Part I. Financial Information

Item 1. Consolidated Financial Statements

Public Company, Inc.
Consolidated Statements of Operations (Unaudited)
(in millions, except per share data)

See notes to consolidated financial statements (unaudited).

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Public Company, Inc.
Consolidated Balance Sheets (Unaudited)
(in millions, except share and per share amounts)

See notes to consolidated financial statements (unaudited).

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Public Company, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in millions)

See notes to consolidated financial statements (unaudited).

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Public Company, Inc.
Notes to Consolidated Financial Statements (Unaudited)

Note 1. Basis of Presentation and Significant Accounting Policies

     Business. The Company operated 102 lemonade stands as of March 1, 2003, primarily in the Tallahassee metropolitan area.

     Basis of Presentation. The unaudited consolidated financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, the consolidated financial statements included herein reflect all adjustments which are of a normal and recurring nature and are necessary to present fairly the results of operations and financial position of the Company. This report should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended June 1, 2003.

     Principles of Consolidation. The consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are 100% owned. All intercompany transactions have been eliminated in consolidation.

     Stock-Based Compensation. The Company adopted the Financial Accounting Standards Board (the “FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, which amends SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation plans; however, it also allows an entity to continue to measure compensation expense for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees.” Under the fair value method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Under the intrinsic value based method, compensation expense is the excess, if any, of the quoted market price of the stock at the grant date, or other measurement date, over the amount an employee must pay to acquire the stock. The Company has elected to account for its stock-based employee compensation plans under APB Opinion No. 25 with pro forma disclosures of net earnings (loss) and net earnings (loss) per share, as if the fair value based method of accounting defined in SFAS No. 123 had been applied.

     The pro forma disclosure of net earnings (loss) and net earnings (loss) per share as if the fair value based method of accounting, as defined in SFAS No. 123, had been applied is as follows (in millions, except per share amounts):

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Note 2. Selling, General and Administrative Expenses (“SG&A”)

     SG&A in the 39 weeks ended March 1, 2003 includes an $8.1 million charge related to the Company’s labor buyout initiative and corporate headcount reduction program initiated and completed during the first and second quarters of fiscal 2003 in order to reduce the Company’s labor costs. The aforementioned $8.1 million charge included a $2.0 million charge funded by the Company’s qualified pension plan. Of the $8.1 million charge, $7.3 million is attributable to the cost of a voluntary early retirement program and $0.8 million is attributable to severance and termination benefits. As of March 1, 2003, $0.9 million of benefits related to the labor buyout initiative and corporate headcount reduction program remain to be paid out over time. SG&A in the 39 weeks ended March 1, 2003 was net of a $13.7 million gain from the disposition of real estate related to the assignment of two real estate leases.

Note 3. Long-Term Debt

     Long-term debt is comprised of the following (in millions):

     On September 19, 2003, the Company issued an additional $100 million aggregate principal amount of unregistered 8¾% Senior Subordinated Notes, due 2012 (the “Additional Notes”) at a price equal to 102.5% of the principal amount. The proceeds from the issuance of the Additional Notes were used to repay $102 million of our term loan. As part of this refinancing, the Company terminated and settled $100 million of its $150 million interest rate zero-cost collar on its term loan (see Note 5). During the third quarter, the Company commenced an exchange offer (the “Exchange Offer”) pursuant to which all of the Additional Notes were to be exchanged for $100 million aggregate principal amount of the Company’s registered 8¾% Senior Subordinated Notes, due 2012. The Exchange Offer was scheduled to expire on December 8, 2003. As of close of business on December 8, 2003, $98 million of Additional Notes, representing 98% of such securities outstanding, were validly tendered. The Company has announced that it is extending the Exchange Offer until December 12, 2003.

     Proceeds from the disposition of real estate during the second quarter of fiscal 2003 were used to repay $18 million of our term loan. The Company was in compliance with all debt covenants as of March 1, 2003.

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Note 4. Interest Expense

     Interest expense is comprised of the following (in millions):

     Interest expense in the third quarter and nine-month period of fiscal 2003 includes a derivative settlement charge of $2.8 million related to the termination and settlement of $100 million of the Company’s interest rate zero-cost collar and the write off of deferred financing costs of $1.4 million related to the repayment of $102 million of our term loan from the proceeds of borrowings under the Additional Notes. Interest expense in the nine-month period of fiscal 2003 also includes the write off of deferred financing costs of $0.5 million related to the repayment of $18 million of our term loan and an interest rate increase as a result of the July 28, 2003 amendment to the credit agreement.

Note 5. Derivative Instruments and Hedging Activities

     As part of its overall strategy to manage the level of exposure to interest rate risk, in July 2001, the Company entered into a three-year interest rate zero-cost collar (the “Collar”) on a notional amount of $150 million of our term loan. After giving effect to the July 28, 2003 amendment to the credit agreement, the Collar had an effective cap with a strike of 10.5% and a floor with a strike of 8.89%. After giving effect to the September 19, 2003 repayment of $102 million of our term loan from proceeds of the issuance of the Additional Notes and the related termination and settlement of $100 million of the Collar, the Company had a notional amount of $50 million remaining on the Collar. At inception, this derivative was designated, and continues to qualify, as a perfectly-effective cash-flow hedge of the Company’s forecasted variable interest rate payments due on our term loan. The Company does not hold or issue derivative financial instruments for speculative or trading purposes but rather to hedge against the risk of rising interest rates. This derivative is recorded on the balance sheet at fair value, included in other noncurrent liabilities, with the related unrealized gain (loss), net of tax, recorded in stockholders’ equity and classified as accumulated other comprehensive loss. The fair value of the derivative is based on its market value as determined by an independent party. However, considerable judgment is required in developing estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could settle for in a current market exchange. The use of different market assumptions or methodologies could affect the estimated fair value. The counterparty to this derivative transaction is a major financial institution. The Company recorded a pre-tax charge of $2.8 million ($1.7 million after tax) related to the termination and settlement of $100 million of the Collar in its statement of operations in the third quarter of fiscal 2003.

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Note 6. Comprehensive Earnings (Loss)

     Comprehensive earnings (loss) is comprised of the following (in millions):

Note 7. Guarantees

     In March 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN No. 45 elaborates on the existing disclosure requirements for most guarantees, including loan guarantees such as standby letters of credit. It also clarifies that at the time a company issues a guarantee, the company must recognize an initial liability for the fair value, or market value, of the obligation it assumes under the guarantee and must disclose that information in its interim and annual financial statements. The provisions related to recognizing a liability at inception of the guarantee for the fair value of the guarantor’s obligations do not apply to guarantees accounted for as derivatives. The initial recognition and measurement provisions apply on a prospective basis to guarantees issued or modified after December 31, 2002.

     In the normal course of business, the Company has assigned to third parties various leases related to former businesses that the Company sold as well as former operating Public Co. lemonade stands (the “Assigned Leases”). When the Assigned Leases were assigned, the Company generally remained secondarily liable with respect to these lease obligations. As such, if any of the assignees were to become unable to continue making payments under the Assigned Leases, the Company could be required to assume the lease obligation. As of March 1, 2003, 67 Assigned Leases remain in place. Assuming that each respective assignee became unable to continue to make payments under an Assigned Lease, an event the Company believes to be remote, management estimates its maximum potential obligation with respect to the Assigned Leases to be approximately $109 million, which could be partially or totally offset by reassigning or subletting such leases. The Company has recognized a liability on its consolidated balance sheet as of March 1, 2003 of approximately $3.0 million, which represents the fair value of certain guarantees attributable to the Company’s secondary liability in connection with Assigned Leases assigned after December 31, 2002.

Note 8. Insurance Claim

     On August 14 and 15, 2003, 76 of the Company’s 143 stores were affected by a power outage throughout the Northeast. The Company has settled its insurance claim for all product losses, incremental expenses and business interruption incurred during the power outage, less the policy’s $250,000 deductible. As of March 1, 2003, an insurance claim receivable of $4.3 million was included in other current assets on the consolidated balance sheet. Subsequent to March 1, 2003, the Company collected $3.2 million and expects to collect the remaining $1.1 million related to such insurance claim receivable.

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Note 9. Cumulative Effect of An Accounting Change – Fiscal 2002

     The Company adopted, as of the beginning of fiscal 2002, Emerging Issues Task Force (“EITF”) Issue No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor”. In adopting EITF Issue No. 02-16, vendor payments related to advertising reimbursements are recorded as a reduction of cost of goods sold when both the required advertising is performed and the inventory is sold; prior to this change, these reimbursements were recorded as a reduction of advertising expense when the required advertising was performed. As a result, the Company recorded a charge, as of the first quarter of fiscal 2002, of $0.6 million, net of an income tax benefit of $0.4 million, for the cumulative effect of an accounting change.

Note 10. Condensed Consolidating Financial Information

     The following represents the condensed consolidating financial statements of Public Co. and its 100% owned guarantor and nonguarantor subsidiaries. The guarantor subsidiaries are comprised of six 100% owned entities, including Public Co.’s distribution subsidiary, and guarantee on a full and unconditional and joint and several basis, the senior subordinated notes. The nonguarantor subsidiaries are comprised of four 100% owned single-purpose entities. Each of those entities owns the real estate on which a lemonade stand leased to Public Co. is located.

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