-----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, LBvV/aGaRtEYCpVI4omuEa/3412cWN2a4ZMpA+18uQXRrcyepol43AaAmSXbU53N zLQM08dSSDW/uzni0HFziA== 0000898430-97-002735.txt : 19970701 0000898430-97-002735.hdr.sgml : 19970701 ACCESSION NUMBER: 0000898430-97-002735 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19970627 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: LESLIES POOLMART CENTRAL INDEX KEY: 0000866048 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-RETAIL STORES, NEC [5990] IRS NUMBER: 930976447 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-30305 FILM NUMBER: 97632252 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 S-1 1 REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 27, 1997 REGISTRATION NO. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 LESLIE'S POOLMART, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 5999 95-4620298 (STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZA- CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER) TION)
20630 PLUMMER STREET CHATSWORTH, CALIFORNIA 91311 (818) 701-3813 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- BRIAN P. MCDERMOTT PRESIDENT AND CHIEF EXECUTIVE OFFICER LESLIE'S POOLMART, INC. 20630 PLUMMER STREET CHATSWORTH, CALIFORNIA 91311 (818) 701-3813 (NAME AND ADDRESS, INCLUDING ZIP CODE, OF AGENT FOR SERVICE) COPIES TO: CYNTHIA G. WATTS, ESQ. JENNIFER BELLAH, ESQ. LESLIE'S POOLMART, INC. GIBSON, DUNN & CRUTCHER 20630 PLUMMER STREET 333 SOUTH GRAND AVENUE CHATSWORTH, CALIFORNIA 91311 LOS ANGELES, CALIFORNIA 90071 (818) 993-4212 (213) 229-7986 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED AGGREGATE MAXIMUM AMOUNT OF TITLE OF AMOUNT TO BE PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE - --------------------------------------------------------------------------------------------- 10 3/8% Senior Notes due 2004... $90,000,000 100% $90,000,000 $27,273
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED JUNE 27, 1997 PRELIMINARY PROSPECTUS LOGO $90,000,000 LESLIE'S POOLMART, INC. OFFER TO EXCHANGE 10 3/8% SENIOR NOTES DUE 2004 FOR ANY AND ALL OUTSTANDING 10 3/8% SENIOR NOTES DUE 2004 --------------- THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON 1997, UNLESS EXTENDED. Leslie's Poolmart, Inc. a Delaware corporation (successor to Leslie's Poolmart, a California Corporation, "Leslie's" or the "Company"), hereby offers (the "Exchange Offer"), upon the terms and subject to the conditions set forth in this Prospectus and the accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange its outstanding 10 3/8% Senior Notes due 2004 (the "Old Notes"), of which an aggregate of $90 million principal amount is outstanding as of the date hereof, for an equal amount of newly issued 10 3/8% Senior Notes due 2004 (the "New Notes"). Interest on the Notes will be payable semi-annually on January 15 and July 15 of each year, commencing on January 15, 1998, at the rate of 10 3/8% per annum. The Notes will be redeemable, in whole or in part, at the option of the Company on or after July 15, 2001, at the redemption prices set forth herein plus accrued and unpaid interest, if any, to the date of redemption. In addition, at any time on or prior to July 15, 2000, the Company may redeem up to $25.0 million of aggregate principal amount of the Notes with the net cash proceeds from one or more Public Equity Offerings (as defined) by the Company at a redemption price of 110.375% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of redemption, provided that at least $65.0 million of aggregate principal amount of the Notes remains outstanding after any such redemption. The Notes will be general unsecured obligations of the Company and will rank pari passu in right of payment to all other senior indebtedness of the Company and senior to all subordinated indebtedness of the Company. The Notes will effectively be subordinated to any secured indebtedness of the Company, including the Bank Facility (as defined) of the Company. At March 29, 1997, after giving effect to the Merger, the Offering, certain other financing transactions and the application of the proceeds therefrom as set forth herein (collectively, the "Transactions"), the Company would have had approximately $97.7 million of senior indebtedness outstanding. In the event of a Change of Control, the Company will be required to make an offer to repurchase all outstanding Notes at a price equal to 101% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase. (Continued on the following page) SEE "RISK FACTORS" COMMENCING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD NOTES IN THE EXCHANGE OFFER. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. BT SECURITIES CORPORATION --------------- The date of this Prospectus is , 1997 (Continued from the previous page) The New Notes are being offered hereby in order to satisfy certain obligations of the Company under the Registration Rights Agreement, dated June 11, 1997, among the Company and BT Securities Corporation ("BT") (the "Registration Rights Agreement"). The form and terms of the New Notes will be the same as those of the Old Notes except that the New Notes will have been registered under the Securities Act of 1933, as amended (the "Securities Act"), and hence will not be subject to certain transfer restrictions, registration rights and related liquidated damages provisions applicable to the Old Notes. The New Notes will evidence the same debt as the Old Notes and will be entitled to the benefits of an indenture (the "Indenture"), dated as of June 11, 1997, by and between the Company and U.S. Trust Company of California, N.A., as trustee (the "Trustee"). The Indenture provides for the issuance of both the Old Notes and the New Notes. The Old Notes and the New Notes are referred to herein collectively as the "Notes" and holders of the Notes are sometimes referred to herein as the "Holders." The Company will not receive any proceeds from the Exchange Offer. The Company will pay all expenses incident to the Exchange Offer (which shall not include the expenses of any Holder in connection with resales of the New Notes). The Company will accept for exchange any and all validly tendered Old Notes on or prior to 5:00 p.m. New York City time, on , 1997 (such date and time, if and as extended, the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date. The Exchange Offer is not conditioned upon any minimum principal amount of Old Notes being tendered for exchange. Old Notes may be tendered only in integral multiples of $1,000. In the event the Company terminates the Exchange Offer and does not accept for exchange any Old Notes, the Company will promptly cause the return of all previously tendered Old Notes. Based on interpretations contained in no-action letters issued to third parties by the staff of the Securities and Exchange Commission (the "Commission"), the Company believes that the New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold, and otherwise transferred by a holder thereof (other than (i) a broker-dealer who purchases such New Notes directly from the Company to resell pursuant to Rule 144A or any other available exemption under the Securities Act or (ii) a person who is an affiliate of the Company (within the meaning of Rule 405 under the Securities Act)), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that the holder is acquiring the New Notes in its ordinary course of business and is not participating, and has no arrangement or understanding with any person to participate, in the distribution of the New Notes. Holders of Old Notes wishing to accept the Exchange Offer must represent to the Company that such conditions have been met. Each broker-dealer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a Prospectus in connection with any resale of such New Notes. This Prospectus has been prepared for use in connection with the Exchange Offer and may be used by BT Securities Corporation in connection with offers and sales related to market- making transactions in the Notes. BT may act as principal or agent in such transactions. Such sales will be made at prices related to prevailing market prices at the time of sale. The Letter of Transmittal states that by so acknowledging and by delivering a Prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Notes received in exchange for Old Notes where such Old Notes were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, for a period of 180 days after the Expiration Date, it will make this Prospectus available to any broker-dealer for use in connection with any such resale. See "Plan of Distribution." Prior to this Exchange Offer, there has been no public market for the Notes. The Company does not intend to list the Notes on any securities exchange or to seek approval for quotation through any automated quotation system. There can be no assurance that an active market for the Notes will develop. To the extent that a market for the Notes does develop, there can be no assurance as to the liquidity of such market, the ability of holders of the Notes to sell their Notes or the price at which holders would be able to sell their Notes. Future trading prices of the Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's operating results and the market for similar securities. Such conditions may cause the Notes, to the extent that they are actively traded, to trade at a significant discount from face value. See "Risk Factors--Absence of Public Market for the Notes." PROSPECTUS SUMMARY The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information, risk factors and financial statements, including the related notes, appearing elsewhere in this Offering Memorandum. 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 USA, Inc., a Delaware corporation ("Poolmart") and Leslie's Poolmart, a California corporation ("Leslie's California"), and the predecessor of Leslie's California. Unless otherwise indicated, all references to fiscal years commencing on or after January 1995 in this Offering Memorandum are to fiscal years ending on the Saturday closest to December 31 and all references to fiscal years commencing prior to January 1995 in this Offering Memorandum are to fiscal years ending on December 31. The information in this Prospectus gives effect to the consummation of the Transactions. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Prospectus (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 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, seasonal and weather fluctuations, expansion and other activities of competitors, changes in federal or state environmental laws and the administration of such laws and the general condition of the economy and its effect on the securities markets. THE COMPANY Leslie's is the leading national specialty retailer of swimming pool supplies and related products. These products primarily consist of regularly purchased, non-discretionary pool maintenance items such as chemicals, equipment, cleaning accessories and parts, and also include fun, safety and fitness-oriented recreational items. The Company currently markets its products under the trade name Leslie's Swimming Pool Supplies through 278 company-owned retail stores in 27 states and through mail order catalogs sent to selected pool owners nationwide. From 1992 to 1996, the Company increased its sales at a compound annual growth rate of 18.8%, from $96.3 million to $191.6 million. During the same period, EBITDA (FIFO basis) increased at a compound annual growth rate of 21.9%, from $6.8 million to $15.0 million. The Company's growth reflects a store count that increased from 1992 to 1996 at the rate of 16.0% annually and comparable store sales increases that averaged 10.1% annually during the same time frame. The Company provides its customers a comprehensive selection of high quality products, competitive every day low prices ("EDLP") and superior customer service through knowledgeable and responsive sales personnel who offer a high level of technical assistance at convenient store locations. The EDLP offered by the Company are generally comparable to or better than those offered by any of its competitors, including mass merchandisers and home centers. The typical Leslie's store contains 4,000 square feet of space, is located either in a strip center or on a freestanding site in an area of heavy retail activity, and draws its customers primarily from a trade area with a radius of approximately three miles. The Company maintains a proprietary mailing list of more than 4.5 million addresses, including approximately 90% of the residential in-ground pools in the U.S. This highly focused list of target customers is central to the Company's direct mail marketing efforts, which support both its retail store and mail order operations. Management believes that the Leslie's name is one of the most recognized brands in pool supplies and represents an image of quality to consumers. In fiscal 1996, Leslie's brand name products accounted for approximately 60% of the Company's total sales. 1 Leslie's successful execution of its business strategy has generated a 33- year history of consistently increasing sales. Management intends to continue increasing sales and profits by further expanding its store base at the rate of 12% to 15% annually and continuing to achieve positive comparable store sales increases. The Company attributes its strong historical results and its positive outlook for growth and profitability to the following factors: Leadership Position in a Highly Fragmented Market. Leslie's current store count of 278 locations is approximately equal to the sum of the next fifteen largest specialty retail competitors combined. However, despite its large relative size, Leslie's presently accounts for only approximately 5% of the estimated $3.7 billion annual pool and spa supply market. Since 1989, Leslie's has accelerated the pace of its new store openings and consequently has gained market share. Management believes that this growth has come primarily at the expense of independent local and regional pool supply retailers, which accounted for over two-thirds of industry sales in 1996. Attractive Store Economics. Leslie's results reflect extremely attractive store-level economics. The Company estimates that cash required to open each new store, including inventory net of trade payables, averages approximately $125,000. Based upon the Company's past experience, new stores generally break even in their first year of operation, pay back their initial investments after three years, and in their fifth year of operation, contribute approximately $181,000 of store operating profit, yielding a return on average initial cash investment of 145%. In 1996, the Company's mature stores (the 115 stores open for five years or longer) averaged approximately $900,000 of sales, generated approximately $200,000 of store operating profit per location and posted a comparable store sales increase of 5.8%. Growth Potential of Recently Opened Stores. Leslie's new stores have historically grown dramatically in sales and store operating profit during their first five years of operation. In 1996, the 142 stores opened since the end of 1992 averaged approximately $519,000 in sales and approximately $50,000 of store operating profit per location. Management expects these stores generally to follow the Company's historical pattern of maturation and believes that there exists a large potential for sales and store operating profit increases from these nonmature stores. Large Sales Volume of Non-Discretionary Products. The consistency of Leslie's sales growth and profitability is due in large part to the sale of non- discretionary and regularly consumed products such as pool chemicals, cleaning accessories, major pool equipment (pumps and heaters) and replacement parts. Pool owners must purchase such products to maintain their pools' water quality and physical appearance and, in the Company's experience, do so regardless of the economic environment. In fiscal 1996, non-discretionary and regularly consumed products comprised approximately 74% of the Company's sales, with pool chemicals representing approximately 44% of the Company's total sales. Proprietary Database of Pool Locations. Through ongoing research as well as the conduct of its retail and mail order business, Leslie's has developed a proprietary database of over 4.5 million addresses. The list includes approximately 90% of the residential in-ground pools in the U.S. This proprietary database allows Leslie's to execute cost-effective and highly targeted direct mail marketing. When combined with the Company's mail order sales results and computerized mapping capability, this database also gives Leslie's a sophisticated store site selection capability. Management believes that the scope and accuracy of its proprietary database is unique in the pool supply industry. Purchasing Power and Vertical Integration. Due to its size, Leslie's purchases more chemicals and other pool supplies than any other specialty retailer. In addition, Leslie's operates a repackaging facility which provides the Company with significant cost savings, greater control over product availability and quality, greater flexibility when sourcing products, and vital information when negotiating with third-party providers. Further, unlike most of its competitors, the Company does not rely upon third-party distribution, but has its own specialized and efficient distribution system. Management believes that these factors permit Leslie's to achieve a lower cost of goods than any of its competitors, including mass merchandisers and home centers. 2 Superior Level of Customer Service. Leslie's believes that its superior level of customer service, including its comprehensive product selection, gives it a significant advantage over its competitors in winning the loyalty of customers. Due to the complicated nature of pool chemistry and pool equipment maintenance, and consistent with its philosophy of being a full service swimming pool supply retailer, Leslie's offers a high level of technical assistance to its customers. The Company has developed a comprehensive training program educating all store employees on the subjects of maintenance techniques, water chemistry and equipment testing and repair. As part of its regular customer service program the Company offers free detailed water testing, pamphlets on pool maintenance, and in-store equipment repairs, generally free of labor or bench charges. The Company's headquarters are at 20630 Plummer Street, Chatsworth, California 91311 and its telephone number is (818) 993-4212. SUMMARY OF THE TRANSACTIONS On June 11, 1997, Leslie's consummated an Agreement and Plan of Merger (the "Merger Agreement") with Leslie's California and Poolmart pursuant to which Green Equity Investors L.P., the former sole stockholder of Poolmart ("GEI"), and a group of investors that includes certain members of the management and certain Leslie's California shareholders (the "HPA Group") agreed to the reorganization and recapitalization of Leslie's California through a two-step merger process. Pursuant to the Merger Agreement, Leslie's California reincorporated in Delaware and immediately thereafter Poolmart merged with and into Leslie's, with Leslie's as the surviving corporation. Each outstanding share of common stock of Leslie's, other than 359,505 shares which remained outstanding to the HPA Group (the "Continuing Shares"), was converted into the right to receive $14.50 in cash, and each share of common stock of Poolmart was converted into one share of Leslie's common stock. The holders of Leslie's common stock and stock options received approximately $94.7 million in merger consideration. Upon consummation of the Merger, GEI and the HPA Group own shares of Leslie's common stock that represent, respectively, 73.6% and 26.4% of the outstanding, non-diluted common stock of Leslie's. See "The Transactions" and "Security Ownership of Certain Beneficial Owners and Management." THE EXCHANGE OFFER The form and terms of the New Notes will be the same as those of the Old Notes except that the New Notes will have been registered under the Securities Act of 1933, as amended (the "Securities Act"), and hence will not be subject to certain transfer restrictions, registration rights and related liquidated damages provisions applicable to the Old Notes. The Exchange Offer............... The Company is offering to exchange an aggregate of $90 million principal amount of New Notes for a like principal amount of Old Notes. The Old Notes may be exchanged only in multiples of $1,000 principal amount. The Company will issue the New Notes on or promptly after the Expiration Date. See "The Exchange Offer." Expiration Date.................. The Exchange Offer will expire at 5:00 p.m., New York City time, on , 1997 unless extended in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. Conditions to the Exchange Offer........................... The Exchange Offer is subject to certain conditions, which may be waived by the Company in whole or in part and from time to time in its discretion. See "The Exchange Offer--Certain Conditions to the Exchange Offer." The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Old Notes being tendered for exchange.
3 Procedures for Tendering Old Notes........................... Each Holder desiring to accept the Exchange Offer must complete and sign the Letter of Transmittal, have the signature thereon guaranteed if required by the Letter of Transmittal, and mail or deliver the Letter of Transmittal, together with the Old Notes or a Notice of Guaranteed Delivery and any other required documents (such as evidence of authority to act satisfactory to the Company in its sole discretion, if the Letter of Transmittal is signed by someone acting in a fiduciary or representative capacity), to the Exchange Agent (as defined) at the address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any beneficial owner of the Old Notes whose Old Notes are registered in the name of a nominee, such as a broker, dealer, commercial bank or trust company and who wishes to tender Old Notes in the Exchange Offer, should instruct such entity or person to promptly tender on such beneficial owner's behalf. See "The Exchange Offer--Procedures for Tendering Old Notes." Guaranteed Delivery Procedures... Holders of Old Notes who wish to tender their Old Notes and (i) whose Old Notes are not immediately available or (ii) who cannot deliver their Old Notes or any other documents required by the Letter of Transmittal to the Exchange Agent prior to the Expiration Date (or complete the procedure for book-entry transfer on a timely basis), may tender their Old Notes according to the guaranteed delivery procedures set forth in the Letter of Transmittal. See "The Exchange Offer-- Guaranteed Delivery Procedures." The Letter of Transmittal provides that each Holder of Old Notes (other than participating broker-dealers) will represent to the Company that, among other things, the New Notes acquired pursuant to the Exchange Offer are being obtained in the ordinary course of business of the person receiving such New Notes, that neither such Holder of Old Notes nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes and that neither the Holder nor any such person is an "affiliate" of the Company, as defined in Rule 405 under the Securities Act. Any tendered Old Notes not accepted for exchange for any reason will be returned promptly after the expiration or termination of the Exchange Offer. See "The Exchange Offer." Withdrawal Rights................ Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date. See "The Exchange Offer--Withdrawal Rights." Acceptance of Old Notes and Delivery of New Notes........... The Company will accept for exchange any and all Old Notes which are properly tendered in the Exchange Offer prior to the Expiration Date. The New Notes issued pursuant to the Exchange Offer will be delivered promptly following the Expiration Date. See "The Exchange Offer--Terms of the Exchange Offer." Resales of New Notes............. Based on an interpretation by the staff of the Commission set forth in no-action letters issued to third parties, the Company believes that New Notes issued pursuant to the Exchange Offer in exchange for
4 Old Notes may be offered for resale, resold and otherwise transferred by any Holder thereof (other than any such Holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such Holder's business and that such Holder has no arrangement or understanding with any person to participate in the distribution of such New Notes, and provided, further, that each broker-dealer that receives New Notes for its own account in exchange for Old Notes must acknowledge that it will deliver a Prospectus in connection with any resale of such New Notes. See "Plan of Distribution." If a Holder of Old Notes does not exchange such Old Notes for New Notes pursuant to the Exchange Offer, such Old Notes will continue to be subject to the restrictions on transfer contained in the legend thereon. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exception from, or in a transaction not subject to, the Securities Act and applicable state securities laws. See "The Exchange Offer--Consequences of Failure to Exchange" and "Description of Senior Notes." Consequences of Failure to Exchange.. Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon. In general, Old Notes may not be offered or sold, except pursuant to a statement under the Securities Act or any exemption from registration thereunder and in compliance with applicable state securities laws. In the event the Company completes the Exchange Offer, holders of Old Notes will have no further rights to registration or liquidated damages pursuant to the Registration Rights Agreement. Certain Tax Considerations........... There will be no Federal income tax consequences to Holders exchanging Old Notes for New Notes pursuant to the Exchange Offer and a Holder will have the same adjusted basis and holding period in the New Notes as in the Old Notes immediately before the exchange. Registration Rights Agreement........ The Exchange Offer is intended to satisfy the registration rights of Holders of Old Notes under the Registration Rights Agreement, which rights terminate upon consummation of the Exchange Offer. Exchange Agent....................... U.S. Trust Company of California, N.A. is the Exchange Agent. The address and telephone number of the Exchange Agent are set forth in "The Exchange Offer-- Exchange Agent."
5 THE NOTES Securities Offered.......... $90.0 million principal amount of 10 3/8% Senior Notes due 2004 (the "Notes"). Maturity.................... July 15, 2004. Interest Payment Dates...... January 15 and July 15 of each year, commencing on January 15, 1998. Optional Redemption......... Except as described below, the Company may not redeem the Notes prior to July 15, 2001. On or after such date, the Company may redeem the Notes, in whole or in part, at the redemption prices set forth herein, together with accrued and unpaid interest, if any, to the date of redemption. In addition, at any time on or prior to July 15, 2000, the Company may redeem up to $25.0 million aggregate principal amount of the Notes with the net cash proceeds of one or more Public Equity Offerings (as defined) by the Company at a redemption price equal to 110.375% of the amount redeemed, together with accrued and unpaid interest, if any, to the date of redemption, provided that at least $65.0 million aggregate principal amount of the Notes remains outstanding immediately after any such redemption. See "Description of Notes--Optional Redemption Upon Public Equity Offerings." Change of Control........... Upon the occurrence of a Change of Control, the Company will be required to make an offer to repurchase the Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest, if any, to the date of repurchase. See "Description of Notes--Change of Control." Ranking..................... The Notes will be general unsecured obligations of the Company and will rank pari passu in right of payment to all other senior indebtedness of the Company and senior to all subordinated indebtedness of the Company. The Notes will effectively be subordinated to any secured indebtedness of the Company, including the Bank Facility. See "Description of Notes." Certain Covenants........... The indenture under which the Notes will be issued (the "Indenture") will limit, among other things, (i) the incurrence of additional indebtedness by the Company or any of its subsidiaries, (ii) the payment of dividends on, and redemption of, capital stock of the Company and any of its subsidiaries, the redemption of certain subordinated obligations of the Company and the making of certain investments by the Company or any of its subsidiaries, (iii) the sale of material assets of the Company, (iv) the sale or issuance of certain restricted subsidiary stock, (v) the creation of liens on assets of the Company or any of its subsidiaries, (vi) the consolidation or merger of the Company and the transfer of all or substantially all of the Company's assets and (vii) transactions with affiliates. See "Description of Notes--Certain Covenants." RISK FACTORS See "Risk Factors" for a discussion of certain factors that should be considered by Holders prior to tendering their Old Notes in the Exchange Offer. 6 SUMMARY HISTORICAL AND PRO FORMA FINANCIAL INFORMATION The following table sets forth summary historical financial and other data of Leslie's California for each of the five fiscal years in the period ended December 28, 1996 and as of and for the fiscal quarters ended March 30, 1996 and March 29, 1997, and certain unaudited pro forma financial and other data of the Company for the fiscal year ended December 28, 1996 and the fiscal quarter ended March 29, 1997. The pro forma income data assume that the Transactions occurred on December 31, 1995. The pro forma balance sheet data assume that the Transactions occurred on March 29, 1997. The pro forma financial data do not purport to represent what the Company's financial position or results of operations would actually have been had the Transactions in fact occurred on the assumed dates or to project the Company's financial position or results of operations for any future date or period. For additional information, see the Consolidated Financial Statements and related notes thereto appearing elsewhere in this Offering Memorandum. The following table should also be read in conjunction with "Selected Historical Consolidated Financial Data," "Unaudited Pro Forma Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEARS ENDED THREE MONTHS ENDED ------------------------------------------------ -------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 30, DEC. 28, MARCH 30, MARCH 29, 1992 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- --------- --------- (DOLLARS IN THOUSANDS) (UNAUDITED) OPERATING DATA: Net Sales............... $96,337 $119,955 $141,553 $162,456 $191,640 $18,064 $23,816 Gross Profit............ 39,017 48,289 55,469 60,399 72,760 4,258 5,562 EBITDA (FIFO basis)(1).. 6,779 8,612 11,476 10,472 14,960 (7,564) (8,243) Income (Loss) from Operations............. 4,330 6,350 9,569 6,691 9,400 (8,610) (9,628) Capital Expenditures.... 3,343 5,532 7,394 9,550 8,807 2,393 4,739 Depreciation and Amortization........... 2,423 2,389 2,393 3,374 4,326 1,057 1,314 Comparable Store Sales Growth................. 2.4% 11.7% 12.9% 6.0% 9.9% 6.6% 20.8% Stores Operated at Period-End............. 143 158 180 224 259 239 268
THREE YEAR MONTHS ENDED ENDED DEC. 28, MARCH 29, 1996 1997 -------- --------- PRO FORMA OPERATING DATA: Net Sales................................................... $191,640 $23,816 EBITDA (FIFO basis)(1)...................................... 14,888 (8,304) Income (Loss) from Operations............................... 9,328 (9,689) Cash Interest............................................... 9,858 2,470 Ratio of EBITDA (FIFO basis) to Cash Interest............... 1.51x --
AS OF PRO FORMA MARCH 29, MARCH 29, 1997 1997 --------- --------- (UNAUDITED) BALANCE SHEET DATA: Net Working Capital (excluding cash, short-term borrowings and current portions of long-term debt).................. $ 26,825 $ 27,673 Total Assets.............................................. 113,656 117,643 Total Debt................................................ 38,117 97,733 Average Debt(2)........................................... 31,257 90,873 Preferred Stock........................................... -- 24,884 Stockholders' Equity (Deficit)............................ 30,235 (49,790)
- -------- (1) EBITDA (FIFO basis) represents income before interest expense, depreciation and amortization expense, LIFO inventory provision, gains and losses on disposition of fixed assets and the provision for income taxes. While EBITDA (FIFO basis) is not intended to represent cash flow from operations as defined by generally accepted accounting principles ("GAAP") and should not be considered as an indicator of operating performance or an alternative to cash flow (as measured by GAAP) as a measure of liquidity, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) Represents the sum of the outstanding balances at the end of the most recent quarter plus each of the preceding three quarters divided by four. 7 RISK FACTORS IN ADDITION TO THE OTHER INFORMATION SET FORTH ELSEWHERE IN THIS PROSPECTUS, HOLDERS OF THE OLD NOTES SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS PRIOR TO TENDERING THEIR OLD NOTES IN THE EXCHANGE OFFER. THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING THOSE SET FORTH IN THE FOLLOWING RISK FACTORS AND ELSEWHERE HEREIN. RESTRICTIONS UPON TRANSFER OF AND LIMITED TRADING MARKET FOR OLD NOTES The New Notes will be issued in exchange for Old Notes only after timely receipt by the Exchange Agent of tenders of such Old Notes. Therefore, holders of Old Notes desiring to tender such Old Notes in exchange for New Notes should allow sufficient time to ensure timely delivery. Neither the Exchange Agent nor the Company is under any duty to give notification of defects or irregularities with respect to tenders of Old Notes for exchange. Old Notes that are not tendered or are tendered but not accepted will, following consummation of the Exchange Offer, continue to be subject to the existing restrictions upon transfer thereof. In addition, any holder of Old Notes who tenders in the Exchange Offer for the purpose of participating in a distribution of the New Notes will be required to comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. Each broker-dealer who receives New Notes for its own account in exchange for Old Notes, where such Old Notes were acquired by such broker-dealer as a result of market-making activities or any other trading activities, must acknowledge that it will deliver a Prospectus in connection with any resale of such New Notes. See "Plan of Distribution." To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Notes could be adversely affected. See "The Exchange Offer." BLUE SKY RESTRICTIONS; COMPLIANCE WITH STATE SECURITIES LAWS In order to comply with the securities laws of certain jurisdictions, the New Notes may not be offered or resold by any Holder unless they have been registered or qualified for sale in such jurisdictions or an exemption from registration of qualification is available and the requirements of such exemption have been satisfied. The Company does not currently intend to register or qualify the resale of the New Notes in any such jurisdictions. However, an exemption is generally available for sales to registered broker- dealers and certain institutional buyers. Other exemptions under applicable state securities laws may also be available. SUBSTANTIAL LEVERAGE AND DEBT SERVICE OBLIGATIONS After consummation of the Transactions, the Company is highly leveraged and has indebtedness that is substantial in relation to its stockholders' equity. As of March 29, 1997, on a pro forma basis after giving effect to the Transactions, the Company would have had an aggregate of $97.7 million of outstanding senior indebtedness for borrowed money, $28.0 million (liquidation preference) of outstanding Preferred Stock and ($49.8) million of stockholders' equity. The degree to which the Company is leveraged could have important consequences to holders of the Notes, including the following: (i) the Company's ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired; (ii) a substantial portion of the Company's cash flow from operations must be dedicated to the payment of interest on the Notes, interest and principal on its other indebtedness and, beginning in 2002, cash dividends on the Preferred Stock, thereby reducing the funds available to the Company for other purposes; (iii) the agreements governing the Company's long-term indebtedness contain certain restrictive financial and operating covenants; (iv) indebtedness under the Bank Facility will be at variable rates of interest, which will cause the Company to be vulnerable to increases in interest rates; (v) all of the indebtedness outstanding under the Bank Facility will be secured by substantially all of the assets of the Company and will become due prior to the time the principal on the Notes will become due; (vi) the Company will be substantially more leveraged than certain of its competitors, which might place the Company at a competitive disadvantage; (vii) the Company may be hindered 8 in its ability to adjust rapidly to changing market conditions; and (viii) the Company's substantial degree of leverage could make it more vulnerable in the event of a downturn in general economic conditions, repeated years of unfavorable weather conditions or other adverse events in its business. ASSET ENCUMBRANCE The Notes are unsecured and thus, in effect, will rank junior to any secured indebtedness of the Company. The indebtedness outstanding under the Bank Facility is secured by liens on substantially all of the personal property of the Company. The Bank Facility includes certain covenants that, among other things, restrict: (i) investments, including in fixed assets; (ii) incurrence of lease obligations; (iii) incurrence of additional indebtedness; (iv) granting liens, other than liens under the Bank Facility and certain permitted liens; (v) mergers or consolidations of the Company; (vi) changes in the nature of the Company's business; (vii) sales of all or a substantial part of the Company's business or property; (viii) making loans; (ix) payment of dividends or redemption of capital stock; and (x) guarantying the debts of other persons. The Bank Facility also requires the Company to maintain certain financial ratios, including net worth, interest coverage and leverage ratios. The ability of the Company to comply with these and other provisions of the Bank Facility may be affected by events beyond the Company's control. The breach of any of these covenants could result in a default under the Bank Facility, in which case, depending on the actions taken by the lenders thereunder or their successors in interest, such lenders would be entitled to elect to declare all amounts borrowed under the Bank Facility, together with accrued interest, to be due and payable. If the Company were unable to repay such borrowings, such lenders could proceed against their collateral. If the indebtedness under the Bank Facility were accelerated, there can be no assurance that the assets of the Company would be sufficient to repay in full such indebtedness and the other indebtedness of the Company, including the Notes. See "Description of Notes." FRAUDULENT CONVEYANCE If a court in a lawsuit brought by an unpaid creditor or representative of creditors, such as a trustee in bankruptcy or the Company as a debtor-in- possession, were to find under relevant federal and state fraudulent conveyance statutes that the Company did not receive fair consideration or reasonably equivalent value for incurring certain of the indebtedness, including the Notes, incurred by the Company in connection with the Transactions and that, at the time of such incurrence, the Company (i) was insolvent, (ii) was rendered insolvent by reason of such incurrence or grant, (iii) was engaged in a business or transaction for which the assets remaining with the Company constituted unreasonably small capital or (iv) intended to incur, or believed that it would incur, debts beyond its ability to pay such debts as they matured, such court, subject to applicable statutes of limitation, could void the Company's obligations under the Notes, subordinate the Notes to obligations of the Company that do not otherwise constitute senior indebtedness or take other action detrimental to the holders of the Notes. The measure of insolvency for these purposes varies depending upon the laws of the jurisdiction being applied. Generally, however, a company is considered insolvent for these purposes if the sum of the company's debts is greater than all that company's property at a fair valuation or if the present fair salable value of that company's assets is less than the amount that will be required to pay its probable liability on its existing debts as they become absolute and matured. Moreover, regardless of solvency, a court could void an incurrence of indebtedness, including the Notes, if it determined that such transaction was made with the intent to hinder, delay or defraud creditors, or a court could subordinate the indebtedness, including the Notes, to the claims of all existing and future creditors on similar grounds. There can be no assurance as to what standard a court would apply in order to determine whether the Company was "insolvent" upon consummation of the Transactions, or that, regardless of the method of valuation, a court would not determine that the Company was insolvent upon consummation of the Transactions. Additionally, under federal bankruptcy or applicable state insolvency law, if a bankruptcy or insolvency were initiated by or against the Company within 90 days after any payment by the Company with respect to the 9 Notes, or if the Company anticipated becoming insolvent at the time of such payment, all or a portion of the payment could be avoided as a preferential transfer and the recipient of such payment could be required to return such payment. CONTROL OF THE COMPANY After consummation of the Merger, GEI, through its ownership of 73.6% of the non-diluted shares of Leslie's common stock, together with Michael J. Fourticq and Brian P. McDermott, by virtue of contractual arrangements, have the power to elect a majority of the board of directors of the Company. Accordingly, GEI and such directors have the power to approve all amendments to Leslie's certificate of incorporation and bylaws and to effect fundamental corporate transactions such as mergers, asset sales and public offerings. In addition, Occidental has the ability to elect 20% of the board of directors pursuant to the Preferred Stock, and in certain events, will have the ability to elect additional directors, up to the entire board. Accordingly, in certain circumstances Occidental could have significant power to implement or prevent fundamental corporate transactions of the type referred to above. CHANGE OF CONTROL Upon the occurrence of a Change of Control, the Company will be required to make an offer to repurchase the Notes at a price equal to 101% of the principal amount thereof, together with accrued and unpaid interest thereon. However, the Bank Facility will prohibit the purchase of the Notes by the Company in the event of a Change of Control, unless and until such time as the indebtedness under the Bank Facility is paid in full. The Company's failure to purchase the Notes would result in a default under the Indenture and the Bank Facility. The inability to pay the indebtedness under the Bank Facility, if accelerated, would also constitute a default under the Indenture, which could have adverse consequences to the Company and to the holders of the Notes. In the event of a Change of Control, there can be no assurance that the Company would have sufficient assets to satisfy all of its obligations under the Bank Facility and the Notes. See "Description of Notes--Change of Control." PLANNED EXPANSION The Company's continued growth depends to a significant degree on its ability to open new stores in existing and new markets and to operate these stores on a profitable basis. To a lesser extent, the Company's continued growth depends on increasing comparable store sales. Leslie's opened 44 new stores in 1995 (net of store closings) and 35 net new stores in 1996. The Company has opened 19 net additional retail stores in 1997. The Company anticipates that it will open approximately 30 more stores by March 31, 1998. There can be no assurance that the Company will be able to open new stores in a timely manner; to hire, train and integrate employees; to continue locating and obtaining favorable store sites; and to adapt its distribution, management information and other operating systems to the extent necessary to grow in a successful and profitable manner. Further, there can be no assurance that the Company's new stores will achieve historical levels of sales or profitability. Additionally, the Company's expansion plans could be adversely affected by a significant downturn in the economy and resulting decrease in new home and swimming pool construction. The Company expects that its quarterly results of operations will fluctuate depending on the timing and the amount of revenue contributed by new stores and, to a lesser degree, the timing of costs associated with the opening of new stores. See "Business--General" and "-- Business Strategy." SEASONALITY AND WEATHER Leslie's business exhibits substantial seasonality which the Company believes is typical of the swimming pool supply industry. In general, sales and earnings are highest during the second and third quarters, which represent the peak months of swimming pool use. Typically, all of Leslie's operating income is generated in these two quarters which offsets the operating losses incurred in each of the other two quarters. Leslie's business is significantly affected by weather patterns. For example, unseasonably late warming trends can decrease the 10 length of the pool season, and unseasonably cool weather and/or extraordinary amounts of rainfall in the peak season may decrease swimming pool use, resulting in lower maintenance needs and, therefore, decreased sales by the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Seasonality and Quarterly Fluctuations" and "Business-- Seasonality." COMPETITION Most of Leslie's competition comes from local stores or regional chains which, unlike Leslie's, do not repackage 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. Leslie's competes on selected principal products with large-volume mass merchants and home centers which offer a limited selection of pool supplies and equipment at competitive prices. Certain of these competitors have substantially greater resources than the Company. There are no proprietary technologies or other significant barriers to prevent other firms from entering the swimming pool supply retail market in the future. CASUALTY LOSS AND CHEMICAL HANDLING Leslie's operates a chemical repackaging facility in Ontario, California and stores chemicals in its retail stores and in its distribution facilities in Ontario, California; Dallas, Texas; and Bridgeport, New Jersey. Since certain of the chemicals which Leslie's repackages and stores are flammable or combustible compounds, Leslie's must comply with various fire and safety ordinances. Leslie's maintains strict policies and procedures on chemical handling and on meeting fire and safety regulations, and has never incurred any material liability related to its handling of chemicals. However, a fire at one of its facilities could give rise to liability claims against the Company. In addition, if such an incident involves the repackaging or a distribution facility, the Company might be required temporarily to resort to alternate sources of supply which could increase the Company's cost of sales. The Company believes that such alternate sources would be readily available, and that any casualty loss or business interruption would be adequately covered by insurance. See "Business--Products," "--Distribution," and "-- Vertical Integration." DEPENDENCE ON KEY PERSONNEL The Company believes that its success will be largely dependent upon the abilities and experience of the senior management team of Leslie's. The loss of services of one or more of these senior executives could adversely affect the Company's results of operations. See "Management." ABSENCE OF PUBLIC MARKET FOR THE NOTES The Old Notes have not been registered under the Securities Act and are subject to significant restrictions on resale. The New Notes will constitute a new issue of securities with no established trading market. The Company does not intend to list the New Notes on any national securities exchange or to seek the admission thereof to trading in the National Association of Securities Dealers Automated Quotation System. The Company has been advised by BT that it presently intends to make a market in the Notes. However, BT is not obligated to do so and any market-making activities with respect to the Notes may be discontinued at any time without notice. In addition, such market- marking activity will be subject to the limits imposed by the Securities Act and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and may be limited during the Exchange Offer. If a trading market does not develop or is not maintained, holders of the Notes may experience difficulty in reselling the Notes or may be unable to sell them at all. If a market for the Notes develops, any such market may be discontinued at any time. If a public trading market develops for the Notes, future trading prices of the Notes will depend on many factors, including, among other things, prevailing interest rates, the Company's operating results and the market for similar securities. Depending on prevailing interest rates, the market for similar securities and other factors, including the financial condition of the Company, the Notes may trade at a discount from their principal amount. 11 THE TRANSACTIONS On June 11, 1997 Leslie's consummated the Merger Agreement with Leslie's California and Poolmart pursuant to which GEI and the HPA Group agreed to the reorganization and recapitalization of Leslie's California through a two-step merger process. Pursuant to the Merger Agreement, Leslie's California reincorporated in Delaware and immediately thereafter, Poolmart merged with and into Leslie's, with Leslie's as the surviving corporation. Each outstanding share of common stock of Leslie's, other than the Continuing Shares, was converted into the right to receive $14.50 in cash, and each share of common stock of Poolmart was converted into one share of Leslie's common stock. The holders of Leslie's common stock and stock options received approximately $94.7 million in cash merger consideration. Upon consummation of the Merger, GEI and the HPA Group acquired shares of Leslie's common stock that represent, respectively, 73.6% and 26.4% of the outstanding, non-diluted common stock of Leslie's. See "Description of Financing Transactions." THE EXCHANGE OFFER PURPOSE OF THE EXCHANGE OFFER The Old Notes were sold by the Company on June 11, 1997 (the "Closing Date") to BT as Initial Purchaser (the "Initial Purchaser"). The Initial Purchaser subsequently placed the Old Notes with qualified institutional buyers and institutional accredited investors in transactions not requiring registration under the Securities Act or applicable state securities laws, including sales pursuant to Rule 144A and pursuant to Rule 506 under the Securities Act. As a condition to the sale of the Old Notes, the Company and the Initial Purchaser entered into the Registration Rights Agreement on the Closing Date. Pursuant to the Registration Rights Agreement, the Company agreed that, unless the Exchange Offer is not permitted by applicable law or Commission policy, it would (i) file with the Commission a Registration Statement under the Securities Act with respect to the New Notes within 60 days after the Closing Date, (ii) use its best efforts to cause such Registration Statement to become effective under the Securities Act within 150 days after the Closing Date, and (iii) upon effectiveness of the Registration Statement, commence the Exchange Offer, maintain the effectiveness of the Registration Statement for at least 30 days (or longer if required by applicable law) and deliver to the Exchange Agent New Notes in the same aggregate principal amount as the Old Notes that were properly tendered by holders thereof pursuant to the Exchange Offer. A copy of the Registration Rights Agreement has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. This description of the Registration Rights Agreement is qualified in its entirety by reference to such exhibit. The Registration Statement, of which this Prospectus is a part, is intended to satisfy certain of the Company's obligations under the Registration Rights Agreement. TERMS OF THE EXCHANGE OFFER Upon the terms and subject to the conditions set forth in this Prospectus and in the Letter of Transmittal, the Company will accept any and all Old Notes validly tendered and not withdrawn prior to the Expiration Date. As of the date of this Prospectus, $100 million aggregate principal amount of the Old Notes is outstanding. This Prospectus, together with the Letter of Transmittal, is first being sent on or about , 1997 to all Holders of Old Notes known to the Company. The Company's obligation to accept Old Notes for exchange pursuant to the Exchange Offer is subject to certain conditions as set forth under "--Certain Conditions to the Exchange Offer" below. The Company will issue $1,000 principal amount of New Notes in exchange for each $1,000 principal amount of outstanding Old Notes accepted in the Exchange Offer. Holders may tender some or all of their Old Notes pursuant to the Exchange Offer. See "Risk Factors--Failure to Exchange Old Notes." However, Old Notes may be tendered only in integral multiples of $1,000. The New Notes will evidence the same debt as the Old Notes for which they are exchanged, and are entitled to the benefits of the Indenture. The form and terms of the New Notes are the same as the form and terms of the Old Notes except that the New Notes have been registered under the Securities Act and hence will not bear legends restricting the transfer thereof. 12 Holders do not have any appraisal or dissenters' rights under the Indenture in connection with the Exchange Offer. The Company intends to conduct the Exchange Offer in accordance with the applicable requirements of Regulation 14E under the Exchange Act. The Company shall be deemed to have accepted validly tendered Old Notes when, as and if the Company has given oral or written notice thereof to the Exchange Agent. The Exchange Agent will act as agent for the tendering Holders for the purpose of receiving the New Notes from the Company. If any tendered Old Notes are not accepted for exchange because of an invalid tender, the occurrence of certain other events set forth herein or otherwise, such unaccepted tenders of Old Notes will be returned, without expense to the Holder thereof, as promptly as practicable after the Expiration Date. Holders whose Old Notes are not tendered or are tendered but not accepted in the Exchange Offer will continue to hold such Old Notes and will be entitled to all the rights and preferences and subject to the limitations applicable thereto under the Indenture. Following consummation of the Exchange Offer, the Holders will continue to be subject to the existing restrictions upon transfer thereof and the Company will have no further obligation to such Holders to provide for the registration under the Securities Act of the Old Notes held by them. To the extent that Old Notes are tendered and accepted in the Exchange Offer, the trading market for untendered and tendered but unaccepted Old Notes could be adversely affected. See "Risk Factors-- Restrictions Upon Transfer of and Limited Trading Market for Old Notes." Holders who tender Old Notes in the Exchange Offer will not be required to pay brokerage commissions or fees or, subject to the instructions in the Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes pursuant to the Exchange Offer. The Company will pay all charges and expenses, other than certain applicable taxes, in connection with the Exchange Offer. See "--Fees and Expenses; Solicitation of Tenders." EXPIRATION DATE; EXTENSIONS; AMENDMENTS The term "Expiration Date" shall mean 5:00 p.m., New York City time on , 1997 unless the Company extends the Exchange Offer, in which case the term "Expiration Date" shall mean the latest date and time to which the Exchange Offer is extended. In order to extend the Expiration Date, the Company will notify the Exchange Agent of any extension by oral or written notice and will make a release to the Dow Jones News Services prior to 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date. The Company reserves the right at its sole discretion (i) to delay accepting any Old Notes, (ii) to extend the Exchange Offer, (iii) to terminate the Exchange Offer and not accept Old Notes not previously accepted if any of the conditions set forth below under "--Certain Conditions to the Exchange Offer" shall have occurred and shall not have been waived by the Company, by giving oral or written notice of such delay, extension or termination to the Exchange Agent, or (iv) to amend the terms of the Exchange Offer in any manner. Any such delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice thereof to the Holders. If the Exchange Offer is amended in a manner determined by the Company to constitute a material change, the Company will promptly disclose such amendment by means of a Prospectus supplement that will be distributed to all Holders, and the Company will extend the Exchange Offer for a period of five to ten business days, depending upon the significance of the amendment and the manner of disclosure to Holders, if the Exchange Offer would otherwise expire during such five to ten business day period. During any extension of the Expiration Date, all Old Notes previously tendered will remain subject to the Exchange Offer and may be accepted for exchange by the Company. The Company shall have no obligation to publish, advertise, or otherwise communicate any such public announcement, other than by making a timely release to the Dow Jones News Service. 13 INTEREST ON THE NEW NOTES Interest accrues on the Notes at the rate of 10 3/8% per annum and will be payable in cash semiannually in arrears on each January 15 and July 15, commencing on January 15, 1998. No interest will be payable on the Old Notes on the date of the exchange for the New Notes and therefore no interest will be paid thereon to the Holders at such time. PROCEDURES FOR TENDERING OLD NOTES The tender to the Company of Old Notes by a beneficial owner thereof as set forth below and the acceptance by the Company thereof will constitute a binding agreement between the tendering Holder and the Company upon the terms and subject to the conditions set forth in this Prospectus and the Letter of Transmittal. All of the Old Notes are held of record by a nominee of The Depository Trust Company (the "Depositary"). Except as set forth below, a Holder who wishes to tender Old Notes for exchange pursuant to the Exchange Offer must transmit a properly completed and duly executed Letter of Transmittal, including all other documents required by such Letter of Transmittal, to the Exchange Agent at one of the addresses set forth below under "Exchange Agent" on or prior to the Expiration Date. In addition, (i) certificates for such Old Notes must be received by the Exchange Agent along with the Letter of Transmittal, (ii) a timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such Old Notes into the Exchange Agent's account at the Depositary (the "Book-Entry Transfer Facility") pursuant to the procedure for book-entry transfer described below, must be received by the Exchange Agent prior to the Expiration Date, or (iii) the Holder must comply with the guaranteed delivery procedures described below. THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. Each signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, must be guaranteed unless the Old Notes surrendered for exchange pursuant thereto are tendered (i) by a registered Holder of the Old Notes who has not completed the box entitled "Special Issuance Instructions" or the box entitled "Special Delivery Instructions" in the Letter of Transmittal or (ii) for the account of an Eligible Institution (as defined below). In the event that a signature on a Letter of Transmittal or a notice of withdrawal, as the case may be, is required to be guaranteed, such guarantee must be by a firm which is a member of a registered national securities exchange or a member of the National Association of Securities Dealers, Inc. or by a commercial bank or trust company having an office or correspondent in the United States or otherwise an "eligible guarantor institution" within the meaning of Rule 17Ad- 15 under the Exchange Act (collectively, "Eligible Institutions"). If Old Notes are registered in the name of a person other than the person signing the Letter of Transmittal, the Old Notes surrendered for exchange must be endorsed by, or be accompanied by, a written instrument or instruments of transfer or exchange, in satisfactory form as determined by the Company in its sole discretion, duly executed by the registered Holder with the signature thereon guaranteed by an Eligible Institution. If the Letter of Transmittal is signed by a person or persons other than the registered Holder or Holders of Old Notes, such Old Notes must be endorsed by the registered Holder with signature guaranteed by an Eligible Institution or accompanied by appropriate powers of attorney with signature guaranteed by an Eligible Institution, in either case signed exactly as the name or names of the registered Holder or Holders that appear on the Old Notes. If the Letter of Transmittal or any Old Notes or powers of attorney are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, such person should so indicate when signing and, unless waived by the Company, proper evidence satisfactory to the Company of its authority so to act must be submitted with the Letter of Transmittal. 14 By tendering, each Holder will represent to the Company that, among other things, (i) the New Notes acquired pursuant to the Exchange Offer are being acquired in the ordinary course of business of the person receiving such New Notes, whether or not such person is the Holder, (ii) neither the Holder nor any such other person has an arrangement or understanding with any person to participate in the distribution of such New Notes, (iii) if the Holder is not a broker-dealer, or is a broker-dealer but will not receive New Notes for its own account in exchange for Old Notes, neither the Holder nor any such other person is engaged in or intends to participate in the distribution of such New Notes and (iv) neither the Holder nor any such other person is an "affiliate," as defined under Rule 405 of the Securities Act, of the Company. If the tendering Holder is a broker-dealer that will receive New Notes for its own account in exchange for Old Notes that were acquired as a result of market- making activities or other trading activities, it will be required to acknowledge that it will deliver a Prospectus in connection with any resale of such New Notes. The Letter of Transmittal states that by so acknowledging and by delivering a Prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. DELIVERY OF DOCUMENTS TO THE DEPOSITARY OR THE COMPANY DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. All questions as to the validity, form, eligibility (including time of receipt) and acceptance of Old Notes tendered for exchange will be determined by the Company in its sole discretion, which determination shall be final and binding. The Company reserves the absolute right to reject any and all tenders of any particular Old Notes not properly tendered or to not accept any particular Old Notes which acceptance might, in the judgment of the Company or its counsel, be unlawful. The Company also reserves the absolute right in its sole discretion to waive any defects or irregularities or conditions of the Exchange Offer as to any particular Old Notes either before or after the Expiration Date (including the right to waive the ineligibility of any Holder who seeks to tender Old Notes in the Exchange Offer). The interpretation of the terms and conditions of the Exchange Offer as to any particular Old Notes either before or after the Expiration Date (including the Letter of Transmittal and instructions thereto) by the Company shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with the tenders of Old Notes for exchange must be cured within such reasonable period of time as the Company shall determine. Neither the Company, the Exchange Agent nor any other person shall be under any duty to give notification of any defect or irregularity with respect to any tender of Old Notes for exchange, nor shall any of them incur any liability for failure to give such notification. ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES Upon satisfaction or waiver of all of the conditions to the Exchange Offer, the Company will accept, promptly after the Expiration Date, all Old Notes properly tendered and will issue the New Notes promptly after acceptance of the Old Notes. See "--Certain Conditions to the Exchange Offer" below. For purposes of the Exchange Offer, the Company shall be deemed to have accepted properly tendered Old Notes for exchange when, and if the Company has given oral or written notice thereof to the Exchange Agent. In all cases, issuance of New Notes for Old Notes that are accepted for exchange pursuant to the Exchange Offer will be made only after timely receipt by the Exchange Agent of certificates for such Old Notes or a timely Book- Entry Confirmation of such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described below, a properly completed and duly executed Letter of Transmittal and all other required documents. If any tendered Old Notes are not accepted for any reason set forth in the terms and conditions of the Exchange Offer or if certificates representing Old Notes are submitted for a greater principal amount than the Holder desires to exchange, such unaccepted or non-exchanged Old Notes will be returned without expense to the tendering Holder thereof (or, in the case of Old Notes tendered by book-entry transfer into the Exchange Agent's account at the Book-Entry Transfer Facility pursuant to the book-entry transfer procedures described below, such non-exchanged Old Notes will be credited to an account maintained with such Book-Entry Transfer Facility) as promptly as practicable after the expiration or termination of the Exchange Offer. 15 BOOK-ENTRY TRANSFER The Exchange Agent will make a request to establish an account with respect to the Old Notes at the Book-Entry Transfer Facility for purposes of the Exchange Offer promptly after the date of this Prospectus. Any financial institution that is a participant in the Book-Entry Transfer Facility's systems may make book-entry delivery of Old Notes by causing the Book-Entry Transfer Facility to transfer such Old Notes into the Exchange Agent's account at the Book-Entry Transfer Facility in accordance with the Book-Entry Transfer Facility's Automated Tender Offer Program ("ATOP") procedures for transfer. However, the exchange for the Old Notes so tendered will only be made after timely confirmation of such book-entry transfer of Old Notes into the Exchange Agent's account, and timely receipt by the Exchange Agent of an Agent's Message (as such term is defined in the next sentence) and any other documents required by the Letter of Transmittal on or prior to the Expiration Date or pursuant to the guaranteed delivery procedures described below. The term "Agent's Message" means a message, transmitted by the Book-Entry Transfer Facility and received by the Exchange Agent and forming a part of a Book-Entry Confirmation, which states that the Book-Entry Transfer Facility has received an express acknowledgment from a participant tendering Old Notes that are the subject of such Book-Entry Confirmation that such participant has received and agrees to be bound by the terms of the Letter of Transmittal, and that the Company may enforce such agreement against such participant. GUARANTEED DELIVERY PROCEDURES If a registered Holder of the Old Notes desires to tender such Old Notes and the Old Notes are not immediately available, or time will not permit such Holder's Old Notes or other required documents to reach the Exchange Agent before the Expiration Date, or the procedure for book-entry transfer cannot be completed on a timely basis, a tender may be effected if (i) the tender is made through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent receives from such Eligible Institution a properly completed and duly executed Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed Delivery, substantially in the form provided by the Company (by telegram, telex, facsimile transmission, mail or hand delivery), setting forth the name and address of the Holder of Old Notes and the amount of Old Notes tendered, stating that the tender is being made thereby and guaranteeing that within five New York Stock Exchange ("NYSE") trading days after the date of execution of the Notice of Guaranteed Delivery, the certificates of all physically tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and any other documents required by the Letter of Transmittal will be deposited by the Eligible Institution with the Exchange Agent, and (iii) the certificates for all physically tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation, as the case may be, and all other documents required by the Letter of Transmittal, are received by the Exchange Agent within five NYSE trading days after the date of execution of the Notice of Guaranteed Delivery. WITHDRAWAL RIGHTS Tenders of Old Notes may be withdrawn at any time prior to the Expiration Date. For a withdrawal to be effective, a written notice of withdrawal must be received by the Exchange Agent at one of the addresses set forth below under "Exchange Agent." Any such notice of withdrawal must specify the name of the person having tendered the Old Notes to be withdrawn, identify the Old Notes to be withdrawn (including the principal amount of such Old Notes), and (where certificates for Old Notes have been transmitted) specify the name in which such Old Notes are registered, if different from that of the withdrawing Holder. If certificates for Old Notes have been delivered or otherwise identified to the Exchange Agent, then, prior to the release of such certificates, the withdrawing Holder must also submit the serial numbers of the particular certificates to be withdrawn and a signed notice of withdrawal with signatures guaranteed by an Eligible Institution unless such Holder is an Eligible Institution. If Old Notes have been tendered pursuant to the procedure for book-entry transfer described above, any note of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Old Notes and otherwise comply with the procedures of such facility. All questions as to the validity, form and eligibility (including time 16 of receipt) of such notices will be determined by the Company, whose determination shall be final and binding on all parties. Any Old Notes so withdrawn will be deemed not to have been validly tendered for exchange for purposes of the Exchange Offer. Any Old Notes which have been tendered for exchange but which are not exchanged for any reason will be returned to the Holder thereof without cost to such Holder (or, in the case of Old Notes tendered by book-entry transfer procedures described above, such Old Notes will be credited to an account maintained with such Book-Entry Transfer Facility for the Old Notes) as soon as practicable after withdrawal, rejection of tender or termination of the Exchange Offer. Properly withdrawn Old Notes may be retendered by following one of the procedures described under "Procedures for Tendering Old Notes" above at any time on or prior to the Expiration Date. CERTAIN CONDITIONS TO THE EXCHANGE OFFER Notwithstanding any other provision of the Exchange Offer, the Company shall not be required to accept for exchange, or to issue New Notes in exchange for, any Old Notes and may terminate or amend the Exchange Offer, if at any time before the acceptance of such Old Notes for exchange or the exchange of the New Notes for such Old Notes, there shall be threatened, instituted or pending any action or proceeding before, or any injunction, order or decree shall have been issued by, any court or governmental agency or other governmental regulatory or administrative agency or commission (i) seeking to restrain or prohibit the making or consummation of the Exchange Offer or any other transaction contemplated by the Exchange Offer, or assessing or seeking any damages as a result thereof, or (ii) resulting in a material delay in the ability of the Company to accept for exchange or exchange some or all of the Old Notes pursuant to the Exchange Offer; or any statute, rule, regulation, order or injunction shall be sought, proposed, introduced, enacted, promulgated or deemed applicable to the Exchange Offer or any of the transactions contemplated by the Exchange Offer by any government or governmental authority, domestic or foreign, or any action shall have been taken, proposed or threatened, by any government, governmental authority, agency or court, domestic or foreign, that in the sole judgment of the Company might directly or indirectly result in any of the consequences referred to in clause (i) or (ii) above or, in the sole judgment of the Company, might result in the holders of New Notes having obligations with respect to resales and transfers of New Notes which exceed those described herein, or would otherwise make it inadvisable to proceed with the Exchange Offer. If the Company determines in good faith that any of the conditions are not met, the Company may (i) refuse to accept any Old Notes and return all tendered Old Notes to exchanging Holders, (ii) extend the Exchange Offer and retain all Old Notes tendered prior to the expiration of the Exchange Offer, subject, however, to the rights of Holders to withdraw such Old Notes (see "-- Withdrawal Rights") or (iii) waive certain of such unsatisfied conditions with respect to the Exchange Offer and accept all properly tendered Old Notes which have not been withdrawn or revoked. If such waiver constitutes a material change to the Exchange Offer, the Company will promptly disclose such waiver by means of a Prospectus supplement that will be distributed to all Holders. Holders have certain rights and remedies against the Company under the Registration Rights Agreement, including liquidated damages of up to $.30 per week per $1,000 principal amount of Old Notes, should the Company fail to consummate the Exchange Offer within a certain period of time, notwithstanding a failure due to the occurrence of any of the conditions stated above. Such conditions are not intended to modify those rights or remedies in any respect. The foregoing conditions are for the benefit of the Company and may be asserted by the Company in good faith regardless of the circumstances giving rise to such condition or may be waived by the Company in whole or in part at any time and from time to time in its discretion. The failure by the Company at any time to exercise the foregoing rights shall not be deemed a waiver of any such right and each such right shall be deemed an ongoing right which may be asserted at any time and from time to time. 17 EXCHANGE AGENT U.S. Trust Company of California, N.A. has been appointed as Exchange Agent for the Exchange Offer. Questions and requests for assistance, requests for additional copies of this Prospectus or of the Letter of Transmittal should be directed to the Exchange Agent addressed as follows: BY REGISTERED OR CERTIFIED MAIL; BY OVERNIGHT COURIER; OR BY HAND: U.S. Trust Company of California, N.A. c/o United States Trust Company of New York 770 Broadway 13th Floor New York, NY 10003 Attention: Tony Nista BY FACSIMILE: (212) 420-6155 DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. FEES AND EXPENSES; SOLICITATION OF TENDERS The expenses of soliciting tenders will be borne by the Company. The principal solicitation is being made by mail; however, additional solicitation may be made by telegraph, telephone or in person by officers and regular employees of the Company and its affiliates. The Company has not retained any dealer-manager in connection with the Exchange Offer and will not make any payments to brokers, dealers or others soliciting acceptances of the Exchange Offer. The Company, however, will pay the Exchange Agent reasonable and customary fees for its services and will reimburse it for its reasonable out-of-pocket expenses in connection therewith. The cash expenses to be incurred in connection with the Exchange Offer will be paid by the Company and are estimated in the aggregate to be $ which includes fees and expenses of the Exchange Agent and Trustee and accounting and legal fees. The Company will pay all transfer taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates representing New Notes or Old Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered Holder of the Old Notes tendered, or if a transfer tax is imposed for any reason other than the exchange of Old Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering Holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted to the Exchange Agent, the amount of such transfer taxes will be billed directly to such tendering Holder. No person has been authorized to give any information or to make any representations in connection with the Exchange Offer other than those contained in this Prospectus. If given or made, such information or representations should not be relied upon as having been authorized by the Company. Neither the delivery of this Prospectus nor any exchange made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Company since the respective dates as of which information is given herein. The Exchange Offer is not being made to (nor will tenders be accepted from or on behalf of) Holders in any jurisdiction in which the making of the Exchange Offer or the acceptance thereof would not be in compliance with the laws of such jurisdiction. 18 ACCOUNTING TREATMENT The New Notes will be recorded by the Company at the same carrying value as the Old Notes, which is face value, as reflected in the Company's accounting records on the date of the exchange. Accordingly, no gain or loss for accounting purposes will be recognized. The costs of the Exchange Offer will be expensed over the term of the New Notes. CONSEQUENCES OF FAILURE TO EXCHANGE Holders of Old Notes who do not exchange their Old Notes for New Notes pursuant to the Exchange Offer will continue to be subject to the restrictions on transfer of such Old Notes as set forth in the legend thereon. In general, the Old Notes may not be offered or sold, unless registered under the Securities Act, except pursuant to an exemption from, or in a transaction not subject to, the Securities Act and applicable state securities laws. The Company does not intend to register the Old Notes under the Securities Act. The Company believes that, based upon interpretations contained in no action letters issued to third parties by the staff of the Commission, New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be offered for resale, resold or otherwise transferred by Holders thereof (other than any such Holder which is an "affiliate" of the Company within the meaning of Rule 405 under the Securities Act) without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such Holders' business and such Holders have no arrangement with any person to participate in the distribution of such New-Notes, and provided, further, that each broker-dealer that receives New Notes for its own account in exchange for Old Notes must acknowledge that it will deliver a Prospectus in connection with any resale of such New Notes. See "Plan of Distribution." If any Holder (other than a broker-dealer described in the preceding sentence) has any arrangement or understanding with respect to the distribution of the New Notes to be acquired pursuant to the Exchange Offer, such Holder (i) could not rely on the applicable interpretations of the staff of the Commission and (ii) must comply with the registration and prospectus delivery requirements of the Securities Act in connection with any resale transaction. In addition, to comply with the securities laws of certain jurisdictions, if applicable, the New Notes may not be offered or sold unless they have been registered or qualified for sale in such jurisdiction or an exemption from registration or qualification is available and is complied with. See "Risk Factors--Restrictions upon Transfer of and Limited Trading Market for Old Notes"; and "--Blue Sky Restrictions; Compliance with State Securities Laws". 19 CAPITALIZATION The following table sets forth the unaudited consolidated capitalization of the Company at March 29, 1997, and as adjusted to give effect to the Transactions. This table should be read in conjunction with "The Transactions," "Description of Financing Transactions" and "Unaudited Pro Forma Consolidated Financial Statements" appearing elsewhere in this Offering Memorandum.
MARCH 29, 1997 ---------------------- HISTORICAL AS ADJUSTED ---------- ----------- (DOLLARS IN THOUSANDS) Current debt: Current portion of long-term debt...................... $ 131 $ 80 ======= ======== Long-term debt: Bank credit facility and other......................... $27,986 $ 7,653 Senior Notes........................................... -- 90,000 Convertible Subordinated Debentures.................... 10,000 -- ------- -------- Total long-term debt:................................ $37,986 $ 97,653 ------- -------- Preferred Stock(a):...................................... -- $ 24,884 Stockholders' equity: Common stock, no par value(b).......................... $32,646 $(46,872) Retained (deficit)(c).................................. (2,411) (2,918) ------- -------- Total stockholders' equity........................... 30,235 (49,790) ------- -------- Total capitalization................................. $68,221 $ 72,747 ======= ========
- -------- (a) As adjusted represents the value assigned to the Series A Preferred Stock net of $3.1 million assigned to 252,996 warrants expected to be issued with the Preferred Stock. The Series A Preferred Stock has a liquidation preference of $28.0 million. The Series A Preferred Stock is mandatorily redeemable at a liquidation value of $28.0 million in three equal installments starting 104 months after issue with full payment at 120 months. (b) Represents the payment of merger consideration in respect of 6,192,061 shares of common stock of Leslie's and stock options for $94.7 million; the issuance of new stock for $15.6 million; the value assigned to the Warrants of $3.1 million; and the issuance of new common stock options for $0.8 million aggregate exercise price, less transaction-related costs of $4.3 million. (c) Adjusted to reflect the issuance of new common stock options, net of the related tax effect. 20 UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following unaudited pro forma consolidated financial statements (the "Unaudited Pro Forma Consolidated Financial Statements") of the Company are based on the audited and unaudited financial statements of Leslie's California appearing elsewhere in this Offering Memorandum, as adjusted to illustrate the estimated effects of the Transactions. The unaudited pro forma adjustments are based upon available information and certain assumptions that the Company believes are reasonable. The Unaudited Pro Forma Consolidated Financial Statements and accompanying notes should be read in conjunction with the historical financial statements of Leslie's California and other financial information pertaining to Leslie's California appearing elsewhere in this Offering Memorandum including "The Transactions," "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." The Unaudited Pro Forma Consolidated Financial Statements have been prepared to give effect to the Transactions (and the application of the net proceeds therefrom) as though such Transactions had occurred as of March 29, 1997 for the balance sheet (the "Unaudited Pro Forma Consolidated Balance Sheet"), and as of December 31, 1995 for the statement of operations for the year ended December 28, 1996 and for the three months ended March 29, 1997 (the "Unaudited Pro Forma Consolidated Income Statements" together with the Unaudited Pro Forma Consolidated Balance Sheet comprise the "Unaudited Pro Forma Consolidated Financial Statements"). The Transactions will be treated as a recapitalization for financial accounting purposes. The Unaudited Pro Forma Consolidated Financial Statements do not purport to be indicative of what the Company's financial position or results of operation would actually have been had the Transactions been completed on such date or at the beginning of the periods indicated or to project the Company's results of operations for any future date. 21 UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (DOLLARS IN MILLIONS)
HISTORICAL MARCH 29, PRO FORMA 1997 ADJUSTMENTS PRO FORMA ---------- ----------- --------- ASSETS ------ CURRENT ASSETS: Cash....................................... $ .1 $ -- $ .1 Accounts and other receivables, net........ 2.9 -- 2.9 Inventories, net........................... 56.6 -- 56.6 Prepaid expenses and other................. 2.7 -- 2.7 Deferred tax assets........................ 2.6 .4 (a) 3.0 Deferred income tax charge................. 4.3 4.3 ------ ------ ------ Total current assets..................... 69.2 .4 69.6 ------ ------ ------ PROPERTY, PLANT AND EQUIPMENT:............... 49.4 -- 49.4 Less--Accumulated depreciation and amortization.............................. 13.8 -- 13.8 ------ ------ ------ Net property, plant and equipment.......... 35.6 -- 35.6 ------ ------ ------ OTHER ASSETS: Goodwill, net.............................. 8.2 -- 8.2 Other...................................... .7 3.6 (b) 4.3 ------ ------ ------ Total other assets....................... 8.9 3.6 12.5 ------ ------ ------ $113.7 $ 4.0 $117.7 ====== ====== ====== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) ------------------------------------ CURRENT LIABILITIES: Accounts payable........................... $ 36.6 $ -- $ 36.6 Accrued liabilities........................ 5.7 (.5)(c) 5.2 Current portion of long-term debt.......... .1 -- .1 ------ ------ ------ Total current liabilities................ 42.4 (.5) 41.9 ------ ------ ------ DEFERRED TAX LIABILITIES..................... 3.1 -- 3.1 LONG-TERM DEBT, net of current portion....... 28.0 (20.4)(d) 7.6 SENIOR NOTES................................. -- 90.0 (d) 90.0 CONVERTIBLE SUBORDINATED DEBENTURES.......... 10.0 (10.0)(d) -- SERIES A PREFERRED STOCK, liquidation preference $28.0 million.................... -- 24.9 (e) 24.9 COMMITMENTS AND CONTINGENCIES................ -- -- -- SHAREHOLDERS' EQUITY Preferred stock: authorized--1,000,000 shares; none issued and outstanding....... -- -- -- Common stock, no par value: authorized-- 40,000,000 shares, issued and outstanding--6,551,566 at March 29, 1997.. 32.6 15.6 (f) (46.9) (94.7)(g) 3.1 (e) .8 (h) (4.3)(i) Retained (deficit)......................... (2.4) (.5)(j) (2.9) ------ ------ ------ Total shareholder's equity (deficit)..... 30.2 (80.0) (49.8) ------ ------ ------ $113.7 $ 4.0 $117.7 ====== ====== ======
The accompanying notes to the unaudited pro forma consolidated balance sheet are an integral part of this statement. 22 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET (a) Reflects the tax effect of compensation charge for new common stock options granted to management. (b) Reflects the write-off of historical debt issuance costs of $0.1 million and the addition of $3.7 million of debt issuance costs associated with the Notes, the Bank Facility and related other fees and expenses. (c) Reflects the payment of accrued interest on historical debt and the 8% Convertible Subordinated Debentures being exchanged for the Preferred Stock. (d) Reflects the repayment of the existing credit facility, long- and short- term debt and the exchange of the convertible subordinated debentures and records the borrowings under the Bank Facility and the issuance of the Notes as set forth in the following table: Senior Notes....................................................... $ 90.0 Bank Facility...................................................... 6.3 Repay long-term debt............................................... (26.7) Exchange convertible subordinated debentures....................... (10.0) ------ $ 59.6 ======
(e) Reflects the issuance of Preferred Stock with a face value of $28.0 million net of $3.1 million assigned to the value of 252,996 Warrants. The Preferred Stock is entitled to annual cumulative dividends (payable in either cash or additional Preferred Stock for the first five years) at 50 basis points over the bond yield on the Senior Notes. (f) Represents issuance of 1,074,138 shares of common stock to GEI and management. (g) Represents the redemption of 6,192,061 shares of common stock and of stock options. (h) Represents the difference between the fair value of the option and the exercise price on 83,599 options. (i) Represents investment banking and advisory fees and expenses associated with the fairness opinion, the valuation of the transaction, the repurchase of the common stock and options, the proxy solicitation and other related fees and expenses. (j) Represents the non-recurring compensation charge of $0.8 million related to the issuance of options and the write-off of deferred debt issuance cost of $0.1 million, net of the related tax benefit. 23 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 28, 1996 (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 28, PRO FORMA PRO 1996 ADJUSTMENTS FORMA ------------ ----------- ------ Net sales................................... $191.7 $ -- $191.7 Cost of sales............................... 118.9 -- 118.9 ------ ----- ------ Gross profit................................ 72.8 -- 72.8 Selling, general and administrative expenses(a)................................ 62.4 .2 (b) 62.4 (.2)(c) Amortization of acquisition costs........... .2 -- .2 Loss on disposition of fixed assets......... .8 -- .8 ------ ----- ------ Income from operations...................... 9.4 -- 9.4 Interest expense, net(a).................... 2.8 7.1 (d) 10.5 .6 (e) ------ ----- ------ Income (loss) before taxes.................. 6.6 (7.7) (1.1) Income tax provision (benefit).............. 2.7 (3.2)(f) (.5) ------ ----- ------ Net income (loss)........................... 3.9 (4.5) (.6) ------ ----- ------ Series A Preferred Stock dividends and ac- cretion.................................... -- 3.5 (g) (3.5) ------ ----- ------ Earnings (loss) applicable to common share- holders.................................... $ 3.9 $(8.0) $ (4.1) ====== ===== ====== Ratio of earnings to fixed charges(h)....... 2.07 -- -- Net income (loss) per share................. $ .57 -- $(2.88)
The accompanying notes to the unaudited pro forma consolidated statement of operations are an integral part of this statement. 24 UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 29, 1997 (DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED PRO FORMA PRO MARCH 29, 1997 ADJUSTMENTS FORMA -------------- ----------- ------ Net sales................................. $ 23.8 $ -- $ 23.8 Cost of sales............................. 18.2 -- 18.2 ------ ----- ------ Gross profit.............................. 5.6 -- 5.6 Selling, general and administrative expenses(a).............................. 15.0 .1 (b) 15.1 Amortization of acquisition costs......... .1 -- .1 Loss on disposition of fixed assets....... .1 -- .1 ------ ----- ------ Loss from operations...................... (9.6) (.1) (9.7) Interest expense, net(a).................. .8 1.7 (d) 2.6 .1 (e) ------ ----- ------ Loss before taxes......................... (10.4) (1.9) (12.3) Income tax benefit........................ 4.3 .8 (f) 5.1 ------ ----- ------ Net loss.................................. (6.1) (1.1) (7.2) ------ ----- ------ Series A Preferred Stock dividends and ac- cretion.................................. -- (.9)(g) (.9) ------ ----- ------ Loss applicable to common shareholders.... $ (6.1) $(2.0) $ (8.1) ====== ===== ====== Ratio of earnings to fixed charges(h)..... -- -- -- Net loss per share........................ $ (.90) -- $(5.67)
The accompanying notes to the unaudited pro forma consolidated statement of operations are an integral part of this statement. 25 NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS (a) Excludes the non-recurring compensation charge of $0.8 million related to the issuance of 83,599 options at $5.00 per share and the write-off of deferred debt issuance costs of $0.1 million. (b) Represents management fee to LGP. (c) Represents elimination of costs associated with being a publicly held company. (d) Represents additional interest expense on new borrowings as set forth in the following table:
THREE MONTHS YEAR ENDED ENDED DECEMBER 28, MARCH 29, 1996 1997 ------------ ------------ Interest on new borrowings....................... $ 9.9 $2.5 Less historical interest expense, net.......... (2.8) (.8) ----- ---- Pro forma adjustment......................... $ 7.1 $1.7 ===== ====
(e) Represents amortization of debt issuance costs. (f) Represents the tax benefit applicable to the pro forma adjustments. (g) Represents Preferred Stock dividends of $3.2 million and $0.8 million and accretion of Preferred Stock of $0.3 million and $0.1 million for the year ended December 28, 1996 and the three months ended March 29, 1997, respectively. (h) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of earnings before income taxes and fixed charges. "Fixed charges" consist of interest expense on all indebtedness, amortization of debt issuance costs, one-third of rent expense (the portion deemed representative of the interest factor), Preferred Stock dividend requirements and Preferred Stock accretion. The Company's earnings were inadequate to cover pro forma fixed charges for the year ended December 28, 1996 and the pro forma three months ended March 29, 1997 by approximately $1.1 million and $12.3 million, respectively. However, such earnings included non-cash charges of $5.7 million for the 52 weeks ended December 28, 1996 and $1.5 million for the three months ended March 29, 1997 primarily consisting of depreciation, amortization of debt issuance costs and losses on the disposition of fixed assets. 26 SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA The following table presents selected consolidated financial data of Leslie's California as of and for each of the five fiscal years in the period ended December 28, 1996 and as of and for the fiscal quarters ended March 30, 1996 and March 29, 1997. This financial data was derived from the audited and unaudited historical consolidated financial statements of Leslie's California and should be read in conjunction with the financial statements of Leslie's California and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
YEARS ENDED THREE MONTHS ENDED ------------------------------------------------ -------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 30, DEC. 28, MARCH 30, MARCH 29, 1992 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- --------- --------- (UNAUDITED) (DOLLARS IN THOUSANDS) STATEMENT OF INCOME: Net Sales.............. $96,337 $119,955 $141,553 $162,456 $191,640 $ 18,064 $ 23,816 Cost of Sales.......... 57,320 71,666 86,084 102,057 118,880 13,806 18,254 ------- -------- -------- -------- -------- -------- -------- Gross Profit.......... 39,017 48,289 55,469 60,399 72,760 4,258 5,562 Selling, general and administrative expenses.............. 33,986 41,170 45,764 53,442 62,358 12,804 15,055 Amortization of acquisition costs..... 675 649 242 239 252 64 64 Loss (gain) on disposition of fixed assets................ 26 120 (106) 27 750 -- 71 ------- -------- -------- -------- -------- -------- -------- Income from operations............ 4,330 6,350 9,569 6,691 9,400 (8,610) (9,628) Interest expense, net.. 829 1,189 1,733 2,708 2,786 834 799 ------- -------- -------- -------- -------- -------- -------- Income before taxes.... 3,501 5,161 7,836 3,983 6,614 (9,444) (10,427) Income tax provision (benefit)............. 1,355 2,126 3,252 576 2,745 (3,919) (4,326) ------- -------- -------- -------- -------- -------- -------- Net Income (Loss)...... $ 2,146 $ 3,035 $ 4,584 $ 3,407 $ 3,869 $ (5,525) $ (6,101) ======= ======== ======== ======== ======== ======== ======== Net Income (Loss) per share................. $ .34 $ .47 $ .70 $ .52 $ .57 $ (.82) $ (.90) SELECTED OPERATING DATA: EBITDA (FIFO basis)(1)....... $ 6,779 $ 8,612 $ 11,476 $ 10,472 $ 14,960 $ (7,564) $ (8,243) Capital Expenditures... 3,343 5,532 7,394 9,550 8,807 2,393 4,739 Comparable Store Sales Growth................ 2.4% 11.7% 12.9% 6.0% 9.9% 6.6% 20.8% Stores Operated at Period-End............ 143 158 180 224 259 239 268 Ratio of earnings to fixed charges(2)...... 2.15x 2.28x 2.54x 1.56x 1.81x -- -- AS OF AS OF ------------------------------------------------ -------------------- DEC. 31, DEC. 31, DEC. 31, DEC. 30, DEC. 28, MARCH 30, MARCH 29, 1992 1993 1994 1995 1996 1996 1997 -------- -------- -------- -------- -------- --------- --------- (UNAUDITED) (DOLLARS IN THOUSANDS) BALANCE SHEET DATA: Net Working Capital(3)............ $11,189 $15,548 $22,161 $31,974 $30,258 $ 31,580 $ 26,825 Total Assets........... 44,025 49,532 61,717 79,529 83,157 105,044 113,656 Total Debt............. 15,795 19,397 25,424 36,884 33,208 43,301 38,117 Average Debt(4)........ 11,913 18,056 20,993 31,283 32,553 34,217 31,257 Stockholders' Equity... 17,820 21,041 26,339 31,921 36,315 26,470 30,235
- ------- (1) EBITDA (FIFO basis), as presented historically by the Company, represents income before interest expense, depreciation and amortization expense, the LIFO provision, (gains) and losses on disposition of fixed assets and the provision for income taxes. While EBITDA (FIFO basis) is not intended to represent cash flow from operations as defined by GAAP and should not be considered as an indicator of operating performance or an alternative to cash flow (as measured by GAAP) as a measure of liquidity, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (2) For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of loss before provision for income taxes plus fixed charges. "Fixed charges" consist of interest on all indebtedness, amortization of deferred debt financing costs, one-third of rental expense (the portion deemed representative of the interest factor), 27 Preferred Stock dividend requirements and Preferred Stock accretion. Earnings were insufficient to cover fixed charges for the three months ended March 29, 1997 and March 30, 1996 by approximately $10.4 million and $9.4 million, respectively. (3) Excludes cash, short-term borrowings and current portion of long-term debt. (4) Represents the sum of the outstanding balances at the end of the most recent quarter plus each of the preceding three quarters divided by four. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with "Selected Historical Consolidated Financial Data" and the audited Consolidated Financial Statements of the Company and the notes thereto included elsewhere in this Offering Memorandum. The following table sets forth, for the periods indicated, certain historical income statement and other data for the Company and also sets forth certain of such data as a percentage of net sales.
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED ------------------------------------- ------------------------ MARCH 30, MARCH 29, 1994 1995 1996 1996 1997 ------------ ----------- ----------- ----------- ----------- $ % $ % $ % $ % $ % ----- ----- ----- ----- ----- ----- ---- ----- ---- ----- (DOLLARS IN MILLIONS) Retail Stores........... 129.5 91.5 150.3 92.5 179.1 93.5 16.5 91.1 22.1 92.9 Mail Order Catalog...... 8.3 5.9 7.9 4.9 7.7 4.0 0.8 4.2 0.8 3.3 Service Department and Other.................. 3.7 2.6 4.2 2.6 4.8 2.5 0.8 4.7 0.9 3.7 ----- ----- ----- ----- ----- ----- ---- ----- ---- ----- Total Net Sales....... 141.5 100.0 162.5 100.0 191.6 100.0 18.1 100.0 23.8 100.0 Gross Profit............ 55.5 39.2 60.4 37.2 72.8 38.0 4.3 23.6 5.6 23.4 Selling, General and Administrative Expenses............... 45.8 32.3 53.4 32.9 62.4 32.5 12.8 70.9 15.1 63.5 Amortization of Acquisition Costs...... 0.2 0.2 0.2 0.1 0.3 0.1 0.1 0.4 0.1 0.3 Loss on Disposition of Fixed Assets........... (0.1) (0.1) 0.0 0.0 0.8 0.4 0.0 0.0 0.0 0.0 ----- ----- ----- ----- ----- ----- ---- ----- ---- ----- Income (Loss) from Operations........... 9.6 6.8 6.7 4.1 9.4 4.9 (8.6) (47.7) (9.6) (40.4) EBITDA (FIFO basis)..... 11.5 8.1 10.5 6.4 15.0 7.8 (7.6) (41.9) (8.2) (34.6)
First Quarter of 1997 Compared to First Quarter of 1996 Sales for the first quarter of 1997 increased 31.8% over the first quarter of 1996. Retail store sales grew 34.5% for the three-month period due to an increase in the total number of stores in operation in 1997 versus 1996 as well as a comparable store sales increase of 20.8%. The increase in comparable store sales is primarily the result of the maturing of the new stores opened over the last several years, and continued growth in commercial sales. Commercial sales increased 21.4% in the first quarter of 1997 compared to the same period last year. Additionally, in the Southern California market, the Company is testing the operation of its service technicians out of the local stores, and as a result, is reflecting these service sales in the retail store sales total. Southern California service sales added approximately 2.0% to the first quarter of 1997 comparable store sales growth. Mail order catalog sales in the first quarter of 1997 increased 4.9% compared to the first quarter of the prior year on increased residential mail order sales, resulting from an expanded catalog mailing in 1997 and generally favorable weather. Service department sales increased 5.0% in the first quarter, reflecting strong growth in the Texas service centers, offset by the reclassification of the Southern California service sales to retail store sales. Gross profit for the three months ended March 29, 1997 equaled $5.6 million or 23.4% of sales, 0.2% of sales lower than was reported in the first quarter of 1996. The lower gross margin is primarily due to increased promotional activity in 1997 supporting new store openings, offset by lower rent expense as a percentage of sales due to the decrease in the number of new stores opened in 1997 versus 1996. 29 In the first quarter of 1997, selling, general and administrative expenses equaled $15.1 million, an increase of 18.1% over the same period of last year. This increase is the result of higher store expenses and increased corporate overhead costs required to support the continued growth in the number of stores. EBITDA (FIFO basis) was a deficit of $8.2 million in the first quarter of 1997, representing an increase of $0.6 million as compared to a deficit of $7.6 million in the first quarter of 1996. The increased deficit in the first quarter of 1997 was due to continued expansion of the Company's store base and the associated cost of operating an increased number of stores in the off- season. Interest expense equaled $0.8 million in the first quarter of 1997, down slightly from the same period in 1996 . The lower interest expense was primarily the result of decreased borrowings due to improved working capital management in the first quarter of 1997. In the first quarter ended March 29, 1997, the Company reported a net loss of $6.1 million or $0.90 per share, as compared to a net loss of $5.5 million or $0.82 per share for the first quarter of 1996. During the quarter 11 new stores were opened and 2 stores were closed, bringing the total store count to 268 on March 29, 1997. The Company historically incurs a net loss in the first quarter of the year and generally expects such losses to grow as new stores continue to be added at a significant rate. During April 1997 the Company's sales increased approximately 4.0% compared to the comparable period in the prior year. Seasonal losses continued and unaudited year to date losses increased over 1996. 1996 Compared to 1995 Sales for the year ended December 28, 1996 increased 18.0% over the same period in 1995. Retail store sales, which are comprised of residential sales and commercial sales, grew 19.2%, reflecting increases in comparable store sales of 9.9% as well as an increase in the total number of stores in operation from 224 in 1995 to 259 for most of the 1996 selling season. The increased growth rate of comparable store sales (9.9% in 1996) as compared to the prior year (6.0% in 1995) was the result of improved weather experienced in most market areas, and the commercial sales program, which continued to show solid growth of approximately 20% in 1996. During 1996, Leslie's expanded its business by opening 37 new stores. Additionally, two stores were closed and three relocated in 1996. This resulted in a net increase of 35 stores at the end of December 1996 as compared to December 1995. Mail order catalog sales declined 2.8% to $7.7 million from $7.9 million in 1995. New store openings in a number of strong mail order markets continued to cannibalize mail order sales. Service department sales increased 12.9% in 1996 due to an increased number of service technicians operating in existing service areas, including a significant expansion in Houston, Texas, as well as generally improved execution. Gross profit for the year ended December 28, 1996 increased to 38.0% of net sales, from 37.2% in 1995. Gross profit represents sales less the cost of services and purchased goods, chemical repackaging costs, and non- administrative occupancy costs. The gross margin increase in 1996 reflects increased retail pricing taken in early 1996, offsetting some product cost increases seen in 1995 and again in 1996. In 1996, selling, general and administrative expenses equaled $62.4 million, versus $53.4 million in 1995, an increase of 16.6%, largely the result of the 15.6% increase in the number of stores. As a percentage of sales, selling, general and administrative expenses decreased 0.4% to 32.5%, compared to 32.9% in sales in 1995, due to the improved comparable store sales performance in 1996. EBITDA (FIFO basis) was $15.0 million in 1996, representing an increase of $4.5 million, or 42.9%, as compared to $10.5 million for 1995. EBITDA (FIFO basis) margin increased to 7.8% of sales in 1996 as compared to 6.4% of sales in 1995. The increase in EBITDA (FIFO basis) and EBITDA (FIFO basis) margin was primarily due to the Company's higher sales volume in 1996 and an increase in the Company's gross margin. 30 Amortization of acquisition costs, which represents the amortization of goodwill, equaled $0.3 million in 1996, essentially flat as compared to 1995. In 1996 Leslie's recognized losses on the disposition of fixed assets totaling approximately $0.8 million. This was primarily comprised of a $0.7 million write-off of leasehold improvements related to the relocation of its corporate offices, Southern California distribution operations and chemical repackaging operation in early 1997. Additionally, a $0.1 million loss was realized on the sale of an excess property located in Oklahoma City. Operating income for the period increased 40.5% to $9.4 million or 4.9% sales, from $6.7 million or 4.1% of sales in 1995. Interest expense equaled $2.8 million in 1996, up slightly from $2.7 million in 1995. The increase was primarily the result of slightly increased borrowings due to the capital spending and working capital requirements associated with the continued growth of the business. The tax provision increased to $2.7 million in 1996, an effective rate of 41.5%, from $0.6 million and an effective tax rate of 14.5% in 1995. The lower effective tax rate in 1995 as compared to 1996 reflects the reversal in 1995 of certain tax reserves which were no longer needed. Net income for 1996 increased 13.6% to $3.9 million or $0.57 per share, as compared to $3.4 million or $0.52 per share in 1995. In August 1995, a 5.0% stock dividend was effected and the 1995 earnings per share have been adjusted to reflect the impact of the stock dividend. 1995 Compared to 1994 Sales for the year ended December 30, 1995 increased 14.8% over the same period in 1994. Retail store sales grew 16.0%, reflecting increases in comparable store sales of 6.0% as well as an increase in the total number of stores in operation from 180 in 1994 to 223 for most of the 1995 selling season. The lower growth rate of comparable store sales (6.0%) as compared to prior years (12.9% in 1994 and 11.7% in 1993) was the result of the cool, wet weather experienced in most market areas in the March through June time frame. Despite the reduced growth in residential sales, the commercial sales program continued to show strong growth of approximately 45.0% throughout 1995. Mail order catalog sales declined 4.1% to $7.9 million from $8.3 million in 1994. The poor spring weather impacted mail order sales as did new store openings in a number of strong mail order markets which continued to cannibalize mail order sales. Service department sales increased 14.0% in 1995 due to an increased number of service technicians operating in existing service areas, as well as generally improved execution. Gross profit for the year ended December 30, 1995 declined as a percentage of sales, to 37.2% from 39.2% in 1994. Gross profit represents sales less the cost of services and purchased goods, chemical repackaging costs, and non- administrative occupancy costs. The decrease in gross margin in 1995 was the result of higher occupancy costs associated with the opening of 44 new stores plus the new northeast distribution center, increased merchandise costs in a variety of product categories, and the strong growth of commercial sales, which generate a somewhat lower gross margin. In 1995, selling, general and administrative expenses equaled $53.4 million, versus $45.8 million in 1994, an increase of 16.8%, largely the result of the 24.4% increase in the number of stores. As a percentage of sales, selling, general and administrative expenses increased 0.6% to 32.9%, compared to 32.3% of sales in 1994, due to the lower than expected comparable store sales performance in 1995. It is management's objective to grow selling, general and administrative expenses at a rate lower than the rate of store growth and, as a result, reduce these expenses as a percentage of sales over time. EBITDA (FIFO basis) was $10.5 million in 1995, representing a decrease of $1.0 million, or 8.7%, as compared to $11.5 million for 1994. EBITDA (FIFO basis) margin decreased to 6.4% of sales in 1995 as 31 compared to 8.1% of sales in 1994. The decrease in EBITDA (FIFO basis) and EBITDA (FIFO basis) margin was primarily due to the Company's lower gross margin and higher selling, general and administrative expenses as a percent of sales. Amortization of acquisition costs, which represents the amortization of goodwill, equaled $0.2 million in 1995, essentially flat as compared to 1994. Operating income was $6.7 million in 1995, representing a decrease of $2.9 million, or 30.2%, as compared to $9.6 million for 1994. Operating income margin decreased to 4.1% of sales in 1995 as compared to 6.8% of sales in 1994. The decrease in operating income and operating income margin was primarily due to the Company's lower gross margin and higher selling, general and administrative expenses as a percent of sales. Interest expense equaled $2.7 million in 1995, up from $1.7 million in 1994. The increase was primarily the result of increased borrowings associated with higher capital spending and working capital requirements due to continued growth in the business, and the lower earnings realized in 1995. The tax provision declined to $0.6 million in 1995, an effective rate of 14.5%, from $3.3 million and an effective tax rate of 41.5% in 1994. The lower effective tax rate in 1995 as compared to 1994 reflects the third quarter reversal of certain tax reserves which were no longer needed. LIQUIDITY AND CAPITAL RESOURCES The Company's need for liquidity will arise primarily from interest payable on the indebtedness incurred in connection with the Transactions and the funding of the Company's capital expenditures and working capital requirements. The Company has no mandatory payments of principal on the Notes scheduled prior to their maturity and expects to have no mandatory payments of principal scheduled under the Bank Facility until its expiration in five years. The Company has historically financed its operations through internally generated funds and borrowings under its credit facilities. In the first quarter of 1997, net cash used in operating activities was $1.3 million compared with $4.1 million in the first quarter of the prior year. In the first quarter, cash is typically used to finance operating losses experienced prior to the Company's peak selling season. The impact of the increased operating loss in the first quarter of 1997 was offset by reduced working capital requirements relative to the first quarter of 1996. For the year ended December 28, 1996, net cash provided by operating activities was $12.0 million compared with cash used in operating activities of $4.1 million in the prior year. Higher earnings and decreased per store inventory balances resulted in increased cash flow from operations in 1996. For the first quarter of 1997, cash used in investing activities was $3.6 million compared with $2.4 million in the first quarter of the prior year. This increase resulted from increased capital expenditures in the first quarter of 1997 as compared to the first quarter of 1996 due to the relocation of the Company's corporate headquarters, California distribution center and the California repackaging facility during the quarter, as well as opening the 1997 new stores earlier in the season as compared to 1996. Also, in the first quarter of 1997, two retail store properties were sold and generated proceeds totaling approximately $1.2 million. In 1996, cash used in investing activities was $8.6 million compared with $9.2 million in the prior year. This decrease resulted primarily from reduced capital expenditures in 1996 as compared to 1995 due to the slightly lower number of new store openings. Capital expenditures are expected to be approximately $7.7 million in fiscal 1997, and will be used in part to fund new store openings. The Company estimates that its cash requirements to open each new store in the spring, including inventory net of trade payables, averages approximately $0.1 million. Cash provided by financing activities was $4.9 million in the first quarter of 1997 compared with $6.5 million in the first quarter of 1996. First quarter of 1997 borrowings were used primarily to finance the usual first quarter operating loss and capital expenditures associated with the continued new store openings. Cash used in financing activities was $3.4 million in 1996 compared with cash provided of $13.4 million in 1995, 32 when Leslie's California completed the private placement of its $10.0 million 8% Convertible Subordinated Debentures. The Debentures will be exchanged as part of the consideration for the Preferred Stock and the Warrants in connection with the Transactions. In January of 1997 the Company amended its credit agreement with Wells Fargo Bank to consolidate the existing line of credit facility, the project financing facility, and the term loan into one expanded $38.0 million line of credit facility. The term of the expanded line of credit facility was extended through February 16, 2000 and as a result, the line of credit has been classified as long-term debt on the March 29, 1997 balance sheet. Interest accrues at the lender's reference rate (8.5% at March 29, 1997) or at LIBOR plus 1.75% at the Company's election. Management believes that, following the consummation of the Transactions, the Company will have adequate capital resources and liquidity to meet its working capital needs, maturing obligations and capital expenditure requirements, including those relating to the opening of new stores. The Company's capital resources and liquidity are expected to be provided by the Company's cash flow from operations and borrowings under the Bank Facility. SEASONALITY AND QUARTERLY FLUCTUATIONS The Company's business exhibits substantial seasonality which the Company believes is typical of the swimming pool supply industry. In general, sales and net income are highest during the second and third quarters, which represent the peak months of swimming pool use. Sales are substantially lower during the first and fourth quarters when the Company will typically incur net losses. The principal external factor affecting the Company's business is weather. Hot weather and the higher frequency of pool usage in such weather create a need for more pool chemicals and supplies. Unseasonably early or late warming trends can increase or decrease the length of the pool season. In addition, unseasonably cool weather and/or extraordinary amounts of rainfall in the peak season decrease swimming pool use. The likelihood that unusual weather patterns will severely impact the Company's results is lessened by the geographical diversification of the Company's store locations. The Company expects that its quarterly results of operations will fluctuate depending on the timing and amount of revenue contributed by new stores and, to a lesser degree, the timing of costs associated with the opening of new stores. The Company attempts to open its new stores primarily in the first quarter in order to position itself for the following peak season. As additional stores and the resultant operating expenses are added, the Company expects its usual losses incurred in the first and fourth quarters to increase. 33 SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED) (DOLLARS IN THOUSANDS)
THREE MONTHS ENDED -------------------------------------- MARCH 30 JUNE 29 SEPT. 28 DEC. 28 -------- ------- -------- ------- 1996 Sales............................... $18,064 $88,835 $63,657 $21,084 Gross Profit........................ 4,258 38,236 25,868 4,398 (Loss) Income from Operations....... (8,610) 17,265 7,712 (6,967)(1) Net (Loss) Income................... (5,525) 9,658 4,176 (4,440) EBITDA (FIFO basis)(2).............. (7,564) 18,534 8,919 (4,929) Total Debt Outstanding.............. 43,301 28,235 25,468 33,208 Comparable Store Sales Growth....... 6.6% 16.1% 4.2% 6.4% THREE MONTHS ENDED -------------------------------------- APRIL 1 JULY 1 SEPT. 30 DEC. 30 -------- ------- -------- ------- 1995 Sales............................... $15,360 $71,945 $56,862 $18,289 Gross Profit........................ 3,826 29,883 22,230 4,460 (Loss) Income from Operations....... (6,921) 12,138 6,974 (5,500) Net (Loss) Income................... (4,416) 6,692 4,817 (3,686) EBITDA (FIFO basis)(2).............. (6,257) 12,846 7,791 (3,908) Total Debt Outstanding.............. 31,564 25,273 31,411 36,884 Comparable Store Sales Growth....... (0.6)% (0.3)% 16.0% 9.5%
- -------- (1) The quarter ended December 28, 1996 loss from operations included an approximately $0.7 million loss on disposition of fixed assets. (2) EBITDA (FIFO basis), as presented historically by the Company, represents income before interest expense, depreciation and amortization expense, the LIFO provision, gains and (losses) on disposition of fixed assets and the provision for income taxes. While EBITDA (FIFO basis) is not intended to represent cash flow from operations as defined by GAAP and should not be considered as an indicator of operating performance or an alternative to cash flow (as measured by GAAP) as a measure of liquidity, it is included herein to provide additional information with respect to the ability of the Company to meet its future debt service, capital expenditure and working capital requirements. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Recent Accounting Pronouncements. Leslie's adopted Statement of Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" ("SFAS 121") in the first quarter of 1996. The adoption of SFAS 121 did not impact Leslie's financial position or its results of operations. In addition, in 1996 Leslie's adopted the disclosures required by Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). In March 1997, the FASB issued SFAS No. 128 "Earnings per Share" ("SFAS 128") and SFAS No. 129 "Disclosure of Information about Capital Structure" ("SFAS 129"). SFAS 128 revises and simplifies the computation for earnings per share and requires certain additional disclosures. SFAS 129 requires additional disclosures regarding the Company's capital structure. Both standards will be adopted in fiscal 1997. Management does not expect the adoption of these standards to have a material effect on the Company's financial position or the results of operations. 34 BUSINESS Leslie's is the leading national specialty retailer of swimming pool supplies and related products. These products primarily consist of regularly purchased, non-discretionary pool maintenance items such as chemicals, equipment, cleaning accessories and parts, and also include fun, safety and fitness-oriented recreational items. The Company currently markets its products under the trade name Leslie's Swimming Pool Supplies through 278 company-owned retail stores in 27 states and through mail order catalogs sent to selected pool owners nationwide. From 1992 to 1996, the Company increased its sales at a compound annual growth rate of 18.8%, from $96.3 million to $191.6 million. During the same period, EBITDA (FIFO basis) increased at a compound annual growth rate of 21.9%, from $6.8 million to $15.0 million. The Company's growth reflects a store count that increased from 1992 to 1996 at the rate of 16.0% annually and comparable store sales increases that averaged 10.1% annually during the same time frame. The Company provides its customers a comprehensive selection of high quality products, competitive every day low prices ("EDLP") and superior customer service through knowledgeable and responsive sales personnel who offer a high level of technical assistance at convenient store locations. The EDLP offered by the Company are generally comparable to or better than those offered by any of its competitors, including mass merchandisers and home centers. The typical Leslie's store contains 4,000 square feet of space, is located either in a strip center or on a freestanding site in an area of heavy retail activity, and draws its customers primarily from a trade area with a radius of approximately three miles. The Company maintains a proprietary mailing list of more than 4.5 million addresses, including approximately 90% of the residential in-ground pools in the U.S. This highly focused list of target customers is central to the Company's direct mail marketing efforts, which support both its retail store and mail order operations. Management believes that the Leslie's name is one of the most recognized brands in pool supplies and represents an image of quality to consumers. In fiscal 1996, Leslie's brand name products accounted for approximately 60% of the Company's total sales. Leslie's successful execution of its business strategy has generated a 33- year history of consistently increasing sales. Management intends to continue increasing sales and profits by further expanding its store base at the rate of 12% to 15% annually and continuing to achieve positive comparable store sales increases. The Company attributes its strong historical results and its positive outlook for growth and profitability to the following factors: Leadership Position in a Highly Fragmented Market. Leslie's current store count of 278 locations is approximately equal to the sum of the next fifteen largest specialty retail competitors combined. However, despite its large relative size, Leslie's presently accounts for only approximately 5% of the estimated $3.7 billion annual pool and spa supply market. Since 1989, Leslie's has accelerated the pace of its new store openings and consequently has gained market share. Management believes that this growth has come primarily at the expense of independent local and regional pool supply retailers, which accounted for over two-thirds of industry sales in 1996. Attractive Store Economics. Leslie's results reflect extremely attractive store-level economics. The Company estimates that cash required to open each new store, including inventory net of trade payables, averages approximately $125,000. Based upon the Company's past experience, new stores generally break even in their first year of operation, pay back their initial investments after three years, and in their fifth year of operation, contribute approximately $181,000 of store operating profit, yielding a return on average initial cash investment of 145%. In 1996, the Company's mature stores (the 115 stores open for five years or longer) averaged approximately $900,000 of sales, generated approximately $200,000 of store operating profit per location and posted a comparable store sales increase of 5.8%. Growth Potential of Recently Opened Stores. Leslie's new stores have historically grown dramatically in sales and store operating profit during their first five years of operation. In 1996, the 142 stores opened since the end of 1992 averaged approximately $519,000 in sales and approximately $50,000 of store operating profit per location. Management expects these stores generally to follow the Company's historical pattern of maturation and believes that there exists a large potential for sales and store operating profit increases from these nonmature stores. 35 Large Sales Volume of Non-Discretionary Products. The consistency of Leslie's sales growth and profitability is due in large part to the sale of non-discretionary and regularly consumed products such as pool chemicals, cleaning accessories, major pool equipment (pumps and heaters) and replacement parts. Pool owners must purchase such products to maintain their pools' water quality and physical appearance and, in the Company's experience, do so regardless of the economic environment. In fiscal 1996, non-discretionary and regularly consumed products comprised approximately 74% of the Company's sales, with pool chemicals representing approximately 44% of the Company's total sales. Proprietary Database of Pool Locations. Through ongoing research as well as the conduct of its retail and mail order business, Leslie's has developed a proprietary database of over 4.5 million addresses. The list includes approximately 90% of the residential in-ground pools in the U.S. This proprietary database allows Leslie's to execute cost-effective and highly targeted direct mail marketing. When combined with the Company's mail order sales results and computerized mapping capability, this database also gives Leslie's a sophisticated store site selection capability. Management believes that the scope and accuracy of its proprietary database is unique in the pool supply industry. Purchasing Power and Vertical Integration. Due to its size, Leslie's purchases more chemicals and other pool supplies than any other specialty retailer. In addition, Leslie's operates a repackaging facility which provides the Company with significant cost savings, greater control over product availability and quality, greater flexibility when sourcing products, and vital information when negotiating with third-party providers. Further, unlike most of its competitors, the Company does not rely upon third-party distribution, but has its own specialized and efficient distribution system. Management believes that these factors permit Leslie's to achieve a lower cost of goods than any of its competitors, including mass merchandisers and home centers. Superior Level of Customer Service. Leslie's believes that its superior level of customer service, including its comprehensive product selection, gives it a significant advantage over its competitors in winning the loyalty of customers. Due to the complicated nature of pool chemistry and pool equipment maintenance, and consistent with its philosophy of being a full service swimming pool supply retailer, Leslie's offers a high level of technical assistance to its customers. The Company has developed a comprehensive training program educating all store employees on the subjects of maintenance techniques, water chemistry and equipment testing and repair. As part of its regular customer service program the Company offers free detailed water testing, pamphlets on pool maintenance, and in-store equipment repairs, generally free of labor or bench charges. HISTORY The Company is the successor to the original Leslie's Poolmart founded in 1963. From its inception in 1963 through the end of 1987, Leslie's Poolmart grew steadily in sales and number of stores. In September 1988, Leslie's Poolmart was purchased in a highly leveraged transaction by an investment group led by Hancock Park Associates ("HPA"). The Company completed an initial public offering in April 1991 and in August 1992 added 14 stores through the acquisition of a competitor. Leslie's has added 116 stores over the past four years. Leslie's intends to continue to grow by opening additional retail stores in both new and existing markets. SWIMMING POOL SUPPLY INDUSTRY Regardless of the type or size of a swimming pool, there are numerous ongoing maintenance and repair requirements associated with pool ownership. In order to keep a pool safe and sanitized, chemical treatment is required to maintain proper chemical balance, particularly in response to variables such as pool usage, precipitation and temperature. A swimming pool is chemically balanced when the disinfectant, pH, alkalinity, hardness and dissolved solids are at the desired levels. The majority of swimming pool owners use chlorine to disinfect their pools. When the pool is chemically balanced, problems such as algae, mineral and salt saturation, corrosive water, staining, eye irritation 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 36 which invariably build up in the pool water. To accomplish this, the pool owner can either superchlorinate the pool or use a nonchlorinated oxidizing compound. The maintenance of proper chemical balance and the related upkeep and repair of swimming pool equipment, such as pumps, heaters, and filters, create a non-discretionary demand for pool chemicals and other swimming pool supplies and services. Further, even non-usage considerations such as a pool's appearance and the overall look of a household and yard create an ongoing demand for these maintenance related supplies. In addition, pool usage creates demand for discretionary items such as floats, games and accessories. The swimming pool supply industry can be divided into four major segments by pool type: residential in-ground swimming pools, residential above-ground swimming pools (usually 12 to 24 feet in diameter), commercial swimming pools and spas or hot tubs. The Company's historical strategy was to focus primarily on the residential in-ground pool owner. In recent years the Company has expanded its activities to more aggressively address the commercial and above- ground markets as well. In the residential categories, the Company markets its products primarily to the "do-it-yourself" market as opposed to those pool owners who hire pool servicers. Through its rapidly growing commercial business, products and services are offered to all non-residential pool installations as well as to pool service companies which maintain either residential or commercial pools. The Company's uninterrupted growth through three recessionary periods suggests that due to the ongoing maintenance and repair needs of existing swimming pools, the Company would not be significantly affected by a decline in swimming pool installation. However, there can be no assurance that a prolonged severe economic downturn and resulting decline in new housing construction or swimming pool installation would not adversely affect the Company's long-term expansion plans. SEASONALITY The Company's business exhibits substantial seasonality, which the Company believes is typical of the swimming pool supply industry. In general, sales and net income are highest during the second and third fiscal quarters which represent the peak months of swimming pool use. Sales are substantially lower during the first and fourth quarters when the Company typically incurs net losses. The principal external factor affecting the Company's business is weather. Hot weather and the higher frequency of pool usage in such weather create a need for more pool chemicals and supplies. Unseasonably early or late warming trends can increase or decrease the length of the pool season. In addition, unseasonably cool weather and/or extraordinary amounts of rainfall in the peak season (such as that experienced in much of the U.S. in the spring and early summer of 1995) will tend to decrease swimming pool use. The likelihood that unusual weather patterns will severely impact the Company's results is lessened by the geographical diversification of the Company's store locations. The Company also expects that its quarterly results of operations will fluctuate depending on the timing and amount of revenue contributed by new stores and, to a lesser degree, the timing of costs associated with the opening of new stores. The Company attempts to open its new stores primarily in the first quarter 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 1996, the Company stocked approximately 3,000 items in each store, with more than 7,000 additional items available by special order. For 1997 and beyond, the newly- created Xpress Parts program will make 5,000 more special order items available to Leslie's customers. In 1996, approximately 550 items were displayed in the Company's residential mail order catalogs and 1,200 items were in the commercial catalog, although special order procedures make nearly all Leslie's products available to mail order customers as well. 37 The Company's major product categories are pool chemicals; major equipment; cleaning and testing equipment; pool covers, reels, and liners; in a limited number of stores, above-ground pools; and recreational items (which include swimming pool floats, games, lounges, masks, fins, snorkels and other "impulse" items). The following table shows the approximate percentage of sales and primary function for each of the Company's major product categories in fiscal 1996:
PRODUCT LINE PERCENTAGE PURPOSE ------------ ---------- ------- Pool Chemicals................... 44% Cleanliness, appearance, health Major Equipment and Parts........ 30% Pumps and heaters for cleaning and temperature maintenance; automatic pool cleaners for ease of maintenance Cleaning and Testing Equipment... 8% Water evaluation, cleanliness and appearance Covers, Reels, Liners and Pools.. 9% Safety, cleanliness and temperature maintenance for above-ground pools Recreational Items............... 9% Pool enjoyment, swim aids
Non-discretionary and regularly consumed products such as pool chemicals, major equipment and parts represented approximately 74% of total sales in fiscal 1996. The high percentage of Leslie's business which is attributable to non-discretionary products results in a very high level of inventory quality at the Company since the Company's non-discretionary products have long shelf lives and are not prone to either obsolescence or shrinkage. The Company believes that product quality and availability are key attributes considered by consumers when shopping for pool supplies and that the Company's ability to provide a high quality, in-stock product offering is fundamental to its concept of value leadership. In addition to third-party brand names, Leslie's carries a broad selection of products under the Leslie's brand name. Marketing studies have shown that the Leslie's brand name is one of the three most recognized brands in pool supplies and represents an image of quality to consumers. In fiscal 1996, 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 1996, Leslie's marketed its products through 259 retail stores in 27 states under the trade name Leslie's Swimming Pool Supplies. California represents the Company's single largest concentration of stores with 82, while 45 stores are located in Texas, and 54 stores are in the northeast/mid-Atlantic area. Leslie's retail stores are located in areas with high concentrations of swimming pools and typically are approximately 4,000 square feet in size. In addition to the store manager, the typical Leslie's store employs two assistant managers, both of whom are generally full-time employees. Additionally, Leslie's makes frequent use of part-time and temporary employees to support its full-time employees during peak seasons. During 1996, the Company had 16 regional supervisors, each of whom was responsible for approximately 16 stores. Mail Order Catalog. Leslie's mail order catalogs provide an extension of its service philosophies and products to those areas not currently served by a retail store and allow the scope of the Company's business to be truly nationwide. The Company believes that it operates one of the largest pool supply mail order businesses in the country, with annual sales for 1996 of approximately $7.7 million. Further, the Company believes that its mail order catalogs build awareness of the Leslie's name, provide it with buying efficiencies and, when coupled with information from its retail stores, are instrumental in determining site selection for new stores. 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 38 of its service philosophy. Leslie's extensive training program for all full- time and part-time store employees includes courses in water chemistry, water testing, trouble shooting on equipment, equipment sizing and parts replacement. The Company maintains the same high customer service standards for its mail order business as it does for its retail stores. During 1996, Leslie's stores in Southern and Northern California; Dallas and Houston, Texas; and Las Vegas, Nevada, were supported by the Leslie's Service Department, which offers poolside equipment installation and repair, leak detection and repair, and seasonal opening and closing services. The Service Department utilizes both Company employees and subcontractors to perform these services. The Company anticipates that operations in these markets will serve as a prototype for a nationwide service expansion. MARKETING Substantially all the Company's marketing is done on a direct mail basis through its proprietary mailing list of more than four and a half million addresses at which, primarily, residential pools are located. Leslie's has found that its ability to mail directly to this highly focused group is an effective and efficient way to conduct its marketing activities to both retail store and mail order customers. The Company constantly updates its address list through primary research techniques and in-store customer sign-ups. Addresses on the Company's proprietary list that are located within a specified service area of a retail store receive circulars once or twice per month from late March or early April through September or, selectively, through October. As a regular part of Leslie's promotional activities, each mailer highlights specific items which are intended to increase store traffic, and reinforces to the customer the advantages of shopping at Leslie's, which include everyday low pricing, a high level of customer service, and the broad selection of high quality products. Addresses outside the Company's store service areas, and recently active mail order customers within those service areas, receive the Company's mail order catalogs. Occasionally, the Company will utilize local print media when it enters a new market, and is doing so in connection with its above-ground pool sales test markets. New store openings typically involve additional advertising pieces in the first two to three months of operation. PURCHASING Leslie's management believes that because it is one of the largest purchasers of swimming pool supplies for retail sales in the United States, the Company is able to obtain very favorable pricing on its purchases from outside suppliers. Nearly all raw materials and those products not repackaged by the Company are purchased directly from manufacturers. It is common in the swimming pool supply industry for certain manufacturers to offer extended dating terms on certain products to quantity purchasers such as Leslie's. These dating terms are typically available to the Company for pre-season or early season purchases. The Company's principal chemical raw materials and granular chlorine compounds are purchased primarily from three suppliers. At the end of 1994, the Company entered into a three-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. 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 39 stores with chemicals from its own repackaging plant provides it with cost savings, as well as greater control over product availability and quality, as compared to non-integrated pool supply retailers. It also offers the Company greater flexibility of sourcing and vital information when negotiating with third-party repackagers and chemical providers. The Leslie's brand name appears on all products processed at its repackaging plant, and on the significant majority of its chemical products. The Company believes that it is among the largest processors of chlorine products for the swimming pool supply industry. The total output of Leslie's repackaging plant is utilized by the Company and is not sold or distributed to other retailers. Leslie's currently does not intend to sell any significant amount of chemicals from its Los Angeles area facility to other retailers or distributors. In connection with the operation of its second distribution center in Dallas, Texas, and third distribution center in Bridgeport, New Jersey, the Company has expanded its use of third-party chemical repackagers and its purchase of products already in end-use configurations. These products are also generally packaged under the Leslie's brand name. The Company continually evaluates the cost effectiveness of third-party sourcing versus internal manufacturing in order to minimize its cost of goods. Leslie's will also continue to evaluate the establishment of additional chemical repackaging capabilities, though there are currently no plans for such an investment. In addition to chemicals, a variety of the Company's products are packaged under the Leslie's brand name. DISTRIBUTION The Company distributes all of its products to its retail stores and to its catalog customers through its leased distribution facilities in Ontario, California; Dallas, Texas; and Bridgeport, New Jersey. Leslie's relocated and consolidated its West coast distribution operation, along with the Los Angeles repackaging operation, into a 183,000 square foot facility in Ontario, California in early 1997. Leslie's opened its 100,000 square foot Dallas facility in November 1990 and the 81,000 square foot Bridgeport, New Jersey facility in February 1995. The Company is now purchasing the majority of the chemicals to be distributed from the Dallas and Bridgeport distribution centers from outside manufacturers rather than obtaining them through its repackaging facility in Southern California. During the height of its seasonal activities, each of the Company's retail stores is generally replenished every 5 to 10 days. The Company utilizes company-owned and operated equipment, supplemented by additional equipment leased during the busy season, to transport its goods to stores within an approximately 350-mile radius of a distribution center. Other stores receive deliveries via common carriers. MANAGEMENT INFORMATION SYSTEMS All decisions relating to the buying, pricing and distribution of products are centralized at the Company's headquarters. Leslie's computerized point-of- sale system provides detailed sales and inventory information for each item in each store. This data is used by the Company's buyers in planning their purchases and also updates the Company's inventory management system. 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 products and which generally buy products in smaller quantities. The Company believes that its vertical integration, varied sourcing strategy, and large volume purchasing enable it to maintain attractive margins as well as competitive price leadership relative to the smaller operators, and that its position is strengthened by its merchandising and marketing emphasis. The chain store competitors include a large franchise operator of approximately 110 retail outlets in the Florida market and a limited number of other retail chains of approximately 15 to 30 stores. In August 1992, Leslie's acquired one of its more prominent competitors, Sandy's Pool Supply, Inc. ("Sandy's"). Sandy's was, at the time of the acquisition, a 20-store chain which was 50% owned by Mr. Philip 40 Leslie, a founder and former shareholder of the Company. Mr. Leslie and the co-owner of Sandy's, Mr. Sander Bass, are both subject to a 10-year non- competition agreement which precludes their participation in any retail activities competitive with the Company's current business. The Company competes on selected principal products such as chlorine with large volume, mass merchant and home center retailers. While the ability of these merchants to accept low margins on the limited number of items they offer makes them aggressive price competitors of the Company, they are not generally priced below Leslie's and do not offer the level of customer service or wide selection of swimming pool supplies available at Leslie's. EMPLOYEES As of December 28, 1996, Leslie's employed 1,055 persons. During the height of the Company's seasonal activities in 1996, it employed 1,739 persons, including seasonal and part-time store employees who generally are not employed during the off season. The Company is not subject to any collective bargaining agreements and believes that its relationships with its employees are excellent. TRADEMARKS In the course of its business, Leslie's employs various trademarks, trade names and service marks as well as its logo in packaging and advertising its products. The Company has registered trademarks and trade names for several of its major products on the Principal Register of the United States Patent and Trademark Office. The Company distinguishes the products produced in its chemical repackaging operation or by third party repackagers at its direction through the use of the Leslie's brand name and logo and the trademarks and trade names of the individual items, none of which is patented, licensed, or otherwise restricted to or by the Company. The Company believes the strength of its trademarks and trade names has been beneficial to its business and intends to continue to protect and promote its marks in appropriate circumstances. PROPERTIES The Company operated 278 stores in 27 states as of April 30, 1997. The following table sets forth information concerning the Company's stores:
STATE NUMBER OF STORES ----- ---------------- Alabama.............. 4 Arizona.............. 16 California........... 82 Connecticut.......... 7 Delaware............. 2 Florida.............. 19 Georgia.............. 5 Indiana.............. 3 Kansas............... 1 Kentucky............. 1 Louisiana............ 4 Maryland............. 5 Massachusetts........ 7 Michigan............. 4
STATE NUMBER OF STORES ----- ---------------- Missouri............. 3 Nevada............... 5 New Jersey........... 14 New Mexico........... 1 New York............. 17 North Carolina....... 1 Ohio................. 7 Oklahoma............. 4 Pennsylvania......... 12 Rhode Island......... 1 Tennessee............ 3 Texas................ 47 Virginia............. 3 --- Total Stores......... 278 ===
Except for 23 owned stores, all of Leslie's retail stores are leased by the Company with lease terms expiring between 1997 and 2006. 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. 41 In January and February of 1997, the Company relocated its corporate offices, the Southern California distribution center and the chemical repackaging operation. The corporate offices were relocated to another location in Chatsworth, California. The new 38,000 square foot office building has been leased for five years and the lease has three five-year renewal options. The Southern California distribution center (previously located in Chatsworth, California) and the chemical repackaging operations (previously located in Los Angeles) were moved and consolidated into a 183,000 square foot facility located in Ontario, California. The Ontario facility was leased for 10 years and the lease has two five-year renewal options. The Company's distribution facility in Dallas, Texas, consists of 100,000 square feet, with a lease term expiring in 2000. This lease includes options to renew for two additional five-year periods. In July 1996, the Company entered into a short- term lease on an additional contiguous 25,000 square feet, which may be renewed on an annual basis. The 81,000 square foot distribution facility in Bridgeport, New Jersey is leased for a 10-year term, expiring in 2004. The lease includes options to renew for three five-year periods. 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. 42 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The following table sets forth the name, age and position of each of the persons who will be directors and executive officers of the Company after consummation of the Transactions. Each director will hold office until the next annual meeting of the stockholders or until his successor has been elected and qualified. Officers will be elected by the Board of Directors and will serve at the discretion of the Board.
NAME AGE POSITIONS ---- --- --------- Michael J. Fourticq... 53 Chairman of the Board, Director Brian P. McDermott.... 40 President, Chief Executive Officer, Director Robert D. Olsen....... 44 Executive Vice President, Chief Financial Officer Cynthia G. Watts...... 34 Vice President, General Counsel, Secretary Dr. Dale R. Laurance.. 51 Director Gregory J. Annick..... 33 Director John G. Danhakl....... 41 Director
MICHAEL J. FOURTICQ had been Chairman of the Board of Directors of Leslie's California since May 1988. Between May 1988 and August 1992, he served as Leslie's Chief Executive Officer. From 1986 to 1987, Mr. Fourticq was President and Chief Executive Officer of the Mortell Company, a manufacturer of specialty chemical products. Since 1985 he has been the sole general partner of HPA, which is the general partner and affiliate of several investment partnerships. Mr. Fourticq was Chairman of the Board and Chief Executive Officer of Alliance Northwest Industries, Inc., a holding company, principally for a specialty lighting retailer, which filed a petition for reorganization under Chapter 11 of the Federal Bankruptcy Code in March 1996. BRIAN P. MCDERMOTT had been President and a director of Leslie's California since April 1989 and its Chief Executive Officer since August 1992. Between May 1988 and April 1989, he served as Leslie's Executive Vice President of Operations and also was its Secretary from May 1988 until October 1989. From 1987 to 1988, Mr. McDermott served as Director of Acquisitions and Divestitures at Castle & Cooke, Inc., a publicly held holding company with diverse real estate and corporate interests. Mr. McDermott is Chairman of the Board of Busybody, Inc., a privately held fitness equipment retailer, for which he was acting Chief Executive Officer from November 1994 through March 1996. ROBERT D. OLSEN had been Executive Vice President and Chief Financial Officer of Leslie's California since April 1993. From 1990 through April 1993 he was Executive Vice President and Chief Financial Officer of TuneUp Masters, a California-based chain of fast automotive tuneup and lube outlets, which filed a petition for reorganization under Chapter 11 of the Federal Bankruptcy laws in November 1994. From 1985 through 1989, Mr. Olsen held several positions with AutoZone, an automotive parts and accessories retailer, including Controller, Vice President--Finance, and Senior Vice President and Chief Financial Officer. From 1981 through 1984 he held a variety of positions with Pepsi-Cola International and Pepsi Cola USA. CYNTHIA G. WATTS had been Vice President and General Counsel of Leslie's California since February 1993 and Secretary of Leslie's California since March 1993. From 1988 to January 1993, Ms. Watts was an attorney at Paul, Hastings, Janofsky and Walker, a Los Angeles-based law firm, where her practice was concentrated in the areas of general corporate representation and corporate finance, including securities, venture capital and mergers and acquisitions. DR. DALE R. LAURANCE had been a director of Leslie's California since January 1996. He has been a Director of Occidental Petroleum Corporation since 1990 and its President since 1996. He was its Senior Operating Officer from 1990 to 1996 and Vice President of Operations from 1984 to 1990. He is a Director of Canadian Occidental Petroleum Ltd., Jacobs Engineering Group Inc., The Armand Hammer Museum of Art and Cultural Center, Inc., Chemical Manufacturers Association, American Petroleum Institute, U.S. Arab Chamber of 43 Commerce, Boy Scouts of America-Western Los Angeles County Council and a member of the Advisory Board of the Chemical Heritage Foundation. He is a past Chairman of the Advisory Board for the Department of Chemical and Petroleum Engineering at the University of Kansas and is a recipient of the Distinguished Engineering Service Award from the School of Engineering at the University of Kansas. Dr. Laurance has served as a Managing Director of the Joffrey Ballet Company. GREGORY J. ANNICK became a director of the Company upon consummation of the Merger. He has been an executive officer and an equity owner, through a trust, of LGP, a merchant banking firm which manages GEI, since the formation of LGP and GEI in 1994 by the principals of Leonard Green & Associates, L.P. ("LGA"). He joined LGA as an associate in 1989, became a principal in 1993, and through a corporation became a partner of LGA in 1994. From 1988 to 1989, he was an associate with the merchant banking firm of Gibbons, Green, van Amerongen. Before that time, Mr. Annick was a financial analyst in mergers and acquisitions with Goldman, Sachs & Co. Mr. Annick is also a director of Carr- Gottstein Foods Co. and several private companies. JOHN G. DANHAKL became a director of the Company upon consummation of the Merger. He has been an executive officer and an equity owner of LGP, a merchant banking firm which manages GEI, since 1995. Mr. Danhakl had previously been a Managing Director at Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and had been with DLJ since 1990. Prior to joining DLJ, Mr. Danhakl was a Vice President at Drexel Burnham Lambert Incorporated. Mr. Danhakl is also a director of Twinlab Corporation, The Arden Group, Inc. and several private companies. All executive officers of the Company will be chosen by the Board of Directors and serve at the Board's discretion. No family relationships exist between any of the officers or directors of the Company. Messrs. Fourticq and McDermott are partners together in investment partnerships that do not own shares of the Company. Occidental held Leslie's California's Convertible Subordinated Debentures in the principal amount of $10.0 million, all of which were exchanged as partial consideration for the issuance of the Preferred Stock and Warrants in connection with the Transactions. One of the subsidiaries of Occidental is a supplier of chemicals to Leslie's. Immediately prior to the consummation of the Merger, Leslie's, GEI, the members of the HPA Group, Brian P. McDermott and Manette J. McDermott, as Co- Trustees of the McDermott Family Trust, and Occidental and the holders of certain management options entered into the Stockholders Agreement. In the Stockholders Agreement, Michael Fourticq and Mr. McDermott are given certain rights to be elected as directors of the Company. See "Certain Relationships and Related Transactions--Stockholders Agreement." In addition, Occidental, as owner of the Preferred Stock, has the right to board representation. See "Description of Financing Transactions." EXECUTIVE COMPENSATION The information set forth in this section relates to the Chief Executive Officer of Leslie's California and the four most highly compensated executive officers of Leslie's California as of December 28, 1996. It is expected that, following the consummation of the Transactions, the Company generally will provide its executives with compensation (including cash compensation and benefits) comparable to the compensation provided to them as executives of Leslie's California, with such additions or modifications as may be negotiated by the Company and management. 44 COMPENSATION SUMMARY The following summary compensation table sets forth for the fiscal years ended December 28, 1996, December 30, 1995 and December 31, 1994, the historical compensation for services to Leslie's California of the Chief Executive Officer and the four most highly compensated executive officers as of December 28, 1996:
ANNUAL LONG-TERM ALL OTHER COMPENSATION COMPENSATION COMPENSATION -------------- ------------- ---------------- SALARY BONUS STOCK OPTIONS 401(K) INSURANCE YEAR ($) (1)($) (2) (3)($) (4)($) ---- ------- ------ ------------- ------ --------- Michael J. Fourticq......... 1996 157,500 -- 3,308 -- -- Chairman of the Board 1995 150,000 -- 3,308 -- -- 1994 150,000 -- 3,308 -- -- Brian P. McDermott.......... 1996 367,500 -- 30,000 3,000 204 Chief Executive Officer, 1995 350,000 -- -- 3,000 132 President and Director 1994 325,000 40,000 28,750 2,772 132 Murray H. Dashe............. 1996 288,750 -- 22,500 3,000 576 Chief Operating Officer 1995 275,000 -- -- 3,000 576 and Director 1994 255,000 27,500 21,000 2,772 576 Robert D. Olsen............. 1996 231,000 -- 22,500 3,000 204 Executive Vice President 1995 220,000 -- -- 3,000 204 and Chief Financial Officer 1994 200,000 22,500 21,000 1,945 204 Cynthia G. Watts............ 1996 157,500 -- 15,000 3,000 108 Vice President, General 1995 150,000 -- -- 3,000 108 Counsel and Secretary 1994 135,000 15,000 13,125 1,967 108
- -------- (1) Annual bonuses are indicated for the year in which they were earned and accrued. Bonuses for the 1994 fiscal year were paid in 1995. (2) Options granted prior to April 1994 and August 1995 have been adjusted to reflect Leslie's California's stock dividends effective those months. All options were granted at their fair market value on the date of grant. (3) Represents Leslie's California's matching contributions to individuals' 401(k) accounts. (4) Represents premiums paid by Leslie's California for life insurance not generally available to all Leslie's employees. NQ OPTION PLAN AND ISO OPTION PLAN Immediately prior to the Merger, Leslie's adopted a non-qualified common stock option plan (the "NQ Option Plan") and an incentive common stock option plan (the "ISO Option Plan") and reserved 83,599 shares and 273,946 shares, respectively, of Leslie's common stock for issuance upon the exercise of options to be granted to certain employees of Leslie's upon consummation of the Transactions and thereafter. It is expected that options to purchase Leslie's common stock will be granted to the following individuals at an exercise price of $5.00 per share for options granted under the NQ Option Plan ("NQ Options") and $14.50 per share in the case of options granted under the ISO Option Plan (or $15.95 in the case of ISO options granted to any holder of 10% or more of the Company's common stock) ("ISO Options"):
NQ OPTION ISO OPTION NAME OF RECIPIENT SHARES SHARES ----------------- --------- ---------- Michael J. Fourticq................................... 4,976 -- Brian P. McDermott.................................... -- 77,000 Robert D. Olsen....................................... 52,761 50,000 Other members of management........................... 25,862 146,946
45 Leslie's has reserved 83,599 shares of Leslie's common stock for the NQ Option Plan. NQ Options vest immediately. However, Leslie's has (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. The per share Call Option exercise price is (i) for NQ Options, (x) if the termination is voluntary, the amount by which $14.50 exceeds $5.00, and (y) if the termination is other than voluntary ("Other Termination"), the greater of (A) the amount by which $14.50 exceeds $5.00, or (B) the amount by which the fair market value of a share of the Leslie's common stock on the date of termination, as determined by the Board of Directors of Leslie's, exceeds $5.00; and (ii) for NQ Option Shares, (x) if the termination is voluntary, $14.50, and (y) in the case of an Other Termination, the greater of (A) $14.50, or (B) the fair market value of a share of Leslie's common stock on the date of termination, as determined by the Leslie's Board of Directors. NQ Options have a term of ten years and remain exercisable without regard to any termination of employment of the holder, subject to the exercise of the Call Option as described above. Leslie's has reserved 273,946 shares of Leslie's common stock for the ISO Plan. Under the ISO Plan, ISO Options vest in one-third increments on the first, second and third anniversaries of the effective date of the Merger, except for options to purchase 71,647 shares which will also be subject to a further vesting condition based upon Leslie's achieving certain operating and store-opening goals. Options intended to qualify as "incentive stock options" and options not intended to so qualify may be granted under the ISO Option Plan. Pursuant to law, options intended to qualify as "incentive stock options" are subject to limitations on aggregate amounts granted and must be issued to any holder of 10% or more of the issuer's outstanding common stock at 110% of fair market value. Vested ISO Options may be exercised for 90 days post termination of employment, except in the case of the death of the option holder, in which case the vested portion may be exercised within twelve months from the date of termination. ISO Options will have a term of ten years. COMPENSATION OF DIRECTORS It is anticipated that individuals who are officers of the Company, as well as Messrs. Annick and Danhakl, will 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. See "Certain Relationships and Related Transactions." 46 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the ownership of Leslie's common stock as of March 28, 1997, assuming the Transactions occurred on that date, by (i) each director, (ii) each of the executive officers of the Company, (iii) all executive officers and directors as a group and (iv) each person expected by the Company to be the beneficial owner of more than 5% of Leslie's common stock.
AMOUNT AND NATURE OF PERCENTAGE OF BENEFICIAL SHARES NAME OF INDIVIDUAL OR ENTITY(1) OWNERSHIP OUTSTANDING(2) - ------------------------------- ---------- -------------- GEI(3)............................................... 1,055,172 73.6% Gregory J. Annick(4)................................. 1,055,172 73.6 John G. Danhakl(4)................................... 1,055,172 73.6 Michael J. Fourticq(5)(6)............................ 165,515 11.5 Brian P. McDermott(5)(7)............................. 166,552 11.6 Robert D. Olsen(5)(8)................................ 69,727 4.8 Cynthia G. Watts(9).................................. 9,000 0.6 Dr. Dale R. Laurance................................. -- -- Occidental(10)....................................... 252,996 15.0 All executive officers and directors as a group (8 persons)............................................ 1,465,966 100.0
- -------- (1) The address of Messrs. Fourticq, McDermott, Olsen and Dashe and Ms. Watts is 20630 Plummer Street, Chatsworth, California 91311. The address of Occidental and Dr. Laurance is 10889 Wilshire Boulevard, Los Angeles, California 90029. The address of Green Equity Investors II, L.P. and Messrs. Annick and Danhakl is 11111 Santa Monica Boulevard, Suite 2000, Los Angeles, California 90025. (2) Computed based upon the total number of shares of Leslie's common stock outstanding and the number of shares of Leslie's common stock underlying Warrants and options of that person exercisable within 60 days after consummation of the Transactions. See "Management--NQ Option Plan and ISO Option Plan" for a description of the terms of the options being granted to certain of the indicated individuals. In accordance with Rule 13(d)-3 of the Exchange Act, any Leslie's common stock that will not be outstanding at the consummation of the Transactions 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 Warrant or option, but is not deemed to be outstanding for the purpose of computing the percentage of outstanding shares of Leslie's common stock owned by any other person. (3) GEI is a Delaware limited partnership managed by LGP, which is an affiliate of the general partner of GEI. Each of Leonard I. Green, Jonathan D. Sokoloff, Peter J. Nolan, Mr. Annick and Mr. Danhakl and Jennifer Holden Dunbar, either directly (whether through ownership interest or position) or through one or more intermediaries, may be deemed to control LGP and such general partner. LGP and such general partner may be deemed to control the voting and disposition of the shares of Leslie's common stock owned by GEI. Accordingly, for certain purposes, Messrs. Green, Sokoloff, Nolan, Annick and Danhakl and Ms. Holden Dunbar may be deemed to be beneficial owners of the shares of Leslie's common stock held by GEI. (4) Includes the shares beneficially owned by GEI, of which Messrs. Annick and Danhakl are associates. (5) Member of the HPA Group, which in the aggregate with management will own 34.9% of the fully diluted shares of Leslie's common stock. (6) Includes 4,976 shares subject to options exercisable within 60 days after consummation of the Transactions and 160,539 Continuing Shares of Leslie's common stock. (7) All such shares are Continuing Shares of Leslie's common stock. 47 (8) Includes 52,761 shares subject to options exercisable within 60 days after consummation of the Transactions and 16,966 shares of Leslie's common stock purchased in connection with the Transactions (the "Subscription Stock"). (9) Includes 7,000 shares subject to options exercisable within 60 days after consummation of the Transactions and 2,000 shares of Subscription Stock. (10) All such shares are obtainable upon the exercise of the Warrants. See "Description of Financing Transactions--Preferred Stock Financing." 48 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS MANAGEMENT PARTICIPATION IN THE MERGER Common Stock. The executive officers and directors of Leslie's California received a total of approximately $14.0 million for their sale of common stock owned by them, representing the merger consideration of $14.50 per share payable to Leslie's public stockholders. Certain executive officers and directors retained shares of the Company. See "Security Ownership of Certain Beneficial Owners and Management." Subscription Stock. As described above, immediately upon consummation of the Transactions, Mr. Robert D. Olsen purchased 16,966 shares of Leslie's common stock at a price of $14.50 per share and Cynthia G. Watts purchased 2,000 shares of Subscription Stock at the same per share price. The shares of Subscription Stock are subject to the same Call Option as described above for the NQ Option Shares. Treatment of Stock Options. Certain of the directors and executive officers of Leslie's California held options to purchase Leslie's California common stock that were terminated upon the effectiveness of the Merger and, as to a portion of which, such persons received cash in the aggregate amount of approximately $3.4 million pursuant to the terms of the Merger Agreement. Prior to the effective date of the Merger, Leslie's California agreed, pursuant to the terms of the Merger Agreement, to take all necessary action to cancel all outstanding options to purchase Leslie's California common stock, whether or not exercisable. Upon the surrender and cancellation of each such option, unless another arrangement was made with the holder (see "Management-- NQ Option Plan and ISO Option Plan") each holder thereof was entitled to receive an amount in cash equal to the product of (i) the excess of $14.50 over the exercise price per share of Leslie's common stock purchasable pursuant to such option after the same has been converted into an option to purchase Leslie's common stock upon the effectiveness of the merger of Leslie's with and into Leslie's and (ii) the number of shares of Leslie's common stock subject to such option at the time of such termination. As of April 22, 1997, there were options outstanding to purchase an aggregate of 974,759 shares of Leslie's California common stock at a weighted average exercise price of $8.66 per share, which options were held by 71 persons. MANAGEMENT AGREEMENT Pursuant to the terms of a Management Agreement entered into between LGP and Leslie's, (i) upon consummation of the Transactions, Leslie's paid LGP a transaction fee in the amount of $1.4 million, one-half of which was paid to HPA for distribution among the HPA Group, including to Michael Fourticq, Brian McDermott and Robert Olsen, and (ii) Leslie's agreed to pay LGP an annual management fee equal to 1.6% of the total sum invested by GEI in Leslie's. OCCIDENTAL SUPPLY AGREEMENT Prior to Occidental's purchase of the 8% Convertible Subordinated Debentures of Leslie's California, a wholly owned subsidiary of Occidental was and continues to be a party to a supply agreement with Leslie's California under which that subsidiary supplies all of Leslie's California's requirements for certain chemical chlorine compounds. It is expected that Leslie's and this subsidiary will extend this supply agreement upon terms and conditions that will be mutually satisfactory. INDEMNIFICATION AND INSURANCE The Merger Agreement requires that Leslie's California and Leslie's, as the surviving corporation in the Merger, provide indemnification to the current and prior directors and officers of Leslie's California and Leslie's against costs, expenses, suits, claims and proceedings arising out of or pertaining to, or the approval and consummation of the transactions contemplated by, the Merger Agreement and certain related agreements. In addition, Leslie's is obligated for a period of at least eighteen months from the effective date of the Merger to continue in effect (or provide insurance coverage that, subject to Leslie's ability to obtain higher levels of 49 deductibles, is comparable to) the directors and officers liability insurance that is currently in place with respect to claims arising from facts or events which occurred at or before the effective date of the Merger, provided that Leslie's is not obligated to expend annually more than 150% of the current cost of such coverage. STOCKHOLDERS AGREEMENT Immediately prior to the consummation of the Transactions, Leslie's, GEI, the HPA Group, Brian P. McDermott and Manette J. McDermott, as Co-Trustees of the McDermott Family Trust, and Occidental (collectively, "Class I Stockholders") and the holders of the Subscription Stock, NQ Options and ISO Options (collectively, "Class II Stockholders," and, together with the Class I Stockholders, the "Stockholders") entered into a Stockholders Agreement (the "Stockholders Agreement"). The Stockholders Agreement provides for the subscription of approximately 19,000 shares of Leslie's common stock at $14.50 per share by certain of the Class II Stockholders and gives the Company (and in some instances certain of the Class I Stockholders) the right to repurchase a portion of the unexercised NQ Options, of the NQ Shares and of the Subscription Stock held by a Class II Stockholder upon such Class II Stockholder 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 pursuant to a bona fide offer, in favor of the Class I 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 as to each group of Class I Stockholders (with each of GEI, Occidental and all other Class I Stockholders representing a separate group) and piggyback registration rights for all Stockholders. In the Stockholders Agreement, Michael Fourticq and Mr. McDermott are given certain rights to be elected as directors of the Company. 50 DESCRIPTION OF FINANCING TRANSACTIONS GENERAL Financing for the Merger and the working capital needs of the Company after the Merger was provided by a combination of debt and equity (collectively, the "Financing Transactions") as follows:
(IN THOUSANDS) Continuing Shares............................................ $ 5,213 Issuance of Common Stock to GEI.............................. 15,300 Issuance of Subscription Stock to Management of Leslie's..... 275 Issuance of Preferred Stock and Warrants to Occidental....... 28,000 Sale of Notes................................................ 90,000 Bank Facility................................................ 6,278 -------- Total...................................................... $145,066 ========
GEI EQUITY INVESTMENT Immediately prior to the consummation of the Merger, GEI contributed $15.3 million in cash to Poolmart in exchange for 1,055,172 shares of Poolmart common stock. As a result of the Merger, Leslie's received the $15.3 million, and GEI received 1,055,172 shares of Leslie's common stock in exchange for its Poolmart common stock which was automatically converted into Leslie's common stock by virtue of the Merger. SUBSCRIPTION STOCK As described above under "Certain Relationships and Related Transactions-- Stockholders Agreement," immediately after the Merger, certain members of the management of Leslie's California purchased approximately 19,000 shares of Leslie's common stock for cash consideration in the aggregate amount of $0.3 million. PREFERRED STOCK FINANCING Occidental agreed, pursuant to the Preferred Stock and Warrant Purchase Agreement entered into on June 11, 1997, to purchase 28,000 shares of 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 then held by Occidental. In connection with this transaction, Occidental received Warrants to purchase up to 15.0% of the shares of Leslie's common stock at a purchase price of $0.01 per share (subject to adjustment) for a period of ten years. The Preferred Stock is entitled to an annual cumulative dividend (which will be payable at the option of the Company either in cash or in additional shares of Preferred Stock for the first five years) equal to 10 7/8%. The annual dividend is payable quarterly at the annual rate divided by four. Dividends that become due but are not paid after the quarterly dividend payment date will bear interest at the annual dividend rate plus 5.0%. The Preferred Stock will have a preference and priority in liquidation over the Leslie's common stock equal to $1,000 per share plus accumulated and unpaid dividends. 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. At the option of the Company, all, but not less than all, of the Preferred Stock is exchangeable into subordinated debt of the Company due on the tenth anniversary of the date of issuance of the Preferred Stock having the same interest rate as the dividend rate on the Preferred Stock. Interest on such subordinated debt will be payable in cash. The subordinated debt will contain customary subordination provisions. 51 The holder of the Preferred Stock is initially entitled to elect 20% of the members of the Board of Directors of the Company. However, if the Company fails to meet the Coverage Test described below for four continuous quarters, the holder of the Preferred Stock will have the right to elect 40% of the Board of Directors of the Company. If the Coverage Test is not met for eight consecutive quarters or if the Company fails to pay four consecutive quarterly dividends on the Preferred Stock, the holder of the Preferred Stock will have the right to elect a majority of the Board of Directors of the Company. If the Company either fails to satisfy the mandatory redemption requirement or becomes subject to an event of insolvency, the holder of the Preferred Stock will be entitled to elect the entire Board of Directors. The "Coverage Test" requires that the sum of the Company's cumulative earnings before interest, taxes, depreciation and amortization be greater than its fixed charges for each four and eight fiscal quarterly period. The Company may cure any failure to meet the Coverage Test, pay four consecutive quarterly dividends or satisfy the mandatory redemption requirement by issuing capital stock for consideration equal to the shortfall. The Company is also be subject to a number of negative covenants including those prohibiting certain transactions without the approval of the holder of the Preferred Stock. The right under certain circumstances of the holder of the Preferred Stock to elect more than 20% of the Board of Directors will terminate when Occidental ceases to own 50% or more of the outstanding shares of the Preferred Stock. The Warrants provide for a proportionate adjustment of the warrant price, and the number of shares of Leslie's common stock subject thereto, for stock splits and stock dividends and for additional warrant shares to be issuable in the event any of the NQ Options or ISO Options are exercised. Additionally, Occidental is a party to the Stockholders Agreement and have the rights and be subject to the obligations and restrictions described therein. BANK FACILITY The Bank Facility has the following features: (i) maximum availability of $35.0 million subject to requirements that the level of outstanding borrowing be limited to specified levels of inventories and accounts receivable, (ii) five-year term, (iii) collateralized by inventories, accounts receivable, equipment and other assets, (iv) interest at alternative fluctuating rates, as selected by the Company, of either a prime rate or LIBOR rate, in each case plus an applicable margin, (v) required payment of various commitment and other fees, and (vi) customary financial and other credit document covenants including restrictions on the payment of dividends, stock repurchases, additional debt (except for the Notes), guaranties, liens and loans. 52 DESCRIPTION OF NOTES The New Notes will be issued under an indenture (the "Indenture"), to be dated as of June 11, 1997 by and among the Company and U.S. Trust Company of California, N.A., as trustee (the "Trustee"). The Old Notes were also issued pursuant to the Indenture. The following summary of certain provisions of the Indenture does not purport to be complete and is subject to, and is qualified in its entirety by reference to, the Trust Indenture Act of 1939, as amended (the "TIA"), and to all of the provisions of the Indenture, including the definitions of certain terms therein and those terms made a part of the Indenture by reference to the TIA as in effect on the date of the Indenture. The Indenture is filed as an exhibit to the Registration Statement of which this Prospectus is a part. The definitions of certain capitalized terms used in the following summary are set forth below under "Certain Definitions." For purposes of this section, references to the "Company" include only Leslie's and not its Subsidiaries. The Notes are senior unsecured obligations of the Company, ranking pari passu in right of payment with all other senior unsecured obligations of the Company. The New Notes as issued will be in book-entry form and represented by a single global certificate which will be deposited with, or on behalf of, The Depository Trust Company ("DTC") and registered in the name of Cede & Co., as nominee of DTC. A beneficial owner may request physical delivery of Notes in certificated form. Initially, the Trustee will act as Paying Agent and Registrar for the Notes. The Company may change any Paying Agent and Registrar without notice to holders of the Notes (the "Holders"). The Company will pay principal (and premium (as defined), if any) on the Notes at the Trustee's corporate office in New York, New York. At the Company's option, when due, interest may be paid at the Trustee's corporate trust office or by check mailed to the registered addresses of Holders. PRINCIPAL, MATURITY AND INTEREST The Notes are limited in aggregate principal amount to $115.0 million, of which $90.0 million will be issued in the Offering, and will mature on July 15, 2004. Additional amounts may be issued in one or more series from time to time, subject to the limitations set forth under "--Certain Covenants-- Limitation on Incurrence of Additional Indebtedness." Interest on the Notes will accrue at the rate of 10 3/8% per annum and will be payable semi-annually in arrears on each January 15 and July 15 commencing on January 15, 1998, to the persons who are registered Holders at the close of business on the December 31 and June 30, respectively, immediately preceding the applicable interest payment date. Interest on the Notes will accrue from the most recent date to which interest has been paid or, if no interest has been paid, from and including the date of issuance. The Notes will not be entitled to the benefit of any mandatory sinking fund. REDEMPTION Optional Redemption. The Notes will be redeemable, at the Company's option, in whole at any time or in part from time to time, on and after July 15, 2001, upon not less than 30 nor more than 60 days' notice, at the following redemption prices (expressed as percentages of the principal amount thereof) if redeemed during the twelve-month period commencing on July 15 of the year set forth below, plus, in each case, accrued interest to the date of redemption:
YEAR PERCENTAGE ---- ---------- 2001.......................................... 105.188% 2002.......................................... 102.594% 2003.......................................... 100.000%
Optional Redemption upon Public Equity Offerings. At any time, or from time to time, on or prior to July 15, 2000, the Company may, at its option, use the net cash proceeds of one or more Public Equity Offerings (as defined below) to redeem up to $25.0 million of aggregate principal amount of the Notes at a redemption price equal to 110.375% of the principal amount thereof, plus accrued interest to the date of redemption; provided that after giving effect to any such redemption at least $65.0 million of aggregate principal amount of the 53 Notes remains outstanding. In order to effect the foregoing redemption with the proceeds of any Public Equity Offering, the Company shall make such redemption not more than 60 days after the consummation of any such Public Equity Offering. As used in the preceding paragraph, "Public Equity Offering" means an underwritten public offering of Qualified Capital Stock of the Company pursuant to a registration statement filed with the Commission in accordance with the Securities Act, or any successor statute. SELECTION AND NOTICE OF REDEMPTION In the event that less than all of the Notes are to be redeemed at any time, selection of such Notes for redemption will be made by the Trustee in compliance with the requirements of the principal national securities exchange, if any, on which such Notes are listed or, if such Notes are not then listed on a national securities exchange, on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate; provided, however, that no Notes of a principal amount of $1,000 or less shall be redeemed in part; and provided, further, that if a partial redemption is made with the proceeds of a Public Equity Offering, selection of the Notes or portions thereof for redemption shall be made by the Trustee only on a pro rata basis or on as nearly a pro rata basis as is practicable (subject to DTC procedures), unless such method is otherwise prohibited. Notice of redemption shall be mailed by first-class mail at least 30 but not more than 60 days before the redemption date to each Holder of Notes to be redeemed at its registered address. If any Note is to be redeemed in part only, the notice of redemption that relates to such Note shall state the portion of the principal amount thereof to be redeemed. A new Note in a principal amount equal to the unredeemed portion thereof will be issued in the name of the Holder thereof upon cancellation of the original Note. On and after the redemption date, interest will cease to accrue on Notes or portions thereof called for redemption as long as the Company has deposited with the Paying Agent funds in satisfaction of the applicable redemption price pursuant to the Indenture. CHANGE OF CONTROL The Indenture will provide that upon the occurrence of a Change of Control, each Holder will have the right to require that the Company purchase all or a portion of such Holder's Notes pursuant to the offer described below (the "Change of Control Offer"), at a purchase price equal to 101% of the principal amount thereof plus accrued interest to the date of purchase. Within 30 days following the date upon which the Change of Control occurred, the Company must send, by first-class mail, a notice to each Holder, with a copy to the Trustee, which notice shall govern the terms of the Change of Control Offer. Such notice shall state, among other things, the purchase date, which must be no earlier than 30 days nor later than 60 days from the date such notice is mailed, other than as may be required by law (the "Change of Control Payment Date"). Holders electing to have a Note purchased pursuant to a Change of Control Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase" on the reverse of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third business day prior to the Change of Control Payment Date. If a Change of Control Offer is made, there can be no assurance that the Company will have available funds sufficient to pay the Change of Control purchase price for all the Notes that might be delivered by Holders seeking to accept the Change of Control Offer. In the event the Company is required to purchase outstanding Notes pursuant to a Change of Control Offer, the Company expects that it would seek third-party financing to the extent it does not have available funds to meet its purchase obligations. However, there can be no assurance that the Company would be able to obtain such financing. Neither the Board of Directors of the Company nor the Trustee may waive the covenant relating to the Company's obligation to make a Change of Control Offer. Restrictions in the Indenture described herein on the ability of the Company and its Subsidiaries to incur additional Indebtedness, to grant Liens on its property, to make Restricted Payments and to make Asset Sales may also make more difficult or discourage a takeover of the Company, whether favored or opposed by the management of the Company. Consummation of any such transaction in certain circumstances may require redemption or repurchase of the Notes, and there can be no assurance that the Company or the acquiring party 54 will have sufficient financial resources to effect such redemption or repurchase. Such restrictions and the restrictions on transactions with Affiliates may, in certain circumstances, make more difficult or discourage any leveraged buyout of the Company or any of its Subsidiaries. While such restrictions cover a wide variety of arrangements which have traditionally been used to effect highly leveraged transactions, the Indenture may not afford the Holders of Notes protection in all circumstances from the adverse aspects of a highly leveraged transaction, reorganization, restructuring, merger or similar transaction. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Notes pursuant to a Change of Control Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Change of Control" provisions of the Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Change of Control" provisions of the Indenture by virtue thereof. CERTAIN COVENANTS The Indenture will contain, among others, the following covenants: Limitation on Incurrence of Additional Indebtedness. The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, create, incur, assume, guarantee, become liable, contingently or otherwise, with respect to, or otherwise become responsible for payment of (collectively, "incur"), any Indebtedness (including Acquired Indebtedness but excluding Permitted Indebtedness); provided, however, that if no Default or Event of Default shall have occurred and be continuing at the time of or as a consequence of the incurrence of any such Indebtedness, the Company may incur Indebtedness (including, without limitation, Acquired Indebtedness) if on the date of the incurrence of such Indebtedness, after giving effect to the incurrence thereof, the Consolidated Fixed Charge Coverage Ratio of the Company is greater than 2.0 to 1.0. Indebtedness of a Person which is secured by a Lien on an asset acquired by the Company or a Subsidiary of the Company (whether or not such Indebtedness is assumed by the acquiring Person) shall be deemed incurred at the time of the Asset Acquisition. The Company will not incur any Indebtedness which by its terms (or by the terms of any agreement governing such Indebtedness) is subordinated in right of payment to any other Indebtedness of the Company unless such Indebtedness is also by its terms (or by the terms of any agreement governing such Indebtedness) made expressly subordinate in right of payment to the Notes, pursuant to subordination provisions that are substantively identical to the subordination provisions of such Indebtedness (or such agreement) that are most favorable to the holders of any other Indebtedness of the Company. Limitation on Restricted Payments. The Company will not, and will not cause or permit any of its Subsidiaries to, directly or indirectly, (a) declare or pay any dividend or make any distribution (other than dividends or distributions payable in Qualified Capital Stock of the Company) on or in respect of shares of the Company's Capital Stock to holders of such Capital Stock, (b) purchase, redeem or otherwise acquire or retire for value any Capital Stock of the Company or any warrants, rights or options to purchase or acquire shares of any class of such Capital Stock, (c) make any principal payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire or retire for value, prior to any scheduled final maturity, scheduled repayment or scheduled sinking fund payment, any Indebtedness of the Company that is subordinate or junior in right of payment to the Notes or (d) make any Investment (other than Permitted Investments) (each of the foregoing actions set forth in clauses (a), (b), (c) and (d) being referred to as a "Restricted Payment"), if at the time of such Restricted Payment or immediately after giving effect thereto, (i) a Default or an Event of Default shall have occurred and be continuing or (ii) the Company is not able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) in compliance with the covenant described under "--Limitation on Incurrence of Additional Indebtedness" or (iii) the aggregate amount of Restricted Payments (including such proposed Restricted Payment) made subsequent to the Issue Date (the amount expended for such purposes, if other than in 55 cash, being the fair market value of such property as determined reasonably and in good faith by the Board of Directors of the Company) shall exceed the sum of: (w) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated Net Income shall be a loss, minus 100% of such loss) of the Company reported for any period subsequent to March 29, 1997 and on or prior to the date the Restricted Payment occurs (the "Reference Date") (treating such period as a single accounting period); plus (x) 100% of the aggregate net cash proceeds received by the Company from any Person (other than a Subsidiary of the Company) from the issuance and sale subsequent to the Issue Date and on or prior to the Reference Date of Qualified Capital Stock of the Company; plus (y) without duplication of any amounts included in clause (iii)(x) above, 100% of the aggregate net cash proceeds of any equity contribution received by the Company from a holder of the Company's Capital Stock; plus (z) without duplication, the sum of (1) the aggregate amount returned in cash on or with respect to Investments (other than Permitted Investments) made subsequent to the Issue Date whether through interest payments, principal payments, dividends or other distributions or payments and (2) the Net Cash Proceeds received by the Company or any Subsidiary from the disposition of all or any portion of such Investments (other than to a Subsidiary of the Company). Notwithstanding the foregoing, the provisions set forth in the immediately preceding paragraph do not prohibit: (1) the payment of any dividend within 60 days after the date of declaration of such dividend if the dividend would have been permitted on the date of declaration; (2) if no Default or Event of Default shall have occurred and be continuing, the acquisition of any shares of Capital Stock of the Company, either (i) solely in exchange for shares of Qualified Capital Stock of the Company or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Subsidiary of the Company) of shares of Qualified Capital Stock of the Company; (3) if no Default or Event of Default shall have occurred and be continuing, the acquisition of any Indebtedness of the Company that is subordinate or junior in right of payment to the Notes either (i) solely in exchange for shares of Qualified Capital Stock of the Company or (ii) through the application of net proceeds of a substantially concurrent sale for cash (other than to a Subsidiary of the Company) of (A) shares of Qualified Capital Stock of the Company or (B) Refinancing Indebtedness; (4) so long as no Default or Event of Default shall have occurred and be continuing, repurchases by the Company of Common Stock of the Company or options, warrants or other securities exercisable or convertible into Common Stock of the Company from employees and directors of the Company or any of its Subsidiaries or their authorized representatives upon the death, disability or termination of employment or directorship of such employees or directors, in an aggregate amount not to exceed $500,000 in any calendar year and $2.0 million in the aggregate (in each case plus the amount of net cash proceeds received by the Company from the sale of Qualified Capital Stock to officers or directors of the Company and its Subsidiaries, provided, that such amounts did not provide the basis for any other Restricted Payment); and (5) so long as no Default or Event of Default shall have occurred and be continuing, the payment of dividends on the shares of Series A Preferred Stock issued on the Issue Date and on any additional shares of such stock issued in lieu of cash dividends thereon with (x) the net proceeds of a sale for cash (other than to a Subsidiary of the Company) of shares of Qualified Capital Stock of the Company or (y) the net cash proceeds of any capital contribution to the Company to the extent such amounts in clauses (x) and (y) did not provide the basis for any other Restricted Payment. In determining the aggregate amount of Restricted Payments made subsequent to the Issue Date in accordance with clause (iii) of the immediately preceding paragraph, amounts expended pursuant to clauses (2)(ii), 3(ii)(A), (4) and (5) shall be included in such calculation. Any Investment in a direct or indirect Wholly Owned Subsidiary of the Company that becomes, directly or indirectly, a non-Wholly Owned Subsidiary of the Company (unless the Company or a Subsidiary retains no equity interest in such non-Wholly Owned Subsidiary) shall become a Restricted Payment on such date in an amount equal to (A) 1.0 minus the Company's percentage interest in such non-Wholly Owned Subsidiary times, (B) the amount of all Investments (net of any returns previously paid on such Investment) made in such non-Wholly Owned Subsidiary to such date, not to exceed the greater of (x) the book value of such Subsidiary on such date and (y) the fair market value of such Subsidiary on such date as determined (1) in good faith by the Board of Directors of the Company if such fair market value is determined to be less than $5.0 million and (2) by an investment banking firm of national standing if such fair market value is determined to be in excess of $5.0 million. 56 Not later than the date of making any Restricted Payment, the Company shall deliver to the Trustee an officers' certificate stating that such Restricted Payment complies with the Indenture and setting forth in reasonable detail the basis upon which the required calculations were computed, which calculations may be based upon the Company's latest available internal quarterly financial statements. Limitation on Asset Sales. The Company will not, and will not permit any of its Subsidiaries to, consummate an Asset Sale unless (i) the Company or the applicable Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value of the assets sold or otherwise disposed of (as determined in good faith by the Company's Board of Directors), (ii) at least 75% of the consideration received for the assets sold by the Company or the Subsidiary, as the case may be, from such Asset Sale shall be in the form of cash or Cash Equivalents and is received at the time of such disposition; provided, however, that (A) notes received by the Company as consideration for an Asset Sale that are converted into cash or Cash Equivalents immediately following the consummation of such Asset Sale or (B) the assumption by the purchaser of assets pursuant to an Asset Sale of liabilities of the Company (other than liabilities that are by their terms subordinate to the Notes) shall, in each case of the immediately preceding clauses (A) and (B), be deemed to be cash or Cash Equivalents at the time of such Asset Sale in an amount equal to, in the case of clause (A), the amount of cash or Cash Equivalents realized on such conversion and, in the case of clause (B), the amount of the liabilities so assumed, as reflected on the balance sheet of the Company, and (iii) following the consummation of an Asset Sale, the Company shall or cause such Subsidiary, within 365 days of receipt thereof either (A) to apply the Net Cash Proceeds related to such Asset Sale to prepay any Indebtedness that by its terms is not subordinate to the Notes, (B) to make a Permitted Investment or an investment in properties and assets that replace the properties and assets that were the subject of such Asset Sale or in properties and assets that will be used in a Related Business (collectively, "Replacement Assets") or (C) a combination of prepayment and investment permitted by the foregoing clauses (iii)(A) and (iii)(B). On the 365th day after an Asset Sale, or such earlier date, if any, as the Board of Directors of the Company or of such Subsidiary determines not to apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (each, a "Net Proceeds Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which have not been applied on or before the applicable Net Proceeds Offer Trigger Date as permitted in clauses (iii)(A), (iii)(B) and (iii)(C) of the next preceding sentence (or, in the case of a Net Proceeds Offer Trigger Date (as defined below) occurring prior to such 365th day, the aggregate amount of Net Cash Proceeds that the Board of Directors has determined not to so apply) (each a "Net Proceeds Offer Amount") shall be applied by the Company or such Subsidiary to make an offer to purchase (the "Net Proceeds Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor more than 45 days following the applicable Net Proceeds Offer Trigger Date, from all Holders on a pro rata basis (and on a pro rata basis with the holders of indebtedness of the Company that is not by its terms subordinate to the Notes), that amount of Notes equal to the Net Proceeds Offer Amount at a price equal to 100% of the principal amount of the Notes to be purchased, plus accrued and unpaid interest thereon, if any, to the date of purchase; provided, however, that if at any time any non-cash consideration received by the Company or any Subsidiary of the Company, as the case may be, in connection with any Asset Sale is converted into or sold or otherwise disposed of for cash (other than interest received with respect to any such non-cash consideration), then such conversion or disposition shall be deemed to constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be applied in accordance with this covenant. The Company may defer the Net Proceeds Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to or in excess of $5.0 million resulting from one or more Asset Sales (at which time, the entire unutilized Net Proceeds Offer Amount, and not just the amount in excess of $5.0 million, shall be applied as required pursuant to this paragraph). In the event of the transfer of substantially all (but not all) of the property and assets of the Company and its Subsidiaries as an entirety to a Person in a transaction permitted under "--Merger, Consolidation and Sale of Assets," the successor corporation shall be deemed to have sold the properties and assets of the Company and its Subsidiaries not so transferred for purposes of this covenant, and shall comply with the provisions of this covenant with respect to such deemed sale as if it were an Asset Sale. In addition, the fair market value of such properties and assets of the Company or its Subsidiaries deemed to be sold shall be deemed to be Net Cash Proceeds for purposes of this covenant. 57 Notwithstanding the two immediately preceding paragraphs, the Company and its Subsidiaries will be permitted to consummate an Asset Sale without complying with such paragraphs to the extent (i) at least 75% of the consideration for such Asset Sale constitutes Replacement Assets and (ii) such Asset Sale is for fair market value; provided that any consideration not constituting Replacement Assets received by the Company or any of its Subsidiaries in connection with any Asset Sale permitted to be consummated under this paragraph shall constitute Net Cash Proceeds subject to the provisions of the two preceding paragraphs. Each Net Proceeds Offer will be mailed to the record Holders as shown on the register of Holders within 25 days following the Net Proceeds Offer Trigger Date, with a copy to the Trustee, and shall comply with the procedures set forth in the Indenture. Upon receiving notice of the Net Proceeds Offer, Holders may elect to tender their Notes in whole or in part in integral multiples of $1,000 in exchange for cash. To the extent Holders properly tender Notes in an amount exceeding the Net Proceeds Offer Amount, Notes of tendering Holders will be purchased on a pro rata basis (based on amounts tendered). A Net Proceeds Offer shall remain open for a period of 20 business days or such longer period as may be required by law. The Company will comply with the requirements of Rule 14e-1 under the Exchange Act and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the provisions of any securities laws or regulations conflict with the "Asset Sale" provisions of the Indenture, the Company shall comply with the applicable securities laws and regulations and shall not be deemed to have breached its obligations under the "Asset Sale" provisions of the Indenture by virtue thereof. Upon completion of a Net Proceeds Offer, the amount of Net Cash Proceeds will be reset at zero. Accordingly, to the extent that the aggregate amount of Notes tendered pursuant to a Net Proceeds Offer is less than the Net Cash Proceeds, the Company may use any remaining Net Cash Proceeds for general corporate purposes. Limitation on Dividend and Other Payment Restrictions Affecting Subsidiaries. The Company will not, and will not cause or permit any of its Subsidiaries to, directly or indirectly, create or otherwise cause or permit to exist or become effective any encumbrance or restriction on the ability of any Subsidiary of the Company to (a) pay dividends or make any other distributions on or in respect of its Capital Stock; (b) make loans or advances or to pay any Indebtedness or other obligation owed to the Company or any other Subsidiary of the Company; or (c) transfer any of its property or assets to the Company or any other Subsidiary of the Company, except for such encumbrances or restrictions existing under or by reason of: (1) applicable law; (2) the Indenture; (3) any Credit Agreement; (4) customary non-assignment provisions of any contract or any lease governing a leasehold interest of any Subsidiary of the Company, or any customary restriction on the ability of a Subsidiary of the Company to dividend, distribute or otherwise transfer any asset which secures Purchase Money Indebtedness of such Subsidiary; (5) any instrument governing Acquired Indebtedness, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other than the Person or the properties or assets of the Person so acquired; (6) agreements existing on the Issue Date to the extent and in the manner such agreements are in effect on the Issue Date; or (7) an agreement governing Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred pursuant to an agreement referred to in clause (2), (3), (5) or (6) above; provided, however, that the provisions relating to such encumbrance or restriction contained in any such Indebtedness are no less favorable to the Company in any material respect as determined by the Board of Directors of the Company in their reasonable and good faith judgment than the provisions relating to such encumbrance or restriction contained in agreements referred to in such clause (2), (3), (5) or (6). Limitation on Preferred Stock of Subsidiaries. The Company will not permit any of its Subsidiaries to issue any Preferred Stock (other than to the Company or to a Wholly Owned Subsidiary of the Company) or permit any Person (other than the Company or a Wholly Owned Subsidiary of the Company) to own any Preferred Stock of any Subsidiary of the Company. Limitation on Liens. The Company will not, and will not cause or permit any of its Subsidiaries to, directly or indirectly, create, incur, assume or permit or suffer to exist any Liens of any kind against or upon any property 58 or assets of the Company or any of its Subsidiaries whether owned on the Issue Date or acquired after the Issue Date, or any proceeds therefrom, or assign or otherwise convey any right to receive income or profits therefrom unless (i) in the case of Liens securing Indebtedness that is expressly subordinate or junior in right of payment to the Notes, the Notes are secured by a Lien on such property, assets or proceeds that is senior in priority to such Liens and (ii) in all other cases, the Notes are equally and ratably secured, except for (A) Liens existing as of the Issue Date to the extent and in the manner such Liens are in effect on the Issue Date; (B) Liens of the Company or a Wholly Owned Subsidiary of the Company on assets of any Subsidiary of the Company; (C) Liens securing Refinancing Indebtedness which is incurred to Refinance any Indebtedness which has been secured by a Lien permitted under the Indenture and which has been incurred in accordance with the provisions of the Indenture; provided, however, that such Liens (X) are no less favorable to the Holders and are not more favorable to the lienholders with respect to such Liens than the Liens in respect of the Indebtedness being Refinanced and (Y) do not extend to or cover any property or assets of the Company or any of its Subsidiaries not securing the Indebtedness so Refinanced; and (D) Permitted Liens. Merger, Consolidation and Sale of Assets. Except for the Transaction Mergers, the Company will not, in a single transaction or series of related transactions, consolidate or merge with or into any Person, or sell, assign, transfer, lease, convey or otherwise dispose of (or cause or permit any Subsidiary of the Company to sell, assign, transfer, lease, convey or otherwise dispose of) all or substantially all of the Company's assets (determined on a consolidated basis for the Company and the Company's Subsidiaries) whether as an entirety or substantially as an entirety to any Person unless: (i) either (1) the Company shall be the surviving or continuing corporation or (2) the Person (if other than the Company) formed by such consolidation or into which the Company is merged or the Person which acquires by sale, assignment, transfer, lease, conveyance or other disposition the properties and assets of the Company and of the Company's Subsidiaries substantially as an entirety (the "Surviving Entity") (x) shall be a corporation organized and validly existing under the laws of the United States or any State thereof or the District of Columbia and (y) shall expressly assume, by supplemental indenture (in form and substance satisfactory to the Trustee), executed and delivered to the Trustee, the due and punctual payment of the principal of, and premium, if any, and interest on all of the Notes and the performance of every covenant of the Notes and the Indenture on the part of the Company to be performed or observed; (ii) immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred in connection with or in respect of such transaction), the Company or such Surviving Entity, as the case may be, (1) shall have a Consolidated Net Worth equal to or greater than the Consolidated Net Worth of the Company immediately prior to such transaction and (2) shall be able to incur at least $1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to the covenant described under "--Limitation on Incurrence of Additional Indebtedness"; (iii) immediately before and immediately after giving effect to such transaction and the assumption contemplated by clause (i)(2)(y) above (including, without limitation, giving effect to any Indebtedness and Acquired Indebtedness incurred or anticipated to be incurred and any Lien granted in connection with or in respect of the transaction), no Default or Event of Default shall have occurred or be continuing; and (iv) the Company or the Surviving Entity shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, comply with the applicable provisions of the Indenture and that all conditions precedent in the Indenture relating to such transaction have been satisfied. For purposes of the foregoing, the transfer (by lease, assignment, sale or otherwise, in a single transaction or series of transactions) of all or substantially all of the properties or assets of one or more Subsidiaries of the Company the Capital Stock of which constitutes all or substantially all of the properties and assets of the Company, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Company. The Indenture will provide that upon any consolidation, combination or merger or any transfer of all or substantially all of the assets of the Company in accordance with the foregoing, in which the Company is not the continuing corporation, the successor Person formed by such consolidation or into which the Company is merged 59 or to which such conveyance, lease or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture and the Notes with the same effect as if such surviving entity had been named as such. Limitations on Transactions with Affiliates. (a) The Company will not, and will not permit any of its Subsidiaries to, directly or indirectly, enter into or permit to exist any transaction or series of related transactions (including, without limitation, the purchase, sale, lease or exchange of any property or the rendering of any service) with, or for the benefit of, any of its Affiliates (each an "Affiliate Transaction"), other than (x) Affiliate Transactions permitted under paragraph (b) below and (y) Affiliate Transactions on terms that are no less favorable than those that might reasonably have been obtained in a comparable transaction at such time on an arm's-length basis from a Person that is not an Affiliate of the Company or such Subsidiary. All Affiliate Transactions (and each series of related Affiliate Transactions which are similar or part of a common plan) involving aggregate payments or other property with a fair market value in excess of $1.0 million shall be approved by the Board of Directors of the Company or such Subsidiary, as the case may be, such approval to be evidenced by a Board Resolution stating that such Board of Directors has determined that such transaction complies with the foregoing provisions. If the Company or any Subsidiary of the Company enters into an Affiliate Transaction (or a series of related Affiliate Transactions related to a common plan) that involves an aggregate fair market value of more than $5.0 million, the Company or such Subsidiary, as the case may be, shall, prior to the consummation thereof, obtain a favorable opinion as to the fairness of such transaction or series of related transactions to the Company or the relevant Subsidiary, as the case may be, from a financial point of view, from an Independent Financial Advisor and file the same with the Trustee. (b) The restrictions set forth in clause (a) shall not apply to (i) reasonable fees and compensation paid to and indemnity provided on behalf of, officers, directors, employees or consultants of the Company or any Subsidiary of the Company as determined in good faith by the Company's Board of Directors or senior management; (ii) transactions exclusively between or among the Company and any of its Subsidiaries or exclusively between or among such Subsidiaries; provided such transactions are not otherwise prohibited by the Indenture; (iii) payments to be made in connection with the consummation of the Recapitalization or the financing thereof to be received by Leonard Green & Partners, L.P. and its Affiliates; (iv) payments of annual fees and reimbursement of reasonable expenses in accordance with the provisions of the Management Services Agreement; (v) any employment agreement entered into in the ordinary course of business, (vi) Restricted Payments permitted by the Indenture and Permitted Investments, (vii) payments made in accordance with the Occidental Supply Agreement or any other such agreement with Occidental entered into on terms no less favorable to the Company than those that may have been obtained in an arm's length transaction and (viii) loans or advances to officers or employees of the Company in the ordinary course of business not to exceed $500,000 the aggregate at any one time outstanding. Conduct of Business. The Company and its Subsidiaries will not engage in any businesses other than a Related Business. Reports to Holders. The Indenture will provide that the Company will deliver to the Trustee within 15 days after the filing of the same with the Commission, copies of the quarterly and annual reports and of the information, documents and other reports, if any, which the Company is required to file with the Commission pursuant to Section 13 or 15(d) of the Exchange Act. The Indenture further provides that, notwithstanding that the Company may not be required to remain subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company will file with the Commission, to the extent permitted, and provide the Trustee and Holders with such annual reports and such information, documents and other reports specified in Sections 13 and 15(d) of the Exchange Act. The Company will also comply with the other provisions of TIA (S) 314(a). EVENTS OF DEFAULT The following events are defined in the Indenture as "Events of Default": (i) the failure to pay interest on any Notes when the same becomes due and payable and the default continues for a period of 30 days; 60 (ii) the failure to pay the principal on any Notes, when such principal becomes due and payable, at maturity, upon redemption or otherwise (including the failure to make a required payment to purchase Notes tendered pursuant to a Change of Control Offer or a Net Proceeds Offer); (iii) a default in the observance or performance of any other covenant or agreement contained in the Indenture which default continues for a period of 30 days after the Company receives written notice specifying the default (and demanding that such default be remedied) from the Trustee or the Holders of at least 25% of the outstanding principal amount of the Notes (except in the case of a default with respect to the covenant described under "--Certain Covenants--Merger, Consolidation and Sale of Assets," which will constitute an Event of Default with such notice requirement but without such passage of time requirement); (iv) the failure to pay at final maturity (giving effect to any applicable grace periods and any extensions thereof) the principal amount of any Indebtedness of the Company or any Subsidiary of the Company, or the acceleration of the final stated maturity of any such Indebtedness, in any case if the aggregate principal amount of such Indebtedness, together with the principal amount of any other such Indebtedness in default for failure to pay principal at final maturity or which has been accelerated, aggregates $5.0 million or more at any time; (v) one or more judgments in an aggregate amount in excess of $5.0 million shall have been rendered against the Company or any of its Subsidiaries and such judgments remain undischarged, unpaid or unstayed for a period of 60 days after such judgment or judgments become final and non- appealable; or (vi) certain events of bankruptcy affecting the Company or any of its Significant Subsidiaries. If an Event of Default (other than an Event of Default specified in clause (vi) above) shall occur and be continuing, the Trustee or the Holders of at least 25% in principal amount of outstanding Notes may declare the principal of and accrued interest on all the Notes to be due and payable by notice in writing to the Company and the Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice"), and the same shall become immediately due and payable. If an Event of Default specified in clause (vi) above occurs and is continuing, then all unpaid principal of, and premium, if any, and accrued and unpaid interest on all of the outstanding Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. The Indenture will provide that, at any time after a declaration of acceleration with respect to the Notes as described in the preceding paragraph, the Holders of a majority in principal amount of the Notes may rescind and cancel such declaration and its consequences (i) if the rescission would not conflict with any judgment or decree, (ii) if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration, (iii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid, (iv) if the Company has paid the Trustee its reasonable compensation and reimbursed the Trustee for its reasonable expenses, disbursements and advances and (v) in the event of the cure or waiver of an Event of Default of the type described in clause (vi) of the description above of Events of Default, the Trustee shall have received an officers' certificate and an opinion of counsel that such Event of Default has been cured or waived. No such rescission shall affect any subsequent Default or impair any right consequent thereto. The Holders of a majority in principal amount of the Notes may waive any existing Default or Event of Default under the Indenture, and its consequences, except a default in the payment of the principal of or interest on any Notes. Holders of the Notes may not enforce the Indenture or the Notes except as provided in the Indenture and under the TIA. Subject to the provisions of the Indenture relating to the duties of the Trustee, the Trustee is under no obligation to exercise any of its rights or powers under the Indenture at the request, order or direction of any of the Holders, unless such Holders have offered to the Trustee reasonable indemnity. Subject to all 61 provisions of the Indenture and applicable law, the Holders of a majority in aggregate principal amount of the then outstanding Notes have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. Under the Indenture, the Company is required to provide an officers' certificate to the Trustee promptly upon any such officer obtaining knowledge of any Default or Event of Default (provided that such officers shall provide such certification at least annually whether or not they know of any Default or Event of Default) that has occurred and, if applicable, describe such Default or Event of Default and the status thereof. LEGAL DEFEASANCE AND COVENANT DEFEASANCE The Company may, at its option and at any time, elect to have its obligations discharged with respect to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the outstanding Notes, except for (i) the rights of Holders to receive payments in respect of the principal of, premium, if any, and interest on the Notes when such payments are due, (ii) the Company's obligations with respect to the Notes concerning issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an office or agency for payments, (iii) the rights, powers, trust, duties and immunities of the Trustee and the Company's obligations in connection therewith and (iv) the Legal Defeasance provisions of the Indenture. In addition, the Company may, at its option and at any time, elect to have the obligations of the Company released with respect to certain covenants that are described in the Indenture ("Covenant Defeasance") and thereafter any omission to comply with such obligations shall not constitute a Default or Event of Default with respect to the Notes. In the event Covenant Defeasance occurs, certain events (not including non-payment, bankruptcy, receivership, reorganization and insolvency events) described under "--Events of Default" will no longer constitute an Event of Default with respect to the Notes. In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the Company must irrevocably deposit with the Trustee, in trust, for the benefit of the Holders cash in U.S. dollars, non-callable U.S. government obligations, or a combination thereof, in such amounts as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of, premium and Additional Interest, if any, and interest on the Notes on the stated date for payment thereof or on the applicable redemption date, as the case may be; (ii) in the case of Legal Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that (A) the Company has received from, or there has been published by, the Internal Revenue Service a ruling or (B) since the date of the Indenture, there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion of counsel shall confirm that, the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Legal Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Legal Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the Company shall have delivered to the Trustee an opinion of counsel in the United States reasonably acceptable to the Trustee confirming that the Holders will not recognize income, gain or loss for federal income tax purposes as a result of such Covenant Defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall have occurred and be continuing on the date of such deposit or insofar as Events of Default from bankruptcy or insolvency events are concerned, at any time in the period ending on the 91st day after the date of deposit; (v) such Legal Defeasance or Covenant Defeasance shall not result in a breach or violation of, or constitute a default under the Indenture or any other material agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries is bound; (vi) the Company shall have delivered to the Trustee an officers' certificate stating that the deposit was not made by the Company with the intent of preferring the Holders over any other creditors of the Company or with the intent of defeating, hindering, delaying or defrauding any other creditors of the Company or others; (vii) the Company shall have delivered to the Trustee an officers' certificate and an opinion of counsel, each stating that all conditions precedent provided for or relating to the Legal Defeasance or the Covenant Defeasance have been complied with; 62 (viii) the Company shall have delivered to the Trustee an opinion of counsel to the effect that after the 91st day following the deposit, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; and (ix) certain other customary conditions precedent are satisfied. SATISFACTION AND DISCHARGE The Indenture will be discharged and will cease to be of further effect (except as to surviving rights or registration of transfer or exchange of the Notes, as expressly provided for in the Indenture) as to all outstanding Notes when (i) either (a) all the Notes theretofore authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid and Notes for whose payment money has theretofore been deposited in trust or segregated and held in trust by the Company and thereafter repaid to the Company or discharged from such trust) have been delivered to the Trustee for cancellation or (b) all Notes not theretofore delivered to the Trustee for cancellation have become due and payable and the Company has irrevocably deposited or caused to be deposited with the Trustee funds in an amount sufficient to pay and discharge the entire Indebtedness on the Notes not theretofore delivered to the Trustee for cancellation, for principal of, premium and Additional Interest, if any, and interest on the Notes to the date of deposit together with irrevocable instructions from the Company directing the Trustee to apply such funds to the payment thereof at maturity or redemption, as the case may be; (ii) the Company has paid all other sums payable under the Indenture by the Company; and (iii) the Company has delivered to the Trustee an officers' certificate stating that all conditions precedent under the Indenture relating to the satisfaction and discharge of the Indenture have been complied with. MODIFICATION OF THE INDENTURE From time to time, the Company and the Trustee, without the consent of the Holders, may amend the Indenture for certain specified purposes, including curing ambiguities, defects or inconsistencies, so long as such change does not, in the opinion of the Trustee, adversely affect the rights of any of the Holders in any material respect. In formulating its opinion on such matters, the Trustee will be entitled to rely on such evidence as it deems appropriate, including, without limitation, solely on an opinion of counsel. Other modifications and amendments of the Indenture may be made with the consent of the Holders of a majority in principal amount of the then outstanding Notes issued under the Indenture, except that, without the consent of each Holder affected thereby, no amendment may: (i) reduce the amount of Notes whose Holders must consent to an amendment; (ii) reduce the rate of or change or have the effect of changing the time for payment of interest, including defaulted interest, on any Notes; (iii) reduce the principal of or change or have the effect of changing the fixed maturity of any Notes, or change the date on which any Notes may be subject to redemption or repurchase, or reduce the redemption or repurchase price therefor; (iv) make any Notes payable in money other than that stated in the Notes; (v) make any change in provisions of the Indenture protecting the right of each Holder to receive payment of principal of and interest on such Note on or after the due date thereof or to bring suit to enforce such payment, or permitting Holders of a majority in principal amount of Notes to waive Defaults or Events of Default; (vi) amend, change or modify in any material respect the obligation of the Company to make and consummate a Change of Control Offer in the event of a Change of Control or make and consummate a Net Proceeds Offer with respect to any Asset Sale that has been consummated or modify any of the provisions or definitions with respect thereto or (vii) modify or change any provision of the Indenture or the related definitions affecting the ranking of the Notes in a manner which adversely affects the Holders. GOVERNING LAW The Indenture will provide that the Indenture and the Notes will be governed by, and construed in accordance with, the laws of the State of New York but without giving effect to applicable principles of conflicts of law to the extent that the application of the law of another jurisdiction would be required thereby. THE TRUSTEE The Indenture will provide that, except during the continuance of an Event of Default, the Trustee will perform only such duties as are specifically set forth in the Indenture. During the existence of an Event of 63 Default, the Trustee will exercise such rights and powers vested in it by the Indenture, and use the same degree of care and skill in its exercise as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. The Indenture and the provisions of the TIA contain certain limitations on the rights of the Trustee, should it become a creditor of the Company, to obtain payments of claims in certain cases or to realize on certain property received in respect of any such claim as security or otherwise. Subject to the TIA, the Trustee will be permitted to engage in other transactions; provided that if the Trustee acquires any conflicting interest as described in the TIA, it must eliminate such conflict or resign. CERTAIN DEFINITIONS Set forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full definition of all such terms, as well as any other terms used herein for which no definition is provided. "Acquired Indebtedness" means Indebtedness of a Person or any of its Subsidiaries existing at the time such Person becomes a Subsidiary of the Company or at the time it merges or consolidates with the Company or any of its Subsidiaries or is assumed in connection with the acquisition of assets from such Person and in each case not incurred in connection with, or in anticipation or contemplation of, such acquisition, merger or consolidation. "Affiliate" means, with respect to any specified Person, any other Person who directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control with, such specified Person. The term "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a Person, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative of the foregoing. "Asset Acquisition" means (a) an Investment by the Company or any Subsidiary of the Company in any other Person pursuant to which such Person shall become a Subsidiary of the Company, or shall be merged with or into the Company or any Subsidiary of the Company, or (b) the acquisition by the Company or any Subsidiary of the Company of the assets of any Person (other than a Subsidiary of the Company) which constitute all or substantially all of the assets of such Person or comprises any division or line of business of such Person or any other properties or assets of such Person other than in the ordinary course of business. "Asset Sale" means any direct or indirect sale, issuance, conveyance, transfer, lease (other than operating leases entered into in the ordinary course of business), assignment or other transfer for value by the Company or any of its Subsidiaries (including any Sale and Leaseback Transaction) to any Person other than the Company or a Subsidiary of the Company (including a Person that is or will become a Subsidiary of the Company immediately after such sale, issuance, conveyance, transfer, lease, assignment or other transfer for value) of (a) any Capital Stock of any Subsidiary of the Company; or (b) any other property or assets of the Company or any Subsidiary of the Company other than in the ordinary course of business; provided, however, that Asset Sales shall not include (i) a transaction or series of related transactions for which the Company or its Subsidiaries receive aggregate consideration of less than $500,000 and (ii) the sale, lease, conveyance, disposition or other transfer of all or substantially all of the assets of the Company as permitted under "--Certain Covenants--Merger, Consolidation and Sale of Assets." "Board of Directors" means, as to any Person, the board of directors of such Person or any duly authorized committee thereof. "Board Resolution" means, with respect to any Person, a copy of a resolution certified by the Secretary or an Assistant Secretary of such Person to have been duly adopted by the Board of Directors of such Person and to be in full force and effect on the date of such certification, and delivered to the Trustee. 64 "Capitalized Lease Obligation" means, as to any Person, the obligations of such Person under a lease that are required to be classified and accounted for as capital lease obligations under GAAP and, for purposes of this definition, the amount of such obligations at any date shall be the capitalized amount of such obligations at such date, determined in accordance with GAAP. "Capital Stock" means (i) with respect to any Person that is a corporation, any and all shares, interests, participations or other equivalents (however designated and whether or not voting) of corporate stock, including each class of Common Stock and Preferred Stock of such Person and (ii) with respect to any Person that is not a corporation, any and all partnership or other equity or ownership interests of such Person. "Cash Equivalents" means (i) marketable direct obligations issued by, or unconditionally guaranteed by, the United States Government or issued by any agency thereof and backed by the full faith and credit of the United States, in each case maturing within one year from the date of acquisition thereof; (ii) marketable direct obligations issued by any state of the United States of America or any political subdivision of any such state or any public instrumentality thereof maturing within one year from the date of acquisition thereof and, at the time of acquisition, having one of the two highest ratings obtainable from either Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc. ("Moody's"); (iii) commercial paper maturing no more than one year from the date of creation thereof and, at the time of acquisition, having a rating of at least A-1 from S&P or at least P-1 from Moody's; (iv) certificates of deposit or bankers' acceptances maturing within one year from the date of acquisition thereof issued by any bank organized under the laws of the United States of America or any state thereof or the District of Columbia or any U.S. branch of a foreign bank having at the date of acquisition thereof combined capital and surplus of not less than $250.0 million; (v) repurchase obligations with a term of not more than seven days for underlying securities of the types described in clause (i) above entered into with any bank meeting the qualifications specified in clause (iv) above; and (vi) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (i) through (v) above. "Change of Control" means the occurrence of one or more of the following events: (i) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all of the assets of the Company to any Person or group of related Persons (other than to a Permitted Holder) for purposes of Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates thereof (whether or not otherwise in compliance with the provisions of the Indenture); (ii) the approval by the holders of Capital Stock of the Company of any plan or proposal for the liquidation or dissolution of the Company (whether or not otherwise in compliance with the provisions of the Indenture); (iii) any Person or Group (other than the Permitted Holders) shall become the owner, directly or indirectly, beneficially or of record, of shares representing more than 50% of the aggregate ordinary voting power represented by the issued and outstanding Capital Stock of the Company; (iv) the replacement of a majority of the Board of Directors of the Company (other than in accordance with the terms of the Series A Preferred Stock so long as Occidental owns greater than 50% of the then outstanding shares of the Series A Preferred Stock) over a two-year period from the directors who constituted the Board of Directors of the Company at the beginning of such period, and such replacement shall not have been approved by a vote of at least a majority of the Board of Directors of the Company then still in office who either were members of such Board of Directors at the beginning of such period or whose election as a member of such Board of Directors was previously so approved; or (v) the Company consolidates with, or merges with or into, another Person, or sells, assigns, conveys, transfers, leases or otherwise disposes of all or substantially all of its assets to any Person, or any Person consolidates with, or merges with or into, the Company, in any such event pursuant to a transaction in which the shares representing the aggregate ordinary voting power represented by the issued and outstanding Capital Stock of the Company is converted into or exchanged for cash, securities or other property, other than (A) any such transaction where (1) the shares representing the issued and outstanding ordinary voting Capital Stock of the Company are converted into or exchanged for (I) ordinary voting Capital Stock (other than Disqualified Capital Stock) of the surviving or transferee corporation and/or (II) cash, securities and other property in an amount which could be paid by the Company as a Restricted Payment under the Indenture and (2) the "beneficial owners" of the shares representing the issued and outstanding ordinary voting Capital Stock of the Company immediately prior to such transaction own, directly or indirectly, shares of Capital Stock representing not less than a majority of voting power of all issued and outstanding shares of Capital Stock of the 65 surviving or transferee corporation immediately after such transaction or (B) any such transaction as a result of which the Permitted Holders own shares of Capital Stock representing more than 50% of the voting power of all issued and outstanding shares of Capital Stock of the surviving or transferee corporation immediately after such transaction. "Change of Control Offer" has the meaning set forth under "--Change of Control." "Change of Control Payment Date" has the meaning set forth under "--Change of Control." "Commission" means the Securities and Exchange Commission, or any successor agency thereto with respect to the regulation or registration of securities. "Common Stock" of any Person means any and all shares, interests or other participations in, and other equivalents (however designated and whether voting or non-voting) of such Person's common stock, whether outstanding on the Issue Date or issued after the Issue Date, and includes, without limitation, all series and classes of such common stock. "Consolidated EBITDA" means, with respect to any Person, for any period, the sum (without duplication) of (i) Consolidated Net Income and (ii) to the extent Consolidated Net Income has been reduced thereby, (A) all income taxes of such Person and its Subsidiaries paid or accrued in accordance with GAAP for such period, (B) Consolidated Interest Expense and (C) Consolidated Non- cash Charges less any non-cash items increasing Consolidated Net Income for such period, all as determined on a consolidated basis for such Person and its Subsidiaries in accordance with GAAP. "Consolidated Fixed Charge Coverage Ratio" means, with respect to any Person, the ratio of Consolidated EBITDA of such Person during the four full fiscal quarters (the "Four Quarter Period") ending on or prior to the date of the transaction giving rise to the need to calculate the Consolidated Fixed Charge Coverage Ratio (the "Transaction Date") to Consolidated Fixed Charges of such Person for the Four Quarter Period. In addition to and without limitation of the foregoing, for purposes of this definition, "Consolidated EBITDA" and "Consolidated Fixed Charges" shall be calculated after giving effect on a pro forma basis for the period of such calculation to (i) the incurrence or repayment of any Indebtedness of such Person or any of its Subsidiaries (and the application of the proceeds thereof) giving rise to the need to make such calculation and any incurrence or repayment of other Indebtedness (and the application of the proceeds thereof), other than the incurrence or repayment of Indebtedness in the ordinary course of business for working capital purposes pursuant to working capital facilities, occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such incurrence or repayment, as the case may be (and the application of the proceeds thereof), occurred on the first day of the Four Quarter Period and (ii) any Asset Sales or Asset Acquisitions (including, without limitation, any Asset Acquisition giving rise to the need to make such calculation as a result of such Person or one of its Subsidiaries (including any Person who becomes a Subsidiary as a result of the Asset Acquisition) incurring, assuming or otherwise being liable for Acquired Indebtedness and including, without limitation, by giving pro forma effect to any Consolidated EBITDA (provided that such pro forma Consolidated EBITDA shall be calculated in a manner consistent with the exclusions in the definition of "Consolidated Net Income") attributable to the assets which are the subject of the Asset Acquisition or Asset Sale during the Four Quarter Period) occurring during the Four Quarter Period or at any time subsequent to the last day of the Four Quarter Period and on or prior to the Transaction Date, as if such Asset Sale or Asset Acquisition (including the incurrence, assumption or liability for any such Acquired Indebtedness) occurred on the first day of the Four Quarter Period. If such Person or any of its Subsidiaries directly or indirectly guarantees Indebtedness of a third Person, the preceding sentence shall give effect to the incurrence of such guaranteed Indebtedness as if such Person or any Subsidiary of such Person had directly incurred or otherwise assumed such guaranteed Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for purposes of determining the denominator (but not the numerator) of this "Consolidated Fixed Charge Coverage Ratio," (1) interest on outstanding Indebtedness determined on a fluctuating basis as of the Transaction Date and which will continue to be so determined thereafter shall be deemed to have accrued at a 66 fixed rate per annum equal to the rate of interest on such Indebtedness in effect on the Transaction Date; (2) if interest on any Indebtedness actually incurred on the Transaction Date may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rates, then the interest rate in effect on the Transaction Date will be deemed to have been in effect during the Four Quarter Period; and (3) notwithstanding clause (1) above, interest on Indebtedness determined on a fluctuating basis, to the extent such interest is covered by agreements relating to Interest Swap Obligations, shall be deemed to accrue at the rate per annum resulting after giving effect to the operation of such agreements. "Consolidated Fixed Charges" means, with respect to any Person for any period, the sum, without duplication, of (i) Consolidated Interest Expense (excluding any amortization or write off of deferred financing costs), plus (ii) the product of (x) the amount of all dividend payments on any series of Preferred Stock of such Person (other than dividends paid in Qualified Capital Stock) paid, accrued or scheduled to be paid or accrued during such period times (y) a fraction, the numerator of which is one and the denominator of which is one minus the then current effective consolidated federal, state and local tax rate of such Person, expressed as a decimal. "Consolidated Interest Expense" means, with respect to any Person for any period, the sum of, without duplication: (i) the aggregate of the interest expense of such Person and its Subsidiaries for such period determined on a consolidated basis in accordance with GAAP, including, without limitation, (a) any amortization of debt discount and any amortization or write off of deferred financing costs, (b) the net costs under Interest Swap Obligations, (c) all capitalized interest and (d) the interest portion of any deferred payment obligation; and (ii) the interest component of Capitalized Lease Obligations paid, accrued and/or scheduled to be paid or accrued by such Person and its Subsidiaries during such period as determined on a consolidated basis in accordance with GAAP. "Consolidated Net Income" means, with respect to any Person, for any period, the aggregate net income (or loss) of such Person and its Subsidiaries for such period on a consolidated basis, determined in accordance with GAAP; provided that there shall be excluded therefrom (a) after-tax gains from Asset Sales or abandonments or reserves relating thereto, (b) after-tax items classified as extraordinary or nonrecurring gains or losses, (c) the net income of any Person acquired in a "pooling of interests" transaction accrued prior to the date it becomes a Subsidiary of the referent Person or is merged or consolidated with the referent Person or any Subsidiary of the referent Person, (d) the net income (but not loss) of any Subsidiary of the referent Person to the extent that the declaration of dividends or similar distributions by that Subsidiary of that income is restricted by contract, operation of law or otherwise, (e) the net income of any Person, other than a Subsidiary of the referent Person, except to the extent of cash dividends or distributions paid to the referent Person or to a Wholly Owned Subsidiary of the referent Person by such Person, (f) any restoration to income of any contingency reserve, except to the extent that provision for such reserve was made out of Consolidated Net Income accrued at any time following the Issue Date, (g) income or loss attributable to discontinued operations (including, without limitation, operations disposed of during such period whether or not such operations were classified as discontinued) and (h) in the case of a successor to the referent Person by consolidation or merger or as a transferee of the referent Person's assets, any earnings of the successor corporation prior to such consolidation, merger or transfer of assets. "Consolidated Net Worth" of any Person means the consolidated stockholders' equity of such Person, determined on a consolidated basis in accordance with GAAP, less (without duplication) amounts attributable to Disqualified Capital Stock of such Person. "Consolidated Non-cash Charges" means, with respect to any Person, for any period, the aggregate depreciation, amortization and other non-cash expenses of such Person and its Subsidiaries reducing Consolidated Net Income of such Person and its Subsidiaries for such period, determined on a consolidated basis in accordance with GAAP (including, without limitation, any LIFO adjustments, but excluding any such charges constituting an extraordinary item or loss or any such charge which requires an accrual of or a reserve for cash charges for any future period). 67 "Covenant Defeasance" has the meaning set forth under "--Legal Defeasance and Covenant Defeasance." "Credit Agreement" means credit agreement(s) to be entered into by the Company and one or more lenders, and all amendments thereto, together with the related documents thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring all or any portion of the Indebtedness under such agreement(s) or any successor or replacement agreement(s) and whether by the same or any other agent, lender or group of lenders. "Default" means an event or condition the occurrence of which is, or with the lapse of time or the giving of notice or both would be, an Event of Default. "Disqualified Capital Stock" means that portion of any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof, in any case, on or prior to the final maturity date of the Notes. "Exchange Act" means the Securities Exchange Act of 1934, as amended, or any successor statute or statutes thereto. "fair market value" means, with respect to any asset or property, the price which could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair market value shall be determined by the Board of Directors of the Company acting reasonably and in good faith and shall be evidenced by a Board Resolution of the Board of Directors of the Company delivered to the Trustee. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession of the United States, which are in effect as of the Issue Date. "Indebtedness" means with respect to any Person, without duplication, (i) all Obligations of such Person for borrowed money, (ii) all Obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all Capitalized Lease Obligations of such Person, (iv) all Obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all Obligations under any title retention agreement (but excluding trade accounts payable and other accrued liabilities arising in the ordinary course of business that are not overdue by 90 days or more or are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted), (v) all Obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction, (vi) guarantees and other contingent obligations in respect of Indebtedness referred to in clauses (i) through (v) above and clause (viii) below, (vii) all Obligations of any other Person of the type referred to in clauses (i) through (vi) which are secured by any lien on any property or asset of such Person, the amount of such Obligation being deemed to be the lesser of the fair market value of such property or asset or the amount of the Obligation so secured, (viii) all Obligations under currency agreements and interest swap agreements of such Person and (ix) all Disqualified Capital Stock issued by such Person with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined pursuant to the Indenture, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value shall be determined reasonably and in good faith by the Board of Directors of the issuer of such Disqualified Capital Stock. 68 "Independent Financial Advisor" means an accounting firm, appraisal firm, investment banking firm or consultant to Persons engaged in a Related Business, in each case, of nationally recognized standing that is, in the judgment of the Company's Board of Directors, qualified to perform the task for which it has been engaged. "Interest Swap Obligations" means the obligations of any Person pursuant to any arrangement with any other Person whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements. "Investment" means, with respect to any Person, any direct or indirect loan or other extension of credit (including, without limitation, a guarantee) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition by such Person of any Capital Stock, bonds, notes, debentures or other securities or evidences of Indebtedness issued by, any Person. "Investment" shall exclude extensions of trade credit by the Company or any Subsidiary on commercially reasonable terms in accordance with normal trade practices of the Company or such Subsidiary, as the case may be. If the Company or any Subsidiary of the Company sells or otherwise disposes of any Common Stock of any direct or indirect Subsidiary of the Company such that, after giving effect to any such sale or disposition, the Company no longer owns, directly or indirectly, 100% of the outstanding Common Stock of such Subsidiary, the Company shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Common Stock of such Subsidiary not sold or disposed of. "Issue Date" means the date of original issuance of the Notes. "Legal Defeasance" has the meaning set forth under "--Legal Defeasance and Covenant Defeasance." "Lien" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "Management Services Agreement" means that certain Management Services Agreement dated as of the Issue Date by and between Leonard Green & Partners, L.P., on the one hand, and the Company, on the other hand, providing for certain fees, expenses and reimbursements to be paid to Leonard Green & Partners, L.P., as such Management Services Agreement may be amended from time to time so long as such amendments are in compliance with the provisions of the covenant described under the caption "--Certain Covenants--Limitations on Transactions With Affiliates." "Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds in the form of cash or Cash Equivalents including payments in respect of deferred payment obligations when received in the form of cash or Cash Equivalents (other than the portion of any such deferred payment constituting interest) received by the Company or any of its Subsidiaries from such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees and sales commissions), (b) taxes paid or payable after taking into account any reduction in consolidated tax liability due to available tax credits or deductions and any tax sharing arrangements, (c) repayment of Indebtedness that is required to be repaid in connection with such Asset Sale, (d) appropriate amounts to be provided by the Company or any Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against any liabilities associated with such Asset Sale and retained by the Company or any Subsidiary, as the case may be, after such Asset Sale, including, without limitation, pension and other post-employment benefit liabilities, liabilities related to environmental matters and liabilities under any indemnification obligations associated with such Asset Sale, and (e) that portion of the cash or Cash Equivalents attributable to the Capital Stock of a Subsidiary which is not a Wholly Owned Subsidiary of the Company held, directly or indirectly, by any Person which is not the Company or a Wholly Owned Subsidiary of the Company. 69 "Net Proceeds Offer" has the meaning set forth under "--Certain Covenants-- Limitation on Asset Sales." "Net Proceeds Offer Amount" has the meaning set forth under "--Certain Covenants--Limitation on Asset Sales." "Net Proceeds Offer Payment Date" has the meaning set forth under "--Certain Covenants--Limitation on Asset Sales." "Net Proceeds Offer Trigger Date" has the meaning set forth under "--Certain Covenants--Limitation on Asset Sales." "Obligations" means all obligations for principal, premium, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Occidental" means Occidental Petroleum Corporation, a Delaware corporation. "Occidental Supply Agreement" means the supply agreement between a subsidiary of Occidental and the Company as in effect on the Issue Date. "Permitted Holders" means Green Equity Investors II, L.P., senior management of the Company as in effect on the Issue Date and Occidental, including in each case, their respective Affiliates. "Permitted Indebtedness" means, without duplication, each of the following: (i) Indebtedness under the Old Notes and the New Notes issued pursuant to the Offering; (ii) Indebtedness incurred pursuant to a Credit Agreement(s) in an aggregate principal amount at any time outstanding not to exceed the greater of (a) $35.0 million and (b) the sum of 80% of the total accounts receivable and 60% of the total inventory of the Company and its Subsidiaries, less in each case the amount of any prepayments made with the proceeds of an Asset Sale or assumed in connection with an Asset Sale; (iii) other Indebtedness of the Company and its Subsidiaries outstanding on the Issue Date; (iv) Interest Swap Obligations of the Company covering Indebtedness of the Company or any of its Subsidiaries and Interest Swap Obligations of any Subsidiary of the Company covering Indebtedness of such Subsidiary; provided, however, that such Interest Swap Obligations are entered into to protect the Company and its Subsidiaries from fluctuations in interest rates on Indebtedness incurred in accordance with the Indenture to the extent the notional principal amount of such Interest Swap Obligation does not exceed the principal amount of the Indebtedness to which such Interest Swap Obligation relates; (v) Indebtedness of a Subsidiary of the Company to the Company or to a Wholly Owned Subsidiary of the Company for so long as such Indebtedness is held by the Company or a Wholly Owned Subsidiary of the Company, in each case subject to no Lien held by a Person other than the Company or a Wholly Owned Subsidiary of the Company; provided that if as of any date any Person other than the Company or a Wholly Owned Subsidiary of the Company owns or holds any such Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the issuer of such Indebtedness; (vi) Indebtedness of the Company to a Wholly Owned Subsidiary of the Company for so long as such Indebtedness is held by a Wholly Owned Subsidiary of the Company, in each case subject to no Lien held by a Person other than a Wholly Owned Subsidiary of the Company; provided that if as of any date any Person other than a Wholly Owned Subsidiary of the Company owns or holds any such Indebtedness or any Person other than a Wholly Owned Subsidiary of the Company holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the Company; 70 (vii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within two business days of incurrence; (viii) Indebtedness of the Company or any of its Subsidiaries represented by letters of credit for the account of the Company or such Subsidiary, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self-insurance or similar requirements in the ordinary course of business; (ix) Refinancing Indebtedness; (x) Capitalized Lease Obligations and Purchase Money Indebtedness of the Company or any of its Subsidiaries in an aggregate principal amount not to exceed $5.0 million at any one time outstanding; and (xi) additional Indebtedness of the Company in an aggregate principal amount not to exceed $10.0 million at any one time outstanding. "Permitted Investments" means (i) Investments by the Company or any Wholly Owned Subsidiary of the Company in any Person that is or will become, or Investments by the Company or any Wholly Owned Subsidiary of the Company which result in any Person becoming, in any case, immediately after such Investment, a Wholly Owned Subsidiary of the Company or that will merge or consolidate into the Company or a Wholly Owned Subsidiary of the Company; (ii) Investments by any Wholly Owned Subsidiary of the Company in the Company; (iii) Investments in cash and Cash Equivalents; (iv) loans and advances to employees and officers of the Company and its Subsidiaries in the ordinary course of business for bona fide business purposes not in excess of $500,000 at any one time outstanding; (v) Investments in securities of trade creditors or customers received pursuant to any plan of reorganization or similar arrangement upon the bankruptcy or insolvency of such trade creditors or customers; and (vi) Investments made by the Company or its Subsidiaries as a result of consideration received in connection with an Asset Sale made in compliance with the covenant described under "--Certain Covenants--Limitation on Asset Sales." "Permitted Liens" means the following types of Liens: (i) Liens securing Indebtedness incurred under the Credit Agreement or pursuant to clause (xi) of the definition of Permitted Indebtedness; (ii) Liens for taxes, assessments or governmental charges or claims either (a) not delinquent or (b) contested in good faith by appropriate proceedings and as to which the Company or its Subsidiaries shall have set aside on their books such reserves as may be required pursuant to GAAP; (iii) statutory and contractual Liens of landlords and Liens of carriers, warehousemen, mechanics, suppliers, materialmen, repairmen and other Liens imposed by law incurred in the ordinary course of business for sums not yet delinquent or being contested in good faith, if such reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made in respect thereof; (iv) Liens incurred or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of social security, including any Lien securing letters of credit issued in the ordinary course of business consistent with past practice in connection therewith, or to secure the performance of tenders, statutory obligations, surety and appeal bonds, bids, leases, government contracts, performance and return-of-money bonds and other similar obligations (exclusive of obligations for the payment of borrowed money); (v) judgment Liens not giving rise to an Event of Default so long as such Lien is adequately bonded and any appropriate legal proceedings which may have been duly initiated for the review of such judgment shall not have been finally terminated or the period within which such proceedings may be initiated shall not have expired; 71 (vi) easements, rights-of-way, zoning restrictions and other similar charges or encumbrances in respect of real property not interfering in any material respect with the ordinary conduct of the business of the Company or any of its Subsidiaries; (vii) any interest or title of a lessor under any Capitalized Lease Obligation; provided that such Liens do not extend to any property or assets which is not leased property subject to such Capitalized Lease Obligation; (viii) Liens securing Purchase Money Indebtedness of the Company or any Subsidiary of the Company acquired in the ordinary course of business; provided, however, that (A) the Purchase Money Indebtedness shall not exceed the cost of such property or assets and shall not be secured by any property or assets of the Company or any Subsidiary of the Company other than the property and assets so acquired and (B) the Lien securing such Indebtedness shall be created within 90 days of such acquisition; (ix) Liens upon specific items of inventory or other goods and proceeds of any Person securing such Person's obligations in respect of bankers' acceptances issued or created for the account of such Person to facilitate the purchase, shipment or storage of such inventory or other goods; (x) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other property relating to such letters of credit and products and proceeds thereof; (xi) Liens encumbering deposits made to secure obligations arising from statutory, regulatory, contractual or warranty requirements of the Company or any of its Subsidiaries, including rights of offset and set-off; (xii) Liens securing Interest Swap Obligations which Interest Swap Obligations relate to Indebtedness that is otherwise permitted under the Indenture; (xiii) Liens securing Acquired Indebtedness incurred in accordance with the covenant described under "--Certain Covenants--Limitation on Incurrence of Additional Indebtedness"; provided that (A) such Liens secured such Acquired Indebtedness at the time of and prior to the incurrence of such Acquired Indebtedness by the Company or a Subsidiary of the Company and were not granted in connection with, or in anticipation of, the incurrence of such Acquired Indebtedness by the Company or a Subsidiary of the Company and (B) such Liens do not extend to or cover any property or assets of the Company or of any of its Subsidiaries other than the property or assets that secured the Acquired Indebtedness prior to the time such Indebtedness became Acquired Indebtedness of the Company or a Subsidiary of the Company and are no more favorable to the lienholders than those securing the Acquired Indebtedness prior to the incurrence of such Acquired Indebtedness by the Company or a Subsidiary of the Company; and (xiv) Liens created under the Indenture. "Person" means an individual, partnership, corporation, limited liability company, unincorporated organization, trust or joint venture, or a governmental agency or political subdivision thereof. "Preferred Stock" of any Person means any Capital Stock of such Person that has preferential rights over any other Capital Stock of such Person with respect to dividends or redemptions or upon liquidation. "Purchase Money Indebtedness" means Indebtedness of the Company and its Subsidiaries incurred in connection with the purchase of businesses (including Capital Stock of businesses primarily engaged in a Related Business), properties or assets for the business of the Company and its Subsidiaries and any Refinancing thereof. "Qualified Capital Stock" means the Series A Preferred Stock and any other Capital Stock that is not Disqualified Capital Stock. "Reference Date" has the meaning set forth under "--Certain Covenants-- Limitation on Restricted Payments." "Refinance" means, in respect of any security or Indebtedness, to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or to issue a security or Indebtedness in exchange or replacement for, such security or Indebtedness in whole or in part. "Refinanced" and "Refinancing" shall have correlative meanings. 72 "Refinancing Indebtedness" means any Refinancing by the Company or any Subsidiary of the Company of Indebtedness incurred in accordance with the covenant described under "--Certain Covenants--Limitation on Incurrence of Additional Indebtedness" (other than pursuant to clause (ii), (iv), (v), (vi), (vii), (viii), (x) or (xi) of the definition of Permitted Indebtedness), to the extent that such Refinancing does not (1) result in an increase in the aggregate principal amount of the Indebtedness of such Person as of the date of such proposed Refinancing (plus the amount of any premium required to be paid under the terms of the instrument governing such Indebtedness and plus the amount of reasonable expenses incurred by the Company in connection with such Refinancing) or (2) create Indebtedness with (A) a Weighted Average Life to Maturity that is less than the Weighted Average Life to Maturity of the Indebtedness being Refinanced or (B) a final maturity earlier than the final maturity of the Indebtedness being Refinanced; provided that (x) if such Indebtedness being Refinanced is Indebtedness solely of the Company, then such Refinancing Indebtedness shall be Indebtedness solely of the Company and (y) if such Indebtedness being Refinanced is subordinate or junior to the Notes, then such Refinancing Indebtedness shall be subordinate to the Notes at least to the same extent and in the same manner as the Indebtedness being Refinanced. "Related Business" means a business whose revenues are derived from the general business conducted by the Company on the Issue Date or any business or activity that is reasonably similar thereto or a reasonable extension, development or expansion thereof or ancillary thereto. "Restricted Payments" has the meaning set forth under "--Certain Covenants-- Limitation on Restricted Payments." "Sale and Leaseback Transaction" means any direct or indirect arrangement with any Person or to which any such Person is a party, providing for the leasing to the Company or a Subsidiary of any property, whether owned by the Company or any Subsidiary at the Issue Date or later acquired, which has been or is to be sold or transferred by the Company or such Subsidiary to such Person or to any other Person by whom funds have been or are to be advanced on the security of such Property. "Series A Preferred Stock" means the Series A Preferred Stock of the Company issued pursuant to the Certificate of Designation, Preferences and Rights of Series A Redeemable Preferred Stock, as in effect on the Issue Date. "Significant Subsidiary" shall have the meaning set forth in Rule 1.02(w) of Regulation S-X under the Securities Act. "Subsidiary," with respect to any Person, means (i) any corporation of which the outstanding Capital Stock having at least a majority of the votes entitled to be cast in the election of directors under ordinary circumstances shall at the time be owned, directly or indirectly, by such Person; or (ii) any other Person of which at least a majority of the voting interest under ordinary circumstances is at the time, directly or indirectly, owned by such Person. "Surviving Entity" has the meaning set forth under "--Certain Covenants-- Limitation on Restricted Payments." "Transaction Mergers" means, collectively, the merger of Leslie's Poolmart, a California corporation, into Leslie's Poolmart, Inc., a Delaware corporation, and the subsequent merger of Poolmart USA Inc., a Delaware corporation into Leslie's Poolmart, Inc., to occur on the Issue Date. "Wholly Owned Subsidiary" of any Person means any Subsidiary of such Person of which all the outstanding voting securities (other than in the case of a foreign Subsidiary, directors' qualifying shares or an immaterial amount of shares required to be owned by other Persons pursuant to applicable law) are owned by such Person or any Wholly Owned Subsidiary of such Person. 73 BOOK-ENTRY; DELIVERY AND FORM Except as described in the next paragraph, New Notes originally issued to (i) QIBs will be represented by a single permanent global certificate in definitive, fully registered form (the "QIB Global Note") and (ii) Accredited Investors will be represented by a single permanent global certificate in definitive, fully registered form (the "Accredited Investor Global Note" and, together with the QIB Global Note, the "Global Notes"). Each Global Note will be deposited on the date of consummation of the Exchange Offer with, or on behalf of, DTC and registered in the name of a nominee of DTC. The Global Notes will be subject to certain restrictions on transfer set forth herein and will bear the legend regarding such restrictions set forth under the heading "Transfer Restrictions" herein. Notes originally purchased by or transferred to foreign purchasers, Accredited Investors or QIBs who elect to take physical delivery of their certificates instead of holding their interest through a Global Note (collectively referred to herein as the "Non-Global Purchasers") will be issued in the form of Certificated Notes. Upon the transfer to a QIB, an Accredited Investor or a foreign purchaser of any Certificated Note initially issued to a Non-Global Purchaser, such Certificated Note will, unless the transferee requests Certificated Notes or the Global Notes have previously been exchanged in whole for Certificated Notes, be exchanged for an interest in the QIB Global Note or the Accredited Investor Global Note, as the case may be. Upon the transfer of an interest in a Global Note, such interest will, unless the transferee requests Certificated Notes, be represented by an interest in the applicable Global Note. For a description of the restrictions on the transfer of Certificated Notes and any interest in Global Notes, see "Transfer Restrictions." The Global Notes. The Company expects that pursuant to procedures established by DTC (a) upon the issuance of the Global Notes, DTC or its custodian will credit, on its internal system, the principal amount of Notes of the individual beneficial interests represented by the Global Notes to the respective accounts of persons who have accounts with DTC and (b) ownership of beneficial interests in the Global Notes will be shown on, and the transfer of such ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of Participants (as defined herein)) and the records of Participants (with respect to interests of persons other than Participants). Such accounts initially will be designated by or on behalf of the Initial Purchaser and ownership of beneficial interests in the Global Notes will be limited to persons who have accounts with DTC ("Participants") or persons who hold interests through Participants. Interests in the Global Notes may be held directly through DTC, by Participants, or indirectly through organizations which are Participants. So long as DTC, or its nominee, is the registered owner or holder of the Global Notes, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by such Global Notes for all purposes under the Indenture. No beneficial owner of an interest in any Global Notes will be able to transfer that interest except in accordance with DTC's procedures, in addition to those provided for under the Indenture. Payments of the principal of, premium and Additional Interest, if any, and interest (including Additional Interest) on the Global Notes will be made to DTC or its nominee, as the case may be, as the registered owner thereof. None of the Company, the Trustee or any paying agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Notes or, for maintaining, supervising or reviewing any records relating to such beneficial ownership interest. The Company expects that DTC or its nominee, upon receipt of any payment of principal, premium and Additional Interest, if any, or interest (including Additional Interest) in respect of the Global Notes, will credit Participants' accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of the Global Notes as shown on the records of DTC or its nominee. The Company also expects that payments by Participants to owners of beneficial interests in the Global Notes held through such Participants will be governed by standing instructions and customary practice, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such Participants. 74 Transfers between Participants will be effected in the ordinary way in accordance with DTC rules and will be settled in clearinghouse funds. If a holder requires physical delivery of a Certificated Note for any reason, including to sell Notes to persons in states which require physical delivery of the Notes, or to pledge such securities, such holder must transfer its interest in a Global Note in accordance with the normal procedures of DTC and with the procedures set forth in the Indenture. DTC has advised the Company that it will take any action permitted to be taken by a holder of Notes (including the presentation of Notes for exchange as described below) only at the direction of one or more Participants to whose account the DTC interests in the Global Notes are credited and only in respect of such portion of the aggregate principal amount of Notes as to which such Participant or Participants has or have given such direction. However, if there is an Event of Default under the Indenture, DTC will exchange the Global Notes in whole for Certificated Notes, which it will distribute to the Participants and which will be legended as set forth under the heading "Transfer Restrictions." DTC has advised the Company as follows: DTC is a limited purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the Uniform Commercial Code and a "Clearing Agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for Participants and facilitate the clearance and settlement of securities transactions between Participants through electronic book-entry changes in accounts of its Participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies and clearing corporations and certain other organizations. Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a Participant, either directly or indirectly ("Indirect Participants"). Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in the Global Notes among Participants, it is under no obligation to perform such procedures, and such procedures may be discontinued at any time. Neither the Company nor the Trustee will have any responsibility for the performance by DTC or the Participants or Indirect Participants of their respective obligations under the rules and procedures governing their operations. Certificated Notes. If DTC is at any time unwilling or unable to continue as a depositary for the Global Notes and a successor depositary is not appointed by the Company within 90 days, Certificated Notes will be issued in exchange for the Global Notes. FEDERAL INCOME TAX CONSIDERATIONS There will be no Federal income tax consequences to Holders exchanging Old Notes for New Notes pursuant to the Exchange Offer and a Holder will have the same adjusted basis and holding period in the New Notes as the Old Notes immediately before the exchange. There can be no assurance that the Internal Revenue Service (the "Service") will not take a contrary view, and no ruling from the Service has been or will be sought. Legislative, judicial or administrative changes or interpretations may be forthcoming that could alter or modify the statements and conclusions set forth herein. Any such changes or interpretations may or may not be retroactive and could affect the tax consequences to holders. PLAN OF DISTRIBUTION This Prospectus, as it may be amended or supplemented from time to time, may be used by a Broker-Dealer (a "Participating Broker-Dealer") in connection with the resale of New Notes received in exchange for Old Notes where such Old Notes were acquired as a result of market-making activities or other trading activities. Each such Participating Broker-Dealer that participates in the Exchange Offer that receives New Notes for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a Prospectus in connection 75 with any resale of such New Notes. The Company has agreed that for a period of 180 days after the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any Participating Broker-Dealer for use in connection with any such resale. In addition, until , 1997, all dealers effecting transactions in the New Notes may be required to deliver a Prospectus. The Company will not receive any proceeds from any sale of New Notes by Participating Broker-Dealers. New Notes received by Participating Broker- Dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Notes or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any Participating Broker-Dealer and/or the purchasers of any such New Notes. Any Participating Broker-Dealer that resells New Notes that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Notes may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit on any such resale of New Notes and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a Prospectus, a Participating Broker-Dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 180 days after the Expiration Date, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any Participating Broker-Dealer that requests such documents in the Letter of Transmittal. This Prospectus has been prepared for use in connection with the Exchange Offer and may be used by BT in connection with the offers and sales related to market-making transactions in the Notes. BT may act as principal or agent in such transactions. Such sales will be made at prices related to prevailing market prices at the time of sale. The Company will not receive any of the proceeds of such sales. BT has no obligation to make a market in the Notes and may discontinue its market-making activities at any time without notice, at its sole discretion. The Company has agreed to indemnify BT against certain liabilities, including liabilities under the Securities Act of 1933, and to contribute to payments which BT might be required to make in respect thereof. Affiliates of BT own, in the aggregate, 3.2% of GEI's limited partnership interests. LEGAL MATTERS The validity of the Notes offered hereby will be passed upon for the Company by Gibson, Dunn & Crutcher LLP, Los Angeles, California. EXPERTS The Consolidated Balance Sheets as of December 28, 1996 and December 30, 1995, and the related Consolidated Statements of Income, Shareholders' Equity and Cash Flows for each of the three fiscal years in the period ended December 28, 1996, included in this Prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. AVAILABLE INFORMATION The Company has filed with the Securities and Exchange Commission (the "Commission") in Washington, D.C. a Registration Statement on Form S-1. File No. , (the "Registration Statement") under the 76 Securities Act with respect to the New Notes offered hereby. As used herein, the term "Registration Statement" means the initial Registration Statement and any and all amendments thereto. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto. For further information with respect to the Company, the Notes and the Exchange Offer, reference is hereby made to such Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete and in each instance, reference is made to the copy of such contract or documents filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. The Registration Statement, including the exhibits and schedules thereto, may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington D.C. 20549 and at certain regional offices of the Commission located at 75 Park Place, 14th Floor, New York, New York 1007 and Northwest Atrium Center, 500 Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Room 1025, Washington D.C. 20549, at prescribed rates. The Commission maintains a World Wide Web site at http://www.sec.gov that contains reports, proxy and information statements and other information regarding registrants that filed electronically with the Commission. Upon completion of the Exchange Offer, the Company will be subject to the informational requirements of the Exchange Act and, in accordance therewith, will file reports with the Commission. The Company intends to furnish to Holders annual reports containing audited financial statements of the Company audited by its independent accountants and quarterly reports containing unaudited condensed financial statements for each of the first three quarters of the fiscal year. 77 INDEX TO FINANCIAL STATEMENTS
PAGE ---- Report of Independent Public Accountants................................. F-2 Management's Report...................................................... F-3 Consolidated Balance Sheets--December 28, 1996 and December 30, 1995..... F-4 Consolidated Statements of Income--Years Ended December 28, 1996, December 30, 1995 and December 31, 1994................................. F-5 Consolidated Statements of Shareholders' Equity--Years Ended December 28, 1996, December 30, 1995 and December 31, 1994........................... F-6 Consolidated Statements of Cash Flows--Years Ended December 28, 1996, December 30, 1995 and December 31, 1994................................. F-7 Notes to Consolidated Financial Statements--December 28, 1996............ F-8 Condensed Consolidated Balance Sheets--March 29, 1997 (unaudited)........ F-17 Condensed Consolidated Statements of Operations--Three Months Ended March 29, 1997 and March 30, 1996 (unaudited)................................. F-18 Condensed Consolidated Statements of Cash Flows--Three Months Ended March 29, 1997 and March 30, 1996 (unaudited)................................. F-19 Notes to Condensed Consolidated Financial Statements--March 29, 1997..... F-20
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Leslie's Poolmart: We have audited the accompanying consolidated balance sheets of Leslie's Poolmart (a California corporation) and subsidiaries as of December 28, 1996 and December 30, 1995 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years in the period ended December 28, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Leslie's Poolmart and subsidiaries as of December 28, 1996 and December 30, 1995, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 28, 1996, in conformity with generally accepted accounting principles. Arthur Andersen LLP Los Angeles, California March 6, 1997 F-2 MANAGEMENT'S REPORT Management is responsible for the preparation and integrity of the financial statements appearing in this Proxy Statement. The financial statements were prepared in accordance with generally accepted accounting principles and include certain amounts based on management's best estimates and judgments. The Company maintains a system of internal accounting controls designed to provide reasonable assurance that assets are safeguarded and that transactions are executed as authorized and are recorded and reported properly. Management believes that existing internal accounting control systems are achieving their objectives and that they provide reasonable assurance concerning the accuracy of the financial statements. Arthur Andersen LLP, independent public accountants, has audited the Company's financial statements and their report is presented herein. The Board of Directors has an Audit Committee composed entirely of outside Directors. Arthur Andersen LLP has direct access to the Audit Committee and periodically meets with the Committee to discuss accounting, auditing and financial reporting matters. Robert D. Olsen Chief Financial Officer F-3 LESLIE'S POOLMART CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
DEC. 28, 1996 DEC. 30, 1995 ------------- ------------- ASSETS ------ CURRENT ASSETS: Cash............................................. $ 87 $ 74 Accounts and other receivables, net.............. 2,550 2,235 Inventories, net................................. 33,948 34,303 Prepaid expenses and other....................... 1,693 1,876 Deferred tax assets.............................. 2,602 2,321 ------- ------- Total current assets........................... 40,880 40,809 ------- ------- PROPERTY, PLANT AND EQUIPMENT:..................... 46,058 39,550 Less--Accumulated depreciation and amortization.. 12,751 10,005 ------- ------- Net property, plant and equipment................ 33,307 29,545 ------- ------- OTHER ASSETS: Goodwill, net.................................... 8,298 8,550 Other............................................ 672 625 ------- ------- Total other assets............................. 8,970 9,175 ------- ------- $83,157 $79,529 ======= ======= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable................................. $ 6,055 $ 4,215 Accrued liabilities.............................. 4,480 4,546 Short-term borrowings............................ 15,440 16,956 Current portion of long-term debt................ 2,187 2,085 ------- ------- Total current liabilities...................... 28,162 27,802 ------- ------- DEFERRED TAX LIABILITIES........................... 3,099 1,963 LONG-TERM DEBT, net of current portion............. 5,581 7,843 CONVERTIBLE SUBORDINATED DEBENTURES................ 10,000 10,000 COMMITMENTS AND CONTINGENCIES...................... -- -- SHAREHOLDERS' EQUITY: Preferred stock, authorized 1,000,000 shares; none issued and outstanding..................... -- -- Common stock, no par value: Authorized--40,000,000 shares Issued and outstanding--6,547,928 and 6,507,074 at Dec. 28,1996 and Dec. 30, 1995, respectively................................... 32,625 32,100 Retained earnings (deficit)...................... 3,690 (179) ------- ------- Total shareholders' equity..................... 36,315 31,921 ------- ------- $83,157 $79,529 ======= =======
The accompanying notes are an integral part of these consolidated balance sheets. F-4 LESLIE'S POOLMART CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED ----------------------------------------- DEC. 28, 1996 DEC. 30, 1995 DEC. 31, 1994 ------------- ------------- ------------- Net sales........................... $191,640 $162,456 $141,553 Cost of sales....................... 118,880 102,057 86,084 -------- -------- -------- Gross profit........................ 72,760 60,399 55,469 Selling, general and administrative expenses........................... 62,358 53,442 45,764 Amortization of acquisition costs... 252 239 242 Loss (gain) on disposition of fixed assets............................. 750 27 (106) -------- -------- -------- Income from operations.............. 9,400 6,691 9,569 Interest expense, net............... 2,786 2,708 1,733 -------- -------- -------- Income before taxes................. 6,614 3,983 7,836 Income tax provision................ 2,745 576 3,252 -------- -------- -------- Net income.......................... $ 3,869 $ 3,407 $ 4,584 ======== ======== ======== Net income per share................ $ .57 $ .52 $ .70
The accompanying notes are an integral part of these consolidated statements. F-5 LESLIE'S POOLMART CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK ------------------ RETAINED TOTAL NUMBER OF (DEFICIT) SHAREHOLDERS' SHARES AMOUNT EARNINGS EQUITY --------- -------- --------- ------------- Balance, at December 31, 1993....... 5,603,131 $ 21,467 $ (426) $ 21,041 Stock dividend.................... 283,853 3,447 (3,447) -- Issuance of common stock.......... 1,650 17 -- 17 Stock options exercised........... 107,101 292 -- 292 Tax benefit from stock options exercised........................ -- 405 -- 405 Net income........................ -- -- 4,584 4,584 --------- -------- ------- -------- Balance, at December 31, 1994....... 5,995,735 25,628 711 26,339 Stock dividend.................... 300,793 4,297 (4,297) -- Issuance of common stock.......... 2,050 27 -- 27 Stock options exercised........... 82,735 514 -- 514 Exercise of convertible securities....................... 125,761 1,383 -- 1,383 Tax benefit from stock options exercised........................ -- 251 -- 251 Net income........................ -- -- 3,407 3,407 --------- -------- ------- -------- Balance, at December 30, 1995....... 6,507,074 32,100 (179) 31,921 Issuance of common stock.......... 50 1 -- 1 Stock options exercised........... 40,804 304 -- 304 Tax benefit from stock options exercised........................ -- 220 -- 220 Net income........................ -- -- 3,869 3,869 --------- -------- ------- -------- Balance, at December 28, 1996....... 6,547,928 $ 32,625 $ 3,690 $ 36,315 ========= ======== ======= ========
The accompanying notes are an integral part of these consolidated statements. F-6 LESLIE'S POOLMART CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
YEARS ENDED ----------------------------------------- DEC. 28, 1996 DEC. 30, 1995 DEC. 31, 1994 ------------- ------------- ------------- OPERATING ACTIVITIES: Net income......................... $ 3,869 $ 3,407 $ 4,584 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization...... 4,326 3,374 2,393 Loss (gain) on disposition of fixed assets............................ 750 27 (106) (Increase) decrease in: Accounts and other receivables..... (315) (902) (339) Inventories, net................... 355 (10,114) (6,309) Prepaid expenses and other......... 183 (231) (989) Other assets....................... (47) (290) 262 Increase (decrease) in: Accounts payable and accrued liabilities....................... 1,774 2,121 1,725 Income taxes....................... 1,075 (1,536) (680) ------- -------- ------- Net cash provided by (used in) operating activities.............. 11,970 (4,144) 541 ------- -------- ------- INVESTING ACTIVITIES: Purchase of property, plant and equipment......................... (8,807) (9,550) (7,394) Proceeds from dispositions of property, plant and equipment..... 221 321 583 ------- -------- ------- Net cash used in investing activities........................ (8,586) (9,229) (6,811) ------- -------- ------- FINANCING ACTIVITIES: Net line-of-credit borrowings...... (1,516) 7,435 3,151 Additions to long-term debt........ -- 10,000 4,890 Payments of long-term debt......... (2,160) (4,592) (2,055) Issuance of common stock and stock options exercised................. 305 541 292 ------- -------- ------- Net cash (used in) provided by financing activities.............. (3,371) 13,384 6,278 ------- -------- ------- NET INCREASE IN CASH................. 13 11 8 CASH AT BEGINNING OF PERIOD.......... 74 63 55 ------- -------- ------- CASH AT END OF PERIOD................ $ 87 $ 74 $ 63 ======= ======== =======
The accompanying notes are an integral part of these consolidated statements. F-7 LESLIE'S POOLMART NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BUSINESS AND OPERATIONS Leslie's Poolmart (the Company) is a specialty retailer of swimming pool supplies and related products. As of December 28, 1996, the Company marketed its products under the trade name Leslie's Swimming Pool Supplies through 259 retail stores in 27 states and through mail order catalogs sent to selected swimming pool owners nationwide. The Company also repackages certain bulk chemical products for retail sale. The Company's business is highly seasonal as the majority of its sales (79% in 1996 and 1995) and all of its operating profits are generated in the second and third quarters. The Company purchased the capital stock of Sandy's Pool Supply, Inc. (Sandy's) effective August 31, 1992. The adjusted purchase price for Sandy's was approximately $1,189,000. The Company paid cash of $730,000 (net of Sandy's cash on hand of approximately $120,000) at August 31, 1992, and in 1993 the Company received a refund of $75,000 upon the settlement of the purchase price. The remainder of the purchase price will be paid in installments through 2002. 2. STOCK DIVIDEND In August 1995 and April 1994, 5% stock dividends were declared for shareholders of record as of August 31, 1995 and April 29, 1994, respectively. The fair market value of the stock dividends was transferred from retained earnings to common stock in the accompanying 1995 and 1994 consolidated financial statements. The earnings per share, weighted average number of shares outstanding, and the outstanding options reflect the impact of these stock dividends. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Principles of Consolidation The consolidated financial statements of the Company include Leslie's Poolmart and Sandy's Pool Supply, Inc., its wholly-owned subsidiary. b. Fiscal Periods In January 1995, to be consistent with the reporting practices of many major retailers, the Company changed its fiscal year from a calendar year to a 52- or 53-week year which will end on the Saturday closest to December 31. Each fiscal quarter will have 13 weeks and will close on the Saturday closest to March 31, June 30 and September 30. c. Cash Line-of-credit borrowings include outstanding checks of $25,000 and excess cash balances of $205,000 at December 28, 1996, and December 30, 1995, respectively. d. Accounts and Other Receivables, Net Accounts and other receivables include allowances for doubtful accounts of $49,000 and $70,000 at December 28, 1996 and December 30, 1995, respectively. e. Inventories Inventories are stated at the lower of cost or market. Cost is determined on the last-in, first-out (LIFO) basis. The effect of utilizing this method resulted in inventory balances which were $544,000 lower at December 28, 1996, $60,000 lower at December 30, 1995, and $320,000 higher at December 31, 1994, than would have been reported under the first-in, first-out (FIFO) method. F-8 LESLIE'S POOLMART NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) f. Property, Plant and Equipment Property, plant and equipment are stated at cost. Costs of normal maintenance and repairs are charged to expense as incurred. Major replacements or improvements of property, plant and equipment are capitalized. When items are sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and any resulting gain or loss is included in the statements of income. Depreciation and amortization are computed using the straight-line method (considering appropriate salvage values) based on the following estimated average useful lives: Buildings and improvements....................................... 15-30 years Vehicles, machinery and equipment................................ 3-10 years Office furniture and equipment................................... 3-10 years Leasehold improvements........................................... 4-10 years
g. Goodwill The excess of the acquisition price over the fair value of the net assets at the date of acquisition is included in the accompanying consolidated balance sheets as "Goodwill." Goodwill is being amortized (straight-line) over forty years. The Company continually evaluates whether later events and circumstances have occurred that indicate the remaining estimated useful life of goodwill may warrant revision or that the remaining balance of goodwill may not be recoverable. When factors indicate that goodwill should be evaluated for possible impairment, the Company uses an estimate of the related business segment's undiscounted net income over the remaining life of the goodwill in measuring whether the goodwill is recoverable. The balance recorded at December 28, 1996 and December 30, 1995 was net of accumulated amortization of $1,397,000 and $1,145,000, respectively. h. Income Taxes The Company provides for deferred income taxes relating to timing differences in the recognition of income and expense items (primarily depreciation and amortization) for financial and tax reporting purposes. Also, differences between the tax basis and the financial reporting basis of various assets were created when the Company was acquired in 1988 and when the Company purchased Sandy's in 1992; deferred tax assets and liabilities were provided related to these differences. Deferred taxes at December 28, 1996 and December 30, 1995 include a provision for the differences between tax and financial asset values except that deferred taxes were not provided with respect to amounts allocated to goodwill. As the difference between tax and financial reporting basis changes, appropriate charges/credits are made to the deferred tax account. i. Mail Order Catalog Sales Revenue on mail order catalog sales is recognized at the time goods are shipped. j. Cost of Sales Included in cost of sales are the costs of services and purchased goods, direct manufacturing and chemical repackaging costs and non-administrative occupancy costs. k. Advertising Advertising costs are recognized as the advertising expense is incurred. The net advertising expense incurred was $5,812,000 for the year ended December 28, 1996; $4,344,000 for the year ended December 30, 1995; and $4,223,000 for the year ended December 31, 1994. F-9 LESLIE'S POOLMART NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) l. Use of Estimates in the Preparation of Consolidated Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. m. Recent Accounting Pronouncements The Company adopted Statement of Financial Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" (SFAS 121) in the first quarter of 1996. The adoption of SFAS 121 did not impact the Company's financial position or its results of operations. In addition, in 1996 the Company adopted Statement of Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). The disclosures required by SFAS 123 are presented in Note 12. n. Reclassifications Certain prior period amounts in the consolidated financial statements have been reclassified to conform to the 1996 presentations. 4. INVENTORIES Inventories consist of the following:
DECEMBER 28, DECEMBER 30, 1996 1995 ------------ ------------ Raw materials and supplies......................... $ 1,659,000 $ 1,433,000 Finished goods..................................... 32,289,000 32,870,000 ----------- ----------- $33,948,000 $34,303,000 =========== ===========
5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following:
DECEMBER 28, DECEMBER 30, 1996 1995 ------------ ------------ Land.............................................. $ 6,578,000 $ 6,734,000 Buildings and improvements........................ 6,868,000 6,716,000 Equipment......................................... 1,785,000 1,484,000 Leasehold improvements............................ 14,796,000 12,836,000 Office furniture, equipment and other............. 15,118,000 11,278,000 Construction-in-process........................... 913,000 502,000 ----------- ----------- 46,058,000 39,550,000 Less--Accumulated depreciation and amortization... 12,751,000 10,005,000 ----------- ----------- $33,307,000 $29,545,000 =========== ===========
6. BANK CREDIT AGREEMENT Effective June 30, 1995, the Company entered into a Second Amended and Restated Credit Agreement with Wells Fargo Bank which has three facilities: a Line-of-Credit, a Revolving Term Loan, and a Project financing F-10 LESLIE'S POOLMART NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) facility, which may be drawn to finance specific real estate development projects undertaken in connection with the addition of new retail stores. The Credit Agreement contains certain financial covenants and requires that certain other debts of the Company be subordinated in right of repayment to the lender. As of December 28, 1996 the Company was in compliance with these covenants. As of December 28, 1996, the Line-of-Credit's outstanding principal balance was $15,440,000. The Credit Agreement was amended in November 1995, increasing the amount of borrowings allowed under the line-of-credit up to $19,000,000. In early 1996, the line of credit was amended and temporarily expanded (to $22,000,000 through May 15, 1996 and $19,000,000 thereafter) and the term was extended through October 1, 1997. Subsequent to year-end, the Company amended its Credit Agreement to consolidate the existing line of credit facility, the project financing facility, and the revolving term loan into one expanded $38,000,000 line of credit facility. The term of the expanded line of credit facility was extended through February 16, 2000. Interest is payable monthly on all borrowings. The amended Line-of-Credit accrues interest at the lender's reference rate (8.25% at December 28, 1996) or at LIBOR plus 1.75%, at the borrower's election. 7. LONG-TERM DEBT Long-term debt consists of the following:
DECEMBER 28, DECEMBER 30, 1996 1995 ------------ ------------ Revolving Loan................................... $6,000,000 $8,000,000 Notes payable collateralized by security interests in certain assets, with maturities from March, 1999 to September, 2002. Interest accrues at rates of 6.5% to 8.25%............... 719,000 860,000 Notes payable collateralized by security interest in various properties, due in monthly installments with maturities from December 2003 to December 2009. Interest accrues at the rate of 7.625% to 9.125%............................. 1,049,000 1,068,000 ---------- ---------- 7,768,000 9,928,000 Less--Current portion............................ 2,187,000 2,085,000 ---------- ---------- $5,581,000 $7,843,000 ========== ==========
Principal maturities of long-term debt as of December 28, 1996 are as follows: 1997.............................................................. $2,187,000 1998.............................................................. 4,193,000 1999.............................................................. 124,000 2000.............................................................. 106,000 2001.............................................................. 113,000 Thereafter........................................................ 1,045,000 ---------- $7,768,000 ==========
Convertible Subordinated Debentures On May 25, 1995, the Company completed a private placement of its $10 million 8% convertible subordinated debentures. Interest is payable semi- annually. The debentures have a six-year term, expiring May 15, 2001 and are convertible into the Company's common stock at $20.95 per share. The debentures are unsecured and subordinated to the present and future senior debt of the Company. F-11 LESLIE'S POOLMART NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 7 1/2% Convertible Notes In conjunction with the Company's initial public offering in April, 1991, the Company and one of its former shareholders agreed to terminate the shareholder's covenant not to compete in exchange for $2,767,000 of the Company's 7 1/2% convertible notes. In December, 1993, approximately $1,384,000 of these 7 1/2% convertible notes was repaid. The remaining portion of the 7 1/2% convertible notes was converted to shares of the Company's common stock at a conversion price of $11.00 per share on December 29, 1995. 8. LEASES The Company leases certain store, office, distribution and manufacturing facilities under operating leases which expire at various dates through 2007. Lease agreements generally provide for increases related to cost of living indices and require the Company to pay for property taxes, repairs and insurance. Future minimum lease payments at December 28, 1996 are as follows: 1997............................................................. $13,798,000 1998............................................................. 11,286,000 1999............................................................. 10,030,000 2000............................................................. 7,597,000 2001............................................................. 5,320,000 Thereafter....................................................... 10,205,000 ----------- $58,236,000 ===========
As of March 3, 1997, the Company had entered into operating leases for additional new store sites which have future minimum lease payment requirements of approximately $677,000 in 1997, $1,016,000 in 1998, 1999, and 2000, $976,000 in 2001, and $1,434,000 thereafter. Certain leases are renewable at the option of the Company for periods of one to ten years. Rent expense charged against income totaled $16,024,000, $13,397,000, and $10,119,000, in 1996, 1995 and 1994, respectively. 9. INCOME TAXES The provision for income taxes is comprised of the following:
1996 1995 1994 ---------- ----------- ---------- Federal: Current............................... $2,386,000 $ 2,263,000 $3,074,000 Deferred.............................. (222,000) (1,750,000) (567,000) ---------- ----------- ---------- 2,164,000 513,000 2,507,000 ---------- ----------- ---------- State: Current............................... 641,000 610,000 858,000 Deferred.............................. (60,000) (547,000) (113,000) ---------- ----------- ---------- 581,000 63,000 745,000 ---------- ----------- ---------- $2,745,000 $ 576,000 $3,252,000 ========== =========== ==========
F-12 LESLIE'S POOLMART NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A reconciliation of the provision for income taxes to the amount computed at the federal statutory rate is as follows:
1996 1995 1994 ---------- ----------- ---------- Federal income tax at statutory rate..... $2,248,000 $ 1,354,000 $2,664,000 Reversal of tax reserves no longer needed.................................. -- (1,100,000) -- Effect of differences created by acquisition accounting including amortization of differences between fair values assigned in purchase accounting and historical tax values............... 146,000 96,000 96,000 State taxes, net of federal benefit...... 351,000 226,000 492,000 ---------- ----------- ---------- $2,745,000 $ 576,000 $3,252,000 ========== =========== ==========
The tax effect of temporary differences which give rise to significant portions of the deferred tax liability are summarized below.
1996 1995 ------------------------- ------------------------- DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX ASSETS LIABILITIES ASSETS LIABILITIES ------------ ------------ ------------ ------------ Property, plant and equipment differences.. $ -- $ 1,857,000 $ -- $ 941,000 State income taxes...... 197,000 -- 207,000 -- Inventory overhead differences............ 1,942,000 -- 1,834,000 -- Difference in timing of certain deductions..... 463,000 1,242,000 280,000 1,022,000 ---------- ----------- ---------- ---------- $2,602,000 $ 3,099,000 $2,321,000 $1,963,000 ========== =========== ========== ==========
The Company has net operating losses (NOL) available for offset against future tax liabilities at December 28, 1996 of $7,452,000, extending through 2007, limited to approximately $83,000 per year. As this NOL is utilized, such amounts will reduce goodwill. 10. CONTINGENCIES The Company is a defendant in lawsuits or potential claims encountered in the normal course of business, such matters are being vigorously defended. In the opinion of management, the resolutions of these matters will not have a material effect on the Company's financial position or results of operations. The Company's general liability insurance program and employee group medical plan have self-insurance retention features of $100,000 and $75,000 per incident, respectively. The Company's liability is limited to $600,000 per year for the general liability program. 11. 401(K) PLAN The Company provides for the benefit of its employees a voluntary retirement plan under Section 401(k) of the Internal Revenue Code. During 1996, the plan covered all eligible employees and provided for a matching contribution by the Company of 50% of each participant's contribution up to 4% of the individual's compensation as defined. The expenses related to this program were $263,000, $212,000, and $199,000 for 1996, 1995 and 1994, respectively. F-13 LESLIE'S POOLMART NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 12. STOCK BASED COMPENSATION PLANS The Company has granted stock options to various employees and directors. The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized. Had compensation cost for these plans been determined consistent with SFAS 123, the Company's net income and earnings per share would have been reduced to the following proforma amounts:
1996 1995 ---------- ---------- Net income As Reported.......................................... $3,869,000 $3,407,000 Pro forma............................................ $3,490,000 $3,362,000 Primary EPS As Reported.......................................... $ 0.57 $ 0.52 Pro forma............................................ $ 0.50 $ 0.51
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1996 and 1995: risk free interest rates of 5.8% and 6.5%, respectively; expected volatility of 49% and 50%, respectively; weighted average fair value of options of $7.55 and $7.88 in 1996 and 1995, respectively; expected lives of 7 years for both years and no expected dividend yield for either year. In June 1990, the Company adopted a stock option plan which provided for the issuance of up to 165,375 common shares at an option price equal to at least 100 percent (incentive options) or at least 85 percent (nonqualified options) of the fair value of the common stock at the date of grant. In May 1993, May 1994 and May 1996, the shareholders approved the reservation of an additional 165,375 shares, 330,750 shares and 600,000 shares, respectively, for options issuable under the 1990 plan. Options granted vest ratably over a three-year period, and all expire after 10 years. In March 1992, the Board of Directors adopted the 1992 Directors' Stock Option Plan (which was approved by the shareholders in May 1992) which provides for the issuance to non-employee directors of up to 110,250 common shares at an option price equal to 100 percent of fair market value of the common stock at the date of grant. Options are granted pursuant to a formula under which such directors and the Company's Chairman receive an option to purchase 5,513 shares of stock upon becoming an eligible director and 3,308 shares on the first business day of each succeeding year on which such person is an eligible director.
1996 1995 1994 ----------------- ----------------- ------------------ WTD AVG WTD AVG WTD AVG SHARES EX PRICE SHARES EX PRICE SHARES EX PRICE ------- -------- ------- -------- -------- -------- Outstanding at beg. of year................... 833,166 $ 7.58 859,947 $ 7.06 782,696 $ 5.08 Granted................. 208,168 12.92 71,332 13.02 201,497 12.16 Exercised............... (40,804) (7.44) (83,640) (6.15) (116,342) (2.51) Cancelled............... (28,463) (11.68) (14,473) (11.61) (7,904) (7.66) ------- ------ ------- ------ -------- ------ Outstanding at end of year................... 972,067 8.62 833,166 7.58 859,947 7.06 ------- ------ ------- ------ -------- ------ Exercisable at end of year................... 709,074 $ 9.94 565,431 $ 9.00 444,982 $ 8.74
F-14 LESLIE'S POOLMART NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table summarizes information about all stock options outstanding as of December 28, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------- -------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED REMAINING AVERAGE AVERAGE RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE EXERCISE PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICE -------------- ----------- ----------- -------- ----------- -------- Less than $1.00....... 135,536 2.6 years $ 0.64 135,536 $ 0.64 $5.00 to $7.99........ 361,805 6.2 years 6.80 355,924 6.82 $8.00 to $10.99....... 89,484 7.4 years 9.20 57,229 8.49 $11.00 to $14.00...... 385,242 8.6 years 13.00 160,385 12.86 ------- --------- ------ ------- ------ 972,067 6.8 years $ 8.62 709,074 $ 7.14 ------- --------- ------ ------- ------
During 1996, 40,804 options were exercised at exercise prices ranging between $5.44 and $12.62. In December 1990, the Company adopted a stock bonus plan which provides for the issuance of 20,000 shares of common stock at the fair market value at the date of grant to employees in consideration for services rendered. At December 28, 1996, 12,348 shares of common stock had been issued pursuant to this plan. 13. CALCULATION OF PER SHARE AMOUNTS Net income per share amounts are computed based on the weighted average number of shares outstanding plus the shares that would be outstanding assuming exercise of dilutive stock options, which are considered common stock equivalents. The weighted average number of shares outstanding was 6,789,664; 6,614,497 and 6,515,558 for 1996, 1995 and 1994, respectively. 14. PREFERRED STOCK The rights, preferences and privileges of the preferred stock authorized in the Company's Articles of Incorporation are to be determined by the Board of Directors and do not require shareholder approval. No preferred stock is currently outstanding. 15. SUPPLEMENTAL CASH FLOW DISCLOSURES The Company paid interest charges of $2,835,000, $2,419,000 and $1,538,000, in 1996, 1995, and 1994, respectively. The Company paid income taxes of $2,425,000, $2,086,000, and $4,041,000, in 1996, 1995 and 1994, respectively. 16. PROPOSED REINCORPORATION AND MERGER On February 26, 1997, the Company's Board of Directors approved an Agreement of Merger providing for the reincorporation of the Company in Delaware by merger into a wholly-owned Delaware subsidiary, and an Agreement and Plan of Merger providing for the merger of Poolmart USA Inc., a newly-formed corporation, with and into the Company. Following consummation of the reincorporation and upon effectiveness of the latter merger, (i) each outstanding share of common stock of the Company would be converted into $14.50 cash (other than 359,505 shares owned primarily by members of management, including Michael Fourticq, the Chairman of the Company, and Brian McDermott, the President and CEO of the Company and other than shares as to which the holders perfect dissenters' rights) and (ii) outstanding options covering approximately 846,000 shares of F-15 LESLIE'S POOLMART NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) common stock, including those not yet vested, would be cancelled for payment of the difference between the exercise price and $14.50 per share. The total value of the shares and options at the transaction price of $14.50 approximates $101 million. The proposed mergers are subject to various conditions, including financing and approval by the Company's shareholders. The shareholders are expected to vote on the mergers during the second quarter of 1997. F-16 LESLIE'S POOLMART CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS)
MARCH 29, DEC. 28, 1997 1996 --------- -------- ASSETS ------ CURRENT ASSETS: Cash...................................................... $ 133 $ 87 Accounts and other receivables, net....................... 2,900 2,550 Inventories, net.......................................... 56,552 33,948 Prepaid expenses and other................................ 2,650 1,693 Deferred tax assets....................................... 2,602 2,602 Deferred income tax charge................................ 4,326 -- -------- ------- Total current assets.................................... 69,163 40,880 -------- ------- PROPERTY, PLANT AND EQUIPMENT, NET:......................... 35,557 33,307 GOODWILL, NET............................................... 8,235 8,298 OTHER ASSETS................................................ 701 672 -------- ------- $113,656 $83,157 ======== ======= LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Accounts payable.......................................... $ 36,554 $ 6,055 Accrued liabilities....................................... 5,651 4,480 Short-term borrowings..................................... -- 15,440 Current portion of long-term debt......................... 131 2,187 -------- ------- Total current liabilities............................... 42,336 28,162 -------- ------- DEFERRED TAX LIABILITIES.................................... 3,099 3,099 LONG-TERM DEBT, net of current portion...................... 27,986 5,581 CONVERTIBLE SUBORDINATED DEBENTURES......................... 10,000 10,000 SHAREHOLDERS' EQUITY: Common stock.............................................. 32,646 32,625 Retained (deficit) earnings .............................. (2,411) 3,690 -------- ------- Total shareholders' equity.............................. 30,235 36,315 -------- ------- $113,656 $83,157 ======== =======
The accompanying notes are an integral part of these condensed consolidated balance sheets. F-17 LESLIE'S POOLMART CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED ----------------------------- MARCH 29, 1997 MARCH 30, 1996 -------------- -------------- Sales....................................... $ 23,816 $18,064 Cost of sales............................... 18,254 13,806 -------- ------- Gross profit................................ 5,562 4,258 Selling, general and administrative expenses................................... 15,126 12,804 Amortization of acquisition costs........... 64 64 -------- ------- Loss from operations........................ (9,628) (8,610) Interest expense............................ 799 834 -------- ------- Income before tax benefit................... (10,427) (9,444) Income tax benefit.......................... 4,326 3,919 -------- ------- Net loss.................................... $ (6,101) $(5,525) ======== ======= Net loss per share of common stock.......... $ (.90) $ (.82) Weighted average number of shares of common stock outstanding and common stock equivalents................................ 6,789 6,769
The accompanying notes are an integral part of these condensed consolidated financial statements. F-18 LESLIE'S POOLMART CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED ----------------------------- MARCH 29, 1997 MARCH 28, 1996 -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss................................... $(6,101) $(5,525) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.............. 1,314 1,057 Loss on disposition of fixed assets........ 71 -- Income tax benefit......................... (4,326) (3,919) Net change in receivables, inventory and payables.................................. 8,716 4,627 Other, net................................. (987) (324) ------- ------- Net cash used in operating activities...... (1,313) (4,084) ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment.. (4,739) (2,393) Proceeds from dispositions of property, plant and equipment....................... 1,168 -- ------- ------- Net cash used in investing activities...... (3,571) (2,393) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net line-of-credit borrowings.............. 4,929 6,412 Payments of long-term debt................. (20) -- Proceeds from issuance of common stock and stock options exercised................... 21 73 ------- ------- Net cash provided by financing activities.. 4,930 6,485 ------- ------- NET INCREASE IN CASH......................... 46 8 CASH AT BEGINNING OF PERIOD.................. 87 74 ------- ------- CASH AT END OF PERIOD........................ $ 133 $ 82 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. F-19 LESLIE'S POOLMART NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. PRESENTATION OF FINANCIAL INFORMATION The financial statements included herein have been prepared by Leslie's Poolmart (the "Company"), without audit, and include all adjustments of a normal recurring nature which are, in the opinion of management, necessary for a fair presentation of the results of operations for the three month periods ended March 29, 1997 and March 30, 1996 pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes the disclosures in these financial statements are adequate to make the information presented not misleading. The following material under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" is written with the presumption that the users of the interim financial statements have read or have access to the Company's 1996 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 1997. This document contains the latest audited financial statements and notes thereto, together with Management's Discussion and Analysis of Financial Condition and Results of Operations as of December 28, 1996 and for the year then ended. The results of operations for the three months ended March 29, 1997 and March 30, 1996 are not indicative of the results for a full year. 2. ORGANIZATION AND OPERATIONS Leslie's Poolmart is a specialty retailer of swimming pool supplies and related products. The Company currently markets its products under the trade name Leslie's Swimming Pool Supplies through 278 retail stores in 27 states and through mail order catalogs sent to selected swimming pool owners. The Company also repackages certain bulk chemical products for retail sale. The Company's business is highly seasonal as the majority of its sales (79% in 1996 and 1995) and all of its operating profits are generated in the second and third quarters. 3. INVENTORIES Inventories consist of the following:
MARCH 29, MARCH 30, 1997 1996 ----------- ----------- Raw materials and supplies........................ $ 2,007,000 $ 3,120,000 Finished goods.................................... 54,545,000 51,610,000 ----------- ----------- Total Inventories................................. $56,552,000 $54,730,000 =========== ===========
4. RECENT ACCOUNTING PRONOUNCEMENTS In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" (SFAS 128) and SFAS No. 129, "Disclosure of Information about Capital Structure" (SFAS 129). SFAS 128 revises and simplifies the computation for earnings per share and requires certain additional disclosures. SFAS 129 requires additional disclosures regarding the Company's capital structure. Both standards will be adopted in the fourth quarter of fiscal 1997. Management does not expect the adoption of these standards to have a material effect on the Company's financial position or results of operations. F-20 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPEOPLE OR OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE SECURITIES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 1 Risk Factors ............................................................ 8 The Transactions ........................................................ 12 The Exchange Offer ...................................................... 12 Capitalization .......................................................... 20 Unaudited Pro Forma Consolidated Financial Statements ................... 21 Selected Historical Consolidated Financial Data ......................... 27 Management's Discussion and Analysis of Financial Condition and Results of Operations .......................................................... 29 Business ................................................................ 35 Management .............................................................. 43 Security Ownership of Certain Beneficial Owners and Management .......... 47 Certain Relationships and Related Transactions........................... 49 Description of Financing Transactions ................................... 51 Description of Notes .................................................... 53 Book Entry; Delivery and Form ........................................... 74 Federal Income Tax Considerations........................................ 75 Plan of Distribution..................................................... 75 Legal Matters ........................................................... 76 Experts ................................................................. 76 Available Information.................................................... 76 Index to Financial Statements ........................................... F-1
---------------- UNTIL , 1996 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ---------------------------- PROSPECTUS ---------------------------- $90,000,000 LOGO LESLIE'S POOLMART, INC. OFFER TO EXCHANGE 10 3/8% SENIOR NOTES DUE 2004 FOR ANY AND ALL OUTSTANDING 10 3/8% SENIOR NOTES DUE 2004 , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The estimated expenses in connection with the Exchange Offer are as follows:
EXPENSE AMOUNT - ------- ------- The Commission's Registration Fee...................................... $27,273 Printing Expenses...................................................... Legal Fees and Expenses................................................ 25,000 Accounting Fees and Expenses........................................... 20,000 Exchange Agent Fees.................................................... Miscellaneous Expenses................................................. Total.................................................................. $ -------
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. The Certificate of Incorporation of the Company eliminates the liability of the Company's directors for monetary damages arising from a breach of their fiduciary duties to the Company and its stockholders, to the extent permitted by the Delaware General Corporation Law. Such limitation of liability does not affect the availability of equitable remedies such as injunctive relief or rescission. The Company's Bylaws provide that the Company shall indemnify its directors and officers to the fullest extent permitted by applicable law. The Company has entered into indemnification agreements with its directors and executive officers containing provisions which are in some respects broader than the specific indemnification provisions contained in the Delaware General Corporation Law. Such agreements require the Company, among other things, (i) to indemnify its officers and directors against certain liabilities that may arise by reason of their status or service as directors or officers provided such persons acted in good faith and in a manner reasonably believed to be in the best interests of the Company and, with respect to any criminal action, had no cause to believe their conduct was unlawful; (ii) to advance the expenses actually and reasonable incurred by its officers and directors as a result of any proceeding against them as to which they could be indemnified; and (iii) to obtain directors' and officers' insurance if available on reasonable terms. There is no action or proceeding pending or, to the knowledge of the Company, threatened which may result in a claim for indemnification by any director, officer, employee or agent of the Company. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. On June 11, 1997 the Company reincorporated in the State of Delaware through a statutory merger with its parent company, Leslie's Poolmart. Each outstanding share of Common Stock of Leslie's Poolmart was converted automatically into shares of the Company's Common Stock. This transaction was exempt from the registration provisions of Section 5 of the Securities Act pursuant to Rule 145(a)(c). Immediately thereafter, Poolmart USA Inc. merged into the Company. The two mergers are collectively referred to as the "Mergers." In connection with the Mergers the following transactions were effectuated: (i) the Company issued 83,599 non-qualified ten-year stock options to management, (ii) Robert D. Olsen and Cynthia G. Watts purchased 16,966 and 2,000 shares, respectively of the Company's Common Stock, (iii) Occidental Petroleum Corporation purchased 252,996 warrants to purchase 252,996 shares of Common Stock, (iv) Occidental Petroleum Corporation purchased 28,000 shares of Series A Preferred Stock for $18.0 million cash and the exchange of $10.0 million principal amount of Convertible Subordinated Debentures of Leslie's Poolmart held by Occidental Petroleum Corporation. The Company believes that the securities issued in each of these transactions were issued in a private offering in accordance with Section 4(2) of the Securities Act or, in the case of the non-qualified stock options, are exempt from registration under Section 3(a)(9) of the Securities Act. II-1 On June 6, 1997, the Company sold an aggregate of $90 million principal amount of Senior Notes to BT Securities Corporation (the "Initial Purchaser"). The Company believes this offering was exempt from registration under Section 4(2) of the Securities Act. The Initial Purchaser resold an aggregate of $90 million principal amount of Old Notes to Qualified Institutional Investors (within the meaning of Rule 144A under the Securities Act ("Rule 144A")) in transactions meeting the requirements of Rule 144A. ITEM 16. EXHIBITS. (a) Exhibits.
EXHIBIT DESCRIPTION ------- ----------- 3.1 Amended and Restated Certificate of Incorporation of the Company 3.2 Certificate of Merger of Leslie's Poolmart into the Company 3.3 Certificate of Merger of Poolmart USA Inc. into the Company 3.4 Certificate of Designation, Preferences and Rights of Exchangeable Cumulative Redeemable Preferred Stock, Series A 3.5 Bylaws of the Company 4.1 Indenture dated as of June 11, 1997 between the Company and U.S. Trust Company of California, N.A.* 5.1 Opinion of Gibson, Dunn & Crutcher LLP as to the enforceability of the notes offered hereby* 8.1 Opinion of Gibson, Dunn & Crutcher LLP as to tax consequences* 10.1 Credit Agreement dated June 11, 1997 among the Company, Wells Fargo Bank, N.A. and the financial institutions signatory thereto, including Security Agreement, Stock Pledge Agreement and Guarantees of subsidiaries* 10.2 Preferred Stock and Warrant Purchase Agreement dated as of June 11, 1997 between the Company and Occidental Petroleum Corporation 10.3 Warrant dated June 11, 1997 for the purchase of shares of Common Stock of the Company issued to Occidental Petroleum Corporation 10.4 Stockholders Agreement and Subscription Agreement dated as of June 11, 1997 among the Company and Green Equity Investors II, LLP, Richard H. Hillman, Michael J. Forticq, Greg Fourticq, Brian P. McDermott, the Trustees of the McDermott Family Trust, Occidental Petroleum Corporation and the Stockholders identified on the signature pages thereto. 10.5 NQ Option Plan* 10.6 ISO Option Plan* 10.7 Lease for Dallas Distribution Center* 10.8 Lease for Ontario Distribution Center* 10.9 Lease for Bridgeport Distribution Center* 10.10 Form of Director's and Officer's Indemnification Agreement dated as of June 11, 1997 between the Company and certain members of management 10.11 Management Agreement dated as of June 11, 1997 between the Company and Leonard Green & Partners, L.P. 10.12 Noncompetition Agreement, dated August 31, 1992, among Sandy's Pool Supply, Inc., Leslie's Poolmart, and Philip Leslie* 10.13 Noncompetition Agreement, dated August 31, 1992, among Sandy's Pool Supply, Inc., Leslie's Poolmart, and Sander Bass*
II-2
EXHIBIT DESCRIPTION ------- ----------- 10.14 Purchase Agreement dated June 6, 1997 between the Company and BT Securities Corporation* 10.15 Registration Rights Agreement dated as of June 11, 1997 by and between the Company and BT Securities Corporation* 11.1 Computation of ratio of earnings to fixed charges 23.1 Consent of Independent Public Accountants 23.2 Consent of Gibson Dunn & Crutcher LLP (included in Exhibit 5.1)* 24.1 Power of Attorney (included on page II-4) 25.1 Form T-1: Statement of Eligibility of Trustee* 27.1 Financial Data Schedule 99.1 Letter[s] of Transmittal*
- -------- * To be filed by Amendment. ITEM 17. UNDERTAKINGS. [This Item intentionally left blank]. II-3 SIGNATURES AND POWER OF ATTORNEY PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF CALIFORNIA ON THIS 27TH DAY OF JUNE 1997. LESLIE'S POOLMART, INC. By: /s/ Brian P. McDermott ___________________________________ Brian P. McDermott President and Chief Executive Officer POWER OF ATTORNEY Each person whose signature appears below constitutes and appoints Brian P. McDermott and Robert D. Olsen, and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, 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 agents full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or his substitute or their substitutes, may lawfully do or cause to be done by virtue hereof. PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED ON THE DATES INDICATED.
NAME TITLE DATE ---- ----- ---- /s/ Michael J. Fourticq Director June 27, 1997 ____________________________________ Michael J. Fourticq /s/ Brian P. McDermott President, Chief Executive June 27, 1997 ____________________________________ Officer and Director Brian P.McDermott [Principal Executive Officer] /s/ Robert D. Olsen Executive Vice President and June 27, 1997 ____________________________________ Chief Financial Officer Robert S. Olsen [Principal Financial and Accounting Officer] /s/ Gregory J. Annick Director June 27, 1997 ____________________________________ Gregory J. Annick /s/ John G. Danhakl Director June 27, 1997 ____________________________________ John G. Danhakl /s/ Dr. Dale R. Laurance Director June 27, 1997 ____________________________________ Dr. Dale R. Laurance
II-4 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Leslie's Poolmart: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of Leslie's Poolmart and subsidiary included in this Form 10-K and have issued our report thereon dated March 6, 1997. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic consolidated financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Los Angeles, California March 6, 1997 S-1 LESLIE'S POOLMART SCHEDULE - VALUATION AND QUALIFYING ACCOUNTS
Balance Balance at Charged to at end beginning costs and of of period expenses Deductions Period ---------- ---------- ---------- ---------- Year ended December 31, 1994: Accumulated amortization of goodwill... $ 667,000 $239,000 $--- $ 906,000 Accumulated amortization of deferred loan costs........................... $ 14,000 $ 41,000 $--- $ 55,000 Year ended December 30, 1995: Accumulated amortization of goodwill... $ 906,000 $239,000 $--- $1,145,000 Accumulated amortization of deferred loan costs........................... $ 55,000 $ 51,000 $--- $ 106,000 Year ended December 28, 1996: Accumulated amortization of goodwill... $1,145,000 $252,000 $___ $1,397,000 Accumulated amortization of deferred loan costs........................... $ 106,000 $ 55,000 $___ $ 161,000
S-2 EX-3.1 2 CERTIFICATE OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF LPM HOLDINGS, INC. LPM HOLDINGS, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST. That the Certificate of Incorporation originally filed with the ----- Secretary of State of the State of Delaware on December 16, 1996 is amended and restated in its entirety to read as follows: I. The name of this Corporation is LPM Holdings, Inc. II. The address of the registered office of the Corporation in the State of Delaware is c/o The Corporation Trust Company, The Corporation Trust Center, 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801 and the name of its registered agent at that address is The Corporation Trust Company. III. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. IV. The Corporation is authorized to issue two classes of stock designated as "Common Stock" and "Preferred Stock," respectively. The total number of shares of Common Stock authorized to be issued is twelve million (12,000,000) shares and each such share shall have a par value of $0.001. The total number of shares of Preferred Stock authorized to be issued is two million (2,000,000) shares and each such share shall have a par value $0.0001. The shares of Preferred Stock may be issued from time to time in one or more series. The Board of Directors of the Corporation is hereby authorized, by adopting appropriate resolutions and causing one or more certificates of designation to be executed, acknowledged, filed, recorded and become effective in accordance with the General Corporation Law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof, including but not limited to the fixing or alteration of the dividend rights, dividend rate, conversion rights, exchange rights, voting rights, rights and terms of redemption (including sinking fund provisions), the redemption price or prices, and the liquidation preferences of any wholly unissued series of shares of Preferred Stock, or any of them; and to increase or decrease the number of shares of any series subsequent to the issue of shares of that series, but not above the total number of authorized shares of Preferred Stock and not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. V. The management of the business and the conduct of the affairs of the Corporation shall be vested in the Board of Directors. The number of Directors which shall constitute the whole Board of Directors which shall be fixed by, or in the manner provided in, the Bylaws of the Corporation. VI. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized to make, repeal, alter, amend and rescind the Bylaws of the Corporation. VII. Election of directors at an annual or special meeting of stockholders need not be by written ballot unless the Bylaws of the Corporation shall so provide. VIII. A director shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that this Article VIII shall not eliminate or limit the liability of a director (i) for any breach of such director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) under Section 174 of the General Corporation Law of which the director derives an improper personal benefit. If the General Corporation Law of the State of Delaware is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent permitted by the General Corporation Law of the State of Delaware so amended. The Corporation shall, to the fullest extent permitted by Delaware law and to such greater extent as applicable law may hereafter from time to time permit, indemnify and hold harmless each person (and the heirs, executors or administrators of such person) who was or is a party or is threatened to be made a party to, or is involved in, any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that such person is or was a director or officer of the Corporation or is or was serving at the request of the Corporation as a director, officer, partner, member or other agent of another corporation, partnership, joint venture, trust or other enterprise in connection with any matter relating to the Corporation's business or affairs, against any losses, claims, damages or liabilities. The right to indemnification conferred in this Article VIII shall also include the right to be paid by the Corporation the expenses incurred in connection with any such proceeding in advance of its final disposition to the fullest extent authorized by Delaware law. The right to indemnification conferred in this Article VIII shall be a contract right. No repeal, modification or amendment of this Article VIII, or adoption of any provision of this Certificate of Incorporation or the bylaws of the Corporation, nor, to the fullest extent 2 permitted by Delaware law, any modification of law shall eliminate or reduce the effect of this Article VIII in respect of any acts or omissions occurring prior to the time of such repeal, amendment, adoption or modification. IX. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred on stockholders herein are granted subject to this reservation. SECOND. That the Amended and Restated Certificate of Incorporation has been ------ fully adopted in accordance with the provisions of Section 245 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said LPM HOLDINGS, INC. has caused this Certificate to be signed and attested by its President and Secretary on this 6th day of June 1997. LPM HOLDINGS, INC. By: /s/ BRIAN P. McDERMOTT ---------------------- Brian P. McDermott, President ATTEST: /s/ ROBERT D. OLSEN - ------------------- Robert D. Olsen Secretary EX-3.2 3 CERTIFICATE OF MERGER OF LESLIE'S INTO LPM HOLDINGS EXHIBIT 3.2 CERTIFICATE OF MERGER OF LESLIE'S POOLMART INTO LPM HOLDINGS, INC. (Pursuant to 8 Del. C (S) 252) LPM HOLDINGS, INC., a Delaware corporation, hereby certifies that: 1. The name and state of incorporation of each of the constituent corporations are: (a) Leslie's Poolmart, a California corporation; and (b) LPM Holdings, Inc., a Delaware corporation. 2. An Agreement of Merger has been approved, adopted, certified, executed and acknowledged by each of the constituent corporation in accordance with the provisions of subsection (c) of Section 252 of the Delaware General Corporation Law. 3. The surviving corporation shall be LPM Holdings, Inc., the name of which shall be changed to "Leslie's Poolmart, Inc." on the date on which the merger is effective, as provided in Item 4 below. 4. On the date on which the merger is effective, Article I of the Certificate of incorporation of LPM Holdings, Inc. shall be amended to read in its entirety as follows: "The name of this Corporation is: Leslie's Poolmart, Inc." The Certificate of Incorporation of LPM Holdings, Inc., as so amended and in effect on the date on which the merger is effective, shall be the Certificate of incorporation of LPM Holdings, Inc. as the surviving corporation without further change or amendment until further amended in accordance with the provisions thereof and applicable law. 5. The executed Agreement of Merger is on file at an office of LPM Holdings, Inc. located at: 20630 Plummer St. Chatsworth, California 91311 6. A copy of the Agreement Of Merger will be furnished by LPM Holdings, Inc., on request and without cost, to any stockholder of any of the constituent corporations. 7. The authorized capital stock of Leslie's Poolmart, a California corporation, is 40,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock. IN WITNESS WHEREOF, LPM HOLDINGS, INC. has caused this certificate to be executed by a duly authorized officer as of this 11th day of June, 1997. LPM HOLDINGS, INC., a Delaware corporation By: /s/ Brian P. McDermott --------------------------- Brian P. McDermott President and Chief Executive Officer 2 EX-3.3 4 CERTIFICATE OF MERGER OF POOLMART USA INTO LESLIE'S EXHIBIT 3.3 CERTIFICATE OF MERGER OF POOLMART USA INC. INTO LESLIE'S POOLMART, INC. (Pursuant to 8 Del. C (S) 251) LESLIE'S POOLMART, INC., a Delaware corporation, hereby certifies that: 1. The name and state of incorporation of each of the constituent corporations are: (a) Poolmart USA Inc., a Delaware corporation; and (b) Leslie's Poolmart, Inc., a Delaware corporation. 2. An Agreement and Plan of Merger has been approved, adopted, certified, executed and acknowledged by each of the constituent corporations in accordance with the provisions of Section 251 of the General Corporation Law of the State of Delaware. 3. The surviving corporation shall be Leslie's Poolmart, Inc-, a Delaware corporation. 4. The Certificate of Incorporation of Leslie's Poolmart, Inc., as in effect on the date on which the merger is effective, shall be the Certificate of incorporation of Leslie's Poolmart, Inc. as the surviving corporation without change or amendment until further amended in accordance with, the provisions thereof and applicable law. 5. The executed Agreement and Plan of Merger is on file at an office of Leslie's Poolmart, Inc. located at: 20630 Plummer St. Chatsworth, California 91311 6. A copy of the Agreement and Plan of Merger will be furnished by Leslie's Poolmart, Inc., on request and without cost, to any stockholder of any of the constituent corporations. IN WITNESS WHEREOF, LESLIE'S POOLMART, INC. has caused this certificate to be executed by a duly authorized officer as of this 11th day of June, 1997. LESLIE'S POOLMART, INC., a Delaware corporation By: /s/ Brian P. McDermott ------------------------------ Brian P. McDermott President and Chief Executive Officer EX-3.4 5 CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS EXHIBIT 3.4 LESLIE'S POOLMART, INC. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF EXCHANGEABLE CUMULATIVE REDEEMABLE PREFERRED STOCK, SERIES A (Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware.) Leslie's Poolmart, Inc., a corporation organized and existing under the laws of the State of Delaware (hereinafter the "Company"), DOES HEREBY CERTIFY THAT, pursuant to authority conferred upon the Board of Directors of the Company (the "Board") by the Certificate of Incorporation of the Company, as amended (the "Certificate of Incorporation"), the Board, pursuant to a unanimous written consent dated as of June 11, 1997, adopted the following resolutions authorizing the issuance of Exchangeable Cumulative Redeemable Preferred Stock, Series A of the Company, which resolutions are still in full force and effect and are not in conflict with any provisions of the Certificate of Incorporation or Bylaws of the Company: RESOLVED, that pursuant to authority vested in the Board by the Certificate of Incorporation, the Board does hereby establish a series of preferred stock of the Company from the Company's authorized class of Two Million (2,000,000) shares of $.001 par value preferred shares, such series to consist of 50,000 shares, and does hereby fix and state the voting rights, designation, powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereof, as follows: (a) Designation. ----------- The Preferred Stock created and authorized hereby shall be designated as the "Exchangeable Cumulative Redeemable Preferred Stock, Series A" (hereinafter called the "Series A Preferred Stock"). The number of shares of Series A Preferred Stock shall be 50,000, and no more. (b) Rank. ---- The Series A Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company, rank senior to all classes of common stock of the Company, and to each other class of Capital Stock of the Company the terms of which do not expressly provide that it ranks senior to or on a parity with the Series A Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company (collectively referred to with the common stock of the Company as "Junior Securities"). The Series A Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company, rank on a parity with any class of Capital Stock or series of preferred stock hereafter created which expressly provides that it ranks on a parity with the Series A Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company ("Parity Securities"); provided that any such Parity Securities that were not issued in accordance with paragraph (f)(v)(A) hereof shall be deemed to be Junior Securities and not Parity Securities. The Series A Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company, rank junior to each class of Capital Stock hereafter issued in accordance with paragraph (f)(v)(A) hereof and which expressly provides that it ranks senior to the Series A Preferred Stock as to dividend distributions or distributions upon the liquidation, winding up and dissolution of the Company ("Senior Securities"). (c) Dividends. --------- (i) Beginning on the Issue Date, each Holder shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, distributions in the form of dividends on each whole or fractional share of Series A Preferred Stock, at a rate per annum equal to ten and seven-eighths percent (10 7/8%) of the Liquidation Preference per share of the Series A Preferred Stock, payable quarterly. All dividends with respect to each whole or fractional share of Series A Preferred Stock shall be cumulative, whether or not earned or declared, on a daily basis from the Issue Date with respect to such whole or fractional share, and shall be payable quarterly in arrears on each Dividend Payment Date, commencing on the first Dividend Payment Date after the Issue Date with respect to such whole or fractional share; provided that if any dividend payable on any Dividend Payment Date on or before the fifth anniversary of the Initial Preferred Stock Issue Date is not declared and paid in full in cash on such Dividend Payment Date, the amount payable as dividends on such Dividend Payment Date that is not paid in cash on such Dividend Payment Date shall be paid by the Company on such date by the issuance of additional fully paid and non-assessable shares (including fractional shares, if applicable, or, at the Company's option, cash in lieu of such fractional shares) of Series A Preferred Stock having an aggregate Liquidation Preference equal to the amount of such dividends (rounded to the nearest whole cent). The payment by the Company in such additional shares of Series A Preferred Stock shall constitute full payment of such dividend. Dividends payable on any Dividend Payment Date after the fifth anniversary of the Preferred Stock Issue Date shall be paid only in cash. If any dividend (or portion thereof) payable on any Dividend Payment Date after the fifth anniversary of the Initial Preferred Stock Issue Date is not declared or paid in full in cash on such Dividend Payment Date, the amount of such dividend that is payable and that is not paid in cash on such date shall accrue interest at the annual dividend rate plus 5% until declared and paid in full, compounded quarterly. Each distribution in the form of a dividend shall be payable to the Holders of Series A Preferred Stock of record as they appear on the stock books of the Company on such record dates, not less than 10 nor more than 45 days preceding the related Dividend Payment Date, as shall be fixed by the Board of Directors. Dividends shall cease to accumulate in respect of shares of the Series A Preferred Stock on the Exchange Date or on the date of their earlier redemption unless the Company shall have failed to issue the appropriate aggregate principal amount of Exchange Notes in respect of the Series A Preferred Stock on the Exchange Date or shall have failed to pay the relevant redemption price on the date fixed for redemption. (ii) All dividends paid with respect to shares of the Series A Preferred Stock pursuant to paragraph (c)(i) shall be paid pro rata to the Holders thereof entitled thereto. (iii) Dividends on account of arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date, together with all accrued and unpaid interest thereon, to Holders of Series A Preferred Stock of record on such date, not more than 45 days prior to the payment thereof, as may be fixed by the Board of Directors. 2 (iv) Holders of shares of the Series A Preferred Stock shall be entitled to receive the dividends provided for in paragraph (c)(i) hereof in preference to and in priority over any dividends upon any of the Junior Securities. (v) Holders of shares of the Series A Preferred Stock shall be entitled to receive the dividends provided for in paragraph (c)(i) hereof on a pro rata basis with respect to any dividends upon any Parity Securities. (vi) Dividends payable on shares of the Series A Preferred Stock for any period less than a year shall be computed on the basis of a 360-day year of twelve 30-day months. If any Dividend Payment Date occurs on a day that is not a Business Day, any accrued dividends otherwise payable on such Dividend Payment Date shall be paid on the next succeeding Business Day. (d) Liquidation Preference. ---------------------- (i) Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the Holders of shares of Series A Preferred Stock then outstanding shall be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, $1,000 per share of Series A Preferred Stock (the "Liquidation Preference"), plus an amount in cash equal to accumulated and unpaid dividends thereon (and all accrued and unpaid interest thereon) to the date fixed for liquidation, dissolution or winding up (including an amount equal to a prorated dividend for the period from the last Dividend Payment Date to the date fixed for liquidation, dissolution or winding up) before any payment shall be made or any assets distributed to the holders of any of the Junior Securities, including, without limitation, common stock of the Company. Except as provided in the preceding sentence, Holders of shares of Series A Preferred Stock shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the Company. If the assets of the Company are not sufficient to pay in full the liquidation payments payable to the Holders of outstanding shares of the Series A Preferred Stock and all Parity Securities, then the holders of all such shares shall share equally and ratably in such distribution of assets of the Company in accordance with the amounts which would be payable on such distribution if the amount to which the Holders of outstanding shares of Series A Preferred Stock and the holders of outstanding shares of all Parity Securities are entitled were paid in full. (ii) For the purposes of this paragraph (d), neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more corporations or other entities shall be deemed to be a liquidation, dissolution or winding up of the affairs of the Company (unless such sale, conveyance, exchange or transfer is in connection with a dissolution or winding up of the business of the Company). 3 (e) Redemption. ---------- (i) Optional Redemption. ------------------- (A) The Company may (subject to contractual and other restrictions with respect thereto and the legal availability of funds therefor), at the option of the Company, redeem at any time from any source of funds legally available therefor, in whole or in part, in the manner provided in paragraph (e)(iii) hereof, any or all of the shares of the Series A Preferred Stock, at a redemption price equal to (1) the Liquidation Preference per share multiplied by 101% plus (2) an amount in cash equal to all accumulated and unpaid dividends per share (and all accrued and unpaid interest thereon) (including an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Redemption Date to the Redemption Date) (the sum of (1) and (2) being denominated herein the "Optional Redemption Price"). (B) In the event of a redemption pursuant to paragraph (e)(i)(A) hereof of only a portion of the then outstanding shares of the Series A Preferred Stock, the Company shall effect such redemption pro rata according to the number of shares held by each Holder of Series A Preferred Stock or by lot, as may be determined by the Company in its sole discretion. (ii) Mandatory Redemption. On each Mandatory Redemption Date, the -------------------- Company shall redeem, subject to contractual and other restrictions thereupon, from any source of funds legally available therefor, in the manner provided in paragraph (e)(iii) hereof, a number of shares equal to one-third of the shares of Series A Preferred outstanding on the First Mandatory Redemption Date, rounded to the nearest whole share per holder, at a redemption price equal to (1) 100% of the Liquidation Preference per share, plus (2) an amount in cash equal to all accumulated and unpaid dividends per share (and all accrued and unpaid interest thereon) (including an amount equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to each Mandatory Redemption Date to the such Mandatory Redemption Date) (the sum of (1) and (2) being denominated herein the "Mandatory Redemption Price"). (iii) Procedures for Redemption. ------------------------- (A) At least 30 days and not more than 60 days prior to the date fixed for any redemption of the Series A Preferred Stock, written notice (the "Redemption Notice") shall be given by first-class mail, postage prepaid, to each Holder of Series A Preferred Stock of record on the record date fixed for such redemption of the Series A Preferred Stock at such Holder's address as the same appears on the stock register of the Company, provided that no failure to give such notice nor any deficiency therein shall affect the validity of the procedure for the redemption of any shares of Series A Preferred Stock to be redeemed except as to the Holder or Holders to whom the Company has failed to give said notice or except as to the Holder or Holders whose notice was defective. The Redemption Notice shall state: (1) whether the redemption is pursuant to paragraph (e)(i) or (e)(ii) hereof; (2) the Optional Redemption Price or 4 the Mandatory Redemption Price, as the case may be; (3) whether all or less than all the outstanding shares of the Series A Preferred Stock are to be redeemed and the total number of shares of the Series A Preferred Stock being redeemed; (4) the number of shares of Series A Preferred Stock held, as of the appropriate record date, by the Holder that the Company intends to redeem; (5) the date fixed for redemption; (6) that the Holder is to surrender to the Company, at the place or places where certificates for shares of Series A Preferred Stock are to be surrendered for redemption, in the manner and at the price designated, such Holder's certificate or certificates representing the shares of Series A Preferred Stock to be redeemed; and (7) that dividends on the shares of the Series A Preferred Stock to be redeemed shall cease to accrue on such Redemption Date unless the Company defaults in the payment of the Optional Redemption Price or the Mandatory Redemption Price, as the case may be. (B) Each Holder of Series A Preferred Stock shall surrender the certificate or certificates representing such shares of Series A Preferred Stock to the Company in the manner and at the place designated in the Redemption Notice, and on the Redemption Date the full Optional Redemption Price or Mandatory Redemption Price, as the case may be, for such shares shall be payable in cash to the Person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event that less than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (C) Unless the Company defaults in the payment in full of the applicable redemption price, dividends on the Series A Preferred Stock called for redemption shall cease to accumulate on the Redemption Date, and the Holders of such redemption shares shall cease to have any further rights with respect thereto on the Redemption Date, other than the right to receive the Optional Redemption Price or the Mandatory Redemption Price, as the case may be, without interest. (f) Voting Rights and Protective Provisions. --------------------------------------- (i) Generally. --------- The Holders of shares of the Series A Preferred Stock will not have any voting rights except as set forth below or as otherwise from time to time required by applicable law. In connection with any right to vote, each Holder of Series A Preferred Stock will have one vote for each such share held. Any shares of Series A Preferred Stock held by the Company or any Subsidiary of the Company shall not have voting rights hereunder and shall not be counted in determining the presence of a quorum or in calculating any percentage of shares under this paragraph (f). (ii) Right to Elect Class A Directors. -------------------------------- The number of directors of the Company shall be as from time to time fixed by, or determined in the manner provided in, the Certificate of Incorporation and the Bylaws of the Company, provided, that subject to the provisions of paragraph (f)(iii), a number of directors equal to 5 the smallest whole number of directors that will represent at least 20% of the members of the Company's Board of Directors shall be designated as "Class A Directors" and shall be elected by the Holders of a majority of the shares of the Series A Preferred Stock then outstanding, voting as a separate class. The holders of the Series A Preferred Stock, voting as a separate class, shall have the exclusive right to remove without cause at any time and replace any Class A Director by an affirmative vote of the Holders of a majority of the shares of Series A Preferred Stock then outstanding. (iii) Additional Class A Directors. ---------------------------- (A) If (i) the Coverage Ratio for any four consecutive Quarters shall be less than 1.0:1.0 (a "Four Quarter Coverage Ratio Event"), and (ii) the number of Class A Directors then represents less than 40% of the members of the Company's Board of Directors, then, if such Four Quarter Coverage Ratio Event has not been remedied prior thereto, effective as of the thirtieth day after (x) the forty-fifth day after the end of such four consecutive Quarters, or (y) such earlier date on which the Company first publicly announces its results of operations for the last such Quarter, upon written notice to the Company by the Holders of at least 20% of the outstanding Series A Preferred Stock, but without any action on the part of the Board of Directors, the number of members of the Board of Directors shall be increased by the smallest whole number that will result in at least 40% of the members of the Company's Board of Directors being Class A Directors (assuming that such directors are designated as "Class A Directors"), and all of such additional directors shall be designated as additional "Class A Directors." (B) If (i) the Coverage Ratio for any eight consecutive Quarters shall be less than 1.0:1.0 (a "Eight Quarter Coverage Ratio Event"), and (ii) the number of Class A Directors then represents less than a majority of the members of the Company's Board of Directors, then, if such Eight Quarter Coverage Ratio Event has not been remedied prior thereto, effective as of the thirtieth day after (x) the forty-fifth day after the end of such eight consecutive Quarters, or (y) such earlier date on which the Company first publicly announces its results of operations for the last such Quarter, upon written notice to the Company by the Holders of at least 20% of the outstanding Series A Preferred Stock, but without any action on the part of the Board of Directors, the number of members of the Board of Directors shall be increased by the smallest whole number that will result in at least a majority of the members of the Company's Board of Directors being Class A Directors (assuming that such directors are designated as "Class A Directors"), and all of such additional directors shall be designated as additional "Class A Directors." (C) If (i) the dividends on the Series A Preferred Stock shall be in arrears and unpaid for four consecutive Quarters (a "Dividend Event") and (ii) the number of Class A Directors then represents less than a majority of the members of the Company's Board of Directors, then, if such Dividend Event has not been remedied prior thereto, effective as of the day immediately following the Dividend Payment Date that resulted in such four consecutive quarter arrearage, upon written notice to the Company by the Holders of at least 20% of the outstanding Series A Preferred Stock, but without any 6 action on the part of the Board of Directors, the number of members of the Board of Directors shall be increased by the smallest whole number that will result in at least a majority of the members of the Company's Board of Directors being Class A Directors (assuming that such directors are designated as "Class A Directors"), and all of such additional directors shall be designated as additional "Class A Directors." (D) If the Company fails to pay any portion of the Mandatory Redemption Price of the Series A Preferred Stock on any Mandatory Redemption Date (whether or not any contractual or other restrictions apply to such redemption) pursuant to paragraph (e)(ii) hereof (a "Redemption Event"), then, if such Redemption Event has not been remedied prior thereto, effective as of the day immediately following such Mandatory Redemption Date, upon written notice to the Company by the Holders of at least 20% of the outstanding Series A Preferred Stock, but without any action on the part of the Board of Directors, all members of the Board of Directors shall thereafter be designated as "Class A Directors." (E) If an Insolvency Event occurs, then, effective immediately upon the occurrence of such Insolvency Event, upon written notice to the Company by the Holders of at least 20% of the outstanding Series A Preferred Stock, but without any action on the part of the Board of Directors, all members of the Board of Directors shall thereafter be designated as "Class A Directors." (F) Any event described in paragraph (f)(iii)(A), (B), (C) or (D) above shall be deemed remedied at such time as such event ceases to be in effect. Without limiting the foregoing, the events described in paragraph (f)(iii)(A) and (B) may be cured by a contribution to capital in the amount which, had it been added as if it were Net Income to the amount of EBITDA for the relevant period, would have resulted in a Coverage Ratio of at least one. (G) Notwithstanding any of the provisions of paragraphs (f)(iii)(A), (B), (C), (D), (E) or (F) above, the rights set forth therein of the Holders of the issued and outstanding shares of the Series A Preferred Stock to elect and remove Class A Directors pursuant to a Special Voting Rights Date relating to a Four Quarter Coverage Ratio Event or an Eight Quarter Coverage Ratio Event shall terminate when Occidental Petroleum Corporation, a Delaware corporation ("Occidental") ceases to own at least a majority of the outstanding shares of Series A Preferred Stock. (iv) Certain Procedures. ------------------ (A) If, during the interval between annual meetings of stockholders for the election of directors, there is a vacancy or vacancies in the Class A Directors (whether as a result of an increase in the number of Class A Directors pursuant to paragraph (f)(iii) hereof, a resignation, death or removal of a Class A Director or any other reason), such vacancy or vacancies in the Class A Directors may, subject to applicable law, be filled by a majority vote of the remaining Class A Directors then in office, or by a sole remaining Class A Director. 7 (B) If there is a vacancy or vacancies in the Class A Directors (whether as a result of an increase in the number of Class A Directors pursuant to paragraph (f)(iii) hereof, a resignation, death or removal of a Class A Director or any other reason), the Chairman of the Board of the Company or other authorized officer of the Company, if any, may, and upon the written request of the Holders of record of at least 10% of the shares of Series A Preferred Stock then outstanding addressed to the Secretary of the Company shall, call a special meeting of the Holders of Series A Preferred Stock, for the purpose of electing a Class A Director or Directors to fill such vacancy. If such meeting is not called by the proper officer of the Company within 10 days after personal service of such written request upon the Secretary of the Company, or within 10 days after mailing the same within the United States by certified mail, addressed to the Secretary of the Company at its principal executive offices, then the Holders of record of at least 20% of the outstanding shares of the Series A Preferred Stock may designate in writing one of their number to call such meeting at the expense of the Company, and such meeting may be called by the Person so designated upon the notice required for special meetings of stockholders of the Company and shall be held at the place for holding the annual meetings of stockholders or such other place in the United States as shall be designated in such notice. (C) At any meeting held for the purpose of electing directors at which the Holders of Series A Preferred Stock shall have the right to elect a Class A Director or Directors, the presence in person or by proxy of the Holders of at least one-third of the then outstanding shares of Series A Preferred Stock shall be required and be sufficient to constitute a quorum of such class for the election of such Class A Director or Directors. At any such meeting or adjournment thereof (1) the absence of a quorum of the Holders of Series A Preferred Stock shall not prevent the election of a director or directors other than the Class A Director or Directors, and the absence of a quorum or quorums of the holders of Capital Stock entitled to elect other directors shall not prevent the election of the Class A Director or Directors, and (2) in the absence of a quorum of the holders of any class of stock entitled to vote for the election of directors, a majority of the holders present in person or by proxy of such class shall have the power to adjourn the meeting for the election of directors which the holders of such class are entitled to elect, from time to time without notice (except as required by law) other than announcement at the meeting, until a quorum shall be present. (D) Any Class A Director elected to fill a vacancy shall hold office for the unexpired term in respect of which the vacancy occurred and until his successor shall be elected and shall qualify or until his earlier death, resignation or removal in the manner provided by the Certificate of Incorporation and the Bylaws of the Company. (E) Any action required or permitted to be taken at an annual or special meeting of Holders of Series A Preferred Stock may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the Holders of outstanding Series A Preferred Stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to 8 vote thereon were present and voted and shall be delivered to the Company by delivery to its registered office in the State of Delaware (by hand or by certified or registered mail, return receipt requested), its principal place of business or an officer or agent of the Company having custody of the book in which proceedings of meetings of stockholders are recorded. (F) Any written notice to be given to the Company by Holders of Series A Preferred Stock may be given (1) by personal service of such written notice upon the Secretary of the Company, (2) by registered or certified mail, addressed to the Secretary of the Company at its principal executive offices, or (3) by delivery to the Company's registered office in the State of Delaware (by hand or by certified or registered mail). (v) Protective Provisions. --------------------- So long as any shares of the Series A Preferred Stock are outstanding, the Company shall not, without the affirmative vote or consent of Holders of at least a majority of the outstanding shares of Series A Preferred Stock, voting or consenting, as the case may be, separately as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting: (A) create, authorize or issue, or reclassify any authorized stock of the Company into, or increase the authorized amount of, any class or series of Senior Securities, Parity Securities, or Junior Securities; (B) amend, alter or repeal any provision of the Certificate of Incorporation, as the same may be amended from time to time, so as to affect adversely the relative rights, preferences, qualifications, limitations or restrictions of the Series A Preferred Stock; (C) permit any of its Subsidiaries to issue any equity securities, or securities convertible into, or exercisable, redeemable or exchangeable for, equity securities, to any Person other than the Company or a wholly owned Subsidiary of the Company; (D) prior to the exchange of Series A Preferred Stock for Exchange Notes, amend or modify the terms of the Exchange Notes; (E) incur, or permit any of its Subsidiaries to incur, any Funded Debt in a principal amount exceeding $5,000,000; (F) (1) declare or pay any dividend or make any distribution on account of any Junior Securities or Parity Securities or any securities convertible into, or exercisable, redeemable or exchangeable for, Junior Securities or Parity Securities, either directly or indirectly, whether in cash, obligations or shares of the Company or other property (other than dividends or distributions payable solely in Junior Securities or securities convertible into, or exercisable, redeemable or exchangeable for, Junior Securities, the issuance of which has been approved pursuant to paragraph (f)(v)(A)), or (2) purchase, redeem or otherwise acquire or retire for value any Junior Securities or 9 Parity Securities (other than as a result of (i) a reclassification of Junior Securities into another class or series of Junior Securities, (ii) a reclassification of Parity Securities into Junior Securities, (iii) the exchange or conversion of one class or series of Junior Securities for or into another class or series of Junior Securities, or (iv) the exchange or conversion of one class or series of Parity Securities for or into Junior Securities, in each case, subject to obtaining any approval required pursuant to paragraph (f)(v)(A) or any securities convertible into, or exercisable, redeemable or exchangeable for, any Junior Securities or Parity Securities; provided, however, that the restrictions in this paragraph (f)(v)(F) shall not apply to any purchase, redemption or other acquisition or retirement for value contemplated by the Stockholders Agreement; (G) enter into, or permit any Subsidiary to enter into, any transaction with any Affiliate of the Company (an "Affiliate Transaction"); provided, however, that the following shall not be deemed to be Affiliate Transactions: (v) transaction fees payable to LGP or Hancock Park Associates II, L.P. on or about the Preferred Stock Issue Date pursuant to the Management Agreement, (w) payments to LGP pursuant to the Management Agreement, (x) advances to directors, officers or employees of the Company to provide for the payment of reasonable expenses incurred by such persons in the performance of such persons' responsibilities to the Company; (y) reasonable fees and compensation paid to and indemnity provided on behalf of officers, directors or employees of the Company as determined in good faith by the Board of Directors and the Company's senior management, and (z) transactions between or among the Company and/or its Subsidiaries; (H) enter into, or permit any of its Subsidiaries to enter into, any employment contract; or (I) increase, or permit any of its Subsidiaries to increase, in any material respect the benefits or compensation of any of the executive officers of the Company. (vi) Additional Provisions. --------------------- (1) The creation, authorization or issuance of any shares of Common Stock or (2) any increase or decrease in the amount of authorized capital stock of any class, including any preferred stock, shall not require the consent of Holders of Series A Preferred Stock and shall not be deemed to materially affect adversely the rights, preferences, privileges or voting rights of Holders of shares of Series A Preferred Stock. (g) Optional Exchange ----------------- (i) Conditions. ---------- (A) The Company may, at its option on any Dividend Payment Date (herein the "Exchange Date"), exchange all, but not less than all, of the then outstanding shares of Series A Preferred Stock into the Company's Exchange Notes if such exchange is then permitted by applicable law. To exchange Series A Preferred Stock into 10 Exchange Notes, the Company shall send a written notice (the "Exchange Notice") of exchange by mail to each Holder of shares of Series A Preferred Stock, which notice shall state: (1) that the Company has elected to exchange the shares of Series A Preferred Stock held by such Holder into an Exchange Note pursuant to this paragraph (g); (2) the Exchange Date, which shall be the next succeeding Dividend Payment Date and shall not be less than 20 days following the date on which the Exchange Notice is mailed; (3) that the Holder is to surrender to the Company, at the place or places where certificates for shares of Series A Preferred Stock are to be surrendered for exchange, in the manner designated in the Exchange Notice, his certificate or certificates representing the shares of Series A Preferred Stock to be exchanged; (4) that dividends on the shares of Series A Preferred Stock to be exchanged shall cease to accrue, and the Holders of such shares shall cease to have any further rights with respect to such shares (other than the right to receive Exchange Notes), on the Exchange Date whether or not certificates for shares of Series A Preferred Stock are surrendered for exchange on the Exchange Date unless the Company shall default in the delivery of Exchange Notes; and (5) that interest on the Exchange Notes shall accrue from the Exchange Date whether or not certificates for shares of Series A Preferred Stock are surrendered for exchange on the Exchange Date. On the Exchange Date, if the conditions set forth in clauses (I) and (II) below are satisfied and if the exchange is then permitted under applicable law, the Company shall issue Exchange Notes in exchange for the Series A Preferred Stock as provided in the next paragraph, provided that on the Exchange Date, immediately after giving effect to such exchange, no Default or Event of Default (each as defined in the Exchange Notes) would exist under the Exchange Notes. In the event that the issuance of the Exchange Notes is not permitted on the Exchange Date set forth in the Exchange Notice, or any of the conditions set forth in clauses (I) or (II) of the preceding sentence are not satisfied on the Exchange Date set forth in the Exchange Notice, the Exchange Date shall be deemed to be the first business day thereafter, if any, upon which all of such conditions are satisfied. (B) Upon any exchange pursuant to paragraph (g)(i)(A), each Holder of outstanding shares of Series A Preferred Stock shall be entitled to receive an Exchange Note in a principal amount equal to the sum of (1) the Liquidation Preference of such Holder's shares of Series A Preferred Stock and (2) the amount of accumulated and unpaid dividends, if any, thereon (and accrued and unpaid interest thereon); provided that the Company may pay cash in lieu of issuing an Exchange Note in a principal amount of less than $1,000. (ii) Procedure for Exchange. ---------------------- (A) On or before the Exchange Date, each Holder of Series A Preferred Stock shall surrender the certificate or certificates representing such shares of Series A Preferred Stock, in the manner and at the place designated in the Exchange Notice. The Company shall cause the Exchange Notes to be executed on the Exchange Date and, upon surrender in accordance with the Exchange Notice of the certificates for any shares of Series A Preferred Stock so exchanged such shares shall be exchanged by the 11 Company into Exchange Notes. The Company shall pay interest on the Exchange Notes at the rate and on the dates specified therein from the Exchange Date. (B) Subject to the conditions set forth in paragraph (g)(i), if notice has been mailed as aforesaid, and if before the Exchange Date the Exchange Notes shall have been duly executed and delivered by the Company to the Holders, then the rights of the Holders of shares of the Series A Preferred Stock as stockholders of the Company shall cease (except the right to receive Exchange Notes), and the Person or Persons entitled to receive the Exchange Notes issuable upon exchange shall be treated for all purposes as the registered Holder or Holders of such Exchange Notes as of the date of exchange without any further action of the Holders of Series A Preferred Stock. (h) Conversion or Exchange. ---------------------- The Holders of shares of Series A Preferred Stock shall not have any rights hereunder to convert such shares into or exchange such shares for shares of any other class or classes or of any other series of any class or classes of Capital Stock of the Company. (i) Reissuance of Series A Preferred Stock. -------------------------------------- Shares of Series A Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed or exchanged, shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized but unissued shares of preferred stock of the Company undesignated as to series and may be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Company, provided that such shares may not in any event be reissued as Series A Preferred Stock (other than in payment of dividends, if any, on Series A Preferred Stock). (j) Business Day. ------------ If any payment, redemption or exchange shall be required by the terms hereof to be made on a day that is not a Business Day, such payment, redemption or exchange shall be made on the immediately succeeding Business Day. (k) Definitions. ----------- As used in this Certificate, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires: "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided 12 that beneficial ownership of a majority or more of the voting securities of a Person shall be deemed to be control. "Affiliate Transaction" has the meaning set forth in paragraph f(v)(H). "Applicable Board Percentage" means the number of Class A Directors at any time, pursuant to the provisions of paragraph (f) hereof, that the Holders of the issued and outstanding shares of the Series A Preferred Stock, voting separately as one class, shall have the exclusive right to elect and remove at such time. "Bankruptcy Code" means title 11 of the United States Code, as amended from time to time. "Board" or "Board of Directors" means the Board of Directors of the Company. "Business Day" means any day other than a Legal Holiday. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Certificate of Incorporation" has the meaning set forth in the Recitals. "Class A Director" or "Class A Directors" means any director or directors, as the case may be, elected by the Holders of a majority of the outstanding shares of Series A Preferred Stock pursuant to paragraph (f) hereof. "Company" means Leslie's Poolmart, Inc., a Delaware corporation. "Consolidated EBITDA" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period, adjusted as follows (in each case, without duplication, on a consolidated basis, in accordance with GAAP, and to the extent deducted (in the case of "plus" items) or added (in the case of "minus" items) in the calculation of such Consolidated Net Income): (i) plus any extraordinary or nonrecurring loss of such Person during such period; (ii) minus any extraordinary or nonrecurring gain of such Person during such period; (iii) plus any loss due solely to fluctuations in currency values; (iv) minus any gain due solely to fluctuations in currency values; (v) plus provision for taxes based on income or profits of such Person and its Subsidiaries for such period; (vi) plus consolidated interest expense of such Person and its Subsidiaries for such period, whether paid or accrued and whether or not capitalized (and including any amortization of deferred financing costs); (vii) plus any noncash charges for such period (including LIFO charges); (viii) plus depreciation, amortization (including amortization of goodwill and other intangibles but excluding 13 amortization of prepaid cash expenses that were paid in a prior period) and other noncash charges of such Person and its Subsidiaries for such period. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate Net Income of such Person and its Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP (except as provided in the definition of "Net Income"); provided that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Subsidiary thereof, (ii) the Net Income of any Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (other than approvals already obtained on the date of computation) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded and (iv) the cumulative effect of a change in accounting principles shall be excluded. "Coverage Ratio" means, as of the last day of any Quarter, and with respect to any specified period prior to the end of such Quarter, (i) Consolidated EBITDA for the specified period prior to the end of such Quarter divided by (ii) Fixed Charges for the specified period prior to the end of such Quarter. "Credit Agreement" means credit agreement(s) to be entered into by the Company and one or more lenders, and all amendments thereto, together with the related documents thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring all or any portion of the Indebtedness under such agreement(s) or any successor or replacement agreement(s) and whether by the same or any other agent, lender or group of lenders. "Disqualified Capital Stock" means that portion of any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof, in any case, on or prior to the final maturity date of the Senior Notes; provided, however, that the term "Disqualified Capital Stock" shall not include the shares of Series A Preferred Stock. "Dividend Event" has the meaning set forth in paragraph (f)(iii). "Dividend Payment Date " means February 1, May 1, August 1 and November 1. "Dividend Period" means the Initial Dividend Period and, thereafter, each Quarterly Dividend Period. 14 "Eight Quarter Coverage Ratio Event" has the meaning set forth in paragraph (f)(iii). "Exchange Date" has the meaning set forth in paragraph (g)(i)(A). "Exchange Notes" means the Company's 10 7/8% Junior Subordinated Notes due June 11, 2007 in the form attached to the Preferred Stock and Warrant Purchase Agreement. "Exchange Notice" has the meaning set forth in paragraph (g)(i)(A). "First Mandatory Redemption Date" means the date eight years and six months after the Initial Preferred Stock Issue Date. "Fixed Charges" means, with respect to any Person for any period, without duplication, the sum of (i) the consolidated interest expense (excluding amortization or write-off of debt issuance costs) of such Person and its Subsidiaries for such period, to the extent such expense was deducted in computing Consolidated Net Income for such Person for such period, whether paid or accrued and (ii) any interest expense on Guaranteed Indebtedness of such Person or one of its Subsidiaries or secured by a Lien on assets of such Person or one of its Subsidiaries (whether or not such Guaranteed Indebtedness or Lien is called upon) determined on a consolidated basis, and (iii) all dividend payments payable (whether declared or not and whether paid in cash or in kind) on any series of preferred stock of such Person during such period, in each case, on a consolidated basis and in accordance with GAAP; provided, that with -------- respect to the Company for the period from the Initial Preferred Stock Issue Date to the end of the Quarter in which the first anniversary of the Initial Preferred Stock Issue Date falls, Fixed Charges shall not include any dividend payments on the shares of Series A Preferred Stock for such period. For purposes of the foregoing clause (ii), interest expense attributable to any Guaranteed Indebtedness by such Person or a Subsidiary of such Person shall be deemed to be the interest expense of such Person to the extent such expense was deducted in computing Consolidated Net Income of such Person. "Four Quarter Coverage Ratio Event" has the meaning set forth in paragraph (f)(iii). "Funded Debt" means, with respect to any Person and as of any date of determination, the principal amount of all debt for borrowed money; provided, that Funded Debt shall in any event not include any Permitted Indebtedness. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect as of the Initial Preferred Stock Issue Date. "Guaranteed Indebtedness" means, with respect to any Person, a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect. in any manner (including, without limitation. letters of credit and reimbursement agreements in respect thereof), of all or any part of any indebtedness of another Person. 15 "Holder" means a Person in whose name a share of Series A Preferred Stock is registered on the stock ledger of the Company. "Indebtedness" means with respect to any Person, without duplication, (i) all Obligations of such Person for borrowed money, (ii) all Obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all Capital Lease Obligations of such Person, (iv) all Obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all Obligations under any title retention agreement (but excluding trade accounts payable and other accrued liabilities arising in the ordinary course of business that are not overdue by 90 days or more or are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted), (v) all Obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction, (vi) guarantees and other contingent obligations in respect of Indebtedness referred to in clauses (i) through (v) above and clause (viii) below, (vii) all Obligations of any other Person of the type referred to in clauses (i) through (vi) which are secured by any lien on any property or asset of such Person, the amount of such Obligation being deemed to be the lesser of the fair market value of such property or asset or the amount of the Obligation so secured, (viii) all Obligations under currency agreements and interest swap agreements of such Person and (ix) all Disqualified Capital Stock issued by such Person with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value shall be determined reasonably and in good faith by the Board of Directors of the issuer of such Disqualified Capital Stock. "Initial Dividend Period " means the dividend period commencing on the Initial Preferred Stock Issue Date and ending on the day before the first Dividend Payment Date to occur thereafter. "Initial Preferred Stock Issue Date" means June 11, 1997. "Insolvency Event" means any of the following: (i) there shall be commenced against the Company an involuntary case seeking the liquidation or reorganization of the Company under Chapter 7 or Chapter 11, respectively, of the federal Bankruptcy Code, and the petition commencing the involuntary case or proceeding remains undismissed and unstayed for a period of sixty (60) days, (ii) the Company shall file a voluntary case seeking liquidation or reorganization under Chapter 7 or Chapter 11, respectively, of the federal Bankruptcy Code, or (iii) the Company shall make a general assignment for the benefit of creditors. "Issue Date" means, with respect to any whole or fractional share of Series A Preferred Stock, the date upon which such whole or fractional share is issued pursuant hereto. "Interest Swap Obligations" means the obligations of any Person pursuant to any arrangement with any other Person whereby, directly or indirectly, such Person is entitled to receive from time to 16 time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements. "Junior Securities" has the meaning set forth in paragraph (b). "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the Company's principal place of business, the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. "LGP" means Leonard Green & Partners, L.P. "Lien" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "Liquidation Preference" has the meaning set forth in paragraph (d). "Management Agreement" means that certain Management Agreement dated as of the Preferred Stock Issue Date by and between LGP and the Company, providing for certain annual fees, expenses and reimbursements to be paid to LGP, as such Management Agreement may be amended from time to time in accordance with the Stockholders Agreement. "Mandatory Redemption Date" means each of the following dates: (1) the date eight years and six months after the Initial Preferred Stock Issue Date, (2) the ninth anniversary of the Initial Preferred Stock Issue Date and (3) the tenth anniversary of the Initial Preferred Stock Issue Date. "Mandatory Redemption Price" has the meaning set forth in paragraph (e)(ii). "Net Income" means, with respect to any Person for any period, the net income (loss) of such Person for such period, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends; provided, however, that for purposes of paragraph (f)(iii)(F), contributions to capital made in accordance with such paragraph (f)(iii)(F) shall be included in Net Income to the extent of the amount so contributed and as provided in such paragraph (f)(iii)(F). "Obligations" means all obligations for principal, premium, interest and additional interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Occidental" means Occidental Petroleum Corporation, a Delaware corporation. "Optional Redemption Price" has the meaning set forth in paragraph (e)(i). "Parity Securities" has the meaning set forth in paragraph (b). 17 "Permitted Indebtedness" means, without duplication, each of the following: (i) Indebtedness under the Exchange Notes; (ii) Indebtedness under the Senior Notes; (iii) Indebtedness incurred pursuant to a Credit Agreement(s) in an aggregate principal amount at any time outstanding not to exceed the greater of (a) $35.0 million and (b) the sum of 80% of the total accounts receivable and 60% of the total inventory of the Company and its Subsidiaries, less in each case the amount of any prepayments made with the proceeds of an Asset Sale (as defined in the documentation with respect to the Senior Notes) or assumed in connection with an Asset Sale (as defined in the documentation with respect to the Senior Notes); (iv) other Indebtedness of the Company and its Subsidiaries outstanding on the Closing Date; (v) Interest Swap Obligations of the Company covering Indebtedness of the Company or any of its Subsidiaries and Interest Swap Obligations of any Subsidiary of the Company covering Indebtedness of such Subsidiary; provided, however, that such Interest Swap Obligations are -------- ------- entered into to protect the Company and its Subsidiaries from fluctuations in interest rates on Indebtedness incurred in accordance with the Indenture to the extent the notional principal amount of such Interest Swap Obligation does not exceed the principal amount of the Indebtedness to which such Interest Swap Obligation relates; (vi) Indebtedness of a Subsidiary of the Company to the Company or to a Wholly Owned Subsidiary of the Company for so long as such Indebtedness is held by the Company or a Wholly Owned Subsidiary of the Company, in each case subject to no Lien held by a Person other than the Company or a Wholly Owned Subsidiary of the Company; provided that if as of -------- any date any Person other than the Company or a Wholly Owned Subsidiary of the Company owns or holds any such Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the issuer of such Indebtedness; (vii) Indebtedness of the Company to a Wholly Owned Subsidiary of the Company for so long as such Indebtedness is held by a Wholly Owned Subsidiary of the Company, in each case subject to no Lien held by a Person other than a Wholly Owned Subsidiary of the Company; provided that if as of any date any Person other than a Wholly Owned -------- Subsidiary of the Company owns or holds any such Indebtedness or any Person other than a Wholly Owned Subsidiary of the Company holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the Company; (viii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; 18 provided, however, that such Indebtedness is extinguished within two -------- ------- business days of incurrence; (ix) Indebtedness of the Company or any of its Subsidiaries represented by letters of credit for the account of the Company or such Subsidiary, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self-insurance or similar requirements in the ordinary course of business; (x) Refinancing Indebtedness (as defined in the documentation with respect to the Senior Notes); (xi) Capital Lease Obligations and Purchase Money Indebtedness (as defined in the documentation with respect to the Senior Notes) of the Company or any of its Subsidiaries in an aggregate principal amount not to exceed $5.0 million at any one time outstanding; and (xii) additional Indebtedness of the Company in an aggregate principal amount not to exceed $10.0 million at any one time outstanding. "Person" means any individual, corporation, partnership. joint venture, association, limited liability company, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "Preferred Stock and Warrant Purchase Agreement" means the Preferred Stock and Warrant Purchase Agreement dated as of June 11, 1997 by and among the Company and Occidental. "Quarter" means the 13-week period ended on the Friday closest to December 31, March 31, June 30 or September 30 or such other quarterly period as the Company may from time to time adopt in connection with a change in its fiscal year approved by Holders of at least a majority of the outstanding shares of Series A Preferred Stock. "Quarterly Dividend Period" shall mean the quarterly period commencing on each February 1, May 1, August 1, and November 1 and ending on the day before the following Dividend Payment Date. "Redemption Date" with respect to any shares of Series A Preferred Stock, means the date on which such shares of Series A Preferred Stock are redeemed by the Company in accordance with paragraph (e). "Redemption Event" has the meaning set forth in paragraph (f)(iii). "Redemption Notice" has the meaning set forth in paragraph (e)(iii). "Senior Notes" shall mean $90 million in principal amount of the Company's 10 3/8% Senior Notes due 2004. 19 "Senior Securities" has the meaning set forth in paragraph (b). "Series A Preferred Stock" has the meaning set forth in paragraph (a). "Special Voting Rights Date" has the meaning set forth in paragraph (f)(iii). "Stockholders Agreement" means that certain Stockholders Agreement and Subscription Agreement among Leslie's Poolmart, Inc., Green Equity Investors II, L.P., Hancock Park Associates, Occidental Petroleum Corporation, and the stockholders identified on Annex A thereto, as in effect on the Initial Preferred Stock Issue Date. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof). "Wholly Owned Subsidiary" of any Person means any Subsidiary of such Person of which all the outstanding voting securities (other than in the case of a foreign Subsidiary, directors' qualifying shares or an immaterial amount of shares required to be owned by other Persons pursuant to applicable law) are owned by such Person or any Wholly Owned Subsidiary of such Person. 20 IN WITNESS WHEREOF, Leslie's Poolmart, Inc. has caused this Certificate to be executed by its Vice President and Assistant Secretary this 11th day of June, 1997. LESLIE'S POOLMART, INC. By: /s/ Cynthia G. Watts ----------------------------- 21 EX-3.5 6 BYLAWS OF THE COMPANY EXHIBIT 3.5 BYLAWS of LPM HOLDINGS, INC. (As amended as of June 9, 1997) TABLE OF CONTENTS -----------------
Page ---- ARTICLE I - Offices Section 1.01 Registered Office 1 Section 1.02 Principal Office 1 Section 1.03 Other Offices 1 ARTICLE II - Meetings of Stockholders Section 2.01 Annual Meetings 1 Section 2.02 Special Meeting 1 Section 2.03 Place of Meetings 2 Section 2.04 Notice of Meetings 2 Section 2.05 Quorum 3 Section 2.06 Voting 3 Section 2.07 List of Stockholders 5 Section 2.08 Inspector of Election 5 Section 2.09 Stockholder Action Without Meetings 5 Section 2.10 Record Date 6 ARTICLE III - Board of Directors Section 3.01 General Powers 7 Section 3.02 Number and Term 7 Section 3.03 Election of Directors 7 Section 3.04 Resignation and Removal 7 Section 3.05 Vacancies 8
-i- Section 3.06 Place of Meeting; Telephone Conference Meeting 8 Section 3.07 First Meeting 8 Section 3.08 Regular Meetings 8 Section 3.09 Special Meetings 9 Section 3.10 Quorum and Action 9 Section 3.11 Action by Consent 9 Section 3.12 Compensation 10 Section 3.13 Committees 10 Section 3.14 Officers of the Board 10 ARTICLE IV - Officers Section 4.01 Officers 11 Section 4.02 Election and Term 11 Section 4.03 Subordinate Officers 11 Section 4.04 Removal and Resignation 11 Section 4.05 Vacancies 12 Section 4.06 President 12 Section 4.07 Chairman of the Board 12 Section 4.08 Vice President 12 Section 4.09 Secretary 12 Section 4.10 Chief Financial Officer 13 Section 4.11 Compensation 14 ARTICLE V - Contracts, Checks, Drafts Bank Accounts, Etc. Section 5.01 Execution of Contracts 14
-ii- Section 5.02 Checks, Drafts, Etc. 14 Section 5.03 Deposit 14 Section 5.04 General and Special Bank Accounts 14 ARTICLE VI - Shares and Their Transfer Section 6.01 Certificates for Stock 15 Section 6.02 Transfer of Stock 16 Section 6.03 Regulations 16 Section 6.04 Lost, Stolen, Destroyed and Mutilated Certificates 16 Section 6.05 Representation of Shares of Other Corporations 16 ARTICLE VII - Indemnification Section 7.01 Actions Other Than By or In the Right of the Corporation 17 Section 7.02 Actions By or In the Right of the Corporation 17 Section 7.03 Determination of Right of Indemnification 18 Section 7.04 Indemnification Against Expenses of Successful Party 18 Section 7.05 Advance of Expenses 18 Section 7.06 Other Rights and Remedies 19 Section 7.07 Insurance 19 Section 7.08 Constituent Corporations 19 Section 7.09 Employee Benefit Plans 20 Section 7.10 Broadest Lawful Indemnification 20 Section 7.11 Term 21
-iii- Section 7.12 Severability 21 Section 7.13 Amendments 22 ARTICLE VIII - Miscellaneous Section 8.01 Seal 22 Section 8.02 Waiver of Notices 22 Section 8.03 Loans and Guaranties 23 Section 8.04 Gender 23 Section 8.05 Amendments 23 Section 8.06 Interpretation 23
-iv- BYLAWS of Leslie's Poolmart, Inc. f/k/a LPM Holdings, Inc. a Delaware Corporation (As amended as of June 9, 1997) ARTICLE I OFFICES ------- Section 1.01 REGISTERED OFFICE. The registered office of LPM HOLDINGS, INC. (hereinafter called the "Corporation") shall be at such place in the State of Delaware as shall be designated by the Board of Directors (hereinafter called the "Board"). Section 1.02 PRINCIPAL OFFICE. The principal office for the transaction of the business of the Corporation shall be at such location, within or without the State of Delaware, as shall be designated by the Board. Section 1.03 OTHER OFFICES. The Corporation may also have an office or offices at such other place or places, either within or without the State of Delaware, as the Board may from time to time determine or as the business of the Corporation may require. ARTICLE II MEETINGS OF STOCKHOLDERS ------------------------ Section 2.01 ANNUAL MEETINGS. Annual meetings of the stockholders of the Corporation for the purpose of electing directors and for the transaction of such other proper business as may come before such meetings may be held at such time, date and place as the Board shall determine by resolution. Section 2.02 SPECIAL MEETINGS. Special meetings of the stockholders of the Corporation for any purpose or purposes may be called at any time by the Board, or by a committee of the Board which has been duly designated by the Board and whose powers and authority, as provided in a resolution of the Board or in the Bylaws, include the power to call such meetings, but such special meetings may not be called by any other person or persons; provided, however, that if and to the extent that any special meeting of stock holders may be called by any other person or persons specified in any provisions of the Certificate of Incorporation or any amendment thereto or any certificate filed under Section 151(g) of the General Corporation Law of the State of Delaware (or its successor statute as in effect from time to time hereafter), then such special meeting may also be called by the person or persons, in the manner, at the time and for the purposes so specified. Section 2.03 PLACE OF MEETINGS. All meetings of the stockholders shall be held at such places, within or without the State of Delaware, as may from time to time be designated by the person or persons calling the respective meetings and specified in the respective notices or waivers of notice thereof. Section 2.04 NOTICE OF MEETINGS. Except as otherwise required by law, notice of each meeting of the stockholders, whether annual or special, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder of record entitled to vote at such meeting by delivering a typewritten or printed notice thereof to him personally, or by depositing such notice in the United States mail, in a postage prepaid envelope, directed to him at his address furnished by him to the Secretary of the Corporation for such purpose or, if he shall not have furnished to the Secretary his address for such purpose, then at his address last known to the Secretary, or by transmitting a notice thereof to him at such address by telegraph, cable or wireless. Except as otherwise expressly required by law, no publication of any notice of a meeting of the stockholders shall be required. Every notice of a meeting of the stockholders shall state the place, date and hour of the meeting, and, in the case of a special meeting shall also state the purpose or purposes for which the meeting is called. Except as otherwise expressly required by law, notice of any adjourned meeting of the stockholders need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken. Whenever notice is required to be given to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities -2- during a twelve month period, have been mailed addressed to such person at his address as shown on the records of the Corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall have been taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the Corporation a written notice setting forth his then current address, the requirement that notice be given to such person shall be reinstated. No notice need be given to any person with whom communication is unlawful, nor shall there be any duty to apply for any permit or license to give notice to any such person. Section 2.05 QUORUM. Except as provided by law, the holders of record of a majority in voting interest of the shares of stock of the Corporation entitled to be voted, present in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of the stockholders of the Corporation or any adjournment thereof. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. In the absence of a quorum at any meeting or any adjournment thereof, a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat or, in the absence therefrom of all the stockholders, any officer entitled to preside at or to act as secretary of such meeting may adjourn such meeting from time to time. At any such adjourned meeting at which a quorum is present any business may be transacted which might have been transacted at the meeting as originally called. Section 2.06 VOTING. (a) At each meeting of the stockholders, each stockholder shall be entitled to vote in person or by proxy each share or fractional share of the stock of the Corporation which has voting rights on the matter in question and which shall have been held by him and registered in his name on the books of the Corporation: (i) on the date fixed pursuant to Section 2.10 of these Bylaws as the record date for the determination of stockholders entitled to notice of and to vote at such meeting, or -3- (ii) if no such record date shall have been so fixed, then (A) at the close of business on the day next preceding the day on which notice of the meeting shall be given or (B) if notice of the meeting shall be waived, at the close of business on the day next preceding the day on which the meeting shall be held. (b) Shares of its own stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors in such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes. Persons holding stock of the Corporation in a fiduciary capacity shall be entitled to vote such stock. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the Corporation he shall have expressly empowered the pledgee to vote thereon, in which case only the pledgee, or his proxy, may represent such stock and vote thereon. Stock having voting power standing of record in the names of two or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or with respect to which two or more persons have the same fiduciary relationship, shall be voted in accordance with the provisions of the General Corporation Law of Delaware. (c) Any such voting rights may be exercised by the stockholder entitled thereto in person or by his proxy appointed by an instrument in writing, subscribed by such stockholder or by his attorney thereunto authorized and delivered to the secretary of the meeting; provided, however, that no proxy shall be voted or acted upon after three years from its date unless said proxy shall provide for a longer period. The attendance at any meeting of a stockholder who may theretofore have given a proxy shall not have the effect of revoking the same unless he shall in writing so notify the secretary of the meeting prior to the voting of the proxy. At any meeting of the stockholders all matters, except as otherwise provided in the Certificate of Incorporation, in these Bylaws or by law, shall be decided by the vote of a majority in voting interest of the stockholders present in person or by proxy and entitled to vote thereat and thereon. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. The vote at any meeting of the stockholders on any question need not be by ballot, unless so directed by the -4- chairman of the meeting. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by his proxy if there be such proxy, and it shall state the number of shares voted. Section 2.07 LIST OF STOCKHOLDERS. The Secretary of the Corporation shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the entire duration thereof, and may be inspected by any stockholder who is present. Section 2.08 INSPECTOR OF ELECTION. If at any meeting of the stockholders a vote by written ballot shall be taken on any question, the chairman of such meeting may appoint an inspector or inspectors of election to act with respect to such vote. Each inspector so appointed shall first subscribe an oath faithfully to execute the duties of an inspector at such meeting with strict impartiality and according to the best of his ability. Such inspectors shall decide upon the qualification of the voters and shall report the number of shares represented at the meeting and entitled to vote on such question, shall conduct and accept the votes, and, when the voting is completed, shall ascertain and report the number of shares voted respectively for and against the question. Reports of the inspectors shall be in writing and subscribed and delivered by them to the Secretary of the Corporation. Inspectors need not be stockholders of the Corporation, and any officer of the Corporation may be an inspector on any question other than a vote for or against a proposal in which he shall have a material interest. 2.09 STOCKHOLDER ACTION WITHOUT MEETINGS. Any action required by the General Corporation Law of the State of Delaware to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, -5- if a consent in writing setting forth the action so taken shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. Section 2.10 RECORD DATE. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board and which record date: (i) in the case of determination of stockholders entitled to vote at any meeting of stockholders or adjournment thereof, shall, unless otherwise required by law, not be more than sixty (60) nor less than ten (10) days before the date of such meeting; (ii) in the case of determination of stockholders entitled to express consent to corporate action in writing without a meeting, shall not be more than ten (10) days from the date upon which the resolution fixing the record date is adopted by the Board; and (iii) in the case of any other action, shall not be more than sixty (60) days prior to such other action. If no record date is fixed: (i) the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held; (ii) the record date for determining stockholders entitled to express consent to corporate action in writing without a meeting when no prior action of the Board is required by law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation in accordance with applicable law, or, if prior action by the Board is required by law, shall be at the close of business on the day on which the Board adopts the resolution taking such prior action; and (iii) the record date for determining stockholders for any other purpose shall be at the close of -6- business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stock holders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. ARTICLE III BOARD OF DIRECTORS ------------------ Section 3.01 GENERAL POWERS. The property, business and affairs of the Corporation shall be managed by or under the direction of the Board, which may exercise all of the powers of the Corporation, except such as are by the Certificate of Incorporation, by these Bylaws or by law conferred upon or reserved to the stockholders. Section 3.02 NUMBER AND TERM. The authorized Board shall consist of one or more members, the number of which shall be set by resolution of the Board; provided that such number shall be automatically increased without action by the Board to the extent required by any Certificate of Designation of the Corporation. Directors need not be stockholders of the Corporation. Each director shall hold office until a successor is elected and qualified or until the director resigns or is removed. Section 3.03 ELECTION OF DIRECTORS. The directors shall be elected by the stockholders of the Corporation, and at each election the persons receiving the greatest number of votes, up to the number of directors then to be elected, shall be the persons then elected. The election of directors is subject to any provisions contained in the Certificate of Incorporation relating thereto, including any provisions for a classified board. Section 3.04 RESIGNATION AND REMOVAL. Any director of the Corporation may resign at any time by giving written notice to the Board or to the Secretary of the Corporation. Any such resignation shall take effect at the time specified therein, or, if the time is not specified, it shall take effect immediately upon its receipt; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Except as otherwise provided by the Certificate of Incorporation or by law, any director or the entire board of directors may be removed, with or without cause, by the -7- holders of a majority of shares then entitled to vote at an election of directors. Section 3.05 VACANCIES. Except as otherwise provided in the Certificate of Incorporation, any vacancy in the Board, whether because of death, resignation, disquali fication, an increase in the number of directors, or any other cause, may be filled by vote of the majority of the remaining directors, although less than a quorum, or by a sole remaining director. Each director so chosen to fill a vacancy shall hold office until his successor shall have been elected and shall qualify or until he shall resign or shall have been removed. No reduction of the authorized number of directors shall have the effect of removing any director prior to the expiration of his term of office. Upon the resignation of one or more directors from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided hereinabove in the filling of other vacancies. Section 3.06 PLACE OF MEETING; TELEPHONE CONFERENCE MEETING. The Board may hold any of its meetings at such place or places within or without the State of Delaware as the Board may from time to time by resolution designate or as shall be designated by the person or persons calling the meeting or in the notice or waiver of notice of any such meeting. Directors may participate in any regular or special meeting of the Board by means of conference telephone or similar communications equipment pursuant to which all persons participating in the meeting of the Board can hear each other, and such participation shall constitute presence in person at such meeting. Section 3.07 FIRST MEETING. The Board shall meet as soon as practicable after each annual election of directors and notice of such first meeting shall not be required. Section 3.08 REGULAR MEETINGS. Regular meetings of the Board may be held at such times as the Board shall from time to time by resolution determine. If any day fixed for a meeting shall be a legal holiday at the place where the meeting is to be held, then the meeting shall be held at the same hour and place on the next succeeding business day -8- which is not a legal holiday. Except as provided by law, notice of regular meetings need not be given. Section 3.09 SPECIAL MEETINGS. Special meetings of the Board may be called at any time by the Chairman of the Board or the President or by any two (2) directors, to be held at the principal office of the Corporation, or at such other place or places, within or without the State of Delaware, as the person or persons calling the meeting may designate. Notice of the time and place of special meetings shall be given to each director either (i) by mailing or otherwise sending to him a written notice of such meeting, charges prepaid, addressed to him at his address as it is shown upon the records of the Corporation, or if it is not so shown on such records or is not readily ascertainable, at the place in which the meetings of the directors are regularly held, at least seventy-two (72) hours prior to the time of the holding of such meeting; or (ii) by orally communicating the time and place of the special meeting to him at least forty-eight (48) hours prior to the time of the holding of such meeting. Either of the notices as above provided shall be due, legal and personal notice to such director. Section 3.10 QUORUM AND ACTION. Except as otherwise provided in the Certificate of Incorporation, these Bylaws or by law, the presence of a majority of the authorized number of directors shall be required to consti tute a quorum for the transaction of business at any meeting of the Board, and all matters shall be decided at any such meeting, a quorum being present, by the affirmative votes of a majority of the directors present. In the absence of a quorum, a majority of directors present at any meeting may adjourn the same from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given. The directors shall act only as a Board, and the individual directors shall have no power as such. Section 3.11 ACTION BY CONSENT. Any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting if a written consent thereto is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or such committee. Such action by written consent shall have the same force and effect as the unanimous vote of such directors. -9- Section 3.12 COMPENSATION. No stated salary need be paid to directors, as such, for their services but, as fixed from time to time by resolution of the Board, the directors may receive directors' fees, compensation and reimbursement for expenses for attendance at directors' meetings, for serving on committees and for discharging their duties; provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Section 3.13 COMMITTEES. The Board may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of the committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they consti tute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent permitted by law and provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Unless the Board otherwise provides, each committee designated by the Board may make, alter and repeal rules for conduct of its business. In the absence of such rules each committee shall conduct its business in the same manner as the Board conducts its business pursuant to these Bylaws. Any such committee shall keep written minutes of its meetings and report the same to the Board when required. Section 3.14 OFFICERS OF THE BOARD. A Chairman of the Board or a Vice Chairman may be appointed from time to time by the Board and shall have such powers and duties as shall be designated by the Board. -10- ARTICLE IV OFFICERS -------- Section 4.01 OFFICERS. The officers of the Corporation shall be a President, a Secretary and a Chief Financial Officer. The Corporation may also have, at the discretion of the Board, a Chairman of the Board, a Chief Executive Officer, one or more Vice Presidents, a Treasurer, one or more Assistant Vice Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers and such other officers as may be appointed in accordance with the provi sions of Section 4.03 of these Bylaws. Any number of offices may be held be the same person. The salaries of all officers of the Corporation shall be fixed from time to time by the Board. Section 4.02 ELECTION AND TERM. The officers of the Corporation, except such officers as may be appointed in accordance with the provisions of Section 4.03 or Section 4.05 of these Bylaws, shall be chosen annually by the Board, and each shall hold his office until he shall resign or shall be removed or otherwise disqualified to serve, or until his successor shall be elected and qualified. Section 4.03 SUBORDINATE OFFICERS. The Board may appoint, or may authorize the Chief Executive Officer to appoint, such other officers as the business of the Corporation may require, each of whom shall have such authority and perform such duties as are provided in these Bylaws or as the Board or the President from time to time may specify, and shall hold office until he shall resign or shall be removed or otherwise disqualified to serve. Section 4.04 REMOVAL AND RESIGNATION. Any officer may be removed, with or without cause, by a majority of the directors at the time in office, at any regular or special meeting of the Board, or, except in case of an officer chosen by the Board, by the Chief Executive Officer upon whom such power of removal may be conferred by the Board. Any officer may resign at any time by giving written notice to the Board, the Chairman of the Board, the President or the Secretary of the Corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. -11- Section 4.05 VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the Bylaws for the regular appointments to such office. Section 4.06 PRESIDENT. The President of the Corporation shall, subject to the control of the Board, have general supervision, direction and control of the business and affairs of the Corporation. He shall preside at all meetings of stockholders and the Board. He shall have the general powers and duties of management usually vested in the chief executive officer of a corporation, and shall have such other powers and duties with respect to the administration of the business and affairs of the Corporation as may from time to time be assigned to him by the Board or as prescribed by the Bylaws. Section 4.07 CHAIRMAN OF THE BOARD. The Chairman of the Board, if any, shall preside at all meetings of the stockholders and the Board and exercise and perform such other powers and duties with respect to the administration of the business and affairs of the Corporation as may from time to time be assigned to him by the Board or as is prescribed by the Bylaws. Section 4.08 VICE PRESIDENT. The Vice President(s), if any, shall exercise and perform such powers and duties with respect to the administration of the business and affairs of the Corporation as from time to time may be assigned to each of them by the President, by the Chairman of the Board, if any, by the Board or as is prescribed by the Bylaws. In the absence or disability of the President, the Vice Presidents, in order of their rank as fixed by the Board, or if not ranked, the Vice President designated by the Board, shall perform all of the duties of the President and when so acting shall have all of the powers of and be subject to all the restrictions upon the President. Section 4.09 SECRETARY. The Secretary shall keep, or cause to be kept, a book of minutes at the principal office for the transaction of the business of the Corporation, or such other place as the Board may order, of all meetings of directors and stockholders, with the time and place of holding, whether regular or special, and if special, how authorized and the notice thereof given, the names of those present at directors' meetings, the number of shares present or represented at stockholders' meetings and the proceedings thereof. -12- The Secretary shall keep, or cause to be kept, at the principal office for the transaction of the business of the Corporation or at the office of the Corporation's transfer agent, a share register, or a duplicate share register, showing the names of the stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all the meetings of the stockholders and of the Board required by these Bylaws or by law to be given, and he shall keep the seal of the Corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board or these Bylaws. If for any reason the Secretary shall fail to give notice of any special meeting of the Board called by one or more of the persons identified in Section 3.09 of these Bylaws, or if he shall fail to give notice of any special meeting of the stockholders called by one or more of the persons identified in Section 2.02 of these Bylaws, then any such person or persons may give notice of any such special meeting. Section 4.10 CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall keep and maintain or cause to be kept and maintained, adequate and correct accounts of the properties and business transactions of the Corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, surplus and shares. Any surplus, including earned surplus, paid-in surplus and surplus arising from a reduction of capital, shall be classified according to source and shown in a separate account. The books of account at all reasonable times shall be open to inspection by any director. The Chief Financial Officer shall deposit all moneys and other valuables in the name and to the credit of the Corporation with such depositories as may be designated by the Board. He shall disburse the funds of the Corporation as may be ordered by the Board, shall render to the President, to the Chief Executive Officer and to the directors, whenever they request it, an account of all of his transactions as Chief Financial Officer and of the financial condition of the Corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board or these Bylaws. -13- Section 4.11 COMPENSATION. The compensation of the officers of the Corporation, if any, shall be fixed from time to time by the Board. ARTICLE V CONTRACTS, CHECKS, DRAFTS, BANK ACCOUNTS, ETC. ---------------------------------------------- Section 5.01 EXECUTION OF CONTRACTS. The Board, except as otherwise provided in these Bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name and on behalf of the Corporation, and such authority may be general or confined to specific instances; and unless so authorized by the Board or by these Bylaws, no officer, agent or employee shall have any power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or in any amount. Section 5.02 CHECKS, DRAFTS, ETC. All checks, drafts or other orders for payment of money, notes or other evidence of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board. Each such person shall give such bond, if any, as the Board may require. Section 5.03 DEPOSIT. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies or other depositories as the Board may select, or as may be selected by any officer or officers, assistant or assistants, agent or agents, attorney or attorneys, of the Corporation to whom such power shall have been delegated by the Board. For the purpose of deposit and for the purpose of collection for the account of the Corporation, the President, the Chief Executive Officer, any Vice President or the Chief Financial Officer (or any other officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation who shall be determined by the Board from time to time) may endorse, assign and deliver checks, drafts and other orders for the payment of money which are payable to the order of the Corporation. Section 5.04 GENERAL AND SPECIAL BANK ACCOUNTS. The Board from time to time may authorize the opening and -14- keeping of general and special bank accounts with such banks, trust companies or other depositories as the Board may select or as may be selected by an officer or officers, assistant or assistants, agent or agents, or attorney or attorneys of the Corporation to whom such power shall have been delegated by the Board. The Board may make such special rules and regulations with respect to such bank accounts, not inconsistent with the provisions of these Bylaws, as it may deem expedient. ARTICLE VI SHARES AND THEIR TRANSFER ------------------------- Section 6.01 CERTIFICATES FOR STOCK. Every owner of stock of the Corporation shall be entitled to have a certificate or certificates, in such form as the Board shall prescribe, certifying the number and class of shares of the stock of the Corporation owned by him. The certificates representing shares of such stock shall be numbered in the order in which they shall be issued and shall be signed in the name of the Corporation by the Chairman of the Board, the President or a Vice President and by the Secretary or an Assistant Secretary or by the Chief Financial Officer, the Treasurer or an Assistant Treasurer. Any or all of the signatures on the certificates may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon any such certificate shall thereafter have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may nevertheless be issued by the Corporation with the same effect as though the person who signed such certificate, or whose facsimile signature shall have been placed thereupon, were such officer, transfer agent or registrar at the date of issue. A record shall be kept of the respective names of the persons, firms or corporations owning the stock represented by such certificates, the number and class of shares represented by such certificates, respectively, and the respective dates thereof, and in case of cancellation, the respective dates of cancellation. Every certificate surrendered to the Corporation for exchange or transfer shall be cancelled, and no new certificate or certificates shall be issued in exchange for any existing certificate until such existing certificate shall have been so cancelled, except in cases provided for in Section 6.04 of these Bylaws. -15- Section 6.02 TRANSFER OF STOCK. Transfer of shares of stock of the Corporation shall be made only on the books of the Corporation by the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary, or with a transfer clerk or a transfer agent appointed as provided in Section 6.03 of these Bylaws, and upon surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. The person in whose name shares of stock stand on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation. Whenever any transfer of shares shall be made for collateral security, and not absolutely, such fact shall be stated expressly in the entry of transfer if, when the certificate or certificates shall be presented to the Corporation for transfer, both the transferor and the transferee request the Corporation to do so. Section 6.03 REGULATIONS. The Board may make such rules and regulations as it may deem expedient, not inconsistent with these Bylaws, concerning the issue, transfer and registration of certificates for shares of the stock of the Corporation. The Board may appoint, or authorize any officer or officers to appoint, one or more transfer clerks or one or more transfer agents and one or more registrars, and may require all certificates for stock to bear the signature or signatures of any of them. Section 6.04 LOST, STOLEN, DESTROYED AND MUTILATED CERTIFICATES. In any case of loss, theft, destruction, or mutilation of any certificate of stock, another may be issued in its place upon proof of such loss, theft, destruction, or mutilation and upon the giving of a bond of indemnity to the Corporation in such form and in such sums as the Board may direct; provided, however, that a new certificate may be issued without requiring any bond when, in the judgment of the Board, it is proper to do so. Section 6.05 REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The President or any Vice President and the Secretary or any Assistant Secretary of this Corporation are authorized to vote, represent and exercise on behalf of this Corporation all rights incident to all shares of any other corporation or corporations standing in the name of this Corporation. The authority herein granted to said officers to vote or represent on behalf of this Corporation any and all shares held by this Corporation in any other corporation or corporations may be exercised either by such officers in -16- person or by any person authorized so to do by proxy or power of attorney duly executed by said officers. ARTICLE VII INDEMNIFICATION --------------- Section 7.01 ACTIONS OTHER THAN BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a member of any committee or similar body, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, that he had reasonable cause to believe that his conduct was unlawful. Section 7.02 ACTIONS BY OR IN THE RIGHT OF THE CORPORATION. The Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or as a member of any committee or similar body, against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or -17- suit if he acted in good faith and in a manner he reasonably believed to be in, or not opposed to, the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. Section 7.03 DETERMINATION OF RIGHT OF INDEMNIFICATION. Any indemnification under Section 7.01 or 7.02 of these Bylaws (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in Sections 7.01 and 7.02 of these Bylaws. Such determination shall be made (i) by the Board by a majority vote of a quorum consisting of directors who were not parties to such action, suit or proceeding, or (ii) if such a quorum is not obtainable, or, even if obtainable, a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or (iii) by the stockholders. Section 7.04 INDEMNIFICATION AGAINST EXPENSES OF SUCCESSFUL PARTY. Notwithstanding the other provisions of this Article VII, to the extent that a director, officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Section 7.01 or 7.02 of these Bylaws, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 7.05 ADVANCE OF EXPENSES. Expenses (including attorneys' fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding as authorized by the Board upon receipt of an undertaking by or on behalf of the director or officer, to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the -18- Corporation as authorized in this Article VII. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the Board deems appropriate. Section 7.06 OTHER RIGHTS AND REMEDIES. The indemnification and advancement of expenses provided by, or granted pursuant to, the other Sections of this Article VII shall not be deemed exclusive and are declared expressly to be nonexclusive of any other rights to which those seeking indemnification or advancements of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Section 7.07 INSURANCE. Upon resolution passed by the Board, the Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a member of any committee or similar body against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article VII. Section 7.08 CONSTITUENT CORPORATIONS. For the purposes of this Article VII, references to "the Corpora tion" include in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise or as a member of any committee or similar body shall stand in the same position under the provisions of this Article VII with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. -19- Section 7.09 EMPLOYEE BENEFIT PLANS. For the purposes of this Article VII, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the Corporation" shall include any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Article VII. Section 7.10. BROADEST LAWFUL INDEMNIFICATION. In addition to the foregoing, the Corporation shall, to the broadest and maximum extent permitted by Delaware law, as the same exists from time to time (but, in case of any amendment to or change in Delaware law, only to the extent that such amendment or change permits the Corporation to provide broader rights of indemnification than is permitted to the Corporation prior to such amendment or change), indemnify each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he is or was a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding. In addition, the Corporation shall, to the broadest and maximum extent permitted by Delaware law, as the same may exist from time to time (but, in case of any amendment to or change in Delaware law, only to the extent that such amendment or change permits the Corporation to provide broader rights of payment of expenses incurred in advance of the final disposition of an action, suit or proceeding than is permitted to the Corporation prior to such amendment or change), pay to such person any and all expenses (including attorneys' fees) incurred in defending or settling any such action, suit or proceeding in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the direc- -20- tor or officer, to repay such amount if it shall ultimately be determined by a final judgment or other final adjudication that he is not entitled to be indemnified by the Corporation as authorized in this Section 7.10. The first sentence of this Section 7.10 to the contrary notwithstanding, the Corporation shall not indemnify any such person with respect to any of the following matters: (i) remuneration paid to such person if it shall be determined by a final judgment or other final adjudication that such remuneration was in violation of law; or (ii) any accounting of profits made from the purchase or sale by such person of the Corporation's securities within the meaning of Section 16(b) of the Securities Exchange Act of 1934 and amendments thereto or similar provisions of any federal, state or local statutory law; or (iii) actions brought about or contributed to by the dishonesty of such person, if a final judgment or other final adjudication adverse to such person establishes that acts of active and deliberate dishonesty were committed or attempted by such person with actual dishonest purpose and intent and were material to the adjudication; or (iv) actions based on or attributable to such person having gained any personal profit or advantage to which he was not entitled, in the event that a final judgment or other final adjudication adverse to such person establishes that such person in fact gained such personal profit or other advantage to which he was not entitled; or (v) any matter in respect of which a final decision by a court with competent jurisdiction shall determine that indemnification is unlawful; provided, however, that the Corporation shall perform its obligations under the second sentence of this Section 7.10 on behalf of such person until such time as it shall be ultimately determined by a final judgment or other final adjudication that he is not entitled to be indemnified by the Corporation as authorized by the first sentence of this Section 7.10 by virtue of any of the preceding clauses (i), (ii), (iii), (iv) or (v). Section 7.11. TERM. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 7.12 SEVERABILITY. If any part of this Article VII shall be found, in any action, suit or proceeding or appeal therefrom or in any other circumstances or as to any particular officer, director, employee or agent -21- to be unenforceable, ineffective or invalid for any reason, the enforceability, effect and validity of the remaining parts or of such parts in other circumstances shall not be affected, except as otherwise required by applicable law. Section 7.13 AMENDMENTS. The foregoing provisions of this Article VII shall be deemed to constitute an agreement between the Corporation and each of the persons entitled to indemnification hereunder, for as long as such provisions remain in effect. Any amendment to the foregoing provisions of this Article VII which limits or otherwise adversely affects the scope of indemnification or rights of any such persons hereunder shall, as to such persons, apply only to claims arising, or causes of action based on actions or events occurring, after such amendment and delivery of notice of such amendment is given to the person or persons so affected. Until notice of such amendment is given to the person or persons whose rights hereunder are adversely affected, such amendment shall have no effect on such rights of such persons hereunder. Any person entitled to indemnification under the foregoing provisions of this Article VII shall, as to any act or omission occurring prior to the date of receipt of such notice, be entitled to indemnification to the same extent as had such provisions continued as Bylaws of the Corporation without such amendment. ARTICLE VIII MISCELLANEOUS ------------- Section 8.01 SEAL. The Board shall provide a corporate seal, which shall be in the form of a circle and shall bear the name of the Corporation and words and figures showing that the Corporation was incorporated in the State of Delaware and showing the year of incorporation. Section 8.02 WAIVER OF NOTICES. Whenever notice is required to be given under any provision of these bylaws, the Certificate of Incorporation or by law, a written waiver, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when a person attends a meeting for the express purpose of objecting at the beginning of the meeting, to the trans action of any business because the meeting is not lawfully called or convened. Neither the business to be transacted -22- at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice unless required by the Certificate of Incorporation. Section 8.03 LOANS AND GUARANTIES. The Corporation may lend money to, or guarantee any obligation of, and otherwise assist any officer or other employee of the Corporation or of its subsidiaries, including any officer who is a director, whenever, in the judgment of the Board, such loan, guaranty or assistance may reasonably be expected to benefit the Corporation. The loan, guaranty, or other assistance may be with or without interest, and may be unsecured or secured in such manner as the Board shall approve, including, without limitation, a pledge of shares of stock of the Corporation. Section 8.04 GENDER. All personal pronouns used in these Bylaws shall include the other genders, whether used in the masculine, feminine or neuter gender, and the singular shall include the plural, and vice versa, whenever and as often as may be appropriate. Section 8.05 AMENDMENTS. These Bylaws, or any of them, may be rescinded, altered, amended or repealed, and new Bylaws may be made (i) by the Board, by vote of a majority of the number of directors then in office as directors, acting at any meeting of the Board or (ii) by the stockholders, by the vote of a majority of the outstanding shares of voting stock of the Corporation, at an annual meeting of stockholders, without previous notice, or at any special meeting of stockholders, provided that notice of such proposed amendment, modification, repeal or adoption is given in the notice of special meeting; provided, however, that Section 2.02 of these Bylaws can only be amended if that Section as amended would not conflict with the Corporation's Certificate of Incorporation. Any Bylaw made or altered by the stockholders may be altered or repealed by the Board or may be altered or repealed by the stockholders. Section 8.06 INTERPRETATION. To the extent that these Bylaws are inconsistent with the Corporation's Certificate of Incorporation, the Certificate of Incorporation shall control. -23- CERTIFICATE OF SECRETARY The undersigned certifies: (1) That the undersigned is duly elected and acting Secretary of LPM HOLDINGS, INC., a Delaware corporation; and (2) That the foregoing Bylaws constitute the Bylaws of the Corporation as duly adopted by written consent of the Board of Directors dated as of the 9th day of June, 1997. IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of the Corporation this 9th day of June, 1997. /s/ Robert D. Olsen _______________________________ Robert D. Olsen, Secretary [SEAL] EX-10.2 7 PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT EXHIBIT 10.2 EXECUTION COPY PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT ---------------------------------------------- TABLE OF CONTENTS -----------------
Page ---- 1. PURCHASE AND SALE OF SECURITIES......................................................... 1 1.1 AUTHORIZATION..................................................................... 1 1.2 SALE AND ISSUANCE OF CERTAIN SHARES OF SERIES A PREFERRED STOCK AND WARRANTS...... 1 2. CLOSING; DELIVERIES..................................................................... 2 2.1 THE CLOSING....................................................................... 2 2.2 DELIVERIES........................................................................ 2 2.3 CERTIFICATE OF DESIGNATION........................................................ 2 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................................... 2 3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION..................................... 2 3.2 AUTHORIZATION; BINDING AGREEMENT.................................................. 2 3.3 GOVERNMENTAL AND OTHER CONSENTS; NO VIOLATION..................................... 3 3.4 CAPITALIZATION.................................................................... 3 3.5 FINANCIAL STATEMENTS AND REPORTS.................................................. 4 3.6 NO OPERATIONS; EXISTING FUNDED DEBT............................................... 4 3.7 CERTAIN SECURITIES LAW ISSUES..................................................... 4 3.8 DISCLOSURE........................................................................ 5 4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR.......................................... 5 4.1 ACCREDITED INVESTOR............................................................... 5 4.2 INVESTMENT INTENT................................................................. 5 4.3 NO CONFLICTS...................................................................... 5 4.4 CERTAIN SECURITIES LAW ISSUES..................................................... 5 4.5 AUTHORIZATION..................................................................... 5 4.6 BROKERS........................................................................... 5 5. CONDITIONS TO INVESTOR'S AND COMPANY'S OBLIGATIONS AT CLOSING........................... 6 5.1 NO INJUNCTION..................................................................... 6 5.2 QUALIFICATIONS; LEGAL INVESTMENT.................................................. 6 5.3 STOCKHOLDERS AGREEMENT............................................................ 6 5.4 CERTIFICATE OF DESIGNATION........................................................ 6 6. CONDITIONS TO INVESTOR'S OBLIGATIONS AT CLOSING......................................... 6 6.1 REPRESENTATIONS AND WARRANTIES.................................................... 6 6.2 PERFORMANCE....................................................................... 6 6.3 MERGER............................................................................ 6 6.4 CLOSING DOCUMENTS................................................................. 7 6.5 OPINION OF COMPANY COUNSEL........................................................ 7 6.6 DELIVERIES........................................................................ 7 7. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING...................................... 7 7.1 REPRESENTATIONS AND WARRANTIES.................................................... 7 7.2 PERFORMANCE....................................................................... 7 7.3 CANCELLATION OF EXISTING DEBT..................................................... 7
i 8. CONVERSION OF PURCHASED STOCK TO EXCHANGE NOTE.......................................... 8 8.1 GENERALLY......................................................................... 8 8.2 EXCHANGE NOTE AFFIRMATIVE COVENANTS............................................... 8 8.3 EXCHANGE NOTE NEGATIVE COVENANTS.................................................. 9 8.4 EXCHANGE NOTE EVENTS OF DEFAULT; REMEDIES......................................... 10 8.5 EXPENSES.......................................................................... 11 8.6 REMEDIES CUMULATIVE............................................................... 11 9. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES........................................... 11 9.1 RESTRICTIONS ON TRANSFERABILITY................................................... 11 9.2 TRANSFER RESTRICTIONS............................................................. 12 9.3 RESTRICTIVE LEGEND................................................................ 12 10. MISCELLANEOUS.......................................................................... 12 10.1 PROVISION OF INFORMATION......................................................... 12 10.2 SUCCESSORS AND ASSIGNS........................................................... 13 10.3 GOVERNING LAW.................................................................... 13 10.4 COUNTERPARTS..................................................................... 13 10.5 TITLES AND SUBTITLES............................................................. 13 10.6 NOTICES.......................................................................... 13 10.7 AMENDMENTS AND WAIVERS........................................................... 13 10.8 SEVERABILITY..................................................................... 14 10.9 ENTIRE AGREEMENT................................................................. 14 11. DEFINITIONS............................................................................ 14
ii EXHIBITS -------- EXHIBITS - -------- Exhibit A Form of Series A Certificate of Designation Exhibit B Form of Warrant Exhibit C Form of Stockholders Agreement and Subscription Agreement Exhibit D Form of Opinion of Counsel to Company Exhibit E Form of Exchange Note iii PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT ---------------------------------------------- THIS PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT (the "Agreement") is made as of the 11th day of June, 1997, by and among Leslie's Poolmart, Inc., a Delaware corporation (the "Company", which term includes the surviving company with respect to the Merger (as defined below)) and Occidental Petroleum Corporation, a Delaware corporation (the "Investor"). Certain of the capitalized terms used in the Agreement are defined in Section 1 hereof. R E C I T A L S --------------- WHEREAS, the Investor desires to purchase certain securities of the Company on the terms and conditions set forth herein; WHEREAS, the Company desires to sell to the Investor such securities on the terms and conditions set forth herein; WHEREAS, the Company and the Investor anticipate that prior to the Closing (as defined below), Poolmart USA Inc. shall be merged into the Company (the "Merger"), pursuant to the provisions of the Agreement and Plan of Merger dated as of February 26, 1997 by and among Leslie's Poolmart, a California corporation ("Leslie's California"), Poolmart USA Inc., and the Company (the "Merger Agreement"). NOW, THEREFORE, in consideration of the foregoing recitals, the terms and provisions set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. PURCHASE AND SALE OF SECURITIES. ------------------------------- 1.1 AUTHORIZATION. The Company has authorized (i) the sale and ------------- issuance of up to Fifty Thousand (50,000) shares of its Series A Preferred Stock, having the rights, privileges, preferences and restrictions as stated in the Certificate of Designation, Preferences and Rights of Series A Exchangeable Cumulative Redeemable Preferred Stock set forth as Exhibit A to this Agreement --------- (the "Certificate of Designation") and (ii) the sale of warrants to purchase an aggregate of Two Hundred Fifty-Two Thousand Nine Hundred Ninety-Six (252,996) shares of its Common Stock, subject to adjustment as set forth in the warrant certificate (the "Warrants"). Each Warrant will be evidenced by a warrant certificate substantially in the form set forth as Exhibit B hereto. --------- 1.2 SALE AND ISSUANCE OF CERTAIN SHARES OF SERIES A PREFERRED --------------------------------------------------------- STOCK AND WARRANTS. - ------------------ (a) Subject to the terms and conditions set forth in this Agreement, the Investor shall purchase at the Closing (as defined below), and the Company shall sell and issue to the Investor at the Closing (i) Twenty-Eight Thousand (28,000) shares of Series A 1 Preferred Stock (the "Purchased Stock") and (ii) Two Hundred Fifty-Two Thousand Nine Hundred Ninety-Six (252,996) Warrants (the "Purchased Warrants"). (b) The aggregate purchase price for the Purchased Stock and Purchased Warrants (the "Aggregate Purchase Price") shall be Twenty-Eight Million Dollars ($28,000,000) comprised of Eighteen Million Dollars ($18,000,000) in cash (the "Cash Purchase Price") and the Occidental Notes. 2. CLOSING; DELIVERIES. ------------------- 2.1 THE CLOSING. Subject to the satisfaction or waiver of the ----------- conditions set forth in this Agreement, the closing (the "Closing") of the purchase and sale of the Series A Preferred Stock shall take place at the offices of Gibson, Dunn & Crutcher LLP, 333 South Grand Avenue, Los Angeles, California 90071 on a date to which the Company and the Investor may agree (the "Closing Date"). 2.2 DELIVERIES. At the Closing, the Company shall deliver to ---------- the Investor certificates representing the numbers of shares of Purchased Stock and the number of Warrants under this Agreement in exchange for delivery to the Company from the Investor of the Occidental Notes and by wire transfer from the Investor to the Company of the Cash Purchase Price, net of any offset with respect to accrued but unpaid interest to the Closing Date with respect to the Occidental Notes. 2.3 CERTIFICATE OF DESIGNATION. Prior to the Closing, the -------------------------- Company shall adopt and duly file with the Secretary of State of Delaware the Certificate of Designation in the form set forth in Exhibit A to this Agreement. --------- 3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company --------------------------------------------- represents and warrants to the Investor as follows: 3.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION. Each of the --------------------------------------------- Company and its Subsidiaries is a duly organized and validly existing corporation in good standing under the laws of the state of its incorporation, with all requisite power and authority (corporate and other) to own, lease and operate its properties and conduct its business and is duly qualified and in good standing as a foreign corporation authorized to do business in each of the jurisdictions in which the character of the properties owned or held under lease by it or the nature of the business transacted by it makes such qualification necessary, except where the failure to be so qualified would not have a material adverse effect on the Company and its Subsidiaries, taken as a whole. The Company has heretofore delivered to Investor accurate and complete copies of its and its Subsidiaries certificates or articles of incorporation and bylaws, as in effect on the date hereof. Neither the Company nor any of its Subsidiaries is in violation of any of the provisions of their respective certificates or articles of incorporation or bylaws. 3.2 AUTHORIZATION; BINDING AGREEMENT. The Company has all -------------------------------- requisite corporate power and authority to execute and deliver this Agreement and to 2 consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by the Company's Board of Directors. This Agreement has been duly and validly executed and delivered by the Company, and constitutes a legal, valid and binding agreement of the Company, enforceable against the Company in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or other laws, now or hereafter in effect, relating to or limiting creditors' rights generally, and (b) general principles of equity (whether considered in an action in equity or at law) which provide, among other things, that the remedies of specific performance and injunctive and other forms of equitable relief are subject to equitable defenses and to the discretion of the court before which any proceedings therefor may be brought. 3.3 GOVERNMENTAL AND OTHER CONSENTS; NO VIOLATION. No consent, --------------------------------------------- approval, order or authorization of, or registration, qualification, designation, declaration or filing with, any Governmental Authority or any other Person is required on the part of the Company in connection with the Company's valid execution, delivery or performance of this Agreement or the other agreements referred to herein or the offer, sale or issuance of the Securities, except as may be required under applicable state "blue sky" laws. The execution, delivery and performance by the Company of this Agreement, the issuance of the Purchased Stock, and the consummation of the other transactions contemplated hereby, do not and will not (a) violate any provision of the Company's Certificate of Incorporation or bylaws as currently in effect or (b) conflict with, result in a breach of, or constitute (or, with the giving of notice or lapse of time or both, would constitute) a default under, or require the approval or consent of any Person, or give any Person any right of termination, amendment, acceleration, repurchase or repayment, increased payments or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of the Company pursuant to, any contract of the Company, except for (x) consents that have been obtained and are in full force and effect and (y) consents that would not prevent or materially delay the performance by the Company of its obligations hereunder and in the aggregate would, if not obtained, fail to have a material adverse effect on the Company. 3.4 CAPITALIZATION. The authorized capital of the Company -------------- consists of: (i) Twelve Million (12,000,000) shares of common stock ("Common Stock"), One Million Four Hundred Thirty-Three Thousand, Six Hundred and Forty- Three (1,433,643) of which will be issued and outstanding on the Closing Date; and (ii) Two Million (2,000,000) shares of Preferred Stock, of which Twenty- Eight Thousand (28,000) shares of Series A Preferred Stock shall be issued and outstanding immediately after the Closing Date. All of the outstanding shares of Capital Stock of the Company and the Subsidiaries of the Company have been duly authorized and validly issued and are fully paid and nonassessable and free of preemptive rights. All issued and outstanding shares of Capital Stock of the Subsidiaries of the Company are owned by the Company or a Wholly-Owned Subsidiary of the Company free and clear of all liens, charges, encumbrances, claims and options of any nature. Except as contemplated by this Agreement, the Merger Agreement, the Stockholders Agreement and Subscription Agreement among the Company, the Investor and the other parties thereto dated as of even date herewith (the "Stockholders Agreement") and agreements referred to herein and therein, 3 neither the Company nor any Subsidiary of the Company has granted any outstanding warrant, subscription or other right, or entered into any agreement or commitment which either (a) obligates the Company or any of its Subsidiaries to issue, sell or transfer any shares of the Capital Stock of the Company or any Subsidiary of the Company or (b) restricts the transfer of, or otherwise encumbers, shares of the Company's Capital Stock. 3.5 FINANCIAL STATEMENTS AND REPORTS. All consolidated -------------------------------- financial statements of Leslie's California and its Subsidiaries (including the notes to such financial statements) included in Leslie's California's Annual Report on Form 10-K for the year ended December 28, 1996 (the "Year End Financial Statements") filed pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the unaudited financial statements of Leslie's California and its Subsidiaries included in Leslie's California's Quarterly Reports on Form 10-Q for the quarter ended March 29, 1997 (the "Interim Financial Statements") filed pursuant to the Exchange Act (a) are in accordance with the books and records of Leslie's California and its Subsidiaries, (b) present fairly the consolidated financial position, results of operations, changes in shareholders' equity, and cash flow (as applicable) of Leslie's California and its Subsidiaries as of the respective dates and for the respective periods indicated, except, in the case of the Interim Financial Statements, for normal year-end audit adjustments, and (c) except for the absence of footnotes in the Interim Financial Statements, have been prepared in conformity with generally accepted accounting principles applies in all material respects on a consistent basis through all the periods involved. Since the date of the latest Interim Financial Statements, (i) Leslie's California and its Subsidiaries have conducted their respective businesses only in the ordinary course and consistent with past practice, (ii) there has been no material adverse change in the business, assets, properties, operations, condition (financial or otherwise) or prospects of Leslie's California, and (iii) since the date of the latest Interim Financial Statements, neither Leslie's California nor any of its Subsidiaries has incurred any liabilities or obligations (whether absolute, accrued, fixed, contingent, liquidated, unliquidated or otherwise and whether due or to become due) of any nature except in the ordinary course of its business or as contemplated by the Proxy Statement or Offering Memorandum. 3.6 NO OPERATIONS; EXISTING FUNDED DEBT. Each of LPM Holdings, ----------------------------------- Inc. and Poolmart USA Inc. was formed in connection with the transactions contemplated by the Merger Agreement. As of immediately prior to the consummation of the transactions contemplated by the Merger Agreement, such corporations had no operations and had incurred no Funded Debt. 3.7 CERTAIN SECURITIES LAW ISSUES. Assuming the accuracy of ----------------------------- the Investor's representations and warranties in Section 4, the offer, sale and issuance of the Purchased Stock and the Purchased Warrants are exempt from with the registration or qualification provisions of the Securities Act, as amended and any relevant state securities laws. 4 3.8 DISCLOSURE. Neither the Proxy Statement nor the Offering ---------- Memorandum contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading. 4. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR. The Investor ---------------------------------------------- represents and warrants to the Company as follows: 4.1 ACCREDITED INVESTOR. The Investor is an "accredited ------------------- investor" as defined by the SEC's Rule 501 under the Securities Act. 4.2 INVESTMENT INTENT. The Investor is acquiring the ----------------- Securities for its own account or one of its affiliates, and not with a present view to, or for sale in connection with any, distribution thereof. 4.3 NO CONFLICTS. The execution, delivery and performance by ------------ the Investor of this Agreement and the other agreements referred to herein, and the consummation of the transactions contemplated hereby, do not and will not (a) violate any provision of the Investor's Certificate of Incorporation or Bylaws as currently in effect or (b) conflict with, result in a breach of, or constitute (or, with the giving of notice or lapse of time or both, would constitute) a default under, or, except for consents that have been obtained and are in full force and effect, require the approval or consent of any Person pursuant to, any contractual obligation of Investor. 4.4 CERTAIN SECURITIES LAW ISSUES. The Investor understands ----------------------------- that the Securities are or will be "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Securities Act only in certain limited circumstances. 4.5 AUTHORIZATION. All corporate action on the part of the ------------- Investor necessary for the authorization, execution, delivery and performance by the Investor of this Agreement and the other agreements referred to in this Agreement, the purchase of the shares of Purchased Stock and the Warrants, and the performance of all of the Investor's obligations hereunder and thereunder have been taken or will be taken prior to the Closing. This Agreement, when executed and delivered by the Investor, will constitute a valid and binding obligation of the Investor, enforceable against the Investor in accordance with its terms, except as such enforceability may be limited by (a) bankruptcy, insolvency, reorganization, moratorium or other laws, now or hereafter in effect, relating to or limiting creditors' rights generally, and (b) general principles of equity (whether considered in an action in equity or at law) which provide, among other things, that the remedies of specific performance and injunctive and other forms of equitable relief are subject to equitable defenses and to the discretion of the court before which any proceedings therefor may be brought. 4.6 BROKERS. The Investor has not dealt with, or incurred ------- Liability for a fee to, any finder, broker, investment banker or financial advisor in connection with any 5 of the transactions contemplated by this Agreement or the negotiations looking toward the consummation of such transactions. 5. CONDITIONS TO INVESTOR'S AND COMPANY'S OBLIGATIONS AT CLOSING. ------------------------------------------------------------- The obligations of the Investor to purchase and pay for the Securities and the other obligations of the Investor under this Agreement, and the obligations of the Company under this Agreement, are subject to the fulfillment at or prior to the Closing of the following conditions: 5.1 NO INJUNCTION. There shall not be in effect any order, ------------- decree or injunction of a court or agency of competent jurisdiction which enjoins or prohibits consummation of the transactions contemplated hereby. 5.2 QUALIFICATIONS; LEGAL INVESTMENT. All authorizations, -------------------------------- approvals, or permits, if any, of any Governmental Authority or any other Person that are required in connection with the lawful sale and issuance of the shares of the Purchased Stock and the consummation of the transactions contemplated by this Agreement shall have been duly obtained and shall be effective on and as of the Closing. No stop order or other order enjoining the sale of the shares of the Securities shall have been issued and no proceedings for such purpose shall be pending or, to the knowledge of the Company and the Investor, threatened by the SEC, the California Commissioner of Corporations or any commissioner of corporations or similar officer of any state having jurisdiction over this transaction. At the time of the Closing, the sale and issuance of the shares of the Securities shall be legally permitted by all laws and regulations to which the Company and the Investor are subject. 5.3 STOCKHOLDERS AGREEMENT. The Investor and the other parties ---------------------- thereto shall have entered into the Stockholders Agreement in substantially the form set forth as Exhibit C hereto. --------- 5.4 CERTIFICATE OF DESIGNATION. The Company shall have adopted -------------------------- and duly filed with the Secretary of State of Delaware the Certificate of Designation in the form set forth in Exhibit A to this Agreement. --------- 6. CONDITIONS TO INVESTOR'S OBLIGATIONS AT CLOSING6. ------------------------------------------------ 6.1 REPRESENTATIONS AND WARRANTIES. On the date of the Closing, ------------------------------ the representations and warranties of the Company contained in Section 3 shall be true and correct in all respects with the same force and effect as though such representations and warranties had been made at and as of the time of Closing, except to the extent that any changes therein are specifically contemplated by this Agreement. 6.2 PERFORMANCE. The Company shall have performed and complied ----------- with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by it at or prior to the Closing. 6.3 MERGER. The Merger shall have been consummated. ------ 6 6.4 CLOSING DOCUMENTS. The Company shall have delivered to the ----------------- Investor, unless waived in writing by the Investor: (a) copies (certified by the Secretary of the Company) of the resolutions duly adopted by the Board of Directors of the Company, authorizing the execution, delivery and performance of this Agreement and the other agreements contemplated hereby; (b) a copy (certified by the Secretary of State of the State of Delaware) of the Certificate of Incorporation as amended through the date of the Closing and a copy (certified by the Secretary of the Company) of the Company's Bylaws as amended through the date of the Closing; and (c) such other documents relating to the transactions contemplated by this Agreement as the Investor or the Investor's counsel may reasonably request. 6.5 OPINION OF COMPANY COUNSEL. The Investor shall have -------------------------- received the opinion of Gibson, Dunn & Crutcher LLP, counsel to the Company, in the form set forth as Exhibit D hereto. --------- 6.6 PAYMENT OF ACCRUED INTEREST ON OCCIDENTAL NOTES. The ----------------------------------------------- Investor shall have received payment, in cash or by offset against the Cash Purchase Price, of all accrued but unpaid interest to the Closing Date with respect to the Occidental Notes. 7. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The -------------------------------------------------- obligations of the Company under this Agreement are subject to the fulfillment at or prior to the Closing of the following conditions, any of which may be waived in writing in whole or in part by the Company: 7.1 REPRESENTATIONS AND WARRANTIES. On the date of the ------------------------------ Closing, the representations and warranties of the Investor contained in Section 4 shall be true and correct in all respects with the same force and effect as though such representations and warranties had been made at and as of the time of Closing, except to the extent that any changes therein are specifically contemplated by this Agreement. 7.2 PERFORMANCE. The Investor shall have performed and ----------- complied with all agreements, obligations and conditions contained in this Agreement that are required to be performed or complied with by such Investor on or before the Closing, including payment to the Company of the Purchase Price set forth in Section 1.2 of this Agreement. 7.3 DELIVERY OF EXISTING DEBT. The Occidental Notes shall have ------------------------- been delivered to the Company by the Investor. 7 8. CONVERSION OF PURCHASED STOCK TO EXCHANGE NOTE. ---------------------------------------------- 8.1 GENERALLY. The Purchased Stock is exchangeable by the Company --------- under certain terms and conditions set forth in the Certificate of Designation into the Company's 10 7/8% Junior Subordinated Notes due June 11, 2007 (the "Exchange Notes"). The Exchange Notes shall be subordinated to the Senior Indebtedness on terms and conditions approved by the lenders with respect to the Senior Bank Debt and a majority in interest of the holders of the Series A Preferred Stock at the time of issuance of such Exchange Notes. The form of Exchange Note (excluding the terms and conditions of such subordination, which terms and conditions will be supplied upon receipt of the lenders approval described in the preceding sentence) is attached hereto as Exhibit E hereto. --------- 8.2 EXCHANGE NOTE AFFIRMATIVE COVENANTS. So long as any principal or ----------------------------------- interest under the Exchange Notes is outstanding, the Company shall: (a) punctually pay the interest and principal on the Exchange Notes at the times and place and in the manner specified herein; (b) maintain adequate books and records in accordance with generally accepted accounting principles consistently applied; (c) provide to each holder of an Exchange Note all of the following: (x) not later than 100 days after and as of the end of each fiscal year, audited consolidated financial statements of the Company, prepared by a nationally recognized firm of certified public accountants, to include a balance sheet, income statement and statements of cash flow and stockholders equity; and (y) not later than 55 days after and as of the end of each fiscal quarter, unaudited consolidated financial statements of the Company prepared by the Company and certified by the Company's chief financial officer, to include a balance sheet, income statement and statement of cash flow together with a certificate in each case signed by an executive officer of the Company certifying that the Company is not in default under any provision of this Agreement, the Purchased Stock or the Purchased Warrants; (d) maintain, and cause each Subsidiary to maintain, all licenses, permits, governmental approvals, rights, privileges and franchises necessary for the conduct of their respective businesses; conduct their respective businesses in an orderly and regular manner; and comply with the provisions of all documents pursuant to which each of them is organized or which govern their continued existence and with the material requirements of all laws, rules, regulations and orders of any governmental authority applicable to each of them or their respective businesses; (e) maintain and keep in force, and cause any Subsidiary to maintain and keep in force, insurance of the types and in amounts customarily 8 carried in similar lines of business, including but not limited to fire, extended coverage, public liability, property damage and workers' compensation; (f) pay and discharge when due, and cause each Subsidiary to pay and discharge when due, any and all taxes, including federal and state income taxes, except such as the Company may in good faith contest or as to which a bona fide dispute may arise, provided provision is made for eventual payment thereof in the event that it is found that the same is an obligation of the Company or any Subsidiary; (g) keep, and cause each Subsidiary to keep, all properties useful or necessary to their business in good repair and condition, subject to ordinary wear and tear, and from time to time make necessary repairs, renewals and replacements thereto so that such properties shall be fully and efficiently preserved and maintained; and (h) promptly provide each holder of an Exchange Note with notice of any (i) Event of Default, (ii) Change of Control (as such term is defined under the Indenture with respect to the Senior Notes) or (iii) event of default under instruments or documents evidencing Senior Indebtedness. 8.3 EXCHANGE NOTE NEGATIVE COVENANTS. So long as any principal or -------------------------------- interest under the Exchange Notes is outstanding, the Company shall not, without the consent of holders of a majority of the outstanding principal amount of Exchange Notes: (a) incur, or permit any of its Subsidiaries to incur, any Funded Debt in a principal amount exceeding $5,000,000; (b) enter into, or permit any Subsidiary to enter into, any transaction with any Affiliate of the Company (an "Affiliate Transaction"); provided, however, that the following shall not be deemed to be Affiliate Transactions: (v) transaction fees payable to LGP or Hancock Park Associates II, L.P. on or about the Preferred Stock Issue Date pursuant to the Management Agreement, (w) payments to LGP pursuant to the Management Agreement, (x) advances to directors, officers or employees of the Company to provide for the payment of reasonable expenses incurred by such persons in the performance of such persons' responsibilities to the Company; (y) reasonable fees and compensation paid to and indemnity provided on behalf of officers, directors or employees of the Company as determined in good faith by the Board of Directors and the Company's senior management, and (z) transactions between or among the Company and/or its Subsidiaries; (c) declare or pay any dividend or make any distribution on account of any Capital Stock, either directly or indirectly, whether in cash, obligations or other property (other than dividends or distributions payable solely in Capital Stock) or (2) purchase, redeem or otherwise acquire or retire 9 for value any Capital Stock (other than as a result of (i) a reclassification of any Capital Stock into another class or series of Capital Stock , (ii) the exchange or conversion of one class or series of Capital Stock for or into another class or series of Capital Stock; provided, however, that the restrictions in this Section 8.3(c) shall not apply to any purchase, redemption or other acquisition or retirement for value contemplated by the Stockholders Agreement; (d) enter into, or permit any of its Subsidiaries to enter into, any employment contract; (e) increase, or permit any of its Subsidiaries to increase, in any material respect the benefits or compensation of any of the executive officers of the Company; or (f) make any substantial change in the character of its principal business. 8.4 EXCHANGE NOTE EVENTS OF DEFAULT; REMEDIES. If one or more of the ----------------------------------------- following events ("Events of Default") shall have occurred and be continuing: (a) the Company (i) shall fail to pay when due any principal of the Exchange Note or (ii) shall fail to pay within 5 days after the due date thereof any interest due under the Exchange Note; or (b) the Company shall fail to observe or perform any of the covenants set forth in Sections 8.2 or 8.3 hereof; or (c) the Company shall commence a voluntary case or other proceeding seeking liquidation, reorganization or other relief with respect to itself or its debts under any domestic or foreign bankruptcy, insolvency or other similar law now or hereafter in effect, or shall make a general assignment for the benefit of creditors; or (d) an involuntary case or other proceeding shall be commenced against the Company seeking liquidation, reorganization or other relief with respect to it or its debts under any domestic or foreign bankruptcy, insolvency or other similar law now or hereafter in effect, and such involuntary case or other proceeding shall remain undismissed and unstayed for a period of 60 days; (e) the holders of at least Five Million Dollars ($5,000,000) in principal amount of the Senior Indebtedness shall accelerate the maturity of such Senior Indebtedness prior to the scheduled maturity date thereof as a result of an event of default under the documents governing such Senior Indebtedness. 10 then, and in every such event, the holders of a majority of principal amount of the Exchange Notes shall by written notice to the Company be entitled to declare the unpaid principal amount of the Exchange Note, with the interest accrued thereon, to be immediately due and payable. 8.5 EXPENSES. In case any one or more Events of Default shall have -------- occurred and be continuing, unless such Events of Default shall have been waived, the holders of the Exchange Notes may proceed to protect and enforce their rights, subject to the rights of the holders of the Senior Indebtedness and the related provisions of the Exchange Note regarding subordination. The Company agrees to pay such holders all fees, costs and expenses of enforcing their rights under or with respect to this Agreement, including without limitation such reasonable fees, costs and expenses of attorneys and accountants (whether or not litigation is commenced), and including, without limitation, reasonable fees, costs and expenses of appeals. 8.6 REMEDIES CUMULATIVE. No right, power or remedy conferred upon ------------------- the holders of the Exchange Notes shall be exclusive, and each such right, power or remedy shall be cumulative and in addition to every other right, power or remedy, whether conferred hereby or now or hereafter available at law or in equity or by statute or otherwise. 9. RESTRICTIONS ON TRANSFERABILITY OF SECURITIES --------------------------------------------- 9.1 RESTRICTIONS ON TRANSFERABILITY. The Securities shall not ------------------------------- be sold, assigned, transferred or pledged except upon satisfaction of the conditions specified in this Section 9. The Investor will cause any proposed purchaser, assignee, transferee, or pledgee of the shares of Securities to agree to take and hold such securities subject to the provisions and conditions of this Section 9. 9.2 TRANSFER RESTRICTIONS. The Investor shall not sell, ---------------------- transfer, pledge or hypothecate the shares of Purchased Stock or the Exchange Note in the absence of an effective registration statement for such securities under the Securities Act of 1933, as amended, or an opinion of counsel delivered to the Company that registration is not required under such Act. The Investor shall not sell, transfer, pledge or hypothecate the shares of Purchased Stock or the Exchange Note in the except in compliance with any applicable state securities laws. 9.3 RESTRICTIVE LEGEND. Each certificate representing the ------------------ Purchased Stock and the Exchange Note shall be stamped or otherwise imprinted with a legend in the following form (in addition to any legend required under applicable state securities laws): THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE 11 REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL DELIVERED TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT. 10. MISCELLANEOUS. ------------- 10.1 PROVISION OF INFORMATION. The Company covenants as follows: ------------------------ (a) The Company will promptly provide the holders of the shares of Series A Preferred Stock with copies of all documents, reports or other information provided to all holders of the Common Stock. (b) No later than the 45th day after each calendar quarter, the Company will provide the holders of the shares of Series A Preferred Stock with a certificate signed by an executive officer of the Company (i) stating that such officer is familiar with the terms of the Certificate of Designation and has made or caused to be made a review of the transactions and conditions of the Company and that such review has not disclosed the existence and such officer does not otherwise have knowledge of any event which would permit the holders of the shares of Series A Preferred Stock to elect additional Class A Directors pursuant to paragraph f(iii) of the Certificate of Designation and (ii) demonstrating in reasonable detail the Company's compliance as of the end of the immediately preceding calendar quarter with the Four Quarter Coverage Ratio and the Eight Quarter Coverage Ratio (as such terms are defined in the Certificate of Designation). 10.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly ---------------------- provided herein, the terms and conditions of this Agreement shall inure to the benefit of and be binding upon the respective successors and assigns of the parties (including transferees of the Securities). Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and assigns any rights, remedies, obligations, or Liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. 10.3 GOVERNING LAW. This Agreement shall be governed by and ------------- construed under the laws of the State of Delaware as applied to agreements among Delaware residents entered into and to be performed entirely within Delaware. 10.4 COUNTERPARTS. This Agreement may be executed in two or more ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 10.5 TITLES AND SUBTITLES. The titles and subtitles used in this -------------------- Agreement are used for convenience only and are not to be considered in construing or interpreting this Agreement. 12 10.6 NOTICES. All notices, demands, or other communications under ------- this Agreement shall be in writing and shall be delivered via confirmed facsimile, overnight courier, by hand delivery or by certified mail, return receipt requested, to the appropriate party at the address set forth on the signature page of this Agreement (subject to change from time to time by written notice to all other parties to this Agreement). All communications shall be deemed served upon delivery of, or if mailed, upon the first to occur of receipt or the expiration of three (3) Business Days after the deposit in the United States Postal Service mail, postage prepaid and addressed to the address of Company or the Investor at the address specified or, if transmitted via facsimile, upon electronic confirmation of receipt; provided, however, that non- -------- ------- receipt of any communication as the result of any change of address or facsimile number of which the sending party was not notified or as the result of a refusal to accept delivery shall be deemed receipt of such communication. 10.7 AMENDMENTS AND WAIVERS. Any term of this Agreement may be ---------------------- amended and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and (i) so long as the Investor is the sole holder of the shares of Series A Preferred Stock or the Exchange Notes, the Investor, and (ii) at any time when the Investor is not the sole holder of the shares of Series A Preferred Stock or the Exchange Notes, a majority in interest of such holders, based on (x) the liquidation preference of each outstanding share of Series A Preferred Stock or (y) the outstanding principal amount under each Exchange Note, as applicable. 10.8 SEVERABILITY. If one or more provisions of this Agreement ------------ are held to be unenforceable under applicable law, such provision or provisions shall be excluded from this Agreement and the balance of the Agreement shall be interpreted as if such provision or provisions were so excluded and shall be enforceable in accordance with its terms. 10.9 ENTIRE AGREEMENT. This Agreement, the Schedules and Exhibits ---------------- hereto, and the other documents required to be delivered pursuant hereto constitute the entire understanding and agreement between the parties with regard to the specific subject matter hereof, and no party shall be liable or bound by any representation, warranty, covenant or agreement except as specifically set forth herein or therein. Any previous agreement (whether written, oral or implied) among the parties relative to the specific subject matter hereof is superseded by this Agreement. 11. DEFINITIONS. ----------- The following terms have the following meanings when used in this Agreement, unless the context expressly or by necessary implication otherwise requires: "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause 13 the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided that beneficial ownership of a majority or more of the voting securities of a Person shall be deemed to be control. "Affiliate Transaction" has the meaning set forth in Section 8.2(b). "Aggregate Purchase Price" has the meaning set forth in Section 1.2(b). "Agreement" has the meaning set forth in the preamble hereto. "Board of Directors" shall mean, as to any corporation. the Board of Directors of such corporation or a committee of such corporation having authority to exercise, when the Board of Directors is not in session, the powers of the Board of Directors (subject to any designated limitations) in the management of the business and affairs of such corporation. "Business Day" means each day other than a Saturday, Sunday or other day on which commercial banks in Los Angeles, California are authorized or required by law to close. Unless specifically referenced in this Agreement as a Business Day, all references to "days" shall be to calendar days. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" of any Person shall mean the beneficial ownership interests in said Person, including, without limitation, the capital stock of any Person that is a corporation and the partnership interests (general and limited) in any Person that is a partnership. "Cash Purchase Price" has the meaning set forth in Section 1.1. "Certificate of Designation" has the meaning set forth in Section 1.1. "Certificate of Incorporation" means the Certificate of Incorporation of the Company, including all amendments thereto, as in effect on the date hereof. "Closing" has the meaning set forth in Section 2.1. "Closing Date" has the meaning set forth in Section 2.1. "Common Stock" has the meaning set forth in Section 3.4. "Credit Agreement" means credit agreement(s) to be entered into by the Company and one or more lenders, and all amendments thereto, together with the related documents thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring all or 14 any portion of the Indebtedness under such agreement(s) or any successor or replacement agreement(s) and whether by the same or any other agent, lender or group of lenders. "Disqualified Capital Stock" means that portion of any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof, in any case, on or prior to the final maturity date of the Senior Notes; provided, however, that the term "Disqualified Capital Stock" shall not include the shares of Series A Preferred Stock. "Exchange Act" has the meaning set forth in Section 3.5. "Exchange Notes" has the meaning set forth in Section 8.1. "Existing Indebtedness" means any indebtedness of the Company (including without limitation Funded Debt) existing on the Exchange Date (as such term is defined in the Certificate of Designation). "Events of Default" has the meaning set forth in Section 8.3. "Fiscal Year" shall mean the fiscal year of the Company, which shall be the fifty-two (52) week period ending on the Saturday closest to December 31 in each year. "Funded Debt" means, with respect to any Person and as of any date of determination, the principal amount of all debt for borrowed money; provided, that Funded Debt shall in any event not include any Permitted Indebtedness. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect as of the Closing Date. "Governmental Authority" means any federal, territorial, state or local governmental authority, quasi-governmental authority, instrumentality, court, government or self-regulatory organization, commission, tribunal or organization or any regulatory, administrative or other agency, or any political or other subdivision, department or branch of any of the foregoing, in all such cases whether domestic or foreign. "Indebtedness" means with respect to any Person, without duplication, (i) all Obligations of such Person for borrowed money, (ii) all Obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all Capital Lease Obligations of such Person, (iv) all Obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all Obligations under any title retention agreement (but excluding trade accounts payable and other accrued liabilities arising in the 15 ordinary course of business that are not overdue by 90 days or more or are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted), (v) all Obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction, (vi) guarantees and other contingent obligations in respect of Indebtedness referred to in clauses (i) through (v) above and clause (viii) below, (vii) all Obligations of any other Person of the type referred to in clauses (i) through (vi) which are secured by any lien on any property or asset of such Person, the amount of such Obligation being deemed to be the lesser of the fair market value of such property or asset or the amount of the Obligation so secured, (viii) all Obligations under currency agreements and interest swap agreements of such Person and (ix) all Disqualified Capital Stock issued by such Person with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value shall be determined reasonably and in good faith by the Board of Directors of the issuer of such Disqualified Capital Stock. "Interest Swap Obligations" means the obligations of any Person pursuant to any arrangement with any other Person whereby, directly or indirectly, such Person is entitled to receive from time to time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements. "Interim Financial Statements" has the meaning set forth in Section 3.5. "Lien" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "Leslie's California" has the meaning set forth in the Recitals. "LGP" means Leonard Green & Partners, L.P. "Liability" means, with respect to any Person, any liability or obligation of such Person of any kind, character or description, whether known or unknown, absolute or contingent, accrued or unaccrued, liquidated or unliquidated, secured or unsecured, joint or several, due or to become due, vested or unvested, executory, determined, determinable or otherwise and whether or not the same is required to be accrued on the financial statements of such Person. 16 "Management Agreement" means that certain Management Agreement dated as of the Closing Date by and between LGP and the Company, providing for certain annual fees, expenses and reimbursements to be paid to LGP, as such Management Agreement may be amended from time to time in accordance with the Stockholders Agreement. "Material Adverse Effect" means, with respect to any Person or designated group of Persons, a change in, or effect on, or group of such changes in or effects on, the operations, financial condition or results of operations, prospects, assets or Liabilities of the Person or group of Persons, as the case may be, taken as a whole, that results in a material adverse effect on, or a material adverse change in, the operations, financial condition, results of operations, prospects, assets or Liabilities of the Person or group of Persons, as the case may be, taken as a whole, excluding adverse changes in the general economy. "Merger" has the meaning set forth in the Recitals. "Merger Agreement" has the meaning set forth in the Recitals. "Offering Memorandum" means the Offering Memorandum relating to the offering by the Company of the Senior Notes. "Occidental Notes" means $10 million principal amount of 8% subordinated debentures issued by Leslie's California due 2001. "Permitted Indebtedness" means, without duplication, each of the following: (i) Indebtedness under the Exchange Notes; (ii) Indebtedness under the Senior Notes; (iii) Indebtedness incurred pursuant to a Credit Agreement(s) in an aggregate principal amount at any time outstanding not to exceed the greater of (a) $35.0 million and (b) the sum of 80% of the total accounts receivable and 60% of the total inventory of the Company and its Subsidiaries, less in each case the amount of any prepayments made with the proceeds of an Asset Sale (as defined in the documentation with respect to the Senior Notes) or assumed in connection with an Asset Sale (as defined in the documentation with respect to the Senior Notes); (iv) other Indebtedness of the Company and its Subsidiaries outstanding on the Closing Date; (v) Interest Swap Obligations of the Company covering Indebtedness of the Company or any of its Subsidiaries and Interest Swap Obligations of any Subsidiary of the Company covering Indebtedness of such Subsidiary; provided, however, that such Interest Swap Obligations are -------- ------- entered into to protect the Company and its Subsidiaries from fluctuations in interest rates on Indebtedness incurred in accordance with the Indenture to the extent the notional principal amount of such 17 Interest Swap Obligation does not exceed the principal amount of the Indebtedness to which such Interest Swap Obligation relates; (vi) Indebtedness of a Subsidiary of the Company to the Company or to a Wholly Owned Subsidiary of the Company for so long as such Indebtedness is held by the Company or a Wholly Owned Subsidiary of the Company, in each case subject to no Lien held by a Person other than the Company or a Wholly Owned Subsidiary of the Company; provided that if as of -------- any date any Person other than the Company or a Wholly Owned Subsidiary of the Company owns or holds any such Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the issuer of such Indebtedness; (vii) Indebtedness of the Company to a Wholly Owned Subsidiary of the Company for so long as such Indebtedness is held by a Wholly Owned Subsidiary of the Company, in each case subject to no Lien held by a Person other than a Wholly Owned Subsidiary of the Company; provided that if as of any date any Person other than a Wholly Owned -------- Subsidiary of the Company owns or holds any such Indebtedness or any Person other than a Wholly Owned Subsidiary of the Company holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the Company; (viii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; provided, however, -------- ------- that such Indebtedness is extinguished within two business days of incurrence; (ix) Indebtedness of the Company or any of its Subsidiaries represented by letters of credit for the account of the Company or such Subsidiary, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self-insurance or similar requirements in the ordinary course of business; (x) Refinancing Indebtedness (as defined in the documentation with respect to the Senior Notes); (xi) Capital Lease Obligations and Purchase Money Indebtedness (as defined in the documentation with respect to the Senior Notes) of the Company or any of its Subsidiaries in an aggregate principal amount not to exceed $5.0 million at any one time outstanding; and (xii) additional Indebtedness of the Company in an aggregate principal amount not to exceed $10.0 million at any one time outstanding. 18 "Obligations" means all obligations for principal, premium, interest and additional interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Person" or "person," means any natural person, firm, corporation, partnership, limited liability company, association, trust, Governmental Authority or other entity. "Proxy Statement" shall mean the proxy statement of Leslie's California dated May 2, 1997 in connection with the transactions contemplated by the Merger Agreement. "Purchased Stock" has the meaning set forth in Section 1.2(a). "Purchased Warrants" has the meaning set forth in Section 1.2(a). "Securities" shall mean, collectively, the Purchased Stock and the Purchased Warrants. "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute and the rules and regulations of the SEC thereunder, all as the same shall be in effect at the time. "Senior Bank Debt" shall mean debt outstanding under the Credit Agreement dated as of June 11, 1997 between the Company, the financial institutions party thereto, and Wells Fargo Bank, National Association as Agent and Swingline Lender. "Senior Indebtedness" shall mean, collectively, the Senior Bank Debt, the Senior Notes, and any refinancings of either the Senior Bank Debt or the Senior Notes. "Senior Notes" shall mean $90 million in principal amount of the Company's 10 3/8% Senior Notes due 2004. "Series A Preferred Stock" shall mean the Series A Exchangeable Cumulative Redeemable Preferred Stock, with the rights, preferences and privileges set forth in the Certificate of Designation. "Stockholders Agreement" has the meaning set forth in Section 3.4. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof). 19 "Warrants" has the meaning set forth in Section 1.1. "Wholly Owned Subsidiary" of any Person means any Subsidiary of such Person of which all the outstanding voting securities (other than in the case of a foreign Subsidiary, directors' qualifying shares or an immaterial amount of shares required to be owned by other Persons pursuant to applicable law) are owned by such Person or any Wholly Owned Subsidiary of such Person. "Year-End Financial Statements" has the meaning set forth in Section 3.5. 20 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first above written. THE COMPANY: LESLIE'S POOLMART, INC. a Delaware corporation By: /s/ Robert D. Olsen ------------------------------ Address: 20630 Plummer Street Chatsworth, California 91311 THE INVESTOR: OCCIDENTAL PETROLEUM CORPORATION By: /s/ Stephen I. Chazen ------------------------------ Stephen I. Chazen Executive Vice President Address: 10889 Wilshire Boulevard Los Angeles, CA 90024 21 EXHIBIT A LESLIE'S POOLMART, INC. CERTIFICATE OF DESIGNATION, PREFERENCES AND RIGHTS OF EXCHANGEABLE CUMULATIVE REDEEMABLE PREFERRED STOCK, SERIES A (Pursuant to Section 151(g) of the General Corporation Law of the State of Delaware.) Leslie's Poolmart, Inc., a corporation organized and existing under the laws of the State of Delaware (hereinafter the "Company"), DOES HEREBY CERTIFY THAT, pursuant to authority conferred upon the Board of Directors of the Company (the "Board") by the Certificate of Incorporation of the Company, as amended (the "Certificate of Incorporation"), the Board, pursuant to a unanimous written consent dated as of June 11, 1997, adopted the following resolutions authorizing the issuance of Exchangeable Cumulative Redeemable Preferred Stock, Series A of the Company, which resolutions are still in full force and effect and are not in conflict with any provisions of the Certificate of Incorporation or Bylaws of the Company: RESOLVED, that pursuant to authority vested in the Board by the Certificate of Incorporation, the Board does hereby establish a series of preferred stock of the Company from the Company's authorized class of Two Million (2,000,000) shares of $.001 par value preferred shares, such series to consist of 50,000 shares, and does hereby fix and state the voting rights, designation, powers, preferences and relative participating, optional or other special rights and the qualifications, limitations or restrictions thereof, as follows: (a) Designation. ----------- The Preferred Stock created and authorized hereby shall be designated as the "Exchangeable Cumulative Redeemable Preferred Stock, Series A" (hereinafter called the "Series A Preferred Stock"). The number of shares of Series A Preferred Stock shall be 50,000, and no more. (b) Rank. ---- The Series A Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company, rank senior to all classes of common stock of the Company, and to each other class of Capital Stock of the Company the terms of which do not expressly provide that it ranks senior to or on a parity with the Series A Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company (collectively referred to with the common stock of the Company as "Junior Securities"). The Series A Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company, rank on a parity with any class of Capital Stock or series of preferred stock hereafter created which expressly provides that it ranks on a parity with the Series A Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company ("Parity Securities"); provided that any such Parity Securities that were not issued in accordance with paragraph (f)(v)(A) hereof shall be deemed to be Junior Securities and not Parity Securities. The Series A Preferred Stock shall, with respect to dividend distributions and distributions upon the liquidation, winding up and dissolution of the Company, rank junior to each class of Capital Stock hereafter issued in accordance with paragraph (f)(v)(A) hereof and which expressly provides that it ranks senior to the Series A Preferred Stock as to dividend distributions or distributions upon the liquidation, winding up and dissolution of the Company ("Senior Securities"). (c) Dividends. --------- (i) Beginning on the Issue Date, each Holder shall be entitled to receive, when, as and if declared by the Board of Directors, out of funds legally available therefor, distributions in the form of dividends on each whole or fractional share of Series A Preferred Stock, at a rate per annum equal to ten and seven-eighths percent (10 7/8%) of the Liquidation Preference per share of the Series A Preferred Stock, payable quarterly. All dividends with respect to each whole or fractional share of Series A Preferred Stock shall be cumulative, whether or not earned or declared, on a daily basis from the Issue Date with respect to such whole or fractional share, and shall be payable quarterly in arrears on each Dividend Payment Date, commencing on the first Dividend Payment Date after the Issue Date with respect to such whole or fractional share; provided that if any dividend payable on any Dividend Payment Date on or before the fifth anniversary of the Initial Preferred Stock Issue Date is not declared and paid in full in cash on such Dividend Payment Date, the amount payable as dividends on such Dividend Payment Date that is not paid in cash on such Dividend Payment Date shall be paid by the Company on such date by the issuance of additional fully paid and non-assessable shares (including fractional shares, if applicable, or, at the Company's option, cash in lieu of such fractional shares) of Series A Preferred Stock having an aggregate Liquidation Preference equal to the amount of such dividends (rounded to the nearest whole cent). The payment by the Company in such additional shares of Series A Preferred Stock shall constitute full payment of such dividend. Dividends payable on any Dividend Payment Date after the fifth anniversary of the Preferred Stock Issue Date shall be paid only in cash. If any dividend (or portion thereof) payable on any Dividend Payment Date after the fifth anniversary of the Initial Preferred Stock Issue Date is not declared or paid in full in cash on such Dividend Payment Date, the amount of such dividend that is payable and that is not paid in cash on such date shall accrue interest at the annual dividend rate plus 5% until declared and paid in full, compounded quarterly. Each distribution in the form of a dividend shall be payable to the Holders of Series A Preferred Stock of record as they appear on the stock books of the Company on such record dates, not less than 10 nor more than 45 days preceding the related Dividend Payment Date, as shall be fixed by the Board of Directors. Dividends shall cease to accumulate in respect of shares of the Series A Preferred Stock on the Exchange Date or on the date of their earlier redemption unless the Company shall have failed to issue the appropriate aggregate principal amount of Exchange Notes in respect of the Series A Preferred Stock on the Exchange Date or shall have failed to pay the relevant redemption price on the date fixed for redemption. (ii) All dividends paid with respect to shares of the Series A Preferred Stock pursuant to paragraph (c)(i) shall be paid pro rata to the Holders thereof entitled thereto. (iii) Dividends on account of arrears for any past Dividend Period may be declared and paid at any time, without reference to any regular Dividend Payment Date, together with all accrued and unpaid interest thereon, to Holders of Series A Preferred Stock of record on such date, not more than 45 days prior to the payment thereof, as may be fixed by the Board of Directors. 2 (iv) Holders of shares of the Series A Preferred Stock shall be entitled to receive the dividends provided for in paragraph (c)(i) hereof in preference to and in priority over any dividends upon any of the Junior Securities. (v) Holders of shares of the Series A Preferred Stock shall be entitled to receive the dividends provided for in paragraph (c)(i) hereof on a pro rata basis with respect to any dividends upon any Parity Securities. (vi) Dividends payable on shares of the Series A Preferred Stock for any period less than a year shall be computed on the basis of a 360-day year of twelve 30-day months. If any Dividend Payment Date occurs on a day that is not a Business Day, any accrued dividends otherwise payable on such Dividend Payment Date shall be paid on the next succeeding Business Day. (d) Liquidation Preference. ---------------------- (i) Upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Company, the Holders of shares of Series A Preferred Stock then outstanding shall be entitled to be paid, out of the assets of the Company available for distribution to its stockholders, $1,000 per share of Series A Preferred Stock (the "Liquidation Preference"), plus an amount in cash equal to accumulated and unpaid dividends thereon (and all accrued and unpaid interest thereon) to the date fixed for liquidation, dissolution or winding up (including an amount equal to a prorated dividend for the period from the last Dividend Payment Date to the date fixed for liquidation, dissolution or winding up) before any payment shall be made or any assets distributed to the holders of any of the Junior Securities, including, without limitation, common stock of the Company. Except as provided in the preceding sentence, Holders of shares of Series A Preferred Stock shall not be entitled to any distribution in the event of liquidation, dissolution or winding up of the affairs of the Company. If the assets of the Company are not sufficient to pay in full the liquidation payments payable to the Holders of outstanding shares of the Series A Preferred Stock and all Parity Securities, then the holders of all such shares shall share equally and ratably in such distribution of assets of the Company in accordance with the amounts which would be payable on such distribution if the amount to which the Holders of outstanding shares of Series A Preferred Stock and the holders of outstanding shares of all Parity Securities are entitled were paid in full. (ii) For the purposes of this paragraph (d), neither the sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Company nor the consolidation or merger of the Company with or into one or more corporations or other entities shall be deemed to be a liquidation, dissolution or winding up of the affairs of the Company (unless such sale, conveyance, exchange or transfer is in connection with a dissolution or winding up of the business of the Company). 3 (e) Redemption. ---------- (i) Optional Redemption. ------------------- (A) The Company may (subject to contractual and other restrictions with respect thereto and the legal availability of funds therefor), at the option of the Company, redeem at any time from any source of funds legally available therefor, in whole or in part, in the manner provided in paragraph (e)(iii) hereof, any or all of the shares of the Series A Preferred Stock, at a redemption price equal to (1) the Liquidation Preference per share multiplied by 101% plus (2) an amount in cash equal to all accumulated and unpaid dividends per share (and all accrued and unpaid interest thereon) (including an amount in cash equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to the Redemption Date to the Redemption Date) (the sum of (1) and (2) being denominated herein the "Optional Redemption Price"). (B) In the event of a redemption pursuant to paragraph (e)(i)(A) hereof of only a portion of the then outstanding shares of the Series A Preferred Stock, the Company shall effect such redemption pro rata according to the number of shares held by each Holder of Series A Preferred Stock or by lot, as may be determined by the Company in its sole discretion. (ii) Mandatory Redemption. On each Mandatory Redemption Date, the -------------------- Company shall redeem, subject to contractual and other restrictions thereupon, from any source of funds legally available therefor, in the manner provided in paragraph (e)(iii) hereof, a number of shares equal to one-third of the shares of Series A Preferred outstanding on the First Mandatory Redemption Date, rounded to the nearest whole share per holder, at a redemption price equal to (1) 100% of the Liquidation Preference per share, plus (2) an amount in cash equal to all accumulated and unpaid dividends per share (and all accrued and unpaid interest thereon) (including an amount equal to a prorated dividend for the period from the Dividend Payment Date immediately prior to each Mandatory Redemption Date to the such Mandatory Redemption Date) (the sum of (1) and (2) being denominated herein the "Mandatory Redemption Price"). (iii) Procedures for Redemption. ------------------------- (A) At least 30 days and not more than 60 days prior to the date fixed for any redemption of the Series A Preferred Stock, written notice (the "Redemption Notice") shall be given by first-class mail, postage prepaid, to each Holder of Series A Preferred Stock of record on the record date fixed for such redemption of the Series A Preferred Stock at such Holder's address as the same appears on the stock register of the Company, provided that no failure to give such notice nor any deficiency therein shall affect the validity of the procedure for the redemption of any shares of Series A Preferred Stock to be redeemed except as to the Holder or Holders to whom the Company has failed to give said notice or except as to the Holder or Holders whose notice was defective. The Redemption Notice shall state: (1) whether the redemption is pursuant to paragraph (e)(i) or (e)(ii) hereof; (2) the Optional Redemption Price or 4 the Mandatory Redemption Price, as the case may be; (3) whether all or less than all the outstanding shares of the Series A Preferred Stock are to be redeemed and the total number of shares of the Series A Preferred Stock being redeemed; (4) the number of shares of Series A Preferred Stock held, as of the appropriate record date, by the Holder that the Company intends to redeem; (5) the date fixed for redemption; (6) that the Holder is to surrender to the Company, at the place or places where certificates for shares of Series A Preferred Stock are to be surrendered for redemption, in the manner and at the price designated, such Holder's certificate or certificates representing the shares of Series A Preferred Stock to be redeemed; and (7) that dividends on the shares of the Series A Preferred Stock to be redeemed shall cease to accrue on such Redemption Date unless the Company defaults in the payment of the Optional Redemption Price or the Mandatory Redemption Price, as the case may be. (B) Each Holder of Series A Preferred Stock shall surrender the certificate or certificates representing such shares of Series A Preferred Stock to the Company in the manner and at the place designated in the Redemption Notice, and on the Redemption Date the full Optional Redemption Price or Mandatory Redemption Price, as the case may be, for such shares shall be payable in cash to the Person whose name appears on such certificate or certificates as the owner thereof, and each surrendered certificate shall be canceled and retired. In the event that less than all of the shares represented by any such certificate are redeemed, a new certificate shall be issued representing the unredeemed shares. (C) Unless the Company defaults in the payment in full of the applicable redemption price, dividends on the Series A Preferred Stock called for redemption shall cease to accumulate on the Redemption Date, and the Holders of such redemption shares shall cease to have any further rights with respect thereto on the Redemption Date, other than the right to receive the Optional Redemption Price or the Mandatory Redemption Price, as the case may be, without interest. (f) Voting Rights and Protective Provisions. --------------------------------------- (i) Generally. --------- The Holders of shares of the Series A Preferred Stock will not have any voting rights except as set forth below or as otherwise from time to time required by applicable law. In connection with any right to vote, each Holder of Series A Preferred Stock will have one vote for each such share held. Any shares of Series A Preferred Stock held by the Company or any Subsidiary of the Company shall not have voting rights hereunder and shall not be counted in determining the presence of a quorum or in calculating any percentage of shares under this paragraph (f). (ii) Right to Elect Class A Directors. -------------------------------- The number of directors of the Company shall be as from time to time fixed by, or determined in the manner provided in, the Certificate of Incorporation and the Bylaws of the Company, provided, that subject to the provisions of paragraph (f)(iii), a number of directors equal to 5 the smallest whole number of directors that will represent at least 20% of the members of the Company's Board of Directors shall be designated as "Class A Directors" and shall be elected by the Holders of a majority of the shares of the Series A Preferred Stock then outstanding, voting as a separate class. The holders of the Series A Preferred Stock, voting as a separate class, shall have the exclusive right to remove without cause at any time and replace any Class A Director by an affirmative vote of the Holders of a majority of the shares of Series A Preferred Stock then outstanding. (iii) Additional Class A Directors. ---------------------------- (A) If (i) the Coverage Ratio for any four consecutive Quarters shall be less than 1.0:1.0 (a "Four Quarter Coverage Ratio Event"), and (ii) the number of Class A Directors then represents less than 40% of the members of the Company's Board of Directors, then, if such Four Quarter Coverage Ratio Event has not been remedied prior thereto, effective as of the thirtieth day after (x) the forty-fifth day after the end of such four consecutive Quarters, or (y) such earlier date on which the Company first publicly announces its results of operations for the last such Quarter, upon written notice to the Company by the Holders of at least 20% of the outstanding Series A Preferred Stock, but without any action on the part of the Board of Directors, the number of members of the Board of Directors shall be increased by the smallest whole number that will result in at least 40% of the members of the Company's Board of Directors being Class A Directors (assuming that such directors are designated as "Class A Directors"), and all of such additional directors shall be designated as additional "Class A Directors." (B) If (i) the Coverage Ratio for any eight consecutive Quarters shall be less than 1.0:1.0 (a "Eight Quarter Coverage Ratio Event"), and (ii) the number of Class A Directors then represents less than a majority of the members of the Company's Board of Directors, then, if such Eight Quarter Coverage Ratio Event has not been remedied prior thereto, effective as of the thirtieth day after (x) the forty-fifth day after the end of such eight consecutive Quarters, or (y) such earlier date on which the Company first publicly announces its results of operations for the last such Quarter, upon written notice to the Company by the Holders of at least 20% of the outstanding Series A Preferred Stock, but without any action on the part of the Board of Directors, the number of members of the Board of Directors shall be increased by the smallest whole number that will result in at least a majority of the members of the Company's Board of Directors being Class A Directors (assuming that such directors are designated as "Class A Directors"), and all of such additional directors shall be designated as additional "Class A Directors." (C) If (i) the dividends on the Series A Preferred Stock shall be in arrears and unpaid for four consecutive Quarters (a "Dividend Event") and (ii) the number of Class A Directors then represents less than a majority of the members of the Company's Board of Directors, then, if such Dividend Event has not been remedied prior thereto, effective as of the day immediately following the Dividend Payment Date that resulted in such four consecutive quarter arrearage, upon written notice to the Company by the Holders of at least 20% of the outstanding Series A Preferred Stock, but without any 6 action on the part of the Board of Directors, the number of members of the Board of Directors shall be increased by the smallest whole number that will result in at least a majority of the members of the Company's Board of Directors being Class A Directors (assuming that such directors are designated as "Class A Directors"), and all of such additional directors shall be designated as additional "Class A Directors." (D) If the Company fails to pay any portion of the Mandatory Redemption Price of the Series A Preferred Stock on any Mandatory Redemption Date (whether or not any contractual or other restrictions apply to such redemption) pursuant to paragraph (e)(ii) hereof (a "Redemption Event"), then, if such Redemption Event has not been remedied prior thereto, effective as of the day immediately following such Mandatory Redemption Date, upon written notice to the Company by the Holders of at least 20% of the outstanding Series A Preferred Stock, but without any action on the part of the Board of Directors, all members of the Board of Directors shall thereafter be designated as "Class A Directors." (E) If an Insolvency Event occurs, then, effective immediately upon the occurrence of such Insolvency Event, upon written notice to the Company by the Holders of at least 20% of the outstanding Series A Preferred Stock, but without any action on the part of the Board of Directors, all members of the Board of Directors shall thereafter be designated as "Class A Directors." (F) Any event described in paragraph (f)(iii)(A), (B), (C) or (D) above shall be deemed remedied at such time as such event ceases to be in effect. Without limiting the foregoing, the events described in paragraph (f)(iii)(A) and (B) may be cured by a contribution to capital in the amount which, had it been added as if it were Net Income to the amount of EBITDA for the relevant period, would have resulted in a Coverage Ratio of at least one. (G) Notwithstanding any of the provisions of paragraphs (f)(iii)(A), (B), (C), (D), (E) or (F) above, the rights set forth therein of the Holders of the issued and outstanding shares of the Series A Preferred Stock to elect and remove Class A Directors pursuant to a Special Voting Rights Date relating to a Four Quarter Coverage Ratio Event or an Eight Quarter Coverage Ratio Event shall terminate when Occidental Petroleum Corporation, a Delaware corporation ("Occidental") ceases to own at least a majority of the outstanding shares of Series A Preferred Stock. (iv) Certain Procedures. ------------------ (A) If, during the interval between annual meetings of stockholders for the election of directors, there is a vacancy or vacancies in the Class A Directors (whether as a result of an increase in the number of Class A Directors pursuant to paragraph (f)(iii) hereof, a resignation, death or removal of a Class A Director or any other reason), such vacancy or vacancies in the Class A Directors may, subject to applicable law, be filled by a majority vote of the remaining Class A Directors then in office, or by a sole remaining Class A Director. 7 (B) If there is a vacancy or vacancies in the Class A Directors (whether as a result of an increase in the number of Class A Directors pursuant to paragraph (f)(iii) hereof, a resignation, death or removal of a Class A Director or any other reason), the Chairman of the Board of the Company or other authorized officer of the Company, if any, may, and upon the written request of the Holders of record of at least 10% of the shares of Series A Preferred Stock then outstanding addressed to the Secretary of the Company shall, call a special meeting of the Holders of Series A Preferred Stock, for the purpose of electing a Class A Director or Directors to fill such vacancy. If such meeting is not called by the proper officer of the Company within 10 days after personal service of such written request upon the Secretary of the Company, or within 10 days after mailing the same within the United States by certified mail, addressed to the Secretary of the Company at its principal executive offices, then the Holders of record of at least 20% of the outstanding shares of the Series A Preferred Stock may designate in writing one of their number to call such meeting at the expense of the Company, and such meeting may be called by the Person so designated upon the notice required for special meetings of stockholders of the Company and shall be held at the place for holding the annual meetings of stockholders or such other place in the United States as shall be designated in such notice. (C) At any meeting held for the purpose of electing directors at which the Holders of Series A Preferred Stock shall have the right to elect a Class A Director or Directors, the presence in person or by proxy of the Holders of at least one-third of the then outstanding shares of Series A Preferred Stock shall be required and be sufficient to constitute a quorum of such class for the election of such Class A Director or Directors. At any such meeting or adjournment thereof (1) the absence of a quorum of the Holders of Series A Preferred Stock shall not prevent the election of a director or directors other than the Class A Director or Directors, and the absence of a quorum or quorums of the holders of Capital Stock entitled to elect other directors shall not prevent the election of the Class A Director or Directors, and (2) in the absence of a quorum of the holders of any class of stock entitled to vote for the election of directors, a majority of the holders present in person or by proxy of such class shall have the power to adjourn the meeting for the election of directors which the holders of such class are entitled to elect, from time to time without notice (except as required by law) other than announcement at the meeting, until a quorum shall be present. (D) Any Class A Director elected to fill a vacancy shall hold office for the unexpired term in respect of which the vacancy occurred and until his successor shall be elected and shall qualify or until his earlier death, resignation or removal in the manner provided by the Certificate of Incorporation and the Bylaws of the Company. (E) Any action required or permitted to be taken at an annual or special meeting of Holders of Series A Preferred Stock may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the Holders of outstanding Series A Preferred Stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to 8 vote thereon were present and voted and shall be delivered to the Company by delivery to its registered office in the State of Delaware (by hand or by certified or registered mail, return receipt requested), its principal place of business or an officer or agent of the Company having custody of the book in which proceedings of meetings of stockholders are recorded. (F) Any written notice to be given to the Company by Holders of Series A Preferred Stock may be given (1) by personal service of such written notice upon the Secretary of the Company, (2) by registered or certified mail, addressed to the Secretary of the Company at its principal executive offices, or (3) by delivery to the Company's registered office in the State of Delaware (by hand or by certified or registered mail). (v) Protective Provisions. --------------------- So long as any shares of the Series A Preferred Stock are outstanding, the Company shall not, without the affirmative vote or consent of Holders of at least a majority of the outstanding shares of Series A Preferred Stock, voting or consenting, as the case may be, separately as one class, given in person or by proxy, either in writing or by resolution adopted at an annual or special meeting: (A) create, authorize or issue, or reclassify any authorized stock of the Company into, or increase the authorized amount of, any class or series of Senior Securities, Parity Securities, or Junior Securities; (B) amend, alter or repeal any provision of the Certificate of Incorporation, as the same may be amended from time to time, so as to affect adversely the relative rights, preferences, qualifications, limitations or restrictions of the Series A Preferred Stock; (C) permit any of its Subsidiaries to issue any equity securities, or securities convertible into, or exercisable, redeemable or exchangeable for, equity securities, to any Person other than the Company or a wholly owned Subsidiary of the Company; (D) prior to the exchange of Series A Preferred Stock for Exchange Notes, amend or modify the terms of the Exchange Notes; (E) incur, or permit any of its Subsidiaries to incur, any Funded Debt in a principal amount exceeding $5,000,000; (F) (1) declare or pay any dividend or make any distribution on account of any Junior Securities or Parity Securities or any securities convertible into, or exercisable, redeemable or exchangeable for, Junior Securities or Parity Securities, either directly or indirectly, whether in cash, obligations or shares of the Company or other property (other than dividends or distributions payable solely in Junior Securities or securities convertible into, or exercisable, redeemable or exchangeable for, Junior Securities, the issuance of which has been approved pursuant to paragraph (f)(v)(A)), or (2) purchase, redeem or otherwise acquire or retire for value any Junior Securities or 9 Parity Securities (other than as a result of (i) a reclassification of Junior Securities into another class or series of Junior Securities, (ii) a reclassification of Parity Securities into Junior Securities, (iii) the exchange or conversion of one class or series of Junior Securities for or into another class or series of Junior Securities, or (iv) the exchange or conversion of one class or series of Parity Securities for or into Junior Securities, in each case, subject to obtaining any approval required pursuant to paragraph (f)(v)(A) or any securities convertible into, or exercisable, redeemable or exchangeable for, any Junior Securities or Parity Securities; provided, however, that the restrictions in this paragraph (f)(v)(F) shall not apply to any purchase, redemption or other acquisition or retirement for value contemplated by the Stockholders Agreement; (G) enter into, or permit any Subsidiary to enter into, any transaction with any Affiliate of the Company (an "Affiliate Transaction"); provided, however, that the following shall not be deemed to be Affiliate Transactions: (v) transaction fees payable to LGP or Hancock Park Associates II, L.P. on or about the Preferred Stock Issue Date pursuant to the Management Agreement, (w) payments to LGP pursuant to the Management Agreement, (x) advances to directors, officers or employees of the Company to provide for the payment of reasonable expenses incurred by such persons in the performance of such persons' responsibilities to the Company; (y) reasonable fees and compensation paid to and indemnity provided on behalf of officers, directors or employees of the Company as determined in good faith by the Board of Directors and the Company's senior management, and (z) transactions between or among the Company and/or its Subsidiaries; (H) enter into, or permit any of its Subsidiaries to enter into, any employment contract; or (I) increase, or permit any of its Subsidiaries to increase, in any material respect the benefits or compensation of any of the executive officers of the Company. (vi) Additional Provisions. --------------------- (1) The creation, authorization or issuance of any shares of Common Stock or (2) any increase or decrease in the amount of authorized capital stock of any class, including any preferred stock, shall not require the consent of Holders of Series A Preferred Stock and shall not be deemed to materially affect adversely the rights, preferences, privileges or voting rights of Holders of shares of Series A Preferred Stock. (g) Optional Exchange ----------------- (i) Conditions. ---------- (A) The Company may, at its option on any Dividend Payment Date (herein the "Exchange Date"), exchange all, but not less than all, of the then outstanding shares of Series A Preferred Stock into the Company's Exchange Notes if such exchange is then permitted by applicable law. To exchange Series A Preferred Stock into 10 Exchange Notes, the Company shall send a written notice (the "Exchange Notice") of exchange by mail to each Holder of shares of Series A Preferred Stock, which notice shall state: (1) that the Company has elected to exchange the shares of Series A Preferred Stock held by such Holder into an Exchange Note pursuant to this paragraph (g); (2) the Exchange Date, which shall be the next succeeding Dividend Payment Date and shall not be less than 20 days following the date on which the Exchange Notice is mailed; (3) that the Holder is to surrender to the Company, at the place or places where certificates for shares of Series A Preferred Stock are to be surrendered for exchange, in the manner designated in the Exchange Notice, his certificate or certificates representing the shares of Series A Preferred Stock to be exchanged; (4) that dividends on the shares of Series A Preferred Stock to be exchanged shall cease to accrue, and the Holders of such shares shall cease to have any further rights with respect to such shares (other than the right to receive Exchange Notes), on the Exchange Date whether or not certificates for shares of Series A Preferred Stock are surrendered for exchange on the Exchange Date unless the Company shall default in the delivery of Exchange Notes; and (5) that interest on the Exchange Notes shall accrue from the Exchange Date whether or not certificates for shares of Series A Preferred Stock are surrendered for exchange on the Exchange Date. On the Exchange Date, if the conditions set forth in clauses (I) and (II) below are satisfied and if the exchange is then permitted under applicable law, the Company shall issue Exchange Notes in exchange for the Series A Preferred Stock as provided in the next paragraph, provided that on the Exchange Date, immediately after giving effect to such exchange, no Default or Event of Default (each as defined in the Exchange Notes) would exist under the Exchange Notes. In the event that the issuance of the Exchange Notes is not permitted on the Exchange Date set forth in the Exchange Notice, or any of the conditions set forth in clauses (I) or (II) of the preceding sentence are not satisfied on the Exchange Date set forth in the Exchange Notice, the Exchange Date shall be deemed to be the first business day thereafter, if any, upon which all of such conditions are satisfied. (B) Upon any exchange pursuant to paragraph (g)(i)(A), each Holder of outstanding shares of Series A Preferred Stock shall be entitled to receive an Exchange Note in a principal amount equal to the sum of (1) the Liquidation Preference of such Holder's shares of Series A Preferred Stock and (2) the amount of accumulated and unpaid dividends, if any, thereon (and accrued and unpaid interest thereon); provided that the Company may pay cash in lieu of issuing an Exchange Note in a principal amount of less than $1,000. (ii) Procedure for Exchange. ---------------------- (A) On or before the Exchange Date, each Holder of Series A Preferred Stock shall surrender the certificate or certificates representing such shares of Series A Preferred Stock, in the manner and at the place designated in the Exchange Notice. The Company shall cause the Exchange Notes to be executed on the Exchange Date and, upon surrender in accordance with the Exchange Notice of the certificates for any shares of Series A Preferred Stock so exchanged such shares shall be exchanged by the 11 Company into Exchange Notes. The Company shall pay interest on the Exchange Notes at the rate and on the dates specified therein from the Exchange Date. (B) Subject to the conditions set forth in paragraph (g)(i), if notice has been mailed as aforesaid, and if before the Exchange Date the Exchange Notes shall have been duly executed and delivered by the Company to the Holders, then the rights of the Holders of shares of the Series A Preferred Stock as stockholders of the Company shall cease (except the right to receive Exchange Notes), and the Person or Persons entitled to receive the Exchange Notes issuable upon exchange shall be treated for all purposes as the registered Holder or Holders of such Exchange Notes as of the date of exchange without any further action of the Holders of Series A Preferred Stock. (h) Conversion or Exchange. ---------------------- The Holders of shares of Series A Preferred Stock shall not have any rights hereunder to convert such shares into or exchange such shares for shares of any other class or classes or of any other series of any class or classes of Capital Stock of the Company. (i) Reissuance of Series A Preferred Stock. -------------------------------------- Shares of Series A Preferred Stock that have been issued and reacquired in any manner, including shares purchased or redeemed or exchanged, shall (upon compliance with any applicable provisions of the laws of Delaware) have the status of authorized but unissued shares of preferred stock of the Company undesignated as to series and may be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Company, provided that such shares may not in any event be reissued as Series A Preferred Stock (other than in payment of dividends, if any, on Series A Preferred Stock). (j) Business Day. ------------ If any payment, redemption or exchange shall be required by the terms hereof to be made on a day that is not a Business Day, such payment, redemption or exchange shall be made on the immediately succeeding Business Day. (k) Definitions. ----------- As used in this Certificate, the following terms shall have the following meanings (with terms defined in the singular having comparable meanings when used in the plural and vice versa), unless the context otherwise requires: "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise; provided 12 that beneficial ownership of a majority or more of the voting securities of a Person shall be deemed to be control. "Affiliate Transaction" has the meaning set forth in paragraph f(v)(H). "Applicable Board Percentage" means the number of Class A Directors at any time, pursuant to the provisions of paragraph (f) hereof, that the Holders of the issued and outstanding shares of the Series A Preferred Stock, voting separately as one class, shall have the exclusive right to elect and remove at such time. "Bankruptcy Code" means title 11 of the United States Code, as amended from time to time. "Board" or "Board of Directors" means the Board of Directors of the Company. "Business Day" means any day other than a Legal Holiday. "Capital Lease Obligation" means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP. "Capital Stock" means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Certificate of Incorporation" has the meaning set forth in the Recitals. "Class A Director" or "Class A Directors" means any director or directors, as the case may be, elected by the Holders of a majority of the outstanding shares of Series A Preferred Stock pursuant to paragraph (f) hereof. "Company" means Leslie's Poolmart, Inc., a Delaware corporation. "Consolidated EBITDA" means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period, adjusted as follows (in each case, without duplication, on a consolidated basis, in accordance with GAAP, and to the extent deducted (in the case of "plus" items) or added (in the case of "minus" items) in the calculation of such Consolidated Net Income): (i) plus any extraordinary or nonrecurring loss of such Person during such period; (ii) minus any extraordinary or nonrecurring gain of such Person during such period; (iii) plus any loss due solely to fluctuations in currency values; (iv) minus any gain due solely to fluctuations in currency values; (v) plus provision for taxes based on income or profits of such Person and its Subsidiaries for such period; (vi) plus consolidated interest expense of such Person and its Subsidiaries for such period, whether paid or accrued and whether or not capitalized (and including any amortization of deferred financing costs); (vii) plus any noncash charges for such period (including LIFO charges); (viii) plus depreciation, amortization (including amortization of goodwill and other intangibles but excluding 13 amortization of prepaid cash expenses that were paid in a prior period) and other noncash charges of such Person and its Subsidiaries for such period. "Consolidated Net Income" means, with respect to any Person for any period, the aggregate Net Income of such Person and its Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP (except as provided in the definition of "Net Income"); provided that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or that is accounted for by the equity method of accounting shall be included only to the extent of the amount of dividends or distributions paid in cash to the referent Person or a Subsidiary thereof, (ii) the Net Income of any Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (other than approvals already obtained on the date of computation) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its stockholders, (iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded and (iv) the cumulative effect of a change in accounting principles shall be excluded. "Coverage Ratio" means, as of the last day of any Quarter, and with respect to any specified period prior to the end of such Quarter, (i) Consolidated EBITDA for the specified period prior to the end of such Quarter divided by (ii) Fixed Charges for the specified period prior to the end of such Quarter. "Credit Agreement" means credit agreement(s) to be entered into by the Company and one or more lenders, and all amendments thereto, together with the related documents thereto (including, without limitation, any guarantee agreements and security documents), in each case as such agreements may be amended (including any amendment and restatement thereof), supplemented or otherwise modified from time to time, including any agreement extending the maturity of, refinancing, replacing or otherwise restructuring all or any portion of the Indebtedness under such agreement(s) or any successor or replacement agreement(s) and whether by the same or any other agent, lender or group of lenders. "Disqualified Capital Stock" means that portion of any Capital Stock which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the sole option of the holder thereof, in any case, on or prior to the final maturity date of the Senior Notes; provided, however, that the term "Disqualified Capital Stock" shall not include the shares of Series A Preferred Stock. "Dividend Event" has the meaning set forth in paragraph (f)(iii). "Dividend Payment Date " means February 1, May 1, August 1 and November 1. "Dividend Period" means the Initial Dividend Period and, thereafter, each Quarterly Dividend Period. 14 "Eight Quarter Coverage Ratio Event" has the meaning set forth in paragraph (f)(iii). "Exchange Date" has the meaning set forth in paragraph (g)(i)(A). "Exchange Notes" means the Company's 10 7/8% Junior Subordinated Notes due June 11, 2007 in the form attached to the Preferred Stock and Warrant Purchase Agreement. "Exchange Notice" has the meaning set forth in paragraph (g)(i)(A). "First Mandatory Redemption Date" means the date eight years and six months after the Initial Preferred Stock Issue Date. "Fixed Charges" means, with respect to any Person for any period, without duplication, the sum of (i) the consolidated interest expense (excluding amortization or write-off of debt issuance costs) of such Person and its Subsidiaries for such period, to the extent such expense was deducted in computing Consolidated Net Income for such Person for such period, whether paid or accrued and (ii) any interest expense on Guaranteed Indebtedness of such Person or one of its Subsidiaries or secured by a Lien on assets of such Person or one of its Subsidiaries (whether or not such Guaranteed Indebtedness or Lien is called upon) determined on a consolidated basis, and (iii) all dividend payments payable (whether declared or not and whether paid in cash or in kind) on any series of preferred stock of such Person during such period, in each case, on a consolidated basis and in accordance with GAAP; provided, that with -------- respect to the Company for the period from the Initial Preferred Stock Issue Date to the end of the Quarter in which the first anniversary of the Initial Preferred Stock Issue Date falls, Fixed Charges shall not include any dividend payments on the shares of Series A Preferred Stock for such period. For purposes of the foregoing clause (ii), interest expense attributable to any Guaranteed Indebtedness by such Person or a Subsidiary of such Person shall be deemed to be the interest expense of such Person to the extent such expense was deducted in computing Consolidated Net Income of such Person. "Four Quarter Coverage Ratio Event" has the meaning set forth in paragraph (f)(iii). "Funded Debt" means, with respect to any Person and as of any date of determination, the principal amount of all debt for borrowed money; provided, that Funded Debt shall in any event not include any Permitted Indebtedness. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect as of the Initial Preferred Stock Issue Date. "Guaranteed Indebtedness" means, with respect to any Person, a guarantee (other than by endorsement of negotiable instruments for collection in the ordinary course of business), direct or indirect. in any manner (including, without limitation. letters of credit and reimbursement agreements in respect thereof), of all or any part of any indebtedness of another Person. 15 "Holder" means a Person in whose name a share of Series A Preferred Stock is registered on the stock ledger of the Company. "Indebtedness" means with respect to any Person, without duplication, (i) all Obligations of such Person for borrowed money, (ii) all Obligations of such Person evidenced by bonds, debentures, notes or other similar instruments, (iii) all Capital Lease Obligations of such Person, (iv) all Obligations of such Person issued or assumed as the deferred purchase price of property, all conditional sale obligations and all Obligations under any title retention agreement (but excluding trade accounts payable and other accrued liabilities arising in the ordinary course of business that are not overdue by 90 days or more or are being contested in good faith by appropriate proceedings promptly instituted and diligently conducted), (v) all Obligations for the reimbursement of any obligor on any letter of credit, banker's acceptance or similar credit transaction, (vi) guarantees and other contingent obligations in respect of Indebtedness referred to in clauses (i) through (v) above and clause (viii) below, (vii) all Obligations of any other Person of the type referred to in clauses (i) through (vi) which are secured by any lien on any property or asset of such Person, the amount of such Obligation being deemed to be the lesser of the fair market value of such property or asset or the amount of the Obligation so secured, (viii) all Obligations under currency agreements and interest swap agreements of such Person and (ix) all Disqualified Capital Stock issued by such Person with the amount of Indebtedness represented by such Disqualified Capital Stock being equal to the greater of its voluntary or involuntary liquidation preference and its maximum fixed repurchase price, but excluding accrued dividends, if any. For purposes hereof, the "maximum fixed repurchase price" of any Disqualified Capital Stock which does not have a fixed repurchase price shall be calculated in accordance with the terms of such Disqualified Capital Stock as if such Disqualified Capital Stock were purchased on any date on which Indebtedness shall be required to be determined, and if such price is based upon, or measured by, the fair market value of such Disqualified Capital Stock, such fair market value shall be determined reasonably and in good faith by the Board of Directors of the issuer of such Disqualified Capital Stock. "Initial Dividend Period " means the dividend period commencing on the Initial Preferred Stock Issue Date and ending on the day before the first Dividend Payment Date to occur thereafter. "Initial Preferred Stock Issue Date" means June 11, 1997. "Insolvency Event" means any of the following: (i) there shall be commenced against the Company an involuntary case seeking the liquidation or reorganization of the Company under Chapter 7 or Chapter 11, respectively, of the federal Bankruptcy Code, and the petition commencing the involuntary case or proceeding remains undismissed and unstayed for a period of sixty (60) days, (ii) the Company shall file a voluntary case seeking liquidation or reorganization under Chapter 7 or Chapter 11, respectively, of the federal Bankruptcy Code, or (iii) the Company shall make a general assignment for the benefit of creditors. "Issue Date" means, with respect to any whole or fractional share of Series A Preferred Stock, the date upon which such whole or fractional share is issued pursuant hereto. "Interest Swap Obligations" means the obligations of any Person pursuant to any arrangement with any other Person whereby, directly or indirectly, such Person is entitled to receive from time to 16 time periodic payments calculated by applying either a floating or a fixed rate of interest on a stated notional amount in exchange for periodic payments made by such other Person calculated by applying a fixed or a floating rate of interest on the same notional amount and shall include, without limitation, interest rate swaps, caps, floors, collars and similar agreements. "Junior Securities" has the meaning set forth in paragraph (b). "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the Company's principal place of business, the City of New York or at a place of payment are authorized by law, regulation or executive order to remain closed. If a payment date is a Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. "LGP" means Leonard Green & Partners, L.P. "Lien" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "Liquidation Preference" has the meaning set forth in paragraph (d). "Management Agreement" means that certain Management Agreement dated as of the Preferred Stock Issue Date by and between LGP and the Company, providing for certain annual fees, expenses and reimbursements to be paid to LGP, as such Management Agreement may be amended from time to time in accordance with the Stockholders Agreement. "Mandatory Redemption Date" means each of the following dates: (1) the date eight years and six months after the Initial Preferred Stock Issue Date, (2) the ninth anniversary of the Initial Preferred Stock Issue Date and (3) the tenth anniversary of the Initial Preferred Stock Issue Date. "Mandatory Redemption Price" has the meaning set forth in paragraph (e)(ii). "Net Income" means, with respect to any Person for any period, the net income (loss) of such Person for such period, determined in accordance with GAAP and before any reduction in respect of preferred stock dividends; provided, however, that for purposes of paragraph (f)(iii)(F), contributions to capital made in accordance with such paragraph (f)(iii)(F) shall be included in Net Income to the extent of the amount so contributed and as provided in such paragraph (f)(iii)(F). "Obligations" means all obligations for principal, premium, interest and additional interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Occidental" means Occidental Petroleum Corporation, a Delaware corporation. "Optional Redemption Price" has the meaning set forth in paragraph (e)(i). "Parity Securities" has the meaning set forth in paragraph (b). 17 "Permitted Indebtedness" means, without duplication, each of the following: (i) Indebtedness under the Exchange Notes; (ii) Indebtedness under the Senior Notes; (iii) Indebtedness incurred pursuant to a Credit Agreement(s) in an aggregate principal amount at any time outstanding not to exceed the greater of (a) $35.0 million and (b) the sum of 80% of the total accounts receivable and 60% of the total inventory of the Company and its Subsidiaries, less in each case the amount of any prepayments made with the proceeds of an Asset Sale (as defined in the documentation with respect to the Senior Notes) or assumed in connection with an Asset Sale (as defined in the documentation with respect to the Senior Notes); (iv) other Indebtedness of the Company and its Subsidiaries outstanding on the Closing Date; (v) Interest Swap Obligations of the Company covering Indebtedness of the Company or any of its Subsidiaries and Interest Swap Obligations of any Subsidiary of the Company covering Indebtedness of such Subsidiary; provided, however, that such Interest Swap Obligations are -------- ------- entered into to protect the Company and its Subsidiaries from fluctuations in interest rates on Indebtedness incurred in accordance with the Indenture to the extent the notional principal amount of such Interest Swap Obligation does not exceed the principal amount of the Indebtedness to which such Interest Swap Obligation relates; (vi) Indebtedness of a Subsidiary of the Company to the Company or to a Wholly Owned Subsidiary of the Company for so long as such Indebtedness is held by the Company or a Wholly Owned Subsidiary of the Company, in each case subject to no Lien held by a Person other than the Company or a Wholly Owned Subsidiary of the Company; provided that if as of -------- any date any Person other than the Company or a Wholly Owned Subsidiary of the Company owns or holds any such Indebtedness or holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the issuer of such Indebtedness; (vii) Indebtedness of the Company to a Wholly Owned Subsidiary of the Company for so long as such Indebtedness is held by a Wholly Owned Subsidiary of the Company, in each case subject to no Lien held by a Person other than a Wholly Owned Subsidiary of the Company; provided that if as of any date any Person other than a Wholly Owned -------- Subsidiary of the Company owns or holds any such Indebtedness or any Person other than a Wholly Owned Subsidiary of the Company holds a Lien in respect of such Indebtedness, such date shall be deemed the incurrence of Indebtedness not constituting Permitted Indebtedness by the Company; (viii) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or similar instrument inadvertently (except in the case of daylight overdrafts) drawn against insufficient funds in the ordinary course of business; 18 provided, however, that such Indebtedness is extinguished within two -------- ------- business days of incurrence; (ix) Indebtedness of the Company or any of its Subsidiaries represented by letters of credit for the account of the Company or such Subsidiary, as the case may be, in order to provide security for workers' compensation claims, payment obligations in connection with self-insurance or similar requirements in the ordinary course of business; (x) Refinancing Indebtedness (as defined in the documentation with respect to the Senior Notes); (xi) Capital Lease Obligations and Purchase Money Indebtedness (as defined in the documentation with respect to the Senior Notes) of the Company or any of its Subsidiaries in an aggregate principal amount not to exceed $5.0 million at any one time outstanding; and (xii) additional Indebtedness of the Company in an aggregate principal amount not to exceed $10.0 million at any one time outstanding. "Person" means any individual, corporation, partnership. joint venture, association, limited liability company, joint-stock company, trust, unincorporated organization or government or agency or political subdivision thereof (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). "Preferred Stock and Warrant Purchase Agreement" means the Preferred Stock and Warrant Purchase Agreement dated as of June 11, 1997 by and among the Company and Occidental. "Quarter" means the 13-week period ended on the Friday closest to December 31, March 31, June 30 or September 30 or such other quarterly period as the Company may from time to time adopt in connection with a change in its fiscal year approved by Holders of at least a majority of the outstanding shares of Series A Preferred Stock. "Quarterly Dividend Period" shall mean the quarterly period commencing on each February 1, May 1, August 1, and November 1 and ending on the day before the following Dividend Payment Date. "Redemption Date" with respect to any shares of Series A Preferred Stock, means the date on which such shares of Series A Preferred Stock are redeemed by the Company in accordance with paragraph (e). "Redemption Event" has the meaning set forth in paragraph (f)(iii). "Redemption Notice" has the meaning set forth in paragraph (e)(iii). "Senior Notes" shall mean $90 million in principal amount of the Company's 10 3/8% Senior Notes due 2004. 19 "Senior Securities" has the meaning set forth in paragraph (b). "Series A Preferred Stock" has the meaning set forth in paragraph (a). "Special Voting Rights Date" has the meaning set forth in paragraph (f)(iii). "Stockholders Agreement" means that certain Stockholders Agreement and Subscription Agreement among Leslie's Poolmart, Inc., Green Equity Investors II, L.P., Hancock Park Associates, Occidental Petroleum Corporation, and the stockholders identified on Annex A thereto, as in effect on the Initial Preferred Stock Issue Date. "Subsidiary" means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof). "Wholly Owned Subsidiary" of any Person means any Subsidiary of such Person of which all the outstanding voting securities (other than in the case of a foreign Subsidiary, directors' qualifying shares or an immaterial amount of shares required to be owned by other Persons pursuant to applicable law) are owned by such Person or any Wholly Owned Subsidiary of such Person. 20 IN WITNESS WHEREOF, Leslie's Poolmart, Inc. has caused this Certificate to be executed by its Vice President and Assistant Secretary this 11th day of June, 1997. LESLIE'S POOLMART, INC. By:______________________________ 21 EXHIBIT B THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL DELIVERED TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT. LESLIE'S POOLMART, INC. WARRANT Dated June 11, 1997 WARRANTS TO PURCHASE COMMON STOCK Certificate for 252,996 Warrants ISSUED TO OCCIDENTAL PETROLEUM CORPORATION ("OCCIDENTAL") ---------- LESLIE'S POOLMART, INC., a Delaware corporation (the "Company"), hereby ------- certifies that Occidental is the registered owner of the number of Warrants set forth above. Each Warrant entitles the persons who shall from time to time, of record or beneficially, own any of the Warrants (collectively "Holders" and individually "Holder") to purchase one (1) share (each such share being referred to herein as a "Warrant Share" and all such shares being referred to herein, collectively, as ------------- the "Warrant Shares"), as adjusted from time to time as provided in Section 7 -------------- hereof, of the Common Stock, $0.001 par value per share, of the Company (the "Common Stock") at the exercise price of $0.01 (one cent) per Warrant Share (the ------------ "Exercise Price"), subject to the following terms and conditions. -------------- 1. REGISTRATION. The Company shall register each Warrant, upon records ------------ to be maintained by the Company for such purpose (such records being referred to herein as the "Register"), in the name of the record holder of such Warrant from -------- time to time. The Company may deem and treat the registered holder of each Warrant as the absolute owner thereof for the purpose of any exercise thereof or any distribution to the Holder thereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. 2. TRANSFERS AND EXCHANGES. ----------------------- (a) Registration; Issuance of New Warrant Certificates. The Company -------------------------------------------------- shall reflect in the Register the transfer of any Warrant represented hereby upon the surrender of this Warrant Certificate, with the Form of Assignment attached as Annex A hereto duly completed and signed (and with a signature guarantee for the transfer of any Warrants by a registered holder other than the initial registered holder of this Warrant Certificate), to the Company at the office of the Company set forth in Section 11 hereof. Upon any such registration of transfer, a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the Warrants so transferred shall be issued to the transferee of such Warrants and a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the remaining Warrants, if any, not so transferred, shall be issued to the Holder. The Company shall at no time close the Register against the transfer of any Warrant or Warrant Share in any manner that materially interferes with the timely exercise of such Warrant. (b) Warrants Exchangeable for Different Denominations. This Warrant ------------------------------------------------- Certificate is exchangeable, upon the surrender hereof by the Holder at the office of the Company set forth in Section 11 hereof, for new Warrant Certificates, in substantially the form of this Warrant Certificate, evidencing in the aggregate the right to purchase the number of Warrant Shares that may then be purchased under this Warrant Certificate. Each such new Warrant Certificate shall be dated the date of such exchange and represent the right to purchase such number of Warrant Shares as shall be designated by the Holder at the time of such surrender. 3. DURATION AND EXERCISE OF WARRANTS. --------------------------------- (a) Subject to all the terms and conditions hereinafter set forth (including, without limitation, the terms and conditions in Section 16), the Warrants may be exercised by the Holder at any time from the date hereof until 5:00 p.m., Los Angeles time, on the tenth (10th) anniversary of the date hereof (the "Expiration Time"). At the Expiration Time, each Warrant not exercised --------------- prior thereto shall be and become void and of no value. (b) Subject to the provisions of this Warrant Certificate, including adjustments to the Exercise Price and to the number of Warrant Shares issuable upon the exercise of each Warrant pursuant to Section 7 hereof, each holder of a Warrant on or prior to the Expiration Time shall have the right to purchase from the Company (and the Company shall be obligated to issue and sell to such holder of a Warrant) at the Exercise Price one fully-paid Warrant Share, which shall be nonassessable upon issuance. (c) Subject to Sections 4, 9 and 10(a) hereof, upon (i) surrender of this Warrant Certificate, together with the Form of Election to Purchase attached as Annex B hereto (the "Form of Election to Purchase") duly completed ---------------------------- and signed, to the Company at the address provided in Section 11, and (ii) payment of the Exercise Price, multiplied by the number of Warrant Shares then issuable upon exercise of the Warrants being so exercised in immediately available lawful money of the United States of America, the Company shall promptly, but in any event within five (5) days of its receipt of the Form of Election to Purchase, together with the 2 Warrant Certificate and receipt of payment of the Exercise Price, issue and cause to be delivered to or upon the written order of the Holder, and in such name or names as such Holder may designate (subject to Section 4 hereof), a certificate for the Warrant Shares issued upon such exercise of such Warrants. Any person so designated to be named in such certificate for such Warrant Shares shall be deemed to have become the holder of record of such Warrant Shares as of the Date of Election to Purchase such Warrants. The "Date of Election to ------------------- Purchase" as to any Warrant means the date on which the Company shall have - -------- received (1) this Warrant Certificate, with the completed Form of Election to Purchase and (2) payment of the Exercise Price for such Warrant. (d) Any part of the Warrants evidenced by this Warrant Certificate shall be exercisable from time to time. If fewer than all the Warrants evidenced by this Warrant Certificate are exercised at any time, the Company, at its expense, shall issue to the registered holder a new Warrant Certificate, in substantially the form of this Warrant Certificate, for the remaining number of Warrants evidenced by this Warrant Certificate. 4. PAYMENT OF TAXES. ---------------- (a) The Company shall pay all issuance and transfer taxes and charges that may be imposed on the Company or on the Warrants or the Warrant Shares in respect of the transfer of Warrants, or the issuance or delivery of the Certificates for Warrant Shares or other Securities in respect of the Warrant Shares upon the exercise or conversion of Warrants; provided, however, that the -------- ------- Company shall not be required to pay any such tax or other charge imposed in respect of the transfer of Warrants, or the issuance or delivery of certificates for Warrant Shares or other securities in respect of the Warrant Shares upon the exercise of Warrants, to a person or entity other than a then-existing registered holder of Warrants. (b) Upon exercise of the Warrant in whole or in part, the Holder shall be required to pay to the Company (by cashier's or certified check) an amount equal to all applicable federal and state withholding taxes that may become payable by reason of such exercise. 5. MUTILATED OR MISSING WARRANT CERTIFICATE. If this Warrant Certificate ---------------------------------------- shall be mutilated, lost, stolen or destroyed, upon request by the registered holder of the Warrants, the Company shall issue, in exchange for and upon cancellation of the mutilated Warrant Certificate, or in substitution for the lost, stolen or destroyed Warrant Certificate, a new Warrant Certificate, in substantially the form of this Warrant Certificate, of like tenor and representing the equivalent number of Warrants, but, in the case of loss, theft or destruction, only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of this Warrant Certificate and, if requested by the Company, indemnity also satisfactory to it. 6. RESERVATION AND ISSUANCE OF WARRANT SHARES. ------------------------------------------ (a) The Company shall at all times have authorized, and reserve and keep available, exclusively for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon the exercise of the Warrants, the number of Warrant Shares deliverable upon 3 exercise of the Warrants. The Company shall take all corporate action necessary to enable the Company to validly and legally issue, at the Exercise Price, Warrant Shares that are fully paid and nonassessable. (b) The Company covenants that all Warrant Shares will, upon issuance in accordance with the terms of this Warrant Certificate, be (i) duly authorized, validly issued, fully paid and nonassessable and (ii) free from all taxes or other governmental charges with respect to the issuance thereof (not including income taxes payable by the holders of Warrants being exercised in respect of gains thereon) and from all liens, charges and security interests created by the Company. 7. ADJUSTMENTS. ----------- (a) If the Company shall at any time subdivide the outstanding shares of Common Stock into a greater number of shares, or pay to holders of Common Stock any dividend payable in shares of Common Stock, the number of Warrant Shares in effect immediately prior to such subdivision or dividend shall be proportionately increased, and conversely, if the outstanding shares of Common Stock shall be combined into a smaller number of shares, the number of Warrant Shares in effect immediately prior to such combination shall be proportionately reduced; and, in either case the Exercise Price shall be adjusted proportionately; provided, however, that the Exercise Price shall in all events -------- ------- be no less than the par value of the Warrant Shares. (b) If and to the extent the Company shall issue shares of Common Stock upon the exercise of options issued under either the Company's 1997 Non- Qualified Stock Option Plan (as to which 83,599 shares have been reserved for issuance) or under the Company's 1997 Incentive Stock Option Plan (as to which 273,946 shares have been reserved for issuance), the number of Warrant Shares shall be adjusted, effective on the date of each such issuance of Common Stock under one of the aforesaid Plans, such that when the shares of Common Stock so issued are added to the number of shares of Common Stock outstanding on the date hereof (as such number may be reduced from time to time pursuant to the exercise of the Call Option in respect of Call NQ Options and Call Option Shares, as defined in the Stockholders and Subscription Agreement of even date herewith by and among the Company, Occidental and the stockholders identified therein (the "Stockholders Agreement")), the Warrant Shares shall represent fifteen percent (15%) of all of such outstanding shares of Common Stock, rounded to the next highest number of whole shares. 8. NO STOCK RIGHTS. The Holder of this Warrant Certificate, as such, --------------- shall not be entitled to vote or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained herein be construed to confer upon the Holder of this Warrant Certificate, as such, the rights of a stockholder of the Company or the right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, to exercise any preemptive right, to receive notice of meetings or other actions affecting stockholders (except as provided herein), or to receive dividends or subscription rights or otherwise, until the Date of Election to Purchase Warrants shall have occurred. 4 9. FRACTIONAL WARRANTS AND FRACTIONAL WARRANT SHARES. The Company may, ------------------------------------------------- but shall not be required to, issue fractional Warrant Shares. If any fraction of a Warrant Share would, except for the provisions of this Section 9, be issuable to the Holder of this Warrant Certificate upon exercise of any Warrants, the Company may, at its election, pay to such Holder an amount in cash equal to the amount by which (a) the Fair Market Value (determined pursuant to the Stockholders Agreement) of one share of Common Stock exceeds (b) the Exercise Price, multiplied by such fraction. The Holder of a Warrant Certificate, by the acceptance of the Warrant Certificate, expressly waives the right to receive any fractional Warrant Shares upon exercise of a Warrant. The Holder of a Warrant Certificate shall be entitled to receive fractional Warrants and fractional Warrant Shares at the election of the Company. 10. [Intentionally deleted.] --------------------- 11. NOTICES. All notices, requests, demands and other communications ------- relating to this Warrant Certificate shall be in writing, including by telecopier, telex, telegram or cable, addressed, if to the registered holder hereof, to it at the address furnished by the registered holder to the Company, and if to the Company, at its office at 20630 Plummer Street, Chatsworth, California 91311, Attention: President, or to such other address as any party shall notify the other party in writing, and shall be effective, in the case of written notice by mail, three days after placement into the mails (first class, postage prepaid), and in the case of notice by telex, telecopier, telegram or cable, on the same day as sent. 12. BINDING EFFECT. This Warrant Certificate shall be binding upon and -------------- inure to the sole and exclusive benefit of the Company, its permitted successors and permitted assigns, and the registered holder or holders from time to time of the Warrants and the Warrant Shares. 13. SURVIVAL OF RIGHTS AND DUTIES. Unless earlier terminated or canceled ----------------------------- in whole or in part pursuant to Section 16 of this Warrant Certificate, this Warrant Certificate and unexercised Warrants represented hereby shall terminate and be of no further force and effect on the earlier of the Expiration Time or the date on which all the Warrants shall have been exercised, except that the provisions of Sections 4, 6(b) and 10 of this Warrant Certificate shall continue in full force and effect after any such termination or cancellation. 14. GOVERNING LAW. This Warrant Certificate shall be construed in ------------- accordance with and governed by the internal laws of the State of Delaware applicable to contracts executed and to be performed wholly within such state, without regard to the principles of conflicts or choice of law. 15. MODIFICATION AND WAIVER. This Warrant Certificate and any term hereof ----------------------- may be changed, waived, discharged or terminated only by an instrument in writing signed by the Holder and the Company against which enforcement of such change, waiver, discharge or termination is sought. 16. REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. If --------------------------------------------------------------- any capital reorganization or reclassification of the capital stock of the Company, any consolidation or 5 merger of the Company with another entity, or the sale of all or substantially all of the Company's assets to another entity shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, cash or other assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provisions shall be made whereby the Holder shall thereafter have the right to purchase and receive upon the basis and the terms and conditions specified in this Warrant Certificate and in lieu of the shares of Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities, cash or other assets as may be issued or payable in such reorganization, reclassification, consolidation, merger or sale with respect to or in exchange for the number of shares of Common Stock purchasable and receivable upon the exercise of the rights represented hereby had such rights been exercised immediately prior thereto, and in any such case appropriate provision shall be made with respect to the rights and interests of the Holder to the end and that the provisions hereof (including without limitation provisions for adjustments of the Exercise Price and of the number of shares of Common stock purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company will not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument, executed and mailed or delivered to the Holder at the last address thereof appearing in the Register, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. Notwithstanding the foregoing, in the event that, as a result of a transaction described in this Section 16, a Change of Control (as defined in the Stockholders Agreement) shall occur, then effective as of the date of consummation of the Change of Control, this Warrant shall terminate and shall represent only the right to receive, upon surrender and payment of the exercise price therefor, the stock, securities, cash or other assets to which the holder would have been entitled had this Warrant been exercised immediately prior to consummation of such Change of Control. 17. NOTICES OF CERTAIN EVENTS. In case: (a) the Company shall authorize ------------------------- the issuance to all holders of shares of Common Stock of rights, options or warrants to subscribe for or purchase shares of Common Stock or of any other subscription rights or warrants; (b) the Company shall authorize the distribution to all holders of shares of Common Stock of assets, including cash, evidences of its indebtedness or other securities; (c) of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the conveyance or transfer of the properties and assets of the Company substantially as an entirety, or of any reclassification or change of Common Stock issuable upon exercise of the Warrants, or of the commencement of a tender offer or exchange offer for shares of Common Stock; (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) any event requiring an adjustment pursuant to Section 7 hereof, then the Company shall cause to be given to the Holder at least 10 business days prior to the applicable record date hereinafter specified, or the date of the event in the case of events for which there is no record date, notice stating (i) the date as of which the holders of record of 6 shares of Common Stock to be entitled to receive any such rights, options, warrants or distribution are to be determined, or (ii) the initial expiration date set forth in any tender offer or exchange offer for shares of Common Stock, or (iii) the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective or consummated, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up. 18. INFORMATION REGARDING ADJUSTMENTS. The Company shall keep a record of --------------------------------- any adjustment to the Warrant Shares or the Exercise Price pursuant hereto, together with a record as to the method of calculation and the facts upon which such calculations are based. Such information shall be provided to the Holder upon request. The Company will include such information in the notices given pursuant to Section 17. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be executed under its corporate seal by its officers thereunto duly authorized as of the date hereof, and the Holder has caused this Warrant Certificate to be executed and delivered by its duly authorized representative. LESLIE'S POOLMART, INC. By: ________________________________________ Name:___________________________________ Title:__________________________________ OCCIDENTAL PETROLEUM CORPORATION By: _________________________________________ Name:____________________________________ Title:___________________________________ ___________________________________ 7 ANNEX A ------- FORM OF ASSIGNMENT FOR VALUE RECEIVED, _________________________________ hereby sells, assigns and transfers to each assignee set forth below all the rights of the undersigned in and to the number of Warrants (as deemed in and evidenced by the foregoing Warrant Certificate) set opposite the name of such assignee below and in and to the foregoing Warrant Certificate with respect to such Warrants and the shares of common stock, $.__ par value per share, of Leslie's Poolmart, Inc. issuable upon exercise of such Warrants: Name of Assignee Address Number of Warrants ------------------ ------- ------------------ If the aggregate number of such Warrants shall not constitute all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so assigned be issued in the name of and delivered to the undersigned. Name of Holder (Print):_________________________ Dated: _______________, ______ (By:)___________________________________ (Title:)________________________________ [SIGNATURE GUARANTEE] ATTEST: (Not Required for Initial Registered holder) ________________________________________ [Assistant] Secretary 8 ANNEX B ------- FORM OF ELECTION TO PURCHASE (To Be Executed by the Holder if the Holder Desires to Exercise Warrants Evidenced by the foregoing Warrant Certificate) To Leslie's Poolmart, Inc.: The undersigned hereby irrevocably elects to exercise _____________ Warrants (as deemed in and evidenced by the foregoing Warrant Certificates) for, and to purchase thereunder, ____________ shares of common stock, $______ par value per share, of Leslie's Poolmart, Inc., issuable upon exercise of such Warrants and delivery of $____________ in cash and any applicable taxes payable by the undersigned pursuant to such Warrant Certificate. The undersigned requests that certificates for such shares be issued in the name of the following: PLEASE INSERT SOCIAL SECURITY NUMBER OR TAX IDENTIFICATION NUMBER ________________________________________ ________________________________________ ________________________________________ (Please print name and address) ________________________________________________________________________________ If such number of Warrants shall not constitute all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so exercised be issued in the name of and delivered to the following: ________________________________________________________________________________ (Please print name and address) ________________________________________________________________________________ ________________________________________________________________________________ Dated: ___________, _____ Name of Holder (Print):________________________________ [SIGNATURE GUARANTEE] (By:)___________________________________ (Title:) (Not Required for Initial Registered Holder) 9 EXHIBIT C STOCKHOLDERS AGREEMENT AND SUBSCRIPTION AGREEMENT AMONG LESLIE'S POOLMART, INC. GREEN EQUITY INVESTORS II, L.P. RICHARD H. HILLMAN MICHAEL J. FOURTICQ GREG FOURTICQ BRIAN P. MCDERMOTT THE TRUSTEES OF THE MCDERMOTT FAMILY TRUST OCCIDENTAL PETROLEUM CORPORATION AND THE STOCKHOLDERS IDENTIFIED ON THE SIGNATURE PAGES
TABLE OF CONTENTS Page ---- 1. REPRESENTATIONS AND WARRANTIES.......................................... 1 (a) Company Representations............................................. 1 (b) Stockholder Representations and Warranties.......................... 2 2. SUBSCRIPTION FOR COMMON STOCK; CALL OPTION.............................. 3 (a) Common Stock Subscription........................................... 3 (b) Call Option......................................................... 3 3. COMPLIANCE WITH SECURITIES LAW.......................................... 4 4. TRANSFERS OF SECURITIES................................................. 4 (a) Prohibition on Transfers............................................ 4 (b) Transfer Procedure; Right of First Refusal.......................... 4 (c) Transfers to Related Transferees.................................... 5 (d) Legend on Certificates.............................................. 6 (e) Transfers in Violation of this Agreement............................ 6 5. COMPANY CALL OPTION..................................................... 7 (a) Call Purchase Event and Purchase Price.............................. 7 (b) Exercise of Call Option............................................. 8 6. REGISTRATION RIGHTS..................................................... 8 (a) Demand Registration Rights.......................................... 8 (b) Piggyback Registration Rights; Cutbacks............................. 9 (c) Expenses of Registration............................................ 10 (d) Registration Procedures............................................. 11 (e) Indemnification..................................................... 14 (f) Holdback Amount..................................................... 16 (g) Assignment and Assumption........................................... 17 (h) Stock Option Plans.................................................. 17 7. DRAG-ALONG SALES AND TAG-ALONG SALES.................................... 17 (a) Drag-Along Sales.................................................... 17 (b) Optional Participation in Sales of Common Stock (Tag-Along Sales)... 18 (c) Obligations of Drag-Along Sellers................................... 19 8. TERMINATION AND LAPSE OF RIGHTS AND RESTRICTIONS; APPLICATIONS TO OTHER STOCK AND ADJUSTMENTS................................................... 19 (a) Termination of Provisions........................................... 19 (b) Application......................................................... 19 9. ELECTION OF DIRECTORS................................................... 20 10. CERTAIN ADDITIONAL AGREEMENTS........................................... 20 (a) Right to Participate in Securities Issuances........................ 20 (b) Right to Participate in Equity Repurchases.......................... 21 (c) Affiliate Transactions.............................................. 21 (d) Change of Control Transactions...................................... 21
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Page ---- (e) Information............................................................. 22 11. NOTICES................................................................. 22 12. GENERAL................................................................. 22 13. ADDITIONAL CLASS II STOCKHOLDERS........................................ 24 14. ARBITRATION............................................................. 24 (a) Scope............................................................... 24 (b) Deposition.......................................................... 24 (c) JAMS................................................................ 24 (d) Selection of Arbitrator............................................. 25 (e) Governing Law....................................................... 25 (f) Procedures.......................................................... 25 (g) Award............................................................... 25 15. DEFINITIONS............................................................. 25 ANNEX A COMMON STOCK CAPITAL STRUCTURE.......................................A-1 ANNEX B TERMS OF NQ OPTION PLAN..............................................B-1 ANNEX C TERMS OF INCENTIVE STOCK OPTION PLAN.................................C-1
ii STOCKHOLDERS AGREEMENT This Stockholders Agreement (this "AGREEMENT") is entered into as of June ___, 1997, by and among (i) Leslie's Poolmart, Inc., a Delaware corporation (the "COMPANY"), (ii) Green Equity Investors II, L.P., a Delaware limited partnership ("GEI"), (iii) Michael J. Fourticq, Greg Fourticq, Richard H. Hillman, Brian P. McDermott and Manette J. McDermott, T.R.U.A. DTD 3/15/90 The McDermott Family Trust (collectively referred to as the "HPA GROUP") and (iv) Occidental Petroleum Corporation, a Delaware corporation ("OCCIDENTAL," and together with GEI and the HPA Group, the "CLASS I STOCKHOLDERS") and the individual stockholders named on the signature pages hereto (the "CLASS II STOCKHOLDERS"). WHEREAS, on the date hereof the Company has consummated a merger (the "MERGER") with Poolmart USA Inc., a Delaware corporation ("POOLMART"), pursuant to which certain of the outstanding shares of common stock of the Company, $.001 par value per share (which authorized class of stock is hereinafter called "COMMON STOCK"), remained outstanding and the shares of capital stock of Poolmart were converted into capital stock of the Company; and WHEREAS, concurrently with the Merger, GEI acquired 1,055,172 shares of Common Stock, the HPA Group collectively retained 359,505 shares of Common Stock, Occidental acquired 28,000 shares of Exchangeable Cumulative Redeemable Preferred Stock, Series A of the Company (the "PREFERRED STOCK") and warrants (the "WARRANTS") to purchase 252,996 shares of Common Stock, subject to adjustment (the "WARRANT SHARES"), certain of the Class II Stockholders are subscribing for Common Stock and certain of the Class II Stockholders will acquire certain nonqualified options and incentive stock options, as described on Annex B and Annex C, respectively (collectively, the "OPTIONS" and the Common Stock issuable upon exercise thereof, the "OPTION SHARES"); and WHEREAS, the Company and the Class I and Class II Stockholders (collectively, the "STOCKHOLDERS") desire to enter into certain agreements concerning their holdings of Common Stock, Warrants, Warrant Shares, Options and Option Shares (collectively, together with such additional shares of Common Stock, Options or securities exercisable for or convertible into Common Stock as they may hereafter acquire, the "SECURITIES"); NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Representations and Warranties. ------------------------------ (a) Company Representations. The Company hereby represents and ----------------------- warrants to the Class I and Class II Stockholders as follows: (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has full corporate power and authority to carry on its business as and where it is now being conducted. The Company has full corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company. This Agreement constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the enforceability hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). (ii) Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will violate or conflict with (A) any provision of the Certificate of Incorporation or Bylaws of the Company, or (B) any agreement, indenture, undertaking, permit, license or other instrument to which the Company is a party or by which it or any of its properties may be bound or affected, other than such violations and conflicts which are not reasonably likely to (1) prevent or materially delay consummation of the transactions contemplated by this Agreement or (2) prevent the Company from performing its obligations under this Agreement. (iii) The Company has no outstanding capital stock or securities convertible into or exchangeable or exercisable for any shares of its capital stock, nor any outstanding rights to subscribe for or to purchase, or any options for the purchase of, or any agreement providing for the issuance (contingent or otherwise) of any shares of its capital stock or any securities convertible into or exchangeable or exercisable for any shares of its capital stock, other than the Preferred Stock and the Securities. (b) Stockholder Representations and Warranties. ------------------------------------------ (i) Each Stockholder hereby severally and not jointly represents and warrants that if it is an entity, it is a corporation, limited partnership, trust or other entity duly organized and validly existing under the laws of its state of organization. (ii) Each Stockholder hereby severally and not jointly represents and warrants that it has full power and authority and, in the case of an individual, legal and fiduciary capacity to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby. This Agreement constitutes a legal, valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms, except as the enforceability hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). (iii) Each of the Class II Stockholders hereby severally and not jointly represents and warrants that (A) as a result of his relationship with the Company and experience in financial matters, is able to evaluate the acquisition of Common Stock and 2 Options, the business and proposed capital structure of the Company and the risks inherent therein; (B) has been given the opportunity to obtain any additional information or documents, and to ask questions and receive answers, from the officers and representatives of the Company to the extent necessary to evaluate the risks and merits of an investment in the Company; (C) has determined that the acquisition of Common Stock and Options is consistent both in nature and amount, with his overall investment program and financial condition, and that his financial condition is such that he can afford to bear the economic risk of holding unregistered Securities for which there is no market and acknowledges that he may suffer a complete loss of such investment. (iv) Each of GEI, the HPA Group and each Class II Stockholder hereby severally and not jointly represents and warrants that (A) the Securities acquired by GEI, the HPA Group and each Class II Stockholder are being acquired for such Stockholder's own account for investment, without any present intention of selling or further distributing the same, (B) such Stockholder acknowledges that the no liquid trading market currently exists or is expected to exist in the foreseeable future and as a result, such Stockholder may be unable to sell any of the Securities for an indefinite period of time and (C) such Stockholder acknowledges that the Company has no obligation, except as set forth in Section 6 hereof, to register any of the Securities. (v) Each member of the HPA Group represents and warrants that he or it is an accredited investor within the meaning of Regulation D under the Act. Each Stockholder acknowledges that the Company is relying upon the truth and accuracy of the above representations to a material degree in effectuating the transactions contemplated hereby. 2. Subscription for Common Stock; Call Option. ------------------------------------------ (a) Common Stock Subscription(a).Common Stock Subscription. Each ------------------------------------------------------ Class II Stockholder reflected as a purchaser of Common Stock on the signature pages hereto (a "PURCHASER") severally agrees to purchase, and the Company agrees to sell to such Purchaser, the number of shares of Common Stock set forth opposite his or her name on Annex A hereto, at the purchase price of $14.50 per ------------- share (collectively, the "Subscription Stock"). Each Purchaser severally agrees - ----- to make payment for the Subscription Stock by delivery to the Company of a certified check or wire transfer in the amount of the purchase price therefore. (b) Call Option. Each Class II Stockholder severally agrees that the ----------- Company and certain other Stockholders shall have a call ("Call Option") in respect of the Subscription Stock, as well as in respect of the Non-Qualified Options described on Annex B hereto (the "NQ OPTIONS") and shares issued upon the exercise thereof (collectively, "Callable Securities"). As to each holder of Callable Securities, the Call Option shall apply only to (i) two-thirds of all of such holder's Callable Securities if the Call Option is exercised before the first anniversary of the date hereof, and (ii) one-third of the holder's Callable Securities of each category if the Call Option is exercised on or after the first anniversary of the date hereof but before the second anniversary of the date hereof. Except as expressly provided in this Section 2(b), the Call Option 3 shall not otherwise apply to Subscription Stock, NQ Options or shares issued upon the exercise thereof. Subscription Stock, NQ Options and shares issuable upon the exercise thereof that are Callable Securities are respectively hereinafter referred to as "Call Option Stock," "Call NQ Options" and "Call Option Shares." 3. Notice of Transfer; Compliance with Securities Law. In addition to the -------------------------------------------------- other applicable restrictions provided in this Agreement, each Stockholder (other than Occidental) agrees that prior to effecting any Transfer of any Securities (other than a Transfer to the Company) such Stockholder will give not less than 15 days' advance written notice to the Company describing the manner of such proposed Transfer. Each Stockholder further agrees that he or it will not effect such proposed Transfer until either (A) such Stockholder has provided to the Company, if so requested by the Company, an opinion of counsel reasonably satisfactory in form and substance to the Company that such proposed Transfer is exempt from registration under the Act and any applicable state securities laws, or (B) a registration statement under the Act covering such proposed Transfer has been filed by the Company and become effective under the Act and compliance with applicable state securities laws has been effected and in each case other than in respect of the Warrants or the Warrant Shares, the Company's independent public accountants have advised the Company that it is not reasonably likely that such Transfer will necessitate a new basis for accounting for the Company. Each Stockholder also agrees that he or it will not Transfer any Securities except in compliance with the registration requirements of the Act (or an exemption therefrom), and the relevant state securities laws applicable to the Stockholder's actions. 4. Transfers of Securities. ----------------------- (a) Prohibition on Transfers. Each of the members of the HPA Group ------------------------ and each of the Class II Stockholders hereby agrees that such Stockholder will not Transfer any Securities (or any interest therein) now or hereafter at any time owned by such Stockholder, except for Transfers permitted pursuant to this Section 4, Section 5 or Section 7 of this Agreement (each such Transfer being a "PERMITTED TRANSFER"). (b) Transfer Procedure; Right of First Refusal. If any member of ------------------------------------------ the HPA Group or any of the Class II Stockholders shall have received a bona fide arm's-length written offer (a "BONA FIDE OFFER") which such Stockholder desires to accept from an independent party unrelated to such Stockholder (the "OUTSIDE PARTY") for the purchase of Securities for consideration consisting entirely of cash (it being understood that no sale for any other consideration would be a Permitted Transfer), then such Stockholder shall give a notice in writing (the "OPTION NOTICE") to each Class I Stockholder and the Company setting forth such desire, which notice shall set forth at least the name and address of the Outside Party and the price and terms of the Bona Fide Offer and be accompanied by a copy of the Bona Fide Offer. Upon the giving of such Option Notice, the Company, and to the extent the Company elects not to do so, the respective Stockholders set forth in the following sentence (each an "ELECTING STOCKHOLDER") shall have an option to purchase all, but not less than all, of the Securities specified in the Option Notice, such option to be exercised within 30 days after the giving of such Option Notice by giving a counter-notice (the "ELECTION NOTICE") to the Stockholder. If the Stockholder sending an Option Notice is (i) a Class II Stockholder, then GEI, Occidental and the HPA Group shall be 4 entitled to be Electing Stockholders; or (ii) a member of the HPA Group, then GEI, Occidental and the other members of the HPA Group shall be entitled to be Electing Stockholders. Where more than one Electing Stockholder desires to participate in a purchase pursuant to an Option Notice, such Stockholders shall participate, pro rata based upon their respective Equity --- ---- Ownership (but in the case of Occidental, Fully Diluted Ownership) in the Company, with the portion attributable to Stockholders declining to be Electing Stockholders being redistributed to the remaining Stockholders pro rata based --- ---- upon their respective Equity Ownership in the Company (but in the case of Occidental, Fully Diluted Ownership), it being understood that the Company may elect to purchase up to all of the Securities and any remainder shall be prorated as aforesaid. The Company and, if applicable, the Electing Stockholders shall be severally obligated to purchase, and the Stockholder shall be obligated to sell, the Securities covered by such Election Notice at the cash price and terms indicated in the Bona Fide Offer, provided that the closing of the purchase by the Electing Stockholder shall be held on a business day within 30 days after the giving of the Election Notice at 10:30 a.m., California time, at the principal executive office of the Company, or at such other time and place as may be mutually agreed to by the Stockholder, the Company and, if applicable, the Electing Stockholders. If an Election Notice is not timely given by the Company and/or one or more Electing Stockholders within the period specified above after an Option Notice has been given, the Stockholder thereafter, at any time within a period of four months from the giving of such Option Notice, may Transfer all (but not less than all) of the Securities covered by such Option Notice to the Outside Party at the cash price and terms contained in the Bona Fide Offer; provided, however, that such Outside Party and such Securities -------- ------- shall thereafter be subject to and bound by all of the provisions of this Agreement as if such party were a Class II Stockholder except as otherwise provided in Section 6(g) and, as a condition precedent to the completion of such Transfer of Securities to such Outside Party, shall execute and deliver to the Company a written consent to such effect in form and substance satisfactory to the Company; and provided, further, however, that to the extent that the Stockholder has not so Transferred such Securities to the Outside Party within such four-month period, then such Securities thereafter shall continue to be subject to all of the restrictions contained in this Agreement. Any election in any instance by the Company or any Stockholder entitled to be Electing Stockholders not to exercise its rights under this clause (b) shall not constitute a waiver of such rights with respect to any other actual or proposed Transfer of Securities. (c) Transfers to Related Transferees. Notwithstanding anything to -------------------------------- the contrary contained in clauses (a) and (b) of this Section 4, each member of the HPA Group and Class II Stockholder may Transfer Securities to a Related Transferee provided that such Related Transferee shall first (i) execute a -------- written consent in form and substance satisfactory to the Company to be bound by all of the applicable provisions of this Agreement, and (ii) give a duplicate original of such consent to the Company. In the event of any Transfer by a member of the HPA Group or any Class II Stockholder to a Related Transferee of all or any part of his or its Securities (or in the event of any subsequent Transfer by any such Related Transferee to another Related Transferee of the Stockholder), such Related Transferee shall receive and hold such Securities subject to the terms of this Agreement and the rights and obligations hereunder of a Stockholder as though such Securities were still owned by the transferor Stockholder, and such Related Transferee shall be deemed to be such transferor Stockholder for the purposes of this Agreement. If the Related Transferee acquired Securities from a Stockholder, such Related 5 Transferee shall be entitled to participate, collectively with the Stockholders of the same group, in the registration rights provided for in Section 6 hereof. There shall be no further Transfer of such Securities by a Related Transferee except between and among such Related Transferee, the original Stockholder and other Related Transferees, or except as otherwise permitted by this Agreement. (d) Legend on Certificates. Each certificate of the Company issued ---------------------- to represent any of the Securities shall bear the following (or substantially equivalent) legends on the face or reverse side thereof, to the extent applicable: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY JURISDICTION. SUCH SECURITIES MAY NOT BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT PURSUANT TO (I) A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES THAT IS EFFECTIVE UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAW, OR (II) ANY EXEMPTION FROM REGISTRATION UNDER SUCH ACT, OR APPLICABLE STATE SECURITIES LAW, RELATING TO THE DISPOSITION OF SECURITIES, INCLUDING RULE 144, PROVIDED AN OPINION OF COUNSEL IS FURNISHED TO THE COMPANY, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND/OR APPLICABLE STATE SECURITIES LAW IS AVAILABLE. THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER COMPLIES WITH THE APPLICABLE PROVISIONS OF THE STOCKHOLDERS AGREEMENT DATED AS OF JUNE 11, 1997, A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE COMPANY. Any stock certificate issued at any time in exchange or substitution for any certificate bearing such legends (except a new certificate issued upon the completion of a public offering) shall also bear such (or substantially equivalent) legends, unless the Security represented by such certificate is no longer subject to the provisions of this Agreement and, in the opinion of counsel for the Company, the Security represented thereby need no longer be subject to restrictions pursuant to the Act or applicable state securities law. (e) Transfers in Violation of this Agreement. The Company shall not ---------------------------------------- be required to record on its books and records, or otherwise to recognize or facilitate, any Transfer of Securities in violation of this Agreement, nor shall the Company be required to issue any certificate for Securities Transferred in violation of this Agreement. 6 5. Company "Call" Option. --------------------- (a) Call Purchase Event and Purchase Price. Upon the termination -------------------------------------- of a Class II Stockholder's employment with the Company or its subsidiaries for any reason (including, without limitation, the voluntary termination, dismissal, involuntary termination, Retirement, death or Permanent Disability of the Stockholder) (a "CALL PURCHASE EVENT"), the Company, and to the extent the Company elects not to do so and, in the case of the NQ Options, such purchase may otherwise be made pursuant to the NQ Option Plan, GEI, Michael J. Fourticq and Brian P. McDermott (or any Related Transferee of the latter) (collectively the "PURCHASING GROUP") may, collectively and pro rata based upon their --- ---- respective Equity Ownership in the Company, exercise the Call Option by written notice (a "PURCHASE NOTICE") delivered to the Class II Stockholder within 90 days after such Call Purchase Event, elect to purchase, and, upon the giving of such notice, the Company, and if applicable, the Purchasing Group shall be severally obligated to purchase and the Class II Stockholder (and the Related Transferees, if any, of the Class II Stockholder) (in each case, the "SELLER") shall be obligated to sell all, or any lesser portion indicated in the Purchase Notice, of the Callable Securities owned at the time of the Call Purchase Event by the Seller, for consideration calculated as to each share of Call Option Stock and each Call Option Share or Call NQ Option, as the case may be, as follows: (i) in the case of voluntary termination by a Class II Stockholder holding Call NQ Options, an amount equal to the difference between the cash consideration per share paid in the Merger and the exercise price of the Call NQ Option; or (ii) in the case of any other termination (including without limitation dismissal, involuntary termination, death, Retirement or Permanent Disability ("OTHER TERMINATION"), of a Class II Stockholder holding Call NQ Options, the difference between the higher of (A) the cash consideration per share paid in the Merger and (B) the Fair Market Value of the underlying shares on the date of the Call Purchase Event, and the exercise price of the Call NQ Option; or (iii) in the case of voluntary termination by a Class II Stockholder holding Call Option Stock, the purchase price therefor; or (iv) in the case of Other Termination of a Class II Stockholder holding Call Option Stock, the higher of the Fair Market Value thereof on the date of the Call Purchase Event and the purchase price paid by the holder therefor; or (v) in the case of voluntary termination by a Class II Stockholder holding Call Option Shares, an amount equal to the cash consideration per share paid in the Merger; or (vi) in the case of Other Termination of a Class II Stockholder holding Call Option Shares, the higher of the Fair Market Value of such shares on the date of the Call Purchase Event and the amount payable pursuant to clause (v) above. 7 (b) Exercise of Call Option. In the event the Company and/or any ----------------------- Class I Stockholder elects not to participate in the purchase of Callable Securities pursuant to the Call Option, all remaining Purchasing Group Stockholders desiring so to participate may do so, pro rata amongst such --- ---- remaining Purchasing Group Stockholders based upon their respective Equity Ownership in the Company, or in any other proportion as they may agree. The closing for all purchases and sales of Callable Securities pursuant to this Section 5 shall be at the principal executive offices of the Company at 10:30 a.m., California time, on the 60th day after the giving of the applicable Purchase Notice. The purchase price for the purchase and sale of Callable Securities shall be paid in cash, by certified or official bank check. The Seller(s) of Callable Securities sold pursuant to this Section 5 shall cause such Securities to be delivered to the Purchasing Group or the Company at the relevant closing free and clear of all liens, charges or encumbrances of any kind. Such Seller(s) shall take all actions as the Purchasing Group or the Company shall request as necessary to vest in the members of the Purchasing Group and/or the Company at such closing such Callable Securities, free and clear of all liens, charges and encumbrances incurred, voluntarily or involuntarily, by or through Seller(s). 6. Registration Rights. ------------------- (a) Demand Registration Rights. At any time on or after January 31, --------------------------- 1998, each of (i) GEI, (ii) the HPA Group collectively, and (iii) Occidental shall be entitled, respectively, to request a registration (a "DEMAND REGISTRATION") of any of its Registrable Securities, and at such time as the Company qualifies for registration of securities on Form S-3 or any successor short-form, one additional registration that remains effective for a period of at least 180 days on such form. In such event, the Company shall: (i) as soon as reasonably practicable, and at its expense as set forth in Section 6 hereof, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of the Class I Stockholder's Registrable Securities as are specified in such request on the form specified in such request covering the Registrable Securities; (ii) use its best efforts to cause such registration to become and remain effective, as soon as practicable after receipt of the request of the Class I Stockholder, for the period necessary to effectuate the distribution contemplated by the Class I Stockholder; and (iii) at the request of the Class I Stockholder or the Manager, enter into and perform its obligations under an underwriting or purchase agreement (the "UNDERWRITING AGREEMENT") in customary form for secondary offerings of common stock, and otherwise reasonably acceptable to the parties, with the Manager (acting for itself and/or a group of syndicate of underwriters) and the Class I Stockholder. Notwithstanding the foregoing, the Company shall be entitled to delay any such Demand Registration if (x) the Company has determined in good faith that in view of pending negotiations or other material developments regarding the Company not otherwise required to be made public, disclosure of such information is not in the best interest of the Company (in which case the delay 8 in filing a Demand Registration may not exceed 90 days); or (y) the Company has initiated discussions with an underwriter regarding the sale of securities of the same class or convertible into the same class as the Registrable Securities in a registered primary public offering, in which case the Demand Registration may be delayed for up to 120 days from the effectiveness of such primary public offering, provided that the Company may not invoke the provision of clause (x) for more than an aggregate of 180 days in any twelve-month period, and may not invoke the delay in clause (y) more than once in any such period. In addition, to the extent a Demand Registration is a "shelf" registration, the Company may interrupt such registration for the reasons set forth above for no more than 90 days, provided that sales under such shelf registration shall in all events be permitted for an aggregate of 180 days if requested by the Stockholder. (b) Piggyback Registration Rights; Cutbacks. Each time the Company --------------------------------------- proposes to register under the Act (other than registration (A) on Forms S-4 or S-8 or any successor forms thereto, or (B) filed in connection with an exchange offer) securities of the same class as any of the Registrable Securities, the Company shall give written notice of such proposed registration (a "REGISTRATION NOTICE") to each Class I Stockholder and Class II Stockholder at least 20 days prior to the filing thereof. Each Registration Notice shall indicate that the recipient has the right (subject to the provisions of this Section 6) to propose that its Registrable Securities be included in such registration. Each Class I Stockholder and Class II Stockholder shall have the right to propose that a number of its Registrable Securities be included in such registration by written notice given to the Company within fifteen (15) days after the giving of such Registration Notice. Subject to the provisions of this Section 6, the Company shall include all such Registrable Securities in such registration; provided, -------- however, that: - ------- (i) if the registration is in whole or part an underwritten primary registration on behalf of the Company (whether or not it is also in part a Demand Registration or other secondary registration on behalf of any Company securityholders) and the managing underwriters of such offering determine that the aggregate amount of securities of the Company which all Stockholders and all other Company securityholders pursuant to future contractual rights to participate in such registration (such other Company securityholders, "FUTURE PARTICIPANTS") propose to include in such registration exceeds the maximum amount of securities that should be included therein, the Company will include in such registration, first, the ----- shares which the Company proposes to sell and second, securities to be sold ------ for the account of any Class I Stockholder and Robert Olsen ("Olsen") pro --- rata among such Stockholders, and third, securities to be sold for the ---- ----- account of the Class II Stockholders, pro rata among the Class II --- ---- Stockholders and fourth, the other securities to be sold for the account of ------ Future Participants, pro rata among such Future Participants, in each case --- ---- on the basis of the relative Equity Ownership of the parties who have requested that securities owned by them be so included (it being agreed and understood, however, that such underwriters shall have the right to eliminate entirely the participation in such registration of all Stockholders and Future Participants); (ii) if the registration is pursuant to an underwritten Demand Registration and the managing underwriters determine that the aggregate amount of securities which all Stockholders and all Future Participants propose to include in such registration exceeds the maximum amount of securities that should be included therein, the Company will 9 include in such registration, first, the securities to be sold for the ----- account of the Class I Stockholders and Olsen, pro rata among such --- ---- Stockholders, second, securities to be sold for the account of the Company, ------ if any, third, securities to be sold for the account of the Class II ----- Stockholders, pro rata among the Class II Stockholders and fourth, --- ---- ------ securities to be sold for the account of the Future Participants electing to include securities in such registration, pro rata among such Future --- ---- Participants, in each case, on the basis of their relative Equity Ownership (it being agreed and understood, however, that such underwriters shall have the right to eliminate entirely the participation therein of the Company and all such Future Participants not entitled to demand inclusion of securities in such registration); (iii) if the registration is pursuant to an underwritten secondary registration other than as described in clause (ii) above on behalf of Future Participants and the managing underwriters determine that the aggregate amount of securities which all Future Participants and Stockholders propose to include in such registration exceeds the maximum number of securities that should be included therein, the Company will include in such registration first, the securities to be sold for the ----- account of the Future Participants, pro rata among the Future Participants, --- ---- second, securities to be sold for the account of the Company, if any, ------ third, securities to be sold for the account of the Class I Stockholder and ----- Olsen, pro rata among such Stockholders and fourth, securities to be sold -------- for the account of the Class II Stockholders, in each case, on the basis of their relative Equity Ownership (it being agreed and understood, however, that such underwriters shall have the right to eliminate the participation therein of the Company and the Stockholders entirely unless, on the date of such secondary registration, any Class I Stockholder electing to participate in such registration shall not theretofore have completed one Demand Registration in which all of the Registrable Securities it sought to include were sold, in which case any such Class I Stockholder may convert such registration into one governed by clause (ii) above) ; (iv) in the event that, as a result of the provisions of Section 6(b)(i) or (ii), a group of Stockholders which has exercised its right to request a Demand Registration is unable to register all of the Registrable Securities as to which the request was made, such Stockholder shall not be considered to have utilized a Demand Registration under Section 6(a); and. (v) in exercising the rights of Stockholders in respect of Registrable Securities in this Section 6, Stockholders comprising the holders of the Demand Registrations enumerated in clauses (i) through (iii) of Section 6(a) shall be treated as an individual party to this Agreement for such purpose and, if more than one Stockholder has or succeeds to such rights, such Stockholders collectively shall exercise such rights and make all determinations hereunder acting by majority-in-interests based upon their respective ownership of Registrable Securities. (c) Expenses of Registration. Whether or not any registration ------------------------ statement prepared and filed pursuant to Section 6(a) or (b) hereof is declared effective by the SEC (except where a Demand Registration is terminated, withdrawn or abandoned at the written request of a 10 Class I Stockholder solely due to market conditions), the Company shall pay all expenses incident to the Company's performance of or compliance with the registration requirements of this Agreement, including, without limitation, the following: (A) all SEC registration and filing fees and expenses; (B) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of Registrable Securities; (C) any and all expenses incident to its performance of, or compliance with, this Agreement, including, without limitation, any allocation of salaries and expenses of the Company personnel or other general overhead expenses of the Company, or other expenses for the preparation of historical and pro forma financial statements; (D) fees and expenses incurred in connection with the listing of Registrable Securities on each securities exchange or the NASDAQ Stock Market, as applicable, on which securities of the same class are then listed; (E) all transfer and/or exchange agent and registrar fees; (F) fees and expenses in connection with the qualification of the Registrable Securities under securities or "blue sky" laws including reasonable fees and disbursements of counsel for the underwriters in connection therewith; (G) mailing and printing expenses relating to the registration and distribution of Registrable Securities; (H) messenger and delivery expenses relating to the registration and distribution of Registrable Securities; (I) fees and out-of-pocket expenses of a single counsel for the selling Stockholders (in each registration) and (J) fees and out-of-pocket expenses of counsel for the Company and its independent certified public accountants (including the expenses of any audit, review and/or "cold comfort" letters) and other persons, including special experts, retained by the Company (collectively, clauses (A) through (J), "REGISTRATION EXPENSES"); provided, however, that the Company shall not be required to pay, and each - -------- ------- Selling Stockholder shall pay, any discounts, commissions or fees of underwriters, selling brokers and dealers relating to the distribution of the Registrable Securities by it. (d) Registration Procedures. In the case of each registration ----------------------- effected by the Company pursuant to this Agreement, the Company shall keep the participating Stockholders advised in writing as to the initiation of each registration and as to the completion thereof. The Company shall (i) permit the participating Stockholders, the Manager, if any, and their respective counsel to make such investigation of the Company as they may reasonably request, (ii) furnish to the participating Stockholders, the Manager and their respective counsel drafts of the registration statement and all amendments thereto, all prospectuses and supplements thereof prior to filing with the SEC and consider their comments and suggestions with respect to such documents, and (iii) not file any such registration statement, amendment, prospectus or supplement to which the participating Stockholders or the Manager shall reasonably object. At its expense, the Company shall: (i) keep such registration effective and current as required by law for such period necessary to permit the participating Stockholders to complete the distribution described in the registration statement relating thereto, or for such period as may be agreed to in the Underwriting Agreement; (ii) prepare and file with the SEC such amendments, post- effective amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act and the Underwriting Agreement and to keep such registration statement effective and 11 current as required by law for that period of time specified above, in each case exclusive of any period during which the prospectus used in connection with such registration shall not comply with the requirements of Section 10 of the Securities Act, and respond as promptly as practicable to any comments received from the SEC with respect to such registration statement or any amendment thereto; (iii) furnish such number of copies of the registration statement, each amendment thereto, each preliminary prospectus, prospectuses, supplements and incorporated documents and other documents incident thereto as the participating Stockholders or the Manager from time to time may reasonably request; (iv) use its best efforts to register or qualify the Registrable Securities covered by such registration statement under the securities or "blue sky" laws of such jurisdictions as the participating Stockholders and the Manager shall reasonably request, and do any and all other acts and things which may be necessary or desirable to enable the participating Stockholders and the Manager to consummate the offering and disposition of Registrable Securities in such jurisdictions; provided, -------- however, that the Company shall not, by virtue of this Agreement, be ------- required to qualify generally to do business as a foreign corporation, subject itself to taxation, or consent to general service of process, in any jurisdiction wherein it would not, but for the requirements of this clause (iv), be obligated to be qualified; (v) notify the participating Stockholders and the Manager promptly and, if requested by any such person, confirm such notification in writing, (A) when a prospectus or any prospectus supplement has been filed with the SEC, and, with respect to a registration statement or any post- effective amendment thereto, when the same has been declared effective by the SEC, (B) of any request by the SEC for amendments or supplements to a registration statement or related prospectus, or for additional information, (C) of the issuance by the SEC of any stop order or the initiation of any proceedings for such or a similar purpose (and the Company shall make every reasonable effort to obtain the withdrawal of any such order at the earliest practicable time), (D) of the receipt by the Company of any notification with respect to the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose (and the Company shall make every reasonable effort to obtain the withdrawal of any such suspension at the earliest practicable time), (E) of the occurrence of any event with requires the making of any changes to a registration statement or related prospectus so that such documents shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (and the Company shall promptly prepare and furnish to the participating Stockholders and the Manager a reasonable number of copies of a supplemented or amended prospectus such that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading), and (F) of the Company's 12 determination that the filing of a post-effective amendment to the Registration Statement shall be necessary or appropriate. Each participating Stockholder agrees that it shall, as expeditiously as possible, notify the Company at any time when a prospectus relating to a registration statement covering such Stockholder's Registrable Securities is required to be delivered under the Securities Act, of the happening of any event of the kind described in this clause (v) as a result of any information provided by such Stockholder in writing expressly for inclusion in such prospectus included in such registration statement and, at the request of the Company, promptly prepare and furnish to it such information as may be necessary so that, after incorporation into a supplement or amendment of such prospectus as thereafter delivered to the purchasers of such securities, the information so provided by the participating Stockholders shall not include an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Each Stockholder shall be deemed to have agreed by acquisition of such Registrable Securities that upon the receipt of any notice from the Company of the occurrence of any event of the kind described in clause (E) of this clause (v), such Stockholder shall forthwith discontinue its offer and disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Stockholder shall have received copies of a supplemented or amended prospectus which is no longer defective as contemplated by clause (E) of this clause (v) and, if so directed by the Company, shall deliver to the Company, at the Company's expense, all copies (other than permanent file copies) of the defective prospectus covering such Registrable Securities which are then in such Stockholder's possession; (vi) use its best efforts to cause all such Registrable Securities covered by such registration statement to be listed on each securities exchange or the Nasdaq Stock Market, as applicable, on which similar securities issued by the Company are then listed, if the listing of such Registrable Securities is then permitted under the rules and regulations of such exchange or the Nasdaq Stock Market, as applicable; (vii) engage and provide a transfer agent for all Registrable Securities covered by such registration statement not later than the effective date of such registration statement; (viii) whether or not the Underwriting Agreement is entered into and whether or not any portion of the offering contemplated by such registration statement is an underwritten offering or is made through a placement or sales agent or any other entity, (A) make such representations and warranties to the underwriters, if any, in form, substance and scope as are customarily made in connection with an offering of common stock or other equity securities pursuant to any appropriate agreement and/or to a registration statement filed on the form applicable to such registration; (B) obtain an opinion of counsel to the Company in customary form and covering such matters, of the type customarily covered by such opinions, as the Manager, if any, and as the Stockholder may reasonably request; (C) obtain a "cold comfort" letter or letters from the independent certified public accountants of Company addressed to the underwriters, if any, thereof, dated (i) the effective date of such registration statement and (ii) the date of the closing 13 under the underwriting agreement relating thereto, such letter or letters to be in customary form and covering such matters of the type customarily covered, from time to time, by letters of such type and such other financial matters as the Manager, if any, may reasonably request; (D) deliver such documents and certificates, including officers' certificates, as may be reasonably requested by the underwriters, if any, therefor and the Manager, if any, thereof to evidence the accuracy of the representations and warranties made pursuant to clause (A) above and the compliance with or satisfaction of any agreements or conditions contained in the underwriting agreement or other agreement entered into by the Company, and (E) undertake such obligations relating to expense reimbursement, indemnification and contribution as are provided in this Agreement; (ix) permit the participating Stockholders to participate in the preparation of such registration statement and include therein material acceptable to the Company and its counsel, furnished to the Company in writing which, in the reasonable judgment of the participating Stockholders and their counsel, is required to be included therein; (x) use its best efforts to obtain the withdrawal of any order suspending the effectiveness of such registration statement by the SEC or any state securities authority as promptly as possible; and (xi) cooperate with the participating Stockholders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and enable certificates for such Registrable Securities to be issued for such number of shares of Company Common Stock and registered in such names as the participating Stockholders may reasonably request. (e) Indemnification --------------- (i) The Company shall indemnify and hold harmless each Stockholder, each of its directors, officers and agents, each underwriter (as defined in the Securities Act) of such Registrable Securities, if any, and each person who controls (within the meaning of Section 15 of the Securities Act) such Stockholder or any underwriter of the Registrable Securities held by or issuable to such Stockholder, against all claims, losses, expenses, damages and liabilities, joint or several, including any of the foregoing incurred in settlement of any proceeding, commenced or threatened, (or actions in respect thereto) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Act or any state securities law applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, and shall reimburse each Stockholder, each of its directors, officers and agents, each such underwriter and each person who controls such Stockholder or any such underwriter for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim, 14 loss, damage, liability or action, provided, however, that the Company -------- ------- shall not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Stockholder or such underwriter specifically for use therein. The indemnity provided by this Section 6(e) shall be in addition to any liability which the Company may otherwise have. (ii) Each Stockholder shall indemnify and hold harmless Company, each of its directors and officers, each underwriter, if any, and each person who controls the Company or any of the underwriters within the meaning of the Act, against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse the Company or underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information pertaining to such Stockholder, which is furnished in writing to Company by such Stockholder specifically for use therein. (iii) If the indemnification provided for in this Section 6 is unavailable to or insufficient to hold harmless an Indemnified Party (as defined below) in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then the Company and the Stockholder shall contribute to the amount paid or payable as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of Company on the one hand and the Stockholder on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Stockholder on the other and such person's relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company agrees that it would not be just and equitable if contribution pursuant to this Section 6(e) were determined by pro rata allocation or by any other method of allocation which does not --- ---- take account of the equitable considerations referred to above in this Section 6(e). The amount paid or payable by a party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section 6(e) shall include any legal or other expenses reasonably incurred by such party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. No person shall be 15 required to contribute to any settlement effected without its consent, which consent shall not be unreasonably withheld. If, however, indemnification is available under this Section 6, the indemnifying parties shall indemnify each indemnified party to the fullest extent provided herein without regard to the relative fault of such indemnifying party or indemnified party or any other equitable considerations. (iv) Each party entitled to indemnification under this Section 6(e) (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnification may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense, unless the Indemnified Party in its reasonable judgment determines that joint representation by counsel for the Indemnifying Party would be inappropriate due to actual or potential differing interests between the Indemnifying Party and the Indemnified Party in the conduct of the defense of such action, in which case the Indemnified Party shall be entitled to be represented by separate counsel selected by it, the reasonable fees and expenses of which shall be borne by the Indemnifying Party, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations hereunder, unless such failure resulted in actual detriment to the Indemnifying Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation. (v) Notwithstanding the foregoing, to the extent that the provisions on indemnification of the underwriters and their controlling persons contained in the Underwriting Agreement in connection with an underwritten public offering are in conflict with the foregoing provisions, the provisions in the Underwriting Agreement shall control as to indemnification of the underwriters and their controlling persons in the public offering. (vi) Notwithstanding the foregoing, in no event shall any Stockholder be liable under this Section 6(e) for an amount exceeding the net proceeds received by such Stockholder from the sale of its Registrable Securities pursuant to the registration rights granted to such Stockholder hereunder. (f) Holdback Amount. Each Stockholder agrees that in the event of an --------------- underwritten public offering of Registrable Securities for the account of any other Stockholder, such Stockholder and any Related Transferee thereof will not, without the written consent of the underwriters, offer for public sale (other than as part of such underwritten public offering) any Securities during the ten (10) days prior to and such number of days (not to exceed 180 days in the case of an initial public offering and 90 days in all other cases) after the effective date of the 16 registration statement in connection with such public offering as the underwriters may reasonably request in writing. (g) Assignment and Assumption. For avoidance of doubt, the parties ------------------------- acknowledge that each Stockholder may assign its rights under this Section 6 as an incident to any permitted Transfer of Securities held by it to the Transferee of such Securities, and if the Stockholder retains any Securities, the rights under this Section 6 shall remain applicable to the retained Securities. If Securities are acquired from a Class I Stockholder, such Securities shall be entitled to participate in any Demand Registration as a member of the group enumerated in clauses (i) through (iii) of Section 6(a) that includes such Class I Stockholder, without thereby increasing the aggregate number of Demand Registrations the Company may be required to effect. Each Stockholder shall promptly notify the Company in writing of each such assignment of rights, and the assignee shall execute such documentation as the Company may reasonably request to evidence its agreement to be bound by this Section 6. Registration rights shall not be assignable to any purchaser of Securities sold under Rule 144 or in any public securities sale. If the Company effects a business combination in which Stockholders receive securities of another issuer and such securities cannot be resold by the Stockholders without registration under the Securities Act, as a condition to the consummation of such business combination, the Company shall cause such issuer to provide to the Stockholders rights equivalent to those under this Section 6 unless applicable law would permit free resale of the Securities so received without registration in a public market. (h) Stock Option Plans. After the IPO, the Company shall use its ------------------ reasonable efforts to register, on Form S-8 or any similar or successor form, the Securities underlying the ISOs and NQ Options. 7. Drag-Along Sales and Tag-Along Sales. ------------------------------------ (a) Drag-Along Sales. ---------------- (i) Notwithstanding any other provision hereof, if GEI agrees to sell Securities held by it pursuant to a transaction in which more than 75% of the then-outstanding Common Stock of the Company will be sold to or acquired by a Third Party (a "DRAG-ALONG SALE"), then upon the demand of GEI, (i) in the case of Occidental and the Class II Stockholders, made at any time after the Closing Date and (ii) in the case of the HPA Group, made at any time after the fourth anniversary of the Closing Date (the HPA Group and the Class II Stockholders being collectively referred to for this purpose as "DRAG-ALONG SELLERS"), each Drag-Along Seller hereby agrees to sell to such Third Party the same percentage of the total number of Securities held by such Drag-Along Seller on the date of the Drag-Along Notice, as the number of Securities GEI is selling in the Drag-Along Sale bears to the total number of shares held by GEI as of the date of the Drag- Along Notice (the "SALE PERCENTAGE"), at the same price and form of consideration and on the same terms and conditions as GEI has agreed to with such Third Party. If the Drag-Along Sale is in the form of a merger transaction, the Drag-Along Seller agrees to vote his or her Securities in favor of such merger and not to exercise any rights of appraisal or dissent afforded under applicable law. The provisions of this Section 7 shall 17 apply regardless of the form of consideration received in the Drag-Along Sale. For purposes of Drag-Along Sales, the number of shares owned by each Drag-Along Seller shall include all shares underlying Options and Warrants, which Options and Warrants will be exercised by the Drag-Along Sellers immediately prior to and contingent upon consummation of the Drag-Along Sale. (ii) Prior to making any Drag-Along Sale, if GEI elects to exercise the option described in this Section 7, GEI shall provide the Drag-Along Seller to whom this Section 7 then applies with written notice (the "DRAG-ALONG NOTICE") not more than 60 nor less than 15 days prior to the proposed date of the Drag-Along Sale (the "DRAG-ALONG SALE DATE"). The Drag-Along Notice shall set forth: (i) a general description of the transaction and the proposed amount and form of consideration to be paid per share offered by the Third Party; (ii) the aggregate number of Securities held by GEI as of the date that the Drag-Along Notice is first given to a Drag-Along Seller; (iii) the Sale Percentage; and (iv) the Drag- Along Sale Date. (iii) On the Drag-Along Sale Date, each Drag-Along Seller shall deliver a certificate or certificates for the Sale Percentage of its Securities, duly endorsed for transfer with signatures guaranteed, to such Third Party in the manner and at the address indicated in the Drag-Along Notice against delivery of the purchase price therefor; provided, however, -------- ------- that in the event the Company has possession of any such certificates pursuant to this Agreement, upon the written request of the Drag-Along Seller at least five (5) business days in advance of-the Drag-Along Sale Date, the Company shall deliver such certificates to the purchaser at the time and in the manner described above. (b) Optional Participation in Sales of Common Stock (Tag-Along ---------------------------------------------------------- Sales) ----- (i) If GEI shall at any time desire to Transfer shares of Common Stock to a third party, other than ratably to its partners, then each of the HPA Group, Occidental and the Class II Stockholders and their Related Transferees (each, a "TAG-ALONG SELLER") shall be entitled, to participate pro rata in such Transfer at the same price and on the same --- ---- terms and conditions applicable to GEI, based upon their respective Fully Diluted Ownership in the Company. (ii) Each Tag-Along Seller shall have the right to Transfer up to a percentage of the number of shares specified in the Transfer Notice delivered pursuant to the following sentence of the aggregate number of shares of Common Stock then owned by GEI. GEI shall deliver or cause to be delivered to each Tag-Along Seller a written notice (a "TRANSFER NOTICE") of a proposed tag-along sale no later than 30 days prior to the proposed closing thereof. Such notice shall make reference to the Tag-Along Sellers' rights under this Section 7(b) and shall describe in reasonable detail (A) the aggregate number of shares of Common Stock to be Transferred by GEI if none of the HPA Group or Class II Stockholders participates, (B) the aggregate number of shares of Common Stock then owned by GEI, (C) the person or entity to whom or which such shares of Common Stock are proposed to be Transferred, (D) the terms and conditions of the Transfer, including the consideration to be paid therefor, (E) the maximum percentage of 18 its shares such Tag-Along Seller is entitled to include in the Transfer and (F) the proposed date, time and location of the closing of the Transfer. Each Stockholder receiving a Transfer Notice shall exercise its right to participate in a Transfer of Common Stock pursuant to this Section 7 by delivering to GEI a written notice (a "TAG-ALONG NOTICE") stating its election to do so and specifying the number of shares (which shall not exceed the number of shares determined for such Tag-Along Seller in the Transfer Notice) of Common Stock held by it to be Transferred no later than fifteen days after receipt of the Transfer Notice. Failure to provide a Tag-Along Notice within such fifteen-day period shall be deemed to constitute an election by such Stockholder not to exercise its rights pursuant to this Section 7, and GEI shall have 90 days following the expiration of such fifteen-day period in which to Transfer the number of shares equal to the difference between the number set forth in the Transfer Notice and the aggregate number of shares as to which GEI has received a Tag-Along Notice, on terms not more favorable to GEI than those set forth in the Transfer Notice. (iii) Each Tag-Along Seller shall be required to deliver at such closing the certificate or certificates representing the shares to be Transferred, duly endorsed for transfer, and shall be entitled to receive the net proceeds allocable to the Transfer thereof, after deduction of such Tag-Along Seller's proportionate share of the expenses of Transfer, which share shall not exceed an amount proportionate to the amount of such expenses allocated to GEI. If, at the end of the 90-day period following the expiration of such fifteen-day period, GEI has not completed the Transfer of shares of Common Stock, GEI may not sell the shares of Common Stock without again fully providing a new Transfer Notice. (c) Obligations of Drag-Along Sellers. In connection with any Drag- --------------------------------- Along Sale, Drag-Along Sellers shall not be required to make any representation or warranty to the purchaser other than to the effect that they hold title to the Securities they are selling in the Drag-Along Sale, free and clear of liens and the like, and as to their right, power and authority to sell such Securities. Except as to such representations, Drag-Along Sellers shall not be liable beyond the net proceeds of the Drag-Along Sale for any other breach of representations or warranties. In addition, unless expressly agreed to by a Drag-Along Seller, no Drag-Along Seller shall be required to enter into any covenant not to compete or similar agreement restricting their business activities. 8. Termination and Lapse of Rights and Restrictions; Applications to ----------------------------------------------------------------- Other Stock and Adjustments. - --------------------------- (a) Termination of Provisions. The provisions of Sections 4, 5, 7, 9 ------------------------- and 10 shall lapse and be of no further effect immediately following the earlier to occur of a Change in Control or an IPO. (b) Application. In the event any capital stock of the Company or any ----------- other corporation shall be distributed on, with respect to, or in exchange for Securities as a stock dividend, stock split, reverse stock split, reclassification or recapitalization, or in connection with any merger or reorganization, the restrictions, rights and options and prices set forth herein shall 19 apply with respect to such other capital stock to the same extent as they are, or would have been applicable, to the Securities on or with respect to which such other capital stock was distributed and shall continue to apply to the Securities or such other securities outstanding thereafter, in each case with such adjustments as are necessary or appropriate. 9. Election of Directors. So long as such individuals respectively own --------------------- the requisite amount of Common Stock set forth herein, each of the other Stockholders (other than Occidental) agrees to vote his or its Common Stock, and to cause his Related Transferees to vote their Common Stock, in favor of Michael J. Fourticq and Brian P. McDermott ("FOURTICQ" and "MCDERMOTT") in all elections of the directors of the Company, whether by meeting or action in writing. Such agreement to vote shall be effective as to each of Fourticq and McDermott so long as such individual continues to own (directly or, in the case of Mr. McDermott, through a family trust and in either case, through Related Transferees after the date hereof) at least two-thirds (K) of the Common Stock owned by him on the date hereof. Such agreement to vote shall cease to be effective upon the first to occur of: (i) such individual ceasing to own (directly or indirectly, as aforesaid) in excess of one-third (J) of the Common Stock owned by him on the date hereof and (ii) a Disproportionate Sale after which such individual and his Related Transferees own less than two-thirds (K) of the Common Stock owned by him and such Related Transferees on the date hereof. A "DISPROPORTIONATE SALE" as to either individual occurs on the date of a Transfer of Common Stock as a result of which the Common Stock owned by such individual and Related Transferees has decreased by a percentage that is greater, by at least five percent (5%), than the corresponding decrease in ownership of Common Stock of GEI to date. Each of the Stockholders (other than Occidental) further agrees that he or it shall vote its Common Stock, and cause its Related Transferees to vote their Common Stock, in all elections of directors of the Company, whether by meeting or action in writing, in favor of all nominees for the board of directors proposed by GEI. For purposes of this Section 9 and the effectiveness of the voting agreements herein, ownership of Common Stock shall be calculated based upon the Fully Diluted Ownership of the individual and his Related Transferees, in the aggregate; provided, however, that to the extent any of the Options included in the Fully Diluted Ownership of an individual should fail to vest, the calculation as to such individual's ownership of Common Stock shall thereafter be made as if the aggregate Common Stock owned by such individual on the date hereof had not included such Options. The parties acknowledge that the provisions of the Preferred Stock could, under the circumstances specified therein, entitle the holders thereof to elect all of the Company's directors, making this Section 9 inoperative. 10. Certain Additional Agreements. ----------------------------- (a) Right to Participate in Securities Issuances. If the Company shall issue, sell or distribute to GEI or any of its Affiliates any equity or debt securities of the Company, or any option, warrant, or right to acquire, or any security convertible into or exchangeable for, any of the foregoing (other than pursuant to an underwritten public offering, a stock dividend, stock split or other pro rata distribution of securities to stockholders of --- ---- the Company generally in which the HPA Group, Olsen and Occidental participates on an equal basis, including any Related Transferees), the members of the HPA Group, Olsen and Occidental shall be entitled, provided that they collectively maintain two-thirds (2/3) of the Fully Diluted Ownership held by them on the date hereof, to participate in such issuance, sale or distribution, at the same price and on the 20 same terms and conditions applicable to GEI, pro rata, based upon their --- ---- respective Fully Diluted Ownership in the Company. The Company shall provide at least twenty (20) days' prior notice to the members of the HPA Group, Olsen and Occidental as to its intention so to issue equity, debt or related securities to GEI, and in the event any member of the HPA Group, Olsen or Occidental fails to respond within such twenty-day period, such member shall be deemed to have waived his or its right so to participate in the issuance of securities. The members of the HPA Group and Olsen may determine amongst themselves that to the extent any member does not desire to participate, other members may increase their participation, provided that the aggregate participation does not exceed that offered to the HPA Group and Olsen as a whole and that notice, which shall be binding upon all the HPA Group members and Olsen and as to which GEI shall have no duty to inquire, shall be given to GEI within such 20-day period as to the aggregate number of securities being subscribed for. The parties acknowledge that time is of the essence as to this Section 10(a). (b) Right to Participate in Equity Repurchases. The Company and GEI ------------------------------------------ agree that the Company will not purchase any Securities from GEI or any of its Affiliates unless the Company offers to simultaneously purchase a proportionately equal number of Securities of the same class from each member of the HPA Group, Olsen and Occidental at the same price and on the same terms and conditions applicable to GEI and its Affiliates, based upon their respective Fully Diluted Ownership. (c) Affiliate Transactions. No material transaction or series or ---------------------- related transactions (including any issuance of securities, profits interests, stock appreciation rights, or similar rights or interests of the Company) between the Company and GEI or any of its Affiliates involving value in excess of $1,000,000 may be consummated unless approved (i) if one of Fourticq or McDermott then holds at least one-third of his Fully Diluted Ownership as of the date hereof, by such individual, and otherwise by a majority of the disinterested directors of the Company, or (ii) by the board of directors of the Company after it is presented with a fairness opinion of a nationally recognized investment bank to the effect that the transaction is fair to the Company and its stockholders. Notwithstanding the foregoing, other than the Management Agreement of even date herewith between the Company and Leonard Green & Partners, L.P. (the "Management Agreement"), GEI and its Affiliates will not enter into any consulting, management or similar agreement or arrangement with the Company or increase the fees provided for in the Management Agreement as of the date hereof, except that such fees may be proportionately increased provided such increase is calculated on the same basis (1.6% of invested capital) as the fee currently provided for therein and such increase reflects further investment by GEI consistent with the terms of this Section 10. (d) Change of Control Transactions. Each of GEI, Fourticq and ------------------------------ McDermott agrees that no such Stockholder shall, without the prior consent of the other two Stockholders, pursue, advocate or enter into an agreement in respect of any recapitalization, reclassification, share exchange, reorganization, merger, consolidation or similar transaction involving the Company unless all holders of Common Stock of the Company will be treated identically in such transaction, but ratably in proportion to their respective Equity Ownership. 21 (e) Information. The Company shall provide each Class I Stockholder ----------- and Olsen with the following information, all of which each Class I Stockholder and Olsen agrees to hold in confidence: (i) For each fiscal quarter of the Company, as and when submitted to Green, unaudited consolidated financial statements of the Company (consisting of balance sheet and statements of operations, stockholders' equity and cash flows for such fiscal quarter, in the form submitted to GEI; (ii) For each fiscal year of the Company, as and when submitted to Green, audited financial statements of the Company for such fiscal year, certified by the Company's independent certified public accounting firm, in the form submitted to GEI; (iii) Any information the Company provides generally to the holders of its Common Stock; and (iv) Such additional information about the Company as such Class I Stockholder or Olsen may reasonably request from time to time. 11. Notices. All notices or other communications under this Agreement shall ------- be given in writing and shall be deemed duly given and received on the third full business day following the day of the mailing thereof by registered or certified mail or the next Business Day if sent by overnight courier or when delivered personally or sent by facsimile transmission as follows: (a) if to the Company, at its principal executive offices at the time of the giving of such notice, or at such other place as the Company shall have designated by notice as herein provided to the Purchaser; (b) if to a Class I Stockholder, at its principal executive offices at the time of the giving of such notice, or at such other place as such Stockholder shall have designated by notice as herein provided to the Company. (c) if to any Class II Stockholder, at his address as it appears on Annex A or at such other place as he shall have designated by notice as herein provided to the Company. 12. General. ------- (a) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and may not be modified or amended except by a written agreement signed by each of the Company and the Class I Stockholders and, to the extent their interests are affected, by the Class II Stockholders, provided, however, that Class II Stockholders having a majority of -------- ------- Equity Ownership as amongst such Stockholders may bind all of such Class II Stockholders as to any matter adversely affecting them if such adverse effect is equal, on a proportionate basis, as to all such Class II Stockholders and the consent of each adversely affected Class II Stockholder shall otherwise be required. 22 (b) No waiver of any breach or default hereunder shall be considered valid unless in writing, and no such waiver shall be deemed a waiver of any subsequent breach or default of the same or similar nature. (c) Except as otherwise expressly provided herein, this Agreement shall be binding upon and inure to the benefit of each of the Company, the Stockholders and their respective heirs, personal representatives, successors and assigns; provided, however, that nothing contained herein shall be construed -------- ------- as granting any Stockholder the right to Transfer any of the Securities except in accordance with this Agreement and any Transferee shall hold such Securities having only those rights and being subject to the restrictions provided for in this Agreement. (d) If any provision of this Agreement shall be invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render invalid or unenforceable any other severable provision of this Agreement, and this Agreement shall be carried out as if any such invalid or unenforceable provision were not contained herein. (e) Each Class II Stockholder agrees that nothing herein shall be deemed to create any implication concerning the adequacy of his services to the Company, or shall be construed as an agreement by the Company, express or implied, to employ him or contract for his services, to restrict the right of the Company to discharge him or cease contracting for his services or to modify, extend or otherwise affect in any manner whatsoever, the terms of any employment agreement or contract for services which may exist between him and the Company or its subsidiaries. Each Class II Stockholder represents that he has been advised, to the extent he deemed necessary, by legal counsel and tax advisors of his choice in connection with this Agreement. Each Class II Stockholder further represents that, if he is married, his spouse has executed and delivered to the Company the Acknowledgment and Agreement of Spouse set forth at the end of this Agreement. (f) In the event any day upon which a sale, notice or other matter is required to occur hereunder is not a Business Day, such matter shall be deferred until the next Business Day. (g) The section headings contained herein are for the purposes of convenience only and are not intended to define or limit the contents of such sections. The masculine pronoun shall be deemed to include and incorporate the feminine pronoun. (h) Each party hereto shall cooperate and shall take such further action and shall execute and deliver such further documents as may be reasonably requested by any other party in order to carry out the provisions and purposes of this Agreement. (i) Words in the singular shall be read and construed as though in the plural and words in the plural shall be read and construed as though in the singular in all cases where they would so apply. 23 (j) This Agreement may be executed in one or more counterparts, all of which taken together shall be deemed one original. (k) Due to the fact the securities of the Company cannot be readily purchased or sold in the open market, and for other reasons, the parties will be irreparably damaged in the event that this Agreement is not specifically enforced. In the event of a breach or threatened breach of the terms, covenants and/or conditions of this Agreement by any of the parties hereto, the other parties shall, subject to Section 13, in addition to all other remedies, be entitled to a temporary and/or permanent injunction, without showing any actual damage or that monetary damages would not provide an adequate remedy, and/or a decree for specific performance, in accordance with the provisions hereof. Each Stockholder hereby irrevocably and unconditionally consents to the jurisdiction of any California State court or federal court of the United States sitting in the State of California in any action or proceeding relating to this Agreement and consents to service of process in connection therewith by the delivery of notice to such Stockholder's address set forth in this Agreement. (l) This Agreement shall be deemed to be a contract under the laws of the State of Delaware and for all purposes shall be construed and enforced in accordance with the internal laws of such state without regard to the principles of conflicts of law. 13. Additional Class II Stockholders. Prior to issuing any Options, Common -------------------------------- Stock or other right exercisable for or convertible into Common Stock, and as a condition to the receipt thereof, the Company shall require the recipient to execute and deliver a duplicate counterpart of this Agreement, and such recipient shall become a Class II Stockholder for all purposes hereof. 14. Arbitration. ----------- (a) Scope. The parties, except Occidental, mutually consent to the ----- resolution by binding arbitration of all claims or controversies ("CLAIMS") arising out of or related to this Agreement; provided that such consent shall not apply to any claim to which Occidental is a party. Notwithstanding the foregoing, the parties may have recourse to the courts for injunctive or equitable relief in respect of matters arising out of or relating to this Agreement. (b) Deposition. Each party to a dispute shall have the right to take ---------- the deposition of up to two individuals and any expert witness designated by each other party. Each party also shall have the right to make requests for production of documents to any party. The subpoena right specified below shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had only where the arbitrator selected pursuant to this Section 14 so orders, upon a showing of reasonable and substantial need. At least 30 days before the arbitration, the parties must exchange lists of witnesses, including any expert, and copies of all exhibits intended to be used at the arbitration. Each party shall have the right to subpoena witnesses and documents for the arbitration. (c) JAMS. The Arbitration will be held under the auspices of either ---- the American Arbitration Association ("AAA") or Judicial Arbitration & Mediation Services, Inc. ("J.A.M.S."), with the designation of the sponsoring organization to be made by the party who 24 did not initiate the claim. The parties agree that, except as provided in this Agreement, the arbitration shall be in accordance with the AAA's then-current arbitration procedures (if AAA is designated) or the then-current J.A.M.S. arbitration rules (if J.A.M.S. is designated). The arbitration shall be conducted by a single arbitrator selected from the AAA large complex case panel (the "ARBITRATOR"). The arbitration shall take place in Los Angeles, California. (d) Selection of Arbitrator. If the parties to the dispute cannot ----------------------- agree upon the selection of the arbitrator within 30 days from the day the matter is submitted to arbitration, then, on application of any party, the arbitrator shall be designated by the sponsoring organization. (e) Governing Law. The Arbitrator shall apply the substantive law ------------- (and the law of remedies, if applicable) of the state of Delaware. The Arbitrator shall be without jurisdiction to apply any different substantive law, or law of remedies. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement is void or voidable. The arbitration shall be final and binding upon the parties, except as provided in this Agreement. (f) Procedures. The Arbitrator shall have jurisdiction to hear and ---------- rule on pre-hearing disputes and are authorized to hold pre-hearing conferences by telephone or in person, as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. Such proceedings shall be concluded within 180 days of the commencement of the arbitration, as evidenced by the rendering of the award described below. Any party to a dispute, at its expense, may arrange for and pay the cost of a court reporter to provide a stenographic record of proceedings. If such a transcript is prepared, it shall be the official transcript of the proceedings for all purposes. Any party to a dispute, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. (g) Award. The Arbitrator shall render an award and opinion outlining ----- in reasonable detail the findings of fact and conclusions of law upon which the award is based. The award of the Arbitrator shall be final, binding and conclusive on the parties. If the Company is a party to the dispute, the Company shall bear the fees and costs of the Arbitrator. If Company is not a party to the dispute, the parties to the dispute shall equally share the fees and costs of the Arbitrator. Each party shall pay for its own costs and attorneys' fees. 15. Definitions. As used in this Agreement, unless the context requires ----------- otherwise, the capitalized terms described in this Section 15 shall have the meanings indicated herein. (a) Each of the following capitalized terms shall have the meaning ascribed to such term in the section of this Agreement indicated:
Term Section -------------------------------- --------------- Act............................. 15(b)
25
Term Section -------------------------------- --------------- Affiliate....................... 15(b) Agreement....................... Introduction Bona Fide Offer................. 4(b) Business Day.................... 15(b) Callable Securities............. 2(b) Call Purchase Event............. 5(a) Call Option..................... 2(b) Change in Control............... 15(b) Class I Stockholder............. Introduction Class II Stockholder............ Introduction Common Stock.................... Recitals Company......................... Introduction Control......................... 13(b) Demand Registration............. 6(a) Demand Seller................... 6(b) Disproportionate Disposition.... 9 Drag-Along Notice............... 7(b) Drag-Along Sale................. 7(a) Drag-Along Sale Date............ 7(b) Drag-Along Seller............... 15(b) Electing Stockholder............ 4(b) Equity Ownership................ 15(b) Fair Market Value............... 15(b) Fully Diluted Ownership......... 15(b) Future Stockholder.............. 6(b) Future Participants............. 6(a) GEI............................. Introduction GEI Distribution................ 12 Stockholder..................... 6(a) IPO............................. 15(b) Living Trust.................... 15(b) Manager......................... 15(b) NQ Option....................... 2(b) Option Notice................... 4(b) Other Termination............... 5(a) Outside Party................... 4(b) Permanent Disability............ 15(b) Permitted Transfer.............. 4(a) Purchase Notice................. 5(a) Purchaser....................... 2(b) Purchasing Group................ 5(a) Registrable Securities.......... 15(b) Registration Notice............. 6(a)
26
Term Section ------------------------------------------ ------------- Related Transferee........................ 15(b) Retirement................................ 15(b) Rule 144.................................. 15(b) Sale Percentage........................... 7(a) SEC....................................... 15(b) Securities................................ Introduction Seller.................................... 5(a) Subscription Stock........................ 2(a) Tag-Along Notice.......................... 7(e) Tag-Along Seller.......................... 7(d) Third Party............................... 7(a) Transfer.................................. 15(b) Transfer Notice........................... 7(e)
(b) Each of the following capitalized terms shall have the meanings indicated in this clause (b): "ACT" means the Securities Act of 1933, as amended from time to time. "AFFILIATE" has the meaning set forth in Rule 405 under the Act. "BUSINESS DAY" means a day on which banks are open for business in the State of California. "CHANGE IN CONTROL" means any of (i) a sale or other disposition by the Company of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole, or (ii) a merger or consolidation of the Company if, immediately following such merger or consolidation, there is not Control of the surviving entity of such merger or consolidation, or (iii) a sale of capital stock of the Company (by any holder thereof or by the Company) if, immediately following such sale, there is not Control of the Company. "CONTROL" means that the holders of the capital stock of the Company immediately following the Merger (including the Class I Stockholders) hold, in the aggregate, directly and indirectly, the power to elect a majority of the directors of the Company that are not elected pursuant to the provisions of the Preferred Stock (or, as the case may be, the surviving entity of a merger or consolidation of the Company). "EQUITY OWNERSHIP" means the relative interests of the holders of the Company's outstanding Common Stock as of the date of determination. "FAIR MARKET VALUE" of Securities means the fair market value of Securities as determined as of the time of the Call Purchase Event (or other event requiring valuation) by the Company's Board of Directors in the exercise of its reasonable discretion; provided, however, that in the event that the Common -------- ------- Stock is traded publicly on any national securities exchanges) 27 (including without limitation NASDAQ National Market System or the NASDAQ "Small-Cap" Issues System), such fair market value shall be based upon the closing price for such Common Stock on such exchange(s) on the date preceding the Call Purchase Event (or other event requiring valuation). "FULLY DILUTED OWNERSHIP" means, as to any Stockholder, his or its aggregate ownership of all equity interests in the Company, including all Options and all other securities exercisable, convertible or exchangeable for Common Stock. "IPO" means the completion of the first underwritten public offering of the Company's shares of Common Stock registered under the Act after the date hereof "LIVING TRUST" means a revocable living trust established by the Purchaser for estate planning purposes and pursuant to which no one other than the Purchaser and/or the Purchaser's spouse is the beneficiary during the Purchaser's lifetime. "MANAGER" means the investment banking firm or firms designated by the Stockholders effecting a Demand Registration as the managing underwriter(s) of an offering registered pursuant to this Agreement, which firm or firms shall be the existing investment bankers for or other nationally recognized investment bankers reasonably acceptable to the Company. "PERMANENT DISABILITY" of a Class II Stockholder means that (i) the Class II Stockholder becomes physically or mentally incapacitated or disabled so that he is unable to perform for the Company substantially the same services as he performed prior to incurring such incapacity or disability, and (ii) such incapacity or disability continues for a period of 120 days, whether or not consecutive, over a period of six consecutive months; provided, however, that -------- ------- (x) the Company, at its option and expense, shall be entitled to retain a physician to confirm the existence of such incapacity or disability, and (y) the determination of such physician shall be binding upon the Company and the Class II Stockholder. "REGISTRABLE SECURITIES" means the Common Stock and the Warrant Shares held by the Stockholders, subject to adjustment pursuant to Section 8 hereof. "RELATED TRANSFEREE" means (i) in the case of any individual, any of the Stockholder's spouse, adult lineal descendants, adult spouses of such lineal descendants, a Living Trust, trusts solely for the benefit of the Stockholder's spouse or the Stockholder's minor or adult lineal descendants, and (in the event of the Stockholder's death) the Stockholder's personal representatives (in their capacities as such), estate or named beneficiaries and (ii) in the case of a business organization, any individual or other business organization controlled by or under common control with such business organization, as such terms are defined within the meaning of Rule 405 under the Act. "RETIREMENT" means retirement pursuant to the Company's standard retirement policy in effect from time to time but in no event prior to the age of 65, unless pursuant to a specific determination by the Board of Directors of the Company. 28 "RULE 144" means Rule 144 under the Act, as amended from time to time, or any successor or similar rule. "SEC" means the Securities and Exchange Commission. "TRANSFER," used as a noun, means any sale, pledge, gift, bequest, transfer, assignment or any other encumbrance or disposition, whether direct or indirect, conditional or unconditional. "TRANSFER," used as a verb, means to make a Transfer. 29 IN WITNESS WHEREOF, the parties have executed this Agreement as of the first date written above. Number of Purchase Price Shares of of Subscription Common Stock Stock ------------ --------------- LESLIE'S POOLMART, INC. By ____________________________________ Its ____________________________________ GREEN EQUITY INVESTORS II, L.P. 1,055,172 By: Grand Avenue Capital Partners, L.P., its sole general partner By: Grand Avenue Capital Corporation, its sole general partner By:________________________________________ Name_______________________________________ Title______________________________________ OCCIDENTAL PETROLEUM CORPORATION By ________________________________________ Name ______________________________________ Title _____________________________________ ___________________________________________ 22,414 Richard H. Hillman ___________________________________________ 160,539 Michael J. Fourticq ___________________________________________ 10,000 Greg Fourticq ___________________________________________ Brian P. McDermott 30 Number of Purchase Price Shares of of Subscription Common Stock Stock ------------- --------------- _____________________________________ Brian P. McDermott and Manette J. McDermott, T.R.U.A. DTD 3/15/90 The McDermott Family Trust _____________________________________ 14,768 $214,136 Robert Olsen _____________________________________ 4,198 $60,871 Cynthia G. Watts CLASS II STOCKHOLDERS - --------------------- (INCLUDING NO OPTIONHOLDERS) - ----------------------------- _____________________________________ 14,768 $214,136 Robert Olsen _____________________________________ 4,198 $60,871 Cynthia G. Watts _____________________________________ Mike Adamson _____________________________________ Richard Grice _____________________________________ Patrick Murphy _____________________________________ Charles Vasquez _____________________________________ Jodi Knight 31 Number of Purchase Price Shares of of Subscription Common Stock Stock ------------ --------------- ______________________________________ Mark Lum ______________________________________ Marvin Schutz 32 ACKNOWLEDGMENT AND AGREEMENT OF SPOUSE -------------------------------------- The undersigned, being the spouse of a Class II Stockholder, hereby agrees to be bound by the provisions of this Agreement. ___________________________________ Name ______________________________ 33 ANNEX A COMMON STOCK ------------ CAPITAL STRUCTURE -----------------
Fully Diluted Common Shares ------------ Michael J. Fourticq 160,539 Brian McDermott 166,552 Richard H. Hillman 22,414 Greg Fourticq 10,000 ------------ Total Stock Remaining Outstanding 359,505 Michael J. Fourticq 4,976 Robert Olsen 52,761 Other Management 25,862 ------------ Total Options 83,599 Robert Olsen--Cash 16,966 Cynthia Watts--Cash 2,000 Green Equity Investors II, L.P. 1,055,172 Occidental Warrants 316,092 Management Incentive Stock Options 273,946 Total 2,107,280 ============
A-1 ANNEX B TERMS OF NQ OPTION PLAN ----------------------- Number of Shares....... 83,599 total. The number of shares covered by each individual grant will be the quotient of (i) the product of (x) the number of shares subject to the corresponding canceled option multiplied by (y) the difference between $14.50 and such canceled option's exercise price, divided by (ii) $9.50. In the case of Messrs. Fourticq and Olsen, the foregoing formula results in the issuance of options for a maximum of 4,976 and 52,761 shares, respectively, with the balance to be allocated to management as heretofore agreed. Exercise Price......... $5.00 Type of Options........ Non-Qualified, ten-year options Termination of Employment.......... A portion of options and shares are subject to repurchase upon termination of employment prior to the second anniversary of the Closing Date as set forth in the Agreement, all other NQ Options remain exercisable notwithstanding employment status of optionee Adjustment............. The number of shares subject to NQ Options, and the exercise price, will be proportionately adjusted for each subdivision and combination of Company common stock. Acceleration........... NQ Options will accelerate and may be cashed out upon the occurrence of a Change of Control. In a cash-out situation, Class I Optionholders will be treated as Class I Stockholders and Class II Optionholders will be treated as Class II Stockholders.
B-1 ANNEX C TERMS OF INCENTIVE STOCK OPTION PLAN ------------------------------------ Number of Shares....... 273,946 Exercise Price......... Fair Market Value (opening equity price) Type of Options........ Incentive, ten-year options Vesting................ One-third (1/3) on the first, second and third anniversaries of the Closing Date, except in respect of performance portion Performance Portion.... Options equivalent to 71,647 of the fully-diluted Common Stock outstanding on the Closing Date vest upon achievement (assuming continued employment) of performance targets as follows: EBITDA for Year Ended: Number of Stores Opened by: --------------------- -------------------------- $18 M.............. 1997 30...........March 31, 1998 $22M .............. 1998 30...........March 31, 1999 $26M .............. 1999 30...........March 31, 2000 Note: Vesting also occurs if the store opening target ---- is met in each prior year and the Company achieves 95% of a year's EBITDA target and the sum of that year and the following year's EBITDA equals 100% of the combined targets. EBITDA means the Consolidated Net Income of the Company (i) plus (minus) any extraordinary or nonrecurring gain (loss); (ii) plus (minus) any gain (loss) due solely to fluctuations in currency values; (iii) plus provision for taxes; (iv) plus consolidated interest expense, whether paid or accrued and whether or not capitalized (and including any amortization of deferred financing costs); (v) plus any noncash charges for such period (including LIFO charges); (vi) plus depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other noncash charges.
C-1 Termination of Employment............. Vested options may be exercised for 90 days post- termination; unvested options are forfeited and become eligible for future grant at Fair Market Value Adjustment............. The number of shares subject to Options, and the exercise price, will be proportionately adjusted for each subdivision and combination of Company common stock Acceleration........... ISO Options will accelerate and may be cashed out upon the occurrence of a Charge of Control. In a cash-out situation, Class I Optionholders will be treated as Class I Stockholders and Class II Optionholders will be treated as Class II Stockholders.
C-2 EXHIBIT D June 11, 1997 (213) 229-7000 C 35375-00004 Occidental Petroleum Corporation 10889 Wilshire Boulevard Los Angeles, CA 90024 Re: Leslie's Poolmart, Inc. Preferred Stock and Warrant Purchase Agreement Ladies and Gentlemen: We have acted as counsel for Leslie's Poolmart, Inc., a Delaware corporation (the "Company"), in connection with the Preferred Stock ad Warrant Purchase Agreement dated as of the date hereof (the "Purchase Agreement"), by and among the Company and you (the "Purchaser"). This opinion is furnished to you pursuant to Section 6.5 of the Purchase Agreement. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Purchase Agreement or the other Transaction Documents (as defined below), as the context may require. In that connection, we have examined: (i) an executed counterpart of the Purchase Agreement (including, without limitation, the Exhibits thereto); (ii) the Certificate of Designation, Preferences and Rights of Series A Exchangeable Cumulative Redeemable Preferred Stock of the Company in the form filed today with the Secretary of State of the State of Delaware (the "Certificate of Designation"); (iii) the Warrant of the Company of even date herewith (the "Warrant"); (iv) the Certificate of Incorporation of the Company; and (v) the Bylaws of the Company. Occidental Petroleum Corporation June____, 1997 Page 2 The Purchase Agreement, the Certificate of Designation and the Warrant are collectively referred to herein as the "Transaction Documents." We have assumed with your permission that: (a) The signatures on all documents examined by us are genuine, all documents submitted to us as originals are authentic and all documents submitted to us as certified or reproduction copies conform to the originals; (b) The Purchaser has all requisite power and authority to execute, deliver and perform its obligations under each of the Transaction Documents to which it is a party, the execution and delivery of such Transaction Documents and the performance of such obligations has been duly authorized by all necessary action on the part of the Purchaser, the Purchaser has duly executed and delivered each of the Transaction Documents to which it is a party and such Transaction Documents are its legal, valid and binding obligations, enforceable against it in accordance with their respective terms; (c) All parties to the Transaction Documents have filed all required franchise tax returns, if any, and paid all required taxes, if any, under the California Revenue & Taxation Code (see Damato v. Slevin, 214 Cal. App. 3d 668 -------------------- (1989); White Dragon Productions, Inc. v. Performance Guarantees, Inc., 196 Cal. -------------------------------------------------------------- App. 3d 163, 24 Cal. Rptr. 745 (1987); California Revenue and Taxation Code Section 23301); (d) All parties to the Transaction Documents are duly qualified in California if required by Section 1750 of the California Financial Code or Chapter 21 of the California General Corporation Law; and (e) There are no agreements or understandings between or among Company, the Purchaser or third parties that would expand, modify or otherwise affect the terms of the Transaction Documents or the respective rights or obligations of the parties thereunder, and each and all of the Transaction Documents correctly and completely sets forth the intent of all parties thereto (see Trident Center v. Connecticut General Life Insurance Company, 847 F.2d 564 ---------------------------------------------------------------- (9th Cir. 1988)). In rendering this opinion, we have made such inquiries and examined, among other things, originals or copies, certified or otherwise identified to our satisfaction, of such records, agreements, certificates, instruments and other documents as we have considered necessary or appropriate for purposes of this opinion. As to certain factual matters, we have relied upon certificates of officers of Company or certificates obtained from public officials. In addition, as to certain factual matters we have relied upon the representations and warranties of the Company and, in connection with our opinion in paragraph 5 hereof, the Purchaser, set forth in the Purchase Agreement. We have not independently verified any of the factual matters referred to above. Based on the foregoing and in reliance thereon, and subject to the assumptions, exceptions, qualifications and limitations set forth herein, we are of the opinion that: 1. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of Delaware. Occidental Petroleum Corporation June ___, 1997 Page 3 2. The Company has the requisite corporate power to execute, deliver and perform its obligations under each of the Transaction Documents to which it is a party. The execution and delivery of the Transaction Documents by the Company and the performance of its obligations thereunder have been duly authorized by all necessary corporate action (including any required stockholder action). 3. The Company has been duly authorized to issue Twelve Million (12,000,000) shares of common stock ("Common Stock") and Two Million (2,000,000) shares of Preferred Stock ("Preferred Stock"). The Twenty-Eight Thousand (28,000) shares of Series A Preferred Stock to be issued pursuant to the Purchase Agreement have been duly authorized and, upon payment therefor by the Purchaser in accordance with the Purchase Agreement, will be validly issued, fully paid and non-assessable. The additional shares of Series A Preferred Stock to be issued as dividends pursuant to paragraph (c) of the Certificate of Designation have been duly authorized, and, if and when issued in accordance with the Certificate of Designation, will be validly issued. The shares of Common Stock issuable upon exercise of the Warrant are duly authorized and reserved for issuance, and upon payment of the exercise price therefor will be validly issued, fully paid and non-assessable. The Exchange Note has been duly authorized. 4. Each of the Transaction Documents has been duly executed and delivered by the Company, and constitutes the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 5. The issuance and sale of the Series A Preferred Stock and the Warrant are exempt from the registration requirements of Section 5 of the Securities Act of 1933, as amended and, assuming that the Company timely files a Form 25102(f) with the California Department of Corporations in connection with the closing of the Purchase Agreement, the registration requirements of applicable state "blue sky" laws. The foregoing opinions are subject to the following exceptions, qualifications and limitations: A. We render no opinion herein as to matters involving the laws of any jurisdiction other than the State of California, the United States of America and the State of Delaware. Although we are not admitted to practice in the State of Delaware, we are generally familiar with the Delaware General Corporation Law as presently in effect and have made such inquiries as we consider necessary to render the opinions contained above. This opinion is limited to the effect of the present state of the laws of the State of California, of the United States of America and to the limited extent set forth above, the State of Delaware, and the facts as they presently exist. We assume no obligation to revise or supplement this opinion in the event of future changes in such laws or the interpretations thereof or such facts. B. Our opinion set forth in paragraph 4 above as to the validity, binding effect and enforceability of the Transaction Documents is subject to limitations imposed by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally, including, without limitation, the limitation, the effect of statutory or other laws regarding fraudulent conveyances or transfers or preferential transfers or (ii) general principles of equity, whether considered at law or at equity, and except as rights to indemnity and contribution may be limited by federal or state securities laws. The remedies of specific performance and injunctive and other forms of equitable relief (whether sought in a proceeding at law or in equity) are subject to Occidental Petroleum Corporation June ___, 1997 Page 4 certain equitable defenses and to the discretion of the court before which any proceeding therefor may be brought. C. Without limitation, we express no opinion (i) as to the ability to obtain specific performance, injunctive relief or other equitable relief (whether sought in a proceeding in equity or at law) as a remedy for noncompliance with any provision of any Transaction Document, (ii) regarding the rights or remedies available to any party for violations or breaches of any provisions that are immaterial or for violations or breaches of any provisions the enforcement of which a court determines would be unreasonable under the then existing circumstances or would violate the implied covenant of good faith and fair dealing, (iii) regarding the rights of remedies available to any party for material violations or breaches that are the proximate result of actions taken by any party other than the party against whom enforcement is sought, which action such other party is not entitled to take pursuant to the relevant agreement or instrument or applicable laws or which otherwise violates applicable laws, and (iv) regarding the rights or remedies available to any party insofar as such party may take discretionary action that is arbitrary, unreasonable or capricious, or is not taken in good faith or in a commercially reasonable manner, whether or not such action is permitted under the Transaction Documents. D. We express no opinion with respect to the legality, validity, binding nature or enforceability of any provision of the Transaction Documents to the effect that rights or remedies are not exclusive, that every right or remedy is cumulative and may be exercised in addition to any other right or remedy, that the election of some particular remedy does not preclude recourse to one or more others or that failure to exercise or delay in exercising rights or remedies will not operate as a waiver of any such right or remedy. E. We express no opinion as to any provision of the Transaction Documents requiring written amendments or waivers of such documents insofar as it suggests that oral or other modifications, amendments or waivers could not be effectively agreed upon by the parties or that the doctrine of promissory estoppel might not apply. This opinion is rendered to you in connection with the Transaction Documents and may not be relied upon by any person other than you, or by you in any other context, provided that you may provide this opinion (i) to your independent auditors and attorneys, (ii) pursuant to order to legal process of any court or governmental agency or (iii) in connection with any legal action to which you are a party arising out of the transactions contemplated by the Transaction Documents. This opinion may not be quoted without the prior written consent of this Firm. Very truly yours, GIBSON, DUNN & CRUTCHER LLP Exhibit E --------- 10 7/8% JUNIOR SUBORDINATED NOTE DUE 2007 $_________________ June 11, 2007 FOR VALUE RECEIVED, subject to the terms and conditions set forth below, LESLIE'S POOLMART, INC., a Delaware corporation (the "Company"), whose address is __________________, hereby promises to pay to the order of __________________________________________________________________________ (the "Holder"), whose address is ______________________________________________, the principal sum of ____________________________ Thousand and no/100 Dollars ($__________), together with interest thereon at the rate of ten and seven- eighths percent (10 7/8%) per annum or, if less, the maximum rate allowable under applicable law, compounded quarterly, and payable in cash as set forth below (as defined below). Payment of principal and interest shall be made in lawful money of the United States of America. Payment of principal and interest shall be made to the address of the Holder set forth above, or at such other place as the Holder may from time to time designate in writing to the Company. 1. Amortization of Principal; Maturity Date. Subject to the provisions ---------------------------------------- of Section 2 below, the Company shall repay the unpaid principal outstanding balance in three equal installments of $_________________ on each of January 11, 2006, June 11, 2006, and June 11, 2007 (with June 11, 2007 being denominated herein the "Maturity Date"). Subject to the provisions of Section 2 below, all interest shall be payable quarterly in arrears. 2. Optional Redemption. The Company may redeem the Note at any time ------------------- prior to the Maturity Date by payment of a redemption price to the Holder equal to the sum of (i) the unpaid principal balance on this Note multiplied by 101% plus (ii) all accrued but unpaid interest as of the date of such redemption (the "Optional Redemption Price"). If the Company elects to redeem the Note pursuant to this Section 2, the Company shall deliver to the Holder notice of such election (the "Redemption Notice"). The Redemption Notice shall specify a redemption date not more than ten (10) days after the date of the Redemption Notice (the "Redemption Date"). 3. [Intentionally Deleted]. ----------------------- 4. Covenants; Events of Default; Acceleration. The Company shall comply ------------------------------- with the covenants set forth in Section 8 of the Preferred Stock and Warrant Purchase Agreement made as of the 11th day of June, 1997, by and among the Company and Occidental Petroleum Corporation, a Delaware corporation (the "Stock Purchase Agreement"). The term "Event of Default" as used herein shall have the meaning ascribed to it in the Stock Purchase Agreement. At any time after the occurrence and during the continuation of an Event of Default, interest shall accrue on this Note at the rate of eleven and seven-eighths percent (11 7/8%) per annum (the "Default Rate"). Upon and after the occurrence of any Event of Default (whether such occurrence shall be voluntary or involuntary or come about or be effected by operation of law or otherwise) and at any time so long as such Event of Default shall be continuing, the Holder E-1 may, by notice to the Company, declare this Note, all interest hereon and all other amounts payable hereunder, to be immediately due and payable, whereupon this Note, all such interest and all such amounts shall become and be immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by the Company. Unpaid principal and overdue interest on this Note shall continue to bear interest after an Event of Default until all principal and interest due hereunder has been paid in full. The Holder may enforce its rights hereunder by an action at law, suit in equity or other appropriate proceeding, whether (to the extent permitted by law) for the specific performance of any agreement contained herein or for an injunction against the violation of any of the terms or provisions hereof, or in aid of the exercise of any power granted herein or by law. 5. Replacement. Upon receipt of the Company of evidence satisfactory to ----------- it of the loss, theft, destruction or mutilation of this Note (provided that an affidavit of the Holder will be satisfactory for such purpose), and of indemnity satisfactory to it and upon surrender and cancellation of this Note, if mutilated, the Company will make and deliver a new Note identical in form and substance to this Note and any such lost, stolen, destroyed or mutilated Note shall thereupon become void. 6. Cancellation. Upon payment in full of all principal and interest ------------ payable hereunder this Note shall be surrendered to the Company for cancellation. 7. Amendment and Waiver. Any provision of this Note may be amended or -------------------- waived by a written instrument signed by the Company and (i) if there is only one Holder of any Exchange Notes, such Holder, and (ii) at any time when there is more than one Holder of any Exchange Notes, a majority in interest of such Holders, based on the outstanding principal amount under each Exchange Note. In the event of any such amendment or waiver, such amendment or waiver shall be effective but only in the specific instance and for the specific purpose for which the amendment or waiver is made or given. No delay on the part of any Holder in exercising any right thereunder shall operate as a waiver of such right. 8. No Recourse Against Others. No recourse under or upon any obligation, -------------------------- covenant or agreement of this Note, or for any claim based thereon or otherwise in respect thereof, shall be had against any incorporator or against any past, present or future stockholder, officer, employee or director, as such, of the Company or of any successor corporation, either directly or through the Company, whether by virtue of any constitution, statute or rule of law, or by the enforcement of any assessment or penalty or otherwise; it being expressly agreed that this Note and the obligations issued hereunder, are solely corporate obligations, and that no such personal liability whatever shall attach to, or is or shall be incurred by, the incorporators, stockholders, officers, employees or directors, as such, of the Company, or of any successor corporation, or any of them, under or by reason of this Note or implied therefrom, or for any claim based thereon or in respect thereof, all such liability and any and all such claims being hereby expressly waived and released as a condition of, and as consideration for, the issue of this Note. E-2 9. Notices. Any notice required or permitted hereunder shall be given in ------- writing and shall be deemed given upon personal delivery or five days after deposit in the United States mail, by registered or certified mail, postage prepaid, addressed (i) if to the Company at the address set forth above and (ii) if to the Holder at such Holder's address set forth above, or at such other address as the Company or the Holder may designate by notice as provided herein. 10. Severability. If one or more provision of this Note shall be ------------ unenforceable, the remaining provisions of this Note shall not in any way be effected or impaired thereby and shall continue in full force and effect. 11. Governing Law. This Note and the obligations of the Company hereunder ------------- shall be governed by and construed in accordance with the laws of the State of Delaware. LESLIE'S POOLMART, INC. By:___________________________ Name: Title: E-3 EX-10.3 8 WARRANT 6/11/97 PURCHASE OF COMMON STOCK EXHIBIT 10.3 THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT WITH A VIEW TO DISTRIBUTION, AND MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR SUCH SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL DELIVERED TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT. LESLIE'S POOLMART, INC. WARRANT Dated June 11, 1997 WARRANTS TO PURCHASE COMMON STOCK Certificate for 252,996 Warrants ISSUED TO OCCIDENTAL PETROLEUM CORPORATION ("OCCIDENTAL") ---------- LESLIE'S POOLMART, INC., a Delaware corporation (the "Company"), hereby ------- certifies that Occidental is the registered owner of the number of Warrants set forth above. Each Warrant entitles the persons who shall from time to time, of record or beneficially, own any of the Warrants (collectively "Holders" and individually "Holder") to purchase one (1) share (each such share being referred to herein as a "Warrant Share" and all such shares being referred to herein, collectively, as ------------- the "Warrant Shares"), as adjusted from time to time as provided in Section 7 -------------- hereof, of the Common Stock, $0.001 par value per share, of the Company (the "Common Stock") at the exercise price of $0.01 (one cent) per Warrant Share (the ------------ "Exercise Price"), subject to the following terms and conditions. -------------- 1. REGISTRATION. The Company shall register each Warrant, upon records ------------ to be maintained by the Company for such purpose (such records being referred to herein as the "Register"), in the name of the record holder of such Warrant from -------- time to time. The Company may deem and treat the registered holder of each Warrant as the absolute owner thereof for the purpose of any exercise thereof or any distribution to the Holder thereof, and for all other purposes, and the Company shall not be affected by any notice to the contrary. 2. TRANSFERS AND EXCHANGES. ----------------------- (a) Registration; Issuance of New Warrant Certificates. The Company -------------------------------------------------- shall reflect in the Register the transfer of any Warrant represented hereby upon the surrender of this Warrant Certificate, with the Form of Assignment attached as Annex A hereto duly completed and signed (and with a signature guarantee for the transfer of any Warrants by a registered holder other than the initial registered holder of this Warrant Certificate), to the Company at the office of the Company set forth in Section 11 hereof. Upon any such registration of transfer, a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the Warrants so transferred shall be issued to the transferee of such Warrants and a new Warrant Certificate, in substantially the form of this Warrant Certificate, evidencing the remaining Warrants, if any, not so transferred, shall be issued to the Holder. The Company shall at no time close the Register against the transfer of any Warrant or Warrant Share in any manner that materially interferes with the timely exercise of such Warrant. (b) Warrants Exchangeable for Different Denominations. This Warrant ------------------------------------------------- Certificate is exchangeable, upon the surrender hereof by the Holder at the office of the Company set forth in Section 11 hereof, for new Warrant Certificates, in substantially the form of this Warrant Certificate, evidencing in the aggregate the right to purchase the number of Warrant Shares that may then be purchased under this Warrant Certificate. Each such new Warrant Certificate shall be dated the date of such exchange and represent the right to purchase such number of Warrant Shares as shall be designated by the Holder at the time of such surrender. 3. DURATION AND EXERCISE OF WARRANTS. --------------------------------- (a) Subject to all the terms and conditions hereinafter set forth (including, without limitation, the terms and conditions in Section 16), the Warrants may be exercised by the Holder at any time from the date hereof until 5:00 p.m., Los Angeles time, on the tenth (10th) anniversary of the date hereof (the "Expiration Time"). At the Expiration Time, each Warrant not exercised --------------- prior thereto shall be and become void and of no value. (b) Subject to the provisions of this Warrant Certificate, including adjustments to the Exercise Price and to the number of Warrant Shares issuable upon the exercise of each Warrant pursuant to Section 7 hereof, each holder of a Warrant on or prior to the Expiration Time shall have the right to purchase from the Company (and the Company shall be obligated to issue and sell to such holder of a Warrant) at the Exercise Price one fully-paid Warrant Share, which shall be nonassessable upon issuance. (c) Subject to Sections 4, 9 and 10(a) hereof, upon (i) surrender of this Warrant Certificate, together with the Form of Election to Purchase attached as Annex B hereto (the "Form of Election to Purchase") duly completed ---------------------------- and signed, to the Company at the address provided in Section 11, and (ii) payment of the Exercise Price, multiplied by the number of Warrant Shares then issuable upon exercise of the Warrants being so exercised in immediately available lawful money of the United States of America, the Company shall promptly, but in any event within five (5) days of its receipt of the Form of Election to Purchase, together with the 2 Warrant Certificate and receipt of payment of the Exercise Price, issue and cause to be delivered to or upon the written order of the Holder, and in such name or names as such Holder may designate (subject to Section 4 hereof), a certificate for the Warrant Shares issued upon such exercise of such Warrants. Any person so designated to be named in such certificate for such Warrant Shares shall be deemed to have become the holder of record of such Warrant Shares as of the Date of Election to Purchase such Warrants. The "Date of Election to ------------------- Purchase" as to any Warrant means the date on which the Company shall have - -------- received (1) this Warrant Certificate, with the completed Form of Election to Purchase and (2) payment of the Exercise Price for such Warrant. (d) Any part of the Warrants evidenced by this Warrant Certificate shall be exercisable from time to time. If fewer than all the Warrants evidenced by this Warrant Certificate are exercised at any time, the Company, at its expense, shall issue to the registered holder a new Warrant Certificate, in substantially the form of this Warrant Certificate, for the remaining number of Warrants evidenced by this Warrant Certificate. 4. PAYMENT OF TAXES. ---------------- (a) The Company shall pay all issuance and transfer taxes and charges that may be imposed on the Company or on the Warrants or the Warrant Shares in respect of the transfer of Warrants, or the issuance or delivery of the Certificates for Warrant Shares or other Securities in respect of the Warrant Shares upon the exercise or conversion of Warrants; provided, however, that the -------- ------- Company shall not be required to pay any such tax or other charge imposed in respect of the transfer of Warrants, or the issuance or delivery of certificates for Warrant Shares or other securities in respect of the Warrant Shares upon the exercise of Warrants, to a person or entity other than a then-existing registered holder of Warrants. (b) Upon exercise of the Warrant in whole or in part, the Holder shall be required to pay to the Company (by cashier's or certified check) an amount equal to all applicable federal and state withholding taxes that may become payable by reason of such exercise. 5. MUTILATED OR MISSING WARRANT CERTIFICATE. If this Warrant Certificate ---------------------------------------- shall be mutilated, lost, stolen or destroyed, upon request by the registered holder of the Warrants, the Company shall issue, in exchange for and upon cancellation of the mutilated Warrant Certificate, or in substitution for the lost, stolen or destroyed Warrant Certificate, a new Warrant Certificate, in substantially the form of this Warrant Certificate, of like tenor and representing the equivalent number of Warrants, but, in the case of loss, theft or destruction, only upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of this Warrant Certificate and, if requested by the Company, indemnity also satisfactory to it. 6. RESERVATION AND ISSUANCE OF WARRANT SHARES. ------------------------------------------ (a) The Company shall at all times have authorized, and reserve and keep available, exclusively for the purpose of enabling it to satisfy any obligation to issue Warrant Shares upon the exercise of the Warrants, the number of Warrant Shares deliverable upon 3 exercise of the Warrants. The Company shall take all corporate action necessary to enable the Company to validly and legally issue, at the Exercise Price, Warrant Shares that are fully paid and nonassessable. (b) The Company covenants that all Warrant Shares will, upon issuance in accordance with the terms of this Warrant Certificate, be (i) duly authorized, validly issued, fully paid and nonassessable and (ii) free from all taxes or other governmental charges with respect to the issuance thereof (not including income taxes payable by the holders of Warrants being exercised in respect of gains thereon) and from all liens, charges and security interests created by the Company. 7. ADJUSTMENTS. ----------- (a) If the Company shall at any time subdivide the outstanding shares of Common Stock into a greater number of shares, or pay to holders of Common Stock any dividend payable in shares of Common Stock, the number of Warrant Shares in effect immediately prior to such subdivision or dividend shall be proportionately increased, and conversely, if the outstanding shares of Common Stock shall be combined into a smaller number of shares, the number of Warrant Shares in effect immediately prior to such combination shall be proportionately reduced; and, in either case the Exercise Price shall be adjusted proportionately; provided, however, that the Exercise Price shall in all events -------- ------- be no less than the par value of the Warrant Shares. (b) If and to the extent the Company shall issue shares of Common Stock upon the exercise of options issued under either the Company's 1997 Non- Qualified Stock Option Plan (as to which 83,599 shares have been reserved for issuance) or under the Company's 1997 Incentive Stock Option Plan (as to which 273,946 shares have been reserved for issuance), the number of Warrant Shares shall be adjusted, effective on the date of each such issuance of Common Stock under one of the aforesaid Plans, such that when the shares of Common Stock so issued are added to the number of shares of Common Stock outstanding on the date hereof (as such number may be reduced from time to time pursuant to the exercise of the Call Option in respect of Call NQ Options and Call Option Shares, as defined in the Stockholders and Subscription Agreement of even date herewith by and among the Company, Occidental and the stockholders identified therein (the "Stockholders Agreement")), the Warrant Shares shall represent fifteen percent (15%) of all of such outstanding shares of Common Stock, rounded to the next highest number of whole shares. 8. NO STOCK RIGHTS. The Holder of this Warrant Certificate, as such, --------------- shall not be entitled to vote or be deemed the holder of Common Stock or any other securities of the Company which may at any time be issuable on the exercise hereof, nor shall anything contained herein be construed to confer upon the Holder of this Warrant Certificate, as such, the rights of a stockholder of the Company or the right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, to exercise any preemptive right, to receive notice of meetings or other actions affecting stockholders (except as provided herein), or to receive dividends or subscription rights or otherwise, until the Date of Election to Purchase Warrants shall have occurred. 4 9. FRACTIONAL WARRANTS AND FRACTIONAL WARRANT SHARES. The Company may, ------------------------------------------------- but shall not be required to, issue fractional Warrant Shares. If any fraction of a Warrant Share would, except for the provisions of this Section 9, be issuable to the Holder of this Warrant Certificate upon exercise of any Warrants, the Company may, at its election, pay to such Holder an amount in cash equal to the amount by which (a) the Fair Market Value (determined pursuant to the Stockholders Agreement) of one share of Common Stock exceeds (b) the Exercise Price, multiplied by such fraction. The Holder of a Warrant Certificate, by the acceptance of the Warrant Certificate, expressly waives the right to receive any fractional Warrant Shares upon exercise of a Warrant. The Holder of a Warrant Certificate shall be entitled to receive fractional Warrants and fractional Warrant Shares at the election of the Company. 10. [Intentionally deleted.] --------------------- 11. NOTICES. All notices, requests, demands and other communications ------- relating to this Warrant Certificate shall be in writing, including by telecopier, telex, telegram or cable, addressed, if to the registered holder hereof, to it at the address furnished by the registered holder to the Company, and if to the Company, at its office at 20630 Plummer Street, Chatsworth, California 91311, Attention: President, or to such other address as any party shall notify the other party in writing, and shall be effective, in the case of written notice by mail, three days after placement into the mails (first class, postage prepaid), and in the case of notice by telex, telecopier, telegram or cable, on the same day as sent. 12. BINDING EFFECT. This Warrant Certificate shall be binding upon and -------------- inure to the sole and exclusive benefit of the Company, its permitted successors and permitted assigns, and the registered holder or holders from time to time of the Warrants and the Warrant Shares. 13. SURVIVAL OF RIGHTS AND DUTIES. Unless earlier terminated or canceled ----------------------------- in whole or in part pursuant to Section 16 of this Warrant Certificate, this Warrant Certificate and unexercised Warrants represented hereby shall terminate and be of no further force and effect on the earlier of the Expiration Time or the date on which all the Warrants shall have been exercised, except that the provisions of Sections 4, 6(b) and 10 of this Warrant Certificate shall continue in full force and effect after any such termination or cancellation. 14. GOVERNING LAW. This Warrant Certificate shall be construed in ------------- accordance with and governed by the internal laws of the State of Delaware applicable to contracts executed and to be performed wholly within such state, without regard to the principles of conflicts or choice of law. 15. MODIFICATION AND WAIVER. This Warrant Certificate and any term hereof ----------------------- may be changed, waived, discharged or terminated only by an instrument in writing signed by the Holder and the Company against which enforcement of such change, waiver, discharge or termination is sought. 16. REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE. If --------------------------------------------------------------- any capital reorganization or reclassification of the capital stock of the Company, any consolidation or 5 merger of the Company with another entity, or the sale of all or substantially all of the Company's assets to another entity shall be effected in such a way that holders of Common Stock shall be entitled to receive stock, securities, cash or other assets with respect to or in exchange for Common Stock, then, as a condition of such reorganization, reclassification, consolidation, merger or sale, lawful and adequate provisions shall be made whereby the Holder shall thereafter have the right to purchase and receive upon the basis and the terms and conditions specified in this Warrant Certificate and in lieu of the shares of Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock, securities, cash or other assets as may be issued or payable in such reorganization, reclassification, consolidation, merger or sale with respect to or in exchange for the number of shares of Common Stock purchasable and receivable upon the exercise of the rights represented hereby had such rights been exercised immediately prior thereto, and in any such case appropriate provision shall be made with respect to the rights and interests of the Holder to the end and that the provisions hereof (including without limitation provisions for adjustments of the Exercise Price and of the number of shares of Common stock purchasable and receivable upon the exercise of this Warrant) shall thereafter be applicable, as nearly as may be, in relation to any shares of stock, securities or assets thereafter deliverable upon the exercise hereof. The Company will not effect any such consolidation, merger or sale, unless prior to the consummation thereof the successor corporation (if other than the Company) resulting from such consolidation or merger or the corporation purchasing such assets shall assume by written instrument, executed and mailed or delivered to the Holder at the last address thereof appearing in the Register, the obligation to deliver to such Holder such shares of stock, securities or assets as, in accordance with the foregoing provisions, such Holder may be entitled to purchase. Notwithstanding the foregoing, in the event that, as a result of a transaction described in this Section 16, a Change of Control (as defined in the Stockholders Agreement) shall occur, then effective as of the date of consummation of the Change of Control, this Warrant shall terminate and shall represent only the right to receive, upon surrender and payment of the exercise price therefor, the stock, securities, cash or other assets to which the holder would have been entitled had this Warrant been exercised immediately prior to consummation of such Change of Control. 17. NOTICES OF CERTAIN EVENTS. In case: (a) the Company shall authorize ------------------------- the issuance to all holders of shares of Common Stock of rights, options or warrants to subscribe for or purchase shares of Common Stock or of any other subscription rights or warrants; (b) the Company shall authorize the distribution to all holders of shares of Common Stock of assets, including cash, evidences of its indebtedness or other securities; (c) of any consolidation or merger to which the Company is a party and for which approval of any stockholders of the Company is required, or of the conveyance or transfer of the properties and assets of the Company substantially as an entirety, or of any reclassification or change of Common Stock issuable upon exercise of the Warrants, or of the commencement of a tender offer or exchange offer for shares of Common Stock; (d) of the voluntary or involuntary dissolution, liquidation or winding up of the Company; or (e) any event requiring an adjustment pursuant to Section 7 hereof, then the Company shall cause to be given to the Holder at least 10 business days prior to the applicable record date hereinafter specified, or the date of the event in the case of events for which there is no record date, notice stating (i) the date as of which the holders of record of 6 shares of Common Stock to be entitled to receive any such rights, options, warrants or distribution are to be determined, or (ii) the initial expiration date set forth in any tender offer or exchange offer for shares of Common Stock, or (iii) the date on which any such consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up is expected to become effective or consummated, and the date as of which it is expected that holders of record of shares of Common Stock shall be entitled to exchange such shares for securities or other property, if any, deliverable upon such reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up. 18. INFORMATION REGARDING ADJUSTMENTS. The Company shall keep a record of --------------------------------- any adjustment to the Warrant Shares or the Exercise Price pursuant hereto, together with a record as to the method of calculation and the facts upon which such calculations are based. Such information shall be provided to the Holder upon request. The Company will include such information in the notices given pursuant to Section 17. IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to be executed under its corporate seal by its officers thereunto duly authorized as of the date hereof, and the Holder has caused this Warrant Certificate to be executed and delivered by its duly authorized representative. LESLIE'S POOLMART, INC. By: /s/ Brian McDermott ---------------------------------------- Name: BRIAN MCDERMOTT ----------------------------------- Title: PRESIDENT & CEO ---------------------------------- OCCIDENTAL PETROLEUM CORPORATION By: /s/ D. P. de Brien ----------------------------------------- Name: D. P. de Brien ------------------------------------ Title: Executive Vice President and ----------------------------------- General Counsel ----------------------------------- 7 ANNEX A ------- FORM OF ASSIGNMENT FOR VALUE RECEIVED, _________________________________ hereby sells, assigns and transfers to each assignee set forth below all the rights of the undersigned in and to the number of Warrants (as deemed in and evidenced by the foregoing Warrant Certificate) set opposite the name of such assignee below and in and to the foregoing Warrant Certificate with respect to such Warrants and the shares of common stock, $.__ par value per share, of Leslie's Poolmart, Inc. issuable upon exercise of such Warrants: Name of Assignee Address Number of Warrants ------------------ ------- ------------------ If the aggregate number of such Warrants shall not constitute all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so assigned be issued in the name of and delivered to the undersigned. Name of Holder (Print):_________________________ Dated: _______________, ______ (By:)___________________________________ (Title:)________________________________ [SIGNATURE GUARANTEE] ATTEST: (Not Required for Initial Registered holder) ________________________________________ [Assistant] Secretary 8 ANNEX B ------- FORM OF ELECTION TO PURCHASE (To Be Executed by the Holder if the Holder Desires to Exercise Warrants Evidenced by the foregoing Warrant Certificate) To Leslie's Poolmart, Inc.: The undersigned hereby irrevocably elects to exercise _____________ Warrants (as deemed in and evidenced by the foregoing Warrant Certificates) for, and to purchase thereunder, ____________ shares of common stock, $______ par value per share, of Leslie's Poolmart, Inc., issuable upon exercise of such Warrants and delivery of $____________ in cash and any applicable taxes payable by the undersigned pursuant to such Warrant Certificate. The undersigned requests that certificates for such shares be issued in the name of the following: PLEASE INSERT SOCIAL SECURITY NUMBER OR TAX IDENTIFICATION NUMBER ________________________________________ ________________________________________ ________________________________________ (Please print name and address) ________________________________________________________________________________ If such number of Warrants shall not constitute all the Warrants evidenced by the foregoing Warrant Certificate, the undersigned requests that a new Warrant Certificate evidencing the Warrants not so exercised be issued in the name of and delivered to the following: ________________________________________________________________________________ (Please print name and address) ________________________________________________________________________________ ________________________________________________________________________________ Dated: ___________, _____ Name of Holder (Print):________________________________ [SIGNATURE GUARANTEE] (By:)___________________________________ (Title:) (Not Required for Initial Registered Holder) 9 EX-10.4 9 STOCKHOLDER AGREE. & SUBSCRIPTION AGREE. 6/11/97 EXHIBIT 10.4 [EXECUTION COPY] ---------------- STOCKHOLDERS AGREEMENT AND SUBSCRIPTION AGREEMENT AMONG LESLIE'S POOLMART, INC. GREEN EQUITY INVESTORS II, L.P. RICHARD H. HILLMAN MICHAEL J. FOURTICQ GREG FOURTICQ BRIAN P. MCDERMOTT THE TRUSTEES OF THE MCDERMOTT FAMILY TRUST OCCIDENTAL PETROLEUM CORPORATION AND THE STOCKHOLDERS IDENTIFIED ON THE SIGNATURE PAGES
TABLE OF CONTENTS Page ---- 1. REPRESENTATIONS AND WARRANTIES.......................................... 2 (a) Company Representations............................................. 2 (b) Stockholder Representations and Warranties.......................... 2 2. SUBSCRIPTION FOR COMMON STOCK; CALL OPTION.............................. 3 (a) Common Stock Subscription........................................... 3 (b) Call Option......................................................... 4 3. COMPLIANCE WITH SECURITIES LAW.......................................... 4 4. TRANSFERS OF SECURITIES................................................. 4 (a) Prohibition on Transfers............................................ 4 (b) Transfer Procedure; Right of First Refusal.......................... 4 (c) Transfers to Related Transferees.................................... 6 (d) Legend on Certificates.............................................. 6 (e) Transfers in Violation of this Agreement............................ 7 5. COMPANY CALL OPTION..................................................... 7 (a) Call Purchase Event and Purchase Price.............................. 7 (b) Exercise of Call Option............................................. 8 6. REGISTRATION RIGHTS..................................................... 8 (a) Demand Registration Rights.......................................... 8 (b) Piggyback Registration Rights; Cutbacks............................. 9 (c) Expenses of Registration............................................ 11 (d) Registration Procedures............................................. 11 (e) Indemnification..................................................... 14 (f) Holdback Amount..................................................... 17 (g) Assignment and Assumption........................................... 17 (h) Stock Option Plans.................................................. 17 7. DRAG-ALONG SALES AND TAG-ALONG SALES.................................... 18 (a) Drag-Along Sales.................................................... 18 (b) Optional Participation in Sales of Common Stock (Tag-Along Sales)... 19 (c) Obligations of Drag-Along Sellers................................... 20 8. TERMINATION AND LAPSE OF RIGHTS AND RESTRICTIONS; APPLICATIONS TO OTHER STOCK AND ADJUSTMENTS................................................... 20 (a) Termination of Provisions........................................... 20 (b) Application......................................................... 20 9. ELECTION OF DIRECTORS................................................... 20 10. CERTAIN ADDITIONAL AGREEMENTS........................................... 21 (a) Right to Participate in Securities Issuances........................ 21 (b) Right to Participate in Equity Repurchases.......................... 21 (c) Affiliate Transactions.............................................. 22 (d) Change of Control Transactions...................................... 22
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Page ---- (e) Information............................................................. 22 11. NOTICES................................................................. 22 12. GENERAL................................................................. 23 13. ADDITIONAL CLASS II STOCKHOLDERS........................................ 24 14. ARBITRATION............................................................. 25 (a) Scope............................................................... 25 (b) Deposition.......................................................... 25 (c) JAMS................................................................ 25 (d) Selection of Arbitrator............................................. 25 (e) Governing Law....................................................... 25 (f) Procedures.......................................................... 26 (g) Award............................................................... 26 15. DEFINITIONS............................................................. 26 ANNEX A COMMON STOCK CAPITAL STRUCTURE.......................................A-1 ANNEX B TERMS OF NQ OPTION PLAN..............................................B-1 ANNEX C TERMS OF INCENTIVE STOCK OPTION PLAN.................................C-1
ii STOCKHOLDERS AGREEMENT This Stockholders Agreement (this "AGREEMENT") is entered into as of June ___, 1997, by and among (i) Leslie's Poolmart, Inc., a Delaware corporation (the "COMPANY"), (ii) Green Equity Investors II, L.P., a Delaware limited partnership ("GEI"), (iii) Michael J. Fourticq, Greg Fourticq, Richard H. Hillman, Brian P. McDermott and Manette J. McDermott, T.R.U.A. DTD 3/15/90 The McDermott Family Trust (collectively referred to as the "HPA GROUP") and (iv) Occidental Petroleum Corporation, a Delaware corporation ("OCCIDENTAL," and together with GEI and the HPA Group, the "CLASS I STOCKHOLDERS") and the individual stockholders named on the signature pages hereto (the "CLASS II STOCKHOLDERS"). WHEREAS, on the date hereof the Company has consummated a merger (the "MERGER") with Poolmart USA Inc., a Delaware corporation ("POOLMART"), pursuant to which certain of the outstanding shares of common stock of the Company, $.001 par value per share (which authorized class of stock is hereinafter called "COMMON STOCK"), remained outstanding and the shares of capital stock of Poolmart were converted into capital stock of the Company; and WHEREAS, concurrently with the Merger, GEI acquired 1,055,172 shares of Common Stock, the HPA Group collectively retained 359,505 shares of Common Stock, Occidental acquired 28,000 shares of Exchangeable Cumulative Redeemable Preferred Stock, Series A of the Company (the "PREFERRED STOCK") and warrants (the "WARRANTS") to purchase 252,996 shares of Common Stock, subject to adjustment (the "WARRANT SHARES"), certain of the Class II Stockholders are subscribing for Common Stock and certain of the Class II Stockholders will acquire certain nonqualified options and incentive stock options, as described on Annex B and Annex C, respectively (collectively, the "OPTIONS" and the Common Stock issuable upon exercise thereof, the "OPTION SHARES"); and WHEREAS, the Company and the Class I and Class II Stockholders (collectively, the "STOCKHOLDERS") desire to enter into certain agreements concerning their holdings of Common Stock, Warrants, Warrant Shares, Options and Option Shares (collectively, together with such additional shares of Common Stock, Options or securities exercisable for or convertible into Common Stock as they may hereafter acquire, the "SECURITIES"); NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto agree as follows: 1. Representations and Warranties. ------------------------------ (a) Company Representations. The Company hereby represents and ----------------------- warrants to the Class I and Class II Stockholders as follows: (i) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, has full corporate power and authority to carry on its business as and where it is now being conducted. The Company has full corporate power and authority to enter into this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation of the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Company. This Agreement has been duly executed and delivered by the Company. This Agreement constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms, except as the enforceability hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). (ii) Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will violate or conflict with (A) any provision of the Certificate of Incorporation or Bylaws of the Company, or (B) any agreement, indenture, undertaking, permit, license or other instrument to which the Company is a party or by which it or any of its properties may be bound or affected, other than such violations and conflicts which are not reasonably likely to (1) prevent or materially delay consummation of the transactions contemplated by this Agreement or (2) prevent the Company from performing its obligations under this Agreement. (iii) The Company has no outstanding capital stock or securities convertible into or exchangeable or exercisable for any shares of its capital stock, nor any outstanding rights to subscribe for or to purchase, or any options for the purchase of, or any agreement providing for the issuance (contingent or otherwise) of any shares of its capital stock or any securities convertible into or exchangeable or exercisable for any shares of its capital stock, other than the Preferred Stock and the Securities. (b) Stockholder Representations and Warranties. ------------------------------------------ (i) Each Stockholder hereby severally and not jointly represents and warrants that if it is an entity, it is a corporation, limited partnership, trust or other entity duly organized and validly existing under the laws of its state of organization. (ii) Each Stockholder hereby severally and not jointly represents and warrants that it has full power and authority and, in the case of an individual, legal and fiduciary capacity to execute, deliver and perform this Agreement and to consummate the transactions contemplated hereby. This Agreement constitutes a legal, valid and binding obligation of such Stockholder, enforceable against such Stockholder in accordance with its terms, except as the enforceability hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditors' rights generally and general principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). (iii) Each of the Class II Stockholders hereby severally and not jointly represents and warrants that (A) as a result of his relationship with the Company and experience in financial matters, is able to evaluate the acquisition of Common Stock and 2 Options, the business and proposed capital structure of the Company and the risks inherent therein; (B) has been given the opportunity to obtain any additional information or documents, and to ask questions and receive answers, from the officers and representatives of the Company to the extent necessary to evaluate the risks and merits of an investment in the Company; (C) has determined that the acquisition of Common Stock and Options is consistent both in nature and amount, with his overall investment program and financial condition, and that his financial condition is such that he can afford to bear the economic risk of holding unregistered Securities for which there is no market and acknowledges that he may suffer a complete loss of such investment. (iv) Each of GEI, the HPA Group and each Class II Stockholder hereby severally and not jointly represents and warrants that (A) the Securities acquired by GEI, the HPA Group and each Class II Stockholder are being acquired for such Stockholder's own account for investment, without any present intention of selling or further distributing the same, (B) such Stockholder acknowledges that the no liquid trading market currently exists or is expected to exist in the foreseeable future and as a result, such Stockholder may be unable to sell any of the Securities for an indefinite period of time and (C) such Stockholder acknowledges that the Company has no obligation, except as set forth in Section 6 hereof, to register any of the Securities. (v) Each member of the HPA Group represents and warrants that he or it is an accredited investor within the meaning of Regulation D under the Act. Each Stockholder acknowledges that the Company is relying upon the truth and accuracy of the above representations to a material degree in effectuating the transactions contemplated hereby. 2. Subscription for Common Stock; Call Option. ------------------------------------------ (a) Common Stock Subscription(a).Common Stock Subscription. Each ------------------------------------------------------ Class II Stockholder reflected as a purchaser of Common Stock on the signature pages hereto (a "PURCHASER") severally agrees to purchase, and the Company agrees to sell to such Purchaser, the number of shares of Common Stock set forth opposite his or her name on Annex A hereto, at the purchase price of $14.50 per ------------- share (collectively, the "Subscription Stock"). Each Purchaser severally agrees - ----- to make payment for the Subscription Stock by delivery to the Company of a certified check or wire transfer in the amount of the purchase price therefore. (b) Call Option. Each Class II Stockholder severally agrees that the ----------- Company and certain other Stockholders shall have a call ("Call Option") in respect of the Subscription Stock, as well as in respect of the Non-Qualified Options described on Annex B hereto (the "NQ OPTIONS") and shares issued upon the exercise thereof (collectively, "Callable Securities"). As to each holder of Callable Securities, the Call Option shall apply only to (i) two-thirds of all of such holder's Callable Securities if the Call Option is exercised before the first anniversary of the date hereof, and (ii) one-third of the holder's Callable Securities of each category if the Call Option is exercised on or after the first anniversary of the date hereof but before the second anniversary of the date hereof. Except as expressly provided in this Section 2(b), the Call Option 3 shall not otherwise apply to Subscription Stock, NQ Options or shares issued upon the exercise thereof. Subscription Stock, NQ Options and shares issuable upon the exercise thereof that are Callable Securities are respectively hereinafter referred to as "Call Option Stock," "Call NQ Options" and "Call Option Shares." 3. Notice of Transfer; Compliance with Securities Law. In addition to the -------------------------------------------------- other applicable restrictions provided in this Agreement, each Stockholder (other than Occidental) agrees that prior to effecting any Transfer of any Securities (other than a Transfer to the Company) such Stockholder will give not less than 15 days' advance written notice to the Company describing the manner of such proposed Transfer. Each Stockholder further agrees that he or it will not effect such proposed Transfer until either (A) such Stockholder has provided to the Company, if so requested by the Company, an opinion of counsel reasonably satisfactory in form and substance to the Company that such proposed Transfer is exempt from registration under the Act and any applicable state securities laws, or (B) a registration statement under the Act covering such proposed Transfer has been filed by the Company and become effective under the Act and compliance with applicable state securities laws has been effected and in each case other than in respect of the Warrants or the Warrant Shares, the Company's independent public accountants have advised the Company that it is not reasonably likely that such Transfer will necessitate a new basis for accounting for the Company. Each Stockholder also agrees that he or it will not Transfer any Securities except in compliance with the registration requirements of the Act (or an exemption therefrom), and the relevant state securities laws applicable to the Stockholder's actions. 4. Transfers of Securities. ----------------------- (a) Prohibition on Transfers. Each of the members of the HPA Group ------------------------ and each of the Class II Stockholders hereby agrees that such Stockholder will not Transfer any Securities (or any interest therein) now or hereafter at any time owned by such Stockholder, except for Transfers permitted pursuant to this Section 4, Section 5 or Section 7 of this Agreement (each such Transfer being a "PERMITTED TRANSFER"). (b) Transfer Procedure; Right of First Refusal. If any member of ------------------------------------------ the HPA Group or any of the Class II Stockholders shall have received a bona fide arm's-length written offer (a "BONA FIDE OFFER") which such Stockholder desires to accept from an independent party unrelated to such Stockholder (the "OUTSIDE PARTY") for the purchase of Securities for consideration consisting entirely of cash (it being understood that no sale for any other consideration would be a Permitted Transfer), then such Stockholder shall give a notice in writing (the "OPTION NOTICE") to each Class I Stockholder and the Company setting forth such desire, which notice shall set forth at least the name and address of the Outside Party and the price and terms of the Bona Fide Offer and be accompanied by a copy of the Bona Fide Offer. Upon the giving of such Option Notice, the Company, and to the extent the Company elects not to do so, the respective Stockholders set forth in the following sentence (each an "ELECTING STOCKHOLDER") shall have an option to purchase all, but not less than all, of the Securities specified in the Option Notice, such option to be exercised within 30 days after the giving of such Option Notice by giving a counter-notice (the "ELECTION NOTICE") to the Stockholder. If the Stockholder sending an Option Notice is (i) a Class II Stockholder, then GEI, Occidental and the HPA Group shall be 4 entitled to be Electing Stockholders; or (ii) a member of the HPA Group, then GEI, Occidental and the other members of the HPA Group shall be entitled to be Electing Stockholders. Where more than one Electing Stockholder desires to participate in a purchase pursuant to an Option Notice, such Stockholders shall participate, pro rata based upon their respective Equity --- ---- Ownership (but in the case of Occidental, Fully Diluted Ownership) in the Company, with the portion attributable to Stockholders declining to be Electing Stockholders being redistributed to the remaining Stockholders pro rata based --- ---- upon their respective Equity Ownership in the Company (but in the case of Occidental, Fully Diluted Ownership), it being understood that the Company may elect to purchase up to all of the Securities and any remainder shall be prorated as aforesaid. The Company and, if applicable, the Electing Stockholders shall be severally obligated to purchase, and the Stockholder shall be obligated to sell, the Securities covered by such Election Notice at the cash price and terms indicated in the Bona Fide Offer, provided that the closing of the purchase by the Electing Stockholder shall be held on a business day within 30 days after the giving of the Election Notice at 10:30 a.m., California time, at the principal executive office of the Company, or at such other time and place as may be mutually agreed to by the Stockholder, the Company and, if applicable, the Electing Stockholders. If an Election Notice is not timely given by the Company and/or one or more Electing Stockholders within the period specified above after an Option Notice has been given, the Stockholder thereafter, at any time within a period of four months from the giving of such Option Notice, may Transfer all (but not less than all) of the Securities covered by such Option Notice to the Outside Party at the cash price and terms contained in the Bona Fide Offer; provided, however, that such Outside Party and such Securities -------- ------- shall thereafter be subject to and bound by all of the provisions of this Agreement as if such party were a Class II Stockholder except as otherwise provided in Section 6(g) and, as a condition precedent to the completion of such Transfer of Securities to such Outside Party, shall execute and deliver to the Company a written consent to such effect in form and substance satisfactory to the Company; and provided, further, however, that to the extent that the Stockholder has not so Transferred such Securities to the Outside Party within such four-month period, then such Securities thereafter shall continue to be subject to all of the restrictions contained in this Agreement. Any election in any instance by the Company or any Stockholder entitled to be Electing Stockholders not to exercise its rights under this clause (b) shall not constitute a waiver of such rights with respect to any other actual or proposed Transfer of Securities. (c) Transfers to Related Transferees. Notwithstanding anything to -------------------------------- the contrary contained in clauses (a) and (b) of this Section 4, each member of the HPA Group and Class II Stockholder may Transfer Securities to a Related Transferee provided that such Related Transferee shall first (i) execute a -------- written consent in form and substance satisfactory to the Company to be bound by all of the applicable provisions of this Agreement, and (ii) give a duplicate original of such consent to the Company. In the event of any Transfer by a member of the HPA Group or any Class II Stockholder to a Related Transferee of all or any part of his or its Securities (or in the event of any subsequent Transfer by any such Related Transferee to another Related Transferee of the Stockholder), such Related Transferee shall receive and hold such Securities subject to the terms of this Agreement and the rights and obligations hereunder of a Stockholder as though such Securities were still owned by the transferor Stockholder, and such Related Transferee shall be deemed to be such transferor Stockholder for the purposes of this Agreement. If the Related Transferee acquired Securities from a Stockholder, such Related 5 Transferee shall be entitled to participate, collectively with the Stockholders of the same group, in the registration rights provided for in Section 6 hereof. There shall be no further Transfer of such Securities by a Related Transferee except between and among such Related Transferee, the original Stockholder and other Related Transferees, or except as otherwise permitted by this Agreement. (d) Legend on Certificates. Each certificate of the Company issued ---------------------- to represent any of the Securities shall bear the following (or substantially equivalent) legends on the face or reverse side thereof, to the extent applicable: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY JURISDICTION. SUCH SECURITIES MAY NOT BE OFFERED, SOLD, OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED EXCEPT PURSUANT TO (I) A REGISTRATION STATEMENT WITH RESPECT TO SUCH SECURITIES THAT IS EFFECTIVE UNDER SUCH ACT OR APPLICABLE STATE SECURITIES LAW, OR (II) ANY EXEMPTION FROM REGISTRATION UNDER SUCH ACT, OR APPLICABLE STATE SECURITIES LAW, RELATING TO THE DISPOSITION OF SECURITIES, INCLUDING RULE 144, PROVIDED AN OPINION OF COUNSEL IS FURNISHED TO THE COMPANY, IN FORM AND SUBSTANCE REASONABLY SATISFACTORY TO THE COMPANY, TO THE EFFECT THAT AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND/OR APPLICABLE STATE SECURITIES LAW IS AVAILABLE. THE SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF UNLESS SUCH TRANSFER COMPLIES WITH THE APPLICABLE PROVISIONS OF THE STOCKHOLDERS AGREEMENT DATED AS OF JUNE 11, 1997, A COPY OF WHICH IS ON FILE AT THE OFFICES OF THE COMPANY. Any stock certificate issued at any time in exchange or substitution for any certificate bearing such legends (except a new certificate issued upon the completion of a public offering) shall also bear such (or substantially equivalent) legends, unless the Security represented by such certificate is no longer subject to the provisions of this Agreement and, in the opinion of counsel for the Company, the Security represented thereby need no longer be subject to restrictions pursuant to the Act or applicable state securities law. (e) Transfers in Violation of this Agreement. The Company shall not ---------------------------------------- be required to record on its books and records, or otherwise to recognize or facilitate, any Transfer of Securities in violation of this Agreement, nor shall the Company be required to issue any certificate for Securities Transferred in violation of this Agreement. 6 5. Company "Call" Option. --------------------- (a) Call Purchase Event and Purchase Price. Upon the termination -------------------------------------- of a Class II Stockholder's employment with the Company or its subsidiaries for any reason (including, without limitation, the voluntary termination, dismissal, involuntary termination, Retirement, death or Permanent Disability of the Stockholder) (a "CALL PURCHASE EVENT"), the Company, and to the extent the Company elects not to do so and, in the case of the NQ Options, such purchase may otherwise be made pursuant to the NQ Option Plan, GEI, Michael J. Fourticq and Brian P. McDermott (or any Related Transferee of the latter) (collectively the "PURCHASING GROUP") may, collectively and pro rata based upon their --- ---- respective Equity Ownership in the Company, exercise the Call Option by written notice (a "PURCHASE NOTICE") delivered to the Class II Stockholder within 90 days after such Call Purchase Event, elect to purchase, and, upon the giving of such notice, the Company, and if applicable, the Purchasing Group shall be severally obligated to purchase and the Class II Stockholder (and the Related Transferees, if any, of the Class II Stockholder) (in each case, the "SELLER") shall be obligated to sell all, or any lesser portion indicated in the Purchase Notice, of the Callable Securities owned at the time of the Call Purchase Event by the Seller, for consideration calculated as to each share of Call Option Stock and each Call Option Share or Call NQ Option, as the case may be, as follows: (i) in the case of voluntary termination by a Class II Stockholder holding Call NQ Options, an amount equal to the difference between the cash consideration per share paid in the Merger and the exercise price of the Call NQ Option; or (ii) in the case of any other termination (including without limitation dismissal, involuntary termination, death, Retirement or Permanent Disability ("OTHER TERMINATION"), of a Class II Stockholder holding Call NQ Options, the difference between the higher of (A) the cash consideration per share paid in the Merger and (B) the Fair Market Value of the underlying shares on the date of the Call Purchase Event, and the exercise price of the Call NQ Option; or (iii) in the case of voluntary termination by a Class II Stockholder holding Call Option Stock, the purchase price therefor; or (iv) in the case of Other Termination of a Class II Stockholder holding Call Option Stock, the higher of the Fair Market Value thereof on the date of the Call Purchase Event and the purchase price paid by the holder therefor; or (v) in the case of voluntary termination by a Class II Stockholder holding Call Option Shares, an amount equal to the cash consideration per share paid in the Merger; or (vi) in the case of Other Termination of a Class II Stockholder holding Call Option Shares, the higher of the Fair Market Value of such shares on the date of the Call Purchase Event and the amount payable pursuant to clause (v) above. 7 (b) Exercise of Call Option. In the event the Company and/or any ----------------------- Class I Stockholder elects not to participate in the purchase of Callable Securities pursuant to the Call Option, all remaining Purchasing Group Stockholders desiring so to participate may do so, pro rata amongst such --- ---- remaining Purchasing Group Stockholders based upon their respective Equity Ownership in the Company, or in any other proportion as they may agree. The closing for all purchases and sales of Callable Securities pursuant to this Section 5 shall be at the principal executive offices of the Company at 10:30 a.m., California time, on the 60th day after the giving of the applicable Purchase Notice. The purchase price for the purchase and sale of Callable Securities shall be paid in cash, by certified or official bank check. The Seller(s) of Callable Securities sold pursuant to this Section 5 shall cause such Securities to be delivered to the Purchasing Group or the Company at the relevant closing free and clear of all liens, charges or encumbrances of any kind. Such Seller(s) shall take all actions as the Purchasing Group or the Company shall request as necessary to vest in the members of the Purchasing Group and/or the Company at such closing such Callable Securities, free and clear of all liens, charges and encumbrances incurred, voluntarily or involuntarily, by or through Seller(s). 6. Registration Rights. ------------------- (a) Demand Registration Rights. At any time on or after January 31, --------------------------- 1998, each of (i) GEI, (ii) the HPA Group collectively, and (iii) Occidental shall be entitled, respectively, to request a registration (a "DEMAND REGISTRATION") of any of its Registrable Securities, and at such time as the Company qualifies for registration of securities on Form S-3 or any successor short-form, one additional registration that remains effective for a period of at least 180 days on such form. In such event, the Company shall: (i) as soon as reasonably practicable, and at its expense as set forth in Section 6 hereof, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of the Class I Stockholder's Registrable Securities as are specified in such request on the form specified in such request covering the Registrable Securities; (ii) use its best efforts to cause such registration to become and remain effective, as soon as practicable after receipt of the request of the Class I Stockholder, for the period necessary to effectuate the distribution contemplated by the Class I Stockholder; and (iii) at the request of the Class I Stockholder or the Manager, enter into and perform its obligations under an underwriting or purchase agreement (the "UNDERWRITING AGREEMENT") in customary form for secondary offerings of common stock, and otherwise reasonably acceptable to the parties, with the Manager (acting for itself and/or a group of syndicate of underwriters) and the Class I Stockholder. Notwithstanding the foregoing, the Company shall be entitled to delay any such Demand Registration if (x) the Company has determined in good faith that in view of pending negotiations or other material developments regarding the Company not otherwise required to be made public, disclosure of such information is not in the best interest of the Company (in which case the delay 8 in filing a Demand Registration may not exceed 90 days); or (y) the Company has initiated discussions with an underwriter regarding the sale of securities of the same class or convertible into the same class as the Registrable Securities in a registered primary public offering, in which case the Demand Registration may be delayed for up to 120 days from the effectiveness of such primary public offering, provided that the Company may not invoke the provision of clause (x) for more than an aggregate of 180 days in any twelve-month period, and may not invoke the delay in clause (y) more than once in any such period. In addition, to the extent a Demand Registration is a "shelf" registration, the Company may interrupt such registration for the reasons set forth above for no more than 90 days, provided that sales under such shelf registration shall in all events be permitted for an aggregate of 180 days if requested by the Stockholder. (b) Piggyback Registration Rights; Cutbacks. Each time the Company --------------------------------------- proposes to register under the Act (other than registration (A) on Forms S-4 or S-8 or any successor forms thereto, or (B) filed in connection with an exchange offer) securities of the same class as any of the Registrable Securities, the Company shall give written notice of such proposed registration (a "REGISTRATION NOTICE") to each Class I Stockholder and Class II Stockholder at least 20 days prior to the filing thereof. Each Registration Notice shall indicate that the recipient has the right (subject to the provisions of this Section 6) to propose that its Registrable Securities be included in such registration. Each Class I Stockholder and Class II Stockholder shall have the right to propose that a number of its Registrable Securities be included in such registration by written notice given to the Company within fifteen (15) days after the giving of such Registration Notice. Subject to the provisions of this Section 6, the Company shall include all such Registrable Securities in such registration; provided, -------- however, that: - ------- (i) if the registration is in whole or part an underwritten primary registration on behalf of the Company (whether or not it is also in part a Demand Registration or other secondary registration on behalf of any Company securityholders) and the managing underwriters of such offering determine that the aggregate amount of securities of the Company which all Stockholders and all other Company securityholders pursuant to future contractual rights to participate in such registration (such other Company securityholders, "FUTURE PARTICIPANTS") propose to include in such registration exceeds the maximum amount of securities that should be included therein, the Company will include in such registration, first, the ----- shares which the Company proposes to sell and second, securities to be sold ------ for the account of any Class I Stockholder and Robert Olsen ("Olsen") pro --- rata among such Stockholders, and third, securities to be sold for the ---- ----- account of the Class II Stockholders, pro rata among the Class II --- ---- Stockholders and fourth, the other securities to be sold for the account of ------ Future Participants, pro rata among such Future Participants, in each case --- ---- on the basis of the relative Equity Ownership of the parties who have requested that securities owned by them be so included (it being agreed and understood, however, that such underwriters shall have the right to eliminate entirely the participation in such registration of all Stockholders and Future Participants); (ii) if the registration is pursuant to an underwritten Demand Registration and the managing underwriters determine that the aggregate amount of securities which all Stockholders and all Future Participants propose to include in such registration exceeds the maximum amount of securities that should be included therein, the Company will 9 include in such registration, first, the securities to be sold for the ----- account of the Class I Stockholders and Olsen, pro rata among such --- ---- Stockholders, second, securities to be sold for the account of the Company, ------ if any, third, securities to be sold for the account of the Class II ----- Stockholders, pro rata among the Class II Stockholders and fourth, --- ---- ------ securities to be sold for the account of the Future Participants electing to include securities in such registration, pro rata among such Future --- ---- Participants, in each case, on the basis of their relative Equity Ownership (it being agreed and understood, however, that such underwriters shall have the right to eliminate entirely the participation therein of the Company and all such Future Participants not entitled to demand inclusion of securities in such registration); (iii) if the registration is pursuant to an underwritten secondary registration other than as described in clause (ii) above on behalf of Future Participants and the managing underwriters determine that the aggregate amount of securities which all Future Participants and Stockholders propose to include in such registration exceeds the maximum number of securities that should be included therein, the Company will include in such registration first, the securities to be sold for the ----- account of the Future Participants, pro rata among the Future Participants, --- ---- second, securities to be sold for the account of ------ the Company, if any, third, securities to be sold for the account of the ----- Class I Stockholder and Olsen, pro rata among such Stockholders and fourth, --- ---- ------ securities to be sold for the account of the Class II Stockholders, in each case, on the basis of their relative Equity Ownership (it being agreed and understood, however, that such underwriters shall have the right to eliminate the participation therein of the Company and the Stockholders entirely unless, on the date of such secondary registration, any Class I Stockholder electing to participate in such registration shall not theretofore have completed one Demand Registration in which all of the Registrable Securities it sought to include were sold, in which case any such Class I Stockholder may convert such registration into one governed by clause (ii) above); (iv) in the event that, as a result of the provisions of Section 6(b)(i) or (ii), a group of Stockholders which has exercised its right to request a Demand Registration is unable to register all of the Registrable Securities as to which the request was made, such Stockholder shall not be considered to have utilized a Demand Registration under Section 6(a); and. (v) in exercising the rights of Stockholders in respect of Registrable Securities in this Section 6, Stockholders comprising the holders of the Demand Registrations enumerated in clauses (i) through (iii) of Section 6(a) shall be treated as an individual party to this Agreement for such purpose and, if more than one Stockholder has or succeeds to such rights, such Stockholders collectively shall exercise such rights and make all determinations hereunder acting by majority-in-interests based upon their respective ownership of Registrable Securities. (c) Expenses of Registration. Whether or not any registration ------------------------ statement prepared and filed pursuant to Section 6(a) or (b) hereof is declared effective by the SEC (except where a Demand Registration is terminated, withdrawn or abandoned at the written request of a 10 Class I Stockholder solely due to market conditions), the Company shall pay all expenses incident to the Company's performance of or compliance with the registration requirements of this Agreement, including, without limitation, the following: (A) all SEC registration and filing fees and expenses; (B) the filing fees incident to securing any required review by the National Association of Securities Dealers, Inc. of the terms of the sale of Registrable Securities; (C) any and all expenses incident to its performance of, or compliance with, this Agreement, including, without limitation, any allocation of salaries and expenses of the Company personnel or other general overhead expenses of the Company, or other expenses for the preparation of historical and pro forma financial statements; (D) fees and expenses incurred in connection with the listing of Registrable Securities on each securities exchange or the NASDAQ Stock Market, as applicable, on which securities of the same class are then listed; (E) all transfer and/or exchange agent and registrar fees; (F) fees and expenses in connection with the qualification of the Registrable Securities under securities or "blue sky" laws including reasonable fees and disbursements of counsel for the underwriters in connection therewith; (G) mailing and printing expenses relating to the registration and distribution of Registrable Securities; (H) messenger and delivery expenses relating to the registration and distribution of Registrable Securities; (I) fees and out-of-pocket expenses of a single counsel for the selling Stockholders (in each registration) and (J) fees and out-of-pocket expenses of counsel for the Company and its independent certified public accountants (including the expenses of any audit, review and/or "cold comfort" letters) and other persons, including special experts, retained by the Company (collectively, clauses (A) through (J), "REGISTRATION EXPENSES"); provided, however, that the Company shall not be required to pay, and each - -------- ------- Selling Stockholder shall pay, any discounts, commissions or fees of underwriters, selling brokers and dealers relating to the distribution of the Registrable Securities by it. (d) Registration Procedures. In the case of each registration ----------------------- effected by the Company pursuant to this Agreement, the Company shall keep the participating Stockholders advised in writing as to the initiation of each registration and as to the completion thereof. The Company shall (i) permit the participating Stockholders, the Manager, if any, and their respective counsel to make such investigation of the Company as they may reasonably request, (ii) furnish to the participating Stockholders, the Manager and their respective counsel drafts of the registration statement and all amendments thereto, all prospectuses and supplements thereof prior to filing with the SEC and consider their comments and suggestions with respect to such documents, and (iii) not file any such registration statement, amendment, prospectus or supplement to which the participating Stockholders or the Manager shall reasonably object. At its expense, the Company shall: (i) keep such registration effective and current as required by law for such period necessary to permit the participating Stockholders to complete the distribution described in the registration statement relating thereto, or for such period as may be agreed to in the Underwriting Agreement; (ii) prepare and file with the SEC such amendments, post- effective amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to comply with the provisions of the Securities Act and the Underwriting Agreement and to keep such registration statement effective and 11 current as required by law for that period of time specified above, in each case exclusive of any period during which the prospectus used in connection with such registration shall not comply with the requirements of Section 10 of the Securities Act, and respond as promptly as practicable to any comments received from the SEC with respect to such registration statement or any amendment thereto; (iii) furnish such number of copies of the registration statement, each amendment thereto, each preliminary prospectus, prospectuses, supplements and incorporated documents and other documents incident thereto as the participating Stockholders or the Manager from time to time may reasonably request; (iv) use its best efforts to register or qualify the Registrable Securities covered by such registration statement under the securities or "blue sky" laws of such jurisdictions as the participating Stockholders and the Manager shall reasonably request, and do any and all other acts and things which may be necessary or desirable to enable the participating Stockholders and the Manager to consummate the offering and disposition of Registrable Securities in such jurisdictions; provided, -------- however, that the Company shall not, by virtue of this Agreement, be ------- required to qualify generally to do business as a foreign corporation, subject itself to taxation, or consent to general service of process, in any jurisdiction wherein it would not, but for the requirements of this clause (iv), be obligated to be qualified; (v) notify the participating Stockholders and the Manager promptly and, if requested by any such person, confirm such notification in writing, (A) when a prospectus or any prospectus supplement has been filed with the SEC, and, with respect to a registration statement or any post- effective amendment thereto, when the same has been declared effective by the SEC, (B) of any request by the SEC for amendments or supplements to a registration statement or related prospectus, or for additional information, (C) of the issuance by the SEC of any stop order or the initiation of any proceedings for such or a similar purpose (and the Company shall make every reasonable effort to obtain the withdrawal of any such order at the earliest practicable time), (D) of the receipt by the Company of any notification with respect to the suspension of the qualification of any of the Registrable Securities for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose (and the Company shall make every reasonable effort to obtain the withdrawal of any such suspension at the earliest practicable time), (E) of the occurrence of any event with requires the making of any changes to a registration statement or related prospectus so that such documents shall not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (and the Company shall promptly prepare and furnish to the participating Stockholders and the Manager a reasonable number of copies of a supplemented or amended prospectus such that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading), and (F) of the Company's 12 determination that the filing of a post-effective amendment to the Registration Statement shall be necessary or appropriate. Each participating Stockholder agrees that it shall, as expeditiously as possible, notify the Company at any time when a prospectus relating to a registration statement covering such Stockholder's Registrable Securities is required to be delivered under the Securities Act, of the happening of any event of the kind described in this clause (v) as a result of any information provided by such Stockholder in writing expressly for inclusion in such prospectus included in such registration statement and, at the request of the Company, promptly prepare and furnish to it such information as may be necessary so that, after incorporation into a supplement or amendment of such prospectus as thereafter delivered to the purchasers of such securities, the information so provided by the participating Stockholders shall not include an untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the statements made therein, in the light of the circumstances under which they were made, not misleading. Each Stockholder shall be deemed to have agreed by acquisition of such Registrable Securities that upon the receipt of any notice from the Company of the occurrence of any event of the kind described in clause (E) of this clause (v), such Stockholder shall forthwith discontinue its offer and disposition of Registrable Securities pursuant to the registration statement covering such Registrable Securities until such Stockholder shall have received copies of a supplemented or amended prospectus which is no longer defective as contemplated by clause (E) of this clause (v) and, if so directed by the Company, shall deliver to the Company, at the Company's expense, all copies (other than permanent file copies) of the defective prospectus covering such Registrable Securities which are then in such Stockholder's possession; (vi) use its best efforts to cause all such Registrable Securities covered by such registration statement to be listed on each securities exchange or the Nasdaq Stock Market, as applicable, on which similar securities issued by the Company are then listed, if the listing of such Registrable Securities is then permitted under the rules and regulations of such exchange or the Nasdaq Stock Market, as applicable; (vii) engage and provide a transfer agent for all Registrable Securities covered by such registration statement not later than the effective date of such registration statement; (viii) whether or not the Underwriting Agreement is entered into and whether or not any portion of the offering contemplated by such registration statement is an underwritten offering or is made through a placement or sales agent or any other entity, (A) make such representations and warranties to the underwriters, if any, in form, substance and scope as are customarily made in connection with an offering of common stock or other equity securities pursuant to any appropriate agreement and/or to a registration statement filed on the form applicable to such registration; (B) obtain an opinion of counsel to the Company in customary form and covering such matters, of the type customarily covered by such opinions, as the Manager, if any, and as the Stockholder may reasonably request; (C) obtain a "cold comfort" letter or letters from the independent certified public accountants of Company addressed to the underwriters, if any, thereof, dated (i) the effective date of such registration statement and (ii) the date of the closing 13 under the underwriting agreement relating thereto, such letter or letters to be in customary form and covering such matters of the type customarily covered, from time to time, by letters of such type and such other financial matters as the Manager, if any, may reasonably request; (D) deliver such documents and certificates, including officers' certificates, as may be reasonably requested by the underwriters, if any, therefor and the Manager, if any, thereof to evidence the accuracy of the representations and warranties made pursuant to clause (A) above and the compliance with or satisfaction of any agreements or conditions contained in the underwriting agreement or other agreement entered into by the Company, and (E) undertake such obligations relating to expense reimbursement, indemnification and contribution as are provided in this Agreement; (ix) permit the participating Stockholders to participate in the preparation of such registration statement and include therein material acceptable to the Company and its counsel, furnished to the Company in writing which, in the reasonable judgment of the participating Stockholders and their counsel, is required to be included therein; (x) use its best efforts to obtain the withdrawal of any order suspending the effectiveness of such registration statement by the SEC or any state securities authority as promptly as possible; and (xi) cooperate with the participating Stockholders to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and enable certificates for such Registrable Securities to be issued for such number of shares of Company Common Stock and registered in such names as the participating Stockholders may reasonably request. (e) Indemnification --------------- (i) The Company shall indemnify and hold harmless each Stockholder, each of its directors, officers and agents, each underwriter (as defined in the Securities Act) of such Registrable Securities, if any, and each person who controls (within the meaning of Section 15 of the Securities Act) such Stockholder or any underwriter of the Registrable Securities held by or issuable to such Stockholder, against all claims, losses, expenses, damages and liabilities, joint or several, including any of the foregoing incurred in settlement of any proceeding, commenced or threatened, (or actions in respect thereto) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any prospectus, offering circular or other document (including any related registration statement, notification or the like) incident to any such registration, or based on any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by the Company of any rule or regulation promulgated under the Act or any state securities law applicable to the Company and relating to action or inaction required of the Company in connection with any such registration, and shall reimburse each Stockholder, each of its directors, officers and agents, each such underwriter and each person who controls such Stockholder or any such underwriter for any reasonable legal and any other expenses incurred in connection with investigating, defending or settling any such claim, 14 loss, damage, liability or action, provided, however, that the Company shall not be liable in any such case to the extent that any such claim, loss, damage or liability arises out of or is based on any untrue statement or omission based upon written information furnished to the Company by such Stockholder or such underwriter specifically for use therein. The indemnity provided by this Section 6(e) shall be in addition to any liability which the Company may otherwise have. (ii) Each Stockholder shall indemnify and hold harmless Company, each of its directors and officers, each underwriter, if any, and each person who controls the Company or any of the underwriters within the meaning of the Act, against all claims, losses, expenses, damages and liabilities (or actions in respect thereof) arising out of or based on any untrue statement (or alleged untrue statement) of a material fact contained in any such registration statement, prospectus, offering circular or other document, or any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and shall reimburse the Company or underwriters for any reasonable legal or any other expenses incurred in connection with investigating, defending or settling any such claim, loss, damage, liability or action, in each case to the extent, but only to the extent, that such untrue statement (or alleged untrue statement) or omission (or alleged omission) is made in such registration statement, prospectus, offering circular or other document in reliance upon and in conformity with written information pertaining to such Stockholder, which is furnished in writing to Company by such Stockholder specifically for use therein. (iii) If the indemnification provided for in this Section 6 is unavailable to or insufficient to hold harmless an Indemnified Party (as defined below) in respect of any losses, claims, damages or liabilities (or actions in respect thereof) referred to therein, then the Company and the Stockholder shall contribute to the amount paid or payable as a result of such losses, claims, damages or liabilities (or actions in respect thereof) in such proportion as is appropriate to reflect the relative fault of Company on the one hand and the Stockholder on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions in respect thereof), as well as any other relevant equitable considerations. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Stockholder on the other and such person's relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company agrees that it would not be just and equitable if contribution pursuant to this Section 6(e) were determined by pro rata allocation or by any other method of allocation which does not --- ---- take account of the equitable considerations referred to above in this Section 6(e). The amount paid or payable by a party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section 6(e) shall include any legal or other expenses reasonably incurred by such party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. No person shall be 15 required to contribute to any settlement effected without its consent, which consent shall not be unreasonably withheld. If, however, indemnification is available under this Section 6, the indemnifying parties shall indemnify each indemnified party to the fullest extent provided herein without regard to the relative fault of such indemnifying party or indemnified party or any other equitable considerations. (iv) Each party entitled to indemnification under this Section 6(e) (the "Indemnified Party") shall give notice to the party required to provide indemnification (the "Indemnifying Party") promptly after such Indemnified Party has actual knowledge of any claim as to which indemnification may be sought, and shall permit the Indemnifying Party to assume the defense of any such claim or any litigation resulting therefrom, provided that counsel for the Indemnifying Party, who shall conduct the defense of such claim or litigation, shall be approved by the Indemnified Party (whose approval shall not be unreasonably withheld), and the Indemnified Party may participate in such defense at such party's expense, unless the Indemnified Party in its reasonable judgment determines that joint representation by counsel for the Indemnifying Party would be inappropriate due to actual or potential differing interests between the Indemnifying Party and the Indemnified Party in the conduct of the defense of such action, in which case the Indemnified Party shall be entitled to be represented by separate counsel selected by it, the reasonable fees and expenses of which shall be borne by the Indemnifying Party, and provided further that the failure of any Indemnified Party to give notice as provided herein shall not relieve the Indemnifying Party of its obligations hereunder, unless such failure resulted in actual detriment to the Indemnifying Party. No Indemnifying Party, in the defense of any such claim or litigation, shall, except with the consent of each Indemnified Party, consent to entry of any judgment or enter into any settlement which does not include as an unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability in respect of such claim or litigation. (v) Notwithstanding the foregoing, to the extent that the provisions on indemnification of the underwriters and their controlling persons contained in the Underwriting Agreement in connection with an underwritten public offering are in conflict with the foregoing provisions, the provisions in the Underwriting Agreement shall control as to indemnification of the underwriters and their controlling persons in the public offering. (vi) Notwithstanding the foregoing, in no event shall any Stockholder be liable under this Section 6(e) for an amount exceeding the net proceeds received by such Stockholder from the sale of its Registrable Securities pursuant to the registration rights granted to such Stockholder hereunder. (f) Holdback Amount. Each Stockholder agrees that in the event of an --------------- underwritten public offering of Registrable Securities for the account of any other Stockholder, such Stockholder and any Related Transferee thereof will not, without the written consent of the underwriters, offer for public sale (other than as part of such underwritten public offering) any Securities during the ten (10) days prior to and such number of days (not to exceed 180 days in the case of an initial public offering and 90 days in all other cases) after the effective date of the 16 registration statement in connection with such public offering as the underwriters may reasonably request in writing. (g) Assignment and Assumption. For avoidance of doubt, the parties ------------------------- acknowledge that each Stockholder may assign its rights under this Section 6 as an incident to any permitted Transfer of Securities held by it to the Transferee of such Securities, and if the Stockholder retains any Securities, the rights under this Section 6 shall remain applicable to the retained Securities. If Securities are acquired from a Class I Stockholder, such Securities shall be entitled to participate in any Demand Registration as a member of the group enumerated in clauses (i) through (iii) of Section 6(a) that includes such Class I Stockholder, without thereby increasing the aggregate number of Demand Registrations the Company may be required to effect. Each Stockholder shall promptly notify the Company in writing of each such assignment of rights, and the assignee shall execute such documentation as the Company may reasonably request to evidence its agreement to be bound by this Section 6. Registration rights shall not be assignable to any purchaser of Securities sold under Rule 144 or in any public securities sale. If the Company effects a business combination in which Stockholders receive securities of another issuer and such securities cannot be resold by the Stockholders without registration under the Securities Act, as a condition to the consummation of such business combination, the Company shall cause such issuer to provide to the Stockholders rights equivalent to those under this Section 6 unless applicable law would permit free resale of the Securities so received without registration in a public market. (h) Stock Option Plans. After the IPO, the Company shall use its ------------------ reasonable efforts to register, on Form S-8 or any similar or successor form, the Securities underlying the ISOs and NQ Options. 7. Drag-Along Sales and Tag-Along Sales. ------------------------------------ (a) Drag-Along Sales. ---------------- (i) Notwithstanding any other provision hereof, if GEI agrees to sell Securities held by it pursuant to a transaction in which more than 75% of the then-outstanding Common Stock of the Company will be sold to or acquired by a Third Party (a "DRAG-ALONG SALE"), then upon the demand of GEI, (i) in the case of Occidental and the Class II Stockholders, made at any time after the Closing Date and (ii) in the case of the HPA Group, made at any time after the fourth anniversary of the Closing Date (the HPA Group and the Class II Stockholders being collectively referred to for this purpose as "DRAG-ALONG SELLERS"), each Drag-Along Seller hereby agrees to sell to such Third Party the same percentage of the total number of Securities held by such Drag-Along Seller on the date of the Drag-Along Notice, as the number of Securities GEI is selling in the Drag-Along Sale bears to the total number of shares held by GEI as of the date of the Drag- Along Notice (the "SALE PERCENTAGE"), at the same price and form of consideration and on the same terms and conditions as GEI has agreed to with such Third Party. If the Drag-Along Sale is in the form of a merger transaction, the Drag-Along Seller agrees to vote his or her Securities in favor of such merger and not to exercise any rights of appraisal or dissent afforded under applicable law. The provisions of this Section 7 shall 17 apply regardless of the form of consideration received in the Drag-Along Sale. For purposes of Drag-Along Sales, the number of shares owned by each Drag-Along Seller shall include all shares underlying Options and Warrants, which Options and Warrants will be exercised by the Drag-Along Sellers immediately prior to and contingent upon consummation of the Drag-Along Sale. (ii) Prior to making any Drag-Along Sale, if GEI elects to exercise the option described in this Section 7, GEI shall provide the Drag-Along Seller to whom this Section 7 then applies with written notice (the "DRAG-ALONG NOTICE") not more than 60 nor less than 15 days prior to the proposed date of the Drag-Along Sale (the "DRAG-ALONG SALE DATE"). The Drag-Along Notice shall set forth: (i) a general description of the transaction and the proposed amount and form of consideration to be paid per share offered by the Third Party; (ii) the aggregate number of Securities held by GEI as of the date that the Drag-Along Notice is first given to a Drag-Along Seller; (iii) the Sale Percentage; and (iv) the Drag- Along Sale Date. (iii) On the Drag-Along Sale Date, each Drag-Along Seller shall deliver a certificate or certificates for the Sale Percentage of its Securities, duly endorsed for transfer with signatures guaranteed, to such Third Party in the manner and at the address indicated in the Drag-Along Notice against delivery of the purchase price therefor; provided, however, -------- ------- that in the event the Company has possession of any such certificates pursuant to this Agreement, upon the written request of the Drag-Along Seller at least five (5) business days in advance of-the Drag-Along Sale Date, the Company shall deliver such certificates to the purchaser at the time and in the manner described above. (b) Optional Participation in Sales of Common Stock (Tag-Along ---------------------------------------------------------- Sales) ----- (i) If GEI shall at any time desire to Transfer shares of Common Stock to a third party, other than ratably to its partners, then each of the HPA Group, Occidental and the Class II Stockholders and their Related Transferees (each, a "TAG-ALONG SELLER") shall be entitled, to participate pro rata in such Transfer at the same price and on the same --- ---- terms and conditions applicable to GEI, based upon their respective Fully Diluted Ownership in the Company. (ii) Each Tag-Along Seller shall have the right to Transfer up to a percentage of the number of shares specified in the Transfer Notice delivered pursuant to the following sentence of the aggregate number of shares of Common Stock then owned by GEI. GEI shall deliver or cause to be delivered to each Tag-Along Seller a written notice (a "TRANSFER NOTICE") of a proposed tag-along sale no later than 30 days prior to the proposed closing thereof. Such notice shall make reference to the Tag-Along Sellers' rights under this Section 7(b) and shall describe in reasonable detail (A) the aggregate number of shares of Common Stock to be Transferred by GEI if none of the HPA Group or Class II Stockholders participates, (B) the aggregate number of shares of Common Stock then owned by GEI, (C) the person or entity to whom or which such shares of Common Stock are proposed to be Transferred, (D) the terms and conditions of the Transfer, including the consideration to be paid therefor, (E) the maximum percentage of 18 its shares such Tag-Along Seller is entitled to include in the Transfer and (F) the proposed date, time and location of the closing of the Transfer. Each Stockholder receiving a Transfer Notice shall exercise its right to participate in a Transfer of Common Stock pursuant to this Section 7 by delivering to GEI a written notice (a "TAG-ALONG NOTICE") stating its election to do so and specifying the number of shares (which shall not exceed the number of shares determined for such Tag-Along Seller in the Transfer Notice) of Common Stock held by it to be Transferred no later than fifteen days after receipt of the Transfer Notice. Failure to provide a Tag-Along Notice within such fifteen-day period shall be deemed to constitute an election by such Stockholder not to exercise its rights pursuant to this Section 7, and GEI shall have 90 days following the expiration of such fifteen-day period in which to Transfer the number of shares equal to the difference between the number set forth in the Transfer Notice and the aggregate number of shares as to which GEI has received a Tag-Along Notice, on terms not more favorable to GEI than those set forth in the Transfer Notice. (iii) Each Tag-Along Seller shall be required to deliver at such closing the certificate or certificates representing the shares to be Transferred, duly endorsed for transfer, and shall be entitled to receive the net proceeds allocable to the Transfer thereof, after deduction of such Tag-Along Seller's proportionate share of the expenses of Transfer, which share shall not exceed an amount proportionate to the amount of such expenses allocated to GEI. If, at the end of the 90-day period following the expiration of such fifteen-day period, GEI has not completed the Transfer of shares of Common Stock, GEI may not sell the shares of Common Stock without again fully providing a new Transfer Notice. (c) Obligations of Drag-Along Sellers. In connection with any Drag- --------------------------------- Along Sale, Drag-Along Sellers shall not be required to make any representation or warranty to the purchaser other than to the effect that they hold title to the Securities they are selling in the Drag-Along Sale, free and clear of liens and the like, and as to their right, power and authority to sell such Securities. Except as to such representations, Drag-Along Sellers shall not be liable beyond the net proceeds of the Drag-Along Sale for any other breach of representations or warranties. In addition, unless expressly agreed to by a Drag-Along Seller, no Drag-Along Seller shall be required to enter into any covenant not to compete or similar agreement restricting their business activities. 8. Termination and Lapse of Rights and Restrictions; Applications to ----------------------------------------------------------------- Other Stock and Adjustments. - --------------------------- (a) Termination of Provisions. The provisions of Sections 4, 5, 7, 9 ------------------------- and 10 shall lapse and be of no further effect immediately following the earlier to occur of a Change in Control or an IPO. (b) Application. In the event any capital stock of the Company or any ----------- other corporation shall be distributed on, with respect to, or in exchange for Securities as a stock dividend, stock split, reverse stock split, reclassification or recapitalization, or in connection with any merger or reorganization, the restrictions, rights and options and prices set forth herein shall 19 apply with respect to such other capital stock to the same extent as they are, or would have been applicable, to the Securities on or with respect to which such other capital stock was distributed and shall continue to apply to the Securities or such other securities outstanding thereafter, in each case with such adjustments as are necessary or appropriate. 9. Election of Directors. So long as such individuals respectively own --------------------- the requisite amount of Common Stock set forth herein, each of the other Stockholders (other than Occidental) agrees to vote his or its Common Stock, and to cause his Related Transferees to vote their Common Stock, in favor of Michael J. Fourticq and Brian P. McDermott ("FOURTICQ" and "MCDERMOTT") in all elections of the directors of the Company, whether by meeting or action in writing. Such agreement to vote shall be effective as to each of Fourticq and McDermott so long as such individual continues to own (directly or, in the case of Mr. McDermott, through a family trust and in either case, through Related Transferees after the date hereof) at least two-thirds (K) of the Common Stock owned by him on the date hereof. Such agreement to vote shall cease to be effective upon the first to occur of: (i) such individual ceasing to own (directly or indirectly, as aforesaid) in excess of one-third (J) of the Common Stock owned by him on the date hereof and (ii) a Disproportionate Sale after which such individual and his Related Transferees own less than two-thirds (K) of the Common Stock owned by him and such Related Transferees on the date hereof. A "DISPROPORTIONATE SALE" as to either individual occurs on the date of a Transfer of Common Stock as a result of which the Common Stock owned by such individual and Related Transferees has decreased by a percentage that is greater, by at least five percent (5%), than the corresponding decrease in ownership of Common Stock of GEI to date. Each of the Stockholders (other than Occidental) further agrees that he or it shall vote its Common Stock, and cause its Related Transferees to vote their Common Stock, in all elections of directors of the Company, whether by meeting or action in writing, in favor of all nominees for the board of directors proposed by GEI. For purposes of this Section 9 and the effectiveness of the voting agreements herein, ownership of Common Stock shall be calculated based upon the Fully Diluted Ownership of the individual and his Related Transferees, in the aggregate; provided, however, that to the extent any of the Options included in the Fully Diluted Ownership of an individual should fail to vest, the calculation as to such individual's ownership of Common Stock shall thereafter be made as if the aggregate Common Stock owned by such individual on the date hereof had not included such Options. The parties acknowledge that the provisions of the Preferred Stock could, under the circumstances specified therein, entitle the holders thereof to elect all of the Company's directors, making this Section 9 inoperative. 10. Certain Additional Agreements. ----------------------------- (a) Right to Participate in Securities Issuances. If the Company shall issue, sell or distribute to GEI or any of its Affiliates any equity or debt securities of the Company, or any option, warrant, or right to acquire, or any security convertible into or exchangeable for, any of the foregoing (other than pursuant to an underwritten public offering, a stock dividend, stock split or other pro rata distribution of securities to stockholders of --- ---- the Company generally in which the HPA Group, Olsen and Occidental participates on an equal basis, including any Related Transferees), the members of the HPA Group, Olsen and Occidental shall be entitled, provided that they collectively maintain two-thirds (2/3) of the Fully Diluted Ownership held by them on the date hereof, to participate in such issuance, sale or distribution, at the same price and on the 20 same terms and conditions applicable to GEI, pro rata, based upon their --- ---- respective Fully Diluted Ownership in the Company. The Company shall provide at least twenty (20) days' prior notice to the members of the HPA Group, Olsen and Occidental as to its intention so to issue equity, debt or related securities to GEI, and in the event any member of the HPA Group, Olsen or Occidental fails to respond within such twenty-day period, such member shall be deemed to have waived his or its right so to participate in the issuance of securities. The members of the HPA Group and Olsen may determine amongst themselves that to the extent any member does not desire to participate, other members may increase their participation, provided that the aggregate participation does not exceed that offered to the HPA Group and Olsen as a whole and that notice, which shall be binding upon all the HPA Group members and Olsen and as to which GEI shall have no duty to inquire, shall be given to GEI within such 20-day period as to the aggregate number of securities being subscribed for. The parties acknowledge that time is of the essence as to this Section 10(a). (b) Right to Participate in Equity Repurchases. The Company and GEI ------------------------------------------ agree that the Company will not purchase any Securities from GEI or any of its Affiliates unless the Company offers to simultaneously purchase a proportionately equal number of Securities of the same class from each member of the HPA Group, Olsen and Occidental at the same price and on the same terms and conditions applicable to GEI and its Affiliates, based upon their respective Fully Diluted Ownership. (c) Affiliate Transactions. No material transaction or series or ---------------------- related transactions (including any issuance of securities, profits interests, stock appreciation rights, or similar rights or interests of the Company) between the Company and GEI or any of its Affiliates involving value in excess of $1,000,000 may be consummated unless approved (i) if one of Fourticq or McDermott then holds at least one-third of his Fully Diluted Ownership as of the date hereof, by such individual, and otherwise by a majority of the disinterested directors of the Company, or (ii) by the board of directors of the Company after it is presented with a fairness opinion of a nationally recognized investment bank to the effect that the transaction is fair to the Company and its stockholders. Notwithstanding the foregoing, other than the Management Agreement of even date herewith between the Company and Leonard Green & Partners, L.P. (the "Management Agreement"), GEI and its Affiliates will not enter into any consulting, management or similar agreement or arrangement with the Company or increase the fees provided for in the Management Agreement as of the date hereof, except that such fees may be proportionately increased provided such increase is calculated on the same basis (1.6% of invested capital) as the fee currently provided for therein and such increase reflects further investment by GEI consistent with the terms of this Section 10. (d) Change of Control Transactions. Each of GEI, Fourticq and ------------------------------ McDermott agrees that no such Stockholder shall, without the prior consent of the other two Stockholders, pursue, advocate or enter into an agreement in respect of any recapitalization, reclassification, share exchange, reorganization, merger, consolidation or similar transaction involving the Company unless all holders of Common Stock of the Company will be treated identically in such transaction, but ratably in proportion to their respective Equity Ownership. 21 (e) Information. The Company shall provide each Class I Stockholder ----------- and Olsen with the following information, all of which each Class I Stockholder and Olsen agrees to hold in confidence: (i) For each fiscal quarter of the Company, as and when submitted to Green, unaudited consolidated financial statements of the Company (consisting of balance sheet and statements of operations, stockholders' equity and cash flows for such fiscal quarter, in the form submitted to GEI; (ii) For each fiscal year of the Company, as and when submitted to Green, audited financial statements of the Company for such fiscal year, certified by the Company's independent certified public accounting firm, in the form submitted to GEI; (iii) Any information the Company provides generally to the holders of its Common Stock; and (iv) Such additional information about the Company as such Class I Stockholder or Olsen may reasonably request from time to time. 11. Notices. All notices or other communications under this Agreement shall ------- be given in writing and shall be deemed duly given and received on the third full business day following the day of the mailing thereof by registered or certified mail or the next Business Day if sent by overnight courier or when delivered personally or sent by facsimile transmission as follows: (a) if to the Company, at its principal executive offices at the time of the giving of such notice, or at such other place as the Company shall have designated by notice as herein provided to the Purchaser; (b) if to a Class I Stockholder, at its principal executive offices at the time of the giving of such notice, or at such other place as such Stockholder shall have designated by notice as herein provided to the Company. (c) if to any Class II Stockholder, at his address as it appears on Annex A or at such other place as he shall have designated by notice as herein provided to the Company. 12. General. ------- (a) This Agreement constitutes the entire agreement of the parties with respect to the subject matter hereof and may not be modified or amended except by a written agreement signed by each of the Company and the Class I Stockholders and, to the extent their interests are affected, by the Class II Stockholders, provided, however, that Class II Stockholders having a majority of -------- ------- Equity Ownership as amongst such Stockholders may bind all of such Class II Stockholders as to any matter adversely affecting them if such adverse effect is equal, on a proportionate basis, as to all such Class II Stockholders and the consent of each adversely affected Class II Stockholder shall otherwise be required. 22 (b) No waiver of any breach or default hereunder shall be considered valid unless in writing, and no such waiver shall be deemed a waiver of any subsequent breach or default of the same or similar nature. (c) Except as otherwise expressly provided herein, this Agreement shall be binding upon and inure to the benefit of each of the Company, the Stockholders and their respective heirs, personal representatives, successors and assigns; provided, however, that nothing contained herein shall be construed -------- ------- as granting any Stockholder the right to Transfer any of the Securities except in accordance with this Agreement and any Transferee shall hold such Securities having only those rights and being subject to the restrictions provided for in this Agreement. (d) If any provision of this Agreement shall be invalid or unenforceable, such invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render invalid or unenforceable any other severable provision of this Agreement, and this Agreement shall be carried out as if any such invalid or unenforceable provision were not contained herein. (e) Each Class II Stockholder agrees that nothing herein shall be deemed to create any implication concerning the adequacy of his services to the Company, or shall be construed as an agreement by the Company, express or implied, to employ him or contract for his services, to restrict the right of the Company to discharge him or cease contracting for his services or to modify, extend or otherwise affect in any manner whatsoever, the terms of any employment agreement or contract for services which may exist between him and the Company or its subsidiaries. Each Class II Stockholder represents that he has been advised, to the extent he deemed necessary, by legal counsel and tax advisors of his choice in connection with this Agreement. Each Class II Stockholder further represents that, if he is married, his spouse has executed and delivered to the Company the Acknowledgment and Agreement of Spouse set forth at the end of this Agreement. (f) In the event any day upon which a sale, notice or other matter is required to occur hereunder is not a Business Day, such matter shall be deferred until the next Business Day. (g) The section headings contained herein are for the purposes of convenience only and are not intended to define or limit the contents of such sections. The masculine pronoun shall be deemed to include and incorporate the feminine pronoun. (h) Each party hereto shall cooperate and shall take such further action and shall execute and deliver such further documents as may be reasonably requested by any other party in order to carry out the provisions and purposes of this Agreement. (i) Words in the singular shall be read and construed as though in the plural and words in the plural shall be read and construed as though in the singular in all cases where they would so apply. 23 (j) This Agreement may be executed in one or more counterparts, all of which taken together shall be deemed one original. (k) Due to the fact the securities of the Company cannot be readily purchased or sold in the open market, and for other reasons, the parties will be irreparably damaged in the event that this Agreement is not specifically enforced. In the event of a breach or threatened breach of the terms, covenants and/or conditions of this Agreement by any of the parties hereto, the other parties shall, subject to Section 13, in addition to all other remedies, be entitled to a temporary and/or permanent injunction, without showing any actual damage or that monetary damages would not provide an adequate remedy, and/or a decree for specific performance, in accordance with the provisions hereof. Each Stockholder hereby irrevocably and unconditionally consents to the jurisdiction of any California State court or federal court of the United States sitting in the State of California in any action or proceeding relating to this Agreement and consents to service of process in connection therewith by the delivery of notice to such Stockholder's address set forth in this Agreement. (l) This Agreement shall be deemed to be a contract under the laws of the State of Delaware and for all purposes shall be construed and enforced in accordance with the internal laws of such state without regard to the principles of conflicts of law. 13. Additional Class II Stockholders. Prior to issuing any Options, Common -------------------------------- Stock or other right exercisable for or convertible into Common Stock, and as a condition to the receipt thereof, the Company shall require the recipient to execute and deliver a duplicate counterpart of this Agreement, and such recipient shall become a Class II Stockholder for all purposes hereof. 14. Arbitration. ----------- (a) Scope. The parties, except Occidental, mutually consent to the ----- resolution by binding arbitration of all claims or controversies ("CLAIMS") arising out of or related to this Agreement; provided that such consent shall not apply to any claim to which Occidental is a party. Notwithstanding the foregoing, the parties may have recourse to the courts for injunctive or equitable relief in respect of matters arising out of or relating to this Agreement. (b) Deposition. Each party to a dispute shall have the right to take ---------- the deposition of up to two individuals and any expert witness designated by each other party. Each party also shall have the right to make requests for production of documents to any party. The subpoena right specified below shall be applicable to discovery pursuant to this paragraph. Additional discovery may be had only where the arbitrator selected pursuant to this Section 14 so orders, upon a showing of reasonable and substantial need. At least 30 days before the arbitration, the parties must exchange lists of witnesses, including any expert, and copies of all exhibits intended to be used at the arbitration. Each party shall have the right to subpoena witnesses and documents for the arbitration. (c) JAMS. The Arbitration will be held under the auspices of either ---- the American Arbitration Association ("AAA") or Judicial Arbitration & Mediation Services, Inc. ("J.A.M.S."), with the designation of the sponsoring organization to be made by the party who 24 did not initiate the claim. The parties agree that, except as provided in this Agreement, the arbitration shall be in accordance with the AAA's then-current arbitration procedures (if AAA is designated) or the then-current J.A.M.S. arbitration rules (if J.A.M.S. is designated). The arbitration shall be conducted by a single arbitrator selected from the AAA large complex case panel (the "ARBITRATOR"). The arbitration shall take place in Los Angeles, California. (d) Selection of Arbitrator. If the parties to the dispute cannot ----------------------- agree upon the selection of the arbitrator within 30 days from the day the matter is submitted to arbitration, then, on application of any party, the arbitrator shall be designated by the sponsoring organization. (e) Governing Law. The Arbitrator shall apply the substantive law ------------- (and the law of remedies, if applicable) of the state of Delaware. The Arbitrator shall be without jurisdiction to apply any different substantive law, or law of remedies. The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to the interpretation, applicability, enforceability or formation of this Agreement, including but not limited to any claim that all or any part of this Agreement is void or voidable. The arbitration shall be final and binding upon the parties, except as provided in this Agreement. (f) Procedures. The Arbitrator shall have jurisdiction to hear and ---------- rule on pre-hearing disputes and are authorized to hold pre-hearing conferences by telephone or in person, as the Arbitrator deems necessary. The Arbitrator shall have the authority to entertain a motion to dismiss and/or a motion for summary judgment by any party and shall apply the standards governing such motions under the Federal Rules of Civil Procedure. Such proceedings shall be concluded within 180 days of the commencement of the arbitration, as evidenced by the rendering of the award described below. Any party to a dispute, at its expense, may arrange for and pay the cost of a court reporter to provide a stenographic record of proceedings. If such a transcript is prepared, it shall be the official transcript of the proceedings for all purposes. Any party to a dispute, upon request at the close of hearing, shall be given leave to file a post-hearing brief. The time for filing such a brief shall be set by the Arbitrator. (g) Award. The Arbitrator shall render an award and opinion outlining ----- in reasonable detail the findings of fact and conclusions of law upon which the award is based. The award of the Arbitrator shall be final, binding and conclusive on the parties. If the Company is a party to the dispute, the Company shall bear the fees and costs of the Arbitrator. If Company is not a party to the dispute, the parties to the dispute shall equally share the fees and costs of the Arbitrator. Each party shall pay for its own costs and attorneys' fees. 15. Definitions. As used in this Agreement, unless the context requires ----------- otherwise, the capitalized terms described in this Section 15 shall have the meanings indicated herein. (a) Each of the following capitalized terms shall have the meaning ascribed to such term in the section of this Agreement indicated:
Term Section -------------------------------- --------------- Act............................. 15(b)
25
Term Section -------------------------------- --------------- Affiliate....................... 15(b) Agreement....................... Introduction Bona Fide Offer................. 4(b) Business Day.................... 15(b) Callable Securities............. 2(b) Call Purchase Event............. 5(a) Call Option..................... 2(b) Change in Control............... 15(b) Class I Stockholder............. Introduction Class II Stockholder............ Introduction Common Stock.................... Recitals Company......................... Introduction Control......................... 13(b) Demand Registration............. 6(a) Demand Seller................... 6(b) Disproportionate Disposition.... 9 Drag-Along Notice............... 7(b) Drag-Along Sale................. 7(a) Drag-Along Sale Date............ 7(b) Drag-Along Seller............... 15(b) Electing Stockholder............ 4(b) Equity Ownership................ 15(b) Fair Market Value............... 15(b) Fully Diluted Ownership......... 15(b) Future Stockholder.............. 6(b) Future Participants............. 6(a) GEI............................. Introduction GEI Distribution................ 12 Stockholder..................... 6(a) IPO............................. 15(b) Living Trust.................... 15(b) Manager......................... 15(b) NQ Option....................... 2(b) Option Notice................... 4(b) Other Termination............... 5(a) Outside Party................... 4(b) Permanent Disability............ 15(b) Permitted Transfer.............. 4(a) Purchase Notice................. 5(a) Purchaser....................... 2(b) Purchasing Group................ 5(a) Registrable Securities.......... 15(b) Registration Notice............. 6(a)
26
Term Section ------------------------------------------ ------------- Related Transferee........................ 15(b) Retirement................................ 15(b) Rule 144.................................. 15(b) Sale Percentage........................... 7(a) SEC....................................... 15(b) Securities................................ Introduction Seller.................................... 5(a) Subscription Stock........................ 2(a) Tag-Along Notice.......................... 7(e) Tag-Along Seller.......................... 7(d) Third Party............................... 7(a) Transfer.................................. 15(b) Transfer Notice........................... 7(e)
(b) Each of the following capitalized terms shall have the meanings indicated in this clause (b): "ACT" means the Securities Act of 1933, as amended from time to time. "AFFILIATE" has the meaning set forth in Rule 405 under the Act. "BUSINESS DAY" means a day on which banks are open for business in the State of California. "CHANGE IN CONTROL" means any of (i) a sale or other disposition by the Company of all or substantially all of the assets of the Company and its subsidiaries, taken as a whole, or (ii) a merger or consolidation of the Company if, immediately following such merger or consolidation, there is not Control of the surviving entity of such merger or consolidation, or (iii) a sale of capital stock of the Company (by any holder thereof or by the Company) if, immediately following such sale, there is not Control of the Company. "CONTROL" means that the holders of the capital stock of the Company immediately following the Merger (including the Class I Stockholders) hold, in the aggregate, directly and indirectly, the power to elect a majority of the directors of the Company that are not elected pursuant to the provisions of the Preferred Stock (or, as the case may be, the surviving entity of a merger or consolidation of the Company). "EQUITY OWNERSHIP" means the relative interests of the holders of the Company's outstanding Common Stock as of the date of determination. "FAIR MARKET VALUE" of Securities means the fair market value of Securities as determined as of the time of the Call Purchase Event (or other event requiring valuation) by the Company's Board of Directors in the exercise of its reasonable discretion; provided, however, that in the event that the Common -------- ------- Stock is traded publicly on any national securities exchanges) 27 (including without limitation NASDAQ National Market System or the NASDAQ "Small-Cap" Issues System), such fair market value shall be based upon the closing price for such Common Stock on such exchange(s) on the date preceding the Call Purchase Event (or other event requiring valuation). "FULLY DILUTED OWNERSHIP" means, as to any Stockholder, his or its aggregate ownership of all equity interests in the Company, including all Options and all other securities exercisable, convertible or exchangeable for Common Stock. "IPO" means the completion of the first underwritten public offering of the Company's shares of Common Stock registered under the Act after the date hereof "LIVING TRUST" means a revocable living trust established by the Purchaser for estate planning purposes and pursuant to which no one other than the Purchaser and/or the Purchaser's spouse is the beneficiary during the Purchaser's lifetime. "MANAGER" means the investment banking firm or firms designated by the Stockholders effecting a Demand Registration as the managing underwriter(s) of an offering registered pursuant to this Agreement, which firm or firms shall be the existing investment bankers for or other nationally recognized investment bankers reasonably acceptable to the Company. "PERMANENT DISABILITY" of a Class II Stockholder means that (i) the Class II Stockholder becomes physically or mentally incapacitated or disabled so that he is unable to perform for the Company substantially the same services as he performed prior to incurring such incapacity or disability, and (ii) such incapacity or disability continues for a period of 120 days, whether or not consecutive, over a period of six consecutive months; provided, however, that -------- ------- (x) the Company, at its option and expense, shall be entitled to retain a physician to confirm the existence of such incapacity or disability, and (y) the determination of such physician shall be binding upon the Company and the Class II Stockholder. "REGISTRABLE SECURITIES" means the Common Stock and the Warrant Shares held by the Stockholders, subject to adjustment pursuant to Section 8 hereof. "RELATED TRANSFEREE" means (i) in the case of any individual, any of the Stockholder's spouse, adult lineal descendants, adult spouses of such lineal descendants, a Living Trust, trusts solely for the benefit of the Stockholder's spouse or the Stockholder's minor or adult lineal descendants, and (in the event of the Stockholder's death) the Stockholder's personal representatives (in their capacities as such), estate or named beneficiaries and (ii) in the case of a business organization, any individual or other business organization controlled by or under common control with such business organization, as such terms are defined within the meaning of Rule 405 under the Act. "RETIREMENT" means retirement pursuant to the Company's standard retirement policy in effect from time to time but in no event prior to the age of 65, unless pursuant to a specific determination by the Board of Directors of the Company. 28 "RULE 144" means Rule 144 under the Act, as amended from time to time, or any successor or similar rule. "SEC" means the Securities and Exchange Commission. "TRANSFER," used as a noun, means any sale, pledge, gift, bequest, transfer, assignment or any other encumbrance or disposition, whether direct or indirect, conditional or unconditional. "TRANSFER," used as a verb, means to make a Transfer. 29 IN WITNESS WHEREOF, the parties have executed this Agreement as of the first date written above. Number of Shares of Purchase LESLIE'S POOLMART, INC. Subscription Stock Price ------------------ -------- By /s/ Brian P. McDermott ---------------------------- Its PRESIDENT & C.E.O ---------------------------- GREEN EQUITY INVESTORS II, L.P. By: Grand Avenue Capital Partners, L.P., its sole general partner By: Grand Avenue Capital Corporation, its sole general partner By: [SIGNATURE ILLEGIBLE] ------------------------------------------ Name __________________________________________ Title _________________________________________ /s/ Richard H. Hillman ----------------------------------------------- Richard H. Hillman /s/ Michael J. Fourticq ----------------------------------------------- Michael J. Fourticq /s/ Greg Fourticq ----------------------------------------------- Greg Fourticq /s/ Brian P. McDermott ----------------------------------------------- Brian P. McDermott /s/ Manette McDermott / Brian McDermott ----------------------------------------------- Brian P. McDermott and Manette J. McDermott, T.R.U.A. DTD 3/15/90 The McDermott Family Trust /s/ Robert Olsen ----------------------------------------------- Robert Olsen IN WITNESS WHEREOF, the parties have executed this Agreement as of the first date written above. Number of Shares of Purchase LESLIE'S POOLMART, INC. Subscription Stock Price ------------------ -------- By ____________________________ Its ____________________________ GREEN EQUITY INVESTORS II, L.P. By: Grand Avenue Capital Partners, L.P., its sole general partner By: Grand Avenue Capital Corporation, its sole general partner By: __________________________________________ Name __________________________________________ Title _________________________________________ _______________________________________________ Richard H. Hillman _______________________________________________ Michael J. Fourticq /s/ Greg Fourticq ----------------------------------------------- Greg Fourticq _______________________________________________ Brian P. McDermott _______________________________________________ Brian P. McDermott and Manette J. McDermott, T.R.U.A. DTD 3/15/90 The McDermott Family Trust _______________________________________________ Robert Olsen 30 IN WITNESS WHEREOF, the parties have executed this Agreement as of the first date written above. Number of Purchase Price Shares of of Subscription Common Stock Stock ------------ --------------- LESLIE'S POOLMART, INC. By ____________________________________ Its ____________________________________ GREEN EQUITY INVESTORS II, L.P. 1,055,172 By: Grand Avenue Capital Partners, L.P., its sole general partner By: Grand Avenue Capital Corporation, its sole general partner By:________________________________________ Name_______________________________________ Title______________________________________ OCCIDENTAL PETROLEUM CORPORATION By /s/ Stephen I. Chazen ---------------------------------------- Name Stephen I. Chazen -------------------------------------- Title Executive Vice President - Corporate Development ------------------------------------- 22,414 ___________________________________________ Richard H. Hillman 160,539 ___________________________________________ Michael J. Fourticq 10,000 ___________________________________________ Greg Fourticq ___________________________________________ Brian P. McDermott 30 OCCIDENTAL PETROLEUM CORPORATION By _________________________________________ Name _______________________________________ Title ______________________________________ CLASS II STOCKHOLDERS --------------------- /s/ Robert D. Olsen -------------------------------------------- Robert Olsen /s/ Cynthia G. Watts -------------------------------------------- Cynthia G. Watts /s/ Mike Adamson -------------------------------------------- Mike Adamson /s/ Richard Grice -------------------------------------------- Richard Grice /s/ Patrick Murphy -------------------------------------------- Patrick Murphy /s/ Charles Vasquez -------------------------------------------- Charles Vasquez 31 /s/ Jodi Knight -------------------------------------------- Jodi Knight /s/ Mark Lum ------------------------------------------- Mark Lum /s/ Marvin Schutz ------------------------------------------- Marvin Schutz /s/ Gerald Karmele ------------------------------------------- Gerald Karmele /s/ James Lowe ------------------------------------------- James Lowe /s/ Marie Sousa ------------------------------------------- Marie Sousa /s/ Kris Raney ------------------------------------------- Kris Raney /s/ Jodi Knight -------------------------------------------- Jodi Knight /s/ Mark Lum ------------------------------------------- Mark Lum /s/ Marvin Schutz ------------------------------------------- Marvin Schutz /s/ Gerald Karmele ------------------------------------------- Gerald Karmele /s/ James Lowe ------------------------------------------- James Lowe /s/ Marie Sousa ------------------------------------------- Marie Sousa /s/ Kris Raney ------------------------------------------- Kris Raney ACKNOWLEDGMENT AND AGREEMENT OF SPOUSE -------------------------------------- The undersigned, being the spouse of a Class II Stockholder, hereby agrees to be bound by the provisions of this Agreement. /s/ Christine M Lum ----------------------------------- Name Christine M Lum ------------------------------ 33 ACKNOWLEDGMENT AND AGREEMENT OF SPOUSE -------------------------------------- The undersigned, being the spouse of a Class II Stockholder, hereby agrees to be bound by the provisions of this Agreement. /s/ Vickie Vasquez ----------------------------------- Name VICKIE VASQUEZ ------------------------------- 33 ACKNOWLEDGMENT AND AGREEMENT OF SPOUSE -------------------------------------- The undersigned, being the spouse of a Class II Stockholder, hereby agrees to be bound by the provisions of this Agreement. /s/ Sandra Murphy ----------------------------------- Name SANDRA MURPHY ------------------------------- 33 ACKNOWLEDGMENT AND AGREEMENT OF SPOUSE -------------------------------------- The undersigned, being the spouse of a Class II Stockholder, hereby agrees to be bound by the provisions of this Agreement. /s/ Steve Knight ----------------------------------- Name Steve Knight ------------------------------- 33 ACKNOWLEDGMENT AND AGREEMENT OF SPOUSE -------------------------------------- The undersigned, being the spouse of a Class II Stockholder, hereby agrees to be bound by the provisions of this Agreement. /s/ Katherine Farr Olsen ----------------------------------- Name Katherine Farr Olsen ------------------------------- 33 ACKNOWLEDGMENT AND AGREEMENT OF SPOUSE -------------------------------------- The undersigned, being the spouse of a Class II Stockholder, hereby agrees to be bound by the provisions of this Agreement. /s/ Adelle W. Hertinson ----------------------------------- Name ADELLE W. HERTINSON ------------------------------- 33 ACKNOWLEDGMENT AND AGREEMENT OF SPOUSE -------------------------------------- The undersigned, being the spouse of a Class II Stockholder, hereby agrees to be bound by the provisions of this Agreement. /s/ Susan K. Grice ----------------------------------- Name Susan K. Grice ------------------------------- 33 ACKNOWLEDGMENT AND AGREEMENT OF SPOUSE -------------------------------------- The undersigned, being the spouse of a Class II Stockholder, hereby agrees to be bound by the provisions of this Agreement. /s/ Linda C. Sch???? ----------------------------------- Name Linda C. Sch??? ------------------------------- 33 ANNEX A COMMON STOCK ------------ CAPITAL STRUCTURE -----------------
Fully Diluted Common Shares ------------ Michael J. Fourticq 160,539 Brian McDermott 166,552 Richard H. Hillman 22,414 Greg Fourticq 10,000 ------------ Total Stock Remaining Outstanding 359,505 Michael J. Fourticq 4,976 Robert Olsen 52,761 Other Management 25,862 ------------ Total Options 83,599 Robert Olsen--Cash 16,966 Cynthia Watts--Cash 2,000 Green Equity Investors II, L.P. 1,055,172 Occidental Warrants 316,092 Management Incentive Stock Options 273,946 Total 2,107,280 ============
A-1 ANNEX B TERMS OF NQ OPTION PLAN ----------------------- Number of Shares....... 83,599 total. The number of shares covered by each individual grant will be the quotient of (i) the product of (x) the number of shares subject to the corresponding canceled option multiplied by (y) the difference between $14.50 and such canceled option's exercise price, divided by (ii) $9.50. In the case of Messrs. Fourticq and Olsen, the foregoing formula results in the issuance of options for a maximum of 4,976 and 52,761 shares, respectively, with the balance to be allocated to management as heretofore agreed. Exercise Price......... $5.00 Type of Options........ Non-Qualified, ten-year options Termination of Employment.......... A portion of options and shares are subject to repurchase upon termination of employment prior to the second anniversary of the Closing Date as set forth in the Agreement, all other NQ Options remain exercisable notwithstanding employment status of optionee Adjustment............. The number of shares subject to NQ Options, and the exercise price, will be proportionately adjusted for each subdivision and combination of Company common stock. Acceleration........... NQ Options will accelerate and may be cashed out upon the occurrence of a Change of Control. In a cash-out situation, Class I Optionholders will be treated as Class I Stockholders and Class II Optionholders will be treated as Class II Stockholders.
B-1 ANNEX C TERMS OF INCENTIVE STOCK OPTION PLAN ------------------------------------ Number of Shares....... 273,946 Exercise Price......... Fair Market Value (opening equity price) Type of Options........ Incentive, ten-year options Vesting................ One-third (1/3) on the first, second and third anniversaries of the Closing Date, except in respect of performance portion Performance Portion.... Options equivalent to 71,647 of the fully-diluted Common Stock outstanding on the Closing Date vest upon achievement (assuming continued employment) of performance targets as follows: EBITDA for Year Ended: Number of Stores Opened by: --------------------- -------------------------- $18 M.............. 1997 30...........March 31, 1998 $22M .............. 1998 30...........March 31, 1999 $26M .............. 1999 30...........March 31, 2000 Note: Vesting also occurs if the store opening target ---- is met in each prior year and the Company achieves 95% of a year's EBITDA target and the sum of that year and the following year's EBITDA equals 100% of the combined targets. EBITDA means the Consolidated Net Income of the Company (i) plus (minus) any extraordinary or nonrecurring gain (loss); (ii) plus (minus) any gain (loss) due solely to fluctuations in currency values; (iii) plus provision for taxes; (iv) plus consolidated interest expense, whether paid or accrued and whether or not capitalized (and including any amortization of deferred financing costs); (v) plus any noncash charges for such period (including LIFO charges); (vi) plus depreciation, amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) and other noncash charges.
C-1 Termination of Employment............. Vested options may be exercised for 90 days post- termination; unvested options are forfeited and become eligible for future grant at Fair Market Value Adjustment............. The number of shares subject to Options, and the exercise price, will be proportionately adjusted for each subdivision and combination of Company common stock Acceleration........... ISO Options will accelerate and may be cashed out upon the occurrence of a Charge of Control. In a cash-out situation, Class I Optionholders will be treated as Class I Stockholders and Class II Optionholders will be treated as Class II Stockholders.
C-2 EX-10.10 10 FORM OF DIRECTOR'S AND OFFICER'S INDEMNIFICATION EXHIBIT 10.10 FORM OF INDEMNIFICATION AGREEMENT This Indemnification Agreement, dated as of June 11, 1997, is made by and between Leslie's Poolmart, Inc., a Delaware corporation (the "Corporation"), and ((NAME)), whose name, address and position(s) at the Corporation and/or any of the direct or indirect subsidiaries of the Corporation appear on the signature page hereto ("Indemnitee"). RECITALS A. Indemnitee is currently serving as, or is assuming the position of, a director and/or officer of the Corporation and/or, at the Corporation's request, a director, officer, employee and/or agent of another corporation, partnership, joint venture, trust or other enterprise, and the Corporation wishes Indemnitee to continue in such capacity(ies); B. The Corporation and Indemnitee recognize that the present state of the law is too uncertain to provide the Corporation's directors and officers with adequate and reliable advance knowledge or guidance with respect to the legal risks and potential liabilities to which they may become personally exposed as a result of performing their duties for the Corporation; C. The Certificate of Incorporation (the "Certificate") and the Bylaws (the "Bylaws") of the Corporation each provide that the Corporation may indemnify, to the fullest extent permitted by law, certain persons, including directors, officers, employees or agents of the Corporation, against specified expenses and losses arising out of certain threatened, pending or completed actions, suits or proceedings; D. Section 145(f) of the Delaware General Corporation Law (the "DGCL") expressly recognizes that the indemnification provided by the other subsections of Section 145 of the DGCL shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office; E. Indemnitee has indicated that s/he may not be willing to serve, or continue to serve, as a director and/or officer of the Corporation and/or, at the Corporation's request, as a director, officer, employee and/or agent of another corporation, partnership, joint venture, trust or other enterprise in the absence of an indemnification agreement of the Corporation; and F. The Board of Directors of the Corporation has concluded that, to retain and attract talented and experienced individuals to serve as directors and officers of the Corporation and to encourage such individuals to take the business risks necessary for the success of the Corporation, it is necessary for the Corporation to contractually indemnify them, and to assume for itself liability for expenses and damages in connection with claims against them in connection with their service to the Corporation, and has further concluded that the failure to provide such contractual indemnification could result in great harm to the Corporation and its stockholders. AGREEMENT NOW, THEREFORE, the Corporation and Indemnitee agree as follows: 1. Definitions. ----------- (a) "Expenses" means, for the purposes of this Agreement, all direct and indirect costs of any type or nature whatsoever (including, without limitation, any fees and disbursements of Indemnitee's counsel, accountants and other experts and other out-of-pocket costs) actually and reasonably incurred by Indemnitee in connection with the investigation, preparation, defense or appeal of a Proceeding; provided, however, that Expenses shall not include judgments, -------- ------- fines, penalties or amounts paid in settlement of a Proceeding unless such matters may be indemnified under applicable provisions of the DGCL. Expenses shall include any federal, state, local and foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of payments under this Agreement. (b) "Proceeding" means, for the purposes of this Agreement, any threatened, pending or completed action, suit, arbitration or proceeding whether civil, criminal, administrative or investigative (including actions, suits or proceedings brought by or in the right of the Corporation) in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a director or officer of the Corporation, by reason of any action taken by him or of any inaction on his part while acting as such director or officer or by reason of the fact that s/he is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, was a fiduciary of any trust or employee benefit plan or was a director and/or officer of the foreign or domestic corporation which was a predecessor corporation to the Corporation or of another enterprise at the request of such predecessor corporation, whether or not s/he is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. 2. Indemnification. --------------- (a) Third Party Proceedings. To the fullest extent permitted by law, ----------------------- the Corporation shall indemnify and hold harmless Indemnitee against Expenses and liabilities of any type whatsoever (including, but not limited to, judgments, fines, penalties, and amounts paid in settlement (if the settlement is approved in advance by the Corporation, which approval shall not be unreasonably withheld)) actually and reasonably incurred by Indemnitee in connection with a Proceeding (other than a Proceeding by or in the right of the Corporation) if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner that Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation, or, with respect to any criminal Proceeding, had reasonable cause to believe that Indemnitee's conduct was unlawful. Notwithstanding the foregoing, no indemnification shall be made in any criminal proceeding where Indemnitee has been adjudged guilty unless a disinterested majority of the directors determines that Indemnitee did not receive, participate in or share in any pecuniary benefit to the detriment of the Corporation and, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for Expenses or liabilities. 2 (b) Proceedings by or in the Right of the Corporation. To the fullest ------------------------------------------------- extent permitted by law, the Corporation shall indemnify and hold harmless Indemnitee against Expenses actually and reasonably incurred by Indemnitee in connection with the defense or settlement of a Proceeding by or in the right of the Corporation to procure a judgment in its favor if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in, or not opposed to, the best interests of the Corporation. Notwithstanding the foregoing, no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Corporation in the performance of Indemnitee's duty to the Corporation unless and only to the extent that the court in which such Proceeding is or was pending shall determine upon application that, in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for Expenses and then only to the extent that the court shall determine. (c) Scope. Notwithstanding any other provision of this Agreement ----- other than Sections 3 and 13, the Corporation shall indemnify Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by other provisions of this Agreement, the Certificate, the Bylaws or statute. 3. Limitations on Indemnification. Any other provision herein to the ------------------------------ contrary notwithstanding, the Corporation shall not be obligated pursuant to the terms of this Agreement: (a) Excluded Acts. To indemnify Indemnitee for any acts or omissions ------------- or transactions from which a director may not be relieved of liability under Section 102(b)(7) of the DGCL; or (b) Claims Initiated by Indemnitee. To indemnify or advance Expenses ------------------------------ to Indemnitee with respect to Proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the DGCL, but such indemnification or advancement of Expenses may be provided by the Corporation in specific cases if a majority of the disinterested directors has approved the initiation or bringing of such suit; or (c) Lack of Good Faith. To indemnify Indemnitee for any Expenses ------------------ incurred by Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by Indemnitee in such proceeding was not made in good faith or was frivolous; or (d) Insured Claims. To indemnify Indemnitee for Expenses or -------------- liabilities of any type whatsoever (including, but not limited to, judgments, fines or penalties, and amounts paid in settlement) which have been paid directly to or on behalf of Indemnitee by an insurance carrier under a policy of directors' and officers' liability insurance maintained by the Corporation or any other policy of insurance maintained by the Corporation or Indemnitee; or (e) Claims Under Section 16(b). To indemnify Indemnitee for Expenses -------------------------- and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. 3 4. Determination of Right to Indemnification. Upon receipt of a ----------------------------------------- written claim addressed to the Board of Directors for indemnification pursuant to Section 2 of this Agreement, the Corporation shall determine by any of the methods set forth in Section 145(d) of the DGCL whether Indemnitee has met the applicable standards of conduct that make it permissible under applicable law to indemnify Indemnitee. If a claim under Section 2 of this Agreement is not paid in full by the Corporation within thirty days after such written claim has been received by the Corporation, Indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, unless such action is dismissed by the court as frivolous or brought in bad faith, Indemnitee shall be entitled to be paid also the expense of prosecuting such claim. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to make a determination prior to the commencement of such action that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct under applicable law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has not met the applicable standard of conduct. The court in which such action is brought shall determine whether Indemnitee or the Corporation shall have the burden of proof concerning whether Indemnitee has or has not met the applicable standard of conduct. 5. Advancement and Repayment of Expenses. The Expenses incurred by ------------------------------------- Indemnitee in defending and investigating any Proceeding shall be paid by the Corporation prior to the final disposition of such Proceeding within thirty days after receiving from Indemnitee copies of invoices presented to Indemnitee for such Expenses and an undertaking by or on behalf of Indemnitee to the Corporation to repay such amount to the extent it is ultimately determined that Indemnitee is not entitled to indemnification. In determining whether or not to make an advance hereunder, the ability of Indemnitee to repay shall not be a factor. Notwithstanding the foregoing, in a proceeding brought by the Corporation directly, in its own right (as distinguished from an action brought derivatively or by any receiver or trustee), the Corporation shall not be required to make the advances called for hereby if a majority of the disinterested directors determine that it does not appear that Indemnitee has met the standards of conduct that made it permissible under applicable law to indemnify Indemnitee and that the advancement of Expenses would not be in the best interests of the Corporation and its stockholders. 6. Partial Indemnification. If Indemnitee is entitled under any ----------------------- provision of this Agreement to indemnification or advancement by the Corporation of some or a portion of any Expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, penalties, and amounts paid in settlement) incurred by him in the investigation, defense, settlement or appeal of a Proceeding, but is not entitled to indemnification or advancement of the total amount thereof, the Corporation shall nevertheless indemnify or pay advancements to Indemnitee for the portion of such Expenses or liabilities to which Indemnitee is entitled. 7. Notice to Corporation by Indemnitee. Indemnitee shall notify the ----------------------------------- Corporation in writing of any matter with respect to which Indemnitee intends to seek indemnification hereunder as soon as reasonably practicable following the receipt by Indemnitee of written notice thereof; provided that any delay in so notifying the Corporation shall not constitute a waiver by Indemnitee of his rights hereunder. The written notification to the Corporation shall be addressed to the Board of Directors and shall include a description of the nature of the Proceeding and the facts underlying the Proceeding and be accompanied by copies of any documents filed with the court, if any, in which the Proceeding is pending. In 4 addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. 8. Defense of Claim. In the event that the Corporation shall be ---------------- obligated under Section 5 hereof to pay the Expenses of any Proceeding against Indemnitee, the Corporation, if appropriate, shall be entitled to assume the defense of such Proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Corporation, the Corporation will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Proceeding; provided that (i) Indemnitee shall have the right to employ his own counsel in any such Proceeding at Indemnitee's expense, and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Corporation, or (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Corporation and Indemnitee in the conduct of such defense or (C) the Corporation shall not, in fact, have employed counsel to assume the defense of such Proceeding, then the fees and expenses of Indemnitee's counsel shall be paid by the Corporation. 9. Attorneys' Fees. If any legal action is necessary to enforce the --------------- terms of this Agreement, the prevailing party shall be entitled to recover, in addition to other amounts to which the prevailing party may be entitled, actual attorneys' fees and court costs as may be awarded by the court. 10. Continuation of Obligations. All agreements and obligations of --------------------------- the Corporation contained herein shall continue during the period Indemnitee is a director or officer of the Corporation, or is or was serving at the request of the Corporation as a director, officer, fiduciary, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, and shall continue thereafter so long as Indemnitee shall be subject to any possible Proceeding by reason of the fact that Indemnitee served in any capacity referred to herein. 11. Assumption of Prior Agreement; Successors and Assigns. ----------------------------------------------------- (a) The Corporation hereby expressly assumes the obligations of Leslie's California, a California corporation (the "Predecessor"), under the Predecessor's bylaws, articles and indemnification agreements as to all acts or omissions occuring prior to the effective time (the "Effective Time") of the merger of the Predecessor with and into the Corporation. (b) This Agreement establishes contract rights that shall be binding upon, and shall inure to the benefit of, the successors, assigns, heirs and legal representatives of the parties hereto. 12. Non-exclusivity. --------------- (a) The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed to be exclusive of any other rights that Indemnitee may have under any provision of law, the Certificate or Bylaws, the vote of the Corporation's stockholders or disinterested directors, other agreements or otherwise, both as to action in his official capacity and action in another capacity while occupying his position as a director or officer of the Corporation; provided, however, that as to all acts or omissions 5 occurring after the Effective Time, this Agreement supercedes in its entirety any and all prior agreements with respect to the subject matter hereof between Indemnitee and the Predecessor. (b) In the event of any changes, after the date of this Agreement, in any applicable law, statute, or rule that expand the right of a Delaware corporation to indemnify its directors and officers, Indemnitee's rights and the Corporation's obligations under this Agreement shall be expanded to the fullest extent permitted by such changes. In the event of any changes in any applicable law, statute or rule, that narrow the right of a Delaware corporation to indemnify a director and officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder. 13. Effectiveness of Agreement. This Agreement shall be effective as -------------------------- of the date set forth on the first page and may apply to acts or omissions of Indemnitee that occurred prior to such date if Indemnitee was a director or officer of the Corporation or its predecessor, or was serving at the request of the Corporation or its predecessor as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the time such act or omission occurred. 14. Severability. Nothing in this Agreement is intended to require ------------ or shall be construed as requiring the Corporation to do or fail to do any act in violation of applicable law. The Corporation's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 14. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify Indemnitee to the fullest extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 15. Governing Law. This Agreement shall be interpreted and enforced ------------- in accordance with the laws of the State of Delaware without regard to its rules pertaining to conflicts of laws. To the extent permitted by applicable law, the parties hereby waive any provisions of law that render any provision of this Agreement unenforceable in any respect. 16. Notice. All notices, requests, demands and other communications ------ under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressed, on the date of such receipt, or (ii) if delivered by facsimile transmission to the recipient followed by a copy sent by mail on the same date as the facsimile transmission, on the date of receipt of such facsimile transmission, or (iii) if mailed by certified or registered mail with postage prepaid, on the third business day after the mailing date. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 17. Mutual Acknowledgment. Both the Corporation and Indemnitee --------------------- acknowledge that in certain instances, federal law or applicable public policy may prohibit the Corporation from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Corporation has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Corporation's right under public policy to indemnify Indemnitee. 6 18. Counterparts. This Agreement may be executed in several ------------ counterparts, each of which shall constitute an original. 19. Amendment and Termination. No amendment, modification, ------------------------- termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 7 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year set forth above. LESLIE'S POOLMART, INC. A DELAWARE CORPORATION By: __________________________________________ Title: Chief Executive Officer and President Notices should be addressed to: Chief Financial Officer Leslie's Poolmart, Inc. 20630 Plummer Street Chatsworth, California 91311 INDEMNITEE: ____________________________ ((NAME)) ____________________________ Street Address ____________________________ City, State and Zip Code Position(s): ((POSITION 1)) ((POSITION 2)) ((POSITION 3)) 8 EX-10.11 11 MANAGEMENT AGREEMENT EXHIBIT 10.11 [EXECUTION COPY] MANAGEMENT AGREEMENT This MANAGEMENT AGREEMENT (the "Agreement"), dated as of June 11, 1997, is made by and between, Leslie's Poolmart, Inc., a Delaware corporation (the "Company"), and LEONARD GREEN & PARTNERS, L.P. ("LGP"). WHEREAS, the Company desires to obtain from LGP, and LGP desires to provide, certain management, consulting and financial planning services on an ongoing basis and certain financial advisory and investment banking services in connection with major financial transactions that may be undertaken from time to time in the future. NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereby agree as follows: 1. RETENTION. --------- 1.1 General Services. Subject to the terms and conditions hereof, LGP ---------------- will provide management, consulting and financial planning services to the Company on an ongoing basis in connection with the operation and growth of the Company and its respective subsidiaries during the term of this Agreement (the "General Services"). 1.2 Major Transaction Services. Subject to the terms and conditions -------------------------- hereof, either or both of LGP and Hancock Park Associates ("HPA") may provide financial advisory and investment banking services to the Company in connection with major financial transactions that may be undertaken from time to time in the future ("Major Transaction Services" and, together with the General Services, the "Services"). 1.3 Approval Requirements. In addition to any applicable requirements in --------------------- the Company's charter, preferred stock or financing documents, no Major Transaction Services shall be provided by LGP nor fees paid to LGP in connection therewith pursuant to Sections 1.2 or 2.2 unless, in each such case, such Services and fees are approved (i) if one of Messrs. Michael J. Fourticq and Brian P. McDermott then holds at least one third of his Fully Diluted Ownership (as defined in the Stockholders Agreement and Subscription Agreement of even date herewith among the Company and the stockholders named therein (the "Stockholders Agreement")), by such individual, and otherwise by a majority of the disinterested directors of the Company or (ii) by the board of directors of the Company after it is presented with a fairness opinion of a nationally recognized investment bank. 2. COMPENSATION. ------------ 2.1 General Services Fee. In consideration of the General Services, the -------------------- Company shall pay LGP an aggregate annual fee of $244,800. Such fee shall be payable pro rata for the initial month and thereafter in equal monthly installments of $20,400, in advance, on the first day of each month commencing on the first such day following the date hereof. Notwithstanding the foregoing, at such time as Green Equity Investors II, L.P. or an affiliate thereof (collectively, "Green") owns 50% or less of the shares of the Company it holds on the date hereof, such fee shall be automatically reduced by 50%. 2.2 Major Transaction Service Fee. In consideration of Major Transaction ----------------------------- Services provided by HPA or LGP from time to time, the Company may pay reasonable and customary fees for services of like kind, taking into consideration all relevant factors, including but not limited to, the complexity of the subject transaction, the time devoted to providing such services and the value of HPA's or LGP's investment banking expertise and relationships within the business and financial community. 2.3 Merger Transaction Fees. In connection with the transactions ----------------------- contemplated by the Agreement and Plan of Merger dated as of February 26, 1997 by and among Leslie's Poolmart, a California corporation, LPM Holdings, Inc. and Poolmart USA (collectively, the "Merged Companies") in connection with which each of LGP and HPA has provided financial advisory and certain other services in connection with the Merger Transaction (as defined in the Agreement) and the financing thereof, including, without limitation (a) the identification and evaluation of the Merger Transaction as an appropriate investment opportunity, (b) negotiations with other investors regarding the terms of the Merger Transaction, (c) the selection, retention and supervision of outside legal counsel, (d) the incorporation and organization of the Merged Companies, (e) preparation and filing of federal state and local tax, securities and other required filings and related advice required in connection with the Merger Transaction, (f) conducting negotiations with investors and lenders to the Company in connection with the financing of the Merger Transaction and (g) reviewing documentation relating to the Merger Transaction and the financing of the Merger Transaction, the Company hereby agrees to pay a fee of $1,400,000 to LGP on the date hereof. LGP will immediately pay one half of such fee to Hancock Park Associates. 2.4 Expenses. In addition to the fees to be paid to LGP under Sections -------- 2.1 and 2.2 hereof, the Company shall pay to, or on behalf of, HPA or LGP, promptly as billed, all reasonable out-of-pocket expenses incurred by LGP in connection with the Services rendered hereunder. 3. TERM. ---- 3.1 Termination. This Agreement shall terminate on the first to occur of ----------- (i) the tenth anniversary of the date of this Agreement and (ii) the date on which Green shall own 25% or less of the shares of the Company it holds on the date hereof. Notwithstanding the foregoing, this Agreement may be terminated at any time by LGP by written notice to the Company. 3.2 Survival of Certain Obligations. Notwithstanding any other provision ------------------------------- hereof, the Company's obligation to pay amounts due with respect to periods prior to the termination hereof pursuant to Section 2 and the provisions of Section 5 shall survive any termination of this Agreement. 2 4. DECISIONS/AUTHORITY OF MANAGEMENT ADVISOR. ----------------------------------------- 4.1 Decisions by the Company. The Company reserves the right to make all ------------------------ decisions with regard to any matter upon which LGP has rendered its advice and consultation. 4.2 Independent Contractor. LGP shall act solely as an independent ---------------------- contractor and shall have complete charge of its personnel engaged in the performance of the Services. As an independent contractor, LGP shall have authority only to act as an advisor to the Company and shall have no authority to enter into any agreement or to make any representation, commitment or warranty binding upon the Company or to obtain or incur any right, obligation or liability on behalf of the Company. 5. INDEMNIFICATION. --------------- 5.1 Indemnification/Reimbursement of Expenses. The Company shall (i) ----------------------------------------- indemnify, defend and hold harmless LGP, its affiliates, and the partners, directors, officers, employees, agents and controlling persons of LGP and their respective affiliates (collectively, the "INDEMNIFIED PARTIES") to the fullest extent permitted by law, from and against any and all losses, claims, damages and liabilities, joint or several, to which any Indemnified Party may become subject, caused by, related to or arising out of the Services or any other advice or services contemplated by this Agreement or the engagement of LGP pursuant to, and the performance by LGP of the Services contemplated by, this Agreement, and (ii) promptly reimburse each Indemnified Party for all costs and expenses (including reasonable attorneys' fees and expenses), as incurred, in connection with the investigation of, preparation for or defense of any pending or threatened claim or any action or proceeding arising therefrom, whether or not such Indemnified Party is a party and whether or not such claim, action or proceeding is initiated or brought by or on behalf of the Company and whether or not resulting in any liability. 5.2. Limited Liability. The Company shall not be liable under the ----------------- indemnification contained in Section 5.1 to the extent that such loss, claim, damage, liability, cost or expense is found in a final non-appealable judgment by a court to have resulted from LGP's willful misconduct or gross negligence. The Company further agrees that no Indemnified Party shall have any liability (whether direct or indirect, in contract, tort or otherwise) to the Company, holders of their securities or their creditors related to or arising out of the engagement of LGP pursuant to, or the performance by LGP of the Services contemplated by, this Agreement, except to the extent that any loss, claim, damage, liability, cost or expense is found in a final non-appealable judgment by a court to have resulted from LGP's willful misconduct or gross negligence. 5.3 Contribution. In order to provide for just and equitable ------------ contribution, if a claim for indemnification pursuant to this Agreement is made but it is found in a final non-appealable judgment by a court that such indemnification may not be enforced in such case, even though the express provisions hereof provide for indemnification in such case, then the Company, on the one hand, and LGP, on the other hand, shall contribute to the losses, claims, damages, liabilities, costs and expenses to which the Indemnified Persons may be subject in accordance with the relative benefits received by the Company, on the one hand, and LGP, on the other hand, and also the 3 relative fault of the Company, on the one hand, and LGP, on the other hand, in connection with the statements, acts or omissions which resulted in such losses, claims, damages, liabilities, costs and expenses and the relevant equitable considerations shall also be considered. No person found liable for a fraudulent misrepresentation shall be entitled to contribution from any person who is not also found liable for such fraudulent misrepresentation. Notwithstanding the foregoing, LGP shall not be obligated to contribute any amount hereunder that exceeds the amount of fees previously received by it pursuant to this Agreement. 6. MISCELLANEOUS. ------------- 6.1 Assignment. Neither the Company nor LGP shall assign this Agreement ---------- or the rights and obligations hereunder, in whole or in part, without the prior written consent of the other; provided, however, that, without obtaining such -------- ------- consent, LGP may assign this Agreement or its rights and obligations hereunder to (i) any of its affiliates; (ii) any investment manager, investment advisor or partner of LGP, or any principal or beneficial owner of any of the foregoing; or (iii) any investment fund, investment account or investment entity whose investment manager, investment advisor or partner, or any principal or beneficial owner of any of the foregoing, is either LGP or any person identified in (i) or (ii) above. Subject to the foregoing, this Agreement will be binding upon and inure solely for the benefit of the parties hereto and their respective successors and assigns, and no other person shall acquire or have any right hereunder or by virtue hereof. 6.2 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of the State of California as applied to contracts made and performed within the State of California without regard to principles of conflict of laws. 6.3 Severability. If any term, provision, covenant or restriction of this ------------ Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their best efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. 6.4 Entire Agreement. This Agreement contains the entire agreement ---------------- between the parties with respect to the subject matter of this Agreement and memorializes and supersedes all written or verbal representations, warranties, commitments and other understandings prior to the date of this Agreement. 6.5 Further Assurances. Each party hereto agrees to use all reasonable ------------------ efforts to obtain all consents and approvals and to do all other things necessary to consummate the transactions contemplated by this Agreement. The parties agree to take such further action and to deliver or cause to be delivered any additional agreements or instruments as any of them may reasonably request for the purpose of carrying out this Agreement and the agreements and transactions contemplated hereby. 4 6.6 Attorneys' Fees. In any action or proceeding brought to enforce any --------------- provision of this Agreement, or where any provision hereof is validly asserted as a defense, the prevailing party, as determined by the court, shall be entitled to recover reasonable attorneys' fees in addition to any other available remedy. 6.7 Headings. The headings in this Agreement are for convenience and -------- reference only and shall not limit or otherwise affect the meaning hereof. 6.8 Amendment and Waiver. This Agreement may be amended, modified or -------------------- supplemented, and waivers or consents to departures from the provisions hereof may be given, provided that the same are in writing and signed by each of the parties hereto. 6.9 Dispute Resolution. Any dispute amongst any of the Company, LGP or ------------------ HPA arising under or resulting from this Agreement shall be deemed to be a dispute described under Section 14 of the Stockholders Agreement and shall be subject to arbitration as set forth therein. 6.10 Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 5 IN WITNESS WHEREOF, the parties have executed this Management Services Agreement on the date first appearing above. LESLIE'S POOLMART, INC. By: Brian McDermott -------------------------------------- Name: BRIAN MCDERMOTT ------------------------------------ Title: PRESIDENT & C.E.O ----------------------------------- LEONARD GREEN & PARTNERS, L.P. By: LGP MANAGEMENT, INC. By: Gregory J Annick --------------------------------- Gregory J. Annick,Vice President AGREED TO AND ACCEPTED: HANCOCK MANAGEMENT PARTNERS, INC. By: Brian McDermott -------------------------------------- Brian P. McDermott,Vice President EX-11.1 12 COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES EXHIBIT 11.1 LESLIE'S POOLMART Computation of Ratio of Earnings to Fixed Charges (dollars in thousands) (unaudited)
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended December 31, 1992 December 31, 1993 December 31, 1994 December 30, 1995 December 28, 1996 ----------------- ----------------- ----------------- ----------------- ----------------- Fixed Fixed Fixed Fixed Fixed Earnings Charges Earnings Charges Earnings Charges Earnings Charges Earnings Charges ================ ================ ================ ================ ================ Income (loss) before provision for income taxes $3,501 - $5,161 - $7,836 - $3,983 - $6,614 - Add-Fixed Charges: - ----------------- Interest expenses 829 829 1,189 1,189 1,733 1,733 2,708 2,708 2,786 2,786 Interest factor in net expense (1) 2,209 2,209 2,835 2,835 3,373 3,373 4,466 4,466 5,341 5,341 Preferred Stock Dividends and Accretion - - - - - - - - - - ---------------- ---------------- ---------------- ----------------- ---------------- Earnings applicable to common shareholders $6,539 $3,038 $9,185 $4,024 $12,942 $5,106 $11,157 $7,174 $14,741 $8,127 ================ ================ ================ ================= ================ Ratio of earnings to fixed changes 2.15 2.28 2.54 1.56 1.81 ================ ================ ================ ================= ================ Deficiency of earnings to cover fixed changes - - - - - ================ ================ ================ ================= ================ (1) Calculated as one-third of minimum rent expense (see note 8 in the audited financial statements): Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended December 31, 1992 December 31, 1993 December 31, 1994 December 30, 1995 December 28, 1996 ----------------- ----------------- ----------------- ----------------- ----------------- Minimum Rent $6,628 $8,504 $10,119 $13,397 $16,024 +3 +3 +3 +3 +3 ---------- ---------- ---------- ---------- ---------- Interest Factor $2,209 $2,835 $3,373 $4,466 $5,341 ========== ========== ========== ========== ==========
Proforma Proforma Fiscal Year Ended 13 Weeks Ended 13 Weeks Ended 13 Weeks Ended December 28, 1996 March 30, 1996 March 29, 1997 March 29, 1997 ----------------- ----------------- ---------------- ---------------- Fixed Fixed Fixed Fixed Earnings Charges Earnings Charges Earnings Charges Earnings Charges ================= ================= ================= ================= Income (loss) before provision for income taxes ($1,082) - ($9,444) - ($10,427) - ($12,309) - Add-Fixed Charges: - ----------------- Interest expenses 10,410 10,410 834 834 799 799 2,620 2,737 Interest factor in net expense (1) 5,341 5,341 1,336 1,336 1,515 1,515 1,515 1,515 Preferred Stock Dividends and Accretion 3,491 3,491 - - - - 928 928 ----------------- ----------------- ---------------- ---------------- Earnings applicable to common shareholders $18,160 $19,242 ($7,274) $2,170 ($8,113) $2,314 ($7,246) $5,180 ================= ================= ================= ================= Ratio of earnings to fixed changes - - - - ================= ================= ================= ================= Deficiency of earnings to cover fixed changes $1,082 $9,444 $10,427 $12,309 ================= ================= ================= ================= (1) Calculated as one-third of minimum rent expense (see note 8 in the audited financial statements): Proforma Proforma Fiscal Year Ended 13 Weeks Ended 13 Weeks Ended 13 Weeks Ended December 28, 1996 March 30, 1996 March 29, 1997 March 29, 1997 ----------------- -------------- -------------- ------------- Minimum Rent $16,024 $4,008 $4,546 $4,546 Interest Factor +3 +3 +3 +3 -------- -------- -------- -------- $5,341 $1,336 $1,515 $1,515 ======== ======== ======== ========
EX-23.1 13 ACCOUNTANT'S CONSENT EXHIBIT 23.1 Consent of Independent Public Accountants As independent public accountants, we hereby consent to the use of our reports and to all references to our Firm included in or made a part of this registration statement. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Los Angeles, California June 26, 1997 EX-27.1 14 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS JAN-03-1998 DEC-29-1996 MAR-29-1997 133 0 2,900 0 56,552 69,163 35,557 0 113,656 42,336 0 0 0 32,646 0 113,656 0 23,816 0 18,254 15,190 0 799 (10,427) 4,326 (6,101) 0 0 0 (6,101) (.90) (.90)
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