series of shares.
California law also requires that holders of nonredeemable common stock
receive nonredeemable common stock in a merger of the corporation with the
holder of more than 50% but less than 90% of such common stock or its
affiliate unless all of the holders of such common stock consent to the
transaction. This provision of California law may have the effect of making a
"cash-out" merger by a majority shareholder more difficult to accomplish.
Delaware law has no comparable provision.
California law also provides that, except in certain circumstances, when a
tender offer or a proposal for a reorganization or for a sale of assets is
made by an interested party (generally, a controlling or managing party of the
target corporation), an affirmative opinion in writing as to the fairness of
the consideration to be paid to the shareholders must be delivered to
shareholders. This fairness opinion requirement does not apply to a
corporation which does not have shares held of record by at least 100 persons,
or to a transaction which has been qualified under California state securities
laws. Furthermore, if a tender of shares or vote is sought pursuant to an
interested party's proposal and a later proposal is made by another party at
least ten days prior to the date of acceptance of the interested party
proposal, the shareholders must be informed of the later offer and be afforded
a reasonable opportunity to withdraw any vote, consent or proxy, or to
withdraw any tendered shares. Again, Delaware law has no comparable provision.
California law also requires that the holders of all shares of the same
class be treated equally in a merger transaction unless all holders of that
class of shares consent to the disparate treatment. There is no such
requirement under Delaware law.
INTERESTED DIRECTOR TRANSACTIONS
Under both California and Delaware law, certain contracts or transactions in
which one or more of a corporation's directors has an interest are not void or
voidable solely because of such interest provided that certain conditions,
such as obtaining the required approval and fulfilling the requirements of
good faith and full disclosure, are met. With certain exceptions, the
conditions are similar under California and Delaware law. Under California and
Delaware law, (i) either the shareholders or the board of directors must
approve any such contract or transaction after full disclosure of the material
facts, and in the case of board approval the contract or transaction must also
be "just and reasonable" (in California) or "fair" (in Delaware) to the
corporation, or
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(ii) the contract or transaction must have been just and reasonable or fair,
as applicable, to the corporation at the time it was approved. In the latter
case, California law explicitly places the burden of proof on the interested
director. Under California law, if shareholder approval is sought, the
interested director is not entitled to vote his shares at a shareholder
meeting with respect to any action regarding such contract or transaction. If
board approval is sought, the contract or transaction must be approved by a
majority vote of a quorum of the directors, without counting the vote of any
interested directors (except that interested directors may be counted for
purposes of establishing a quorum). Under Delaware law, if board approval is
sought, the contract or transaction must be approved by a majority of the
disinterested directors (even though less than a majority of a quorum).
Therefore, certain transactions that the board of directors of Leslie's
California might not be able to approve because of the number of interested
directors, or the exclusion of interested director shares, could be approved
by a majority of the disinterested directors of Leslie's Delaware, although
less than a majority of a quorum, or by a majority of all voting shares, which
might not include a majority of the disinterested shares. Leslie's California
is not aware of any plans to propose any transaction involving directors of
Leslie's California which could not be so approved under California law but
could be so approved under Delaware law.
VOTING BY BALLOT
California law provides that the election of directors need not be by ballot
unless a shareholder demands election by ballot at the shareholders' meeting
or unless the bylaws require voting by ballot. Leslie's California's bylaws
provide that the election of directors at a shareholders' meeting may be by
voice vote or ballot, unless prior to such vote a shareholder demands voting
by ballot, in which case such vote must be by ballot. Under Delaware law, the
right to vote by written ballot may be restricted if so provided in the
certificate of incorporation. The Leslie's Delaware certificate of
incorporation so provides. The bylaws of Leslie's Delaware provide that
election need not be by ballot unless so directed by the chairman of the
meeting. It may be more difficult for a stockholder to contest the outcome of
a vote which has not been conducted by written ballot.
SHAREHOLDER DERIVATIVE SUITS
California law provides that a shareholder bringing a derivative action on
behalf of a corporation need not have been a shareholder at the time of the
transaction in question, provided that certain tests are met. Under Delaware
law, a stockholder may only bring a derivative action on behalf of the
corporation if the stockholder was a stockholder of the corporation at the
time of the transaction in question or his or her stock thereafter devolved
upon him or her by operation of law. California law also provides that the
corporation or the defendant in a derivative suit may make a motion to the
court for an order requiring the plaintiff shareholder to furnish a security
bond. Delaware does not have a similar bonding requirement.
DISSENTERS' APPRAISAL RIGHTS
Under both California and Delaware law, a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal rights (called dissenters' rights
under California law) pursuant to which such shareholder may receive cash in
the amount of the fair market value of his or her shares in lieu of the
consideration he or she would otherwise receive in the transaction. Under
Delaware law, unless the certificate of incorporation otherwise provides, such
appraisal rights are not available (i) with respect to the sale, lease or
exchange of all or substantially all of the assets of a corporation, (ii) with
respect to a merger or consolidation by a corporation the shares of which are
either listed on a national securities exchange or are held of record by more
than 2,000 holders if such stockholders receive only shares of the surviving
corporation or shares of any other corporation which are either listed on a
national securities exchange or held of record by more than 2,000 holders,
plus cash in lieu of fractional shares, or any combination thereof, or (iii)
to stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the merger
because the merger agreement does not amend the existing certificate of
incorporation, each share of the surviving corporation outstanding prior to
the merger is an identical outstanding or treasury share after the merger, and
the number of shares to be issued in the merger does not exceed 20% of the
shares of the surviving corporation outstanding immediately prior to the
merger and if certain other conditions are met.
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The limitations on the availability of appraisal rights under California law
are different from those under Delaware law. Shareholders of a California
corporation whose shares are listed on a national securities exchange or on a
list of over-the-counter margin stocks issued by the Board of Governors of the
Federal Reserve System (as are the shares of Leslie's California) generally do
not have such appraisal rights unless the holders of at least 5% of the class
of outstanding shares claim the right or unless the corporation or any law
restricts the transfer of such shares. Appraisal rights are unavailable,
however, if the shareholders of a corporation or the corporation itself, or
both, immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting more than five-sixths of the
voting power of the surviving or acquiring corporation or its parent entity.
Nevertheless, the Merger Agreement contemplates that dissenters' rights will
be applicable to the merger. See "Dissenters' Rights." In general, California
law affords dissenters' rights in sale of assets reorganizations.
DISSOLUTION
Under California law, shareholders holding 50% or more of the total voting
power may authorize a corporation's dissolution, with or without the approval
of the corporation's board of directors, and this right may not be modified by
the articles of incorporation. Under Delaware law, unless the board of
directors approves the proposal to dissolve, the dissolution must be approved
by stockholders holding 100% of the total voting power of the corporation.
Only if the dissolution of a Delaware corporation is initiated by the board of
directors may it be approved by a simple majority of the corporation's
stockholders. In the event of such a board-initiated dissolution, Delaware law
allows a Delaware corporation to include in its certificate of incorporation a
supermajority voting requirement in connection with dissolutions. Leslie's
Delaware's certificate of incorporation contains no such supermajority voting
requirement, however, and a majority of shares voting at a meeting at which a
quorum is present would be sufficient to approve a dissolution of Leslie's
Delaware which had previously been approved by its board of directors.
APPLICATION OF THE GENERAL CORPORATION LAW OF CALIFORNIA TO DELAWARE
CORPORATIONS
Under Section 2115 of the California General Corporation Law, certain
foreign corporations (i.e. corporations not organized under California law)
are placed in a special category if they have characteristics of ownership and
operation which indicate that they have significant contacts with California.
So long as a Delaware or other foreign corporation is in this special
category, and it does not qualify for one of the statutory exemptions, it is
subject to a number of key provisions of the California General Corporation
Law applicable to corporations incorporated in California. Among the more
important provisions are those relating to the election and removal of
directors, cumulative voting, prohibition of classified boards of directors,
standards of liability and indemnification of directors, distributions,
dividends and repurchases of shares, shareholder meetings, approval of certain
corporate transactions, dissenters' and appraisal rights and inspection of
corporate records. See "Significant Differences Between the Corporation Laws
of California and Delaware" above.
Exemptions from Section 2115 are provided for corporations whose shares are
listed on a major national securities exchange or are traded in the Nasdaq
National Market and which have 800 or more shareholders of record. If the
Merger is not consummated and the board of directors of Leslie's California
nevertheless proceeds with the Reincorporation, the common stock of Leslie's
Delaware will be traded on the Nasdaq National Market, and will likely be held
beneficially by more than 800 stockholders as of the record date of its most
recent annual meeting and, accordingly, only in such event will Leslie's
Delaware be exempt from Section 2115.
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APPENDIX F
CHAPTER 13 OF THE CALIFORNIA
GENERAL CORPORATION LAW
DISSENTERS' RIGHTS
(S) 1300. RIGHT TO REQUIRE PURCHASE--"DISSENTING SHARES" AND "DISSENTING
SHAREHOLDER" DEFINED.
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair
market value of the shares owned by the shareholder which are dissenting
shares as defined in subdivision (b). The fair market value shall be
determined as of the day before the first announcement of the terms of the
proposed reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split or share dividend which becomes effective
thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
(S) 1301. DEMAND FOR PURCHASE.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such
sections. The
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statement of price constitutes an offer by the corporation to purchase at the
price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such
price.
(S) 1302. ENDORSEMENT OF SHARES.
Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
(S) 1303. AGREED PRICE--TIME FOR PAYMENT.
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
(S) 1304. DISSENTER'S ACTION TO ENFORCE PAYMENT.
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of
the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152)
or notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
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(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
(S) 1305. APPRAISERS' REPORT--PAYMENT COSTS.
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed
by the court, the appraisers, or a majority of them, shall make and file a
report in the office of the clerk of the court. Thereupon, on the motion of
any party, the report shall be submitted to the court and considered on such
evidence as the court considers relevant. If the court finds the report
reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting shares
which any dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than
125 percent of the price offered by the corporation under subdivision (a) of
Section 1301).
(S) 1306. DISSENTING SHAREHOLDER'S STATUS AS CREDITOR.
To the extent that the provisions of Chapter 5 prevent the payment to any
holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
(S) 1307. DIVIDENDS PAID AS CREDIT AGAINST PAYMENT.
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
(S) 1308. CONTINUING RIGHTS AND PRIVILEGES OF DISSENTING SHAREHOLDERS.
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A
dissenting shareholder may not withdraw a demand for payment unless the
corporation consents thereto.
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(S) 1309. TERMINATION OF DISSENTING SHAREHOLDER STATUS.
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to
require the corporation to purchase their shares upon the happening of any of
the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys'
fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
(S) 1310. SUSPENSION OF PROCEEDINGS FOR PAYMENT PENDING LITIGATION.
If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
(S) 1311. EXEMPT SHARES.
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect
to such shares in the event of a reorganization or merger.
(S) 1312. ATTACKING VALIDITY OF REORGANIZATION OR MERGER.
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted in
favor thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event
of a reorganization or short-form merger is entitled to payment in accordance
with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the
approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash
for such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-
form merger or to have the reorganization set aside or rescinded, the
shareholder shall not thereafter have any right to demand payment of cash for
the shareholder's shares pursuant to this chapter. The court in any action
attacking the validity of the reorganization or short-form merger or to have
the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10-days
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
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(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable
as to the shareholders of any party so controlled.
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APPENDIX G
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
LPM HOLDINGS, INC.
LPM HOLDINGS, INC., a corporation organized and existing under and by virtue
of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY:
FIRST: That the Certificate of Incorporation originally filed with the
Secretary of State of the State of Delaware on December 16, 1996 is amended
and restated in its entirety to read as follows:
"I.
The name of this Corporation is LPM Holdings, Inc.
II.
The address of the registered office of the Corporation in the State of
Delaware is c/o The Corporation Trust Company, The Corporation Trust Center,
1209 Orange Street, Wilmington, County of New Castle, Delaware 19801 and the
name of its registered agent at that address is The Corporation Trust Company.
III.
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of
the State of Delaware.
IV.
The Corporation is authorized to issue two classes of stock designated as
"Common Stock" and "Preferred Stock," respectively. The total number of shares
of Common Stock authorized to be issued is twelve million (12,000,000) shares
and each such share shall have a par value of $0.001. The total number of
shares of Preferred Stock authorized to be issued is two million (2,000,000)
shares and each such share shall have a par value $0.001.
The shares of Preferred Stock may be issued from time to time in one or more
series. The Board of Directors of the Corporation is hereby authorized, by
adopting appropriate resolutions and causing one or more certificates of
designation to be executed, acknowledged, filed, recorded and become effective
in accordance with the General Corporation Law of the State of Delaware, to
establish from time to time the number of shares to be included in each such
series, and to fix the designation, powers, preferences and rights of the
shares of each such series and the qualifications, limitations or restrictions
thereof, including but not limited to the fixing or alteration of the dividend
rights, dividend rate, conversion rights, exchange rights, voting rights,
rights and terms of redemption (including sinking fund provisions), the
redemption price or prices, and the liquidation preferences of any wholly
unissued series of shares of Preferred Stock, or any of them; and to increase
or decrease the number of shares of any series subsequent to the issue of the
shares of that series, but not above the total number of authorized shares of
Preferred Stock and not below the number of shares of such series then
outstanding. In case the number of shares of any series shall be so decreased,
the shares constituting such decrease shall resume the status which they had
prior to the adoption of the resolution originally fixing the number of shares
of such series.
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V.
The management of the business and the conduct of the affairs of the
Corporation shall be vested in the Board of Directors. The number of Directors
which shall constitute the whole Board of Directors shall be fixed by, or in
the manner provided in, the Bylaws of the Corporation.
VI.
In furtherance and not in limitation of the powers conferred by statute, the
Board of Directors is expressly authorized to make, repeal, alter, amend and
rescind the Bylaws of the Corporation.
VII.
Election of directors at an annual or special meeting of stockholders need
not be by written ballot unless the Bylaws of the Corporation shall so
provide.
VIII.
A director shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director;
provided that this Article VIII shall not eliminate or limit the liability of
a director (i) for any breach of such director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of the law,
(iii) under Section 174 of the General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derives an
improper personal benefit. If the General Corporation Law of the State of
Delaware is amended to authorize corporate action further eliminating or
limiting the personal liability of directors, then the liability of a director
of the Corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware so amended.
The Corporation shall, to the fullest extent permitted by Delaware law and
to such greater extent as applicable law may hereafter from time to time
permit, indemnify and hold harmless each person (and the heirs, executors or
administrators of such person) who was or is a party or is threatened to be
made a party to, or is involved in, any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director or
officer of the Corporation or is or was serving at the request of the
Corporation as a director, officer, partner, member or other agent of another
corporation, partnership, joint venture, trust or other enterprise in
connection with any matter relating to the Corporation's business or affairs,
against any losses, claims, damages or liabilities. The right to
indemnification conferred in this Article VIII shall also include the right to
be paid by the Corporation the expenses incurred in connection with any such
proceeding in advance of its final disposition to the fullest extent
authorized by Delaware law. The right to indemnification conferred in this
Article VIII shall be a contract right.
No repeal, modification or amendment of this Article VIII, or adoption of
any provision of this Certificate of Incorporation or the bylaws of the
Corporation, nor, to the fullest extent permitted by Delaware law, any
modification of law shall eliminate or reduce the effect of this Article VIII
in respect of any acts or omissions occurring prior to the time of such
repeal, amendment, adoption or modification.
IX.
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred on stockholders
herein are granted subject to this reservation.
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SECOND: That the Amended and Restated Certificate of Incorporation has been
duly adopted in accordance with the provisions of Section 245 of the General
Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said LPM HOLDINGS, INC. has caused this Certificate to
be signed and attested by its President and Secretary on this day of May
1997.
LPM Holdings, Inc.
By: _________________________________
Brian P. McDermott,
President
ATTEST:
_____________________________________
Robert D. Olsen
Secretary
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APPENDIX H
BYLAWS
OF
LPM HOLDINGS, INC.,
A DELAWARE CORPORATION
(AS AMENDED AS OF MAY , 1997)
ARTICLE I
OFFICES
Section 1.01 REGISTERED OFFICE. The registered office of LPM HOLDINGS, INC.
(hereinafter called the "Corporation") shall be at such place in the State of
Delaware as shall be designated by the Board of Directors (hereinafter called
the "Board").
Section 1.02 PRINCIPAL OFFICE. The principal office for the transaction of
the business of the Corporation shall be at such location, within or without
the State of Delaware, as shall be designated by the Board.
Section 1.03 OTHER OFFICES. The Corporation may also have an office or
offices at such other place or places, either within or without the State of
Delaware, as the Board may from time to time determine or as the business of
the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.01 ANNUAL MEETINGS. Annual meetings of the stockholders of the
Corporation for the purpose of electing directors and for the transaction of
such other proper business as may come before such meetings may be held at
such time, date and place as the Board shall determine by resolution.
Section 2.02 SPECIAL MEETINGS. Special meetings of the stockholders of the
Corporation for any purpose or purposes may be called at any time by the
Board, or by a committee of the Board which has been duly designated by the
Board and whose powers and authority, as provided in a resolution of the Board
or in the Bylaws, include the power to call such meetings, but such special
meetings may not be called by any other person or persons; provided, however,
that if and to the extent that any special meeting of stockholders may be
called by any other person or persons specified in any provisions of the
Certificate of Incorporation or any amendment thereto or any certificate filed
under Section 151(g) of the General Corporation Law of the State of Delaware
(or its successor statute as in effect from time to time hereafter), then such
special meeting may also be called by the person or persons, in the manner, at
the time and for the purposes so specified.
Section 2.03 PLACE OF MEETINGS. All meetings of the stockholders shall be
held at such places, within or without the State of Delaware, as may from time
to time be designated by the person or persons calling the respective meetings
and specified in the respective notices or waivers of notice thereof.
Section 2.04 NOTICE OF MEETINGS. Except as otherwise required by law, notice
of each meeting of the stockholders, whether annual or special, shall be given
not less than ten (10) nor more than sixty (60) days before the date of the
meeting to each stockholder of record entitled to vote at such meeting by
delivering a typewritten or printed notice thereof to him personally, or by
depositing such notice in the United States mail, in
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a postage prepaid envelope, directed to him at his address furnished by him to
the Secretary of the Corporation for such purpose or, if he shall not have
furnished to the Secretary his address for such purpose, then at his address
last known to the Secretary, or by transmitting a notice thereof to him at
such address by telegraph, cable or wireless. Except as otherwise expressly
required by law, no publication of any notice of a meeting of the stockholders
shall be required. Every notice of a meeting of the stockholders shall state
the place, date and hour of the meeting, and, in the case of a special meeting
shall also state the purpose or purposes for which the meeting is called.
Except as otherwise expressly required by law, notice of any adjourned meeting
of the stockholders need not be given if the time and place thereof are
announced at the meeting at which the adjournment is taken.
Whenever notice is required to be given to any stockholder to whom (i)
notice of two consecutive annual meetings, and all notices of meetings or of
the taking of action by written consent without a meeting to such person
during the period between such two consecutive annual meetings, or (ii) all,
and at least two, payments (if sent by first class mail) of dividends or
interest on securities during a twelve month period, have been mailed
addressed to such person at his address as shown on the records of the
Corporation and have been returned undeliverable, the giving of such notice to
such person shall not be required. Any action or meeting which shall have been
taken or held without notice to such person shall have the same force and
effect as if such notice had been duly given. If any such person shall deliver
to the Corporation a written notice setting forth his then current address,
the requirement that notice be given to such person shall be reinstated.
No notice need be given to any person with whom communication is unlawful,
nor shall there be any duty to apply for any permit or license to give notice
to any such person.
Section 2.05 QUORUM. Except as provided by law, the holders of record of a
majority in voting interest of the shares of stock of the Corporation entitled
to be voted, present in person or by proxy, shall constitute a quorum for the
transaction of business at any meeting of the stockholders of the Corporation
or any adjournment thereof. The stockholders present at a duly called or held
meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave
less than a quorum. In the absence of a quorum at any meeting or any
adjournment thereof, a majority in voting interest of the stockholders present
in person or by proxy and entitled to vote thereat or, in the absence
therefrom of all the stockholders, any officer entitled to preside at or to
act as secretary of such meeting may adjourn such meeting from time to time.
At any such adjourned meeting at which a quorum is present any business may be
transacted which might have been transacted at the meeting as originally
called.
Section 2.06 VOTING.
(a) At each meeting of the stockholders, each stockholder shall be entitled
to vote in person or by proxy each share or fractional share of the stock of
the Corporation which has voting rights on the matter in question and which
shall have been held by him and registered in his name on the books of the
Corporation:
(i) on the date fixed pursuant to Section 2.10 of these Bylaws as the
record date for the determination of stockholders entitled to notice of and
to vote at such meeting, or
(ii) if no such record date shall have been so fixed, then (A) at the
close of business on the day next preceding the day on which notice of the
meeting shall be given or (B) if notice of the meeting shall be waived, at
the close of business on the day next preceding the day on which the
meeting shall be held.
(b) Shares of its own stock belonging to the Corporation or to another
corporation, if a majority of the shares entitled to vote in the election of
directors in such other corporation is held, directly or indirectly, by the
Corporation, shall neither be entitled to vote nor be counted for quorum
purposes. Persons holding stock of the Corporation in a fiduciary capacity
shall be entitled to vote such stock. Persons whose stock is pledged shall be
entitled to vote, unless in the transfer by the pledgor on the books of the
Corporation he shall have expressly empowered the pledgee to vote thereon, in
which case only the pledgee, or his proxy, may represent such stock and vote
thereon. Stock having voting power standing of record in the names of two or
more persons, whether
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fiduciaries, members of a partnership, joint tenants, tenants in common,
tenants by the entirety or otherwise, or with respect to which two or more
persons have the same fiduciary relationship, shall be voted in accordance
with the provisions of the General Corporation Law of Delaware.
(c) Any such voting rights may be exercised by the stockholder entitled
thereto in person or by his proxy appointed by an instrument in writing,
subscribed by such stockholder or by his attorney thereunto authorized and
delivered to the secretary of the meeting; provided, however, that no proxy
shall be voted or acted upon after three years from its date unless said proxy
shall provide for a longer period. The attendance at any meeting of a
stockholder who may theretofore have given a proxy shall not have the effect
of revoking the same unless he shall in writing so notify the secretary of the
meeting prior to the voting of the proxy. At any meeting of the stockholders
all matters, except as otherwise provided in the Certificate of Incorporation,
in these Bylaws or by law, shall be decided by the vote of a majority in
voting interest of the stockholders present in person or by proxy and entitled
to vote thereat and thereon. The stockholders present at a duly called or held
meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough stockholders to leave
less than a quorum. The vote at any meeting of the stockholders on any
question need not be by ballot, unless so directed by the chairman of the
meeting. On a vote by ballot, each ballot shall be signed by the stockholder
voting, or by his proxy if there be such proxy, and it shall state the number
of shares voted.
Section 2.07 LIST OF STOCKHOLDERS. The Secretary of the Corporation shall
prepare and make, at least ten (10) days before every meeting of stockholders,
a complete list of the stockholders entitled to vote at the meeting, arranged
in alphabetical order, and showing the address of each stockholder and the
number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten (10)
days prior to the meeting, either at a place within the city where the meeting
is to be held, which place shall be specified in the notice of the meeting,
or, if not so specified, at the place where the meeting is to be held. The
list shall also be produced and kept at the time and place of the meeting
during the entire duration thereof, and may be inspected by any stockholder
who is present.
Section 2.08 INSPECTOR OF ELECTION. If at any meeting of the stockholders a
vote by written ballot shall be taken on any question, the chairman of such
meeting may appoint an inspector or inspectors of election to act with respect
to such vote. Each inspector so appointed shall first subscribe an oath
faithfully to execute the duties of an inspector at such meeting with strict
impartiality and according to the best of his ability. Such inspectors shall
decide upon the qualification of the voters and shall report the number of
shares represented at the meeting and entitled to vote on such question, shall
conduct and accept the votes, and, when the voting is completed, shall
ascertain and report the number of shares voted respectively for and against
the question. Reports of the inspectors shall be in writing and subscribed and
delivered by them to the Secretary of the Corporation. Inspectors need not be
stockholders of the Corporation, and any officer of the Corporation may be an
inspector on any question other than a vote for or against a proposal in which
he shall have a material interest.
Section 2.09 STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the
General Corporation Law of the State of Delaware to be taken at any annual or
special meeting of the stockholders, or any action which may be taken at any
annual or special meeting of the stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent in writing setting forth
the action so taken shall be 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. Prompt notice of the taking of the corporate action
without a meeting by less than unanimous written consent shall be given to
those stockholders who have not consented in writing.
Section 2.10 RECORD DATE. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or to express consent to corporate action in
writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board may fix a record date, which
record date shall not
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precede the date upon which the resolution fixing the record date is adopted
by the Board and which record date: (i) in the case of determination of
stockholders entitled to vote at any meeting of stockholders or adjournment
thereof, shall, unless otherwise required by law, not be more than sixty (60)
nor less than ten (10) days before the date of such meeting; (ii) in the case
of determination of stockholders entitled to express consent to corporate
action in writing without a meeting, shall not be more than ten (10) days from
the date upon which the resolution fixing the record date is adopted by the
Board; and (iii) in the case of any other action, shall not be more than sixty
(60) days prior to such other action. If no record date is fixed: (i) the
record date for determining stockholders entitled to notice of or to vote at a
meeting of stockholders shall be at the close of business on the day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the day next preceding the day on which the meeting is
held; (ii) the record date for determining stockholders entitled to express
consent to corporate action in writing without a meeting when no prior action
of the Board is required by law, shall be the first date on which a signed
written consent setting forth the action taken or proposed to be taken is
delivered to the corporation in accordance with applicable law, or, if prior
action by the Board is required by law, shall be at the close of business on
the day on which the Board adopts the resolution taking such prior action; and
(iii) the record date for determining stockholders for any other purpose shall
be at the close of business on the day on which the Board of Directors adopts
the resolution relating thereto. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to
any adjournment of the meeting; provided, however, that the Board may fix a
new record date for the adjourned meeting.
ARTICLE III
BOARD OF DIRECTORS
Section 3.01 GENERAL POWERS. The property, business and affairs of the
Corporation shall be managed by or under the direction of the Board, which may
exercise all of the powers of the Corporation, except such as are by the
Certificate of Incorporation, by these Bylaws or by law conferred upon or
reserved to the stockholders.
Section 3.02 NUMBER AND TERM. The authorized Board shall consist of seven
(7) members until changed from time to time by resolution of the Board.
Directors need not be stockholders of the Corporation. Each director shall
hold office until a successor is elected and qualified or until the director
resigns or is removed.
Section 3.03 ELECTION OF DIRECTORS. The directors shall be elected by the
stockholders of the Corporation, and at each election the persons receiving
the greatest number of votes, up to the number of directors then to be
elected, shall be the persons then elected. The election of directors is
subject to any provisions contained in the Certificate of Incorporation
relating thereto, including any provisions for a classified board.
Section 3.04 RESIGNATION AND REMOVAL. Any director of the Corporation may
resign at any time by giving written notice to the Board or to the Secretary
of the Corporation. Any such resignation shall take effect at the time
specified therein, or, if the time is not specified, it shall take effect
immediately upon its receipt; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Except as otherwise provided by the Certificate of Incorporation or by law,
any director or the entire board of directors may be removed, with or without
cause, by the holders of a majority of shares then entitled to vote at an
election of directors.
Section 3.05 VACANCIES. Except as otherwise provided in the Certificate of
Incorporation, any vacancy in the Board, whether because of death,
resignation, disqualification, an increase in the number of directors, or any
other cause, may be filled by vote of the majority of the remaining directors,
although less than a quorum, or by a sole remaining director. Each director so
chosen to fill a vacancy shall hold office until his successor shall have been
elected and shall qualify or until he shall resign or shall have been removed.
No
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reduction of the authorized number of directors shall have the effect of
removing any director prior to the expiration of his term of office.
Upon the resignation of one or more directors from the Board, effective at a
future date, a majority of the directors then in office, including those who
have so resigned, shall have the power to fill such vacancy or vacancies, the
vote thereon to take effect when such resignation or resignations shall become
effective, and each director so chosen shall hold office as provided
hereinabove in the filling of other vacancies.
Section 3.06 PLACE OF MEETING; TELEPHONE CONFERENCE MEETING. The Board may
hold any of its meetings at such place or places within or without the State
of Delaware as the Board may from time to time by resolution designate or as
shall be designated by the person or persons calling the meeting or in the
notice or waiver of notice of any such meeting. Directors may participate in
any regular or special meeting of the Board by means of conference telephone
or similar communications equipment pursuant to which all persons
participating in the meeting of the Board can hear each other, and such
participation shall constitute presence in person at such meeting.
Section 3.07 FIRST MEETING. The Board shall meet as soon as practicable
after each annual election of directors and notice of such first meeting shall
not be required.
Section 3.08 REGULAR MEETINGS. Regular meetings of the Board may be held at
such times as the Board shall from time to time by resolution determine. If
any day fixed for a meeting shall be a legal holiday at the place where the
meeting is to be held, then the meeting shall be held at the same hour and
place on the next succeeding business day which is not a legal holiday. Except
as provided by law, notice of regular meetings need not be given.
Section 3.09 SPECIAL MEETINGS. Special meetings of the Board may be called
at any time by the Chairman of the Board or the President or by any two (2)
directors, to be held at the principal office of the Corporation, or at such
other place or places, within or without the State of Delaware, as the person
or persons calling the meeting may designate.
Notice of the time and place of special meetings shall be given to each
director either (i) by mailing or otherwise sending to him a written notice of
such meeting, charges prepaid, addressed to him at his address as it is shown
upon the records of the Corporation, or if it is not so shown on such records
or is not readily ascertainable, at the place in which the meetings of the
directors are regularly held, at least seventy-two (72) hours prior to the
time of the holding of such meeting; or (ii) by orally communicating the time
and place of the special meeting to him at least forty-eight (48) hours prior
to the time of the holding of such meeting. Either of the notices as above
provided shall be due, legal and personal notice to such director.
Section 3.10 QUORUM AND ACTION. Except as otherwise provided in the
Certificate of Incorporation, these Bylaws or by law, the presence of a
majority of the authorized number of directors shall be required to constitute
a quorum for the transaction of business at any meeting of the Board, and all
matters shall be decided at any such meeting, a quorum being present, by the
affirmative votes of a majority of the directors present. In the absence of a
quorum, a majority of directors present at any meeting may adjourn the same
from time to time until a quorum shall be present. Notice of any adjourned
meeting need not be given. The directors shall act only as a Board, and the
individual directors shall have no power as such.
Section 3.11 ACTION BY CONSENT. Any action required or permitted to be taken
at any meeting of the Board or of any committee thereof may be taken without a
meeting if a written consent thereto is signed by all members of the Board or
of such committee, as the case may be, and such written consent is filed with
the minutes of proceedings of the Board or such committee. Such action by
written consent shall have the same force and effect as the unanimous vote of
such directors.
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Section 3.12 COMPENSATION. No stated salary need be paid to directors, as
such, for their services but, as fixed from time to time by resolution of the
Board, the directors may receive directors' fees, compensation and
reimbursement for expenses for attendance at directors' meetings, for serving
on committees and for discharging their duties; provided that nothing herein
contained shall be construed to preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
Section 3.13 COMMITTEES. The Board may, by resolution passed by a majority
of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of the committee, the member or
members thereof present at any meeting and not disqualified from voting,
whether or not he or they constitute a quorum, may unanimously appoint another
member of the Board of Directors to act at the meeting in place of any such
absent or disqualified member. Any such committee, to the extent permitted by
law and provided in the resolution of the Board, shall have and may exercise
all the powers and authority of the Board in the management of the business
and affairs of the Corporation, and may authorize the seal of the Corporation
to be affixed to all papers which may require it.
Unless the Board otherwise provides, each committee designated by the Board
may make, alter and repeal rules for conduct of its business. In the absence
of such rules each committee shall conduct its business in the same manner as
the Board conducts its business pursuant to these Bylaws. Any such committee
shall keep written minutes of its meetings and report the same to the Board
when required.
Section 3.14 OFFICERS OF THE BOARD. A Chairman of the Board or a Vice
Chairman may be appointed from time to time by the Board and shall have such
powers and duties as shall be designated by the Board.
ARTICLE IV
OFFICERS
Section 4.01 OFFICERS. The officers of the Corporation shall be a President,
a Secretary and a Chief Financial Officer. The Corporation may also have, at
the discretion of the Board, a Chairman of the Board, a Chief Executive
Officer, one or more Vice Presidents, a Treasurer, one or more Assistant Vice
Presidents, one or more Assistant Secretaries, one or more Assistant
Treasurers and such other officers as may be appointed in accordance with the
provisions of Section 4.03 of these Bylaws. Any number of offices may be held
by the same person. The salaries of all officers of the Corporation shall be
fixed from time to time by the Board.
Section 4.02 ELECTION AND TERM. The officers of the Corporation, except such
officers as may be appointed in accordance with the provisions of Section 4.03
or Section 4.05 of these Bylaws, shall be chosen annually by the Board, and
each shall hold his office until he shall resign or shall be removed or
otherwise disqualified to serve, or until his successor shall be elected and
qualified.
Section 4.03 SUBORDINATE OFFICERS. The Board may appoint, or may authorize
the Chief Executive Officer to appoint, such other officers as the business of
the Corporation may require, each of whom shall have such authority and
perform such duties as are provided in these Bylaws or as the Board or the
President from time to time may specify, and shall hold office until he shall
resign or shall be removed or otherwise disqualified to serve.
Section 4.04 REMOVAL AND RESIGNATION. Any officer may be removed, with or
without cause, by a majority of the directors at the time in office, at any
regular or special meeting of the Board, or, except in case of an officer
chosen by the Board, by the Chief Executive Officer upon whom such power of
removal may be conferred by the Board.
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Any officer may resign at any time by giving written notice to the Board,
the Chairman of the Board, the President or the Secretary of the Corporation.
Any such resignation shall take effect at the date of the receipt of such
notice or at any later time specified therein; and unless otherwise specified
therein, the acceptance of such resignation shall not be necessary to make it
effective.
Section 4.05 VACANCIES. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in
the manner prescribed in the Bylaws for the regular appointments to such
office.
Section 4.06 PRESIDENT. The President of the Corporation shall, subject to
the control of the Board, have general supervision, direction and control of
the business and affairs of the Corporation. He shall preside at all meetings
of stockholders and the Board. He shall have the general powers and duties of
management usually vested in the chief executive officer of a corporation, and
shall have such other powers and duties with respect to the administration of
the business and affairs of the Corporation as may from time to time be
assigned to him by the Board or as prescribed by the Bylaws.
Section 4.07 CHAIRMAN OF THE BOARD. The Chairman of the Board, if any, shall
preside at all meetings of the stockholders and the Board and exercise and
perform such other powers and duties with respect to the administration of the
business and affairs of the Corporation as may from time to time be assigned
to him by the Board or as is prescribed by the Bylaws.
Section 4.08 VICE PRESIDENT. The Vice President(s), if any, shall exercise
and perform such powers and duties with respect to the administration of the
business and affairs of the Corporation as from time to time may be assigned
to each of them by the President, by the Chairman of the Board, if any, by the
Board or as is prescribed by the Bylaws. In the absence or disability of the
President, the Vice Presidents, in order of their rank as fixed by the Board,
or if not ranked, the Vice President designated by the Board, shall perform
all of the duties of the President and when so acting shall have all of the
powers of and be subject to all the restrictions upon the President.
Section 4.09 SECRETARY. The Secretary shall keep, or cause to be kept, a
book of minutes at the principal office for the transaction of the business of
the Corporation, or such other place as the Board may order, of all meetings
of directors and stockholders, with the time and place of holding, whether
regular or special, and if special, how authorized and the notice thereof
given, the names of those present at directors' meetings, the number of shares
present or represented at stockholders' meetings and the proceedings thereof.
The Secretary shall keep, or cause to be kept, at the principal office for
the transaction of the business of the Corporation or at the office of the
Corporation's transfer agent, a share register, or a duplicate share register,
showing the names of the stockholders and their addresses, the number and
classes of shares held by each, the number and date of certificates issued for
the same, and the number and date of cancellation of every certificate
surrendered for cancellation.
The Secretary shall give, or cause to be given, notice of all the meetings
of the stockholders and of the Board required by these Bylaws or by law to be
given, and he shall keep the seal of the Corporation in safe custody, and
shall have such other powers and perform such other duties as may be
prescribed by the Board or these Bylaws. If for any reason the Secretary shall
fail to give notice of any special meeting of the Board called by one or more
of the persons identified in Section 3.09 of these Bylaws, or if he shall fail
to give notice of any special meeting of the stockholders called by one or
more of the persons identified in Section 2.02 of these Bylaws, then any such
person or persons may give notice of any such special meeting.
Section 4.10 CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep
and maintain or cause to be kept and maintained, adequate and correct accounts
of the properties and business transactions of the Corporation, including
accounts of its assets, liabilities, receipts, disbursements, gains, losses,
capital, surplus and shares. Any surplus, including earned surplus, paid-in
surplus and surplus arising from a reduction of capital,
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shall be classified according to source and shown in a separate account. The
books of account at all reasonable times shall be open to inspection by any
director.
The Chief Financial Officer shall deposit all moneys and other valuables in
the name and to the credit of the Corporation with such depositories as may be
designated by the Board. He shall disburse the funds of the Corporation as may
be ordered by the Board, shall render to the President, to the Chief Executive
Officer and to the directors, whenever they request it, an account of all of
his transactions as Chief Financial Officer and of the financial condition of
the Corporation, and shall have such other powers and perform such other
duties as may be prescribed by the Board or these Bylaws.
Section 4.11 COMPENSATION. The compensation of the officers of the
Corporation, if any, shall be fixed from time to time by the Board.
ARTICLE V
CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC.
Section 5.01 EXECUTION OF CONTRACTS. The Board, except as otherwise provided
in these Bylaws, may authorize any officer or officers, agent or agents, to
enter into any contract or execute any instrument in the name and on behalf of
the Corporation, and such authority may be general or confined to specific
instances; and unless so authorized by the Board or by these Bylaws, no
officer, agent or employee shall have any power or authority to bind the
Corporation by any contract or engagement or to pledge its credit or to render
it liable for any purpose or in any amount.
Section 5.02 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for
payment of money, notes or other evidence of indebtedness, issued in the name
of or payable to the Corporation, shall be signed or endorsed by such person
or persons and in such manner as, from time to time, shall be determined by
resolution of the Board. Each such person shall give such bond, if any, as the
Board may require.
Section 5.03 DEPOSIT. All funds of the Corporation not otherwise employed
shall be deposited from time to time to the credit of the Corporation in such
banks, trust companies or other depositories as the Board may select, or as
may be selected by any officer or officers, assistant or assistants, agent or
agents, attorney or attorneys, of the Corporation to whom such power shall
have been delegated by the Board. For the purpose of deposit and for the
purpose of collection for the account of the Corporation, the President, the
Chief Executive Officer, any Vice President or the Chief Financial Officer (or
any other officer or officers, assistant or assistants, agent or agents, or
attorney or attorneys of the Corporation who shall be determined by the Board
from time to time) may endorse, assign and deliver checks, drafts and other
orders for the payment of money which are payable to the order of the
Corporation.
Section 5.04 GENERAL AND SPECIAL BANK ACCOUNTS. The Board from time to time
may authorize the opening and keeping of general and special bank accounts
with such banks, trust companies or other depositories as the Board may select
or as may be selected by an officer or officers, assistant or assistants,
agent or agents, or attorney or attorneys of the Corporation to whom such
power shall have been delegated by the Board. The Board may make such special
rules and regulations with respect to such bank accounts, not inconsistent
with the provisions of these Bylaws, as it may deem expedient.
ARTICLE VI
SHARES AND THEIR TRANSFER
Section 6.01 CERTIFICATES FOR STOCK. Every owner of stock of the Corporation
shall be entitled to have a certificate or certificates, in such form as the
Board shall prescribe, certifying the number and class of
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shares of the stock of the Corporation owned by him. The certificates
representing shares of such stock shall be numbered in the order in which they
shall be issued and shall be signed in the name of the Corporation by the
Chairman of the Board, the President or a Vice President and by the Secretary
or an Assistant Secretary or by the Chief Financial Officer, the Treasurer or
an Assistant Treasurer. Any or all of the signatures on the certificates may
be a facsimile. In case any officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon any such certificate
shall thereafter have ceased to be such officer, transfer agent or registrar
before such certificate is issued, such certificate may nevertheless be issued
by the Corporation with the same effect as though the person who signed such
certificate, or whose facsimile signature shall have been placed thereupon,
were such officer, transfer agent or registrar at the date of issue. A record
shall be kept of the respective names of the persons, firms or corporations
owning the stock represented by such certificates, the number and class of
shares represented by such certificates, respectively, and the respective
dates thereof, and in case of cancellation, the respective dates of
cancellation. Every certificate surrendered to the Corporation for exchange or
transfer shall be cancelled, and no new certificate or certificates shall be
issued in exchange for any existing certificate until such existing
certificate shall have been so cancelled, except in cases provided for in
Section 6.04 of these Bylaws.
Section 6.02 TRANSFER OF STOCK. Transfer of shares of stock of the
Corporation shall be made only on the books of the Corporation by the
registered holder thereof, or by his attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary, or with a transfer clerk
or a transfer agent appointed as provided in Section 6.03 of these Bylaws, and
upon surrender of the certificate or certificates for such shares properly
endorsed and the payment of all taxes thereon. The person in whose name shares
of stock stand on the books of the Corporation shall be deemed the owner
thereof for all purposes as regards the Corporation. Whenever any transfer of
shares shall be made for collateral security, and not absolutely, such fact
shall be stated expressly in the entry of transfer if, when the certificate or
certificates shall be presented to the Corporation for transfer, both the
transferor and the transferee request the Corporation to do so.
Section 6.03 REGULATIONS. The Board may make such rules and regulations as
it may deem expedient, not inconsistent with these Bylaws, concerning the
issue, transfer and registration of certificates for shares of the stock of
the Corporation. The Board may appoint, or authorize any officer or officers
to appoint, one or more transfer clerks or one or more transfer agents and one
or more registrars, and may require all certificates for stock to bear the
signature or signatures of any of them.
Section 6.04 LOST, STOLEN, DESTROYED AND MUTILATED CERTIFICATES. In any case
of loss, theft, destruction, or mutilation of any certificate of stock,
another may be issued in its place upon proof of such loss, theft,
destruction, or mutilation and upon the giving of a bond of indemnity to the
Corporation in such form and in such sums as the Board may direct; provided,
however, that a new certificate may be issued without requiring any bond when,
in the judgment of the Board, it is proper to do so.
Section 6.05 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The President
or any Vice President and the Secretary or any Assistant Secretary of this
Corporation are authorized to vote, represent and exercise on behalf of this
Corporation all rights incident to all shares of any other corporation or
corporations standing in the name of this Corporation. The authority herein
granted to said officers to vote or represent on behalf of this Corporation
any and all shares held by this Corporation in any other corporation or
corporations may be exercised either by such officers in person or by any
person authorized so to do by proxy or power of attorney duly executed by said
officers.
ARTICLE VII
INDEMNIFICATION
Section 7.01 ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any person who was or is a party or is threatened
to be made a party to any
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threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise or
as a member of any committee or similar body, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding
if he acted in good faith and in a manner he reasonably believed to be in, or
not opposed to, the best interests of the Corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in,
or not opposed to, the best interests of the Corporation, and, with respect to
any criminal action or proceeding, that he had reasonable cause to believe
that his conduct was unlawful.
Section 7.02 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation
shall 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 the Corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, or as a member of any committee or
similar body, against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted in good faith and in a manner he 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, issue or
matter as to which such person shall have been adjudged to be liable to the
Corporation unless and only to the extent that the Court of Chancery or the
court in which such action or suit was brought shall determine 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 which the Court of Chancery or such other court
shall deem proper.
Section 7.03 DETERMINATION OF RIGHT OF INDEMNIFICATION. Any indemnification
under Section 7.01 or 7.02 of these Bylaws (unless ordered by a court) shall
be made by the Corporation only as authorized in the specific case upon a
determination that indemnification of the director, officer, employee or agent
is proper in the circumstances because he has met the applicable standard of
conduct set forth in Sections 7.01 and 7.02 of these Bylaws. Such
determination shall be made (i) by the Board by a majority vote of a quorum
consisting of directors who were not parties to such action, suit or
proceeding, or (ii) if such a quorum is not obtainable, or, even if
obtainable, a quorum of disinterested directors so directs, by independent
legal counsel in a written opinion, or (iii) by the stockholders.
Section 7.04 INDEMNIFICATION AGAINST EXPENSES OF SUCCESSFUL PARTY.
Notwithstanding the other provisions of this Article VII, to the extent that a
director, officer, employee or agent of the Corporation has been successful on
the merits or otherwise in defense of any action, suit or proceeding referred
to in Section 7.01 or 7.02 of these Bylaws, or in defense of any claim, issue
or matter therein, he shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection
therewith.
Section 7.05 ADVANCE OF EXPENSES. Expenses (including attorneys' fees)
incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board upon receipt of an undertaking by or on
behalf of the director or officer, to repay such amount if it shall ultimately
be determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article VII. Such expenses (including attorneys' fees)
incurred by other employees and agents may be so paid upon such terms and
conditions, if any, as the Board deems appropriate.
Section 7.06 OTHER RIGHTS AND REMEDIES. The indemnification and advancement
of expenses provided by, or granted pursuant to, the other Sections of this
Article VII shall not be deemed exclusive and are
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declared expressly to be nonexclusive of any other rights to which those
seeking indemnification or advancements of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
Section 7.07 INSURANCE. Upon resolution passed by the Board, the Corporation
may purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving
at the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise or
as a member of any committee or similar body against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article VII.
Section 7.08 CONSTITUENT CORPORATIONS. For the purposes of this Article VII,
references to "the Corporation" include in addition to the resulting
corporation, any constituent corporation (including any constituent of a
constituent) absorbed in a consolidation or merger which, if its separate
existence had continued, would have had power and authority to indemnify its
directors, officers and employees or agents, so that any person who is or was
a director, officer, employee or agent of such constituent corporation or is
or was serving at the request of such constituent corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise or as a member of any committee or similar body
shall stand in the same position under the provisions of this Article VII with
respect to the resulting or surviving corporation as he would have with
respect to such constituent corporation if its separate existence had
continued.
Section 7.09 EMPLOYEE BENEFIT PLANS. For the purposes of this Article VII,
references to "other enterprises" shall include employee benefit plans;
references to "fines" shall include any excise taxes assessed on a person with
respect to any employee benefit plan; and references to "serving at the
request of the Corporation" shall include any service as a director, officer,
employee or agent of the Corporation which imposes duties on, or involves
services by, such director, officer, employee or agent with respect to an
employee benefit plan, its participants or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the
interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests
of the Corporation" as referred to in this Article VII.
Section 7.10 BROADEST LAWFUL INDEMNIFICATION. In addition to the foregoing,
the Corporation shall, to the broadest and maximum extent permitted by
Delaware law, as the same exists from time to time (but, in case of any
amendment to or change in Delaware law, only to the extent that such amendment
or change permits the Corporation to provide broader rights of indemnification
than is permitted to the Corporation prior to such amendment or change),
indemnify each person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative by reason of the fact
that he is or was a director or officer of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding. In addition, the Corporation
shall, to the broadest and maximum extent permitted by Delaware law, as the
same may exist from time to time (but, in case of any amendment to or change
in Delaware law, only to the extent that such amendment or change permits the
Corporation to provide broader rights of payment of expenses incurred in
advance of the final disposition of an action, suit or proceeding than is
permitted to the Corporation prior to such amendment or change), pay to such
person any and all expenses (including attorneys' fees) incurred in defending
or settling any such action, suit or proceeding in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of the director or officer, to repay such amount if it shall
ultimately be determined by a final judgment or other final adjudication that
he is not entitled to be indemnified by the Corporation as authorized in this
Section 7.10. The first sentence of this Section 7.10 to the contrary
notwithstanding, the Corporation shall not indemnify any such person with
respect to any of the following matters: (i) remuneration paid to such person
if it shall be determined by a final judgment or other
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final adjudication that such remuneration was in violation of law; or (ii) any
accounting of profits made from the purchase or sale by such person of the
Corporation's securities within the meaning of Section 16(b) of the Securities
Exchange Act of 1934 and amendments thereto or similar provisions of any
federal, state or local statutory law; or (iii) actions brought about or
contributed to by the dishonesty of such person, if a final judgment or other
final adjudication adverse to such person establishes that acts of active and
deliberate dishonesty were committed or attempted by such person with actual
dishonest purpose and intent and were material to the adjudication; or (iv)
actions based on or attributable to such person having gained any personal
profit or advantage to which he was not entitled, in the event that a final
judgment or other final adjudication adverse to such person establishes that
such person in fact gained such personal profit or other advantage to which he
was not entitled; or (v) any matter in respect of which a final decision by a
court with competent jurisdiction shall determine that indemnification is
unlawful; provided, however, that the Corporation shall perform its
obligations under the second sentence of this Section 7.10 on behalf of such
person until such time as it shall be ultimately determined by a final
judgment or other final adjudication that he is not entitled to be indemnified
by the Corporation as authorized by the first sentence of this Section 7.10 by
virtue of any of the preceding clauses (i), (ii), (iii), (iv) or (v).
Section 7.11 TERM. The indemnification and advancement of expenses provided
by, or granted pursuant to, this Article VII shall, unless otherwise provided
when authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Section 7.12 SEVERABILITY. If any part of this Article VII shall be found,
in any action, suit or proceeding or appeal therefrom or in any other
circumstances or as to any particular officer, director, employee or agent to
be unenforceable, ineffective or invalid for any reason, the enforceability,
effect and validity of the remaining parts or of such parts in other
circumstances shall not be affected, except as otherwise required by
applicable law.
Section 7.13 AMENDMENTS. The foregoing provisions of this Article VII shall
be deemed to constitute an agreement between the Corporation and each of the
persons entitled to indemnification hereunder, for as long as such provisions
remain in effect. Any amendment to the foregoing provisions of this Article
VII which limits or otherwise adversely affects the scope of indemnification
or rights of any such persons hereunder shall, as to such persons, apply only
to claims arising, or causes of action based on actions or events occurring,
after such amendment and delivery of notice of such amendment is given to the
person or persons so affected. Until notice of such amendment is given to the
person or persons whose rights hereunder are adversely affected, such
amendment shall have no effect on such rights of such persons hereunder. Any
person entitled to indemnification under the foregoing provisions of this
Article VII shall, as to any act or omission occurring prior to the date of
receipt of such notice, be entitled to indemnification to the same extent as
had such provisions continued as Bylaws of the Corporation without such
amendment.
ARTICLE VIII
MISCELLANEOUS
Section 8.01 SEAL. The Board shall provide a corporate seal, which shall be
in the form of a circle and shall bear the name of the Corporation and words
and figures showing that the Corporation was incorporated in the State of
Delaware and showing the year of incorporation.
Section 8.02 WAIVER OF NOTICES. Whenever notice is required to be given
under any provision of these bylaws, the Certificate of Incorporation or by
law, a written waiver, signed by the person entitled to notice, whether before
or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of
such meeting, except when a person attends a meeting for the express purpose
of objecting at the beginning of the meeting, to the transaction of any
business because the
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meeting is not lawfully called or convened. Neither the business to be
transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors, or members of a committee of directors need be
specified in any written waiver of notice unless required by the Certificate
of Incorporation.
Section 8.03 LOANS AND GUARANTIES. The Corporation may lend money to, or
guarantee any obligation of, and otherwise assist any officer or other
employee of the Corporation or of its subsidiaries, including any officer who
is a director, whenever, in the judgment of the Board, such loan, guaranty or
assistance may reasonably be expected to benefit the Corporation. The loan,
guaranty, or other assistance may be with or without interest, and may be
unsecured or secured in such manner as the Board shall approve, including,
without limitation, a pledge of shares of stock of the Corporation.
Section 8.04 GENDER. All personal pronouns used in these Bylaws shall
include the other genders, whether used in the masculine, feminine or neuter
gender, and the singular shall include the plural, and vice versa, whenever
and as often as may be appropriate.
Section 8.05 AMENDMENTS. These Bylaws, or any of them, may be rescinded,
altered, amended or repealed, and new Bylaws may be made (i) by the Board, by
vote of a majority of the number of directors then in office as directors,
acting at any meeting of the Board or (ii) by the stockholders, by the vote of
a majority of the outstanding shares of voting stock of the Corporation, at an
annual meeting of stockholders, without previous notice, or at any special
meeting of stockholders, provided that notice of such proposed amendment,
modification, repeal or adoption is given in the notice of special meeting;
provided, however, that Section 2.02 of these Bylaws can only be amended if
that Section as amended would not conflict with the Corporation's Certificate
of Incorporation. Any Bylaw made or altered by the stockholders may be altered
or repealed by the Board or may be altered or repealed by the stockholders.
Section 8.06 INTERPRETATION. To the extent that these Bylaws are
inconsistent with the Corporation's Certificate of Incorporation, the
Certificate of Incorporation shall control.
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APPENDIX I
DIRECTORS AND EXECUTIVE OFFICERS
OF LESLIE'S CALIFORNIA AND CERTAIN OTHER PERSONS
Michael J. Fourticq has been Chairman of the Board of Directors of the
Company since May 1988. Between May 1988 and August 1992, he served as the
Company's Chief Executive Officer. From 1986 to 1987, Mr. Fourticq was
President and Chief Executive Officer of the Mortell Company, a manufacturer
of specialty chemical products. Since 1985 he has been the sole general
partner of Hancock Park Associates, which is the general partner of several
investment partnerships. Mr. Fourticq was the Chairman of the Board and Chief
Executive Officer of Alliance Northwest Industries, Inc., a holding company,
principally for a specialty lighting retailer, which filed a petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code in March 1996.
His business address is 1925 Century Park East, Suite 810, Los Angeles,
California 90067.
Brian P. McDermott has been President and a Director of the Company since
April 1989 and its Chief Executive Officer since August 1992. Between May 1988
and April 1989, he served as the Company's Executive Vice President of
Operations and also was its Secretary from May 1988 until October 1989. From
1987 to 1988, Mr. McDermott served as Director of Acquisitions and
Divestitures at Castle & Cook, Inc., a publicly-held holding company with
diverse real estate and corporate interests. Mr. McDermott is the Chairman of
the Board of Directors of Busybody, Inc., a privately held fitness equipment
retailer, for which he was acting Chief Executive Officer from November 1994
through March 1996. His business address is that of the Company.
Murray H. Dashe has been the Company's Chief Operating Officer since August
1992 and was a director between August 1989 and November 1996. From April 1990
through August 1992, he was President and Chief Executive Officer of
RogerSound Labs, a Southern California retailer of audio/video consumer
electronics, which filed a petition for dissolution under Chapter 7 of the
Federal Bankruptcy Code in June 1992. From September 1985 through April 1990,
Mr. Dashe held several positions with SILO, a consumer electronics and
appliance retailer, including Regional President. From 1970 to 1978, and 1983
to 1985, Mr. Dashe held positions of increasing operating responsibility with
Allied Stores Corp. (now Federated Department Stores, Inc.), an operator of
department and specialty stores throughout the United States. His business
address is that of the Company.
Richard H. Hillman has been a Director of the Company since May 1988. From
May 1988 to April 1989, he served as President of the Company. Since 1985, Mr.
Hillman has been President of Hillman Capital Partners, a private investment
and management advisory firm. From 1978 through 1984, Mr. Hillman served as
Chairman, President and Chief Executive Officer of Phone-Mate, Inc., a
manufacturer and marketer of telephone answering machines, telephones and
related products. Mr. Hillman is a director of Airdrome Parts Company, a high
precision machine parts manufacturer. His business address is 2665 Main
Street, Suite 260, Santa Monica, California 90405.
Dr. Dale R. Laurance has been a Director of the Company since January 1996.
Since 1996, he has been President of Occidental Petroleum Corporation. He was
its Executive Vice President and Senior Operating Officer from 1990 to 1996
and Executive Vice President--Operations from 1984 to 1990. Prior to joining
Occidental, Dr. Laurance held positions of increasing responsibility at Olin
Corporation, in its worldwide urethanes and organic chemicals business, from
1997 to 1983 and at E.I. DuPont deNemours from 1967 to 1977. He is a Director
of Occidental Petroleum Corporation, Canadian Occidental Petroleum Ltd., and
Jacobs Engineering Group Inc. His business address is 10889 Wilshire Blvd.,
Los Angeles, California 90024.
John A. Canning, Jr. has been a Director of the Company since January 1996.
He is President and founder of Madison Dearborn Partners, Inc. which
specializes in management buyout and special equity investing. Prior to
founding Madison Dearborn Partners in January 1993, Mr. Canning spent 24 years
with First Chicago Corporation, most recently as Executive Vice President of
The First National Bank of Chicago and President of First Chicago Venture
Capital. He currently serves on the Boards of Directors of Bayou Steel
Corporation, The
I-1
<PAGE>
Interlake Corporation, the Milnot Company and Tyco Toys, Inc. His business
address is 3 First National Plaza, Suite 1330, Chicago, Illinois 60602.
Dann V. Angeloff has been a Director of the Company since November 1996.
Since 1976 he has been President and founder of The Angeloff Company, a
corporate financial advisory firm. He currently serves on the Board of
Directors of Compensation Resource Group, Eagle Lifestyle Nutrition Inc.,
Nicholas/Applegate Growth Equity Fund, Nicholas/Applegate Investment Trust,
Public Storage, Inc., Ready Pac Produce, Inc., Royce Medical, Inc. and Seda
Specialty Packaging. His business address is 727 West 7th Street, Los Angeles,
California 90017.
Clarence T. Schmitz has been a Director of the Company since November 1996.
Since February 1995 he has been Executive Vice President and Chief Financial
Officer of Jefferies Group, Inc., a brokerage and investment banking firm.
From 1993 through 1995, Mr. Schmitz served as National Managing Partner of
KPMG, a financial services firm in its Manufacturing, Retailing & Distribution
line of business. From 1990 through 1993, Mr. Schmitz served as Managing
Partner of KPMG in its Los Angeles Business Unit. He is a Director if RVI
Limited, a Bermuda insurance company. His business address is 11100 Santa
Monica Blvd., Suite 1100, Los Angeles, California 90025.
Robert D. Olsen has been Executive Vice President and Chief Financial
Officer of the Company since April 1993. From 1990 through April 1993 he was
Executive Vice President and Chief Financial Officer of TuneUp Masters, a
California-based chain of fast automotive tuneup and lube outlets, which filed
a petition for reorganization under Chapter 11 of the Federal Bankruptcy Code
in November 1994. From 1985 through 1989, Mr. Olsen held several positions
with AutoZone, an automotive parts and accessories retailer, including
Controller, Vice President--Finance, and Senior Vice President and Chief
Financial Officer. From 1981 through 1984 he held a variety of positions with
PepsiCo International and Pepsi Cola USA. His business address is that of the
Company.
Cynthia G. Watts has been Vice President and General Counsel of the Company
since February 1993 and Secretary of the Company since March 1993. From 1988
to January 1993, Ms. Watts was an attorney at Paul, Hastings, Janofsky &
Walker, a Los Angeles-based law firm, where her practice was concentrated in
the areas of general corporate representation and corporate finance, including
securities, venture capital and mergers and acquisitions. Her business address
is that of the Company.
All executive officers of the Company are chosen by the Board of Directors
and serve at the Board's discretion. No family relationships exist between any
of the officers or directors of the Company. All executive officers and
directors of the Company and other persons listed herein are United States
citizens.
Gregory Fourticq is President of Cascade Sawing and Drilling. His business
address is P.O. Box 3157, Kent, Washington 98032.
Liberty West Partners is a California general partnership whose principal
business is investing. Its principal executive offices are located at 1925
Century Park East, Suite 810, Los Angeles, California 90067.
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<PAGE>
PROXY PROXY
LESLIE'S POOLMART
20630 PLUMMER STREET
CHATSWORTH, CALIFORNIA 91311
The undersigned hereby constitutes and appoints Michael J. Fourticq and/or
Brian P. McDermott, and each of them, with full power of substitution, as
attorneys and proxies to appear and vote, as designated below, all of the shares
of Leslie's Poolmart ("Leslie's California") held of record by the undersigned
on April 22, 1997 at the Special Meeting of Shareholders (the "Special Meeting")
to be held on June 10, 1997, or at any adjournment or adjournments thereof.
1. REINCORPORATION PROPOSAL - To approve the principal terms of the merger of
Leslie's California with and into LPM Holdings, Inc. ("Leslie's Delaware") in
accordance with an Agreement of Merger dated February 26, 1996, all as described
in the accompanying Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. MERGER PROPOSAL - To approve the merger with and into Leslie's Delaware of
Poolmart USA Inc. in accordance with an Agreement and Plan of Merger dated
February 26, 1996, all as described in the accompanying Proxy Statement.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
Other Business -- In their discretion to vote on such other business as may
properly come before the Special Meeting or any adjournment or adjournments
thereof. The undersigned acknowledges receipt of the Notice of Special Meeting
of Shareholders and Proxy Statement dated May 9, 1997.
THIS PROXY IS CONTINUED ON THE REVERSE SIDE, PLEASE DATE AND RETURN PROMPTLY.
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED. IF NO
DIRECTION IS MADE, THE SHARES WILL BE VOTED FOR THE REINCORPORATION PROPOSAL
---
AND FOR THE MERGER PROPOSAL.
---
Dated , 1997
------------------------
------------------------------------
Signature
------------------------------------
Signature (if held jointly)
------------------------------------
Title
Please sign exactly as name appears hereon.
When Shares are held by joint tenants, both
should sign. When signing as an attorney,
executor, administrator, trustee or
guardian, please give full title of such.
If a corporation, please sign in corporate
name by President or other authorized
officer. If a partnership, please sign in
partnership name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY PROMPTLY USING THE ENCLOSED PRE-
PAID ENVELOPE OR DELIVER TO: The Herman Group, Inc., 2121 San Jacinto Street,
26th Floor, Dallas, Texas 75201. Facsimile copies of the Proxy, properly
completed and duly executed, will be accepted at (214) 999-9323 or (214) 999-
9348. If you have any questions, please call The Herman Group, Inc. at
(800) 555-5209.
