LESLIES POOLMART INC, 10-K405, 2000-12-29

LESLIES POOLMART INC
10-K405, 2000-12-29
RETAIL STORES, NEC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________
Form 10-K
______________

(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the period from October 3, 1999 to September 30, 2000

Commission file number 0-18741

LESLIE'S POOLMART, INC.
(Exact name of registrant as specified in its charter)

Delaware 95-4620298
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

20630 Plummer Street, Chatsworth, California 91311
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (818) 993-4212

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock: None

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: X

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: X

APPLICABLE ONLY TO CORPORATE REGISTRANTS:

The number of outstanding shares of the Registrant's Common Stock on
December 22 was 1,466,976.

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PART I

ITEM 1. BUSINESS

Leslie's Poolmart, Inc. ("Leslie's" or the "Company") is the leading national
specialty retailer of swimming pool supplies and related products. These
products primarily consist of regularly purchased, non-discretionary pool
maintenance items such as chemicals, equipment, cleaning accessories and parts,
and also include fun, safety and fitness-oriented recreational items. The
Company currently markets its products under the trade name Leslie's Swimming
Pool Supplies through 383 company-owned retail stores in 30 states and through
mail order catalogs sent to selected pool owners nationwide.

The Company provides its customers a comprehensive selection of high quality
products, competitive every day low prices ("EDLP") and superior customer
service through knowledgeable and responsive sales personnel who offer a high
level of technical assistance at convenient store locations. The typical
Leslie's store contains 4,000 square feet of space, is located either in a strip
center or on a freestanding site in an area of heavy retail activity, and draws
its customers primarily from an approximately three-mile trade area. The Company
maintains a proprietary mailing list of approximately 5 million addresses,
including approximately 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.

History

The Company is a successor to the original Leslie's Poolmart founded in 1963.
From its inception in 1963 through the end of 1987, Leslie's Poolmart grew
steadily in sales and number of stores. In September 1988, Leslie's Poolmart was
purchased in a highly leveraged transaction by an investment group led by
Hancock Park Associates ("HPA"). The purchase was accomplished by means of a
merger, with Leslie's Poolmart, a California corporation ("Leslie's California")
as the surviving entity. Leslie's California completed an initial public
offering in April 1991 and in August 1992 added 14 stores through the
acquisition of a competitor.

In June 1997, Leslie's California reincorporated in Delaware by merger into a
wholly-owned Delaware subsidiary and completed an additional recapitalization
merger (the "Mergers"). The transactions were led by Green Equity Investors,
II, L.P. ("GEI") and HPA, together with certain members of management and
associates of HPA (collectively, the "HPA Group"). As a result of the Mergers,
the Company's common stock is no longer publicly-traded. Unless otherwise
referred to herein or the context otherwise requires, references to "Leslie's"
or the "Company" shall mean Leslie's Poolmart, Inc., its predecessors by merger,
Poolmart and Leslie's California, and the predecessor of Leslie's California.

Swimming Pool Supply Industry

Regardless of the type or size of a swimming pool, there are numerous ongoing
maintenance and repair requirements associated with pool ownership. In order to
keep a pool safe and sanitized, chemical treatment is required to maintain
proper chemical balance, particularly in response to variables such as pool
usage, precipitation and temperature. A swimming pool is chemically balanced
when the disinfectant, pH, alkalinity, hardness and dissolved solids are at the
desired levels. The majority of swimming pool owners use chlorine to disinfect
their pools. When the pool is chemically balanced, problems such as algae,
mineral and salt saturation, corrosive water, staining, eye irritation and
strong chlorine smell are less likely to occur. A regular testing and
maintenance routine will result in a stable and more easily maintained pool.
However, regardless of how well appropriate levels of chlorine are maintained,
"shocking" is periodically required to break up the contaminants which
invariably build up in the pool water. To accomplish this, the pool owner can
either superchlorinate the pool or use a nonchlorinated oxidizing compound. The
maintenance of proper chemical balance and the related upkeep and repair of
swimming pool equipment, such as pumps, heaters, and filters, create a non-
discretionary demand for pool chemicals and other swimming pool supplies and
services. Further, even non-usage considerations such as a pool's appearance and
the overall look of a household and yard create an ongoing demand for these
maintenance related supplies. In addition, pool usage creates demand for
discretionary items such as floats, games and accessories.

The swimming pool supply industry can be divided into four major segments by
pool type: residential in-ground swimming pools, residential above-ground
swimming pools (usually 12 to 24 feet in diameter), commercial swimming

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pools and spas or hot tubs. The Company's historical strategy was to focus
primarily on the residential in-ground pool owner. In recent years the Company
has expanded its activities to more aggressively address the commercial and
above-ground markets as well. In the residential categories, the Company markets
its products primarily to the "do-it-yourself" market as opposed to those pool
owners who hire pool servicers. Through its rapidly growing commercial business,
products and services are offered to all non-residential pool installations as
well as to pool service companies which maintain either residential or
commercial pools.

Seasonality

The Company's business exhibits substantial seasonality, which the Company
believes is typical of the swimming pool supply industry. In general, sales and
net income are highest during the quarters ended June and September which
represent the peak months of swimming pool use. Sales are substantially lower
during the quarters ended December and March when the Company typically incurs
net losses. The principal external factor affecting the Company's business is
weather. Hot weather and the higher frequency of pool usage in such weather
create a need for more pool chemicals and supplies. Unseasonably early or late
warming trends can increase or decrease the length of the pool season. In
addition, unseasonably cool weather and/or extraordinary amounts of rainfall in
the peak season will tend to decrease swimming pool use. The likelihood that
unusual weather patterns will severely impact the Company's results is lessened
by the geographical diversification of the Company's store locations. The
Company also expects that its quarterly results of operations will fluctuate
depending on the timing and amount of revenue contributed by new stores and, to
a lesser degree, the timing of costs associated with the opening of new stores.
The Company attempts to open its new stores primarily in the quarter ending
March in order to position itself for the following peak season.

Products

Leslie's offers its customers a comprehensive selection of products necessary
to satisfy their swimming pool supply needs. During 2000, the Company stocked
approximately 2,600 items in each store, with more than 15,000 additional items
available through its Xpress Parts program and special order processes. In 2000,
approximately 500 items were displayed in the Company's residential mail order
catalogs and 800 items were in the commercial catalog, although special order
procedures make nearly all Leslie's products available to mail order customers
as well.

The Company's major product categories are pool chemicals; major equipment;
cleaning and testing equipment; pool covers, reels, and liners; in a limited
number of stores, above-ground pools; and recreational items (which include
swimming pool floats, games, lounges, masks, fins, snorkels and other
"impulse" items).

Non-discretionary and regularly consumed products such as pool chemicals,
major equipment and parts represented approximately 80% of total sales in fiscal
2000. The Company's non-discretionary products have long shelf lives and are
generally not prone to either obsolescence or shrinkage due to the high
percentage of Leslie's business which is attributable to non-discretionary
products. During the fourth quarter of 2000, the Company took an unusual charge
of $2.1 million to write-off aged and excessive inventory.

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 2000, Leslie's brand name products accounted for
approximately 70% of the Company's total sales.

Channels of Distribution

Retail Store Operations. At the end of fiscal 2000, Leslie's marketed its
products through 383 retail stores in 30 states under the trade name Leslie's
Swimming Pool Supplies. California represents its single largest concentration
of stores with 102, while 63 stores are located in Texas, and 96 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 2000,
the Company had 27 district managers, each of whom was responsible for
approximately 14 stores.

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Mail Order Catalog. Leslie's mail order catalogs provide an extension of its
service philosophies and products to those areas not currently served by a
retail store and allow the scope of the Company's business to be truly
nationwide. The Company believes that its mail order catalogs build awareness of
the Leslie's name, provide it with buying efficiencies and, when coupled with
information from its retail stores, are instrumental in determining site
selection for new stores.

Customer Service

Due to the complicated nature of pool chemistry and equipment maintenance and
consistent with its philosophy of being a full service swimming pool supply
retailer, Leslie's offers a high level of technical assistance to support its
customers. The Company considers its training of store personnel to be an
integral part of its service philosophy. Leslie's extensive training program for
all full-time and part-time store employees includes courses in water chemistry,
water testing, trouble shooting on equipment, equipment sizing and parts
replacement.

Leslie's stores in Northern California; Dallas and Houston, Texas; and Las
Vegas, are supported by the Leslie's Service Department, which offers poolside
equipment installation and repair, leak detection and repair, and seasonal
opening and closing services. The Service Department utilizes both Company
employees and subcontractors to perform these services.

Marketing

Substantially all the Company's marketing is done on a direct mail basis
through its proprietary mailing list of approximately 5 million addresses at
which, primarily, residential pools are located. Leslie's has found that its
ability to mail directly to this highly focused group is an effective and
efficient way to conduct its marketing activities to both retail store and mail
order customers. The Company constantly updates its address list through primary
research techniques and in-store customer sign-ups.

Addresses on the Company's proprietary list that are located within a
specified service area of a retail store receive circulars once or twice per
month from late March or early April through September or, selectively, through
October. As a regular part of Leslie's promotional activities, each mailer
highlights specific items which are intended to increase store traffic, and
reinforces to the customer the advantages of shopping at Leslie's, which include
everyday low pricing, a high level of customer service, and the broad selection
of high quality products. Addresses outside the Company's store service areas,
and recently active mail order customers within those service areas, receive the
Company's mail order catalogs. Occasionally, the Company will utilize local
print media when it enters a new market, and is doing so in connection with its
above-ground pool sales test markets. New store openings typically involve
additional advertising pieces in the first two to three months of operation.

Purchasing

Leslie's management believes that because it is one of the largest purchasers
of swimming pool supplies for retail sales in the United States, the Company is
able to obtain very favorable pricing on its purchases from outside suppliers.
Nearly all raw materials and those products not repackaged by the Company are
purchased directly from manufacturers. It is common in the swimming pool supply
industry for certain manufacturers to offer extended dating terms on certain
products to quantity purchasers such as Leslie's. These dating terms are
typically available to the Company for pre-season or early season purchases.

The Company's principal chemical raw materials and granular chlorine
compounds are purchased primarily from three suppliers. At the end of fiscal
1997, the Company entered into a multi-year product purchase agreement with a
major producer of one of the principal chlorine compounds, the chlorinated
isocyanurates. The Company believes that there are several other reliable
suppliers of chlorine products in the marketplace today. Although the Company
has one sole source supplier for a nonchlorine shocking compound, termination of
supply would not pose any significant problems for the Company because
substitute chemicals and alternate shocking techniques are available. The
Company believes that reliable alternative sources of supply are available for
all of its raw materials and finished products.

Vertical Integration

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Leslie's operates a plant in the Los Angeles area where it converts dry
granular chlorine into tablet form and repackages a variety of bulk chemicals
into various sized containers suitable for retail sales. Leslie's also
formulates a variety of specialty liquids, including water clarifiers, tile
cleaners, algaecides and stain preventives. The chemicals that the Company
processes have a relatively long shelf life. Leslie's believes that supplying
its stores with chemicals from its own repackaging plant provides it with cost
savings, as well as greater control over product availability and quality, as
compared to non-integrated pool supply retailers. It also offers the Company
greater flexibility of product sourcing and acquiring vital information when
negotiating with third-party repackagers and chemical providers. The Leslie's
brand name appears on all products processed at its repackaging plant, and on
the significant majority of all its chemical products. The Company believes that
it is among the largest processors of chlorine products for the swimming pool
supply industry. The total output of Leslie's repackaging plant is utilized by
the Company and is not sold or distributed to other retailers.

In connection with the operation of its three distribution centers outside of
California, the Company has expanded its use of third-party chemical repackagers
and its purchase of products already in end-use configurations. These products
are also generally packaged under the Leslie's brand name. The Company
continually evaluates the cost effectiveness of third-party sourcing versus
internal manufacturing in order to minimize its cost of goods. Leslie's will
also continue to evaluate the establishment of additional chemical repackaging
capabilities, though there are currently no plans for such an investment. In
addition to chemicals, a variety of the Company's products are packaged under
the Leslie's brand name.

Distribution

In 2000, the Company distributed all of its products to its retail stores and
to its catalog customers through its leased distribution facilities in Ontario,
California; Dallas, Texas; Swedesboro, New Jersey and Hebron, Kentucky.
Leslie's relocated and consolidated its West Coast distribution operation, along
with the Los Angeles repackaging operation, into a 183,000 square foot facility
in Ontario, California in early 1997. Leslie's opened its 100,000 square foot
Dallas facility in November 1990 and relocated its Swedesboro, New Jersey
operations to a new 119,000 square foot facility in March of 1998. In January
of 1999, the Company opened its' new 146,000 square foot distribution center in
Covington, Kentucky.

The Company is now purchasing the majority of the chemicals to be distributed
from the Dallas, Swedesboro and Hebron distribution centers from outside
manufacturers rather than obtaining them through its repackaging facility in
Southern California. During the height of its seasonal activities, each of the
Company's retail stores is generally replenished every 5 to 7 days.

The Company utilizes company-owned and operated equipment, supplemented by
additional equipment leased during the busy season, to transport its goods to
stores within an approximately 350-mile radius of a distribution center. Other
stores receive deliveries via common carriers.

Competition

Primary elements of competition in the retail swimming pool supply industry
are price, technical assistance, customer service, product selection and product
availability. Most of the Company's competition comes from local stores or
regional chains which do not repackage or manufacture products and which
generally buy products in smaller quantities. The chain store competitors
include a large franchise operator of approximately 110 retail outlets in the
Florida market and a limited number of other retail chains of approximately 15
to 30 stores.

The Company competes on selected principal products such as chlorine with
large volume, mass merchant and home center retailers. While the ability of
these merchants to accept low margins on the limited number of items they offer
makes them aggressive price competitors of the Company, they are not generally
priced below Leslie's and do not offer the level of customer service or wide
selection of swimming pool supplies available at Leslie's.

Employees

As of September 30, 2000, Leslie's employed 1,813 persons. During the height
of the Company's seasonal activities in 2000, it employed 3,090 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 good.

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Trademarks

In the course of its business, Leslie's employs various trademarks, trade
names and service marks as well as its logo in packaging and advertising its
products. The Company has registered trademarks and trade names for several of
its major products on the Principal Register of the United States Patent and
Trademark Office. The Company distinguishes the products produced in its
chemical repackaging operation or by third party repackagers at its direction
through the use of the Leslie's brand name and logo and the trademarks and trade
names of the individual items, none of which is patented, licensed, or otherwise
restricted to or by the Company. The Company believes the strength of its
trademarks and trade names has been beneficial to its business and intends to
continue to protect and promote its marks in appropriate circumstances.

ITEM 2. PROPERTIES

As of September 30, 2000, the Company operated 383 stores in 30 states. The
following table sets forth information concerning the Company's stores:

<TABLE>
<CAPTION>
State Number of Stores State Number of Stores
----- ---------------- ----- ----------------
<S> <C> <C> <C>
Alabama................... 4 Missouri.................. 7

Arizona................... 22 Nevada.................... 8

California................ 102 New Hampshire............. 2

Connecticut............... 9 New Jersey................ 21

Delaware.................. 2 New Mexico................ 2

Florida................... 14 New York.................. 23

Georgia................... 13 North Carolina............ 2

Illinois.................. 6 Ohio...................... 11

Indiana................... 5 Oklahoma.................. 5

Kansas.................... 1 Pennsylvania.............. 19

Kentucky.................. 2 Rhode Island.............. 1

Louisiana................. 5 South Carolina............ 2

Maryland.................. 6 Tennessee................. 4

Massachusetts............. 8 Texas..................... 63

Michigan.................. 9 Virginia.................. 5
---
Total Stores.............. 383
===
</TABLE>

Except for 26 owned stores, all of its retail stores are leased by the Company
with lease terms expiring between 2000 and 2010. The Company's typical lease
term is five years, and in the majority of instances, the Company has renewal
options at increased rents. Five leases provide for rent contingent on sales
exceeding specific amounts. No other leases require payment of percentage rent.

In January and February of 1997, the Company relocated its corporate offices,
the Southern California distribution center and the chemical repackaging
operation. The corporate offices were relocated to another location in
Chatsworth, California. The existing 38,000 square foot office building had been
leased for five years and the lease has three five-year renewal options.

On October 10, 2000, the Company publicly announced that it would be
relocating the corporate office to Phoenix, Arizona from the current location in
Chatsworth, California. The new 38,000 square foot office building has been
leased for five years and has one five-year renewal option.

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The Southern California distribution center (previously located in Chatsworth,
California) and the chemical repackaging operations (previously located in Los
Angeles) were moved and consolidated into a 183,000 square foot facility located
in Ontario, California. The Ontario facility was leased for 10 years and the
lease has two five-year renewal options. The Company's distribution facility in
Dallas, Texas, consists of 100,000 square feet, with a lease term expiring in
2000. This lease includes options to renew for two additional five-year periods.
The 119,000 square foot distribution facility in Bridgeport, New Jersey is
leased for a 10-year term, expiring in 2008. The lease includes options to renew
for two five-year periods. A new 146,000 square foot distribution center in
Covington, Kentucky was opened in January 1999. This facility was leased for a
12 year term and provides for two five year renewal options.

ITEM 3. LEGAL PROCEEDINGS

The Company is routinely involved in legal proceedings related to the ordinary
course of its business. Management does not believe any such matters will have a
material adverse effect on the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

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PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

There is no public trading market for the Company's common stock. There are
11 holders of the Company's common stock. The Company has not paid any dividends
on its common stock, and does not anticipate doing so in the foreseeable future.

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ITEM 6. SELECTED FINANCIAL DATA

SELECTED CONSOLIDATED FINANCIAL DATA

The following table presents selected consolidated financial data of the
Company as of and for the fiscal years ended September 30, 2000, October 2, 1999
and October 3, 1998 (53 weeks), the twelve months ended September 27, 1997
(unaudited), the nine months ended September 27, 1997 (transition period) and
the fiscal year ended December 28, 1996. This financial data was derived from
the audited historical consolidated financial statements of the Company (with
the exception of the twelve months ended September 27, 1997) and should be read
in conjunction with the consolidated financial statements of the Company and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" elsewhere in this Annual Report.

<TABLE>
<CAPTION>
Twelve Nine
Years Ended Months Ended Months Ended Year Ended
------------------------------------------
(Amounts in Thousands, except September 30, October 2, October 3, September 27, September 27, December 28,
employees and store information) 2000 1999 1998 1997 1997 1996
----------------------------------------------------------------------------------------------------------------------------
(53 Weeks) (52 Weeks) (Transition
(Unaudited) Period)
<S>
Operating Results: <C> <C> <C> <C> <C> <C>
Net Sales $ 303,163 $ 282,349 $ 252,923 $ 217,109 $ 196,025 $ 191,640
Gross Profit 114,057 111,529 99,358 81,761 77,365 72,760
Gross Margin/(1)/ 37.6% 39.5% 39.3% 37.7% 39.5% 38.0%
Loss on Disposition of Fixed
Assets 1,477 1,131 334 1,112 457 750
Depreciation and Amortization 8,579 7,952 6,666 5,151 4,148 4,280
Income from Operations/(1)/ 5,002 10,411 15,536 11,021 17,989 9,400
Interest Expense, net 12,536 11,380 10,513 4,842 4,220 2,786
Net Income/(Loss)/(1)/ (4,713) (878) 2,790 4,343 8,783 3,869
Balance Sheet Data:
Working Capital 27,817 36,023 36,102 36,711 36,711 12,718
Total Assets 132,312 132,780 121,286 113,252 113,252 83,157
Current Ratio 1.60 1.96 2.13 2.29 2.29 1.45
Long-term Debt 90,988 91,095 91,195 91,290 91,290 15,581
Preferred Stock 37,526 33,225 29,361 25,853 25,853 --
Stockholder's (Deficit) Equity (47,764) (39,657) (34,915) (35,845) (35,845) 36,315
Selected Operating Data:
Capital Expenditures 9,129 16,042 10,519 9,885 7,917 8,807
Unusual Charge/(1,2)/ 3,173 -- -- -- -- --
EBITDA/(1,2)/ 18,655 19,465 22,537 18,318 23,247 14,960
EBITDA Margin/(1,3)/ 6.2% 6.89% 8.91% 8.44% 11.86% 7.81%
Number of Employees 1,813 2,437 1,906 1,767 1,767 1,055
Number of Stores 383 364 316 278 278 259
Comparable Store Sales 3.8% 6.6% 10.3% 10.1% 10.4% 9.9%
Growth
-----------------
</TABLE>

(1) In the fourth quarter of 2000, the Company recognized an unusual charge of
$2.1 million for expenses principally associated with its decision to write
-off nonproductive aged inventory, $0.8 million in restructuring costs for
expenses associated with the relocation of its corporate office to Phoenix,
Arizona, and an additional $0.2 million in accrued expenses for other
corporate office move related expenses.
(2) Earnings before interest, taxes, depreciation, amortization, loss/(gain) on
disposition of fixed assets, recapitalization costs, LIFO adjustments,
stock compensation expense and unusual charges. EBITDA is a measurement
that is used by the financial community. It is not a substitute for the
statement of cash flows prepared in accordance with Generally Accepted
Accounting Principles but is a factor that is widely used and accepted by
the investment community.
(3) EBITDA Margin represents EBITDA as a percentage of sales.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The Private Securities Litigation Reform Act of 1995 provides a ''safe
harbor'' for forward-looking statements. Certain information included in this
document (as well as information included in oral statements or other written
statements made or to be made by the Company) contains statements that are
forward-looking, such as statements relating to plans for future activities.
Such forward-looking information involves important risks and uncertainties that
could significantly affect anticipated results in the future and, accordingly,
such results may differ from those expressed in any forward-looking statements
made by or on behalf of the Company. These risks and uncertainties include, but
are not limited to, those relating to domestic economic conditions, activities
of competitors, changes in federal or state tax laws and of the administration
of such laws and the general condition of the economy.

Results of Operations

2000 compared to 1999:

For the twelve months ended September 30, 2000, sales increased 7.4% to $303.2
million from $282.3 million in the same twelve months of 1999. The sales
increase is attributable to comparable store sales growth of 3.8% over the
comparable 52 weeks and 19 net new store additions in 2000. EBITDA before the
unusual charge for the period decreased 4.2% to $18.7 million from $19.5 million
in the same twelve months of 1999. A net loss of $4.7 million was realized in
the year 2000. EBITDA including the unusual charges was $15.5 million. This
decrease was primarily the result of a $2.1 million unusual charge taken by the
Company in the fourth quarter of 2000 to write-off aged excessive and obsolete
inventory, $0.8 million in restructuring expenses associated with the relocation
of the corporate office to Phoenix, Arizona, and an additional $0.2 million in
accrued expenses for other corporate office related expenses.

During 2000, the Company expanded its business by opening 29 new stores.
Additionally, 10 stores were closed and 8 were relocated in 2000. This resulted
in a net increase of 19 stores as of September 30, 2000 as compared to October
2, 1999.

Sales for the twelve months ended September 30, 2000 increased 7.4% over the
same fiscal period of 1999. Sales were lower than expected due to the cool, wet
weather experienced in several major markets (most notably the Northeast and
Southeast areas of the country) in the important May through July timeframe.

Comparable store sales increased 3.8% with an increase in the total number of
stores in operation from 364 in 1999 to 383 at the end of 2000. The increase in
comparable store sales resulted from the maturing of new stores opened over the
last several years, from continued growth of commercial sales, and from the
addition of service sales to selected retail stores. The lower comparable store
sales growth of 3.8% in 2000 versus 6.6% in 1999 was attributable to the
weather, pricing and promotional issues referred to above.

Gross profit for the fiscal year ended September 30, 2000 decreased to 37.6%
of sales, from 39.5% in 1999. Gross profit represents sales less the cost of
services and purchased goods, chemical repackaging costs, and non-administrative
occupancy costs. The gross margin decrease in 2000 reflects more competitive
retail pricing, an increase in store rent expense as a percentage of sales,
markdowns taken during the year to promote excessive inventory, and a $2.1
million unusual charge taken in the fourth quarter to write-off aged and
excessive inventory.

In 2000, total operating expenses equaled $106.8 million, versus $99.2 million
in 1999, an increase of 7.7%. The increase in operating expenses in 2000 was
impacted due to the cost of opening of 29 new stores, increased depreciation
expenses, a $0.8 million charge for restructuring expenses associated with the
Company's planned corporate relocation to Phoenix, Arizona, $0.2 million in
other corporate move related expenses, and a non-cash charge of $0.4 million for
non-cash expenses associated with the restructuring of a stock option incentive
agreement for the former Chief Executive Officer. Excluding the charge for the
office relocation and the non-cash stock compensation expense, expenses as a
percent to sales have decreased as compared to the prior year.

EBITDA before the unusual charges was $18.7 million in fiscal year 2000,
representing a decrease of $0.8 million,

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or 4.2% as compared to $19.5 million for the same period of 1999. The decrease
in EBITDA was primarily the result of the margin reduction and SG&A increases
discussed above. EBITDA including the unusual charges was $15.5 million.

Amortization expense for the fiscal year ended September 30, 2000 was $742,000
as compared to $742,000 in the same period of 1999.

For the fiscal year ended September 30, 2000, the Company recognized losses on
the disposition of fixed assets totaling approximately $1.5 million as compared
to $1.1 million in the prior year. These expenses were primarily associated
with the Company's decision to close or relocate stores that were unproductive
and not meeting expectations.

Income from operations for the period decreased 52.0% to $5.0 million from
$10.4 million in the same twelve months of 1999. Excluding the inventory write-
off, the corporate move related expenses and the non-cash stock compensation
expense discussed above, income from operations was $8.6 million.

Interest expense equaled $12.5 million in 2000, up from $11.4 million in 1999.
The increase was primarily the result of increased average borrowings earlier in
the year resulting from lower earnings, and increased capital spending related
to continued growth of the business.

The tax benefit of $2.8 million in 2000 reflected the pre-tax losses realized
this year. The Company expects to recognize this benefit in future years
through the realization of taxable earnings.

1999 compared to 1998:

The Company's 1999 fiscal year included 52 weeks while the 1998 fiscal year
included 53 weeks.

For the twelve months ended October 2, 1999, sales increased 11.6% to $282.3
million from $252.9 million in the same twelve months of 1998. The sales
increase is attributable to comparable store sales growth of 6.6% (over the
comparable 52 weeks) and 48 (net) new store additions in 1999. EBITDA for the
period decreased 13.6% to $19.5 million from $22.5 million in the same twelve
months of 1998. A net loss of $878,000 was realized in 1999 with the reduced
EBITDA and operating earnings. The decrease in EBITDA was largely the result of
lower than expected sales in a year when SG&A expense increases were being made
to support the growth of the business.

During 1999, the Company expanded its business by opening 52 new stores.
Additionally, 4 stores were closed and 8 were relocated in 1999. This resulted
in a net increase of 48 stores as of October 2, 1999 as compared to October 3,
1998.

Sales for the twelve months ended October 2, 1999 increased 11.6% over the
same fiscal period of 1998, which included an additional week. On a same week
basis, the Company's sales grew 13.1% when comparing the same 52 weeks of each
period. Though sales grew 11.6% over fiscal 1998, the 1999 sales were lower than
expected due to the cool, wet weather experienced in several major markets (most
notably California) in the important May through July timeframe. Less
aggressive retail pricing on some key items and a less aggressive promotional
program also contributed to the sales softness in 1999.

Retail store sales, which are comprised of residential and commercial sales,
grew 12.7% in the fiscal year on comparable store sales increases (over the
comparable 52 weeks) of 6.6% and an increase in the total number of stores in
operation from 316 in 1998 to 364 at the end of 1999. The increase in comparable
store sales resulted from the maturing of new stores opened over the last
several years, from continued growth of commercial sales, and from the addition
of service sales to selected retail stores. The lower comparable store sales
growth (6.6% in 1999 versus 10.3% in fiscal 1998 and 10.4% in the nine month
transition period of 1997) was attributable to the weather, pricing and
promotional issues referred to above.

In total, commercial sales grew by approximately 13% in the twelve month
period as compared to last year, while service sales grew at a rate of
approximately 50%. In 1998, the Company converted its Service Department
operations into a store based format, and as a result, reflected these service
sales in the retail store total. The inclusion of commercial

10
<PAGE>

and service sales in store sales increased the comparable store sales gains
(over the same 52 weeks) by approximately 3% in the year-to-date period.

Gross profit for the fiscal year ended October 2, 1999 increased to 39.5% of
sales, from 39.3% in 1998. Gross profit represents sales less the cost of
services and purchased goods, chemical repackaging costs, and non-administrative
occupancy costs. The gross margin increase in 1999 reflects higher average
retail pricing and some lower product acquisition costs, partially offset by an
increase in store rent expense as a percentage of sales. Store rent as a
percentage of sales increased over the prior year due to the increased number of
new store openings in 1999, the opening of the new Kentucky Distribution Center,
and the soft sales experienced this season.

In 1999, operating expenses equaled $99.2 million versus $82.9 million in
1998, an increase of 19.7%. The increase in SG&A expenses in 1999 was largely
due to the opening of 52 new stores, to additional investments in both store and
corporate-based staffing to better support future growth, and to additional
staff hired to support the continued rollout of the store-based service
operations.

EBITDA was $19.5 in fiscal year 1999, representing a decrease of $3.1, or
13.6%, as compared to $22.5 million for the same period of 1998. The decrease
in EBITDA was primarily the result of much softer than expected sales in a year
when SG&A expense increases were being made to support the growth of the
business.

Amortization expense for the fiscal year ended October 2, 1999 increased to
$742,000 from $580,000 in the same period of 1998 due to additional amortization
and the amortization of non competition agreements associated with the Marlin
acquisition. (See Note 2(g) of the Financial Statements.)

For the fiscal year ended October 2, 1999, the Company recognized losses on
the disposition of fixed assets totaling approximately $1.1 million. This was
primarily associated with the implementation of a new computer system designed
to support a retail sales environment which is Year 2000 compliant. The
disposition of the old computer system and the closure of several stores
resulted in the $1.1 million charge in 1999.

Income from operations for the period decreased 33.0% to $10.4 million from
$15.5 million in the same twelve months of 1998.

Interest expense equaled $11.4 million in 1999, up from $10.5 million in 1998.
The increase was primarily the result of increased borrowings resulting from the
lower earnings, and increased capital spending related to continued growth of
the business.

The tax benefit of $91,000 in 1999 reflected the pre-tax losses realized this
year versus the pre-tax profit seen in 1998.

Financial Condition, Liquidity and Capital Resources

Changes in Financial Condition. From October 3, 1999 to September 30, 2000,
total current assets increased $919,000 from $73.5 million to $74.4 million.
The increase in current assets results mainly from decreases in inventories and
prepaid expenses partially offset by increase in accounts receivables and
deferred taxes. The principal component of current assets is inventory, which
decreased $1.3 million from $58.7 million to $57.4 million. The inventory
decrease, even in light of the increased store count, was the result of
significantly improved inventory management, increased inventory markdowns used
to promote excessive inventory levels and the unusual inventory charge taken in
the fourth quarter of 2000.

Total current liabilities increased $9.1 million from October 2, 1999 as
compared to September 30, 2000. Accounts payable and accrued liabilities
increased primarily from the continued growth of the business.

Liquidity and Capital Resources. For the fiscal year ended September 30,
2000, net cash provided by operating activities was $14.5 million compared to
cash used of $984,000 in the prior year. The improved working capital
management, in particular the productivity of current inventory, helped produce
the change from the prior year.

In 2000, cash used in investing activities was $8.7 million as compared with
$15.8 million in the same period of

11
<PAGE>

the prior year. Decreased capital expenditures in 2000 were the result of a
fewer number of new stores opened in the current year, and the Company purchase
and implementation of a new Year 2000 compliant computer system in the prior
year.

Cash used in financing activities was $5.8 million in fiscal year 2000
compared with cash provided by financing activities of $7.4 million in the same
period of 1999. In 2000, the Company reduced its credit borrowings that were
needed to finance the working capital and capital expenditure investments
described above. The net working capital revolver at year-end was $1.9 million
as compared to $7.5 million in 1999, a reduction of $5.6 million.

On June 22, 2000, the Company entered into a new loan and security agreement
(the "Agreement") with Foothill Capital Corporation whereby the Company's
borrowing potential under the Agreement increased to $65.0 million as compared
to a maximum level of $50.0 million under its previous credit facility. Under
the Agreement, the minimum borrowing availability amount is established at $40.0
million. The Agreement has a maturity date of January 31, 2004. The Agreement
bears interest at an annual rate equal to the lender's reference rate or the
reserve-adjusted Eurodollar rate plus 1.75%. Interest rates on the Agreement
are subject to increases or reductions by up to 0.25% based on the Company's
financial performance.

At September 30, 2000 the Company had $34.9 million of additional borrowing
capability on the Agreement. Funds borrowed under the Agreement are used
primarily to fund working capital and other general corporate purposes.

During the fourth quarter 2000, the Company recorded a restructuring charge of
$0.8 million for expenses associated with its planned corporate relocation to
Phoenix, Arizona. These expenses consisted primarily of the occupancy related
costs expected to be incurred after vacating its existing corporate location and
for employee related termination expenses. The Company also accrued an
additional $0.2 million for additional employee related expenses that are not
yet recognizable under EITF No. 94.3. The Company expects that it will incur an
additional $2.1 million in expenses related to the corporate move during the
first quarter of 2001. The Company believes that the future operating expense
benefits of this move will offset the expected relocation cost expected to be
incurred.

The Company believes that its internally generated funds, as well as its
borrowing capacity, are adequate to meet its working capital needs, maturing
obligations and capital expenditure requirements, including those relating to
the opening of new stores and the relocation of the corporate office.

Seasonality and Quarterly Fluctuations. The Company's business exhibits
substantial seasonality which the Company believes is typical of the swimming
pool supply industry. In general, sales and net income are highest during the
quarters ended June and September, which represent the peak months of swimming
pool use. Sales are substantially lower during the quarters ended December and
March when the Company will typically incur net losses. The principal external
factor affecting the Company's business is weather. Hot weather and the higher
frequency of pool usage in such weather create a need for more pool chemicals
and supplies. Unseasonably early or late warming trends can increase or decrease
the length of the pool season. In addition, unseasonably cool weather and/or
extraordinary amounts of rainfall in the peak season decrease swimming pool use.

The Company expects that its quarterly results of operations will fluctuate
depending on the timing and amount of revenue contributed by new stores and, to
a lesser degree, the timing of costs associated with the opening of new stores.
The Company attempts to open its new stores primarily in the quarter ending
March in order to position itself for the following peak season. As additional
stores and the resultant operating expenses are added, the Company expects its
usual losses incurred in the quarters ended December and March to increase.

12
<PAGE>

Summarized Quarterly Financial Data (Unaudited)
(In thousands)

13 Weeks Ended
-------------------------------------------------
2000 Jan. 1 April 1 July 1 Sept. 30
-------------------------------------------------
<S> <C> <C> <C> <C>
Net Sales............................................... $ 30,890 $ 37,683 $138,286 $96,304
Gross Profit............................................ 7,357 9,804 59,449 37,447
(Loss) Income from Operations........................... (14,103) (16,538) 28,384 7,259
Net (Loss) Income....................................... (9,408) (10,951) 13,815 1,831
EBITDA/1/............................................... (11,698) (13,703) 30,637 13,419
Comparable Store Sales Growth........................... 11.8% 7.1% 4.5% (.04)%
</TABLE>

13 Weeks Ended
-----------------------------------------------
1999 Jan. 2 April 3 July 3 Oct. 2
-----------------------------------------------
<S> <C> <C> <C> <C>

Net Sales................................................ $ 26,132 $ 33,389 $128,875 $93,953
Gross Profit............................................. 6,246 8,492 56,995 39,796
(Loss) Income from Operations............................ (11,168) (14,392) 25,085 10,886
Net (Loss) Income........................................ (7,665) (9,681) 12,288 4,180
EBITDA/1/................................................ (9,267) (12,373) 27,149 13,956
Comparable Store Sales Growth............................ 17.3% 9.1% 4.8% 5.7%
</TABLE>
____________________

/(1)/ EBITDA represents income before interest, taxes, depreciation and
amortization, loss/(gain) on disposition of fixed assets, non-cash stock
compensation expenses and the $3.2 million in unusual charges.

Recent Accounting Pronouncement. In June 1998, the Financial Accounting
Standards Board (FASB) issued Statement on Financial Accounting Standards (SFAS)
133, "Accounting for Derivative Investments and Hedging Activities," which was
amended by SFAS 138 and will be effective for the Company's fiscal year 2001.
Management does not anticipate the adoption of the new Statement will have a
material impact on the Company's financial position, results of operations or
cash flows.

In December 1999, the SEC staff issued Staff Accounting Bulletin (SAB) 101
"Revenue Recognition in Financial Statements" which provides guidance on revenue
recognition issues. The Company will be required to implement SAB 101 in fiscal
2001. The interpretation is not expected to have a material impact on the
Company's financial position, results of operations or cash flows.

In March 2000, the FASB issued FIN 44, "Accounting for Certain Transactions
Involving Stock Compensation," which will be effective for the Company's fiscal
year 2001. The interpretation clarifies the application of existing stock
compensation accounting pronouncements for certain issues. The interpretation
is not expected to have a material impact on the Company's financial positions,
results of operations or cash flows.

ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's Agreement described in note 5 to the financial statements as
well as in the Management Discussion and Analysis carries interest rate risk.
Amounts borrowed under this Agreement bear interest at either Libor plus 1.75%,
or at the Company's choice, the lender's reference rate. Should the lenders'
base rate change, the Company's interest expense will increase or decrease
accordingly. As of September 30, 2000, the Company had borrowed $4.0 million

13
<PAGE>

subject to interest rate risk. On this amount, a 1% increase in the interest
rate would cost the Company $40,000 in additional gross interest cost on an
annual basis.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS

Page
-----

<S> <C>
Reports of Independent Auditors and Public Accountants................................. 16

Consolidated Balance Sheets -- September 30, 2000 and October 2, 1999.................. 18

Consolidated Statements of Operations -- Years Ended September 30, 2000, October 2,
1999, andOctober 3, 1998............................................................... 19

Consolidated Statements of Shareholders' Equity (Deficit) -- Years Ended September 30,
2000, October 2, 1999, and October 3, 1998............................................ 20

Consolidated Statements of Cash Flows -- Years Ended September 30, 2000, October 2,
1999, andOctober 3, 1998............................................................... 21

Notes to Consolidated Financial Statements............................................. 22

</TABLE>

14
<PAGE>

REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of Leslie's Poolmart, Inc.:

We have audited the accompanying consolidated balance sheet of Leslie's
Poolmart, Inc. and subsidiaries as of September 30, 2000 and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows for the year then ended. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Leslie's
Poolmart, Inc. and subsidiaries at September 30, 2000 and the consolidated
results of their operations and their cash flows for the year then ended in
conformity with accounting principles generally accepted in the United States.

Ernst & Young LLP
Phoenix, Arizona
December 22, 2000

15
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors and Shareholders of Leslie's Poolmart, Inc.:

We have audited the accompanying consolidated balance sheet of Leslie's
Poolmart, Inc. (a Delaware corporation) and subsidiaries as of October 2, 1999
and the consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the years ended October 2, 1999 and October 3, 1998. 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.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Leslie's
Poolmart, Inc. and subsidiaries as of October 2, 1999, and the results of their
operations and their cash flows for the years ended October 2, 1999 and October
3, 1998 in conformity with accounting principles generally accepted in the
United States.

Arthur Andersen LLP
Los Angeles, California
December 17, 1999

16
<PAGE>

LESLIE'S POOLMART, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)

<TABLE>
<CAPTION>
ASSETS
------
Sep. 30, 2000 Oct. 2, 1999
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash............................................................................................ $ 199 $ 193
Accounts and other receivables, net............................................................. 9,143 7,350
Inventories, net................................................................................ 57,430 58,729
Prepaid expenses and other...................................................................... 1,334 2,128
Deferred tax assets............................................................................. 6,335 5,122
--------- ---------
Total current assets......................................................................... 74,441 73,522
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:.................................................................... 79,213 73,681
Less--Accumulated depreciation and amortization................................................. 32,535 26,345
--------- ---------
Net property, plant and equipment............................................................... 46,678 47,336
--------- ---------
OTHER ASSETS:
Goodwill, net................................................................................... 8,114 8,392
Non-compete covenant, net....................................................................... 163 627
Deferred financing costs, net................................................................... 2,420 2,460
Other........................................................................................... 496 443
--------- ---------
Total other assets........................................................................... 11,193 11,922
--------- ---------
$ 132,312 $ 132,780
========= =========

LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
----------------------------------------------

CURRENT LIABILITIES:
Accounts payable................................................................................ $ 24,141 $ 16,937
Accrued liabilities............................................................................. 18,102 15,462
Current portion of long-term debt............................................................... 108 101
Income taxes.................................................................................... 4,273 4,999
--------- ---------
Total current liabilities.................................................................... 46,624 37,499
--------- ---------
DEFERRED TAX LIABILITIES.......................................................................... 3,036 3,106
LINE-OF-CREDIT BORROWINGS, NET.................................................................... 1,902 7,512
LONG-TERM DEBT, net of current portion............................................................ 988 1,095
SENIOR NOTES...................................................................................... 90,000 90,000
PREFERRED STOCK, $0.001 par value; Authorized--2,000,000 shares;
Issued and outstanding --28,000 Series A at September 30, 2000 and
October 2, 1999; liquidation preference $28,000,000............................................. 37,526 33,225
COMMITMENTS AND CONTINGENCIES..................................................................... -- --
SHAREHOLDERS' EQUITY (DEFICIT):
Common stock, $0.001 par value;
Authorized--12,000,000 shares;
Issued and outstanding--1,466,976 and 1,433,643 at
September 30, 2000 and October 2, 1999, respectively 1 1
Additional paid-in capital...................................................................... (44,795) (45,702)
Retained earnings (deficit)..................................................................... (2,970) 6,044
--------- ---------
Total shareholders' deficit.................................................................. (47,764) (39,657)
--------- ---------
$ 132,312 $ 132,780
========= =========
</TABLE>

The accompanying notes are an integral part of these consolidated balance
sheets.

17
<PAGE>

LESLIE'S POOLMART, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)

<TABLE>
<CAPTION>
For the Years Ended
Sept. 30, 2000 Oct. 2, 1999 Oct. 3, 1998
---------------------------------------------------
<S> <C> <C> <C>
Net sales................................................ $ 303,163 $ 282,349 $ 252,923
Cost of sales............................................ 189,106 170,820 153,565
----------- ---------- -----------
Gross profit............................................. 114,057 111,529 99,358
Operating Expenses:
Selling, general and administrative expenses.......... 105,363 99,245 82,908
Unusual expense....................................... 230 -- --
Restructuring charge.................................. 819 -- --
Stock compensation expense............................ 424 -- --
----------- ---------- -----------
Total Operating Expenses................................. 106,836 99,245 82,908
Amortization of acquisition costs........................ 742 742 580
Loss on disposition of fixed assets...................... 1,477 1,131 334
----------- ---------- -----------
Income from operations................................... 5,002 10,411 15,536
Interest expense, net.................................... 12,536 11,380 10,513
----------- ---------- -----------
Income before taxes...................................... (7,534) (969) 5,023
Income tax provision (benefit)........................... (2,821) (91) 2,233
----------- ---------- -----------
Net income/(loss)........................................ (4,713) (878) 2,790
Series A Preferred Stock dividends and
accretion................................................ 4,301 3,864 3,508
----------- ---------- -----------
(Loss)/Income applicable to common
shareholders............................................. $ (9,014) $ (4,742) $ (718)
=========== ========== ===========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements

18
<PAGE>

LESLIE'S POOLMART, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

LESLIE'S POOLMART, INC

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(In thousands, except share amounts)

<TABLE>
<CAPTION>
Common Stock
-----------------------
Additional Retained Total
Number of Paid in Earnings/ Shareholders'
Shares Amount Capital (Deficit) Equity/(Deficit)
---------- ------ ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, at September 27, 1997.................... 1,433,643 $ 1 $ (47,350) $ 11,504 $ (35,845)
Series A Preferred Stock
Dividends and accretion....................... -- -- -- (3,508) (3,508)
Tax benefit NQ stock options..................... -- -- 1,648 -- 1,648
Net income....................................... -- -- -- 2,790 2,790
------------- ------- ---------- --------- ---------------

Balance, at October 3, 1998....................... 1,433,643 1 (45,702) 10,786 (34,915)
Series A Preferred Stock
Dividends and accretion....................... -- -- -- (3,864) (3,864)
Net loss......................................... -- -- -- (878) (878)
------------ -------- ---------- ---------- ----------------

Balance, at October 2, 1999....................... 1,433,643 1 (45,702) 6,044 (39,657)
Series A Preferred Stock
Dividends and accretion....................... -- -- -- (4,301) (4,301)
Stock option compensation expense -- -- 424 -- 483
Issuance of common stock......................... 33,333 -- 483 -- 424
Net loss......................................... -- -- -- (4,713) (4,713)
------------ ------- ---------- --------- ---------------

Balance, at September 30, 2000.................... 1,466,976 $ 1 $ (44,795) $ (2,970) $ (47,764)
============ ======= ========== ========= ==============
</TABLE>

19
<PAGE>

LESLIE'S POOLMART, INC.

Notes to Consolidated Financial Statements

LESLIE'S POOLMART, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

<TABLE>
<CAPTION>
Years Ended
-------------------------------------------------
Sep. 30, 2000 Oct. 2, 1999 Oct. 3, 1998
------------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income/(loss)................................................ $ (4,713) $ (878) $ 2,790
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................ 8,579 7,952 6,666
Amortization of loan fees and discounts...................... 629 547 557
Deferred income taxes........................................ (1,283) (1,364) 268
Loss on Disposition of assets................................ 1,477 1,131 334
Compensation recognized for stock options.................... 424 -- --
Changes in operating assets and liabilities:
Accounts and other receivables............................... (1,793) (2,080) (902)
Inventories.................................................. 1,299 (11,289) (7,201)
Prepaid expenses and other................................... 794 (545) (60)
Other assets................................................. (53) 76 96
Accounts payable and accrued liabilities..................... 9,844 5,148 4,869
Income taxes................................................. (726) 318 320
------------ ------------ ------------
Net cash provided by (used in) operating activities.............. 14,478 (984) 7,737

INVESTING ACTIVITIES:
Purchase of property and equipment........................... (9,129) (16,042) (10,519)
Proceeds from disposition of property, plant
and equipment............................................... 473 236 --
Business acquisitions........................................ -- -- (2,396)
------------ ------------ ------------
Net cash used in investing activities............................ (8,656) (15,806) (12,915)

FINANCING ACTIVITIES:
Net line of credit borrowings/(repayments)................... (5,610) 7,512 --
Payments of long-term debt................................... (100) (93) (87)
Payment of deferred financing costs.......................... (589) -- --
Proceeds from issuance of common stock, net.................. 483 -- --
------------ ------------ ------------
Net cash provided by/(used in) financing activities................ (5,816) 7,149 (87)
------------ ------------ ------------
NET INCREASE/(DECREASE) IN CASH 6 (9,371) (5,265)

CASH AT BEGINNING OF YEAR........................................... 193 9,564 14,829
------------ ------------ ------------
CASH AT END OF YEAR................................................. $ 199 $ 193 $ 9,564
============ ============ ============
</TABLE>

20
<PAGE>

Leslie's Poolmart, Inc.

Notes to Consolidated Financial Statements

21
<PAGE>

Leslie's Poolmart, Inc.

Notes to Consolidated Financial Statements --(Continued)

1. Business and Operations

Leslie's Poolmart, Inc. (the Company) is a specialty retailer of swimming
pool supplies and related products. As of September 30, 2000, the Company
marketed its products under the trade name Leslie's Swimming Pool Supplies
through 383 retail stores in 30 states and through mail order catalogs sent to
selected swimming pool owners nationwide. The Company also repackages certain
bulk chemical products for retail sale. The Company's business is highly
seasonal as the majority of its sales and all of its operating profits are
generated in the quarters ending in June and September.

On June 11, 1997, Leslie's Poolmart (a California corporation - "Leslie's
California") reincorporated in Delaware by merging into a wholly-owned Delaware
subsidiary (the "Reincorporation"), changed its name to Leslie's Poolmart, Inc.
and merged Poolmart USA Inc., a newly-formed corporation, with and into the
Company (the "Recapitalization"). As a result of the Recapitalization, (i) each
outstanding share of common stock of Leslie's California was converted into
$14.50 cash (other than 359,505 shares owned primarily by members of
management); and (ii) outstanding options covering approximately 830,000 shares
of common stock, including those not yet vested, were exercised and retired for
payment of the difference between the exercise price and $14.50 per share. The
total value of the shares and options cashed out approximated $94,300,000, plus
$5,229,000 in expenses associated with this transaction. In connection with the
Recapitalization, the Company changed the authorized capital of the Company to
12,000,000 shares of common stock with a $0.001 par value and 2,000,000 shares
of preferred stock with a $0.001 par value.

In order to finance the repurchase of the outstanding common shares and
options, the Company issued $90.0 million of its 10.375% Senior Notes and sold
1,074,138 shares of its common stock for proceeds of $15.6 million. As indicated
above, certain directors and members of management converted some of the
Leslie's California common shares which they owned into shares of the Company's
common stock.

Also in connection with the Recapitalization, the Company issued 28,000
shares of its Series A Preferred Stock of the Company, par value $0.001 per
share, at $1,000 per share for a total consideration of $28.0 million,
consisting of cash and an exchange of the $10.0 million principal amount of
Convertible Subordinated Debentures of Leslie's California held by a major
supplier. In connection with this transaction, the holder of the Series A
Preferred Stock received Warrants to purchase up to 15.0% of the shares of the
Company's common stock at a purchase price of $0.01 per share (subject to
adjustment) for a period of ten years.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The consolidated financial statements of the Company include Leslie's
Poolmart, Inc., and its wholly-owned subsidiaries, Leslie's Pool Brite, Inc.,
Sandy's Pool Supply, Inc. and Blackwood & Simmons, Inc. All significant inter-
company transactions and accounts have been eliminated.

Fiscal Periods

In 1997, the Company changed its fiscal year end from the Saturday closest
to December 31 to the Saturday closest to September 30. The fiscal years ended
on September 30, 2000 and October 2, 1999 included 52 weeks. The 1998 fiscal
year ended on October 3, 1998 and included 53 weeks.

Accounts and Other Receivables, Net

Accounts and other receivables include allowances for doubtful accounts of
$369,000 and $237,000 at September 30, 2000 and October 2, 1999, respectively.

Inventories

Inventories are stated at the lower of cost or market. The Company values
inventory using the first-in, first-out (FIFO) method.

22
<PAGE>

Leslie's Poolmart, Inc.

Notes to Consolidated Financial Statements --(Continued)

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Costs of normal
maintenance and repairs are charged to expense as incurred.

Major replacements or improvements of property, plant and equipment are
capitalized. When items are sold or otherwise disposed of, the cost and related
accumulated depreciation or amortization are removed from the accounts, and any
resulting gain or loss is included in the statements of operations.

Depreciation and amortization are computed using the straight-line method
(considering appropriate salvage values) based on the following estimated
average useful lives:

Buildings and improvements............ 15-30 years

Vehicles, machinery and equipment..... 3-10 years

Office furniture and equipment........ 3-10 years

Leasehold improvements................ 4-10 years

Goodwill

The excess of the acquisition price over the fair value of the net assets
at the date of acquisition is included in the accompanying consolidated balance
sheets as ''Goodwill.'' Goodwill is being amortized (straight-line) over forty
years. The Company continually evaluates whether later events and circumstances
have occurred that indicate the remaining estimated useful life of goodwill may
warrant revision or that the remaining balance of goodwill may not be
recoverable. When factors indicate that goodwill should be evaluated for
possible impairment, the Company uses an estimate of the related business
segment's undiscounted net income over the remaining life of the goodwill in
measuring whether the goodwill is recoverable. The balance recorded at September
30, 2000 and October 2, 1999 was net of accumulated amortization of $2.4 million
and $2.1 million, respectively.

Business Acquisition

In January 1998, the Company purchased the capital stock of Blackwood &
Simons, Inc. (dba Marlin Pool Supply), an operator of six swimming pool supply
stores located in the Atlanta, Georgia area, in a cash for stock transaction.
The purchase price, net of excess cash on hand, was approximately $2.3 million.
The covenant not-to-compete was valued at $1.2 million and is being amortized
over three years. The goodwill of $950,000 is being amortized over 40 years. The
acquisition was immaterial to the consolidated financial statements.

Deferred Financing Costs

In connection with issuing the Senior Notes and signing the 1997 Credit
Agreement, the Company paid $3.7 million in financing costs that were or are
being deferred and amortized over the lives of the corresponding agreements.
During fiscal 2000, the Company recorded and additional $0.7 million in
financing costs associated with the Agreement. The balance recorded at September
30, 2000 and October 2, 1999 was net of accumulated amortization of $1.9 million
and $1.2 million, respectively.

Income Taxes

The Company provides for deferred income taxes relating to timing
differences in the recognition of income and expense items (primarily
depreciation and amortization) for financial and tax reporting purposes. Also,
differences

23
<PAGE>

Leslie's Poolmart, Inc.

Notes to Consolidated Financial Statements --(Continued)

between the tax basis and the financial reporting basis of various assets were
created when the Company was acquired in 1988 and when the Company purchased
Sandy's in 1992; deferred tax assets and liabilities were provided related to
these differences. Deferred taxes at September 30, 2000 and October 2, 1999
include a provision for the differences between tax and financial asset values
except that deferred taxes were not provided with respect to amounts allocated
to goodwill. As the difference between tax and financial reporting basis
changes, appropriate charges/credits are made to the deferred tax account.

Net Sales

Sales are recorded at the time of shipment or when the service is
performed, net of related discounts.

Cost of Sales

Included in cost of sales are the costs of services and purchased goods,
chemical repackaging costs and non-administrative occupancy costs.

Restructuring Costs

During the fourth quarter 2000, the Company recorded a restructuring charge
of $0.8 million for expenses associated with its planned corporate relocation to
Phoenix, Arizona. These expenses consisted primarily of the occupancy related
costs expected to be incurred after vacating its existing corporate location and
for employee related termination expenses. The Company also accrued an
additional $0.2 million for additional employee related expenses that are not
yet recognizable under EITF No. 94.3. The Company expects that it will incur an
additional $2.1 million in expenses related to the corporate move during the
first quarter of 2001. The Company believes that the future operating expense
benefits of this move will offset the expected relocation cost expected to be
incurred.

Fair Value of Financial Statements

The fair value of the $90.0 million Senior Notes using quoted market prices
as of September 30, 2000 is $82.0 million. The carrying amounts of other long-
term debt approximate fair value because either the interest rate fluctuates
based on market rates or interest rates appear to approximate market rates for
similar instruments. The fair value estimates are subjective in nature and
involve uncertainties and matters of judgement and therefore, cannot be
determined with precision. Changes in assumptions could significantly affect
these estimates.

Use of Estimates in the Preparation of Consolidated Financial Statements

The preparation of financial statements in conformity with 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.

Recent Accounting Pronouncements

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments. This standard is effective for fiscal
periods beginning after June 15, 2000 and will be adopted by the Company as of
October 2001. It is not expected that the adoption of this standard, as amended,
will have an impact on the consolidated financial statements nor require
additional footnote disclosure since the Company does not currently utilize
derivative instruments or participate in structured hedging activities.

In December 1999, the SEC staff issued Staff Accounting Bulletin 101
"Revenue Recognition in Financial Statements" which provides guidance on revenue
recognition issues. The Company will be required to implement SAB

24
<PAGE>

Leslie's Poolmart, Inc.

Notes to Consolidated Financial Statements --(Continued)

101 in fiscal 2001. The interpretation is not expected to have a material impact
on the Company's financial position, results of operations or cash flows.

In March 2000, the FASB issued FIN 44, "Accounting for Certain Transactions
Involving Stock Compensation," which will be effective for the Company's fiscal
year 2001. The interpretation clarifies the application of existing stock
compensation accounting pronouncements for certain issues. The interpretation is
not expected to have a material impact on the Company's financial positions,
results of operations or cash flows.

Advertising

The Company expenses advertising during the period of the event.
Advertising expense for the years ended September 30, 2000, October 2, 1999 and
October 3, 1998 was approximately $7.3 million, $7.1 million and $6.6 million,
respectively.

Reclassifications

Certain prior period amounts in the consolidated financial statements have
been reclassified to conform to the current year presentations.

3. Inventories

Inventories consist of the following:

Raw materials and supplies.............................. $ 430,000 $ 656,000
Finished goods.......................................... 57,000,000 58,073,000
------------- --------------
$57,430,000 $58,729,000
============= ==============
</TABLE>

4. Property, Plant and Equipment

Property, plant and equipment consists of the following:

<TABLE>
<CAPTION>
Sep. 30, 2000 Oct. 2, 1999
------------- ------------
<S> <C> <C>
Land................................................... $ 6,370,000 $ 6,070,000

Buildings and improvements............................. 8,471,000 7,529,000

Vehicles, machinery and equipment...................... 3,162,000 2,960,000

Leasehold improvements................................. 31,501,000 29,042,000

Office furniture, equipment and other.................. 29,156,000 25,716,000

Construction-in-process................................ 553,000 2,364,000
----------- -----------

79,213,000 73,681,000

Less--Accumulated depreciation and amortization........ 32,535,000 26,345,000
----------- -----------

$46,678,000 $47,336,000
=========== ===========
</TABLE>

5. Line of Credit Agreement

In June of 2000, the Company entered into the Agreement with Foothill
Capital Corporation. Under the Agreement, maximum borrowings have been increased
to $65.0 million and the minimum amount available not to fall below $40.0
million, and with a maturity date set at January 31, 2004. Under the Agreement,
maximum borrowings are limited as a function of inventory or calculated LTM
EBITDA rates as defined in the Agreement. On September 30, 2000, $1.9 million,
net was outstanding under the Agreement.

25
<PAGE>

Leslie's Poolmart, Inc.

Notes to Consolidated Financial Statements --(Continued)

Borrowings under the Agreement accrue interest at the lender's reference
rate or at LIBOR plus the applicable LIBOR rate margin at September 30, 2000.
The margins are determined by calculated LTM EBITDA rates as defined in the
Agreement. The Agreement contains certain financial covenants that include
Minimum calculated EBITDA levels and maximum capital expenditure amounts. As of
September 30, 2000, the Company was in compliance with these covenants.

26
<PAGE>

Leslie's Poolmart, Inc

Notes To Consolidated Financial Statements -(Continued)

6. Long-Term Debt

Long-term debt consists of the following:
<TABLE>
<CAPTION>
Sep. 30, 2000 Oct. 2, 1999
------------ ------------
<S> <C> <C>
Notes payable collateralized by security interests in certain assets,
maturing September 2002. Interest accrues at the
rate of 6.5%.............................................................. $ 198,000 $ 281,000

Notes payable collateralized by security interest in various properties, due
in monthly installments maturing December 2003.
Interest accrues at the rate of 9.6%...................................... 898,000 915,000
---------- ----------
1,096,000 1,196,000
Less--Current portion............................................................ 108,000 101,000
---------- ----------
$ 988,000 $1,095,000
========== ==========
</TABLE>

Principal maturities of long-term debt as of September 30, 2000 are as
follows:

2001.......................................... $ 108,000

2002.......................................... 116,000

2003.......................................... 37,000

2004.......................................... 835,000
----------
$1,096,000
==========

7. Senior Notes

On June 11, 1997, the Company issued $90.0 million aggregate principal
amount of its 10.375 percent Senior Notes due July 15, 2004 (the "Notes"). The
Notes were issued under an indenture (the "Indenture") by and among the Company
and U.S. Trust Company of California, N.A., as trustee.

Interest on the Notes accrues at the rate of 10.375 percent per annum and
is payable semi-annually in arrears on each January 15 and July 15 commencing on
January 15, 1998. The Notes are redeemable, in whole or in part, at the option
of the Company on or after July 15, 2001, at the specified redemption prices.

The Notes are generally unsecured obligations of the Company and will be
subordinated to any secured indebtedness of the Company. In the event of a
change of control, the Company will be required to make an offer to purchase all
outstanding Notes at a price equal to 101 percent of the principal amount
thereof plus accrued and unpaid interest, if any, to the date of purchase.

The Indenture contains certain covenants which include, among other
matters, limitations on the incurrence of additional indebtedness and the
payment of dividends. At September 30, 2000, the Company was in compliance with
these covenants.

27
<PAGE>

8. Leases

The Company leases certain store, office, distribution and manufacturing
facilities under operating leases which expire at various dates through 2010.
Lease agreements generally provide for increases related to cost of living
indices and require the Company to pay for property taxes, repairs and
insurance. Future annual minimum lease payments at September 30, 2000 are as
follows:

2001..................................... $19,545,000

2002..................................... 17,085,000

2003..................................... 13,846,000

2004..................................... 10,285,000

2005..................................... 5,667,000

Thereafter............................... 3,190,000
-----------
$69,618,000
===========

Certain leases are renewable at the option of the Company for periods of
one to ten years. Rent expense charged against income totaled $22.8 million,
$20.6 million and $17.2 million in 2000, 1999 and 1998, respectively.

28
<PAGE>

Leslie's Poolmart, Inc.

Notes to Consolidated Financial Statements --(Continued)

9. Income Taxes

The provision/(benefit) for income taxes is comprised of the following:

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, October 2, October 3,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Federal:
Current..................................... $ (1,233,000) $ 952,000 $1,962,000
Deferred.................................... (994,000) (1,027,000) (202,000)
------------ ---------- ----------
(2,227,000) (75,000) 1,760,000

State:
Current..................................... (305,000) 321,000 539,000
Deferred.................................... (289,000) (337,000) (66,000)
------------ ---------- ----------
(594,000) (916,000) 473,000
------------ ---------- ----------

$ (2,821,000) $ (91,000) $2,233,000
============ ========== ==========
</TABLE>

A reconciliation of the provision/(benefit) for income taxes to the amount
computed at the federal statutory rate is as follows:

<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
September 30, October 2, October 3,
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Federal income tax at statutory rate.................... $(2,562,000) $(330,000) $1,708,000
Permanent differences................................... 278,000 249,000 206,000
State taxes, net of federal benefit..................... (537,000) (10,000) 319,000
------------ --------- ----------
$(2,821,000) $ (91,000) $2,233,000
============ ========= ==========
</TABLE>

The tax effect of temporary differences which give rise to significant
portions of the deferred tax asset and liability are summarized below.

<TABLE>
<CAPTION>
2000 1999
Deferred Tax Deferred Tax Deferred Tax Deferred Tax
Assets Liabilities Assets Liabilities
------------ ------------- ---------- --------------
<S> <C> <C> <C> <C>
Property, plant and equipment....................... $ -- $ 2,336,000 $ -- $2,370,000
State income taxes.................................. 389,000 -- 465,000 --
Inventory........................................... 1,965,000 -- 1,967,000 36,000
Difference in timing of certain deductions.......... 3,981,000 700,000 2,690,000 700,000
---------- ---------- ---------- ----------
$6,335,000 $3,036,000 $5,122,000 $3,106,000
========== ========== ========== ==========
</TABLE>

The Company has net operating losses (NOL) available for offset against
future tax liabilities, extending through 2007, limited to approximately $83,000
per year. As this NOL is utilized, such amounts will reduce goodwill as a result
of limitations imposed from a change in ownership.

29
<PAGE>

Leslie's Poolmart, Inc.

Notes to Consolidated Financial Statements --(Continued)

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 2000,
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
$491,000, $468,000 and $387,000 for 2000, 1999 and 1998, respectively.

12. Preferred Stock

In connection with the Recapitalization transaction, the Company sold
28,000 shares of Preferred Stock for total consideration of $28.0 million. The
Preferred Stockholder is entitled to an annual cumulative dividend (which is
payable at the option of the Company either in cash or in additional shares of
Preferred Stock for the first five years). The annual dividend is payable
quarterly at the annual rate of 10.875 percent, compounded semi-annually. The
Preferred Stockholder is entitled to elect 20 percent of the members of the
Board of Directors of the Company.

The Preferred Stock may be redeemed at the option of the Company at any
time at $1.010 per share plus accumulated and unpaid dividends. The Company is
required to redeem the Preferred Stock in three equal installments terminating
on the tenth anniversary of the date of issuance of the Preferred Shares.

In connection with the issuance of the Series A Preferred Stock, the
original Preferred Stockholder received 252,996 Warrants to purchase common
stock at an exercise price of $0.01 per share expiring in June of 2007. Of the
$28.0 million face value of the Preferred Stock, $3.1 million was assigned to
the value of these Warrants and reflected as a discount on the Preferred Stock.
This discount is being accreted over the life of the Preferred Stock. The terms
of the Warrant Agreement will provide for a proportionate adjustment of the
warrants for stock splits and stock dividends and for additional warrant shares
to be issuable in the event any of the 1997 NQ Options or ISO Options or options
under the 1998 Plan are exercised. Based on the number of options exercised
during the year an additional 5,882 warrants are subject to exercise at a price
of $0.01 per share expiring in June of 2007, due to the anti-dilution provision
of the Warrant Agreement. Based on the number of options outstanding at
September 30, 2000, an additional 69,664 warrants could be granted if the
options were exercised.

In the ordinary course of business, the Company purchases raw materials and
finished goods pursuant to a multi-year purchase contract from the holder of the
warrants issued to the original owners of the Series A Preferred Stock.
Management believes these transactions were under terms no less favorable to the
Company than those arranged with other parties.

30
<PAGE>

Leslie's Poolmart, Inc.

Notes to Consolidated Financial Statements --(Continued)

13. Stock Based Compensation Plans

In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock-Based
Compensation," which applies the fair value-based method of accounting for
options granted under stock-based compensation plans. SFAS 123 allows companies
to continue to account for stock options granted in accordance with Accounting
Principles Board Opinion No. 25, if the Company discloses the results under SFAS
123. Had compensation cost for these plans been determined consistent with SFAS
123, the Company's net loss would have been increased to the following proforma
amounts:

<TABLE>
<CAPTION>
Sept. 30, 2000 Oct. 2, 1999 Oct. 3, 1998
-------------- ------------ ------------
<S> <C> <C> <C>
(Loss)/Income applicable to common shareholders
As reported...................................... $(9,014,000) $(4,742,000) $ (718,000)
Pro forma ....................................... $(9,441,000) $(5,172,000) $(1,107,000)
</TABLE>

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998: risk free interest rates of
6.4%, 5.6% and 5.7%, respectively; expected volatility of 0%; expected lives of
7 years for all options and no expected dividend yield. Based on these
assumptions, the weighted average value of the options granted is $7.20, $6.41
and $4.72 in 2000, 1999 and 1998, respectively.

In June 1997, the Company adopted a non-qualified common stock option plan
(the "NQ Option Plan") and an incentive common stock option plan (the "ISO
Option Plan") and reserved 83,599 and 273,946 shares, respectively. All of the
NQ Option Plan options were granted at an exercise price of $5.00 per share and
248,000 options were granted under the ISO Option Plan at $14.50 per share.

NQ Options vest immediately. NQ Options have a term of ten years and remain
exercisable without regard to any termination of the employment of the holder.

Under the ISO Option Plan, 206,000 options vest in one-third increments
over three years. The balance of the ISO Options are subject to the Company
achieving certain operating and store-opening goals. Vested ISO Options may be
exercised for 90 days post termination of employment, except in the case of the
death of the option holder, in which case the vested portion may be exercised
within 12 months from the date of termination. ISO Options have a term of ten
years.

In November 1998, Leslie's Board adopted its 1998 Incentive Stock Option
Plan (the "1998 Plan"), and reserved 60,000 shares of nonvoting common stock for
issuance thereunder. In January 2000, the Board approved an amendment to the
Plan to increase the number of shares of nonvoting common stock issuable
thereunder to 100,000 shares in the aggregate. Options to purchase Leslie's
nonvoting common stock have been granted at an exercise price of $20.00 per
share. The 1998 Plan is similar to the ISO Plan, except that it does not contain
any performance vesting criteria. At September 30, 2000, there were 29,449
additional shares available for grant under the plan.

A summary of option activities for all plans is as follows:

<TABLE>
<CAPTION>
2000 1999 1998
---------------------------------------------------------------------------
Wtd Avg Wtd Avg Wtd Avg
Shares Ex Price Shares Ex Price Shares Ex Price
---------- ------------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year........ 362,932 $ 12.76 357,099 $ 12.30 331,599 $ 12.11
Granted................................. 109,000 20.00 28,000 20.00 28,000 14.77
Exercised............................... (33,333) 14.50 -- --
Cancelled............................... (43,836) 14.50 (22,167) 14.50 (2,500) (14.50)
-------- ------- -------- ------- -------- --------
Outstanding at end of year.............. 394,763 $ 14.40 362,932 $ 12.76 357,099 $ 12.30
======== ======= ======== ======= ======== ========
Exercisable at end of year.............. 310,591 $ 13.16 265,099 $ 11.51 168,769 $ 9.79
======== ======= ======== ======= ======== ========
</TABLE>

31
<PAGE>

Leslie's Poolmart, Inc.

Notes to Consolidated Financial Statements --(Continued)

The following table summarizes information about all stock options outstanding
as of September 30, 2000:

<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$5.00....................... 83,599 6.7 years $ 5.00 83,599 $ 5.00
$14.50...................... 173,164 6.7 years 14.50 165,326 14.50
$17.50...................... 2,500 7.9 years 17.50 1,667 17.50
$20.00...................... 135,500 9.1 years 20.00 59,999 20.00
------- ------- ------- -------
394,763 $ 14.40 310,591 $ 13.16
======= ======= ======= =======
</TABLE>

Statement of Financial Accounting Standard No. 123, establishes accounting
and reporting standards for stock-based employee compensation plans. As
permitted by this statement, the Company has elected to continue to account for
stock options using APB Opinion No. 25, Accounting for Stock Issued to
Employees, to determine the amount of any compensation expense related to stock
options. During the second quarter of 2000, the Company recorded a non-cash
stock compensation charge of $0.4 million for expenses associated with the
accelerated vesting of the options held by the former President and Chief
Executive Officer.

14. Supplemental Cash Flow Disclosures

The Company paid interest charges of $12.5 million, $11.5 million and $11.1
million, in 2000, 1999 and 1998, respectively. The Company paid income taxes of
$165,000, $1.1 million and $2.5 million in 2000, 1999 and 1998, respectively.
The Series A Preferred Stock dividends and the accretion of the warrants are
excluded from the statement of cash flows as non-cash transactions. The tax
benefit for non-qualified stock options was excluded from the statement of cash
flows as a non-cash transaction.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

See Part III, Item 13 "REPORTS ON FORM 8-K."

32
<PAGE>

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The directors and executive officers of the Company are as follows:

<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<S> <C> <C>
Lawrence H. Hayward........ 46 Chairman of the Board, President and
Chief Executive Officer
Donald J. Anderson......... 40 Executive Vice President, Chief Financial Officer and
Director
Gregory J. Annick.......... 36 Director
John G. Danhakl............ Director
Michael J. Fourticq........ 56 Director
Brian P. McDermott......... 43 Director
John T. Ball............... 55 Senior Vice President, Merchandising and Marketing
Marvin D. Schutz........... 53 Senior Vice President, Store Operations
Michael M. Adamson......... 43 Vice President, Information Technology
</TABLE>

Lawrence H. Hayward is Chairman of the Board of Directors, President and
Chief Executive Officer. He joined the Company in January 2000 as President and
Chief Executive Officer and assumed the additional role of Chairman of the Board
in September 2000. Most recently, Mr. Hayward was the President of ABCO Desert
Markets located in Phoenix, Arizona which is a division of Fleming Companies,
one of the nation's largest wholesale and retail food and general merchandise
distributors. From 1995 until 1999, he served as President and Chief Executive
Officer of Carr Gottstein Foods Co., Alaska's largest food and drug retailer and
wholesale provider. From 1990 to 1995, Mr. Hayward held other senior level
positions at Buttrey Food and Drug Co. From 1981 until 1990 he served in various
corporate positions at American Stores Company headquartered in Salt Lake City,
Utah.

Donald J. Anderson is Executive Vice President, Chief Financial Officer and
Director of the Company. He joined the Company in May 2000. Mr. Anderson has
24 years of experience in various retail industries. Most recently, Mr.
Anderson was Senior Vice President and Chief Financial Officer of the Follett
Higher Education Group, located in Oakbrook, Illinois, the nation's largest
operator of University bookstores. From 1995 until 1999, he served as Senior
Vice President and Chief Financial Officer of Carr Gottstein Foods Co., Alaska's
largest food and drug retailer and wholesale provider. From 1990 to 1995, Mr.
Anderson held various senior level positions at Buttrey Food and Drug Co. From
1977 to 1990, he served in various positions managerial positions with American
Stores Co.

Gregory J. Annick became a director of the Company in June 1997. He has been
an executive officer of Leonard Green & Partners ("LGP"), a merchant banking
firm which manages Green Equity Investors, II, LP ("GEI"), since the formation
of LGP and GEI in 1994. He joined a merchant banking firm affiliated with LGP
as an associate in 1989, became a principal in 1993, and through a corporation
became a partner in 1994. From 1988 to 1989, he was an associate with the
merchant banking firm of Gibbons, Green, van Amerongen. Before that time, Mr.
Annick was a financial analyst in mergers and acquisitions with Goldman, Sachs &
Co. Mr. Annick is also a director of several private companies.

John G. Danhakl became a director of the Company in June 1997. He has been an
executive officer and an equity owner of LGP, a merchant banking firm which
manages GEI, since 1995. Mr. Danhakl had previously been a Managing Director at
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") and had been with
DLJ since 1990. Prior to joining DLJ, Mr. Danhakl was a Vice President at Drexel
Burnham Lambert Incorporated. Mr. Danhakl is also a director of Twinlab
Corporation, The Arden Group, Inc. and several private companies.

Michael J. Fourticq is a Director of the Company. He also served as Chairman
of the Board of Directors from May

33
<PAGE>

1988 until January 2000. Between May 1988 and August 1992, he served as the
Company's Chief Executive Officer. Since 1995, Mr. Fourticq has been the
Chairman and Chief Executive Officer of Brown Jordan International, a leading
manufacturer of outdoor and casual furniture products. Since 1985 he has been
the sole general partner of Hancock Park Associates, which is the general
partner and affiliate of several investment partnerships. Mr. Fourticq was the
Chairman of the Board and Chief Executive Officer of Alliance Northwest
Industries, Inc., a holding company, principally for a specialty lighting
distributor and retailer, which filed a petition for reorganization under
Chapter 11 of the Federal Bankruptcy Code in March 1996.

Brian P. McDermott had been with the Company since 1988. From 1998 until
August 1992 he served as President and Director. He also served as its Chief
Executive Officer from August 1992 until January 2000 and as Chairman from
January 2000 until September 2000. Between May 1988 and April 1989, he served
as the Company's Executive Vice President of Operations and also was its
Secretary from May 1988 until October 1989. Since May 2000, Mr. McDermott has
served as the President and Chief Executive Officer of PartsAmerica.com. 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.

John T. Ball was Senior Vice President, Merchandising and Marketing of the
Company from November 1997 through November 2000. From March 1995 through
October 1997, he was Senior Vice President, Merchandising at Universal Studios,
Inc. based in Orlando, Florida. Mr. Ball oversaw all merchandising efforts
related to Universal's theme parks located in California, Florida and Japan.
From 1993 to 1995, Mr. Ball was Vice President, Merchandising, Men's at Eddie
Bauer, Inc. in Redmond, Washington, and was Director of Outlet Stores for Eddie
Bauer from 1990 to 1993. From 1980 to 1985, he held several merchandising
management positions in divisions of the Carter Hawley Hale Stores.

Marvin D. Schutz has been Senior Vice President, Store Operations, since July
1999. From May 1997 through June 1999, he was Vice President of Store
Operations. From October 1994, he was Director of Store Operations, Eastern
Division. From 1982 through 1993 he held several management positions in
specialty retail at Montgomery Ward as National Director of Operations and
Training, and Silo Inc. as Regional Sales Manager and Director of Operations.

Michael M. Adamson has been Vice President, Information Technology, since
October 1996. From October 1994 through January 1996, he was Vice President,
MIS at Office Depot, Inc. headquartered in Boca Raton, Florida where he had
worked since April of 1991 in various management capacities. From September
1988 through April 1991, he was the Director of Corporate Networking at Revco,
D.S. Inc. From June of 1984 through September of 1988 he was a District
Systems Manager for Tandem Computers, Inc. and prior to that he was Branch
Systems Manager for Wang Laboratories.

All executive officers of the Company are chosen by the Board of Directors
and serve at the Board's discretion. No family relationships exist between any
of the officers or directors of the Company.

Messrs. Fourticq and McDermott are partners together in investment
partnerships that do not own shares of the Company.

Immediately prior to the consummation of the transactions, Leslie's, GEI, the
members of the HPA Group, Brian P. McDermott and Manette J. McDermott, as Co-
Trustees of the McDermott Family Trust, and Occidental and the holders of
certain management options entered into a Stockholders Agreement. In the
Stockholders Agreement, Michael Fourticq and Mr. McDermott were given certain
rights to be elected as directors of the Company. In addition, Occidental, as
owner of the Preferred Stock, was given the right to board representation.

On March 12, 1999, Green Equity Investors II, L.P. purchased all of the
Preferred Stock from Occidental Petroleum Corporation. Occidental retained
warrants to purchase 105,364 shares of Common Stock.

34
<PAGE>

ITEM 11. EXECUTIVE COMPENSATION

Summary Compensation Table

The following summary compensation table sets forth for the fiscal years
ended September 30, 2000, October 2, 1999, and October 3, 1998, respectively,
the compensation for services to the Company of the Chief Executive Officer and
the four most highly compensated executive officers of the Company as of
September 30, 2000.

<TABLE>
<CAPTION>
Long-Term All Other
Fiscal Year Compensation Compensation Compensation
------------------------ ------------- -------------------

Salary Bonus Stock Options 401(k) Insurance/Other
Year ($) ($)/(1)/ (#)/(2)/ ($)/(3)/ ($)/(4)/
------ --------- ----------- ------------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
Lawrence H. Hayward............................ 2000 300,000 345,852 -- 3,462 --
Chairman of the Board, President and Chief 1999 -- -- -- -- --
Executive Officer and Director 1998 -- -- -- -- --

Brian P. McDermott/(5)/........................ 2000 123,606 -- -- -- 98,888
Director 1999 424,231 -- -- 5,000 174
Former Chief Executive Officer 1998 412,885 76,875 4,976 3,200 --

Donald J. Anderson............................. 2000 116,346 112,230 -- 2,439 66,476/(6)/
Executive Vice President, 1999 -- -- -- -- --
Chief Financial Officer and Director 1998 -- -- -- -- --

Michael Adamson................................ 2000 168,654 -- -- -- --
Vice President, Information Technology 1999 -- -- -- -- --
1998 -- -- -- -- --

John T. Ball/(7)/.............................. 2000 235,200 -- -- 3,777 --
Senior Vice President, 1999 232,846 -- -- 4,834 47,495/(8)/
Merchandising and Marketing 1998 203,265 42,188 23,000 3,200 --

Marvin D. Schutz/(9)/.......................... 2000 175,000 -- -- 4,458 60,606
Senior Vice President, 1999 119,808 7,500 7,500 2,362 495
Store Operations 1998 -- -- -- -- --
</TABLE>

__________________
/(1)/ Bonuses are attributed to the year earned, and are paid out after the
conclusion of the fiscal year. Bonuses were paid on a twelve-month basis
for all of the fiscal years showing. Bonuses to Mr. Hayward and Mr.
Anderson were paid or will be paid in accordance with the terms of their
employment agreements.
/(2)/ All options were granted at their fair market value on the date of
grant.
/(3)/ Represents expected Company matching contributions to individuals' 401(k)
accounts.
/(4)/ Represents premiums paid by the Company for life insurance not generally
available to all Company employees.
/(5)/ Served as the Chief Executive Officer for the first 3 months of fiscal
2000. Other amount includes dollars paid in connection with Mr.
McDermott's consulting agreement dated December 31, 1999.
/(6)/ Represents moving expenses paid in accordance with the terms of
employment.
/(7)/ Employment was terminated in November of 2000.
/(8)/ $47,000 represents a moving allowance paid according to the terms of the
employment contract.
/(9)/ Promoted from Vice President to Senior Vice President in July 1999.

35
<PAGE>

Option Plans

During 1997, the Company adopted a non-qualified common stock option plan
(the "NQ Option Plan") and an incentive common stock option plan (the "ISO
Option Plan") and reserved 83,599 shares and 273,946 shares, respectively, of
Leslie's common stock for issuance upon the exercise of options to be granted to
certain employees of Leslie's thereunder. Options to purchase Leslie's common
stock have been granted at an exercise price of $5.00 per share for options
granted under the NQ Option Plan ("NQ Options") and $14.50 per share in the case
of options granted under the ISO Option Plan.

Leslie's has reserved 83,599 shares of Leslie's common stock for the NQ
Option Plan. NQ Options vest immediately. However, Leslie's (and in some
instances GEI and certain members of the HPA Group) have a right ("Call Option")
to repurchase a portion of each NQ Option (and a portion of any shares of
Leslie's common stock issued upon the exercise of any NQ Option ("NQ Option
Shares")) upon the option holder or stockholder ceasing to provide services to
Leslie's. If the NQ Option holder's service termination occurs prior to the
first anniversary of the consummation of the Transactions, two-thirds of the NQ
Option and two-thirds of any NQ Option Shares may be repurchased; if the
termination occurs on or after the first anniversary and before the second
anniversary, the Call Option applies to one-third of the NQ Options and NQ
Option Shares; and the Call Option will not apply to any NQ Options or NQ Option
Shares if termination occurs on or after the second anniversary of the
consummation of the Transactions. NQ Options have a term of ten years and remain
exercisable without regard to any termination of employment of the holder,
subject to the exercise of the Call Option as described above.

Under the ISO Plan, as amended, ISO Options vest in one-third increments on
the first, second and third anniversaries of the effective date of the merger,
except for options to purchase 67,946 shares are also subject to a further
vesting condition based upon Leslie's achieving certain operating and store-
opening goals. Options intended to qualify as "incentive stock options" and
options not intended to so qualify may be granted under the ISO Option Plan.
Pursuant to law, options intended to qualify as "incentive stock options" are
subject to limitations on aggregate amounts granted and must be issued to any
holder of 10% or more of the issuer's outstanding common stock at 110% of fair
market value. Vested ISO Options may be exercised for 90 days post termination
of employment, except in the case of the death of the option holder, in which
case the vested portion may be exercised within twelve months from the date of
termination. ISO Options have a term of ten years.

36
<PAGE>

Option Grants in 2000

The following table sets forth the stock options granted to the Chief
Executive Officer and the other executive officers of the Company as of
September 30, 2000, during the twelve months ended September 30, 2000, pursuant
to the Company's Incentive Stock Option Plan, NQ Option Plan, or otherwise.

<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------------

Potential Realizable Value at Assumed
% of Total Annual Rates of Stock Price Appreciation
Options ------------
Granted to for Option Term /1/
Options Employees in Exercise or Expiration ---------------
Granted Fiscal Year Base Price Date 0%($) 5%($) 10% ($)
------- ----------- ---------- ------- ----- ----- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Brian P. McDermott.... -- -- -- -- -- -- --
Lawrence H. Hayward... -- -- -- -- -- -- --
Donald J. Anderson.... 50,000 45.9% $20.00 1/03/10 -- 629,000 1,593,500
John T. Ball.......... 35,000 32.1% $20.00 5/01/10 -- 440,300 1,115,450
Marvin D. Schutz...... -- -- -- -- -- -- --
4,000/(2)/ 3.67% $20.00 7/12/09 -- 82,699 203,692
Michael Adamson....... -- -- -- -- -- -- --
</TABLE>

/(1)/ Potential realizable value is based on an assumption that the stock price
of the common stock appreciates at the annual rate shown (compounded
annually) from the date of grant until the end of the ten-year option
term. These numbers are calculated based on requirements promulgated by
the Securities and Exchange Commission and do not reflect the Company's
estimate of future stock price growth.
/(2)/ Granted pursuant to 1997 Stock Option Plan. Options vest over three years.
Certain options vest only in the event the Company achieves certain
performance targets.

Aggregated Option Exercises in 2000 and Fiscal Year-End Option Value

The following table sets forth the stock option exercises by the named
executive officers during 2000. In addition, the table indicates the total
number and value of exercisable and non-exercisable options held by each such
officer as of September 30, 2000.

<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Shares Acquired Value Options at In-the-Money Options at
on Exercise(#) Realized($) September 30, 2000 September 30, 2000
--------------- ----------- -------------------------- ----------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Lawrence H. Hayward..... -- -- 50,000 -- -- --
Donald J. Anderson...... -- -- -- 35,000 -- --
Brian P. McDermott...... -- -- 70,333 -- 386,832 --
John T. Ball............ -- -- 14,222 7,111 78,221 39,111
Marvin D. Schutz........ -- -- 13,411 9,001 75,001 --
Michael M. Adamson...... -- -- 15,860 -- 130,237 --
</TABLE>

____________________
/(1)/ Potential unrealized value is (i) the fair market value at September 30,
2000 ($20.00 per share) less the option exercise price times (ii) the
number of shares.

Directors' Compensation
Directors do not receive any compensation directly for their service on
the Company's Board of Directors. The Company has agreed, however, to pay
LGP certain fees for various management, consulting and financial planning

37
<PAGE>

services, including assistance in strategic planning, providing market and
financial analyses, negotiating and structuring financing and exploring
expansion opportunities

Consulting Agreement

Mr. McDermott resigned his employment with the Company as Chief Executive
Officer and in all other capacities as an officer of the Company pursuant to a
Consulting Agreement with the Company which became effective as of December 31,
1999 (the "Consulting Agreement"). The Consulting Agreement provided that Mr.
McDermott would still serve on the Company's Board of Directors, and that he
would be nominated for Chairman of the Board. The Company agreed to compensate
Mr. McDermott at the rate of $125,000 annually for his service as Chairman, for
so long as and only if Mr. McDermott remained Chairman through and after October
1, 2001.

In exchange for the covenants and general release given by Mr. McDermott
pursuant to the Consulting agreement, the Company agreed to pay Mr. McDermott
six months base salary in installments as if he still were an employee, through
June 30, 2000, and an additional six months base salary paid out in 15 equal
monthly installments through September 30, 2001. Further, the Company agreed to
pay the cost of Mr. McDermott's temporary "COBRA" coverage for a period of
twelve months if Mr. McDermott remained eligible for such coverage during that
twelve months. The Company also reached agreement with Mr. McDermott concerning
his outstanding stock options, so that: (a) 57,000 of his options granted under
the ISO Plan would continue to vest uninterrupted following the date of
separation; and (b) 13,333 of his "performance" options would no longer vest but
would still be exercisable for the duration of their term. The separation
payments and extension of vesting periods for options described above cease
immediately upon Mr. McDermott violation of the proprietary information and non-
solicitation covenants contained in the Consulting Agreement. In June 2000, the
Company determined that such a violation had occurred and has since ceased
making separation payments and halted the extension period for vesting of
options described above. Mr. McDermott served as Chairman of the Board until he
was replaced by Lawrence Hayward in September 2000, and now continues to serve
as a Director on the Board.

Employment Agreements

Lawrence Hayward and Donald Anderson each entered into employment agreements
with Leslie's, dated as of January 1, 2000 and May 1, 2000, respectively. Each
of the employment agreements contains non-solicitation and confidentiality
covenants, and provides that the executive is eligible to participate in
Leslie's benefit plans consistent with the benefits extended to the most senior
of Leslie's executives (including vacation, personal and sick leave, disability,
medical and life insurance). Each of the employment agreements also provides
that the executive will serve at the will of the Company's Board of Directors.

Mr. Hayward's employment agreement provides for a base salary of $400,000
annually, plus a minimum guaranteed bonus of $150,000 for fiscal year 2000. In
all successive years, Mr. Hayward's bonus will be based solely upon the
Company's financial performance. If Leslie's terminates Mr. Hayward's
employment for any reason other than Just Cause (as defined in the Agreement),
Mr. Hayward will receive his base salary and benefits through the twelve-month
period following termination, except that if Mr. Hayward becomes an employee,
consultant or partner of a company which directly competes with Leslie's, any
such severance payments and benefits shall end as of the date Mr. Hayward's
relationship with the competing entity commenced. The benefits are also payable
upon a sale of substantially all of the business or assets of the Company or a
consolidation, merger or change of control of the Company (a "Change of
Control").

Mr. Anderson's employment agreement provides for a base salary of $275,000
annually, plus a minimum guaranteed bonus of $45,833 for fiscal year 2000
(representing the pro-rated period of his actual employment during fiscal year
2000). In all successive years, Mr. Anderson's bonus will be based solely upon
the Company's financial performance. If Leslie's terminates Mr. Anderson's
employment for any reason other than Just Cause (as defined in the Agreement),
Mr. Anderson will receive his base salary and benefits through the twelve-month
period following termination, or through April 30, 2002, whichever is longer,
except that if Mr. Anderson becomes an employee, consultant or partner of a
company which directly competes with Leslie's, any such severance payments and
benefits shall end as of the date Mr. Anderson's relationship with the competing
entity commenced. The benefits are also payable upon a Change of Control (as
defined above).

38
<PAGE>

ITEM 12. PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT

The following table sets forth information as of September 30, 2000 with
respect to (i) all persons known by the Company to be the beneficial owner of
more than 5% of the Company's common stock; (ii) all executive officers of the
Company; (iii) all directors; and (iv) all directors and executive officers as a
group. The address for the directors and executive officers is in care of the
Company.

<TABLE>
<CAPTION>
Amount and Nature of Percentage of
Name and Address Beneficial Ownership of Shares
of Beneficial Owner Common Stock/1//2/ Outstanding/2/
------------------- ----------------------- --------------
<S> <C> <C>
GEI/(3)/................................................................ 1,206,236 58.9%
Gregory J. Annick/(4)/.................................................. 1,206,236 58.9
John G. Danhakl/(4)/.................................................... 1,206,236 58.9
Brian P. McDermott/(5)/................................................. 236,885 11.6
Michael J. Fourticq/(6)/................................................ 144,815 7.1
Lawrence H. Hayward/(7)/................................................ 50,000 2.4
Donald J. Anderson...................................................... -- --
John T. Ball/(8)/....................................................... 21,333 1.0
Marvin D. Schutz /(9)/.................................................. 13,411 0.7
Michael M. Adamson /(10)/............................................... 15,860 0.8
Occidental/(11)/........................................................ 107,814 5.3
All executive officers and directors as a group (9 persons)............. 1,688,540 82.5
</TABLE>

--------------
/(1)/ The address of Messrs. Fourticq, Hayward, Anderson, Ball, Schutz and
Adamson is 20630 Plummer Street, Chatsworth, California 91311. The address
of Occidental is 10889 Wilshire Boulevard, Los Angeles, California 90029.
The address of GEI and Messrs. Annick and Danhakl is 11111 Santa Monica
Boulevard, Suite 2000, Los Angeles, California 90025.
/(2)/ Computed based upon the total number of shares of Leslie's common stock
outstanding and the number of shares of Leslie's common stock underlying
warrants and options of that person exercisable within 60 days. In
accordance with Rule 13(d)-3 of the Exchange Act, any Leslie's common
stock which is subject to warrants or options exercisable within 60 days
is deemed to be outstanding for the purpose of computing the percentage of
outstanding shares of Leslie's common stock owned by the person holding
such warrants or options, but is not deemed to be outstanding for the
purpose of computing the percentage of outstanding shares of Leslie's
common stock owned by any other person.
/(3)/ GEI is a Delaware limited partnership managed by LGP, which is an
affiliate of the general partner of GEI. Each of Leonard I. Green,
Jonathan D. Sokoloff, Peter J. Nolan, Mr. Annick, Mr. Danhakl and Jonathan
A. Seiffer, either directly (whether through ownership interest or
position) or through one of more intermediaries, may be deemed to control
LGP and such general partner. LGP and such general partner may be deemed
to control the voting and disposition of the shares of Leslie's common
stock owned by GEI. Accordingly, for certain purposes, Messrs. Green,
Sokoloff, Nolan, Annick, Danhakl and Seiffer may be deemed to be
beneficial owners of the shares of Leslie's common stock held by GEI.
/(4)/ Includes the shares beneficially owned by GEI, of which Messrs. Annick and
Danhakl and associates.
/(5)/ Includes 70,333 shares subject to options exercisable within 60 days and
166,552 shares of Leslie's common stock.
/(6)/ Includes 4,976 shares subject to options exercisable within 60 days and
139,839 shares of Leslie's common stock.
/(7)/ All such shares are subject to options exercisable within 60 days.
/(8)/ All such shares are subject to options exercisable within 60 days.
/(9)/ All such shares are subject to options exercisable within 60 days.
/(10/ All such shares are subject to options exercisable within 60 days.
/(11/ All such shares are obtainable upon the exercise of warrants.

39
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Management Agreement

Pursuant to the terms of a Management Agreement among LGP, HPA and
Leslie's, Leslie's pays LGP an annual management fee of $244,800.

Occidental Contract

A wholly-owned subsidiary of Occidental has a long-standing relationship
with the Company as a supplier of certain chemical chlorine compounds. A multi-
year supply agreement terminated during 1997, and a new multi-year agreement was
entered into between the parties on mutually satisfactory terms and conditions.

Stockholders Agreement

In connection with the Transactions, Leslie's, GEI, the members of the HPA
Group, Brian P. McDermott and Manette J. McDermott, as Co-Trustees of the
McDermott Family Trust, Occidental, the holders of the Subscription Stock and
members of management who received NQ Options or ISO Options entered into a
Stockholders Agreement (the "Stockholders Agreement"). The Stockholders
Agreement provides the Company and certain Stockholders certain rights to
repurchase a portion of the NQ Options, NQ Shares and the Subscription Stock of
certain other Stockholders upon their ceasing to provide services to the
Company. The Stockholders Agreement generally restricts the transferability of
securities of the Company ("Securities") held by certain of the Stockholders and
establishes a right of first refusal, in the event certain Stockholders seek to
transfer any of their Securities to a third party, in favor of some other
Stockholders. In addition, GEI has certain "drag-along" rights and if GEI
desires to sell any Securities, other Stockholders have certain "tag-along"
rights to participate in such sale. The Stockholders Agreement also grants
demand registration rights to certain Stockholders and piggyback registration
rights for all Stockholders. In the Stockholders Agreement, Mr. Fourticq and
Mr. McDermott are given certain rights to be elected as directors of the
Company.

40
<PAGE>

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1),(2) The following financial statements and financial statement
schedules are included herewith and are filed as part of this annual report.

Consolidated Balance Sheets--September 30, 2000 and October 2, 1999
Consolidated Statements of Operations--Years Ended September 30, 2000, October
2, 1999 and October 3, 1998
Consolidated Statements of Shareholders' Equity (Deficit)--Years Ended
September 30, 2000, October 2, 1999, and October 3, 1998
Consolidated Statements of Cash Flows-- Years Ended September 30, 2000,
October 2, 1999 and October 3, 1998
Notes to Consolidated Financial Statements
Reports of Independent Public Auditors and Accountants

(a)(3) The following exhibits set forth below are filed as part of this annual
report or are incorporated herein by reference.

Exhibit
Number Description
------- -----------
3.1 Amended and Restated Certificate of Incorporation of the
Company*
3.2 Certificate of Merger of Leslie's Poolmart into the Company*
3.3 Certificate of Merger of Poolmart USA Inc. into the Company*
3.4 Certificate of Designation, Preferences and Rights of Exchangeable
Cumulative Redeemable Preferred Stock, Series A*
3.5 Bylaws of the Company*
3.6 Certificate of Amendment to Certificate of Designation, Preferences
and Rights of Exchangeable Cumulative Redeemable Preferred Stock,
Series A*
3.7 Certificate of Amendment to Restated Certificate of Incorporation
of the Company.
4.1 Indenture dated as of June 11, 1997 between the Company and U.S.
Trust Company of California, N.A.*
10.2 Preferred Stock and Warrant Purchase Agreement dated as of June 11,
1997 between the Company and Occidental Petroleum Corporation*
10.3 Warrant dated June 11, 1997 for the purchase of shares of common
stock of the Company issued to Occidental Petroleum Corporation*
10.4 Stockholders Agreement and Subscription Agreement dated as of June
11, 1997 among the Company and Green Equity Investors II, LP,
Richard H. Hillman, Michael J. Fourticq, Greg Fourticq, Brian P.
McDermott, the Trustees of the McDermott Family Trust, Occidental
Petroleum Corporation and the Stockholders identified on the
signature pages thereto*
10.5 NQ Option Plan and form of Agreement*
10.6 ISO Option Plan and form of Agreements*
10.7 Lease for Dallas Distribution Center*
10.8 Lease for Ontario Distribution Center*
10.9 Lease for Bridgeport Distribution Center*
Form of Director's and Officer's Indemnification Agreement dated as
of June 11, 1997 between the Company
10.10 and certain members of management*
10.11 Management Agreement dated as of June 11, 1997 between the Company
and Leonard Green & Partners, LP*
10.12 Noncompetition Agreement, dated August 31, 1992, among Sandy's Pool
Supply, Inc., Leslie's Poolmart, and Philip Leslie*
10.13 Noncompetition Agreement, dated August 31, 1992, among Sandy's Pool
Supply, Inc., Leslie's Poolmart, and

41
<PAGE>

Exhibit
Number Description
------- -----------
Sander Bass*
10.14 Purchase Agreement dated June 6, 1997 between the Company and BT
Securities Corporation*
10.15 Registration Rights Agreement dated as of June 11, 1997 by and between
the Company and BT Securities Corporation*
10.18 1998 Nonvoting Stock Option Plan
10.19 Consulting Agreement dated December 31, 1999 between the Company and
Brian P. McDermott.
10.20 Employment agreement dated December 31, 1999 between the Company and
Lawrence H. Hayward.
10.21 Employment Agreement dated May 1, 2000 between the Company and Donald
J. Anderson.
10.22 Loan and Security Agreement dated May 1, 2000 between the Company and
Donald J. Anderson.
21.1 Subsidiaries*
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule

___________
*Previously filed

(b) Reports on Form 8-K

The following reports on orm 8-K were filed by the Company during the
last quarter of fiscal 2000:

Changes in Independent Auditors: Filed with the Commission on October
10, 2000.

42
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Los
Angeles, State of California, on December 22, 2000.

LESLIE'S POOLMART, INC.
(Registrant)

By: /s/ Donald J. Anderson
------------------------
Donald J. Anderson
Chief Financial Officer

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Lawrence H. Hayward, Donald J. Anderson,
and each of them, his true and lawful attorney-or attorneys-in-fact and agent or
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including pre-or post-effective amendments) to this Report on Form 10-K, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agent, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all hat said attorneys-in-fact and agents, or any of
them, or their substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.

Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Lawrence H. Hayward Chairman of the Board of December 22, 2000
------------------------
Lawrence H. Hayward Directors, Chief Executive
Officer and President

/s/ Brian P. McDermott Director December 22, 2000
-----------------------
Brian P. McDermott

/s/ Gregory J. Annick Director December 22, 2000
-----------------------
Gregory J. Annick

/s/ John G. Danhak Director December 22, 2000
-----------------------
John G. Danhak

/s/ Michael J. Fourticq Director December 22, 2000
-----------------------
Michael J. Fourticq

/s/ Donald J. Anderson Chief Financial Officer, Director and December 22, 2000
-----------------------
Donald J. Anderson Principal Accounting Officer
</TABLE>