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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-K





(Mark One)


|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | ----------------------------------------------------

SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]





For the fiscal year ended: September 28, 2002





or





| ̈ |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
|- |  | --------------------------------------------------------

SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]





For the transition period from
 to
.





Commission file number: 0-18741





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LESLIES POOLMART, INC.


(Exact name of registrant as specified in its charter)





Delaware

95-4620298(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)





3925 E. Broadway Road, Suite 100


Phoenix, Arizona 85040


(Address of principal executive offices)





Registrants telephone number, including area code: (602) 366-3999





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





Securities registered pursuant to section 12(g) of the Act:    None.





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





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K.  x





APPLICABLE ONLY TO CORPORATE REGISTRANTS:





The Number of Shares of Common Stock outstanding as of December 23, 2002 was 7,065,438.





DOCUMENTS INCORPORATED BY REFERENCE


(To the
Extent Indicated Herein)





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---

PART I





ITEM 1.

BUSINESS





Leslies Poolmart, Inc. (Leslies or the
Company) is the leading national specialty retailer of swimming pool supplies and related products. These products primarily consist of regularly purchased, non-discretionary pool maintenance items such as chemicals, equipment, cleaning
accessories and parts, and also include fun, safety and fitness-oriented recreational items. The Company currently markets its products under the trade name Leslies Swimming Pool Supplies through 410 company-owned retail stores in 33 states
and through mail order catalogs sent to selected pool owners nationwide.





The Company provides its customers a
comprehensive selection of high quality products, competitive every day low prices and superior customer service through knowledgeable and responsive sales personnel who offer a high level of technical assistance at convenient store locations. The
typical Leslies store contains 3,700 square feet of space, is located either in a strip center or on a freestanding site in an area of heavy retail activity, and draws its customers primarily from an approximately three-mile trade area. The
Company maintains a proprietary mailing list of approximately 5.2 million addresses, including approximately 88% of the residential in-ground pools in the U.S. This highly focused list of target customers is central to the Companys direct mail
marketing efforts, which support both its retail store and mail order operations.





History





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





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





Swimming Pool Supply Industry





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





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




2




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





Seasonality





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





Products





Leslies offers its customers a comprehensive selection of products necessary to satisfy their swimming pool supply needs. During 2002, the Company stocked approximately 2,200 items in each store, with more than 18,000
additional items available through its Xpress Parts program and special order processes. In 2002, approximately 250 items were displayed in the Companys residential mail order catalogs and 770 items were in the commercial catalog, although
special order procedures make nearly all Leslies products available to mail order customers as well.





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





Non-discretionary and
regularly consumed products such as pool chemicals, major equipment and parts represented approximately 80% of total sales in fiscal 2002. The Companys non-discretionary products have long shelf lives and are generally not prone to either
obsolescence or shrinkage due to the high percentage of Leslies business which is attributable to non-discretionary products.





The Company believes that product quality and availability are key attributes considered by consumers when shopping for pool supplies and that the Companys ability to provide a high quality, in-stock product offering
is fundamental to its concept of value leadership. In addition to third-party brand names, Leslies carries a broad selection of products under the Leslies brand name. The Company believes 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 2002, Leslies brand name products accounted for approximately 50% of the Companys total sales.





Channels of Distribution





Retail Store Operations.    At the end of fiscal 2002, Leslies marketed its products through 410 retail stores in 33 states under the trade name Leslies Swimming Pool Supplies. California
represents its single largest concentration of stores with 104, while 72 stores are located in Texas, and 94 stores are in the northeast/mid-Atlantic area. Leslies retail stores are located in areas with high concentrations of swimming pools
and typically are approximately 3,700 square feet in size. In addition to the store manager, the typical Leslies store employs one assistant manager, who is generally a full-time employee. Additionally, Leslies makes frequent use of
part-time and temporary employees to support its full-time employees during peak seasons. During 2002, the Company had 27 district managers, each of whom was responsible for approximately 15 stores.




3




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





Customer Service





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





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





Marketing





The Majority of the Companys marketing is done on a direct mail basis through its proprietary mailing list of
approximately 5.2 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 proprietary research techniques and in-store customer sign-ups.





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





Purchasing





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





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




4




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Vertical Integration





Leslies operates a plant in the Los Angeles area where it converts dry granular chlorine into tablet form and repackages a variety of bulk chemicals into various
sized containers suitable for retail sales. Leslies also formulates a variety of specialty liquids, including water clarifiers, tile cleaners, algaecides and stain preventives. The chemicals that the Company processes have a relatively long
shelf life. Leslies believes that supplying its stores with chemicals from its own repackaging plant provides it with cost savings, as well as greater control over product availability and quality, as compared to non-integrated pool supply
retailers. It also offers the Company greater flexibility of product sourcing and acquiring vital information when negotiating with third-party repackagers and chemical providers. The Leslies brand name appears on all products processed at its
repackaging plant, and on the significant majority of all its chemical products. The Company believes that it is among the largest processors of chlorine products for the swimming pool supply industry.





In connection with the operation of its three distribution centers outside of California, the Company has expanded its use of third-party
chemical repackagers and its purchase of products already in end-use configurations. These products are also generally packaged under the Leslies brand name. The Company continually evaluates the cost effectiveness of third-party sourcing
versus internal manufacturing in order to minimize its cost of goods. Leslies has continued to evaluate the establishment of additional chemical repackaging capabilities and will be expanding its packaging operation of specialty items to its
Covington, Kentucky distribution facility in fiscal 2003. In addition to chemicals, a variety of the Companys other products are packaged under the Leslies brand name.





Distribution





In 2002, the Company distributed all of its
products to its retail stores and to its catalog customers through its leased distribution facilities in Ontario, California; Dallas, Texas; Swedesboro, New Jersey and Covington, Kentucky. Leslies relocated and consolidated its West Coast
distribution operation, along with the Los Angeles repackaging operation, into a 183,000 square foot facility in Ontario, California in early 1997. Leslies opened its 100,000 square foot Dallas facility in November 1990 and relocated its
Swedesboro operations to a new 119,000 square foot facility in March of 1998. In January of 1999, the Company opened its new 146,000 square foot distribution center in Covington, Kentucky.





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





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





Competition





Primary elements of competition in the retail swimming pool supply industry
are price, technical assistance, customer service, product selection and product availability. Most of the Companys competition comes from local stores or regional chains which do not repackage or manufacture products and which generally buy
products in smaller quantities. The chain store competitors include a large franchise operator of approximately 140 retail outlets in the Florida market and a limited number of other retail chains of approximately 15 to 30 stores.





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





Employees





As of September 28, 2002, Leslies employed 1,843 persons. During the height of the Companys seasonal activities in 2002, it
employed 2,841 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




5




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relationships with its employees are good.





Trademarks





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





ITEM 2.

PROPERTIES





As of September 28, 2002, the Company operated 410 stores in 33
states. The following table sets forth information concerning the Companys stores:





State

Number of StoresAlabama

5Arizona

29Arkansas

1California

104Connecticut

9Delaware

2Florida

10Georgia

17Illinois

6Indiana

5Kansas

1Kentucky

4Louisiana

6Maryland

5Massachusetts

8Michigan

7Mississippi

1Missouri

8Nebraska

1Nevada

9New Hampshire

2New Jersey

21New Mexico

2New York

22North Carolina

3Ohio

10Oklahoma

7Pennsylvania

18Rhode Island

1South Carolina

3Tennessee

5Texas

72Virginia

6Total Stores

410





Except for 26 owned stores, all of its retail stores are leased by
the Company with lease terms expiring between 2002 and 2010. The Companys typical lease term is five years, and in the majority of instances, the Company has renewal options at increased rents. Five leases provide for rent contingent on sales
exceeding specific amounts. No other leases require payment of percentage rent.





In early 1997, the Company
relocated its corporate offices to Chatsworth, California. In 2001, the Company relocated its corporate office to Phoenix, Arizona from its location in Chatsworth, California. The 38,000 square foot office building was leased for five years and had
one five-year renewal option. During 2002, the Company renegotiated its existing lease adding approximately 16,000 square feet of space. The new lease extends the maturity until June 2009, and the Company retains one five-year renewal option.





In early 1997, the Companys Southern California distribution center (previously located in Chatsworth,
California)




6




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





ITEM 3.

LEGAL PROCEEDINGS





Soto, et. al. v. Leslies Poolmart, Inc.: On January 31, 2002,
a former employee brought a purported class action lawsuit against the Company in California Superior Court for the County of Los Angeles. The complaint alleged failure to pay overtime wages, waiting time penalties and unfair business practices and
sought monetary and injunctive relief. A claims made settlement totaling $1.2 million was reached by the parties during a mediation on April 2, 2002. The Court approved the settlement in a final fairness hearing on August 20, 2002. During the second
quarter of 2002, the Company reserved a total of $1.5 million for this settlement and its related legal and other expenses. The majority of these settlement and legal related expenses were paid prior to September 28, 2002 and the Company believes
that it has adequately reserved for the costs associated with this matter.





Dale Quezada et al. v. Leslies
Poolmart, Inc.: This putative class action, filed on March 1, 2002, by a former employee of the Company, alleged similar claims as the Soto matter on behalf of the same putative class members. The parties settled this matter and the Court dismissed
the suit, in its entirety and with prejudice, on December 5, 2002.





Gilbert Dean Harris and Howard Scott Hudson et
al. v. Leslies Poolmart, Inc.: This putative class action, filed on April 5, 2002, by former employees of the Company, alleged similar claims as the Soto matter on behalf of the same putative class members. The parties settled this matter and
the Court dismissed the suit, in its entirety and with prejudice, on November 22, 2002.





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





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





There is no public trading market for the Companys common
stock. There are 13 holders of the Companys common stock. The Company has not paid any dividends on its common stock and does not anticipate doing so in the foreseeable future.




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ITEM 6.

SELECTED FINANCIAL DATA





SELECTED CONSOLIDATED FINANCIAL DATA





The following table presents selected consolidated financial data of the Company as of and for the fiscal years ended September 28, 2002,
September 29, 2001, September 30, 2000, October 2, 1999, October 3, 1998 (53 weeks). This financial data was derived from the audited historical consolidated financial statements of the Company and should be read in conjunction with the consolidated
financial statements of the Company and Managements Discussion and Analysis of Financial Condition and Results of Operations elsewhere in this Annual Report.





Fiscal Years EndedSeptember 28, 2002


September 29, 2001


September 30, 2000


October 2, 1999


October 3, 1998(Amounts in Thousands, except employees and store information)Operating Results:Sales

$
313,311


$
301,700


$
303,163


$
282,349


$
252,923Gross Profit


146,971



135,298



131,195



122,416



110,355Gross Margin(1)


46.9
%


44.8
%


43.3
%


43.4
%


43.6
%Loss on Disposition of Fixed Assets


1,332



919



1,477



1,006



334Depreciation and Amortization


9,044



8,623



8,579



7,952



6,666Income from Operations(1)


20,073



15,559



6,479



11,417



15,870Interest Expense, net


10,690



12,320



12,536



11,380



10,513Net Income/(Loss)(1)


4,693



1,218



(4,713
)


(878
)


2,790Balance Sheet Data:Working Capital


34,634



28,548



31,257



37,079



41,766Total Assets


141,764



132,310



137,577



138,204



126,950Long-term Debt


90,000



90,867



90,988



91,095



91,195Preferred Stock


45,417



42,314



37,526



33,225



29,361Stockholders Deficit


(52,899
)


(52,284
)


(47,764
)


(39,657
)


(34,915
)Selected Operating Data:Capital Expenditures


8,040



7,371



9,129



16,042



10,519Unusual and Restructuring Charges(1,2)


1,500



1,466



3,173







Adjusted EBITDA(1,2)


30,617



25,648



18,655



19,369



22,537Adjusted EBITDA Margin(1,3)


9.8
%


8.5
%


6.1
%


6.9
%


8.9
%Cash flow from (used in) Operating Activities


20,205



15,149



11,723



(2,280
)


7,737Cash flow used in Investing Activities


(8,020
)


(7,233
)


(8,656
)


(15,806
)


(12,915
)Cash flow from (used in) Financing Activities


(957
)


(6,400
)


(3,432
)


8,475



(87
)Number of Employees


1,843



1,805



1,813



2,437



1,906Number of Stores


410



391



383



364



316Comparable Store Sales Growth(4)


1.9
%


(0.8
%)


3.8
%


6.6
%


10.3
%


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|(1) |  | During the second quarter of 2002, the Company recorded an unusual charge of $1.5 million for expenses associated with defending a purported class action
lawsuit that was settled. The Company recorded a restructuring charge of $1.5 million in the first quarter of 2001 costs for expenses associated with the relocation of its corporate office to Phoenix, Arizona. In the fourth quarter of 2000, the
Company recognized an unusual charge consisting of $2.1 million for expenses principally associated with its decision to write-off nonproductive aged inventory, $0.8 million in restructuring costs for expenses associated with the relocation of its
corporate office, and an additional $0.2 million in accrued expenses for other corporate office move related expenses.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) |  | Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization, loss/(gain) on disposition of fixed assets, stock compensation
expense and unusual charges. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States (GAAP), but is used by some investors to determine a companys ability to service or
incur indebtedness. Adjusted EBITDA is not calculated in the same manner by all companies and accordingly is not necessarily comparable to similarly entitled measures of other companies and may not be an appropriate measure for performance relative
to other companies. Adjusted EBITDA should not be construed as an indicator of a companys operating performance or liquidity, and should not be considered in isolation from or as a substitute for net income (loss), cash flows from operations
or cash flow data which are all prepared in accordance with GAAP. We have presented Adjusted EBITDA solely as supplemental disclosure because we believe it allows for a more complete analysis of results of operations. Adjusted EBITDA is not intended
to represent and should not be considered more meaningful than, or as an alternative to, measures of operating performance as determined in accordance with GAAP.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Adjusted EBITDA Margin represents Adjusted EBITDA as a percentage of sales.
|--- |  | ---------------------------------------------------------------------------




The calculation of Adjusted EBITDA is shown as follows:





Fiscal Years EndedSeptember 28, 2002

September 29, 2001

September 30, 2000


October 2, 1999


October 3, 1998(Amounts in Thousands)Net income/(loss)

$
4,693

$
1,218

$
(4,713
)

$
(878
)

$
2,790Depreciation and amortization


9,044


8,623


8,579



7,952



6,666Stock compensation expense








424







Unusual charges


1,500


1,466


3,173







Interest expense, net


10,690


12,320


12,536



11,380



10,513Loss on disposition of assets


1,332


919


1,477



1,006



334Income tax expense/(benefit)


3,358


1,102


(2,821
)


(91
)


2,233Adjusted EBITDA

$
30,617

$
25,648

$
18,655


$
19,369


$
22,537





|(4) |  | The Company considers a store to be comparable in the first full month after it has completed 52 weeks of sales. Closed stores become non-comparable during
their last partial month of operation. Stores that are relocated are considered comparable stores at the time the relocation is completed. Comparable store sales is not a measure of financial performance under accounting principles generally
accepted in the United States (GAAP). Comparable store sales is not calculated in the same manner by all companies and accordingly is not necessarily comparable to similarly entitled measures of other companies and may not be an appropriate measure
for performance relative to other companies.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



9




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ITEM 7.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





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





Results of Operations





2002 compared to 2001





For the 52 weeks ended September 28, 2002, sales increased 3.8% to $313.3 million from $301.7 million in the same 52 weeks of 2001. The
sales increase is attributable to a comparable store sales increase of 1.9% above the comparable 52 weeks of 2001.





Comparable store sales increased 1.9% as compared to the prior year. The comparable store sales increase was attributable to increased marketing and merchandising efforts and an increase in customer counts. For definition purposes, a
store is considered a comparable store in the first full month after it has completed 52 weeks of sales. Closed stores become non-comparable during their last partial month of operation. Stores that are relocated are considered comparable stores at
the time the relocation is completed.





During 2002, the Company expanded its business by opening 23 new stores.
Additionally, 4 stores were closed and 3 were relocated in 2002. This resulted in a net increase of 19 stores as of September 28, 2002 as compared to September 29, 2001.





Gross profit for the fiscal year ended September 28, 2002 improved to 46.9% of sales, from 44.8% in 2001. Gross profit represents sales less the cost of services and
purchased goods, chemical repackaging costs, and related distribution costs. The gross margin increase in 2002 is a result of improved sales, lower promotional discounts on retail pricing, lower acquisition costs and lower distribution expenses as a
percent of sales. The Company anticipates that distribution expenses as a percent of sales should continue to improve proportionally with improvements in sales due to the leverage of its fixed expenses.





In 2002, total operating expenses were $126.9 million, versus $119.7 million in 2001, an increase of 6.0%. The increase in operating
expenses in 2002 was due primarily to the costs associated with the increase in store count and higher insurance related expenses associated with workers compensation and property and casualty coverage. The Company expects to be impacted by the
continuing costs associated with increases in insurance related expenses. However, the Company does not expect to experience cost increases of greater proportion than the retail industry in general. Expenses as a percent of sales were 40.5% as
compared to 39.7% in the prior year.





Amortization expense for the fiscal year ended September 28, 2002 was
$319,000 as compared to $413,000 in the same period of 2001.





For the fiscal year ended September 28, 2002, the
Company recognized losses on the disposition of fixed assets totaling approximately $1.3 million as compared to $0.9 million in the prior year. These losses were primarily associated with the Companys completion and roll-out of its new
point-of-sale system and its decision to close or relocate stores that were unproductive or not meeting expectations.





During the second quarter 2002, the Company recorded an unusual charge of $1.5 million for expenses associated with defending a purported class action lawsuit that was settled. During the first quarter 2001, the Company recorded a
restructuring charge of $1.5 million for expenses associated with its corporate relocation to Phoenix, Arizona. These expenses consisted primarily of the occupancy related costs incurred after vacating its existing corporate location and for




10




---

employee related termination expenses.





Adjusted EBITDA before the unusual charge for the period increased 19.4% to $30.6 million from $25.6 million in the same 52 weeks of 2001. Net income of $4.7 million was realized in the year 2002.
Adjusted EBITDA including the unusual charges was $29.1 million as compared to $24.2 million in the prior year. This increase was primarily the result of increased sales and the improved gross margin rate achieved during the year.





Income from operations for the period increased 29.0% to $20.1 million from $15.6 million in fiscal 2001 as a result of the
previously noted items.





Interest expense was $10.7 million in 2002, as compared to $12.3 million in 2001. The
decrease was primarily the result of reduced average debt balances and the reduction in the related borrowing rates during the year.





The Company recorded income tax expenses of $3.4 million in 2002, or an effective tax rate of 41.7% versus $1.1 million, or an effective tax rate of 47.5% in the prior year. The effective tax rate in 2002 was lower due
primarily to the fact that the permanent tax differences were calculated on a higher net income base which had the impact of reducing the overall effective tax rate.





2001 compared to 2000





For the
52 weeks ended September 29, 2001, sales decreased 0.5% to $301.7 million from $303.2 million in the same twelve months of 2000. The sales decrease is attributable to a comparable store sales decrease of 0.8% below the comparable 52 weeks of 2000.
EBITDA before the unusual charge for the period increased 37.5% to $25.6 million from $18.7 million in the same twelve months of 2000. Net income of $1.2 million was realized in the year 2001. EBITDA including the unusual charges was $24.2 million
as compared to $15.5 million in the prior year. This increase was primarily the result of improved gross margin and effective expense controls achieved during the year.





Sales for the 52 weeks ended September 29, 2001 decreased 0.5% over the same fiscal period of 2000. Sales were lower due to the Companys decision to reduce
promotional spending as compared to prior years levels, and the Companys decision to eliminate business in certain commercial and service markets.





Comparable store sales decreased 0.8% although there was an increase in the total number of stores in operation from 383 in 2000 to 391 at the end of 2001. The decrease in comparable store sales
resulted from reduced promotional spending, the closure of 45 service markets which were included in prior years comparable numbers, and to a lessor degree, the general softening of the economy which impacted the sales of more expensive,
discretionary items.





During 2001, the Company expanded its business by opening 17 new stores. Additionally, 9
stores were closed and 4 were relocated in 2001. This resulted in a net increase of 8 stores as of September 29, 2001 as compared to September 30, 2000.





Gross profit for the fiscal year ended September 29, 2001 improved to 44.8% of sales, from 43.3% in 2000. Gross profit represents sales less the cost of services and purchased goods, chemical
repackaging costs and related distribution costs. The gross margin increase in 2001 reflects lower promotional discounts on retail pricing, reduced markdowns taken during the year to move certain inventory, and a $2.1 million unusual charge taken in
the fourth quarter of 2000 to write-off aged and excessive inventory.





In 2001, total operating expenses were
$119.7 million, versus $124.7 million in 2000, a decrease of 4.0%. The decrease in operating expenses in 2001 was due primarily to reductions in corporate and administrative expenses, the closure of 45 service markets and more effective expense
controls at retail. This decrease in expense was partially offset by the cost of opening of 8 new stores (net of closures), increased depreciation expenses and increased compensation costs. Expenses as a percent of sales was 39.7% as compared to
41.1% in the prior year.





Amortization expense for the fiscal year ended September 29, 2001 was $413,000 as
compared to $742,000 in the same period of 2000.





For the fiscal year ended September 29, 2001, the Company
recognized losses on the disposition of fixed assets




11




---

totaling approximately $0.9 million as compared to $1.5 million in the prior year. These losses were primarily associated with the
Companys relocation of its corporate offices to Phoenix, Arizona from Chatsworth, California and its decision to close or relocate stores that were unproductive or not meeting expectations.





Income from operations for the period increased 140.1% to $15.6 million from $6.5 million in fiscal 2000. Excluding the inventory write-off taken during the fourth
quarter of 2000, income from operations improved by $7.0 million or 80.8%.





Interest expense was $12.3 million in
2001, as compared to $12.6 million in 2000. The decrease was primarily the result of reduced average borrowing rates during the year.





The Company recorded income tax expenses of $1.1 million in 2001, or an effective tax rate of 47.5% versus and income tax benefit of $2.8 million in the prior year.





During the first quarter 2001, the Company recorded a restructuring charge of $1.5 million for expenses associated with its corporate relocation to Phoenix, Arizona. These
expenses consisted primarily of the occupancy related costs incurred after vacating its existing corporate location and for employee related termination expenses. The Company believes that the future operating expense benefits of this move will
continue to offset the relocation cost that were previously incurred. The Company has successfully staffed the new corporate office in Phoenix, Arizona and is operating the administrative functions with significantly fewer individuals than was
previously employed at its Chatsworth, California corporate office.





During 2000, the Company had unusual expenses
of $0.8 million for restructuring expenses associated with the Companys corporate relocation to Phoenix, Arizona, $0.2 million in other corporate move related expenses, and a non-cash charge of $0.4 million for non-cash expenses associated
with the restructuring of a stock option incentive agreement for the former Chief Executive Officer.





Liquidity and Capital Resources





From September 29, 2001 to September 28, 2002, total current assets increased $12.4 million from $77.4
million to $89.8 million. The increase in current assets resulted primarily from the Companys increased cash position which resulted from the improvements in operating cash flow. The principal component of current assets is inventory, which
decreased $0.4 million from $55.9 million to $55.5 million. The inventory decrease, even in light of the increased store count, was the result of improved inventory turns and stronger service levels to the stores from the distribution centers.





Total current liabilities increased by $6.3 million from September 29, 2001 as compared to September 28, 2002.
Accounts payables were flat as compared to the prior year while accrued liabilities increased due to the timing of disbursements and increased accrued compensation costs and insurance related expenses.





For the fiscal year ended September 28, 2002, net cash provided by operating activities was $20.2 million compared to cash provided by
operating activities of $15.1 million in the prior year. The improvement was due primarily to the increase in profitability and higher accounts payable and accrued liabilities.





In 2002, cash used in investing activities was $8.0 million as compared with $7.2 million in the same period of the prior year. The increase in capital expenditures in 2002
was the result of opening more new stores in the current year and the roll-out of the Companys new point-of-sale system.





Cash used in financing activities was $1.0 million in fiscal year 2002 compared with cash used by financing activities of $6.4 million in the same period of 2001. In 2002, the Company reduced its credit borrowings that were needed to
finance the working capital and capital expenditure investments described above. The Company had no borrowings on its working capital revolver at year-end 2002 or 2001. Additionally, due to the Companys strong cash position, it prepaid other
long-term debt in the amount of $1.0 million. There were no prepayment penalties associated with this early payment of debt.





At September 29, 2002 the Company had $40.0 million of additional borrowing capability on its Loan and Security




12




---

Agreement. Funds borrowed under the Loan and Security Agreement are used primarily to fund working capital and other general corporate purposes.





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





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





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





Critical Accounting Policies and Estimates





The preparation of consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, sales and expenses. On an ongoing basis, the Company evaluates its
estimates, including those related to inventory reserves, allowance for doubtful accounts, valuation allowance for the net deferred income tax asset, contingencies and litigation liabilities. The Company bases its estimates on historical experience,
independent valuations, and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.





The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.





Inventories are stated at the lower of cost or market. The Company values inventory using the first-in, first-out (FIFO) method. Revenue
on retail sales is recognized upon purchase by the customer. Revenue on services, is recognized as services are performed and the fee is fixed or determinable and collection is probable. Terms are customarily FOB shipping point or point of sale, net
of related discounts. The Company does not provide an estimated allowance for sales returns as they are deemed to be immaterial. Included in cost of sales are the costs of services and purchased goods, chemical repackaging costs and related
distribution costs. The Company recognizes consideration received from vendors at the time our obligations to purchase products or perform services have been completed. These items are recorded as a reduction in cost of goods sold in the statement
of operations.




13




---

Contractual Obligations and Commercial Commitments





The Company is contractually obligated to make future payments under non-cancelable operating lease agreements. As of September 30, 2002, future contractual payments were
as follows:





Payments Due By PeriodContractual Obligations

Total

Less than 1Year

1-3years

4-5years

After 5years(in thousands)Operating Leases

$
81,758

$
25,499

$
35,832

$
16,902

$
3,525





Amounts of Commitment Expiration Per PeriodCommercial Commitments

Total Amounts Committed

Less than 1 Year

1-3years

4-5years

After 5years(in thousands)Standby Letters of Credit

$
822

$
822

$


$


$
Financial Responsibility Bonds

$
118

$
81

$
27

$


$





14




---

SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)


(In Thousands)





13 Weeks Ended2002

Dec. 29


March 30


June 29


Sept. 28Sales

$
30,882


$
34,258


$
140,627


$
107,544Gross Profit


13,114



14,934



68,055



50,868Unusual Expense






1,500







Operating Income (Loss)


(12,051
)


(13,455
)


31,193



14,386Net (Loss) Income


(8,994
)


(10,097
)


17,121



6,663Adjusted EBITDA(1)


(9,930
)


(9,827
)


33,735



16,639Comparable Store Sales Growth


6.6
%


1.6
%


(1.7
)%


5.6
%13 Weeks Ended2001

Dec. 30


March 31


June 30


Sept. 29Sales

$
28,585


$
32,559


$
140,465


$
100,091Gross Profit


11,003



13,528



67,687



43,080Unusual Expense


1,466











Operating Income (Loss)


(14,540
)


(13,223
)


30,931



12,391Net (Loss) Income


(10,231
)


(10,752
)


16,931



5,154Adjusted EBITDA(1)


(10,843
)


(11,105
)


33,064



14,532Comparable Store Sales Growth(2)


(8.6
)%


(13.3
)%


1.3
%


3.4
%


---

|(1) |  | Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization, loss/(gain) on disposition of fixed assets, stock compensation
expense and unusual charges. Adjusted EBITDA is not a measure of financial performance under accounting principles generally accepted in the United States (GAAP), but is used by some investors to determine a companys ability to service or
incur indebtedness. Adjusted EBITDA is not calculated in the same manner by all companies and accordingly is not necessarily comparable to similarly entitled measures of other companies and may not be an appropriate measure for performance relative
to other companies. Adjusted EBITDA should not be construed as an indicator of a companys operating performance or liquidity, and should not be considered in isolation from or as a substitute for net income (loss), cash flows from operations
or cash flow data all of which are prepared in accordance with GAAP. We have presented Adjusted EBITDA solely as supplemental disclosure because we believe it allows for a more complete analysis of results of operations. Adjusted EBITDA is not
intended to represent and should not be considered more meaningful than, or as an alternative to, measures of operating performance as determined in accordance with GAAP.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | The Company considers a store to be comparable in the first full month after it has completed 52 weeks of sales. Closed stores become non-comparable during
their last partial month of operation. Stores that are relocated are considered comparable stores at the time the relocation is completed. Comparable store sales is not a measure of financial performance under accounting principles generally
accepted in the United States (GAAP). Comparable store sales is not calculated in the same manner by all companies and accordingly is not necessarily comparable to similarly entitled measures of other companies and may not be an appropriate measure
for performance relative to other companies.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Recent Accounting Pronouncements





In accordance with the provisions of SFAS No. 141 Business Combinations and SFAS No. 142 Goodwill and Other
Intangible Assets, the Company applied the new rules on accounting for goodwill and other intangible assets deemed to have indefinite lives beginning on September 29, 2002. The Company also performed the required impairment tests of goodwill and
indefinite lived intangible assets. The Company will no longer amortize its goodwill under SFAS No. 142, but will be subjected to periodic assessments as defined therein. The unamortized balance of goodwill subject to the




15




---

impairment tests was $7.6 million as of September 28, 2002. Additionally, amortization expense of $319,000, $413,000 and $742,000 was included
in the consolidated statements of operations for the year ended September 28, 2002, September 29, 2001 and September 30, 2000, respectively.





In April 2001, the Emerging Issues Task Force (EITF) issued Issue 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendors Products. EITF 00-25 addresses
the accounting and income statement classification of costs that a vendor incurs to or on behalf of a reseller in connection with the resellers purchase or promotion of the vendors products. The standard is effective for fiscal periods
beginning after December 15, 2001 and was adopted by the Company as of October 2002. The adoption of this standard is not expected to have a material impact on the Companys financial position, results of operations or cash flows.





In July 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 143, Accounting for Asset Retirement
Obligations. The standard applies to obligations associated with the retirement of tangible long-lived assets. The standard is effective for fiscal periods beginning after June 15, 2002 and was adopted by the Company as of October 2002. The adoption
of this standard is not expected to have a material impact on the Companys financial position, results of operations or cash flows.





In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement) which supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of; however it retains the fundamental provisions of that statement related to the recognition and measurement of the impairment of long-lived assets to be held and used. The standard is effective for
fiscal periods beginning after December 15, 2001 and was adopted by the Company in October 2002. The adoption of this standard is not expected to have a material impact on the Companys financial position, results of operations or cash flows.





In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 addresses the following costs associated with an exit or disposal activity: 1) costs to terminate an existing contractual obligation, including but not limited to an operating lease; 2) incremental direct (and other)
costs associated with the related disposal activity (such as costs to close or consolidate facilities); and 3) termination benefits (severance pay) provided to employees pursuant to a one-time benefit arrangement that does not constitute a
preexisting or newly-created ongoing benefit plan covered by other pronouncements Statement 146 superseded EITF Issue No. 94-3 Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). Under Statement 146, liabilities for costs associated with an exit or disposal activity would be recognized in the period(s) in which they are incurred. Therefore, unlike the approach in EITF Issue
94-3 on restructuring charges, an entitys commitment to a plan would not, in and of itself, result in the recognition of a liability. The adoption of the standard is not expected to have material impact on the operations or financial position
of the Company.





ITEM 7a.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





The Companys Loan and Security Agreement described in note 5
to the consolidated financial statements as well as in the Management Discussion and Analysis carries interest rate risk. Amounts borrowed under this Agreement bear interest at either Libor plus 1.5%, or at the Companys choice, the
lenders reference rate. Should the lenders base rate change, the Companys interest expense will increase or decrease accordingly. No amounts are currently outstanding under this facility.




16




---

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





INDEX TO FINANCIAL STATEMENTS





PageReports of Independent Auditors

18Consolidated Balance SheetsSeptember 28, 2002 and September 29, 2001

19Consolidated Statements of OperationsYears Ended September 28, 2002, September 29, 2001, and September 30,
2000

20Consolidated Statements of Stockholders Equity (Deficit)Years Ended September 28, 2002, September 29, 2001,
and September 30, 2000

21Consolidated Statements of Cash FlowsYears Ended September 28, 2002, September 29, 2001, and September 30,
2000

22Notes to Consolidated Financial Statements

23




17




---

REPORT OF INDEPENDENT AUDITORS





To the Board of Directors and Stockholders of Leslies Poolmart, Inc.:





We have
audited the accompanying consolidated balance sheets of Leslies Poolmart, Inc. and subsidiaries as of September 28, 2002 and September 29, 2001 and the related consolidated statements of operations, stockholders equity (deficit) and cash
flows for each of the three years in the period ended September 28, 2002. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our
audits.





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





In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Leslies Poolmart, Inc. and subsidiaries at September 28, 2002 and September 29, 2001 and the consolidated results of their operations and their cash flows for each of the
three years in the period ended September 28, 2002, in conformity with accounting principles generally accepted in the United States.





ERNST & YOUNG LLP





Phoenix, Arizona


November 19, 2002




18




---

LESLIES POOLMART, INC.





CONSOLIDATED BALANCE SHEETS





Sept. 28, 2002


Sept. 29, 2001(Dollar Amounts in Thousands)ASSETSCurrent assets:Cash and cash equivalents

$
17,996


$
6,768Accounts and other receivables, net


7,398



7,450Inventories


55,540



55,935Prepaid expenses and other current assets


1,235



1,176Deferred tax assets


7,678



6,118Total current assets


89,847



77,447Property, plant and equipment, at cost, net of accumulated depreciation


42,744



44,781Goodwill, net


7,564



7,836Deferred financing costs, net


1,080



1,744Other assets


529



502Total assets

$
141,764


$
132,310LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable

$
19,572


$
19,449Accrued expenses


27,402



23,329Income taxes payable


8,225



5,999Current maturities of long-term debt


14



121Total current liabilities


55,213



48,898Other long term liabilities


2,121



Long-term debt






867Senior notes


90,000



90,000Deferred tax liabilities


1,812



2,515Total liabilities


149,146



142,280Commitments and contingencies






Redeemable preferred stock, $0.001 par value; Authorized2,000,000 shares; Issued and
outstanding45,517 Series A at September 28, 2002 and 42,314 Series A at September 29, 2001, respectively


45,517



42,314Stockholders equity (deficit):Common stock, $0.001 par value, authorized 12,000,000 shares, Issued and outstanding 7,065,438 shares at September 28,
2002 and 7,057,105 at September 29, 2001, respectively


1



1Stock subscription receivable


(450
)


(450
)Paid-in capital


(45,278
)


(45,295
)Retained deficit


(7,172
)


(6,540
)Total stockholders deficit


(52,899
)


(52,284
)Total liabilities and stockholders equity (deficit)

$
141,764


$
132,310





See accompanying notes to financial statements.




19




---

LESLIES POOLMART, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS





For the Years EndedSept. 28, 2002


Sept. 29, 2001


Sept. 30, 2000(Dollar Amounts in Thousands)Sales

$
313,311


$
301,700


$
303,163Cost of merchandise and services sold, including warehousing and transportation expenses, and related occupancy
costs


166,340



166,402



171,968Gross profit


146,971



135,298



131,195Selling, general and administrative expenses


125,079



117,860



122,925Unusual expense


1,500







230Restructuring Charge






1,466



819Amortization of goodwill


319



413



742Operating Income


20,073



15,559



6,479Other (income) expenseInterest expense


10,708



12,334



12,576Interest income


(18
)


(14
)


(40
)Loss on disposition of fixed assets


1,332



919



1,477Total other expense


12,022



13,239



14,013Net income/(loss) before taxes


8,051



2,320



(7,534
)Income tax expense/(benefit)


3,358



1,102



(2,821
)Net income/(loss)


4,693



1,218



(4,713
)Series A preferred stock dividends and accretion


5,325



4,788



4,301Loss applicable to common shareholders

$
(632
)

$
(3,570
)

$
(9,014
)





See accompanying notes to financial statements.




20




---

LESLIES POOLMART, INC.





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT )





Common Stock

Stock Subscription Receivable


Additional Paid In Capital


Retained Earnings/ (Deficit)


Total Stockholders Equity/(Deficit)Number of Shares


Amount(Dollar Amounts in Thousands, except share amounts)Balance, at October 2, 1999

7,168,215


$
1

$



$
(45,702
)

$
6,044


$
(39,657
)Series A preferred stock dividends and accretion
















(4,301
)


(4,301
)Stock option compensation expense












424







483Issuance of common stock

166,665










483







424Net loss
















(4,713
)


(4,713
)Balance, at September 30, 2000

7,334,880



1






(44,795
)


(2,970
)


(47,764
)Series A preferred stock dividends and accretion
















(4,788
)


(4,788
)Repurchase common stock

(277,775
)









(500
)






(500
)Stock subscription receivable








(450
)










(450
)Net income
















1,218



1,218Balance, at September 29, 2001

7,057,105



1


(450
)


(45,295
)


(6,540
)


(52,284
)Series A preferred stock dividends and accretion
















(5,325
)


(5,325
)Issuance common stock

8,333










17







17Net income
















4,693



4,693Balance, at September 28, 2002

7,065,438


$
1

$
(450
)

$
(45,278
)

$
(7,172
)

$
(52,899
)





See accompanying notes to financial statements.




21




---

LESLIES POOLMART, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS





Fiscal Years EndedSept. 28, 2002


Sept. 29, 2001


Sept. 30, 2000(Dollar Amounts in Thousands)OPERATING ACTIVITIES:Net income/(loss)

$
4,693


$
1,218


$
(4,713
)Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization


9,044



8,623



8,579Amortization of loan fees and discounts


664



675



629Deferred income taxes


(2,263
)


(304
)


(1,283
)Allowance for doubtful accounts


437



104



502Loss on disposition of assets


1,332



919



1,477Compensation recognized for stock options










424Changes in operating assets and liabilities:Accounts and other receivables


(385
)


1,589



(2,295
)Inventories


395



1,707



1,087Prepaid expenses and other current assets


(59
)


158



794Other assets


(74
)


23



(53
)Accounts payable and accrued expenses


4,195



(1,289
)


7,301Income taxes payable


2,226



1,726



(726
)Net cash provided by operating activities


20,205



15,149



11,723INVESTING ACTIVITIES:Purchase of property, plant and equipment


(8,040
)


(7,371
)


(9,129
)Proceeds from disposition of property, plant and equipment


20



138



473Net cash used in investing activities


(8,020
)


(7,233
)


(8,656
)FINANCING ACTIVITIES:Net line of credit borrowings/(repayments)






(5,342
)


(3,226
)Payments of long-term debt


(974
)


(108
)


(100
)Purchase of common stock






(500
)


Stock subscription receivable






(450
)


Payment of deferred financing costs










(589
)Proceeds from issuance of common stock, net


17







483Net cash used in financing activities


(957
)


(6,400
)


(3,432
)NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS


11,228



1,516



(365
)CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR


6,768



5,252



5,617CASH AND CASH EQUIVALENTS AT END OF YEAR

$
17,996


$
6,768


$
5,252





See accompanying notes to financial statements.




22




---

LESLIES POOLMART, INC.





NOTES TO FINANCIAL STATEMENTS





1.    Business and
Operations





Leslies Poolmart, Inc. (the Company) is a specialty retailer of swimming pool supplies and
related products. As of September 28, 2002, the Company marketed its products under the trade name Leslies Swimming Pool Supplies through 410 retail stores in 33 states and through mail order catalogs sent to selected swimming pool owners
nationwide. The Company also repackages certain bulk chemical products for retail sale. The Companys business is highly seasonal as the majority of its sales and all of its operating profits are generated in the quarters ending in June and
September.





On June 11, 1997, Leslies Poolmart (a California corporationLeslies
California) reincorporated in Delaware by merging into a wholly-owned Delaware subsidiary (the Reincorporation), changed its name to Leslies Poolmart, Inc. and merged Poolmart USA Inc., a newly-formed corporation, with and
into the Company (the Recapitalization). As a result of the Recapitalization, (i) each outstanding share of common stock of Leslies California was converted into $2.90 cash (other than 1,797,525 shares owned primarily by members of
management); and (ii) outstanding options covering approximately 4,150,000 shares of common stock, including those not yet vested, were exercised and retired for payment of the difference between the exercise price and $2.90 per share. The total
value of the shares and options cashed out approximated $94,300,000, plus $5,229,000 in expenses associated with this transaction. In connection with the Recapitalization, the Company changed the authorized capital of the Company to 12,000,000
shares of common stock with a $0.001 par value and 2,000,000 shares of preferred stock with a $0.001 par value.





In order to finance the merger, the Company issued $90.0 million of its 10.375% Senior Notes and sold 5,370,690 shares of its common stock for proceeds of $15.6 million. As indicated above, certain directors and members of management
converted some of the Leslies California common shares which they owned into shares of the Companys common stock.





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





2.    Summary of Significant Accounting Policies





Principles of Consolidation





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





Fiscal Periods





The Company fiscal year ends on the Saturday closest to September 30. The fiscal years ended on September 28, 2002, September 29, 2001, and September 30, 2000 included 52 weeks.





Cash and Cash Equivalents





The Company considers all investments with a maturity of three months or less when purchased to be cash equivalents.




23




---



LESLIES POOLMART, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







Accounts and Other Receivables, Net





Accounts and other receivables include allowances for doubtful accounts of $717,000, $422,000 and $369,000 at September 28, 2002,
September 29, 2001 and September 30, 2000, respectively.





Allowance for doubtful accounts consists of the
following:





Balance at beginning of period

Additions Charged to costs and expenses

Deductions Write-off of bad debts


Balance at end of periodBalance at September 30, 2000

$
237,000

$
502,000

$
(370,000
)

$
369,000Balance at September 29, 2001


369,000


104,000


(51,000
)


422,000Balance at September 28, 2002


422,000


437,000


(142,000
)


717,000





Inventories





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





Property, Plant and Equipment





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





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





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





Buildings and improvements

539 yearsVehicles, machinery and equipment

310 yearsOffice furniture and equipment

37 yearsLeasehold improvements

510 years





Goodwill





The excess of the acquisition price over the fair value of the net assets at the date of acquisition is included in the accompanying
consolidated balance sheets as Goodwill. Goodwill is being amortized (straight-line) over forty years. In accordance with the provisions of SFAS No. 141 Business Combinations and SFAS No. 142 Goodwill and Other Intangible Assets, the
Company applied the new rules on accounting for goodwill and other intangible assets deemed to have indefinite lives beginning on September 29, 2002. The Company also performed the required impairment tests of goodwill and indefinite lived
intangible assets and there was no impairment identified. The Company will no longer amortize its goodwill under SFAS No. 142, but will subject its goodwill to periodic assessments as defined therein. The balance recorded at September 28, 2002 and
September 29, 2001 was net of accumulated amortization of $3.1 million and $2.8 million, respectively. The Company amortized $319,000, $413,000 and $742,000 in the years ended September 28, 2002, September 29, 2001 and September 30, 2000. There will
be no such amortization in fiscal 2003 and beyond.




24




---



LESLIES POOLMART, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







Deferred Financing Costs





In connection with issuing the Senior Notes and signing the 1997 Credit Agreement, the Company paid $3.7 million in financing costs that
are being deferred and amortized over the lives of the corresponding agreements. During fiscal 2000, the Company recorded an additional $0.7 million in financing costs associated with the 1997 Credit Agreement. The balance recorded at September 28,
2002 and September 29, 2001 was net of accumulated amortization of $3.0 million and $2.4 million, respectively.





Income Taxes





The Company provides for deferred income taxes relating to timing differences
in the recognition of income and expense items (primarily depreciation and amortization) for financial and tax reporting purposes. Deferred taxes at September 28, 2002 and September 29, 2001 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.





Sales





Revenue on retail sales is recognized upon purchase by the customer. Revenue on
services, is recognized as services are performed and the fee is fixed or determinable and collection is probable. Terms are customarily FOB shipping point or point of sale, net of related discounts. The Company does not provide an estimated
allowance for sales returns as they are deemed to be immaterial.





Cost of Sales





Included in cost of sales are the costs of services and purchased goods, chemical repackaging costs and related distribution costs. The
Company recognizes consideration received from vendors at the time our obligations to purchase products or perform services have been completed. These items are recorded as a reduction in cost of goods sold in the statement of operations.





Shipping and Handling Costs





The Company records shipping and handling costs paid by customers are shown as a reduction in selling, general and administrative expenses. Likewise, the actual costs for
shipping and handling have been have been charged to selling, general and administrative expenses.





Advertising





The Company expenses advertising during the period of the event. Advertising expense for the years ended
September 28, 2002, September 29, 2001 and September 30, 2000 was approximately $7.4 million, $7.4 million and $7.3 million, respectively.





Restructuring Costs





During the first quarter 2001, the Company recorded a
restructuring charge of $1.5 million for expenses associated with its corporate relocation to Phoenix, Arizona. These expenses consisted primarily of the relocation related costs incurred after vacating its existing corporate location for employee
relocation related expenses. The Company believes that the operating expense benefits of this move will continue to offset the previously incurred relocation costs. No restructuring reserve remains accrued at September 28, 2002.




25




---



LESLIES POOLMART, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







Fair Value of Financial Statements





The fair value of the $90.0 million Senior Notes using quoted market prices as of September 28, 2002 is $131.1 million. The carrying
amounts of other long-term debt approximate fair value because either the interest rate fluctuates based on market rates or interest rates appear to approximate market rates for similar instruments. The fair value estimates are subjective in nature
and involve uncertainties and matters of judgment and therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates.





Use of Estimates in the Preparation of Consolidated Financial Statements





The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.





Recent Accounting Pronouncements.





In accordance with the provisions of SFAS No. 141 Business Combinations, and SFAS No. 142 Goodwill and Other Intangible Assets, the Company applied the new rules on
accounting for goodwill and other intangible assets deemed to have indefinite lives beginning on September 29, 2002. The Company also performed the required impairment tests of goodwill and indefinite lived intangible assets. The Company will no
longer amortize its goodwill under SFAS No. 142, but will be subjected to periodic assessments as defined therein.





In April 2001, the Emerging Issues Task Force (EITF) issued Issue 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendors Products. EITF 00-25 addresses the accounting and income
statement classification of costs that a vendor incurs to or on behalf of a reseller in connection with the resellers purchase or promotion of the vendors products. The standard is effective for fiscal periods beginning after December
15, 2001 and was adopted by the Company as of October 2002. The adoption of this standard is not expected to have a material impact on the Companys financial position, results of operations or cash flows.





In July 2001, the Financial Accounting Standards Board (FASB) issued Statement No. 143, Accounting for Asset Retirement Obligations. The
standard applies to obligations associated with the retirement of tangible long-lived assets. The standard is effective for fiscal periods beginning after June 15, 2002 and was adopted by the Company as of October 2002. The adoption of this standard
is not expected to have a material impact on the Companys financial position, results of operations or cash flows.





In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (Statement) which supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of; however it retains the fundamental provisions of that statement related to the recognition and measurement of the impairment of long-lived assets to be held and used. The standard is effective for
fiscal periods beginning after December 15, 2001 and was adopted by the Company in October 2002. The adoption of this standard is not expected to have a material impact on the Companys financial position, results of operations or cash flows.





In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal
Activities. SFAS No. 146 addresses the following costs associated with an exit or disposal activity: 1) costs to terminate an existing contractual obligation, including but not limited to an operating lease; 2) incremental direct (and other)
costs associated with the related disposal activity (such as costs to close or consolidate facilities); and 3) termination benefits (severance pay) provided to employees pursuant to a one-time benefit arrangement that does not constitute a
preexisting or newly-created ongoing benefit plan covered by other pronouncements. Statement 146 superseded EITF Issue No. 94-3 Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring). Under Statement 146, liabilities for costs associated with an exit or disposal activity would be




26




---



LESLIES POOLMART, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)




recognized in the period(s) in which they are incurred. Therefore, unlike the approach in EITF Issue 94-3 on restructuring charges,
an entitys commitment to a plan would not, in and of itself, result in the recognition of a liability. The adoption of the standard is not expected to have material impact on the operations or financial position of the Company.





3. Inventories





Inventories consist of the following:





Sept. 28, 2002

Sept. 29, 2001Raw materials and supplies

$
660,000

$
182,000Finished goods


54,880,000


55,753,000Total inventory

$
55,540,000

$
55,935,000





4. Property, Plant and Equipment





Property, plant and equipment consists of the following:





Sept. 28, 2002

Sept. 29, 2001Land

$
6,215,000

$
6,215,000Buildings and addresses


8,675,000


8,546,000Vehicles, machinery and equipment


2,957,000


3,069,000Leasehold improvements


35,301,000


33,235,000Office furniture, equipment and other


27,705,000


29,894,000Construction-in-process


2,597,000


3,025,00083,450,000


83,984,000Lessaccumulated deprecation and amortization


40,706,000


39,203,000Total Property, Plant and Equipment

$
42,744,000

$
44,781,000





5. Line of Credit Agreement





In June of 2000, the Company entered into a Loan and Security Agreement (the Agreement) with Foothill Capital Corporation. Under the Agreement, maximum
borrowings are $65.0 million and the minimum amount available is not to fall below $40.0 million, and with a maturity date set at January 31, 2004. Under the Agreement, maximum borrowings are limited as a function of inventory or calculated EBITDA
rates as defined in the Agreement. On September 28, 2002, there were no borrowings outstanding under the Agreement.





Borrowings under the Agreement accrue interest at the lenders reference rate or at LIBOR plus the applicable LIBOR rate margin. Based on the LIBOR rate margin at September 28, 2002, the interest rate at September 28, 2002 was
3.3%. The margins are determined by calculated LTM EBITDA rates as defined in the Agreement. The Agreement contains certain financial covenants that include minimum calculated EBITDA levels and maximum capital expenditure amounts. As of September
28, 2002, the Company was in compliance with these covenants.




27




---



LESLIES POOLMART, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







6. Long-Term Debt





Long-term debt consists of the following:





Sept. 28,2002

Sept. 29,2001Notes payable collateralized by security interests in certain assets, repaid in 2002

$


$
109,000Notes payable collateralized by security interests in various properties, due in monthly installments maturing December
2002. Interest accrues at the rate of 9.6%


14,000


879,00014,000


988,000Less current portion


14,000


121,000$


$
867,000





7. Senior Notes





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





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





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





The
Indenture contains certain covenants which include, among other matters, limitations on the incurrence of additional indebtedness and the payment of dividends. At September 28, 2002, the Company was in compliance with these covenants.







28




---



LESLIES POOLMART, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







8.    Leases





The Company leases certain store, office, distribution and manufacturing facilities under operating leases which expire at various dates
through 2010. Lease agreements generally provide for increases related to cost of living indices and require the Company to pay for property taxes, repairs and insurance. Future annual minimum lease payments at September 28, 2002 are as follows:





2003

$
25.5 million2004


20.7 million2005


15.1 million2006


10.4 million2007


6.5 millionThereafter


3.6 million$
81.8 million





Certain leases are renewable at the option of the Company for
periods of one to ten years. Rent expense charged against income totaled $23.8 million, $22.5 million and $22.8 million in 2002, 2001 and 2000, respectively.




29




---



LESLIES POOLMART, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







9.    Income Taxes





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





52 Weeks Ended September 28, 2002


52 Weeks Ended September 29, 2001


52 Weeks Ended September 30, 2000Federal:Current

$
4,507,000


$
1,129,000


$
(1,233,000
)Deferred


(1,860,000
)


(262,000
)


(994,000
)2,647,000



867,000



(2,227,000
)State:Current


1,114,000



277,000



(305,000
)Deferred


(403,000
)


(42,000
)


(289,000
)711,000



235,000



(594,000
)Total

$
3,358,000


$
1,102,000


$
(2,821,000
)





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





52 Weeks Ended September 28, 2002

52 Weeks Ended September 29, 2001

52 Weeks Ended September 30, 2000Federal income tax at statutory rate

$
2,737,000

$
793,000

$
(2,562,000
)Permanent differences


151,000


157,000


278,000State taxes, net of federal benefit


470,000


152,000


(537,000
)$
3,358,000

$
1,102,000

$
(2,821,000
)





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





Fiscal 2002

Fiscal 2001Deferred TaxAssets

DeferredTaxLiabilities

Deferred Tax|Assets

DeferredTaxLiabilitiesDepreciation and amortization

$


$
1,112,000

$


$
1,815,000State income taxes


862,000





497,000


Inventory


1,881,000





1,874,000


Reserves and other accruals


2,893,000





1,736,000


Deferred Rent


874,000





1,198,000


Compensation accruals


687,000





318,000


Other


481,000


700,000


495,000


700,000$
7,678,000

$
1,812,000

$
6,118,000

$
2,515,000





The Company has federal net operating losses (NOL) of $6.8 million
available to offset future tax liabilities through 2007. The losses are subject to Internal Revenue Code Section 382 which limits the annual utilization of NOLs after an ownership change. The Companys annual Section 382 limitation is
approximately $83,000. As such, approximately




30




---



LESLIES POOLMART, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)




$6.4 million of these NOLs will expire as worthless. As the Company utilizes the NOL, 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.





On January 31, 2002, a former employee brought a purported class action lawsuit against the Company in California Superior Court for the County of Los Angeles. The complaint alleged failure to pay overtime wages, waiting time
penalties and unfair business practices and sought monetary and injunctive relief. A claims made settlement totaling $1.2 million was reached by the parties during a mediation on April 2, 2002. The Court approved the settlement in a final fairness
hearing on August 20, 2002. During the second quarter of 2002, the Company reserved a total of $1.5 million for this settlement and its related legal and other expenses. The majority of these settlement and legal related expenses were paid prior to
September 28, 2002 and the Company believes that it has adequately reserved for the costs associated with this matter.





The Companys general liability insurance program and employee group medical plan have self-insurance retention features of $250,000 and $100,000 per incident, respectively.





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 2002, 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 $420,000, $423,000 and $491,000 for 2002, 2001 and 2000, respectively.





12.    Equity Transactions





Preferred Stock





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





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





In connection with the issuance of the Preferred Stock, the original Preferred Stockholder received 1,264,980 warrants to
purchase common stock at an exercise price of $0.01 per share expiring in June of 2007. Of the $28.0 million face value of the Preferred Stock, $3.1 million was assigned to the value of these Warrants and reflected as a discount on the Preferred
Stock. This discount is being accreted over the life of the Preferred Stock. The terms of the Warrant Agreement provide for a proportionate adjustment of the warrants for stock splits and stock dividends and for additional warrant shares to be
issuable in the event any of the 1997 NQ Options or ISO Options or options under the 1998 Plan are exercised. Based on the number of options outstanding at September 28, 2002, an additional 76,864 warrants could be granted if the options are
exercised.




31




---



LESLIES POOLMART, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







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





Common Stock





On February 15, 2001, the Board of Directors approved a resolution to amend the Corporations Certificate of Incorporation to effectuate a 5 for 1 stock split
whereby each outstanding share of the Corporations common stock, par value $.001 per share, was converted into five shares of common stock. Following approval by the Corporations shareholders, the Charter Amendment was filed with the
Delaware Secretary of State on February 22, 2001. The consolidated financial statements reflect the split as though it occurred at beginning of the periods presented.





On March 23, 2001, the Company individually, and Lawrence Hayward, President and CEO, Donald Anderson, Executive Vice President and CFO, and Green Equity Investors II,
L.P., the (Purchasers) entered into two separate Stock Purchase Agreements, the (Agreements) with Brian P. McDermott, (McDermott) the Companys former President and CEO (the McDermott
Transactions). Pursuant to the Agreements, the Company repurchased 277,775 shares of the Companys voting common stock held by McDermott for an aggregate purchase price of $499,995 and the other Purchasers acquired the remaining 554,985
shares of the Companys voting common stock held by McDermott for an aggregate purchase price of $998,973. Also pursuant to the Agreements, (i) McDermotts existing options were cancelled and of no further effect; (ii) McDermott resigned
from his position as a director on the Board of Directors of the Company; and (iii) the existing Consulting Agreement, dated as of December 31, 1999, between McDermott and the Company was terminated.





As part of the McDermott Transactions, the Company entered into separate loan agreements with each of Mr. Hayward and Mr. Anderson,
pursuant to which the Company loaned $225,000 to each of Hayward and Anderson, respectively, thereby providing a portion of the funds required for each of Anderson and Hayward to purchase the shares of the Companys common stock held by
McDermott. Each Loan, together with all accrued interest, will be due and payable to the Company in full, on the earlier of: 1) the date which is 7 years from the date hereof; or 2) the termination of Borrowers employment with the Company for
any reason, other than a termination by the Company. The loan agreements are secured by a portion of the shares being purchased by each of Hayward and Anderson, pursuant to Pledge Agreements executed concurrently by each of Hayward and Anderson.
Additionally, the Company and Foothill Capital Corporation executed a first amendment to the existing Loan and Security Agreement to effectively permit the Company to make loans to employees in an aggregate amount not to exceed $500,000 at any time,
compared to the previous limit of $250,000.





13.    Related Party Transactions





Leonard Green & Partners (LGP), a merchant-banking firm that manages Green Equity Investors II (GEI), Hancock
Park Associates (HPA) and Leslies are parties to a Management Agreement dated June 11, 1997. The Management Agreement provides that Leslies will pay LGP an annual fee of $244,800 for ongoing management, consulting and
financial services. In addition, subject to certain approval requirements, the Management Agreement provides that either LGP or HPA may provide financial advisory or investment banking services for Leslies in connection with major financial
transactions, and LGP or HPA will be paid a reasonable fee for such services. The Management Agreement terminates on the earlier of the tenth anniversary of its execution or the date that LGP affiliates holds 25% or less of the shares of
Leslies that they held on the date of the Management Agreement.





During the years ended September 28, 2002,
September 29, 2001, and September 30, 2000, the Company paid management fees to Leonard Green in the amount of $245,000 for each of the three years represented.





14.    Stock Based Compensation Plans




32




---



LESLIES POOLMART, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







Pursuant to SFAS No. 123 Accounting for Stock-Based
Compensation, the Company may continue to account for stock options granted in accordance with Accounting Principles Board Opinion No. 25, if the Company discloses results under SFAS 123. Had compensation cost for these plans been determined
consistent with SFAS 123, the Companys net loss would have increased by $56,000, $26,000 and $427,000 in 2002, 2001, and 2000 respectively.





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 2002, 2001 and 2000
risk free interest rates of 4.0%, 4.0% and 6.4%, respectively; expected volatility of 0%; expected lives of 7 years for all options and no expected dividend yield. Based on these assumptions, the weighted average fair value of the options granted is
$0.49, $0.49, and $1.44 in 2002, 2001 and 2000, respectively. All of the options issued in 2000 were subsequently cancelled.





During 1997, the Company adopted a non-qualified common stock option plan (the NQ Option Plan) and an incentive common stock option plan (the ISO Option Plan) and reserved 417,995 shares and 1,369,730 shares,
respectively, of Leslies common stock for issuance upon the exercise of options to be granted to certain employees of Leslies thereunder. Options to purchase Leslies common stock have been granted at an exercise price of $1.00 per
share for options granted under the NQ Option Plan (NQ Options) and $2.00 per share in the case of options granted under the ISO Option Plan.





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





Under the ISO Plan, as amended, ISO Options vest in one-third increments on the first, second and third anniversaries of the original
grant date. Options intended to qualify as incentive stock options and options not intended to so qualify may be granted under the ISO Option Plan. Pursuant to law, options intended to qualify as incentive stock options are
subject to limitations on aggregate amounts granted and must be issued to any holder of 10% or more of the issuers outstanding common stock at 110% of fair market value. Vested ISO Options may be exercised for 90 days post termination of
employment, except in the case of the death of the option holder, in which case the vested portion may be exercised within twelve months from the date of termination. ISO Options have a term of ten years.





In November 1998, Leslies Board adopted its 1998 Incentive Stock Option Plan (the 1998 Plan), and reserved 300,000
shares of nonvoting common stock for issuance thereunder. In January 2000, the Board approved an amendment to the Plan to increase the number of shares of nonvoting common stock issuable thereunder to 500,000 shares in the aggregate. Options to
purchase Leslies nonvoting common stock have been granted at an exercise price of $2.00 per share.





On
February 15, 2001, the Board of Directors approved a resolution to effectuate the repricing of options outstanding under the Companys ISO Option Plan and the 1998 Plan. Under the program, 198,500 existing options were cancelled and
holders thereof were entitled to receive new options on a date which would be at least 6 months and a day from the date of cancellation, at a price equal to the then market value of the Companys stock. The options cancelled had exercise prices
that were higher than the Boards view of the then current market price of the Companys stock and the higher exercise prices had impaired the ability of such options to fulfill their purpose.




33




---



LESLIES POOLMART, INC.





NOTES TO FINANCIAL STATEMENTS(Continued)







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





Fiscal 2002

Fiscal 2001

Fiscal 2000Shares


Wt. Avg. Ex Price

Shares


Wt. Avg. Ex Price

Shares


Wt. Avg. Ex PriceOutstanding at beginning of year

1,683,830


$
1.75

2,032,150


$
2.88

1,814,660


$
2.55Granted

220,000



2.00

1,265,835



2.00

605,000



4.00Exercised

(8,333
)


2.00







(166,665
)


Cancelled

(54,167
)


2.00

(1,614,155
)


3.41

(220,845
)


2.90Outstanding at end of year

1,841,330


$
1.77

1,683,830


$
1.75

2,032,150


$
2.88Exercisable at end of year

1,278,270


$
1.67

997,160


$
1.58

1,552,955


$
2.63





The following table summarizes information about all stock options
outstanding as of September 28, 2002:





Options Outstanding

Options ExercisableRange of Exercise
Price

Number Outstanding

Weighted Avg. Remaining Contractual Life

Weighed Avg. Exercise Price

Number Exercisable

Weighted Avg. Exercise Price$1.00

417,995

4.7

$
1.00

417,995

$
1.00$2.00

1,423,335

9.0

$
2.00

860,275

$
2.001,841,330

8.0

$
1.77

1,278,270

$
1.58





15.    Supplemental Cash Flow Disclosures





The Company paid interest charges of $10.1 million, $11.2 million and $12.5 million, in 2002, 2001 and 2000, respectively. The
Company paid or was (refunded) income taxes of $3.4 million, $(344,545) and $165,000 in 2002, 2001 and 2000, respectively. The Preferred Stock dividends and the accretion of the Warrants are excluded from the statement of cash flows as non-cash
transactions. The tax benefit for non-qualified stock options was excluded from the statement of cash flows as a non-cash transaction in 2000.





ITEM 9.

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





None




34




---

PART III





ITEM 10.

DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT





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





Name

Age

PositionsLawrence H. Hayward

48

Chairman of the Board, President and Chief Executive OfficerDonald J. Anderson

42

Executive Vice President, Chief Financial Officer and DirectorJohn M. Baumer

35

DirectorJohn G. Danhakl

46

DirectorMichael J. Fourticq

58

DirectorRick Carlson

38

Vice President, LogisticsMichael L. Hatch

49

Senior Vice President, Merchandising and MarketingMarvin D. Schutz

53

Senior Vice President, Store Operations





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





Donald J. Anderson is
Executive Vice President, Chief Financial Officer and Director of the Company. He joined the Company in May 2000. Mr. Anderson has 26 years of experience in various retail industries. Most recently, Mr. Anderson was Senior Vice President and Chief
Financial Officer of the Follett Higher Education Group, located in Oakbrook, Illinois, the nations largest operator of University bookstores. From 1995 until 1999, he served as Senior Vice President and Chief Financial Officer of Carr
Gottstein Foods Co., Alaskas largest food and drug retailer and wholesale provider. From 1990 to 1995, Mr. Anderson held various senior level positions at Buttrey Food and Drug Co. From 1977 to 1990, he served in various managerial positions
with American Stores Company.





John M. Baumer became a director of the Company in November 2001. He has been an
executive officer and equity owner of Leonard Green & Partners (LGP), a merchant-banking firm that manages Green Equity Investors II (GEI), since 1999. Mr. Baumer had previously been a Vice President at Donaldson, Lufkin
& Jenrette Securities Corporation (DLJ), and had been with DLJ since 1995. Prior to joining DLJ, Mr. Baumer was at Fidelity Investments and Arthur Andersen. Mr. Baumer is also a director of Communications & Power Industries,
Inc., Intercontinental Art, Inc., Petco Animal Supplies, Inc., Phoenix Scientific, Inc. and VCA Antech, Inc.





John
G. Danhakl became a director of the Company in June 1997. He has been an executive officer and an equity owner of LGP, a merchant banking firm which manages GEI, since 1995. Mr. Danhakl had previously been a Managing Director at DLJ and had been
with DLJ since 1990. Prior to joining DLJ, Mr. Danhakl was a Vice President at Drexel Burnham Lambert Incorporated. Mr. Danhakl is also a director of Twinlab Corporation, Arden Group, Inc., Big 5 Sporting Goods Corp., Communications & Power
Industries, Inc., Liberty Group Operating, Inc., Petco Animal Supplies, Inc., Phoenix Scientific, Inc., MEMC Electronic Materials, Inc., Diamond Triumph Auto Glass, Inc., and VCA Antech, Inc.





Michael J. Fourticq is a director of the Company. He also served as Chairman of the Board of Directors from May 1988 until January 2000. Between May 1988 and August
1992, he served as the Companys Chief Executive Officer. From 1995 to 2001, Mr. Fourticq had been the Chairman and Chief Executive Officer of Brown Jordan International, a leading manufacturer of outdoor and casual furniture products. Since
1985 he has been the sole general partner of




35




---

Hancock Park Associates, which is the general partner and affiliate of several investment partnerships. Mr. Fourticq is the Chairman of Mikol
Missile-Air, a director of WinsLoew Furniture and the Chairman of Fitness Holdings International.





Rick D. Carlson
has been Vice President Logistics since February of 2000. Mr. Carlson has over 15 years of experience in the freight logistics and distribution industry. Most recently Mr. Carlson was the General Manager of the Alaska Division of Totem Ocean Trailer
Express. From 1995 until 1999, he was the Director of Transportation and Freight Operations of Carr Gottstein Foods Co., Alaskas largest food and drug retailer and wholesale provider. Prior to that time he held several management positions at
Buttrey Food and Drug Co. From 1991 to 1995, he served in various managerial positions with PST Vans.





Michael L.
Hatch has been Senior Vice President, Merchandising and Marketing of the Company since November 2000. Mr. Hatch has more than 28 years of experience in the retail industry. Most recently, Mr. Hatch was the President of ABCO Desert Markets which was
a division of Fleming Companies. From 1996 to 1999 he was employed by Smiths Food and Drug where he held various positions including Senior Vice President and Southwest Manager and Vice President of Sales, Merchandising and Marketing. From 1970 to
1996, Mr. Hatch held various senior management positions at Smittys Super Valu, Inc. located in Phoenix, Arizona, which later merged with Smiths Food and Drug.





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





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





Leslies, GEI, the members of HPA Group, Occidental Petroleum Corporation and the holders of certain management options are parties to a Stockholders Agreement. In the Stockholders Agreement,
Michael Fourticq was given certain rights to be elected as a director of the Company.





On March 12, 1999, Green
Equity Investors II, L.P. purchased all of the Preferred Stock from Occidental. Occidental retained warrants to purchase 519,258 shares of Common Stock.




36




---




ITEM 11.

EXECUTIVE COMPENSATION





Summary Compensation Table





The following summary compensation table sets forth for the fiscal years ended September 28, 2002, September 29, 2001, and September 30, 2000, respectively, the
compensation for services to the Company of the Chief Executive Officer and the four most highly compensated executive officers of the Company as of September 28, 2002.





Year

Fiscal Year Compensation

Long-Term Compensation

All Other CompensationSalary ($)

Bonus ($)(1)

Stock Options (#)(2)

401(k) ($)(3)

Insurance/Other ($)(4)Lawrence H. Hayward

2002

417,308

365,925

30,000

3,400

180Chairman of the Board, President and Chief

2001

400,000

168,000

312,500

3,400

180Executive Officer and Director

2000

300,000

345,852



3,400

Donald J. Anderson

2002

292,308

183,250

20,000

3,400

120Executive Vice President,

2001

275,000

115,500

237,500

3,400

17,552
(5)Chief Financial Officer and Director

2000

116,346

112,230





66,476
(5)Rick D. Carlson

2002

137,804

51,731

10,000

3,400

108Vice President,

2001









Logistics

2000









Michael L. Hatch

2002

186,292

81,817

10,000

2,250

180Senior Vice President,

2001

153,785

50,781

87,500

2,250

118Merchandising and Marketing

2000









Marvin D. Schutz

2002

179,779

78,792

10,000

3,400

451Senior Vice President,

2001

175,000

55,125

110,000

3,400

60,606
(5)Store Operations

2000

175,000





3,400




---

|(1) |  | Bonuses are attributed to the year earned, and are paid out after the conclusion of the fiscal year. Bonuses were paid on a twelve-month basis for all of the
fiscal years showing. Bonuses in 2000 to Mr. Hayward and Mr. Anderson were paid in accordance with the terms of their employment agreements.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | All options were granted at their fair market value on the date of grant. 678,333 of the total options issued in 2001, were the reissue of options that had been
previously cancelled pursuant to the Boards option repricing resolution.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | Represents expected Company matching contributions to individuals 401(k) accounts.
|--- |  | -----------------------------------------------------------------------------------

|(4) |  | Represents premiums paid by the Company for life insurance not generally available to all Company employees.
|--- |  | ------------------------------------------------------------------------------------------------------------

|(5) |  | Represents moving expenses paid in accordance with the terms of employment.
|--- |  | ---------------------------------------------------------------------------



37




---




Option Plans





During 1997, the Company adopted a non-qualified common stock option plan (the NQ Option Plan) and an incentive common stock option plan (the ISO Option
Plan) and reserved 417,995 shares and 1,369,730 shares, respectively, of Leslies common stock for issuance upon the exercise of options to be granted to certain employees of Leslies thereunder. Options to purchase Leslies
common stock have been granted at an exercise price of $1.00 per share for options granted under the NQ Option Plan (NQ Options) and $2.00 per share in the case of options granted under the ISO Option Plan.





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





Under the ISO Plan, as amended, ISO Options vest in one-third
increments on the first, second and third anniversaries of the original grant date. Options intended to qualify as incentive stock options and options not intended to so qualify may be granted under the ISO Option Plan. Pursuant to law,
options intended to qualify as incentive stock options are subject to limitations on aggregate amounts granted and must be issued to any holder of 10% or more of the issuers outstanding common stock at 110% of fair market value.
Vested ISO Options may be exercised for 90 days post termination of employment, except in the case of the death of the option holder, in which case the vested portion may be exercised within twelve months from the date of termination. ISO Options
have a term of ten years.





In November 1998, Leslies Board adopted its 1998 Incentive Stock Option Plan (the
1998 Plan), and reserved 300,000 shares of nonvoting common stock for issuance thereunder. In January 2000, the Board approved an amendment to the Plan to increase the number of shares of nonvoting common stock issuable thereunder to
500,000 shares in the aggregate. Options to purchase Leslies nonvoting common stock have been granted at an exercise price of $2.00 per share.





On February 15, 2001, the Board of Directors approved a resolution to effectuate the repricing of options outstanding under the Companys ISO Option Plan and the 1998 Plan. Under the
program, 198,500 existing options were cancelled and holders thereof were entitled to receive new Options on a date which would be at least 6 months and a day from the date of cancellation, at a price equal to the then market value of the
Companys stock. The options cancelled had exercise prices that were higher than the Boards view of the then current market price of the Companys stock and had impaired the ability of such options to fulfill their purpose.





On February 15, 2001, the Board of Directors approved a resolution to amend the Corporations Certificate of
Incorporation to effectuate a 5 for 1 stock split whereby each outstanding share of the Corporations common stock, par value $.001 per share, was converted into five shares of common stock. Following approval by the Corporations
shareholders, the Charter Amendment was filed with the Delaware Secretary of State on February 22, 2001.




38




---




Option Grants in 2002





The following table sets forth the stock options granted to the Chief Executive Officer and the other executive officers of the Company, during the twelve months ended
September 28, 2002, pursuant to the Companys ISO Option Plan, NQ Option Plan, or 1998 Plan.





Individual Grants

Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option
Term(2)Options Granted(1)

% of Total Options Granted to Employees in Fiscal Year



Exercise or Base Price

Expiration Date0%($)

5%($)

10% ($)Lawrence H. Hayward

30,000

13.6
%

$
2.00

7/31/12



37,800

95,700Donald J. Anderson

20,000

9.1
%

$
2.00

7/31/12



25,200

63,800Rick D. Carlson

10,000

4.6
%

$
2.00

7/31/12



12,600

31,900Michael L. Hatch

10,000

4.6
%

$
2.00

7/31/12



12,600

31,900Marvin D. Schutz

10,000

4.6
%

$
2.00

7/31/12



12,600

31,900


---

|(1) |  | Granted pursuant to ISO Option Plan, the NQ Option Plan and 1998 Stock Option Plan. Options granted on 7/31/02 vest over a three-year period.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Potential realizable value is based on an assumption that the stock price of the common stock appreciates at the annual rate shown (compounded annually) from
the date of grant until the end of the ten-year option term. These numbers are calculated based on requirements promulgated by the Securities and Exchange Commission and do not reflect the Companys estimate of future stock price growth.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Aggregated Option Exercises in 2002 and Fiscal Year-End Option Value





The following table sets forth the stock option exercises by the named executive officers during 2002. In addition, the table indicates
the total number and value of exercisable and non-exercisable options held by each such officer as of September 28, 2002.





Shares Acquired On Exercise (#)

Value Realized ($)

Number of Unexercised Options at September 28, 2002

Value of Unexercised In-the-Money Options at September 28, 2002(1)Exercisable

Unexercisable

Exercisable

UnexercisableLawrence Hayward





270,833

71,667



Donald J. Anderson





137,501

119,999



Rick D. Carlson





29,999

30,001



Michael L. Hatch





54,167

43,333



Marvin D. Schutz





99,444

20,556






---

|(1) |  | Potential unrealized value is (i) the fair market value at September 28, 2002 ($2.00 per share) less the option exercise price times (ii) the number of shares.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------




Directors Compensation





Directors do not receive any compensation directly for their service on the Companys Board of Directors. Pursuant to a Management Agreement dated June 11, 1997,
Leslies pays LGP an annual fee for various management, consulting




39




---

and financial planning services, including assistance in strategic planning, providing market and financial analysis, negotiating and
structuring financing and exploring expansion opportunities. The Management Agreement also provides that subject to certain approval requirements, either LGP or HPA may provide financial advisory or investment banking services for Leslies in
connection with major financial transactions, and LGP or HPA will be paid a reasonable fee for such services. During 2002, Leslies paid LGP the annual fee in the amount of $244,800 plus out-of-pocket expenses of approximately $28,000. John M.
Baumer and John D. Danhakl are members of the Companys Board of Directors and are executive officers and equity owners of LGP.





Employment Agreements





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





Mr. Haywards employment
agreement provides for a minimum base salary of $400,000 annually, plus a minimum guaranteed bonus of $150,000 for fiscal year 2000. In fiscal year 2002 and all successive years, Mr. Haywards bonus will be based solely upon the Companys
financial performance. If Leslies terminates Mr. Haywards employment for any reason other than Just Cause (as defined in the Agreement), Mr. Hayward will receive his base salary and benefits through the twelve-month period following
termination, except that if Mr. Hayward becomes an employee, consultant or partner of a company which directly competes with Leslies, any such severance payments and benefits shall end as of the date Mr. Haywards relationship with the
competing entity commenced. The benefits are also payable upon a sale of substantially all of the business or assets of the Company or a consolidation, merger or change of control of the Company (a Change of Control).





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




40




---




ITEM 12.

PRINCIPAL SHAREHOLDERS AND STOCK OWNERSHIP OF MANAGEMENT





The following table sets forth information as of September 28, 2002
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.





Name and Address of Beneficial
Owner(1)

Amount and Nature of Beneficial Ownership of Common Stock(2)

Percentage of Shares Outstanding(2)GEI(3)

6,058,429

62.8
%John M. Baumer(4)

6,058,429

62.8John G. Danhakl(4)

6,058,429

62.8Michael J. Fourticq(5)

724,075

7.5Lawrence H. Hayward(6)

520,833

5.4Donald J. Anderson(7)

387,501

4.0Rick D. Carlson (8)

22,778

0.2Michael L. Hatch(8)

79,167

0.8Marvin D. Schutz(8)

99,444

1.0Occidental(9)

519,258

5.4All executive officers and directors as a group (8 persons)

7,867,227

81.9
%


---

|(1) |  | The address of Messrs. Fourticq, Hayward, Anderson, Carlson, Hatch, and Schutz is 3925 E. Broadway Road, Suite 100, Phoenix, Arizona 85040. The address of
Occidental is 10889 Wilshire Boulevard, Los Angeles, California 90029. The address of GEI and Messrs. Baumer and Danhakl is 11111 Santa Monica Boulevard, Suite 2000, Los Angeles, California 90025.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | Computed based upon the total number of shares of Leslies common stock outstanding and the number of shares of Leslies common stock underlying
warrants and options of that person exercisable within 60 days. In accordance with Rule 13(d)-3 of the Exchange Act, any Leslies common stock which is subject to warrants or options exercisable within 60 days is deemed to be outstanding for
the purpose of computing the percentage of outstanding shares of Leslies common stock owned by the person holding such warrants or options, but is not deemed to be outstanding for the purpose of computing the percentage of outstanding shares
of Leslies common stock owned by any other person.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | GEI is a Delaware limited partnership managed by LGP, which is an affiliate of the general partner of GEI. Each of Messrs. Sokoloff, Nolan, Danhakl and Seiffer,
either directly (whether through ownership interest or position) or through one of more intermediaries, may be deemed to control LGP and such general partner. LGP and such general partner may be deemed to control the voting and disposition of the
shares of Leslies common stock owned by GEI. Accordingly, for certain purposes, Messrs. Green, Sokoloff, Nolan, Danhakl and Seiffer may be deemed to be beneficial owners of the shares of Leslies common stock held by GEI.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | Includes the shares beneficially owned by GEI, of which Messrs. Baumer and Danhakl are associates.
|--- |  | --------------------------------------------------------------------------------------------------

|(5) |  | Includes 24,880 shares subject to options exercisable within 60 days and 699,195 shares of Leslies common stock.
|--- |  | -----------------------------------------------------------------------------------------------------------------

|(6) |  | Includes 270,833 shares subject to options exercisable within 60 days and 250,000 shares of Leslies common stock.
|--- |  | ------------------------------------------------------------------------------------------------------------------

|(7) |  | Includes 137,501 shares subject to options exercisable within 60 days and 250,000 shares of Leslies common stock.
|--- |  | ------------------------------------------------------------------------------------------------------------------

|(8) |  | All such shares are subject to options exercisable within 60 days.
|--- |  | ------------------------------------------------------------------

|(9) |  | All such shares are obtainable upon the exercise of warrants.
|--- |  | -------------------------------------------------------------



41




---




Equity Compensation Plan Information





(a)

(b)

(c)Number of securities to be issued upon exercise of outstanding options, warrants and rights

Weighted-average exercise price of outstanding options, warrants and rights

Number of securities remaining available for future issuance under equity compensation plans (excluding
securities reflected in column (a))Equity compensation plans approved by security holders

1,841,330

$
1.77

3,093,232Equity compensation plans not approved by security holders












ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS





Management Agreement





LGP, HPA and Leslies are parties to a Management Agreement dated June 11, 1997. The Management Agreement provides that Leslies will pay LGP an annual fee of
$244,800 for ongoing management, consulting and financial services. In addition, subject to certain approval requirements, the Management Agreement provides that either LGP or HPA may provide financial advisory or investment banking services for
Leslies in connection with major financial transactions, and LGP or HPA will be paid a reasonable fee for such services. The Management Agreement terminates on the earlier of the tenth anniversary of its execution or the date that LGP
affiliates holds 25% or less of the shares of Leslies that they held on the date of the Management Agreement.





Occidental
Contract





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





Stockholders Agreement





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





Stock Repurchase and Promissory Note
Agreements





On March 23, 2001, the Company individually, and Lawrence Hayward, President and CEO, Donald
Anderson, Executive Vice President and CFO, and Green Equity Investors II, L.P., the (Purchasers) entered into two separate




42




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Stock Purchase Agreements, the (Agreements) with Brian P. McDermott, (McDermott) the Companys former President and
CEO (the McDermott Transactions). Pursuant to the Agreements, the Company repurchased 277,775 shares of the Companys voting common stock held by McDermott for an aggregate purchase price of $499,995 and the Purchasers acquired the
remaining 554,985 shares of the Companys voting common stock held by McDermott for an aggregate purchase price of $998,973. Also pursuant to the Agreements, (i) McDermotts existing options were cancelled and of no further effect; (ii)
McDermott resigned from his position as a director on the Board of Directors of the Company; and (iii) the Consulting Agreement, dated as of December 31, 1999, between McDermott and the Company was terminated.





As part of the McDermott Transactions, the Company entered into separate loan agreements with each of Mr. Hayward and Mr. Anderson,
pursuant to which the Company loaned $225,000 to each of Hayward and Anderson, respectively, thereby providing a portion of the funds required for each of Anderson and Hayward to purchase the shares of the Companys common stock sold by
McDermott. Each Loan, together with all accrued interest, will be due and payable to the Company in full, on the earlier of: 1) the date which is 7th anniversary of the Note and 2) the termination of Borrowers employment with the Company for
any reason, other than a termination by the Company, and is secured by a portion of the shares being purchased by each of Hayward and Anderson, pursuant to Pledge Agreements executed concurrently by each of Hayward and Anderson. Additionally, the
Company and Foothill Capital Corporation executed a first amendment to the existing Loan and Security Agreement to effectively permit the Company to make loans to employees in an aggregate amount not to exceed $500,000 at any time, compared to the
previous limit of $250,000.




43




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ITEM 14.

CONTROLS AND PROCEDURES





(a) Evaluation of disclosure controls and procedures. Within
the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Companys management, including the Companys Chief Executive Office and Chief Financial Officer
of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Office and Chief Financial Officer concluded that the
Companys disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Companys periodic SEC filings.





(b) Changes in internal controls. No significant changes were made in the Companys internal controls
or in other factors that could significantly affect these controls subsequent to the date of their evaluation.




44




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PART IV





ITEM 14.

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





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





Consolidated Balance SheetsSeptember 28, 2002 and September 29, 2001





Consolidated Statements of OperationsYears Ended September 28, 2002, September 29, 2001, and September 30, 2000





Consolidated Statements of Stockholders Equity (Deficit)Years Ended September 28, 2002, September 29, 2001, and September 30, 2000





Consolidated Statements of Cash Flows Years Ended September 28, 2002, September 29, 2001, and September 30, 2000





Notes to Consolidated Financial Statements





Reports of Independent Auditors





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





Exhibit Number

Description3.1

Restated Certificate of Incorporation filed with the Delaware Secretary of State on June 6, 1997*3.2

Certificate of Designation, Preferences and Rights of Exchangeable Cumulative Redeemable Preferred Stock, Series A
filed with the Delaware Secretary of State on June 11, 1997*3.3

Certificate of Amendment to Certificate of Designation filed with the Delaware Secretary of State on November 16,
1998*3.4

Certificate of Amendment of Restated Certificate of Incorporation filed with the Delaware Secretary of State on
December 26, 2000*3.5

Certificate of Amendment of Restated Certificate of Incorporation filed with the Delaware Secretary of State on
February 22, 2001*3.6

Bylaws of the Company*4.1

Indenture dated as of June 11, 1997 between the Company and U.S. Trust Company of California, N.A.*10.1

Preferred Stock and Warrant Purchase Agreement dated as of June 11, 1997 between the Company and Occidental Petroleum
Corporation*10.2

Warrant dated June 11, 1997 for the purchase of shares of common stock of the Company issued to Occidental Petroleum
Corporation*Warrant dated March 12, 1999 for the purchase of shares of common stock of the Company issued to Occidental Petroleum Corporation*10.3

Stockholders Agreement and Subscription Agreement dated as of June 11, 1997 among the Company and Green Equity
Investors II, LP, Richard H. Hillman, Michael J. Fourticq, Greg Fourticq, Brian P. McDermott, the Trustees of the McDermott Family Trust, Occidental Petroleum Corporation and the Stockholders identified on the signature pages thereto*10.4

NQ Option Plan and form of Agreement*10.5

ISO Option Plan and form of Agreements*10.6

Lease for Dallas Distribution Center*10.7

Lease for Ontario Distribution Center*10.8

Lease for Bridgeport Distribution Center*10.9

Form of Directors and Officers Indemnification Agreement dated as of June 11, 1997 between the Company
and certain members of management*10.10

Management Agreement dated as of June 11, 1997 between the Company and Leonard Green & Partners, LP*10.11

Purchase Agreement dated June 6, 1997 between the Company and BT Securities Corporation*




45




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10.12

Registration Rights Agreement dated as of June 11, 1997 by and between the Company and BT Securities
Corporation*10.13

1998 Nonvoting Stock Option Plan*10.14

Employment agreement dated December 31, 1999 between the Company and Lawrence H. Hayward*10.15

Employment Agreement dated May 1, 2000 between the Company and Donald J. Anderson*10.16

Loan and Security Agreement June 22, 2000 among the Company and Foothill Capital Corporation*10.17

Amendment Number One to Loan and Security Agreement*10.18

Secured, Non-recourse Promissory Note and Pledge AgreementLawrence H. Hayward*10.19

Secured, Non-recourse Promissory Note and Pledge AgreementDonald J. Anderson*21.1

Subsidiaries*24.1

Power of Attorney (included on signature page)


---

|* |  | Previously filed
|- |  | ----------------




(b)   Reports on Form 8-K





None.




46




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SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of
Phoenix, State of Arizona, on December 23, 2002.





LESLIES POOLMART, INC. (Registrant)By:

/s/    DONALD J.
ANDERSONDonald J. Anderson Chief
Financial Officer





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





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





Signature

Capacity

Date/s/    LAWRENCE H.
HAYWARD Lawrence H. Hayward

Chairman of the Board of Directors, Chief Executive Officer and President

December 23, 2002/s/    JOHN M.
BAUMER John M. Baumer

Director

December 23, 2002/s/    JOHN G.
DANHAKL John G. Danhakl

Director

December 23, 2002/s/    MICHAEL J.
FOURTICQ Michael J. Fourticq

Director

December 23, 2002/s/    DONALD J.
ANDERSON Donald J. Anderson

Chief Financial Officer, Director and Principal Accounting Officer

December 23, 2002




47




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CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT


OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT





I, Lawrence H. Hayward, certify that:





1.    I have reviewed this annual report on Form 10-K of Leslies Poolmart, Inc.;





2.    Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period covered by this annual report;





3.    Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this annual report;





4.    The registrants other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:





| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including us consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------




5.    The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):





| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




6.    The registrants other certifying officers and I have indicated
in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.





Date:  December 23, 2002



/s/    LAWRENCE H. HAYWARDLawrence H. Hayward Chief
Executive Officer




48




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CERTIFICATION PURSUANT TO RULE 13A-14 OR 15D-14 OF THE SECURITIES EXCHANGE ACT


OF 1934, AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT





I, Donald L Anderson certify that:





1.    I have reviewed this annual report
on Form 10-K of Leslies Poolmart, Inc.;





2.    Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this annual report;





3.    Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;





4.    The registrants other certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:





| | a) |  | designed such disclosure controls and procedures to ensure that material information relating to the registrant, including us consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this annual report is being prepared;
| | -- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | evaluated the effectiveness of the registrants disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual
report (the Evaluation Date); and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | c) |  | presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation
Date;
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------




5.    The registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent function):





| | a) |  | all significant deficiencies in the design or operation of internal controls which could adversely affect the registrants ability to record, process,
summarize and report financial data and have identified for the registrants auditors any material weaknesses in internal controls; and
| | -- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| | b) |  | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal controls; and
| | -- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------




6.    The registrants other certifying officers and I have indicated
in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.





Date: December 23, 2002





/s/    DONALD J.
ANDERSONDonald J. Anderson Chief
Financial Officer




49