10-Q 1 c78723e10vq.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q [ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended January 11, 2003 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 No. 333-56239-01 LPA HOLDING CORP. (exact name of registrant as specified in its charter) SEE TABLE OF ADDITIONAL REGISTRANTS DELAWARE 48-1144353 (State or other jurisdiction of (IRS employer identification number) incorporation or organization) 130 SOUTH JEFFERSON STREET, SUITE 300 CHICAGO, IL 60661 (Address of principal executive office and zip code) (312) 798-1200 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of August 8, 2003, LPA Holding Corp. had outstanding 773,403 shares of Class A Common Stock (par value, $.01 per share) and 20,000 shares of Class B Common Stock (par value, $.01 per share). As of August 8, 2003, the additional registrant had the number of outstanding shares, shown on the following table. ADDITIONAL REGISTRANTS

2 LPA HOLDING CORP. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION

3 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS LPA HOLDING CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

4 LPA HOLDING CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS OF DOLLARS, EXCEPT SHARE AND PER SHARE DATA)

See notes to condensed consolidated financial statements. 5 LPA HOLDING CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (UNAUDITED) (IN THOUSANDS OF DOLLARS)

See notes to condensed consolidated financial statements. 6 LPA HOLDING CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS OF DOLLARS)

See notes to condensed consolidated financial statements. 7 LPA HOLDING CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION The consolidated financial statements presented herein include LPA Holding Corp. (Parent), and its wholly owned subsidiary, La Petite Academy, Inc. (La Petite), and La Petite's wholly owned subsidiaries: Bright Start Inc. (Bright Start), and LPA Services, Inc. (Services). Parent, consolidated with La Petite, Bright Start and Services, is referred to herein as the "Company". On March 17, 1998, LPA Investment LLC (LPA), a Delaware limited liability company, and Parent entered into an Agreement and Plan of Merger pursuant to which a wholly owned subsidiary of LPA was merged into Parent (the Recapitalization). LPA is the direct parent company of Parent and an indirect parent of La Petite. LPA is owned by an affiliate of J.P. Morgan Partners LLC (JPMP) and by an entity controlled by Robert E. King, a director of La Petite and Parent. The Company offers educational, developmental and child care programs that are available on a full-time or part-time basis, for children between six weeks and twelve years old. The Company's schools are located in 37 states and the District of Columbia, primarily in the southern, Atlantic coastal, mid-western and western regions of the United States. As of January 11, 2003, the Company operated 683 schools including 621 residential Academies, 30 employer-based schools and 32 Montessori schools. For the 28 weeks ended January 11, 2003, the Company had an average attendance of approximately 69,700 full and part-time children. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - In the opinion of management, the accompanying unaudited condensed consolidated interim financial statements include all adjustments necessary for their fair presentation in conformity with accounting principles generally accepted in the United States of America (GAAP). The results for the interim period are not necessarily indicative of the results to be expected for the entire fiscal year. Certain information normally included in financial statements prepared in accordance with GAAP has been condensed or omitted. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Form 10-K for the fiscal year ended June 29, 2002. The accompanying unaudited condensed consolidated interim financial statements reflect certain previously reported restatements to the results of operations as of and for the 12 and 28 weeks ended January 12, 2002, contained in the Company's Quarterly Report on Form 10-Q/A for the period ended January 12, 2002. The restatements resulted from the Company's determination that certain asset, liability, revenue and expense items were incorrectly reported or recognized in previously issued quarterly and annual financial statements. The correction of these errors resulted in a net increase in net loss of approximately $2.9 million and $10.1 million, on an after-tax basis, for the 12 and 28 weeks ended January 12, 2002. For a further discussion of the restatements, see Notes 2 and 16 to the audited consolidated financial statements included at Item 8 of the Company's Annual Report on Form 10-K for the year ended June 29, 2002. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company was not in compliance with certain of the financial and informational covenants contained in an agreement (the Credit Agreement) providing for a term loan facility and revolving credit agreement for the first quarter of fiscal year 2003. The Company obtained limited waivers of non-compliance with such financial and 8 informational covenants from the requisite lenders under the Credit Agreement through February 7, 2003. The amendment to the Credit Agreement dated as of February 10, 2003, permanently waived such defaults and among other things, revised and set as applicable, financial covenant targets for fiscal years 2003 through 2006. In the third and fourth quarters of fiscal year 2003, the Company was not in compliance with certain of the informational covenants contained in the Credit Agreement. The Company obtained limited waivers of non-compliance with such informational covenants through July 31, 2003, and permanent waivers of such non-compliance on July 31, 2003. For additional information on the amendments to the Credit Agreement dated as of February 10, 2003 and July 31, 2003, see Note 9 -Subsequent Events. Management is instituting and executing a series of plans and actions designed to improve the Company's operating results and cash flows and to strengthen the Company's financial position. These plans include cost reductions resulting from continued academy closures, targeted reductions in operating expenses and optimization of the Company's real estate portfolio. The Company closed 25 schools in the first quarter and twelve schools in the second quarter of fiscal year 2003. Subsequent to the end of the second quarter, the company closed ten schools in the third quarter and 25 schools in the fourth quarter of fiscal year 2003. Management believes that implementation of its plans to improve operations and cash flows, coupled with the amendment of the financial covenants contained in the Credit Agreement and the additional contingent equity commitments provided in connection with the February 10, 2003 amendment to the Credit Agreement by LPA and the other stockholders of Parent, if needed, will allow the Company to comply with its required financial covenants, meet its obligations as they come due and provide adequate liquidity to operate the business for the next twelve months. However, there can be no assurance in this regard. Furthermore, there can be no assurance that the Company's lenders will waive any future violations of the Credit Agreement that may occur or agree to future amendments of the Credit Agreement or that the Company can obtain additional funding from Parent beyond that noted above or any other external source. FISCAL YEAR END - The Company utilizes a 52 or 53-week fiscal year ending on the Saturday closest to June 30 and is composed of 13 four-week periods. The first quarter contains four such periods or 16 weeks and each remaining quarter contains 3 periods or 12 weeks. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS - In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Standards (`SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and supercedes Emerging Issues Task Force ("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). SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. Although the Statement may impact the timing of recognizing a restructuring charge, the Company has determined that SFAS No. 146 will not have a material effect on its financial condition, results of operations or cash flows. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure: An amendment of FASB Statement No. 123". This Statement amends SFAS No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirement of SFAS No.123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The disclosure provisions of SFAS No. 148 are applicable for fiscal years ending after December 15, 2002. As of October 19, 2002, the Company adopted the disclosure provision of SFAS No. 148. In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires certain guarantees to be recorded at fair value and requires a guarantor to make significant new disclosures, even when the likelihood of making any payments under the guarantee is remote. Generally, FIN 45 applies to certain types of financial guarantees that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, a liability, or an equity security of the guaranteed party; performance guarantees involving contracts which require the guarantor to make payments to the guaranteed party based on another entity's failure to perform under an obligating agreement; 9 indemnification agreements that contingently require the guarantor to make payments to an indemnified party based on changes in an underlying that is related to an asset, a liability, or an equity security of the indemnified party; or indirect guarantees of the indebtedness of others. The initial recognition and initial measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. Disclosure requirements under FIN 45 are effective for financial statements of interim or annual financial periods ending after December 15, 2002 and are applicable to all guarantees issued by the guarantor subject to FIN 45's scope, including guarantees issued prior to FIN 45. The Company has determined that FIN 45 will not have a material effect on its financial condition, results of operations or cash flows. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest Entities, an interpretation of ARB 51", with the objective of improving financial reporting by companies involved with variable interest entities. A variable interest entity is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights, or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. Historically, entities generally were not consolidated unless the entity was controlled through voting interests. FIN 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns or both. A company that consolidates a variable interest entity is called the "primary beneficiary" of that entity. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements of FIN 46 apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Also, certain disclosure requirements apply to all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company does not have any variable interest entities and therefore FIN 46 will not have an impact on its financial condition, results of operations or cash flows. 3. OTHER ASSETS (in thousands of dollars)

(a) Other long-term assets consist primarily of properties held for sale, which are valued at the fair market less costs to sell. 4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS (in thousands of dollars)

10 At January 11, 2003, the Company was not in compliance with certain of the financial covenants contained in the Credit Agreement. See Note 9 for further information regarding the waiver of such default and other defaults under the Credit Agreement and a description of subsequent amendments to the financial covenants, maturity dates and certain other terms of the Credit Agreement. 5. OTHER LONG-TERM LIABILITIES (in thousands of dollars)

(a) In connection with the acquisitions of La Petite and Bright Start, a liability for unfavorable operating leases was recorded and is being amortized over the average remaining life of the leases. (b) The reserve for closed schools includes the long-term liability related primarily to leases for schools that were closed and are no longer operated by the Company. (c) On December 11, 2002, the Company entered into a Separation Agreement with Judith A. Rogala, the Company's former Chief Executive Officer and President. The long-term portion of the Company's total contractual obligations pursuant to the Separation Agreement. is $0.8 million. (d) Long-term insurance liabilities reflect the Company's obligation for incurred but not reported workers' compensation, auto and general liability claims. 6. COMMITMENTS AND CONTINGENCIES The Company is presently, and has been from time to time, subject to claims and litigation arising in the ordinary course of business. Management believes that none of the claims or litigation, of which it is aware, will materially affect the Company's financial condition, liquidity, or results of operations, although assurance cannot be given with respect to the ultimate outcome of any such actions. 7 STOCK-BASED COMPENSATION On August 26, 2002, the Company granted options to purchase 180,254 shares of common stock of Parent at an exercise price of $0.01 to its then Chief Operating Officer (subsequently promoted to Chief Executive Officer). On August 26, 2002, the Company also granted options to purchase 270,381 shares of common stock of Parent at an exercise price of $0.01 to its Chief Executive Officer. In return for the grant of new options, the Chief Executive Officer forfeited all previous option grants. The Company accounts for all options in accordance with APB Opinion No. 25, which requires compensation cost to be recognized only on the excess, if any, between the fair value of the stock at the date of grant and the amount an employee must pay to acquire the stock. Under this method, no compensation cost has been recognized for stock options granted. The weighted average fair value at date of grant, for options granted during the 28 weeks ended January 11, 2003 was $0.00. Had compensation cost for these options been recognized as prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," it would not have had a material effect on the Company's results of operations 11 8. RESTRUCTURING CHARGES The Company recognized restructuring charges of $0.6 million in the second quarter of the 2003 fiscal year in connection with the closure of nine schools, offset by recoveries of $0.2 million principally due to settlement of lease liabilities for less than the recorded reserves. In the second quarter of the 2002 fiscal year, the Company recognized a restructuring charge of $0.3 million principally due to goodwill and asset write downs related to closed schools. Included in the restructuring charges were non-cash charges of $1.1 million and $0.8 million in the 28 weeks ended January 11, 2003 and January 12, 2002 respectively. The restructuring charges related to the school closures consisted principally of the present value of rent, real estate taxes, common area maintenance charges, and utilities, net of anticipated sublease income, and the write-off of leasehold improvements. A summary of the restructuring reserve activity is as follows, with dollars in thousands: Balance at June 29, 2002 $ 4,598 Reserves recorded in the first quarter of fiscal year 2003 2,877 Recoveries recorded in the first quarter of fiscal year 2003 (1,629) Amount utilized in the first quarter of fiscal year 2003 (1,725) ------------ Balance at October 19, 2002 4,121 Reserves recorded in the second quarter of fiscal year 2003 639 Recoveries recorded in the second quarter of fiscal year 2003 (211) Amount utilized in the second quarter of fiscal year 2003 (639) ------------ Balance at January 11, 2003 $ 3,910 ============

On the condensed consolidated balance sheet, the current portion of the restructuring reserve is presented in the reserve for closed academies line item, and the long-term portion is included in the other long-term liabilities line item. 9. SUBSEQUENT EVENTS The Company was not in compliance with certain of the financial and informational covenants contained in the Credit Agreement for the third quarter ended April 6, 2002 and the fourth quarter ended June 29, 2002. Furthermore, following the restatement of the Company's financial information for the fiscal years 1999, 2000 and 2001, the Company was not in compliance with certain of the financial covenants for each of the quarters ending in fiscal years 1999, 2000 and 2001 and the first two quarters of fiscal year 2002. In addition, the Company was not in compliance with certain of the financial and informational covenants for the first quarter of fiscal year 2003. The Company received limited waivers of non-compliance with the foregoing financial and informational covenants through February 7, 2003. The amendment to the Credit Agreement dated as of February 10, 2003, permanently waived such defaults. In the third and fourth quarters of fiscal year 2003, the Company was not in compliance with certain of the informational covenants contained in the Credit Agreement. The Company obtained limited waivers of non-compliance with such informational covenants through July 31, 2003, and permanent waivers of such non-compliance on July 31, 2003. On February 10, 2003, Parent, La Petite and its senior secured lenders entered into Amendment No. 5 to the Credit Agreement. The amendment waived existing defaults of Parent and La Petite in connection with (a) the failure to satisfy certain financial covenants for the quarterly periods ended (i) during 1999, 2000, 2001 and 2002 and (ii) nearest to September 30, 2002 and December 31, 2002; (b) the failure to deliver timely financial information to the senior secured lenders; (c) the failure to certain file reports with the Securities and Exchange Commission; (d) the failure to obtain the consent of the senior lenders prior to the disposition of certain assets; and (e) the failure to deliver required documents to the senior lenders prior to the disposition of other assets. Additionally, the amendment extended the final maturity of the Credit Agreement by one year to May 11, 2006, revised the amortization schedule to account for the additional one-year extension and revised and set, as applicable, financial covenant targets (such as maximum leverage ratio and minimum fixed charge coverage ratio) for fiscal years 2003 through 2006. As a condition to the effectiveness of Amendment No. 5, Parent was required to obtain contingent equity commitments from its existing stockholders for an amount equal to $14,500,000. Pursuant to Amendment No. 5, none of the proceeds, if any, received by Parent as a result of the contingent equity commitments is required to be used to prepay the term loans outstanding under the Credit Agreement. On July 31, 2003, Parent, La Petite and its senior secured lenders entered into Amendment No. 6 to the Credit Agreement. The amendment permanently waived existing third and fourth quarter defaults of Parent and La Petite in connection with (a) the failure 12 to deliver timely financial information to the senior secured lenders; (b) the failure to deliver timely information regarding purchases of material assets to the senior secured lenders; and (c) the failure to file certain reports with the Securities and Exchange Commission. Additionally, the amendment revised the definition of Consolidated EBITDA in the Credit Agreement. Pursuant to the terms of the Securities Purchase Agreement dated February 10, 2003, entered into by Parent and its stockholders who have elected to exercise their respective preemptive rights (the "Electing Stockholders"), as amended by Amendment No. 1 to Securities Purchase Agreement dated July 31, 2003, Parent may issue up to 6,669,734 shares of its series B convertible preferred stock. In connection with such prospective issuance, Parent issued warrants to purchase 1,692,423 shares of its class A common stock, pro rata to each Electing Stockholder. All of the proceeds received by Parent from the issuance of the series B preferred stock, if any, will be contributed to La Petite as common equity and will be used by La Petite for general working capital and liquidity purposes. The Electing Stockholders are only required to purchase shares of series B preferred stock if (a) the fixed charge coverage ratio at the end of a fiscal quarter (calculated in accordance with the terms of the Credit Agreement) is less than the fixed charge coverage ratio target set forth in the Credit Agreement with respect to such fiscal quarter (a "Fixed Charge Purchase"), (b) from time to time, the cash account of Parent and its subsidiaries is negative (as calculated in accordance with the provisions of Amendment No. 1 to the Securities Purchase agreement) over a historical 4 or 5 week review period (a "Cash Shortfall Purchase"), or (c) (i) a payment default shall occur and be continuing under the Credit Agreement or (ii) following payment in full of the obligations under the Credit Agreement, a payment default shall occur and be continuing under the Indenture for the Senior Notes (a "Payment Default Purchase"). The aggregate number of shares to be purchased, if any, by the Electing Stockholders pursuant to a Fixed Charge Purchase shall be purchased within ten business days following the date that Parent is required to deliver its quarterly or annual, as applicable, financial information to the senior lenders pursuant to the terms of the Credit Agreement, and shall equal the quotient obtained by dividing (x) the amount of cash which would have been needed to increase the Parent's consolidated EBITDAR (as defined in the Credit Agreement) to an amount which would have satisfied the fixed charge coverage ratio target set forth in the Credit Agreement by (y) 2.174. The aggregate number of shares to be purchased, if any, by the Electing Stockholders pursuant to a Cash Shortfall Purchase shall be made on the tenth business day after the end of each review period, and shall equal (A) the sum of (x) the cash deficit and (y) $500,000, divided by (B) 2.174, less (C) the number of shares purchased pursuant to Cash Shortfall Purchases and Fixed Charge Purchases during the applicable review period. The aggregate number of shares to be purchased by the Electing Stockholders pursuant to a Payment Default Purchase shall be purchased within five (5) business days after notice of such default is delivered to the Electing Stockholders and shall equal (A) the amount of funds necessary to cure the payment default under the Credit Agreement or the Indenture for the Senior Notes, as applicable, divided by (B) 2.174. The Electing Stockholders have the right to purchase shares of series B preferred stock at any time, in which case the aggregate number of shares of series B preferred stock to be purchased by the Electing Stockholders with respect to a particular fiscal quarter or review period, as applicable, shall be reduced by the number of shares of series B preferred stock purchased prior to the expiration of such fiscal quarter or review period. The obligation of each Electing Stockholder to purchase shares of series B preferred stock shall expire on the earlier of (a) the date the Electing Stockholders purchase an aggregate of 6,669,734 shares of series B preferred stock; and (b) the date the obligations (other than contingent obligations and liabilities) of Parent and its subsidiaries under (i) the Credit Agreement and (ii) the Indenture dated as of May 11, 1998, among the Corporation and certain of its subsidiaries and PNC Bank, National Association as trustee (as amended) are terminated. LPA has committed to purchase, in accordance with the terms of the Securities Purchase Agreement, 6,662,879 shares of the series B preferred stock being offered and has received warrants to purchase 1,690,683 shares of Parent's class A common stock in connection with such commitment. In accordance with such commitment, in June 2003, LPA purchased 341,766 shares of series B preferred stock. Further, in accordance with their commitment to purchase shares of series B preferred stock in accordance with the terms of the Securities Purchase Agreement, in July 2003 the Electing Stockholders other than LPA purchased 570 shares of series B preferred stock. Accordingly, the contingent equity commitment from the stockholders of Parent has been reduced from $14,500,000 to $13,757,131. Subsequent to the end of the second quarter, the Company closed ten schools in the third quarter and 25 schools in the fourth quarter of fiscal year 2003. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this report. The Management's Discussion and 13 Analysis of Financial Condition and Results of Operations presented below reflects certain previously reported restatements to the results of operations for the 12 and 28 weeks ended January 12, 2002 contained in the Company's Quarterly Report on Form 10-Q/A for the period ended January 12, 2002. For a discussion of the restatements, see Notes 2 and 16 to the audited consolidated financial statements included at Item 8 of the Company's Annual Report on Form 10-K for the year ended June 29, 2002. Historically, the Company's operating revenue has followed the seasonality of the school year, declining during the summer months and the calendar year-end holiday period. The number of new children enrolling at La Petite's educational facilities (the schools) is generally highest in September-October and January-February, generally referred to as the Fall and Winter enrollment periods. As a result of this seasonality, results for one quarter are not necessarily indicative of results for an entire year. The Company operated 683 schools at the end of the second quarter of fiscal year 2003 as compared to 723 schools for the same period of fiscal year 2002. The net decrease of 40 schools is a result of 45 closures and 5 openings or additions. The closures resulted from management's decision to close certain school locations where the conditions no longer supported an economically viable operation. New educational facilities (new schools), as defined by the Company, are Academies opened within the current or previous fiscal year. These schools typically generate operating losses until the Academies achieve normalized occupancies. Established educational facilities (established schools), as defined by the Company, are schools that were open prior to the start of the previous fiscal year. Full-time equivalent (FTE) attendance, as defined by the Company, is not a measure of the absolute number of students attending the Company's schools, but rather is an approximation of the full-time equivalent number of students based on Company estimates and weighted averages. For example, a student attending full-time is equivalent to one FTE, while a student attending only one-half of each day is equivalent to 0.5 FTE. The average weekly FTE tuition rate, as defined by the Company, is the tuition revenue divided by the FTE attendance for the respective period. RESULTS OF OPERATIONS TWELVE WEEKS ENDED JANUARY 11, 2003 COMPARED TO TWELVE WEEKS ENDED JANUARY 12, 2002 The following table sets forth the Company's operating results for the comparative 12 weeks ended January 11, 2003 and January 12, 2002, with amounts presented in thousands of dollars and as percentages of revenue:

Operating revenue increased $0.2 million or 0.2% from the same period last year. This revenue increase was a result of a $2.3 million increase at established schools and a $0.5 million increase at new schools, offset by a 14 reduction in revenue from closed schools of $2.2 million and a $0.4 million decrease in other revenue. The revenue increase is principally due to a 6.9% increase in the average weekly FTE tuition rate offset by a decline in the FTE attendance of 6.8%. The increase in the average weekly FTE tuition rate was principally due to selective price increases that were put into place based on geographic market conditions and class capacity utilization. The decrease in FTE attendance was principally due to school closures and a decline in FTE attendance at established schools, partially offset by increased FTE attendance at new schools. Salaries, wages, and benefits increased $1.2 million or 2.5% from the same period last year. As a percentage of revenue, labor costs increased to 56.0% from 54.8% in the prior year. The increases in salaries, wages, and benefits, include increased labor costs of $1.4 million at established schools, increased labor costs of $0.3 million at new schools, and increased benefit costs of $1.6 million, offset by decreased field management and corporate administration labor costs of $0.1 million, $0.6 million decreased bonus cost, and by decreased labor costs of $1.4 million at closed schools. The increase in labor costs at established schools was mainly due to a 3.3% increase in average hourly wage rates and a 0.8% increase in labor hours as compared to the same period in the prior year. Facility lease expense increased $0.2 million or 1.5% from the same period last year. This increase was principally due to lower rent credits in the second quarter of the 2003 fiscal year resulting from certain unfavorable lease liabilities becoming fully amortized prior to the end of the second quarter of the 2003 fiscal year, offset by reductions in lease payments for facilities with contingent rent provisions and for closed schools. Depreciation and amortization decreased $1.0 million or 28.7% from the same period last year. The decrease in depreciation and amortization principally resulted from the reduction in carrying value of long-lived assets, including goodwill, as a result of the impairment losses recognized in the fourth quarter of the fiscal 2002 year. The Company recognized restructuring charges of $0.6 million in the second quarter of the 2003 fiscal year in connection with the closure of nine schools, offset by recoveries of $0.2 million principally due to settlement of lease liabilities for less than the recorded reserves. In the first quarter of the 2002 fiscal year, the Company recognized a restructuring charge of $0.3 million principally due to goodwill and asset write-downs related to closed schools. The restructuring charges related to the school closures consisted principally of the present value of rent (net of anticipated sublease income), real estate taxes, common area maintenance charges, and utilities, along with the write-off of leasehold improvements. Provision for doubtful accounts was not materially changed from the same period last year. Other operating costs decreased $0.6 million or 2.7% from the same period last year. Other operating costs include repairs and maintenance, utilities, insurance, real estate taxes, food, transportation, marketing, supplies, travel, professional fees, personnel, recruitment, training, bank overages and shortages, and other miscellaneous costs. The decrease was due primarily to lower marketing, personnel, bank shortages, supplies and miscellaneous expenses offset by increases in legal and professional fees, insurance, food, and repair and maintenance. As a percentage of revenue, other operating costs decreased to 25.7% as compared to 26.5% in the same period in the prior year. As a result of the foregoing, the Company had operating income of $1.6 million in the second quarter of the 2003 fiscal year as compared to operating income of $1.2 million in the second quarter of the 2002 fiscal year. Net interest expense decreased $0.6 million or 10.0% as compared to the same period last year. The decrease was principally due to prior year termination fees for certain derivative investments held by the Company. (See Item 3 for details on the elimination of certain derivative investments held by the Company). The provision for income taxes includes a state income tax provision. The effective federal tax rate for the twelve weeks ended January 11, 2003 and January 12, 2002 was 0% due to the current period operating losses and the Company's provision of a full valuation allowance against deferred tax assets. 28 WEEKS ENDED JANUARY 11, 2003 COMPARED TO 28 WEEKS ENDED JANUARY 12, 2002 The following table sets forth the Company's operating results for the comparative 28 weeks ended January 11, 2003 and January 12, 2002, with amounts presented in thousands of dollars, and as percentages of revenue: 15

Operating revenue increased $2.6 million or 1.3% from the same period last year. This revenue increase was a result of a $6.9 million increase at established schools and a $1.1 million increase at new schools, offset by a reduction in revenue from closed schools of $5.2 million and a $0.2 million decrease in other revenue. The revenue increase is principally due to a 6.2% increase in the average weekly FTE tuition rate offset by a decline in the FTE attendance of 5.3%. The increase in the average weekly FTE tuition rate was principally due to selective price increases that were put into place based on geographic market conditions and class capacity utilization. The decrease in FTE attendance was principally due to school closures and a decline in FTE attendance at established schools, partially offset by increased FTE attendance at new schools. Salaries, wages, and benefits increased $2.1 million or 1.9% from the same period last year. As a percentage of revenue, labor costs increased slightly to 56.3% from 56.0% in the prior year. The increases in salaries, wages, and benefits includes increased labor costs of $2.5 million at established schools, increased labor costs of $0.5 million at new schools, increased field management and corporate administration labor costs of $0.3 million, and increased benefit costs of $2.4 million, offset by $0.5 million decreased bonus cost, and by decreased labor costs of $3.1 million at closed schools. The increase in labor costs at established schools was mainly due to a 2.3% increase in average hourly wage rates and a 0.6% increase in labor hours as compared to the same period in the prior year. Facility lease expense increased $0.2 million or 1.0% from the same period last year. This increase was principally due to lower rent credits in the 2003 fiscal year resulting from certain unfavorable lease liabilities becoming fully amortized prior to the end of the second quarter of the 2003 fiscal year, offset by reductions in lease payments for facilities with contingent rent provisions and for closed schools. Depreciation and amortization decreased $2.3 million or 28.7% from the same period last year. The decrease in depreciation and amortization principally resulted from the reduction in carrying value of long-lived assets, including goodwill, as a result of the impairment losses recognized in the fourth quarter of the fiscal 2002 year. For the 28 weeks ended January 11, 2003, the Company recognized restructuring charges of $3.2 million in connection with the closure of 32 schools, and $0.3 million in connection with the write-down to fair market value of real estate properties held for disposal, offset by recoveries of $1.8 million principally due to settlement of lease liabilities for less than the recorded reserves. For the 28 weeks ended January 12, 2002, the Company recognized a restructuring charge of $1.5 million in connection with the closure of four schools and goodwill and asset write-downs related to closed schools. The restructuring charges related to the school closures consisted principally of the present value of rent (net of anticipated sublease income), real estate taxes, common area maintenance charges, and utilities, along with the write-off of leasehold improvements. Provision for doubtful accounts decreased $0.2 million or 12.9% from the same period last year. The decrease is principally the result of improved collection efforts over the same period in the prior year. 16 Other operating costs increased $3.6 million or 6.5% from the same period last year. Other operating costs include repairs and maintenance, utilities, insurance, real estate taxes, food, transportation, marketing, supplies, travel, professional fees, personnel, recruitment, training, bank overages and shortages, and other miscellaneous costs. The increase was due primarily to higher expenses in legal and professional fees, insurance, food, repairs and maintenance, bank shortages, and recruitment, offset by decreases in supplies, marketing, school activity costs, transportation, travel, and miscellaneous expenses. As a percentage of revenue, other operating costs increased to 28.7% as compared to 27.3% in the same period in the prior year. As a result of the foregoing, the Company had an operating loss of $3.1 million for the 28 weeks ended January 11, 2003 as compared to an operating loss of $2.1 million for the 28 weeks ended January 12, 2002. Net interest expense decreased $1.0 million or 7.8% as compared to the same period last year. The decrease was principally due to prior year mark-to-market adjustments and termination fees for certain derivative investments held by the Company. (See Item 3 for details on the elimination of certain derivative investments held by the Company). The provision for income taxes includes a state income tax provision. The effective federal tax rate for the 28 weeks ended January 11, 2003 and January 12, 2002 was 0% due to the current period operating losses and the Company's provision of a full valuation allowance against deferred tax assets. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of funds are from cash flows from operations, borrowings on the revolving credit facility under the Credit Agreement, and capital contributions received from Parent. The Company's principal uses of funds are debt service requirements, capital expenditures and working capital needs. The Company incurred substantial indebtedness in connection with the Recapitalization. Parent and La Petite have entered into the Credit Agreement, as amended, consisting of the $40 million Term Loan Facility and the $25 million Revolving Credit Facility. Parent and La Petite borrowed the entire $40 million available under the Term Loan Facility in connection with the Recapitalization. The borrowings under the Credit Agreement, together with the proceeds from the sale of the Senior Notes and the Equity Investment, were used to consummate the Recapitalization and to pay the related fees and expenses. The Credit Agreement will terminate on May 11, 2006. Payments due under the amortization schedule for the term loan are $0.5 million in the remainder of fiscal year 2003, $1.0 million in fiscal year and 2004, $5.5 million in fiscal year 2005, and $28.8 million in fiscal year 2006. The term loan is also subject to mandatory prepayment in the event of certain equity or debt issuances or asset sales by the Company or any of its subsidiaries and in amounts equal to specified percentages of excess cash flow (as defined). On January 11, 2003, there was $35.8 million outstanding under the term loan and $18.7 million outstanding under the Revolving Credit Facility. La Petite had outstanding letters of credit in an aggregate amount of $5.9 million, and $0.4 million was available for working capital purposes under the Revolving Credit Facility. The Company's Credit Agreement, Senior Notes and preferred stock contain certain covenants that limit the ability of the Company to incur additional indebtedness, pay cash dividends or make certain other restricted payments. On December 15, 1999, Parent issued $15.0 million of series A preferred stock and warrants to purchase an additional 3.0% of the Parent's outstanding common stock on a fully diluted basis at that time. The proceeds of that investment were contributed to La Petite as common equity. In connection with such purchase and contribution, the banks waived their right under the Credit Agreement to require that such proceeds be used to repay amounts outstanding under the Credit Agreement. The proceeds of such equity contribution were used to repay borrowings under the revolving credit facility that were incurred to finance the Bright Start acquisition. On November 14, 2001, Parent, La Petite and certain of its senior secured lenders entered into an amendment to the Credit Agreement. The amendment waived existing defaults of Parent and La Petite in connection with the failure to satisfy certain financial covenants for the quarterly periods ended June 30, 2001 and September 30, 2001, and the failure to deliver timely financial information to the senior secured lenders. Additionally, the amendment revised certain financial covenant targets for fiscal years 2002, 2003 and 2004. The amendment also addressed specific waivers necessary to permit the issuance of a new class of convertible redeemable participating preferred stock (series B preferred stock) of Parent. In consideration for the waiver and amendments, Parent was required to issue 17 additional equity in the amount of $15.0 million in a series of closings through May 14, 2002. In connection with such issuances, the banks waived their right under the Credit Agreement to require that the proceeds be used to repay amounts outstanding under the Credit Agreement. Pursuant to a pre-emptive offer dated November 13, 2001, Parent offered all of its stockholders the right to purchase up to their respective pro rata amount of series B preferred stock and warrants to purchase common stock of Parent. The series B preferred stock is junior to the series A preferred stock of Parent in terms of dividends, distributions, and rights upon liquidation. Parent offered and sold in the aggregate $15.0 million of its series B preferred stock and issued warrants to purchase 562,500 shares of its common stock as follows: (a) on November 15, 2001, Parent issued $3.4 million of series B preferred stock and 452,343 warrants, (b) on December 21, 2001, Parent issued $2.3 million of series B preferred stock and 110,157 warrants and (c) on May 14, 2002, Parent issued an additional $9.3 million of its series B preferred stock. All of the proceeds were contributed to La Petite as common equity and were used by La Petite for general working capital and liquidity purposes. As of June 1, 2003, LPA beneficially owned 92.3% of the common stock of Parent on a fully diluted basis, $45 million of series A preferred stock of Parent and approximately $15.0 million of series B preferred stock of Parent. An affiliate of JPMP owns a majority of the economic interests of LPA and an entity controlled by Robert E. King, a director of La Petite and Parent, owns a majority of the voting interests of LPA. The Company was not in compliance with certain of the financial and informational covenants for numerous periods, including the first quarter of fiscal year 2003. The Company received limited waivers of noncompliance with the foregoing financial and informational covenants through February 7, 2003. The amendment to the Credit Agreement dated as of February 10, 2003 permanently waived such defaults. In the third and fourth quarters of fiscal year 2003, the Company was not in compliance with certain of the informational covenants contained in the Credit Agreement. The Company obtained limited waivers of non-compliance with such informational covenants through July 31, 2003, and permanent waivers of such non-compliance on July 31, 2003. On February 10, 2003, Parent, La Petite and its senior secured lenders entered into Amendment No. 5 to the Credit Agreement. The amendment waived existing defaults of Parent and La Petite in connection with (a) the failure to satisfy certain financial covenants for the quarterly periods ended (i) during 1999, 2000, 2001, and 2002 and (ii) nearest to September 30, 2002, and December 31, 2002; (b) the failure to deliver timely financial information to the senior secured lenders; (c) the failure to file reports with the Securities and Exchange Commission; (d) the failure to obtain the consent of the senior lenders prior to the disposition of certain assets; and (e) the failure to deliver required documents to the senior lenders prior to the disposition of other assets. Additionally, the amendment extended the final maturity of the Credit Agreement by one year to May 11, 2006, revised the amortization schedule to account for the additional one-year extension and revised and set, as applicable, financial covenant targets (such as maximum leverage ratio and minimum fixed charge coverage ratio) for fiscal years 2003 through 2006. As a condition to the effectiveness of Amendment No. 5, Parent was required to obtain contingent equity commitments from its existing stockholders for an amount equal to $14,500,000. Pursuant to Amendment No. 5, none of the proceeds, if any, received by Parent as a result of the contingent equity commitments is required to be used to prepay the term loans outstanding under the Credit Agreement. On July 31, 2003, Parent, La Petite and its senior secured lenders entered into Amendment No. 6 to the Credit Agreement. The amendment permanently waived existing third and fourth quarter defaults of Parent and La Petite in connection with (a) the failure to deliver timely financial information to the senior secured lenders; (b) the failure to deliver timely information regarding purchases of material assets to the senior secured lenders; and (c) the failure to file certain reports with the Securities and Exchange Commission. Additionally, the amendment revised the definition of Consolidated EBITDA in the Credit Agreement. Pursuant to the terms of the Securities Purchase Agreement dated February 10, 2003, entered into by Parent and its stockholders who have elected to exercise their respective preemptive rights (the "Electing Stockholders"), as amended by Amendment No. 1 to Securities Purchase Agreement dated July 31, 2003, Parent may issue up to 6,669,734 shares of its series B convertible preferred stock. In connection with such prospective issuance, Parent issued warrants to purchase 1,692,423 shares of its class A common stock, pro rata to each Electing Stockholder. All of the proceeds received by Parent from the issuance of the series B preferred stock, if any, will be contributed to La Petite as common equity and will be used by La Petite for general working capital and liquidity purposes. 18 The Electing Stockholders are only required to purchase shares of series B preferred stock if (a) the fixed charge coverage ratio at the end of a fiscal quarter (calculated in accordance with the terms of the Credit Agreement) is less than the fixed charge coverage ratio target set forth in the Credit Agreement with respect to such fiscal quarter (a "Fixed Charge Purchase"), (b) from time to time, the cash account of Parent and its subsidiaries is negative (as calculated in accordance with the provisions of Amendment No. 1 to the Securities Purchase agreement) over a historical 4 or 5 week review period (a "Cash Shortfall Purchase"), or (c) (i) a payment default shall occur and be continuing under the Credit Agreement or (ii) following payment in full of the obligations under the Credit Agreement, a payment default shall occur and be continuing under the Indenture for the Senior Notes (a "Payment Default Purchase"). The aggregate number of shares to be purchased, if any, by the Electing Stockholders pursuant to a Fixed Charge Purchase shall be purchased within ten business days following the date that Parent is required to deliver its quarterly or annual, as applicable, financial information to the senior lenders pursuant to the terms of the Credit Agreement, and shall equal the quotient obtained by dividing (x) the amount of cash which would have been needed to increase the Parent's consolidated EBITDAR (as defined in the Credit Agreement) to an amount which would have satisfied the fixed charge coverage ratio target set forth in the Credit Agreement by (y) 2.174. The aggregate number of shares to be purchased, if any, by the Electing Stockholders pursuant to a Cash Shortfall Purchase shall be made on the tenth business day after the end of each review period, and shall equal (A) the sum of (x) the cash deficit and (y) $500,000, divided by (B) 2.174, less (C) the number of shares purchased pursuant to Cash Shortfall Purchases and Fixed Charge Purchases during the applicable review period. The aggregate number of shares to be purchased by the Electing Stockholders pursuant to a Payment Default Purchase shall be purchased within five (5) business days after notice of such default is delivered to the Electing Stockholders and shall equal (A) the amount of funds necessary to cure the payment default under the Credit Agreement or the Indenture for the Senior Notes, as applicable, divided by (B) 2.174. The Electing Stockholders have the right to purchase shares of series B preferred stock at any time, in which case the aggregate number of shares of series B preferred stock to be purchased by the Electing Stockholders with respect to a particular fiscal quarter or review periods, as applicable, shall be reduced by the number of shares of series B preferred stock purchased prior to the expiration of such fiscal quarter or review period. The obligation of each Electing Stockholder to purchase shares of series B preferred stock shall expire on the earlier of (a) the date the Electing Stockholders purchase an aggregate of 6,669,734 shares of series B preferred stock; and (b) the date the obligations (other than contingent obligations and liabilities) of Parent and its subsidiaries under (i) the Credit Agreement and (ii) the Indenture dated as of May 11, 1998, among the Corporation and certain of its subsidiaries and PNC Bank, National Association as trustee (as amended) are terminated. LPA has committed to purchase, in accordance with the terms of the Securities Purchase Agreement, 6,662,879 shares of the series B preferred stock being offered and has received warrants to purchase 1,690,683 shares of Parent's class A common stock in connection with such commitment. In accordance with such commitment, in June 2003 LPA purchased 341,766 shares of series B preferred stock. Further, in accordance with their commitment to purchase shares of series B preferred stock in accordance with the terms of the Securities Purchase Agreement, in July 2003 the Electing Stockholders other than LPA purchased 570 shares of series B preferred stock. Accordingly, the contingent equity commitment from the stockholders of Parent has been reduced from $14,500,000 to $13,757,131. Management is instituting and executing a series of plans and actions designed to improve the Company's operating results and cash flows and to strengthen the Company's financial position. These plans include cost reductions resulting from continued academy closures, targeted reductions in operating expenses and optimization of the Company's real estate portfolio. The Company closed 25 schools in the first quarter and twelve schools in the second quarter of fiscal year 2003. Subsequent to the end of the second quarter, the company closed an additional ten schools in the third quarter and 26 schools in the fourth quarter of fiscal year 2003. Management believes that implementation of its plans to improve operations and cash flows, coupled with the amendment of the financial covenants contained in the Credit Agreement and the additional contingent equity commitments provided by LPA and other stockholders of Parent, if needed, will allow the Company to comply with its required financial covenants, meet its obligations as they come due and provide adequate liquidity to operate the business for the next twelve months. However, there can be no assurance in this regard. Furthermore, there can be no assurance that the Company's lenders will waive any future violations of the Credit Agreement that may occur or agree to future amendments of the Credit Agreement or that the Company can obtain additional funding from Parent beyond that as noted above or any other external source. Cash flows used by operating activities were $2.5 million during the twenty-eight weeks ended January 11, 2003 compared to cash flows used by operating activities of $4.4 million for the twenty-eight weeks ended January 12, 2002. The $1.9 million improvement in cash flows from operations were mainly due to decreased working capital amounts of $6.0 million, partially offset by increased restricted cash investments of $2.4 million and a $1.7 million increase in net losses, net of non-cash charges. Restricted cash investments represent cash deposited in an escrow account as security for the self-insured portion of the Company's workers compensation, general liability and automobile insurance coverage. 19 Cash flows used for investing activities were $3.5 million during the twenty-eight weeks ended January 11, 2003 as compared to cash flows used of $4.5 million during the same period ended on January 12, 2002. The $1.0 million decrease in cash flows used for investing activities was due to decreased capital expenditures. Cash flows from financing activities were $0.4 million during the twenty-eight weeks ended January 11, 2003, compared to cash flows from financing activities of $8.3 million during the same period ended January 12, 2002. The $7.9 million decrease in cash flows from financing activities was principally due to decreased revolver borrowings and prior year issuance of redeemable preferred stock. During the 28 weeks ended January 11, 2003, the Company opened one new Journey-based school, three Journey-based school annexes and one employer-based school. Employer-based schools are generally operated in facilities provided by the employer. The cost to open a new Journey school ranges from $1.0 million to $2.0 million. Total capital expenditures for the twenty-eight weeks ended January 11, 2003 and January 12, 2002 were $3.5 million and $5.0 million, respectively. The decrease in total capital expenditures is a result of decreased spending on maintenance and the development of new schools. The Company views all capital expenditures, other than those incurred in connection with the development of new schools, to be maintenance capital expenditures. Maintenance capital expenditures for the twenty-eight weeks ended January 11, 2003 and January 12, 2002 were $3.4 million and $4.9 million, respectively. In addition to maintenance capital expenditures, the Company expends additional funds to repair and maintain its facilities in good working condition. Such funds are expensed in the periods in which they are incurred. The amounts of such expenses for the twenty-eight weeks ended January 11, 2003 and January 12, 2002 were $7.9 million and $6.6 million, respectively. CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Predicting future events is inherently an imprecise activity and as such requires the use of judgment. Actual results may vary from estimates in amounts that may be material to the financial statements. See "Cautionary Statement Concerning Forward Looking Statements." For a description of the Company's significant accounting policies, see "Item 8. Financial Statements and Supplementary Data, Note 3. Summary of Significant Accounting Policies", included in the Company's Annual Report on Form 10-K for the year ended June 29, 2002 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS Under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions investors that any forward-looking statements or projections made by the Company, including those made in this document, are subject to risks and uncertainties that may cause actual results to differ materially from those projected or discussed in these forward looking statements. This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this report contain forward-looking statements that are based on management's current expectations, estimates and projections. Words such as "expects," "projects," "may," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of these words and similar expressions are intended to identify these forward-looking statements. Certain factors, including but not limited to those listed below, may cause actual results to differ materially from current expectations, estimates, projections and from past results. - Economic factors, including changes in the rate of inflation, business conditions and interest rates. - Operational factors, including the Company's ability to open and profitably operate Academies and the Company's ability to satisfy its obligations and to comply with the covenants contained in the Credit Agreement and the indenture. - Demand factors, including general fluctuations in demand for child care services and seasonal fluctuations. - Competitive factors, including: (a) pricing pressures primarily from local nursery schools and child care centers and other large, national for-profit child care companies, (b) the hiring and retention of trained and 20 qualified personnel, (c) the ability to maintain well-equipped facilities and (d) any adverse publicity concerning alleged child abuse at the Company's child care centers or at its Academies. - Governmental action including: (a) new laws, regulations and judicial decisions related to state and local regulations and licensing requirements, (b) changes in the Federal assistance and funding of child care services and (c) changes in the tax laws relating to La Petite's operations. - Changes in accounting standards promulgated by the Financial Accounting Standards Board, the Securities and Exchange Commission or the American Institute of Certified Public Accountants. - Changes in costs or expenses, changes in tax rates, the effects of acquisitions, dispositions or other events occurring in connection with evolving business strategies. - Management's ability to implement plans designed to improve the Company's operating results, cash flows and financial position and to improve the disclosure controls and procedures of the Company. No assurance can be made that any expectation, estimate or projection contained in a forward-looking statement can be achieved. Readers are cautioned not to place undue reliance on such statements, which speak only as of the date made. The Company undertakes no obligation to release publicly any revisions to forward-looking statements as the result of subsequent events or developments. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Derivative financial instruments were utilized by the Company in the management of its interest rate exposures. The Company does not use derivative financial instruments for trading or speculative purposes. Indebtedness as of January 11, 2003 consists of Senior Notes in the aggregate principal amount of $145 million, the term loan under the Credit Agreement in the aggregate principal amount of $35.8 million at January 11, 2003 and the revolving credit facility under the Credit Agreement providing for revolving loans to the Company in an aggregate principal amount (including swingline loans and the aggregate stated amount of letters of credit) of up to $25 million. Borrowings under the Senior Notes bear interest at 10% per annum. Borrowings under the Credit Agreement bear interest at a rate per annum equal (at the Company's option) to: (a) an adjusted London inter-bank offered rate ("LIBOR") not to be less than an amount equal to 2.50% per annum, plus a percentage based on the Company's financial performance; or (b) a rate equal to the higher of The Chase Manhattan Bank's published prime rate, a certificate of deposit rate plus 1% or the federal funds effective rate plus 1/2 of 1% plus, in each case, a percentage based on the Company's financial performance. The borrowing margins applicable to the Credit Agreement are currently 4.25% for LIBOR loans and 3.25% for ABR loans. The Senior Notes will mature in May 2008 and the Credit Agreement will mature in May 2006. Payments due under the term loan are $0.5 million in the remainder of fiscal year 2003, $1.0 million in fiscal year 2004, $5.5 million in fiscal year 2005 and $28.8 million in fiscal year 2006. The term loan is also subject to mandatory prepayment in the event of certain equity or debt issuances or asset sales by the Company or any of its subsidiaries in amounts equal to specified percentage of excess cash flow (as defined). A 1% increase or decrease in the applicable index rate would result in a corresponding interest expense increase or decrease of $0.5 million per year. To reduce the impact of interest rate changes on the term loan, the Company entered into interest rate collar agreements during the second quarter of fiscal year 1999. The collar agreements covered the LIBOR interest rate portion of the term loan, effectively setting maximum and minimum interest rates of 9.5% and 7.9%, respectively. On December 19, 2001, the interest rate collar agreement on the term loan was terminated effective as of January 28, 2002. Pursuant to the termination, the Company paid the counter party $0.8 million in satisfaction of an accrued mark-to-market obligation under the interest rate collar agreement. With the termination of the interest rate collar on the term loan, effective January 28, 2002, the Company has no remaining derivative instruments. ITEM 4. CONTROLS AND PROCEDURES The Company maintains a set of disclosure controls and procedures (the "Disclosure Controls") that are designed to ensure that information required to be disclosed in the reports and filed under the Securities Exchange Act of 1934, as amended ("Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. The Company's Disclosure Controls include, without limitation, those components of internal controls over financial reporting ("Internal Controls") that provide reasonable assurances that transactions are recorded as necessary to permit preparation of the Company's financial statements in accordance with generally accepted accounting principles. 21 Within the 90 days prior to the date of this Quarterly Report on Form 10-Q, the Company evaluated the effectiveness of the design and operation of its Disclosure Controls pursuant to Rule 15d-15 of the Exchange Act. This evaluation ("Controls Evaluation") was done under the supervision and with the participation of management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"). This evaluation resulted in the identification of certain material weaknesses in the Company's Internal Controls primarily related to: (a) the lack of timely preparation and accuracy of account reconciliations, (b) a lack of consistent understanding and compliance with Company's policies and procedures, and (c) the lack of stable financial management and accounting staff. These weaknesses contributed to Company's inability to complete the preparation of its Quarterly Report on Form 10-Q for the quarters ended October 19, 2002, January 11, 2003, and April 5, 2003 within the Exchange Act's prescribed time. While the Company is in the process of implementing a more efficient and reliable system of Disclosure Controls, the Company has, on an immediate basis, instituted interim compensating controls and procedures to ensure that information required to be disclosed in this Quarterly Report on Form 10-Q has been recorded, processed, summarized and reported to its senior management. These interim compensating controls and procedures include, but are not necessarily limited to, (i) communicating a tone from senior management regarding the proper conduct in these matters, (ii) strengthening the financial management organization and reporting process, (iii) requiring stricter account reconciliation compliance, (iv) improving accounting policies and procedures, (v) temporarily supplementing the Company's existing staff with additional contractor-based support to collect and analyze the information necessary to prepare the Company's financial statements, related disclosures and other information contained in the Company's SEC periodic reporting, (vi) increasing financial field audits of academies, (vii) increasing divisional financial staff accountability to ensure field adherence to financial policies and internal controls and (viii) commencing a comprehensive, team-based process to further assess and enhance the efficiency and effectiveness of the Company's Disclosure Controls, including establishing an informal Disclosure Committee comprised of internal and external professionals with financial, legal and operational expertise. Beyond instituting interim measures, the Company is committed to continuing the process of identifying, evaluating and implementing corrective actions where required to improve the effectiveness of its Disclosure Controls on an overall basis. This has included instituting improved processes and procedures as they relate to such critical functions as account reconciliations and the monthly closing process; improving the quality and oversight of the accounting staff; enhancing field level controls; developing metrics to monitor and identify accounting and operational issues and transferring knowledge from outside contractors to the Company's financial staff. The Company's Disclosure Controls, including the Company's Internal Controls, are designed to provide a reasonable level of assurance that the stated objectives are met. The Company's management, including the CEO and CFO, does not expect that the Company's Disclosure Controls or Internal Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Based upon the Controls Evaluation, the CEO and CFO have concluded that, to the best of their knowledge and after giving effect to the interim compensating controls and procedures discussed above, the Disclosure Controls are effective, at a reasonable level of assurance, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, during the period in which the Company's periodic reports are being prepared. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls, subsequent to the date of their evaluation, other than the continuing impact of the corrective actions discussed above. ****** 22 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is presently, and has been from time to time, subject to claims and litigation arising in the ordinary course of business. Management believes that none of the claims or litigation, of which it is aware, will materially affect the Company's financial condition or results of operations, although assurance cannot be given with respect to the ultimate outcome of any such actions. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On December 12, 2002, through Written Consent in Lieu of Meeting of the Stockholders, LPA Investment LLC, as holder of more than 66% of the common stock of LPA Holding Corp., (a) fixed the number of directors constituting the Board of Directors of LPA Holding Corp. to be seven and (b) approved the election of each of the following persons as directors: Stephen P. Murray, Mitchell Blutt, Kevin O'Brien, Robert E. King, Gary Graves, Terry Byers and Ronald Taylor. Also, on December 12, 2002, through Written Consent in Lieu of Meeting of the Stockholders, LPA Holding Corp., as the sole stockholder of La Petite Academy, Inc., (a) fixed the number of directors constituting the Board of Directors of La Petite Academy, Inc. to be seven and (b) approved the election of each of the following persons as directors: Stephen P. Murray, Mitchell Blutt, Kevin O'Brien, Robert E. King, Gary Graves, Terry Byers and Ronald Taylor. Except for the stockholders that executed these Written Consents, no other stockholders were solicited and accordingly, no votes against or withheld were received on the foregoing matter. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a. Exhibits required by Item 601 of Regulation S-K: 99.1 Section 906 certification of Chief Executive Officer 99.2 Section 906 certification of Chief Financial Officer b. Reports on Form 8-K: On November 5, 2002, the Company filed a Current Report on Form 8-K reporting that it had received another limited waiver of non-compliance from its lenders under the Credit Agreement through November 15, 2002. On November 20, 2002, the Company filed a Current Report on Form 8-K reporting that it had received another limited waiver of non-compliance from its lenders under the Credit Agreement through December 2, 2002. On December 9, 2002, the Company filed a Current Report on Form 8-K reporting that it had received another limited waiver of non-compliance from its lenders under the Credit Agreement through December 16, 2002. On December 20, 2002, the Company filed a Current Report on Form 8-K reporting that (a) Gary A. Graves has been promoted from Chief Operating Officer to Chief Executive Officer and President and that Judith A. Rogala resigned her position as President and Chief Executive Officer of the Company to pursue other business opportunities in her home state of California and (b) it had received another limited waiver of non-compliance from its lenders under the Credit Agreement through January 30, 2003. ITEMS 2, 3 AND 5 ARE NOT APPLICABLE AND HAVE BEEN OMITTED. 23 SIGNATURE Pursuant to the requirements 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. LPA HOLDING CORP. Dated August 13, 2003 /s/ Michael F. Czlonka ------------------------------------ By: Michael F. Czlonka Chief Financial Officer and duly authorized representative of the registrant 24 SIGNATURE Pursuant to the requirements 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. LA PETITE ACADEMY, INC. Dated August 13, 2003 /s/ Michael F. Czlonka ------------------------------------ By: Michael F. Czlonka Chief Financial Officer and duly authorized representative of the registrant 25 CERTIFICATIONS I, Gary A. Graves, certify that: 1. I have reviewed this quarterly report on Form 10-Q of LPA Holding Corp. and La Petite Academy, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the LPA Holding Corp. and La Petite Academy, Inc. as of, and for, the periods presented in this quarterly report; 3. LPA Holding Corp.'s and La Petite Academy, Inc.'s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for LPA Holding Corp. and La Petite Academy, Inc. and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrants, including consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of LPA Holding Corp.'s and La Petite Academy, Inc.'s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; and 5. LPA Holding Corp.'s and La Petite Academy, Inc.'s other certifying officer and I have disclosed, based on our most recent evaluation, to LPA Holding Corp.'s and La Petite Academy, Inc.'s auditors and the audit committee of LPA Holding Corp.'s and La Petite Academy, Inc.'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 LPA Holding Corp. and La Petite Academy, Inc.'s ability to record, process, summarize and report financial data and have identified for LPA Holding Corp. and La Petite Academy, Inc.'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 LPA Holding Corp.'s and La Petite Academy, Inc.'s internal controls; and 6. LPA Holding Corp.'s and La Petite Academy, Inc.'s other certifying officer and I have indicated in this quarterly 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. August 13, 2003 /s/ Gary A. Graves ------------------------------- By: Gary A. Graves Chief Executive Officer 26 CERTIFICATIONS I, Michael F. Czlonka, certify that: 1. I have reviewed this quarterly report on Form 10-Q of LPA Holding Corp. and La Petite Academy, Inc.; 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the LPA Holding Corp. and La Petite Academy, Inc. as of, and for, the periods presented in this quarterly report; 4. LPA Holding Corp.'s and La Petite Academy, Inc.'s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for LPA Holding Corp. and La Petite Academy, Inc. and have: a) Designed such disclosure controls and procedures to ensure that material information relating to the registrants, including consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) Evaluated the effectiveness of LPA Holding Corp.'s and La Petite Academy, Inc.'s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); c) Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; and 5. LPA Holding Corp.'s and La Petite Academy, Inc.'s other certifying officer and I have disclosed, based on our most recent evaluation, to LPA Holding Corp.'s and La Petite Academy, Inc.'s auditors and the audit committee of LPA Holding Corp's. and La Petite Academy, Inc.'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 LPA Holding Corp. and La Petite Academy, Inc.'s ability to record, process, summarize and report financial data and have identified for LPA Holding Corp.'s and La Petite Academy, Inc.'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 LPA Holding Corp.'s and La Petite Academy, Inc.'s internal controls; and 6. LPA Holding Corp.'s and La Petite Academy, Inc.'s other certifying officer and I have indicated in this quarterly 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. August 13, 2003 /s/ Michael F. Czlonka --------------------------------- By: Michael F. Czlonka Chief Financial Officer 27

LPA HOLDING CORP 10-Q