<PAGE>
- ------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
Form 10-K
--------------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period from October 4, 1998 to October 2, 1999
Commission file number 0-18741
LESLIE'S POOLMART, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 95-4620298
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
</TABLE>
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 17, 1999 was $1,060,040.
APPLICABLE ONLY TO CORPORATE REGISTRANTS:
The number of outstanding shares of the Registrant's Common Stock on December
17 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 364 company-owned retail stores in 30 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 approximately 5.0 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 1999, Leslie's brand name products accounted for
approximately 65% of the Company's total sales.
Leslie's successful execution of its business strategy has generated a 36-
year history of consistently increasing sales. Management intends to continue
increasing sales and profits by further expanding its store base at the rate of
10% to 15% annually and continuing to achieve positive comparable store sales
increases. The Company attributes its positive 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 364 locations is greater than the sum of the next fifteen largest
specialty retail competitors combined. However, despite its large relative size,
Leslie's presently accounts for only approximately 8% 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 about
two-thirds of industry sales in 1999.
Attractive Store Economics. Leslie's results reflect extremely attractive
store-level economics. The Company estimates that the capital expenditure
required to open each new store currently averages between $125,000 and
$150,000. 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 an annual return of 145% on the
average capital expenditures.
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 1995, Leslie's has opened 155
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 1999, non-discretionary and regularly consumed
products comprised approximately 75% of the Company's sales, with pool chemicals
representing approximately 44% of the Company's product sales.
1
<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 about 5.0 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 155 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.
2
<PAGE>
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
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 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.
3
<PAGE>
Products
Leslie's offers its customers a comprehensive selection of products
necessary to satisfy their swimming pool supply needs. During 1999, the Company
stocked approximately 2,500 items in each store, with more than 15,000
additional items available through its Xpress Parts program and special order
processes. In 1999, approximately 500 items were displayed in the Company's
residential mail order catalogs and 800 items were in the commercial catalog,
although special order procedures make nearly all Leslie's products available to
mail order customers as well.
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 fiscal year ended October 2, 1999:
<TABLE>
<CAPTION>
Product Line Percentage Purpose
------------ ---------- -------
<S> <C> <C>
Pool Chemicals...................... 44% Cleanliness, appearance, health
Major Equipment and Parts........... 31% 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..... 9% Safety, cleanliness and temperature
maintenance for
above-ground pools
Recreational Items.................. 8% 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
1999. The Company's non-discretionary products have long shelf lives and are not
prone to either obsolescence or shrinkage due to the high percentage of Leslie's
business which is attributable to non-discretionary products.
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 1999, Leslie's brand name products accounted for
approximately 65% of the Company's total sales.
Channels of Distribution
Retail Store Operations. At the end of fiscal 1999, Leslie's marketed its
products through 364 retail stores in 30 states under the trade name Leslie's
Swimming Pool Supplies. California represents its single largest concentration
of stores with 100, while 57 stores are located in Texas, and 85 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 1999,
the Company had 27 district managers, each of whom was responsible for
approximately 13 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 year ended
October 2, 1999 of approximately $4.5 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.
4
<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, in late 1997 and early 1998 Leslie's converted all
of its service departments to store-based service operations and added service
capabilities in selected other markets. In 1999, approximately 240 stores were
supported by service technicians. The Company anticipates a nationwide expansion
of the store-based service operations over the next several years.
Marketing
Substantially all the Company's marketing is done on a direct mail basis
through its proprietary mailing list of approximately 5.0 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.
5
<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 three distribution centers outside
of California, 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
In 1999, the Company distributed all of its products to its retail stores
and to its catalog customers through its leased distribution facilities in
Ontario, California; Dallas, Texas; Bridgeport, New Jersey and Covington,
Kentucky. 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 relocated its
Bridgeport, New Jersey operations to a new 119,000 square foot facility in March
of 1998. In January of 1999, the Company opened its' new 146,000 square foot
distribution center in Covington, Kentucky.
The Company is now purchasing the majority of the chemicals to be
distributed from the Dallas, Bridgeport and Covington 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.
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.
6
<PAGE>
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 October 2, 1999, Leslie's employed 2,437 persons. During the height
of the Company's seasonal activities in 1999, it employed 3,142 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.
7
<PAGE>
ITEM 2. PROPERTIES
As of October 2, 1999, the Company operated 364 stores in 30 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 6
Arizona 20 Nevada 8
California 100 New Hampshire 1
Connecticut 9 New Jersey 19
Delaware 2 New Mexico 2
Florida 16 New York 22
Georgia 13 North Carolina 2
Illinois 4 Ohio 11
Indiana 4 Oklahoma 5
Kansas 1 Pennsylvania 16
Kentucky 2 Rhode Island 1
Louisiana 4 South Carolina 2
Maryland 7 Tennessee 4
Massachusetts 8 Texas 57
Michigan 9 Virginia 5
---
Total Stores 364
===
</TABLE>
Except for 25 owned stores, all of its retail stores are leased by the Company
with lease terms expiring between 1999 and 2010. 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 119,000 square foot distribution facility in Bridgeport, New Jersey is
leased for a 10-year term, expiring in 2008. The lease includes options to renew
for two five-year periods. A new 146,000 square foot distribution center in
Covington, Kentucky was opened in December 1998. This facility was leased for a
12 year term and provides for two five year renewal options.
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.
8
<PAGE>
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. The Company has not paid any dividends
on its common stock, and does not anticipate doing so in the foreseeable future.
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
</TABLE>
The following shares of common stock were issued by the Company for
consideration of $14.50 per share, cash:
<TABLE>
<CAPTION>
Purchaser Nmber 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. 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.
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 fiscal years ended October 2, 1999 and October 3, 1998
(53 weeks), the twelve months ended September 27, 1997 (unaudited), the nine
months ended September 27, 1997 (transition period) and the two fiscal years in
the period ended December 28, 1996. This financial data was derived from the
audited historical consolidated financial statements of the Company (with the
exception of the twelve months ended September 27, 1997) 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.
<TABLE>
<CAPTION>
Twelve Nine
Years Ended Months Ended Months Ended Years Ended
----------------------- -------------------------
October 2, October 3, September 27, September 27, December 28, December 30,
1999 1998 1997 1997 1996 1995
--------- --------- ------------ ------------ ------------ -----------
(53 weeks) (52 weeks) (transition
(unaudited) Period)
<S> <C> <C> <C> <C> <C> <C>
Net Sales $282,349 $252,923 $217,109 $196,025 $191,640 162,456
Gross Profit 111,529 99,358 81,761 77,365 72,760 60,399
Gross Margin 39.5% 39.3% 37.7% 39.5% 38.0% 37.2%
Loss on Disposition
of Fixed Assets 1,131 334 1,112 457 750 27
Depreciation and Amortization 8,499 7,223 5,429 4,207 4,326 3,374
Income from Operations 10,411 15,536 11,021 17,989 9,400 6,691
Interest Expense, net 11,380 10,513 4,842 4,220 2,786 2,708
Net Income/(Loss) (878) 2,790 4,343 8,783 3,869 3,407
Balance Sheet Data:
Working Capital $ 36,023 $ 36,102 $ 36,711 $ 36,711 $ 12,718 $ 13,007
Total Assets 132,780 121,286 113,252 113,252 83,157 79,529
Current Ratio 1.96 2.13 2.29 2.29 1.45 1.47
Long-term Debt 91,095 91,195 91,290 91,290 15,581 17,843
Stockholders' (Deficit) Equity (39,657) (34,915) (35,845) (35,845) 36,315 31,921
Selected Operating Data:
Capital Expenditures $ 16,042 $ 10,519 $ 9,885 $ 7,917 $ 8,807 $ 9,550
EBITDA/(1)/ 19,465 22,537 18,318 23,247 14,960 10,472
EBITDA Margin/(2)/ 6.89% 8.91% 8.44% 11.86% 7.81% 6.45%
Number of Employees at Year-end 2,437 1,906 1,767 1,767 1,055 780
Stores Operated at Year-end 364 316 278 278 259 224
Comparable Store Sales Growth 6.6% 10.3% 10.1% 10.4% 9.9% 6.0%
</TABLE>
____________________
/(1)/ Earnings before interest, taxes, depreciation, amortization, loss/(gain)
on disposition of fixed assets, Recapitalization costs and LIFO
adjustments. EBITDA is a measurement that is used by the financial
community. It is not a substitute for the statement of cash flows
prepared in accordance with Generally Accepted Accounting Principles but
is a factor that is widely used and accepted by the investment community.
/(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
Debentures 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 1999 fiscal year ended
on October 2, 1999 and included 52 weeks. The 1998 fiscal year ended on October
3, 1998, and included 53 weeks, while the nine month transition period ended
September 27, 1997 included 39 weeks.
Results of Operations
1999 compared to 1998:
The Company's 1999 fiscal year included 52 weeks while the 1998 fiscal year
included 53 weeks.
For the twelve months ended October 2, 1999, sales increased 11.6% to
$282,349,000 from $252,923,000 in the same twelve months of 1998. The sales
increase is attributable to comparable store sales growth of 6.6% (over the
comparable 52 weeks) and 48 (net) new store additions in 1999. EBITDA for the
period decreased 13.6% to $19,465,000 from $22,537,000 in the same twelve months
of 1998. A net loss of $878,000 was realized in 1999 with the reduced EBITDA and
operating earnings. The decrease in EBITDA was largely the result of lower than
expected sales in a year when SG&A expense increases were being made to support
the growth of the business.
12
<PAGE>
During 1999, the Company expanded its business by opening 52 new stores.
Additionally, 4 stores were closed and 8 were relocated in 1999. This resulted
in a net increase of 48 stores as of October 2, 1999 as compared to October 3,
1998.
<TABLE>
<CAPTION>
Sales
---------------------------
Twelve Months Ended
---------------------------
Oct. 2, 1999 Oct. 3, 1998
------------ ------------
(in thousands)
<S> <C> <C>
Retail Stores........................................................ $ 277,806 $ 246,506
Mail Order Catalog................................................... 4,543 5,521
Service Departments.................................................. -- 896
------------ ------------
$ 282,349 $ 252,923
============ ============
</TABLE>
Sales for the twelve months ended October 2, 1999 increased 11.6% over the
same fiscal period of 1998, which included an additional week. On a same week
basis, the Company's sales grew 13.1% when comparing the same 52 weeks of each
period. Though sales grew 11.6% over fiscal 1998, the 1999 sales were lower than
expected due to the cool, wet weather experienced in several major markets (most
notably California) in the important May through July timeframe. Less aggressive
retail pricing on some key items and a less aggressive promotional program also
contributed to the sales softness in 1999.
Retail store sales, which are comprised of residential and commercial
sales, grew 12.7% in the fiscal year on comparable store sales increases (over
the comparable 52 weeks) of 6.6% and an increase in the total number of stores
in operation from 316 in 1998 to 364 at the end of 1999. 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. The lower comparable store
sales growth (6.6% in 1999 versus 10.3% in fiscal 1998 and 10.4% in the nine
month transition period of 1997) was attributable to the weather, pricing and
promotional issues referred to above.
In total, commercial sales grew by approximately 13% in the twelve month
period as compared to last year, while service sales grew at a rate of
approximately 50%. In 1998, the Company converted its Service Department
operations into a store based format, and as a result, reflected these service
sales in the retail store total. The inclusion of commercial and service sales
in store sales increased the comparable store sales gains (over the same 52
weeks) by approximately 3% in the year-to-date period.
Mail order catalog sales declined 17.7% to $4,543,000 from $5,521,000 in
the same period of 1998. New store openings in mail order markets continued to
cannibalize mail order sales. Service department sales were eliminated in 1999
with the final transition in 1998 to the store-based service operating format.
Gross profit for the fiscal year ended October 2, 1999 increased to 39.5%
of sales, from 39.3% in 1998. 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 1999 reflects higher average
retail pricing and some lower product acquisition costs, partially offset by an
increase in store rent expense as a percentage of sales. Store rent as a
percentage of sales increased over the prior year due to the increased number of
new store openings in 1999, the opening of the new Kentucky Distribution Center,
and the soft sales experienced this season.
In 1999, selling, general and administrative expenses equaled $99,245,000,
versus $82,908,000 in 1998, an increase of 19.7%. The increase in SG&A expenses
in 1999 was largely due to the opening of 52 new stores, to additional
investments in both store and corporate-based staffing to better support future
growth, and to additional staff hired to support the continued rollout of the
store-based service operations.
13
<PAGE>
EBITDA was $19,465,000 in fiscal year 1999, representing a decrease of
$3,072,000, or 13.6%, as compared to $22,537,000 for the same period of 1998.
The decrease in EBITDA was primarily the result of much softer than expected
sales in a year when SG&A expense increases were being made to support the
growth of the business.
Amortization expense for the fiscal year ended October 2, 1999 increased to
$742,000 from $580,000 in the same period of 1998 due to higher goodwill
amortization and the amortization of non competition agreements associated with
the Marlin acquisition. (See Note 2(g) of the Financial Statements.)
For the fiscal year ended October 2, 1999, the Company recognized losses on
the disposition of fixed assets totaling approximately $1,131,000. This was
primarily associated with the implementation of a new computer system designed
to support a retail sales environment which is Year 2000 compliant. The
disposition of the old computer system and the closure of several stores
resulted in the $1,131,000 charge in 1999.
Income from operations for the period decreased 33.0% to $10,411,000 from
$15,536,000 in the same twelve months of 1998.
Interest expense equaled $11,380,000 in 1999, up from $10,513,000 in 1998.
The increase was primarily the result of increased borrowings resulting from the
lower earnings, and increased capital spending related to continued growth of
the business.
The tax benefit of $91,000 in 1999 reflected the pre-tax losses realized
this year versus the pre-tax profit seen in 1998.
1998 compared to 1997:
The Company's 1998 fiscal year includes 53 weeks. The unaudited twelve
month period ended September 27, 1997 (used for comparative purposes) includes
52 weeks.
For the twelve months ended October 3, 1998, sales increased 16.5% to
$252,923,000 from $217,109,000 in the same twelve months of the prior year. The
sales increase is primarily attributable to comparable store sales growth (over
the comparable 53 weeks) of 10.3% and 38 (net) new store additions in 1998.
EBITDA for the period increased 23.0% to $22,537,000 or 8.9% of sales, from
$18,319,000 or 8.4% of sales in the same twelve months of 1997. Net income for
1998 decreased to $2,790,000 as compared to $4,343,000 in 1997 due to higher
interest expense in 1998 resulting from the Recapitalization transaction.
During 1998, the Company expanded its business by opening 36 new stores and
acquiring five from a competitor. Additionally, three stores were closed and six
relocated in 1998. This resulted in a net increase of 38 stores as of October 3,
1998 as compared to September 27, 1997.
<TABLE>
<CAPTION>
Sales
------------------------------
Twelve Months Ended
------------------------------
Oct. 3, 1998 Sep. 27, 1997
-------------- --------------
<S> <C> <C>
(unaudited)
(in thousands)
Retail Stores.............................. $246,506 $205,879
Mail Order Catalog......................... 5,521 6,428
Service Departments........................ 896 4,802
-------- --------
$252,923 $217,109
======== ========
</TABLE>
Sales for the twelve months ended October 3, 1998 increased 16.5% over the
same period in 1997. Retail store sales, which are comprised of residential
sales and commercial sales, grew 19.7%, reflecting an extra sales week in fiscal
1998, increases in comparable store sales (over the comparable 53 weeks) of
10.3% and an increase in the total number of stores in operation from 278 in
1997 to 316 at the end of 1998. The increase in comparable store sales resulted
from
14
<PAGE>
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 approximately 22% in the twelve month
period as compared to last year, increasing comparable store sales growth by
about 2.0%. Additionally, in 1998, the Company converted Service Department
operations into a store-based format, and as a result, reflected these service
sales in the retail store sales total. The inclusion of service increased the
comparable store sales gains by approximately 4.0% in the year-to-date period.
Mail order catalog sales declined 14.1% to $5,521,000 from $6,428,000 in
the comparable period of 1997. New store openings in a number of strong mail
order markets continued to cannibalize mail order sales. Service department
sales declined versus the same period in 1997 reflecting the transition to
store-based service operations.
Gross profit for the twelve months ended October 3, 1998 increased to 39.3%
of sales, from 37.7% in 1997. 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 1998 reflects higher average
retail pricing, some lower product acquisition costs, lower inventory shrinkage
expense and a decrease in store rent expense as a percentage of sales due to the
slightly reduced rate of new store openings in the last two years.
In 1998, selling, general and administrative expenses equaled $82,908,000,
versus $68,580,000 in 1997, an increase of 20.9%, largely the result of the
increase in the number of stores in operation at the end of 1998.
EBITDA was $22,537,000 in the twelve months of 1998, representing an
increase of $4,218,000, or 23.0%, as compared to $18,319,000 for the same period
of 1997. The EBITDA margin increased to 8.9% of sales in the twelve months of
1998 from 8.4% of sales in the same period of 1997. The increase in EBITDA was
primarily the result of the Company's sales growth combined with increased gross
margins.
Amortization expense for the twelve months ended October 3, 1998 increased
to $580,000 from $254,000 in the same period of 1997 due to higher goodwill
amortization and the amortization of non competition agreements associated with
the Marlin acquisition. (See Note 2(g) of the Financial Statements.)
For the twelve months ended October 3, 1998, the Company recognized losses
on the disposition of fixed assets totaling approximately $334,000. This was
primarily associated with the closure or relocation of several stores in 1998.
Income from operations for the period increased 41.0% to $15,536,000 or
6.1% of sales, from $11,021,000 or 5.1% of sales in the same twelve months of
1997.
Interest expense equaled $10,513,000 in 1998, up from $4,842,000 in 1997.
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 increased to $2,233,000 in 1998, an effective tax rate of
44.5%, from $1,836,000 and an effective tax rate of 29.7% in 1997. The lower
effective tax rate in 1997 as compared to 1998 reflects the reversal in 1997 of
certain tax reserves which were no longer needed.
Financial Condition, Liquidity and Capital Resources
Changes in Financial Condition. From October 3, 1998 to October 2, 1999,
total current assets increased $5,394,000 from $68,128,000 to $73,522,000. The
increase in current assets results mainly from increases in inventories
partially offset by reductions in cash. The principal component of current
assets is inventory, which increased $11,289,000 from $47,440,000 to
$58,729,000. The inventory increase results primarily from the increased number
of stores in operation and to the weaker than expected sales performance in
1999.
15
<PAGE>
Total current liabilities increased $5,473,000 between October 3, 1998 and
October 2, 1999. Accounts payable and accrued liabilities increased primarily
from the continued growth of the business.
Liquidity and Capital Resources. For the fiscal year ended October 2, 1999,
net cash used in operating activities was $984,000 compared to cash provided of
$7,737,000 in the twelve months of the prior year. Increased working capital
requirements, in particular inventory, and the lower earnings produced the cash
use of $984,000 in 1999. Inventories increased $11,289,000 year-over-year, due
primarily to the additional stores, the opening of a new distribution center,
and to the lower than expected sales in 1999.
In 1999, cash used in investing activities was $15,806,000 compared with
$12,915,000 in the same period of the prior year. Increased capital expenditures
in 1999 were the result of the larger number of new stores opened this year,
increased store remodeling activity, and the purchase and implementation of a
new Year 2000 compliant computer system.
Cash provided by financing activities was $7,419,000 in fiscal year 1999
compared with cash used in financing activities of $87,000 in the same period of
1998. In 1999, increased line of credit borrowings were used to finance the
working capital and capital expenditure investments described above.
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 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
----------------------------------
1999 Jan. 2 April 3 July 3 Oct. 2
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales.................................................... $ 26,132 $ 33,389 $128,875 $93,953
Gross Profit............................................. 6,246 8,492 56,995 39,796
(Loss) Income from Operations............................ (11,168) (14,392) 25,085 10,886
Net (Loss) Income........................................ (7,665) (9,681) 12,288 4,180
EBITDA/(1)/.............................................. $ (9,267) $(12,373) $ 27,149 $13,956
Comparable Store Sales Growth............................ 17.3% 9.1% 4.8% 5.7%
</TABLE>
<TABLE>
<CAPTION>
14 Weeks
13 Weeks Ended Ended
-------------------------------------
1998 Dec. 27 March 28 June 27 Oct. 3
---------- ------------ ---------- ----------
<S> <C> <C> <C> <C>
Sales.................................................... $24,238 $ 24,403 $110,851 $93,431
Gross Profit............................................. 6,726 5,736 46,309 40,587
(Loss) Income from Operations............................ (6,767) (12,280) 18,805 15,778
Net (Loss) Income........................................ (5,382) (8,504) 9,095 7,581
EBITDA/(1)/.............................................. $(5,225) $(10,709) $ 20,595 $17,876
Comparable Store Sales Growth............................ 16.2 % 0.0% 7.8% 15.0%
</TABLE>
____________________
/(1)/ EBITDA represents income before interest, taxes, depreciation and
amortization, and loss/(gain) on disposition of fixed assets.
Year 2000 Issues
General. The computer systems issue relating to dates beyond 1999 is the
result of many computer programs being written to use and store dates with only
the last two digits of the applicable year. As a result, these programs may
assume that all two digit dates are twentieth century dates. This could result
in system failure, anomalous system behavior or incorrect system reporting.
System failure could, in turn, temporarily affect the Company's ability to
process customer transactions, interface with vendors and engage in similar
normal business activities.
The Company has assessed how it may be impacted. The Company formulated and
implemented a plan to address all known aspects of the issue. The Company fully
completed this plan in September 1999.
Overview of the Plan. The Company's plan addressed internal software
information systems, vendor provided computer hardware and operating systems,
communications systems, suppliers and other business partners. The plan
identified a four step process for each of these areas--
1) Initial Assessment of Exposure
2) Development of a Plan to Further Identify All Necessary Costs/Steps
to Address Issues
3) Plan Implementation and Testing
4) Contingency Planning
Internal Software Information Systems. Internal software information
systems include our base financial and merchandising system (Alliance), our
distribution package (CAMBAR), our point of sale system (POS 98) and other
smaller scale systems developed internally.
17
<PAGE>
The Alliance system was found to be substantially non-compliant. The
initial assessment identified high costs to re-engineer this system for
compliance. For this reason, and for other business-related reasons, the
Company replaced the Alliance system with a new package. This package (JDA) was
chosen and acquired in 1998. The system was fully installed in August 1999. The
vendor has done extensive year 2000 development and testing and has guaranteed
year 2000 compliance. The Company's internal testing of the JDA system has
initially confirmed year 2000 readiness. The capital cost to acquire and install
the JDA system was approximately $1,100,000.
The CAMBAR system was found to be substantially non-compliant. The initial
assessment identified relatively low costs to internally re-engineer the system
for compliance. The development of this year 2000 compliance code has been
completed. The costs to develop, test and install these changes was less than
$20,000. The full test of CAMBAR year 2000 compliant code has been completed.
The POS 98 application system was found to be fully year 2000 compliant.
Changes to support year 2000 dates in other smaller scale internal systems
have been identified. In particular, Sales Audit and Mail Order systems were
modified and/or replaced in order to comply. Modifications to the Sales Audit
system and to other small scale systems that needed modification cost less than
$40,000 to develop, test and install. These changes were operational in June of
1999. The Mail Order system was fully replaced by a new system developed in-
house. This new system cost approximately $160,000 to develop, test and install.
The new system was installed in August of 1999.
Vendor Provided Computer Hardware and Operating Systems. Vendor provided
computer hardware and operating systems includes all data center equipment (IBM
AS-400 systems), all store POS equipment (Various Intel-Based Microcomputer
Systems), embedded systems in corporate environmental equipment, and
corporate/field management microcomputer systems. All of these systems were
found to be substantially year 2000 compliant with the exception of store POS
systems. A limited number of store systems were replaced by June of 1999 with an
estimated cost of less than $30,000. An in-store procedure is necessary in a
limited number of stores to manually set the date on January 1, 2000.
Communications Systems. Communications systems includes all data center
equipment and software systems used to support external communications with the
field and with business partners and all corporate equipment and software
systems used to support internal business management communications. All of
these systems have been recently replaced and/or upgraded. Each significant
component of these communications systems has been tested and all were found to
be substantially year 2000 compliant.
Suppliers and Other Business Partners. This area of the plan called for all
significant suppliers and other business partners to be surveyed for year 2000
readiness. All of the significant trade vendors have been contacted. The Company
is not currently aware of any single vendor or business partner with year 2000
compliance issues that could have a material impact on the Company. Year 2000
business transaction tests of all direct interfaces with vendors and other
business partners were completed by September of 1999. The Company can provide
no assurance that year 2000 compliance will be successfully implemented by all
of its suppliers.
Contingency Planning. The Company has developed a comprehensive contingency
plan to address the risks of operational problems and costs likely to result
from a failure by the Company or by a supplier or business partner to address
year 2000 readiness. This plan was developed by the end of September 1999. It
lists specific action plans for failure in any of the identified areas of the
year 2000 compliance plan. The Company believes that business risks have been
minimized. However, there can be no guarantee that year 2000 compliance issues
not yet identified or fully addressed will not materially affect the Company's
operations or expose it to third party liability.
18
<PAGE>
Recent Accounting Pronouncement. In June 1998, the FASB issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments. This
standard, as amended, is effective for periods beginning after June 15, 2000 and
will be adopted by the Company as of October 2001. It is not expected that the
adoption of this standard will have an impact on the consolidated financial
statements nor require additional footnote disclosure since the Company does not
currently utilize derivative instruments or participate in structured hedging
activities.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," which provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. In April 1998, the AICPA issued SOP No. 98-5, "Reporting on
the Costs of Start-Up Activities," which requires start-up activities and
organization costs to be expenses as incurred. These standards were adopted
during fiscal 1999 and did not materially change the Company's accounting
policies.
Quantitative and Qualitative -- The Company is exposed to market risks
relating to fluctuations in interest rates. The Company's objective of financial
risk management is to minimize the negative impact of interest rate fluctuations
on the Company's earnings and cash flows. At October 2, 1999, the Company had
$7.5 million of variable rate debt and $90 million of fixed rate debt.
Fluctuations in the variable interest rate would not materially impact the
Company's operations.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants...................................................................... 21
Management's Report........................................................................................... 22
Consolidated Balance Sheets--October 2, 1999 and October 3, 1998.............................................. 23
Consolidated Statements of Operations--Years Ended October 2, 1999, October 3, 1998, and
September 27, 1997 (unaudited) and the Nine Months Ended September 27, 1997 (transition period) and
September 28, 1996 (unaudited)........................................................................... 24
Consolidated Statements of Shareholders' Equity (Deficit)--Years Ended October 2, 1999, October 3, 1998,
and the Nine Months Ended September 27, 1997 (transition period)......................................... 25
Consolidated Statements of Cash Flows-- Years Ended October 2, 1999, October 3, 1998, and
September 27, 1997 (unaudited) and the Nine Months Ended September 27, 1997 (transition period) and
September 28, 1996 (unaudited)........................................................................... 26
Notes to Consolidated Financial Statements.................................................................... 27
</TABLE>
20
<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 October 2, 1999
and October 3, 1998, and the related consolidated statements of operations,
shareholders' equity (deficit) and cash flows for the two fiscal years ended
October 2, 1999 and October 3, 1998, and the nine months ended September 27,
1997 (transition period). 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, Inc. and
subsidiaries as of October 2, 1999 and October 3, 1998, and the results of their
operations and their cash flows for the two fiscal years ended October 2, 1999
and October 3, 1998, and the nine months ended September 27, 1997, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Los Angeles, California
December 17, 1999
21
<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.
Arthur Andersen LLP has direct access to the Board of Directors and
periodically meets with the Board to discuss accounting, auditing and financial
reporting matters.
Robert D. Olsen
Chief Financial Officer
22
<PAGE>
LESLIE'S POOLMART, INC
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
ASSETS
------
CURRENT ASSETS: Oct. 2, 1999 Oct. 3, 1998
------------ ------------
<S> <C> <C>
Cash.................................................................... $ 193 $ 9,564
Accounts and other receivables, net..................................... 7,350 5,270
Inventories............................................................. 58,729 47,440
Prepaid expenses and other.............................................. 2,128 1,583
Deferred tax assets..................................................... 5,122 4,271
------------ ------------
Total current assets.............................................. 73,522 68,128
------------ ------------
PROPERTY, PLANT AND EQUIPMENT: 73,681 61,744
Less--Accumulated depreciation and amortization......................... 26,345 21,902
------------ ------------
Net property, plant and equipment....................................... 47,336 39,842
------------ ------------
OTHER ASSETS:
Goodwill, net........................................................... 8,392 8,699
Non-compete covenant, net............................................... 627 1,091
Deferred financing costs, net........................................... 2,460 3,007
Other................................................................... 443 519
------------ ------------
Total other assets................................................ 11,922 13,316
------------ ------------
$ 132,780 $ 121,286
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Accounts payable........................................................ $ 16,937 $ 14,692
Accrued liabilities..................................................... 15,462 12,559
Current portion of long-term debt....................................... 101 94
Income taxes............................................................ 4,999 4,681
------------ ------------
Total current liabilities......................................... 37,499 32,026
------------ ------------
DEFERRED TAX LIABILITIES................................................... 3,106 3,619
LINE-OF-CREDIT BORROWINGS.................................................. 7,512 --
LONG-TERM DEBT, net of current portion..................................... 1,095 1,195
SENIOR NOTES............................................................... 90,000 90,000
PREFERRED STOCK, $0.001 par value; Authorized --2,000,000 shares:
Issued and outstanding --28,000 Series A at Oct. 2, 1999 and
Oct. 3, 1998; liquidation preference $28,000,000........................ 33,225 29,361
COMMITMENTS AND CONTINGENCIES.............................................. -- --
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value;
Authorized --12,000.000 shares;
Issued and outstanding--1,433,643 at
Oct. 2, 1999 and Oct. 3, 1998....................................... 1 1
Additional paid-in capital.............................................. (45,702) (45,702)
Retained earnings...................................................... 6,044 10,786
------------ ------------
Total shareholders' deficit....................................... (39,657) (34,915)
------------ ------------
$ 132,780 $ 121,286
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated balance sheets.
23
<PAGE>
LESLIE'S POOLMART, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
----------------------------------------------- ---------------------------------
Oct. 2, 1999 Oct. 3, 1998 Sep. 27, 1997 Sep. 27, 1997 Sep. 28, 1996
--------------- -------------- ------------- ---------------- -------------
(transition
(unaudited) period) (unaudited)
<S> <C> <C> <C> <C> <C>
Net sales............................. $282,349 $252,923 $217,109 $196,025 $170,555
Cost of sales......................... 170,820 153,565 135,348 118,660 102,193
-------- -------- -------- -------- --------
Gross profit.......................... 111,529 99,358 81,761 77,365 68,362
Selling, general and
administrative expenses.............. 99,245 82,908 68,580 57,934 51,709
Amortization of acquisition
costs................................ 742 580 254 191 191
Recapitalization costs................ -- -- 794 794 --
Loss on disposition of fixed
assets............................... 1,131 334 1,112 457 95
-------- -------- -------- -------- --------
Income from operations................ 10,411 15,536 11,021 17,989 16,367
Interest expense, net................. 11,380 10,513 4,842 4,220 2,164
-------- -------- -------- -------- --------
Income before taxes................... (969) 5,023 6,179 13,769 14,203
Income tax provision
(benefit)............................ (91) 2,233 1,836 4,986 5,894
-------- -------- -------- -------- --------
Net income/(loss)..................... (878) 2,790 4,343 8,783 8,309
======== ======== ======== ======== ========
Series A Preferred Stock
dividends and accretion.............. 3,864 3,508 969 969 --
-------- -------- -------- -------- --------
(Loss)/Income applicable to
common shareholders.................. $ (4,742) $ (718) $ 3,374 $ 7,814 $ 8,309
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
24
<PAGE>
LESLIE'S POOLMART, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)
<TABLE>
<CAPTION>
Common Stock
------------------------
Additional Total
Number of Paid in Retained Shareholders'
Shares Amount Capital Earnings Equity/(Deficit)
----------- ------ ------------ -------- ----------------
<S> <C> <C> <C> <C> <C>
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)
Series A Preferred Stock
Dividends and accretion..................... -- -- -- (3,508) (3,508)
Tax benefits NQ stock options................ -- -- 1,648 -- 1,648
Net income................................... -- -- -- 2,790 2,790
----------- ------ ------------ -------- ------------
Balance, at October 3, 1998................... 1,433,643 1 (45,702) 10,786 (34,915)
----------- ------ ------------ -------- ------------
Series A Preferred Stock
Dividends and accretion..................... -- -- -- (3,864) (3,864)
Net loss...................................... -- -- -- (878) (878)
----------- ------ ------------ -------- ------------
Balance, at October 2, 1999................... 1,433,643 $ 1 $ (45,702) $ 6,044 $ (39,657)
=========== ====== ============ ======== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
25
<PAGE>
LESLIE'S POOLMART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Years Ended Nine Months Ended
------------------------------------------ ----------------------------
Oct. 2, 1999 Oct. 3, 1998 Sep. 27, 1997 Sep. 27, 1997 Sep. 28,1996
------------ ------------ ------------- ------------- ------------
OPERATING ACTIVITIES: (Unaudited) (transition period) (Unaudited)
<S> <C> <C> <C> <C> <C>
Net income/(loss)..................................... $ (878) $ 2,790 $ 4,343 $ 8,783 $ 8,309
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization...................... 8,499 7,223 5,428 4,207 3,227
Deferred income taxes.............................. (1,364) 268 (284) (1,417) --
Recapitalization costs............................. -- -- 794 794 --
Loss on disposition of fixed assets................ 1,131 334 1,112 457 95
(Increase) decrease in:
Accounts and other receivables..................... (2,080) (902) (1,281) (1,818) (852)
Inventories........................................ (11,289) (7,201) (370) (6,291) (5,566)
Prepaid expenses and other......................... (545) (60) 181 170 50
Other assets....................................... 76 96 (48) 56 (1)
Increase (decrease) in:
Accounts payable and accrued liabilities........... 5,148 4,869 5,287 11,847 8,334
Income taxes....................................... 318 320 1,909 6,092 4,183
-------- -------- -------- -------- -------
Net cash provided by (used in)
operating activities............................... (984) 7,737 17,071 22,880 17,779
-------- -------- -------- -------- -------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment............. (16,042) (10,519) (9,885) (7,917) (6,737)
Proceeds from dispositions of property, plant
and equipment....................................... 236 -- 1,213 1,213 120
Business acquisitions................................. -- (2,396) -- -- --
-------- -------- -------- -------- -------
Net cash used in investing activities................. (15,806) (12,915) (8,672) (6,704) (6,617)
-------- -------- -------- -------- -------
FINANCING ACTIVITIES:
Net line-of-credit borrowings/(repayments)............ 7,512 -- (7,263) (15,440) (9,693)
Issuance of Senior Notes.............................. -- -- 90,000 90,000 --
Payments of long-term debt............................ (93) (87) (16,828) (16,391) (1,723)
Payment of deferred financing costs................... -- -- (3,719) (3,719) --
Repurchase of common stock............................ -- -- (99,536) (99,536) --
Proceeds from issuance of preferred stock............. -- -- 28,000 28,000 --
Proceeds from issuance of common stock, net........... -- -- 15,652 15,652 304
-------- -------- -------- -------- -------
Net cash (used in)/provided by financing activities... 7,419 (87) 6,306 (1,434) (11,112)
-------- -------- -------- -------- -------
NET (DECREASE) INCREASE IN CASH......................... (9,371) (5,265) 14,705 14,742 50
CASH AT BEGINNING OF PERIOD............................. 9,564 14,829 124 87 74
-------- -------- -------- -------- -------
CASH AT END OF PERIOD................................... $ 193 $ 9,564 $ 14,829 $ 14,829 $ 124
======== ======== ======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<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 October 2, 1999, the Company marketed
its products under the trade name Leslie's Swimming Pool Supplies through 364
retail stores in 30 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 7)
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 12)
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.,
Sandy's Pool Supply, Inc. and Blackwood & Simmons, 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 1999 fiscal year
ended on October 2, 1999 and included 52 weeks. The 1998 fiscal year ended on
October 3, 1998 and included 53 weeks. The nine month transition period ended
September 27, 1997 included 39 weeks.
27
<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
$237,000 and $192,000 at October 2, 1999 and October 3, 1998, 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 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 operations.
Depreciation and amortization are computed using the straight-line method
(considering appropriate salvage values) based on the following estimated
average useful lives:
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
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 October
2, 1999 and October 3, 1998 was net of accumulated amortization of $2,136,000
and $1,858,000, respectively.
g. Business Acquisition
In January 1998, the Company purchased the capital stock of Blackwood &
Simons, Inc. (dba Marlin Pool Supply), an operator of six swimming pool supply
stores located in the Atlanta, Georgia area, in a cash for stock transaction.
The purchase price, net of excess cash on hand, was approximately $2,300,000.
The covenant not-to-compete was valued at $1,200,000 and is being amortized over
three years. The goodwill of $950,000 is being amortized over 40 years. The
acquisition was immaterial to the financial statements presented.
28
<PAGE>
Leslie's Poolmart, Inc.
Notes to Consolidated Financial Statements --(Continued)
h. Deferred Financing Costs
In connection with issuing the Senior Notes and signing the Credit
Agreement, the Company paid $3,708,000 in financing costs that are being
deferred and amortized over the lives of the corresponding agreements. The
balance recorded at October 2, 1999 and October 3, 1998 was net of accumulated
amortization of $1,248,000 and $701,000 respectively.
i. 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 October 2, 1999 and October 3,
1998 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.
j. Mail Order Catalog Sales
Revenue on mail order catalog sales is recognized at the time goods are
shipped.
k. Cost of Sales
Included in cost of sales are the costs of services and purchased goods,
chemical repackaging costs and non-administrative occupancy costs.
l. Fair Value of Financial Statements
The fair value of the $90,000,000 Senior Notes using quoted market prices
as of October 2, 1999 is $81,000,000. 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.
m. 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.
n. Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments. This standard is effective for periods
beginning after June 15, 2000 and will be adopted by the Company as of October
2001. It is not expected that the adoption of this standard, as amended, will
have an impact on the consolidated financial statements nor require additional
footnote disclosure since the Company does not currently utilize derivative
instruments or participate in structured hedging activities.
29
<PAGE>
Leslie's Poolmart, Inc.
Notes to Consolidated Financial Statements --(Continued)
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) No. 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use," which provides
guidance on accounting for the costs of computer software developed or obtained
for internal use. In April 1998, the AICPA issued SOP No. 98-5, "Reporting on
the Costs of Start-Up Activities," which requires start-up activities and
organization costs to be expenses as incurred. These standards were adopted
during fiscal 1999 and did not materially change the Company's accounting
policies.
o. Reclassifications
Certain prior period amounts in the consolidated financial statements have
been reclassified to conform to the 1999 presentations.
3.Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
October 2, October 3,
1999 1998
----------- -----------
<S> <C> <C>
Raw materials and supplies............... $ 656,000 $ 591,000
Finished goods........................... 58,073,000 46,849,000
----------- -----------
$58,729,000 $47,440,000
=========== ===========
</TABLE>
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
October 2, October 3,
1999 1998
------------ ------------
<S> <C> <C>
Land.............................................. $ 6,070,000 $ 6,250,000
Buildings and improvements........................ 7,529,000 7,423,000
Vehicles, machinery and equipment................. 2,960,000 2,703,000
Leasehold improvements............................ 29,042,000 23,143,000
Office furniture, equipment and other............. 25,716,000 21,909,000
Construction-in-process........................... 2,364,000 316,000
----------- -----------
73,681,000 61,744,000
Less--Accumulated depreciation and amortization... 26,345,000 21,902,000
----------- -----------
$47,336,000 $39,842,000
=========== ===========
</TABLE>
5. Bank Credit Agreement
In connection with the Recapitalization, the Company entered into a Credit
Agreement (the "Agreement") with Wells Fargo Bank including a line of credit,
letters of credit and swingline loans. In the third quarter of fiscal 1999, and
again in
30
<PAGE>
Leslie's Poolmart, Inc.
Notes to Consolidated Financial Statements --(Continued)
December 1999, the Company modified its existing line of credit agreement with
the Wells Fargo Bank. Under the revised agreement, maximum borrowings have been
increased to $50,000,000 for the period December 15 through June 15, and reduced
to $25,000,000 for the period June 16 through November 15, with the maturity
date set at November 15, 2000. Under the revised agreement, maximum borrowings
continue to be limited as a function of inventory and receivables. On October 2,
1999, $7,512,000 was outstanding under this Agreement.
The Agreement accrues interest at the lender's reference rate plus the
applicable Prime rate margin or at LIBOR plus the applicable LIBOR rate margin
(8.25 percent at October 2, 1999). The margins are determined by the funded
debt to EBITDA 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 October 2, 1999, the Company was not in
compliance with certain covenants but obtained a waiver from the bank.
6. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
October 2, October 3,
1999 1998
------------ ------------
<S> <C> <C>
Notes payable collateralized by security interests in certain assets,
maturing September 2002. Interest accrues at the
rate of 6.5%................................................................... $ 281,000 $ 359,000
Notes payable collateralized by security interest in various properties, due
in monthly installments maturing December 2003.
Interest accrues at the rate of 9.6%........................................... 915,000 930,000
---------- ----------
1,196,000 1,289,000
Less--Current portion............................................................. 101,000 94,000
---------- ----------
$1,095,000 $1,195,000
========== ==========
</TABLE>
Principal maturities of long-term debt as of October 2, 1999 are as follows:
<TABLE>
<S> <C>
2000......................................................................... $ 101,000
2001......................................................................... 108,000
2002......................................................................... 116,000
2003......................................................................... 37,000
2004......................................................................... 834,000
----------
$1,196,000
==========
</TABLE>
7. 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.
31
<PAGE>
Leslie's Poolmart, Inc.
Notes to Consolidated Financial Statements-(Continued)
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, limitations on the incurrence of additional indebtedness and the
payment of dividends. At October 2, 1999, the Company was in compliance with all
covenants.
8. Leases
The Company leases certain store, office, distribution and manufacturing
facilities under operating leases which expire at various dates through 2010.
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 October 2, 1999 are as follows:
2000................................ $ 20,632,000
2001................................ 18,104,000
2002................................ 15,390,000
2003................................ 12,050,000
2004................................ 8,731,000
Thereafter.......................... 11,184,000
------------
$ 86,091,000
============
Certain leases are renewable at the option of the Company for periods of
one to ten years. Rent expense charged against income totaled $20,590,000,
$17,167,000 and $11,730,000 in 1999, 1998 and 1997 (transition period),
respectively.
9. Income Taxes
The provision/(benefit) for income taxes is comprised of the following:
<TABLE>
<CAPTION>
Nine Months
Year Ended Year Ended Ended
October 2, October 3, September 27,
1999 1998 1997
---- ---- ----
(transition
period)
<S> <C> <C> <C>
Federal:
Current................ $ (1,102,000) $ 1,962,000 $ 5,505,000
Deferred............... 1,027,000 (202,000) (1,218,000)
------------ ----------- -----------
(75,000) 1,760,000 4,287,000
------------ ----------- -----------
State:
Current................ (353,000) 539,000 898,000
Deferred............... 337,000 (66,000) (199,000)
------------ ----------- -----------
(16,000) 473,000 699,000
------------ ----------- -----------
$ (91,000) $ 2,233,000 $ 4,986,000
============ =========== ===========
</TABLE>
32
<PAGE>
Leslie's Poolmart, Inc.
Notes to Consolidated Financial Statements-(Continued)
A reconciliation of the provision/(benefit) for income taxes to the amount
computed at the federal statutory rate is as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Year Ended Ended
October 2, October 3, September 27,
1999 1998 1997
---- ---- ----
(transition
period)
<S> <C> <C> <C>
Federal income tax at statutory rate........... $(330,000) $1,708,000 $4,681,000
Reversal of tax reserves no longer needed...... -- -- (550,000)
Permanent differences.......................... 249,000 206,000 91,000
State taxes, net of federal benefit............ (10,000) 319,000 764,000
--------- ---------- ----------
$ (91,000) $2,233,000 $4,986,000
========= ========== ==========
</TABLE>
The tax effect of temporary differences which give rise to significant
portions of the deferred tax asset and liability are summarized below.
<TABLE>
<CAPTION>
1999 1998
--------------------------- ----------------------------
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Property, plant and equipment................... $ -- $2,370,000 $ -- $2,995,000
State income taxes.............................. 465,000 -- 460,000 --
Inventory....................................... 1,967,000 36,000 1,634,000 --
Difference in timing of certain deductions...... 2,690,000 700,000 2,177,000 624,000
---------- ---------- ---------- ----------
$5,122,000 $3,106,000 $4,271,000 $3,619,000
========== ========== ========== ==========
</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.
10. Contingencies
The Company is a defendant in lawsuits or potential claims encountered in
the normal course of business, such matters are being vigorously defended. In
the opinion of management, the resolutions of these matters will not have a
material effect on the Company's financial position or results of operations.
The Company's general liability insurance program and employee group
medical plan have self-insurance retention features of $100,000 and $75,000 per
incident, respectively. The Company's liability is limited to $600,000 per year
for the general liability program.
11. 401(k) Plan
33
<PAGE>
Leslie's Poolmart, Inc.
Notes to Consolidated Financial Statements-(Continued)
The Company provides for the benefit of its employees a voluntary
retirement plan under Section 401(k) of the Internal Revenue Code. During 1998,
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
$468,000, $387,000 and $225,000 for 1999, 1998, and 1997 (transition period),
respectively.
12. 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 annual rate of 10.875 percent, compounded semi-annually. 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
original 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 October
2, 1999, an additional 67,959 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
warrants issued to the original owners 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.
13. 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>
1999 1998 1997
---- ---- ----
(Loss)/Income applicable to common shareholders (transition
period)
<S> <C> <C> <C>
As reported.................................... $ (4,742,000) $ (718,000) $ 7,814,000
Pro forma...................................... $ (5,172,000) $ (1,107,000) $ 7,202,000
</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 1999, 1998 and 1997: risk free interest rates of
5.6%, 5.7% and 6.4%, respectively; expected volatility of 0%; expected lives of
7 years for all options and no expected divided yield. Based on these
assumptions, the weighted average value of the options granted is $6.41, $4.72
and $5.18 in 1999, 1998 and 1997, respectively.
34
<PAGE>
Leslie's Poolmart, Inc.
Notes to Consolidated Financial Statements-(Continued)
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. In
November 1998, the Company reserved an additional 60,000 non-voting common
shares for the ISO Option Plan.
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.
Under the ISO Option Plan, 206,000 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>
1999 1998 1997
---- ---- ----
(transition period)
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......... 357,099 $ 12.30 331,599 $ 12.11 972,067 $ 8.62
Granted.................................. 28,000 20.00 28,000 14.77 331,599 12.11
Exercised................................ -- -- -- -- (830,048) (8.57)
Cancelled................................ (22,167) 14.50 (2,500) (14.50) (142,019) (8.91)
------- ------- -------- ------- -------- -------
Outstanding at end of year............... 362,932 $ 12.76 357,099 $ 12.30 331,599 $ 12.11
======= ======= ======== ======= ======== =======
Exercisable at end of year............... 265,099 $ 11.51 168,769 $ 9.79 83,599 $ 5.00
======= ======= ======== ======= ======== =======
</TABLE>
The following table summarizes information about all stock options outstanding
as of October 2, 1999:
<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 7.7 years $ 5.00 83,599 $ 5.00
$14.50.............................. 248,833 7.7 years 14.50 180,666 14.50
$17.50.............................. 2,500 8.8 years 17.50 833 17.50
$20.00.............................. 28,000 9.6 years 20.00 -- 20.00
------- ------- ------- -------
362,932 $ 12.76 265,099 $ 11.51
======= ======= ======= =======
</TABLE>
14. Supplemental Cash Flow Disclosures
35
<PAGE>
Leslie's Poolmart, Inc.
Notes to Consolidated Financial Statements-(Continued)
The Company paid interest charges of $11,520,000, $11,111,000 and
$1,660,000, in 1999, 1998 and 1997 (transition period), respectively. The
Company paid income taxes of $1,109,000, $2,486,000 and $474,000, in 1999, 1998
and 1997 (transition period), 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. The tax benefit for non-qualified stock
options was excluded from the statement of cash flows as a non-cash transaction.
36
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
________________________________________________________________________________
37
<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........ 55 Chairman of the Board of Directors
Brian P. McDermott......... 42 Chief Executive Officer, President and Director
Gregory J. Annick.......... 35 Director
John G. Danhakl............ 43 Director
Dr. Dale R. Laurance....... 53 Director
Robert D. Olsen............ 46 Executive Vice President, Chief Financial Officer
John T. Ball............... 54 Senior Vice President, Merchandising and Marketing
Marvin D. Schutz........... 52 Senior Vice President, Store Operations
</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.
Gregory J. Annick became a director of the Company in June 1997. He has
been an executive officer 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. He joined a merchant banking firm affiliated
with LGP as an associate in 1989, became a principal in 1993, and through a
corporation became a partner 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 several private companies.
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 since 1990. Prior to joining DLJ, Mr. Danhakl was a Vice President at Drexel
Burnham Lambert Incorporated. Mr. Danhakl is also a director of Twinlab
Corporation, The Arden Group, Inc. and several private companies.
38
<PAGE>
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 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.
Marvin D. Schutz has been Senior Vice President, Store Operations, since
July 1999. From May 1997 through June 1999, he was Vice President of Store
Operations. From October 1994, he was Director of Store Operations, Eastern
Division. From 1982 through 1993 he held several management positions in
specialty retail at Montgomery Ward as National Director of Operations and
Training, and Silo Inc. as Regional Sales Manager and Director of Operations.
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.
On March 12, 1999, Green Equity Investors II, L.P. purchased all of the
Preferred Stock from Occidental Petroleum Corporation. Occidental retained
warrants to purchase 105,364 shares of 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.
39
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following summary compensation table sets forth for the fiscal years
ended October 2, 1999 and October 3, 1998, respectively and the nine months
ended September 27, 1997, the compensation for services to the Company of the
Chief Executive Officer and the other executive officers of the Company as of
October 2, 1999.
<TABLE>
<CAPTION>
Long-Term All Other
Fiscal Year Compensation Compensation Compensation
------------------------ -------------- ---------------------------
Salary Bonus Stock Options 401(k) Insurance/Other
Year ($)(1) ($)(2) (#)(3) ($)(4) ($)(5)
---- -------- --------- -------------- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Fourticq................... 1999 200,000 -- -- -- --
Chairman of the Board 1998 200,000 -- -- -- --
1997 150,000 -- 4,976 -- --
Brian P. McDermott.................... 1999 424,231 -- -- 5,000 174
Chief Executive Officer, 1998 412,885 76,875 -- 3,200 --
President and Director 1997 293,000 97,500 77,000 3,200 --
Robert D. Olsen....................... 1999 284,539 -- -- 4,817 303
Executive Vice President 1998 277,089 51,563 -- 3,200 --
And Chief Financial Officer 1997 192,000 63,750 102,761 3,200 --
John T. Ball.......................... 1999 232,846 -- -- 4,834 47,495(6)
Senior Vice President, 1998 203,265 42,188 23,000 3,200 --
Merchandising and Marketing 1997 -- -- -- -- --
Marvin D. Schutz(7)................... 1999 119,808 7,500 7,500 2,362 495
Senior Vice President, 1998 -- -- -- -- --
Store Operations 1997 -- -- -- -- --
</TABLE>
____________________
(1) Salary figures for 1997 reflect the nine month fiscal year.
(2) Bonuses are attributed to the year earned, and are paid out after the
conclusion of the fiscal year. Bonuses were paid on a twelve month basis
for 1999 and 1997, and a nine month basis for 1998.
(3) All options were granted at their fair market value on the date of grant,
except 52,761 options granted to Robert D. Olsen, which have an exercise
price of $5.00 per share.
(4) Represents expected Company matching contributions to individuals' 401(k)
accounts.
(5) Represents premiums paid by the Company for life insurance not generally
available to all Company employees.
(6) $47,000 represents a moving allowance paid according to the terms of the
employment contract.
(7) Promoted from Vice President to Senior Vice President in July 1999.
40
<PAGE>
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 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, as amended, 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 67,946 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 1999
The following table sets forth the stock options granted to the Chief
Executive Officer and the other executive officers of the Company as of
October 2, 1999, during the twelve months ended October 2, 1999, pursuant to the
Company's Incentive Stock Option Plan, NQ Option Plan, or otherwise.
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------
% of Total
Options Date Potential Realizable Value
Granted to Exercise at Assumed Annual Rates of Stock Price
Employees or Price 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..... -- -- -- --
Brian P. McDermott...... -- -- -- --
Robert D. Olsen......... -- -- -- --
John T. Ball............ -- -- -- --
Marvin D. Schutz........ 7,500/(2)/ 26.8% $20.00 7/12/09 82,699 203,692
</TABLE>
41
<PAGE>
(1) Potential realizable value is based on an assumption that the stock price
of the common stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the ten-year option term.
These numbers are calculated based on requirements promulgated by the
Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.
(2) Granted pursuant to 1997 Stock Option Plan. Options vest over three years.
Certain options vest only in the event the Company achieves certain
performance targets.
Aggregated Option Exercises in 1999 and Fiscal Year-End Option Value
The following table sets forth the stock option exercises by the named
executive officers during 1999. In addition, the table indicates the total
number and value of exercisable and non-exercisable options held by each such
officer as of October 2, 1999.
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Shares Acquired Value Options at In-the-Money Options at
on Exercise(#) Realized($) October 2, 1999 October 2, 1999
---------------- ------------ ------------------------------ ------------------------------
Exercisable Unexercisable Exercisable Unexercisable
Name -------------- ------------- ---------------- -------------
-----
<S> <C> <C> <C> <C> <C> <C>
Michael J. Fourticq............ -- -- 4,976 -- 74,640 --
Brian P. McDermott............. -- -- 51,333 19,000 282,333 104,500
Robert D. Olsen................ -- -- 86,094 11,000 974,748 60,500
John T. Ball................... -- -- 15,333 6,000 84,333 33,000
Marvin D. Schutz............... -- -- 8,246 10,166 60,352 14,667
</TABLE>
____________________
(1) Potential unrealized value is (i) the fair market value at October 2, 1999
($20.00 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.
42
<PAGE>
ITEM 12. PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
The following table sets forth information as of October 2, 1999 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
Beneficial Owner Common Stock/(1)(2)/ Outstanding/(2)/
--------------- ----------------------- ---------------
<S> <C> <C>
GEI(3).................................................... 1,202,804 61.6%
Gregory J. Annick(4)...................................... 1,202,804 61.6
John G. Danhakl(4)........................................ 1,202,804 61.6
Brian P. McDermott(5)..................................... 217,885 11.2
Michael J. Fourticq(6).................................... 144,815 7.4
Robert D. Olsen(7)........................................ 103,060 5.3
John T. Ball(8)........................................... 15,333 0.8
Marvin D. Schutz (8)...................................... 8,246 0.4
Dr. Dale R. Laurance...................................... -- --
Occidental(9)............................................. 105,364 5.4
All executive officers and directors as a group (8
persons)................................................. 1,797,507 92.1%
</TABLE>
- --------------
(1) The address of Messrs. Fourticq, McDermott, Olsen, Ball and Schutz 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, 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 partner 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 51,333 shares subject to options exercisable within 60 days and
166,552 shares of Leslie's common stock.
(6) Includes 4,976 shares subject to options exercisable within 60 days and
139,839 shares of Leslie's common stock.
(7) Includes 86,094 shares subject to options exercisable within 60 days and
16,966 shares of Leslie's common stock.
(8) All such shares are subject to options exercisable within 60 days.
(9) All such shares are obtainable upon the exercise of warrants.
43
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 Contract
A wholly-owned subsidiary of Occidental has a long-standing relationship
with the Company as a supplier of certain 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.
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 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.
44
<PAGE>
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--October 2, 1999 and October 3, 1998
Consolidated Statements of Operations--Years Ended October 2, 1999,
October 3, 1998, and
September 27, 1997 (unaudited) and the Nine Months Ended September 27,
1997 (transition period) and
September 28, 1996 (unaudited)
Consolidated Statements of Shareholders' Equity (Deficit)--Years Ended
October 2, 1999, October 3, 1998, and the Nine Months Ended September
27, 1997 (transition period )
Consolidated Statements of Cash Flows-- Years Ended October 2, 1999,
October 3, 1998, and
September 27, 1997 (unaudited) and the Nine Months Ended September 27,
1997 (transition period) and
September 28, 1996 (unaudited)
Notes to Consolidated Financial Statements
Report of Independent Public Accountants
(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*
3.6 Certificate of Amendment to Certificate of Designation,
Preferences and Rights of Exchangeable Cumulative Redeemable
Preferred Stock, Series A*
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*
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*
45
<PAGE>
Exhibit
Number Description
- ------- -----------
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*
10.16 Third Amendment, dated November 15, 1999 to Credit Agreement dated as
of June 11, 1997 among the Company, Wells Fargo Bank, N.A. and the
financial institutions signatory thereto
10.17 Fourth Amendment, dated December 16, 1999 to Credit Agreement dated as
of June 11, 1997 among the Company, Wells Fargo Bank, N.A. and the
financial institutions signatory thereto
21.1 Subsidiaries
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule
______________
*Previously filed
(b) Reports on Form 8-K
None.
46
<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, 1999.
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, 1999
------------------------------------
Michael J. Fourticq Directors
/s/ Brian P. McDermott Chief Executive Officer, December 22, 1999
------------------------------------
Brian P. McDermott President, and Director
/s/ Gregory J. Annick Director December 22, 1999
------------------------------------
Gregory J. Annick
/s/ John G. Danhakl Director December 22, 1999
------------------------------------
John G. Danhakl
/s/ Dr. Dale R. Laurance Director December 22, 1999
-------------------------------------
Dr. Dale R. Laurance
/s/ Robert D. Olsen Chief Financial Officer and December 22, 1999
-------------------------------------
Robert D. Olsen Principal Accounting Officer
</TABLE>
47
<PAGE>
THIRD AMENDMENT TO CREDIT AGREEMENT
THIS THIRD AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered into
as of November 15, 1999, by and between LESLIE'S POOLMART, INC., a Delaware
corporation (the "Borrower"), the financial institutions party to the Credit
Agreement referenced below (collectively, the "Lenders" and each, a "Lender"),
WELLS FARGO BANK, NATIONAL ASSOCIATION ("Wells Fargo"), as swingline lender (the
"Swingline Lender"), and Wells Fargo as agent for the Lenders (the "Agent").
RECITALS
--------
WHEREAS, the parties hereto are parties to a Credit Agreement dated as of
June 11, 1997, as amended by the First Amendment thereto dated as of July 1,
1998 and by the Second Amendment thereto dated as of June 1, 1999 (the "Credit
Agreement"), pursuant to which the Agent and the Lenders have made available to
Borrower a secured revolving credit facility;
WHEREAS, Wells Fargo is currently the only Lender under the Credit
Agreement;
WHEREAS, the parties hereto have agreed to certain changes in the terms and
conditions set forth in the Credit Agreement and have agreed to amend the Credit
Agreement to reflect said changes:
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Section 2.1(a) (i) of the Credit Agreement is hereby amended by
deleting the first sentence thereof and substituting the following for said
sentence:
"Subject to the terms and conditions of this Credit
Agreement, each Lender hereby severally agrees, on a pro
rata basis, to make advances to Borrower from time to time
up to the Line Maturity Date within the following limits
(the "Line of Credit"):
From and including November 15, 1999 up to and
including June 15, 2000, and thereafter from and including
December 15 up to and including June 15 of each year,
outstanding advances shall not exceed at any time the
aggregate principal amount of the sum of (A) FIFTY MILLION
DOLLARS ($50,000,000.00), minus (B) the aggregate undrawn
face amount of Letters of Credit outstanding at such time,
minus (C) the aggregate principal amount of Swingline Loans
outstanding at such time; and
From and including June 16 up to and including
December 14 of each year, outstanding advances shall not
exceed at any time the aggregate principal amount of the
sum of (A) TWENTY-FIVE MILL1ON DOLLARS ($25,000,000.00),
minus (B) the aggregate undrawn face amount of Letters of
Credit outstanding
-1-
<PAGE>
at such time, minus (C) the aggregate principal amount of
Swingline Loans outstanding at such time."
2. Except as specifically provided herein, all terms and conditions of
the Credit Agreement and the other Loan Documents remain in full force and
effect, without waiver or modification.
3. Borrower hereby remakes all representations and warranties contained
in the Credit Agreement and reaffirms all covenants set forth therein, as same
may be modified hereby. Borrower further certifies that as of the date of this
Amendment there exists no Event of Default as defined in the Credit Agreement,
as same may be modified hereby, nor any condition, act or event which with the
giving of notice or the passage of time or both would constitute any such Event
of Default.
4. This Amendment may be executed in any number of identical
counterparts, any set of which signed by all the parties hereto shall be deemed
to constitute a complete, executed original for all purposes.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
WELLS FARGO BANK, NATIONAL
LESLIE'S POOLMART, INC., ASSOCIATION, as Agent, as
a Delaware corporation Swingline Lender and as Lender
By: Robert D. Olsen By: /s/ Brian Carrico
----------------------- --------------------------
Title: C.F.O. Brian Carrico
--------------------
Vice President
-2-
<PAGE>
Exhibit 10.17
FOURTH AMENDMENT TO CREDIT AGREEMENT
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is entered
into as of December 16, 1999, by and between LESLIES'S POOLMART, a Delaware
corporation (the "Borrower"), the financial institutions party to the Credit
Agreement referenced below (collectively, the "Lenders" and each, a "Lender"),
WELLS FARGO BANK, NATIONAL ASSOCIATION ("Wells Fargo"), as swingline lender (the
"Swingline Lender"), and Wells Fargo as agent for the Lenders (the "Agent").
RECITALS
--------
WHEREAS, the parties hereto are parties to a Credit Agreement dated as of
June 11, 1997, as amended by the First Amendment thereto dated as of July 1,
1998, the Second Amendment thereto dated as of June 1, 1999, and the Third
Amendment thereto dated as of November 16, 1999 (the "Credit Agreement"),
pursuant to which the Agent and the Lenders have made available to Borrower a
secured revolving credit facility;
WHEREAS, Wells Fargo is currently the only Lender under the Credit
Agreement;
WHEREAS, the parties hereto have agreed to certain changes in the terms and
conditions set forth in the Credit Agreement and have agreed to amend the Credit
Agreement to reflect said changes;
NOW, THEREFORE, for valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. Capitalized terms used herein and not otherwise defined shall have the
meanings set forth in the Credit Agreement.
2. Section 1.1 of the Credit Agreement is amended by deleting the
definition of "Applicable LIBO Rate Margin" and substituting the following:
"Applicable LIBO Rate Margin" means (i) at all times prior to Borrower's
---------------------------
delivery of the financial statements required in Section 5.3 hereof in respect
-----------
of Borrower's fiscal quarter ending in January 2000, 2.75%, and (ii) at all
times thereafter during each period between (x) the date of Borrower's delivery
of financial statements required in Section 5.3 hereof in respect of any fiscal
-----------
quarter of Borrower and (y) the date of Borrower's delivery of such financial
statements in respect of the next following fiscal quarter of Borrower, the
margin set forth below (corresponding to the applicable Funded Funded Debt Ratio
for such fiscal quarter) under the heading "Applicable LIBO Rate Margin" below:
<TABLE>
<CAPTION>
Funded Debt Ratio Applicable LIBO Rate Margin Applicable Prime Rate Margin
<S> <C> <C>
Greater than
5.00 to 1.00: 2.75% 1.00%
Less than or equal
to 5.00 to 1.00, but
greater than
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
4.50 to 1.00: 2.50% 0.75%
Less than or equal
to 4.50 to 1.00, but
greater than
4.01 to 1.00: 2.00% 0.25%
Less than or equal
to 4.00 to 1.00: 1.75% 0.00%
</TABLE>
The Applicable LIBO Rate Margin as in effect from time to time shall be
determined based upon Borrower's Funded Debt Ratio, as calculated quarterly as
at the end of each fiscal quarter of Borrower for the period in effect at such
time as specified above. The Applicable LIBO Rate Margin in effect shall be
redetermined quarterly on the date Agent receives quarterly financial statements
pursuant to Section 5.3 hereof. Anything to the contrary notwithstanding
-----------
contained in this Credit Agreement, any LIBO Rate Loan outstanding on a day on
which the Applicable LIBO Rate Margin changes automatically shall be adjusted as
of the date on which, and to the extent that, the Applicable LIBO Rate Margin is
adjusted.
Section 5.9(b) of this Agreement requires Borrower and its Subsidiaries to
--------------
maintain their financial condition such that the Funded Debt Ratio is not
greater than certain levels at certain times as set forth therein. The fact
that the above columns may specify an Applicable LIBO Rate Margin and an
Applicable Prime Rate Margin for a Funded Debt Ratio which at some dates may be
greater than the Funded Debt Ratio which is required under Section 5.9(b) is not
--------------
intended to alter the requirements of Section 5.9(b), nor shall it deprive the
--------------
Lender Parties of any right or remedy available hereunder in the event of a
failure to comply with Section 5.9(b).
--------------
3. Section 1.1 of the Credit Agreement is amended by deleting the
definition of Applicable Prime Rate Margin" and substituting the following:
"Applicable Prime Rate Margin" means (i) at all times prior to Borrower's
----------------------------
delivery of the financial statements required in Section 5.3 hereof in respect
-----------
of Borrower's fiscal quarter ending in __________, ____%, and (ii) at all times
thereafter during each period between (x) the date of Borrower's delivery of
financial statements required in Section 5.3 hereof in respect of any fiscal
-----------
quarter of Borrower and (y) the date of Borrower's delivery of such financial
statements in respect of the next following fiscal quarter of Borrower, the
margin set forth (corresponding to the applicable Funded Funded Debt Ratio for
such fiscal quarter) under the heading "Applicable Prime Rate Margin" in the
table contained within the definitions of Applicable LIBO Rate Margin above.
The Applicable Prime Rate Margin as in effect from time to time shall be
determined based upon the Borrower's Funded Debt Ratio for the period in effect
as such time as specified above. The Applicable Prime Rate Margin in effect
shall be redetermined quarterly on the date Agent receives quarterly financial
statements pursuant to Section 5.3 hereof. Anything to the contrary
-----------
notwithstanding contained in this Credit Agreement, any Prime Rate Loan
outstanding on a day on which the Applicable Prime Rate Margin changes
automatically shall be adjusted as of the date on which the Applicable Prime
Rate Margin is adjusted.
4. Section 1.1 of the Credit Agreement is amended by deleting the
definition of "Line Maturity Date" and substituting the following:
"Line Maturity Date" means November 15, 2000.
------------------
<PAGE>
5. Section 5.9(a) of the Credit Agreement is deleted and the following
substituted therefor:
"(a) Tangible Net Worth not less than the amounts shown below, determined
as of the end of each corresponding fiscal quarter:
December 1999 $66,177,000
March 2000 $54,868,000
June 2000 $70,000,000
September 2000 $77,000,000"
6. Section 5.9(b) of the Credit Agreement is deleted and the following
substituted therefor:
"(b) Funded Debt Ratio not greater than the ratio set forth below,
determined as of the end of the corresponding fiscal quarter:
December 1999 7.42:1.00
March 2000 8.75:1.00
June 2000 5.00:1.00
September 2000 4.33:1.00"
7. Section 5.9(c) of the Credit Agreement is deleted and the following
substituted therefor:
"(c) EBITDA Coverage ratio not less than the ratio set forth below,
determined as of the end of the corresponding fiscal quarter:
December 1999 1.40:1.00
March 2000 1.20:1.00
June 2000 1.70:1.00
September 2000 1.90:1.00"
8. Schedule I attached to the Credit Agreement is corrected to reflect
the intent of the parties which had been expressed in the prior Third Amendment
to Credit Agreement by deleting the reference to "$25,000,000 from June 16
through December 14 of each year and $50,000,000.00 from December 15 through
June 15 of each year" as the "Commitment" specified therein for Wells Fargo as
Lender and Swingline Lender, and by substituting therefor the following:
"$50,000,000 from and including November 15, 1999 up to and including June
15, 2000, and thereafter from and including December 15 up to and including
June 15 of each year and $25,000,000.00 from and including June 16 up to
and including December 14 of each year."
9. It is a condition precedent to the effectiveness of this Amendment
that all of the following conditions be satisfied on or before December 31, 1999
or such later date as may be approved by Agent:
(a) This Amendment shall have been duly executed by Borrower in the space
below and returned to Agent.
<PAGE>
(b) Agent Agent shall have received such certified corporate resolution and
incumbency certificate of the Borrower, duly authorizing the Borrower's entry
into and performance of this Amendment, as Agent may reasonably require in
connection herewith.
(c) Agent shall have received such certified corporate resolution and
incumbency certificate for each Guarantor, duly authorizing each Guarantor's
acknowledgment and consent hereto, as Agent may reasonably require in connection
herewith.
(d) Agent shall have received such evidence as it may reasonably require to
assure it that all authorizations or approvals of any Governmental Authority and
all approvals or consents of any other Person, required in connection with this
Amendment have been obtained.
(e) Agent shall have received such legal opinion from counsel to Borrower
and the Guarantors with respect to this Amendment as Agent may reasonably
require.
10. Except as specifically provided herein, all terms, covenants and
conditions of the Credit Agreement and the other Loan Documents remain in full
force and effect, without waiver or modification.
11. Borrower hereby remakes all representations and warranties contained
in the Credit Agreement and reaffirms all covenants set forth therein, as same
may be modified hereby. Borrower further certifies that as of the date of this
Amendment there exists no Event of Default as defined in the Credit Agreement,
as same may be modified hereby, nor any condition, act or event which with the
giving of notice or the passage of time or both would constitute any such Event
of Default.
12. This Amendment may be executed in any number of identical counterparts,
any set of which signed by al the parties hereto shall be deemed to constitute a
complete, executed original for all purposes.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
executed as of the day and year first written above.
LESLIE'S POOLMART, INC.,
a Delaware corporation
By:_____________________
Title:__________________
WELLS FARGO BANK, NATIONAL
ASSOCIATION, as Agent, as
Swingline Lender and as Lender
By:_____________________
Title:__________________
ACKNOWLEDGMENT AND CONSENT OF GUARANTORS:
Each of the undersigned in its capacity as a Guarantor under the Continuing
Guaranty to which it is a party, each dated June 11, 1997 and executed in favor
of the Lenders, the Swingline Lender and the Agent (each Continuing Guaranty, a
"Guaranty"), hereby acknowledges and consents to the foregoing Amendment. Each
of the undersigned acknowledges that its consent is being sought purely as a
protective measure and understands that the terms of the Credit Agreement and
the other Loan Documents may be amended or otherwise modified without prior
notice to or consent of the undersigned and without discharging or otherwise
affecting the liability of the undersigned under its Guaranty. Each of the
undersigned reaffirms that it will continue to be bound by all of the provisions
of its Guaranty and that such Guaranty will remain in full force and effect
notwithstanding the effectiveness of the foregoing Amendment.
LESLIE'S POOL BRITE, INC.
By:_____________________
Title:__________________
SANDY'S POOL SUPPLY, INC.
By:_____________________
Title:__________________
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES
The Company has three wholly-owned subsidiaries:
Leslie's Pool Brite, Inc., a California corporation;
Sandy's Pool Supply, Inc., a California corporation;
and
Blackwood & Simmons, Inc., a Georgia corporation.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-02-1999
<PERIOD-START> OCT-04-1998
<PERIOD-END> OCT-02-1999
<CASH> 193
<SECURITIES> 0
<RECEIVABLES> 7,350
<ALLOWANCES> 0
<INVENTORY> 58,729
<CURRENT-ASSETS> 73,522
<PP&E> 47,336
<DEPRECIATION> 0
<TOTAL-ASSETS> 132,780
<CURRENT-LIABILITIES> 37,499
<BONDS> 0
33,225
0
<COMMON> (45,701)
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 132,780
<SALES> 0
<TOTAL-REVENUES> 282,349
<CGS> 0
<TOTAL-COSTS> 170,820
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,380
<INCOME-PRETAX> (969)
<INCOME-TAX> (91)
<INCOME-CONTINUING> (878)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (878)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
