10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended July 2, 2005

or

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from                      to                     

Commission File Number 0-18741

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

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 12(g) of the Act: None

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

Yes  x    No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

The number of shares of the registrant’s Common Stock outstanding at August 12, 2005 was 40,000,000 shares.

LESLIE’S POOLMART, INC.

AND SUBSIDIARIES

FORM 10-Q

For the Quarterly Period Ended July 2, 2005

INDEX

		Page
Part I. Financial Information
Item 1.	Financial Statements
	Consolidated Balance Sheets as of July 2, 2005 (unaudited) and October 2, 2004	1
	Consolidated Statements of Operations for the 13 weeks and 39 weeks ended July 2, 2005 (unaudited) and June 26, 2004 (unaudited)	2
	Consolidated Statements of Cash Flows for the 39 weeks ended July 2, 2005 (unaudited) and June 26, 2004 (unaudited)	3
	Notes to Consolidated Financial Statements (unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	12
Item 4.	Controls and Procedures	12
Part II. Other Information
Item 1.	Legal Proceedings	13
Item 6.	Exhibits	13
Signatures		13

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Leslie’s Poolmart, Inc.

Consolidated Balance Sheets

(Dollar amounts in thousands)

	July 2, 2005			October 2, 2004
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	16,600		$	20,839
Accounts and other receivables, net		12,933			10,505
Inventories		90,924			54,765
Prepaid expenses and other current assets		2,492			1,404
Deferred tax assets		8,946			6,981
Total current assets		131,895			94,494
Property, plant and equipment, at cost, net of accumulated depreciation		40,662			40,072
Goodwill and other intangibles, net		8,046			7,991
Deferred financing costs, net		7,405			1,811
Other assets		504			468
Total assets	$	188,512		$	144,836
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	68,870		$	22,247
Accrued expenses		42,102			30,643
Income taxes payable		—			8,250
Total current liabilities		110,972			61,140
Revolving commitment		11,502			—
Other long term liabilities		3,525			16,917
Redeemable preferred stock, $0.001 par value; authorized 1,000,000 shares, Issued and outstanding 41,000 Series A at July 2, 2005 and 46,316 at October 2, 2004		41,000			46,316
Senior notes		172,811			59,495
Deferred tax liabilities		59			59
Total liabilities		339,869			183,927
Commitments and contingencies		—			—
Stockholder’s deficit:
Common stock, $0.001 par value, authorized 50,000,000 shares, Issued and outstanding 40,000,000 shares at July 2, 2005 and 7,369,502 at October 2, 2004		40			7
Stock subscriptions receivable		—			(450	)
Paid-in capital		(144,216	)		(44,714	)
Retained deficit		(7,181	)		6,066
Total stockholders’ deficit		(151,357	)		(39,091	)
Total liabilities and stockholders’ deficit	$	188,512		$	144,836

See accompanying notes to consolidated financial statements.

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Leslie’s Poolmart, Inc.

Consolidated Statements of Operations (unaudited)

Amounts In Thousands

	13 Weeks Ended					39 Weeks Ended
	July 2, 2005		June 26, 2004			July 2, 2005			June 26, 2004
	(unaudited)					(unaudited)
Sales	$	173,343	$	151,953		$	259,117		$	231,621
Cost of merchandise sold and services sold, including warehousing and transportation expenses		87,425		76,730			131,997			119,269
Gross profit		85,918		75,223			127,120			112,352
Selling, general and administrative expenses		44,916		41,445			105,610			97,802
Unusual charges		1,117		—			17,988			—
Operating income		39,885		33,778			3,522			14,550
Other expenses/(income):
Interest expense		5,285		1,826			13,860			5,443
Interest income		—		(2	)		(4	)		(12	)
Other expense		11		83			34			136
Unusual charges		—		—			8,881			—
Total other expense		5,296		1,907			22,771			5,567
Income/(loss) before income taxes		34,589		31,871			(19,249	)		8,983
Income tax expense/(benefit)		14,353		12,614			(6,002	)		3,584
Net income/(loss)		20,236		19,257			(13,247	)		5,399
Series A Preferred Stock dividends and accretion		—		(1,822	)		—			(5,270	)
Income/(loss) applicable to common shareholders	$	20,236	$	17,435		$	(13,247	)	$	129

See accompanying notes to consolidated financial statements.

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Leslie’s Poolmart, Inc.

Consolidated Statements of Cash Flows

(Dollar amounts in thousands)

	39 Weeks Ended
		July 2, 2005			June 26, 2004 (restated)
	(unaudited)			(unaudited)
Operating activities:
Net income/(loss)	$	(13,247	)	$	5,399
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
Depreciation and amortization		8,802			8,170
Preferred stock dividend and accretion		4,272			—
Amortization of loan fees and discounts		2,385			397
Allowance for doubtful accounts		387			300
Loss on disposition of assets		34			136
Stock option compensation		16,070			—
Changes in operating assets and liabilities
Accounts and other receivables		(2,815	)		2,145
Inventories		(36,159	)		(31,350	)
Prepaid expenses and other current assets		(1,088	)		(765	)
Other assets		(36	)		(13	)
Accounts payable and accrued expenses		57,567			28,899
Income taxes payable		(10,215	)		(701	)
Net cash provided by operating activities		25,957			12,617
Investing activities:
Purchase of property, plant and equipment		(9,491	)		(8,522	)
Proceeds from disposition of property, plant and equipment		10			610
Net cash used in investing activities		(9,481	)		(7,912	)
Financing activities:
Net line of credit borrowings		11,502			—
Preferred stock premium and discount		1,041			—
Proceeds from warrants and options exercised		4,067			—
Purchase of common stock		(158,984	)		—
Proceeds from issuance of common stock, net of fees		39,828			—
Payments of deferred financing cost		(7,910	)		(260	)
Payment of long term debt		(55,495	)		—
Proceeds from sale of bonds		168,742			—
Preferred stock payment		(64,506	)		—
Refinance preferred stock		41,000			—
Net cash used in financing activities		(20,715	)		(260	)
Net increase/(decrease) in cash and cash equivalents		(4,239	)		4,445
Cash and cash equivalents at beginning of period		20,839			10,022
Cash and cash equivalents at end of period	$	16,600		$	14,467

See accompanying notes to consolidated financial statements.

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Leslie’s Poolmart, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

(1) Restatement of Previously Issued Financial Statements

Following a review of the Company’s lease accounting, the Company has reclassified tenant improvement allowances from a contra asset in property, plant and equipment, net to accrued expenses in the consolidated balance sheets. The amortization of the tenant improvement allowances has also been reclassified from a reduction of depreciation and amortization expense to a reduction of occupancy expense in the consolidated statements of income. Finally, the receipt of tenant improvement allowances has been reclassified in the consolidated statement of cash flows by increasing purchase of property, plant and equipment, and decreasing net cash used in operating activities. There was no impact to net income and the balance of retained earnings as a result of this restatement.

The following table reflects the effect of the restatement on the consolidated statements of Cash Flows (in thousands):

	Thirty-nine weeks ended June 26, 2004
	As Previously Reported			As Restated
Selected Cash Flow Data:
Depreciation and amortization	$	7,700		$	8,170
Accounts payable, expenses and other liabilities		27,980			28,899
Net cash provided by operating activities		11,228			12,617
Purchase of property, plant and equipment		(7,133	)		(8,522	)
Net cash used in investing activities		(6,523	)		(7,912	)

(2) Presentation and Financial Information

The accompanying unaudited consolidated financial statements have been prepared in conformity with United States generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the 13-week and 39-week period ended July 2, 2005 are not necessarily indicative of the results that may be expected for the year ended October 1, 2005.

The balance sheet at July 2, 2005 has been derived from the unaudited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.

For further information, refer to the consolidated financial statements and footnotes thereto included in Leslie’s Poolmart, Inc.’s annual report on Form 10-K-A Amendment No. 2 for the year ended October 2, 2004.

(3) Organization and Operation

Leslie’s Poolmart, Inc., which is sometimes referred to as the “Company” or “Leslie’s” in this report, is a specialty retailer of swimming pool supplies and related products. The Company markets its products under the trade name Leslie’s Swimming Pool Supplies through 514 stores in 36 states; a nationwide mail order catalog; and the Internet. The Company also repackages certain bulk chemical products for retail sale. The

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Company’s business is highly seasonal as the majority of its sales and all of its operating profits are generated in the third and fourth quarters.

(4) Recapitalization

On January 25, 2005, Leslie’s completed a recapitalization. The recapitalization was effected through a merger transaction that was financed by a private placement of new notes and borrowings under an amended credit facility.

Pursuant to an Agreement and Plan of Merger between Leslie’s and LPM Acquisition LLC (“LPM”), LPM was merged with and into Leslie’s, with Leslie’s continuing as the surviving entity in the merger (the “Merger”). Immediately prior to the consummation of the Merger, GCP California Fund, L.P. (“GCP”) and certain other Leslie’s stockholders contributed all or a portion of their existing Leslie’s common stock to LPM, and GCP and others contributed $51.1 million to LPM, in exchange for common and preferred units of LPM which were subsequently converted into common and preferred stock of Leslie’s in the Merger.

In the Merger, each of Leslie’s existing shares of common stock (other than those that were contributed to LPM) were exchanged for $15.00 cash consideration, and each of Leslie’s 46.4 million shares of preferred stock were exchanged for $64.5 million, which was the amount payable under the optional redemption provisions of the preferred stock as if it had been redeemed on the closing date of the Merger.

Offering

On January 25, 2005, Leslie’s sold, through a private placement exempt from the registration requirements under the Securities Act of 1933, as amended (the “Securities Act”), $170 million in aggregate principal amount of its 7.75% Senior Notes due 2013 (the “Notes”), with net proceeds, after fees and discounts, of $164.3 million. The Notes were sold in the United States only to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to non-U.S. persons in accordance with Regulation S under the Securities Act. Leslie’s used the net proceeds of this offering to finance the Merger and to consummate the tender offer for its 10.375% Senior Notes due 2008. Subsequent to the initial private placement of the Notes, the Notes were exchanged for registered notes in June 2005, pursuant to an exchange offer.

Amended Credit Facility

On January 25, 2005, Leslie’s and LPM Manufacturing, Inc., a wholly owned subsidiary of Leslie’s, entered into an Amended and Restated Loan and Security Agreement (the “Loan Agreement”) with the lenders noted therein and Wells Fargo Retail Finance LLC as agent for the Lenders. The Loan Agreement provides for the extension by the lenders of revolving loans and other financial accommodations to Leslie’s and LPM Manufacturing, Inc. in an aggregate principal amount of $75.0 million. The Company’s obligations under the amended credit facility are secured by a lien on substantially all of the Company assets. In addition to the $75.0 million commitment, at the Company’s option, the total commitment can be increased by $20.0 million via a temporary over-advance facility from September 30, 2005 through March 31, 2006. Finally, at the lender’s discretion, an over-advance facility of $10.0 million may be available to the Company from September 30, 2006 through March 31, 2007.

Tender Offer

As part of the recapitalization, Leslie’s commenced a cash tender offer (the “Tender Offer”) for any and all of its 103/8% Senior Subordinated Notes due 2008 (the “Existing Notes”) and a consent

5

solicitation to amend the related indenture (the “Consent Solicitation” and, together with the Tender Offer, the “Offer”). On January 11, 2005, the Company entered into a supplemental indenture (the “Supplemental Indenture”) with The Bank of New York, as the trustee, supplementing the Indenture dated as of May 21, 2003 (the “Indenture”) as contemplated by the terms of its Offer. The Supplemental Indenture eliminated substantially all of the restrictive covenants and certain events of default under the Indenture relating to the Existing Notes.

The total consideration for the Existing Notes was $1,059.30 for each $1,000 principal amount of Existing Notes, which includes the consent payment of $30.00 per $1,000 principal amount of Existing Notes. Existing Note holders received the tender offer consideration of $1,029.30 for each $1,000 principal amount of Existing Notes, which is equal to the total consideration minus the consent payment of $30.00 per $1,000 principal amount of Existing Notes. $55.5 million aggregate principal amount of the notes were accepted by the Company in the Offer.

Unusual charges

As part of the recapitalization, the Company recognized $26.9 million in unusual charges for costs associated with the transaction. This amount includes a severance of approximately $1.1 million representing the anticipated payment due to Mr. Anderson, the Company’s Executive Vice President and Chief Financial Officer, who will be departing the Company early in the fourth quarter.

(in thousands)
Unusual operating charges:
Stock and other compensation expense	$	17,988
Other unusual operating charges:
Bond tender consideration and premium		3,246
Preferred stock premium		470
Miscellaneous, legal and advisory fees		2,904
Unamortized discount on preferred stock		571
Write-off debt issuance costs		1,690
Total unusual charges	$	26,869

(5) Stock Based Compensation

The Company has adopted the provisions of SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure” which amends SFAS No. 123 “Accounting for Stock-Based Compensation”. The Company has adopted the disclosure only provision of SFAS No. 123 and accordingly recognizes no compensation expense upon grant for employee stock option grants. Had compensation expense for these plans been determined consistent with SFAS No. 123, the Company’s net income would have been decreased by $0 and $28,000 for the 13 weeks ended July 2, 2005 and June 26, 2004, respectively. For the 39 weeks ended July 2, 2005 the Company’s net loss would have increased by $50,000 and for the 39 weeks ended June 26, 2004 the Company’s net income would have decreased by $75,000.

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(6) Inventories

Inventories consist of the following:

Amounts in thousands	July 2, 2005		October 2, 2004
Raw materials and supplies	$	1,280	$	355
Finished goods		89,644		54,410
Total Inventories	$	90,924	$	54,765

(7) Redeemable Preferred Stock

Effective October 3, 2004, the Company adopted the provisions of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. In accordance with SFAS No. 150 the Company reclassified the redeemable preferred stock balance from the mezzanine section of the balance sheet to a liability classification on the balance sheet. In addition, the dividend payable and the accretion of the preferred stock was reclassified to interest expense instead of charging it directly to the retained deficit. The amount of interest recorded during the 13-week and 39-week period ended July 2, 2005 related to preferred stock accretion was $1.0 million and $4.3 million respectively.

(8) Recent Accounting Pronouncements

On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123; (Revised 2004) (Statement 123(R)) “Share-Based Payment”, which is a revision of FASB Statement No. 123, “Accounting for Stock-Based Compensation”. Statement 123(R) supersedes APB opinion 25, “Accounting for Stock Issued to Employees” and amends FASB Statement No. 95, “Statement of Cash Flows”. Statement 123(R) requires all share-based payments to employees to be recognized in the financial statements based on their fair market values. Statement 123(R) is effective for the Company beginning October 3, 2005. As permitted by Statement 123, the Company currently accounts for share-based payments to employees using APB Opinion 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)’s fair value method could have a significant impact on our results of operations, although it will have no impact on our overall cash position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in the disclosure of pro forma net income in Note 5 to our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature.

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Leslie’s Poolmart, Inc.

Item 2. 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.

This discussion and analysis of our financial condition and results of operations, should be read in conjunction with our unaudited consolidated financial statements and disclosures included elsewhere in this report, and management’s discussion and analysis of financial condition and results of operations included as part of the Company’s Form 10-K for the year ended October 2, 2004.

General

Leslie’s Poolmart, Inc. (the “Company” or “Leslie’s”) is the leading specialty retailer of swimming pool supplies and related products in the United States. The Company markets its products through 514 Company-owned stores in 36 states; a nationwide mail order catalog; and the Internet. Leslie’s is vertically integrated, operating a chemical repackaging facility in Ontario, California and a specialty chemical repackaging facility in Hebron, Kentucky. We supply our retail stores from distribution facilities located in Ontario, California; Dallas, Texas; Swedesboro, New Jersey; and Hebron, Kentucky.

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 third and fourth fiscal quarters, which represent the peak months of swimming pool use. Sales are substantially lower during the first and second quarters when the Company will typically incur operating losses.

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 generally attempts to open the majority of its new stores during the second quarter in order to position itself for the peak-selling season.

Results of Operations

Net Sales. Net sales for the 13 weeks ended July 2, 2005 were $173.3 million compared to $152.0 million for the 13 weeks ended June 26, 2004. The 14.1% increase was due to improved comparable store sales coupled with additional store count of 514 stores in 2005 versus 473 stores in 2004. Year-to-date sales were $259.1 million as compared to $231.6 million in the prior year. Comparable store sales for the 13 weeks ended July 2, 2005 increased 10.3% as compared to the prior year. Comparable store sales for the 39 weeks ended July 2, 2005 increased 7.2% as compared to the prior year sales. We consider 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.

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Gross Profit. Gross profit for the 13 weeks ended July 2, 2005 was $85.9 million compared to $75.2 million for the 13 weeks ended June 26, 2004. As a percentage of sales, gross profit was 49.6% for the third quarter of fiscal 2005 compared to 49.5% for the third quarter of fiscal 2004. Gross profit improved primarily due to the increase in sales associated with the additional store count and the strong comparable store sales achieved during the quarter. For the 39 weeks ended July 2, 2005, gross profit was $127.1 million as compared to $112.4 million in the prior year. As a percentage of sales, gross profit was 49.1% as compared to 48.5% in the prior year. Gross profit as a percent to sales increased due to improvements in product acquisitions cost.

Operating and Administrative Expense. Operating and administrative expense for the 13 weeks ended July 2, 2005, were $46.0 million compared to $41.4 million for the 13 weeks ended June 26, 2004. Operating and administrative expenses as a percentage of sales were 26.6% for the 13 weeks ended July 2, 2005 compared to 27.3% for the 13 weeks ended June 26, 2004. Operating expenses increased during the quarter due to increases in occupancy and other related costs associated with the additional store count as compared to the prior year. For the 39 weeks ended July 2, 2005, operating expenses, were $123.6 million as compared to $97.8 million in the prior year. Operating and administrative expenses as a percentage of sales were 47.7% for the 39 weeks ended July 2, 2005 compared to 42.2% for the 39 weeks ended June 26, 2004. Operating expenses increased during the year due primarily to a $18.0 million unusual charge for merger related expenses, as described in Note 4 to our consolidated financial statements.

Operating Income. Operating income for the 13 weeks ended July 2, 2005 increased by $6.1 million from a $33.8 million during the 13 weeks ended June 26, 2004 to an operating income of $39.9 million for the 13 weeks ended July 2, 2005. Operating income for the 13 weeks ended July 2, 2005 improved primarily due to the improved gross margin achieved during the quarter. The operating income for the 39 weeks ended July 2, 2005 decreased by $11.0 million as compared to the prior year due primarily to the $18.0 million unusual charge for merger related expenses.

Other Income and Expense. Net interest expense was $5.3 million for the 13 weeks ended July 2, 2005 compared to $1.8 million for the 13 weeks ended June 26, 2004. For the 39 weeks ended July 2, 2005, net interest expense was $13.9 million as compared to $5.4 million in the prior year. The increase in interest expense was due to the impact of the Company’s adoption of SFAS No. 150 whereby the Company records the accrued interest and accretion of our preferred stock as interest expense instead of recording this as a reduction of retained earnings and to the increase in average debt balances in the quarter due to the January merger. For the 13-week and 39-week period ended July 2, 2005, the impact due to the adoption of SFAS No. 150 expense was $1.0 million, and $4.3 million, respectively.

Unusual Charge. During the year, the Company recorded an unusual operating charge of $16.9 million for expenses related to the January recapitalization. Of these costs, $18.0 million was compensation expense due to the stock options that were exercised as part of the merger transaction. Also during January 2005, the Company recorded an unusual non-operating charge of $8.9 million for expenses related to the January recapitalization. See Note 4 to our consolidated financial statements.

Income Taxes. The Company’s income tax expense for the 13 weeks ended July 2, 2005 was $14.4 million, or an effective rate of 41.5% as compared to a $12.6 million expense, or an effective rate of 39.6% for the 13 weeks ended June 26, 2004. The effective rate is higher in 2005 due to the Company’s adoption of SFAS No. 150, whereby preferred stock accretion is treated as interest expense and is a permanent difference and receives no income tax benefit. For the 39 weeks ended July 2, 2005, the income tax benefit was $6.0 million, or an effective rate of 31.2% as compared to a $3.6 million expense, or an effective rate of 39.9% for the prior year.

Adjusted EBITDA. The Adjusted EBITDA for the 13 weeks ended July 2, 2005 was $43.9 million compared to an Adjusted EBITDA of $36.5 million, for the 13 weeks ended June 26, 2004. For the 39 weeks ended July 2, 2005, the adjusted EBITDA improved by $7.6 million from an EBITDA of $22.7 million in the prior year.

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Adjusted EBITDA is determined as follows ⁽¹⁾:

	13 Weeks Ended				39 Weeks Ended
Amounts in thousands	July 2, 2005		June 26, 2004 (restated)		July 2, 2005			June 26, 2004 (restated)
Net income/(loss) as reported	$	20,236	$	19,257	$	(13,247	)	$	5,399
Depreciation		2,873		2,767		8,802			8,170
Interest expense, net		5,285		1,824		13,856			5,431
Loss on disposition of assets		11		83		34			136
Income tax expense/(benefit)		14,353		12,614		(6,002	)		3,584
Unusual charges		1,117		—		26,869			—
Adjusted EBITDA	$	43,875	$	36,545	$	30,312		$	22,720

⁽¹⁾ Adjusted EBITDA is defined as earnings before interest, taxes, depreciation, amortization, loss/(gain) on disposition of fixed assets, 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 and presents a better measure of liquidity for those charges that are not anticipated to be incurred in the future. 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.

Financial Condition, Liquidity and Capital Resources

Changes in Financial Condition. Between October 2, 2004 and July 2, 2005, total current assets increased by $37.4 million primarily as the result of a $36.1 million increase in inventory during the period. Inventory normally increases during this time frame as the Company prepares for its peak selling season.

During the same period, current liabilities increased by $49.8 million due primarily to a $46.6 million increase in accounts payable and a $11.5 million increase in accrued expenses. The change in accounts payable reflects the additional purchases of inventory.

Liquidity and Capital Resources. Net cash provided by operating activities was $9.9 million for the 39 weeks ended July 2, 2005 compared to net cash provided by operating activities of $12.6 million for the same period in the prior year. The change in the 39 weeks ended July 2, 2005 compared to the third quarter of fiscal 2004, was due primarily to an increase in inventories and accounts payable.

Capital expenditures for the 39 weeks ended July 2, 2005 were $9.5 million. We expect to incur capital expenditures between $10.0 and $13.0 million in fiscal 2005, primarily for the purpose of opening new stores. It is anticipated the balance of 2005 capital expenditures will be funded out of cash provided by operations and borrowings under the credit facility.

Net cash used in financing activities for the 39 weeks ended July 2, 2005 was $4.6 million compared to $260,000 in the prior year. The increase was due to higher borrowings drawn against the Company’s revolving credit facility as compared to the prior year. Funds borrowed under the revolving credit portion of

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the Company’s credit facility are restricted to working capital and general corporate purposes, which includes capital expenditures. The level of borrowings under the Company’s credit facility is dependent primarily upon cash flows from operations, the timing of disbursements, long-term borrowing activity and capital expenditure requirements.

The adoption of Statement 123(R)’s fair value method could have an impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of Statement 123 as described in Note 5 to our consolidated financial statements. Statement 123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature.

On January 25, 2005, Leslie’s completed a recapitalization. The recapitalization was effected through a merger transaction that was financed by a private placement of new notes and borrowings under an amended credit facility. The Company sold, through a private placement exempt from the registration requirements under the Securities Act, $170 million in aggregate principal amount of its 7.75% Senior Notes due 2013 (the “Notes”). The Notes were sold in the United States only to qualified institutional buyers pursuant to Rule 144A under the Securities Act and to non-U.S. persons in accordance with Regulation S under the Securities Act. The Notes have not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Leslie’s used the net proceeds of this offering to finance the Merger and to consummate the tender offer for its 10.375% Senior Notes due 2008.

On January 25, 2005, the Company entered into the Loan Agreement with the lenders noted therein and Wells Fargo Retail Finance LLC as agent for the Lenders. The Loan Agreement provides for the extension by the Lenders of revolving loans and other financial accommodations to Leslie’s and LPM Manufacturing, Inc. in an aggregate principal amount not to exceed $105.0 million, was reduced on July 1, 2005 as set forth in the Loan Agreement. The Loan Agreement contains customary representations and warranties, covenants, conditions to borrowing and will require the maintenance of certain quarterly financial and operating ratios and covenants, including minimum EBITDA levels, fixed charged coverage ratio, and senior leverage ratio.

As part of the recapitalization, we incurred new contractual obligations under the indenture governing the notes and a management services agreement with Leonard Green & Partners, L.P. (“LGP”). Following the recapitalization, we expect our interest expense to increase as a result of the higher level of indebtedness and our selling, general and administrative expenses to increase as a result of the increased management fees payable to LGP.

Critical Accounting Policies and Estimates

The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which 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.

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Inventories are stated at the lower of cost or market. The Company values inventory using the weighted average 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s Loan and Security Agreement 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. At the end of the current quarter, there was $11.5 million outstanding under this facility.

Item 4. Controls and Procedures.

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15 (e) and 15d-15 (e) under the Securities Exchange Act of 1934, as amended, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective such that the material information relating to Leslie’s including our consolidated subsidiaries, required to be disclosed in our Securities and Exchange Commission (“SEC”) reports, is recorded, processed, accumulated, summarized and reported within the time periods specified in SEC rules and forms, and was communicated to our principal executive officer and principal accounting officer during the period when this report was being prepared to allow timely decisions regarding required disclosure.

In addition, there were no changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation. We have not identified any significant deficiencies or material weaknesses in our internal controls, and therefore there were no corrective actions taken.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are and may continue to be a party to various lawsuits and arbitrations from time to time. As of July 2, 2005, we were not a party to any legal proceedings that we believe are likely to have a material effect on our business.

Item 6. Exhibits

(a) Exhibits

Exhibit Number	Description
10.1	Amendment No. 1 to Executive Employment Agreement dated July 1, 2005 between the Company and Steven L. Ortega
31.1	Certificate of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certificate of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certificate of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certificate of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

LESLIE’S POOLMART, INC.
By:	/s/ Lawrence H. Hayward
	Lawrence H. Hayward
	President and Chief Executive Officer
Date: August 12, 2005
By:	/s/ Donald J. Anderson
	Donald J. Anderson
	Executive Vice-President and Chief Financial Officer
Date: August 12, 2005

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EX-10.1

Exhibit 10.1

AMENDMENT NO. 1

TO

EXECUTIVE EMPLOYMENT AGREEMENT

This Amendment No. 1 dated as of July 1, 2005 (“Amendment”) to the Employment Agreement dated as of April 18, 2005 (the “Agreement”) is by and between Leslie’s Poolmart, Inc. (the “Company”) and Steven L. Ortega (“Executive”).

Recitals

The Company and Executive agree that it is in the best interest of the Company to provide for a period during which the Executive will not assume the role of Chief Financial Officer but will commence employment with the Company in order to assure a smooth transition upon the resignation of the Company’s current Chief Financial Officer.

Agreement

1. The Company and Executive agree to amend and restate Section 3 of the Agreement in full as set forth below:

3. Position and Duties. During the Term of Employment, Executive will serve as Executive Vice President and Chief Financial Officer of Company; provided that in the event Executive commences employment prior to the resignation date of Donald Anderson, the Company’s current Chief Financial Officer, Executive will not assume such position or responsibilities until the date following Mr. Anderson’s resignation therefrom. Promptly after the date Executive becomes the Company’s Chief Financial Officer, the Company will appoint Executive to fill a vacancy on the Board of Directors of the Company (the “Board”) and each year thereafter, Company will nominate and recommend Executive for reelection to the Board at each appropriate meeting of stockholders. Executive will have responsibilities and authority, and perform executive duties, appropriate to his position. Excluding periods of vacation and sick leave, Executive is to devote substantially his full attention and time to his responsibilities to Company. However, he may serve on boards and committees of other businesses or industrial groups, attend to personal investments, and engage in civic and charitable endeavors, provided that such activities are not competitive with the business of Company and do not unduly interfere with Executive’s attention to his responsibilities under the Agreement.

2. Capitalized terms used but not defined herein shall have the same meanings as assigned to them in the Agreement.

3. Except as expressly amended hereby, the Agreement is in full force and effect.

[Signature Page Follows]

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the day and year first above written.

LESLIE’S POOLMART, INC.		STEVEN L. ORTEGA
/s/ Lawrence H. Hayward		/s/ Steven L. Ortega
Name:	Lawrence H. Hayward
Title:	President and CEO

EX-31.1

Exhibit 31.1

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 quarterly report on Form 10-Q of Leslie’s Poolmart, Inc.;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 12, 2005

By:	/s/ Lawrence H. Hayward
	Lawrence H. Hayward
	President and
	Chief Executive Officer

EX-31.2

Exhibit 31.2

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 J. Anderson certify that:

1. I have reviewed this quarterly report on Form 10-Q of Leslie’s Poolmart, Inc.;

2. Based on my knowledge, this 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 report;

3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 12, 2005

By:	/s/ Donald J. Anderson
	Donald J. Anderson
	Executive Vice-President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Lawrence H. Hayward, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Leslie’s Poolmart, Inc. on Form 10-Q for the fiscal quarter ended July 2, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Leslie’s Poolmart, Inc.

Date: August 12, 2005

By:	/s/ Lawrence H. Hayward
Name:	Lawrence H. Hayward
Title:	President and Chief Executive Officer

EX-32.2

Exhibit 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Donald J. Anderson, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Quarterly Report of Leslie’s Poolmart, Inc. on Form 10-Q for the fiscal quarter ended July 2, 2005 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report on Form 10-Q fairly presents in all material respects the financial condition and results of operations of Leslie’s Poolmart, Inc.

Date: August 12, 2005

By:	/s/ Donald J. Anderson
Name:	Donald J. Anderson
Title:	Executive Vice-President and Chief Financial Officer