-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JERZQJq5xHyJlKYYdjrHaUMbMBk9tcq2aXd1XPdQlB3Af+sRadjPufWK+2p5fDrj /NMhS86zzV6XTKpS51EW1A== 0000898430-97-001757.txt : 19970430 0000898430-97-001757.hdr.sgml : 19970430 ACCESSION NUMBER: 0000898430-97-001757 CONFORMED SUBMISSION TYPE: PRE13E3/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19970429 SROS: NASD SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: LESLIES POOLMART CENTRAL INDEX KEY: 0000866048 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 930976447 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: PRE13E3/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-42108 FILM NUMBER: 97590372 BUSINESS ADDRESS: STREET 1: 20630 PLUMMER ST CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8189934212 MAIL ADDRESS: STREET 1: 20222 PLUMMER ST CITY: CHATSWORTH STATE: CA ZIP: 91311 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: LESLIES POOLMART CENTRAL INDEX KEY: 0000866048 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 930976447 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: PRE13E3/A BUSINESS ADDRESS: STREET 1: 20630 PLUMMER ST CITY: CHATSWORTH STATE: CA ZIP: 91311 BUSINESS PHONE: 8189934212 MAIL ADDRESS: STREET 1: 20222 PLUMMER ST CITY: CHATSWORTH STATE: CA ZIP: 91311 PRE13E3/A 1 SCHEDULE 13E-3 - AMENDMENT #1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ------------------------- SCHEDULE 13E-3/A RULE 13E-3 TRANSACTION STATEMENT (PURSUANT TO SECTION 13(e) OF THE SECURITIES EXCHANGE ACT OF 1934) (Amendment No. 1 ) -------------------- LESLIE'S POOLMART (Name of the Issuer) LESLIE'S POOLMART LPM HOLDINGS, INC. GREGORY FOURTICQ LIBERTY WEST PARTNERS MICHAEL J. FOURTICQ BRIAN P. McDERMOTT RICHARD H. HILLMAN ROBERT D. OLSEN (Name of Persons Filing Statement) Common Stock (Title of Class of Securities) 527069 10 8 (CUSIP Number of Class of Securities) Cynthia G. Watts, Esq. 20630 Plummer Street Chatsworth, California 91311 (818) 994-4212 WITH COPIES TO: Alan J. Barton, Esq. Neal H. Brockmeyer, Esq. Paul Hastings Janofsky & Walker Heller Ehrman White & McAuliffe 555 South Flower Street 601 South Figueroa Street, 40th Floor Los Angeles, California 90071 Los Angeles, California 90017 (213) 683-6000 (213) 689-0200 (Name, Address and Telephone Number of Persons Authorized to Receive Notices and Communications on Behalf of Persons Filing Statement.) This statement is filed in connection and with (check the appropriate box): a. [X] The filing of solicitation materials or an information statement subject to Regulation 14A, Regulation 14C, or Rule 13e-3(c) under the Securities Exchange Act of 1934. b. [_] The filing of a registration statement under the Securities Act of 1933. c. [_] A tender offer. d. [_] None of the above. -1- Check the following box if the soliciting materials are preliminary copies. [X] Calculation of Filing Fee Transaction Valuation* Amount of Filing Fee $97,585,790 $19,517.16 [X] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. Amount previously paid: $19,517.16 Filing party: Leslie's Poolmart Form or registration no.: Preliminary Proxy Statement Date filed: March 17, 1997 Schedule 14A
______________________________ * For purposes of calculating the fee only. This transaction applies to an aggregate of 6,192,061 outstanding shares (the "Cash Out Shares") of Common Stock of Leslie's Poolmart ("Leslie's California") computed as follows: (i) 6,551,566 outstanding shares of Leslie's California Common Stock, less (ii) 359,505 shares (the "Continuing Shares") primarily held by members of management (the "Continuing Stockholders") which will remain outstanding after the Merger Agreement as described in the Proxy Statement submitted as Exhibit (d) hereto. The cash consideration being offered to shareholders of Leslie's California for each share of Common Stock is $14.50 per share (other than with respect to the Continuing Shares to be held by the Continuing Stockholders). The proposed maximum aggregate value of the transaction is $97,585,790 (sum of (i) the product of the Cash Out Shares and $14.50, and (ii) cash consideration of $7,800,905 to be paid for options being surrendered in connection with the transaction.) The total fee of $19,517.16 was paid by wire transfer on March 14, 1997 to the Federal lock box depository account at Mellon Bank. The amount of the filing fee, calculated in accordance with Rule 0-11 promulgated under the Securities Exchange Act of 1934, as amended, equals 1/50 of one percent of the maximum aggregate value of the transaction. This Transaction Statement (this "Statement") is being filed with the Securities and Exchange Commission jointly by Michael J. Fourticq, Gregory Fourticq, Liberty West Partners (a general partnership in which Michael J. Fourticq and Gregory Fourticq are general partners), Brian P. McDermott, Richard H. Hillman and Robert D. Olsen (collectively, the "Hancock Group"), Leslie's California and LPM Holdings, Inc., a Delaware corporation and wholly-owned subsidiary of Leslie's California ("Leslie's Delaware")in connection with the filing of a Proxy Statement by Leslie's California under the Securities Exchange Act of 1934, as amended. This Statement relates to (i) a proposal to reincorporate Leslie's California in Delaware in accordance with an Agreement of Merger pursuant to which Leslie's California would be merged with and into Leslie's Delaware and (ii) a proposal to adopt an Agreement and Plan of Merger (the "Merger -2- Agreement") among Leslie's California, Leslie's Delaware and Poolmart USA Inc., a Delaware corporation ("Poolmart") dated February 26, 1997, pursuant to which Poolmart will be merged with and into Leslie's Delaware (the "Merger"). Upon the consummation of the Merger, each outstanding share of Common Stock (other than 359,505 outstanding shares currently held by Messrs. Fourticq, McDermott and Hillman, and Liberty West Partners and an as yet unknown number of shares held by stockholders who may perfect their dissenters' rights), will be converted into the right to receive $14.50 in cash for each share of Common Stock. Pursuant to General Instruction F to Schedule 13E-3, the information indicated below as contained in the Proxy Statement is hereby incorporated by reference in answer to the items of this Schedule. Where substantially identical information required by Schedule 13E-3 is included under more than one caption, reference may be made to only one caption of the Proxy Statement. CROSS REFERENCE SHEET
Item of Location in Proxy Statement Schedule 13E-3 (For Incorporation by Reference) - -------------- -------------------------------- ITEM 1. ISSUER AND CLASS OF SECURITY SUBJECT TO THE TRANSACTION. (a).................... "SUMMARY -- Date, Time and Place of the Special Meeting"; "SUMMARY -- Parties to the Merger Transaction" (b).................... "SUMMARY -- Market Prices for Common Stock and Dividends"; "MARKET PRICES OF COMMON STOCK AND DIVIDENDS"; "THE PROPOSALS -- Vote Required; Record Date" (c).................... "SUMMARY -- Market Prices for Common Stock and Dividends"; "MARKET PRICES OF COMMON STOCK AND DIVIDENDS" (d).................... "SUMMARY -- Market Prices for Common Stock and Dividends"; "MARKET PRICES OF COMMON STOCK AND DIVIDENDS" (e).................... Not applicable (f).................... Not applicable
ITEM 2. IDENTITY AND BACKGROUND. This Schedule 13E-3 is being filed by Leslie's California, the issuer of the class and equity securities which is the subject of this Rule 13E-3 transaction, and by Leslie's Delaware, a wholly owned subsidiary of Leslie's California, Michael J. Fourticq, Brian P. McDermott, Richard H. Hillman, Gregory Fourticq, Robert D. Olsen and Liberty West Partners (a California partnership of which Michael J. Fourticq and Brian P. McDermott are general partners). -3-
Item of Location in Proxy Statement Schedule 13E-3 (For Incorporation by Reference) - -------------- -------------------------------- (a) - (d).............. "PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT"; "CERTAIN INFORMATION CONCERNING HANCOCK GROUP AND GREEN; "APPENDIX I" (e) - (f).............. None of Leslie's California, Leslie's Delaware or the persons listed in Appendix I of the Proxy Statement during the past five years (i) has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) or (ii) was a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining further violation of, or prohibiting activities subject to, Federal or State securities laws or finding any violation of such laws. (g)................... "APPENDIX I" ITEM 3. PAST CONTRACTS, TRANSACTIONS OR NEGOTIATIONS. (a)(1)................ Not applicable (a)(2)................ "SPECIAL FACTORS -- Background of the Merger Transaction"; "SPECIAL FACTORS -- Conflicts of Interest"; "THE REINCORPORATION" (b)................... "SPECIAL FACTORS -- Background of the Merger Transaction"; "SPECIAL FACTORS -- Conflicts of Interest"; "THE REINCORPORATION" ITEM 4. TERMS OF THE TRANSACTION (a)................... "SPECIAL FACTORS -- Conflicts of Interest"; "THE MERGER"; "THE REINCORPORATION" (b)................... "SPECIAL FACTORS -- Conflicts of Interest"; "SPECIAL FACTORS -- Certain Effects of the Merger"; "SPECIAL FACTORS -- Background of the Merger Transaction"; "THE MERGER" ITEM 5. PLANS OR PROPOSALS OF THE ISSUER OR AFFILIATE (a) - (g)............. "SPECIAL FACTORS -- Certain Effects of the Merger"; "SPECIAL FACTORS -- Conflicts of Interest"; "SPECIAL FACTORS -- Conduct of Leslie's Delaware's Business After the Merger"; "THE MERGER -- Financing"
-4-
Item of Location in Proxy Statement Schedule 13E-3 (For Incorporation by Reference) - -------------- -------------------------------- ITEM 6. SOURCES AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a) - (d)........... "THE MERGER -- Financing" ITEM 7. PURPOSES, ALTERNATIVES, REASONS AND EFFECTS (a) - (c)............. "SPECIAL FACTORS -- Background of the Merger Transaction"; "SPECIAL FACTORS -- Purpose and Reasons of Hancock Group and Green for the Merger Transaction"; "SPECIAL FACTORS -- The Special Committee's and Board's Recommendation"; "SPECIAL FACTORS -- Position of Hancock Group as to Fairness of the Merger Transaction"; "THE REINCORPORATION -- Principle Reasons for the Proposed Reincorporation" (d)................... "SPECIAL FACTORS -- The Special Committee's and Board's Recommendation"; "SPECIAL FACTORS -- Certain Effects of the Merger"; "FEDERAL INCOME TAX CONSEQUENCES"; "THE RECAPITALIZATION MERGER"; "SPECIAL FACTORS -- Conflicts of Interest" ITEM 8. FAIRNESS OF THE TRANSACTION (a) - (e)............. "SPECIAL FACTORS -- The Special Committee's and Board's Recommendation"; "SPECIAL FACTORS -- Opinion of Dillon Read"; "SPECIAL FACTORS -- Position of Hancock Group as to Fairness of Merger; "SPECIAL FACTORS -- Background of Merger" (f)................... Not Applicable ITEM 9. REPORTS, OPINIONS, APPRAISALS AND CERTAIN NEGOTIATIONS (a) - (c)............. "SPECIAL FACTORS -- Background of Merger Transaction"; "SPECIAL FACTORS -- Opinion of DLJ"; "SPECIAL FACTORS -- Opinion of Dillon Read" ITEM 10. INTEREST IN SECURITIES OF THE ISSUER (a) .................. "SPECIAL FACTORS -- Conflicts of Interest"; "PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT" (b) .................. Not applicable
-5-
Item of Location in Proxy Statement Schedule 13E-3 (For Incorporation by Reference) - -------------- -------------------------------- ITEM 11. CONTRACTS, ARRANGEMENTS OF UNDERSTANDING WITH RESPECT TO THE ISSUER'S SECURITIES "SPECIAL FACTORS -- Conflicts of Interest"; "THE MERGER -- Financing"; "SPECIAL FACTORS -- Background of the Merger Transaction" ITEM 12. PRESENT INTENTION AND RECOMMENDATION OF CERTAIN PERSONS WITH REGARD TO THE TRANSACTION (a) - (b)............. "SUMMARY -- Vote Required", "Record Date and Quorum"; "MERGER TRANSACTION -- Vote Required", "Record Date"; SPECIAL FACTORS -- Conflicts of Interest" ITEM 13. OTHER PROVISION OF THE TRANSACTION (a)................... "RIGHTS OF DISSENTING SHAREHOLDERS"; "ANNEX F" (b) - (c)............. Not applicable ITEM 14. FINANCIAL INFORMATION (a)................... Company's Financial Statements (as set forth in the "FS" pages) accompanying the Proxy Statement; "SUMMARY -- Summary of Selected Consolidated Financial Data" (b)................... Not applicable ITEM 15. PERSONS AND ASSETS EMPLOYED, RETAINED OR UTILIZED (a) - (b)............. "PROXY SOLICITATION"; "THE MERGER - Financing"; "SPECIAL FACTORS -- Conflicts of Interest"
ITEM 16. ADDITIONAL INFORMATION The Proxy Statement and the Financial Statements and Appendices attached thereto. -6- ITEM 17. MATERIALS TO BE FILED AS EXHIBITS. (a)................... (1) Letter dated December 27, 1996 from Occidental Petroleum Corporation to Mike J. Fourticq(3) (2) Letter dated February 19, 1997 from Hancock Park Associates to the Board of Directors of Leslie's Poolmart(3) (3) Letter dated February 20, 1997 from Leonard, Green & Partners L.P. to the Board of Directors of Leslie's Poolmart(3) (4) Letter dated February 4, 1997 from BT Securities Corporation to Hancock Park Associates(3) (5) Letter dated February 4, 1997 from BT Securities Corporation to Hancock Park Associates(3) (6) Letter dated January 14, 1997 from Wells Fargo Bank to Leslie Poolmart issuer(3) (7) Letter dated February 21, 1997 from Wells Fargo Bank to Leslie's Poolmart(3) (8) Letter dated March 13, 1997 from Wells Fargo Bank to Leslie's Poolmart(3) (9) Letter dated November 11, 1996 from Hancock Park Associates II to Leslie's Poolmart(3) (b)................... (10) Opinion of Donaldson, Lufkin & Jenrette Securities Corporation dated February 26, 1996 (included as Appendix C to the Preliminary Proxy Statement of Leslie's Poolmart filed April 29, 1997)(2) (11) Opinion of Dillon, Read & Co., Inc. dated February 26, 1996 (included as Appendix D to the Preliminary Proxy Statement of Leslie's Poolmart filed April 29, 1997)(2) (12) Presentation Materials to the Special Committee of the Board of Directors of Leslie's Poolmart prepared by Donaldson, Lufkin & Jenrette dated February 26, 1997(1) (13) Presentation Materials to the Special Committee of the Board of Directors of Leslie's Poolmart prepared by Dillon Read dated February 26, 1997(1) (c)................... (14) Agreement of Plan and Merger dated February 26, 1997 among Leslie's California, Poolmart USA Inc. and LPM Holdings, Inc. (included as Appendix B to the Preliminary Proxy Statement of Leslie's Poolmart filed April 29, 1997)(2) (15) Merger Agreement between Leslie's Poolmart and LPM Holdings, Inc. dated February 26, 1997 (included as Exhibit A to the Prelimiary Proxy Statement of Leslie's Poolmart and filed April 29, 1997.)(2) (16) Letter dated February 26, 1997 from Michael J. Fourticq and Brian P. McDermott to the Board of Directors of Leslie's Poolmart(3) (17) Letter dated February 26, 1997 from Leonard, Green & Partners, L.P. to Michael J. Fourticq and Brian P. McDermott attaching proposed form of Stockholders Agreement(3) (18) Revised form of Stockholders Agreement as of April 29, 1997(1) (d)................... (19) Letter to Stockholders, Notice of Special Meeting of Stockholders, Proxy Card and Preliminary Proxy Statement of Leslie's Poolmart filed April 29, 1997.(2) (e)................... (20) Chapter 13 of the California Corporation Code included as Appendix F of the Preliminary Proxy Statement of Leslie's Poolmart filed April 29, 1997 and Section of that Preliminary Proxy Statement entitled "Rights of Dissenting Shareholders"(2)
-7- (f)................... Not Applicable Misc.................. (21) Power of Attorney of Michael J. Fourticq dated November 20, 1996, naming Brian P. McDermott and Robert D. Olsen as attorney-in-fact.(3) (22) Power of Attorney of Greg Fourticq dated November 20, 1996 naming Michael J. Fourticq, Brian P. McDermott and Robert D. Olsen as attorney-in-fact.(3) (23) Power of Attorney of Liberty West Partners dated November 20, 1996, naming Brian P. McDermott and Robert D. Olsen as attorney-in-fact.(3) (24) Power of Attorney of Richard H. Hillman dated November 20, 1996, naming Michael J. Fourticq, Brian P. McDermott and Robert D. Olsen as attorney-in-fact.(3) (25) Power of Attorney of Robert D. Olsen dated November 20, 1996, naming Michael J. Fourticq and Brian P. McDermott as attorney-in-fact.(3)
- ---------------------- (1) Filed herewith. (2) Incorporated herein by reference from the Preliminary Proxy Materials of Leslie's Poolmart filed April 29, 1997. (3) Incorporated herein by reference from the Schedule 13E filed by Leslie's Poolmart on March 17, 1997, File No. 5-42108. -8- SIGNATURES After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement, as amended, is true, complete and correct. Dated: April 29, 1997 MICHAEL J. FOURTICQ * ---------------------------------------------- Michael J. Fourticq GREGORY FOURTICQ * ---------------------------------------------- Gregory Fourticq RICHARD H. HILLMAN * ---------------------------------------------- Richard H. Hillman BRIAN P. McDERMOTT /s/ Brian P. McDermott ---------------------------------------------- Brian P. McDermott ROBERT D. OLSEN * ---------------------------------------------- Robert Olsen LESLIE'S POOLMART By: /s/ Brian P. McDermott ------------------------------------------- Brian P. McDermott President and Chief Executive Officer -9- LPM HOLDINGS, INC. By: /s/ Brian P. McDermott ------------------------------------------- Brian P. McDermott President and Chief Executive Officer LIBERTY WEST PARTNERS By: * ------------------------------------------- *By: /s/ Brian P. McDermott ------------------------------------------ Brian P. McDermott Attorney-in-fact -10- EXHIBIT INDEX
Exhibit Number Page No. - -------- -------- (a)................... (1) Letter dated December 27, 1996 from Occidental Petroleum Corporation to Mike J. Fourticq /3/ * (2) Letter dated February 19, 1997 from Hancock Park Associates to the Board of Directors of Leslie's Poolmart /3/ * (3) Letter dated February 20, 1997 from Leonard, Green & Partners L.P. to the Board of Directors of Leslie's Poolmart /3/ * (4) Letter dated February 4, 1997 from BT Securities Corporation to Hancock Park Associates /3/ * (5) Letter dated February 4, 1997 from BT Securities Corporation to Hancock Park Associates /3/ * (6) Letter dated January 14, 1997 from Wells Fargo Bank to Leslie Poolmart issuer /3/ * (7) Letter dated February 21, 1997 from Wells Fargo Bank to Leslie's Poolmart /3/ * (8) Letter dated March 13, 1997 from Wells Fargo Bank to Leslie's Poolmart /3/ * (9) Letter dated November 11, 1996 from Hancock Park Associates II to Leslie's Poolmart /3/ * (b)................... (10) Opinion of Donaldson, Lufkin & Jenrette Securities Corporation dated February 26, 1996 (included as Appendix C to the Preliminary Proxy Statement of Leslie's Poolmart filed April 29, 1997) /2/ * (11) Opinion of Dillon, Read & Co., Inc. dated February 26, 1996 (included as Appendix D to the Preliminary Proxy Statement of Leslie's Poolmart filed April 29, 1997) /2/ * (12) Presentation Materials to the Special Committee of the Board of Directors of Leslie's Poolmart prepared by Donaldson, Lufkin & Jenrette dated February 26, 1997 /1/ * (13) Presentation Materials to the Special Committee of the Board of Directors of Leslie's Poolmart prepared by Dillon Read dated February 26, 1997 /1/ * (c)................... (14) Agreement of Plan and Merger dated February 26, 1997 among Leslie's California, Poolmart USA Inc. and LPM Holdings, Inc. (included as Appendix B to the Preliminary Proxy Statement of Leslie's Poolmart and filed April 29, 1997) /2/ * (15) Merger Agreement between Leslie's Poolmart and LPM Holdings, Inc. dated February 26, 1997 (included as Exhibit A to the Preliminary Proxy Statement of Leslie's Poolmart and filed April 29, 1997.) /2/ * (16) Letter dated February 26, 1997 from Michael J. Fourticq and Brian P. McDermott to the Board of Directors of Leslie's Poolmart /3/ * (17) Letter dated February 26, 1997 from Leonard, Green & Partners, L.P. to Michael J. Fourticq and Brian P. McDermott attaching proposed form of Stockholders Agreement /3/ * (18) Revised form of Stockholders Agreement as of April 29, 1997 /1/ * (d)................... (19) Letter to Stockholders, Notice of Special Meeting of Stockholders, Proxy Card and Preliminary Proxy Statement of Leslie's Poolmart filed April 29, 1997. /2/ * (e)................... (20) Chapter 13 of the California Corporation Code included as Appendix F of the Preliminary Proxy Statement of Leslie's Poolmart filed April 29, 1997 and Section of that Preliminary Proxy Statement entitled "Rights of Dissenting Shareholders" /2/ *
11 Page No. ------- (f)................... Not Applicable Misc.................. (21) Power of Attorney of Michael J. Fourticq dated November 20, 1996, naming Brian P. McDermott and Robert D. Olsen as attorney-in-fact. /3/ * (22) Power of Attorney of Greg Fourticq dated November 20, 1996 naming Michael J. Fourticq, Brian P. McDermott and Robert D. Olsen as * attorney-in-fact. /3/ (23) Power of Attorney of Liberty West Partners dated November 20, 1996, naming Brian P. McDermott and Robert D. Olsen as attorney-in-fact. /3/ * (24) Power of Attorney of Richard H. Hillman dated November 20, 1996, naming Michael J. Fourticq, Brian P. McDermott and Robert D. Olsen as attorney-in-fact. /3/ * (25) Power of Attorney of Robert D. Olsen dated November 20, 1996, naming Michael J. Fourticq and Brian P. McDermott as attorney-in-fact. /3/ *
- ------------------- 1 Filed herewith 2 Incorporated herein by reference from the Preliminary Proxy Materials of Leslie's Poolmart filed April 29, 1997 3 Incorporated herein by reference from the Schedule 13E filed by Leslie's Poolmart on March 17, 1997, File No. 5-42108 12 EX-12 2 PRESENTATION MATERIALS PREPARED BY DLJ EXHIBIT 12 TO 13E-3/A - -------------------------------------------------------------------------------- PRESENTATION TO THE SPECIAL COMMITTEE OF BOARD OF DIRECTORS OF LESLIE'S POOLMART FEBRUARY 26, 1997 - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- ------------------------- DONALDSON, LUFKIN & JENRETTE LESLIE'S POOLMART - -------------------------------------------------------------------------------- TABLE OF CONTENTS
EXHIBIT TRANSACTION OVERVIEW............................................. 1 MARKETING PROCESS SUMMARY........................................ 2 HISTORICAL AND PROJECTED FINANCIAL PERFORMANCE................... 3 STOCK PRICE HISTORY.............................................. 4 VALUATION SUMMARY................................................ 5
- -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE LESLIE'S POOLMART - -------------------------------------------------------------------------------- TRANSACTION OVERVIEW - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE LESLIE'S POOLMART - -------------------------------------------------------------------------------- TRANSACTION OVERVIEW . Hancock Park Associates II, L.P.("Hancock"), Leonard Green & Partners, L.P. ("LGP") and current management to sponsor a recapitalization transaction of Leslie's Poolmart ("Leslie's" or the "Company") . In the transaction, all of the outstanding shares of Leslie's common stock other than shares held by Continuing Stockholders(1)will receive $14.50 per share in cash (the "Public Shareholders") . Selected conditions in the draft Merger Agreement dated February 21, 1997 include: (i) financing; (ii) approval by majority of all shareholders and the Public Shareholders; (iii) LGP must be satisfied with environmental due diligence; and (iv) SEC allows recapitalization accounting . Financing for the Transaction is to be provided by BT Securities, BT Commercial, Occidental Petroleum ("Occidental"), Hancock and LGP - -------------------------------------------------------------------------------- DLJ HAS BEEN REQUESTED BY THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS OF THE COMPANY TO RENDER AN OPINION AS TO WHETHER THE CONSIDERATION TO BE RECEIVED BY THE PUBLIC SHAREHOLDERS IS FAIR TO THE PUBLIC SHAREHOLDERS FROM A FINANCIAL POINT OF VIEW. - -------------------------------------------------------------------------------- - --------------------------- (1) Continuing Stockholders include Michael Fourticq, Chairman and affiliate of Hancock; Brian McDermott, President and affiliate of Hancock; Manette McDermott, Trustee of the McDermott Family Trust; Greg Fourticq, affiliate of Hancock; and Richard Hillman, director. - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -1- LESLIE'S POOLMART - -------------------------------------------------------------------------------- TRANSACTION OVERVIEW (CONT'D) ($ IN MILLIONS, EXCEPT PER SHARE DATA) Purchase Price per Share..................... $14.50 Fully-diluted Shares Outstanding............. 6,943,278 --------- Equity Value................................. $100.7 Plus: Debt (@ 12/28/96 est.)................ 33.2 Less: Cash (@ 12/28/96 est.)................ (0.1) ----- Total Enterprise Value..................... $133.8 ======
SUMMARY FINANCIAL AND VALUATION DATA
1996E 1997P ---------------------- --------------------- $ MULTIPLE $ MULTIPLE ----------- ---------- ---------- ---------- Revenue/(1)/................. $191.6 0.7x $223.3 0.6x EBITDA/(1)/.................. 14.5 9.2 18.1 7.4 EBIT/(1)/.................... 10.2 13.2 12.6 10.6 Company EPS Estimates........ $0.63 23.0x $0.80 18.1x First Call EPS Estimates..... 0.63 23.0 0.85 17.1
- --------------- (1) Management estimates. - ----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -2- LESLIE'S POOLMART - -------------------------------------------------------------------------------- SUMMARY SOURCES AND USES ($ IN MILLIONS)
SOURCES USES - ------------------------------------------- ----------------------------------------------------- Revolver..................... $5.9 Purchase Price of Equity............... $100.7 Senior Notes................. 85.0 Refinance Existing Debt................ 33.2 PIK Preferred................ 28.0 Fees & Expenses........................ 7.0 Rollover Equity.............. 6.7 New Equity................... 15.3 ---- Total Sources........... $140.9 Total Uses......................... $140.9 ====== ====== - ------------------------------------------------------------------------------------------------------------------------------ SECURITY PROVIDER AMOUNT COMMENT - ------------------ ---------------- ------------ ----------------------------------------------------------------------- Revolver BT Commercial $ 5.9 Letter delivered on February 21, 1997 Senior Notes BT Securities 85.0 Highly confident letter delivered on February 4,1997 PIK Preferred Occidental 28.0 Term sheet provided on December 27, 1996; additional oral confirmation Rollover Equity Hancock 6.7 Letter delivered February 19, 1997 New Equity LGP 15.3 Letter delivered on February 20, 1997 - -------------------------------------------------------------------------------------------------------------------------------
- -------------------------- (1) With warrants representing 15% of the fully diluted Common Stock. - ----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -3- LESLIE'S POOLMART - -------------------------------------------------------------------------------- MARKETING PROCESS SUMMARY - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE LESLIE'S POOLMART - -------------------------------------------------------------------------------- CHRONOLOGY OF EVENTS DATE EVENT - ------------------ --------------------------------------------------- December 1995 DLJ is engaged by Leslie's to advise on strategic alternatives January 1996 DLJ and Leslie's halt marketing process due to market conditions June 1996 Process is resumed (Leslie's stock at all-time high of $19.50) August-October 1996 DLJ conducts comprehensive marketing and solicitation process (38 potential strategic partners, 13 potential financial buyers) October 1996 DLJ receives indications of interest from LGP and Shamrock Holdings ("Shamrock") November 12, 1996 Hancock publicly announces $14.50 per share offer December 1996 Leslie's Board of Directors forms Special Committee; DLJ is engaged by Special Committee December 24, 1996 LGP revisits the Company to re-evaluate initial proposal; Shamrock withdraws from process; LGP submits non-binding offer for $15.00 per share January 1997 LGP informs DLJ of their participation in Hancock's original proposal Keller expresses interest then withdraws - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -1- LESLIE'S POOLMART - ------------------------------------------------------------------------------- MARKETING PROCESS SUMMARY
RECEIVED RECEIVED CONFIDENTIALITY INFORMATION POTENTIAL PURCHASER CONTACTED AGREEMENTS MEMORANDUM INDICATED INTEREST - ------------------------------ -------------------- --------------------- -------------------- ---------------------- STRATEGIC BUYERS - ---------------- Aoen/Jusco X Albertson's Inc. X Authentic Fitness Corporation X Carrefour S.A. X CML Group, Inc. X X X Culligan Water Technologies, Inc X CVS H.C. Inc. X Delhaize "Le Lion" S.A. X Eckerd Corporation X Fingerhut Companies, Inc. X Food Lion, Inc. X Great Lakes Chemical X Hayward Industries, Inc. X Home Depot, Inc. X Hughes Supply, Inc. X Israel Chemicals Limited X Kroger Company X Limited, Inc. X Lowe's Companies, Inc. X Metro Vermogensverwaltlungs RG X Olin Corporation X X X PPG X Price/Costco, Inc. X Publix Super Markets, Inc. X Rentokill Group, Plc. X Roto-Rooter X Sears, Roebuck & Co. X Sentrachem Limited X
- ----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -2- LESLIE'S POOLMART - -------------------------------------------------------------------------------- MARKETING PROCESS SUMMARY (CONT'D)
RECEIVED RECEIVED CONFIDENTIALITY INFORMATION POTENTIAL PURCHASER CONTACTED AGREEMENTS MEMORANDUM INDICATED INTEREST - ----------------------------------------- ------------------ --------------------- ----------------- ---------------------- STRATEGIC BUYERS - ---------------- Service Master X Tangleman Warenhandels X Gesellschaft/Great A&P Tesco Plc X Thrifty PayLess Holdings X Toys R' Us X Vons Companies X Wicor X X X Williams-Sonoma, Inc. X Winn-Dixie X Zodiac S.A. X X X SUB TOTAL 38 4 4 0 FINANCIAL BUYERS - ---------------- Apollo Advisors X X X Castle Harlan, Inc. X Code, Hennessy & Simmons, Inc. (SCP Pools) X Freeman, Spogli & Company, Inc. X X X Hicks Muse Tate & Furst X Investcorp International, Inc., X Keller Group X X X Kohlberg & Company X X X Leonard Green & Partners X X X X Rosecliff, Inc. X X X Shamrock Capital Advisors, Inc. X X X X Saunders, Karp & Company X X X Thomas H. Lee Co. X X X SUB TOTAL 13 9 9 2 GRAND TOTAL 51 13 13 2
- ----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -3- LESLIE'S POOLMART - -------------------------------------------------------------------------------- HISTORICAL AND PROJECTED FINANCIAL PERFORMANCE - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE LESLIE'S POOLMART - -------------------------------------------------------------------------------- EVOLUTION OF PROJECTED FINANCIAL RESULTS ($ IN THOUSANDS, EXCEPT PER SHARE DATA)
DATE OF PROJECTIONS/(1)/ ---------------------------------------------------------------------- OFFERING MEMORANDUM 9/11/96 12/19/97 2/21/97 ---------------------------------------------------------------------- EBITDA - ------ 1996......................... $17,600 $16,100 $14,362 $14,477 1997......................... 22,113 20,500 18,928 18,122 EPS - --- 1996......................... $0.86 $0.73 $0.61 $0.63 1997......................... 1.14 0.96 0.86 0.80
- --------------------- (1) The date DLJ received the projections from the Company. - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -1- LESLIE'S POOLMART - -------------------------------------------------------------------------------- DIFFERENCE BETWEEN ACTUAL AND ESTIMATED EPS/(1)/ 1991-1996 [THE TABLE ON THE FOLLOWING PAGE WAS DEPICTED AS A GRAPH HERE IN THE PRINTED MATERIAL.] - ------------------ (1) Mean IBES rolling earning per share estimate. - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -2- LESLIE'S POOLMART - -------------------------------------------------------------------------------- COMPARISON OF ACTUAL VS. ESTIMATED EPS(1) 1991-1996
SEP-91 DEC-91 MAR-92 JUN-92 SEP-92 DEC-92 MAR-93 JUN-93 SEP-93 DEC-93 MAR-94 -------------- ------ ------ ------ ------ ------ ------ ------ ------ ------ Actual EPS $0.31 $(0.19) $(0.44) $0.71 $0.34 $(0.27) $(0.56) $0.93 $0.39 $(0.29) $(0.54) IBES Mean Estimates 0.31 (0.19) (0.43) 0.79 0.34 (0.26) (0.51) 0.89 0.51 (0.32) (0.68) ----- ------ ------- ----- ----- ------ ------ ----- ----- ------ ----- Over / (Under) 0.00 0.00 (0.01) (0.08) 0.00 (0.01) (0.05) 0.04 (0.12) 0.03 0.14 JUN-94 SEP-94 DEC-94 MAR-95 JUN-95 SEP-95 DEC-95 MAR-96 JUN-96 SEP-96 DEC-96 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ Actual EPS $1.10 $0.50 $(0.36) $(0.67) $1.01 $0.73 $(0.56) $(0.82) $1.41 $0.62 $(0.58) IBES Mean Estimates 1.16 0.50 (0.34) 0.60 1.32 0.88 (0.38) NA 1.43 0.66 (0.59) ----- ----- ----- ------ ----- ----- ------- ------- ----- ----- ------- Over / (Under) (0.06) 0.00 (0.02) (0.07) (0.31) (0.15) (0.18) NA (0.02) (0.04) 0.01
- ------------------------- (1) Mean IBES rolling earning per share estimates. - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -3- LESLIE'S POOLMART - -------------------------------------------------------------------------------- SUMMARY HISTORICAL AND PROJECTED DATA ($ in thousands, except per share data)
FOR THE YEARS ENDED DECEMBER 31,/(1)/ ------------------------------------------------------------------------- 1991/(2)/ 1992 1993 1994 1995 1996E ----------- ---------- ---------- ----------- ---------- ----------- Retail Sales $70,454 $85,355 $107,432 $129,545 $150,263 $179,119 Mail-Order 9,206 8,013 8,918 8,283 7,945 7,723 Service 2,942 2,969 3,605 3,725 4,247 4,798 ----- ----- ----- ----- ----- ----- Total Sales 82,602 96,337 119,955 141,553 162,455 191,640 Gross Profit/(3)/ 34,547 39,017 48,289 55,469 60,399 72,759 SG&A 27,245 32,238 39,550 43,507 50,307 58,282 ------ ------ ------ ------ ------ ------ EBITDA 7,302 6,779 8,739 11,962 10,092 14,477 Depreciation and Amortization 2,221 2,423 2,389 2,393 3,373 4,327 ----- ----- ----- ----- ----- ----- EBIT 5,081 4,356 6,350 9,569 6,719 10,150 Interest/Other Expenses/(4)/ 1,651 855 1,189 1,733 2,736 3,536 ----- ----- ----- ----- ----- ----- Pre-Tax Income 3,430 3,501 5,161 7,836 3,983 6,614 Income Taxes 1,389 1,355 2,126 3,252 576 2,745 ----- ----- ----- ----- ----- ----- Net Income $2,041 $2,146 $3,035 $4,584 $3,407 $3,869 ====== ====== ===== ===== ===== ===== Shares Outstanding 5,713 6,399 6,464 6,515 6,614 6,790 EPS after extraordinary items $0.36 $0.34 $0.47 $0.70 $0.52 $0.57 EPS before extraordinary $0.36 $0.34 $0.47 $0.70 $0.52 $0.63 items Margins: - -------- Gross Margin 41.8% 40.5% 40.3% 39.2% 37.2% 38.0% SG&A 33.0 33.5 33.0 30.7 31.0 30.4 EBITDA 8.8 7.0 7.3 8.5 6.2 7.6 EBIT 6.2 4.5 5.3 6.8 4.1 5.3 Store Information: - ------------------ No. of Stores Open 102 143 158 180 224 259 Comp Store Sales Growth 3.7% 2.4% 11.7% 12.9% 6.0% 11.9% High Stock Price $11.56 $10.20 $10.44 $13.81 $16.67 $19.50 Low Stock Price $4.98 $4.53 $6.80 $7.94 $12.38 $10.50 FOR THE YEARS ENDED DECEMBER 31,/(1)/ ----------------------------------------------------------- 1997P 1998P 1999P 2000P 2001P ----------- ---------- ---------- ---------- ---------- Retail Sales $208,348 $244,139 $281,526 $320,338 $362,609 Mail-Order 8,300 8,300 8,300 8,300 8,300 Service 6,661 7,660 8,809 10,131 11,650 ----- ----- ----- ------ ------ Total Sales 223,309 260,099 298,635 338,768 382,559 Gross Profit/(3)/ 85,617 100,174 114,972 130,137 146,612 SG&A 67,495 77,510 87,970 99,250 111,770 ------ ------ ------ ------ ------- EBITDA 18,122 22,664 27,002 30,887 34,842 Depreciation and Amortization 5,492 5,710 6,042 6,424 6,848 ----- ----- ----- ----- ----- EBIT 12,630 16,954 20,960 24,463 27,994 Interest/Other Expenses/(4)/ 3,100 3,039 2,900 2,645 2,289 ----- ----- ----- ----- ----- Pre-Tax Income 9,530 13,915 18,059 21,818 25,704 Income Taxes 3,955 5,668 7,326 8,829 10,384 ----- ----- ----- ----- ------ Net Income $5,575 $8,247 $10,733 $12,989 $15,320 ====== ====== ======= ======= ======= Shares Outstanding 7,050 7,214 7,394 7,579 7,769 EPS after extraordinary items $0.79 $1.14 $1.45 $1.71 $1.97 EPS before extraordinary $0.80 $1.14 $1.45 $1.71 $1.97 items Margins: - -------- Gross Margin 38.3% 38.5% 38.5% 38.4% 38.3% SG&A 30.2 29.8 29.5 29.3 29.2 EBITDA 8.1 8.7 9.0 9.1 9.1 EBIT 5.7 6.5 7.0 7.2 7.3 Store Information: - ------------------ No. of Stores Open 284 319 359 404 454 Comp Store Sales Growth 10.7% 10.5% 8.8% 7.4% 7.0% High Stock Price -- -- -- -- -- Low Stock Price -- -- -- -- --
- ---------------------- (1) Financial data for 1996 derived from unaudited year-end closing estimates made by the Company. Financial data for 1997-2001 derived from management's estimates and projection models. (2) 1991 results exclude a non-recurring charge of approximately $1.8 mm. (3) Cost of goods sold includes manufacturing overhead and store and distribution center (DC) occupancy costs. (4) Includes write-off of assets of $28,000, $750,000 and $100,000 in 1995, 1996E and 1997P, respectively. - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -4- LESLIE'S POOLMART - -------------------------------------------------------------------------------- SUMMARY OF COMPARABLE STORE GROWTH
1991 1992 1993 1994 1995 1996 ---------- ---------- ---------- ---------- ---------- ---------- Quarter 1.................... 10.7% (7.0%) (2.7%) 12.1% (0.6%) 6.6% Quarter 2.................... 4.4 3.8 14.3 15.0 (0.3) 16.1 Quarter 3.................... 1.0 3.9 12.0 10.5 16.0 4.2 Quarter 4.................... NA 3.3 13.0 12.3 9.5 6.4 Full Year.................... 3.7 2.4 11.7 12.9 6.0 11.9
- -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -5- LESLIE'S POOLMART - -------------------------------------------------------------------------------- STOCK PRICE HISTORY - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE LESLIE'S POOLMART - -------------------------------------------------------------------------------- LESLIE'S HISTORICAL TRADING PERFORMANCE April 19, 1991 through February 21, 1997 [GRAPH SHOWING HISTORICAL TRADING PRICE AND WEEKLY TRADING VOLUME FOR THE PERIOD COMMENCING ON 4/19/91 AND ENDING ON 2/21/97 APPEARS HERE, COMPARED TO THE ACQUISITION PRICE OF $14.50]
--------------------------------------------------------------------------------------------------------------------------------- (2/21/92 - 2/19/97) (2/21/96 - 2/21/97) (11/21/96 - 2/21/97) (1/21/96 - 2/21/97) ---------------------- -------- ------------------------ -------- --------------------- --------- ------------------- ------- Since IPO High $19.50 52-Week High $19.50 90-Day High $13.63 30-Day High $13.50 Since IPO Low 4.54 52-Week Low 10.50 90-Day Low 12.75 30-Day Low 12.88 Mean 10.66 Mean 13.71 Mean 13.07 Mean 13.10 Average Volume/(1)/ 32,257 Average Volume/(1)/ 33,454 Average Volume/(1)/ 23,585 Average Volume/(1)/ 15,764 - ----------------------------------------------------------------------------------------------------------------------------------
- ---------------------- (1) Reflects average daily trading volume over the period. - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -1- LESLIE'S POOLMART - -------------------------------------------------------------------------------- LESLIE'S STOCK PRICE PERFORMANCE: LAST TWELVE MONTHS [GRAPH SHOWING THE STOCK PRICE PERFORMANCE (PRICE AND WEEKLY TRADING VOLUME) FOR THE LAST TWELVE-MONTH PERIOD COMMENCING ON 2/23/96 AND ENDING ON 12/27/96, WITH DESCRIPTION OF SPECIFIC EVENTS APPEARS HERE, COMPARED TO THE ACQUISITION PRICE OF $14.50.] - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -2- LESLIE'S POOLMART - -------------------------------------------------------------------------------- HISTORICAL INDEXED STOCK PRICE PERFORMANCE February 21, 1996 through February 21, 1997 [GRAPH SHOWING THE HISTORICAL INDEXED STOCK PRICE PERFORMANCE FOR THE COMPANY, A COMPOSITE AND THE S & P 400 FOR THE PERIOD COMMENCING ON 2/21/96 AND ENDING ON 2/21/97 APPEARS HERE.] - -------------------------- (1) Composite includes Central Tractor Farm & Country, Discount Auto Parts, Eagle Hardware Garden, Friedman's, Garden Ridge, O'Reilly Automotive, SPC Pool, Tractor Supply and West Marine. - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -3- LESLIE'S POOLMART - -------------------------------------------------------------------------------- HISTORICAL INDEXED STOCK PRICE PERFORMANCE February 21, 1995 through February 21, 1997 [GRAPH SHOWING THE HISTORICAL INDEXED STOCK PRICE PERFORMANCE FOR THE COMPANY, A COMPOSITE AND THE S & P 400 FOR THE PERIOD COMMENCING 2/21/95 AND ENDING ON 2/21/97 APPEARS HERE.] - ----------------------- (1) Composite includes Central Tractor Farm & Country, Discount Auto Parts, Eagle Hardware Garden, Friedman's, Garden Ridge, O'Reilly Automotive, SPC Pool, Tractor Supply and West Marine. - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -4- LESLIE'S POOLMART - -------------------------------------------------------------------------------- STOCK TRADING HISTOGRAM February 21, 1996 through February 21, 1997 [THE FOLLOWING TABLE WAS DEPICTED AS A HISTOGRAM IN THE PRINTED MATERIAL.] - -------------------------------------------------------------------------------- Volume 8,366,800 6,313,000 4,575,800 Percent 100.0% 75.5% 54.7% Stock Price $10.00 less than $11.50 less than $13.00 less than - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------- Volume 2,470,000 1,238,400 1,217,300 98,800 Percent 29.5% 14.8% 14.5% 1.2% Stock Price $14.50 less than $16.00 less than $17.50 less than $19.00 less than - -------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -5- LESLIE'S POOLMART - -------------------------------------------------------------------------------- STOCK TRADING HISTOGRAM February 21, 1995 through February 21, 1997 [THE FOLLOWING TABLE WAS DEPICTED AS A HISTOGRAM IN THE PRINTED MATERIAL.] - -------------------------------------------------------------------------------- Volume 14,930,572 12,876,772 10,226,946 Percent 100.0% 86.2% 68.5% Stock Price $10.00 less than $11.50 less than $13.00 less than - -------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------- Volume 5,363,723 1,956,056 1,217,300 98,800 Percent 35.9% 13.1% 8.2% 0.7% Stock Price $14.50 less than $16.00 less than $17.50 less than $19.00 less than - -------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -6- LESLIE'S POOLMART - -------------------------------------------------------------------------------- STOCK TRADING HISTOGRAM February 21, 1996 through February 21, 1997 [THE FOLLOWING TABLE WAS DEPICTED AS A HISTOGRAM IN THE PRINTED MATERIAL.] - --------------------------------------------------------------------------------------------- Volume 1,366,400 779,400 1,645,200 1,914,200 386,100 Stock Price $10 - $10.99 $11 - $11.99 $12 - $12.99 $13- 13.99 $14 - $14.99 - ---------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------- Volume 1,037,100 8,800 271,200 859,600 98,800 Stock Price $15 - $15.99 $16 - $16.99 $17 - $17.99 $18 - $18.99 $19 - $19.99 - ---------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -7- LESLIE'S POOLMART - -------------------------------------------------------------------------------- STOCK TRADING HISTOGRAM February 21, 1995 through February 21, 1997 [THE FOLLOWING TABLE WAS DEPICTED AS A HISTOGRAM IN THE PRINTED MATERIAL.] - --------------------------------------------------------------------------------------------- Volume 1,366,400 779,400 2,557,826 4,233,967 1,665,310 Stock Price $10 - $10.99 $11 - $11.99 $12 - $12.99 $13- 13.99 $14 - $14.99 - ---------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------- Volume 2,371,612 726,456 271,200 859,600 98,800 Stock Price $15 - $15.99 $16 - $16.99 $17 - $17.99 $18 - $18.99 $19 - $19.99 - ---------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -8- LESLIE'S POOLMART - -------------------------------------------------------------------------------- VALUATION SUMMARY - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE LESLIE'S POOLMART - ------------------------------------------------------------------------------- VALUATION METHODOLOGY OVERVIEW - --------------------------------- PREMIUM ANALYSIS Comparison of the premium of the Acquisition Price over the current market price relative to premiums paid in all closed merger and acquisition transactions occurring between January 1, 1996 and February 21, 1997 with transaction valuations of between $50 and $250 million - --------------------------------- COMPARISON OF SELECTED PUBLICLY Comparison of the implied purchase TRADED COMPARABLE COMPANIES multiples of the proposed Transaction to trading multiples of selected publicly - --------------------------------- traded specialty retailers ANALYSIS OF SELECTED TRANSACTIONS Comparison of the implied purchase IN THE SPECIALTY RETAIL SECTOR multiples of the proposed Transaction to multiples paid in recent comparable merger and acquisition transactions in the specialty retailing industry - --------------------------------- DISCOUNTED CASH FLOW ANALYSIS Comparison of the implied equity purchase price of Leslie's to the value of its discounted future cash flows based on: (i) the Company's projections; and (ii) adjusted projections utilizing a 20% discount applied to the Company's projections - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -1- LESLIE'S POOLMART - -------------------------------------------------------------------------------- PREMIUM ANALYSIS
- ---------------------------------------------------------------------------------------------------------------- DATE PRIOR TO ANNOUNCEMENT DATE (11/12/96) 1 DAY 1 WEEK 1 MONTH - ------------------------------------- ------------------ ---------------- --------------- Leslie's Stock Price............................. $11.50 $11.00 $10.75 Purchase Price................................... 14.50 14.50 14.50 Implied Acquisition Premium...................... 26.1% 31.8% 34.9% Median Premiums-M&A Transactions................. 19.0 24.6 28.4 - ----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -2- LESLIE'S POOLMART - -------------------------------------------------------------------------------- COMPARISON OF SELECTED PUBLICLY TRADED COMPARABLE COMPANIES ($ IN MILLIONS,EXCEPT PER SHARE DATA)
LESLIE'S IMPLIED ACQUISITION MULTIPLE/(1)/ COMPARABLE TRADING MULTIPLES ------------------------- ------------------------------------------- LTM 1996E MEDIAN MEAN(2) HIGH LOW ------- ------------ ---------- --------- -------- -------- ENTERPRISE VALUE/ LTM Revenues................ 0.7x 0.7x 0.7x 0.8x 1.4x 0.5x LTM EBITDA.................. 8.2 9.2 8.0 8.3 19.7 6.2 LTM EBIT.................... 11.6 13.2 9.8 10.3 24.6 7.8 PRICE/ LTM EPS..................... 21.7x 23.0x 16.5x 16.5x 51.1x 10.2x 1996 EPS.................... 23.0 23.0 16.7 13.0 38.6 8.8 1997 EPS.................... 17.1 17.1 12.5 10.3 27.1 7.1 LTM EBITDA Margin............ 8.1% 7.6% 7.2% 9.2% 16.4% 6.2% 3 Year Historical EPS Growth Rate........................ 5.0 15.6 25.7 25.1 105.4 (1.0) 5 Year Projected EPS Growth (IBES)...................... 17.0 17.0 20.5 22.5 31.0 17.5 - ------------------------------------------------------------------------------------------------------------------
- -------------------- (1) Assumes purchase price of $14.50 per share. (2) Mean excludes high and low. - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -3- LESLIE'S POOLMART - -------------------------------------------------------------------------------- COMPARISON OF SELECTED PUBLICLY TRADED COMPARABLE COMPANIES ($ IN MILLIONS, EXCEPT PER SHARE DATA)
VALUATION MULTIPLES ----------------------------------------------------- ENTERPRISE VALUE PRICE/ -------------------- -------------------------------- STOCK PRICE EQUITY ENTERPRISE LTM LTM LTM PROJ. 1996 PROJ. 1997 COMPANY MKT. CAP. VALUE REVENUES EBITDA EPS EPS EPS - --------------------------- ----------- --------- ----------- -------- ------ ---- ----------- ----------- Leslie's Poolmart - LTM $14.50 $100.678 $126.022 0.7x 8.2x 21.7x 23.0x 17.1x Leslie's Poolmart - 1996E 14.50 100.678 133.799 0.7 9.2 23.0 23.0 17.1 Comparables: Central Tractor Farm & Country $13.88 $148.059 $165.430 0.6x 8.0x 17.3x 16.7x 12.5x Discount Auto Parts Inc. 15.75 261.135 353.738 1.0 6.2 10.2 10.2 9.8 Eagle Hardware & Garden Inc. 16.13 465.470 499.532 0.7 10.4 19.9 21.2 17.3 Friedman's Inc. 14.25 204.142 194.439 1.2 8.1 13.6 8.8 7.1 Garden Ridge Corp. 7.75 138.188 110.452 0.6 6.9 15.7 14.9 12.1 O'Reilly Automotive Inc. 31.75 331.904 321.462 1.3 9.9 17.9 17.4 14.8 SCP Pool Corp. 22.38 94.485 114.672 0.5 7.6 NM 22.6 14.4 Tractor Supply Co. 21.00 183.078 201.472 0.5 7.4 14.6 14.0 11.5 West Marine Inc. 30.13 493.991 519.022 1.4 19.7 51.1 38.6 27.1
- -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -4- LESLIE'S POOLMART - -------------------------------------------------------------------------------- ANALYSIS OF SELECTED TRANSACTIONS IN THE SPECIALTY RETAIL SECTOR/(1)/
- ----------------------------------------------------------------------------------------------------------------------- LESLIE'S J.W. CHILDS/ IMPLIED ACQUISITION CENTRAL MULTIPLE/(2)/ COMPARABLE ACQUISITION MULTIPLES TRACTOR -------------------- ----------------------------------------- ------------ LTM 1996E MEDIAN MEAN/(3)/ HIGH LOW ------- --------- ---------- --------- -------- ------- ENTERPRISE VALUE/ LTM Revenues................ 0.7x 0.7x 0.6x 0.5x 0.9x 0.2x 0.6x LTM EBITDA.................. 8.2 9.2 9.4 9.7 12.3 7.6 8.4 LTM EBIT.................... 11.6 13.2 13.1 15.3 27.9 10.4 10.4 EQUITY VALUE/ LTM Net Income.............. 21.8x 21.8x 22.4x 25.7x 48.8x 11.2x 17.8x - ----------------------------------------------------------------------------------------------------------------------------
- ------------------ (1) Completed transactions with values ranging from $50 to $500 million. (2) Assumes purchase price of $14.50 per share. (3) Mean excludes high and low. - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -5- LESLIE'S POOLMART - -------------------------------------------------------------------------------- DISCOUNTED CASH FLOW ANALYSIS: MANAGEMENT CASE ($ in thousands, except per share data)
PROJECTED FISCAL YEAR ENDED DECEMBER 30, --------------------------------------------------------------- 1997 1998 1999 2000 2001 -------- -------- -------- -------- -------- EBIT......................... $ 12,630 $16,954 $20,960 $24,463 $27,994 Taxes................. 40.0% 5,052 6,781 8,384 9,785 11,197 ----- -------- ------- ------- ------- ------- After-tax EBIT............... 7,578 10,172 12,576 14,678 16,796 Plus: D & A............... 5,492 5,710 6,042 6,424 6,848 Less: CapEx............... (7,700) (7,200) (7,800) (8,400) (8,400) Less: Change in WC........ (7,029) (4,106) (4,668) (5,249) (5,846) -------- ------- ------- ------- ------- Free Cash Flow............... $ (1,659) $ 4,576 $ 6,150 $ 7,453 $ 9,399 ======== ======= ======= ======= ======= ---------------------------------------------------------------------------------------------------------------- 5 YEAR EXIT IMPLIED VALUE PER SHARE BASED ON A DISCOUNT RATE OF: EBITDA ----------------------------------------------------------------------------------- MULTIPLE 12.0% 14.0% 16.0% 18.0% - ------------------- ------------- ------------- ------------- ------------- 6.5 $16.49 $14.73 $13.14 $11.70 7.0 17.95 16.06 14.36 12.82 7.5 19.41 17.39 15.58 13.94 8.0 20.86 18.73 16.80 15.06 8.5 22.32 20.06 18.02 16.19 ----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -6- LESLIE'S POOLMART - -------------------------------------------------------------------------------- DISCOUNTED CASH FLOW ANALYSIS: ADJUSTED CASE ($ in thousands, except per share data)
PROJECTED FISCAL YEAR ENDED DECEMBER 30, --------------------------------------------------------------- 1997 1998 1999 2000 2001 -------- -------- -------- -------- -------- EBIT/(1)/.................... $ 10,104 $13,563 $16,768 $19,570 22,395 Taxes................ 40.0% 4,042 5,425 6,707 7,828 8,958 ----- -------- ------- ------- ------- ------- After-tax EBIT............... 6,062 8,138 10,061 11,742 13,437 Plus: D & A............... 5,492 5,710 6,042 6,424 6,848 Less: CapEx............... (7,700) (7,200) (7,800) (8,400) (8,400) Less: Change in WC........ (7,029) (4,106) (4,668) (5,249) (5,846) -------- ------- ------- ------- ------- Free Cash Flow............... $ (3,175) $ 2,542 $ 3,635 $ 4,517 $ 6,039 ======== ======= ======= ======= ======= ---------------------------------------------------------------------------------------------------------------- 5 YEAR EXIT IMPLIED VALUE PER SHARE BASED ON A DISCOUNT RATE OF: EBITDA ----------------------------------------------------------------------------------- MULTIPLE 12.0% 14.0% 16.0% 18.0% - -------------------- ------------- ------------- ------------- ------------- 6.5 $12.20 $10.76 $ 9.46 $ 8.29 7.0 13.42 11.87 10.48 9.23 7.5 14.64 12.99 11.51 10.17 8.0 15.86 14.11 12.53 11.11 8.5 17.08 15.23 13.56 12.05 - ---------------------------------------------------------------------------------------------------------------------
- ------------------ (1) Discounted 20%. - -----------------------------------------------------------------------------DLJ DONALDSON, LUFKIN & JENRETTE -7- EX-13 3 PRESENTATION MATERIALS PREPARED BY DILLON READ EXHIBIT 13 TO 13E-3/A - -------------------------------------------------------------------------------- CONFIDENTIAL [LESLIE'S POOLMART LOGO] PRESENTATION TO THE SPECIAL COMMITTEE OF THE BOARD OF DIRECTORS DILLON, READ & CO. INC. FEBRUARY 26, 1997 LESLIE'S POOLMART - -------------------------------------------------------------------------------- Table of Contents
Tab --- Review of Proposed Transaction.............................................A Overview of Sale Process.........................................A - 1 Summary of Terms and Conditions of Offer.........................A - 2 Acquisition Multiples............................................A - 3 Financing Structure and Analysis of Feasibility of Proposal......A - 4 Review of Leslie's Poolmart................................................B Historical Financial Performance.................................B - 1 Historical Trading Analysis......................................B - 2 Projected Business Plan and Strategy.............................B - 3 Preliminary Valuation......................................................C Exhibits - -------- Financial Projections Model.............................................1 Discounted Cash Flow Analysis...........................................2 LBO Analysis............................................................3 Recapitalization Analysis...............................................4 Calculation of Estimated Weighted Average Cost of Capital...............5
LESLIE'S POOLMART - -------------------------------------------------------------------------------- Presentation to the Special Committee of the Board of Directors REVIEW OF PROPOSED TRANSACTION....................................... A Overview of Sale Process....................................... A - 1
LESLIE'S POOLMART/A-1-1 - -------------------------------------------------------------------------------- Executive Summary . DILLON READ HAS BEEN ASKED TO RENDER AN OPINION AS TO THE FAIRNESS OF A BID BY POOLMART USA, INC. (A CORPORATION WHOSE SHAREHOLDERS CONSIST OF LEONARD GREEN & PARTNERS ("LEONARD GREEN") AND CERTAIN EXECUTIVE OFFICERS OF LESLIE'S POOLMART ("LESLIE'S" OR THE "COMPANY")) FOR LESLIE'S. LESLIE'S POOLMART/A-1-2 - -------------------------------------------------------------------------------- History of Sale Process . IN NOVEMBER OF 1995 LESLIE'S POOLMART RETAINED DONALDSON, LUFKIN & JENRETTE ("DLJ") AS FINANCIAL ADVISOR TO REVIEW POSSIBLE STRATEGIC ALTERNATIVES FOR THE COMPANY, INCLUDING: - Strategic acquisition - Strategic alliance with third parties - Sale of the Company . THE PROCESS WAS DELAYED DUE TO LESLIE'S WEAK PERFORMANCE IN LATE 1995 AND EARLY 1996. - Process was reinstated in late summer 1996 based on Leslie's improved results in 2Q of 1996. . DLJ CONTACTED 51 POTENTIAL PARTNERS AND/OR ACQUIRORS INCLUDING 39 CORPORATE BUYERS AND 12 FINANCIAL BUYERS. - Potential corporate buyers included chemical manufacturers, general retailers and specialty retailers. . THE COMPANY DISTRIBUTED INFORMATION MEMORANDUMS TO 12 POTENTIAL ACQUIRORS (8 FINANCIAL BUYERS AND 4 CORPORATE BUYERS) WHO EXPRESSED INTEREST AND SIGNED CONFIDENTIALITY AGREEMENTS. LESLIE'S POOLMART/A-1-3 - -------------------------------------------------------------------------------- History of Sale Process . AFTER EXTENSIVE DISCUSSION WITH A NUMBER OF PARTIES, ONLY TWO POTENTIAL ACQUIRORS SUBMITTED FORMAL PRELIMINARY INDICATIONS OF INTEREST. THE FOLLOWING PARTIES SHOWED INTEREST IN LESLIE'S POOLMART. - Shamrock Associates, L.P. . On November 10, 1996 submitted a preliminary indication of $13.00 - $14.00 per share - Leonard Green & Partners, L.P. . On November 12, 1996 submitted a preliminary indication of $14.50 per share . ON NOVEMBER 12, 1996 HANCOCK PARK ASSOCIATES ("HANCOCK") ANNOUNCED THEIR OWN INDICATION OF $14.50 PER SHARE. - Hancock, the Company's largest shareholder, is a partnership consisting of Leslie's Chairman, Michael Fourticq, and President and CEO, Brian McDermott, as well as certain other members of senior management. LESLIE'S POOLMART/A-1-4 - -------------------------------------------------------------------------------- History of Sale Process . ON DECEMBER 24, 1996 LEONARD GREEN EXPRESSED PRELIMINARY INTEREST IN SPONSORING A LEVERAGED RECAPITALIZATION OF THE COMPANY WHICH WOULD DELIVER $15.00 PER SHARE OF CASH TO SHAREHOLDERS. . AFTER CONDUCTING ADDITIONAL DUE DILIGENCE, HOWEVER, LEONARD GREEN REAFFIRMED ITS INITIAL BID OF $14.50 PER SHARE ON JANUARY 30, 1997. - Leonard Green believed the Company would be too leveraged at a $15.00 share price and the resulting weakened credit statistics could affect the success of the transaction. - In addition, Leonard Green decided to join with Hancock in formulating a proposal in order to ensure continuity of management. . HANCOCK FORMALLY SUBMITTED A PROPOSAL TO SPONSOR A LEVERAGED RECAPITALIZATION AT $14.50 PER SHARE WITH BOTH HANCOCK AND LEONARD GREEN ACTING AS EQUITY SPONSORS. LESLIE'S POOLMART - -------------------------------------------------------------------------------- Presentation to the Special Committee of the Board of Directors REVIEW OF PROPOSED TRANSACTION........................ A Overview of Sale Process...................A - 1 SUMMARY OF TERMS AND CONDITIONS OF OFFER...A - 2
LESLIE'S POOLMART/A-2-1 - -------------------------------------------------------------------------------- Summary of Terms and Conditions DILLON READ HAS CONDUCTED DUE DILIGENCE WITH THE MANAGEMENT OF LESLIE'S POOLMART AND LEONARD GREEN TO VERIFY THEIR INTEREST IN, FINANCING CAPABILITY AND PROPOSED FINANCING STRUCTURE OF THE PROPOSED TRANSACTION.
- ----------------------------------------------------------------------------------- ACQUIRING ENTITY: Poolmart USA, Inc. (a corporation owned by Hancock Park Associates and Leonard Green & Partners, L.P.) PRICE PER COMMON SHARE: $14.50 PERCENT OF SHARES TO BE ACQUIRED: 100% CONSIDERATION: Cash OFFER FOR EQUITY/1/: $100.7 million - -----------------------------------------------------------------------------------
Note 1: Net of proceeds from exercise of options. LESLIE'S POOLMART/A-2-2 - -------------------------------------------------------------------------------- Summary of Terms and Conditions CONDITIONS: 1) Completion of financing on satisfactory terms and conditions 2) No material adverse change 3) Satisfactory review of year-end audited financial statements 4) Receipt of regulatory approval and SEC acceptance of recapitalization accounting treatment 5) Fully diluted ownership by Leonard Green greater than 50% 6) Compliance with all necessary regulatory and governmental laws 7) Receipt of approval from Board of Directors of Leslie's Poolmart BREAK-UP FEE: Board has fiduciary right to negotiate and accept a higher offer from another acquiror without incurring any legal obligations to Hancock other than expense reimbursement. However, if fiduciary out is invoked, Leonard Green would receive $1.75 million of break-up fees and reasonable out-of-pocket expenses of up to $1.5 million would be split between Leonard Green and Hancock. In addition, if the Company breaks the "no shop" provision, Leonard Green would receive the break- up fees. LESLIE'S POOLMART - -------------------------------------------------------------------------------- Presentation to the Special Committee of the Board of Directors REVIEW OF PROPOSED TRANSACTION.................... A Overview of Sale Process................... A - 1 Summary of Terms and Conditions of Offer... A - 2 ACQUISITION MULTIPLES...................... A - 3
LESLIE'S POOLMART/A-3-1 - -------------------------------------------------------------------------------- Acquisition Multiples . BASED ON A PURCHASE PRICE OF $14.50 PER SHARE, AN OFFER FOR EQUITY OF $100.7 MILLION AND AN OFFER OF $133.8 MILLION FOR THE NET ASSETS OF LESLIE'S POOLMART, POOLMART USA WOULD BE PAYING THE FOLLOWING ACQUISITION MULTIPLES.
- -------------------------------------------------------------------------------- VALUATION (IN MILLIONS, EXCEPT PER SHARE DATA) Offer price per share $14.50 Primary shares outstanding 6.548 Exercisable options 0.974 ------ Total shares 7.522 Total equity value of offer $109.1 Less: cash from exercise of options/1/ (8.4) ------ EQUITY VALUE OF OFFER: $100.7 Plus: debt assumed/2/ 33.2 Less: cash/2/ (0.1) ------ ENTERPRISE VALUE OF OFFER: $133.8 - --------------------------------------------------------------------------------
Note 1: Average exercise price equals $8.62 per share. Note 2: 1996 year-end Company preliminary figure.
- -------------------------------------------------------------------------------- IMPLIED ACQUISITION MULTIPLES (IN MILLIONS, EXCEPT PER SHARE DATA) LTM EPS $ 0.65 FY 1996P EPS/1/ 0.63 FY 1997E EPS/2/ 0.80 Book value per common share 5.51 Equity Value to: LTM EPS 22.3x FY 1996P EPS/1/ 23.0x FY 1997E EPS/2/ 18.1x Book value per share 2.6x 1996P Sales $191.6 1996P EBITDA 14.5/1/ 1996P EBIT 10.2/1/ Enterprise Value to: 1996P Sales 0.7x 1996P EBITDA 9.2x 1996P EBIT 13.1x Acquisition premium over unaffected stock price of $10.75 34.9% - --------------------------------------------------------------------------------
Note 1: Excludes $750,000 asset write-off. Note 2: Excludes $100,000 asset write-off. LESLIE'S POOLMART - -------------------------------------------------------------------------------- Presentation to the Special Committee of the Board of Directors REVIEW OF PROPOSED TRANSACTION...................... A Overview of Sale Process................... A - 1 Summary of Terms and Conditions of Offer... A - 2 Acquisition Multiples...................... A - 3 FEASIBILITY OF PROPOSED TRANSACTION........ A - 4
LESLIE'S POOLMART/A-4-1 - -------------------------------------------------------------------------------- Feasibility Analysis . DILLON READ HAS ANALYZED THE FEASIBILITY OF THE PROPOSED LEVERAGED BUYOUT OF LESLIE'S POOLMART BASED UPON THE PROPOSED FINANCING STRUCTURE USING ACCEPTED FINANCING PARAMETERS IN TODAY'S CURRENT LENDING MARKET FOR LBO'S. AS SUCH, A TYPICAL LBO IS STRUCTURED AS FOLLOWS. - Generally, a minimum of 25% of the purchase price is in the form of common equity. - Lenders typically require total indebtedness not to exceed 5.5x EBITDA (earnings before interest, taxes and depreciation and amortization), and the senior portion not to exceed 4.0x EBITDA, excluding seasonal demands. EBITDA for this criteria is generally based on historical performance as substantial projected improvements are often skeptically received. - Subordinated debt or preferred stock lenders typically require 5% - 15% in equity in the form of warrants which in combination with the interest / dividend rate on the debt or preferred stock is designed to yield a combined return in the 20% area. - Equity investors generally require a minimum return of 30% - 35% return over four to five years. LESLIE'S POOLMART/A-4-2 - -------------------------------------------------------------------------------- Feasibility Analysis . THE PROPOSED FINANCING STRUCTURE TO BE USED IN THE BUYOUT IS OUTLINED BELOW.
- -------------------------------------------------------------------------------------------------------------------------------- SOURCES OF FUNDS (IN MILLIONS) Expected Fully- Interest/ Diluted % of Dividend Equity Amount Total Rate Ownership Source ------ ----- -------- --------- ---------------------------------------------------- Common Equity $ 22.0 16% -- 81% $6.7MM from rollover of Hancock's and mgmt's equity holdings; $15.3MM of new equity from Leonard Green PIK Preferred 28.0 20 11.5-12.0% 15 Occidental Petroleum ------ ----- --------- Total Equity 50.0 36 96 Sr. Unsecured Notes 85.0 60 11.0-11.5% 4/1/ Bankers Trust underwriting Revolver 5.7 4 Eurodollar -- Bankers Trust; Five-year ------ ----- Rate + 250 --------- $40.0MM facility TOTAL SOURCES $140.7 100% 100% - --------------------------------------------------------------------------------------------------------------------------------
Note 1: Senior Notes may require a small amount of warrants depending upon market conditions. - -------------------------------------------------------------------------------- USES OF FUNDS
(IN MILLIONS) Payment of Cash Dividends $100.7 Repayment of existing debt/1/ 33.2 Fees and expenses 6.8 ------ TOTAL USES $140.7 - --------------------------------------------------------------------------------
Note 1: Preliminary year-end figure. LESLIE'S POOLMART/A-4-3 - -------------------------------------------------------------------------------- Illustrative Financing Structure . PRO FORMA CREDIT STATISTICS UNDER THIS ILLUSTRATIVE FINANCING STRUCTURE FOLLOW. - These credit statistics are generally at low end of acceptable levels.
- --------------------------------------------------------------------------------------------------------------------- Stand-Alone Leslie's Poolmart Pro Forma ----------------------------- -------------------------- 1996E 1997E 1996E 1997E ------------ ------------ ----------- ----------- EBIT/ Cash Interest 3.6x 4.2x 1.0x 1.2x EBITDA/Cash Interest 5.2 6.0 1.4 1.8 EBITDA - CapEx/Cash Interest 2.5 3.5 0.7 1.0 Cash Fixed Charge Coverage Ratio 1.5 1.6 1.0 1.2 EBIT/Total Interest 3.6x 4.2x 1.0x 1.2x EBITDA/Total Interest 5.2 6.0 1.4 1.8 EBITDA-CapEx/Total Interest 2.5 3.5 0.7 1.0 Total Fixed Charge Coverage Ratio 1.4 1.6 0.9 0.9 Total Debt/Capitalization 47.9% 47.2% 123.7% 120.8% Total Fixed Obligations/Capitalization/1/ 47.8% 47.1% 161.9% 161.0% Total Debt/EBITDA 2.3x 2.1x 6.3x 5.1x Total Debt/EBIT 3.3 3.0 8.9 7.4 - ---------------------------------------------------------------------------------------------------------------------
Note 1: Includes preferred stock in fixed obligations. LESLIE'S POOLMART/A-4-4 - -------------------------------------------------------------------------------- Returns Analysis . ASSUMING THE SUCCESSFUL EXECUTION OF LESLIE'S POOLMART'S BUSINESS PLAN, THE EQUITY INVESTORS IN LESLIE'S POOLMART SPONSORED BY HANCOCK AND LEONARD GREEN CAN EXPECT RETURNS IN THE 20% AREA, WHICH IS BELOW THOSE TYPICALLY SOUGHT BY LBO FUNDS.
- ------------------------------------------------------------------------------------------------------------------------- EQUITY RETURN ANALYSIS (IN MILLIONS) MULTIPLE OF FY2001E EBITDA ------------------------------------------------------- 5.0x 6.0x 7.0x ------------- ------------- ------------- FY 2001E EBITDA/1/ $ 35.1 $ 35.1 $ 35.1 Total Enterprise Value 175.5 210.6 245.6 Less: Net Fixed Obligations (140.0) (140.0) (140.0) ------------- ------------- ------------- Total Equity Value 35.5 70.6 105.6 Less: Value of Warrants (6.7) (13.4) (20.1) ------------- ------------- ------------- NET VALUE TO EQUITY INVESTORS $ 26.8 $ 57.2 $ 85.5 Equity Rate of Return 4.5% 17.2% 25.4% - -------------------------------------------------------------------------------------------------------------------------
Note 1: Includes an increase in EBIT of $250,000 due to a savings resulting from not being a public company. LESLIE'S POOLMART - -------------------------------------------------------------------------------- Presentation to the Special Committee of the Board of Directors Review of Proposed Transaction......................... A Overview of Sale Process..................... A - 1 Summary of Terms and Conditions of Offer..... A - 2 Acquisition Multiples........................ A - 3 Feasibility of Proposed Transaction.......... A - 4 REVIEW OF LESLIE'S POOLMART............................ B HISTORICAL FINANCIAL PERFORMANCE............. B - 1
LESLIE'S POOLMART/B-1-1 - -------------------------------------------------------------------------------- Overview of Historical Financial Performance . LESLIE'S HAS GROWN DRAMATICALLY OVER THE PAST FIVE YEARS NEARLY DOUBLING THE TOTAL NUMBER OF RETAIL STORES. --------------------------------------------------------------------------- STORES OPERATED AT YEAR END [GRAPH APPEARS HERE] CAGR: 16.0%
1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- 143 158 180 224 259 - ------------------------------------------------------------------------------------------------------- Number of Net New Stores Opened 41 15 22 44 35 % Change 40.2% 10.5% 13.9% 24.4% 15.6% - -------------------------------------------------------------------------------------------------------
LESLIE'S POOLMART/B-1-2 - -------------------------------------------------------------------------------- Overview of Historical Financial Performance . LESLIE'S SALES GROWTH HAS BENEFITED FROM THE COMPANY'S ENTRY INTO THE COMMERCIAL SEGMENT OF THE MARKET. -------------------------------------------------------------------------- COMMERCIAL SALES (in millions) [GRAPH APPEARS HERE] CAGR: 50.5%
1992 1993 1994 1995 1996P ---- ---- ----- ----- ----- $4.0 $7.3 $10.9 $17.1 $20.5
- ------------------------------------------------------------------------------------------ % Change N.A. 82.5% 49.3% 56.9% 19.9% - ------------------------------------------------------------------------------------------
LESLIE'S POOLMART/B-1-3 - -------------------------------------------------------------------------------- Overview of Historical Financial Performance . HOWEVER, THE COMPANY'S CATALOG SALES HAVE BEEN NEGATIVELY IMPACTED BY NEW STORE OPENINGS DUE TO CANNIBALIZATION. -------------------------------------------------------------------------- CATALOG SALES (in millions) [GRAPH APPEARS HERE] CAGR: (1.0%)
1992 1993 1994 1995 1996P ---- ---- ---- ---- ----- $8.0 $8.9 $8.3 $7.9 $7.7
- ------------------------------------------------------------------------------------------- % Change (3.0%) 11.3% (6.7%) (4.8%) (2.5%) - -------------------------------------------------------------------------------------------
LESLIE'S POOLMART/B-1-4 - -------------------------------------------------------------------------------- Overview of Historical Financial Performance . COMPARABLE STORE SALES HAVE TYPICALLY BEEN IN THE LOW DOUBLE DIGIT AREA. - Compares favorably to other retailers - Exceptions (1992 and 1995) were largely due to poor weather. -------------------------------------------------------------------------- COMPARABLE STORE SALES GROWTH [GRAPH APPEARS HERE] Average: 8.8%
1992 1993 1994 1995 1996P ---- ----- ----- ---- ----- 2.4% 11.7% 12.9% 6.0% 11.0%
LESLIE'S POOLMART/B-1-5 - -------------------------------------------------------------------------------- Overview of Historical Financial Performance . AS A RESULT OF THESE FACTORS TOTAL REVENUES HAVE GROWN FROM $96.3 MILLION IN 1992 TO $191.6P MILLION IN 1996. -------------------------------------------------------------------------- TOTAL SALES (in millions) [GRAPH APPEARS HERE] CAGR: 18.8%
1992 1993 1994 1995 1996P ------ ------ ------ ------ ------ 96.3 $119.9 $141.6 $162.5 $191.6 - ------------------------------------------------------------------------------------------ % Change 16.6% 24.5% 18.1% 14.8% 18% - ------------------------------------------------------------------------------------------
LESLIE'S POOLMART/B-1-6 - -------------------------------------------------------------------------------- Overview of Historical Financial Performance -------------------------------------------------------------------------- GROSS PROFIT (in millions) [GRAPH APPEARS HERE] CAGR: 16.8%
1992 1993 1994 1995 1996P ----- ----- ----- ----- ----- $39.0 $48.3 $55.5 $60.4 $72.7
- -------------------------------------------------------------------------------- % Change 13.0% 23.8% 14.9% 8.8% 20.4% - --------------------------------------------------------------------------------
-------------------------------------------------------------------------- GROSS MARGIN (in millions) [GRAPH APPEARS HERE] Average: 39.0%
1992 1993 1994 1995 1996P ----- ----- ----- ----- ----- 40.5% 40.3% 39.2% 37.2% 37.9%
-------------------------------------------------------------------------- EBIT (in millions) [GRAPH APPEARS HERE] CAGR: 23.4%
1992 1993 1994 1995 1996P/1/ ----- ----- ----- ----- -------- $4.4 $6.4 $9.6 $6.7 $10.2
-------------------------------------------------------------------------- Note 1: Excludes $750,000 asset write-off. - -------------------------------------------------------------------------------- % Change (13.7%) 45.5% 50.0% (30.2%) 52.2% - --------------------------------------------------------------------------------
-------------------------------------------------------------------------- EBIT MARGIN [GRAPH APPEARS HERE] Average: 5.2%
1992 1993 1994 1995 1996P ---- ---- ---- ---- ----- 4.5% 5.3% 6.8% 4.1% 5.3%
LESLIE'S POOLMART/B-1-7 - -------------------------------------------------------------------------------- Overview of Historical Financial Performance . MARGINS AND PROFITABILITY HAVE BEEN NEGATIVELY IMPACTED OVER THE PAST SEVERAL YEARS DUE TO A NUMBER OF FACTORS. - 1995 results were particularly impacted by generally wet and cold weather which reduced sales. . 1996 results improved, in part, due to more normal weather patterns. - In addition, the Company was unable to pass on to consumers during 1995 price increases in many of its products. . However, the Company was able to increase prices during 1996. - As a result of the significant increase in new store openings, many stores were opened late in the season during FY1995 and FY1996 and performed below the Company's new store model, incurring greater than expected losses in the first year. . Approximately 40% of Leslie's stores have been open three years or less. . As a result, the Company intends to reduce the number of new store openings going forward. LESLIE'S POOLMART/B-1-8 - -------------------------------------------------------------------------------- Overview of Historical Financial Performance (Cont'd) - The Company's entry into Florida, an important market, has not matched expectations. . New stores (20) in Florida have performed below the Company's store model. ----------------------------------------------------------------------- FLORIDA FINANCIAL RESULTS
1994 1995 1996E ---------- ----------- ----------- Sales $2,610,059 $4,562,243 $6,997,429 Store Operating Loss NA (599,083) (400,000)
- ------------------------------------------------------------------------------ . Company plans no more new stores in Florida and expects Florida stores to reach breakeven in 1997 and profitability in 1998. - Commercial sales did not increase as projected during 1996 due to the Company's decision to hire commercial account salespeople and change the commission structure. . New salespeople took longer than expected to generate revenue. . Compensation system removed incentive for store managers to focus on commercial business. . The Company intends to restructure compensation system for 1997 in order to assure appropriate incentive for store managers as well as commercial salespeople. . AS A RESULT OF THE ABOVE FACTORS, 1995 AND 1996P FINANCIAL PERFORMANCE (ALTHOUGH IMPROVED VS. 1995) WAS SIGNIFICANTLY BELOW INVESTORS' EXPECTATIONS. LESLIE'S POOLMART/B-1-9 - -------------------------------------------------------------------------------- Comparable Financial Analysis . EXCEPT FOR GROSS MARGIN LESLIE'S FINANCIAL RESULTS ARE GENERALLY BELOW THOSE OF ITS PEERS. -------------------------------------------------------------------------- COMPARABLE COMPANY ANALYSIS (in millions)
3 Yr. CAGR Gross Margin EBIT Margin ----------------------- ------------------- -------------------- LTM 3 Year 3 Year Company Revenues Revenues Net Income Average LTM Average LTM - ----------------------------- -------- -------- ---------- ------- ------- ------- ------- Related Industry - ---------------- West Marine $ 300 35.1% 29.1% 28.8% 29.5% 6.5% 8.2% SCP Pool 211 54.7 (17.6) 23.8 23.0 7.0 6.1 Home Centers - ------------ Home Depot $18,329 29.4% 26.5% 27.8% 27.7% 7.7% 7.8% Lowe's 8,255 24.9 31.0 22.6 23.1 7.1 5.7 Wickes Lumber 860 7.2 NA 23.0 21.5 2.5 1.2 "Category Killers" - ------------------ The Sports Authority $ 1,220 31.3% 32.3% 27.5% 28.4% 3.6% 3.6% Office Max 3,036 33.7 122.4 21.9 21.9 2.6 3.4 Toys 'R Us 9,870 8.9 (10.6) 28.9 28.2 9.6 8.0 PetSmart 1,227 45.9 NA 25.9 27.4 1.3 6.0 Bed Bath & Beyond 701 40.2 34.3 41.7 41.5 11.7 10.9 Leslie's Poolmart/1/ $ 192 16.4% (3.0%)/2/ 38.1% 37.9% 5.4% 5.3%/2/ Ranking 11/11 9/11 7/9 2/11 2/11 7/11 8/11 - -----------------------------------------------------------------------------------------------------------------------------------
Note 1: 1996 Company preliminary figures. Note 2: Excludes $750,000 asset write-off. LESLIE'S POOLMART - -------------------------------------------------------------------------------- Presentation to the Special Committee of the Board of Directors Review of Proposed Transaction..................... A Overview of Sale Process..................A - 1 Summary of Terms and Conditions of Offer..A - 2 Acquisition Multiples.....................A - 3 Feasibility of Proposed Transaction.......A - 4 REVIEW OF LESLIE'S POOLMART........................ B Historical Financial Performance..........B - 1 HISTORICAL TRADING ANALYSIS...............B - 2
LESLIE'S POOLMART/B-2-1 - -------------------------------------------------------------------------------- Overview of Leslie's trading statistics . LESLIE'S POOLMART COMPLETED ITS IPO IN APRIL 1991 AT $11.00 PER SHARE. . THE COMPANY'S STOCK PRICE REACHED A LOW OF $4.54 ON JULY 15, 1992, AND A SUBSEQUENT HIGH OF $19.50 ON JUNE 14, 1996. . LESLIE'S STOCK JUMPED $2.875 FROM $16.250 TO $19.125 ON MAY 31, 1996. - We believe this increase was due to investors wrongly interpreting the announced acquisition of Leslie's Supply (a private distributor of office equipment) by Danka Business Systems in late May 1996. - The stock subsequently declined to $16.00 by early July. - As a result we believe the true all-time high stock price is approximately $16.50. ---------------------------------------------------------------------- LESLIE'S POOLMART HISTORICAL STOCK PRICE PERFORMANCE, IPO TO PRESENT [GRAPH APPEARS HERE] LESLIE'S POOLMART/B-2-2 - -------------------------------------------------------------------------------- Leslie's Trading Statistics . THE STOCK SUBSEQUENTLY RECEDED TO $10.75 PRIOR TO THE ANNOUNCEMENT OF HANCOCK'S INITIAL ACQUISITION OFFER. - The recent decline was largely attributable to disappointing third quarter sales and earnings growth. . DESPITE CONTINUED SALES AND EARNINGS GROWTH THE COMPANY HAS OFTEN MISSED "STREET" EARNINGS ESTIMATES AND ITS STOCK PRICE HAS REACTED ACCORDINGLY. . THE STOCK PRICE IS CURRENTLY TRADING IN THE $12.50-$13.00 AREA IN ANTICIPATION OF THE COMPANY'S SALE AT $14.50 PER SHARE. LESLIE'S POOLMART/B-2-3 - -------------------------------------------------------------------------------- Overview of Leslie's Trading Statistics . LESLIE'S VALUATION IS AT THE BOTTOM OF ITS PEER GROUP. -------------------------------------------------------------------------- COMPARABLE COMPANY ANALYSIS (in millions)
Equity Value to: Unlevered Value to: ----------------------------- --------------------- Total Equity LTM CY 1996E CY 1997E LTM LTM Company Value EPS EPS EPS EBIT EBITDA - ------------------------------------------ ------------ ----- -------- -------- -------- ------ Related Industry - ---------------- West Marine $ 494.0 36.1x 38.6x 27.1x 21.2x 18.0x SCP Pool 94.5 15.3 22.2 14.9 11.9 9.9 Home Centers - ------------ Home Depot $24,496.7 28.2x 27.0x 22.0x 17.6x 15.2x Lowe's 5,731.6 19.8 20.1 16.6 13.7 9.8 Wickes Lumber 47.2 NA NA NA 22.8 13.3 "Category Killers" - ------------------ The Sports Authority $ 605.4 23.2x 20.9x 16.9x 15.7x 9.9x Office Max 1,438.5 21.6 21.1 16.0 12.1 8.2 Toys 'R Us 6,973.0 17.2 14.8 12.8 11.1 8.8 Pet Smart 2,129.4 47.7 48.5 33.8 29.6 22.1 Bed Bath & Beyond 1,755.5 36.4 35.2 27.7 21.2 18.4 Leslie's Poolmart/1/ $ 70.4 15.5x 16.8x 12.8x 8.8x 6.3x Ranking 10/11 9/10 9/10 10/10 11/11 11/11 - ----------------------------------------------------------------------------------------------------------------------
Note 1: Leslie's statistics are based on a pre-announcement stock price of $10.75 per share. LESLIE'S POOLMART/B-2-4 - -------------------------------------------------------------------------------- Overview of Leslie's Trading Statistics . LESLIE'S VOLATILE STOCK PRICE PERFORMANCE AND LOW VALUATION CAN BE ATTRIBUTED TO A NUMBER OF FACTORS MANY OF WHICH ARE INHERENT TO LESLIE'S BUSINESS. - Disappointing results versus investor expectations for the reasons outlined in Section B-1. - Tremendous seasonality of business which is disliked by investors . Business incurs substantial losses in 1stQ and 4thQ. - Importance and unpredictability of weather - Relative illiquidity of stock and "micro-cap" market capitalization LESLIE'S POOLMART - -------------------------------------------------------------------------------- Presentation to the Special Committee of the Board of Directors Review of Proposed Transaction.......................A Overview of Sale Process...................A - 1 Summary of Terms and Conditions of Offer...A - 2 Acquisition Multiples......................A - 3 Feasibility of Proposed Transaction........A - 4 REVIEW OF LESLIE'S POOLMART..........................B Historical Financial Performance...........B - 1 Historical Trading Analysis................B - 2 PROJECTED BUSINESS PLAN AND STRATEGY.......B - 3
LESLIE'S POOLMART/B-3-1 - -------------------------------------------------------------------------------- Overview of Business Plan and Strategy . DILLON READ HAS PERFORMED DUE DILIGENCE OF LESLIE'S POOLMART'S BUSINESS PROJECTIONS AND STRATEGIES INCLUDING: - Receipt and review of financials as of September 28, 1996 and subsequent revisions including: . Detailed preliminary results for 12 months ended December 1996 . Summary projections for fiscal years 1997-2001 - Discussions with Brian McDermott, President and CEO, and Bob Olsen, CFO, regarding major assumptions underlying strategy and potential upside and downside risks . MANAGEMENT HAS INDICATED THAT THERE WILL BE NO MAJOR CHANGES IN THE COMPANY'S BUSINESS PLAN AND STRATEGY IF POOLMART USA IS SUCCESSFUL IN ACQUIRING LESLIE'S. - The Company may slightly slow growth of new store openings. . THE FOLLOWING PAGES SUMMARIZE CERTAIN ASPECTS OF THE PLAN. LESLIE'S POOLMART/B-3-2 - -------------------------------------------------------------------------------- Projected Financial Performance . SIGNIFICANT ASSUMPTIONS AND/OR CHANGES IN LESLIE'S BUSINESS PLAN INCLUDE: - Normal weather patterns throughout the 5 year projection period, 1997-2001 - Reduced new store openings from the 40 - 50 level to the 25 - 35 level in 1997 & 1998 - No new store openings in Florida and the assumption that the existing store base is breakeven in 1997 and profitable in 1998 - Restructure of commercial compensation system which should cause commercial sales to increase at a greater rate than in 1996 LESLIE'S POOLMART/B-3-3 - -------------------------------------------------------------------------------- Review of Business Plan and Strategy . DILLON READ COMPARED LESLIE'S POOLMART'S HISTORICAL GROWTH AND PROFITABILITY TO THOSE PRESENTED IN THE CURRENT BUSINESS PLAN.
- --------------------------------------------------------------------------------------------------------- SELECTED STATISTICS Projected Historical 1997-2001 1992-1996P --------- ---------- Annual Average Number of Net New Store Openings 39 31 CAGR in New Store Openings 12.4% 16.0% Average Comparable Store Sales Increase 8.8 8.8 Average Sales Growth 14.8 18.4 Average Gross Margin 38.4 39.0 Average EBIT Margin 6.7 5.2 CAGR in EPS 24.9 16.7 - ---------------------------------------------------------------------------------------------------------
. IN SUMMARY, LESLIE'S BUSINESS PLAN IS GENERALLY MORE AGGRESSIVE THAN THE COMPANY'S HISTORICAL RESULTS IN EVERY ASPECT THAN NEW STORE OPENINGS. - This can be in part attributable to the assumption of normal weather patterns throughout the projection periods. LESLIE'S POOLMART/B-3-4 - -------------------------------------------------------------------------------- Projected Financial Performance -------------------------------------------------------------------------- NUMBER OF STORES (in millions) [GRAPH APPEARS HERE] 1996P-2001E CAGR: 11.9%
1996P 1997E 1998E 1999E 2000E 2001E ----- ----- ----- ----- ----- ----- 259 285 320 360 405 455
- ----------------------------------------------------------------------------------------------- Net New Stores 35 25 35 40 45 50 % Change 12% 10% 12% 13% 13% 12% - -----------------------------------------------------------------------------------------------
-------------------------------------------------------------------------- COMPARABLE STORE SALES GROWTH [GRAPH APPEARS HERE] 1997P-2001E AVERAGE: 8.9%
1996P 1997E 1998E 1999E 2000E 2001E ----- ----- ----- ----- ----- ----- 11.0% 10.7% 10.5% 8.8% 7.4% 7.0%
-------------------------------------------------------------------------- TOTAL SALES (in millions) [GRAPH APPEARS HERE] 1996P-2001E CAGR: 14.8%
1996P 1997E 1998E 1999E 2000E 2001E ------ ------ ------ ------ ------ ------ $191.6 $223.3 $260.1 $298.6 $338.8 $382.6
- ------------------------------------------------------------------------------------------------- % Change 18.2% 16.5% 15.9% 14.8% 13.5% 12.9% - -------------------------------------------------------------------------------------------------
LESLIE'S POOLMART/B-3-5 - -------------------------------------------------------------------------------- Projected Financial Performance . GROSS MARGIN IS PROJECTED TO REMAIN EFFECTIVELY CONSISTENT WITH 1996P RESULTS. - As a result, gross profit grows at approximately the same rate as sales. -------------------------------------------------------------------------- GROSS PROFIT [GRAPH APPEARS HERE] 1996P-2001E CAGR: 15.1%
1996P 1997E 1998E 1999E 2000E 2001E ----- ----- ------ ------ ------ ------ $72.7 $85.6 $100.2 $115.0 $130.1 $146.6
- ------------------------------------------------------------------------------------------------- % Change 20.4% 17.7% 16.5% 14.8% 13.1% 12.7% - -------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------- GROSS MARGIN [GRAPH APPEARS HERE] 1996P-2001E Average: 38.3%
1996P 1997E 1998E 1999E 2000E 2001E ----- ----- ----- ----- ----- ----- 37.9% 38.3% 38.5% 38.5% 38.4% 38.3%
LESLIE'S POOLMART/B-3-6 - -------------------------------------------------------------------------------- Projected Financial Performance . EBIT MARGIN IS PROJECTED TO IMPROVE OVER THE PROJECTION PERIOD DUE TO THE ABILITY TO LEVERAGE SG&A EXPENSES AND REDUCED NEW STORE OPENINGS. -------------------------------------------------------------------------- EBIT (in millions) [GRAPH APPEARS HERE] 1996P-2001E CAGR: 22.3%
1996P 1997E 1998E 1999E 2000E 2001E ----- ----- ----- ----- ----- ----- $10.2 $12.6 $17.0 $21.0 $24.5 $28.0
- ------------------------------------------------------------------------------------------------- % Change 52.2% 23.5% 34.9% 23.5% 16.7% 14.3% - -------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------- EBIT MARGIN [GRAPH APPEARS HERE] 1997P-2001E Average: 6.7%
1996P 1997E 1998E 1999E 2000E 2001E ----- ----- ----- ----- ----- ----- 5.3% 5.7% 6.5% 7.0% 7.2% 7.3%
LESLIE'S POOLMART/B-3-7 - -------------------------------------------------------------------------------- Projected Financial Performance AS A RESULT OF THE ABOVE FACTORS, NET INCOME AND EPS ARE PROJECTED TO GROW APPROXIMATELY 25%-30% PER YEAR. -------------------------------------------------------------------------- NET INCOME (in millions) [GRAPH APPEARS HERE] 1996P-2001E CAGR: 29.8%
1996P 1997E 1998E 1999E 2000E 2001E ----- ----- ----- ----- ----- ----- $4.3 $5.7 $8.2 $10.7 $13.0 $15.3
- -------------------------------------------------------------------------------- % Change 26.5% 32.6% 43.9% 30.5% 21.5% 17.7% - --------------------------------------------------------------------------------
-------------------------------------------------------------------------- EARNINGS PER SHARE [GRAPH APPEARS HERE] 1996P-2001E CAGR: 25.6%
1996P/1/ 1997E/1/ 1998E 1999E 2000E 2001E -------- -------- ----- ----- ----- ----- $0.63 $0.80 $1.14 $1.45 $1.71 $1.97 --------------------------------------------------------------------------
Note 1: Excludes asset write-off. LESLIE'S POOLMART - -------------------------------------------------------------------------------- Presentation to the Special Committee of the Board of Directors Review of Proposed Transaction....................... A Overview of Sale Process................. A - 1 Summary of Terms and Conditions of Offer. A - 2 Acquisition Multiples.................... A - 3 Feasibility of Proposed Transaction...... A - 4 Review of Leslie's Poolmart.......................... B Historical Financial Performance......... B - 1 Historical Trading Analysis.............. B - 2 Projected Business Plan and Strategy..... B - 3 PRELIMINARY VALUATION................................ C
LESLIE'S POOLMART/C-1 - -------------------------------------------------------------------------------- Discounted Cash Flow Analysis . BASED UPON THE BUSINESS PLAN PROVIDED BY MANAGEMENT, DILLON READ EVALUATED A MEASURE OF INTRINSIC VALUE USING A DISCOUNTED CASH FLOW ANALYSIS. - ------------------------------------------------------------------------------- DISCOUNTED CASH FLOW ANALYSIS (in millions, except per share data)
Discount Rates -------------------------------------- 11.0% 12.0% 13.0% -------- -------- -------- Net Present Value of Cash Flows $ 16.6 $ 15.9 $ 15.3 Terminal Value as a Multiple (6.0x) of 2001 EBITDA 123.6 118.2 113.1 -------- -------- -------- Total Net Present Value of Enterprise 140.2 134.1 128.4 Less: Net Debt (33.1) (33.1) (33.1) -------- -------- -------- TOTAL NET PRESENT VALUE OF EQUITY $107.1 $101.0 $ 95.3 Per Share Basis $15.36 $14.55 $13.78 - -----------------------------------------------------------------------------------------------------
. BASED ON THE COMPARISON OF THE COMPANY'S PROJECTED RESULTS TO HISTORICAL RESULTS, WE VIEW LESLIE'S CURRENT PLAN AS A BETTER THAN AVERAGE SCENARIO. - Assumes normal weather for next 5 years where as 2 out of the last 5 years (1992 & 1995) had abnormally poor weather conditions. . ASSUMING THE COMPANY EXPERIENCES ONE POOR WEATHER YEAR OVER THE NEXT FIVE SIGNIFICANTLY REDUCES THE EQUITY VALUE. - ------------------------------------------------------------------------------- DISCOUNTED CASH FLOW ASSUMING POOR WEATHER YEAR IN 1999/1/ (in millions, except per share data)
Discount Rates -------------------------------------- 11.0% 12.0% 13.0% -------- -------- -------- Adjusted Net Present Value of Equity $ 91.7 $86.3 $81.2 Per Share Basis $13.31 $12.59 $11.91 - -----------------------------------------------------------------------------------------------------
Note 1: Assumes EBITDA and cash flow decline by 25% and grow the next year at 50% and 25% each year thereafter. LESLIE'S POOLMART/C-2 - -------------------------------------------------------------------------------- Leveraged Buyout Analysis . A LEVERAGED BUYOUT AT PURCHASE PRICES GREATER THAN $14.50 WOULD BE DIFFICULT TO FINANCE DUE TO INCREASINGLY WEAKER CREDIT STATISTICS BELOW MARKET EQUITY RETURNS. ------------------------------------------------------------------------- SUMMARY 5-YEAR EQUITY RETURN ANALYSIS
Price Per Common Share/1/ ------------------------------------------------ $14.50 $15.00 $15.50 $16.00 - ---------------------------------------------------- ------- ------- ------- ------- 1997E EBITDA/Total Fixed Charges 0.57x 0.57x 0.57x 0.56x 1997E EBIT/Total Fixed Charges 0.31 0.31 0.30 0.29 Total Debt/Capitalization 65.9% 65.6% 65.4% 65.2% Total Debt / EBITDA 5.1x 5.2x 5.3x 5.4x IRR Assuming 6.0x Exit Multiple of 2001 EBITDA 17.2% 14.9% 12.7% 10.6% - ---------------------------------------------------------------------------------------------------------
Note 1: Assumes increase in purchase price is funded 50% with equity and 50% with debt. LESLIE'S POOLMART/C-3 - -------------------------------------------------------------------------------- Recapitalization Analysis . AN ANALYSIS OF LESLIE'S COMPLETING A LEVERAGED RECAPITALIZATION BY PAYING A ONE-TIME CASH DIVIDEND FINANCED WITH DEBT GENERALLY RESULTS IN LOWER VALUES. -------------------------------------------------------------------------- RECAPITALIZATION VALUATION ANALYSIS (in millions, except per share data)
Cash dividend per share $ 5.00 $ 6.00 $ 7.00 $ 8.00 - --------------------------------- -------- -------- -------- -------- Total cash dividend $29,212 $36,734 $44,257 $51,779 1996 EBIT/Interest expense 1.3x 1.1x 1.0x 1.0x 1996 EBITDA/Interest expense 1.8 1.6 1.5 1.4 1997E pro forma EPS $ 0.42 $ 0.33 $ 0.25 $ 0.17 Assumed P/E multiple/1/ 13.4x 13.4x 13.4x 13.4x ------- ------- ------- ------- Implied stock value $ 5.61 $ 4.50 $ 3.39 $ 2.28 ------- ------- ------- ------- TOTAL VALUE PER SHARE $ 10.61 $ 10.50 $ 10.39 $ 10.28 - ---------------------------------------------------------------------------------------------
Note 1: Multiple of 1997E earnings prior to announcement of $14.50 offer. . IN ADDITION, THERE ARE MANY OTHER NEGATIVE QUALITATIVE FACTORS TO CONSIDER WHICH COULD CAUSE THE COMPANY'S STOCK TO TRADE AT LEVELS BELOW THAT INDICATED ABOVE, INCLUDING: - The resulting very small market capitalization and float of stock - Significant financial leverage added to inherent operating leverage of business due to seasonality and unpredictability of weather. LESLIE'S POOLMART/C-4 - -------------------------------------------------------------------------------- Analysis of Comparable Acquisitions . NO MEANINGFUL ACQUISITIONS OF RETAILERS OF POOL SUPPLIES HAVE BEEN COMPLETED IN RECENT YEARS. - As a result, comparable acquisition statistics do not provide clear valuation parameters. . REVIEWING A SELECTION OF ACQUISITIONS OF RETAILERS, BROADLY DEFINED, THE VALUATION MULTIPLES OF LESLIE'S ARE COMPARABLE TO THOSE RECEIVED BY OTHER RETAILERS IN RECENT ACQUISITIONS. -------------------------------------------------------------------------- COMPARABLE MERGER ANALYSIS FOR SPECIALTY RETAIL COMPANIES
Offer for Assets to LTM: Offer for Equity to:/1/ -------------------------- ------------------------ Offer Date Acquiror/Target Description of Target Sales EBIT EBITDA Book Value LTM Net Inc - ---------- --------------------------- ------------------------ ----- ----- ------ ---------- ----------- 11/27/96 Childs/Central Tractor Tractor/hardware stores 0.6x 11.8x 9.3x 1.7x 20.8x 10/02/96 Toys 'R Us/Baby Superstores Childrens wear stores 1.6 NM NM 4.2 NM 09/04/96 Staples/Office Depot Office supply stores 0.7 16.5 12.8 3.3 26.2 08/15/96 Sears Robuck/Orchard Hardware stores 0.7 /2/ 12.2 /2/ 9.2 /2/ 2.7 27.5 08/08/96 Proffits/Parisian Family apparel stores 0.6 15.4 9.9 2.6 24.4 10/23/95 Proffits/Younkers Department stores 0.5 11.4 7.4 1.4 17.5 02/07/95 Petsmart/Petstuff Pet supply stores 0.8 NM NM 2.4 NM MEDIAN 0.7X 12.2X 9.3X 2.6X 24.4X LESLIE'S IMPLIED VALUE PER SHARE/3/ $14.53 $13.57 $14.61 $14.33 $15.37 - ---------------------------------------------------------------------------------------------------------------------------
Note 1: Includes cash paid for outstanding options. Note 2: Assumes the conversion of preferred stock into 1.28MM shares of Sears common stock. Note 3: Based on 1996P financials. . HOWEVER, MANY OF THE ABOVE TRANSACTIONS ARE OF A SIGNIFICANTLY LARGER SIZE AND REPRESENT CONSOLIDATIONS OF COMPETITORS IN THE SAME INDUSTRY WHICH TYPICALLY RESULTS IN SIGNIFICANT COST SAVING OPPORTUNITIES. LESLIE'S POOLMART/C-5 - -------------------------------------------------------------------------------- Analysis of Accretion (Dilution) at Various Purchase Prices . AT $14.50 A SHARE IN CASH AND HIGHER PRICES, AN ACQUISITION OF LESLIE'S BY A CORPORATE ACQUIROR WOULD BE SLIGHTLY DILUTIVE. - Does not reflect any synergies - Assumes achievement of 1997 plan ------------------------------------------------------------------------- ACCRETION (DILUTION) ANALYSIS (in millions)
$14.50 $15.00 $15.50 $16.00 - ---------------------------- ------- ------ ------ ------ 1997E Pretax Income $ 9.6 $ 9.6 $ 9.6 $ 9.6 Plus: Public Company Costs 0.3 0.3 0.3 0.3 Less: Interest Expense on Acquisition Debt at 8.5% (8.6) (8.9) (9.2) (9.5) ------- ------ ------ ------ Adjusted Pretax Income 1.3 1.0 0.7 0.4 Less: Taxes (0.5) (0.4) (0.3) (0.2) ------- ------ ------ ------ Net Income 0.8 0.6 0.4 0.2 Goodwill Amortization/1/ (2.7) (2.8) (3.0) (3.2) ------- ------ ------ ------ PRO FORMA NET INCOME $(1.9) $(2.2) $(2.6) $(3.0) - -------------------------------------------------------------------------
Note 1: Assumes goodwill amortized over 25 years. . HOWEVER, NO CORPORATE BUYER APPROACHED THE COMPANY WITH FORMAL BIDS. - -------------------------------------------------------------------------------- Exhibits FINANCIAL PROJECTIONS MODEL..................... 1 DISCOUNTED CASH FLOW ANALYSIS................... 2 LBO ANALYSIS.................................... 3 RECAPITALIZATION ANALYSIS....................... 4 CALCULATION OF ESTIMATED WEIGHTED AVERAGE COST OF CAPITAL............................... 5
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Financial Projections Confidential (Dollars in thousands) Income Statement
Projected For the Year Ending December 31, -------------------------------------------------------------------------------------- 1996P 1997 1998 1999 2000 2001 -------- -------- -------- -------- -------- -------- Sales Retail $179,119 $208,348 $244,139 $281,526 $320,338 $362,609 Mail Order 7,723 8,300 8,300 8,300 8,300 8,300 Service 4,798 6,661 7,660 8,809 10,131 11,651 -------- -------- -------- -------- -------- -------- Total Sales 191,640 223,309 260,099 298,635 338,769 382,559 Cost of Goods Sold 118,919 137,691 159,925 183,664 208,632 235,947 -------- -------- -------- -------- -------- -------- Gross Profit 72,721 85,617 100,174 114,972 130,137 146,612 SG&A 58,241 67,495 77,510 87,970 99,250 111,770 -------- -------- -------- -------- -------- -------- EBITDA 14,480 18,122 22,664 27,001 30,887 34,842 Depreciation & Amortization 4,327 5,492 5,710 6,042 6,424 6,848 -------- -------- -------- -------- -------- -------- EBIT 10,153(1) 12,630(1) 16,954 20,959 24,463 27,994 Interest and Other Expense 2,787 3,000 3,039 2,900 2,645 2,289 -------- -------- -------- -------- -------- -------- Pretax Income 7,366 9,630 13,915 18,059 21,818 25,705 Income Taxes 3,053 3,955 5,668 7,326 8,829 10,384 -------- -------- -------- -------- -------- -------- Net Income $4,314 $5,675 $8,247 $10,733 $12,989 $15,321 Shares Outstanding 6,825 7,050 7,214 7,394 7,579 7,769 EPS $0.63 $0.80 $1.14 $1.45 $1.71 $1.97 (1) Excludes $750,000 and $100,000 write offs in 1996 and 1997, respectively. Assumptions Sales Growth Retail 19.2% 16.3% 17.2% 15.3% 13.8% 13.2% Mail Order -2.8% 7.5% 0.0% 0.0% 0.0% 0.0% Service 13.0% 38.8% 15.0% 15.0% 15.0% 15.0% Margins Gross Profit 37.9% 38.3% 38.5% 38.5% 38.4% 38.3% SG&A 30.4% 30.2% 29.8% 29.5% 29.3% 29.2% EBITDA 7.6% 8.1% 8.7% 9.0% 9.1% 9.1% EBIT 5.3% 5.7% 6.5% 7.0% 7.2% 7.3% Net Income 2.3% 2.5% 3.2% 3.6% 3.8% 4.0%
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Financial Projections Confidential (Dollars in thousands) Projected Balance Sheet
Projected As of December 31, -------------------------------------------------------------- 1996P 1997 1998 1999 2000 2001 ------- ------- ------- ------- ------- ------- Assets Cash $87 $87 $87 $87 $87 $87 Accounts Receivable 2,550 3,350 3,901 4,480 5,082 5,738 Inventory 37,048 38,840 43,507 48,812 54,776 61,416 Prepaid Expenses and Other Current 1,693 2,233 2,601 2,986 3,388 3,826 Deferred Tax Assets 2,321 2,321 2,321 2,321 2,321 2,321 ------- ------- ------- ------- ------- ------- Total Current 43,699 46,831 52,418 58,686 65,653 73,388 Net PP&E 33,307 35,775 37,520 39,532 41,763 43,570 Goodwill, Net 8,298 8,038 7,783 7,528 7,273 7,018 Other Assets 672 713 800 900 1,013 1,138 ------- ------- ------- ------- ------- ------- Total Assets $85,976 $91,356 $98,520 $106,647 $115,703 $125,114 Liabilities and Shareholders' Equity Accounts Payable $9,155 $4,661 $5,221 $5,857 $6,573 $7,370 Accrued Liabilities 5,556 5,583 6,502 7,466 8,469 9,564 ------- ------- ------- ------- ------- ------- Total Current Liabilities 14,711 10,243 11,723 13,323 15,042 16,934 Total Debt 33,208 37,381 34,818 30,611 24,959 17,158 Deferred Tax Liabilities 1,963 1,963 1,963 1,963 1,963 1,963 ------- ------- ------- ------- ------- ------- Total Liabiliites 49,882 49,587 48,504 45,897 41,965 36,055 Shareholders' Equity 36,094 41,769 50,016 60,750 73,738 89,059 ------- ------- ------- ------- ------- ------- Total Liabilities and Sharesholders' Equity $85,976 $91,356 $98,520 $106,647 $115,703 $125,114 Assumptions Accounts Receivable as a % of Sales 1.3% 1.5% 1.5% 1.5% 1.5% 1.5% Prepaid Expenses and Other Current as a % of Sales 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Accrued Liabilities as a % of Sales 2.9% 2.5% 2.5% 2.5% 2.5% 2.5% Accounts Payable as a % of Inventory 24.7% 12.0% 12.0% 12.0% 12.0% 12.0% Inventory per Store $142 $136 $136 $136 $135 $135
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Financial Projections Confidential (Dollars in thousands) Credit Statistics
Projected As of December 31, ------------------------------------------------------------------------------------ 1996 1997 1998 1999 2000 2001 ------ ------ ------ ------ ------ ------ Total Debt 33,208 37,381 34,818 30,611 24,959 17,158 EBIT / Cash Interest 3.6 x 4.2 x 5.6 x 7.2 x 9.2 x 12.2 x EBITDA / Cash Interest 5.2 6.0 7.5 9.3 11.7 15.2 EBITDA - CapX / Cash Interest 2.5 3.5 5.1 6.6 8.5 11.6 EBIT / Total Interest 3.6 4.2 5.6 7.2 9.2 12.2 EBITDA / Total Interest 5.2 6.0 7.5 9.3 11.7 15.2 EBITDA - CapX / Total Interest 2.5 3.5 5.1 6.6 8.5 11.6 Cash Fixed Charge Coverage Ratio 1.5 1.6 1.8 2.1 2.4 2.6 Total Debt / EBIT 3.3 3.0 2.1 1.5 1.0 0.6 Total Debt / EBITDA 2.3 x 2.1 x 1.5 x 1.1 x 0.8 x 0.5 x Total Debt / Total Capitalization 47.9% 47.2% 41.0% 33.5% 25.3% 16.2% Net Debt / Total Capitalization 47.8% 47.1% 40.9% 33.4% 25.2% 16.1% Total Debt / Common Equity 0.9 x 0.9 x 0.7 x 0.5 x 0.3 x 0.2 x
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Financial Projections Confidential (Dollars in thousands) Projected Cash Flow Statement
Projected for the Year Ending December 31, ----------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------ ------ ------ ------- ------- ------- Operating Activities Net Income $4,314 $5,675 $8,247 $10,733 $12,989 $15,321 Depreciation 4,073 5,232 5,455 5,787 6,169 6,593 Amortization of Goodwill 254 260 255 255 255 255 (Increase)/Decrease in Accts Receivable (800) (552) (578) (602) (657) (Increase)/Decrease in Inventory (1,792) (4,667) (5,305) (5,964) (6,640) (Increase)/Decrease in Prepaid & Other Current (540) (368) (385) (401) (438) Increase/(Decrease) in Accounts Payable (4,494) 560 637 716 797 Increase/(Decrease) in Accrued Liabilities 27 920 963 1,003 1,095 ------ ------ ------ ------- ------- ------- Total Operating Activities 8,641 3,568 9,850 12,107 14,165 16,326 Investing Activities Capital Expenditures (7,522) (7,700) (7,200) (7,800) (8,400) (8,400) (Increase)/Decrease in Other Assets (41) (87) (100) (113) (125) ------ ------ ------ ------- ------- ------- Total Investing Activities (7,522) (7,741) (7,287) (7,900) (8,513) (8,525) Total Cash Provided/(Used) 1,119 (4,173) 2,563 4,207 5,652 7,801 Beginning Balance Total Debt 34,327 33,208 37,381 34,818 30,611 24,959 Drawn/(Paydown) (1,119) 4,173 (2,563) (4,207) (5,652) (7,801) ------ ------ ------ ------- ------- ------- Ending Balance Total Debt 33,208 37,381 34,818 30,611 24,959 17,158 Beginning Cash Balance 87 87 87 87 87 87 Cash Provided/(Used) 0 0 0 0 0 0 ------ ------ ------ ------- ------- ------- Ending Cash Balance $87 $87 $87 $87 $87 $87
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Financial Projections Confidential (Dollars in thousands) New Store Model
Sales Ramp-up Average Sales % Growth Number of New Stores Opened ----------- ----------- Year 1 $400 NM 1991 97 A 1997 25 E Year 2 550 37.5% 1992 37 A 1998 35 E Year 3 650 18.2% 1993 16 A 1999 40 E Year 4 730 12.3% 1994 26 A 2000 45 E Year 5 840 15.1% 1995 44 A 2001 50 E Thereafter NM 2.5% 1996 40 E 2002 50 E
Projected Retail Sales
Sales from Stores in Model ----------------------------------------------------------- Stores At Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total Sales Year End ------- ------- ------- ------- ------- ---------- ----------- -------- 1996 $12,661 $21,722 $15,361 $12,151 $32,739 $ 84,485 $179,119 260 1997 10,000 18,992 27,153 18,433 13,985 119,785 208,348 285 1998 14,000 13,750 23,738 32,583 21,761 138,307 244,139 320 1999 16,000 19,250 16,250 28,487 37,470 164,070 281,526 360 2000 18,000 22,000 22,750 18,250 32,760 206,578 320,338 405 2001 20,000 24,750 26,000 25,550 20,988 245,321 362,609 455
Projected Rent Expense
Rent Expense Total Total Rent Total Rent Expense per Store Stores Expense as a % of Sales ----------- ------ ---------- ----------------- 1995 A $60 224 $13,397 8.2% 1996 61 260 15,804 8.2% 1997 65 285 18,415 8.2% 1998 67 320 21,449 8.2% 1999 68 360 24,627 8.2% 2000 69 405 27,937 8.2% 2001 69 455 31,548 8.2%
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Financial Projections Confidential (Dollars in thousands) Capital Expenditures, Depreciation and Amortization and Tax Schedule
Capital Expenditures Projected for the Year Ending December 31, ------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------ ------ ------ ------ ------ ------ Base CapEx $3,522 $5,200 $3,700 $3,800 $3,900 $3,900 New Stores CapEx $100 Per Store 4,000 2,500 3,500 4,000 4,500 4,500 ------ ------ ------ ------ ------ ------ Total CapEx $7,522 $7,700 $7,200 $7,800 $8,400 $8,400 Depreciation and Amortization Schedule Projected for the Year Ending December 31, ------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------ ------ ------ ------ ------ ------ Existing PP&E $3,321 $3,710 $3,213 $2,765 $2,307 $1,891 Total New CapEx 10 Avg Life 1996 752 752 752 752 752 752 1997 770 770 770 770 770 1998 720 720 720 720 1999 780 780 780 2000 840 840 2001 840 ------ ------ ------ ------ ------ ------ Total Depreciation 4,073 5,232 5,455 5,787 6,169 6,593 Amortization of Existing Goodwill 254 260 255 255 255 255 ------ ------ ------ ------ ------ ------ Total Depreciation and Amortization $4,327 $5,492 $5,710 $6,042 $6,424 $6,848 Tax Schedule Projected for the Year Ending December 31, -------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------ ------ ------- ------- ------- ------- Pretax Income $7,366 $9,630 $13,915 $18,059 $21,818 $25,705 Plus: Goodwill Amortization 254 260 255 255 255 255 ------ ------ ------- ------- ------- ------- Total Taxable Income 7,620 9,890 14,170 18,314 22,073 25,960 Tax Rate 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% ------ ------ ------- ------- ------- ------- Total Income Taxes $3,053 $3,955 $ 5,668 $ 7,326 $ 8,829 $10,384
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Financial Projections Confidential (Dollars in thousands) Debt Schedule
Projected for the Year Ending December 31, ------------------------------------------------------------------------------------ 1996 1997 1998 1999 2000 2001 ------ ------ ------ ------ ------ ------ Total Debt Beginning Balance 34,327 33,208 37,381 34,818 30,611 24,959 Change (1,119) 4,173 (2,563) (4,207) (5,652) (7,801) Ending Balance 33,208 37,381 34,818 30,611 24,959 17,158 Cash Interest 2,787 3,000 3,039 2,900 2,645 2,289
- -------------------------------------------------------------------------------- Leslie's Poolmart Discounted Cash Flow Analysis (Dollars in thousands) Valuation Summary
Net Present Value of Cash Flows Net Present Value of Terminal Value As a Multiple of 2001 EBITDA Average Cost Value of Average Cost ------------------------------------- of Capital Free Cash Flow of Capital 5.0 x 6.0 x 7.0 x ------------ -------------- ------------ ------- ------- ------- 11% 16,766 11.00% 103,385 124,062 144,739 12% 16,110 12.00% 98,851 118,622 138,392 13% 15,489 13.00% 94,554 113,465 132,376
Enterprise Valuation As a Multiple of 2001 EBITDA Average Cost ------------------------------------- of Capital 5.0 x 6.0 x 7.0 x ------------ ------- ------- ------- 11% 120,151 140,828 161,505 12% 114,962 134,732 154,502 13% 110,043 128,954 147,865 Less: Current Net Debt 33,121 33,121 33,121 Equity Valuation As a Multiple of 2001 EBITDA Average Cost ------------------------------------- of Capital 5.0 x 6.0 x 7.0 x ------------ ------- ------- ------- 11% 87,030 107,707 128,384 12% 81,841 101,611 121,381 13% 76,922 95,833 114,744 As a Multiple of 2001 EBITDA ------------------------------------- Per Share 5.0 x 6.0 x 7.0 x ------- ------- ------- 11% $12.69 $15.43 $18.18 12% $12.00 $14.62 $17.25 13% $11.34 $13.86 $16.37
- -------------------------------------------------------------------------------- Leslie's Poolmart Discounted Cash Flow Analysis (Dollars in thousands) Free Cash Flow Reconciliation
Projected For the Year Ending December 31, ----------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 --------- --------- --------- --------- --------- --------- Total Sales $191,640 $223,309 $260,099 $298,635 $338,769 $382,559 Earnings Before Interest & Taxes 10,153 12,630 16,954 20,959 24,463 27,994 Plus: Goodwill Amortizaton 254 260 255 255 255 255 --------- --------- --------- --------- --------- --------- Earnings Before Interest, Taxes and Amortization 10,407 12,890 17,209 21,214 24,718 28,249 Tax Effect 40% (4,163) (5,156) (6,884) (8,486) (9,887) (11,300) --------- --------- --------- --------- --------- --------- Earnings Before Interest and Amortization, after tax 6,244 7,734 10,325 12,728 14,831 16,949 Plus: Depreciation 4,073 5,232 5,455 5,787 6,169 6,593 Less: Increase in Working Capital (168) (7,599) (4,107) (4,669) (5,248) (5,843) Less: Capital Expenditures and Increase in Other Assets (7,522) (7,741) (7,287) (7,900) (8,513) (8,525) --------- --------- --------- --------- --------- --------- Net Free Cash Flow $2,627 ($2,374) $4,386 $5,947 $7,239 $9,175 EBITDA 14,480 18,122 22,664 27,001 30,887 34,842
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Leveraged Buyout Analysis Confidential (Dollars in thousands) Transaction Summary Equity Valuation Current Common Shares Out 6,548.411 Proposed Price per Share $14.50 --------- Value of Common Shares 94,952 Options Outstanding 974 Average Exercise Price $8.62 Proposed Price per Share $14.50 --------- Value of Options $5,724 Total Value of Equity $100,675 Goodwill Calculation Purchase Price of Equity $100,675 Plus: Transaction Fees and Expenses 2,812 Less: Book Value of Equity 36,094 --------- Total Goodwill $67,394 Years of Amortization 25 Annual Goodwill Expense 2,696
Sources of Funds % of Total Coupon Warrants ---------- ------ -------- Common Equity $22,000 16% NM PIK Preferred A 28,000 20% 11.3% 15.0% PIK Preferred B 0 0% 11.3% Senior Unsecured Notes 85,000 60% 11.8% 4.0% Revolver 5,695 4% 8.0% -------- Total Sources of Funds $140,696 100%
Fees and Expenses Transaction Fees $1,812 Transaction Expenses 1,000 Financing Fees 3,500 Financing Expenses 500 ------ Total Fees and Expenses $6,812 Deferred Financing Fees $4,000 Years of Amortization 7 ------ Annual Amortization of Financing Fees $571
Uses of Funds Purchase Price of Equity $100,675 Revolving Loan 6,000 Mortgage Notes 1,049 Notes 719 Convertible Subordinated Notes 10,000 Line of Credit 15,440 Fees and Expenses 6,812 -------- Total Uses of Funds $140,696
Pro Forma Capitalization 1996 Pro Forma 1997 1998 1999 2000 2001 -------------- ------- ------- ------- ------- ------- Total Long-term Debt 85,000 85,000 85,000 85,000 85,000 85,000 Total Debt 90,695 93,715 96,085 96,588 95,402 92,391 Net Debt 90,608 93,615 95,985 96,488 95,302 92,291 Total Equity 50,000 48,560 49,179 51,734 56,014 62,112 Total Book Capitalization 140,696 142,275 145,264 148,322 151,416 154,503 Credit Statistics EBIT / Cash Interest (1) 1.0 x 1.0 x 1.3 x 1.6 x 1.8 x 2.1 x EBITDA / Cash Interest (1) 1.4 1.8 2.1 2.5 2.9 3.2 EBITDA - CapX /Cash Interest (1) 0.7 1.0 1.3 1.7 2.0 2.3 EBIT /Total Interest 1.0 1.0 1.3 1.6 1.8 2.1 EBITDA / Total Interest 1.4 1.8 2.1 2.5 2.9 3.2 EBITDA - CapX /Total Interest 0.7 1.0 1.3 1.7 2.0 2.3 EBITDA/Total Fixed Charges 0.78 0.57 0.64 0.69 0.72 0.74 EBIT/Total Fixed Charges 0.55 0.31 0.38 0.43 0.46 0.49 Cash Fixed Charge Coverage Ratio 1.0 1.0 1.1 1.2 1.2 1.3 Total Fixed Charge Coverage Ratio 0.9 0.9 1.0 1.1 1.1 1.2 Total Fixed Obligations/Total Book Capitalization (2) 84.4% 87.8% 90.0% 91.1% 91.3% 90.7% Total Debt / EBIT 8.9 9.4 7.0 5.6 4.8 4.0 Total Debt / EBITDA 6.3 x 5.1 x 4.2 x 3.5 x 3.1 x 2.6 x Total Debt / Total Capitalization 64.5% 65.9% 66.1% 65.1% 63.0% 59.8% Net Debt / Total Capitalization 64.4% 65.8% 66.1% 65.1% 62.9% 59.7% Total Debt / Common Equity 1.8 x 1.9 x 2.0 x 1.9 x 1.7 x 1.5 x
Note 1: Excludes PIK preferred and zero coupon bonds. Note 2: Includes PIK preferred and zero coupon bonds in total fixed obligations. Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Leveraged Buyout Analysis Confidential (Dollars in thousands) Return Analysis
Summary 5-Year Return Analysis Price per Common Share ------------------------------------------------- Common Equity $14.50 $15.00 $15.50 $16.00 ------ ------ ------ ------ Based on 5 x 4.5% 1.8% -0.9% -3.6% Exit Multiple of 6 x 17.2% 14.9% 12.7% 10.6% EBITDA 7 x 25.4% 23.2% 21.1% 19.1% PIK Preferred A Based on 5 x 11.2% 11.1% 10.9% 10.8% Exit Multiple of 6 x 13.0% 12.9% 12.7% 12.6% EBITDA 7 x 14.6% 14.5% 14.4% 14.3%
Implied Transaction Multiples Actual -------- 1996 Sales 0.7 x 1996 EBIT 13.9 1996 EBITDA 9.7 1996 Net Income 23.3 1997 Net Income 17.7
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Leveraged Buyout Analysis Confidential (Dollars in thousands) Projected Income Statement
Projected For the Year Ending December 31, ---------------------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------- ------- ------- ------- ------- ------- Sales Retail 179,119 208,348 244,139 281,526 320,338 362,609 Mail Order 7,723 8,300 8,300 8,300 8,300 8,300 Service 4,798 6,661 7,660 8,809 10,131 11,651 ------- ------- ------- ------- ------- ------- Total Sales 191,640 223,309 260,099 298,635 338,769 382,559 Cost of Goods Sold 118,919 137,691 159,925 183,664 208,632 235,947 ------- ------- ------- ------- ------- ------- Gross Profit 72,721 85,617 100,174 114,972 130,137 146,612 Operating Expenses SG&A 58,241 67,495 77,510 87,970 99,250 111,770 Less: Public Company Expenses 0 (250) (250) (250) (250) (250) ------- ------- ------- ------- ------- ------- EBITDA 14,480 18,372 22,914 27,251 31,137 35,092 Depreciation and Amortization Depreciation 4,073 4,843 5,713 6,633 7,603 8,623 Amortization of Existing Goodwill 254 254 254 254 254 254 Amortization of New Goodwill 0 2,696 2,696 2,696 2,696 2,696 Amortization of Financing Fees 0 571 571 571 571 571 ------- ------- ------- ------- ------- ------- Total Depreciation and Amortization 4,327 8,364 9,234 10,154 11,124 12,144 ------- ------- ------- ------- ------- ------- EBIT 10,153 10,008 13,680 17,097 20,012 22,948 Interest Expense Existing Debt 2,787 0 0 0 0 0 Revolver 0 456 697 887 927 832 Zero Coupon Bonds 0 0 0 0 0 0 Senior Unsecured Notes 0 9,988 9,988 9,988 9,988 9,988 Interest Income (2) (2) (2) (2) (2) (2) ------- ------- ------- ------- ------- ------- Net Interest Expense 2,785 10,441 10,683 10,872 10,913 10,818 ------- ------- ------- ------- ------- ------- Pretax Income 7,368 (433) 2,997 6,225 9,100 12,130 Income Taxes 3,053 1,007 2,379 3,670 4,820 6,032 ------- ------- ------- ------- ------- ------- Net Income $4,315 ($1,440) $618 $2,555 $4,280 $6,098 Assumptions Sales Growth Retail 19.2% 16.3% 17.2% 15.3% 13.8% 13.2% Mail Order -2.8% 7.5% 0.0% 0.0% 0.0% 0.0% Service 13.0% 38.8% 15.0% 15.0% 15.0% 15.0% Margins Gross Profit 37.9% 38.3% 38.5% 38.5% 38.4% 38.3% SG&A 30.4% 30.2% 29.8% 29.5% 29.3% 29.2% EBITDA 8.1% 8.8% 9.4% 9.7% 9.7% 9.7% EBIT 5.7% 4.8% 5.6% 6.1% 6.2% 6.3% Net Income 2.4% -0.7% 0.3% 0.9% 1.3% 1.7%
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Leveraged Buyout Analysis Confidential (Dollars in thousands) Projected Balance Sheet
Projected As of December 31, -------------------------------------------------------------------- 1996 Adjustments 1996 Pro Forma 1997 1998 ------- ----------- -------------- -------- -------- Assets Cash $87 0 $87 $100 $100 Accounts Receivable 2,550 0 2,550 2,847 3,316 Inventory 37,048 0 37,048 38,840 43,507 Prepaid Expenses and Other Current 1,693 0 1,693 2,263 2,636 Deferred Tax Assets 2,321 0 2,321 2,321 2,321 ------- -------- -------- -------- Total Current 43,699 43,699 46,371 51,881 Net PP&E 33,307 0 33,307 36,164 39,151 Goodwill, Net 8,298 67,394 75,692 72,742 69,792 Amortized Financing Fees 0 4,000 4,000 3,429 2,857 Other Assets 672 0 672 713 800 ------- -------- -------- -------- Total Assets $85,976 $157,370 $159,418 $164,480 Liabilities and Shareholders' Equity Accounts Payable $9,155 0 $9,155 $9,598 $10,751 Accrued Liabilities 5,556 0 5,556 5,583 6,502 Line of Credit and Project Financing Facility 15,440 (15,440) 0 0 0 New Revolver 0 5,695 5,695 8,714 11,085 Current Portion of Long-term Debt 2,120 (2,120) 0 0 0 ------- -------- -------- -------- Total Current Liabilities 32,271 20,406 23,895 28,338 Revolving Loan 33,208 4,000 (4,000) 0 0 0 Mortgage Notes Payable 1,049 (1,049) 0 0 0 Notes Payable 599 (599) 0 0 0 Convertible Subordinated Notes 10,000 (10,000) 0 0 0 Senior Unsecured Notes 0 85,000 85,000 85,000 85,000 ------- -------- -------- -------- Total Long-term Debt 15,648 85,000 85,000 85,000 Deferred Tax Liabilities 1,963 0 1,963 1,963 1,963 ------- -------- -------- -------- Total Liabiliites 49,882 107,369 110,858 115,302 PIK Preferred A 0 28,000 28,000 31,150 34,654 PIK Preferred B 0 0 0 0 0 Shareholders' Equity 36,094 (14,094) 22,000 17,410 14,525 ------- -------- -------- -------- Total Shareholders' Equity 36,094 50,000 48,560 49,179 ------- -------- -------- -------- Total Liabilities and Sharesholders' Equity $85,976 $157,370 $159,418 $164,480 Assumptions Accounts Receivable as a % of Sales 1.3% 1.3% 1.3% 1.3% Prepaid Expenses and Other Current as a % of Sales 1.0% 0.9% 1.0% 1.0% Accrued Liabilities as a % of Sales 0.0% 2.9% 2.5% 2.5% Accounts Payable as a % of Inventory 24.7% 24.7% 24.7% 24.7% Inventory per Store $142 $142 $136 $136
Projected As of December 31, -------------------------------------- 1999 2000 2001 -------- -------- -------- Assets Cash $100 $100 $100 Accounts Receivable 3,808 4,319 4,878 Inventory 48,812 54,776 61,416 Prepaid Expenses and Other Current 3,027 3,433 3,877 Deferred Tax Assets 2,321 2,321 2,321 -------- -------- -------- Total Current 58,068 64,950 72,592 Net PP&E 41,717 43,814 45,391 Goodwill, Net 66,842 63,893 60,943 Amortized Financing Fees 2,286 1,714 1,143 Other Assets 900 1,013 1,138 -------- -------- -------- Total Assets $169,813 $175,384 $181,207 Liabilities and Shareholders' Equity Accounts Payable $12,062 $13,536 $15,177 Accrued Liabilities 7,466 8,469 9,564 Line of Credit and Project Financing Facility 0 0 0 New Revolver 11,588 10,402 7,391 Current Portion of Long-term Debt 0 0 0 -------- -------- -------- Total Current Liabilities 31,116 32,407 32,132 Revolving Loan 33,208 0 0 0 Mortgage Notes Payable 0 0 0 Notes Payable 0 0 0 Convertible Subordinated Notes 0 0 0 Senior Unsecured Notes 85,000 85,000 85,000 -------- -------- -------- Total Long-term Debt 85,000 85,000 85,000 Deferred Tax Liabilities 1,963 1,963 1,963 -------- -------- -------- Total Liabiliites 118,079 119,370 119,095 PIK Preferred A 38,553 42,890 47,715 PIK Preferred B 0 0 0 Shareholders' Equity 13,181 13,124 14,396 -------- -------- -------- Total Shareholders' Equity 51,734 56,014 62,112 -------- -------- -------- Total Liabilities and Sharesholders' Equity $169,813 $175,384 $181,207 Assumptions Accounts Receivable as a % of Sales 1.3% 1.3% 1.3% Prepaid Expenses and Other Current as a % of Sales 1.0% 1.0% 1.0% Accrued Liabilities as a % of Sales 2.5% 2.5% 2.5% Accounts Payable as a % of Inventory 24.7% 24.7% 24.7% Inventory per Store $136 $135 $135
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Leveraged Buyout Analysis Confidential (Dollars in thousands) Projected Cash Flow Statement
Projected for the Year Ending December 31, ---------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------ ------- ------- ------- ------- ------- Operating Activities Net Income $4,315 ($1,440) $618 $2,555 $4,280 $6,098 Depreciation 4,073 4,843 5,713 6,633 7,603 8,623 Amortization of Goodwill 254 3,521 3,521 3,521 3,521 3,521 (Increase)/Decrease in Accts Receivable (297) (469) (491) (512) (558) (Increase)/Decrease in Inventory (1,792) (4,667) (5,305) (5,964) (6,640) (Increase)/Decrease in Prepaid & Other Current (570) (373) (391) (407) (444) Increase/(Decrease) in Accounts Payable 443 1,153 1,311 1,474 1,641 Increase/(Decrease) in Accrued Liabilities 27 920 963 1,003 1,095 ------ ------- ------- ------- ------- ------- Total Operating Activities 8,643 4,735 6,417 8,796 10,999 13,336 Investing Activities Capital Expenditures (7,522) (7,700) (8,700) (9,200) (9,700) (10,200) (Increase)/Decrease in Other Assets 0 (41) (87) (100) (113) (125) ------ ------- ------- ------- ------- ------- Total Investing Activities (7,522) (7,741) (8,787) (9,300) (9,813) (10,325) Total Cash Provided/(Used) 1,121 (3,006) (2,370) (504) 1,186 3,011 Cash Available (13) 0 0 0 0 ------ ------- ------- ------- ------- ------- Additional Cash Needed (3,019) (2,370) (504) 0 0 Beginning Line of Credit Balance 34,327 5,695 8,714 11,085 11,588 10,402 Line Drawn/(Paydown) (1,121) 3,019 2,370 504 (1,186) (3,011) ------ ------- ------- ------- ------- ------- Ending Line of Credit Balance 33,208 8,714 11,085 11,588 10,402 7,391 Beginning Cash Balance 87 87 100 100 100 100 Cash Provided/(Used) 0 13 0 0 0 0 ------ ------- ------- ------- ------- ------- Ending Cash Balance $87 $100 $100 $100 $100 $100
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Leveraged Buyout Analysis Confidential (Dollars in thousands) New Store Model
Sales Ramp-up Average Sales % Growth ------------- --------- Year 1 $400 NM Year 2 550 37.5% Year 3 650 18.2% Year 4 730 12.3% Year 5 840 15.1% Thereafter NM 2.5%
Number of New Stores Opened 1991 97 A 1997 25 E 1992 37 A 1998 35 E 1993 16 A 1999 40 E 1994 26 A 2000 45 E 1995 44 A 2001 50 E 1996 40 E 2002 50 E
Projected Retail Sales
Sales from Stores in Model -------------------------------------------------------------------------- Stores At Year 1 Year 2 Year 3 Year 4 Year 5 Thereafter Total Sales Year End ------- ------- ------- ------- ------- ------------ ----------- -------- 1996 $12,661 $21,722 $15,361 $12,151 $32,739 $84,485 $0 $179,119 260 1997 $10,000 $18,992 $27,153 $18,433 $13,985 $119,785 $0 $208,348 285 1998 $14,000 $13,750 $23,738 $32,583 $21,761 $138,307 $0 $244,139 320 1999 $16,000 $19,250 $16,250 $28,487 $37,470 $164,070 $0 $281,526 360 2000 $18,000 $22,000 $22,750 $18,250 $32,760 $206,578 $0 $320,338 405 2001 $20,000 $24,750 $26,000 $25,550 $20,988 $245,321 $0 $362,609 455 2002 $0 $0 $0 $0 $0 $0 $0 $0 505
Projected Rent Expense
Rent Expense Total Total Rent Total Rent Expense per Store Stores Expense as a % of Sales ------------ ------ ---------- ------------------ 1995 A $60 224 $13,397 8.2% 1996 61 260 15,804 8.2% 1997 65 285 18,415 8.2% 1998 67 320 21,449 8.2% 1999 68 360 24,627 8.2% 2000 69 405 27,937 8.2% 2001 69 455 31,548 8.2% 2002 0 505 0 8.2%
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Leveraged Buyout Analysis Confidential (Dollars in thousands) Capital Expenditures, Depreciation and Amortization and Tax Schedule
Capital Expenditures Projected for the Year Ending December 31, -------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------ ------ ------ ------ ------ ------- Base CapEx $3,522 $5,200 $5,200 $5,200 $5,200 $5,200 New Stores CapEx $100 Per Store 4,000 2,500 3,500 4,000 4,500 5,000 ------ ------ ------ ------ ------ ------- Total CapEx $7,522 $7,700 $8,700 $9,200 $9,700 $10,200 Depreciation and Amortization Schedule Projected for the Year Ending December 31, -------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------ ------ ------ ------- ------- ------- Existing PP&E $3,321 $3,321 $3,321 $3,321 $3,321 $3,321 Total New Capital Expenditure 10 Avg Life 1996 752 752 752 752 752 752 1997 770 770 770 770 770 1998 870 870 870 870 1999 920 920 920 2000 970 970 2001 1,020 2002 ------ ------ ------ ------- ------- ------- Total Depreciation 4,073 4,843 5,713 6,633 7,603 8,623 Amortization of Existing Goodwill 254 254 254 254 254 254 Amortization of New Goodwill 0 2,696 2,696 2,696 2,696 2,696 Amortization of Deferred Financing Fees 0 571 571 571 571 571 ------ ------ ------ ------- ------- ------- Total Amortization 254 3,521 3,521 3,521 3,521 3,521 ------ ------ ------ ------- ------- ------- Total Depreciation and Amortization $4,327 $8,364 $9,234 $10,154 $11,124 $12,144 Tax Schedule Projected for the Year Ending December 31, -------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------ ------ ------ ------ ------ ------- Pretax Income $7,368 ($433) $2,997 $6,225 $9,100 $12,130 Plus: New Goodwill Amortization 0 2,696 2,696 2,696 2,696 2,696 Plus: Goodwill Amortization 254 254 254 254 254 254 ------ ------ ------ ------ ------ ------- Total Taxable Income 7,622 2,517 5,947 9,174 12,050 15,080 Tax Rate 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% ------ ------ ------ ------ ------ ------- Total Income Taxes $3,053 $1,007 $2,379 $3,670 $4,820 $6,032
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Leveraged Buyout Analysis Confidential (Dollars in thousands) Debt Schedule
Projected for the Year Ending December 31, -------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------ ------ ------ ------ ------ ------- Short-term Debt Line of Credit Beginning Balance 0 0 0 0 0 Annual Interest Payment LIBOR +175 bps 7.3% 0 0 0 0 0 Additions/(Redemptions) 0 0 0 0 0 Ending Balance 15,440 0 0 0 0 0 Average Balance 0 0 0 0 0 Ending Balance Pro Forma 0 0 0 0 0 Project Financing Facility Beginning Balance 2,000 0 0 0 0 0 Annual Interest Payment Prime + 25 bps 8.8% 154 0 0 0 0 0 Additions/(Redemptions) (2,000) 0 0 0 0 0 Ending Balance 0 0 0 0 0 0 New Revolver Beginning Balance 5,695 8,714 11,085 11,588 10,402 Annual Interest Payment 8.0% 456 697 887 927 832 Additions/(Redemptions) 3,019 2,370 504 (1,186) (3,011) Ending Balance 8,714 11,085 11,588 10,402 7,391
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Leveraged Buyout Analysis Confidential (Dollars in thousands) Debt Schedule (Cont'd)
Projected for the Year Ending December 31, -------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------ ------ ------ ------ ------ ------- Long-term Debt Revolving Loan Beginning Balance(total incl. current portion) 8,000 0 0 0 0 0 Annual Interest Payment LIBOR +175 bps 7.3% 584 0 0 0 0 0 Additions/(Redemptions) (2,000) (2,000) 0 0 0 0 Ending Balance 6,000 0 0 0 0 0 Ending Balance Pro Forma 0 0 0 0 0 0 Mortgage Notes Payable Beginning Balance 1,049 0 0 0 0 0 Annual Interest Payment 8.6% 90 0 0 0 0 0 Additions/(Redemptions) 0 0 0 0 0 Ending Balance 1,049 0 0 0 0 0 Ending Balance Pro Forma 0 0 0 0 0 0 Notes Payable Beginning Balance(total incl. current portion) 804 0 0 0 0 0 Annual Interest Payment 7.5% 60 0 0 0 0 0 Additions/(Redemptions) (85) (120) 0 0 0 0 Ending Balance 719 0 0 0 0 0 Ending Balance Pro Forma 0 0 0 0 0 0 Convertible Subordinated Notes Beginning Balance 10,000 0 0 0 0 0 Annual Interest Payment 8.0% 800 0 0 0 0 0 Additions/(Redemptions) 0 0 0 0 0 0 Ending Balance 10,000 0 0 0 0 0 Ending Balance Pro Forma 0 0 0 0 0 0 PIK Preferred A Beginning Balance 28,000 31,150 34,654 38,553 42,890 Annual Interest Payment 11.3% 3,150 3,504 3,899 4,337 4,825 Additions/(Redemptions) 0 0 0 0 0 Ending Balance 31,150 34,654 38,553 42,890 47,715 PIK Preferred B Beginning Balance 0 0 0 0 0 Annual Interest Payment 11.3% 0 0 0 0 0 Additions/(Redemptions) 0 0 0 0 0 Ending Balance 0 0 0 0 0 Senior Unsecured Notes Beginning Balance 85,000 85,000 85,000 85,000 85,000 Annual Interest Payment 11.8% 9,988 9,988 9,988 9,988 9,988 Additions/(Redemptions) 0 0 0 0 0 Ending Balance 85,000 85,000 85,000 85,000 85,000 Zero Coupon Bonds Beginning Balance 0 0 0 0 0 Annual Interest Payment 11.3% 0 0 0 0 0 Additions/(Redemptions) 0 0 0 0 0 Ending Balance 0 0 0 0 0 Total Interest Payments 1,689 13,138 13,492 13,886 14,325 14,813 Cash Interest Income 5.0% (2) (2) (2) (2) (2) (2) ------ ------ ------ ------ ------ ------- Net Interest Expense 1,686 13,136 13,490 13,884 14,323 14,811
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Leveraged Buyout Analysis Confidential (Dollars in thousands) Return Analysis Projected Value of Equity
2001 -------- Projected EBITDA 35,092 Projected Enterprise Value 5.0 x 175,460 Based on 6.0 x 210,552 Multiple of EBITDA 7.0 x 245,644 Less: Net Fixed Obligations (140,007) Projected Equity Value 5.0 x 35,453 Based on 6.0 x 70,545 Multiple of EBITDA 7.0 x 105,637
Equity Ownership
Pro Forma for Offerings ------------- Common 81.0% PIK Preferred A 15.0% PIK Preferred B 0.0% Senior Secured Note Holders 4.0% Existing Shareholders 0.0%
5-Year Return Analysis Common Equity 5.0 x (22,000) 0 0 0 0 28,717 4.5% 6.0 (22,000) 0 0 0 0 57,142 17.2% 7.0 (22,000) 0 0 0 0 85,566 25.4% PIK Preferred A 5.0 x (28,000) 0 0 0 0 53,033 11.2% 6.0 (28,000) 0 0 0 0 58,297 13.0% 7.0 (28,000) 0 0 0 0 63,561 14.6% PIK Preferred B 5.0 x 0 0 0 0 0 0 NA 6.0 0 0 0 0 0 0 NA 7.0 0 0 0 0 0 0 NA Senior Secured Notes 5.0 x (85,000) 9,988 9,988 9,988 9,988 96,406 9.5% 6.0 (85,000) 9,988 9,988 9,988 9,988 97,810 9.7% 7.0 (85,000) 9,988 9,988 9,988 9,988 99,213 9.9% PIK Preferred B and Common 5.0 x (22,000) 0 0 0 0 28,717 4.5% 6.0 (22,000) 0 0 0 0 57,142 17.2% 7.0 (22,000) 0 0 0 0 85,566 25.4%
Dillion, Read & Co., Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Recapitalization Analysis Confidential (Dollars in thousands) Transaction Summary SHAREHOLDER DIVIDEND Current Common Shares Out 6,548,411 Dividend per Share $ 5.00 ---------- Value of Common Shares 32,742 Options Outstanding 974 Average Exercise Price $ 8.62 Proposed Price per Share $ 5.00 ---------- Value of Options ($ 3,530) TOTAL DIVIDENDS DISTRIBUTED $29,212
GOODWILL CALCULATION Purchase Price of Equity $0 Plus: Transaction Fees and Expenses 0 Less: Book Value of Equity 0 ---- TOTAL GOODWILL 0 Years of Amortization 25 Annual Goodwill Expense 0
FEES AND EXPENSES Transaction Fees $ 526 Transaction Expenses 1,000 Financing Fees 3,500 Financing Expenses 500 ------ TOTAL FEES AND EXPENSES $5,526 Deferred Financing Fees $4,000 Years of Amortization 7 ------ Annual Amortization of Financing Fees $ 571
SOURCES OF FUNDS % of Total Coupon Warrants ---------- ------ --------- Common Equity $ 0 0% NM 0.0% PIK Preferred A $ 0 0% 11.3% 15.0% PIK Preferred B $ 0 0% 11.3% 0.0% Senior Unsecured Notes $67,946 100% 11.8% 4.0% Revolver $ 0 0% 8.0% ------- TOTAL SOURCES OF FUNDS $67,946 100%
USES OF FUNDS Dividend to Shareholders $29,212 Revolving Loan 6,000 Mortgage Notes 1,049 Notes 719 Convertible Subordinated 10,000 Line of Credit 15,440 Fees and Expenses 5,526 ------- TOTAL USES OF FUNDS $67,946
PRO FORMA CAPITALIZATION 1996 Pro Forma 1997 1998 1999 2000 2001 -------------- ---------- ---------- ---------- ---------- ---------- Total Long-term Debt 67,946 67,946 67,946 67,946 67,946 67,946 Total Debt 67,946 69,489 70,313 69,196 67,946 67,946 Net Debt 67,859 69,389 70,213 69,096 66,211 61,498 Total Equity 5,356 8,088 12,949 19,820 28,494 38,990 Total Book Capitalization 73,302 77,577 83,262 89,016 96,440 106,935 CREDIT STATISTICS EBIT / Cash Interest (1) 1.3x 1.6x 2.0x 2.4x 2.8x 3.2x EBITDA / Cash Interest (1) 1.8 2.3 2.8 3.3 3.9 4.4 EBITDA - CapX /Cash Interest (1) 0.9 1.3 1.8 2.2 2.7 3.1 EBIT /Total Interest 1.3 1.6 2.0 2.4 2.8 3.2 EBITDA / Total Interest 1.8 2.3 2.8 3.3 3.9 4.4 EBITDA - CapX /Total Interest 0.9 1.3 1.8 2.2 2.7 3.1 Cash Fixed Charge Coverage Ratio 1.1 1.6 2.0 2.4 2.8 3.2 Total Fixed Obligations/Total Book Capitalization (2) 92.7% 89.6% 84.4% 77.7% 70.5% 63.5% Total Debt / EBITDA 4.7 3.8x 3.1x 2.5x 2.2x 1.9 Total Debt/EBIT 6.7 5.5 4.3 3.5 3.0 2.6 Total Debt / Total Capitalization 92.7% 89.6% 84.4% 77.7% 70.5% 63.5% Net Debt / Total Capitalization 92.6% 89.4% 84.3% 77.6% 68.7% 57.5% Total Debt / Common Equity 12.7x 8.6x 5.4x 3.5x 2.4x 1.7
Note 1: Excludes PIK preferred and zero coupon bonds. Note 2: Includes PIK preferred and zero coupon bonds in total fixed obligations. Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Recapitalization Analysis Confidential (Dollars in thousands) VALUATION ANALYSIS
Dividend per Share --------------------------------------------------------------- $5.00 $6.00 $7.00 $8.00 $9.00 --------- --------- ---------- ---------- --------- Shares Outstanding 6,548.4 6,548.4 6,548.4 6,548.4 6,548.4 Total Dividends $32,742.1 $39,290.5 $45,838.9 $52,387.3 $58.935.7 Projected 1997 Net Income 2,732 2,192 1,652 1,112 572 Net Income per Share $ 0.42 $ 0.33 $ 0.25 $ 0.17 $ 0.09 1997 Price Earnings Multiple 13.4x 13.4x 13.4x 13.4 13.4 Implied Trading Price per Share $ 5.61 $ 4.50 $ 3.39 $ 2.28 $ 1.17 Plus: Dividend per Share 5.00 6.00 7.00 8.00 9.00 Implied Total Value per Share $ 10.61 $ 10.50 $ 10.39 $ 10.28 $ 10.17
Dillion, Read & Co. Inc. - -------------------------------------------------------------------------------- LESLIE'S POOLMART RECAPITALIZATION ANALYSIS Confidential (Dollars in thousands) PROJECTED INCOME STATEMENT
Projected For the Year Ending December 31, --------------------------------------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------------ ------------ ------------ ------------ ------------ ------------ Sales Retail 179,119 208,348 244,139 281,526 320,338 362,609 Mail Order 7,723 8,300 8,300 8,300 8,300 8,300 Service 4,798 6,661 7,660 8,809 10,131 11,651 -------- -------- -------- -------- -------- -------- Total Sales 191,640 223,309 260,099 298,635 338,769 382,559 Cost of Goods Sold 118,919 137,691 159,925 183,664 208,632 235,947 -------- -------- -------- -------- -------- -------- Gross Profit 72,721 85,617 100,174 114,972 130,137 146,612 Operating Expenses SG&A 58,241 67,495 77,510 87,970 99,250 111,770 Less: Public Company Expenses 0 (250) (250) (250) (250) (250) -------- -------- -------- -------- -------- -------- EBITDA 14,480 18,372 22,914 27,251 31,137 35,092 Depreciation and Amortization Depreciation 4,073 4,843 5,713 6,633 7,603 8,623 Amortization of Existing Goodwill 254 254 254 254 254 254 Amortization of New Goodwill 0 0 0 0 0 0 Amortization of Financing Fees 0 571 571 571 571 571 -------- -------- -------- -------- -------- -------- Total Depreciation and Amortization 4,327 5,669 6,539 7,459 8,429 9,449 -------- -------- -------- -------- -------- -------- EBIT 10,153 12,704 16,376 19,793 22,708 25,643 Interest Expense Existing Debt 2,787 0 0 0 0 0 Revolver 0 0 123 189 100 0 Zero Coupon Bonds 0 0 0 0 0 0 Senior Unsecured Notes 0 7,984 7,984 7,984 7,984 7,984 Interest Income (2) (2) (2) (2) (2) (2) -------- -------- -------- -------- -------- -------- Net Interest Expense 2,785 7,982 8,105 8,171 8,082 7,982 -------- -------- -------- -------- -------- -------- Pretax Income 7,368 4,722 8,271 11,622 14,627 17,662 Income Taxes 3,053 1,990 3,410 4,750 5,952 7,166 -------- -------- -------- -------- -------- -------- NET INCOME $ 4,315 $ 2,732 $ 4,861 $ 6,871 $ 8,674 $ 10,495
- ------------------------------------------------------------------------------------------------------------------------------------ ASSUMPTIONS Sales Growth Retail 19.2% 16.3% 17.2% 15.3% 13.8% 13.2% Mail Order -2.8% 7.5% 0.0% 0.0% 0.0% 0.0% Service 13.0% 38.8% 15.0% 15.0% 15.0% 15.0% Margins Gross Profit 37.9% 38.3% 38.5% 38.5% 38.4% 38.3% SG&A 30.4% 30.2% 29.8% 29.5% 29.3% 29.2% EBITDA 8.1% 8.8% 9.4% 9.7% 9.7% 9.7% EBIT 5.7% 6.1% 6.7% 7.0% 7.1% 7.1% Net Income 2.4% 1.3% 2.0% 2.4% 2.7% 2.9% - ------------------------------------------------------------------------------------------------------------------------------------
DILLION, READ & CO. INC. - -------------------------------------------------------------------------------- CONFIDENTIAL Leslie's Poolmart Recapitalization Analysis (Dollars in thousands) PROJECTED BALANCE SHEET
Projected As of December 31, ------------------------------------------------------- Assets 1996 ADJUSTMENTS 1996 PRO FORMA 1997 ------- ----------- -------------- ------- Cash $ 87 0 $ 87 $ 100 Accounts Receivable 2,550 0 2,550 2,847 Inventory 37,048 0 37,048 38,840 Prepaid Expenses and Other Current 1,693 0 1,693 2,263 Deferred Tax Assets 2,321 0 2,321 2,321 -------- ----------- -------------- ------- Total Current 43,699 43,699 46,371 Net PP&E 33,307 0 33,307 36,164 Goodwill, Net 8,298 0 8,298 8,044 Amortized Financing Fees 0 4,000 4,000 3,429 Other Assets 672 0 672 713 -------- ----------- -------------- ------- TOTAL ASSETS $ 85,976 $89,976 $94,721 Liabilities and Shareholders' Equity Accounts Payable $ 9,155 0 $ 9,155 $ 9,598 Accrued Liabilities 5,556 0 5,556 5,583 Line of Credit and Project Financing Facility 15,440 (15,440) 0 0 New Revolver 0 0 0 1,543 Current Portion of Long-term Debt 2,120 (2,120) 0 0 -------- ----------- -------------- ------- Total Current Liabilities 32,271 14,711 16,724 Revolving Loan 4,000 (4,000) 0 0 Mortgage Notes Payable 1,049 (1,049) 0 0 Notes Payable 599 (599) 0 0 Convertible Subordinated Notes 10,000 (10,000) 0 0 Senior Unsecured Notes 0 67,946 67,946 67,946 Zero Coupon Bonds 0 0 0 0 -------- ----------- -------------- ------- Total Long-term Debt 15,648 67,946 67,946 Deferred Tax Liabilities 1,963 0 1,963 1,963 -------- ----------- -------------- ------- Total Liabilities 49,882 84,620 86,633 PIK Preferred A 0 0 0 0 PIK Preferred B 0 0 0 0 Shareholders' Equity 36,094 (30,738) 5,356 8,088 -------- -------------- ------- Total Shareholders' Equity 36,094 5,356 8,088 -------- -------------- ------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 85,976 $89,976 $94,721 Projected As of December 31, ------------------------------------------------------- Assets 1998 1999 2000 2001 -------- --------- -------- -------- Cash $ 100 100 $ 1,735 $ 6,477 Accounts Receivable 3,316 3,808 4,319 4,878 Inventory 43,507 48,812 54,776 61,416 Prepaid Expenses and Other Current 2,636 3,027 3,433 3,877 Deferred Tax Assets 2,321 2,321 2,321 2,321 -------- --------- -------- -------- Total Current 51,881 58,068 66,585 78,939 Net PP&E 39,151 41,717 43,814 45,391 Goodwill, Net 7,790 7,536 7,282 7,028 Amortized Financing Fees 2,857 2,286 1,714 1,143 Other Assets 800 900 1,013 1,138 -------- --------- -------- -------- TOTAL ASSETS $102,478 $ 110,507 $120,408 $133,639 Liabilities and Shareholders' Equity Accounts Payable $ 10,751 $ 12,062 $ 13,536 $ 15,177 Accrued Liabilities 6,502 7,466 8,469 9,564 Line of Credit and Project Financing Facility 0 0 0 0 New Revolver 2,367 1,250 0 0 Current Portion of Long-term Debt 0 0 0 0 -------- --------- -------- -------- Total Current Liabilities 19,621 $ 20,778 22,005 24,741 Revolving Loan 0 0 0 0 Mortgage Notes Payable 0 0 0 0 Notes Payable 0 0 0 0 Convertible Subordinated Notes 0 0 0 0 Senior Unsecured Notes 67,946 67,946 67,946 67,946 Zero Coupon Bonds 0 0 0 0 -------- --------- -------- -------- Total Long-term Debt 67,946 $ 67,946 67,946 67,946 Deferred Tax Liabilities 1,963 1,963 1,963 1,963 -------- --------- -------- -------- Total Liabilities 89,530 90,687 91,914 94,649 PIK Preferred A 0 0 0 0 PIK Preferred B 0 0 0 0 Shareholders' Equity 12,949 19,820 28,494 38,990 -------- --------- -------- -------- Total Shareholders' Equity 12,949 19,820 28,494 38,990 -------- --------- -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $102,478 $ 110,507 $120,408 $133,639
ASSUMPTIONS 1996 1996 PRO FORMA 1997 -------- -------------- ------- Accounts Receivable as a % of Sales 1.3% 1.3% 1.3% Prepaid Expenses and Other Current as a % of Sal 1.0% 0.9% 1.0% Accrued Liabilities as a % of Sales 0.0% 2.9% 2.5% Accounts Payable as a % of Inventory 24.7% 24.7% 24.7% Inventory per Store $142 142 $136 Inventory Turns (1) 5.6x 5.6 3.9
1998 1999 2000 2001 ------- ------- ------- ------- ASSUMPTIONS Accounts Receivable as a % of Sales 1.3% 1.3% 1.3% 1.3% Prepaid Expenses and Other Current as a % of Sal 1.0% 1.0% 1.0% 1.0% Accrued Liabilities as a % of Sales 2.5% 2.5% 2.5% 2.5% Accounts Payable as a % of Inventory 24.7% 24.7% 24.7% 24.7% Inventory per Store $136 $136 $135 $135 Inventory Turns (1) 3.9 3.4 3.5 3.5
Notes: (1) Excludes rent expense. Based on annual average inventory. Dillion, Read & Co., Inc. - -------------------------------------------------------------------------------- LESLIE'S POOLMART RECAPITALIZATION ANALYSIS Confidential (Dollars in thousands) Projected Cash Flow Statement
Projected for the Year Ending December 31, -------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------- ------ ------- ------ ------ ------ Operating Activities Net Income $ 4,315 $ 2,732 $ 4,861 $ 6,871 $ 8,674 $ 10,495 Depreciation 4,073 4,843 5,713 6,633 7,603 8,623 Amortization of Goodwill 254 825 825 825 825 825 (Increase)/Decrease in Accts Receivable (297) (469) (491) (512) (558) (Increase)/Decrease in Inventory (1,792) (4,667) (5,305) (5,964) (6,640) (Increase)/Decrease in Prepaid & Other Current (570) (373) (391) (407) (444) Increase/(Decrease) in Accounts Payable 443 1,153 1,311 1,474 1,641 Increase/(Decrease) in Accrued Liabilities 27 920 963 1,003 1,095 ------- ------- ------- ------- ------- -------- Total Operating Activities 8,643 6,211 7,963 10,417 12,698 15,038 Investing Activities Capital Expenditures (7,522) (7,700) (8,700) (9,200) (9,700) (10,200) (Increase)/Decrease in Other Assets (41) (87) (100) (113) (125) ------- ------- ------- ------- ------- -------- Total Investing Activities (7,522) (7,741) (8,787) (9,300) (9,813) (10,325) Total Cash Provided/(Used) 1,121 (1,530) (824) 1,117 2,885 4,713 Cash Available (13) 0 0 0 1,635 ------- ------- ------- ------- -------- Additional Cash Needed (1,543) (824) 0 0 0 Beginning Line of Credit Balance 34,329 0 1,543 2,367 1,250 0 Line Drawn/(Paydown) (1,121) 1,543 824 (1,117) (1,250) 0 ------- ------- ------- ------- ------- -------- Ending Line of Credit Balance 33,208 1,543 2,367 1,250 0 0 Beginning Cash Balance 87 87 100 100 100 1,735 Cash Provided/(Used) 0 13 0 0 1,635 4,713 ------- ------- ------- ------- ------- -------- Ending Cash Balance $ 87 $ 100 $ 100 $ 100 $ 1,735 $ 6,447
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Recapitalization Analysis Confidential (Dollars in thousands) NEW STORE MODEL
SALES RAMP-UP AVERAGE SALES % GROWTH ------------- -------- Year 1 $400 NM Year 2 550 37.5% Year 3 650 18.2% Year 4 730 12.3% Year 5 840 15.1% Thereafter NM 0.0%
NUMBER OF NEW STORES OPENED 1991 97 A 1997 25 E 1992 37 A 1998 35 E 1993 16 A 1999 40 E 1994 26 A 2000 45 E 1995 44 A 2001 50 E 1996 40 E 2002 50 E
PROJECTED RETAIL SALES
SALES FROM STORES IN MODEL -------------------------------------------------------------------------------------- STORES AT YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 THEREAFTER TOTAL SALES YEAR END ------- ------- ------- ------- ------- ---------- ----------- ---------- 1996 $12,661 $21,722 $15,361 $12,151 $32,739 $ 84,485 $ 179,119 260 1997 $10,000 $18,992 $27,153 $18,433 $13,985 $119,785 208,348 285 1998 $14,000 $13,750 $23,738 $32,583 $21,761 $138,307 244,139 320 1999 $16,000 $19,250 $16,250 $28,487 $37,470 $164,070 281,526 360 2000 $18,000 $22,000 $22,750 $18,250 $32,760 $206,578 320,338 405 2001 $20,000 $24,750 $26,000 $25,550 $20,988 $245,321 362,609 455 2002 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 0 505
PROJECTED RENT EXPENSE
RENT EXPENSE TOTAL TOTAL RENT TOTAL RENT EXPENSE PER STORE STORES EXPENSE AS A % OF SALES ------------ ------ ---------- ------------------ 1995 A $60 224 $13,397 ERR 1996 61 260 15,804 8.2% 1997 65 285 18,415 8.2% 1998 67 320 21,449 8.2% 1999 68 360 24,627 8.2% 2000 69 405 27,937 8.2% 2001 69 455 31,548 8.2% 2002 0 505 0 8.2%
Dillion, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Recapitalization Analysis Confidential (Dollars in thousands) Capital Expenditures, Depreciation and Amortization and Tax Schedule
Capital Expenditures Projected for the Year Ending December 31, -------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------ ------ ------ ------ ------ ------- Base CapEx $3,522 $5,200 $5,200 $5,200 $5,200 $5,200 New Stores CapEx $0 Per Store 4,000 2,500 3,500 4,000 4,500 5,000 ------ ------ ------ ------ ------ ------- Total CapEx $7,522 $7,700 $8,700 $9,200 $9,700 $10,200 Depreciation and Amortization Schedule Projected for the Year Ending December 31, --------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------ ------ ------ ------ ------ ------- Existing PP&E (1) 0 Avg Life $3,321 $3,321 $3,321 $3,321 $3,321 $ 3,321 Total New Capital Expenditures 0 Avg Life 1996 752 752 752 752 752 752 1997 770 770 770 770 770 1998 870 870 870 870 1999 920 920 920 2000 970 970 2001 1,020 2002 ------ ------ ------ ------ ------ ------- Total Depreciation 4,073 4,843 5,713 6,633 7,603 8,623 Amortization of Existing Goodwill 254 254 254 254 254 254 Amortization of New Goodwill 0 0 0 0 0 0 Amortization of Deferred Financing Fees 0 571 571 571 571 571 ------ ------ ------ ------ ------ ------- Total Amortization 254 825 825 825 825 825 ------ ------ ------ ------ ------ ------- Total Depreciation and Amortization $4,327 $5,669 $6,539 $7,459 $8,429 $ 9,449 Tax Schedule Projected for the Year Ending December 31, ---------------------------------------------------------- 1996 1997 1998 1999 2000 2001 ------ ------ ------ ------- ------- ------- Pretax Income $7,368 $4,722 $8,271 $11,622 $14,627 $17,662 Plus: New Goodwill Amortization 0 0 0 0 0 0 Plus: Goodwill Amortization 254 254 254 254 254 254 ------ ------ ------ ------- ------- ------- Total Taxable Income 7,622 4,976 8,525 11,876 14,881 17,916 Tax Rate 0.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0% ------ ------ ------ ------- ------- ------- Total Income Taxes $3,053 $1,990 $3,410 $ 4,750 $ 5,952 $ 7,166
Notes: (1) Based on net PP&E as of 12/31/95. Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Recapitalization Analysis Confidential (Dollars in thousands)
Debt Schedule Projected for the Year Ending December 31, --------------------------------------------------------- Short-term Debt 1996 1997 1998 1999 2000 2001 ------ ----- ----- ------ ------ ----- Line of Credit Beginning Balance 0 0 0 0 0 Annual Interest Payment LIBOR +175 bps 7.3% 0 0 0 0 0 Additions/(Redemptions) 0 0 0 0 0 Ending Balance 15,440 0 0 0 0 0 Average Balance 0 0 0 0 0 Ending Balance Pro Forma 0 0 0 0 0 Project Financing Facility Beginning Balance 2,000 0 0 0 0 0 Annual Interest Payment Prime + 25 bps 8.8% 154 0 0 0 0 0 Additions/(Redemptions) (2,000) 0 0 0 0 0 Ending Balance 0 0 0 0 0 0 New Revolver Beginning Balance 0 1,543 2,367 1,250 0 Annual Interest Payment 8.0% 0 123 189 100 0 Additions/(Redemptions) 1,543 824 (1,117) (1,250) 0 Ending Balance 1,543 2,367 1,250 0 0
Dillon, Read & Co., Inc. - -------------------------------------------------------------------------------- Leslie's Poolmart Recapitalization Analysis Confidential (Dollars in thousands) DEBT SCHEDULE (CONT'D)
PROJECTED FOR THE YEAR ENDING DECEMBER 31, ------------------------------------------ 1996 1997 1998 -------- -------- ------ Long-term Debt Revolving Loan Beginning Balance(total incl. current portion) 8,000 0 0 Annual Interest Payment LIBOR +175 bps 7.3% 584 0 0 Additions/(Redemptions) (2,000) (2,000) 0 Ending Balance 6,000 0 0 Ending Balance Pro Forma 0 0 0 Mortgage Notes Payable Beginning Balance 1,049 0 0 Annual Interest Payment 8.6% 90 0 0 Additions/(Redemptions) 0 0 0 Ending Balance 1,049 0 0 Ending Balance Pro Forma 0 0 0 Notes Payable Beginning Balance(total incl. current portion) 804 0 0 Annual Interest Payment 7.5% 60 0 0 Additions/(Redemptions) (85) (120) 0 Ending Balance 719 0 0 Ending Balance Pro Forma 0 0 0 Convertible Subordinated Notes Beginning Balance 10,000 0 0 Annual Interest Payment 8.0% 800 0 0 Additions/(Redemptions) 0 0 0 Ending Balance 10,000 0 0 Ending Balance Pro Forma 0 0 0 PIK Preferred A Beginning Balance 0 0 Annual Interest Payment 11.3% 0 0 Additions/(Redemptions) 0 0 Ending Balance 0 0 PIK Preferred B Beginning Balance 0 0 Annual Interest Payment 11.3% 0 0 Additions/(Redemptions) 0 0 Ending Balance 0 0 Senior Unsecured Notes Beginning Balance 67,946 67,946 Annual Interest Payment 11.8% 7,984 7,984 Additions/(Redemptions) 0 0 Ending Balance 67,946 67,946 Zero Coupon Bonds Beginning Balance 0 0 Annual Interest Payment 11.3% 0 0 Additions(Redemptions) 0 0 Ending Balance 0 0 Total Interest Payments 1,689 7,984 7,984 Cash Interest Income 5.0% (2) (2) (2) -------- -------- ------ Net Interest Expense 1,686 7,982 7,982 1999 2000 2001 -------- -------- ------ Long-term Debt Revolving Loan Beginning Balance(total incl. current portion) 0 0 0 Annual Interest Payment LIBOR +175 bps 7.3% 0 0 0 Additions/(Redemptions) 0 0 0 Ending Balance 0 0 0 Ending Balance Pro Forma 0 0 0 Mortgage Notes Payable Beginning Balance 0 0 0 Annual Interest Payment 8.6% 0 0 0 Additions/(Redemptions) 0 0 0 Ending Balance 0 0 0 Ending Balance Pro Forma 0 0 0 Notes Payable Beginning Balance(total incl. current portion) 0 0 0 Annual Interest Payment 7.5% 0 0 0 Additions/(Redemptions) 0 0 0 Ending Balance 0 0 0 Ending Balance Pro Forma 0 0 0 Convertible Subordinated Notes Beginning Balance 0 0 0 Annual Interest Payment 8.0% 0 0 0 Additions/(Redemptions) 0 0 0 Ending Balance 0 0 0 Ending Balance Pro Forma 0 0 0 PIK Preferred A Beginning Balance 0 0 0 Annual Interest Payment 11.3% 0 0 0 Additions/(Redemptions) 0 0 0 Ending Balance 0 0 0 PIK Preferred B Beginning Balance 0 0 0 Annual Interest Payment 11.3% 0 0 0 Additions/(Redemptions) 0 0 0 Ending Balance 0 0 0 Senior Unsecured Notes Beginning Balance 67,946 67,946 67,946 Annual Interest Payment 11.8% 7,984 7,984 7,984 Additions/(Redemptions) 0 0 0 Ending Balance 67,946 67,946 67,946 Zero Coupon Bonds Beginning Balance 0 0 0 Annual Interest Payment 11.3% 0 0 0 Additions(Redemptions) 0 0 0 Ending Balance 0 0 0 Total Interest Payments 7,984 7,984 7,984 Cash Interest Income 5.0% (2) (2) (2) -------- -------- ------ Net Interest Expense 7,982 7,982 7,982
Dillon, Read & Co. Inc. - -------------------------------------------------------------------------------- LESLIE'S POOLMART RECAPITALIZATION ANALYSIS Confidential (Dollars in thousands) RETURN ANALYSIS
PROJECTED VALUE OF EQUITY 2001 ------- Projected EBITDA 35,092 Projected Enterprise Value 5.0x 175,460 Based on 6.0x 210,552 Multiple of EBITDA 7.0x 245,644 Less: Net Fixed Obligations (61,498) Projected Equity Value 5.0x 113,961 Based on 6.0x 149,053 Multiple of EBITDA 7.0x 184,145
5-YEAR RETURN ANALYSIS Common Equity 5.0x 0 0 0 0 0 92,309 NA 6.0 0 0 0 0 0 120,733 NA 7.0 0 0 0 0 0 149,158 NA PIK Preferred A 5.0x 0 0 0 0 0 64,810 NA 6.0 0 0 0 0 0 70,073 NA 7.0 0 0 0 0 0 75,337 NA PIK Preferred B 5.0x 0 0 0 0 0 0 NA 6.0 0 0 0 0 0 0 NA 7.0 0 0 0 0 0 0 NA Senior Secured Notes 5.0x (67,946) 9,988 9,988 9,988 9,988 99,546 15.0% 6.0 (67,946) 9,988 9,988 9,988 9,988 100,950 15.2% 7.0 (67,946) 9,988 9,988 9,988 9,988 102,354 15.4% PIK Preferred B and Common 5.0x 0 0 0 0 0 92,309 ERR 6.0 0 0 0 0 0 120,733 ERR 7.0 0 0 0 0 0 149,158 ERR
EQUITY OWNERSHIP Pro Forma for Offerings ------------- Common 81.0% PIK Preferred A 15.0% PIK Preferred B 0.0% Senior Secured Note Holders 4.0% Existing Shareholders 0.0%
Estimation of Unlevered Asset Beta ---------------------------------- Equity Total Market D/ E/ Unlevered Company Name Beta (a) Net Debt* Equity ME + D ME + D Beta (b) - ------------ -------- --------- ------ ------ ------ -------- Leslie's Poolmart 1.05 33.1 89.4 27.0% 73.0% 0.81 Average Unlevered Asset Beta 0.81 ---- - --------------------------------------------------------------------------------------------------------------- After tax cost of Debt 5.0% 5.5% 6.0% Estimation of Weighted Average Cost of Capital Under Hypothetical Capital Structures ------------------------------------------------------------------------------------ D/(ME+D) 20.0% 30.0% 40.0% D/ME 25.0% 42.9% 66.7% Implied Equity Beta (b) 0.973 1.087 1.240 Cost of Equity Over Bills (c) 13.5% 14.5% 15.8% Cost of Equity Over Bonds (d) 13.4% 14.2% 15.3% Average Cost of Equity 13.5% 14.3% 15.5% After Tax Cost of Debt (e) 5.0% 5.5% 6.0% Weighted Average Cost of Capital Based on Bills 11.8% 11.8% 11.9% Based on Bonds 11.7% 11.6% 11.6% ------------------------------------------------------ Average 11.8% 11.7% 11.7% ------------------------------------------------------ - -------------------------------------------------------------------------------------------------------
Notes: - ----------------------------------------- * Includes liquidation value of preferred stock. (a) Source: Bloomberg (02/24/97) (b) Assumes a debt beta of 0.17 as given by Reilly and Joehnk in The Journal of Finance, December, 1976, Table I, p.1394. Unlevered asset beta calculated as: [(D/(ME + D)) * Debt Beta + (ME/(ME + D)) * Equity Beta]. Equity beta under the hypothetical capital structures calculated as: [Asset Beta + (D/ME) * (Asset Beta - Debt Beta)]. Levered Beta = [1+((1-corporate tax rate)*(Debt/Market Equity))]*Unlevered Beta. As found in Financial Theory and Corporate Policy, Page 457, Third Edition, Copeland and Weston. (c) Cost of equity over bills calculated as: [Equity Beta * 8.40% + 5.35%]. The 8.40% figure is the short-horizon expected equity risk premium (large company stock total returns minus U.S. Treasury bill total returns; average based on annual data from 1926 to 1994) according to SBBI 1995 Yearbook (Ibbotson Associates). The 5.35% figure, our proxy for the risk-free rate, is the average yield on 3-Month Treasury Bills on 12/13/96. (d) Cost of equity over bonds calculated as: [Equity Beta * 7.00% + 6.57%]. The 7.00% figure is the long-horizon expected equity risk premium (large company stock total returns minus long-term government bond income returns; average based on annual data from 1926 to 1994) according to SBBI 1995 Yearbook (Ibbotson Associates). The 6.57% figure, our proxy for the risk-free rate, is the average yield on 30 Year Treasury Bonds on 8/20/96. (e) Pretax costs of debt were taken as the average yields for each class of bond on Bloomberg for 8/20/96. These were taxed at a rate of 40.0%, which approximates the average federal and state tax rates for the period beginning January,1993 under the Tax Reform Act of 1993. (Note: Pretax costs of debt used were A=7.16%, BBB=7.63%, BB=10.0% and B=11.5%) EX-18 4 REVISED FORM OF STOCKHOLDERS AGREEMENT EXHIBIT 18 TO 13E-3/A STOCKHOLDERS AGREEMENT AND SUBSCRIPTION AGREEMENT AMONG LESLIE'S POOLMART, INC. GREEN EQUITY INVESTORS II, L.P. 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 ANNEX A HERETO TABLE OF CONTENTS
Page ---- 1. Representations and Warranties.................................................. 1 (a) Company Representations..................................................... 1 (b) Stockholder Representations and Warranties.................................. 2 2. Subscription for Common Stock; Call Option...................................... 3 (a) Common Stock Subscription................................................... 3 (b) Call Option................................................................. 3 3. Compliance with Securities Law.................................................. 4 4. Transfers of Securities......................................................... 4 (a) Prohibition on Transfers.................................................... 4 (b) Transfer Procedure; Right of First Refusal.................................. 4 (c) Transfers to Related Transferees............................................ 5 (d) Legend on Certificates...................................................... 6 (e) Transfers in Violation of this Agreement.................................... 7 5. Company Call Option............................................................. 7 (a) Call Purchase Event and Purchase Price...................................... 7 (b) Exercise of Call Option..................................................... 8 6. Registration Rights............................................................. 8 (a) Demand Registration Rights.................................................. 8 (b) Piggyback Registration Rights; Cutbacks..................................... 9 (c) Expenses of Registration.................................................... 11 (d) Registration Procedures..................................................... 12 (e) Indemnification............................................................. 15 (f) Holdback Amount............................................................. 17 (g) Assignment and Assumption................................................... 17 (h) Stock Option Plans.......................................................... 18 7. Drag-Along Sales and Tag-Along Sales........................................... 18 (a) Drag-Along Sales............................................................ 18 (b) Optional Participation in Sales of Common Stock (Tag-Along Sales)........... 19 (c) Obligations of Drag-Along Sellers........................................... 20 8. Termination and Lapse of Rights and Restrictions; Applications to Other Stock and Adjustments........................................................... 20 9. Election of Directors........................................................... 20 10. Certain Additional Agreements................................................... 21 (a) Right to Participate in Securities Issuances................................ 21 (b) Right to Participate in Equity Repurchases.................................. 21 (c) Affiliate Transactions...................................................... 22 (d) Change of Control Transactions.............................................. 22 (e) Information................................................................. 22
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Page ---- 11. Notices........................................................................ 23 12. General........................................................................ 23 13. Additional Class II Stockholders............................................... 25 14. Arbitration.................................................................... 25 (a) Scope...................................................................... 25 (b) Deposition................................................................. 25 (c) JAMS....................................................................... 25 (d) Selection of Arbitrator.................................................... 25 (e) Governing Law.............................................................. 25 (f) Procedures................................................................. 26 (g) Award...................................................................... 26 15. Definitions.................................................................... 26 ANNEX A CAPITAL STRUCTURE.......................................................... A-1 ANNEX B TERMS OF NQ OPTION PLAN.................................................... B-1 ANNEX C TERMS OF INCENTIVE STOCK OPTION PLAN....................................... C-1
ii STOCKHOLDERS AGREEMENT This Stockholders Agreement (this "AGREEMENT") is entered into as of ____________, 1997, by and among (i) Leslie's Poolmart, Inc., a Delaware corporation (the "COMPANY"), (ii) Green Equity Investors II, L.P., a Delaware limited partnership ("GEI"), (iii) Michael J. Fourticq, Greg Fourticq, Richard H. Hillman, Brian P. McDermott and Manette J. McDermott, T.R.U.A. DTD 3/15/90 The McDermott Family Trust (collectively referred to as the "HPA GROUP") and (iv) Occidental Petroleum Corporation, a Delaware corporation ("OCCIDENTAL," and together with GEI and the HPA Group, the "CLASS I STOCKHOLDERS") and the individual stockholders named on the signature pages hereto (the "CLASS II STOCKHOLDERS"). WHEREAS, on the date hereof the Company has consummated a merger (the "MERGER") with Poolmart USA Inc., a Delaware corporation ("POOLMART"), pursuant to which certain of the outstanding shares of common stock of the Company, $.001 par value per share (which authorized class of stock is hereinafter called "COMMON STOCK"), remained outstanding and the shares of capital stock of Poolmart were converted into capital stock of the Company; and WHEREAS, concurrently with the Merger, GEI acquired ______ shares of Common Stock, the HPA Group collectively retained _______ shares of Common Stock, Occidental acquired ______ shares of Exchangeable Cumulative Redeemable Preferred Stock, Series A of the Company (the "PREFERRED STOCK") and warrants (the "WARRANTS") to purchase ________ shares of Common Stock, subject to adjustment (the "WARRANT SHARES") certain of the Class II Stockholders are subscribing for Common Stock and certain of the Class II Stockholders will acquire certain nonqualified options and incentive stock options, as described on Annex B and Annex C, respectively (collectively, the "OPTIONS" and the Common Stock issuable upon exercise thereof, the "OPTION SHARES"); and WHEREAS, the Company and the Class I and Class II Stockholders (collectively, the "STOCKHOLDERS") desire to enter into certain agreements concerning their holdings of Common Stock, Warrants, Warrant Shares, Options and Option Shares (collectively, the "SECURITIES"); NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Representations and Warranties. ------------------------------ (a) Company Representations. The Company hereby represents and ----------------------- warrants to the Class I and Class II Stockholders as follows: (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has full corporate power and authority to carry on its business as and where it is now being conducted. The Company has full corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and 1 the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company. This Agreement constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the enforceability hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). (ii) Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will violate or conflict with (A) any provision of the Certificate of Incorporation or Bylaws of the Company, or (B) any agreement, indenture, undertaking, permit, license or other instrument to which the Company is a party or by which it or any of its properties may be bound or affected, other than such violations and conflicts which are not reasonably likely to (1) prevent or materially delay consummation of the transactions contemplated by this Agreement or (2) prevent the Company from performing its obligations under this Agreement. (iii) The Company has no outstanding capital stock or securities convertible into or exchangeable or exercisable for any shares of its capital stock, nor any outstanding rights to subscribe for or to purchase, or any options for the purchase of, or any agreement providing for the issuance (contingent or otherwise) of any shares of its capital stock or any securities convertible into or exchangeable or exercisable for any shares of its capital stock, other than the Preferred Stock and the Securities . (b) Stockholder Representations and Warranties. Each Stockholder ------------------------------------------ hereby severally represents and warrants as follows: (i) If it is an entity, it is a corporation, limited partnership, trust or other entity duly organized and validly existing under the laws of its state of organization. (ii) It has full power and authority and, in the case of an individual, legal and fiduciary capacity to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby. This Agreement constitutes a legal, valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms, except as the enforceability hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). (iii) Each of the Class II Stockholders (A) as a result of his relationship with the Company and experience in financial matters, is able to evaluate the acquisition of Common Stock and Options, the business and proposed capital structure of the Company and the risks inherent therein; (B) has been given the opportunity to obtain any additional information or documents, and to ask questions and receive answers, from the officers and representatives of the Company to the extent necessary to evaluate the risks 2 and merits of an investment in the Company; (C) has determined that the acquisition of Common Stock and Options is consistent both in nature and amount, with his overall investment program and financial condition, and that his financial condition is such that he can afford to bear the economic risk of holding unregistered Securities for which there is no market and acknowledges that he may suffer a complete loss of such investment. (iv) (A) the Securities acquired by him are being acquired for his own account for investment, without any present intention of selling or further distributing the same, (B) acknowledges that that no liquid trading market currently exists or is expected to exist in the foreseeable future and as a result, such Stockholder may be unable to sell any of the Securities for an indefinite period of time and (C) acknowledges that the Company has no obligation, except as set forth in Section 6 hereof, to register any of the Securities. (v) Each member of the HPA Group represents and warrants that he or it is an accredited investor within the meaning of Regulation D under the Act. Each Stockholder acknowledges that the Company is relying upon the truth and accuracy of the above representations to a material degree in effectuating the transactions contemplated hereby. 2. Subscription for Common Stock; Call Option. ------------------------------------------ (a) Common Stock Subscription. Each Class II Stockholder reflected ------------------------- as a purchaser of Common Stock on Annex A hereto (a "PURCHASER") severally agrees to purchase, and the Company agrees to sell to such Purchaser, the number of shares of Common Stock set forth opposite his name on Annex A hereto, at the purchase price shown thereon. Each Purchaser severally agrees to make payment for the Subscription Shares by delivery to the Company of a certified check or wire transfer in the amount of the purchase price therefore. (b) Call Option. Each Class II Stockholder agrees that the Company ----------- and certain other Stockholders shall have a call ("Call Option") in respect of certain shares of Common Stock acquired pursuant to Section 2(a) above ("SUBSCRIPTION STOCK"), as well as in respect of the Non-Qualified Options described on Annex B hereto (the "NQ OPTIONS") and shares issued upon the exercise thereof. As to each holder of Subscription Stock, of an NQ Option or of shares issued upon the exercise thereof, the Call Option shall apply only to (i) two-thirds of all of such holder's shares of Subscription Stock, NQ Options and shares issued upon exercise of such NQ Options (collectively, "Callable Securities") if the Call Option is exercised before the first anniversary of the date hereof, and (ii) one-third of the holder's Callable Securities of each category if the Call Option is exercised on or after the first anniversary of the date hereof but before the second anniversary of the date hereof. Except as expressly provided in this Section 2(b), the Call Option shall not otherwise apply to Subscription Stock, NQ Options or shares issued upon the exercise thereof. Subscription Stock, NQ Options and shares issuable upon the exercise thereof that are Callable Securities are respectively hereinafter referred to as "Call Option Stock," "Call NQ Options" and "Call Option Shares." 3 3. Notice of Transfer; Compliance with Securities Law. In addition to -------------------------------------------------- the other applicable restrictions provided in this Agreement, each Stockholder agrees that prior to effecting any Transfer of any Securities (other than a Transfer to the Company) such Stockholder will give not less than 15 days' advance written notice to the Company describing the manner of such proposed Transfer. Each Stockholder further agrees that he or it will not effect such proposed Transfer until either (A) such Stockholder has provided to the Company, if so requested by the Company, an opinion of counsel reasonably satisfactory in form and substance to the Company that such proposed Transfer is exempt from registration under the Act and any applicable state securities laws, or (B) a registration statement under the Act covering such proposed Transfer has been filed by the Company and become effective under the Act and compliance with applicable state securities laws has been effected and in each case, the Company's independent public accountants have advised the Company that it is not reasonably likely that such Transfer will necessitate a new basis for accounting for the Company. Each Stockholder also agrees that he or it will not Transfer any Securities except in compliance with the registration requirements of the Act, the rules and regulations of the SEC thereunder, the relevant state securities laws applicable to the Stockholder's actions, and the applicable terms of this Agreement. The restrictions in this Section 3 shall remain in effect until, in the opinion of counsel for the Company, Securities held by the Stockholder are no longer subject to restrictions pursuant to the Act or applicable state securities law. 4. Transfers of Securities. ----------------------- (a) Prohibition on Transfers. Each of the members of the HPA ------------------------ Group, Occidental and each of the Class II Stockholders hereby agrees that such Stockholder will not Transfer any Securities (or any interest therein) now or hereafter at any time owned by such Stockholder, except for Transfers permitted pursuant to this Section 4, Section 5 or Section 7 of this Agreement (each such Transfer being a "PERMITTED TRANSFER"). (b) Transfer Procedure; Right of First Refusal. If any member of ------------------------------------------ the HPA Group, Occidental or any of the Class II Stockholders hereby shall have received a bona fide arm's-length written offer (a "BONA FIDE OFFER") which such Stockholder desires to accept from an independent party unrelated to such Stockholder (the "OUTSIDE PARTY") for the purchase of Securities for consideration consisting entirely of cash (it being understood that no sale for any other consideration would be a Permitted Transfer), then such Stockholder shall give a notice in writing (the "OPTION NOTICE") to each Class I Stockholder and the Company setting forth such desire, which notice shall set forth at least the name and address of the Outside Party and the price and terms of the Bona Fide Offer and be accompanied by a copy of the Bona Fide Offer. Upon the giving of such Option Notice, the Company, and to the extent the Company elects not to do so, the respective Stockholders set forth in the following sentence (each an "ELECTING STOCKHOLDER") shall have an option to purchase all, but not less than all, of the Securities specified in the Option Notice, such option to be exercised within 30 days after the giving of such Option Notice by giving a counter-notice (the "ELECTION NOTICE") to the Stockholder. If the Stockholder sending an Option Notice is (i) Occidental or a Class II Stockholder, then GEI and the HPA Group shall be entitled to be Electing Stockholders; or (ii) a member of the HPA Group, then GEI and the other members of the HPA Group shall be entitled to be Electing 4 Stockholders. Where more than one Electing Stockholder desires to participate in a purchase pursuant to an Option Notice, such Stockholders shall participate, pro rata based upon their respective Equity Ownership in the Company, with the portion attributable to Stockholders declining to be Electing Stockholders being redistributed to the remaining Stockholders pro rata based upon their respective Equity Ownership in the Company, it being understood that the Company may elect to purchase up to all of the Securities and any remainder shall be prorated as aforesaid. The Company and, if applicable, the Electing Stockholders shall be severally obligated to purchase, and the Stockholder shall be obligated to sell, the Securities covered by such Election Notice at the cash price and terms indicated in the Bona Fide Offer, provided that the closing of the purchase by the Electing Stockholder shall be held on a business day within 30 days after the giving of the Election Notice at 10:30 a.m., California time, at the principal executive office of the Company, or at such other time and place as may be mutually agreed to by the Stockholder, the Company and, if applicable, the Electing Stockholders. If an Election Notice is not timely given by the Company and/or one or more Electing Stockholders within the period specified above after an Option Notice has been given, the Stockholder thereafter, at any time within a period of four months from the giving of such Option Notice, may Transfer all (but not less than all) of the Securities covered by such Option Notice to the Outside Party at the cash price and terms contained in the Bona Fide Offer; provided, however, that such Outside Party and such Securities shall thereafter be subject to and bound by all of the provisions of this Agreement as if such party were a Class II Stockholder except as otherwise provided in Section 6(g) and, as a condition precedent to the completion of such Transfer of Securities to such Outside Party, shall execute and deliver to the Company a written consent to such effect in form and substance satisfactory to the Company; and provided, further, however, that to the extent that the Stockholder has not so Transferred such Securities to the Outside Party within such four- month period, then such Securities thereafter shall continue to be subject to all of the restrictions contained in this Agreement. Any election in any instance by the Company or any Stockholder entitled to be Electing Stockholders not to exercise its rights under this clause (b) shall not constitute a waiver of such rights with respect to any other actual or proposed Transfer of Securities. (c) Transfers to Related Transferees. Notwithstanding anything to -------------------------------- the contrary contained in clauses (a) and (b) of this Section 4, any Stockholder may Transfer Securities to a Related Transferee provided that such Related Transferee shall first (i) execute a written consent in form and substance satisfactory to the Company to be bound by all of the provisions of this Agreement, and (ii) give a duplicate original of such consent to the Company. In the event of any Transfer by a Stockholder to a Related Transferee of all or any part of his or its Securities (or in the event of any subsequent Transfer by any such Related Transferee to another Related Transferee of the Stockholder), such Related Transferee shall receive and hold such Securities subject to the terms of this Agreement and the rights and obligations hereunder of a Stockholder as though such Securities were still owned by the Stockholder, and such Related Transferee shall be deemed the Stockholder for the purposes of this Agreement. If the Related Transferee acquired Securities from a Stockholder, such Related Transferee shall be entitled to participate, collectively with the Stockholders of the same group, in the registration rights provided for in Section 6 hereof. There shall be no further Transfer of such Securities by a 5 Related Transferee except between and among such Related Transferee, the original Stockholder and other Related Transferees, or except as otherwise permitted by this Agreement. (d) Legend on Certificates. Each certificate of the Company issued ---------------------- to represent any of the Securities shall bear the following (or substantially equivalent) legends on the face or reverse side thereof: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY JURISDICTION. SUCH SECURITIES MAY NOT BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT PURSUANT TO (I) A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES THAT IS EFFECTIVE UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAW, OR (II) ANY EXEMPTION FROM REGISTRATION UNDER SUCH ACT, OR APPLICABLE STATE SECURITIES LAW, RELATING TO THE DISPOSITION OF SECURITIES, INCLUDING RULE 144, PROVIDED AN OPINION OF COUNSEL IS FURNISHED TO THE COMPANY, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND/OR APPLICABLE STATE SECURITIES LAW IS AVAILABLE. THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER COMPLIES WITH THE PROVISIONS OF THE STOCKHOLDERS AGREEMENT DATED AS OF _____________, 1997, A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE COMPANY. Any stock certificate issued at any time in exchange or substitution for any certificate bearing such legends (except a new certificate issued upon the completion of a public offering) shall also bear such (or substantially equivalent) legends, unless the Security represented by such certificate is no longer subject to the provisions of this Agreement and, in the opinion of counsel for the Company, the Security represented thereby need no longer be subject to restrictions pursuant to the Act or applicable state securities law. (e) Transfers in Violation of this Agreement. The Company shall ---------------------------------------- not be required to record on its books and records, or otherwise to recognize or facilitate, any Transfer of Securities in violation of this Agreement, nor shall the Company be required to issue any certificate for Securities Transferred in violation of this Agreement. 6 5. Company "Call" Option. --------------------- (a) Call Purchase Event and Purchase Price. Upon the termination -------------------------------------- of a Class II Stockholder's employment with the Company or its subsidiaries for any reason (including, without limitation, the voluntary termination, dismissal, involuntary termination, Retirement, death or Permanent Disability of the Stockholder) (a "CALL PURCHASE EVENT"), the Company, and to the extent the Company elects not to do so and, in the case of the NQ Options, such purchase may otherwise be made pursuant to the NQ Option Plan, GEI, Michael J. Fourticq and Brian P. McDermott (or any Related Transferee of the latter) (collectively the "PURCHASING GROUP") may, collectively and pro rata based upon their respective Equity Ownership in the Company, exercise the Call Option by written notice (a "PURCHASE NOTICE") delivered to the Class II Stockholder within 90 days after such Call Purchase Event, elect to purchase, and, upon the giving of such notice, the Company, and if applicable, the Purchasing Group shall be severally obligated to purchase and the Class II Stockholder (and the Related Transferees, if any, of the Class II Stockholder) (in each case, the "SELLER") shall be obligated to sell all, or any lesser portion indicated in the Purchase Notice, of the Callable Securities owned at the time of the Call Purchase Event by the Seller, for consideration calculated as to each share of Call Option Stock and each Call Option Share or Call NQ Option, as the case may be, as follows: (i) in the case of voluntary termination by a Class II Stockholder holding Call NQ Options, an amount equal to the difference between the cash consideration per share paid in the Merger and the exercise price of the Call NQ Option; or (ii) in the case of any other termination (including without limitation dismissal, involuntary termination, death, Retirement or Permanent Disability of a Class II Stockholder holding Option Shares) ("OTHER TERMINATION"), of a Class II Stockholder holding Call NQ Options, the difference between the higher of (A) the cash consideration per share paid in the Merger and (B) the Fair Market Value of the underlying shares on the date of the Call Purchase Event, and the exercise price of the Call NQ Option; or (iii) in the case of voluntary termination by a Class II Stockholder holding Call Option Stock, the purchase price therefor; or (iv) in the case of Other Termination of a Class II Stockholder holding Call Option Stock, the higher of the Fair Market Value thereof on the date of the Call Purchase Event and the purchase price paid by the holder therefor; or (v) in the case of voluntary termination by a Class II Stockholder holding Call Option Shares, an amount equal to the cash consideration per share paid in the Merger; or (vi) in the case of Other Termination of a Class II Stockholder holding Call Option Shares, the higher of the Fair Market Value of such shares on the date of the Call Purchase Event and the amount payable pursuant to clause (v) above. 7 (b) Exercise of Call Option. In the event the Company and/or any ----------------------- Class I Stockholder elects not to participate in the purchase of Callable Securities pursuant to the Call Option, all remaining Purchasing Group Stockholders desiring so to participate may do so, pro rata amongst such remaining Purchasing Group Stockholders based upon their respective Equity Ownership in the Company, or in any other proportion as they may agree. The closing for all purchases and sales of Callable Securities pursuant to this Section 5 shall be at the principal executive offices of the Company at 10:30 a.m., California time, on the 60th day after the giving of the applicable Purchase Notice. The purchase price for the purchase and sale of Callable Securities shall be paid in cash, by certified or official bank check. The Seller(s) of Callable Securities sold pursuant to this Section 5 shall cause such Securities to be delivered to the Purchasing Group or the Company at the relevant closing free and clear of all liens, charges or encumbrances of any kind. Such Seller(s) shall take all actions as the Purchasing Group or the Company shall request as necessary to vest in the members of the Purchasing Group and/or the Company at such closing such Callable Securities, free and clear of all liens, charges and encumbrances incurred, voluntarily or involuntarily, by or through Seller(s). 6. Registration Rights. ------------------- (a) Demand Registration Rights. At any time on or after January -------------------------- 31, 1998, each of (i) GEI, (ii) the HPA Group collectively, and (iii) Occidental shall be entitled, respectively, to request a registration (a "DEMAND REGISTRATION") of no less than 50% of its Registrable Securities held by such Class I Stockholder, and at such time as the Company qualifies for registration of securities on Form S-3 or any successor short-form, one additional registration for a period not to exceed 180 days on such form. In such event, the Company shall: (i) as soon as reasonably practicable, and at its expense as set forth in Section 6 hereof, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of the Class I Stockholder's Registrable Securities as are specified in such request on the form specified in such request covering the Registrable Securities; (ii) use its best efforts to cause such registration to become and remain effective, as soon as practicable after receipt of the request of the Class I Stockholder, for the period necessary to effectuate the distribution contemplated by the Class I Stockholder; and (iii) at the request of the Class I Stockholder or the Manager, enter into and perform its obligations under an underwriting or purchase agreement (the "UNDERWRITING AGREEMENT") in customary form for secondary offerings of common stock, and otherwise reasonably acceptable to the parties, with the Manager (acting for itself and/or a group of syndicate of underwriters) and the Class I Stockholder. Notwithstanding the foregoing, the Company shall be entitled to delay any such Demand Registration if (i) the Company has determined in good faith that in view of pending negotiations or other material developments regarding the Company not otherwise required to be made public, disclosure of such information is not in the best interest of the Company (in which case the delay 8 in filing a Demand Registration may not exceed 90 days); (ii) the Company has initiated discussions with an underwriter regarding the sale of securities of the same class or convertible into the same class as the Registrable Securities in a registered primary public offering, in which case the Demand Registration may be delayed for up to 180 days from the effectiveness of such primary public offering, provided that the Company may not invoke the provision of clause (i) for more than an aggregate of 120 days in any twelve-month period, and may not invoke the delay in clause (ii) more than once in any such period. In addition, to the extent a Demand Registration is a "shelf" registration, the Company may interrupt such registration for the reasons set forth above, provided that sales under such shelf registration shall in all events be permitted for an aggregate of 180 days if requested. (b) Piggyback Registration Rights; Cutbacks. Each time the Company --------------------------------------- proposes to register under the Act (other than registration (A) on Forms S-4 or S-8 or any successor forms thereto, or (B) filed in connection with an exchange offer) securities of the same class as any of the Registrable Securities, the Company shall give written notice of such proposed registration (a "REGISTRATION NOTICE") to each Class I Stockholder and Class II Stockholder at least 20 days prior to the filing thereof. Each Registration Notice shall indicate that the recipient has the right (subject to the provisions of this Section 6) to propose that its Registrable Securities be included in such registration. Each Class I Stockholder and Class II Stockholder shall have the right to propose that a number of its Registrable Securities be included in such registration by written notice given to the Company within fifteen (15) days after the giving of such Registration Notice. Subject to the provisions of this Section 6, the Company shall include all such Registrable Securities in such registration; provided, -------- however, that: - ------- (i) if the registration is in whole or part an underwritten primary registration on behalf of the Company (whether or not it is also in part a Demand Registration or other secondary registration on behalf of any Company securityholders) and the managing underwriters of such offering determine that the aggregate amount of securities of the Company which all Stockholders and all other Company securityholders pursuant to future contractual rights to participate in such registration (such other Company securityholders, "FUTURE PARTICIPANTS") propose to include in such registration exceeds the maximum amount of securities that should be included therein, the Company will include in such registration, first, the ----- shares which the Company proposes to sell and second, securities to be sold ------ for the account of any Class I Stockholder pro rata among the Class I --- ---- Stockholders, and third, securities to be sold for the account of the Class ----- II Stockholders, pro rata among the Class II Stockholders and fourth, the --- ---- other securities to be sold for the account of Future Participants, pro --- rata among such Future Participants, in each case on the basis of the ---- relative Equity Ownership of the parties who have requested that securities owned by them be so included (it being agreed and understood, however, that such underwriters shall have the right to eliminate entirely the participation in such registration of all Stockholders and Future Participants); 9 (ii) if the registration is pursuant to an underwritten Demand Registration and the managing underwriters determine that the aggregate amount of securities which all Stockholders and all Future Participants propose to include in such registration exceeds the maximum amount of securities that should be included therein, the Company will include in such registration, first, the securities to be sold for the account of the ----- Class I Stockholders, pro rata among the Class I Stockholders, second, --- ---- ------ securities to be sold for the account of the Company, if any, third, ----- securities to be sold for the account of the Class II Stockholders, pro --- rata among the Class II Stockholders and fourth, securities to be sold for ---- ------ the account of the Future Participants electing to include securities in such registration, pro rata among such Future Participants, in each case, --- ---- on the basis of their relative Equity Ownership (it being agreed and understood, however, that such underwriters shall have the right to eliminate entirely the participation therein of the Company and all such Future Participants not entitled to demand inclusion of securities in such registration); (iii) if the registration is pursuant to an underwritten secondary registration other than as described in clause (ii) above on behalf of Future Participants and the managing underwriters determine that the aggregate amount of securities which all Future Participants and Stockholders propose to include in such registration exceeds the maximum number of securities that should be included therein, the Company will include in such registration first, the securities to be sold for the ----- account of the Future Participants, pro rata among the Future Participants, --- ---- second, securities to be sold for the account of the Company, if any, ------ third, securities to be sold for the account of the Class I Stockholders, ----- pro rata among such Stockholders and fourth, securities to be sold for the --- ---- ------ account of the Class II Stockholders, in each case, on the basis of their relative Equity Ownership (it being agreed and understood, however, that such underwriters shall have the right to eliminate the participation therein of the Company and the Stockholders entirely unless, on the date of such secondary registration, any Class I Stockholder electing to participate in such registration shall not theretofore have completed one Demand Registration in which all of the Registrable Securities it sought to include were sold, in which case any such Class I Stockholder may convert such registration into one governed by clause (ii) above); (iv) in the event that, as a result of the provisions of Section 6(b)(i) or (ii), a group of Stockholders which has exercised its right to request a Demand Registration is unable to register all of the Registrable Securities as to which the request was made, such Stockholder shall not be considered to have utilized a Demand Registration under Section 6(a); and. (v) in exercising the rights of Stockholders in respect of Registrable Securities in this Section 6, Stockholders comprising the holders of the Demand Registrations enumerated in clauses (i) through (iii) of Section 6(a) shall, if more than one Stockholder has or succeeds to such rights, exercise such rights and make all determinations hereunder acting by majority-in-interests based upon their respective ownership of Registrable Securities. 10 (c) Expenses of Registration. Whether or not any registration ------------------------ statement prepared and filed pursuant to Section 6(a) or (b) hereof is declared effective by the SEC (except where a Demand Registration is terminated, withdrawn or abandoned at the written request of a Class I Stockholder solely due to market conditions), the Company shall pay all expenses incident to Company's performance of or compliance with the registration requirements of this Agreement, including, without limitation, the following: (A) all SEC registration and filing fees and expenses; (B) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of Registrable Securities; (C) any and all expenses incident to its performance of, or compliance with, this Agreement, including, without limitation, any allocation of salaries and expenses of Company personnel or other general overhead expenses of Company, or other expenses for the preparation of historical and pro forma financial statements; (D) fees and expenses incurred in connection with the listing of Registrable Securities on each securities exchange or the NASDAQ Stock Market, as applicable, on which securities of the same class are then listed; (E) all transfer and/or exchange agent and registrar fees; (F) fees and expenses in connection with the qualification of the Registrable Securities under securities or "blue sky" laws including reasonable fees and disbursements of counsel for the underwriters in connection therewith; (G) mailing and printing expenses relating to the registration and distribution of Registrable Securities; (H) messenger and delivery expenses relating to the registration and distribution of Registrable Securities; (I) fees and out-of-pocket expenses of a single counsel for the selling Stockholders and (J) fees and out-of-pocket expenses of counsel for Company and its independent certified public accountants (including the expenses of any audit, review and/or "cold comfort" letters) and other persons, including special experts, retained by Company (collectively, clauses (A) through (J), "REGISTRATION EXPENSES"); Provided, however, that company shall not ----------------- be required to pay, and the stockholder shall pay, any discounts, commissions or fees of underwriters, selling brokers and dealers relating to the distribution of the Registrable Securities. (d) Registration Procedures. In the case of each registration ----------------------- effected by Company pursuant to this Agreement, Company shall keep the participating Stockholders advised in writing as to the initiation of each registration and as to the completion thereof. The Company shall (i) permit the Stockholder, the Manager, if any, and their respective counsel to make such investigation of Company as they may reasonably request, (ii) furnish to the participating Stockholders, the Manager and their respective counsel drafts of the registration statement and all amendments thereto, all prospectuses and supplements thereof prior to filing with the SEC and consider their comments and suggestions with respect to such documents, and (iii) not file any such registration statement, amendment, prospectus or supplement to which the participating Stockholders or the Manager shall reasonably object. At its expense, Company shall: (i) keep such registration effective and current as required by law for such period necessary to permit the Stockholder to complete the distribution described in the registration statement relating thereto, or for such period as may be agreed to in the Underwriting Agreement; 11 (ii) prepare and file with the SEC such amendments, post- effective amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act and the Underwriting Agreement and to keep such registration statement effective and current as required by law for that period of time specified above, in each case exclusive of any period during which the prospectus used in connection with such registration shall not comply with the requirements of Section 10 of the Securities Act, and respond as promptly as practicable to any comments received from the SEC with respect to such registration statement or any amendment thereto; (iii) furnish such number of copies of the registration statement, each amendment thereto, each preliminary prospectus, prospectuses, supplements and incorporated documents and other documents incident thereto as the Stockholder or the Manager from time to time may reasonably request; (iv) use its best efforts to register or qualify the Registrable Securities covered by such registration statement under the securities or "blue sky" laws of such jurisdictions as the Stockholder and the Manager shall reasonably request, and do any and all other acts and things which may be necessary or desirable to enable the Stockholder and the Manager to consummate the offering and disposition of Registrable Securities in such jurisdictions; provided, however, that the Company shall not, by virtue of --------- ------- this Agreement, be required to qualify generally to do business as a foreign corporation, subject itself to taxation, or consent to general service of process, in any jurisdiction wherein it would not, but for the requirements of this clause (iv), be obligated to be qualified; (v) notify the Stockholder and the Manager promptly and, if requested by any such person, confirm such notification in writing, (A) when a prospectus or any prospectus supplement has been filed with the SEC, and, with respect to a registration statement or any post-effective amendment thereto, when the same has been declared effective by the SEC, (B) of any request by the SEC for amendments or supplements to a registration statement or related prospectus, or for additional information, (C) of the issuance by the SEC of any stop order or the initiation of any proceedings for such or a similar purpose (and the Company shall make every reasonable effort to obtain the withdrawal of any such order at the earliest practicable time), (D) of the receipt by Company of any notification with respect to the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose (and the Company shall make every reasonable effort to obtain the withdrawal of any such suspension at the earliest practicable time), (E) of the occurrence of any event with requires the making of any changes to a registration statement or related prospectus so that such documents shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (and the Company shall promptly prepare and furnish to the Stockholder and the Manager a reasonable number of copies of a supplemented or 12 amended prospectus such that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading), and (F) of the Company's determination that the filing of a post-effective amendment to the Registration Statement shall be necessary or appropriate. Each Stockholder agrees that it shall, as expeditiously as possible, notify the Company at any time when a prospectus relating to a registration statement covering such Stockholder's Registrable Securities is required to be delivered under the Securities Act, of the happening of any event of the kind described in this clause (v) as a result of any information provided by such Stockholder in writing expressly for inclusion in such prospectus included in such registration statement and, at the request of the Company, promptly prepare and furnish to it such information as may be necessary so that, after incorporation into a supplement or amendment of such prospectus as thereafter delivered to the purchasers of such securities, the information so provided by the Stockholder shall not include an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Each Stockholder shall be deemed to have agreed by acquisition of such Registrable Securities that upon the receipt of any notice from the Company of the occurrence of any event of the kind described in clause (E) of this clause (v), such Stockholder shall forthwith discontinue its offer and disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Stockholder shall have received copies of a supplemented or amended prospectus which is no longer defective as contemplated by clause (E) of this clause (v) and, if so directed by the Company, shall deliver to the Company, at the Company's expense, all copies (other than permanent file copies) of the defective prospectus covering such Registrable Securities which are then in such Stockholder's possession; (vi) use its best efforts to cause all such Registrable Securities covered by such registration statement to be listed on each securities exchange or the Nasdaq Stock Market, as applicable, on which similar securities issued by Company are then listed, if the listing of such Registrable Securities is then permitted under the rules and regulations of such exchange or the Nasdaq Stock Market, as applicable; (vii) engage and provide a transfer agent for all Registrable Securities covered by such registration statement not later than the effective date of such registration statement; (viii) whether or not the Underwriting Agreement is entered into and whether or not any portion of the offering contemplated by such registration statement is an underwritten offering or is made through a placement or sales agent or any other entity, (A) make such representations and warranties to the underwriters, if any, in form, substance and scope as are customarily made in connection with an offering of common stock or other equity securities pursuant to any appropriate agreement and/or to a 13 registration statement filed on the form applicable to such registration; (B) obtain an opinion of counsel to the Company in customary form and covering such matters, of the type customarily covered by such opinions, as the Manager, if any, and as the Stockholder may reasonably request; (C) obtain a "cold comfort" letter or letters from the independent certified public accountants of Company addressed to the underwriters, if any, thereof, dated (i) the effective date of such registration statement and (ii) the date of the closing under the underwriting agreement relating thereto, such letter or letters to be in customary form and covering such matters of the type customarily covered, from time to time, by letters of such type and such other financial matters as the Manager, if any, may reasonably request; (D) deliver such documents and certificates, including officers' certificates, as may be reasonably requested by the underwriters, if any, therefor and the Manager, if any, thereof to evidence the accuracy of the representations and warranties made pursuant to clause (A) above and the compliance with or satisfaction of any agreements or conditions contained in the underwriting agreement or other agreement entered into by Company, and (E) undertake such obligations relating to expense reimbursement, indemnification and contribution as are provided in this Agreement; (ix) permit the Stockholder to participate in the preparation of such registration statement and include therein material acceptable to the Company and its counsel, furnished to Company in writing which, in the reasonable judgment of the Stockholder and its counsel, is required to be included therein; (x) use its best efforts to obtain the withdrawal of any order suspending the effectiveness of such registration statement by the SEC or any state securities authority as promptly as possible; and (xi) cooperate with the Stockholder to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and enable certificates for such Registrable Securities to be issued for such number of shares of Company Common Stock and registered in such names as Stockholder may reasonably request. (e) Indemnification. --------------- (i) The Company shall indemnify and hold harmless each Stockholder, each of its directors, officers and agents, each underwriter (as defined in the Securities Act) of such Registrable Securities, if any, and each person who controls (within the meaning of Section 15 of the Securities Act) such Stockholder or any underwriter of the Registrable Securities held by or issuable to such Stockholder, against all claims, losses, expenses, damages and liabilities, joint or several, including any of the foregoing incurred in settlement of any proceeding, commenced or threatened, (or actions in respect thereto) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, or based on any omission (or alleged omission) to state therein a material fact required to be 14 stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Act or any state securities law applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, and shall reimburse each Stockholder, each of its directors, officers and agents, each such underwriter and each person who controls such Stockholder or any such underwriter for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, provided, -------- however, that the Company shall not be liable in any such case to the ------- extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Stockholder or such underwriter specifically for use therein. The indemnity provided by this Section 6(e) shall be in addition to any liability which Company may otherwise have. (ii) Each Stockholder shall indemnify and hold harmless Company, each of its directors and officers, each underwriter, if any, and each person who controls Company or any of the underwriters within the meaning of the Act, against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse the Company or underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information pertaining to such Stockholder, which is furnished in writing to Company by such Stockholder specifically for use therein. (iii) If the indemnification provided for in this Section 6 is unavailable to or insufficient to hold harmless an Indemnified Party (as defined below) in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then Company and the Stockholder shall contribute to the amount paid or payable as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of Company on the one hand and the Stockholder on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Stockholder on the other and such person's relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company agrees that it would not be just and equitable if contribution pursuant to this Section 6(e) were determined by pro --- 15 rata allocation or by any other method of allocation which does not --- take account of the equitable considerations referred to above in this Section 6(e). The amount paid or payable by a party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section 6(e) shall include any legal or other expenses reasonably incurred by such party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. No person shall be required to contribute to any settlement effected without its consent, which consent shall not be unreasonably withheld. If, however, indemnification is available under this Section 6, the indemnifying parties shall indemnify each indemnified party to the fullest extent provided here without regard to the relative fault of such indemnifying party or indemnified party or any other equitable considerations. (iv) Each party entitled to indemnification under this Section 6(e) (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnity may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense, unless the Indemnified Party in its reasonable judgment determines that joint representation by counsel for the Indemnifying Party would be inappropriate due to actual or potential differing interests between the Indemnifying Party and the Indemnified Party in the conduct of the defense of such action, in which case the Indemnified Party shall be entitled to be represented by separate counsel selected by it, the reasonable fees and expenses of which shall be borne by the Indemnifying Party, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations hereunder, unless such failure resulted in actual detriment to the Indemnifying Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation. (v) Notwithstanding the foregoing, to the extent that the provisions on indemnification of the underwriters and their controlling persons contained in the Underwriting Agreement in connection with an underwritten public offering are in conflict with the foregoing provisions, the provisions in the Underwriting Agreement shall control as to indemnification of the underwriters and their controlling persons in the public offering. (vi) Notwithstanding the foregoing, in no event shall any Stockholder be liable under this Section 6(e) for an amount exceeding the net proceeds received by 16 Stockholder from the sale of its Registrable Securities pursuant to the registration rights granted to Stockholder hereunder. (f) Holdback Amount. Each Stockholder agrees that in the event of an --------------- underwritten public offering of Registrable Securities for the account of any Stockholder, such Stockholder and any Related Transferee thereof will not, without the written consent of the underwriters, offer for public sale (other than as part of such underwritten public offering) any Securities during the ten (10) days prior to and such number of days (not to exceed 180 days in the case of an initial public offering and 90 days in all other cases) after the effective date of the registration statement in connection with such public offering as the underwriters may reasonably request in writing. (g) Assignment and Assumption. For avoidance of doubt, the parties ------------------------- acknowledge that each Stockholder may assign its rights under this Section 6 as an incident to any permitted Transfer of Securities held by it to the Transferee of such Securities, and if the Stockholder retains any Securities, the rights under this Section 6 shall remain applicable to the retained Securities. If Securities are acquired from a Class I Stockholder, such Securities shall be entitled to participate in any Demand Registration as a member of the group enumerated in clauses (i) through (iii) of Section 6(a), without thereby increasing the aggregate number of Demand Registrations the Company may be required to effect. Each Stockholder shall promptly notify the Company in writing of each such assignment of rights, and the assignee shall execute such documentation as the Company may reasonably request to evidence its agreement to be bound by this Section 6. Registration rights shall not be assignable to any purchaser of Securities sold under Rule 144 or in any public securities sale. If the Company effects a business combination in which Stockholders receive securities of another issuer and such securities cannot be resold by the Stockholders without registration under the Securities Act, as a condition to the consummation of such business combination, the Company shall cause such issuer to assume the Company's obligations under this Section 6. (h) Stock Option Plans. After the IPO, the Company shall use its ------------------ reasonable efforts to register, on Form S-8 or any similar or successor form, the Securities underlying the ISOs and NQ Options so as to permit the Stockholders to dispose of Common Stock issuable upon the exercise thereof pursuant to Rule 144. 7. Drag-Along Sales and Tag-Along Sales. ------------------------------------ (a) Drag-Along Sales. ---------------- (i) Notwithstanding any other provision hereof, if GEI agrees to sell Securities held by it pursuant to a transaction in which more than 75% of the then-outstanding Common Stock of the Company will be sold to or acquired by a Third Party (either of such sales, a "DRAG-ALONG SALE"), then upon the demand of GEI, (i) in the case of Occidental and the Class II Stockholders, made at any time after the Closing Date and (ii) in the case of the HPA Group, made at any time after the fourth anniversary of the Closing Date (the HPA Group and the Class II Stockholders being collectively referred to for this purpose as "DRAG-ALONG SELLERS"), each Drag-Along Seller hereby agrees to sell 17 to such Third Party the same percentage of the total number of securities held by such Drag-Along Seller on the date of the Drag-Along Notice, as the number of Securities GEI is selling in the Drag-Along Sale bears to the total number of shares held by GEI as of the date of the Drag-Along Notice (the "SALE PERCENTAGE"), at the same price and form of consideration and on the same terms and conditions as GEI has agreed to with such Third Party. If the Drag-Along Sale is in the form of a merger transaction, the Drag- Along Seller agrees to vote his or her securities in favor of such merger and not to exercise any rights of appraisal or dissent afforded under applicable law. The provisions of this Section 7 shall apply regardless of the form of consideration received in the Drag-Along Sale. For purposes of Drag-Along Sales, the number of shares owned by each Drag-Along Seller shall include all shares underlying Options, which Options will be exercised by the Drag-Along Sellers immediately prior to and contingent upon consummation of the Drag-Along Sale. (ii) Prior to making any Drag-Along Sale, if GEI elects to exercise the option described in this Section 7, GEI shall provide the Drag-Along Seller to whom this Section 7 then applies with written notice (the "DRAG-ALONG NOTICE") not more than 60 nor less than 15 days prior to the proposed date of the drag-along sale (the "DRAG-ALONG SALE DATE"). The Drag-Along Notice shall set forth: (i) a general description of the transaction and the proposed amount and form of consideration to be paid per share offered by the Third Party; (ii) the aggregate number of Securities held by GEI as of the date that the Drag-Along notice is first given to a Drag-Along Seller; (iii) the Sale Percentage; and (iv) the Drag- Along Sale Date. (iii) On the Drag-Along Sale Date, each Drag-Along Seller shall deliver a certificate or certificates for the Sale Percentage of its Securities, duly endorsed for transfer with signatures guaranteed, to such Third Party in the manner and at the address indicated in the Drag-Along Notice against delivery of the purchase price therefor; provided, however, that in the event the Company has possession of any such certificates pursuant to this Agreement, upon the written request of the Drag-Along Seller at least five (5) business days in advance of-the Drag-Along Sale Date, the Company shall deliver such certificates to the purchaser at the time and in the manner described above. (b) Optional Participation in Sales of Common Stock (Tag-Along ---------------------------------------------------------- Sales). ------ (i) If GEI shall at any time desire to Transfer shares of Common Stock to a third party, other than ratably to its partners, then each of the HPA Group and the Class II Stockholders and their Related Transferees (collectively, a "TAG-ALONG SELLER") shall be entitled, to participate pro --- rata in such transfer at the same price and on the same terms and ---- conditions applicable to GEI, based upon their respective Fully Diluted Ownership in the Company. (ii) Each Tag-Along Seller shall have the right to Transfer up to a percentage of the number of shares specified in the Transfer Notice delivered pursuant to the following sentence by the aggregate number of shares of Common Stock then owned 18 by GEI. GEI shall deliver or cause to be delivered to each Tag-Along Seller a written notice (a "TRANSFER NOTICE") of a proposed tag-along sale no later than 30 days prior to the proposed closing thereof. Such notice shall make reference to the Tag-Along Sellers' rights under this Section 7(b) and shall describe in reasonable detail (A) the aggregate number of shares of Common Stock to be Transferred by GEI if none of the HPA Group or Class II Stockholders participates, (B) the aggregate number of shares of Common Stock then owned by GEI, (C) the person or entity to whom or which such shares of Common Stock are proposed to be Transferred, (D) the terms and conditions of the Transfer, including the consideration to be paid therefor, (E) the maximum percentage of its shares such Tag-Along Seller is entitled to include in the Transfer and (F) the proposed date, time and location of the closing of the Transfer. Each Stockholder receiving a Transfer Notice shall exercise its right to participate in a Transfer of Common Stock pursuant to this Section 7 by delivering to GEI a written notice (a "TAG-ALONG NOTICE") stating its election to do so and specifying the number of shares (which shall not exceed the number of shares determined for such Tag-Along Seller in the Transfer Notice) of Common Stock held by it to be Transferred no later than fifteen days after receipt of the Transfer Notice. Failure to provide a Tag-Along Notice within such fifteen-day period shall be deemed to constitute an election by such Stockholder not to exercise its rights pursuant to this Section 7, and GEI shall have 90 days following the expiration of such fifteen-day period in which to Transfer the number of shares equal to the difference between the number set forth in the Transfer Notice and the aggregate number of shares as to which GEI has received a Tag-Along Notice, on terms not more favorable to GEI than those set forth in the Transfer Notice. (iii) Each Tag-Along Seller shall be required to deliver at such closing the certificate or certificates representing the shares to be Transferred, duly endorsed for transfer, and shall be entitled to receive the net proceeds allocable to the Transfer thereof, after deduction of such Tag-Along Seller's proportionate share of the expenses of Transfer, which share shall not exceed an amount proportionate to the amount of such expenses allocated to GEI. If, at the end of the 90-day period following the expiration of such fifteen-day period, GEI has not completed the Transfer of shares of Common Stock, GEI may not sell the shares of Common Stock without again fully providing a Transfer Notice. (c) Obligations of Drag-Along Sellers. In connection with any Drag- --------------------------------- Along Sale,Drag-Along Sellers shall not be required to make any representation or warranty to the purchaser other than to the effect that they hold title to the Securities they are selling in the Drag-Along Sale, free and clear of liens and the like, and as to their right, power and authority to sell such Securities. Except as to such representations, Drag-Along Sellers shall not be liable beyond thenet proceeds of the Drag-Along Sale for any other breach of representations or warranties. In addition, unless expressly agreed to by a Drag-Along Seller, no Drag-Along Seller shall be required to enter into any covenant not to compete or similar agreement restricting their business activities. 19 8. Termination and Lapse of Rights and Restrictions; Applications to ----------------------------------------------------------------- Other Stock and Adjustments. The provisions of Sections 4, 5, 7, 9 and 10 shall - --------------------------- lapse and be of no further effect immediately following the earlier to occur of a Change in Control or an IPO. In the event any capital stock of the Company or any other corporation shall be distributed on, with respect to, or in exchange for Securities as a stock dividend, stock split, reverse stock split, reclassification or recapitalization, or in connection with any merger or reorganization, the restrictions, rights and options and prices set forth herein shall apply with respect to such other capital stock to the same extent as they are, or would have been applicable, to the Securities on or with respect to which such other capital stock was distributed and shall continue to apply to the Securities or such other securities outstanding thereafter, in each case with such adjustments as are necessary or appropriate. 9. Election of Directors. So long as such individuals respectively own ---------------------- the requisite amount of Common Stock set forth herein, each of the other Stockholders agrees to vote his or its Common Stock, and to cause his Related Transferees to vote their Common Stock, in favor of Michael J. Fourticq and Brian P. McDermott ("FOURTICQ" AND "MCDERMOTT") in all elections of the directors of the company, whether by meeting or action in writing. such agreement to vote shall be effective as to each such individual so long as such individual continues to own (directly or, in the case of Mr. McDermott, through a family trust and in either case, through Related Transferees after the date hereof) at least two-thirds of the Common Stock owned by him on the date hereof. Such agreement to vote shall cease to be effective upon the first to occur of: (i) Such individual ceasing to own (directly or indirectly, as aforesaid) in excess of one-third of the Common Stock owned by him on the date hereof and (ii) a Disproportionate Sale after which such individual and his Related Transferees own less than two-thirds of the Common Stock owned by him and such Related Transferees on the date hereof. A "DISPROPORTIONATE SALE" as to either individual occurs on the date of a Transfer of Common Stock as a result of which the Common Stock owned by such individual and Related Transferees has decreased by a percentage that is greater, by at least five percent (5%), than the corresponding decrease in ownership of Common Stock of GEI to date. Each of the stockholders further agrees that he or it shall vote its Common Stock, and cause its Related Transferees to vote their Common Stock, in all elections of directors of the Company, whether by meeting or action in writing, in favor of all nominees for the board of directors proposed by GEI. For purposes of this Section 9 and the effectiveness of the voting agreements herein, ownership of Common Stock shall be calculated based upon the Fully Diluted Ownership of the individual and his Related Transferees, in the aggregate; provided, however, that to the extent any of the Options included in the Fully Diluted Ownership of an individual should fail to vest, the calculation as to such individual's ownership of Common Stock shall thereafter be made as if the aggregate Common Stock owned by such individual on the date hereof had not included such Options. 10. Certain Additional Agreements. ----------------------------- (a) Right to Participate in Securities Issuances. If the Company -------------------------------------------- shall issue, sell or distribute to GEI or any of its Affiliates any equity or debt securities of the Company, or any option, warrant, or right to acquire, or any security convertible into or exchangeable for, any of the foregoing (other than pursuant to an underwritten public offering, a stock dividend, stock 20 split or other pro rata distribution of securities to stockholders of the --- ---- Company generally in which the HPA Group participates on an equal basis, including any Related Transferees), the members of the HPA Group shall be entitled, provided that they collectively maintain two-thirds (2/3) of the Fully Diluted Ownership held by them on the date hereof, to participate in such issuance, sale or distribution, at the same price and on the same terms and conditions applicable to GEI, pro rata, based upon their respective Fully --- ---- Diluted Ownership in the Company. The Company shall provide at least twenty (20) days' prior notice to the members of the HPA Group as to its intention so to issue equity, debt or related securities to GEI, and in the event any member of the HPA Group fails to respond within such twenty-day period, such member shall be deemed to have waived his or its right so to participate in the issuance of securities. The members of the HPA Group may determine amongst themselves that to the extent any member does not desire to participate, other members may increase their participation, provided that the aggregate participation does not exceed that offered to the HPA Group as a whole and that notice, which shall be binding upon all the HPA Group members and as to which GEI shall have no duty to inquire, shall be given to GEI within such 20-day period as to the aggregate number of securities being subscribed for. The parties acknowledge that time is of the essence as to this Section 10(a). (b) Right to Participate in Equity Repurchases. The Company and GEI ------------------------------------------ agree that the Company will not purchase any Securities from GEI or any of its Affiliates unless the Company offers to simultaneously purchase a proportionately equal number of Securities of the same class from each member of the HPA Group at the same price and on the same terms and conditions applicable to GEI and its Affiliates, based upon their respective Fully Diluted Ownership. (c) Affiliate Transactions. No material transaction or series or ---------------------- related transactions (including any issuance of securities, profits interests, stock appreciation rights, or similar rights or interests of the Company) between the Company and GEI or any of its Affiliates involving value in excess of $1,000,000 may be consummated unless approved (i) if one of Fourticq or McDermott then holds at least one-third of his Fully Diluted Ownership as of the date hereof, by such individual, and otherwise by a majority of the disinterested directors of the Company, or (ii) by the board of directors of the Company after it is presented with a fairness opinion of a nationally recognized investment bank to the effect that the transaction is fair to the Company and its stockholders. Notwithstanding the foregoing, other than the Management Agreement of even date herewith between the Company and Leonard Green & Partners, L.P. (the "Management Agreement"), GEI and its Affiliates will not enter into any consulting, management or similar agreement or arrangement with the Company or increase the fees provided for in the Management Agreement as of the date hereof, except that such fees may be proportionately increased provided such increase is calculated on the same basis (1.6% of invested capital) as the fee currently provided for therein and such increase reflects further investment by GEI consistent with the terms of this Section 10. (d) Change of Control Transactions. Each of GEI, Fourticq and ------------------------------ McDermott agrees that no such Stockholder shall, without the prior consent of the other two Stockholders, pursue, advocate or enter into an agreement in respect of any recapitalization, reclassification, 21 share exchange, reorganization, merger, consolidation or similar transaction involving the Company unless all holders of Common Stock of the Company will be treated identically in such transaction, but ratably in proportion to their respective Equity Ownership. (e) Information. The Company shall provide each Class I Stockholder ----------- with the following information, all of which each Class I Stockholder agrees to hold in confidence: (i) For each fiscal quarter of the Company, as and when submitted to Green, unaudited consolidated financial statements of the Company (consisting of balance sheet and statements of operations, stockholders' equity and cash flows for such fiscal quarter, in the form submitted to GEI; (ii) For each fiscal year of the Company, as and when submitted to Green, audited financial statements of the Company for such fiscal year, certified by the Company's independent certified public accounting firm, in the form submitted to GEI; (iii) Such additional information about the Company as such Class I Stockholder may reasonably request from time to time. 11. Notices. All notices or other communications under this Agreement ------- shall be given in writing and shall be deemed duly given and received on the third full business day following the day of the mailing thereof by registered or certified mail or the next Business Day if sent by overnight courier or when delivered personally or sent by facsimile transmission as follows: (a) if to the Company, at its principal executive offices at the time of the giving of such notice, or at such other place as the Company shall have designated by notice as herein provided to the Purchaser; (b) if to a Class I Stockholder, at its principal executive offices at the time of the giving of such notice, or at such other place as such Stockholder shall have designated by notice as herein provided to the Company. (c) if to any Class II Stockholder, at his address as it appears on Annex A or at such other place as he shall have designated by notice as herein provided to the Company. 12. General. ------- (a) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and may not be modified or amended except by a written agreement signed by each of the Company and the Class I Stockholders and, to the extent their interests are affected, by the Class II Stockholders, provided, however, that Class II Stockholders having a majority of -------- ------- Equity Ownership as amongst such Stockholders may bind all of such Stockholders as to any matter adversely affecting them if such adverse effect is equal, on a proportionate basis, as to all such Stockholders and the consent of each adversely affected Class II Stockholder shall otherwise be required. 22 (b) No waiver of any breach or default hereunder shall be considered valid unless in writing, and no such waiver shall be deemed a waiver of any subsequent breach or default of the same or similar nature. (c) Except as otherwise expressly provided herein, this Agreement shall be binding upon and inure to the benefit of each of the Company, the Stockholders and their respective heirs, personal representatives, successors and assigns; provided, however, that nothing contained herein shall be construed -------- ------- as granting any Stockholder the right to Transfer any of the Securities except in accordance with this Agreement and any Transferee shall hold such Securities having only those rights and being subject to the restrictions provided for in this Agreement. (d) If any provision of this Agreement shall be invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render invalid or unenforceable any other severable provision of this Agreement, and this Agreement shall be carried out as if any such invalid or unenforceable provision were not contained herein. (e) Each Class II Stockholder agrees that nothing herein shall be deemed to create any implication concerning the adequacy of his services to the company, or shall be construed as an agreement by the Company, express or implied, to employ him or contract for his services, to restrict the right of the Company to discharge him or cease contracting for his services or to modify, extend or otherwise affect in any manner whatsoever, the terms of any employment agreement or contract for services which may exist between him and the Company or its subsidiaries. Each Class II Stockholder represents that he has been advised, to the extent he deemed necessary, by legal counsel and tax advisors of his choice in connection with this Agreement. Each Class II Stockholder further represents that, if he is married, his spouse has executed and delivered to the Company the Acknowledgment and Agreement of Spouse set forth at the end of this Agreement. (f) In the event any day upon which a sale, notice or other matter is required to occur hereunder is not a Business Day, such matter shall be deferred until the next Business Day. (g) The section headings contained herein are for the purposes of convenience only and are not intended to define or limit the contents of such sections. The masculine pronoun shall be deemed to include and incorporate the feminine pronoun. (h) Each party hereto shall cooperate and shall take such further action and shall execute and deliver such further documents as may be reasonably requested by any other party in order to carry out the provisions and purposes of this Agreement. (i) Words in the singular shall be read and construed as though in the plural and words in the plural shall be read and construed as though in the singular in all cases where they would so apply. 23 (j) This Agreement may be executed in one or more counterparts, all of which taken together shall be deemed one original. (k) Due to the fact the securities of the Company cannot be readily purchased or sold in the open market, and for other reasons, the parties will be irreparably damaged in the event that this Agreement is not specifically enforced. In the event of a breach or threatened breach of the terms, covenants and/or conditions of this Agreement by any of the parties hereto, the other parties shall, subject to Section 13, in addition to all other remedies, be entitled to a temporary and/or permanent injunction, without showing any actual damage or that monetary damages would not provide an adequate remedy, and/or a decree for specific performance, in accordance with the provisions hereof. Each Stockholder hereby irrevocably and unconditionally consents to the jurisdiction of any California State court or federal court of the United States sitting in the State of California in any action or proceeding relating to this Agreement and consents to service of process in connection therewith by the delivery of notice to such Stockholder's address set forth in this Agreement. (l) This Agreement shall be deemed to be a contract under the laws of the State of Delaware and for all purposes shall be construed and enforced in accordance with the internal laws of such state without regard to the principles of conflicts of law. 13. Additional Class II Stockholders. Prior to issuing any Options, -------------------------------- Common Stock or other right exercisable for or convertible into Common Stock, and as a condition to the receipt thereof, the Company shall require the recipient to execute and deliver a duplicate counterpart of this Agreement, and such recipient shall become a Class II Stockholder for all purposes hereof. 14. Arbitration. ----------- (a) Scope. The parties mutually consent to the resolution by binding ----- arbitration of all claims or controversies ("CLAIMS") arising out of or related to this agreement. notwithstanding the foregoing, the parties may have recourse to the courts for injunctive or equitable relief in respect of matters arising out of or relating to this Agreement. (b) Deposition. Each party to a dispute shall have the right to ---------- take the deposition of up to two individuals and any expert witness designated by each other party. Each party also shall have the right to make requests for production of documents to any party. The subpoena right specified below shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had only where the arbitrator selected pursuant to this Section 14 so orders, upon a showing of reasonable and substantial need. At least 30 days before the arbitration, the parties must exchange lists of witnesses, including any expert, and copies of all exhibits intended to be used at the arbitration. Each party shall have the right to subpoena witnesses and documents for the arbitration. (c) JAMS. The Arbitration will be held under the auspices of either ---- the American Arbitration Association ("AAA") or Judicial Arbitration & Mediation Services, Inc. ("J.A.M.S"), with the designation of the sponsoring organization to be made by the party who did not initiate the claim. The parties agree that, except as provided in this Agreement, the 24 arbitration shall be in accordance with the AAA's then-current arbitration procedures (if AAA is designated) or the then-current J.A.M.S arbitration rules (if j.a.m.s is designated). the arbitration shall be conducted by a single arbitrator selected from the AAA large complex case panel (the "Arbitrator"). The arbitration shall take place in Los Angeles, California. (d) Selection of Arbitrator. If the parties to the dispute cannot ------------------------ agree upon the selection of the arbitrator within 30 days from the day the matter is submitted to arbitration, then, on application of any party, the arbitrator shall be designated by the sponsoring organization. (e) Governing Law. The Arbitrator shall apply the substantive law -------------- (and the law of remedies, if applicable) of the state of Delaware. The Arbitrator shall be without jurisdiction to apply any different substantive law, or law of remedies. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement is void or voidable. The arbitration shall be final and binding upon the parties, except as provided in this Agreement. (f) Procedures. The Arbitrator shall have jurisdiction to hear and ----------- rule on pre-hearing disputes and are authorized to hold pre-hearing conferences by telephone or in person, as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. If such a transcript is prepared, it shall be the official transcript of the proceedings for all purposes. Such proceedings shall be concluded within 180 days of the commencement of the arbitration, as evidenced by the rendering of the award described below. Any party to a dispute, at its expense, may arrange for and pay the cost of a court reporter to provide a stenographic record of proceedings. Any party to a dispute, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. (g) Award. The Arbitrator shall render an award and opinion ------ outlining in reasonable detail the findings of fact and conclusions of law upon which the award is based. The award of the Arbitrator shall be final, binding and conclusive on the parties. If the Company is a party to the dispute, the Company shall bear the fees and costs of the Arbitrator. If Company is not a party to the dispute, the parties to the dispute shall equally share the fees and costs of the Arbitrator. Each party shall pay for its own costs and attorneys' fees. 15. Definitions. As used in this Agreement, unless the context requires ------------ otherwise, the capitalized terms described in this Section 15 shall have the meanings indicated herein. (a) Each of the following capitalized terms shall have the meaning ascribed to such term in the section of this Agreement indicated:
Term Section - ------------------------------- ------- Act............................ 15(b) Affiliate...................... 15(b)
25
Term Section - ------------------------------- ------------ Agreement...................... Introduction Bona Fide Offer................ 4(b) Business Day................... 15(b) Callable Securities............ 2(b) Call Purchase Event............ 5(a) Call Option.................... 2(b) Change in Control.............. 15(b) Class I Stockholder............ Introduction Class II Stockholder........... Introduction Common Stock................... Recitals Company........................ Introduction Control........................ 13(b) Demand Registration............ 6(a) Demand Seller.................. 6(b) Disproportionate Disposition... 9 Drag-Along Notice.............. 7(b) Drag-Along Sale................ 7(a) Drag-Along Sale Date........... 7(b) Drag-Along Seller.............. 15(b) Electing Stockholder........... 4(b) Equity Ownership............... 15(b) Fair Market Value.............. 15(b) Fully Diluted Ownership........ 15(b) Future Stockholder............. 6(b) Future Participants............ 6(a) GEI............................ Introduction GEI Distribution............... 12 Stockholder.................... 6(a) IPO............................ 15(b) Living Trust................... 15(b) Manager........................ 15(b) NQ Option...................... 2(b) Option Notice.................. 4(b) Other Termination.............. 5(a) Outside Party.................. 4(b) Permanent Disability........... 15(b) Permitted Transfer............. 4(a) Purchase Notice................ 5(a) Purchaser...................... 2(b) Purchasing Group............... 5(a) Registrable Securities......... 15(b) Registration Notice............ 6(a) Related Transferee............. 15(b)
26
Term Section - -------------------------------- ------------ Retirement..................... 15(b) Rule 144....................... 15(b) Sale Percentage................ 7(a) SEC............................ 15(b) Securities..................... Introduction Seller......................... 5(a) Subscription Stock............. 2(b) Tag-Along Notice............... 7(e) Tag-Along Seller............... 7(d) Third Party.................... 7(a) Transfer....................... 15(b) Transfer Notice................ 7(e)
(b) Each of the following capitalized terms shall have the meanings indicated in this clause (b): "ACT" means the Securities Act of 1933, as amended from time to time. "AFFILIATE" has the meaning set forth in Rule 405 under the Act. "BUSINESS DAY" means a day on which banks are open for business in the State of California. "CHANGE IN CONTROL" means any of (i) a sale or other disposition by the Company of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole, or (ii) a merger or consolidation of the Company if, immediately following such merger or consolidation, there is not Control of the surviving entity of such merger or consolidation, or (iii) a sale of capital stock of the Company (by any holder thereof or by the Company) if, immediately following such sale, there is not Control of the Company. "CONTROL" means that the holders of the capital stock of the Company immediately following the Merger (including the Class I Stockholders) hold, in the aggregate, directly and indirectly, the power to elect a majority of the directors of the Company that are not elected pursuant to the provisions of the Preferred Stock (or, as the case may be, the surviving entity of a merger or consolidation of the Company). "EQUITY OWNERSHIP" means the relative interests of the holders of the Company's outstanding Common Stock as of the date of determination. "FAIR MARKET VALUE" of Securities means the fair market value of Securities as determined as of the time of the Call Purchase Event by the Company's Board of Directors in the exercise of its reasonable discretion; provided, however, -------- ------ that in the event that the Common Stock is traded publicly on any national securities exchanges) (including without limitation NASDAQ 27 National Market System or the NASDAQ "Small-Cap" Issues System), such fair market value shall be based upon the closing price for such Common Stock on such exchange(s) on the date preceding the Call Purchase Event. "FULLY DILUTED OWNERSHIP" means, as to any Stockholder, his or its aggregate ownership of all equity interests in the Company, including all Options and all other securities excercisable convertible or exchangeable for Common Stock. "IPO" means the completion of the first underwritten public offering of the Company's shares of Common Stock registered under the Act. "LIVING TRUST" means a revocable living trust established by the Purchaser for estate planning purposes and pursuant to which no one other than the Purchaser and/or the Purchaser's spouse is the beneficiary during the Purchaser's lifetime. "MANAGER" means the investment banking firm or firms designated by the Stockholder as the managing underwriter(s) of an offering registered pursuant to this Agreement, which firm or firms shall be the existing investment bankers for or other nationally recognized investment bankers reasonably acceptable to the Company. "PERMANENT DISABILITY" of a Class II Stockholder means that (i) the Class II Stockholder becomes physically or mentally incapacitated or disabled so that he is unable to perform for the Company substantially the same services as he performed prior to incurring such incapacity or disability, and (ii) such incapacity or disability continues for a period of 120 days, whether or not consecutive, over a period of six consecutive months; provided, however, that -------- ------- (x) the Company, at its option and expense, shall be entitled to retain a physician to confirm the existence of such incapacity or disability, and the determination of such physician shall be binding upon the Company and the Class II Stockholder. "REGISTRABLE SECURITIES" means the Common Stock and the Warrant Shares, subject to adjustment pursuant to Section 8 hereof. "RELATED TRANSFEREE" means (i) in the case of any individual, any of the Stockholder's spouse, adult lineal descendants, adult spouses of such lineal descendants, a Living Trust, trusts solely for the benefit of the Stockholder's spouse or the Stockholder's minor or adult lineal descendants, and (in the event of the Stockholder's death) the Stockholder's personal representatives (in their capacities as such), estate or named beneficiaries and (ii) in the case of a business organization, any individual or other business organization controlled by or under common control with such business organization, as such terms are defined within the meaning of Rule 405 under the Act. "RETIREMENT" means retirement pursuant to the Company's standard retirement policy in effect from time to time but in no event prior to the age of 65, unless pursuant to a specific determination by the Board of Directors of the Company. 28 "RULE 144" means Rule 144 under the Act, as amended from time to time, or any successor or similar rule. "SEC" means the Securities and Exchange Commission. "TRANSFER," used as a noun, means any sale, pledge, gift, bequest, transfer, assignment or any other encumbrance or disposition, whether direct or indirect, conditional or unconditional. "TRANSFER," used as a verb, means to make a Transfer. 29 IN WITNESS WHEREOF, the parties have executed this Agreement as of the first date written above. LESLIE'S POOLMART, INC. By _______________________________________________ Its_______________________________________________ GREEN EQUITY INVESTORS II, L.P. By: Grand Avenue Capital Partners, L.P., its sole general partner By: Grand Avenue Capital Corporation, its sole general partner By: ______________________________________________ Name _____________________________________________ Title ____________________________________________ __________________________________________________ Richard H. Hillman __________________________________________________ Michael J. Fourticq __________________________________________________ Greg Fourticq __________________________________________________ Brian P. McDermott __________________________________________________ Brian P. McDermott and Manette J. McDermott, T.R.U.A. DTD 3/15/90 The McDermott Family Trust OCCIDENTAL PETROLEUM CORPORATION By _______________________________________________ Name _____________________________________________ Title ____________________________________________ 30 ACKNOWLEDGMENT AND AGREEMENT OF SPOUSE -------------------------------------- The undersigned, being the spouse of a Purchaser listed on Annex A hereto, hereby agrees to be bound by the provisions of this Agreement and consents to the Purchaser's subscription for the Common Stock pursuant hereto. _________________________________________ Name ____________________________________ 31 ANNEX A CAPITAL STRUCTURE -----------------
Fully Diluted Shares ------- Michael J. Fourticq 160,539 Brian McDermott 166,552 Richard H. Hillman 22,414 Greg Fourticq 10,000 --------- Total Stock Remaining Outstanding 359,505 Michael J. Fourticq 4,976 Robert Olsen 52,761 Other Management 25,862 --------- Total Options 83,599 Robert Olsen--Cash 14,768 Other Management Cash 4,198 Green Equity Investors II, L.P. 1,055,172 Occidental Warrants 316,092 Management Incentive Stock Options 273,946 Total 2,107,280 =========
A-1 ANNEX B TERMS OF NQ OPTION PLAN ----------------------- Number of Shares............. 83,599 total. The number of shares covered by each individual grant will be the quotient of (i) the product of (x) the number of shares subject to the corresponding cancelled option multiplied by (y) the difference between $14.50 and such cancelled option's exercise price, divided by (ii) $9.50. In the case of Messrs. Fourticq and Olsen, the foregoing formula results in the issuance of options for a maximum of 4,976 and 52,761 shares, respectively, with the balance to be allocated to management as heretofore agreed. Exercise Price............... $5.00 Type of Options.............. Non-Qualified, ten-year options Termination of Employment................ A portion of options and shares are subject to repurchase upon termination of employment prior to the second anniversary of the Closing Date as set forth in the Agreement, all other NQ Options remain exercisable notwithstanding employment status of optionee Adjustment................... The number of shares subject to NQ Options, and the exercise price, will be proportionately adjusted for each subdivision and combination of Company common stock. Acceleration................. NQ Options will accelerate and may be cashed out upon the occurrence of a Change of Control. In a cash-out situation, Class I Optionholders will be treated as Class I Stockholders and Class II Optionholders will be treated as Class II Stockholders. B-1 ANNEX C TERMS OF INCENTIVE STOCK OPTION PLAN ------------------------------------ Number of Shares............. 13% of the Company's fully-diluted Common Stock on the Closing Date Exercise Price............... Fair Market Value (opening equity price) Type of Options.............. Incentive, ten-year options Vesting...................... One-third (w) on the first, second and third anniversaries of the Closing Date, except in respect of performance portion Performance Portion.......... Options equivalent to 3.4% of the fully- diluted Common Stock outstanding on the Closing Date vest upon achievement (assuming continued employment) of performance targets as follows:
EBITDA for Year Ended: Number of Stores Opened by: --------------------- -------------------------- $18M............. 1997 30...........March 31, 1998 $22M............. 1998 30...........March 31, 1999 $26M............. 1999 30...........March 31, 2000
Note: Vesting also occurs if the store ---- opening target is met in each prior year and the Company achieves 95% of a year's EBITDA target and the sum of that year and the following year's EBITDA equals 100% of the combined targets. EBITDA means the Consolidated Net Income of the Company (i) plus (minus) any extraordinary or nonrecurring gain (loss); (ii) plus (minus) any gain (loss) due solely to fluctuations in currency values; (iii) plus provision for taxes; (iv) plus consolidated interest expense, whether paid or accrued and whether or not capitalized (and including any amortization of deferred financing costs); (v) plus any noncash charges for such period (including LIFO charges); (vi) plus depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other noncash charges. C-1 Termination of Employment................... Vested options may be exercised for 90 days post-termination; unvested options are forfeited and become eligible for future grant at Fair Market Value Adjustment................... The number of shares subject to Options, and the exercise price, will be proportionately adjusted for each subdivision and combination of Company common stock Acceleration................. ISO Options will accelerate and may be cashed out upon the occurrence of a Change of Control. In a cash-out situation, Class I Optionholders will be treated as Class I Stockholders and Class II Optionholders will be treated as Class II Stockholders. C-2 -----END PRIVACY-ENHANCED MESSAGE-----