-----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, VOtiU7ywFDj3/iR6A5wuhfJxu7HwtJCViVQ8dzTyK9bMIx/WRommze3gImXCYvBX HVGeBrkj/yAUKIZX/C19yw== 0000898430-01-504076.txt : 20020413 0000898430-01-504076.hdr.sgml : 20020413 ACCESSION NUMBER: 0000898430-01-504076 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010929 FILED AS OF DATE: 20011227 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LESLIES POOLMART INC CENTRAL INDEX KEY: 0000866048 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 954620298 STATE OF INCORPORATION: DE FISCAL YEAR END: 0927 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-18741 FILM NUMBER: 1823562 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 10-K405 1 d10k405.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended: September 29, 2001 or [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from __________ to ____________. Commission file number: 0-18741 LESLIE'S POOLMART, INC. (Exact name of registrant as specified in its charter) Delaware 95-4620298 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 3925 E. Broadway Road, Suite 100 Phoenix, Arizona 85040 (Address of principal executive offices) Registrant's telephone number, including area code: (602) 366-3999 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K. [X] APPLICABLE ONLY TO CORPORATE REGISTRANTS: The Number of Shares of Common Stock outstanding as of December 21, 2001 was 7,065,438. DOCUMENTS INCORPORATED BY REFERENCE (To the Extent Indicated Herein) PART I ITEM 1. BUSINESS Leslie's Poolmart, Inc. ("Leslie's" or the "Company") is the leading national specialty retailer of swimming pool supplies and related products. These products primarily consist of regularly purchased, non-discretionary pool maintenance items such as chemicals, equipment, cleaning accessories and parts, and also include fun, safety and fitness-oriented recreational items. The Company currently markets its products under the trade name Leslie's Swimming Pool Supplies through 391 company-owned retail stores in 30 states and through mail order catalogs sent to selected pool owners nationwide. The Company provides its customers a comprehensive selection of high quality products, competitive every day low prices and superior customer service through knowledgeable and responsive sales personnel who offer a high level of technical assistance at convenient store locations. The typical Leslie's store contains 4,000 square feet of space, is located either in a strip center or on a freestanding site in an area of heavy retail activity, and draws its customers primarily from an approximately three-mile trade area. The Company maintains a proprietary mailing list of approximately 5 million addresses, including approximately 88% of the residential in-ground pools in the U.S. This highly focused list of target customers is central to the Company's direct mail marketing efforts, which support both its retail store and mail order operations. History The Company is a successor to the original Leslie's Poolmart founded in 1963 ("Poolmart"). From its inception in 1963 through the end of 1987, Leslie's Poolmart grew steadily in sales and number of stores. In September 1988, Leslie's Poolmart was purchased in a highly leveraged transaction by an investment group led by Hancock Park Associates (''HPA''). The purchase was accomplished by means of a merger, with Leslie's Poolmart, a California corporation ("Leslie's California") as the surviving entity. Leslie's California completed an initial public offering in April 1991 and in August 1992 added 14 stores through the acquisition of a competitor. In June 1997, Leslie's California reincorporated in Delaware by merger into a wholly-owned Delaware subsidiary and completed an additional recapitalization merger (the "Mergers"). The transactions were led by Green Equity Investors, II, L.P. ("GEI") and HPA, together with certain members of management and associates of HPA (collectively, the "HPA Group"). As a result of the Mergers, the Company's common stock is no longer publicly-traded. Unless otherwise referred to herein or the context otherwise requires, references to "Leslie's" or the "Company" shall mean Leslie's Poolmart, Inc., its predecessors by merger, Poolmart and Leslie's California, and the predecessor of Leslie's California. Swimming Pool Supply Industry Regardless of the type or size of a swimming pool, there are numerous ongoing maintenance and repair requirements associated with pool ownership. In order to keep a pool safe and sanitized, chemical treatment is required to maintain proper chemical balance, particularly in response to variables such as pool usage, precipitation and temperature. A swimming pool is chemically balanced when the disinfectant, pH, alkalinity, hardness and dissolved solids are at the desired levels. The majority of swimming pool owners use chlorine to disinfect their pools. When the pool is chemically balanced, problems such as algae, mineral and salt saturation, corrosive water, staining, eye irritation and strong chlorine smell are less likely to occur. A regular testing and maintenance routine will result in a stable and more easily maintained pool. However, regardless of how well appropriate levels of chlorine are maintained, ''shocking'' is periodically required to break up the contaminants which invariably build up in the pool water. To accomplish this, the pool owner can either superchlorinate the pool or use a nonchlorinated oxidizing compound. The maintenance of proper chemical balance and the related upkeep and repair of swimming pool equipment, such as pumps, heaters, and filters, create a non- discretionary demand for pool chemicals and other swimming pool supplies and services. Further, even non-usage considerations such as a pool's appearance and the overall look of a household and yard create an ongoing demand for these maintenance related supplies. In addition, pool usage creates demand for discretionary items such as floats, games and accessories. The swimming pool supply industry can be divided into four major segments by pool type: residential in-ground swimming pools, residential above-ground swimming pools (usually 12 to 24 feet in diameter), commercial swimming 2 pools and spas or hot tubs. The Company's historical strategy was to focus primarily on the residential in-ground pool owner. In recent years, the Company has expanded its activities to more aggressively address the commercial and above-ground markets as well. In the residential categories, the Company markets its products primarily to the ''do-it-yourself'' market as opposed to those pool owners who hire pool servicers. Through its rapidly growing commercial business, products and services are offered to all non-residential pool installations as well as to pool service companies which maintain either residential or commercial pools. Seasonality The Company's business exhibits substantial seasonality, which the Company believes is typical of the swimming pool supply industry. In general, sales and net income are highest during the quarters ended June and September which represent the peak months of swimming pool use. Sales are substantially lower during the quarters ended December and March when the Company typically incurs net losses. The principal external factor affecting the Company's business is weather. Hot weather and the higher frequency of pool usage in such weather create a need for more pool chemicals and supplies. Unseasonably early or late warming trends can increase or decrease the length of the pool season. In addition, unseasonably cool weather and/or extraordinary amounts of rainfall in the peak season will tend to decrease swimming pool use. The likelihood that unusual weather patterns will severely impact the Company's results is lessened by the geographical diversification of the Company's store locations. The Company also expects that its quarterly results of operations will fluctuate depending on the timing and amount of revenue contributed by new stores and, to a lesser degree, the timing of costs associated with the opening of new stores. The Company attempts to open its new stores primarily in the quarter ending March in order to position itself for the following peak season. Products Leslie's offers its customers a comprehensive selection of products necessary to satisfy their swimming pool supply needs. During 2001, the Company stocked approximately 2,000 items in each store, with more than 15,000 additional items available through its Xpress Parts program and special order processes. In 2001, approximately 250 items were displayed in the Company's residential mail order catalogs and 770 items were in the commercial catalog, although special order procedures make nearly all Leslie's products available to mail order customers as well. The Company's major product categories are pool chemicals; major equipment; cleaning and testing equipment; pool covers, reels, and liners; above-ground pools in a limited number of stores; and recreational items (which include swimming pool floats, games, lounges, masks, fins, snorkels and other "impulse" items). Non-discretionary and regularly consumed products such as pool chemicals, major equipment and parts represented approximately 80% of total sales in fiscal 2001. The Company's non-discretionary products have long shelf lives and are generally not prone to either obsolescence or shrinkage due to the high percentage of Leslie's business which is attributable to non-discretionary products. The Company believes that product quality and availability are key attributes considered by consumers when shopping for pool supplies and that the Company's ability to provide a high quality, in-stock product offering is fundamental to its concept of value leadership. In addition to third-party brand names, Leslie's carries a broad selection of products under the Leslie's brand name. Marketing studies have shown that the Leslie's brand name is one of the three most recognized brands in pool supplies and represents an image of quality to consumers. In fiscal 2001, Leslie's brand name products accounted for approximately 60% of the Company's total sales. Channels of Distribution Retail Store Operations. At the end of fiscal 2001, Leslie's marketed its products through 391 retail stores in 30 states under the trade name Leslie's Swimming Pool Supplies. California represents its single largest concentration of stores with 101, while 67 stores are located in Texas, and 94 stores are in the northeast/mid-Atlantic area. Leslie's retail stores are located in areas with high concentrations of swimming pools and typically are approximately 4,000 square feet in size. In addition to the store manager, the typical Leslie's store employs one assistant manager, who is generally a full-time employee. Additionally, Leslie's makes frequent use of part-time and temporary employees to support its full-time employees during peak seasons. During 2001, the Company had 26 district managers, each of whom was responsible for approximately 15 stores. 3 Mail Order Catalog. Leslie's mail order catalogs provide an extension of its service philosophies and products to those areas not currently served by a retail store and allow the scope of the Company's business to be truly nationwide. The Company believes that its mail order catalogs build awareness of the Leslie's name, provide it with buying efficiencies and, when coupled with information from its retail stores, are instrumental in determining site selection for new stores. Customer Service Due to the complicated nature of pool chemistry and equipment maintenance and consistent with its philosophy of being a full service swimming pool supply retailer, Leslie's offers a high level of technical assistance to support its customers. The Company considers its training of store personnel to be an integral part of its service philosophy. Leslie's extensive training program for all full-time and part-time store employees includes courses in water chemistry, water testing, trouble shooting on equipment, equipment sizing and parts replacement. Leslie's stores in California; Dallas and Houston, Texas; and Las Vegas, Nevada, are supported by the Leslie's Service Department, which offers poolside equipment installation and repair, leak detection and repair, and seasonal opening and closing services. The Service Department utilizes both Company employees and subcontractors to perform these services. Marketing Substantially all the Company's marketing is done on a direct mail basis through its proprietary mailing list of approximately 5 million addresses at which, primarily, residential pools are located. Leslie's has found that its ability to mail directly to this highly focused group is an effective and efficient way to conduct its marketing activities to both retail store and mail order customers. The Company constantly updates its address list through primary research techniques and in-store customer sign-ups. Addresses on the Company's proprietary list that are located within a specified service area of a retail store receive circulars once or twice per month from late March or early April through September or, selectively, through October. As a regular part of Leslie's promotional activities, each mailer highlights specific items which are intended to increase store traffic, and reinforces to the customer the advantages of shopping at Leslie's, which include everyday low pricing, a high level of customer service, and the broad selection of high quality products. Addresses outside the Company's store service areas, and recently active mail order customers within those service areas, receive the Company's mail order catalogs. Occasionally, the Company will utilize local print media when it enters a new market, and is doing so in connection with its above-ground pool sales test markets. New store openings typically involve additional advertising in the first two to three months of operation. Purchasing Leslie's management believes that because it is one of the largest purchasers of swimming pool supplies for retail sales in the United States, the Company is able to obtain very favorable pricing on its purchases from outside suppliers. Nearly all raw materials and those products not repackaged by the Company are purchased directly from manufacturers. It is common in the swimming pool supply industry for certain manufacturers to offer extended dating terms on certain products to quantity purchasers such as Leslie's. These dating terms are typically available to the Company for pre-season or early season purchases. The Company's principal chemical raw materials and granular chlorine compounds are purchased primarily from three suppliers. At the end of fiscal 1997, the Company entered into a multi-year product purchase agreement with a major producer of one of the principal chlorine compounds, the chlorinated isocyanurates. The Company believes that there are several other reliable suppliers of chlorine products in the marketplace today. Although the Company has one sole source supplier for a nonchlorine shocking compound, termination of supply would not pose any significant problems for the Company because substitute chemicals and alternate shocking techniques are available. The Company believes that reliable alternative sources of supply are available for all of its raw materials and finished products. 4 Vertical Integration Leslie's operates a plant in the Los Angeles area where it converts dry granular chlorine into tablet form and repackages a variety of bulk chemicals into various sized containers suitable for retail sales. Leslie's also formulates a variety of specialty liquids, including water clarifiers, tile cleaners, algaecides and stain preventives. The chemicals that the Company processes have a relatively long shelf life. Leslie's believes that supplying its stores with chemicals from its own repackaging plant provides it with cost savings, as well as greater control over product availability and quality, as compared to non-integrated pool supply retailers. It also offers the Company greater flexibility of product sourcing and acquiring vital information when negotiating with third-party repackagers and chemical providers. The Leslie's brand name appears on all products processed at its repackaging plant, and on the significant majority of all its chemical products. The Company believes that it is among the largest processors of chlorine products for the swimming pool supply industry. The total output of Leslie's repackaging plant is utilized by the Company and is not sold or distributed to other retailers. In connection with the operation of its three distribution centers outside of California, the Company has expanded its use of third-party chemical repackagers and its purchase of products already in end-use configurations. These products are also generally packaged under the Leslie's brand name. The Company continually evaluates the cost effectiveness of third-party sourcing versus internal manufacturing in order to minimize its cost of goods. Leslie's will also continue to evaluate the establishment of additional chemical repackaging capabilities, though there are currently no plans for such an investment. In addition to chemicals, a variety of the Company's other products are packaged under the Leslie's brand name. Distribution In 2001, the Company distributed all of its products to its retail stores and to its catalog customers through its leased distribution facilities in Ontario, California; Dallas, Texas; Swedesboro, New Jersey and Covington, Kentucky. Leslie's relocated and consolidated its West Coast distribution operation, along with the Los Angeles repackaging operation, into a 183,000 square foot facility in Ontario, California in early 1997. Leslie's opened its 100,000 square foot Dallas facility in November 1990 and relocated its Swedesboro operations to a new 119,000 square foot facility in March of 1998. In January of 1999, the Company opened its' new 146,000 square foot distribution center in Covington, Kentucky. The Company is now purchasing the majority of the chemicals to be distributed from the Dallas, Swedesboro and Covington distribution centers from outside manufacturers rather than obtaining them through its repackaging facility in Southern California. During the height of its seasonal activities, each of the Company's retail stores is generally replenished every 5 to 7 days. The Company utilizes company-owned and operated equipment, supplemented by additional equipment leased during the busy season, to transport its goods to stores within an approximately 350-mile radius of a distribution center. Other stores receive deliveries via common carriers. Competition Primary elements of competition in the retail swimming pool supply industry are price, technical assistance, customer service, product selection and product availability. Most of the Company's competition comes from local stores or regional chains which do not repackage or manufacture products and which generally buy products in smaller quantities. The chain store competitors include a large franchise operator of approximately 110 retail outlets in the Florida market and a limited number of other retail chains of approximately 15 to 30 stores. The Company competes on selected principal products such as chlorine with large volume, mass merchant and home center retailers. While the ability of these merchants to accept low margins on the limited number of items they offer makes them aggressive price competitors of the Company, they are not generally priced below Leslie's and do not offer the level of customer service or wide selection of swimming pool supplies available at Leslie's. Employees As of September 29, 2001, Leslie's employed 1,805 persons. During the height of the Company's seasonal activities in 2001, it employed 2,826 persons, including seasonal and part-time store employees who generally are not employed 5 during the off season. The Company is not subject to any collective bargaining agreements and believes that its relationships with its employees are good. Trademarks In the course of its business, Leslie's employs various trademarks, trade names and service marks as well as its logo in packaging and advertising its products. The Company has registered trademarks and trade names for several of its major products on the Principal Register of the United States Patent and Trademark Office. The Company distinguishes the products produced in its chemical repackaging operation or by third party repackagers at its direction through the use of the Leslie's brand name and logo and the trademarks and trade names of the individual items, none of which is patented, licensed, or otherwise restricted to or by the Company. The Company believes the strength of its trademarks and trade names has been beneficial to its business and intends to continue to protect and promote its marks in appropriate circumstances. ITEM 2. PROPERTIES As of September 29, 2001, the Company operated 391 stores in 30 states. The following table sets forth information concerning the Company's stores:
State Number of Stores State Number of Stores ----- ---------------- ----- ---------------- Alabama............. 4 Missouri.............. 7 Arizona............. 26 New Hampshire......... 2 California.......... 101 New Jersey............ 21 Connecticut......... 9 New Mexico............ 2 Delaware............ 2 New York.............. 22 Florida............. 10 North Carolina........ 2 Georgia............. 15 Ohio.................. 11 Illinois............ 6 Oklahoma.............. 7 Indiana............. 5 Pennsylvania.......... 19 Kansas.............. 1 Rhode Island.......... 1 Kentucky............ 3 South Carolina........ 3 Louisiana........... 5 Tennessee............. 4 Maryland............ 5 Texas................. 67 Massachusetts....... 8 Virginia.............. 5 --- Michigan............ 9 Total Stores.......... 391 ===
Except for 26 owned stores, all of its retail stores are leased by the Company with lease terms expiring between 2001 and 2010. The Company's typical lease term is five years, and in the majority of instances, the Company has renewal options at increased rents. Five leases provide for rent contingent on sales exceeding specific amounts. No other leases require payment of percentage rent. In early 1997, the Company relocated its corporate offices to Chatsworth, California. In 2001, the Company relocated its corporate office to Phoenix, Arizona from its location in Chatsworth, California. The new 38,000 square foot office building has been leased for five years and has one five-year renewal option. In early 1997, the Company's Southern California distribution center (previously located in Chatsworth, California) and its chemical repackaging operations (previously located in Los Angeles) were moved and consolidated into a 183,000 square foot facility located in Ontario, California. The Ontario facility was leased for 10 years and the lease has two five-year renewal options. The Company's distribution facility in Dallas, Texas contains 100,000 square feet of space. The lease of this facility expired in 2000, and the Company renewed the lease for an additional five years. The 6 lease included one additional five-year renewal period. The 119,000 square foot distribution facility in Bridgeport, New Jersey is leased for a 10-year term, expiring in 2008. The lease includes options to renew for two five-year periods. A new 146,000 square foot distribution center in Covington, Kentucky was opened in January 1999. This facility was leased for a 12 year term and provides for two five year renewal options. ITEM 3. LEGAL PROCEEDINGS The Company is routinely involved in legal proceedings related to the ordinary course of its business. Management does not believe any such matters will have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS There is no public trading market for the Company's common stock. There are 11 holders of the Company's common stock. The Company has not paid any dividends on its common stock and does not anticipate doing so in the foreseeable future. 8 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA The following table presents selected consolidated financial data of the Company as of and for the fiscal years ended September 29, 2001, September 30, 2000, October 2, 1999 and October 3, 1998 (53 weeks), the twelve months ended September 27, 1997 (unaudited), and the nine months ended September 27, 1997 (transition period). This financial data was derived from the audited historical consolidated financial statements of the Company (with the exception of the twelve months ended September 27, 1997) and should be read in conjunction with the consolidated financial statements of the Company and ''Management's Discussion and Analysis of Financial Condition and Results of Operations'' elsewhere in this Annual Report.
Fiscal Years Ended 12 Months Nine Months ------------------------------------------------------------------------------------------ (Amounts in Thousands, September 29, September 30, October 2, October 3, September 27, September 27, except Employees and 2001 2000 1999 1998 1997 1997 store information) - --------------------------------------------------------------------------------------------------------------------- Operating Results: Net Sales $301,700 $303,163 $282,349 $252,923 $217,109 $196,025 Gross Profit 135,298 131,195 122,416 110,355 91,389 83,148 Gross Margin (1) 44.8% 43.3% 43.4% 43.6% 42.1% 42.4% Loss on Disposition of Fixed Assets 919 1,477 1,006 334 1,112 457 Depreciation and Amortization 8,885 8,579 7,952 6,666 5,151 4,148 Income from Operations(1) 15,559 6,479 11,417 15,870 12,133 18,446 Interest Expense, net 12,320 12,536 11,380 10,513 4,842 4,220 Net Income/(Loss)(1) 1,218 (4,713) (878) 2,790 4,343 8,783 Balance Sheet Data: Working Capital 28,548 31,257 37,079 41,766 36,711 36,711 Total Assets 132,310 137,577 138,204 126,950 113,252 113,252 Long-term Debt 90,867 90,988 91,095 91,195 91,290 91,290 Preferred Stock 42,313 37,526 33,225 29,361 25,853 25,853 Stockholders' Deficit (52,284) (47,764) (39,657) (34,915) (35,845) (35,845) Selected Operating Data: Capital Expenditures 7,371 9,129 16,042 10,519 9,885 7,917 Unusual Charge(1,2) 1,466 3,173 -- -- -- -- EBITDA(1,2) 25,648 18,655 19,465 22,537 18,318 23,247 EBITDA Margin(1,3) 8.5% 6.1% 6.9% 8.9% 8.4% 11.9% Number of Employees 1,805 1,813 2,437 1,906 1,767 1,767 Number of Stores 391 383 364 316 278 278 Comparable Store Sales Growth (0.8%) 3.8% 6.6% 10.3% 10.1% 10.4%
- -------------------------- (1) In the fourth quarter of 2000, the Company recognized an unusual charge of $2.1 million for expenses principally associated with its decision to write-off nonproductive aged inventory, $0.8 million in restructuring costs for expenses associated with the relocation of its corporate office to Phoenix, Arizona, and an additional $0.2 million in accrued expenses for other corporate office move related expenses. The Company recorded an additional unusual charge of $1.5 million in the first quarter of 2001 for relocation of its corporate offices. (2) Earnings before interest, taxes, depreciation, amortization, loss/(gain) on disposition of fixed assets, recapitalization costs, LIFO adjustments, stock compensation expense and unusual charges. EBITDA is a measurement that is used by the financial community. It is not a substitute for the statement of cash flows prepared in accordance with accounting principles generally accepted in the United States but is a factor that is widely used and accepted by the investment community. (3) EBITDA Margin represents EBITDA as a percentage of sales. 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this document (as well as information included in oral statements or other written statements made or to be made by the Company) contains statements that are forward-looking, such as statements relating to plans for future activities. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks and uncertainties include, but are not limited to, those relating to domestic economic conditions, activities of competitors, changes in federal or state tax laws and of the administration of such laws and the general condition of the economy. Results of Operations 2001 compared to 2000: For the twelve months ended September 29, 2001, sales decreased 0.5% to $301.7 million from $303.2 million in the same twelve months of 2000. The sales decrease is attributable to a comparable store sales decrease of 0.8% below the comparable 52 weeks of 2000. EBITDA before the unusual charge for the period increased 37.5% to $25.6 million from $18.7 million in the same twelve months of 2000. A net profit of $1.2 million was realized in the year 2001. EBITDA including the unusual charges was $24.2 million as compared to $15.5 million in the prior year. This increase was primarily the result of improved gross margin and effective expense controls achieved during the year. During the first quarter, the Company recorded a $1.5 million unusual charge for restructuring expenses associated with the relocation of the corporate office to Phoenix, Arizona. Sales for the twelve months ended September 29, 2001 decreased 0.5% over the same fiscal period of 2000. Sales were lower due to the Company's decision to reduce promotional spending as compared to prior years levels and the Company's decision to eliminate business in certain commercial and service markets. Comparable store sales decreased 0.8% although there was an increase in the total number of stores in operation from 383 in 2000 to 391 at the end of 2001. The decrease in comparable store sales resulted from reduced promotional spending, the closure of 45 service markets which were included in prior years comparable numbers, and to a lessor degree, the general softening of the economy which impacted the sales of more expensive, discretionary items. During 2001, the Company expanded its business by opening 17 new stores. Additionally, 9 stores were closed and 4 were relocated in 2001. This resulted in a net increase of 8 stores as of September 29, 2001 as compared to September 30, 2000. Gross profit for the fiscal year ended September 29, 2001 improved to 44.8% of sales, from 43.3% in 2000. Gross profit represents sales less the cost of services and purchased goods, chemical repackaging costs, and related distribution costs. The gross margin increase in 2001 reflects less promotional spending on the retail pricing, reduced markdowns taken during the year to move certain inventory, and a $2.1 million unusual charge taken in the fourth quarter of 2000 to write-off aged and excessive inventory. In 2001, total operating expenses were $119.7 million, versus $124.7 million in 2000, a decrease of 4.0%. The decrease in operating expenses in 2001 was due primarily to reduced corporate and administrative expenses, the closure of 45 service markets, and more effective expense controls at retail. This decrease in expense was partially offset by the cost of opening of 8 new stores (net of closures), increased depreciation expenses, and increased compensation costs. Expenses as a percent of sales was 39.7% as compared to 41.1% in the prior year. EBITDA before the unusual charges was $25.6 million in fiscal year 2001, representing an increase of $6.9 million, or 37.5% as compared to $18.7 million for the same period in fiscal 2000. The increase in EBITDA was primarily the result of improved margins and reductions in selling, general and administration expenses (SG&A). EBITDA including the unusual charges was $24.2 million as compared to $15.5 in the prior fiscal year. 10 Amortization expense for the fiscal year ended September 29, 2001 was $413,000 as compared to $742,000 in the same period of 2000. For the fiscal year ended September 29, 2001, the Company recognized losses on the disposition of fixed assets totaling approximately $0.9 million as compared to $1.5 million in the prior year. These losses were primarily associated with the Company's relocation of its Corporate offices to Phoenix, Arizona from Chatsworth, California and its decision to close or relocate stores that were unproductive or not meeting expectations. Income from operations for the period increased 140.1% to $15.6 million from $6.5 million in fiscal 2000. Excluding the inventory write-off taken during the fourth quarter of 2000, income from operations improved by $7.0 million or 80.8%. Interest expense was $12.3 million in 2001, as compared to $12.5 million in 2000. The decrease was primarily the result of reduced average borrowing rates during the year. The Company recorded income tax expenses of $1.1 million in 2001, or an effective tax rate of 47.5% versus and income tax benefit of $2.8 million in the prior year. During the first quarter 2001, the Company recorded a restructuring charge of $1.5 million for expenses associated with its corporate relocation to Phoenix, Arizona. These expenses consisted primarily of the occupancy related costs incurred after vacating its existing corporate location and for employee related termination expenses. The Company believes that the future operating expense benefits of this move will offset the relocation cost that have been incurred. 2000 compared to 1999: For the twelve months ended September 30, 2000, sales increased 7.4% to $303.2 million from $282.3 million in fiscal 1999. The sales increase is attributable to comparable store sales growth of 3.8% over the comparable 52 weeks and 19 net new store additions in 2000. EBITDA before the unusual charge for the period decreased 4.2% to $18.7 million from $19.5 million in the same twelve months of 1999. A net loss of $4.7 million was realized in the year 2000. EBITDA including the unusual charges was $15.5 million. This decrease was primarily the result of a $2.1 million unusual charge taken by the Company in the fourth quarter of 2000 to write off aged excessive and obsolete inventory, $0.8 million in restructuring expenses associated with the relocation of the corporate office to Phoenix, Arizona, and an additional $0.2 million in accrued expenses for other corporate office related expenses. During 2000, the Company expanded its business by opening 29 new stores. Additionally, 10 stores were closed and 8 were relocated in 2000. This resulted in a net increase of 19 stores as of September 30, 2000 as compared to October 2, 1999. Sales for the twelve months ended September 30, 2000 increased 7.4% over the same fiscal period of 1999. Sales were lower than expected due to the cool, wet weather experienced in several major markets (most notably the Northeast and Southeast areas of the country) in the important May through July timeframe. Comparable store sales increased 3.8% with an increase in the total number of stores in operation from 364 in 1999 to 383 at the end of 2000. The increase in comparable store sales resulted from the maturing of new stores opened over the last several years, from continued growth of commercial sales, and from the addition of service sales to selected retail stores. The lower comparable store sales growth of 3.8% in 2000 versus 6.6% in 1999 was attributable to the weather, pricing and promotional issues referred to above. Gross profit for the fiscal year ended September 30, 2000 decreased to 43.3% of sales, from 43.4% in 1999. Gross profit represents sales less the cost of services and purchased goods, chemical repackaging costs and related distribution costs. The gross margin decrease in 2000 reflects more competitive retail pricing, markdowns taken during the year to promote excess inventory and a $2.1 million unusual charge taken in the fourth quarter to write-off aged and excessive inventory. In 2000, total operating expenses equaled $124.7 million, versus $111.0 million in 1999, an increase of 12.4%. The increase in operating expenses in 2000 was due primarily to the cost of opening of 29 new stores, increased depreciation expenses, a $0.8 million charge for restructuring expenses associated with the Company's planned corporate relocation to Phoenix, Arizona, $0.2 million in other corporate move related expenses, and a non-cash charge of $0.4 million for non-cash expenses associated with the restructuring of a stock option incentive agreement for the former Chief Executive Officer. 11 EBITDA before the unusual charges was $18.7 million in fiscal year 2000, representing a decrease of $0.8 million, or 4.2% as compared to $19.5 million for the same period of 1999. The decrease in EBITDA was primarily the result of the margin reduction and SG&A increases discussed above. EBITDA including the unusual charges was $15.5 million. Amortization expense for the fiscal year ended September 30, 2000 was $742,000 as compared to $742,000 in the same period of 1999. For the fiscal year ended September 30, 2000, the Company recognized losses on the disposition of fixed assets totaling approximately $1.5 million as compared to $1.0 million in the prior year. These expenses were primarily associated with the Company's decision to close or relocate stores that were unproductive or not meeting expectations. Income from operations for the period decreased 43.2% to $6.5 million from $11.4 million in the same twelve months of 1999. Excluding the inventory write- off, the corporate move related expenses and the non-cash stock compensation expense discussed above, income from operations was $10.1 million in 2000. Interest expense equaled $12.5 million in 2000, up from $11.4 million in 1999. The increase was primarily the result of increased average borrowings earlier in the year resulting from lower earnings, and increased capital spending related to continued growth of the business. The tax benefit of $2.8 million in 2000 reflected the pre-tax losses realized this year. The Company expects to recognize this benefit in future years through the realization of taxable earnings. During the fourth quarter 2000, the Company recorded a restructuring charge of $0.8 million for expenses associated with its corporate relocation to Phoenix, Arizona. These expenses consisted primarily of the occupancy related costs expected to be incurred after vacating its existing corporate location and for employee related termination expenses. The Company also accrued an additional $0.2 million for additional employee related expenses that are not yet recognizable under EITF No. 94-3. The Company believes that the future operating expense benefits of this move will offset the expected relocation cost expected to be incurred. Liquidity and Capital Resources From September 30, 2000 to September 29, 2001, total current assets decreased $2.3 million from $79.7 million to $77.4 million. The decrease in current assets results mainly from decreases in inventories, prepaid expenses, and accounts receivable partially offset by increases in cash. The principal component of current assets is inventory, which decreased $1.7 million from $57.6 million to $55.9 million. The inventory decrease, even in light of the increased store count, was the result of improved inventory management. Total current liabilities increased slightly by $0.4 million from September 30, 2000 as compared to September 29, 2001. Accounts payable reductions were offset by increases in accrued liabilities due to the timing of disbursements and increased accrued compensation costs. For the fiscal year ended September 29, 2001, net cash provided by operating activities was $15.1 million compared to cash provided by operating activities of $11.7 million in the prior year. The significantly improved profitability and effective management of working capital helped produce the increase from the prior year. In 2001, cash used in investing activities was $7.2 million as compared with $8.7 million in the same period of the prior year. Decreased capital expenditures in 2001 were the result of opening fewer new stores in the current year. Cash used in financing activities was $6.4 million in fiscal year 2001 compared with cash used by financing activities of $3.4 million in the same period of 2000. In 2000, the Company reduced its credit borrowings that were needed to finance the working capital and capital expenditure investments described above. The Company had no borrowings on its working capital revolver at year-end as compared to $5.3 million in 2000. 12 At September 30, 2001 the Company had $39.2 million of additional borrowing capability on its Loan and Security Agreement. Funds borrowed under the Loan and Security Agreement are used primarily to fund working capital and other general corporate purposes. The Company believes that its internally generated funds, as well as its borrowing capacity, are adequate to meet its working capital needs, maturing obligations and capital expenditure requirements, including those relating to the opening of new stores and the relocation of the corporate office. Seasonality and Quarterly Fluctuations. The Company's business exhibits substantial seasonality which the Company believes is typical of the swimming pool supply industry. In general, sales and net income are highest during the quarters ended June and September, which represent the peak months of swimming pool use. Sales are substantially lower during the quarters ended December and March when the Company will typically incur net losses. The principal external factor affecting the Company's business is weather. Hot weather and the higher frequency of pool usage in such weather create a need for more pool chemicals and supplies. Unseasonably early or late warming trends can increase or decrease the length of the pool season. In addition, unseasonably cool weather and/or extraordinary amounts of rainfall in the peak season decrease swimming pool use. The Company expects that its quarterly results of operations will fluctuate depending on the timing and amount of revenue contributed by new stores and, to a lesser degree, the timing of costs associated with the opening of new stores. The Company attempts to open its new stores primarily in the quarter ending March in order to position itself for the following peak season. As additional stores and the resultant operating expenses are added, the Company expects its usual losses incurred in the quarters ended December and March to increase. 13 Summarized Quarterly Financial Data (Unaudited) (In thousands)
13 Weeks Ended -------------------------------------------------- 2001 Dec. 29 March 30 June 29 Sept. 29 -------------------------------------------------- Net Sales.......................................... $ 28,585 $ 32,559 $140,465 $100,091 Gross Profit....................................... 11,003 13,528 67,687 43,080 (Loss) Income from Operations...................... (14,540) (13,223) 30,931 12,391 Net (Loss) Income.................................. (10,231) (10,752) 16,931 5,154 EBITDA(1).......................................... (10,843) (11,105) 33,064 14,532 Comparable Store Sales Growth...................... -8.6% -13.3% 1.3% 3.4%
13 Weeks Ended ----------------------------------------------------- 2000 Jan. 1 April 1 July 1 Sept. 30 ----------------------------------------------------- Net Sales.......................................... $ 30,890 $ 37,683 $138,286 $96,304 Gross Profit....................................... 7,352 9,800 59,475 54,568 (Loss) Income from Operations...................... (14,103) (16,539) 23,834 8,737 Net (Loss) Income.................................. (9,407) (10,952) 13,815 1,831 EBITDA(1).......................................... (11,698) (13,703) 30,637 13,419 Comparable Store Sales Growth...................... 11.8% 7.1% 4.5% -0.4%
(1) EBITDA represents income before interest, taxes, depreciation and amortization, loss/(gain) on disposition of fixed assets, non-cash stock compensation expenses and the $1.5 million and $3.2 million unusual charges in 2001 and 2000, respectively. Recent Accounting Pronouncement. In June 2001, the FASB issued SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other Intangible Assets", effective for the Company's fiscal year beginning September 30, 2001 the Company has not determined what the effect these tests will have on the earnings and financial position of the Company. In April 2001, the Emerging Issues Task Force (EITF) issued Issue 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products. EITF 00-25 addresses the accounting and income statement classification of costs that a vendor incurs to or on behalf of a reseller in connection with the reseller's purchase or promotion of the vendor's products. The standard is effective for fiscal periods beginning after December 15, 2001 and will be adopted by the Company as of October 2002. It is not expected that the adoption of this standard will have a material impact on the Company's financial position, results of operations or cash flows. In July 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 143, Accounting for Asset Retirement Obligations. The standard applies to obligations associated with the retirement of tangible long-lived assets. The standard is effective for fiscal periods beginning after June 15, 2002 and will be adopted by the Company as of October 2003. It is not expected that the adoption of this standard will have a material impact on the Company's financial position, results of operations or cash flows. In August 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement) which supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of; however it retains the fundamental provisions of that statement related to the recognition and measurement of the impairment of 14 long-lived assets to be "held and used." The standard is effective for fiscal periods beginning after December 15, 2001 and will be adopted by the Company as of October 2002. It is not expected that the adoption of this standard will have a material impact on the Company's financial position, results of operations or cash flows. ITEM 7a. Quantitative and Qualitative Disclosures about Market Risk The Company's Loan and Security Agreement described in note 5 to the financial statements as well as in the Management Discussion and Analysis carries interest rate risk. Amounts borrowed under this Agreement bear interest at either Libor plus 1.75%, or at the Company's choice, the lender's reference rate. Should the lenders' base rate change, the Company's interest expense will increase or decrease accordingly. 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS
Page ------- Reports of Independent Auditors and Public Accountants................................. 17 Consolidated Balance Sheets -- September 29, 2001 and September 30, 2000............... 19 Consolidated Statements of Operations -- Years Ended September 29, 2001, September 30, 2000, and October 2, 1999......................................................... 20 Consolidated Statements of Shareholders' Equity (Deficit) -- Years Ended September 29, 2001, September 30, 2000, and October 2, 1999........................................ 21 Consolidated Statements of Cash Flows -- Years Ended September 29, 2001, September 30, 2000, and October 2, 1999............................................................. 22 Notes to Consolidated Financial Statements............................................. 23
16 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders of Leslie's Poolmart, Inc.: We have audited the accompanying consolidated balance sheets of Leslie's Poolmart, Inc. and subsidiaries as of September 29, 2001 and September 30, 2000 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Leslie's Poolmart, Inc. and subsidiaries at September 29, 2001 and September 30, 2000 and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. Ernst & Young LLP Phoenix, Arizona December 17, 2001 17 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Leslie's Poolmart, Inc.: We have audited the accompanying consolidated statements of operations, shareholders' equity (deficit) and cash flows of Leslie's Poolmart, Inc. (a Delaware corporation) and subsidiaries for the year ended October 2, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated results of operations and cash flows of Leslie's Poolmart, Inc. and subsidiaries for the year ended October 2, 1999 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Los Angeles, California December 17, 1999 18 Leslie's Poolmart, Inc.
Consolidated Balance Sheets - -------------------------------------------------------------------------------------------------------------------------- (Dollar Amounts in Thousands) - -------------------------------------------------------------------------------------------------------------------------- ASSETS Sept. 29, Sept. 30, 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- Current assets: Cash and cash equivalents $ 6,768 $ 5,252 Accounts and other receivables, net 7,450 9,143 Inventories 55,935 57,642 Prepaid expenses and other current assets 1,176 1,334 Deferred tax assets 6,118 6,335 - -------------------------------------------------------------------------------------------------------------------------- Total current assets 77,447 79,706 Property, plant and equipment, at cost, net of accumulated depreciation 44,781 46,678 Goodwill, net 7,836 8,114 Non-compete covenant, net - 163 Deferred financing costs, net 1,744 2,420 Other assets 502 496 - -------------------------------------------------------------------------------------------------------------------------- Total assets $132,310 $137,577 ========================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable $ 19,449 $ 25,875 Accrued expenses 23,329 18,193 Income taxes payable 5,999 4,273 Current maturities of long-term debt 121 108 - -------------------------------------------------------------------------------------------------------------------------- Total current liabilities 48,899 48,449 Line of credit - 5,342 Long-term debt 867 988 Senior notes 90,000 90,000 Deferred tax liabilities 2,515 3,036 - -------------------------------------------------------------------------------------------------------------------------- Total liabilities 142,281 147,815 - -------------------------------------------------------------------------------------------------------------------------- Commitments and contingencies - - Redeemable preferred stock, $0.001 par value; Authorized - 2,000,000 shares; Issued and outstanding - 28,000 Series A at September 29, 2001 And September 30, 2000, respectively 42,314 37,526 Stockholder's equity (deficit): Common stock, $0.001 par value, authorized 12,000,000 shares, Issued and outstanding 7,057,105 shares at September 29, 2001 and 7,334,880 at September 30, 2000, respectively 1 1 Stock subscription receivable (450) - Paid-in capital (45,295) (44,795) Retained deficit (6,540) (2,970) - -------------------------------------------------------------------------------------------------------------------------- Total stockholders' deficit (52,284) (47,764) - -------------------------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity (deficit) $132,310 $137,577 ==========================================================================================================================
See accompanying notes to financial statements. 19 Leslie's Poolmart, Inc. Consolidated Statements of Operations - -------------------------------------------------------------------------------- (Dollar Amounts in Thousands) - --------------------------------------------------------------------------------
For the Years Ended ------------------------------------------------------- Sept. 29, 2001 Sept. 30, 2000 Oct. 2, 1999 ------------------------------------------------------- Sales $301,700 $303,163 $282,349 Cost of merchandise sold and services sold, including warehousing and transportation expenses 166,402 171,968 159,933 - -------------------------------------------------------------------------------------------------------------------------- Gross profit. 135,298 131,195 122,416 Selling, general and administrative expenses 117,860 122,501 110,257 Stock compensation expense - 424 - Unusual expense - 230 - Restructuring Charge 1,466 819 - Amortization of acquisition costs 413 742 742 - -------------------------------------------------------------------------------------------------------------------------- Operating Income 15,559 6,479 11,417 Other expenses: Interest expense, net 12,320 12,536 11,380 Other expense 919 1,477 1,006 - -------------------------------------------------------------------------------------------------------------------------- Total other expense 13,239 14,013 12,386 Net income/(loss) before taxes 2,320 (7,534) (969) Income tax expense/(benefit) 1,102 (2,821) (91) - -------------------------------------------------------------------------------------------------------------------------- Net income/(loss) 1,218 (4,713) (878) Series A preferred stock dividends and accretion 4,788 4,301 3,864 - -------------------------------------------------------------------------------------------------------------------------- Loss applicable to common shareholders $ (3,570) $ (9,014) $ (4,742) ==========================================================================================================================
See accompanying notes to financial statements. 20 Leslie's Poolmart, Inc. Consolidated Statements of Stockholders' Equity (Deficit) - -------------------------------------------------------------------------------- (Dollar Amounts in Thousands, except share amounts) - --------------------------------------------------------------------------------
Common Stock -------------------- Stock Additional Retained Total Number of Subscription Paid In Earnings/ Stockholders' Shares Amount Receivable Capital (Deficit) Equity/(Deficit) - -------------------------------------------------------------------------------------------------------------- Balance, at October 3, 1998 7,168,215 $1 $ - $(45,702) $10,786 $(34,915) Series A preferred stock dividends and accretion - - - - (3,864) (3,864) Net loss - - - - (878) (878) - -------------------------------------------------------------------------------------------------------------- Balance, at October 2, 1999 7,168,215 1 - (45,702) 6,044 (39,657) Series A preferred stock dividends and accretion - - - - (4,301) (4,301) Stock option compensation expense - - - 424 - 483 Issuance of common stock 166,665 - - 483 - 424 Net loss - - - - (4,713) (4,713) - -------------------------------------------------------------------------------------------------------------- Balance, at September 30, 2000 7,334,880 1 - (44,795) (2,970) (47,764) Series A preferred stock dividends and accretion - - - - (4,788) (4,788) Repurchase common stock (277,775) - - (500) - (500) Stock subscription receivable - - (450) - - (450) Net income - - - - 1,218 1,218 - -------------------------------------------------------------------------------------------------------------- Balance, at September 29, 2001 7,057,105 $1 $(450) $(45,295) $(6,540) $(52,284) ==============================================================================================================
See accompanying notes to financial statements. 21 Leslie's Poolmart, Inc. Consolidated Statements of Cash Flows - -------------------------------------------------------------------------------- (Dollar Amounts in Thousands) - --------------------------------------------------------------------------------
Years Ended ----------------------------------------------- Sept. 29, 2001 Sept. 30, 2000 Oct. 2, 1999 - ----------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES: Net income/(loss) $ 1,218 $(4,713) $ (878) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 8,885 8,579 7,952 Amortization of loan fees and discounts 415 629 547 Deferred income taxes (304) (1,283) (1,364) Loss on disposition of assets 919 1,477 1,131 Compensation recognized for stock options -- 424 -- Changes in operating assets and liabilities: Accounts and other receivables 1,693 (1,793) (2,080) Inventories 1,707 1,087 (11,289) Prepaid expenses and other 158 794 (545) Other assets 21 (53) 76 Accounts payable and accrued liabilities (1,289) 7,301 3,852 Income taxes 1,726 (726) 318 - --------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) operating activities 15,149 11,723 (2,280) - --------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES: Purchase of property and equipment (7,371) (9,129) (16,042) Proceeds from disposition of property, plant and equipment 138 473 236 - --------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (7,233) (8,656) (15,806) - --------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES: Net line of credit borrowings/(repayments) (5,342) (3,226) 8,568 Payments of long-term debt (108) (100) (93) Purchase of common stock (500) -- -- Stock subscription receivable (450) -- -- Payment of deferred financing costs -- (589) -- Proceeds from issuance of common stock, net -- 483 -- - --------------------------------------------------------------------------------------------------------------------- Net cash provided by/(used in) financing activities (6,400) (3,432) 8,475 - --------------------------------------------------------------------------------------------------------------------- NET INCREASE/(DECREASE) IN CASH 1,516 (365) (9,611) CASH AT BEGINNING OF YEAR 5,252 5,617 15,228 - --------------------------------------------------------------------------------------------------------------------- CASH AT END OF YEAR $ 6,768 $ 5,252 $ 5,617 =====================================================================================================================
See accompanying notes to financial statements. 22 Leslie's Poolmart, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 1. Business and Operations Leslie's Poolmart, Inc. (the Company) is a specialty retailer of swimming pool supplies and related products. As of September 29, 2001, the Company marketed its products under the trade name Leslie's Swimming Pool Supplies through 391 retail stores in 30 states and through mail order catalogs sent to selected swimming pool owners nationwide. The Company also repackages certain bulk chemical products for retail sale. The Company's business is highly seasonal as the majority of its sales and all of its operating profits are generated in the quarters ending in June and September. On June 11, 1997, Leslie's Poolmart (a California corporation - "Leslie's California") reincorporated in Delaware by merging into a wholly-owned Delaware subsidiary (the "Reincorporation"), changed its name to Leslie's Poolmart, Inc. and merged Poolmart USA Inc., a newly-formed corporation, with and into the Company (the "Recapitalization"). As a result of the Recapitalization, (i) each outstanding share of common stock of Leslie's California was converted into $2.90 cash (other than 1,797,525 shares owned primarily by members of management); and (ii) outstanding options covering approximately 4,150,000 shares of common stock, including those not yet vested, were exercised and retired for payment of the difference between the exercise price and $2.90 per share. The total value of the shares and options cashed out approximated $94,300,000, plus $5,229,000 in expenses associated with this transaction. In connection with the Recapitalization, the Company changed the authorized capital of the Company to 12,000,000 shares of common stock with a $0.001 par value and 2,000,000 shares of preferred stock with a $0.001 par value. In order to finance the repurchase of the outstanding common shares and options, the Company issued $90.0 million of its 10.375% Senior Notes and sold 5,370,690 shares of its common stock for proceeds of $15.6 million. As indicated above, certain directors and members of management converted some of the Leslie's California common shares which they owned into shares of the Company's common stock. Also in connection with the Recapitalization, the Company issued 28,000 shares of its Series A Preferred Stock of the Company, par value $0.001 per share, at $1,000 per share for a total consideration of $28.0 million, consisting of cash and an exchange of the $10.0 million principal amount of Convertible Subordinated Debentures of Leslie's California held by a major supplier. In connection with this transaction, the holder of the Series A Preferred Stock received Warrants to purchase up to 15.0% of the shares of the Company's common stock at a purchase price of $0.01 per share (subject to adjustment) for a period of ten years. 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements of the Company include Leslie's Poolmart, Inc., and its wholly-owned subsidiaries, Leslie's Pool Brite, Inc., Sandy's Pool Supply, Inc. and Blackwood & Simmons, Inc. All significant inter- company transactions and accounts have been eliminated. Fiscal Periods In 1997, the Company changed its fiscal year end from the Saturday closest to December 31 to the Saturday closest to September 30. The fiscal years ended on September 29, 2001, September 30, 2000 and October 2, 1999 included 52 weeks. Accounts and Other Receivables, Net Accounts and other receivables include allowances for doubtful accounts of $422,000 and $369,000 at September 29, 2001 and September 30, 2000, respectively. 23 Leslie's Poolmart, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Inventories Inventories are stated at the lower of cost or market. The Company values inventory using the first-in, first-out (FIFO) method. Property, Plant and Equipment Property, plant and equipment are stated at cost. Costs of normal maintenance and repairs are charged to expense as incurred. Major replacements or improvements of property, plant and equipment are capitalized. When items are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is included in the statements of operations. Depreciation and amortization are computed using the straight-line method (considering appropriate salvage values) based on the following estimated average useful lives:
Buildings and improvements............. 5-39 years Vehicles, machinery and equipment...... 3-10 years Office furniture and equipment......... 3-7 years Leasehold improvements................. 5-10 years
Goodwill The excess of the acquisition price over the fair value of the net assets at the date of acquisition is included in the accompanying consolidated balance sheets as ''Goodwill.'' Goodwill is being amortized (straight-line) over forty years. The Company continually evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the related business segment's undiscounted net income over the remaining life of the goodwill in measuring whether the goodwill is recoverable. The balance recorded at September 29, 2001 and September 30, 2000 was net of accumulated amortization of $2.8 million and $2.4 million, respectively. Deferred Financing Costs In connection with issuing the Senior Notes and signing the 1997 Credit Agreement, the Company paid $3.7 million in financing costs that were or are being deferred and amortized over the lives of the corresponding agreements. During fiscal 2000, the Company recorded an additional $0.7 million in financing costs associated with the Agreement. The balance recorded at September 29, 2001 and September 30, 2000 was net of accumulated amortization of $2.4 million and $1.9 million, respectively. Income Taxes The Company provides for deferred income taxes relating to timing differences in the recognition of income and expense items (primarily depreciation and amortization) for financial and tax reporting purposes. Deferred taxes at September 29, 2001 and September 29, 2000 include a provision for the differences between tax and financial asset values except that deferred taxes were not provided with respect to amounts allocated to goodwill. As the difference between tax and financial reporting basis changes, appropriate charges/credits are made to the deferred tax account. Net Sales Sales are recorded at the point of sale or when the service is performed, net of related discounts. 24 Leslie's Poolmart, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- Cost of Sales Included in cost of sales are the costs of services and purchased goods, chemical repackaging costs and related distribution costs. Restructuring Costs During the first quarter 2001, the Company recorded a restructuring charge of $1.5 million for expenses associated with its corporate relocation to Phoenix, Arizona. These expenses consisted primarily of the relocation related costs incurred after vacating its existing corporate location for employee relocation related expenses. The Company believes that the future operating expense benefits of this move will offset the expected relocation cost expected to be incurred. During the fourth quarter 2000, the Company recorded a restructuring charge of $0.8 million for expenses associated with its corporate relocation to Phoenix, Arizona. These expenses consisted primarily of the occupancy related costs expected to be incurred after vacating its existing corporate location and for employee related termination expenses. The Company also accrued an additional $0.2 million for additional employee related expenses that are not yet recognizable under EITF No. 94-3. The Company expected to incur an additional $2.1 million in expenses related to the corporate move during the first quarter of 2001. Fair Value of Financial Statements The fair value of the $90.0 million Senior Notes using quoted market prices as of September 29, 2001 is $118.6 million. The carrying amounts of other long- term debt approximate fair value because either the interest rate fluctuates based on market rates or interest rates appear to approximate market rates for similar instruments. The fair value estimates are subjective in nature and involve uncertainties and matters of judgement and therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates. Use of Estimates in the Preparation of Consolidated Financial Statements The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Derivative Instruments Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," (SFAS 133), requires companies to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designed and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation. For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the 25 Leslie's Poolmart, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change. For derivative instruments that are designated and qualify as a hedge of a net investment in foreign currency, the gain or loss is reported in other comprehensive income as part of the cumulative translation adjustment to the extent it is effective. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in current earnings during the period of change. Recent Accounting Pronouncements In June 2001, the FASB issued SFAS 141 "Business Combinations", and SFAS 142, "Goodwill and Other Intangible Assets", effective for the Company's fiscal year beginning September 30, 2001, the Company has not determined what the effect of these test will be on the earnings and financial position of the Company. In April 2001, the Emerging Issues Task Force (EITF) issued Issue 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products. EITF 00-25 addresses the accounting and income statement classification of costs that a vendor incurs to or on behalf of a reseller in connection with the reseller's purchase or promotion of the vendor's products. The standard is effective for fiscal periods beginning after December 15, 2001 and will be adopted by the Company as of October 2002. It is not expected that the adoption of this standard will have a material impact on the Company's financial position, results of operations or cash flows. In July 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 143, Accounting for Asset Retirement Obligations. The standard applies to obligations associated with the retirement of tangible long-lived assets. The standard is effective for fiscal periods beginning after June 15, 2002 and will be adopted by the Company as of October 2003. It is not expected that the adoption of this standard will have a material impact on the Company's financial position, results of operations or cash flows. In August 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement) which supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of; however it retains the fundamental provisions of that statement related to the recognition and measurement of the impairment of long-lived assets to be "held and used." The standard is effective for fiscal periods beginning after December 15, 2001 and will be adopted by the Company as of October 2002. It is not expected that the adoption of this standard will have a material impact on the Company's financial position, results of operations or cash flows. Advertising The Company expenses advertising during the period of the event. Advertising expense for the years ended September 29, 2001, September 30, 2000 and October 2, 1999 was approximately $7.4 million, $7.3 million and $7.1 million, respectively. Reclassifications Certain reclassifications have been made to the prior year. During prior years, warehousing, transportation and the related occupancy costs were reported as operating and administrative expenses and certain retail occupancy costs were classified as cost of sales. For the current year presentation, these distribution expenses have been reclassified as cost of sales and the retail occupancy costs have been reclassified as operating and administrative expenses for the periods presented. 26 Leslie's Poolmart, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 3. Inventories Inventories consist of the following:
Sept. 29, 2001 Sept. 30, 2000 ----------------------------------------- Raw materials and supplies................................... $ 182,000 $ 430,000 Finished goods............................................... 55,753 ,000 57,212,000 ----------------------------------------- Total Inventory.............................................. $55,935 ,000 $57,642,000 =========================================
4. Property, Plant and Equipment Property, plant and equipment consists of the following:
Sept. 29, 2001 Sept. 30, 2000 ----------------------------------------- Land...................................................... $ 6,215,000 $ 6,370,000 Buildings and improvements................................ 8,546,000 8,471,000 Vehicles, machinery and equipment......................... 3,069,000 3,162,000 Leasehold improvements.................................... 33,235,000 31,501,000 Office furniture, equipment and other..................... 29,894,000 29,156,000 Construction-in-process................................... 3,025,000 553,000 ----------------------------------------- 83,984,000 79,213,000 Less - accumulated deprecation and amortization........... 39,203,000 32,535,000 ----------------------------------------- Total Property, Plant and Equipment....................... $44,781,000 $46,678,000 =========================================
5. Line of Credit Agreement In June of 2000, the Company entered into a new Loan and Security Agreement (the "Agreement") with Foothill Capital Corporation. Under the Agreement, maximum borrowings are $65.0 million and the minimum amount available not to fall below $40.0 million, and with a maturity date set at January 31, 2004. Under the Agreement, maximum borrowings are limited as a function of inventory or calculated LTM EBITDA rates as defined in the Agreement. On September 29, 2000, there were no borrowings outstanding under the Agreement. Borrowings under the Agreement accrue interest at the lender's reference rate or at LIBOR plus the applicable LIBOR rate margin at September 29, 2001. The interest rate at September 29, 2001 was 3.8%. The margins are determined by calculated LTM EBITDA rates as defined in the Agreement. The Agreement contains certain financial covenants that include minimum calculated EBITDA levels and maximum capital expenditure amounts. As of September 29, 2001, the Company was in compliance with these covenants. 27 Leslie's Poolmart, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 6. Long-Term Debt Long-term debt consists of the following:
Sept. 29, 2001 Sept. 30, 2000 ----------------------------------------- Notes payable collateralized by security interests in certain assets, maturing September 2002. Interest accrues at the rate 6.5%................................................................ $109,000 $ 198,000 Notes payable collaterlized by security interest in various properties, due in monthly installments maturing December 2003. Interest accrues at the rate of 9.6%................................ 879,000 898,000 ----------------------------------------- 988,000 1,096,000 Less current portion................................................. 121,000 108,000 ----------------------------------------- $867,000 $ 988,000 =========================================
Principal maturities of long-term debt as of September 29, 2001 are as follows: 2002............................................................................... $ 121,000 2003............................................................................... 37,000 2004............................................................................... 830,000 ---------- $ 988,000 ==========
28 Leslie's Poolmart, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 7. Senior Notes On June 11, 1997, the Company issued $90.0 million aggregate principal amount of its 10.375 percent Senior Notes due July 15, 2004 (the "Notes"). The Notes were issued under an indenture (the "Indenture") by and among the Company and U.S. Trust Company of California, N.A., as trustee. Interest on the Notes accrues at the rate of 10.375 percent per annum and is payable semi-annually in arrears on each January 15 and July 15 commencing on January 15, 1998. The Notes are redeemable, in whole or in part, at the option of the Company on or after July 15, 2001, at the specified redemption prices. The Notes are generally unsecured obligations of the Company and will be subordinated to any secured indebtedness of the Company. In the event of a change of control, the Company will be required to make an offer to purchase all outstanding Notes at a price equal to 101 percent of the principal amount thereof plus accrued and unpaid interest, if any, to the date of purchase. The Indenture contains certain covenants which include, among other matters, limitations on the incurrence of additional indebtedness and the payment of dividends. At September 29, 2001, the Company was in compliance with these covenants. 8. Leases The Company leases certain store, office, distribution and manufacturing facilities under operating leases which expire at various dates through 2010. Lease agreements generally provide for increases related to cost of living indices and require the Company to pay for property taxes, repairs and insurance. Future annual minimum lease payments at September 29, 2001 are as follows:
2002...................................................... $23,023,000 2003...................................................... 19,363,000 2004...................................................... 15,469,000 2005...................................................... 10,248,000 2006...................................................... 5,778,000 Thereafter................................................ 5,356,000 ---------------- $79,237,000 ================
Certain leases are renewable at the option of the Company for periods of one to ten years. Rent expense charged against income totaled $22.5 million, $22.8 million and $20.6 million in 2001, 2000 and 1999, respectively. 29 Leslie's Poolmart, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 9. Income Taxes The provision/(benefit) for income taxes is comprised of the following:
Year Ended Year Ended Year Ended September 29, 2001 September 30, 2000 October 2, 1999 -------------------------------------------------------------------------------------- Federal: Current $1,129,000 $(1,233,000) $ 952,000 Deferred (262,000) (994,000) (1,027,000) -------------------------------------------------------------------------------------- 867,000 (2,227,000) (75,000) ====================================================================================== State: Current 277,000 (305,000) 321,000 Deferred (42,000) (289,000) (337,000) -------------------------------------------------------------------------------------- 235,000 (594,000) (16,000) ====================================================================================== Total $1,102,000 $(2,821,000) $ (91,000) ======================================================================================
A reconciliation of the provision/(benefit) for income taxes to the amount computed at the federal statutory rate is as follows:
Year Ended Year Ended Year Ended September 29, 2001 September 30, 2000 October 2, 1999 -------------------------------------------------------------------------- Federal income tax at statutory rate $ 793,000 $(2,562,000) $(330,000) Permanent differences 157,000 278,000 249,000 State taxes, net of federal benefit 152,000 (537,000) (10,000) -------------------------------------------------------------------------- $1,102,000 $(2,821,000) $ (91,000) ==========================================================================
The tax effect of temporary differences which give rise to significant portions of the deferred tax asset and liability are summarized below.
Fiscal 2001 Fiscal 2000 --------------------------------------------- ------------------------------------- Deferred Tax Assets Deferred Tax Deferred Tax Deferred Tax Liabilities Assets Liabilities --------------------------------------------- ------------------------------------- Property, plant and equip. $ -- $1,815,000 $ -- $2,336,000 State income taxes 497,000 -- 389,000 Inventory 1,874,000 -- 1,965,000 -- Difference in timing of certain deductions 3,747,000 700,000 3,981,000 700,000 --------------------------------------------- ------------------------------------- $6,118,000 $2,515,000 $6,335,000 $3,036,000 ============================================= =====================================
The Company has net operating losses (NOL) available for offset against future tax liabilities, extending through 2007, limited to approximately $83,000 per year. As this NOL is utilized, such amounts will reduce goodwill as a result of limitations imposed from a change in ownership. 30 Leslie's Poolmart, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 10. Contingencies The Company is a defendant in lawsuits or potential claims encountered in the normal course of business, such matters are being vigorously defended. In the opinion of management, the resolutions of these matters will not have a material effect on the Company's financial position or results of operations. The Company's general liability insurance program and employee group medical plan have self-insurance retention features of $100,000 and $75,000 per incident, respectively. The Company's liability is limited to $600,000 per year for the general liability program. 11. 401(k) Plan The Company provides for the benefit of its employees a voluntary retirement plan under Section 401(k) of the Internal Revenue Code. During 2001, the plan covered all eligible employees and provided for a matching contribution by the Company of 50% of each participant's contribution up to 4% of the individual's compensation as defined. The expenses related to this program were $423,000, $491,000 and $468,000 for 2001, 2000 and 1999, respectively. 12. Equity Transactions Preferred Stock In connection with the Recapitalization transaction, the Company sold 28,000 shares of Preferred Stock for total consideration of $28.0 million. The Preferred Stockholder is entitled to an annual cumulative dividend (which is payable at the option of the Company either in cash or in additional shares of Preferred Stock for the first five years). The annual dividend is payable quarterly at the annual rate of 10.875 percent, compounded semi-annually. The Preferred Stockholder is entitled to elect 20 percent of the members of the Board of Directors of the Company. The Preferred Stock may be redeemed at the option of the Company at any time at $1.010 per share plus accumulated and unpaid dividends. The Company is required to redeem the Preferred Stock in three equal installments terminating on the tenth anniversary of the date of issuance of the Preferred Shares. In connection with the issuance of the Series A Preferred Stock, the original Preferred Stockholder received 1,264,980 warrants to purchase common stock at an exercise price of $0.01 per share expiring in June of 2007. Of the $28.0 million face value of the Preferred Stock, $3.1 million was assigned to the value of these Warrants and reflected as a discount on the Preferred Stock. This discount is being accreted over the life of the Preferred Stock. The terms of the Warrant Agreement will provide for a proportionate adjustment of the warrants for stock splits and stock dividends and for additional warrant shares to be issuable in the event any of the 1997 NQ Options or ISO Options or options under the 1998 Plan are exercised. Based on the number of options outstanding at September 29, 2001, an additional 76,864 warrants could be granted if the options were exercised. In the ordinary course of business, the Company purchases raw materials and finished goods pursuant to a multi-year purchase contract from the holder of the warrants issued to the original owners of the Series A Preferred Stock. Management believes these transactions were under terms no less favorable to the Company than those arranged with other parties. Common Stock On February 15, 2001, the Board of Directors approved a resolution to amend the Corporation's Certificate of Incorporation to effectuate a 5 for 1 stock split whereby each outstanding share of the Corporation's common stock, par value $.001 per share, was converted into five shares of common stock. Following approval by the Corporation's shareholders, the Charter Amendment was filed with the Delaware Secretary of State on February 22, 2001. The consolidated financial statements reflect the split as though it occurred at beginning of the periods presented. 31 Leslie's Poolmart, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- On March 23, 2001, the Company individually, and Lawrence Hayward, President and CEO, Donald Anderson, Executive Vice President and CFO, and Green Equity Investors II, L.P., the ("Purchasers") entered into two separate Stock Purchase Agreements, the ("Agreements") with Brian P. McDermott, ("McDermott") the Company's former President and CEO (the "McDermott Transactions"). Pursuant to the Agreements, the Company repurchased 277,775 shares of the Company's voting common stock held by McDermott for an aggregate purchase price of $499,995 and the other Purchasers acquired the remaining 554,985 shares of the Company's voting common stock held by McDermott for an aggregate purchase price of $998,973. Also pursuant to the Agreements, (i) McDermott's existing options were cancelled and of no further effect; (ii) McDermott resigned from his position as a director on the Board of Directors of the Company; and (iii) the existing Consulting Agreement, dated as of December 31, 1999, between McDermott and the Company was terminated. As part of the McDermott Transactions, the Company entered into separate loan agreements with each of Mr. Hayward and Mr. Anderson, pursuant to which the Company loaned $225,000 to each of Hayward and Anderson, respectively, thereby providing a portion of the funds required for each of Anderson and Hayward to purchase the shares of the Company's common stock held by McDermott. Each Loan, together with all accrued interest, will be due and payable to the Company in full, on the earlier of: 1) the date which is 7 years from the date hereof; or 2) the termination of Borrower's employment with the Company for any reason, other than a termination by the Company. The loan agreements are secured by a portion of the shares being purchased by each of Hayward and Anderson, pursuant to Pledge Agreements executed concurrently by each of Hayward and Anderson. Additionally, the Company and Foothill Capital Corporation executed a first amendment to the existing Loan and Security Agreement to effectively permit the Company to make loans to employees in an aggregate amount not to exceed $500,000 at any time, compared to the previous limit of $250,000. 32 Leslie's Poolmart, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- 13. Stock Based Compensation Plans Pursuant to SFAS No. 123 "Accounting for Stock-Based Compensation," the Company continues to account for stock options granted in accordance with Accounting Principles Board Opinion No. 25, if the Company discloses results under SFAS 123. Had compensation cost for these plans been determined consistent with SFAS 123, the Company's net loss would not have been materially different. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 2001 risk free interest rates of 2.0%; expected volatility of 0%; expected lives of 7 years for all options and no expected dividend yield. Based on these assumptions, the weighted average value of the options granted is $0.26. All of the options issued in 2000 and 1999 were subsequently cancelled. During 1997, the Company adopted a non-qualified common stock option plan (the "NQ Option Plan") and an incentive common stock option plan (the "ISO Option Plan") and reserved 417,995 shares and 1,369,730 shares, respectively, of Leslie's common stock for issuance upon the exercise of options to be granted to certain employees of Leslie's thereunder. Options to purchase Leslie's common stock have been granted at an exercise price of $1.00 per share for options granted under the NQ Option Plan ("NQ Options") and $2.00 per share in the case of options granted under the ISO Option Plan. Leslie's has reserved 417,995 shares of Leslie's common stock for the NQ Option Plan. NQ Options vest immediately. However, Leslie's (and in some instances GEI and certain members of the HPA Group) have a right ("Call Option") to repurchase a portion of each NQ Option (and a portion of any shares of Leslie's common stock issued upon the exercise of any NQ Option ("NQ Option Shares")) upon the option holder or stockholder ceasing to provide services to Leslie's. If the NQ Option holder's service termination occurs prior to the first anniversary of the consummation of the Transactions, two-thirds of the NQ Option and two-thirds of any NQ Option Shares may be repurchased; if the termination occurs on or after the first anniversary and before the second anniversary, the Call Option applies to one-third of the NQ Options and NQ Option Shares; and the Call Option will not apply to any NQ Options or NQ Option Shares if termination occurs on or after the second anniversary of the consummation of the Transactions. NQ Options have a term of ten years and remain exercisable without regard to any termination of employment of the holder, subject to the exercise of the Call Option as described above. Under the ISO Plan, as amended, ISO Options vest in one-third increments on the first, second and third anniversaries of the original grant date. Options intended to qualify as "incentive stock options" and options not intended to so qualify may be granted under the ISO Option Plan. Pursuant to law, options intended to qualify as "incentive stock options" are subject to limitations on aggregate amounts granted and must be issued to any holder of 10% or more of the issuer's outstanding common stock at 110% of fair market value. Vested ISO Options may be exercised for 90 days post termination of employment, except in the case of the death of the option holder, in which case the vested portion may be exercised within twelve months from the date of termination. ISO Options have a term of ten years. In November 1998, Leslie's Board adopted its 1998 Incentive Stock Option Plan (the "1998 Plan"), and reserved 300,000 shares of nonvoting common stock for issuance thereunder. In January 2000, the Board approved an amendment to the Plan to increase the number of shares of nonvoting common stock issuable thereunder to 500,000 shares in the aggregate. Options to purchase Leslie's nonvoting common stock have been granted at an exercise price of $2.00 per share. On February 15, 2001, the Board of Directors approved a resolution to effectuate the "repricing" of options outstanding under the Company's ISO Option Plan and the 1998 Plan. Under the program, 198,500 existing options were cancelled and holders thereof were entitled to receive new options on a date which would be at least 6 months and a day from the date of cancellation, at a price equal to the then market value of the Company's stock. The options cancelled had exercise prices that were higher than the Board's view of the then current market price of the Company's stock and had impaired the ability of such options to fulfill their purpose. 33 Leslie's Poolmart, Inc. Notes to Financial Statements - -------------------------------------------------------------------------------- A summary of option activities for all plans is as follows:
Fiscal 2001 Fiscal 2000 Fiscal 1999 --------------------------------------------------------------------------------- Wtd Avg Wtd Avg Wtd Avg Shares Ex Price Shares Ex Price Shares Ex Price - -------------------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 2,032,150 $2.88 1,814,660 $2.55 1,785,495 $2.46 Granted 1,265,835 2.00 605,000 4.00 140,000 4.00 Exercised -- -- (166,665) -- -- -- Cancelled (1,614,155) 3.41 (220,845) 2.90 (110,835) 2.90 - -------------------------------------------------------------------------------------------------------------------- Outstanding at end of year. 1,683,830 $1.75 2,032,150 $2.88 1,814,660 $2.55 ==================================================================================================================== Exercisable at end of year. 997,160 $1.58 1,552,955 $2.63 1,325,495 $2.30 ====================================================================================================================
The following table summarizes information about all stock options outstanding as of September 29, 2001:
Options Outstanding Options Exercisable ------------------------------------------------------------ ------------------------------ Weighted Avg. Range of Number Remaining Weighed Avg. Number Weighted Avg. Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price - -------------------------------------------------------------------------------------------------------------------- $1.00 417,995 5.7 $1.00 417,995 $1.00 $2.00 1,265,835 9.8 $2.00 579,165 $2.00 - -------------------------------------------------------------------------------------------------------------------- 1,683,830 $1.75 997,160 $1.58 ====================================================================================================================
14. Supplemental Cash Flow Disclosures The Company paid interest charges of $11.2 million, $12.5 million and $11.5 million, in 2001, 2000 and 1999, respectively. The Company paid or was (refunded) income taxes of $(344,545), $165,000 and $1.1 million in 2001, 2000 and 1999, respectively. The Series A Preferred Stock dividends and the accretion of the warrants are excluded from the statement of cash flows as non- cash transactions. The tax benefit for non-qualified stock options was excluded from the statement of cash flows as a non-cash transaction in 2000. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Previously reported on Form 8-K dated October 9, 2000 filed on October 10, 2000. 34 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The directors and executive officers of the Company are as follows:
Name Age Positions ---- ----- --------- Lawrence H. Hayward........ 47 Chairman of the Board, President and Chief Executive Officer Donald J. Anderson......... 41 Executive Vice President, Chief Financial Officer and Director John M. Baumer............. 34 Director John G. Danhakl............ 45 Director Michael J. Fourticq........ 57 Director Michael L. Hatch........... 48 Senior Vice President, Merchandising and Marketing Mark A. Lum................ 44 Vice President, Service and Commercial Marvin D. Schutz........... 53 Senior Vice President, Store Operations
Lawrence H. Hayward is Chairman of the Board of Directors, President and Chief Executive Officer. He joined the Company in January 2000 as President and Chief Executive Officer and assumed the additional role of Chairman of the Board in September 2000. Most recently, Mr. Hayward was the President of ABCO Desert Markets located in Phoenix, Arizona which is a division of Fleming Companies, one of the nation's largest wholesale and retail food and general merchandise distributors. From 1995 until 1999, he served as President and Chief Executive Officer of Carr Gottstein Foods Co., Alaska's largest food and drug retailer and wholesale provider. From 1990 to 1995, Mr. Hayward held other senior level positions at Buttrey Food and Drug Co. From 1981 until 1990 he served in various corporate positions at American Stores Company headquartered in Salt Lake City, Utah. Donald J. Anderson is Executive Vice President, Chief Financial Officer and Director of the Company. He joined the Company in May 2000. Mr. Anderson has 25 years of experience in various retail industries. Most recently, Mr. Anderson was Senior Vice President and Chief Financial Officer of the Follett Higher Education Group, located in Oakbrook, Illinois, the nation's largest operator of University bookstores. From 1995 until 1999, he served as Senior Vice President and Chief Financial Officer of Carr Gottstein Foods Co., Alaska's largest food and drug retailer and wholesale provider. From 1990 to 1995, Mr. Anderson held various senior level positions at Buttrey Food and Drug Co. From 1977 to 1990, he served in various managerial positions with American Stores Company. John M. Baumer became a director of the Company in November 2001. He has been an executive officer and equity owner of Leonard Green & Partners ("LGP"), a merchant-banking firm that manages Green Equity Investors II ("GEI"), since 1999. Mr. Baumer had previously been a Vice President at Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), and had been with DLJ since 1995. Prior to joining DLJ, Mr. Baumer was at Fidelity Investments and Arthur Andersen. Mr. Baumer is also a director of Intercontinental Art, Inc., Petco Animal Supplies, Inc. and VCA Antech, Inc. John G. Danhakl became a director of the Company in June 1997. He has been an executive officer and an equity owner of LGP, a merchant banking firm which manages GEI, since 1995. Mr. Danhakl had previously been a Managing Director at DLJ and had been with DLJ since 1990. Prior to joining DLJ, Mr. Danhakl was a Vice President at Drexel Burnham Lambert Incorporated. Mr. Danhakl is also a director of Twinlab Corporation, The Arden Group, Inc. and several private companies. Michael J. Fourticq is a Director of the Company. He also served as Chairman of the Board of Directors from May 1988 until January 2000. Between May 1988 and August 1992, he served as the Company's Chief Executive Officer. Since 1995, Mr. Fourticq had been the Chairman and Chief Executive Officer of Brown Jordan International, a leading manufacturer of outdoor and casual furniture products. Since 1985 he has been the sole general partner of Hancock Park Associates, which is the general partner and affiliate of several investment partnerships. Mr. Fourticq is the Chairman of Mikol Missile-Air, director of WinsLoew Furniture and Chairman of Fitness Holdings International. 35 Michael L. Hatch has been Senior Vice President, Merchandising and Marketing of the Company since November 2000. Mr. Hatch has more than 28 years of experience in the retail industry. Most recently, Mr. Hatch was the President of ABCO Desert Markets which was a division of Fleming Companies. From 1996 to 1999 he was employed by Smiths Food and Drug where he held various positions including Senior Vice President and Southwest Manager and Vice President of Sales, Merchandising and Marketing. From 1970 to 1996, Mr. Hatch held various senior management positions at Smitty's Super Valu, Inc. located in Phoenix, Arizona, which later merged with Smith's Food and Drug. Marvin D. Schutz has been Senior Vice President, Store Operations, since July 1999. From May 1997 through June 1999, he was Vice President of Store Operations. From October 1994, he was Director of Store Operations, Eastern Division. From 1982 through 1993 he held several management positions in specialty retail at Montgomery Ward as National Director of Operations and Training and Silo Inc. as Regional Sales Manager and Director of Operations. Mark Lum has been Vice President Service and Commercial since October 2000. Mr. Lum has over 25 years of experience in the Swimming Pool Supply industry having joined the Company in April of 1976. Since June 1997, he has held various senior level management assignments with the Company including Vice President Special Projects, Vice President Operations and Administration, and Vice President of Store Operations. Prior to that time he held several management positions such as National Operations Director, District and Store Manager. All executive officers of the Company are chosen by the Board of Directors and serve at the Board's discretion. No family relationships exist between any of the officers or directors of the Company. Leslie's, GEI, the members of HPA Group, Occidental and the holders of certain management options are parties to a Stockholders Agreement. In the Stockholders Agreement, Michael Fourticq was given certain rights to be elected as a director of the Company. On March 12, 1999, Green Equity Investors II, L.P. purchased all of the Preferred Stock from Occidental Petroleum Corporation. Occidental retained warrants to purchase 518,645 shares of Common Stock. 36 ITEM 11. EXECUTIVE COMPENSATION Summary Compensation Table The following summary compensation table sets forth for the fiscal years ended September 29, 2001, September 30, 2000, and October 2, 1999, respectively, the compensation for services to the Company of the Chief Executive Officer and the four most highly compensated executive officers of the Company as of September 29, 2001.
Fiscal Year Long-Term All Other Compensation Compensation Compensation ------------------- ------------- ------------------------------- Stock Salary Bonus Options 401(k) Insurance/Other Year ($) ($)(1) (#)(2) ($)(3) ($)(4) ----- ------ ------- ------- ------ ------ Lawrence H. Hayward.................... 2001 400,000 168,000 312,500 3,400 180 Chairman of the Board, President and 2000 300,000 345,852 -- 3,400 -- Chief Executive Officer and Director 1999 -- -- -- -- -- Donald J. Anderson..................... 2001 275,000 115,500 237,500 3,400 17,552(5) Executive Vice President, 2000 116,346 112,230 -- -- 66,476(5) Chief Financial Officer and Director 1999 -- -- -- -- -- Michael L. Hatch....................... 2001 153,785 50,781 87,500 2,250 118 Senior Vice President, 2000 -- -- -- -- -- Merchandising and Marketing 1999 -- -- -- -- -- Mark A. Lum............................ 2001 119,527 31,500 75,000 2,885 68,082(5) Vice President, 2000 -- -- -- -- -- Service and Commercial Operations 1999 -- -- -- -- -- Marvin D. Schutz(6)..................... 2001 175,000 55,125 110,000 3,400 60,606(5) Senior Vice President, 2000 175,000 -- -- 3,400 -- Store Operations 1999 119,808 7,500 -- 2,362 495
__________________ (1) Bonuses are attributed to the year earned, and are paid out after the conclusion of the fiscal year. Bonuses were paid on a twelve-month basis for all of the fiscal years showing. Bonuses in 2000 to Mr. Hayward and Mr. Anderson were paid in accordance with the terms of their employment agreements. (2) All options were granted at their fair market value on the date of grant. 678,333 of the total options issued, were the reissue of options that had been previously cancelled pursuant to the Board's option repricing resolution. (3) Represents expected Company matching contributions to individuals' 401(k) accounts. (4) Represents premiums paid by the Company for life insurance not generally available to all Company employees. (5) Represents moving expenses paid in accordance with the terms of employment. (6) Promoted from Vice President to Senior Vice President in July 1999. 37 Option Plans During 1997, the Company adopted a non-qualified common stock option plan (the "NQ Option Plan") and an incentive common stock option plan (the "ISO Option Plan") and reserved 417,995 shares and 1,369,730 shares, respectively, of Leslie's common stock for issuance upon the exercise of options to be granted to certain employees of Leslie's thereunder. Options to purchase Leslie's common stock have been granted at an exercise price of $1.00 per share for options granted under the NQ Option Plan ("NQ Options") and $2.00 per share in the case of options granted under the ISO Option Plan. Leslie's has reserved 417,995 shares of Leslie's common stock for the NQ Option Plan. NQ Options vest immediately. However, Leslie's (and in some instances GEI and certain members of the HPA Group) have a right ("Call Option") to repurchase a portion of each NQ Option (and a portion of any shares of Leslie's common stock issued upon the exercise of any NQ Option ("NQ Option Shares")) upon the option holder or stockholder ceasing to provide services to Leslie's. If the NQ Option holder's service termination occurs prior to the first anniversary of the consummation of the Transactions, two-thirds of the NQ Option and two-thirds of any NQ Option Shares may be repurchased; if the termination occurs on or after the first anniversary and before the second anniversary, the Call Option applies to one-third of the NQ Options and NQ Option Shares; and the Call Option will not apply to any NQ Options or NQ Option Shares if termination occurs on or after the second anniversary of the consummation of the Transactions. NQ Options have a term of ten years and remain exercisable without regard to any termination of employment of the holder, subject to the exercise of the Call Option as described above. Under the ISO Plan, as amended, ISO Options vest in one-third increments on the first, second and third anniversaries of the original grant date. Options intended to qualify as "incentive stock options" and options not intended to so qualify may be granted under the ISO Option Plan. Pursuant to law, options intended to qualify as "incentive stock options" are subject to limitations on aggregate amounts granted and must be issued to any holder of 10% or more of the issuer's outstanding common stock at 110% of fair market value. Vested ISO Options may be exercised for 90 days post termination of employment, except in the case of the death of the option holder, in which case the vested portion may be exercised within twelve months from the date of termination. ISO Options have a term of ten years. In November 1998, Leslie's Board adopted its 1998 Incentive Stock Option Plan (the "1998 Plan"), and reserved 300,000 shares of nonvoting common stock for issuance thereunder. In January 2000, the Board approved an amendment to the Plan to increase the number of shares of nonvoting common stock issuable thereunder to 500,000 shares in the aggregate. Options to purchase Leslie's nonvoting common stock have been granted at an exercise price of $2.00 per share. On February 15, 2001, the Board of Directors approved a resolution to effectuate the "repricing" of options outstanding under the Company's ISO Option Plan and the 1998 Plan. Under the program, 198,500 existing options were cancelled and holders thereof were entitled to receive new Options on a date which would be at least 6 months and a day from the date of cancellation, at a price equal to the then market value of the Company's stock. The options cancelled had exercise prices that were higher than the Board's view of the then current market price of the Company's stock and had impaired the ability of such options to fulfill their purpose. On February 15, 2001, the Board of Directors approved a resolution to amend the Corporation's Certificate of Incorporation to effectuate a 5 for 1 stock split whereby each outstanding share of the Corporation's common stock, par value $.001 per share, was converted into five shares of common stock. Following approval by the Corporation's shareholders, the Charter Amendment was filed with the Delaware Secretary of State on February 22, 2001. The consolidated financial statements reflect the split as though it occurred at beginning of the periods presented. 38 Option Grants in 2001 The following table sets forth the stock options granted to the Chief Executive Officer and the other executive officers of the Company as of September 29, 2001, during the twelve months ended September 29, 2001, pursuant to the Company's Incentive Stock Option Plan, NQ Option Plan, or otherwise.
Individual Grants ------------------------------------------------------- Potential Realizable Value at Assumed Annual Rates of Stock Price % of Total Appreciation for Option Term(2) Options Granted -------------------------------------- Options to Employees in Exercise or Expiration Granted(1) Fiscal Year Base Price Date 0%($) 5%($) 10% ($) ----------------------------------------------------------------------------------------------- Lawrence H. Hayward..... 62,500 4.9% $2.00 2/22/11 -- 78,750 199,375 250,000 19.8% $2.00 8/24/11 -- 315,000 797,500 Donald J. Anderson...... 62,500 4.9% $2.00 2/22/11 -- 78,750 199,375 175,000 13.8% $2.00 8/24/11 -- 220,500 558,250 Michael L. Hatch........ 12,500 1.0% $2.00 2/22/11 -- 15,750 39,875 75,000 5.9% $2.00 8/24/11 -- 94,500 239,250 Mark A. Lum............. 835 0.1% $2.00 2/22/11 -- 1,052 2,664 74,165 5.9% $2.00 8/24/11 -- 93,448 236,586 Marvin D. Schutz........ 5,835 0.5% $2.00 2/22/11 -- 7,352 18,614 104,165 8.2% $2.00 8/24/11 -- 131,248 332,286
(1) Granted pursuant to 1997 and 1998 Stock Option Plan. Options granted on 2/22/01 vest over a three-year period. Options granted on 8/24/01, were reissued as mandated under the Board's Repricing Resolution and vest according to the original vesting schedule of the previously cancelled options. (2) Potential realizable value is based on an assumption that the stock price of the common stock appreciates at the annual rate shown (compounded annually) from the date of grant until the end of the ten-year option term. These numbers are calculated based on requirements promulgated by the Securities and Exchange Commission and do not reflect the Company's estimate of future stock price growth. Aggregated Option Exercises in 2001 and Fiscal Year-End Option Value The following table sets forth the stock option exercises by the named executive officers during 2001. In addition, the table indicates the total number and value of exercisable and non-exercisable options held by each such officer as of September 29, 2001.
Shares Value Number of Unexercised Value of Unexercised Acquired On Realized Options at In-the-Money Options at Exercise (#) ($) September 29, 2001 September 29, 2001 ------------------------------------------------------------------------------------ Exercisable Unexercisable Exercisable Unexercisable ------------------------------------------------------------ Lawrence H. Hayward... -- -- 250,000 62,500 -- -- Donald J. Anderson.... -- -- 58,334 179,166 -- -- Michael L. Hatch...... -- -- 25,000 62,500 -- -- Mark A. Lum........... -- -- 55,832 19,168 -- -- Marvin D. Schutz...... -- -- 78,332 31,668 -- --
____________________ (1) Potential unrealized value is (i) the fair market value at September 29, 200 ($2.00 per share) less the option exercise price times (ii) the number of shares. 39 Directors' Compensation Directors do not receive any compensation directly for their service on the Company's Board of Directors. The Company has agreed, however, to pay LGP certain fees for various management, consulting and financial planning services, including assistance in strategic planning, providing market and financial analyses, negotiating and structuring financing and exploring expansion opportunities. John M. Baumer and John D. Danhakl are members of the Company's Board of Directors and are executive officers and equity owners of LGP. Employment Agreements Lawrence Hayward and Donald Anderson each entered into employment agreements with Leslie's, dated as of January 1, 2000 and May 1, 2000, respectively. Each of the employment agreements contains non-solicitation and confidentiality covenants, and provides that the executive is eligible to participate in Leslie's benefit plans consistent with the benefits extended to the most senior of Leslie's executives (including vacation, personal and sick leave, disability, medical and life insurance). Each of the employment agreements also provides that the executive will serve at the will of the Company's Board of Directors. Mr. Hayward's employment agreement provides for a base salary of $400,000 annually, plus a minimum guaranteed bonus of $150,000 for fiscal year 2000. In fiscal year 2001 and all successive years, Mr. Hayward's bonus will be based solely upon the Company's financial performance. If Leslie's terminates Mr. Hayward's employment for any reason other than Just Cause (as defined in the Agreement), Mr. Hayward will receive his base salary and benefits through the twelve-month period following termination, except that if Mr. Hayward becomes an employee, consultant or partner of a company which directly competes with Leslie's, any such severance payments and benefits shall end as of the date Mr. Hayward's relationship with the competing entity commenced. The benefits are also payable upon a sale of substantially all of the business or assets of the Company or a consolidation, merger or change of control of the Company (a "Change of Control"). Mr. Anderson's employment agreement provides for a base salary of $275,000 annually, plus a minimum guaranteed bonus of $45,833 for fiscal year 2000 (representing the pro-rated period of his actual employment during fiscal year 2000). In fiscal year 2001 and all successive years, Mr. Anderson's bonus will be based solely upon the Company's financial performance. If Leslie's terminates Mr. Anderson's employment for any reason other than Just Cause (as defined in the Agreement), Mr. Anderson will receive his base salary and benefits through the twelve-month period following termination, or through April 30, 2002, whichever is longer, except that if Mr. Anderson becomes an employee, consultant or partner of a company which directly competes with Leslie's, any such severance payments and benefits shall end as of the date Mr. Anderson's relationship with the competing entity commenced. The benefits are also payable upon a Change of Control (as defined above). 40 ITEM 12. PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT The following table sets forth information as of September 29, 2001 with respect to (i) all persons known by the Company to be the beneficial owner of more than 5% of the Company's common stock; (ii) all executive officers of the Company; (iii) all directors; and (iv) all directors and executive officers as a group. The address for the directors and executive officers is in care of the Company.
Amount and Nature of Beneficial Percentage of Name and Address Ownership of Shares of Beneficial Owner(1) Common Stock(2) Outstanding(2) ---------------------- ------------------ -------------- GEI(3).................................................... 6,057,571 64.8% John M. Baumer(4)......................................... 6,057,571 64.8 John G. Danhakl(4)........................................ 6,057,571 64.8 Michael J. Fourticq(5).................................... 724,075 7.7 Lawrence H. Hayward(6).................................... 500,000 5.3 Donald J. Anderson(7)..................................... 308,334 3.3 Michael L. Hatch(8)....................................... 25,000 0.3 Mark A. Lum(8)............................................ 50,000 0.5 Marvin D. Schutz(8)....................................... 50,000 0.5 Occidental(9)............................................. 518,645 5.3 All executive officers and directors as a group (8 persons)................................................. 7,714,980 82.5%
(1) The address of Messrs. Fourticq, Hayward, Anderson, Hatch, Lum and Schutz is 3925 E. Broadway Road, Suite 100, Phoenix, Arizona 85040. The address of Occidental is 10889 Wilshire Boulevard, Los Angeles, California 90029. The address of GEI and Messrs. Baumer and Danhakl is 11111 Santa Monica Boulevard, Suite 2000, Los Angeles, California 90025. (2) Computed based upon the total number of shares of Leslie's common stock outstanding and the number of shares of Leslie's common stock underlying warrants and options of that person exercisable within 60 days. In accordance with Rule 13(d)-3 of the Exchange Act, any Leslie's common stock which is subject to warrants or options exercisable within 60 days is deemed to be outstanding for the purpose of computing the percentage of outstanding shares of Leslie's common stock owned by the person holding such warrants or options, but is not deemed to be outstanding for the purpose of computing the percentage of outstanding shares of Leslie's common stock owned by any other person. (3) GEI is a Delaware limited partnership managed by LGP, which is an affiliate of the general partner of GEI. Each of Messrs. Green, Sokoloff, Nolan, Danhakl and Seiffer, either directly (whether through ownership interest or position) or through one of more intermediaries, may be deemed to control LGP and such general partner. LGP and such general partner may be deemed to control the voting and disposition of the shares of Leslie's common stock owned by GEI. Accordingly, for certain purposes, Messrs. Green, Sokoloff, Nolan, Danhakl and Seiffer may be deemed to be beneficial owners of the shares of Leslie's common stock held by GEI. (4) Includes the shares beneficially owned by GEI, of which Messrs. Baumer and Danhakl are associates. (5) Includes 24,880 shares subject to options exercisable within 60 days and 699,195 shares of Leslie's common stock. (6) Includes 250,000 shares subject to options exercisable within 60 days and 250,000 shares of Leslie's common stock. (7) Includes 58,334 shares subject to options exercisable within 60 days and 250,000 shares of Leslie's common stock. (8) All such shares are subject to options exercisable within 60 days. (9) All such shares are obtainable upon the exercise of warrants. 41 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Management Agreement Pursuant to the terms of a Management Agreement among LGP, HPA and Leslie's, Leslie's pays LGP an annual management fee of $244,800. Occidental Contract A wholly-owned subsidiary of Occidental has a long-standing relationship with the Company as a supplier of certain chemical chlorine compounds. A multi-year supply agreement terminated during 1997, and a new multi-year agreement was entered into between the parties on mutually satisfactory terms and conditions. Stockholders Agreement In connection with the Mergers, Leslie's, GEI, the members of the HPA Group, Occidental, the holders of the Subscription Stock and members of management who received NQ Options or ISO Options entered into a Stockholders Agreement (the "Stockholders Agreement"). The Stockholders Agreement provides the Company and certain Stockholders certain rights to repurchase a portion of the NQ Options, NQ Shares and the Subscription Stock of certain other Stockholders upon their ceasing to provide services to the Company. The Stockholders Agreement generally restricts the transferability of securities of the Company ("Securities") held by certain of the Stockholders and establishes a right of first refusal, in the event certain Stockholders seek to transfer any of their Securities to a third party, in favor of some other Stockholders. In addition, GEI has certain "drag-along" rights and if GEI desires to sell any Securities, other Stockholders have certain "tag-along" rights to participate in such sale. The Stockholders Agreement also grants demand registration rights to certain Stockholders and piggyback registration rights for all Stockholders. In the Stockholders Agreement, Mr. Fourticq is given certain rights to be elected as a director of the Company. Stock Repurchase and Promissory Note Agreements On March 23, 2001, the Company individually, and Lawrence Hayward, President and CEO, Donald Anderson, Executive Vice President and CFO, and Green Equity Investors II, L.P., the ("Purchasers") entered into two separate Stock Purchase Agreements, the ("Agreements") with Brian P. McDermott, ("McDermott") the Company's former President and CEO (the "McDermott Transactions"). Pursuant to the Agreements, the Company repurchased 277,775 shares of the Company's voting common stock held by McDermott for an aggregate purchase price of $499,995 and the Purchasers acquired the remaining 554,985 shares of the Company's voting common stock held by McDermott for an aggregate purchase price of $998,973. Also pursuant to the Agreements, (i) McDermott's existing options were cancelled and of no further effect; (ii) McDermott resigned from his position as a director on the Board of Directors of the Company; and (iii) the Consulting Agreement, dated as of December 31, 1999, between McDermott and the Company was terminated. As part of the McDermott Transactions, the Company entered into separate loan agreements with each of Mr. Hayward and Mr. Anderson, pursuant to which the Company loaned $225,000 to each of Hayward and Anderson, respectively, thereby providing a portion of the funds required for each of Anderson and Hayward to purchase the shares of the Company's common stock sold by McDermott. Each Loan, together with all accrued interest, will be due and payable to the Company in full, on the earlier of: 1) the date which is 7th anniversary of the Note and 2) the termination of Borrower's employment with the Company for any reason, other than a termination by the Company, and is secured by a portion of the shares being purchased by each of Hayward and Anderson, pursuant to Pledge Agreements executed concurrently by each of Hayward and Anderson. Additionally, the Company and Foothill Capital Corporation executed a first amendment to the existing Loan and Security Agreement to effectively permit the Company to make loans to employees in an aggregate amount not to exceed $500,000 at any time, compared to the previous limit of $250,000. 42 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1),(2) The following financial statements and financial statement schedules are included herewith and are filed as part of this annual report. Consolidated Balance Sheets--September 29, 2001 and September 30, 2000 Consolidated Statements of Operations--Years Ended September 29, 2001, September 30, 2000, and October 2, 1999 Consolidated Statements of Stockholders' Equity (Deficit)--Years Ended September 29, 2001, September 30, 2000, October 2, 1999, and October 3, 1998 Consolidated Statements of Cash Flows--Years Ended September 29, 2001, September 30, 2000, and October 2, 1999 Notes to Consolidated Financial Statements Reports of Independent Public Auditors and Accountants (a)(3) The following exhibits set forth below are filed as part of this annual report or are incorporated herein by reference.
Exhibit Number Description - ------ ----------- 3.1 Restated Certificate of Incorporation filed with the Delaware Secretary of State on June 6, 1997* 3.2 Certificate of Designation, Preferences and Rights of Exchangeable Cumulative Redeemable Preferred Stock, Series A filed with the Delaware Secretary of State on June 11, 1997* 3.3 Certificate of Amendment to Certificate of Designation filed with the Delaware Secretary of State on November 16, 1998* 3.4 Certificate of Amendment of Restated Certificate of Incorporation filed with the Delaware Secretary of State on December 26, 2000* 3.5 Certificate of Amendment of Restated Certificate of Incorporation filed with the Delaware Secretary of State on February 22, 2001* 3.6 Bylaws of the Company* 4.1 Indenture dated as of June 11, 1997 between the Company and U.S. Trust Company of California, N.A.* 10.1 Preferred Stock and Warrant Purchase Agreement dated as of June 11, 1997 between the Company and Occidental Petroleum Corporation* 10.2 Warrant dated June 11, 1997 for the purchase of shares of common stock of the Company issued to Occidental Petroleum Corporation* 10.3 Stockholders Agreement and Subscription Agreement dated as of June 11, 1997 among the Company and Green Equity Investors II, LP, Richard H. Hillman, Michael J. Fourticq, Greg Fourticq, Brian P. McDermott, the Trustees of the McDermott Family Trust, Occidental Petroleum Corporation and the Stockholders identified on the signature pages thereto* 10.4 NQ Option Plan and form of Agreement* 10.5 ISO Option Plan and form of Agreements* 10.6 Lease for Dallas Distribution Center* 10.7 Lease for Ontario Distribution Center* 10.8 Lease for Bridgeport Distribution Center* 10.9 Form of Director's and Officer's Indemnification Agreement dated as of June 11, 1997 between the Company and certain members of management* 10.10 Management Agreement dated as of June 11, 1997 between the Company and Leonard Green & Partners, LP* 10.11 Noncompetition Agreement, dated August 31, 1992, among Sandy's Pool Supply, Inc., Leslie's Poolmart, and Philip Leslie* 10.12 Noncompetition Agreement, dated August 31, 1992, among Sandy's Pool Supply, Inc., Leslie's Poolmart, and Sander Bass*
43
Exhibit Number Description - ------ ----------- 10.13 Purchase Agreement dated June 6, 1997 between the Company and BT Securities Corporation* 10.14 Registration Rights Agreement dated as of June 11, 1997 by and between the Company and BT Securities Corporation* 10.15 1998 Nonvoting Stock Option Plan* 10.16 Employment agreement dated December 31, 1999 between the Company and Lawrence H. Hayward* 10.17 Employment Agreement dated May 1, 2000 between the Company and Donald J. Anderson* 10.18 Loan and Security Agreement June 22, 2000 among the Company and Foothill Capital Corporation* 10.19 Amendment Number One to Loan and Security Agreement* 10.20 Secured, Non-recourse Promissory Note and Pledge Agreement - Lawrence H. Hayward* 10.21 Secured, Non-recourse Promissory Note and Pledge Agreement - Donald J. Anderson* 21.1 Subsidiaries* 24.1 Power of Attorney (included on signature page)
- -------------- *Previously filed (b) Reports on Form 8-K - None 44 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Phoenix, State of Arizona, on December 21, 2001. LESLIE'S POOLMART, INC. (Registrant) By: /s/ Donald J. Anderson -------------------------- Donald J. Anderson Chief Financial Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Lawrence H. Hayward, Donald J. Anderson, and each of them, his true and lawful attorney-or attorneys-in-fact and agent or agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including pre-or post-effective amendments) to this Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agent, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the date indicated.
Signature Capacity Date --------- -------- ---- /s/ Lawrence H. Hayward Chairman of the December 21, 2001 - ---------------------------------- Board of Lawrence H. Hayward Directors, Chief Executive Officer and President /s/ John M. Baumer Director December 21, 2001 - ---------------------------------- John M. Baumer /s/ John G. Danhakl Director December 21, 2001 - ---------------------------------- John G. Danhakl /s/ Michael J. Fourticq Director December 21, 2001 - ---------------------------------- Michael J. Fourticq /s/ Donald J. Anderson Chief Financial Officer, December 21, 2001 - --------------------------------- Director and Donald J. Anderson Principal Accounting Officer
45 -----END PRIVACY-ENHANCED MESSAGE-----