<PAGE>
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
----------------
(MARK ONE)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
X TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM DECEMBER 29, 1996 TO SEPTEMBER 27, 1997
COMMISSION FILE NUMBER 0-18741
LESLIE'S POOLMART, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-4620298
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
20630 PLUMMER STREET, CHATSWORTH, CALIFORNIA 91311
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (818) 993-4212
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: X
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: X
The aggregate value of the voting stock held by non-affiliates of the
Registrant on December 19, 1997 was $769,979.
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
The number of outstanding shares of the Registrant's Common Stock on
December 19, 1997 was 1,433,643.
================================================================================
<PAGE>
PART I
ITEM 1. BUSINESS
Leslie's Poolmart, Inc. ("Leslie's" or the "Company") 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.
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 1997, Leslie's brand name products accounted for
approximately 60% of the Company's total sales.
Leslie's successful execution of its business strategy has generated a 34-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 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 presently accounts for only approximately 5% of the
estimated $3.7 billion annual pool and spa supply market. Since 1989, Leslie's
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 1997.
Attractive Store Economics. Leslie'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%.
Growth Potential of Recently Opened Stores. Leslie's new stores have
historically grown dramatically in sales and store operating profit during their
first five years of operation. Since the end of 1993, Leslie's has opened 136
new stores. 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 nonmature stores.
Large Sales Volume of Non-Discretionary Products. The consistency of
Leslie'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 1997, non-discretionary and regularly consumed
products comprised approximately 75% of the Company's sales, with pool chemicals
representing approximately 45% of the Company's total sales.
2
<PAGE>
Proprietary Database of Pool Locations. Through ongoing research as well as
the conduct of its retail and mail order business, Leslie's 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 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 a sophisticated store site selection capability. Management believes
that the scope and accuracy of its proprietary database is unique in the pool
supply industry.
Purchasing Power and Vertical Integration. Due to its size, Leslie's
purchases more chemicals and other pool supplies than any other specialty
retailer. In addition, Leslie's operates a repackaging facility which provides
the Company with significant cost savings, greater control over product
availability and quality, greater flexibility when sourcing products, and 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 it own highly efficient distribution system. Management believes that these
factors permit Leslie's 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 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 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.
HISTORY
The Company is a successor to the original Leslie's Poolmart founded in 1963.
From its inception in 1963 through the end of 1987, Leslie's Poolmart grew
steadily in sales and number of stores. In September 1988, Leslie's Poolmart was
purchased in a highly leveraged transaction by an investment group led by
Hancock Park Associates ("HPA"). The purchase was accomplished by means of a
merger, with Leslie's Poolmart, a California corporation ("Leslie's California")
as the surviving entity. Leslie's California completed an initial public
offering in April 1991 and in August 1992 added 14 stores through the
acquisition of a competitor.
In June 1997, Leslie's California reincorporated in Delaware by merger into a
wholly-owned Delaware subsidiary and completed an additional recapitalization
merger (the "Mergers"). The transactions were led by Green Equity Investors,
II, L.P. ("GEI") and HPA, together with certain members of management and
associates of HPA (collectively, the "HPA Group"). As a result of the Mergers,
the Company's common stock is no longer publicly-traded. Unless otherwise
referred to herein or the context otherwise requires, references to "Leslie's"
or the "Company" shall mean Leslie's Poolmart, Inc., its predecessors by merger,
Poolmart and Leslie's California, and the predecessor of Leslie's California.
Leslie's has opened 136 new stores during the past four years. Leslie's
intends to continue to grow by opening additional retail stores in both new and
existing markets.
SWIMMING POOL SUPPLY INDUSTRY
Regardless of the type or size of a swimming pool, there are numerous ongoing
maintenance and repair requirements associated with pool ownership. In order to
keep a pool safe and sanitized, chemical treatment is required to maintain
proper chemical balance, particularly in response to variables such as pool
usage, precipitation and temperature. A swimming pool is chemically balanced
when the disinfectant, pH, alkalinity, hardness and dissolved solids are at the
desired levels. The majority of swimming pool owners use chlorine to disinfect
their pools. When the pool is chemically balanced, problems such as algae,
mineral and salt saturation, corrosive water, staining, eye irritation
3
<PAGE>
and strong chlorine smell are less likely to occur. A regular testing and
maintenance routine will result in a stable and more easily maintained pool.
However, regardless of how well appropriate levels of chlorine are maintained,
"shocking" is periodically required to break up the contaminants which
invariably build up in the pool water. To accomplish this, the pool owner can
either superchlorinate the pool or use a nonchlorinated oxidizing compound. The
maintenance of proper chemical balance and the related upkeep and repair of
swimming pool equipment, such as pumps, heaters, and filters, create a non-
discretionary demand for pool chemicals and other swimming pool supplies and
services. Further, even non-usage considerations such as a pool's appearance and
the overall look of a household and yard create an ongoing demand for these
maintenance related supplies. In addition, pool usage creates demand for
discretionary items such as floats, games and accessories.
The swimming pool supply industry can be divided into four major segments by
pool type: residential in-ground swimming pools, residential above-ground
swimming pools (usually 12 to 24 feet in diameter), commercial swimming pools
and spas or hot tubs. The Company's historical strategy was to focus primarily
on the residential in-ground pool owner. In recent years the Company has
expanded its activities to more aggressively address the commercial and above-
ground markets as well. In the residential categories, the Company markets its
products primarily to the "do-it-yourself" market as opposed to those pool
owners who hire pool servicers. Through its rapidly growing commercial business,
products and services are offered to all non-residential pool installations as
well as to pool service companies which maintain either residential or
commercial pools. The Company's uninterrupted growth through three recessionary
periods suggests that due to the ongoing maintenance and repair needs of
existing swimming pools, the Company would not be significantly affected by a
decline in swimming pool installation. However, there can be no assurance that a
prolonged severe economic downturn and resulting decline in new housing
construction or swimming pool installation would not adversely affect the
Company's long-term expansion plans.
SEASONALITY
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 quarters ended June and September which
represent the peak months of swimming pool use. Sales are substantially lower
during the quarters ended December and March when the Company typically incurs
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 (such as that experienced in much of the U.S. in the spring and
early summer of 1995) will tend to 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 also 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 quarter ending
March in order to position itself for the following peak season.
PRODUCTS
Leslie's offers its customers a comprehensive selection of products necessary
to satisfy their swimming pool supply needs. During 1997, the Company stocked
approximately 3,000 items in each store, with more than 12,000 additional items
available through its Xpress Parts program and special order processes. In 1997,
approximately 550 items were displayed in the Company's residential mail order
catalogs and 1,200 items were in the commercial catalog, although special order
procedures make nearly all Leslie's products available to mail order customers
as well.
4
<PAGE>
The Company's major product categories are pool chemicals; major equipment;
cleaning and testing equipment; pool covers, reels, and liners; in a limited
number of stores, above-ground pools; and recreational items (which include
swimming pool floats, games, lounges, masks, fins, snorkels and other
"impulse" items). The following table shows the approximate percentage of
sales and primary function for each of the Company's major product categories
for the twelve months ended September 27, 1997:
<TABLE>
<CAPTION>
PRODUCT LINE PERCENTAGE PURPOSE
------------ ---------- -------
<S> <C> <C>
Pool Chemicals.................... 45% Cleanliness, appearance, health
Major Equipment and Parts......... 30% Pumps and heaters for cleaning and temperature
maintenance; automatic pool cleaners for ease of
maintenance
Cleaning and Testing Equipment.... 8% Water evaluation, cleanliness and appearance
Covers, Reels, Liners and Pools... 8% Safety, cleanliness and temperature maintenance for
above-ground pools
Recreational Items................ 9% Pool enjoyment, swim aids
</TABLE>
Non-discretionary and regularly consumed products such as pool chemicals,
major equipment and parts represented approximately 75% of total sales in fiscal
1997. The high percentage of Leslie's business which is attributable to non-
discretionary products results in a very high level of inventory quality at the
Company since the Company's non-discretionary products have long shelf lives and
are not prone to either obsolescence or shrinkage.
The Company believes that product quality and availability are key attributes
considered by consumers when shopping for pool supplies and that the Company's
ability to provide a high quality, in-stock product offering is fundamental to
its concept of value leadership. In addition to third-party brand names,
Leslie's carries a broad selection of products under the Leslie's brand name.
Marketing studies have shown that the Leslie's brand name is one of the three
most recognized brands in pool supplies and represents an image of quality to
consumers. In fiscal 1997, Leslie's brand name products accounted for
approximately 60% of the Company's total sales.
CHANNELS OF DISTRIBUTION
Retail Store Operations. At the end of fiscal 1997, Leslie's marketed its
products through 278 retail stores in 27 states under the trade name Leslie's
Swimming Pool Supplies. California represents its single largest concentration
of stores with 82, while 47 stores are located in Texas, and 68 stores are in
the northeast/mid-Atlantic area. Leslie's retail stores are located in areas
with high concentrations of swimming pools and typically are approximately 4,000
square feet in size. In addition to the store manager, the typical Leslie's
store employs two assistant managers, both of whom are generally full-time
employees. Additionally, Leslie's makes frequent use of part-time and temporary
employees to support its full-time employees during peak seasons. During 1997,
the Company had 18 regional supervisors, each of whom was responsible for
approximately 15 stores.
Mail Order Catalog. Leslie's mail order catalogs provide an extension of its
service philosophies and products to those areas not currently served by a
retail store and allow the scope of the Company's business to be truly
nationwide. The Company believes that it operates one of the largest pool supply
mail order businesses in the country, with annual sales for the twelve months
ended September 27, 1997 of approximately $6.4 million. Further, the Company
believes that its mail order catalogs build awareness of the Leslie's name,
provide it with buying efficiencies and, when coupled with information from its
retail stores, are instrumental in determining site selection for new stores.
5
<PAGE>
CUSTOMER SERVICE
Due to the complicated nature of pool chemistry and equipment maintenance and
consistent with its philosophy of being a full service swimming pool supply
retailer, Leslie's offers a high level of technical assistance to support its
customers. The Company considers its training of store personnel to be an
integral part of its service philosophy. Leslie's extensive training program for
all full-time and part-time store employees includes courses in water chemistry,
water testing, trouble shooting on equipment, equipment sizing and parts
replacement. The Company maintains the same high customer service standards for
its mail order business as it does for its retail stores.
During fiscal 1997, Leslie's stores in Northern California; Dallas and
Houston, Texas; and Las Vegas, Nevada, were supported by the Leslie's Service
Department, which offers poolside equipment installation and repair, leak
detection and repair, and seasonal opening and closing services. The Service
Department utilizes both Company employees and subcontractors to perform these
services. In Southern California in 1997, the Company tested the operation of
its service technicians out of the local stores as compared to the service
department organization described above. This operating structure proved very
successful and as a result, Leslie's is converting all of its service
departments to store-based service operations in late 1997 and early 1998. The
Company anticipates that the store-based service operations in these markets
will serve as a prototype for a nationwide service expansion.
MARKETING
Substantially all the Company's marketing is done on a direct mail basis
through its proprietary mailing list of more than four and a half million
addresses at which, primarily, residential pools are located. Leslie's has found
that its ability to mail directly to this highly focused group is an effective
and efficient way to conduct its marketing activities to both retail store and
mail order customers. The Company constantly updates its address list through
primary research techniques and in-store customer sign-ups.
Addresses on the Company's proprietary list that are located within a
specified service area of a retail store receive circulars once or twice per
month from late March or early April through September or, selectively, through
October. As a regular part of Leslie's promotional activities, each mailer
highlights specific items which are intended to increase store traffic, and
reinforces to the customer the advantages of shopping at Leslie's, which include
everyday low pricing, a high level of customer service, and the broad selection
of high quality products. Addresses outside the Company's store service areas,
and recently active mail order customers within those service areas, receive the
Company's mail order catalogs. Occasionally, the Company will utilize local
print media when it enters a new market, and is doing so in connection with its
above-ground pool sales test markets. New store openings typically involve
additional advertising pieces in the first two to three months of operation.
PURCHASING
Leslie's management believes that because it is one of the largest purchasers
of swimming pool supplies for retail sales in the United States, the Company is
able to obtain very favorable pricing on its purchases from outside suppliers.
Nearly all raw materials and those products not repackaged by the Company are
purchased directly from manufacturers. It is common in the swimming pool supply
industry for certain manufacturers to offer extended dating terms on certain
products to quantity purchasers such as Leslie's. These dating terms are
typically available to the Company for pre-season or early season purchases.
The Company's principal chemical raw materials and granular chlorine compounds
are purchased primarily from three suppliers. At the end of fiscal 1997, the
Company entered into a multi-year product purchase agreement with a major
producer of one of the principal chlorine compounds, the chlorinated
isocyanurates. The Company believes that there are several other reliable
suppliers of chlorine products in the marketplace today. Although the Company
has one sole source supplier for a nonchlorine shocking compound, termination of
supply would not pose any significant problems for the Company because
substitute chemicals and alternate shocking techniques are available. The
Company believes that reliable alternative sources of supply are available for
all of its raw materials and finished products.
6
<PAGE>
VERTICAL INTEGRATION
Leslie's operates a plant in the Los Angeles area where it converts dry
granular chlorine into tablet form and repackages a variety of bulk chemicals
into various sized containers suitable for retail sales. Leslie's also
formulates a variety of specialty liquids, including water clarifiers, tile
cleaners, algaecides and stain preventives. The chemicals that the Company
processes have a relatively long shelf life. Leslie's believes that supplying
its stores with chemicals from its own repackaging plant provides it with cost
savings, as well as greater control over product availability and quality, as
compared to non-integrated pool supply retailers. It also offers the Company
greater flexibility of sourcing and vital information when negotiating with
third-party repackagers and chemical providers. The Leslie's brand name appears
on all products processed at its repackaging plant, and on the significant
majority of all its chemical products. The Company believes that it is among the
largest processors of chlorine products for the swimming pool supply industry.
The total output of Leslie's repackaging plant is utilized by the Company and is
not sold or distributed to other retailers. Leslie's currently does not intend
to sell any significant amount of chemicals from its Los Angeles area facility
to other retailers or distributors.
In connection with the operation of its second Distribution Center in Dallas,
Texas, and third Distribution Center in Bridgeport, New Jersey, the Company has
expanded its use of third-party chemical repackagers and its purchase of
products already in end-use configurations. These products are also generally
packaged under the Leslie's brand name. The Company continually evaluates the
cost effectiveness of third-party sourcing versus internal manufacturing in
order to minimize its cost of goods. Leslie's will also continue to evaluate the
establishment of additional chemical repackaging capabilities, though there are
currently no plans for such an investment. In addition to chemicals, a variety
of the Company's products are packaged under the Leslie's brand name.
DISTRIBUTION
The Company distributes all of its products to its retail stores and to its
catalog customers through its leased distribution facilities in Ontario,
California; Dallas, Texas; and Bridgeport, New Jersey. Leslie's relocated and
consolidated its West coast distribution operation, along with the Los Angeles
repackaging operation, into a 183,000 square foot facility in Ontario,
California in early 1997. Leslie's opened its 100,000 square foot Dallas
facility in November 1990 and the 81,000 square foot Bridgeport, New Jersey
facility in February 1995. The Company is now purchasing the majority of the
chemicals to be distributed from the Dallas and Bridgeport distribution centers
from outside manufacturers rather than obtaining them through its repackaging
facility in Southern California. During the height of its seasonal activities,
each of the Company's retail stores is generally replenished every 5 to 10 days.
The Company utilizes company-owned and operated equipment, supplemented by
additional equipment leased during the busy season, to transport its goods to
stores within an approximately 350-mile radius of a distribution center. Other
stores receive deliveries via common carriers.
MANAGEMENT INFORMATION SYSTEMS
All decisions relating to the buying, pricing and distribution of products are
centralized at the Company's headquarters. Leslie's computerized point-of-sale
system provides detailed sales and inventory information for each item in each
store. This data is used by the Company's buyers in planning their purchases and
also updates the Company's inventory management system.
7
<PAGE>
COMPETITION
Primary elements of competition in the retail swimming pool supply industry
are price, technical assistance, customer service, product selection and product
availability. Most of the Company's competition comes from local stores or
regional chains which do not repackage or manufacture products and which
generally buy products in smaller quantities. The Company believes that its
vertical integration, varied sourcing strategy, and large volume purchasing
enable it to maintain attractive margins as well as competitive price leadership
relative to the smaller operators, and that its position is strengthened by its
merchandising and marketing emphasis. The chain store competitors include a
large franchise operator of approximately 110 retail outlets in the Florida
market and a limited number of other retail chains of approximately 15 to 30
stores.
In August 1992, Leslie's acquired one of its more prominent competitors,
Sandy's Pool Supply, Inc. ("Sandy's"). Sandy's was, at the time of the
acquisition, a 20-store chain which was 50% owned by Mr. Philip Leslie, a
founder and former shareholder of the Company. Mr. Leslie and the co-owner of
Sandy's, Mr. Sander Bass, are both subject to a 10-year non-competition
agreement which precludes their participation in any retail activities
competitive with the Company's current business.
The Company competes on selected principal products such as chlorine with
large volume, mass merchant and home center retailers. While the ability of
these merchants to accept low margins on the limited number of items they offer
makes them aggressive price competitors of the Company, they are not generally
priced below Leslie's and do not offer the level of customer service or wide
selection of swimming pool supplies available at Leslie's.
EMPLOYEES
As of September 27, 1997, Leslie's employed 1,767 persons. During the height
of the Company's seasonal activities in 1997, it employed 2,073 persons,
including seasonal and part-time store employees who generally are not employed
during the off season. The Company is not subject to any collective bargaining
agreements and believes that its relationships with its employees are excellent.
TRADEMARKS
In the course of its business, Leslie's employs various trademarks, trade
names and service marks as well as its logo in packaging and advertising its
products. The Company has registered trademarks and trade names for several of
its major products on the Principal Register of the United States Patent and
Trademark Office. The Company distinguishes the products produced in its
chemical repackaging operation or by third party repackagers at its direction
through the use of the Leslie's brand name and logo and the trademarks and trade
names of the individual items, none of which is patented, licensed, or otherwise
restricted to or by the Company. The Company believes the strength of its
trademarks and trade names has been beneficial to its business and intends to
continue to protect and promote its marks in appropriate circumstances.
8
<PAGE>
ITEM 2. PROPERTIES
As of September 27, 1997, the Company operated 278 stores in 27 states. The
following table sets forth information concerning the Company's stores:
<TABLE>
<CAPTION>
STATE NUMBER OF STORES STATE NUMBER OF STORES
----- ---------------- ----- ----------------
<S> <C> <C> <C>
Alabama................ 4 Missouri............... 3
Arizona................ 16 Nevada................. 5
California............. 82 New Jersey............. 14
Connecticut............ 7 New Mexico............. 1
Delaware............... 2 New York............... 17
Florida................ 19 North Carolina......... 1
Georgia................ 5 Ohio................... 7
Indiana................ 3 Oklahoma............... 4
Kansas................. 1 Pennsylvania........... 12
Kentucky............... 1 Rhode Island........... 1
Louisiana.............. 4 Tennessee.............. 3
Maryland............... 5 Texas.................. 47
Massachusetts.......... 7 Virginia............... 3
Michigan............... 4 Total Stores........... 278
</TABLE>
Except for 24 owned stores, all of its retail stores are leased by the Company
with lease terms expiring between 1997 and 2009. The Company's typical lease
term is five years, and in the majority of instances, the Company has renewal
options at increased rents. Five leases provide for rent contingent on sales
exceeding specific amounts. No other leases require payment of percentage rent.
In January and February of 1997, the Company relocated its corporate offices,
the Southern California distribution center and the chemical repackaging
operation. The corporate offices were relocated to another location in
Chatsworth, California. The new 38,000 square foot office building has been
leased for five years and the lease has three five-year renewal options.
The Southern California distribution center (previously located in Chatsworth,
California) and the chemical repackaging operations (previously located in Los
Angeles) were moved and consolidated into a 183,000 square foot facility located
in Ontario, California. The Ontario facility was leased for 10 years and the
lease has two five-year renewal options. The Company's distribution facility in
Dallas, Texas, consists of 100,000 square feet, with a lease term expiring in
2000. This lease includes options to renew for two additional five-year periods.
The 81,000 square foot distribution facility in Bridgeport, New Jersey is leased
for a 10-year term, expiring in 2004. The lease includes options to renew for
three five-year periods.
ITEM 3. LEGAL PROCEEDINGS
The Company is routinely involved in legal proceedings related to the ordinary
course of its business. Management does not believe any such matters will have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no public trading market for the Company's common stock. There are
11 holders of the Company's common stock.
SALES OF UNREGISTERED SECURITIES
On June 11, 1997, the Company made the following sales or exchanges of its
securities.
The following shares of common stock were issued upon conversion of a like
number of shares of Leslie's California common stock:
<TABLE>
<CAPTION>
HOLDER NUMBER OF SHARES
------------------- ----------------
<S> <C>
Michael J. Fourticq 160,539
Brian P. McDermott 166,552
Richard H. Hillman 22,414
Gregory Fourticq 10,000
<CAPTION>
The following shares of common stock were issued by the Company for consideration of $14.50 per share, cash:
PURCHASER NUMBER OF SHARES
------------------- ----------------
<S> <C>
GEI 1,055,172
Robert D. Olsen 16,966
Cynthia G. Watts 2,000
</TABLE>
In addition, 28,000 shares of the Company's Series A Preferred Stock together
with warrants to purchase 252,996 shares of common stock (subject to
adjustment), were issued to Occidental Petroleum Corporation for $28,000,000.
All such transactions were exempt pursuant to Section 4(2) of the Securities
Act of 1933, as a transaction not involving a public offering. All offerees and
purchasers were either affiliates of the Company or continuing securities
holders.
SENIOR NOTES; USE OF PROCEEDS
An S-1 Registration Statement covering the Company's 10.375 percent Senior
Notes due 2004, in principal amount of $90,000,000 was declared effective on
July 21, 1997. Commission file number 333-30305 was assigned to the registration
statement. The offering, which was an exchange offer open to holders of the
Company's notes issued June 11, 1997 pursuant to a transaction exempt from
registration under Rule 144 A of the Securities Act, commenced on July 21, 1997,
and terminated on November 28, 1997. The managing underwriter of the original
offering was BT Securities. All offered securities were sold. The proceeds were
100% used in the payment of the Cash Merger Consideration. Fees and expenses of
the original offering, together with the filing of the Registration Statement
and the Exchange offer were approximately $3,449,000, distributed as follows:
<TABLE>
<CAPTION>
<S> <C>
Underwriting Discounts and Commissions $2,700,000
Expenses Paid to or for Underwriters 210,000
Other Expenses 539,000
----------
Total Expenses: $3,449,000
</TABLE>
The net proceeds to the Company were $86,551,000.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data of the
Company as of and for the nine months ended September 28, 1996 (unaudited) and
the four fiscal years in the period ended September 27, 1997. 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 Annual Report. The data presented
for the nine months ended September 28, 1996 is derived from unaudited
consolidated financial statements and include in the opinion of the Company's
management, all adjustments necessary to present fairly the data for such
period.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
--------------------------- ------------------------------------------------
SEP. 27, SEP. 28, DEC. 28, DEC. 30, DEC. 31, DEC. 31,
1997 1996 1996 1995 1994 1993
---- ---- ---- ----
(UNAUDITED)
STATEMENTS OF INCOME: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net Sales $196,025 $170,555 $191,640 $162,456 $141,553 $119,955
Gross Profit 77,365 68,362 72,760 60,399 55,469 48,289
Gross Margin 39.5% 40.1% 38.0% 37.2% 39.2% 40.3%
Loss (Gain) on Disposition
Of Fixed Assets 457 95 750 27 (106) 120
Depreciation and Amortization 4,207 3,227 4,326 3,374 2,393 2,389
Income from Operations 17,989 16,367 9,400 6,691 9,569 6,350
Interest Expense, net 4,220 2,164 2,786 2,708 1,733 1,189
Net Income 8,783 8,309 3,869 3,407 4,584 3,035
BALANCE SHEET DATA:
Working Capital $ 36,711 $ 16,566 $ 12,718 $ 13,007 $ 8,072 $ 8,957
Total Assets 113,252 89,243 83,157 79,529 61,717 49,532
Current Ratio 2.29 1.54 1.45 1.47 1.38 1.73
Long-term Debt 91,290 16,085 15,581 17,843 11,272 12,751
Stockholders' (Deficit) Equity (35,845) 40,534 36,315 31,921 26,339 21,041
SELECTED OPERATING DATA:
Capital Expenditures $ 7,917 $ 6,736 $ 8,807 $ 9,550 $ 7,394 $ 5,532
EBITDA/(1)/ 23,247 19,889 14,960 10,472 11,476 8,612
EBITDA Margin/(2)/ 11.9% 11.7% 7.81% 6.45% 8.11% 7.18%
Number of Employees at Year-end 1,767 1,451 1,055 780 678 565
Stores Operated at Year-end 278 259 259 224 180 158
Comparable Store Sales Growth 10.4% 10.4% 9.9% 6.0% 12.9% 11.7%
</TABLE>
- --------------------
/(1)/ Earnings before interest, taxes, depreciation, amortization, loss/(gain)
on disposition of fixed assets, Recapitalization costs and LIFO
adjustments.
/(2)/ EBITDA Margin represents EBITDA as a percentage of sales.
11
<PAGE>
ITEM 7. 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.
THE TRANSACTIONS
On June 11, 1997, Leslie's California reincorporated in Delaware by merger
into a wholly-owned Delaware subsidiary (the "Reincorporation"), and merged
Poolmart USA Inc., a newly-formed corporation, with and into the Company (the
Recapitalization"). As a result of the Recapitalization, (i) each outstanding
share of common stock of Leslie's California (other than 359,505 shares owned
primarily by members of management, including Michael Fourticq and Brian
McDermott, the President and CEO of the Company) was converted into $14.50 cash
(the "Cash Merger Consideration"); and (ii) outstanding options covering
approximately 830,000 shares of common stock, including those not yet vested,
were exercised and retired upon for payment of the difference between the
exercise price and $14.50 per share. The total value of the shares and options
approximated $100,000,000.
In order to finance the repurchase of the outstanding common shares and
options, the Company issued $90,000,000 of its 10.375% Senior Notes and sold
1,074,138 shares of its common stock for net proceeds of $15,575,000. As
indicated above, certain directors and members of management converted some of
the Leslie's California common shares which they owned into shares of the
Company's common stock.
Also in connection with the Recapitalization, the Company issued 28,000 shares
of its Series A Preferred Stock of the Company, par value $0.001 per share, at
$1,000 per share for a total consideration of $28,000,000 consisting of cash and
an exchange of the $10,000,000 principal amount of Convertible Subordinated of
Leslie's California held by Occidental Petroleum Corporation. In connection
with this transaction, Occidental received warrants to purchase up to 15.0% of
the shares of the Company's common stock at a purchase price of $0.01 per share
(subject to adjustment) for a period of ten years. (The transactions described
in the foregoing paragraphs are sometimes collectively referred to as the
"Transactions.")
FISCAL PERIOD CHANGE
In 1997, the Company changed its fiscal year end from the Saturday closest to
December 31 to the Saturday closest to September 30. The 1996 and 1995 fiscal
years include 52 weeks, while the nine month fiscal year ended September 27,
1997 includes 39 weeks. Each fiscal quarter will have 13 weeks and will close on
the Saturday closest to December 31, March 31 and June 30.
RESULTS OF OPERATIONS
The Company is the leading specialty retailer of swimming pool supplies and
related products in the United States. At September 27, 1997, the Company
marketed its products through 278 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 Ontario, California. In 1997, the
Company supplied its retail stores from three distribution facilities, located
in Ontario, California; Dallas, Texas; and Bridgeport, New Jersey.
For the nine months ended September 27, 1997, sales increased 14.9% to
$196,025,000 from $170,555,000 in the same period of 1996. The sales increase is
attributable to comparable store sales growth of 10.4% and 19 (net) new store
additions in 1997. EBITDA for the period increased 16.9% to $23,247,000 or 11.9%
of sales, from $19,889,000 or 11.7% of sales in the same nine months of 1996.
Net income for 1997 increased 5.7% to $8,783,000 as compared to $8,309,000 in
1996.
During 1997, the Company expanded its business by opening 23 new stores.
Additionally, four stores were closed and eleven relocated in 1997. This
resulted in a net increase of 19 stores at the end of September 1997 as compared
to December 1996.
12
<PAGE>
1997 compared to 1996:
<TABLE>
<CAPTION>
SALES
------------------------------
NINE MONTHS ENDED
------------------------------
SEP. 27, 1997 SEP. 28, 1996
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Retail Stores $186,641 $159,881
Mail Order Catalog 5,508 6,803
Service Departments 3,876 3,871
-------- --------
$196,025 $170,555
======== ========
</TABLE>
Sales for the nine months ended September 27, 1997 increased 14.9% over the
same period in 1996. Retail store sales, which are comprised of residential
sales and commercial sales, grew 16.7%, reflecting increases in comparable store
sales of 10.4% as well as an increase in the total number of stores in operation
from 259 in 1996 to 278 for most of the 1997 selling season. The increase in
comparable store sales resulted from the maturing of new stores opened over the
last several years, from continued growth of commercial sales, and from the
addition of service sales to selected retail stores.
In total, commercial sales grew by 20.9% in the nine month period as
compared to last year increasing comparable store sales growth by approximately
.5%. Additionally, in the Southern California market, the Company tested the
operations of its service technicians out of the local stores, and as a result,
reflected these service sales in the retail store sales total. This increased
the comparable store sales gains by approximately 1.0% in the year-to-date
period.
Mail order catalog sales declined 19.0% to $5,507,000 from $6,803,000 in the
comparable period of 1996. New store openings in a number of strong mail order
markets continued to cannibalize mail order sales. Service department sales were
flat as compared to the same period in 1996 reflecting solid growth in the Texas
service centers, offset by the reclassification of the Southern California
service sales to the retail store sales.
Gross profit for the nine months ended September 27, 1997 decreased to 39.5%
of sales, from 40.1% in 1996. Gross profit represents sales less the cost of
services and purchased goods, chemical repackaging costs, and non-administrative
occupancy costs. The gross margin decrease in 1997 reflects increased
promotional activity, including increased retail price discounting in 1997
associated with the grand opening of new stores, as well as an increase in store
rent expense as a percentage of sales due to continued new store openings.
In 1997, selling, general and administrative expenses equaled $57,934,000,
versus $51,709,000 in 1996, an increase of 12.0%, largely the result of the
increase in the number of stores. As a percentage of sales, selling, general and
administrative expenses decreased 0.7% to 29.6%, compared to 30.3% of sales in
1996, due to the continued comparable store sales growth in 1997.
EBITDA was $23,247,000 in the nine months of 1997, representing an increase of
$3,358,000, or 16.9%, as compared to $19,889,000 for the same period of 1996.
The EBITDA margin increased to 11.9% of sales in the nine months of 1997 from
11.7% of sales in the same period of 1996. The increase in the EBITDA margin
was the result of the Company's solid sales growth which leveraged expenses as a
percentage of sales, partially offset by lower gross margins.
Amortization of acquisition costs, which represents the amortization of
goodwill, equaled $191,000 in the nine months of 1997, essentially flat as
compared to the same period in 1996.
In 1997, the Company recognized losses on the disposition of fixed assets
totaling approximately $457,000. This was primarily associated with the closure
or relocation of several stores in 1997 as well as the sale and leaseback of a
company-owned property.
13
<PAGE>
Income from operations for the period increased 9.9% to $17,989,000 or 9.2% of
sales, from $16,367,000 or 9.6% of sales in 1996.
Interest expense equaled $4,220,000 in 1997, up from $2,164,000 in 1996. The
increase was primarily the result of increased borrowings subsequent to June 11,
1997 resulting from the completion of the Recapitalization transaction and
related issuance of the $90,000,000 in Senior Notes.
The tax provision decreased to $4,986,000 in 1997, an effective rate of 36.2%,
from $5,894,000 and an effective tax rate of 41.5% in 1996. The lower effective
tax rate in 1997 as compared to 1996 reflects the reversal in 1997 of certain
tax reserves which were no longer needed.
1996 compared to 1995
<TABLE>
<CAPTION>
SALES
-----------------------------
YEARS ENDED
-----------------------------
DEC. 28, 1996 DEC. 30, 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.
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 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 margin increased to 7.8% of
sales in 1996 as compared to 6.4% of sales in 1995. The increase in EBITDA and
EBITDA 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.
14
<PAGE>
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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Changes in Financial Condition. From December 28, 1996 to September 27,
1997, total current assets increased $24,392,000 from $40,880,000 to
$65,272,000. The increase in current assets results mainly from increases in
inventories and cash. The principal component of current assets is inventory,
which increased $6,291,000 from $33,948,000 to $40,239,000. The inventory
increase results primarily from seasonal nature of the Company's business, and
the increased number of stores in operation in 1997. The increased cash balance
at September 27, 1997 is the result of the new capital structure created in the
Recapitalization transaction.
Total current liabilities increased very slightly between December 28, 1996
and September 27, 1997. Increased accounts payable, reflecting the seasonal
inventory increase, and increases in accrued liabilities, mainly the result of
accrued interest on the new Senior Notes financing, were offset by reductions in
line of credit borrowings, again a result of the June 1997 Recapitalization
transaction.
Liquidity and Capital Resources. For the nine months ended September 27,
1997, net cash provided by operating activities was $22,880,000 compared to
$17,779,000 in the nine months of the prior year. Higher earnings and decreased
working capital requirements resulted in increased cash flow from operations in
1997.
In the nine months of fiscal 1997, cash used in investing activities was
$6,704,000 compared with $6,617,000 in the same period of the prior year.
Increased capital expenditures in 1997 were offset by proceeds from the sale of
several properties. The relocation of the Company's corporate offices and the
Southern California distribution and repackaging operations to new facilities in
1997 produced the increase in capital spending.
Cash used in financing activities was $1,434,000 in the nine months of 1997
compared with $11,112,000 in the same period of 1996. In June 1997, the
Recapitalization transaction was completed creating a new and significantly
different capital structure for the Company. The cash used in financing
activities in 1997 reflects this change.
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
quarters ended June and September, which represent the peak months of swimming
pool use. Sales are substantially lower during the quarters ended December and
March 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
15
<PAGE>
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 quarter ending
March 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 quarters ended December and March to increase.
16
<PAGE>
SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
13 WEEKS ENDED
-------------------------------
MARCH 29 JUNE 28 SEPT. 30
-------- ------- --------
1997
<S> <C> <C> <C>
Sales................................... $23,816 $98,034 $74,175
Gross Profit............................ 5,562 40,858 30,945
(Loss) Income from Operations........... (9,628) 16,012 11,605
Net (Loss) Income....................... (6,101) 8,776 6,108
EBITDA(2)............................... (8,243) 18,367 13,123
Comparable Store Sales Growth........... 20.8% 6.6% 13.6%
<CAPTION>
13 WEEKS ENDED
------------------------------------------
MARCH 30 JUNE 29 SEPT. 28 DEC. 28
-------- ------- -------- -------
1996
<S> <C> <C> <C> <C>
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)
EBITDA(2)............................... (7,564) 18,534 8,919 (4,929)
Comparable Store Sales Growth........... 6.6% 16.1% 4.2% 6.4%
- --------------------
</TABLE>
(1) The quarter ended December 28, 1996 loss from operations included
approximately a $650,000 loss on disposition of fixed assets.
(2) EBITDA represents income before interest, taxes, depreciation, amortization,
loss/(gain) on disposition of fixed assets, Recapitalization costs and LIFO
adjustments.
Recent Accounting Pronouncement. In March 1997, the Financial Accounting
Standard Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share" (SFAS 128) and SFAS No. 129, "Disclosure of
Information about Capital Structure" (SFAS 129). SFAS 128 revises and simplifies
the computation for earnings per share and requires certain additional
disclosures. SFAS 129 requires additional disclosures regarding the Company's
capital structure. Effective for fiscal year beginning after December 15, 1997,
SFAS No. 130, "Reporting Comprehensive Income," requires that comprehensive
income and its components, as defined in the Statement, be reported in the
financial statement. Also, SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," requires a new model of segment reporting
called the "management approach." All standards, to the extent applicable, will
be adopted in the first quarter of fiscal 1998. Management does not expect the
adoption of these standards to have a material effect on the Company's financial
position or results of operations.
The Year 2000 Issue. Leslie's computerized information systems have been
substantially replaced or upgraded in the last five years. As a result, most of
the applications currently in place are largely Year 2000 compliant. Management
anticipates beginning a project in late 1998 to modify certain applications to
ensure Year 2000 compliance across all systems. Management does not believe
that the Year 2000 implementation will have a material impact on the Company's
financial results.
17
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................................. 19
Management's Report....................................................................... 20
Consolidated Balance Sheets--September 27, 1997 and December 28, 1996..................... 21
Consolidated Statements of Income--Nine Months Ended September 27, 1997 and
September 28, 1996 (unaudited) and Years Ended December 28, 1996 and December
30, 1995................................................................................ 22
Consolidated Statements of Shareholders' Equity--Years Ended September 27, 1997,
December 28, 1996 and December 30, 1995................................................. 23
Consolidated Statements of Cash Flows--Nine Months Ended September 27, 1997 and
September 28, 1996 (unaudited) and Years Ended December 28, 1996 and December 30, 1995.. 24
Notes to Consolidated Financial Statements................................................ 25
</TABLE>
18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
of Leslie's Poolmart, Inc.:
We have audited the accompanying consolidated balance sheets of Leslie's
Poolmart, Inc. (a Delaware corporation) and subsidiaries as of September 27,
1997 and December 28, 1996 and the related consolidated statements of income,
shareholders' equity and cash flows for the nine months ended September
27, 1997 and each of the two 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 September 27, 1997 and December 28, 1996, and the results of
their operations and their cash flows for the nine months ended September 27,
1997 and each of the two fiscal years in the period ended December 28, 1996, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Los Angeles, California
November 14, 1997
19
<PAGE>
MANAGEMENT'S REPORT
Management is responsible for the preparation and integrity of the financial
statements appearing in this Form 10-K. 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
20
<PAGE>
LESLIE'S POOLMART, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEP. 27, 1997 DEC. 28, 1996
-------------- -------------
ASSETS
------
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................................... $ 14,829 $ 87
Accounts and other receivables, net....................................... 4,368 2,550
Inventories............................................................... 40,239 33,948
Prepaid expenses and other................................................ 1,523 1,693
Deferred tax assets....................................................... 4,313 2,602
-------- -------
Total current assets...................................................... 65,272 40,880
-------- -------
PROPERTY, PLANT AND EQUIPMENT:................................................ 52,102 46,058
Less--Accumulated depreciation and amortization........................... 16,408 12,751
-------- -------
Net property, plant and equipment......................................... 35,694 33,307
-------- -------
OTHER ASSETS:
Goodwill, net............................................................. 8,051 8,298
Deferred financing costs.................................................. 3,564 --
Other..................................................................... 671 672
-------- -------
Total other assets........................................................ 12,286 8,970
-------- -------
$113,252 $83,157
======== =======
LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
----------------------------------------------
CURRENT LIABILITIES:
Accounts payable.......................................................... $ 11,838 $ 6,055
Accrued liabilities....................................................... 10,544 4,480
Short-term borrowings..................................................... -- 15,440
Current portion of long-term debt......................................... 87 2,187
Income taxes.............................................................. 6,092 --
-------- -------
Total current liabilities................................................. 28,561 28,162
-------- -------
DEFERRED TAX LIABILITIES...................................................... 3,393 3,099
LONG-TERM DEBT, net of current portion........................................ 1,290 5,581
SENIOR NOTES.................................................................. 90,000 --
CONVERTIBLE SUBORDINATED DEBENTURES........................................... -- 10,000
PREFERRED STOCK, $0.001 par value; Authorized--2,000,000 shares; Issued
and outstanding --28,000 Series A at Sep. 27, 1997 and none at Dec. 28,
1996; liquidation preference $28.0 million............................... 25,853 --
COMMITMENTS AND CONTINGENCIES................................................. -- --
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value:
Authorized--12,000,000 shares
Issued and outstanding--1,433,643 and 6,547,928
Sep. 27, 1997 and Dec. 28, 1996, respectively........................... 1 6
Additional paid-in capital................................................ (47,350) 32,619
Retained earnings......................................................... 11,504 3,690
-------- -------
Total shareholders' (deficit) equity...................................... (35,845) 36,315
-------- -------
$113,252 $83,157
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
21
<PAGE>
LESLIE'S POOLMART, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
------------------------------ -----------------------------
SEP. 27, 1997 SEP. 28, 1996 DEC. 28, 1996 DEC. 30, 1995
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Net sales............................................. $196,025 $170,555 $191,640 $162,456
Cost of sales......................................... 118,660 102,193 118,880 102,057
-------- -------- -------- --------
Gross profit.......................................... 77,365 68,362 72,760 60,399
Selling, general and administrative expenses.......... 57,934 51,709 62,358 53,442
Amortization of acquisition costs..................... 191 191 252 239
Recapitalization costs................................ 794 -- -- --
Loss on disposition of fixed assets................... 457 95 750 27
-------- -------- -------- --------
Income from operations................................ 17,989 16,367 9,400 6,691
Interest expense, net................................. 4,220 2,164 2,786 2,708
-------- -------- -------- --------
Income before taxes................................... 13,769 14,203 6,614 3,983
Income tax provision.................................. 4,986 5,894 2,745 576
-------- -------- -------- --------
Net income............................................ 8,783 8,309 3,869 3,407
======== ======== ======== ========
Series A Preferred Stock dividends and accretion...... 969 -- -- --
-------- -------- -------- --------
Income applicable to common shareholders.............. $ 7,814 $ 8,309 $ 3,869 $ 3,407
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
22
<PAGE>
LESLIE'S POOLMART, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
------------
ADDITIONAL RETAINED TOTAL
NUMBER OF PAID IN (DEFICIT) SHAREHOLDERS
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C>
Balance, at December 31, 1994.................. 5,995,735 $ 6 $ 25,622 $ 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 6 32,094 (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 6 32,619 3,690 36,315
Stock options exercised...................... 9,184 -- 77 -- 77
Repurchase of Common Stock................... (6,197,607) (6) (99,530) -- (99,536)
Issuance of Common Stock..................... 1,074,138 1 15,574 -- 15,575
Issuance of Non-Qualified Stock Options...... -- -- 794 -- 794
Issuance of warrants......................... -- -- 3,116 -- 3,116
Series A Preferred Stock
Dividends and Accretion..................... -- -- -- (969) (969)
Net income................................... -- -- -- 8,783 8,783
--------- ------ -------- ------- --------
Balance, at September 27, 1997................. 1,433,643 $ 1 $(47,350) $11,504 $(35,845)
========= ====== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
23
<PAGE>
LESLIE'S POOLMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED
------------------------------ ------------------------------
SEP. 27, 1997 SEP. 28, 1996 DEC. 28, 1996 DEC. 30, 1995
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................... $ 8,783 $ 8,309 $ 3,869 $ 3,407
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization.................... 4,207 3,227 4,326 3,374
Deferred income taxes............................ (1,417) -- (282) (2,297)
Recapitalization costs........................... 794 -- -- --
Loss on disposition of fixed assets.............. 457 95 750 27
(Increase) decrease in:
Accounts and other receivables................... (1,818) (852) (315) (902)
Inventories...................................... (6,291) (5,566) 355 (10,114)
Prepaid expenses and other....................... 170 50 183 (231)
Other assets..................................... 56 (1) (47) (290)
Increase (decrease) in:
Accounts payable and accrued liabilities......... 11,847 8,334 1,774 2,121
Income taxes..................................... 6,092 4,183 1,357 761
-------- -------- ------- --------
Net cash provided by (used in) operating activities.. 22,880 17,779 11,970 (4,144)
-------- -------- ------- --------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment............ (7,917) (6,737) (8,807) (9,550)
Proceeds from dispositions of property, plant and
equipment....................................... 1,213 120 221 321
-------- -------- ------- --------
Net cash used in investing activities................ (6,704) (6,617) (8,586) (9,229)
-------- -------- ------- --------
FINANCING ACTIVITIES:
Net line-of-credit (repayments) borrowings........... (15,440) (9,693) (1,516) 7,435
Issuance of Senior Notes............................. 90,000 -- -- 10,000
Payments of long-term debt........................... (16,391) (1,723) (2,160) (4,592)
Payment of deferred financing costs.................. (3,719) -- -- --
Purchase of common stock............................. (99,536) -- -- --
Proceeds from issuance of preferred stock............ 28,000 -- -- --
Proceeds from issuance of common stock, net.......... 15,652 304 305 541
-------- -------- ------- --------
Net cash (used in) provided by financing activities.. (1,434) (11,112) (3,371) 13,384
-------- -------- ------- --------
NET INCREASE IN CASH.................................... 14,742 50 13 11
CASH AT BEGINNING OF PERIOD............................. 87 74 74 63
-------- -------- ------- --------
CASH AT END OF PERIOD................................... $ 14,829 $ 124 $ 87 $ 74
======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
LESLIE'S POOLMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND OPERATIONS
Leslie's Poolmart, Inc. (the Company) is a specialty retailer of swimming pool
supplies and related products. As of September 27, 1997, the Company marketed
its products under the trade name Leslie's Swimming Pool Supplies through 278
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 and all of its operating profits are generated in the
quarters ending in June and September.
On June 11, 1997, Leslie's Poolmart (a California corporation - "Leslie's
California") reincorporated in Delaware by merging into a wholly-owned Delaware
subsidiary (the "Reincorporation"), changed its name to Leslie's Poolmart, Inc.
and merged Poolmart USA Inc., a newly-formed corporation, with and into the
Company (the "Recapitalization"). As a result of the Recapitalization, (i) each
outstanding share of common stock of Leslie's California was converted into
$14.50 cash (other than 359,505 shares owned primarily by members of
management); and (ii) outstanding options covering approximately 830,000 shares
of common stock, including those not yet vested, were exercised and retired for
payment of the difference between the exercise price and $14.50 per share. The
total value of the shares and options cashed out approximated $94,300,000, plus
$5,229,000 in expenses associated with this transaction. These costs have been
included in the cost to repurchase the common stock in the accompanying
statement of shareholders' equity. In connection with the Recapitalization, the
Company changed the authorized capital of the Company to 12,000,000 shares of
common stock with a $0.001 par value and 2,000,000 shares of preferred stock
with a $0.001 par value.
In order to finance the repurchase of the outstanding common shares and
options, the Company issued $90,000,000 of its 10.375% Senior Notes and sold
1,074,138 shares of its common stock for proceeds of $15,575,000. As indicated
above, certain directors and members of management converted some of the
Leslie's California common shares which they owned into shares of the Company's
common stock. (See Note 8)
Also in connection with the Recapitalization, the Company issued 28,000 shares
of its Series A Preferred Stock of the Company, par value $0.001 per share, at
$1,000 per share for a total consideration of $28,000,000, consisting of cash
and an exchange of the $10,000,000 principal amount of Convertible Subordinated
Debentures of Leslie's California held by a major supplier. In connection with
this transaction, the holder of the Series A Preferred Stock received Warrants
to purchase up to 15.0% of the shares of the Company's common stock at a
purchase price of $0.01 per share (subject to adjustment) for a period of ten
years. (See Note 14)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Principles of Consolidation
The consolidated financial statements of the Company include Leslie's
Poolmart, Inc., and its wholly-owned subsidiaries, Leslie's Pool Brite, Inc.
and Sandy's Pool Supply, Inc. All significant inter-company transactions and
accounts have been eliminated.
b. Fiscal Periods
In 1997, the Company changed its fiscal year end from the Saturday closest to
December 31 to the Saturday closest to September 30. The 1996 and 1995 fiscal
years include 52 weeks, while the nine month fiscal year ended September 27,
1997 includes 39 weeks. Each fiscal quarter will have 13 weeks and will close
on the Saturday closest to December 31, March 31 and June 30.
25
<PAGE>
LESLIE'S POOLMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
c. Accounts and Other Receivables, Net
Accounts and other receivables include allowances for doubtful accounts of
$217,000 and $49,000 at September 27, 1997 and December 28, 1996, respectively.
d. Inventories
Inventories are stated at the lower of cost or market. In September 1997, the
Company changed its inventory valuation method from last-in, first-out (LIFO) to
first-in, first-out (FIFO). The effect of utilizing LIFO in prior years resulted
in inventory balances which were $544,000 lower at December 28, 1996, and
$60,000 lower at December 30, 1995, than would have been reported under the
first-in, first-out (FIFO) method. The effect of changing the inventory
valuation method was immaterial to all periods presented.
e. 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>
f. 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 September
27, 1997 and December 28, 1996 was net of accumulated amortization of $1,588,000
and $1,397,000, respectively.
g. Deferred Financing Costs
In connection with issuing the Senior Notes and signing the Credit Agreement,
the Company paid $3,719,000 in financing costs that are being deferred and
amortized over the lives of the corresponding agreements, under the interest
method.
26
<PAGE>
LESLIE'S POOLMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 September 27, 1997 and December
28, 1996 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. Fair Value of Financial Statements
The fair value of the $90,000,000 Senior Notes using quoted market prices
as of September 27, 1997 is $92,700,000. The carrying amounts of other long-term
debt approximate fair value because either the interest rate fluctuates based on
market rates or interest rates appear to approximate market rates for similar
instruments. The fair value estimates are subjective in nature and involve
uncertainties and matters of judgement and therefore, cannot be determined with
precision. Changes in assumptions could significantly affect these estimates.
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
In March 1997, the Financial Accounting Standard Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share"
(SFAS 128) and SFAS No. 129, "Disclosure of Information about Capital Structure"
(SFAS 129). SFAS 128 revises and simplifies the computation for earnings per
share and requires certain additional disclosures. SFAS 129 requires additional
disclosures regarding the Company's capital structure. Effective for fiscal year
beginning after December 15, 1997, SFAS No. 130, "Reporting Comprehensive
Income," requires that comprehensive income and its components, as defined in
the Statement, be reported in the financial statement. Also, SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information," requires
a new model of segment reporting called the "management approach." All
standards, to the extent applicable, will be adopted in the first quarter of
fiscal 1998. Management does not expect the adoption of these standards to have
a material effect on the Company's financial position or results of operations.
n. Reclassifications
Certain prior period amounts in the consolidated financial statements have
been reclassified to conform to the 1997 presentations.
27
<PAGE>
LESLIE'S POOLMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, DECEMBER 28,
1997 1996
------------- ------------
<S> <C> <C>
Raw materials and supplies...... $ 1,102,000 $ 1,659,000
Finished goods.................. 39,137,000 32,289,000
----------- -----------
$40,239,000 $33,948,000
=========== ===========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, DECEMBER 28,
1997 1996
------------- ------------
<S> <C> <C>
Land............................................. $ 6,122,000 $ 6,578,000
Buildings and improvements....................... 6,280,000 6,868,000
Equipment........................................ 2,290,000 1,785,000
Leasehold improvements........................... 19,027,000 14,796,000
Office furniture, equipment and other............ 17,767,000 15,118,000
Construction-in-process.......................... 616,000 913,000
----------- -----------
52,102,000 46,058,000
Less--Accumulated depreciation and amortization.. 16,408,000 12,751,000
----------- -----------
$35,694,000 $33,307,000
=========== ===========
</TABLE>
6. BANK CREDIT AGREEMENT
In connection with the Recapitalization, the Company entered into a five
year Credit Agreement (the "Agreement") with Wells Fargo Bank including a line
of credit, letters of credit and swingline loans. The maximum borrowings
available under the Agreement is $35,000,000, subject to requirements that the
level of outstanding borrowing be limited as a function of inventory and
accounts receivable balances. The Agreement is collateralized by inventories,
accounts receivables, equipment and other assets. On September 27, 1997, no
balances were outstanding under this Agreement.
The Agreement accrues interest at the lender's reference rate (8.5 percent
at September 27, 1997) plus the applicable Prime rate margin or at LIBOR plus
the applicable LIBOR rate margin. The margins are determined by the EBITDA
coverage ratios as defined in the Agreement. The Agreement contains certain
financial covenants that include tangible net worth, funded debt ratio and
EBITDA coverage ratio. As of September 27, 1997, the Company was in compliance
with these covenants.
28
<PAGE>
LESLIE'S POOLMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SEPTEMBER 27, DECEMBER 28,
1997 1996
------------- ------------
<S> <C> <C>
Revolving Loan.............................................................. $ -- $6,000,000
Notes payable collateralized by security interests in certain assets,
maturing September 2002. Interest accrues at the
rate of 6.5%............................................................... 432,000 719,000
Notes payable collateralized by security interest in various properties,
due in monthly installments maturing December 2003.
Interest accrues at the rate of 9.6%....................................... 945,000 1,049,000
---------- ----------
1,377,000 7,768,000
Less--Current portion....................................................... 87,000 2,187,000
---------- ----------
$1,290,000 $5,581,000
========== ==========
</TABLE>
Principal maturities of long-term debt as of September 27, 1997 are as
follows:
<TABLE>
<S> <C>
1998................................................................... $ 87,000
1999................................................................... 94,000
2000................................................................... 100,000
2001................................................................... 108,000
2002................................................................... 116,000
Thereafter................................................................ 872,000
----------
$1,377,000
==========
</TABLE>
8. SENIOR NOTES
On June 11, 1997, the Company issued $90,000,000 aggregate principal amount
of its 10.375 percent Senior Notes due July 15, 2004 (the "Notes"). The Notes
were issued under an indenture (the "Indenture") by and among the Company and
U.S. Trust Company of California, N.A., as trustee.
Interest on the Notes will accrue at the rate of 10.375 percent per annum
and will be payable semi-annually in arrears on each January 15 and July 15
commencing on January 15, 1998. The Notes are redeemable, in whole or in part,
at the option of the Company on or after July 15, 2001, at the specified
redemption prices. In addition, at any time on or prior to July 15, 2000, the
Company may redeem up to $25,000,000 of aggregate principal amount of the Notes
with the net cash proceeds from one or more Public Equity Offerings at a
specified redemption price.
The Notes are generally unsecured obligations of the Company and will be
subordinated to any secured indebtedness of the Company. In the event of a
change of control, the Company will be required to make an offer to purchase all
outstanding Notes at a price equal to 101 percent of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase.
The Indenture contains certain covenants which include, among other
matters, limitation on the incurrence of additional indebtedness and the payment
of dividends At September 27, 1997, the Company was in compliance with all
covenants.
29
<PAGE>
LESLIE'S POOLMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. LEASES
The Company leases certain store, office, distribution and manufacturing
facilities under operating leases which expire at various dates through 2009.
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 September 27, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998.............................. $14,292,000
1999.............................. 12,681,000
2000.............................. 10,193,000
2001.............................. 7,719,000
2002.............................. 5,330,000
Thereafter........................ 9,118,000
-----------
$59,333,000
===========
</TABLE>
As of November 14, 1997, the Company had entered into operating leases for
additional new store sites which have future minimum lease payment requirements
of approximately $351,000 in 1998, $354,000 in 1999, 2000 and 2001, $312,000 in
2002, and $55,000 thereafter.
Certain leases are renewable at the option of the Company for periods of
one to ten years. Rent expense charged against income totaled $13,994,000,
$16,024,000 and $13,397,000, in 1997, 1996 and 1995, respectively.
10. INCOME TAXES
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Federal:
Current.......................................... $ 5,505,000 $2,386,000 $ 2,263,000
(1,218,000) (222,000) (1,750,000)
Deferred......................................... ----------- ---------- -----------
4,287,000 2,164,000 513,000
----------- ---------- -----------
State:
Current.......................................... 898,000 641,000 610,000
(199,000) (60,000) (547,000)
Deferred......................................... ---------- ---------- -----------
699,000 581,000 63,000
----------- ---------- -----------
$ 4,986,000 $2,745,000 $ 576,000
=========== ========== ===========
</TABLE>
30
<PAGE>
LESLIE'S POOLMART, INC.
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>
1997 1996 1995
------------ ---------- ------------
<S> <C> <C> <C>
Federal income tax at statutory rate.......................................... $4,681,000 $2,248,000 $1,354,000
Reversal of tax reserves no longer needed..................................... (550,000) -- (1,100,000)
Permanent differences......................................................... 91,000 146,000 96,000
State taxes, net of federal benefit........................................... 764,000 351,000 226,000
---------- ---------- -----------
$4,986,000 $2,745,000 $ 576,000
========== ========== ===========
</TABLE>
The tax effect of temporary differences which give rise to significant
portions of the deferred tax liability are summarized below.
<TABLE>
<CAPTION>
1997 1996
------------ ------------
DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX
ASSETS LIABILITIES ASSETS LIABILITIES
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Property, plant and equipment differences.................. $ -- $2,693,000 $ -- $1,857,000
State income taxes......................................... 585,000 -- 197,000 --
Inventory overhead differences............................. 2,108,000 -- 1,942,000 --
Difference in timing of certain deductions................. 1,620,000 700,000 463,000 1,242,000
---------- ---------- ---------- ----------
$4,313,000 $3,393,000 $2,602,000 $3,099,000
========== ========== ========== ==========
</TABLE>
The Company has net operating losses (NOL) available for offset against
future tax liabilities, extending through 2007, limited to approximately $83,000
per year. As this NOL is utilized, such amounts will reduce goodwill.
11. 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.
12. STOCK DIVIDEND
In August 1995, a 5% stock dividend was declared for shareholders of record
as of August 31, 1995. The fair market value of the stock dividend was
transferred from retained earnings to common stock in the accompanying 1995
consolidated financial statements.
13. 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 1997,
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
$225,000, $263,000 and $212,000 for 1997, 1996 and 1995, respectively.
31
<PAGE>
LESLIE'S POOLMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. PREFERRED STOCK
In connection with the Recapitalization transaction, the Company sold
28,000 shares of Preferred Stock for total consideration of $28,000,000. The
Preferred Stockholder is entitled to an annual cumulative dividend (which is
payable at the option of the Company either in cash or in additional shares of
Preferred Stock for the first five years). The annual dividend is payable
quarterly at the annualized rate of 10.875 percent. The Preferred Stockholder is
entitled to elect 20 percent of the members of the Board of Directors of the
Company.
The Preferred Stock may be redeemed at the option of the Company at any
time at $1.010 per share plus accumulated and unpaid dividends. The Company is
required to redeem the Preferred Stock in three equal installments terminating
on the tenth anniversary of the date of issuance of the Preferred Shares.
In connection with the issuance of the Series A Preferred Stock, the
Preferred Stockholder received 252,996 Warrants to purchase common stock. Of
the $28,000,000 face value of the Preferred Stock, $3,116,000 was assigned to
the value of these Warrants and reflected as a discount on the Preferred Stock.
This discount will be accreted over the life of the Preferred Stock. The terms
of the Warrant Agreement will provide for a proportionate adjustment of the
warrants for stock splits and stock dividends and for additional warrant shares
to be issuable in the event any of the NQ Options or ISO Options are exercised.
Based on the number of options outstanding at September 27, 1997, an additional
58,518 warrants could be granted if the options were exercised.
In the ordinary course of business, the Company purchases raw materials and
finished goods pursuant to a multi-year purchase contract from the holder of the
Series A Preferred Stock. Management believes these transactions were under
terms no less favorable to the Company than those arranged with other parties.
15. STOCK BASED COMPENSATION PLANS
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation," which applies the fair value-based method of accounting for
options granted under stock-based compensation plans. SFAS 123 allows companies
to continue to account for stock options granted in accordance with Accounting
Principles Board Opinion No. 25, if the Company discloses the results under SFAS
123. Had compensation cost for these plans been determined consistent with SFAS
123, the Company's net income would have been reduced to the following proforma
amounts:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Income applicable to common shareholders
As reported...................... $7,815,000 $3,869,000
Pro forma........................ $7,202,000 $3,490,000
</TABLE>
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 1997, 1996 and 1995: risk free interest rates of
6.4%, 5.8% and 6.5%, respectively; expected volatility of 0%, 49% and 50%,
respectively; expected lives of 7 years for all options and no expected
dividend yield. Based on these assumptions, the weighted average value of the
options granted is $5.18, $7.55 and $7.88 in 1997, 1996 and 1995, respectively.
In June 1997, the Company adopted a non-qualified common stock option plan
(the "NQ Option Plan") and an incentive common stock option plan (the "ISO
Option Plan") and reserved 83,599 and 273,946 shares, respectively. All of the
NQ Option Plan options were granted at an exercise price of $5.00 per share and
248,000 options were granted under the ISO Option Plan at $14.50 per share.
32
<PAGE>
LESLIE'S POOLMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The difference between the NQ Option price of $5.00 per share and the fair
market value of $14.50 at the date of issuance has been charged as
Recapitalization costs in the consolidated income statements for the period
ended September 27, 1997. NQ Options vest immediately. NQ Options have a term
of ten years and remain exercisable without regard to any termination of the
employment of the holder. The Company and its major shareholders have a right
to repurchase ("Call Option") a portion of the NQ Options if the option holder
ceases to provide services to the Company. This call option ceases in June,
1999.
Under the ISO Option Plan, 186,500 options vest in one-third increments
over three years. The balance of the ISO Options are subject to the Company
achieving certain operating and store-opening goals. 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 12 months from the date of termination. ISO Options have a term of ten
years.
A summary of option activities for all plans is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------ -------------------- ------------------------
WTD AVG WTD AVG WTD AVG
SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE
--------- ------------ -------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year...... 972,067 $ 8.62 833,166 $ 7.58 859,947 $ 7.06
Granted ............................. 331,599 12.11 208,168 12.92 71,332 13.02
Exercised ........................... (830,048) (8.57) (40,804) (7.44) (83,640) (6.15)
Cancelled ........................... (142,019) (8.91) (28,463) (11.68) (14,473) (11.61)
-------- -------- ------- ------- -------- -------
Outstanding at end of year .......... 331,599 $ 12.11 972,067 $ 8.62 833,166 $ 7.58
======== ======== ======= ======= ======== =======
Exercisable at end of year............ 83,599 $ 5.00 709,074 $ 9.94 565,431 $ 9.00
======== ======== ======= ======= ======== =======
</TABLE>
The following table summarizes information about all stock options
outstanding as of September 27, 1997:
<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>
$5.00 .................................... 83,599 9.7 years $5.00 83,599 $5.00
$14.50 ................................... 248,000 9.7 years 14.50 -- --
-------- -------- ------- --------
331,599 $12.11 83,599 $5.00
======== ======== ======= ========
</TABLE>
33
<PAGE>
LESLIE'S POOLMART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. SUPPLEMENTAL CASH FLOW DISCLOSURES
The Company paid interest charges of $1,660,000, $2,835,000 and $2,419,000,
in 1997, 1996 and 1995, respectively. The Company paid income taxes of $474,000,
$2,425,000 and $2,086,000, in 1997, 1996 and 1995, respectively. The Series A
Preferred Stock dividends and the accretion of the warrants are excluded from
the statement of cash flows as non-cash transactions.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
34
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITIONS
---- --- ---------
<S> <C> <C>
Michael J. Fourticq....... 53 Chairman of the Board of Directors
Brian P. McDermott........ 40 Chief Executive Officer, President and Director
Gregory J. Annick......... 33 Director
John G. Danhakl........... 41 Director
Dr. Dale R. Laurance...... 51 Director
Robert D. Olsen........... 44 Executive Vice President, Chief Financial Officer
John T. Ball.............. 52 Senior Vice President, Merchandising and Marketing
Cynthia G. Watts.......... 35 Senior Vice President, General Counsel and Secretary
</TABLE>
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 and affiliate 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 distributor and retailer, which filed a
petition for reorganization under Chapter 11 of the Federal Bankruptcy Code in
March 1996.
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 & Cooke, Inc., a publicly-held holding company with diverse real
estate and corporate interests. Mr. McDermott is Chairman of the Board of
Busybody, Inc., a privately held fitness equipment retailer, of which he was
acting Chief Executive Officer from November 1994 through March 1996.
Gregory J. Annick became a director of the Company in June 1997. He has
been an executive officer and an equity owner, through a trust, of Leonard Green
& Partners ("LGP"), a merchant banking firm which manages Green Equity
Investors, II, LP ("GEI"), since the formation of LGP and GEI in 1994 by the
principals of Leonard Green & Associates, LP ("LGA"). He joined LGA as an
associate in 1989, became a principal in 1993, and through a corporation became
a partner of LGA in 1994. From 1988 to 1989, he was an associate with the
merchant banking firm of Gibbons, Green, van Amerongen. Before that time, Mr.
Annick was a financial analyst in mergers and acquisitions with Goldman, Sachs &
Co. Mr. Annick is also a director of Carr-Gottstein Foods Co., Communications &
Power Industries, Inc. and Hechinger Company.
John G. Danhakl became a director of the Company in June 1997. He has been
an executive officer and an equity owner of LGP, a merchant banking firm which
manages GEI, since 1995. Mr. Danhakl had previously been a Managing Director at
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and had been with
DLJ sine 1990. Prior to joining DLJ, Mr. Danhakl was a Vice President at Drexel
Burnham Lambert Incorporated. Mr. Danhakl is also a director of Big 5 Corp.,
Communications & Power Industries, Inc., Hechinger Company, Twinlab Corporation,
and The Arden Group, Inc.
Dr. Dale R. Laurance has been a Director of the Company since January 1996.
He has been a Director of Occidental Petroleum Corporation since 1990 and its
President since 1996. He was its Senior Operating Officer from 1990 to 1996 and
Vice President of Operations from 1984 to 1990. He is a Director of Canadian
Occidental Petroleum Ltd., Jacobs Engineering Group Inc., The Armand Hammer
Museum of Art and Cultural Center, Inc., Chemical Manufacturers Association,
American Petroleum Institute, U.S.-Arab Chamber of Commerce, Boy Scouts of
America-Western Los Angeles County Council and a member of the Advisory Board of
the Chemical Heritage Foundation. He
35
<PAGE>
is a past Chairman of the Advisory Board for the Department of Chemical and
Petroleum Engineering at the University of Kansas and is a recipient of the
Distinguished Engineering Service Award from the School of Engineering at the
University of Kansas. Dr. Laurance has served as a Managing Director of the
Joffrey Ballet Company.
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 laws 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.
John T. Ball has been Senior Vice President, Merchandising and Marketing of
the Company since November 1997. From March 1995 through October 1997, he was
Senior Vice President, Merchandising at Universal Studios, Inc. based in
Orlando, Florida. Mr. Ball oversaw all merchandising efforts related to
Universal's theme parks located in California, Florida and Japan. From 1993 to
1995, Mr. Ball was Vice President, Merchandising, Men's at Eddie Bauer, Inc. in
Redmond, Washington, and was Director of Outlet Stores for Eddie Bauer from 1990
to 1993. From 1980 to 1985, he held several merchandising management positions
in divisions of the Carter Hawley Hale Stores.
Cynthia G. Watts has been Vice President and General Counsel of the Company
since February 1993 and Secretary of the Company since March 1993. Since July
1997, she has been General Counsel to Hancock Park Associates, which is the
general partner and affiliate of several investment partnerships. From 1988 to
January 1993, Ms. Watts was an attorney at Paul, Hastings, Janofsky and 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.
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.
Messrs. Fourticq and McDermott are partners together in investment
partnerships that do not own shares of the Company.
Occidental holds Leslie's Series A Preferred Stock in the principal amount of
$28.0 million, together with warrants to purchase common stock.
Immediately prior to the consummation of the transactions, Leslie's, GEI, the
members of the HPA Group, Brian P. McDermott and Manette J. McDermott, as Co-
Trustees of the McDermott Family Trust, and Occidental and the holders of
certain management options entered into a Stockholders Agreement. In the
Stockholders Agreement, Michael Fourticq and Mr. McDermott were given certain
rights to be elected as directors of the Company. In addition, Occidental, as
owner of the Preferred Stock, was given the right to board representation.
36
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following summary compensation table sets forth for the fiscal years
ended September 27, 1997, December 28, 1996, and December 30, 1995, the
compensation for services to the Company of the Chief Executive Officer and the
other executive officers of the Company as of September 27, 1997.
<TABLE>
<CAPTION>
LONG-TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION
---------------------- ------------ ------------------------
SALARY BONUS STOCK OPTION 401(k) INSURANCE
YEAR ($) ($) (#) /(1)/ ($) /(2)/ ($) /(3)/
---- ------- ----- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Fourticq................ 1997 150,000 -- 4,976 -- --
Chairman of the Board 1996 157,500 -- 3,308 -- --
1995 150,000 -- 3,308 -- --
Brian P. McDermott................. 1997 293,000 -- 77,000 3,200 --
Chief Executive Officer, 1996 367,500 -- 30,000 3,000 204
President and Director 1995 350,000 -- -- 3,000 132
Robert D. Olsen.................... 1997 192,000 -- 102,761 3,200 --
Executive Vice President 1996 231,000 -- 22,500 3,000 204
and Chief Financial Officer 1995 220,000 -- -- 3,000 204
Cynthia G. Watts /(4)/............. 1997 104,000 -- 16,000 3,200 --
Senior Vice President, General 1996 157,500 -- 15,000 3,000 108
Counsel and Secretary 1995 150,000 -- -- 3,000 108
- --------------------
</TABLE>
/(1)/ All options were granted at their fair market value on the date of grant,
except 52,761 options granted to Robert D. Olsen and 7,000 options
granted to Cynthia G. Watts in 1997, which have an exercise price of
$5.00 per share.
/(2)/ Represents Company expected matching contributions to individuals' 401(k)
accounts.
/(3)/ Represents premiums paid by the Company for life insurance not generally
available to all Company employees.
/(4)/ Employed on a part-time basis since July 1, 1997.
NQ OPTION PLAN AND ISO OPTION PLAN
Leslie's has adopted a non-qualified common stock option plan (the "NQ
Option Plan") and an incentive common stock option plan (the "ISO Option Plan")
and has reserved 83,599 shares and 273,946 shares, respectively, of Leslie's
common stock for issuance upon the exercise of options to be granted to certain
employees of Leslie's thereunder. Options to purchase Leslie's common stock have
been granted 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.
Leslie's has reserved 83,599 shares of Leslie's common stock for the NQ
Option Plan. NQ Options vest immediately. However, Leslie's (and in some
instances GEI and certain members of the HPA Group) have a right ("Call Option")
to repurchase a portion of each NQ Option (and a portion of any shares of
Leslie's 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. If the NQ Option holder's service termination occurs prior to the
first anniversary of the consummation of the Transactions, 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
37
<PAGE>
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 consummation of the Transactions. 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.
Under the ISO Plan, ISO Options vest in one-third increments on the first,
second and third anniversaries of the effective date of the merger, except for
options to purchase 71,647 shares are also subject to a further vesting
condition based upon Leslie's 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 have a term of ten years.
OPTION GRANTS IN 1997
The following table sets forth the stock options granted to the Chief
Executive Officer and the other executive officers of the Company as of
September 27, 1997, during the nine months ended September 27, 1997, pursuant to
the Company's Incentive Stock Option Plan, NQ Option Plan, or otherwise.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------
% OF TOTAL
OPTIONS POTENTIAL REALIZABLE VALUE
GRANTED TO EXERCISE AT ASSUMED ANNUAL RATES OF STOCK PRICE
EMPLOYEES OR APPRECIATION FOR OPTION TERM/(1)/
OPTIONS IN BASE EXPIRATION
GRANTED FISCAL YEAR PRICE DATE 0%($) 5%($) 10% ($)
------- ----------- ----- ---- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael J. Fourticq......... 4,976/(2)/ 1.5% $ 5.00 6/11/07 47,270 92,730 161,990
Brian P. McDermott.......... 77,000/(3)/ 23.2% 14.50 6/11/07 -- 703,400 1,775,240
Robert D. Olsen............. 50,000/(3)/ 15.1% 14.50 6/11/07 -- 456,750 1,155,460
52,761/(2)/ 15.9% 5.00 6/11/07 501,230 982,360 1,717,630
Cynthia G. Watts............ 9,000/(3)/ 2.7% 14.50 6/11/07 -- 82,220 207,500
7,000/(2)/ 2.1% 5.00 6/11/07 66,500 130,450 227,890
</TABLE>
/(1)/ Potential realizable value is based on an assumption that the stock price
of the common stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the ten-year option
term. These numbers are calculated based on requirements promulgated by
the Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.
/(2)/ Granted pursuant to the NQ Option Plan. All grants pursuant to the NQ
Option Plan were made at a $5.00 per share exercise price.
/(3)/ Granted pursuant to 1997 Stock Option Plan. All grants pursuant to the
1997 Stock Option Plan were made at a $14.50 exercise pr ice. Options vest
over three years. Certain options vest only in the event the Company
achieves certain performance targets.
AGGREGATED OPTION EXERCISES IN 1997 AND FISCAL YEAR-END OPTION VALUE
The following table sets forth the stock option exercises by the named
executive officers during 1997. In addition, the table indicates the total
number and value of exercisable and non-exercisable options held by each such
officer as of September 27, 1997.
38
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
Shares Acquired VALUE OPTIONS AT IN-THE-MONEY OPTIONS AT
on Exercise(#) REALIZED($)/(1/) SEPTEMBER 27, 1997 SEPTEMBER 27, 1997($)/(1)/
-------------- --------------- --------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Fourticq.......... 12,091 30,250 4,976 -- 47,270 --
Brian P. McDermott........... 225,794 1,854,890 -- 77,000 -- --
Robert D. Olsen.............. 72,545 263,800 52,761 50,000 501,230 --
Cynthia G. Watts............. 44,773 159,650 7,000 9,000 66,500 --
</TABLE>
- --------------------
(/1/) All such options were exercised and retired in connection with the
Transactions.
(/2/) Potential unrealized value is (i) the fair market value at September
27, 1997 ($14.50 per share) less the option exercise price times (ii)
the number of shares.
DIRECTORS' COMPENSATION
Directors do not receive any compensation directly for their service on the
Company's Board of Directors. The Company has agreed, however, to pay LGP
certain fees for various management, consulting and financial planning services,
including assistance in strategic planning, providing market and financial
analyses, negotiating and structuring financing and exploring expansion
opportunities.
39
<PAGE>
ITEM 12. PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth information as of December 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 PERCENTAGE OF
NAME AND ADDRESS BENEFICIAL OWNERSHIP OF SHARES
OF BENEFICIAL OWNER COMMON STOCK(1)(2) OUTSTANDING (2)
------------------- ------------------ ---------------
<S> <C> <C>
GEI (3).............................................................. 1,055,172 73.6%
Gregory J. Annick /(4)/.............................................. 1,055,172 73.6
John G. Danhakl /(4)/................................................ 1,055,172 73.6
Brian P. McDermott................................................... 166,552 11.6
Michael J. Fourticq /(5)/............................................ 144,827 10.1
Robert D. Olsen/(6)/................................................. 69,727 4.8
Cynthia G. Watts /(7)/............................................... 9,000 0.6
Dr. Dale R. Laurance................................................. -- --
John T. Ball......................................................... -- --
Occidental /(8)/..................................................... 252,996 15.0
All executive officers and directors as a group (8 persons).......... 1,465,966 96.4
</TABLE>
- --------------
(1) The address of Messrs. Fourticq, McDermott, Olsen, Ball and Ms. Watts is
20630 Plummer Street, Chatsworth, California 91311. The address of
Occidental and Dr. Laurance is 10889 Wilshire Boulevard, Los Angeles,
California 90029. The address of GEI and Messrs. Annick and Danhakl is
11111 Santa Monica Boulevard, Suite 2000, Los Angeles, California 90025.
(2) Computed based upon the total number of shares of Leslie's common stock
outstanding and the number of shares of Leslie's common stock underlying
warrants and options of that person exercisable within 60 days. In
accordance with Rule 13(d)-3 of the Exchange Act, any Leslie's common
stock which is subject to warrants or options exercisable within 60 days
is deemed to be outstanding for the purpose of computing the percentage
of outstanding shares of Leslie's common stock owned by the person
holding such warrants or options, but is not deemed to be outstanding for
the purpose of computing the percentage of outstanding shares of Leslie's
common stock owned by any other person.
(3) GEI is a Delaware limited partnership managed by LGP, which is an
affiliate of the general partner of GEI. Each of Leonard I. Green,
Jonathan D. Sokoloff, Peter J. Nolan, Mr. Annick and Mr. Danhakl and
Jennifer Holden Dunbar, either directly (whether through ownership
interest or position) or through one of more intermediaries, may be
deemed to control LGP and such general partner. LGP and such general may
be deemed to control the voting and disposition of the shares of Leslie's
common stock owned by GEI. Accordingly, for certain purposes, Messrs.
Green, Sokoloff, Nolan, Annick and Danhakl and Ms. Holden Dunbar may be
deemed to be beneficial owners of the shares of Leslie's common stock
held by GEI.
(4) Includes the shares beneficially owned by GEI, of which Messrs. Annick
and Danhakl and associates.
(5) Includes 4,976 shares subject to options exercisable within 60 days and
139,851 shares of Leslie's common stock.
(6) Includes 52,761 shares subject to options exercisable within 60 days and
16,966 shares of Leslie's common stock.
(7) Includes 7,000 shares subject to options exercisable within 60 days and
2,000 shares of Leslie's common stock.
(8) All such shares are obtainable upon the exercise of warrants.
40
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCK TRANSACTIONS
In connection with the Transactions, the executive officers and directors of
Leslie's California as of the date of the Transactions received a total of
approximately $14.0 million for their sale of common stock owned by them,
representing the Cash Merger Consideration, which was also payable to Leslie's
California's public shareholders. Included in that amount, Mr. Fourticq (and
affiliated partnerships) received the Cash Merger Consideration with respect to
approximately 667,350 shares of Leslie's California common stock. He retained
160,539 shares of Leslie's California common stock, which were converted into an
equal number of shares of the common stock of the Company. Also included in
that amount, Mr. McDermott received the Cash Merger Consideration with respect
to 10,647 shares of Leslie's California Common Stock. He retained 166,552
shares of Leslie's California common stock, which were converted into an equal
number of shares of the Common Stock of the Company.
In connection with the Transactions, Mr. Olsen purchased 16,966 shares of the
Company's Common Stock and Ms. Watts purchased 2,000 shares (collectively, the
"Subscription Stock").
MANAGEMENT AGREEMENT
Pursuant to the terms of a Management Agreement among LGP, HPA and Leslie's,
(i) upon consummation of the Transactions, Leslie's paid LGP a transaction fee
in the amount of $1.4 million, one-half of which was be paid to HPA for
distribution among the HPA Group, including to Michael Fourticq, Brian McDermott
and Robert Olsen, and (ii) Leslie's has agreed to pay LGP an annual management
fee equal to 1.6% of the total sum invested by GEI in Leslie's.
OCCIDENTAL TRANSACTIONS
Occidental, of which Dr. Laurance is an officer and director, was a holder of
$10 million of 8% Convertible Subordinated Debentures issued by Leslie's
California. In connection with the Transactions, exchanged the Debentures, and
an additional $18 million in cash consideration for 28,000 shares of the
Company's Series A Preferred Stock and warrants to purchase up to 15 percent
(subject to adjustment) of the Company's common stock.
A wholly-owned subsidiary of Occidental has a long-standing relationship with
the Company as a supplier of certain of chemical chlorine compounds. A multi-
year supply agreement terminated during 1997, and a new multi-year agreement was
entered into between the parties on mutually satisfactory terms and conditions.
INDEMNIFICATION AND INSURANCE
Pursuant to the requirements of the agreements concerning the Transactions,
Leslie's is required to provide indemnification to the current and prior
directors and officers of Leslie's California and Leslie's against costs,
expenses, suits, claims and proceedings arising out of or pertaining to, or the
approval and consummation of certain agreements related to the Transactions.
Leslie's is obligated for a period of at least eighteen months from the
effective date of the Transactions to continue in effect (or provide insurance
coverage that, subject to Leslie'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 of the Transactions, provided
that the Company is not obligated to expend annually more than 150% of the cost
of such coverage prior to the date of the Transactions.
STOCKHOLDERS AGREEMENT
In connection with the Transactions, Leslie's, GEI , the members of the HPA
Group, Brian P. McDermott and Manette J. McDermott, as Co-Trustees of the
McDermott Family Trust, Occidental, the holders of the Subscription Stock and
members of management who received NQ Options or ISO Options entered into a
Stockholders Agreement (the "Stockholders Agreement"). The Stockholders
Agreement provides the Company and certain Stockholders certain rights
41
<PAGE>
to repurchase a portion of the NQ Options, NQ Shares and the Subscription Stock
of certain other Stockholders upon their ceasing to provide services to the
Company. The Stockholders Agreement generally restricts the transferability of
securities of the Company ("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, in favor of some other
Stockholders. In addition, GEI has certain "drag-along" rights and if GEI
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 certain Stockholders and piggyback registration
rights for all Stockholders. In the Stockholders Agreement, Mr. Fourticq and Mr.
McDermott are given certain rights to be elected as directors of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1),(2) The following financial statements and financial statement
schedules are included herewith and are filed as part of this annual report.
Consolidated Balance Sheets at September 27, 1997 and December 28, 1996
Consolidated Statements of Income for the nine months ended September 27, 1997
and September 28, 1996 (unaudited) and the years ended December 28, 1996
and December 30, 1995
Consolidated Statements of Shareholders' Equity (Deficit) for the nine months
ended September 27, 1997 and the years ended December 28, 1996 and December
30, 1995.
Consolidated Statements of Cash Flows for the nine months ended September 27,
1997 and
September 28, 1996 (unaudited) and the years ended December 28, 1996 and
December 30, 1995
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
Schedule II--Valuation and Qualifying Accounts
(a)(3) The following exhibits set forth below are filed as part of this annual
report or are incorporated herein by reference.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of the Company*
3.2 Certificate of Merger of Leslie's Poolmart into the Company*
3.3 Certificate of Merger of Poolmart USA Inc. into the Company*
3.4 Certificate of Designation, Preferences and Rights of Exchangeable
Cumulative Redeemable Preferred Stock, Series A*
3.5 Bylaws of the Company*
4.1 Indenture dated as of June 11, 1997 between the Company and U.S. Trust
Company of California, N.A.*
10.1 Credit Agreement dated June 11, 1997 among the Company, Wells Fargo
Bank, N.A. and the financial institutions signatory thereto, including
Security Agreement, Stock Pledge Agreement and Guarantees of
subsidiaries*
10.2 Preferred Stock and Warrant Purchase Agreement dated as of June 11,
1997 between the Company and Occidental Petroleum Corporation*
10.3 Warrant dated June 11, 1997 for the purchase of shares of common stock
of the Company issued to Occidental Petroleum Corporation*
10.4 Stockholders Agreement and Subscription Agreement dated as of June 11,
1997 among the Company and Green Equity Investors II, LP, Richard H.
Hillman, Michael J. Fourticq, Greg Fourticq, Brian P. McDermott, the
Trustees of the McDermott Family Trust, Occidental Petroleum
Corporation and the Stockholders identified on the signature pages
thereto*
10.5 NQ Option Plan and form of Agreement*
42
<PAGE>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
10.6 ISO Option Plan and form of Agreements*
10.7 Lease for Dallas Distribution Center*
10.8 Lease for Ontario Distribution Center*
10.9 Lease for Bridgeport Distribution Center*
10.10 Form of Director's and Officer's Indemnification Agreement dated as of
June 11, 1997 between the Company and certain members of management*
10.11 Management Agreement dated as of June 11, 1997 between the Company and
Leonard Green & Partners, LP*
10.12 Noncompetition Agreement, dated August 31, 1992, among Sandy's Pool
Supply, Inc., Leslie's Poolmart, and Philip Leslie*
10.13 Noncompetition Agreement, dated August 31, 1992, among Sandy's Pool
Supply, Inc., Leslie's Poolmart, and Sander Bass*
10.14 Purchase Agreement dated June 6, 1997 between the Company and BT
Securities Corporation*
10.15 Registration Rights Agreement dated as of June 11, 1997 by and between
the Company and BT Securities Corporation*
18.1 Letter of Arthur Andersen LLP regarding change in accounting principle
or practice
24.1 Power of Attorney (included on signature page)
21.1 Subsidiaries
27.1 Financial Data Schedule
- --------------
*Previously filed
(b) Reports on Form 8-K
None. Subsequent to the period covered by this report, on September 29,
1997, the Company filed a Report on Form 8-K stating that it had changed its
fiscal year-end from the Saturday closest to December 31 to the Saturday closest
to September 30.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on December 22, 1997.
LESLIE'S POOLMART, INC.
(Registrant)
By: /s/ Robert D. Olsen
----------------------------
Robert D. Olsen
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Brian P. McDermott, Robert D. Olsen, and
each of them, his true and lawful attorney-or attorneys-in-fact and agent or
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including pre-or post-effective amendments) to this Report on Form 10-k, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agent, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all hat said attorneys-in-fact and agents, or any of
them, or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
--------- -------- ----
<S> <C> <C>
/s/ Michael J. Fourticq Chairman of the Board of December 22, 1997
- -------------------------------
Michael J. Fourticq Directors
/s/ Brian P. McDermott Chief Executive Officer, December 22, 1997
- -------------------------------
Brian P. McDermott President, and Director
/s/ Gregory J. Annick Director December 22, 1997
- -------------------------------
Gregory J. Annick
/s/ John G. Danhakl Director December 22, 1997
- -------------------------------
John G. Danhakl
/s/ Dr. Dale R. Laurance Director December 22, 1997
- -------------------------------
Dr. Dale R. Laurance
/s/ Robert D. Olsen Chief Financial Officer and December 22, 1997
- -------------------------------
Robert D. Olsen Principal Accounting Officer
</TABLE>
44
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of Leslie's Poolmart, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Leslie's Poolmart, Inc. and subsidiary
included in this Form 10-K and have issued our report thereon dated November 14,
1997. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in Item 14 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Los Angeles, California
November 14, 1997
<PAGE>
LESLIE'S POOLMART
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 30, 1995:
Accumulated amortization of goodwill........................... 906,000 239,000 -- 1,145,000
Accumulated amortization of deferred loan costs................ 55,000 51,000 -- 106,000
Year ended December 28, 1996:
Accumulated amortization of goodwill........................... 1,145,000 252,000 -- 1,397,000
Accumulated amortization of deferred loan costs................ 106,000 55,000 -- 161,000
Year ended September 27, 1997:
Accumulated amortization of goodwill........................... 1,397,000 191,000 -- 1,588,000
Accumulated amortization of deferred loan costs................ 161,000 263,000 (280,000) 144,000
</TABLE>
<PAGE>
EXHIBIT 18.1
Leslie's Poolmart, Inc.
November 14, 1997
Re: Form 10-K Report for the Nine Months Ended September 27, 1997
Gentlemen:
This letter is written to meet the requirements of Regulation S-K calling for a
letter from a registrant's independent accountants whenever there has been a
change in accounting principle or practice.
As of July 1, 1997, the Company changed from the last-in first-out (LIFO) method
of accounting for inventory to the first-in first-out (FIFO) method. According
to the management of the Company, this change was primarily for the following
reasons:
1. The Company must meet minimum financial covenants in accordance with its
publicly traded Senior Notes and in accordance with a revolving credit
facility with a bank. These covenants must be calculated on a FIFO basis,
as specified in the agreements.
2. The predominant costing method within Leslie's industry is FIFO.
3. The change to FIFO does not materially change the Company's historical
trends and will not have a material effect on shareholders' equity.
4. The market price for the inventory of the Company is quite variable. Also,
the change to FIFO will not materially change the inventory value.
5. The FIFO method will present inventory at a value that most closely
approximates its replacement cost and its actual acquisition cost. Use of
the FIFO method will enable users such as the bond holders and commercial
banks to better understand the Company's financial condition.
6. The FIFO method will minimize the effect of accounting estimates on interim
financial information.
7. The Company will realize significant administrative savings as a result of
a change to FIFO.
A complete coordinated set of financial and reporting standards for determining
the preferability of accounting principles among acceptable alternative
principles has not been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change in accounting
described in the preceding paragraph is to a preferable method. However, we have
reviewed the pertinent factors, including those related to financial reporting,
in this particular case on a subjective basis, and our opinion stated below is
based on our determination made in this manner.
We are of the opinion that the Company's change in method of accounting is to an
acceptable alternative method of accounting, which, based upon the reasons
stated for the change and our discussions with you, is also preferable under the
circumstances in this particular case. In arriving at this opinion, we have
relied on the business judgment and business planning of your management.
ARTHUR ANDERSEN LLP
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
The Company has two wholly-owned subsidiaries:
Leslie's Pool Brite, Inc., a California corporation;
and
Sandy's Pool Supply, Inc., a California corporation.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> DEC-29-1996
<PERIOD-END> SEP-27-1997
<CASH> 14,829
<SECURITIES> 0
<RECEIVABLES> 4,368
<ALLOWANCES> 0
<INVENTORY> 40,239
<CURRENT-ASSETS> 65,272
<PP&E> 35,694
<DEPRECIATION> 0
<TOTAL-ASSETS> 113,252
<CURRENT-LIABILITIES> 28,561
<BONDS> 0
25,853
0
<COMMON> (47,349)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 113,252
<SALES> 0
<TOTAL-REVENUES> 196,025
<CGS> 0
<TOTAL-COSTS> 118,660
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,220
<INCOME-PRETAX> 13,769
<INCOME-TAX> 4,986
<INCOME-CONTINUING> 8,783
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,783
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
