<PAGE>
 
================================================================================

                                 UNITED STATES

                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549
                                         
                                   FORM 10-K/A       

(Mark One)
   
[X]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
     ACT OF 1934     
     For the fiscal year ended December 28, 1996

                                      OR
    
[ ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
     EXCHANGE ACT OF 1934      
       For the transition period from _____________________ to
       __________________________

                        Commission file number 0-19096

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

                California                               93-0976447
       (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
                               (Title of Class)

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes   X    No 
                                              -----     -----

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

The aggregate market value of the voting stock held by non-affiliates of the
Registrant on March 25, 1997 was $70,918,489.

                   APPLICABLE ONLY TO CORPORATE REGISTRANTS:

The number of outstanding shares of the Registrant's Common Stock on March 27,
1997 was 6,551,566.

         


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<PAGE>
 
                                    PART I

ITEM 1.  BUSINESS
    
     Leslie's is the leading national specialty retailer of swimming pool
supplies and related products. These products primarily consist of regularly
purchased, non-discretionary pool maintenance items such as chemicals,
equipment, cleaning accessories and parts, and also include fun, safety and
fitness-oriented recreational items. The Company currently markets its products
under the trade name Leslie's Swimming Pool Supplies through 278 company-owned
retail stores in 27 states and through mail order catalogs sent to selected pool
owners nationwide. From 1992 to 1996, the Company increased its sales at a
compound annual growth rate of 18.8%, from $96.3 million to $191.6 million.
During the same period, EBITDA (FIFO basis) increased at a compound annual
growth rate of 21.9%, from $6.8 million to $15.0 million. The Company's growth
reflects a store count that increased from 1992 to 1996 at the rate of 16.0%
annually and comparable store sales increases that averaged 10.1% annually
during the same time frame.     
    
     The Company provides its customers a comprehensive selection of high
quality products, competitive every day low prices ("EDLP") and superior
customer service through knowledgeable and responsive sales personnel who offer
a high level of technical assistance at convenient store locations.  The EDLP
offered by the Company are comparable to or better than those offered by any of
its competitors, including mass merchandisers and home centers.  The typical
Leslie's store contains 4,000 square feet of space, is located either in a strip
center or on a freestanding site in an area of heavy retail activity, and draws
its customers primarily from an approximately three-mile trade area.  The
Company maintains a proprietary mailing list of more than 4.5 million addresses,
including approximately 90% of the residential in-ground pools in the U.S.  This
highly focused list of target customers is central to the Company's direct mail
marketing efforts, which support both its retail store and mail order
operations.  Management believes that the Leslie's name is one of the most
recognized brands in pool supplies and represents an image of quality to
consumers.  In fiscal 1996, Leslie's brand name products accounted for
approximately 60% of the Company's total sales.      
    
     Leslie's successful execution of its business strategy has generated a 33-
year history of consistently increasing sales.  Management intends to continue
increasing sales and profits by further expanding its store base at the rate of
12% to 15% annually and continuing to achieve positive comparable store sales
increases.  The Company attributes its strong historical results and its
positive outlook for growth and profitability to the following factors:      
    
     Leadership Position in a Highly Fragmented Market.  Leslie's current store
count of 278 locations is approximately equal to the sum of the next fifteen
largest specialty retail competitors combined.  However, despite its large
relative size, Leslie's presently accounts for only approximately 5% of the
estimated $3.7 billion annual pool and spa supply market.  Since 1989, Leslie's
has accelerated the pace of its new store openings and consequently has gained
market share.  Management believes that this growth has come primarily at the
expense of independent local and regional pool supply retailers, which accounted
for over two-thirds of industry sales in 1996.      
    
     Attractive Store Economics.  Leslie's results reflect extremely attractive
store-level economics.  The Company estimates that cash required to open each
new store, including inventory net of trade payables, averages approximately
$125,000.  Based upon the Company's past experience, new stores generally break
even in their first year of operation, pay back their initial investments after
three years, and in their fifth year of operation, contribute approximately
$181,000 of store operating profit, yielding a return on average initial cash
investment of 145%. In 1996, the Company's mature stores (115 stores open for
five years or longer) averaged approximately $900,000 of sales, generated
approximately $200,000 of store operating profit per location and posted a
comparable store sales increase of 5.8%.     
    
     Growth Potential of Recently Opened Stores. Leslie's new stores have
historically grown dramatically in sales and store operating profit during their
first five years of operation. In 1996, the 142 stores opened since the end of
1992 averaged $519,000 in sales and $50,000 of store operating profit per
location. Management expects these stores generally to follow the Company's
historical pattern of maturation and believes there exists a large potential for
sales and store operating profit increases from these nonmature stores.     
    
     Large Sales Volume of Non-Discretionary Products.  The consistency of
Leslie's sales growth and profitability is due in large part to the sale of non-
discretionary and regularly consumed products such as pool chemicals, cleaning
accessories, major pool equipment (pumps and heaters) and replacement parts.
Pool owners      

                                       1
<PAGE>

     
must purchase such products to maintain their pools' water quality
and physical appearance and, in the Company's experience, do so regardless of
the economic environment.  In fiscal 1996, non-discretionary and regularly
consumed products comprised approximately 74% of the Company's sales, with pool
chemicals representing approximately 44% of the Company's total sales.      
    
     Proprietary Database of Pool Locations.  Through ongoing research as well
as the conduct of its retail and mail order business, Leslie's has developed a
proprietary database of over 4.5 million addresses.  The list includes
approximately 90% of the residential in-ground pools in the U.S.  This
proprietary database allows Leslie's to execute cost-effective and highly
targeted direct mail marketing.  When combined with the Company's mail order
sales results and computerized mapping capability, this database also gives
Leslie's a sophisticated store site selection capability.  Management believes
that the scope and accuracy of its proprietary database is unique in the pool
supply industry.      
    
     Purchasing Power and Vertical Integration. Due to its size, Leslie's
purchases more chemicals and other pool supplies than any other specialty
retailer. In addition, Leslie's operates a repackaging facility which provides
the Company with significant cost savings, greater control over product
availability and quality, greater flexibility when sourcing products, and vital
information when negotiating with third-party providers. Further, unlike most of
its competitors, the Company does not rely upon third-party distribution, but
has it own highly efficient distribution system. Management believes that these
factors permit Leslie's to achieve a lower cost of goods than any of its
competitors, including mass merchandisers and home centers.       
    
     Superior Level of Customer Service.  Leslie's believes that its superior
level of customer service, including its comprehensive product selection, gives
it a significant advantage over its competitors in winning the loyalty of
customers.  Due to the complicated nature of pool chemistry and pool equipment
maintenance, and consistent with its philosophy of being a full service swimming
pool supply retailer, Leslie's offers a high level of technical assistance to
its customers.  The Company has developed a comprehensive training program
educating all store employees on the subjects of maintenance techniques, water
chemistry and equipment testing and repair.  As part of its regular customer
service program the Company offers free detailed water testing, pamphlets on
pool maintenance, and in-store equipment repairs, generally free of labor or
bench charges.      
    
HISTORY      
    
     The Company is the successor to the original Leslie's Poolmart founded in
1963.  From its inception in 1963 through the end of 1987, Leslie's Poolmart
grew steadily in sales and number of stores. In September 1988, Leslie's
Poolmart was purchased in a highly leveraged transaction by an investment group
led by Hancock Park Associates ("HPA").  The Company completed an initial public
offering in April 1991 and in August 1992 added 14 stores through the
acquisition of a competitor.  Leslie's has added 116 stores over the past four
years.  Leslie's intends to continue to grow by opening additional retail stores
in both new and existing markets.      
    
SWIMMING POOL SUPPLY INDUSTRY      
    
     Regardless of the type or size of a swimming pool, there are numerous
ongoing maintenance and repair requirements associated with pool ownership.  In
order to keep a pool safe and sanitized, chemical treatment is required to
maintain proper chemical balance, particularly in response to variables such as
pool usage, precipitation and temperature. A swimming pool is chemically
balanced when the disinfectant, pH, alkalinity, hardness and dissolved solids
are at the desired levels.  The majority of swimming pool owners use chlorine to
disinfect their pools.  When the pool is chemically balanced, problems such as
algae, mineral and salt saturation, corrosive water, staining, eye irritation
and strong chlorine smell are less likely to occur.  A regular testing and
maintenance routine will result in a stable and more easily maintained pool.
However, regardless of how well appropriate levels of chlorine are maintained,
"shocking" is periodically required to break up the contaminants 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      

                                       2
<PAGE>

     
and services. Further, even non-usage considerations such as a pool's appearance
and the overall look of a household and yard create an ongoing demand for these
maintenance related supplies. In addition, pool usage creates demand for
discretionary items such as floats, games and accessories.      
    
     The swimming pool supply industry can be divided into four major segments
by pool type:  residential in-ground swimming pools, residential above-ground
swimming pools (usually 12 to 24 feet in diameter), commercial swimming pools
and spas or hot tubs.  The Company's historical strategy was to focus primarily
on the residential in-ground pool owner.  In recent years the Company has
expanded its activities to more aggressively address the commercial and above-
ground markets as well.  In the residential categories, the Company markets its
products primarily to the "do-it-yourself" market as opposed to those pool
owners who hire pool servicers.  Through its rapidly growing commercial
business, products and services are offered to all non-residential pool
installations as well as to pool service companies which maintain either
residential or commercial pools. The Company's uninterrupted growth through
three recessionary periods suggests that due to the ongoing maintenance and
repair needs of existing swimming pools, the Company would not be significantly
affected by a decline in swimming pool installation.  However, there can be no
assurance that a prolonged severe economic downturn and resulting decline in new
housing construction or swimming pool installation would not adversely affect
the Company's long-term expansion plans.      
    
SEASONALITY      
    
     The Company's business exhibits substantial seasonality, which the Company
believes is typical of the swimming pool supply industry.  In general, sales and
net income are highest during the second and third fiscal quarters which
represent the peak months of swimming pool use.  Sales are substantially lower
during the first and fourth quarters when the Company typically incurs net
losses.  The principal external factor affecting the Company's business is
weather.  Hot weather and the higher frequency of pool usage in such weather
create a need for more pool chemicals and supplies.  Unseasonably early or late
warming trends can increase or decrease the length of the pool season.  In
addition, unseasonably cool weather and/or extraordinary amounts of rainfall in
the peak season (such as that experienced in much of the U.S. in the spring and
early summer of 1995) will tend to decrease swimming pool use.  The likelihood
that unusual weather patterns will severely impact the Company's results is
lessened by the geographical diversification of the Company's store locations.
The Company also expects that its quarterly results of operations will fluctuate
depending on the timing and amount of revenue contributed by new stores and, to
a lesser degree, the timing of costs associated with the opening of new stores.
The Company attempts to open its new stores primarily in the first quarter in
order to position itself for the following peak season.     
    
PRODUCTS      
    
     Leslie's offers its customers a comprehensive selection of products
necessary to satisfy their swimming pool supply needs.  During 1996, the Company
stocked approximately 3,000 items in each store, with more than 7,000 additional
items available by special order.  For 1997 and beyond, the newly-created Xpress
Parts program will make 5,000 more special order items available to Leslie's
customers.  In 1996, approximately 550 items were displayed in the Company's
residential mail order catalogs and 1,200 items were in the commercial catalog,
although special order procedures make nearly all Leslie's products available to
mail order customers as well.      
    
     The Company's major product categories are pool chemicals; major equipment;
cleaning and testing equipment; pool covers, reels, and liners; in a limited
number of stores, above-ground pools; and recreational items (which include
swimming pool floats, games, lounges, masks, fins, snorkels and other "impulse"
items).  The following table shows the approximate percentage of sales and
primary function for each of the Company's major product categories in fiscal
1996:      

                                       3
<PAGE>

<TABLE>     
<CAPTION>
        PRODUCT LINE            PERCENTAGE                             PURPOSE
--------------------------      ------------             ------------------------------------                 
<S>                             <C>                      <C>                                   
Pool Chemicals                       [44%]               Cleanliness, appearance, health       
                                                                                               
Major Equipment & Parts              [30%]               Pumps and heaters for cleaning and    
                                                         temperature maintenance; automatic    
                                                         pool cleaners for ease of             
                                                         maintenance                           

Cleaning and Testing                  [8%]               Water evaluation, cleanliness and     
 Equipment                                               appearance                            

Covers, Reels, Liners & Pools         [9%]               Safety, cleanliness and temperature   
                                                         maintenance for above-ground pools    

Recreational Items                    [9%]               Pool enjoyment, swim aids              
</TABLE>      
    
     Non-discretionary and regularly consumed products such as pool chemicals,
major equipment and parts represented approximately 75% of total sales in fiscal
1996. The high percentage of Leslie's business which is attributable to non-
discretionary products results in a very high level of inventory quality at the
Company since the Company's non-discretionary products have long shelf lives and
are not prone to either obsolescence or shrinkage.     
    
     The Company believes that product quality and availability are key
attributes considered by consumers when shopping for pool supplies and that the
Company's ability to provide a high quality, in-stock product offering is
fundamental to its concept of value leadership.  In addition to third-party
brand names, Leslie's carries a broad selection of products under the Leslie's
brand name.  Marketing studies have shown that the Leslie's brand name is one of
the three most recognized brands in pool supplies and represents an image of
quality to consumers.  In fiscal 1996, Leslie's brand name products accounted
for approximately 60% of the Company's total sales.      
    
CHANNELS OF DISTRIBUTION      
    
     Retail Store Operations.  At the end of 1996, Leslie's marketed its
products through 259 retail stores in 27 states under the trade name Leslie's
Swimming Pool Supplies.  California represents its single largest concentration
of stores with 82, while  45 stores are located in Texas, and 54 stores are in
the northeast/mid-Atlantic area. Leslie's retail stores are located in areas
with high concentrations of swimming pools and typically are approximately 4,000
square feet in size.  In addition to the store manager, the typical Leslie's
store employs two assistant managers, both of whom are generally full-time
employees.  Additionally, Leslie's makes frequent use of part-time and temporary
employees to support its full-time employees during peak seasons.  During 1996,
the Company had 16 regional supervisors, each of whom was responsible for
approximately 16 stores.      
    
     Mail Order Catalog.  Leslie's mail order catalogs provide an extension of
its service philosophies and products to those areas not currently served by a
retail store and allow the scope of the Company's business to be truly
nationwide.  The Company believes that it operates one of the largest pool
supply mail order businesses in the country, with annual sales for 1996 of
approximately $7.7 million. Further, the Company believes that its mail order
catalogs build awareness of the Leslie's name, provide it with buying
efficiencies and, when coupled with information from its retail stores, are
instrumental in determining site selection for new stores.      
    
CUSTOMER SERVICE      
    
     Due to the complicated nature of pool chemistry and equipment maintenance
and consistent with its philosophy of being a full service swimming pool supply
retailer, Leslie's offers a high level of technical assistance to support its
customers.  The Company considers its training of store personnel to be an
integral part of its service philosophy.  Leslie's extensive training program
for all full-time and part-time store employees includes courses in water
chemistry, water testing, trouble shooting on equipment, equipment sizing and
parts replacement.  The Company maintains the same high customer service
standards for its mail order business as it does for its retail stores.      

                                       4
<PAGE>

     
     During 1996, Leslie's stores in Southern and Northern California; Dallas
and Houston, Texas; and Las Vegas, Nevada, were supported by the Leslie's
Service Department, which offers poolside equipment installation and repair,
leak detection and repair, and seasonal opening and closing services.  The
Service Department utilizes both Company employees and subcontractors to perform
these services.  The Company anticipates that operations in these markets will
serve as a prototype for a nationwide service expansion.      
    
MARKETING      
    
     Substantially all the Company's marketing is done on a direct mail basis
through its proprietary mailing list of more than four and a half million
addresses at which, primarily, residential pools are located.  Leslie's has
found that its ability to mail directly to this highly focused group is an
effective and efficient way to conduct its marketing activities to both retail
store and mail order customers.  The Company constantly updates its address list
through primary research techniques and in-store customer sign-ups.      
    
     Addresses on the Company's proprietary list that are located within a
specified service area of a retail store receive circulars once or twice per
month from late March or early April through September or, selectively, through
October.  As a regular part of Leslie's promotional activities, each mailer
highlights specific items which are intended to increase store traffic, and
reinforces to the customer the advantages of shopping at Leslie's, which include
everyday low pricing, a high level of customer service, and the broad selection
of high quality products.  Addresses outside the Company's store service areas,
and recently active mail order customers within those service areas, receive the
Company's mail order catalogs.  Occasionally, the Company will utilize local
print media when it enters a new market, and is doing so in connection with its
above-ground pool sales test markets.  New store openings typically involve
additional advertising pieces in the first two to three months of operation. 
                                                                                
    
PURCHASING      
    
     Leslie's management believes that because it is one of the largest
purchasers of swimming pool supplies for retail sales in the United States, the
Company is able to obtain very favorable pricing on its purchases from outside
suppliers.  Nearly all raw materials and those products not repackaged by the
Company are purchased directly from manufacturers.  It is common in the swimming
pool supply industry for certain manufacturers to offer extended dating terms on
certain products to quantity purchasers such as Leslie's.  These dating terms
are typically available to the Company for pre-season or early season purchases.
                                                                                
    
     The Company's principal chemical raw materials and granular chlorine
compounds are purchased primarily from three suppliers.  At the end of 1994, the
Company entered into a three-year product purchase agreement with a major
producer of one of the principal chlorine compounds, the chlorinated
isocyanurates. The Company believes that there are several other reliable
suppliers of chlorine products in the marketplace today.  Although the Company
has one sole source supplier for a nonchlorine shocking compound, termination of
supply would not pose any significant problems for the Company because
substitute chemicals and alternate shocking techniques are available.  The
Company believes that reliable alternative sources of supply are available for
all of its raw materials and finished products.      
    
VERTICAL INTEGRATION      
    
     Leslie's operates a plant in the Los Angeles area where it converts dry
granular chlorine into tablet form and repackages a variety of bulk chemicals
into various sized containers suitable for retail sales.  Leslie's also
formulates a variety of specialty liquids, including water clarifiers, tile
cleaners, algaecides and stain preventives.  The chemicals that the Company
processes have a relatively long shelf life.  Leslie's believes that supplying
its stores with chemicals from its own repackaging plant provides it with cost
savings, as well as greater control over product availability and quality, as
compared to non-integrated pool supply retailers.  It also offers the Company
greater flexibility of sourcing and vital information when negotiating with
third-party repackagers and chemical providers. The Leslie's brand name appears
on all products processed at its repackaging plant, and on the significant
majority of all its chemical products.  The Company believes that it is among
the largest processors of chlorine products for the swimming pool supply
industry.  The total output of Leslie's repackaging plant is utilized by the
Company and is not sold or distributed to other retailers.       

                                       5
<PAGE>

     
Leslie's currently does not intend to sell any significant amount of chemicals
from its Los Angeles area facility to other retailers or distributors.      
    
     In connection with the operation of its second Distribution Center in
Dallas, Texas, and third Distribution Center in Bridgeport, New Jersey, the
Company has expanded its use of third-party chemical repackagers and its
purchase of products already in end-use configurations. These products are also
generally packaged under the Leslie's brand name. The Company continually
evaluates the cost effectiveness of third-party sourcing versus internal
manufacturing in order to minimize its cost of goods. Leslie's will also
continue to evaluate the establishment of additional chemical repackaging
capabilities, though there are currently no plans for such an investment.  In
addition to chemicals, a variety of the Company's products are packaged under
the Leslie's brand name.      
    
DISTRIBUTION      
    
     The Company distributes all of its products to its retail stores and to its
catalog customers through its leased distribution facilities in Ontario,
California; Dallas, Texas; and Bridgeport, New Jersey.  Leslie's relocated and
consolidated its West coast distribution operation, along with the Los Angeles
repackaging operation, into a 183,000 square foot facility in Ontario,
California in early 1997.  Leslie's opened its 100,000 square foot Dallas
facility in November 1990 and the 81,000 square foot Bridgeport, New Jersey
facility in February 1995.  The Company is now purchasing the majority of the
chemicals to be distributed from the Dallas and Bridgeport distribution centers
from outside manufacturers rather than obtaining them through its repackaging
facility in Southern California.  During the height of its seasonal activities,
each of the Company's retail stores is generally replenished every 5 to 10 days.
                                                                                
    
     The Company utilizes company-owned and operated equipment, supplemented by
additional equipment leased during the busy season, to transport its goods to
stores within an approximately 350-mile radius of a distribution center. Other
stores receive deliveries via common carriers.      
    
MANAGEMENT INFORMATION SYSTEMS      
    
     All decisions relating to the buying, pricing and distribution of products
are centralized at the Company's headquarters.  Leslie's computerized point-of-
sale system provides detailed sales and inventory information for each item in
each store.  This data is used by the Company's buyers in planning their
purchases and also updates the Company's inventory management system.      
    
COMPETITION      
    
     Primary elements of competition in the retail swimming pool supply industry
are price, technical assistance, customer service, product selection and product
availability.  Most of the Company's competition comes from local stores or
regional chains which do not repackage or manufacture products and which
generally buy products in smaller quantities.  The Company believes that its
vertical integration, varied sourcing strategy, and large volume purchasing
enable it to maintain attractive margins as well as competitive price leadership
relative to the smaller operators, and that its position is strengthened by its
merchandising and marketing emphasis.  The chain store competitors include a
large franchise operator of approximately 110 retail outlets in the Florida
market and a limited number of other retail chains of approximately 15 to 30
stores.      
    
     In August 1992, Leslie's acquired one of its more prominent competitors,
Sandy's Pool Supply, Inc. ("Sandy's").  Sandy's was, at the time of the
acquisition, a 20-store chain which was 50% owned by Mr. Philip Leslie, a
founder and former shareholder of the Company. Mr. Leslie and the co-owner of
Sandy's, Mr. Sander Bass, are both subject to a 10-year non-competition
agreement which precludes their participation in any retail activities
competitive with the Company's current business.      
    
     The Company competes on selected principal products such as chlorine with
large volume, mass merchant and home center retailers.  While the ability of
these merchants to accept low margins on the limited number of items they offer
makes them aggressive price competitors of the Company, they are not generally
priced below Leslie's and do not offer the level of customer service or wide
selection of swimming pool supplies available at Leslie's.      

                                       6
<PAGE>

     
EMPLOYEES      
    
     As of December 28, 1996, Leslie's employed 1,055 persons.  During the
height of the Company's seasonal activities in 1996, it employed 1,739 persons,
including seasonal and part-time store employees who generally are not employed
during the off season.  The Company is not subject to any collective bargaining
agreements and believes that its relationships with its employees are excellent.
                                                                                
    
TRADEMARKS      
    
     In the course of its business, Leslie's employs various trademarks, trade
names and service marks as well as its logo in packaging and advertising its
products.  The Company has registered trademarks and trade names for several of
its major products on the Principal Register of the United States Patent and
Trademark Office.  The Company distinguishes the products produced in its
chemical repackaging operation or by third party repackagers at its direction
through the use of the Leslie's brand name and logo and the trademarks and trade
names of the individual items, none of which is patented, licensed, or otherwise
restricted to or by the Company.  The Company believes the strength of its
trademarks and trade names has been beneficial to its business and intends to
continue to protect and promote its marks in appropriate circumstances.      
    
ITEM 2.   PROPERTIES      
    
     As of April 30, 1997, the Company will operate 278 stores in 27 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              Michigan                        4                     
                    Arizona                   16              Missouri                        3                     
                    California                82              North Carolina                  1                     
                    Connecticut                7              New Jersey                     14                     
                    Delaware                   2              New Mexico                      1                     
                    Florida                   19              Nevada                          5                     
                    Georgia                    5              New York                       17                     
                    Indiana                    3              Ohio                            7                     
                    Kansas                     1              Oklahoma                        4                     
                    Kentucky                   1              Pennsylvania                   12                     
                    Louisiana                  4              Tennessee                       3                     
                    Massachusetts              7              Texas                          47                     
                    Maryland                   5              Rhode Island                    1                     
                                                              Virginia                        3                     

                                                              Total Stores                  278                      
</TABLE>     
    
     Except for 23 owned stores, all of its retail stores are leased by the
Company with lease terms expiring between 1997 and 2006.  The Company's typical
lease term is five years, and in the majority of instances, the Company has
renewal options at increased rents.  Five leases provide for rent contingent on
sales exceeding specific amounts.  No other leases require payment of percentage
rent.      
    
     In January and February of 1997, the Company relocated its corporate
offices, the Southern California distribution center and the chemical
repackaging operation.  The corporate offices were relocated to another location
in Chatsworth, California.  The new 38,000 square foot office building has been
leased for five years and the lease has three five-year renewal options.      
    
     The Southern California distribution center (previously located in
Chatsworth, California) and the chemical repackaging operations (previously
located in Los Angeles) were moved and consolidated into a 183,000 square foot
facility located in Ontario, California.  The Ontario facility was leased for 10
years and the lease has two five-      

                                       7
<PAGE>

     
year renewal options. The Company's distribution facility in Dallas, Texas,
consists of 100,000 square feet, with a lease term expiring in 2000. This lease
includes options to renew for two additional five-year periods. In July 1996,
the Company took a short-term lease on an additional contiguous 25,000 square
feet, which may be renewed on an annual basis. The 81,000 square foot
distribution facility in Bridgeport, New Jersey is leased for a 10-year term,
expiring in 2004. The lease includes options to renew for three five-year
periods.      
    
ITEM 3.   LEGAL PROCEEDINGS      
    
     The Company is routinely involved in legal proceedings related to the
ordinary course of its business.  Management does not believe any such matters
will have a material adverse effect on the Company.      

                                       8
<PAGE>

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

      None.

                                    PART II


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

HIGH AND LOW SALES PRICES OF LESLIE'S POOLMART COMMON STOCK
    
As of March 27, 1997, there were approximately 1,900 holders of the Company's
Common Stock. On April 26, 1991, the Company closed its initial public offering
of 2,525,000 shares of its Common Stock. The stock is designated as a national
market security on the NASDAQ Stock Market and trades under the symbol LESL. The
                                                                                

                                       9
<PAGE>

     
closing price of the Common Stock on March 27, 1997 was $ 13 1/2.  The high
and low sales prices for the Company's Common Stock for each quarter in 1996 and
1995 are reflected in the following table, adjusted to give effect to the 5%
stock dividend effective in August 1995.     

<TABLE> 
<CAPTION> 
                               1996                 1995
                        -------------------   -----------------
                          High       Low        High     Low
                          ----       ---        -----    ---
     <S>                 <C>       <C>        <C>       <C>
     First Quarter       $14 1/2   $ 12 1/2   $15       $12 3/8
 
     Second Quarter       19 1/2     13 1/4    16 5/8    12 1/8
 
     Third Quarter        17 1/4     10 7/16   16 1/4    12 1/2
 
     Fourth Quarter       14 1/2     10 1/2    16 1/4    12 1/2
</TABLE>

The Company has paid no cash dividends on its Common Stock for at least the past
eight years.  The Company currently intends to retain earnings for use in the
operation and expansion of its business and therefore does not anticipate paying
any cash dividends in the foreseeable future.


                                      10
<PAGE>
 
ITEM 6.   SELECTED FINANCIAL DATA

                     SELECTED CONSOLIDATED FINANCIAL DATA
 
  The following table presents selected consolidated financial data of the
Company as of and for each of the five fiscal years in the period ended
December 28, 1996. This financial data was derived from the audited historical
consolidated financial statements of the Company and should be read in
conjunction with the financial statements of the Company and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
elsewhere in this Annual Report.

<TABLE>   
<CAPTION>
                                 YEAR      YEAR
                                ENDED     ENDED    YEARS ENDED DECEMBER 31,
                               DEC. 28,  DEC. 30,  ---------------------------
                                 1996      1995      1994      1993     1992
                               --------  --------  --------  --------  -------
                                 (IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S>                            <C>       <C>       <C>       <C>       <C>
STATEMENTS OF INCOME
Net Sales....................  $191,640  $162,456  $141,553  $119,955  $96,337
Gross Profit.................    72,760    60,399    55,469    48,289   39,017
Gross Margin.................      38.0%     37.2%     39.2%     40.3%    40.5%
Loss (Gain) on Disposition of
 Fixed Assets................       750        27      (106)      120       26
Depreciation and
 Amortization................     4,326     3,374     2,393     2,389    2,423
Income from Operations.......     9,400     6,691     9,569     6,350    4,330
Interest Expense.............     2,786     2,708     1,733     1,189      829
Net Income...................     3,869     3,407     4,584     3,035    2,146
PER SHARE DATA/(1)/
Net Income Per Share.........  $    .57  $    .52  $    .70  $    .47  $   .34
Book Value Per Share.........  $   5.55  $   4.91  $   4.18  $   3.41  $  2.90
Weighted Average Shares
 Outstanding.................     6,790     6,614     6,515     6,464    6,399
BALANCE SHEET DATA
Working Capital..............  $ 12,718  $ 13,007  $  8,072  $  8,957  $ 7,387
Total Assets.................    83,157    79,529    61,717    49,532   44,888
Current Ratio................      1.45      1.47      1.38      1.73     1.56
Long-term Debt...............    15,581    17,843    11,272    12,751   10,220
Stockholders' Equity.........    36,315    31,921    26,339    21,041   17,820
SELECTED OPERATING DATA
Capital Expenditures.........  $  8,807  $  9,550  $  7,394  $  5,532  $ 3,343
EBITDA/(2)/..................    14,476    10,092    11,856     8,859    6,779
EBITDA (FIFO basis)/(3)/.....    14,960    10,472    11,476     8,612    6,779
EBITDA (FIFO basis)
 Margin/(4)/.................      7.81%     6.45%     8.11%     7.18%    7.04%
Number of Employees at Year-
 end.........................     1,055       780       678       565      533
Stores Operated at Year-end..       259       224       180       158      143
Comparable Store Sales
 Growth......................       9.9%      6.0%     12.9%     11.7%     2.4%
</TABLE>    
--------
/(1)/ Prior year amounts have been adjusted to reflect the 5% stock dividends
      effective in April 1994 and August 1995.
/(2)/ Earnings before interest, taxes, depreciation, amortization and loss
      (gain) on disposition of fixed assets.
    
/(3)/ EBITDA (FIFO basis) represents EBITDA plus the LIFO provision.     
    
/(4)/ EBITDA (FIFO basis) Margin represents EBITDA (FIFO basis) as a percentage
      of sales.     

                                      11
<PAGE>
 
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
 
  The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements. Certain information included in this
document (as well as information included in oral statements or other written
statements made or to be made by the Company) contains statements that are
forward-looking, such as statements relating to plans for future activities.
Such forward-looking information involves important risks and uncertainties
that could significantly affect anticipated results in the future and,
accordingly, such results may differ from those expressed in any forward-
looking statements made by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, those relating to domestic
economic conditions, activities of competitors, changes in federal or state
tax laws and of the administration of such laws and the general condition of
the economy and its effect on the securities market.
 
RESULTS OF OPERATIONS
 
  The Company is the leading specialty retailer of swimming pool supplies and
related products in the United States. At December 28, 1996 the Company
marketed its products through 259 Company-owned retail stores in 27 states and
through a nationwide mail order catalog. The Company is vertically integrated,
operating a chemical repackaging facility in Los Angeles, California. In 1996,
the Company supplied its retail stores from three distribution facilities,
located in Chatsworth, California; Dallas, Texas; and Bridgeport, New Jersey.
 
  For the year ended December 28, 1996, sales increased 18.0% to $191,640,000
from $162,456,000 in 1995. The sales increase is attributable to comparable
store sales growth of 9.9% and 35 (net) new store additions in 1996. Operating
income for the period increased 40.5% to $9,400,000 or 4.9% of sales, from
$6,691,000 or 4.1% of sales in 1995. Net income for 1996 increased 13.6% to
$3,869,000 or $.57 per share, as compared to $3,407,000 or $.52 per share in
1995. In August 1995, a 5% stock dividend was effected and the 1995 earnings
per share have been adjusted to reflect the impact of the stock dividend.
 
  The 18.0% sales growth and improved gross margin produced a 40.5% increase
in operating profits to $9,400,000 or 4.9% of sales in 1996. The $9,400,000
operating income in 1996 reflects charges totaling $750,000 associated with
the disposition of certain fixed assets in 1996. Excluding the impact of these
charges, the 1996 operating income margin would have been expanded to 5.3% of
sales versus the 4.1% operating income margin realized in 1995, and after tax
net income would have equaled $4,308,000 or $.63 per share.
 
  During 1996, the Company expanded its business by opening 37 new stores.
Additionally, two stores were closed and three relocated in 1996. This
resulted in a net increase of 35 stores at the end of December 1996 as
compared to December 1995.
 
 1996 compared to 1995
 
<TABLE>
<CAPTION>
                                                                    SALES
                                                              -----------------
                                                                1996     1995
                                                              -------- --------
                                                               (IN THOUSANDS)
<S>                                                           <C>      <C>
Retail Stores................................................ $179,119 $150,263
Mail Order Catalog...........................................    7,723    7,945
Service Departments and Other................................    4,798    4,248
                                                              -------- --------
                                                              $191,640 $162,456
                                                              ======== ========
</TABLE>
 
  Sales for the year ended December 28, 1996 increased 18% over the same
period in 1995. Retail store sales, which are comprised of residential sales
and commercial sales, grew 19.2%, reflecting increases in comparable store
sales of 9.9% as well as an increase in the total number of stores in
operation from 224 in 1995 to 259 for most of the 1996 selling season. The
increased growth rate of comparable store sales (9.9% in 1996) as compared to
the prior year (6.0% in 1995) was the result of improved weather experienced
in most market areas, and the commercial sales program, which continued to
show solid growth of approximately 20% in 1996.
 
                                      12
<PAGE>
 
  Mail order catalog sales declined 2.8% to $7,723,000 from $7,945,000 in
1995. New store openings in a number of strong mail order markets continued to
cannibalize mail order sales. Service department sales increased 12.9% in 1996
due to an increased number of service technicians operating in existing
service areas, including a significant expansion in Houston, Texas, as well as
generally improved execution.
 
  Gross profit for the year ended December 28, 1996 increased to 38.0% of
sales, from 37.2% in 1995. Gross profit represents sales less the cost of
services and purchased goods, chemical repackaging costs, and non-
administrative occupancy costs. The gross margin increase in 1996 reflects
increased retail pricing taken in early 1996, offsetting some product cost
increases seen in 1995 and again in 1996.
 
  In 1996, selling, general and administrative expenses equaled $62,358,000,
versus $53,442,000 in 1995, an increase of 16.6%, largely the result of the
15.6% increase in the number of stores. As a percentage of sales, selling,
general and administrative expenses decreased 0.4% to 32.5%, compared to 32.9%
of sales in 1995, due to the improved comparable store sales performance in
1996.
     
  EBITDA (FIFO basis) was $15.0 million in 1996, representing an increase of 
$4.5 million, or 42.9%, as compared to $10.5 million for 1995.  EBITDA (FIFO 
basis) margin increased to 7.8% of sales in 1996 as compared to 6.4% of sales in
1995.  The increase in EBITDA (FIFO basis) and EBITDA (FIFO basis) margin was 
primarily due to the Company's higher sales volume in 1996 and an increase in 
the Company's gross margin.     
    
  Amortization of acquisition costs, which represents the amortization of
goodwill, equalled $252,000 in 1996, essentially flat as compared to 1995.     

  In 1996 the Company recognized losses on the disposition of fixed assets
totaling approximately $750,000. This was primarily comprised of a $650,000
write off of leasehold improvements related to the relocations of its
corporate offices, Southern California distribution operations and Pool Brite
chemical repackaging operation in early 1997. Additionally a $100,000 loss was
realized on the sale of an excess property located in Oklahoma City.
     
  Income from operations for the period increased 40.5% to $9,400,000 or 4.9% of
sales, from $6,691,000 or 4.1% of sales in 1995.      

  Interest expense equalled $2,786,000 in 1996, up slightly from $2,708,000 in
1995. The increase was primarily the result of slightly increased borrowings
due to the capital spending and working capital requirements associated with
the continued growth of the business.
 
  The tax provision increased to $2,745,000 in 1996, an effective rate of
41.5%, from $576,000 and an effective tax rate of 14.5% in 1995. The lower
effective tax rate in 1995 as compared to 1996 reflects the reversal in 1995
of certain tax reserves which were no longer needed.
 
 1995 compared to 1994
 
<TABLE>
<CAPTION>
                                                                    SALES
                                                              -----------------
                                                                1995     1994
                                                              -------- --------
                                                               (IN THOUSANDS)
<S>                                                           <C>      <C>
Retail Stores................................................ $150,263 $129,545
Mail Order Catalog...........................................    7,945    8,283
Service Departments and Other................................    4,248    3,725
                                                              -------- --------
                                                              $162,456 $141,553
                                                              ======== ========
</TABLE>
 
  Sales for the year ended December 30, 1995 increased 14.8% over the same
period in 1994. Retail store sales grew 16.0%, reflecting increases in
comparable store sales of 6.0% as well as an increase in the total number of
stores in operation from 180 in 1994 to 223 for most of the 1995 selling
season. The lower growth rate of comparable store sales (6.0%) as compared to
prior years (12.9% in 1994 and 11.7% in 1993) was the result of the cool, wet
weather experienced in most market areas in the March through June timeframe.
Despite the reduced growth in residential sales, the commercial sales program
continued to show strong growth of approximately 45% throughout 1995.
 
  Mail order catalog sales declined 4.1% to $7,945,000 from $8,283,000 in
1994. The poor spring weather impacted mail order sales as did new store
openings in a number of strong mail order markets which continued to
cannibalize mail order sales. Service department sales increased 14.0% in 1995
due to an increased number of service technicians operating in existing
service areas, as well as generally improved execution.

                                      13 
<PAGE>
  Gross profit for the year ended December 30, 1995 declined as a percentage of
sales, to 37.2% from 39.2% in 1994. Gross profit represents sales less the cost
of services and purchased goods, chemical repackaging costs, and non-
administrative occupancy costs. The decrease in gross margin in 1995 was the
result of higher occupancy costs associated with the opening of 44 new stores
plus the new northeast distribution center, increased merchandise costs in a
variety of product categories, and the strong growth of commercial sales, which
generate a somewhat lower gross margin.
 
  In 1995, selling, general and administrative expenses equaled $53,442,000,
versus $45,764,000 in 1994, an increase of 16.8%, largely the result of the
24.4% increase in the number of stores. As a percentage of sales, selling,
general and administrative expenses increased 0.6% to 32.9%, compared to 32.3%
of sales in 1994, due to the lower than expected comparable store sales
performance in 1995. It is management's objective to grow selling, general and
administrative expenses at a rate lower than the rate of store growth and, as a
result, reduce these expenses as a percentage of sales over time.
    
  EBITDA (FIFO basis) was $10.5 million in 1995, representing a decrease of $1.0
million, or 8.7%, as compared to $11.5 million for 1994. EBITDA (FIFO basis)
margin decreased to 6.4% of sales in 1995 as compared to 8.1% of sales in 1994.
The decrease in EBITDA (FIFO basis) and EBITDA (FIFO basis) margin was primarily
due to the Company's lower gross margin and higher selling, general and
administrative expenses as a percent of sales.     

  Amortization of acquisition costs, which represents the amortization of
goodwill, equaled $239,000 in 1995, essentially flat as compared to 1994.
    
  Income from operations was $6.7 million in 1995, representing a decrease of
$2.9 million, or 30.2%, as compared to $9.6 million for 1994. Income from
operations as a percentage of net sales decreased to 4.1% in 1995 as compared to
6.8% in 1994. The decrease was primarily due to the Company's lower gross margin
and higher selling, general and administrative expenses as a percent of
sales.    

  Interest expense equaled $2,708,000 in 1995, up from $1,733,000 in 1994. The
increase was primarily the result of increased borrowings associated with higher
capital spending and working capital requirements due to continued growth in the
business, and the lower earnings realized in 1995.
 
  The tax provision declined to $576,000 in 1995, an effective rate of 14.5%,
from $3,252,000 and an effective tax rate of 41.5% in 1994. The lower effective
tax rate in 1995 as compared to 1994 reflects the third quarter reversal of
certain tax reserves which were no longer needed.
 
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
 
  Changes in Financial Condition. From December 30, 1995 to December 28, 1996,
total current assets increased $71,000 from $40,809,000 to $40,880,000. The
slight overall increase in current assets results from decreases in inventories
offset by increases in accounts receivable and deferred tax assets. The
principal component of current assets is inventory, which decreased $355,000
from $34,303,000 to $33,948,000. The inventory decrease results mainly from a
decrease in the average store inventory, partially offset by an increase in the
number of stores. Average store inventories were higher in 1995 compared to 1996
primarily due to an oversupply of some winterizing and recreational items which
the Company sold through in 1996.
 
  Total current liabilities increased $360,000 between December 30, 1995 and
December 28, 1996. The increase is due principally to the $1,840,000 increase in
accounts payable from $4,215,000 at December 30, 1995 to $6,055,000 at December
28, 1996. The increase in accounts payable is generally attributable to improved
payment terms received from the Company's vendors.
 
  Liquidity and Capital Resources. For the year ended December 28, 1996, net
cash provided by operating activities was $11,970,000 compared with cash used in
operating activities of $4,144,000 in the prior year. Higher earnings and
decreased per store inventory balances resulted in increased cash flow from
operations in 1996.
 
  In 1996, cash used in investing activities was $8,586,000 compared with
$9,229,000 in the prior year. This decrease resulted primarily from reduced
capital expenditures in 1996 as compared to 1995 due to the slightly lower
number of new store openings.
 
  Cash used in financing activities was $3,371,000 in 1996 compared with cash
provided of $13,384,000 in 1995. In the second quarter of 1995, the Company
completed a private placement of its $10 million 8% Convertible Subordinated
Debentures. The debentures have a six-year term, and are convertible into
Leslie's California Common Stock at $20.95 per share. The debentures are
unsecured and subordinated to the present and future senior debt of the Company.
The proceeds were used to refinance some existing long-term debt and provide
capital for continued growth of the Company.
 
                                      14
<PAGE>
 
  Line-of-credit borrowings decreased $1,516,000 since December 30, 1995
primarily as a result of the higher cash flow from operations. In January of
1997 the company amended its credit agreement with Wells Fargo Bank to
consolidate the existing line of credit facility, the project financing
facility, and the term loan into one expanded $38,000,000 line of credit
facility. The term of the expanded line of credit facility was extended
through February 16, 2000. Interest accrues at the lender's reference rate
(8.25% at December 28, 1996) or at LIBOR plus 1.75%, at the Company's
election.
 
  The Company believes that its internally generated funds, as well as its
borrowing capacity, are adequate to meet its working capital needs, maturing
obligations and capital expenditure requirements, including those relating to
the opening of new stores.
 
  Seasonality and Quarterly Fluctuations. The Company's business exhibits
substantial seasonality which the Company believes is typical of the swimming
pool supply industry. In general, sales and net income are highest during the
second and third quarters, which represent the peak months of swimming pool
use. Sales are substantially lower during the first and fourth quarters when
the Company will typically incur net losses. The principal external factor
affecting the Company's business is weather. Hot weather and the higher
frequency of pool usage in such weather create a need for more pool chemicals
and supplies. Unseasonably early or late warming trends can increase or
decrease the length of the pool season. In addition, unseasonably cool weather
and/or extraordinary amounts of rainfall in the peak season decrease swimming
pool use. The likelihood that unusual weather patterns will severely impact
the Company's results is lessened by the geographical diversification of the
Company's store locations.
 
  The Company expects that its quarterly results of operations will fluctuate
depending on the timing and amount of revenue contributed by new stores and,
to a lesser degree, the timing of costs associated with the opening of new
stores. The Company attempts to open its new stores primarily in the first
quarter in order to position itself for the following peak season. As
additional stores and the resultant operating expenses are added, the Company
expects its usual losses incurred in the first and fourth quarters to
increase.
 
                SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
                   (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>     
<CAPTION>
                                         THREE MONTHS ENDED
                                  --------------------------------------
                                  MARCH 30   JUNE 29   SEPT. 28  DEC. 28
                                  --------   -------   --------  -------
<S>                               <C>        <C>       <C>       <C>
1996
Sales............................ $18,064    $88,835   $63,657   $21,084
Gross Profit.....................   4,258     38,236    25,868     4,398
(Loss) Income from Operations....  (8,610)    17,265     7,712    (6,967)/(1)/
Net (Loss) Income................  (5,525)     9,658     4,176    (4,440)
Net (Loss) Income Per Common
 Equivalent Share................ $  (.82)   $  1.41   $   .62   $  (.66)
Weighted Average Common
 Equivalent Shares............... $ 6,769      6,867     6,776     6,756
EBITDA (FIFO basis)/(2)/.........  (7,564)    18,534     8,919    (4,929)
Comparable Store Sales Growth....     6.6%      16.1%      4.2%      6.4%
<CAPTION>
                                         THREE MONTHS ENDED
                                  --------------------------------------
                                  APRIL 1    JULY 1    SEPT. 30  DEC. 30
                                  --------   -------   --------  -------
<S>                               <C>        <C>       <C>       <C>
1995
Sales............................ $15,360    $71,945   $56,862   $18,289
Gross Profit.....................   3,826     29,883    22,230     4,460
(Loss) Income from Operations....  (6,921)    12,138     6,974    (5,500)
Net (Loss) Income................  (4,416)     6,692     4,817    (3,686)
Net (Loss) Income Per Common
 Equivalent Share/(3)/........... $  (.67)   $  1.01   $   .73   $  (.56)
Weighted Average Common
 Equivalent Shares/(3)/.......... $ 6,592      6,622     6,618     6,624
EBITDA (FIFO basis)/(2)/.........  (6,257)    12,846     7,791    (3,908)
Comparable Store Sales Growth....    (0.6)%     (0.3)%    16.0%      9.5%
</TABLE>      
--------
    
/(1)/ The quarter ended December 28, 1996 loss from operations included
      approximately a $650,000 loss on disposition of fixed assets.      
    
/(2)/ EBITDA (FIFO basis) represents income before interest, expense, 
      depreciation and amortization expense, the LIFO provision, (gains) and
      losses on disposition of fixed assets and the provision for income taxes. 
                                                                                
    
/(3)/ The 1995 amounts have been adjusted to reflect a 5% stock dividend
      effective August 1995.      
 
                                      15
<PAGE>
 
  Recent Accounting Pronouncement. The Company adopted Statement of Financial
Accounting Standard No. 121 "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of" ("SFAS 121") in the first quarter
of 1996. The adoption of SFAS 121 did not impact the Company's financial
position or its results of operations. In addition, in 1996 the Company adopted
the disclosures required by Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). The disclosures required
by SFAS 123 are presented below in Note 12 of Notes to the Consolidated
Financial Statements.
 
SUBSEQUENT EVENT
    
  On February 26, 1997, the Company's Board of Directors approved an Agreement
of Merger providing for the reincorporation of the Company in Delaware by merger
into a wholly-owned Delaware subsidiary (the "Reincorporation"), and an
Agreement and Plan of Merger providing for the merger of Poolmart USA Inc., a
newly-formed corporation, with and into the Company (the "Merger"). Consummation
of the Reincorporation and Merger are subject to shareholder approval and other
conditions, including financing. A special meeting of shareholders is currently
scheduled for June 10, 1997, at which shareholders of the Company as of the
record date of April 22, 1997 will be voting on the Reincorparation and Merger
proposals. Assuming consummation of the reincorporation and upon effectiveness
of the Merger, (i) each outstanding share of common stock of the Company
will be converted into $14.50 cash (other than 359,505 shares owned primarily by
members of management, including Michael Fourticq, the Chairman of the Company,
and Brian McDermott, the President and CEO of the Company and other than shares
as to which the holders perfect dissenters' rights) and (ii) outstanding options
covering approximately 846,000 shares of common stock, including those not yet
vested, would be cancelled for payment of the difference between the exercise
price and $14.50 per share. The total value of the shares and options
approximates $101 million. Certain directors and members of management have an
interest in the Reincorporation and Merger. See Item 13--Certain Relationships
and Related Transactions.     

                                      16
<PAGE>
 
ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE> 
<CAPTION> 
                                                                           PAGE
                                                                           ----
<S>                                                                        <C> 
Report of Independent Public Accountants.................................   15
Management's Report......................................................   16
Consolidated Balance Sheets--December 28, 1996 and December 30, 1995.....   17
Consolidated Statements of Income--Years Ended December 28, 1996,
 December 30, 1995 and December 31, 1994.................................   18
Consolidated Statements of Shareholders' Equity--Years Ended December 28,
 1996, December 30, 1995 and December 31, 1994...........................   19
Consolidated Statements of Cash Flows--Years Ended December 28, 1996, De-
 cember 30, 1995 and December 31, 1994...................................   20
Notes to Consolidated Financial Statements...............................   21
</TABLE>
 
                                      17
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors and Shareholders of Leslie's Poolmart:
 
  We have audited the accompanying consolidated balance sheets of Leslie's
Poolmart (a California corporation) and subsidiaries as of December 28, 1996
and December 30, 1995 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended December 28, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Leslie's Poolmart and
subsidiaries as of December 28, 1996 and December 30, 1995, and the results of
their operations and their cash flows for each of the three fiscal years in
the period ended December 28, 1996, in conformity with generally accepted
accounting principles.
 
                                          /s/ Arthur Andersen LLP

                                          Arthur Andersen LLP
 
Los Angeles, California
March 6, 1997
 
                                      18
<PAGE>
 
                              MANAGEMENT'S REPORT
 
  Management is responsible for the preparation and integrity of the financial
statements appearing in this Proxy Statement. The financial statements were
prepared in accordance with generally accepted accounting principles and
include certain amounts based on management's best estimates and judgments.
 
  The Company maintains a system of internal accounting controls designed to
provide reasonable assurance that assets are safeguarded and that transactions
are executed as authorized and are recorded and reported properly. Management
believes that existing internal accounting control systems are achieving their
objectives and that they provide reasonable assurance concerning the accuracy
of the financial statements.
 
  Arthur Andersen LLP, independent public accountants, has audited the
Company's financial statements and their report is presented herein.
 
  The Board of Directors has an Audit Committee composed entirely of outside
Directors. Arthur Andersen LLP has direct access to the Audit Committee and
periodically meets with the Committee to discuss accounting, auditing and
financial reporting matters.
 

/s/ Robert D. Olsen

Robert D. Olsen
Chief Financial Officer
 
                                      19
<PAGE>
 
                               LESLIE'S POOLMART
 
                          CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                    DEC. 28, 1996 DEC. 30, 1995
                                                    ------------- -------------
<S>                                                 <C>           <C>
ASSETS
------
CURRENT ASSETS:
  Cash.............................................    $    87       $    74
  Accounts and other receivables, net..............      2,550         2,235
  Inventories, net.................................     33,948        34,303
  Prepaid expenses and other.......................      1,693         1,876
  Deferred tax assets..............................      2,602         2,321
                                                       -------       -------
    Total current assets...........................     40,880        40,809
                                                       -------       -------
PROPERTY, PLANT AND EQUIPMENT:.....................     46,058        39,550
  Less--Accumulated depreciation and amortization..     12,751        10,005
                                                       -------       -------
  Net property, plant and equipment................     33,307        29,545
                                                       -------       -------
OTHER ASSETS:
  Goodwill, net....................................      8,298         8,550
  Other............................................        672           625
                                                       -------       -------
    Total other assets.............................      8,970         9,175
                                                       -------       -------
                                                       $83,157       $79,529
                                                       =======       =======
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
  Accounts payable.................................    $ 6,055       $ 4,215
  Accrued liabilities..............................      4,480         4,546
  Short-term borrowings............................     15,440        16,956
  Current portion of long-term debt................      2,187         2,085
                                                       -------       -------
    Total current liabilities......................     28,162        27,802
                                                       -------       -------
DEFERRED TAX LIABILITIES...........................      3,099         1,963
LONG-TERM DEBT, net of current portion.............      5,581         7,843
CONVERTIBLE SUBORDINATED DEBENTURES................     10,000        10,000
COMMITMENTS AND CONTINGENCIES......................        --            --
SHAREHOLDERS' EQUITY:
  Preferred stock, authorized 1,000,000 shares;
   none issued and outstanding.....................        --            --
  Common stock, no par value:
   Authorized--40,000,000 shares
   Issued and outstanding--6,547,928 and 6,507,074
    at Dec. 28,1996 and Dec. 30, 1995,
    respectively...................................     32,625        32,100
  Retained earnings (deficit)......................      3,690          (179)
                                                       -------       -------
    Total shareholders' equity.....................     36,315        31,921
                                                       -------       -------
                                                       $83,157       $79,529
                                                       =======       =======
</TABLE>
 
   The accompanying notes are an integral part of these consolidated balance
                                    sheets.
 
                                      20
<PAGE>
 
                               LESLIE'S POOLMART
 
                       CONSOLIDATED STATEMENTS OF INCOME
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                    YEARS ENDED
                                     -----------------------------------------
                                     DEC. 28, 1996 DEC. 30, 1995 DEC. 31, 1994
                                     ------------- ------------- -------------
<S>                                  <C>           <C>           <C>
Net sales...........................   $191,640      $162,456      $141,553
Cost of sales.......................    118,880       102,057        86,084
                                       --------      --------      --------
Gross profit........................     72,760        60,399        55,469
Selling, general and administrative
 expenses...........................     62,358        53,442        45,764
Amortization of acquisition costs...        252           239           242
Loss (gain) on disposition of fixed
 assets.............................        750            27          (106)
                                       --------      --------      --------
Income from operations..............      9,400         6,691         9,569
Interest expense, net...............      2,786         2,708         1,733
                                       --------      --------      --------
Income before taxes.................      6,614         3,983         7,836
Income tax provision................      2,745           576         3,252
                                       --------      --------      --------
Net income..........................   $  3,869      $  3,407      $  4,584
                                       ========      ========      ========
Net income per share................   $    .57      $    .52      $    .70
</TABLE>
 
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                      21
<PAGE>
 
                               LESLIE'S POOLMART
 
           CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                        COMMON STOCK
                                     ------------------ RETAINED      TOTAL
                                     NUMBER OF          (DEFICIT) SHAREHOLDERS'
                                      SHARES    AMOUNT  EARNINGS     EQUITY
                                     --------- -------- --------- -------------
<S>                                  <C>       <C>      <C>       <C>
Balance, at December 31, 1993....... 5,603,131 $ 21,467  $  (426)   $ 21,041
  Stock dividend....................   283,853    3,447   (3,447)        --
  Issuance of common stock..........     1,650       17      --           17
  Stock options exercised...........   107,101      292      --          292
  Tax benefit from stock options ex-
   ercised..........................       --       405      --          405
  Net income........................       --       --     4,584       4,584
                                     --------- --------  -------    --------
Balance, at December 31, 1994....... 5,995,735   25,628      711      26,339
  Stock dividend....................   300,793    4,297   (4,297)        --
  Issuance of common stock..........     2,050       27      --           27
  Stock options exercised...........    82,735      514      --          514
  Exercise of convertible securi-
   ties.............................   125,761    1,383      --        1,383
  Tax benefit from stock options ex-
   ercised..........................       --       251      --          251
  Net income........................       --       --     3,407       3,407
                                     --------- --------  -------    --------
Balance, at December 30, 1995....... 6,507,074   32,100     (179)     31,921
  Issuance of common stock..........        50        1      --            1
  Stock options exercised...........    40,804      304      --          304
  Tax benefit from stock options ex-
   ercised..........................       --       220      --          220
  Net income........................       --       --     3,869       3,869
                                     --------- --------  -------    --------
Balance, at December 28, 1996....... 6,547,928 $ 32,625  $ 3,690    $ 36,315
                                     ========= ========  =======    ========
</TABLE>
 
 
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                      22
<PAGE>
 
                               LESLIE'S POOLMART
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                     YEARS ENDED
                                      -----------------------------------------
                                      DEC. 28, 1996 DEC. 30, 1995 DEC. 31, 1994
                                      ------------- ------------- -------------
<S>                                   <C>           <C>           <C>
OPERATING ACTIVITIES:
  Net income.........................    $ 3,869      $  3,407       $ 4,584
  Adjustments to reconcile net income
   to net cash provided by (used in)
   operating activities:
  Depreciation and amortization......      4,326         3,374         2,393
  Loss (gain) on disposition of fixed
   assets............................        750            27          (106)
  (Increase) decrease in:
  Accounts and other receivables.....       (315)         (902)         (339)
  Inventories, net...................        355       (10,114)       (6,309)
  Prepaid expenses and other.........        183          (231)         (989)
  Other assets.......................        (47)         (290)          262
  Increase (decrease) in:
  Accounts payable and accrued lia-
   bilities..........................      1,774         2,121         1,725
  Income taxes.......................      1,075        (1,536)         (680)
                                         -------      --------       -------
  Net cash provided by (used in) op-
   erating activities................     11,970        (4,144)          541
                                         -------      --------       -------
INVESTING ACTIVITIES:
  Purchase of property, plant and
   equipment.........................     (8,807)       (9,550)       (7,394)
  Proceeds from dispositions of
   property, plant and equipment.....        221           321           583
                                         -------      --------       -------
  Net cash used in investing activi-
   ties..............................     (8,586)       (9,229)       (6,811)
                                         -------      --------       -------
FINANCING ACTIVITIES:
  Net line-of-credit borrowings......     (1,516)        7,435         3,151
  Additions to long-term debt........        --         10,000         4,890
  Payments of long-term debt.........     (2,160)       (4,592)       (2,055)
  Issuance of common stock and stock
   options exercised.................        305           541           292
                                         -------      --------       -------
  Net cash (used in) provided by fi-
   nancing activities................     (3,371)       13,384         6,278
                                         -------      --------       -------
NET INCREASE IN CASH.................         13            11             8
CASH AT BEGINNING OF PERIOD..........         74            63            55
                                         -------      --------       -------
CASH AT END OF PERIOD................    $    87      $     74       $    63
                                         =======      ========       =======
</TABLE>
 
 
 The accompanying notes are an integral part of these consolidated statements.
 
                                      23
<PAGE>
 
                               LESLIE'S POOLMART
 
                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. BUSINESS AND OPERATIONS
 
  Leslie's Poolmart (the Company) is a specialty retailer of swimming pool
supplies and related products. As of December 28, 1996, the Company marketed
its products under the trade name Leslie's Swimming Pool Supplies through 259
retail stores in 27 states and through mail order catalogs sent to selected
swimming pool owners nationwide. The Company also repackages certain bulk
chemical products for retail sale. The Company's business is highly seasonal
as the majority of its sales (79% in 1996 and 1995) and all of its operating
profits are generated in the second and third quarters.
 
  The Company purchased the capital stock of Sandy's Pool Supply, Inc.
(Sandy's) effective August 31, 1992. The adjusted purchase price for Sandy's
was approximately $1,189,000. The Company paid cash of $730,000 (net of
Sandy's cash on hand of approximately $120,000) at August 31, 1992, and in
1993 the Company received a refund of $75,000 upon the settlement of the
purchase price. The remainder of the purchase price will be paid in
installments through 2002.
 
2. STOCK DIVIDEND
 
  In August 1995 and April 1994, 5% stock dividends were declared for
shareholders of record as of August 31, 1995 and April 29, 1994, respectively.
The fair market value of the stock dividends was transferred from retained
earnings to common stock in the accompanying 1995 and 1994 consolidated
financial statements. The earnings per share, weighted average number of
shares outstanding, and the outstanding options reflect the impact of these
stock dividends.
 
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 a. Principles of Consolidation
 
  The consolidated financial statements of the Company include Leslie's
Poolmart and Sandy's Pool Supply, Inc., its wholly-owned subsidiary.
 
 b. Fiscal Periods
 
  In January 1995, to be consistent with the reporting practices of many major
retailers, the Company changed its fiscal year from a calendar year to a 52-
or 53-week year which will end on the Saturday closest to December 31. Each
fiscal quarter will have 13 weeks and will close on the Saturday closest to
March 31, June 30 and September 30.
 
 c. Cash
 
  Line-of-credit borrowings include outstanding checks of $25,000 and excess
cash balances of $205,000 at December 28, 1996, and December 30, 1995,
respectively.
 
 d. Accounts and Other Receivables, Net
 
  Accounts and other receivables include allowances for doubtful accounts of
$49,000 and $70,000 at December 28, 1996 and December 30, 1995, respectively.
 
 e. Inventories
 
  Inventories are stated at the lower of cost or market. Cost is determined on
the last-in, first-out (LIFO) basis. The effect of utilizing this method
resulted in inventory balances which were $544,000 lower at December 28, 1996,
$60,000 lower at December 30, 1995, and $320,000 higher at December 31, 1994,
than would have been reported under the first-in, first-out (FIFO) method.
 
                                      24
<PAGE>
 
                               LESLIE'S POOLMART
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 f. Property, Plant and Equipment
 
  Property, plant and equipment are stated at cost. Costs of normal
maintenance and repairs are charged to expense as incurred.
 
  Major replacements or improvements of property, plant and equipment are
capitalized. When items are sold or otherwise disposed of, the cost and
related accumulated depreciation or amortization are removed from the
accounts, and any resulting gain or loss is included in the statements of
income.
 
  Depreciation and amortization are computed using the straight-line method
(considering appropriate salvage values) based on the following estimated
average useful lives:
 
<TABLE>
   <S>                                                               <C>
   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
</TABLE>
 
 g. Goodwill
 
  The excess of the acquisition price over the fair value of the net assets at
the date of acquisition is included in the accompanying consolidated balance
sheets as "Goodwill." Goodwill is being amortized (straight-line) over forty
years. The Company continually evaluates whether later events and
circumstances have occurred that indicate the remaining estimated useful life
of goodwill may warrant revision or that the remaining balance of goodwill may
not be recoverable. When factors indicate that goodwill should be evaluated
for possible impairment, the Company uses an estimate of the related business
segment's undiscounted net income over the remaining life of the goodwill in
measuring whether the goodwill is recoverable. The balance recorded at
December 28, 1996 and December 30, 1995 was net of accumulated amortization of
$1,397,000 and $1,145,000, respectively.
 
 h. Income Taxes
 
  The Company provides for deferred income taxes relating to timing
differences in the recognition of income and expense items (primarily
depreciation and amortization) for financial and tax reporting purposes. Also,
differences between the tax basis and the financial reporting basis of various
assets were created when the Company was acquired in 1988 and when the Company
purchased Sandy's in 1992; deferred tax assets and liabilities were provided
related to these differences. Deferred taxes at December 28, 1996 and December
30, 1995 include a provision for the differences between tax and financial
asset values except that deferred taxes were not provided with respect to
amounts allocated to goodwill. As the difference between tax and financial
reporting basis changes, appropriate charges/credits are made to the deferred
tax account.
 
 i. Mail Order Catalog Sales
 
  Revenue on mail order catalog sales is recognized at the time goods are
shipped.
 
 j. Cost of Sales
 
  Included in cost of sales are the costs of services and purchased goods,
direct manufacturing and chemical repackaging costs and non-administrative
occupancy costs.
 
 k. Advertising
 
  Advertising costs are recognized as the advertising expense is incurred. The
net advertising expense incurred was $5,812,000 for the year ended December
28, 1996; $4,344,000 for the year ended December 30, 1995; and $4,223,000 for
the year ended December 31, 1994.
 
                                      25
<PAGE>
 
                               LESLIE'S POOLMART
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 l. Use of Estimates in the Preparation of Consolidated Financial Statements
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
 
 m. Recent Accounting Pronouncements
 
  The Company adopted Statement of Financial Accounting Standard No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of" (SFAS 121) in the first quarter of 1996. The adoption of
SFAS 121 did not impact the Company's financial position or its results of
operations. In addition, in 1996 the Company adopted Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). The disclosures required by SFAS 123 are presented in Note 12.
 
 n. Reclassifications
 
  Certain prior period amounts in the consolidated financial statements have
been reclassified to conform to the 1996 presentations.
 
4. INVENTORIES
 
  Inventories consist of the following:
 
<TABLE>
<CAPTION>
                                                       DECEMBER 28, DECEMBER 30,
                                                           1996         1995
                                                       ------------ ------------
   <S>                                                 <C>          <C>
   Raw materials and supplies......................... $ 1,659,000  $ 1,433,000
   Finished goods.....................................  32,289,000   32,870,000
                                                       -----------  -----------
                                                       $33,948,000  $34,303,000
                                                       ===========  ===========
</TABLE>
 
5. PROPERTY, PLANT AND EQUIPMENT
 
  Property, plant and equipment consists of the following:
 
<TABLE>
<CAPTION>
                                                       DECEMBER 28, DECEMBER 30,
                                                            1996         1995
                                                        ------------ -----------
   <S>                                                  <C>          <C>
   Land................................................ $ 6,578,000  $ 6,734,000
   Buildings and improvements..........................   6,868,000    6,716,000
   Equipment...........................................   1,785,000    1,484,000
   Leasehold improvements..............................  14,796,000   12,836,000
   Office furniture, equipment and other...............  15,118,000   11,278,000
   Construction-in-process.............................     913,000      502,000
                                                        -----------  -----------
                                                         46,058,000   39,550,000
   Less--Accumulated depreciation and amortization.....  12,751,000   10,005,000
                                                        -----------  -----------
                                                        $33,307,000  $29,545,000
                                                        ===========  ===========
</TABLE>
 
6. BANK CREDIT AGREEMENT
 
  Effective June 30, 1995, the Company entered into a Second Amended and
Restated Credit Agreement with Wells Fargo Bank which has three facilities: a
Line-of-Credit, a Revolving Term Loan, and a Project financing
 
                                      26
<PAGE>
 
                               LESLIE'S POOLMART
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
facility, which may be drawn to finance specific real estate development
projects undertaken in connection with the addition of new retail stores. The
Credit Agreement contains certain financial covenants and requires that
certain other debts of the Company be subordinated in right of repayment to
the lender. As of December 28, 1996 the Company was in compliance with these
covenants.
 
  As of December 28, 1996, the Line-of-Credit's outstanding principal balance
was $15,440,000. The Credit Agreement was amended in November 1995, increasing
the amount of borrowings allowed under the line-of-credit up to $19,000,000.
In early 1996, the line of credit was amended and temporarily expanded (to
$22,000,000 through May 15, 1996 and $19,000,000 thereafter) and the term was
extended through October 1, 1997. Subsequent to year-end, the Company amended
its Credit Agreement to consolidate the existing line of credit facility, the
project financing facility, and the revolving term loan into one expanded
$38,000,000 line of credit facility. The term of the expanded line of credit
facility was extended through February 16, 2000.
 
  Interest is payable monthly on all borrowings. The amended Line-of-Credit
accrues interest at the lender's reference rate (8.25% at December 28, 1996)
or at LIBOR plus 1.75%, at the borrower's election.
 
7. LONG-TERM DEBT
 
  Long-term debt consists of the following:
 
<TABLE>
<CAPTION>
                                                      DECEMBER 28, DECEMBER 30,
                                                          1996         1995
                                                      ------------ ------------
   <S>                                                <C>          <C>
   Revolving Loan...................................   $6,000,000   $8,000,000
   Notes payable collateralized by security
    interests in certain assets, with maturities
    from March, 1999 to September, 2002. Interest
    accrues at rates of 6.5% to 8.25%...............      719,000      860,000
   Notes payable collateralized by security interest
    in various properties, due in monthly
    installments with maturities from December 2003
    to December 2009. Interest accrues at the rate
    of 7.625% to 9.125%.............................    1,049,000    1,068,000
                                                       ----------   ----------
                                                        7,768,000    9,928,000
   Less--Current portion............................    2,187,000    2,085,000
                                                       ----------   ----------
                                                       $5,581,000   $7,843,000
                                                       ==========   ==========
</TABLE>
 
  Principal maturities of long-term debt as of December 28, 1996 are as
follows:
 
<TABLE>
   <S>                                                                <C>
   1997.............................................................. $2,187,000
   1998..............................................................  4,193,000
   1999..............................................................    124,000
   2000..............................................................    106,000
   2001..............................................................    113,000
   Thereafter........................................................  1,045,000
                                                                      ----------
                                                                      $7,768,000
                                                                      ==========
</TABLE>
 
                                      27
<PAGE>
 
                               LESLIE'S POOLMART
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 Convertible Subordinated Debentures
 
  On May 25, 1995, the Company completed a private placement of its $10
million 8% convertible subordinated debentures. Interest is payable semi-
annually. The debentures have a six-year term, expiring May 15, 2001 and are
convertible into the Company's common stock at $20.95 per share. The
debentures are unsecured and subordinated to the present and future senior
debt of the Company.
 
 7 1/2% Convertible Notes
 
  In conjunction with the Company's initial public offering in April, 1991,
the Company and one of its former shareholders agreed to terminate the
shareholder's covenant not to compete in exchange for $2,767,000 of the
Company's 7 1/2% convertible notes. In December, 1993, approximately
$1,384,000 of these 7 1/2% convertible notes was repaid. The remaining portion
of the 7 1/2% convertible notes was converted to shares of the Company's
common stock at a conversion price of $11.00 per share on December 29, 1995.
 
8. LEASES
 
  The Company leases certain store, office, distribution and manufacturing
facilities under operating leases which expire at various dates through 2007.
Lease agreements generally provide for increases related to cost of living
indices and require the Company to pay for property taxes, repairs and
insurance. Future minimum lease payments at December 28, 1996 are as follows:
 
<TABLE>
   <S>                                                               <C>
   1997............................................................. $13,798,000
   1998.............................................................  11,286,000
   1999.............................................................  10,030,000
   2000.............................................................   7,597,000
   2001.............................................................   5,320,000
   Thereafter.......................................................  10,205,000
                                                                     -----------
                                                                     $58,236,000
                                                                     ===========
</TABLE>
 
  As of March 3, 1997, the Company had entered into operating leases for
additional new store sites which have future minimum lease payment
requirements of approximately $677,000 in 1997, $1,016,000 in 1998, 1999, and
2000, $976,000 in 2001, and $1,434,000 thereafter.
 
  Certain leases are renewable at the option of the Company for periods of one
to ten years. Rent expense charged against income totaled $16,024,000,
$13,397,000, and $10,119,000, in 1996, 1995 and 1994, respectively.
 
9. INCOME TAXES
 
  The provision for income taxes is comprised of the following:
 
<TABLE>
<CAPTION>
                                               1996        1995         1994
                                            ----------  -----------  ----------
   <S>                                      <C>         <C>          <C>
   Federal:
     Current............................... $2,386,000  $ 2,263,000  $3,074,000
     Deferred..............................   (222,000)  (1,750,000)   (567,000)
                                            ----------  -----------  ----------
                                             2,164,000      513,000   2,507,000
                                            ----------  -----------  ----------
   State:
     Current...............................    641,000      610,000     858,000
     Deferred..............................    (60,000)    (547,000)   (113,000)
                                            ----------  -----------  ----------
                                               581,000       63,000     745,000
                                            ----------  -----------  ----------
                                            $2,745,000  $   576,000  $3,252,000
                                            ==========  ===========  ==========
</TABLE>
 
                                      28
<PAGE>
 
                               LESLIE'S POOLMART
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
  A reconciliation of the provision for income taxes to the amount computed at
the federal statutory rate is as follows:
 
<TABLE>
<CAPTION>
                                                1996       1995         1994
                                             ---------- -----------  ----------
   <S>                                       <C>        <C>          <C>
   Federal income tax at statutory rate..... $2,248,000 $ 1,354,000  $2,664,000
   Reversal of tax reserves no longer need-
    ed......................................        --   (1,100,000)        --
   Effect of differences created by
    acquisition accounting including
    amortization of differences between fair
    values assigned in purchase accounting
    and historical tax values...............    146,000      96,000      96,000
   State taxes, net of federal benefit......    351,000     226,000     492,000
                                             ---------- -----------  ----------
                                             $2,745,000 $   576,000  $3,252,000
                                             ========== ===========  ==========
</TABLE>
 
  The tax effect of temporary differences which give rise to significant
portions of the deferred tax liability are summarized below.
 
<TABLE>
<CAPTION>
                                       1996                      1995
                             ------------------------- -------------------------
                             DEFERRED TAX DEFERRED TAX DEFERRED TAX DEFERRED TAX
                                ASSETS    LIABILITIES     ASSETS    LIABILITIES
                             ------------ ------------ ------------ ------------
   <S>                       <C>          <C>          <C>          <C>
   Property, plant and
    equipment differences..   $      --   $ 1,857,000   $      --    $  941,000
   State income taxes......      197,000          --       207,000          --
   Inventory overhead
    differences............    1,942,000          --     1,834,000          --
   Difference in timing of
    certain deductions.....      463,000    1,242,000      280,000    1,022,000
                              ----------  -----------   ----------   ----------
                              $2,602,000  $ 3,099,000   $2,321,000   $1,963,000
                              ==========  ===========   ==========   ==========
</TABLE>
 
  The Company has net operating losses (NOL) available for offset against
future tax liabilities at December 28, 1996 of $7,452,000, extending through
2007, limited to approximately $83,000 per year. As this NOL is utilized, such
amounts will reduce goodwill.
 
10. CONTINGENCIES
 
  The Company is a defendant in lawsuits or potential claims encountered in
the normal course of business, such matters are being vigorously defended. In
the opinion of management, the resolutions of these matters will not have a
material effect on the Company's financial position or results of operations.
 
  The Company's general liability insurance program and employee group medical
plan have self-insurance retention features of $100,000 and $75,000 per
incident, respectively. The Company's liability is limited to $600,000 per
year for the general liability program.
 
11. 401(K) PLAN
 
  The Company provides for the benefit of its employees a voluntary retirement
plan under Section 401(k) of the Internal Revenue Code. During 1996, the plan
covered all eligible employees and provided for a matching contribution by the
Company of 50% of each participant's contribution up to 4% of the individual's
compensation as defined. The expenses related to this program were $263,000,
$212,000, and $199,000 for 1996, 1995 and 1994, respectively.
 
                                      29
<PAGE>
 
                               LESLIE'S POOLMART
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
12. STOCK BASED COMPENSATION PLANS
 
  The Company has granted stock options to various employees and directors.
The Company accounts for these plans under APB Opinion No. 25, under which no
compensation cost has been recognized.
 
  Had compensation cost for these plans been determined consistent with SFAS
123, the Company's net income and earnings per share would have been reduced
to the following proforma amounts:
 
<TABLE>
<CAPTION>
                                                              1996       1995
                                                           ---------- ----------
   <S>                                                     <C>        <C>
   Net income
     As Reported.......................................... $3,869,000 $3,407,000
     Pro forma............................................ $3,490,000 $3,362,000
   Primary EPS
     As Reported.......................................... $     0.57 $     0.52
     Pro forma............................................ $     0.50 $     0.51
</TABLE>
 
  Because the SFAS 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost
may not be representative of that to be expected in future years.
 
  The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: risk free interest rates of 5.8%
and 6.5%, respectively; expected volatility of 49% and 50%, respectively;
weighted average fair value of options of $7.55 and $7.88 in 1996 and 1995,
respectively; expected lives of 7 years for both years and no expected
dividend yield for either year.
 
  In June 1990, the Company adopted a stock option plan which provided for the
issuance of up to 165,375 common shares at an option price equal to at least
100 percent (incentive options) or at least 85 percent (nonqualified options)
of the fair value of the common stock at the date of grant. In May 1993, May
1994 and May 1996, the shareholders approved the reservation of an additional
165,375 shares, 330,750 shares and 600,000 shares, respectively, for options
issuable under the 1990 plan. Options granted vest ratably over a three-year
period, and all expire after 10 years.
 
  In March 1992, the Board of Directors adopted the 1992 Directors' Stock
Option Plan (which was approved by the shareholders in May 1992) which
provides for the issuance to non-employee directors of up to 110,250 common
shares at an option price equal to 100 percent of fair market value of the
common stock at the date of grant. Options are granted pursuant to a formula
under which such directors and the Company's Chairman receive an option to
purchase 5,513 shares of stock upon becoming an eligible director and 3,308
shares on the first business day of each succeeding year on which such person
is an eligible director.
 
<TABLE>
<CAPTION>
                                  1996              1995              1994
                            ----------------- ----------------- ------------------
                                     WTD AVG           WTD AVG            WTD AVG
                            SHARES   EX PRICE SHARES   EX PRICE  SHARES   EX PRICE
                            -------  -------- -------  -------- --------  --------
   <S>                      <C>      <C>      <C>      <C>      <C>       <C>
   Outstanding at beg. of
    year................... 833,166   $ 7.58  859,947   $ 7.06   782,696   $ 5.08
   Granted................. 208,168    12.92   71,332    13.02   201,497    12.16
   Exercised............... (40,804)   (7.44) (83,640)   (6.15) (116,342)   (2.51)
   Cancelled............... (28,463)  (11.68) (14,473)  (11.61)   (7,904)   (7.66)
                            -------   ------  -------   ------  --------   ------
   Outstanding at end of
    year................... 972,067     8.62  833,166     7.58   859,947     7.06
                            -------   ------  -------   ------  --------   ------
   Exercisable at end of
    year................... 709,074   $ 9.94  565,431   $ 9.00   444,982   $ 8.74
</TABLE>
 
                                      30
<PAGE>
 
                               LESLIE'S POOLMART
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  The following table summarizes information about all stock options
outstanding as of December 28, 1996:
 
<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>
   Less than $1.00.......   135,536    2.6 years   $ 0.64    135,536    $ 0.64
   $5.00 to $7.99........   361,805    6.2 years     6.80    355,924      6.82
   $8.00 to $10.99.......    89,484    7.4 years     9.20     57,229      8.49
   $11.00 to $14.00......   385,242    8.6 years    13.00    160,385     12.86
                            -------    ---------   ------    -------    ------
                            972,067    6.8 years   $ 8.62    709,074    $ 7.14
                            -------    ---------   ------    -------    ------
</TABLE>
 
  During 1996, 40,804 options were exercised at exercise prices ranging between
$5.44 and $12.62.
 
  In December 1990, the Company adopted a stock bonus plan which provides for
the issuance of 20,000 shares of common stock at the fair market value at the
date of grant to employees in consideration for services rendered. At December
28, 1996, 12,348 shares of common stock had been issued pursuant to this plan.
 
13. CALCULATION OF PER SHARE AMOUNTS
 
  Net income per share amounts are computed based on the weighted average
number of shares outstanding plus the shares that would be outstanding
assuming exercise of dilutive stock options, which are considered common stock
equivalents. The weighted average number of shares outstanding was 6,789,664,
6,614,497 and 6,515,558 for 1996, 1995 and 1994, respectively.
 
14. PREFERRED STOCK
 
  The rights, preferences and privileges of the preferred stock authorized in
the Company's Articles of Incorporation are to be determined by the Board of
Directors and do not require shareholder approval. No preferred stock is
currently outstanding.
 
15. SUPPLEMENTAL CASH FLOW DISCLOSURES
 
  The Company paid interest charges of $2,835,000, $2,419,000 and $1,538,000,
in 1996, 1995, and 1994, respectively. The Company paid income taxes of
$2,425,000, $2,086,000, and $4,041,000, in 1996, 1995 and 1994, respectively.
 
16. PROPOSED REINCORPORATION AND MERGER
 
  On February 26, 1997, the Company's Board of Directors approved an Agreement
of Merger providing for the reincorporation of the Company in Delaware by
merger into a wholly-owned Delaware subsidiary, and an Agreement and Plan of
Merger providing for the merger of Poolmart USA Inc., a newly-formed
corporation, with and into the Company. Following consummation of the
reincorporation and upon effectiveness of the latter merger, (i) each
outstanding share of common stock of the Company would be converted into
$14.50 cash (other than 359,505 shares owned primarily by members of
management, including Michael Fourticq, the Chairman of the Company, and Brian
McDermott, the President and CEO of the Company and other than shares as to
which the holders perfect dissenters' rights) and (ii) outstanding options
covering approximately 846,000 shares of
 
                                      31
<PAGE>
 
                               LESLIE'S POOLMART
 
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
 
common stock, including those not yet vested, would be cancelled for payment
of the difference between the exercise price and $14.50 per share. The total
amount expected to be paid for these shares and options approximates $101
million. The proposed mergers are subject to various conditions, including
financing and approval by the Company's shareholders. The shareholders are
expected to vote on the mergers during the second quarter of 1997.
 
ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
          FINANCIAL DISCLOSURE.

          None.

                                      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              Position with the Company
       ----                ---              -------------------------
<S>                        <C>   <C>
                          
Michael J. Fourticq        53   Chairman of the Board of Directors
                          
Brian P. McDermott         40   Chief Executive Officer, President and Director
                          
Dann V. Angeloff           61   Director
                          
John A. Canning, Jr.       52   Director
                          
Richard H. Hillman         53   Director
                          
Dr. Dale R. Laurance       51   Director
                          
Clarence T. Schmitz        50   Director
                          
Murray H. Dashe            54   Chief Operating Officer
                          
Robert D. Olsen            44   Executive Vice President, Chief Financial Officer
                          
Cynthia G. Watts           34   Vice President, General Counsel and Secretary
</TABLE>

     Michael J. Fourticq has been Chairman of the Board of Directors of the
Company since May 1988.  Between May 1988 and August 1992, he served as the
Company's Chief Executive Officer.  From 1986 to 1987, Mr. Fourticq was
President and Chief Executive Officer of the Mortell Company, a manufacturer of
specialty chemical products.  Since 1985 he has been the sole general partner of
Hancock Park Associates, which is the general partner and affiliate of several
investment partnerships.  Mr. Fourticq was the Chairman of the Board and Chief
Executive Officer of Alliance Northwest Industries, Inc., a holding company,
principally for a specialty lighting distributor and retailer, which filed a
petition for reorganization under Chapter 11 of the Federal Bankruptcy Code in
March 1996.

     Brian P. McDermott has been President and a Director of the Company since
April 1989 and its Chief Executive Officer since August 1992.  Between May 1988
and April 1989, he served as the Company's Executive Vice President of
Operations and also was its Secretary from May 1988 until October 1989.  From
1987 to 1988, Mr. McDermott served as Director of Acquisitions and Divestitures
at Castle & Cooke, Inc., a publicly-held holding company with diverse real
estate and corporate interests. Mr. McDermott is Chairman of the Board of
Busybody, Inc., a privately held fitness equipment retailer, of which he was
acting Chief Executive Officer from November 1994 through March 1996.

     Dann V. Angeloff has been a Director of the Company since November 1996.
Since 1976 he has been President and founder of The Angeloff Company, a
corporate financial advisory firm.  He currently serves on the Boards of
Directors of Compensation Resource Group,

                                      33
<PAGE>

     
Eagle Lifestyle Nutrition Inc., Nicholas/Applegate Growth Equity Fund,
Nicholas/Applegate Investment Trust, Public Storage, Inc., Ready Pac Produce,
Inc., Royce Medical, Inc. and Seda Specialty Packaging.     

     John A. Canning, Jr. has been a Director of the Company since January 1996.
He is President and founder of Madison Dearborn Partners, Inc. which specializes
in management buyout and special equity investing.  Prior to founding Madison
Dearborn Partners in January 1993, Mr. Canning spent 24 years with First Chicago
Corporation, most recently as Executive Vice President of The First National
Bank of Chicago and President of First Chicago Venture Capital.  He currently
serves on the Boards of Directors of The Interlake Corporation, the Milnot
Company and Tyco Toys, Inc.

     Richard H. Hillman has been a Director of the Company since May 1988.  From
May 1988 to April 1989, he served as President of the Company.  Since 1985, Mr.
Hillman has been President of Hillman Capital Partners, a private investment and
management advisory firm.  From 1978 through 1984, Mr. Hillman served as
Chairman, President and Chief Executive Officer of Phone-Mate, Inc., a
manufacturer and marketer of telephone answering machines, telephones and
related products.

     Dr. Dale R. Laurance has been a Director of the Company since January 1996.
He has been a Director of Occidental Petroleum Corporation since 1990 and its
President since 1996.  He was its Senior Operating Officer from 1990 to 1996 and
Vice President of Operations from 1984 to 1990.  He is a Director of Canadian
Occidental Petroleum Ltd., Jacobs Engineering Group Inc., The Armand Hammer
Museum of Art and Cultural Center, Inc., Chemical Manufacturers Association,
American Petroleum Institute, U.S.-Arab Chamber of Commerce, Boy Scouts of
America-Western Los Angeles County Council and a member of the Advisory Board of
the Chemical Heritage Foundation.  He is a past Chairman of the Advisory Board
for the Department of Chemical and Petroleum Engineering at the University of
Kansas and is a recipient of the Distinguished Engineering Service Award from
the School of Engineering at the Universtiy of Kansas.  Dr. Laurance has served
as a Managing Director of the Joffrey Ballet Company.

     Clarence T. Schmitz has been a Director of the Company since November 1996.
Since February 1995 he has been Executive Vice President and Chief Financial
Officer of Jefferies Group, Inc., a brokerage and investment banking firm.  From
1993 through 1995, Mr. Schmitz served as national Managing Partner of KPMG, a
financial services firm in its Manufacturing, Retailing & Distribution line of
business.  From 1990 through 1993, Mr. Schmitz served as Managing Partner of
KPMG in its Los Angeles Business Unit.  He is a Director of RVI Limited, a
Bermuda insurance company.

     Murray H. Dashe has been Chief Operating Officer of the Company since
August 1992 and was a Director between August 1989 and November 1996.  From
April 1990 through August 1992, he was President and Chief Executive Officer of
RogerSound Labs, a Southern California retailer of audio/video consumer
electronics, which filed a petition for dissolution under Chapter 7 of the
Federal Bankruptcy laws in June 1992.  From 1985 through April 1990, Mr. Dashe
held several positions with SILO, a consumer electronics and appliance retailer,
including Regional President.  From 1970 to 1978, and 1983 to 1985, Mr. Dashe
held positions of increasing operating responsibility with Allied Stores Corp.
(now Federated Department Stores, Inc.), an operator of department and specialty
stores throughout the United States.
 
     Robert D. Olsen has been Executive Vice President and Chief Financial
Officer of the Company since April 1993. From 1990 through April 1993 he was
Executive Vice President and Chief Financial Officer of TuneUp Masters, a
California-based chain of fast automotive tuneup and lube outlets, which filed a
petition for reorganization under Chapter 11 of the Federal Bankruptcy laws in
November 1994. From 1985 through 1989, Mr. Olsen held several positions

                                      34
<PAGE>
 
with AutoZone, an automotive parts and accessories retailer, including
Controller, Vice President - Finance, and Senior Vice President and Chief
Financial Officer.  From 1981 through 1984 he held a variety of positions with
PepsiCo International and Pepsi Cola USA.

     Cynthia G. Watts has been Vice President and General Counsel of the Company
since February 1993 and Secretary of the Company since March 1993.  From 1988 to
January 1993, Ms. Watts was an attorney at Paul, Hastings, Janofsky and Walker,
a Los Angeles-based law firm, where her practice was concentrated in the areas
of general corporate representation and corporate finance, including securities,
venture capital and mergers and acquisitions.

     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.

          Occidental Petroleum Corporation holds the Company's Convertible
Subordinated Debentures in the amount of $10 million, and one of its
subsidiaries is a supplier of chemicals to the Company.

                                      35
<PAGE>
 
ITEM 11.                               EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE

          The following summary compensation table sets forth for the fiscal
years ended December 28, 1996, December 30, 1995, and December 31, 1994, the
compensation for services to the Company of the Chief Executive Officer and the
four most highly compensated executive officers as of December 30, 1995.
<TABLE>    
<CAPTION>
                                                                      Long-Term               All Other
                                            Annual Compensation      Compensation           Compensation
                                           --------------------      -------------      --------------------
                                            Salary      Bonus        Stock Options      401(k)     Insurance
                                Year          ($)      ($) (1)          (#) (2)         ($)(3)       ($)(4)
                                ----        -------    -------       -------------      ------     ---------
<S>                             <C>         <C>        <C>           <C>                <C>        <C>
Michael J. Fourticq             1996        157,500         0            3,308              0            0      
   Chairman of the Board        1995        150,000         0            3,308              0            0
                                1994        150,000         0            3,308              0            0
                                                                                                   
Brian P. McDermott              1996        367,500         0           30,000          3,000          204
   Chief Executive Officer,     1995        350,000         0                0          3,000          132
   President and Director       1994        325,000    40,000           28,875          2,772          132
                                                                                                   
Murray H. Dashe                 1996        288,750         0           22,500          3,000          576
   Chief Operating Officer      1995        275,000         0                0          3,000          576
                                1994        255,000    27,500           21,000          2,772          576
                                                                                                   
Robert D. Olsen                 1996        231,000         0           22,500          3,000          204
   Executive Vice President     1995        220,000         0                0          3,000          204
   and Chief Financial          1994        200,000    22,500           21,000          1,945          204
   Officer                                                                                        
                                                                                                   
Cynthia G. Watts                1996        157,500         0           15,000          3,000          108
   Vice President, General      1995        150,000         0                0          3,000          108
   Counsel and Secretary        1994        135,000    15,000           13,125          1,967          108
------------
</TABLE>     

(1)  Annual bonuses are indicated for the year in which they were earned and
     accrued. Bonuses for the 1994 fiscal year were paid in 1995.
(2)  Options granted prior to April 1994 and August 1995 have been adjusted to
     reflect the Company's stock dividends effective those months. All options
     were granted at their fair market value on the date of grant.
(3)  Represents 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.

                                      36
<PAGE>
 
OPTION GRANTS IN 1996

          The following table sets forth the stock options granted to the Chief
Executive Officer and the four other most highly compensated executive officers
as of December 28, 1996, during the fiscal year ended December 28, 1996,
pursuant to the Company's 1990 Stock Option Plan, 1992 Directors' Stock
Incentive Plan, or otherwise.
<TABLE>    
<CAPTION>
                                                                                       Potential Realizable Value
                                                                                        at Assumed Annual Rates
                                                                                            of Stock Price
                                                                                        Appreciation for Option
                                                  Individual Grants                            Term (1)
                                --------------------------------------------------     --------------------------
                                            % of Total
                                              Options       Exercise 
                                             Granted to        or
                                 Options    Employees in   Base Price   Expiration
      Name                       Granted     Fiscal Year   ($/Sh)(2)      Date          5% ($)           10% ($)
      ----                      ---------   ------------   ----------   ----------     -------           -------
<S>                             <C>         <C>            <C>          <C>            <C>               <C>
Michael J. Fourticq              3,308(3)        1.8%         13.25        1/1/06       27,570            69,860
Brian P. McDermott              30,000(4)       16.4%         13.50        1/9/06      254,700           645,470
Murray Dashe                    22,500(4)       12.0%         13.50        1/9/06      191,030           484,100
Robert D. Olsen                 22,500(4)       12.0%         13.50        1/9/06      191,030           484,100
Cynthia G. Watts                15,000(4)        8.2%         13.50        1/9/06      127,350           322,730
</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)  All stock options were granted at fair market value on the date of grant.
(3)  Granted pursuant to 1992 Directors' Stock Incentive Plan.
(4)  Granted pursuant to 1990 Stock Option Plan.  Vests over three years.


AGGREGATED OPTION EXERCISES IN 1996 AND FISCAL YEAR-END OPTION VALUE

          The following table sets forth the stock option exercises by the named
executive officers during 1996.  In addition, the table indicates the total
number and value of exercisable and non-exercisable options held by each such
officer as of December 28, 1996.
<TABLE>
<CAPTION>
                                                                                                  Value of Unexercised
                                                                Number of Unexercised            In-the-Money Options at
                                                 Value       Options at December 28, 1996       December 28, 1996 ($) (1)
                           Shares Acquired      Realized     ----------------------------     -----------------------------
       Name                on Exercise (#)         ($)       Exercisable    Unexercisable     Exercisable     Unexercisable
       ----                ---------------      --------     -----------    -------------     -----------     -------------
<S>                        <C>                  <C>          <C>            <C>               <C>             <C>
Michael J. Fourticq                 0                 0          16,540              0            48,172              0
Brian P. McDermott                  0                 0         196,869         28,925         1,527,801          3,400
Murray H. Dashe                     0                 0         119,733         22,001           729,215          2,667
Robert D. Olsen                     0                 0         124,363         22,001           554,065          2,667
Cynthia G. Watts                  500             4,997          39,874         14,376           150,605          1,667
</TABLE>

------------
(1)  Potential unrealized value is (i) the fair market value at fiscal 1996 
     year-end ($13.00 per share) less the option exercise price times (ii) the
     number of shares.

                                      37
<PAGE>
 
DESCRIPTION OF CERTAIN COMPENSATION ARRANGEMENTS

Murray H. Dashe Arrangements

          In Connection with his agreeing to serve as the Company's Chief
Operating Officer, the Company entered into a severance agreement with Murray H.
Dashe in August 1992 pursuant to which, if the Company terminates Mr. Dashe's
employment without cause (as defined in the agreement) the Company will pay Mr.
Dashe his annual salary for a period of one year from the date of termination.
The Company further agreed that if Mr. Dashe is terminated for any reason other
than death, disability or cause, the Company will (at Mr. Dashe's option)
purchase his residence for a price of $835,000.  The Agreement's term runs until
Mr. Dashe's employment terminates voluntarily or due to death, disability or
cause or when the value of all exercisable (and exercised) options granted Mr.
Dashe is at least $1.5 million for a four-month period.

DIRECTORS' COMPENSATION

Cash Compensation

          For their services as directors during the 1996 fiscal year, each non-
employee director was paid a fee at the annual rate of $18,000 and received, in
addition, $750 for each Board meeting attended and $500 for each Committee
meeting attended.

1992 Directors' Stock Incentive Plan

          The Company's 1992 Directors' Stock Incentive Plan was adopted by the
Board of Directors of the Company in March 1992 and ratified by its shareholders
in May 1992 (the "1992 Plan").  The purpose of the 1992 Plan is to provide
incentives that will attract and retain highly competent persons as directors of
the Company by providing them with opportunities to acquire a proprietary
interest in the Company.  The 1992 Plan provides for the grant to any non-
employee director of the Company and the Chairman of the Board of the Company
(each, a "Participating Director") of stock options receiving no special tax
benefit (the "Options").  The aggregate number of options to purchase shares of
the Company's Common Stock which may be issued under the 1992 Plan is 110,250.
The

          The 1992 Plan is administered by the Board of Directors or a committee
appointed by the Board of Directors. However, the time of grant, number of
shares granted, and exercise price are established by the terms of the 1992 Plan
and are not subject to the discretion of any committee or person.

          Whenever any person becomes a Participating Director of the Company,
that person will automatically receive an Option, granted the date such person
becomes a Participating Director, to purchase 5,512 shares of Common Stock.  In
addition, on the first business day of each calendar year during the term of the
1992 Plan, each Participating Director then in office is automatically granted
an Option to purchase 3,308 shares of Common Stock.  All Options have an
exercise price equal to their market value on the date of grant, and have a term
of ten years (subject to earlier termination). The Options generally will be
fully exercisable six months after the date of grant.

          On December 28, 1996, options to purchase 61,748 shares at a weighted
average exercise price of $11.03 per share were outstanding under the 1992 Plan.

         

                                      38
<PAGE>
 
    
ITEM 12.      
 
           PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT
       
  The following table sets forth information as of March 27, 1997 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
                                                          BENEFICIAL
                                                         OWNERSHIP OF
                    NAME AND ADDRESS                        COMMON    PERCENT
                  OF BENEFICIAL OWNER                    STOCK(1)(2)  OF CLASS
                  -------------------                    ------------ --------
<S>                                                      <C>          <C>
Michael J. Fourticq (3)(4)(5)...........................    842,338     12.8
David L. Babson & Co. Inc.  ............................    686,124     10.5
 One Memorial Drive
 Cambridge, MA 02142
Liberty West Partners (6)...............................    334,141      5.1
 1925 Century Park East, Suite 810
 Los Angeles, CA 90067
Richard H. Hillman (3)(7)...............................    322,758      4.9
Wellington Management Company...........................    397,112      6.1
 75 State Street
 Boston, MA 02109
Brian P. McDermott (3)(5)(8)............................    378,974      5.6
Robert D. Olsen (5)(9)..................................    127,988      1.9
Murray A. Dashe (5)(10).................................    123,826      1.9
Cynthia G. Watts (5)(11)................................     43,268        *
John A. Canning, Jr. (3)(12)............................     16,538        *
Dr. Dale R. Laurance (3)(13)............................      8,513        *
Dann V. Angeloff (3)....................................          0        *
Clarence T. Schmitz (3).................................          0        *
All Directors and Executive Officers as a Group (10       
 persons) (14)..........................................  1,864,203     26.3
Hancock Group (15)......................................  1,770,430     25.7
</TABLE>      
--------
    
  *  Amount represents less than one percent of the Common Stock.      
    
 (1) Information with respect to beneficial ownership is based upon the
     Company's stock records and data supplied to the Company by the holders.
                                                                                
    
 (2) Beneficial ownership is determined in accordance with rules of the
     Securities and Exchange Commission, and includes generally voting power
     and/or investment power with respect to securities. Shares of Common
     Stock subject to options currently exercisable or exercisable within 60
     days are deemed outstanding for computing the percentage of the person
     holding such options but are not deemed outstanding for computing the
     percentage of any other person. Except as indicated by footnote, and
     subject to joint ownership with spouses and community property laws where
     applicable, the persons named in the table above have sole voting and
     investment power with respect to all shares of Common Stock shown as
     beneficially owned by them.      
    
 (3) Director.      
    
 (4) Includes 444,842 shares owned outright by Mr. Fourticq; 623 shares owned
     by Mr. Fourticq's spouse; 46,192 shares held by Hancock Park Associates,
     a partnership of which Mr. Fourticq is the sole general partner; and
     334,141 shares held by Liberty West Partners, a partnership of which Mr.
     Fourticq is a general partner; all of which shares Mr. Fourticq may be
     deemed to beneficially own; and 16,540 shares subject to options
     exercisable within 60 days.      
 
                                      39
<PAGE>
 
    
 (5) Executive officer.      
    
 (6) All such shares may be deemed to be beneficially owned by Mr. Fourticq.
     See footnote (4).      
    
 (7) Includes 1,323 shares held in trust for the benefit of Mr. Hillman's son
     and 18,745 shares subject to options exercisable within 60 days.      
    
 (8) Shares are held through a trust. Includes 201,775 shares subject to
     options exercisable within 60 days.      
    
 (9) All shares are subject to options exercisable within 60 days.      
    
(10) Includes 123,358 shares subject to options exercisable within 60 days.     
    
(11) Includes 42,217 shares subject to options exercisable within 60 days.      
    
(12) Includes 11,025 shares held by Mr. Canning's spouse and 5,513 shares
     subject to options exercisable within 60 days.      
    
(13) Shares are held through a trust. Includes 5,513 shares subject to options
     exercisable within 60 days.      
    
(14) Includes 541,649 shares subject to options exercisable within 60 days.     
    
(15) Hancock Group consists of Hancock Park Associates II, L.P., a Delaware
     limited partnership ("HPA"), and Michael J. Fourticq and Brian P.
     McDermott who are the general partners of HPA, Richard H. Hillman,
     Gregory Fourticq and Robert D. Olsen. According to information appearing
     in a Schedule 13D filed with the Securities and Exchange Commission and
     delivered to the Company, the Hancock Group beneficially owns 1,770,430
     shares of Common Stock. According to an amendment to this Schedule 13D
     received by the Company and a separate Schedule 13D from Green Equity
     Investors II, L.P. ("Green"), as a result of certain activities described
     in these filings that involve Hancock Group and Green, Hancock Group and
     Green may be deemed to be a group within the meaning of Section 13(d) of
     the Exchange Act. According to the Schedule 13D filed by Green, although
     Green itself does not own any Common Stock of the Company, if such group
     exists, such group beneficially owns 1,770,430 shares of Common Stock.     
 
         

                                      40
<PAGE>
 
    
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS      
    
     In November, 1996, a special committee of newly elected independent members
of the Board (the "Special Committee") was appointed to evaluate proposals for
business combinations involving the Company, including a proposal submitted by a
management group led by Hancock Park Associates II, L.P. ("HPA"). On February
26, 1997, the Board met and after considering the recommendation of the Special
Committee and fairness opinions provided by professionals, the Board unanimously
approved an Agreement of Merger providing for the reincorporation of the Company
in Delaware by merger into a wholly-owned Delaware subsidiary (the
"Reincorporation") and an Agreement of Plan of Merger providing for the merger
(the "Merger") of Poolmart USA Inc., a newly-formed Corporation with it into the
Company ("Leslie's Delaware"). Consummation of the Reincorporation at Merger
(sometimes collectively referred to as the "Merger Transaction") are subject to
shareholder approval and other conditions including financing.     
    
     A special meeting of shareholders is currently scheduled for June 10, 1997
at which shareholders of the Company as of the record date of April 22, 1997 are
expected to vote on the Reincorporation and Merger proposals. Assuming the
Reincorporation and Merger are consummated, (i) each outstanding share of the
Company's Common Stock will be cancelled and converted automatically into the
right to receive $14.50 in cash payable to the holder thereof, without interest
(the "Cash Merger Consideration"), other than 359,505 shares (the "Continuing
Shares") held primarily by members of management of the Company which share
remain outstanding (currently representing 5.5% of the outstanding Common Stock)
and other than shares held by shareholders who are entitled to and who have
perfected their dissenters' rights; and (ii) the Company will be owned by
certain officers and directors of the Company and affiliates, associates, and
persons related to the Company's officer and directors (collectively the
"Hancock Group") and Green Equity Investors II, L.P., and affiliate of Leonard
Green & Partners, L.P.     

                                      41
<PAGE>
 
   
     The interests of the Hancock Group in connection with the Merger which may
present them with actual or potential conflicts of interest are summarized
below. The Special Committee and the Board were aware of these interests and
considered them among the other matters.     
    
  It is anticipated that the following individuals and entities will hold the
indicated number of fully diluted shares of Common Stock or other securities of
Leslie's Delaware shown in the following table immediately after the Merger: 
                                                                                
 
<TABLE>     
<CAPTION>
                                     NUMBER OF FULLY-    NUMBER OF SHARES OF   PERCENTAGE OF FULLY-
                                     DILUTED SHARES OF    LESLIE'S DELAWARE      DILUTED LESLIE'S
        NAME OF                      LESLIE'S DELAWARE        SERIES A              DELAWARE
  INDIVIDUAL OR ENTITY                  COMMON STOCK       PREFERRED STOCK        COMMON STOCK(1)
  --------------------                -----------------   -------------------  --------------------
<S>                                    <C>               <C>                    <C>
Michael J. Fourticq(2)(3).........         165,515                                    7.9%
Brian P. McDermott(3)(4)..........         243,552                                   11.6
Gregory Fourticq(3)...............          10,000                                    0.5
Richard H. Hillman(3).............          22,414                                    1.1
Occidental Petroleum(5)(6)........         316,092              28,000               15.0
Robert D. Olsen(3)(7).............         117,529                                    5.6
</TABLE>      
--------
         
    
(1) Computed based upon the total number of shares of Leslie's Delaware Common
    Stock outstanding and the number of shares of Leslie's Delaware Common
    Stock underlying warrants and options outstanding immediately after the
    effective date of the merger.      
    
(2) Includes 4,976 shares subject to options exercisable within 60 days after
    the consummation of the Merger.     
    
(3) Member of the Hancock Group, which in the aggregate with management will
    own 34.9% of the fully diluted shares of Leslie's Delaware Common Stock. 
                                                                                
    
(4) Includes 77,000 shares subject to stock options issued under the ISO
    Option Plan described below.      
    
(5) Pursuant to Rule 14a-1(a), Occidental is an associate of Dr. Laurance, a
    director of the Company.      
    
(6) Common Stock shown is obtainable upon the exercise of warrants.      
    
(7) Includes 52,761 shares subject to stock options issued under the NQ Option
    Plan described below and 50,000 shares subject to stock options issued
    under the ISO Option Plan described below.      
     
  The information appearing below with respect to beneficial ownership of
the Company's Common Stock has been determined as of March 27, 1997 and
includes options exercisable within 60 days of that date. However, information
as to the receipt of Cash Merger Consideration for shares subject to
outstanding options has been determined after giving effect to acceleration of
the vesting of all outstanding options as a result of the Merger, and
therefore may reflect a higher total number.      
     
  Mr. Michael J. Fourticq, Chairman of the Board, had beneficial ownership
directly or indirectly of 842,338 shares of the Company's Common Stock
(approximately 12.8% of the Company's Common Stock). Certain of these
shares are held by partnerships of which Mr. Fourticq is a general partner and
certain of these shares are subject to stock options. Mr. Fourticq's brother,
Gregory Fourticq, is a partner of one of these partnerships which holds
334,141 of these shares. Out of his total beneficial holdings, Mr. Fourticq
will retain 160,539 Continuing Shares of Leslie's Delaware Common Stock which
will not be converted into the right to receive the Cash Merger Consideration
in the Merger. Certain of Mr. Fourticq's options will be cancelled immediately
prior to the Effective Date, and he will receive a ten-year option to purchase
4,976 shares of Leslie's Delaware at an exercise price of $5.00 per share (an
"NQ Option") under the Leslie's Delaware Non-Qualified Stock Option Plan (the
"NQ Option Plan"). Mr. Fourticq and his affiliated partnerships will receive
the Cash Merger Consideration (or, with respect to shares subject to options,
the Cash Merger Consideration less the option exercise price) with respect to
approximately 667,350 shares of Leslie's Delaware Common Stock.       

                                      42
<PAGE>
 
     
  Mr. Brian P. McDermott, a Director and the President and Chief Executive
Officer of the Company, had beneficial ownership directly or indirectly of
378,974 shares of the Company's Common Stock (approximately 5.6% of the
Company's Common Stock). Certain of these shares are subject to stock options.
Out of his total beneficial holdings, Mr. McDermott will retain 166,552
Continuing Shares of Leslie's Delaware Common Stock which will not be converted
into the right to receive the Cash Merger Consideration in the Merger. Mr.
McDermott will receive the Cash Merger Consideration (or, with respect to shares
that are subject to options, the Cash Merger Consideration less the option
exercise price) with respect to approximately 236,441 shares of Leslie's
Delaware Common Stock. Mr. McDermott will receive options to purchase 77,000
shares of Leslie's Delaware under the Leslie's Delaware incentive stock option
plan (the "ISO Option Plan").       
     
  Mr. Gregory Fourticq had beneficial ownership indirectly of 446,596 shares of
the Company's Common Stock (approximately 7.0% of the Company's Common Stock).
Of these shares, 334,141 are held by a partnership of which each of Mr. Fourticq
and his brother, Michael J. Fourticq, is a general partner. Out of these
beneficial holdings, Mr. Gregory Fourticq will retain 10,000 Continuing Shares
of Leslie's Delaware Common Stock which will not be converted into the right to
receive the Cash Merger Consideration in the Merger. Mr. Fourticq's affiliated
partnership will receive the Cash Merger Consideration with respect to
approximately 324,141 shares of Leslie's Delaware Common Stock, including shares
attributable to the ownership interest of Mr. Michael J. Fourticq in such
partnership. The remaining shares beneficially owned by Mr. Gregory Fourticq are
held in trusts for which he is trustee for the benefit of his nephews and niece.
All such shares will receive the Cash Merger Consideration.      
      
  Mr. Richard H. Hillman, a Director of the Company's, had beneficial ownership
directly or indirectly of 322,758 shares of the Company's Common Stock
(approximately 4.9% of the Company's Common Stock). Certain of these shares are
subject to stock options. Out of his total beneficial holdings, Mr. Hillman will
retain 22,414 Continuing Shares of Leslie's Delaware Common Stock which will not
be converted into the right to receive the Cash Merger Consideration in the
Merger. Mr. Hillman will receive the Cash Merger Consideration (or, with respect
to shares subject to options, the Cash Merger Consideration less the option
exercise price) with respect to approximately 303,652 shares of Leslie's
Delaware Common Stock, which includes 1,323 shares held in a trust for the
benefit of his son.      
     
  Mr. Robert D. Olsen, Chief Financial Officer of Leslie's California, had
beneficial ownership of 127,988 shares of the Company's Common Stock. All such
shares are subject to stock options. Certain of Mr. Olsen's options will be
cancelled immediately prior to the Effective Date. Mr. Olsen will receive the
Cash Merger Consideration less the option exercise price with respect to 72,545
shares of Leslie's Delaware Common Stock subject to options. He will receive a
ten-year NQ Option to purchase 52,761 shares of Leslie's Delaware Common Stock
under the NQ Option Plan and an option to purchase 50,000 shares under the ISO
Option Plan. Mr. Olsen will also purchase 14,768 shares of Leslie's Delaware
Common Stock (the "Subscription Stock") at $14.50 per share.       
     
  Occidental Petroleum, of which Dr. Dale R. Laurance is an officer and a
director, is a holder of $10 million of 8% Convertible Subordinated Debentures
issued by the Company's that are due in 2001 and bear interest at the rate of 8%
per annum, payable semi-annually, and are convertible, upon 91 days' prior
notice, into the Company's Common Stock at $20.95 per share (the "Debentures").
Occidental has agreed to invest a total of $28 million in Leslie's Delaware on
the effective date of the Merger in exchange for 28,000 shares of Leslie's
Delaware Series A Preferred Stock and warrants to purchase up to 316,092 shares
of Leslie's Delaware Common Stock which will represent 15% of the Fully-Diluted
Shares. The consideration for these securities will consist of cash and the
exchange of the Debentures.     
     
  In addition to the foregoing, as of March 27, 1997, other directors, officers
and employees of the Company held options to purchase a total of 560,700 shares
of the Company's Common Stock at prices ranging from $0.907 to $14.047 per share
issued under the Company's 1990 Stock Option Plan and the Company's 1992
Directors' Stock Incentive Plan or otherwise.     

                                      43
<PAGE>
 
    
  Upon the effectiveness of the Merger, the holders of all of these options
(other than options that are exercised or cancelled prior to the Effective Date)
will each be entitled to receive in respect of each option cash equal to the
Cash Merger Consideration per option share less the exercise price of the
applicable option multiplied by the total number of shares that are subject to
the option. Any option not exercised prior to the effective date of the Merger
or for which no such payment is due will automatically be cancelled.      
     
  NQ Option Plan and ISO Option Plan. Immediately prior to the Merger,
Leslie's Delaware will adopt the NQ Option Plan and the ISO Option Plan and
will reserve 83,599 shares and 273,946 shares, respectively, of Leslie's
Delaware Common Stock for issuance upon the exercise of options to be granted
to certain employees of Leslie's Delaware upon consummation of the Merger and
thereafter. It is expected that options to purchase Leslie's Delaware Common
Stock will be granted to the following individuals at an exercise price of
$5.00 per share for options granted under the NQ Option Plan ("NQ Options")
and $14.50 per share in the case of options granted under the ISO Option Plan
("ISO Options") (or $15.95 in the case of ISO options granted to any holder of
10% or more of the outstanding Leslie's Delaware Common Stock):      
 
<TABLE>     
<CAPTION>
    NAME OF RECIPIENT                         NQ OPTION SHARES ISO OPTION SHARES
    -----------------                         ---------------- -----------------
   <S>                                        <C>              <C>
   Michael J. Fourticq.......................       4,976               --
   Brian P. McDermott........................         --             77,000
   Robert D. Olsen...........................      52,761            50,000
   Other members of management...............      25,862           146,946
</TABLE>      
     
  Leslie's Delaware will reserve 83,599 shares of Leslie's Delaware Common
Stock for the NQ Option Plan. Under the NQ Option Plan, NQ Options vest
immediately. However, Leslie's Delaware (and in some instances Green and
certain members of the Hancock Group) will have a right ("Call Option") to
repurchase a portion of each NQ Option (and a portion of any shares of
Leslie's Delaware 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 Delaware. If the NQ Option holder's service termination
occurs prior to the first anniversary of the Effective Date, 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
Effective Date. The per share Call Option exercise price is (i) for NQ
Options, (x) if the termination is voluntary, the amount by which the Cash
Merger Consideration exceeds $5.00, and (y) if the termination is other than
voluntary ("Other Termination"), the greater of (A) the amount by which the
Cash Merger Consideration exceeds $5.00, or (B) the amount by which the fair
market value of a share of the Leslie's Delaware Common Stock on the date of
termination, as determined by the Board of Directors of Leslie's Delaware,
exceeds $5.00; and (ii) for NQ Option Shares, (x) if the termination is
voluntary, the Cash Merger Consideration, and (y) in the case of an Other
Termination, the greater of (A) the Cash Merger Consideration, or (B) the fair
market value of a share of Leslie's Delaware Common Stock on the date of
termination, as determined by the Leslie's Delaware Board of Directors. NQ
Options have a term of ten years and remain exercisable without regard to any
termination of employment of the holder, subject to the exercise of the Call
Option as described above.      
     
  Leslie's Delaware will reserve 273,946 shares of Leslie's Delaware Common
Stock for the ISO Option Plan. Under the ISO Option Plan, ISO Options vest in
one-third increments on the first, second and third anniversaries of the
Effective Date, except for options to purchase 71,647 shares ("Performance
Options") which will also be subject to a further vesting condition based upon
Leslie's Delaware achieving certain operating and store-opening goals. Options
intended to qualify as "incentive stock options" and options not intended to
so qualify may be granted under the ISO Option Plan. Pursuant to law, options
intended to qualify as "incentive stock options" are subject to limitations on
aggregate amounts granted and must be issued to any holder of 10% or more of
the issuer's outstanding common stock at 110% of fair market value.      
     
  Vested ISO Options may be exercised for 90 days post termination of
employment, except in the case of the death of the option holder, in which
case the vested portion may be exercised within twelve months from the date of
termination. ISO Options will have a term of ten years.      
 
                                      44
<PAGE>
 
    
  Subscription Stock. Immediately after the consummation of the Merger, Mr.
Robert D. Olsen, as described above, will purchase 14,768 shares of Leslie's
Delaware Common Stock at a price of $14.50 per share, and one or more additional
members of the Company's current management will purchase a total of an
additional 4,198 shares of Subscription Stock at the same per share price. The
shares of Subscription Stock will be subject to the same Call Option as
described above for the NQ Option Shares.      
      
  Management Agreement. Pursuant to the terms of a Management Agreement (the
"Management Agreement") to be entered into between LCP and Leslie's Delaware,
(i) upon consummation of the Merger Leslie's Delaware will pay LGP a transaction
fee in the amount of $1.4 million, one-half of which will be paid to HPA for
distribution among HPA, Michael Fourticq, Brian McDermott and Robert Olsen, and
(ii) Leslie's Delaware will agree to pay LGP an annual management fee equal to
1.6% of the total sum invested by Green in Leslie's Delaware.     
     
  Stockholders Agreement. Upon consummation of the Merger, Leslie's Delaware,
all holders of Leslie's Delaware Common Stock and of options to purchase
Leslie's Delaware Common Stock and Occidental, as the holder of Leslie's
Delaware Series A Preferred Stock and warrants to purchase up to 316,092 shares
of Leslie's Delaware Common Stock, will become parties to a Stockholders
Agreement ("Stockholders Agreement").      
    
  Occidental Supply Agreement. Prior to its purchase of the Debentures, as
described above, a wholly-owned subsidiary of Occidental was and continues to be
a party to a supply agreement with Leslie's California under which that
subsidiary supplies all of the Company's requirements for certain chemical
chlorine compounds. It is expected that after the effective date of the Merger
Leslie's Delaware and this subsidiary will extend this supply agreement upon
terms and conditions that will be mutually satisfactory.     
     
  Indemnification and Insurance. The Merger Agreement requires that the
Company, Leslies Delaware as the surviving corporation in the Reincorporation
and Leslie's Delaware as the surviving corporation in the Merger provide
indemnification to the current and prior directors and officers of Leslie's
California and Leslie's Delaware against costs, expenses, suits, claims and
proceedings arising out of or pertaining to, or the approval and consummation of
the transactions contemplated by, the Merger Agreement and the Reincorporation
Agreement. In addition, Leslie's Delaware is obligated for a period of at least
eighteen months from the effective date of the Merger to continue in effect (or
provide insurance coverage that, subject to Leslie's Delaware's ability to
obtain higher levels of deductibles, is comparable to) the directors and
officers liability insurance that is currently in place with respect to claims
arising from facts or events which occurred at or before the effective date of
the Merger, provided that Leslie's Delaware is not obligated to expend annually
more than 150% of the current cost of such coverage.     
    
  Treatment of Stock Options. Certain of the directors and executive officers of
Company hold options to purchase the Company's Common Stock that will be
terminated upon the effectiveness of the Merger and, as to a portion of which,
such persons will receive cash pursuant to the terms of the Merger Agreement.
Prior to the effective date of the Merger, the Company's has agreed, pursuant to
the terms of the Merger Agreement, to take all necessary action to cancel all
outstanding options to purchase the Company's Common Stock, whether or not
exercisable. Upon the surrender and cancellation of each such option, unless
another arrangement is made with the holder (see "NQ Option Plan and ISO Option
Plan" above) each holder thereof shall be entitled to receive an amount in cash
equal to the product of (i) the excess of $14.50 over the exercise price per
share of Leslie's Delaware Common Stock purchasable pursuant to such option
after the same has been converted into an option to purchase Leslie's Delaware
Common Stock upon the effectiveness of the Reincorporation and (ii) the number
of shares of Leslie's Delaware Common Stock subject to such option at the time
of such termination. As of March 27, 1997, there were options outstanding to
purchase an aggregate of 974,759 shares of the Company's Common Stock at a
weighted average exercise price of $8.66 per share, which options were held by
71 persons.      
 
                                      45
<PAGE>
 
    
  The following table sets forth information as to the options outstanding on
March 27, 1997 for which cash payment will be received upon consummation of the
Merger, and the proceeds to be received upon termination of such options by the
members of the Hancock Group and by all directors and executive officers of the
Company as a group:      
 
<TABLE>     
<CAPTION>
                                 OUTSTANDING            CASH PAYMENT TO BE
                            OPTIONS FOR WHICH CASH        RECEIVED UPON
   NAME                    PAYMENT WILL BE RECEIVED CONSUMMATION OF THE MERGER
   ----                    ------------------------ --------------------------
<S>                        <C>                      <C>
Michael J. Fourticq.......          12,091                  $   30,252
Brian P. McDermott........         225,794                   1,854,892
Richard H. Hillman........          22,053                     108,503
Robert D. Olsen...........          72,545                     263,797
All directors and
 executive officers as a
 group (10 persons).......         553,042                   3,415,933
</TABLE>      
     
  Special Committee. For their service as members of the Special Committee,
Messrs. Angeloff and Schmitz each received from the Company the sum of $50,000.
No further compensation is payable on a per meeting basis or otherwise for
service on the Special Committee, but they will receive a retainer of $1,500 per
month and per meeting fee of $750 for meetings of the Board, including those at
which the Reincorporation and Merger transactions are considered. These payments
to Messrs. Angeloff and Schmitz are not dependent upon the successful
consummation of the Reincorporation or Merger. Each of the members of the
Special Committee, as an outside director, automatically received stock options
to purchase 8,513 shares of the Company's Common Stock, of which options to
purchase 5,513 shares are exercisable at $11.50 per share and options to
purchase 3,308 shares are exercisable at $12.875 per share. Under the terms of
the Merger Agreement, each of these options will, upon consummation of the
Merger, be terminated, and Messrs. Angeloff and Schmitz will each receive
$21,915.     

                                      46
<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 at December 28, 1996 and December 30, 1995
Consolidated Statements of Income for the years ended December 28, 1996,
December 30, 1995, and December 31, 1994
Consolidated Statements of Shareholders' Equity (Deficit) for the years ended
December 28, 1996, December 30, 1995, and December 31, 1994
Consolidated Statements of Cash Flows for the years ended December 28, 1996,
December 30, 1995, and December 31, 1994
Notes to Consolidated Financial Statements
Report of Independent Public Accountants

Schedule II  -  Valuation and Qualifying Accounts

     (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
     -------    -----------

     2.1/(1)/  Stock Purchase Agreement dated as of August 31, 1992 among
               Registrant, Philip Leslie ("Leslie") and Sander Bass ("Bass")
     3.1/(2)/  Restated Articles of Incorporation
     3.2/(2)/  Bylaws
    10.1/(2)/  Form of Stock Option Agreement between Registrant and the
               individuals set forth on the schedule thereto.
    10.2/(2)/  1990 Stock Option Plan, and forms of Incentive Stock Option
               Agreement and Nonstatutory Stock Option Agreement.
    10.3/(2)/  Lease for distribution center in Dallas, Texas, dated August 15,
               1990, between Registrant and Adams Property Associates.
    10.4/(2)/  Form of Indemnification Agreement.
    10.5/(3)/  1992 Directors' Incentive Stock Option Plan, and form of Stock
               Option Agreement
    10.6/(3)/  Severance Agreement, dated August 21, 1992, between Registrant
               and Murray H. Dashe.
    10.7/(3)/  Noncompetition Agreement, dated August 31, 1992, among Sandy's
               Pool Supply, Inc. ("Sandy's"), Leslie and Registrant.
    10.8/(3)/  Noncompetition Agreement, dated August 31, 1992, among Sandy's,
               Bass and Registrant.
    10.9/(3)/  Stock Option Agreement, dated September 21, 1992, between
               Registrant and Murray H. Dashe.
    10.10/(4)/ Stock Option Agreement, dated May 3, 1993, between Registrant
               and Robert D. Olsen.
    10.11/(5)/ Debenture Purchase Agreement dated as of May 25, 1995 by and
               between Registrant and Occidental Petroleum Corporation, a
               Delaware corporation.
    10.12/(6)/ Second Amended and Restated Credit Agreement between Registrant

                                      47
<PAGE>
 
               and Wells Fargo Bank, N.A. ("Wells Fargo") dated June 30, 1995.
    10.13/(7)/ First Amendment to Second Amended and Restated Credit Agreement
               between Registrant and Wells Fargo, dated October 1, 1995.
    10.14/(8)/ Second Amendment to Second Amended and Restated Credit Agreement
               between Registrant and Wells Fargo, dated November 30, 1995.
    10.15/(8)/ Third Amendment to Second Amended and Restated Credit Agreement
               between Registrant and Wells Fargo, dated February 23, 1996.
    10.16/(9)/ Lease between Registrant and Striks Properties dated August 21,
               1996.
    
    10.17      Lease between Registrant and Bedford Property Investors, Inc.,
               dated November 26, 1996.     
    22.1/(8)/  Subsidiaries of Registrant.
________________
/(1)/  Incorporated herein by reference to the Company's Report on Form 8-K
       filed with the Securities and Exchange Commission ("the Commission") on
       September 15, 1992.
/(2)/  Incorporated herein by reference to the Company's Registration Statement
       on Form S-1 (No. 33-39412) filed with the Commission on March 15, 1991,
       as amended by Amendment No. 1 thereto filed on April 17, 1991.
/(3)/  Incorporated herein by reference to the Company's Report on Form 10-Q for
       the fiscal quarter ended March 31, 1993, filed with the Commission on May
       13, 1993.
/(4)/  Incorporated herein by reference to the Company's Report on Form 10-Q for
       the fiscal quarter ended June 30, 1993, filed with the Commission on
       August 12, 1993.
/(5)/  Incorporated herein by reference to the Company's Report on Form 8-K,
       filed with the Commission on June 8, 1995.
/(6)/  Incorporated herein by reference to the Company's Report on Form 10-Q for
       the fiscal quarter ended July 1, 1995, filed with the Commission on
       August 15, 1995.
/(7)/  Incorporated herein by reference to the Company's Report on Form 10-Q for
       the fiscal quarter ended September 30, 1995, filed with the Commission on
       November 15, 1995.
/(8)/  Incorporated herein by reference to the Company's Report on Form 10-K for
       the fiscal year ended December 30, 1995, as filed with the Commission on
       March 28, 1996.
/(9)/  Incorporated herein by reference to the Company's Report on Form 10-Q for
       the fiscal quarter ended September 28, 1996, as filed with the Commission
       on November 11, 1996.

       (b)  REPORTS ON FORM 8-K

            None.

                                      48
<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 May 8, 1997.


                                       LESLIE'S POOLMART
                                       (Registrant)



                                       By: /s/ Robert D. Olsen
                                           -----------------------
                                           Robert D. Olsen, 
                                           Chief Financial Officer


     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
<TABLE>    
<CAPTION>
           Signature                         Capacity                       Date
           ---------                         --------                       ----
<S>                                  <C>                                <C>
 
       /s/ Michael J. Fourticq       Chairman of the Board of           May 8, 1997
----------------------------------   Directors
        Michael J. Fourticq          
 
       /s/ Brian P. McDermott        Chief Executive Officer,           May 8, 1997
----------------------------------   President, and Director
         Brian P. McDermott          
 
       /s/ Dann V. Angeloff          Director                           May 8, 1997
----------------------------------
        Dann V. Angeloff
 
       /s/ John A. Canning, Jr.      Director                           May 8, 1997
----------------------------------
        John A. Canning, Jr.
 
       /s/ Dr. Dale R. Laurance      Director                           May 8, 1997
----------------------------------
         Dr. Dale R. Laurance
 
       /s/ Clarence T. Schmitz       Director                           May 8, 1997
----------------------------------
         Clarence T. Schmitz
 
       /s/ Robert D. Olsen           Chief Financial Officer            May 8, 1997
----------------------------------   and Principal Accounting Officer
         Robert D. Olsen             
</TABLE>     

                                      49
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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

We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Leslie's Poolmart and subsidiary included
in this Form 10-K and have issued our report thereon dated March 6, 1997.  Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole.  The schedule listed in Item 14 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements.  This schedule has been subjected
to the auditing procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, fairly states in all material respects
the financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.


                                       /s/ Arthur Andersen LLP

                                       ARTHUR ANDERSEN LLP



Los Angeles, California
March 6, 1997

                                      50
<PAGE>
 
                               LESLIE'S POOLMART
                 SCHEDULE - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
                                                                                     Balance
                                             Balance at  Charged to                  at end
                                             beginning   costs and                     of
                                             of period   expenses     Deductions     Period
                                            ----------   ----------   ----------   ----------
<S>                                         <C>          <C>          <C>          <C>
Year ended December 31, 1994:
  Accumulated amortization of goodwill...   $  667,000    $239,000       $---      $  906,000
  Accumulated amortization of deferred
    loan costs...........................   $   14,000    $ 41,000       $---      $   55,000
 
Year ended December 30, 1995:
  Accumulated amortization of goodwill...   $  906,000    $239,000       $---      $1,145,000
  Accumulated amortization of deferred
    loan costs...........................   $   55,000    $ 51,000       $---      $  106,000
 
Year ended December 28, 1996:
  Accumulated amortization of goodwill...   $1,145,000    $252,000       $___      $1,397,000
  Accumulated amortization of deferred
    loan costs...........................   $  106,000    $ 55,000       $___      $  161,000
</TABLE>

                                      51
<PAGE>
 
                                 EXHIBIT INDEX

<TABLE> 
<CAPTION> 
                                                                                 Sequentially
   Exhibit No. Description                                                      Numbered Pages
   ----------- -----------                                                      --------------
   <S>         <C>                                                              <C> 
     2.1/(1)/  Stock Purchase Agreement dated as of August 31, 1992 among
               Registrant, Philip Leslie ("Leslie") and Sander Bass ("Bass")
     3.1/(2)/  Restated Articles of Incorporation
     3.2/(2)/  Bylaws
    10.1/(2)/  Form of Stock Option Agreement between Registrant and the
               individuals set forth on the schedule thereto.
    10.2/(2)/  1990 Stock Option Plan, and forms of Incentive Stock Option
               Agreement and Nonstatutory Stock Option Agreement.
    10.3/(2)/  Lease for distribution center in Dallas, Texas, dated August 15,
               1990, between Registrant and Adams Property Associates.
    10.4/(2)/  Form of Indemnification Agreement.
    10.5/(3)/  1992 Directors' Incentive Stock Option Plan, and form of Stock
               Option Agreement
    10.6/(3)/  Severance Agreement, dated August 21, 1992, between Registrant
               and Murray H. Dashe.
    10.7/(3)/  Noncompetition Agreement, dated August 31, 1992, among Sandy's
               Pool Supply, Inc. ("Sandy's"), Leslie and Registrant.
    10.8/(3)/  Noncompetition Agreement, dated August 31, 1992, among Sandy's,
               Bass and Registrant.
    10.9/(3)/  Stock Option Agreement, dated September 21, 1992, between
               Registrant and Murray H. Dashe.
    10.10/(4)/ Stock Option Agreement, dated May 3, 1993, between Registrant and
               Robert D. Olsen.
    10.11/(5)/ Debenture Purchase Agreement dated as of May 25, 1995 by and
               between Registrant and Occidental Petroleum Corporation, a
               Delaware corporation.
    10.12/(6)/ Second Amended and Restated Credit Agreement between Registrant
               and Wells Fargo Bank, N.A. ("Wells Fargo") dated June 30, 1995.
    10.13/(7)/ First Amendment to Second Amended and Restated Credit Agreement
               between Registrant and Wells Fargo, dated October 1, 1995.
    10.14/(8)/ Second Amendment to Second Amended and Restated Credit Agreement
               between Registrant and Wells Fargo, dated November 30, 1995.
    10.15/(8)/ Third Amendment to Second Amended and Restated Credit Agreement
               between Registrant and Wells Fargo, dated February 23, 1996.
    10.16/(9)/ Lease between Registrant and Striks Properties dated August 21,
               1996.
    10.17      Lease between Registrant and Bedford Property Investors, Inc.,
               dated November 26, 1996.
    22.1/(8)/  Subsidiaries of Registrant.
</TABLE> 
________________
/(1)/  Incorporated herein by reference to the Company's Report on Form 8-K
       filed with the Securities and Exchange Commission ("the Commission") on
       September 15, 1992.
/(2)/  Incorporated herein by reference to the Company's Registration Statement
       on Form S-1 (No. 33-39412) filed with the Commission on March 15, 1991,
       as amended by Amendment No. 1 thereto filed on April 17, 1991.

<PAGE>
 
/(3)/  Incorporated herein by reference to the Company's Report on Form 10-Q for
       the fiscal quarter ended March 31, 1993, filed with the Commission on May
       13, 1993.
/(4)/  Incorporated herein by reference to the Company's Report on Form 10-Q for
       the fiscal quarter ended June 30, 1993, filed with the Commission on
       August 12, 1993.
/(5)/  Incorporated herein by reference to the Company's Report on Form 8-K,
       filed with the Commission on June 8, 1995.
/(6)/  Incorporated herein by reference to the Company's Report on Form 10-Q for
       the fiscal quarter ended July 1, 1995, filed with the Commission on
       August 15, 1995.
/(7)/  Incorporated herein by reference to the Company's Report on Form 10-Q for
       the fiscal quarter ended September 30, 1995, filed with the Commission on
       November 15, 1995.
/(8)/  Incorporated herein by reference to the Company's Report on Form 10-K for
       the fiscal year ended December 30, 1995, as filed with the Commission on
       March 28, 1996.
/(9)/  Incorporated herein by reference to the Company's Report on Form 10-Q for
       the fiscal quarter ended September 28, 1996, as filed with the Commission
       on November 11, 1996.