EFTA02707575

Knowledge Universe Education L.P. and Subsidiaries Consolidated Financial Statements as of and for the Years Ended December 31, 2011 and 2010, and Independent Auditors' Report EFTA_R1_02106168 EFTA02707575 KNOWLEDGE UNIVERSE EDUCATION L.P. AND SUBSIDIARIES TABLE OF CONTENTS Page INDEPENDENT AUDITORS' REPORT 1 CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31,2011 AND 2010: Balance Sheets 2-3 Statements of Operations 4 Statements of Partners' Equity 5 Statements of Cash Flows 6-7 Notes to Consolidated Financial Statements 8-35 EFTA_R1_02106169 EFTA02707576 Deloitte 6 Touche LIP Suite 200 350 South Grand Avenue Los Angeles. CA 90071-3462 USA Tel +1 213 688 0800 Fax: +1 213 6800100 wwwdeloitte can INDEPENDENT AUDITORS' REPORT To the Board of Directors of KUE Management Inc., General Partner of Knowledge Universe Education L.P. and Subsidiaries Santa Monica, California We have audited the accompanying consolidated balance sheets of Knowledge Universe Education L.P. and subsidiaries (the "Company") as of December 31, 2011 and 2010, and the related consolidated statements of operations, partners' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company at December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. --bdotiO 53.7rueite----ZLP June 2.)C 21112 Membet ad Deloine -ouch. EFTA_R1_02106170 EFTA02707577 KNOWLEDGE UNIVERSE EDUCATION L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2011 AND 2010 (Dollars in thousands) 2011 2010 ASSETS CURRENT ASSETS: Cash and cash equivalents S 277,436 S 148,452 Short-term marketable securities 40,986 198,953 Accounts receivable, net 72,429 83,446 Income tax receivable 4,184 5,739 Deferred income taxes 49,658 23,046 Assets held for sale 238 10,785 Prepaid expenses and other current assets 44,932 40,774 Assets related to discontinued operations 86 Total current assets 489,863 511,281 PROPERTY AND EQUIPMENT, Net 1,018,394 1,008,204 LONG-TERM INVESTMENTS 136,634 223,936 GOODWILL 391,676 388,887 OTHER INTANGIBLE ASSETS, Net 130,376 132,826 ASSETS HELD FOR SALE 18,814 OTHER ASSETS 46,953 59,379 TOTAL $2,213,896 $2,343,327 (Continued) - 2 - EFTA_R1_02106171 EFTA02707578 KNOWLEDGE UNIVERSE EDUCATION L.P. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2011 AND 2010 (Dollars in thousands) 2011 2010 LIABILITIES AND EQUITY CURRENT LIABILITIES: Accounts payable S 34,876 $ 25,920 Current portion of self-insurance 24,078 22,427 Income taxes payable 206 392 Accrued property and other taxes 12,135 12,763 Deferred revenue 59,561 50,547 Accrued interest 8,384 8,622 Accrued compensation and related expenses 42,094 45,428 Other accrued liabilities 59,495 52,830 Current portion of long-term debt 21,745 17,970 Current portion of capital lease obligations 3,105 3,073 Current portion of liabilities associated with assets held for sale 29,964 Total current liabilities 265,679 269,936 LONG-TERM DEBT 1,000,943 1,121,605 CAPITAL LEASE OBLIGATIONS 12,237 18,129 DEFERRED INCOME TAXES 68,699 85,336 LIABILITIES ASSOCIATED WITH ASSETS HELD FOR SALE 551 OTHER LONG-TERM LIABILITIES 90,031 95,281 Total liabilities 1,437,589 1,590,838 EQUITY: Partners' equity: Common partner units — 2,239,551 units issued and outstanding 757,383 757,383 Accumulated other comprehensive income 31,014 104,261 Accumulated deficit (22,380) (120,326) Total partners' equity attributable to Knowledge Universe Education L.P. Partners 766,017 741,318 Noncontrolling interests 10,290 11,171 Total equity 776,307 752,489 TOTAL $2,213,896 $2r 343i 327 ...--- See notes to consolidated financial statements. (Concluded) - 3 - EFTA_R1_02106172 EFTA02707579 KNOWLEDGE UNIVERSE EDUCATION L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 (Dollars in thousands) 2011 2010 REVENUE $1,621,150 $1,654,502 COST OF REVENUE 1,179,475 1,241,369 GROSS MARGIN 441,675 413,133 OPERATING EXPENSES (INCOME): General and administrative 286,749 236,839 Depreciation 117,858 112,249 Amortization of intangibles 5,987 7,679 Other 3,426 (106) Total operating expenses, net 414,020 356,661 INCOME FROM OPERATIONS 27,655 56,472 NONOPERATING EXPENSE (INCOME): Losses (gains) on investments 8,570 (4,540) Interest expense 81,639 92,903 Interest income (11,060) (19,895) Other income, nct (1,542) (1,168) Nonoperating expense, net 77,607 67,300 LOSS BEFORE INCOME TAXES (49,952) (10,828) INCOME TAX BENEFIT 39,345 24,375 (LOSS) INCOME FROM CONTINUING OPERATIONS (10,607) 13,547 GAIN FROM DISCONTINUED OPERATIONS 110,455 18,159 NET INCOME 99,848 31,706 NET (INCOME) LOSS ATTRIBUTABLE TO NONCONTROLLING INTERESTS (1,902) 2,086 NET INCOME ATTRIBUTABLE TO KNOWLEDGE UNIVERSE EDUCATION L.P. PARTNERS S 97,946 $ 33,792 See notes to consolidated financial statements. - 4 - EFTA_R1_02106173 EFTA02707580 KNOWLEDGE UNIVERSE EDUCATION L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 (Dollars in thousands) Knowledge Universe Education L.P. Nemo/tolling Interests Total Equity Comprehensive Income Common Partner Units Amount Accumulated Deficit Accumulated Other Comprehermthe Income Total Fergus's' Equity BALANCE - - January 1, 2010 2,239.551 5757,383 5(154,118) S 52.160 5655,425 S 4,967 5660.392 Nei income (loss) 33,792 31,792 (2,086) 31,706 S 31.706 Other comprehensive income: Foreign currency translation adjustments 1,195 1,195 294 1,489 1,489 Nmicomrolling interest related to CIS acquisition 7,996 7.996 Unrealized gain on investments 50,906 50,906 50,906 50,906 Total comprehensive income S 84.101 BALANCE — December 31, 2010 2,239,551 757,383 (120,326) 104,261 741.318 11,171 752,489 Net income 97,946 97,946 1,902 99.848 S 99,848 Other comprehensive income (loss): Foreign currency translation adjustments (129) (129) (630) (759) (759) Noncontrolling interest related to sale of KUE Digital Inc. (2,153) (2,153) Unrealized loss on investments— K12 Inc. (82,143) (82,143) (82,143) (82,143) Reclassification of loss on investment to net income 9,025 9,025 9,025 9.025 Total comprehensive income S 25.971 BALANCE-- December 31, 2011 2239.551 5757,383 S (22.380) S 31,014 $766,017 510.290 5776.307 See notes to consolidated financial statements. PLI.90LZO—L8—Vid3 - 5 - EFTA02707581 KNOWLEDGE UNIVERSE EDUCATION L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 (Dollars in thousands) OPERATING ACTIVITIES: 2011 2010 Net income S 99,848 $ 31,706 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 105,645 106,966 Impairment of fixed assets 19,254 11,966 Stock-based compensation (3,348) 212 Loss (gain) on sale of property and equipment and software rights 662 (3,196) Loss (gain) on sales of debt securities 1,603 (III) Losses on sale of investments 4,412 Gain on sale of discontinued operations (110,397) (40,258) Unrealized gain on marketable securities and derivatives (3,633) (5,183) Return on equity method investments (22) Amortization of deferred financing and other costs 4,746 3,922 Interest expense capitalized as long-term debt 210 767 Foreign currency exchange gain (559) (1,337) Changes in: Accounts receivable 10,844 6,088 Prepaid expenses and other current assets (6,506) (162) Income tax receivable (2,724) 6,157 Assets held for sale (101) 38 Deferred income taxes (39,789) (18,775) Other assets 1,311 (2,988) Accounts payable 19 18,497 Accrued expenses and other liabilities 26,994 14,740 Net cash used in discontinued operations (5,505) (15,512) Net cash provided by operating activities 102,964 113.537 INVESTING ACTIVITIES: Purchases of property and equipment and software costs (129,676) (80,908) Proceeds from sale of property and equipment 970 15,821 Proceeds from sale of investments 119,385 (Increase) decrease in restricted cash 9,935 (4,856) Receipts on long-term note receivable and tax refunds credited to goodwill 9 18 Investment in equity method investment (3,514) Purchases of short-term marketable securities (423,082) (1,150,123) Proceeds from sales of short-term marketable securities 579,062 1,242,122 Acquisitions of businesses (11,766) (6,561) Net cash provided by investing activities 144,837 11,999 (Continued) - 6 - EFTA_R1_02106175 EFTA02707582 KNOWLEDGE UNIVERSE EDUCATION L.P. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 (Dollars in thousands) FINANCING ACTIVITIES: 2011 2010 Payments on long-term debt and capital leases (196,102) S (158,869) Proceeds from long-term debt 77,285 64,867 Proceeds from related-party borrowing 2,146 Debt issuance costs (2,111) Net cash used in financing activities (118,817) (93,967) EFFECT OF EXCHANGE RATES ON CASH 23 NET INCREASE IN CASH 128,984 31,592 CASH AND CASH EQUIVALENTS — Beginning of year 148,452 116,860 CASH AND CASH EQUIVALENTS — End of year S 277,436 S 148,452 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid for interest $ 99,455 $ 87,239 Cash paid for income taxes, net of refunds S 2,608 $ 8,489 NONCASH INVESTING AND FINANCING ACTIVITIES: Purchases of property and equipment included in current liabilities 643 Assets acquired under capital leases $ 713 S 5,319 See notes to consolidated financial statements. -7- (Concluded) EFTA_R1_02106176 EFTA02707583 KNOWLEDGE UNIVERSE EDUCATION L.P. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2010 1. GENERAL Knowledge Universe Education L.P. was formed in April 2006 as a Cayman Islands exempted limited partnership. Knowledge Universe Education L.P. is a holding company, whose subsidiaries specialize in education in the preschool to 12th grade segment, mainly in the United States, Asia, and the United Kingdom (collectively, KUE L.P. or the "Company"). The major subsidiaries are as follows: Knowledge Universe Education Holdings Inc. — Knowledge Universe Education Holdings Inc. (KUEH) was formed in May 2011 as a holding company for the early childhood education operations of its wholly owned subsidiary, Knowledge Universe Education LLC (KUE LLC) formerly, Knowledge Learning Corporation (KLC) and related subsidiaries and offers early childhood education programs to children aged six weeks through 12 years. These include toddler care, preschool and kindergarten classes, and before- and after-school programs. KUE LLC provides education and care programs within the following three categories: Early Childhood Care and Education — KUEH provides early childhood care and education services, generally marketed under the names of KindcrCarc Learning Centers, Knowledge Bcginnings, Cambridge Schools, and The Grove School. These services are provided through 1,618 community centers with a licensed capacity of 215,535 in 38 states. Children's Creative Learning Centers — Children's Creative Learning Centers provides employer- sponsored early childhood care and education services, as well as back-up care, through 96 centers, eight before- and after-school sites, and four game-day sites for professional sport teams. These centers and sites have a licensed capacity of 12,055 in 22 states and the District of Columbia. CCLC operates in partnership with employer sponsors under a variety of arrangements, such as discounted rent, enrollment guarantees, or an arrangement whereby the center is managed by CCLC in return for a management fee. Champions — KUEH provides customized before- and after-school educational enrichment and recreational programs for school-age and preschool children in partnership with elementary schools under the Champions brand. Champions offers approximately 405 education and enrichment programs for school-age children in 17 states and the District of Columbia. These programs primarily operate at preschool and elementary school facilities. KC Distance Learning, Inc. — KC Distance Learning, Inc. (KCDL) sells middle and high school level courses via online and correspondence formats and provides related instructional services directly to private students, as well as to cyber and traditional schools and school districts. In July 2010, the Company sold its ownership in KCDL in exchange for shares of preferred stock in K12 Inc. KCDL's operating results have been classified as discontinued operations (see Note 4). Knowledge Universe PTE Ltd. — Knowledge Universe PTE Ltd. is a Singapore holding company for the early childhood education operations of its wholly owned subsidiaries in Asia. Its primary operations include: Pat's Schoolhouse, Learning Vision, Asian International College, Learning Horizon, Global Educare, The Odyssey Creative Leaming Centre, Canadian International Schools, and Brighton Montessori Centres. - 8 - EFTA_R1_02106177 EFTA02707584 Busy Bees Group Limited — The Company owns approximately 85% of Busy Bees Group Limited ("Busy Bees"). Busy Bees is the UK's largest provider of care and education for children up to school age (five years age). It operates more than 122 child care centers across the UK with a capacity of more than 11,000 children. The nurseries provide complete child care services with child development programs and curricula designed to develop creativity, individuality, and self-confidence in the children. Global Educare Sdn Bhd — The Company acquired Global Educare Sdn Bhd ("Global") on May 14, 2010. The principal activity of Global is providing child care and educational services in Malaysia. Canadian International School Pre Ltd — The Company acquired a 60% joint venture interest in Canadian International School Pte Ltd. (CIS) on June 5, 2010. The principal activity of CIS is providing primary and secondary education services. CIS has constructed a new 463,000 square foot "Lakeside campus" at Jurong West in Singapore. KUE Digital International LLC — KUE Digital International LLC (KUED) is a holding company for early-stage ventures that provide technology products and services in the education industry. The Company owned approximately 88% of KUED at December 31, 2010. KUED provides comprehensive online educational resources for students at all levels, teachers in grades K-12 and college, companies, schools, and school districts requiring administrative support for education and training programs. In January 2011, KUED sold its subsidiaries. The related assets and liabilities are reflected in assets held for sale as of December 31, 2010, and the operations arc reflected in discontinued operations for the years ended December 31, 2011 and 2010 (see Note 4). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation — The consolidated financial statements include the accounts of KUE L.P. and its wholly owned subsidiaries, KUEH, Knowledge Universe Education Inc. (KUE Inc.), KCDL, Knowledge Universe Holdings Cooperatief U.A. (KUHC), Learning Group LLC, Knowledge Universe Online Services Inc., and its majority owned subsidiaries KUED and Busy Bees. All intercompany balances and transactions arc eliminated in consolidation. The information presented herein is for the calendar years ended December 31, 2011 and 2010, with the exception of KUEH and KUHC. The information included herein reflects activity for the 52 weeks ended December 31, 2011, and January 1, 2011. For simplicity, all information herein is referred to as relating to the years ended December 31, 2011 and 2010. The noncontrolling interests represent the 12% noncontrolling ownership in KUED as of December 31, 2010, and the 15% noncontrolling ownership in Busy Bees and the 40% noncontrolling interest in CIS as of December 31, 2011 and 2010. Use of Estimates — The consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America. The preparation thereof requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared based on the most current and best available information and actual results could differ from those estimates. The most significant estimates underlying the consolidated financial statements include the allowance for doubtful accounts; long-lived assets, other intangible assets, and goodwill valuations and any resulting impairment; self-insurance obligations; valuation of stock appreciation rights; and recognition and measurement of uncertain tax positions and valuation allowances against deferred tax assets. - 9 - EFTA_R1_02106178 EFTA02707585 Revenue Recognition — The recognition of revenues meets the following criteria: the existence of an arrangement through an enrollment agreement, the rendering of child care and tutoring services, an age- specific tuition rate and/or fees, and probable collection. Tuition, fees, and other income are recognized as the related services arc provided. Payments for these types of services may be received in advance of services being rendered, in which case the revenue is deferred and recognized over the appropriate service period. Deferred revenue for nonrefundable registration fees is recognized over the average enrollment period, not to exceed 12 months. The Company's primary source of revenue is tuition paid by parents and supplemented, in some cases, by employer sponsors and government agencies. Revenues also include management fees paid by employer sponsors. In addition to tuition revenue and management fees, the Company receives fees for registration and other ancillary services. Cash and Cash Equivalents — Cash and cash equivalents include interest-earning securities that mature within three months or less from the date purchased. Restricted Cash — At December 31, 2011 and 2010, restricted cash of $16.0 million and $25.9 million, respectively, is included within other assets in the Company's consolidated balance sheets. Restricted cash of S7.7 million and $17.4 million at December 31, 2011 and 2010, respectively, is related to debt service requirements for properties sold that are held as collateral under the collateralized mortgaged- backed security (CMBS) facility; consisting of a $650.0 million mortgage loan and $50.0 million senior mezzanine loan (see Note 12). Restricted cash of $8.3 million at December 31, 2011 and 2010, is held as collateral on the Company's foreign currency hedge (see Note 14). Concentration of Credit Risk — Financial instruments that subject the Company to credit risk consist primarily of cash and cash equivalents and trade receivables. Cash and cash equivalents are placed with high-credit-quality financial institutions. Concentration of credit risk with respect to trade receivables is generally diversified due to the large customer base and its geographic dispersion. The Company performs ongoing credit evaluations of its customers and maintains an allowance for doubtful accounts. Accounts Receivable — Accounts receivable are composed primarily of tuition and reimbursable expenses due from government agencies, parents, and employers. Accounts receivable arc presented at estimated net realizable value. The Company uses estimates in determining the ability to collect accounts receivable and must rely on its evaluation of historical experience, specific customer issues, governmental funding ►evels, and current economic trends to arrive at appropriate reserves. Investments — The Company classifies investments in debt and equity securities as trading, held to maturity, or available for sale in accordance with Accounting Standards Codification (ASC) 320-10, Investments — Debt and Equity. Available-for-sale securities include debt and equity securities, which the Company records at fair value, with unrealized gains and losses reported as part of accumulated other comprehensive income in the consolidated balance sheets. Trading securities include investments in short-term corporate debt securities. Unrealized gains and losses on these short-term marketable securities are included in nonoperating income in the consolidated statements of operations. - 10 - EFTA_R1_02106179 EFTA02707586 Our investments at December 31, 2011 and 2010, consisted of the following (in thousands): 2011 2010 Available-for-sale equity securities — K-12 Inc. Trading — short-term marketable securities Equity method investments Total investments Less short-term marketable securities Total long-term investments S 133,098 $ 212,516 40,986 198,953 3,536 11,420 177,620 422,889 40,986 198,953 $ 136 634 5 223,936 Our investments in available-for-sale equity securities and trading short-term marketable securities at December 31, 2011 and 2010, consisted of the following (in thousands): 2011 2010 Gross Estimated Gross Estimated Unrealized Fair Unrealized Fair Cost Gain (Loss) Value Cost Gain (Loss) Value Available for sale: Equity securities — K-12 Inc. $101,465 531,633 5133,098 S 98,866 5113,650 $212,516 Trading — short-term marketable securities 41,879 (893) 40,986 200,092 (1,139) 198,953 Property and Equipment — Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on a straight-line basis over the useful lives of the assets or, in the case of leasehold improvements, the lesser of the term of the related lease or the useful lives of the improvements. A summary of estimated useful lives is as follows: Buildings and leaseholds 5-50 years Land improvements 2-15 years Furniture, fixtures, and equipment 2-10 years Building and leasehold improvements 2-60 years Maintenance, repairs, and minor refurbishments arc expensed as incurred. Assets Held for Sale — Assets held for sale include centers that are being actively marketed and are considered probable of being sold within one year. Such assets are recorded at the lower of their carrying amount or fair value less cost to sell. Long-lived assets are not depreciated while classified as held for sale. Also included in assets held for sale as of December 31, 2010, are the assets of KUED (see Note 4). There were no assets held for sale as of December 31, 201 I . Goodwill — Goodwill represents the excess of the cost over the fair value of the identifiable net assets of businesses acquired. The Company tests its goodwill for impairment on an annual basis, or more frequently, if circumstances indicate reporting unit carrying values exceed their fair values. Fair value is estimated by projecting future discounted cash flows from the reporting unit in addition to other quantitative and qualitative analyses. If the carrying amount of goodwill exceeds the implied estimated fair value (based on discounted cash flows), an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value. There was no impairment of goodwill in fiscal years 2011 or 2010. EFTA_R1_02106180 EFTA02707587 Other Intangible Assets — Other intangible assets consist of customer lists, contract rights, accreditations, proprietary curricula, covenants not to compete, trade names, and trademarks. Other intangible assets subject to amortization are amortized on a straight-line basis over their estimated useful lives. The Company reviews and evaluates the remaining useful lives of such assets if events or changes in circumstances require impairment testing and/or a revision to the remaining period of amortization. Any such impairment analysis is based on a comparison of the carrying values to expected future cash flows. Other intangible assets with indefinite useful lives are tested for impairment on an annual basis, or more frequently, if circumstances indicate the carrying values exceed their fair values. If the carrying amount exceeds the implied estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value. There was no impairment of other intangible assets in fiscal years 2011 or 2010. Long-Lived Assets — The Company reviews and evaluates its long-lived assets, other than goodwill and other intangible assets, for impairment when events or changes in circumstances indicate that the carrying value of assets may not be recoverable through future undiscounted cash flows. Any impairment is measured as the amount by which the carrying values of such assets exceed their fair value (based on discounted cash flows). Impairment losses related to child care center property and equipment totaled $19.3 million for 2011 and $10.2 million for 2010. The impairment charges are included as a component of depreciation expense in the consolidated statements of operations. Financial Instruments — In accordance with reporting and disclosure requirements of ASC 825-10, Financial Instruments, the Company calculates the fair value of financial instruments and includes this information in the Company's notes to consolidated financial statements when the fair value is different than the book value of those financial instruments. When fair value is equal to book value, no disclosure is made. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued compensation, and related expenses and other accrued liabilities, excluding derivatives, approximate fair value due to the short-term nature of these assets and liabilities. The Company's derivatives include an interest rate swap agreement, an interest rate cap agreement, and a four-year forward currency hedge based on the British pound. These instruments are recognized in the consolidated balance sheets at fair value. None of these instruments have been designated as a hedge of specific underlying interest rate exposure and marked to market with the resulting gains or losses recognized as a component of interest expense in the consolidated statement of operations. Changes in the foreign currency hedge are included as a component of gains and losses on investments. Deferred Financing Costs — Included in other assets are deferred financing costs incurred in connection with the issuance of debt. Deferred financing costs are amortized over the lives of the related debt facilities using a method that approximates the effective interest method. Deferred financing costs are recorded in other assets (see Note 11). Income Taxes — The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax liabilities and assets are recognized for the expected future consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is established to reduce the amount of that deferred tax asset to the amount, more likely than not, to be recognized. Uncertain tax positions and the related interest and penalties are recognized in other liabilities and income tax expense (see Note 20). - 12 - EFTA_R1_02106181 EFTA02707588 Other Comprehensive Income— ASC 320-10 requires that investment securities with readily determinable market values be marked to market at each reporting period. Accumulated other comprehensive income includes unrealized gains and losses on marketable securities classified as available for sale, net of the related tax effects, and adjustments to reclassify losses to the consolidated statements of operations for securities that have been determined to have other-than-temporary impairment — net of the related tax effects. ASC 323-10, Investments-Equity Method and Joint Ventures, requires that a transaction of an investee of a capital nature should be recorded based on the investor's proportionate share of stockholder's equity of the investee. Therefore, the Company has recorded its proportionate share of the investee's adjustments to other comprehensive income. Unrealized (losses) gains on available-for-sale securities: Unrealized (losses) gains on investment in K12 Inc. Unrealized gain (loss) on equity method investments: Reclassification of loss on investment in Blesbok LLC 2011 S (82,143) 2010 551,130 to net income 9,025 (224) Adjustments for unrealized (loss) gain on investments — net of tax (73,118) 50,906 Foreign currency translation adjustments — net (129) 1,195 Other comprehensive (loss) income 5 (73,247) S 52,101 Advertising Costs — Costs incurred to produce media advertising for seasonal campaigns arc expensed when the advertising first takes place. All other advertising costs are expensed as incurred. Total advertising expense was $16.2 million and $18.0 million for the years ended December 31, 2011 and 2010, respectively, and are included in general and administrative expenses. Self-Insurance — KUEH is self-insured for certain levels of general liability, workers' compensation, auto, property, and employee medical insurance coverage. Estimated costs of these self-insurance programs are accrued at the undiscounted value of projected settlements for known and anticipated claims incurred. The self-insurance reserves established and claims paid at December 31, 2011 and 2010, arc as follows (in thousands): 2011 2010 Balance — beginning of year S 41,648 S 41,505 Expense 107,574 100,338 Claims paid (106,015) (100,195) Balance — end of year $ 43,207 S 41,648 Recent Accounting Pronouncements — In June 2011, the FASB modified the presentation of comprehensive income in the financial statements. The revised standard requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements and must be applied retrospectively. This standard eliminates the current option to report other comprehensive income and its components in the statement of changes in - 13 - EFTA_R1_02106182 EFTA02707589 equity. The revised standard does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. For nonpublic entities, the amendments are effective fiscal years ending after December 15, 2012, which will be our fiscal year ended December 31, 2012. We do not believe the amendment will have a significant impact on the consolidated financial statements. 3. RESTRUCTURE OF CERTAIN SUBSIDIARIES In May 2011, a wholly owned subsidiary of KUE Inc., Knowledge Schools, Inc., the parent company of KLC, converted from a corporation into a limited liability company and changed its name to Knowledge Schools LLC (KS). In conjunction with this, the membership interest in KC Propco II LLC ("KC Propco") was distributed to KUE Inc. KUE Inc. then contributed all of its membership interest in KS to a newly formed wholly owned subsidiary, KUEH. KUE Inc. then distributed KUEH to its parent company, KUE LP. KUEH provides early childhood education programs. The real estate held by KC Propco is utilized by KUEH. This restructuring activity did not have an impact on the consolidated financial statements. 4. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE KCDL — On July 23, 2010, the Company sold its wholly owned subsidiary, KCAL to K12 Inc. in exchange for 2,750,000 shares of Series A Special Preferred Stock in K12 Inc., which had a fair value of $66.8 million on the date of sale and a fair value of $49.3 million and $78.8 million at December 31, 2011 and 2010, respectively. The carrying value of KCDL was $26.5 million on the date of the sale. As a result, in 2010 the Company recognized a gain on the transaction of approximately $40.3 million, which is included under discontinued operations in the consolidated statements of operations. These Series A Special Preferred Stock shares are eligible for conversion into K12 Inc. common stock on a one-for-one basis upon the approval of the conversion rights by K12 Inc. shareholders. On January 27, 2011, the right to convert the Series A Special Preferred Stock to common stock was approved by the shareholders of K12 Inc. As a result, these shares are now convertible. These securities have been treated at available-for-sale securities and are included within long-term investments in the consolidated balance sheet at December 31, 2011 and 2010. - 14 - EFTA_R1_02106183 EFTA02707590 The table below discloses certain information regarding KCDL included in discontinued operations for 2010 as follows (in thousands): 2010 Revenues $ 17,730 Cost of revenues 5,999 Gross margin 11,731 Operating expenses 14,962 Loss from operations (3,231) Other income, including gain on sale (39,775) Gain before income taxes 36,544 Income tax benefit 1,383 Net gain S 37,927 KUED — On January 3, 2011, KUED sold its wholly owned subsidiaries KUE Digital Inc., ExLogica, and Excelsior for approximately $140 million, and recognized a gain of approximately $110 million after consideration of noncontrolling interests. The table below discloses certain information regarding KUED included in discontinued operations for 2011 and 2010 as follows (in thousands): 2011 2010 Revenues S S 11,308 Cost of revenues 9,325 Gross margin 1,983 Operating expenses 22,175 Loss from operations (20,192) Gain on sale 110,397 Other income (353) Gain (loss) before income taxes 110,397 (19,839) Income tax expense (16) Net gain (loss) $ 110,397 $ (19,855) - 15 - EFTA_R1_02106184 EFTA02707591 Summarized assets and liabilities of KUED included in assets held for sale as of December 31, 2010, were as follows (in thousands): Assets held for sale: 2010 Current assets 510,328 Noncurrent assets 18,814 Total assets $29,142 Liabilities associated with assets held for sale: Current liabilities 529,964 Noncurrent liabilities 551 Total liabilities $30 515 Current assets held for sale at December 31, 2010, also include assets of KC Propco centers of $320 and assets of KUHC of $137. Supplemental Education Services — In July 2008, KUEH announced that it would no longer operate the Supplemental Education Services (SES) programs effective August 1, 2008. SES provided no revenue in fiscal 2011 or 2010. SES had no assets as of December 31, 2011, and less than $0.1 million of total assets as of December 31, 2010. 5. ACQUISITIONS The following acquisitions were accounted for by the purchase method of accounting, and accordingly, the results of operations have been included in the consolidated statements of operations since the acquisition dates. Acquisition of Global Educare SDN BHD — On May 14, 2010, KUHC acquired Global Educare, for a total cash consideration of $1.2 million, net of cash acquired of $2.2 million. The principal activity of Global Educare is providing child care and educational services. The allocation of the purchase price for Global Educare is as follows (in thousands): Trade and other receivables $ 158 Property and equipment 256 Goodwill 1,373 Intangible assets subject to amortization: Customer lists (4 years) 324 Trade names and trademarks (10 years) 943 Trade and other payables (1,475) Deferred tax liability (317) Total purchase price $ 1,262 - 16 - EFTA_R1_02106185 EFTA02707592 Acquisition of Canadian International School Pte Ltd. — On June 5, 2010, KUHC acquired a 60% equity interest in Canadian International School Pte Ltd. for cash consideration of $5.6 million, net of cash acquired of $2.1 million. The terms also include certain put and call options under which the seller may require KUHC to purchase the remaining 40% of the interest in CIS, and alternatively, KUHC may require the noncontrolling interest holder to sell it the remaining ownership in CIS. Additionally, there arc certain options and performance contingencies that also allow the noncontrolling interest holder to buy hack shares from KUHC upon the occurrence of certain events. The principal activity of CIS is providing primary and secondary education service. The allocation of the purchase price for Canadian International School Pte Ltd. is as follows (in thousands): Cash paid, net of cash acquired of $2.2 million $ 5,613 Noncontrolling interest 6,391 Fair value of options 1,779 Total purchase consideration S 13,783 Trade and other receivables $ 9,493 Property and equipment 24,298 Goodwill 1,883 Trade names and trademarks (indefinite) 6,615 Intangible assets subject to amortization: Customer lists (4 years) 5,107 Acquired curriculum (4 years) 384 Trade and other payables (31,939) Deferred tax liability (2,058) Total purchase price $ 13,783 Acquisition of Q Day Nurseries Limited — On June 30, 2011, KUHC acquired 100% of Q Day Nurseries Limited for total consideration of 51.0 million, net of cash acquired of $0.2 million. Q Day Nurseries Limited is in the business of providing children day nurseries, operating three centers in the UK. The allocation of the purchase price for Q Day Nurseries Limited is as follows (in thousands): Cash paid, net of cash acquired of $0.2 million S 1,620 Less indebtedness repayment (601) Total purchase consideration $ 1,019 Trade and other receivables S 283 Intangible assets subject to amortization — customer lists (4.25 years) 105 Goodwill 1,782 Trade and other payables (1,151) Total purchase price S 1,019 - 17 - EFTA R1 02106186 EFTA02707593 Acquisition of Brighton Montessori Centres Pte Ltd. (BMC) — On August 1, 2011, KUHC acquired the stock of BMC, a Singapore entity for a total consideration of $7 million, net of cash acquired of $1.0 million. BMC is in the business of nurseries and kindergarten and providing child care services for preschool children, operating four centers in Singapore, operating primarily under the child care name brand Brighton Montessori International. This acquisition is in line with the Company's overall strategic plans to expand operations globally. The allocation of the purchase price for BMC is as follows (in thousands): Cash paid, net of cash acquired of $1.0 million S 5,439 Management earn out 1,540 Total purchase consideration $ 6,979 Trade and other receivables $ 21 Property and equipment 182 Other assets 100 Intangible assets subject to amortization: Customer lists (4 years) 2,668 Trade names and trademarks 1,799 Goodwill 3,620 Trade and other payables (652) Deferred tax liability (759) Total purchase price $ 6,979 Acquisition of Early Years Childcare Limited — On December 30, 2011, KUHC acquired 100% of Early Years Childcare Limited for total consideration of S4.7 million, net of cash acquired of $0.6 million. Early Years Childcare Limited is in the business of providing children day nurseries, operating nine centers in the UK. The allocation of the purchase for Early Years Childcare Limited is as follows (in thousands): Trade and other receivables S 117 Property and equipment 2,102 Deferred tax asset 23 Unfavorable lease agreements 2,008 Intangible assets subject to amortization — customer lists (4.25 years) 317 Goodwil I 1,716 Trade and other payables (1,028) Total purchase price $ 5.255 - 18 - EFTA_R1_02106187 EFTA02707594 6. ACCOUNTS RECEIVABLE, NET Accounts receivable, net, included the following at December 31 (in thousands): 2011 2010 Tuition S 64,842 $ 74,976 Other 13,599 16,022 Allowance for doubtful accounts (6,012) (7,552) Accounts receivable — net $ 72,429 $ 83,446 7. PREPAID EXPENSES AM) OTHER CURRENT ASSETS Prepaid expenses and other current assets at December 31, 2011 and 2010, included the following (in thousands): 2011 2010 Prepaid rent $ 11,777 S 11,627 Supplies and inventory 7,038 8,056 Prepaid maintenance 1,311 2,122 Prepaid insurance 2,487 2,165 Prepaid property taxes 5,163 5,351 Lease premiums 7,432 7,615 Other 9,724 3,838 Total prepaid expenses and other current assets $44 932 S 40,774 8. PROPERTY AND EQUIPMENT, NET Property and equipment, net, at December 31, 2011 and 2010, included the following (in thousands): 2011 2010 Land and improvements $ 311,346 S 317,364 Buildings and improvements 651,671 712,164 Leasehold improvements 343,581 202,237 Furniture, fixtures, and equipment 315,385 308,347 Total property and equipment 1,621,983 1,540,112 Accumulated depreciation (603,589) (531,908) Property and equipment — net $1,018,394 $1 008 204 Construction in progress included in buildings and improvements was $10.5 million as of December 31, 2011, and $32.1 million as of December 31, 2010. Construction in progress included in furniture, fixtures, and equipment was $2.2 million as of December 31, 2011, and $3.0 million as of December 31, 2010. - 19 - EFTA_R1_02106188 EFTA02707595 Depreciation expense, not including impairment of long-lived assets, was $99.5 million and $102.6 million for 2011 and 2010, respectively. 9. GOODWILL Changes in the carrying amount of goodwill were as follows (in thousands): Balance — December 31, 2009 S 386,770 Acquisition of Canadian International School Pte Ltd. 1,883 Acquisition of Global Educare 1,373 Currency exchange difference (1,139) Balance — December 31, 2010 388,887 Acquisition of Q Day Nurseries Limited 1,782 Acquisition of Brighton Montessori Centres Pte Ltd. 3,620 Acquisition of Early Years Childcare Limited 1,169 Other 521 Reduction in goodwill related to tax adjustment for 2009 Busy Bees acquisition (3,975) Currency exchange difference (328) Balance — December 31, 2011 $ 391,676 10. OTHER INTANGIBLE ASSETS, NET The gross carrying amount and accumulated amortization of other intangible assets at December 31 were as follows (in thousands): Amortization Period 2011 2010 Amortizable intangible assets: Customer lists 2-7 years S 37,369 S 40,503 Contracts 2-14 years 22,773 22,518 Accreditations 3-4 years 12,100 12,100 Intellectual property and proprietary curricula 3-14 years 7,646 5,134 Trade names and trademarks 1.5-10 years 1,500 4,895 Covenants not to compete 3—8 years 200 1,450 Favorable leases acquired 8 years 850 850 Gross carrying amount 82,438 87,450 Accumulated amortization (63,746) (59,470) Net intangible assets subject to amortization 18,692 27,980 Intangible assets not subject to amortization — trade names and trademarks 111,684 104,846 Total other intangible assets — net S 130,376 S 132,826 - 20 - EFTA_R1_02106189 EFTA02707596 Amortization expense, not including impairment, was $6.0 million and $7.7 million for 2011 and 2010, respectively. Estimated future amortization expense for finite-lived intangible assets at December 31, 2011, is as follows (in thousands): 2012 $ 5,859 2013 3,800 2014 3,041 2015 2,524 2016 1,985 Thereafter 1,483 Total S 18,692 11. OTHER ASSETS Other assets at December 31, 2011 and 2010, included the following (in thousands): 2011 2010 Deferred financing costs — net of accumulated amortization $ 11,135 $ 14,510 Restricted cash (Note 2) 15,982 25,917 Deferred compensation 6,365 6,486 Deposits 3,954 5,818 Derivative contract 2,616 2,936 Long-term receivables 1,145 1,977 Other 5,756 1,735 Total other assets S46,953 $ 59,379 - 21 - EFTA_R1_02106190 EFTA02707597 12. LONG-TERM DEBT Long-term debt at December 31, 2011 and 2010, included the following (in thousands): 2011 Secured: 2010 CMBS loan $ 604,825 S 616,525 Senior mezzanine loan 46,525 47,425 Junior mezzanine loan from affiliate, net of discount of $927 50,255 Singapore construction loan 56,762 16,555 Singapore lease loan 3,287 4,774 UK Bank loans 52,390 45,856 Unsecured: Senior subordinated notes 260,000 260,000 Loan from affiliate 100,000 Other, net of discount of $12 and $18 in 2011 and 2010, respectively 1,503 1,664 Fair value adjustment (2,604) (3,479) Total 1,022,688 1,139,575 Current portion (21,745) (17,970) Long-term portion S1,000,943 S 1,121 605 Secured Loans — On November 9, 2005, KC Propco completed a refinancing of all of its senior debt that was assumed in connection with the KinderCare acquisition. The refinancing involved a 10-year fixed-rate $650.0 million CMBS loan and a $50.0 million senior mezzanine loan collectively referred to as the "CMBS facility." The refinancing also included a $150.0 million junior mezzanine loan from an affiliate, which was repaid during 2011. Under the CMBS loan agreement, all of the property and equipment of KC Propco are pledged as collateral. The CMBS loan matures in December 2015. The weighted-average interest rate on the CMBS loan is 5.46% and is payable monthly. Principal and interest payments on the CMBS loan are due in arrears on the 1st day of each month. The monthly principal amount due on the CMBS loan is approximately $1.0 million through December 1, 2015. The CMBS loan contains various customary nonfinancial covenants. The key nonfinancial covenants applicable to KC Propco restricts KC Propco's ability to, among other things, amend lease provisions; impair the value of KUEH's operating companies' leasing arrangements; collect any rents more than one month in advance; consent to assign or sublease arrangements under the KUEH lease; surrender, terminate, modify, or cancel the asset management agreement; establish liens on any of the original 713 CMBS properties; cancel or forgive any debt owed to KC Propco; initiate or consent to any rezoning of the CMBS properties; engage in any nonexempt transaction prohibited under the Employee Retirement Income Security Act of 1974; allow a joint assessment of any of the CMBS properties; enter into or modify any reciprocal easement agreement; or, make any alterations or enter into any agreements that may have an adverse effect on the CMBS Properties. - 22 - EFTA_R1_02106191 EFTA02707598 The CMBS loan also contains customary covenants that restrict KC Propco's ability to, among other things, engage in any other business other than the ownership, operation, and maintenance of the CMBS properties, acquire or own any other assets, merge into or consolidate with another entity or change its legal structure, own or invest in any subsidiary, commingle its assets, incur any additional debt, enter into any contract or agreement with any principal, assume or guarantee any debts, make any loans or advances, acquire obligations or securities, and make changes to name, identity, or structure. Furthermore, the CMBS loan agreement includes a provision that requires KUEH to provide to the lender a consolidated financial statements for the trailing 12 months to determine compliance with minimum thresholds of earnings before interest, taxes, depreciation, and amortization (EBITDA), which, if not maintained, could result in a sweep of 50% or 100% of excess cash flow, depending upon the amount of the shortfall. Any funds swept pursuant to these provisions would be held by the lender in a cash management account owned by KC Propco as additional loan collateral and would be available for distribution upon the lender determining that for the immediately preceding 12-month period, the EBITDA for KUEH was equal to or greater than $108 million at the end of two consecutive calendar quarters. KC Propco was in compliance with the covenants of the CMBS loan as of December 31, 2011. The calculation of consolidated EBITDA for the trailing 12 months ending March 31, 2012, did not meet the threshold. In accordance with the terms of the loan agreement, effective in May 2012, 50% of KC Propco's future Excess Cash Flow will be swept into a cash management account. For the CMBS loan, management's estimate of fair value is based on available information and was determined with assistance from an external valuation firm. The loan's fair value is in the range of $507.0 million to 3510.9 million, as compared to its carrying value of $604.8 million, as of December 31, 2011, and in the range of $548.6 million to $559.0 million, as compared to its carrying value of $616.5 million, as of December 31, 2010. Singapore Construction Loan — In March 2010, CIS obtained a loan of 365.3 million for the construction of a new school building in Singapore. The loan will be drawn down over two years and will be repayable over 15 years. As of December 31, 2011, the amount of the loan was $56.8 million. Total assets of CIS amounting to $134.6 million were pledged as security against the bank loan. Monthly repayments begin in June 2012 and continue for 13 years. The interest rate is the prevailing margin and swap offer rate, which was 4% at December 31, 2011. The Company has not entered into any hedging instrument to hedge the floating interest rate of the loan. Singapore Land Lease Loan — In 2007, OS entered into an agreement with Singapore Land Authority for a 30-year lease of land on which the new school building is to be constructed. The installment payments bear an effective interest rate of 9.5% per annum and are repayable over 84 months beginning in April 2007. The balance of $3.3 million at December 31, 2011, will be paid in installments. UK Bank Loans — On December 21, 2010, Busy Bees obtained a loan from HSBC Bank that it used to repay its RBS bank parent company loans. The loan is made up of two facilities: Facility A is a 15-year facility for $40 million, which is repayable in 60 quarterly installments of 50.7 million beginning in March 2013. Facility B is a six-year facility for $7 million, which is repayable in 24 quarterly installments of S0.3 million beginning in June 2012. On December 19, 2011, Busy Bees increased its HSBC Bank loan by $10.8 million, which it used to fund the acquisition of Early Years Childcare Limited on December 30, 2011, for $5.4 million and also partly fund the repayment of $10.8 million of preference share capital and accrued interest on December 19, 2011. The facility A loan was increased to $46.9 million and is repayable in 56 quarterly installments of $0.84 million ending on December 31, 2025. The facility B loan was increased to S6.9 million and is repayable in 20 quarterly installments of - 23 - EFTA_R1_02106192 EFTA02707599 $0.35 million ending on December 31, 2016. The loan is secured by the assets of all of the child care centers in the United Kingdom. The interest rate on the facility, as defined in the agreement, is the aggregate of a margin, London InterBank Offered Rate (LIBOR) and fees which was 5.51% at December 31, 2011. Interest payments shall be made on the last day of each interest period. The Company has entered into an interest rate swap on the additional HSBC facility in addition to the swaps held on the already existing HSBC facility and the previous RBS facility. These swaps fix the interest rate on two thirds of the loan at an effective rate of 5.51% through maturity. As the interest rate swap has not been designated as a hedge of specific underlying interest rate exposure, it has been marked to market with the resulting gains or losses recognized as a component of interest expense in the consolidated statement of operations. The fair value of the interest rate swap at December 31, 2011, was $1.7 million. The unrealized loss of $1.7 million has increased by S1.3 million in 2011 and this increase is included in interest expense for 2011. The swap converts $38.2 million of notional debt from floating rate to fixed rate of 5.55% and matures on January 29, 2016. The Company was in compliance with the covenants of the UK Bank loans as of December 31, 2011. Unsecured Senior Subordinated Notes — In February 2005, senior subordinated notes (the "Notes") in the amount of $260.0 million were issued to refinance certain indebtedness in connection with the acquisition of KinderCare Learning Centers. The Notes bear interest at 7.75%, payable semiannually on February 1 and August 1 of each year, and are due in February 2015. The Notes may be redeemed at any time, in whole or in part, after February 2011 at a redemption price equal to 102.58% of the principal amount of the Notes and declining yearly to par in February 2015, plus accrued and unpaid interest, if any, to the date of redemption. Upon the occurrence of a change of control, KUEH's subsidiary, KUE LLC, will be required to make an offer to repurchase all Notes properly tendered at a price equal to 101.0% of the principal amount plus accrued and unpaid interest through the date of repurchase. The indenture governing the Notes contains various nonfinancial covenants that limit KUE LLC's ability to, among other things, enter into agreements that restrict KUE LLC's subsidiaries from paying dividends or other distributions, making loans or otherwise transferring assets to KUE LLC or to any other subsidiaries, incurring additional debt or issuing preferred stock, establishing new liens on assets, making certain restricted payments and investments, selling assets or capital stock of subsidiaries in excess of established limits, engaging in certain transactions with affiliates, and making certain fundamental changes to the business. Loan from Affiliate — In January 2005, the Company borrowed $200 million from an affiliate in connection with the Company's acquisition of KinderCare. In December 2010, the Company repaid $100 million of this loan. In April 2011, the Company repaid the balance. Credit Agreement — In June 2010, KUEH's subsidiary, KUE LLC, entered into an amended and restated four-year credit agreement with a group of syndicated lenders (the "Credit Agreement"). The Credit Agreement consists of an $85.0 million revolving line of credit, with increased borrowing capacity available as additional lenders enter the facility, up to a total of $100.0 million. At KUE LLC's discretion, borrowings under the revolving line of credit bear interest at the base rate plus 1.75% or the LIBOR plus 2.75%. The base rate is the higher of the lender's prime rate or 0.50% in excess of the federal funds effective Rate. In addition, the Credit Agreement allows for a maximum of $75.0 million for letters of credit against the current borrowing capacity of the revolving line of credit and up to $10.0 million for selected short-term borrowings. KUE• LLC pays fees on the outstanding balance of letters of credit at an annual rate of 2.75%, plus a fronting fee of 0.25%. KUE LLC is also required to pay fees of 0.63% on the unborrowed and uncommitted balances under the Credit Agreement. - 24 - EFTA_R1_02106193 EFTA02707600 As of December 31, 2011 and 2010, KUE LLC had no borrowings under the Credit Agreement and outstanding letters of credit totaled $46.0 million and $49.8 million, respectively. The Credit Agreement contains various financial and nonfinancial loan covenants and provisions. The key financial loan covenants include a maximum leverage ratio, a minimum fixed-charge coverage ratio, and a minimum interest-coverage ratio. The key nonfinancial loan covenants restrict KUE LLC's ability to, among other things, incur additional debt, make fundamental changes to the business, open new learning centers in excess of established limits, make certain restricted payments and investments, or enter into certain sale-leaseback transactions. The Credit Agreement expires in June 2014. KUEH's subsidiary, KUE LLC, was not in compliance with the maximum leverage ratio financial covenant contained in the Credit Agreement as of December 31, 2011. As a result, KUE LLC received waivers of the financial covenants contained in the Credit Agreement and on June 28, 2012 signed an amendment to the Credit agreement. The amendment changed certain terms of the Credit Agreement, including reduction of the borrowing base to $75 million, elimination of the fixed charge and leverage covenants, addition of a minimum EI3ITDA covenant, and changes to the interest rate. KUEH and KUE LLC were in compliance with the nonfinancial covenants of the Credit Agreement and the covenants of the Notes as of December 31, 2011. While certain defaults under either of the loan agreements may cause a cross-default under the other loan agreement, no cross-default provisions have been triggered as of December 31, 2011. Debt Maturities — Principal payments on long-term debt during the next five years and thereafter at December 31, 2011, are as follows (in thousands): 2012 $ 21,745 2013 23,825 2014 23,711 2015 883,134 2016 9,584 Thereafter 63,305 Total $1,025,304 13. OTHER LONG-TERM LIABILITIES Other long-term liabilities at December 31, 2011 and 2010, included the following (in thousands): 2011 2010 Unfavorable leases $ 26,577 S 27,915 Reserves for uncertain tax positions 6,756 10,072 Self-insurance reserves — long term 19,129 19,221 Deferred rent 14,100 14,785 Deferred compensation plan 6,365 6,357 Deferred gain on sale leasebacks 2,218 Property taxes 4,157 4,162 Real estate obligation 9,922 6,862 Other 3,025 3,689 Total other long-term liabilities $ 90,031 S 95,281, - 25 - EFTA_R1_02106194 EFTA02707601 14. DERIVATIVE CONTRACTS The Company has entered into an interest rate swap, on December 19, 2011, on the additional HSBC facility in addition to the swaps held on the already-existing HSBC facility and the previous RBS facility. These swaps fix the interest rate on two thirds of the loan at an effective rate of 5.51% through maturity. As the interest rate swaps have not been designated as a hedge of specific underlying interest rate exposure, they have been marked to market with the resulting gains or losses recognized as a component of interest expense in the consolidated statement of operations. The fair value of the interest rate swaps at December 31, 2011, was $1.7 million. The unrealized loss of $1.7 million has increased by $1.3 million in the year and this increase is included in interest expense for 2011. The swaps convert $38.2 million of notional debt from floating rate to fixed rate of 5.55% and mature on January 29, 2016. In June 2009, the Company entered into a four-year forward currency hedge based on the British pound. The Company sold 25 million British Pounds at a rate of 1.65205 on a forward leg maturing in June 2013. As the foreign currency hedge has not been designated as a hedge of specific underlying interest rate exposure, it has been marked to market with the resulting gains or losses recognized as a component of (gains) losses on investments in the consolidated statement of operations. The mark to market at December 31, 2011, resulted in an asset of $2.6 million recorded in other assets in the accompanying consolidated balance sheet (sec Note 17). The unrealized loss of $0.3 million in 2011 and the unrealized gain of $4.3 million in 2010 are included in (gains) losses on investments in the consolidated statements of operations. KUEH had an interest rate swap with a notional amount of $100.0 million, which was entered into in May 2005 and matured in January 2012. To the extent LIBOR was less than the stated rate, KUEH paid the spread between the stated rate of 4.35% and the one-month LIBOR. In the event that LIBOR increased beyond the stated rate, the counterparty paid KUEH the spread between LIBOR and the stated rate. As the interest rate swap has not been designated as a hedge of specific underlying interest rate exposure, it is marked to market with the resulting gains or losses recognized as a component of interest expense in the consolidated statement of operations. Total gain recognized was $4.0 million and $2.0 million for the years ended December 31, 2011 and 2010, respectively. As of December 31, 2011 and 2010, the fair value of the interest rate swap resulted in a liability of $0.2 million and $4.2 million, respectively, which is recorded in other accrued liabilities in the accompanying combined and consolidated balance sheet. - 26 - EFTA R1 02106195 EFTA02707602 15. LEASE OBLIGATIONS The Company and its subsidiaries lease certain child care and office facilities, vehicles, and equipment under both capital and operating leases. Many of these operating leases contain renewal options and escalation clauses. For scheduled rent escalation clauses during the lease terms, the Company records minimum rental expenses on a straight-line basis over the terms of the leases in the consolidated statements of operations. Real estate obligations represent the Company's financing obligation for certain asscts constructed under built-to-suit lease arrangements with lessors. The following represents future minimum fixed payments under operating and capital leases, not including unexercised renewal options, real estate taxes, insurance, and maintenance costs (in thousands): Capital Leases Real Estate Obligations Operating Leases Total Leases 2012 $ 4,343 S 1,275 $ 133,126 S 138,744 2013 4,255 1,275 114,783 120,313 2014 3,096 1,275 93,962 98,333 2015 1,599 1,275 75,295 78,169 2016 1,164 1,275 58,584 61,023 Thereafter 7,067 9,576 289,106 305,749 Total minimum payments* 21,524 15,951 $ 764,856 $ 802,331 Less amounts representing interest (6,182) (5,485) 15,342 10,466 Less current portion of lease obligations (3,105) (544) Long-term capital leases and real estate obligations $ 12,237 $ 9,922 *Minimum payments have not been reduced by minimum sublease rentals of 51.6 million in the future under noncancelable subleases. The majority of the vehicles in the Company's fleet are leased pursuant to the terms of a 12-month noncancelable master lease that may be renewed on a month-to-month basis after the initial 12-month lease period. Payments under the vehicle leases vary with the number, type, model, and age of the vehicles leased. The vehicle leases require that KUEH guarantee specified residual values upon cancellation. As of December 31, 2011, our residual guarantee was $7.2 million. In most cases, KUEH expects that substantially all of the leases will be renewed or replaced by other leases as part of the normal course of business. All such leases are classified as operating leases. Lease expense for vehicle leases, included in rent expense in the consolidated statement of operations, was $11.7 million and $11.3 million for the years ended December 31, 2011 and 2010, respectively. Assets related to capital leases and real estate obligations, net of accumulated depreciation, included within property and equipment totaled $22.1 million as of December 31, 2011, and $24.3 million as of December 31, 2010. - 27 - EFTA_R1_02106196 EFTA02707603 16. NONCONTROLLING INTERESTS KUED had noncontrolling interest holders that had a combined ownership interest of approximately 12.38% at December 31, 2010. The Company has recorded the proportionate share of the KUED net losses, as net loss attributable to noncontrolling interests in the consolidated statements of operations. KUED was sold in January 2011. Busy Bees has noncontrolling interest holders that have a combined ownership interest of approximately 15% at December 31, 2011. The Company has recorded the proportionate share of the Busy Bees' net losses, as net loss attributable to noncontrolling interests in the consolidated statement of operations. OS has noncontrolling interest holders that have a combined ownership interest of approximately 40% at December 31, 2011. The terms of the acquisition also include certain put and call options under which the seller may require KUHC to purchase the remaining 40% of the interest in CIS, and alternatively, KUHC may require the noncontrolling interest holder to sell it the remaining ownership in CIS. Additionally, there are certain options and performance contingencies which also allow the noncontrolling interest holder to buy back shares from KUHC upon the occurrence of certain events. Changes in the balance of the noncontrolling interests for 2011 and 2010 are as follows (in thousands): 2011 2010 Balance —January 1 S 11,171 $ 4,967 Sale of KUE Digital Inc. (2,153) Allocation of income (losses) 1,902 (2,086) Noncontrolling interest related to CIS acquisition 7,996 Other (630) 294 Balance— December 31 S 10,290 $11,171 17. FAIR VALUE MEASUREMENTS Fair value guidance defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability, in an orderly transaction between market participants on the measurement date. Fair value guidance also establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The three levels are described as follows: • Level 1: Inputs based on quoted market prices for identical assets or liabilities in active markets at the measurement date. • Level 2: Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that arc observable or can be corroborated by observable market data. • Level 3: Inputs reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instruments' valuation. - 28 - EFTA R1 02106197 EFTA02707604 The fair value hierarchy for those assets and liabilities measured at fair value at December 31, 2011 and 2010, is as follows (in thousands): 2011 Fair Value Level 1 Level 2 Level 3 Total Balance Sheet Classification Assets: Cash equivalents S 53,467 S - $ $ 53,467 Cash and cash equivalents Short-term marketable securities 35,072 5,914 40,986 Short-term marketable securities Impaired long-lived assets 1,362 1,362 Property and equipment, net Investments 83,692 52,942 136,634 Long-term investments Foreign currency hedge 2,616 2,616 Other assets Investments in deferred compensation plan 6,365 6,365 Other assets Liabilities: Interest rate swaps 1,560 1,560 Other accrued liabilities 2010 Fair Value Level 1 Level 2 Level 3 Total Balance Sheet Classification Assets: Cash equivalents S 77,713 S S S 77,713 Cash and cash equivalents Short-term marketable securities 198,953 198,953 Short-term marketable securities Impaired long-lived assets 60,807 60,807 Property and equipment, net Investments 141,607 82,329 223,936 Long-term investments Foreign currency hedge 2,936 2,936 Other assets Investments in deferred compensation plan 6,357 6,357 Other assets Liabilities: Interest rate swaps 4,632 4,632 Other accrued liabilities Cash Equivalents — The Company has invested in short-term marketable money market funds with maturity dates less than three months at date of purchase. Short-Term Marketable Securities — The Company has invested in corporate debt securities which it generally holds for periods of less than six months from date of purchase. Derivatives — Derivative assets and liabilities within the scope of ASC 815, Derivatives and Hedging, are required to be recorded at fair value. The Company has two interest rate swaps that are marked to market based on observable rates at commonly quoted intervals for the full term of the swaps and, therefore, are considered to be Level 2 financial instruments. The Company has also entered into a four- year forward currency hedge based on the British pound. The hedge is marked to market based on observable daily quotes in the currency markets for the British pound and is, therefore, considered a Level 2 financial instrument (see Note 14). Long-Lived Assets, Purchase Price Allocation Adjustment of Property, and Equipment and Assets Held for Sale — In accordance with guidance related to the impairment of long-lived assets, the Company performs an impairment test whenever events and changes in circumstances indicate that impairment might have occurred. - 29 - EFTA_R1_02106198 EFTA02707605 As of December 31, 2011, these tests revealed that certain long-lived assets, with a carrying amount of $20.7 million, needed to be written down to an estimated fair value of $1.4 million, resulting in an impairment charge of $19.3 million, which was included in depreciation expense for the fiscal year ended December 31, 2011. As of December 31, 2010, these tests revealed that certain long-lived assets, with a carrying amount of $71.0 million, needed to be written down to an estimated fair value of $60.8 million, resulting in an impairment charge of $10.2 million, which was included in depreciation expense for the fiscal year ended December 31, 2010. The estimation of fair value required quoted prices for similar assets and liabilities in active markets, quoted prices for similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. Long-Term Debt — For the CMBS loan and the Notes, management's estimate of fair value was determined with assistance from an external valuation firm. The carrying value of the RBS loan approximates its fair value. For the senior mezzanine loan, the junior mezzanine loan from affiliate, and the loan from affiliate, it is not practicable to estimate fair value due to limited market activity and the junior mezzanine's and loan from affiliate's related-party nature. These estimated fair values at December 31, 2011 and 2010, are as follows (in thousands): 2011 2010 Fair Value Fair Value CMBS loan Senior subordinated notes 18. PARTNERS' EQUITY $ 509,000 $ 554,000 241,000 256,000 Common Partner Units — At December 31, 2011 and 2010, the Company had 2,239,551 common partner units outstanding, of which KUE Management Inc., the Company's general partner, held 1,464 units and limited partners held the remaining units. Profits Participation Limited Partner Units — At December 31, 2011 and 2010, the Company had 251,164 profits participation limited partner units (PPUs) outstanding. PPUs were issued in conjunction with the sale of units to investors. PPUs are limited to 11% of the aggregate number of total units outstanding. KULG LLC (KULG) is entitled to hold 9/11ths and employees and others are limited to 2/11ths of the PPUs. KULG held 224,164 PPUs; employees and others held 27,000 PPUs. The PPUs entitle the holders to share in increases in value of the Company, upon distributions, liquidation, or sale of the Company, based on the number of PPUs they hold divided by the total number of common partner units and PPUs outstanding. For the PPUs held by employees and others, this sharing percentage applies to the Company's value in excess of the value of total contributions. The PPUs held by KULG participate after the value of the Company is in excess of the total value of contributions, plus 8% per annum. PPUs held by employees and others vest over a four-year period, and will result in compensation expense to the extent that the Company's value increases to a level where amounts are due to the holders. PPUs held by KULG were fully vested upon issuance. At December 31, 2011 and 2010, no amounts were due under either of these PPU arrangements. - 30 - EFTA R1 02106199 EFTA02707606 19. EMPLOYEE BENEFIT PLANS ASC 718, Compensation — Stock Compensation, requires that compensation costs relating to share- based payment transactions be recognized in the consolidated financial statements, with the cast measured based on the estimated fair value of the equity or liability instruments issued. Costs attributable to stock appreciation rights and unit appreciation rights granted subsequent to the adoption of ASC 718 are recognized in accordance with the graded vesting attribution method. KUE L.P. Unit Appreciation Rights — KUE L.P. has a Unit Appreciation Rights Plan. KUE L.P.'s Unit Appreciation Rights Plan has been approved by the Board of Directors of KUE Management Inc., the Company's general partner, and provides the Company with the authority to grant unit appreciation rights to directors, officers, and key employees of the Company. The unit appreciation rights vest annually over a period of up to five years from the grant date, have an expiration date of 10 years from the grant date, and are redeemable in cash at the holder's discretion. Fifty percent of the unit appreciation rights that vest during a year are exercisable upon vesting, and the remaining balance is exercisable upon occurrence of certain conditions, such as termination of employment. At December 31, 2011 and 2010, ICUE L.P. had 3,829 and 9,976 unit appreciation rights outstanding, respectively, of which 2,026 and 8,872 unit appreciation rights, respectively, were fully vested. During 2011, the Company canceled 8,527 unit appreciation rights. No compensation expense has been recorded for 2011 and 2010, as the exercise price of the unit appreciation rights was higher than the approximate fair values at December 31, 2011 and 2010. KS Stock Appreciation Rights — KUEH's subsidiary, KS, adopted a stock appreciation rights (SARs) plan in April 2004. The SARs plan has been approved by KS' Board of Directors and provides KS with the authority to grant SARs to certain employees of KS and its subsidiaties. SARS have been granted to certain directors and key employees of KUEH. The SARs vest annually over a period of up to five years from the grant date, have an expiration date of 10 years from the grant date, and are redeemable in cash at the holder's discretion. KS recognizes a liability for the vested portion and compensation expense is charged for the change in the intrinsic value of the vested awards during the year. The intrinsic value is the estimated fair value at the end of the reporting period. KUEH recognizes compensation expense for the change in the intrinsic value of the SARs granted to KUEH employees. As of December 31, 2011, KS had 3,629 SARs outstanding, related to certain directors and key employees of KUEH and its subsidiaries, of which all were fully vested. As of December 31, 2010, KS had 3,733 shares of SARs outstanding related to certain directors and key employees of KUEH and its subsidiaries, of which 3,661 were fully vested. No SARs were issued or exercised during either of the fiscal years 2011 or 2010. During the fiscal year 2011, KUEH recognized a $3.3 million reduction in compensation expense related to SARs. Compensation expense related to SARs was $0.2 million during fiscal year 2010. The intrinsic values of the SARS outstanding and exercisable were $2.3 million and $5.6 million as of December 31, 2011 and 2010, respectively. KS awards stock option grants to certain directors and key employees of KUEH and its subsidiaries. As of December 31, 2011 and 2010, KS had no stock options outstanding. As the stock options are redeemable at the holder's discretion, upon vesting, KUEH recognizes a liability for the vested portion and compensation expense is charged or credited for the change in the intrinsic value of the vested awards during the year. During fiscal years 2011 and 2010, no compensation expense was recognized in connection with vested options. There were no intrinsic values of stock options outstanding and exercisable as of December 31, 2011 or 2010. - 31 - EFTA R1 02106200 EFTA02707607 The weighted-average remaining contractual term for SARS outstanding and exercisable was 2.6 years as of December 31, 2011. 401(k) Plan — Certain employees are eligible to enroll in the Knowledge Learning Corporation Savings and Investment Plan (the "401(k) Plan") on January 1, April I, July 1, or October 1 following their date of hire and can contribute between 1% and 100% of pay up to the IRS maximum allowable. KUEH will match 40 cents for each dollar contributed on the first 5% of compensation. Nonqualified Deferred Compensation Plan — KUEH offers highly compensated employees who are excluded from participating in the 401(k) Plan the ability to participate in the Knowledge Learning Corporation Nonqualified Deferred Compensation Plan. This plan allows employees to defer between I% and 100% of base and bonus compensation. KUEH will match 40 cents for each dollar contributed on the first 5% of compensation. Employer matching contribution expense for the 401(k) Plan and the Nonqualified Deferred Compensation Plan totaled $2.3 million in fiscal years 2011 and 2010. 20. INCOME TAXES The provision for income taxes at December 31, 2011 and 2010, included the following (in thousands) Continuing operations: Current: 2011 2010 Federal $ (132) S 1,394 State (2,411) (3,831) Foreign 1,909 14,226 Total current (expense) benefit (634) 11,789 Deferred: Federal 25,523 6,579 State 8,231 2,524 Foreign 6,225 3,483 Total deferred benefit 39,979 12,586 Income tax benefit from continuing operations $ 39,345 $ 24,375 Under ASC 740, Income Taxes, deferred taxes arc recorded to give recognition to temporary differences between the tax basis of assets or liabilities and their reported amounts in the consolidated balance sheets. The tax effects of these temporary differences are recorded as deferred tax assets or deferred tax liabilities. Deferred tax assets generally represent items that can be used as a tax deduction or credit in future years. Deferred tax liabilities generally represent items that have been deducted for tax purposes, but have not yet been recorded in the consolidated statements of operations. - 32 - EFTA R1 02106201 EFTA02707608 Deferred tax assets and liabilities as of December 31, 2011 and 2010, included the following: Deferred tax assets: 2011 2010 Tax credits $ 16,008 S 13,486 Compensation payments 6,607 9,680 Net operating loss carryforwards 46,509 28,219 Self-insurance reserves 17,019 16,316 Capital lease obligations 17,653 19,862 Other 26,441 20 902 Total deferred tax assets 130,237 108,465 Valuation allowance (5,733) (5,417) Net deferred tax assets 124,504 103,048 Deferred tax liabilities — fixed assets/intangibles (143,545) (165,338) Net deferred tax liability $ (19,041) $ (62,290) The Company had federal net operating loss carryforwards of $87.5 million as of December 31, 2011, and $42.7 million as of December 31, 2010. The Company had state net operating loss carryforwards of $164.5 million as of December 31, 2011, and S97.8 million as of December 31, 2010, which start expiring in 2012. The Company had federal tax general business, foreign tax, and alternative minimum tax credit carryforwards of $13.5 million as of December 31, 2011, and $11.3 million as of December 31, 2010, which start expiring in 2020. The Company had state credit carryforwards of S1.5 million as of December 31, 2011, and $1.3 million as of December 31, 2010, which have an unlimited carryforward period. The Company also operates in several foreign jurisdictions. As of December 31, 2011 and 2010, it had foreign net operating losses of $18.8 million and $30.4 million, respectively, which have an unlimited carryforward period. The Company cannot assert on a more-likely-than-not basis that the acquired foreign net operating losses, certain capital losses, and certain federal and state net operating losses and tax credits will be utilized before they expire. Therefore, at December 31, 2011, the Company had recorded a valuation allowance of $5.7 million to offset deferred tax assets related to those net operating losses, capital losses, and tax credits. During 2011, the recorded valuation allowance increased by $0.3 million. The Company or any one of its subsidiaries files income tax returns in the United States, various states, Canada, United Kingdom, Singapore, and various other foreign jurisdictions. With few exceptions, all domestic subsidiaries of the Company are no longer subject to examinations by tax authorities for years before 2008. Canadian tax years remain open from 2004. All other foreign statues remain open from 2008. As of December 31, 2011 and 2010, the liability for the Company's uncertain tax positions, including interest and penalties, totaled S6.6 million and $10.7 million, respectively. As of December 31, 2011 and 2010, the estimated potential tax-related interest and penalties were $1.2 million and $2.8 million, respectively. The Company recognizes accrued interest and penalties related to uncertain tax positions in federal, state, and foreign income tax expense. If the Company's positions were sustained by the taxing authority in favor of the Company, approximately $6.1 million for December 31, 2011, and approximately $8.9 million for December 31, 2010, would be recognized as a reduction in the tax provision, which would reduce the Company's effective tax rate. - 33 - EFTA R1 02106202 EFTA02707609 The Company believes it is reasonably possible that, within the next 12 months, $4.1 million of previously unrecognized tax benefits related to certain federal, state, and foreign filing positions, all of which would reduce the Company's effective tax rate, will be recorded primarily as a result of the expiration of federal, state, and foreign statutes of limitation. A reconciliation of the beginning and ending amount of unrecognized tax benefits for 2011 and 2010 is as follows: 2011 2010 Gross unrecognized tax benefits — beginning of year $ 7,975 $ 17,103 Gross (decrease) increase in tax positions for prior years' (229) 815 Gross increase in tax positions for current years 230 620 Settlements Lapse of statute of limitations (2,589) (10,563) Gross unrecognized tax benefits — end of year $ 5,387 $ 7,975 21. RELATED-PARTY TRANSACTIONS Fixed Overhead Payment Agreement— KUE Inc. and KUE LLC are required to pay annually to related parties KULG and Knowledge Universe Limited LLC $17.5 million and $2.5 million, respectively, for services provided to the Company and its subsidiaries. The payments are made in quarterly installments and cover salaries and bonuses of the affiliates' employees providing services to the Company and its subsidiaries, fees, and expenses related to financing transactions and acquisitions, professional fees, and other administrative expenses. These expenses arc included within general and administrative expenses in the consolidated statements of operations. Real Estate Services — One of KUE LP's affiliates, Greenstreet Real Estate Partners, L.P., provides real estate asset management and consulting services to KC Propco for an annual management fee of $8.3 million. KUEH's subsidiary, KUE LLC had leases for nine child care facilities owned by subsidiaries of Greenstreet Real Estate Holdings, L.P. ("Greenstreet Holdings") as of December 31, 2010. During the fiscal year ended December 31, 2011, Greenstreet Holdings sold one of these facilities to an affiliate of KUE LLC and another to a third party, both of which continue to lease the facilities to KUE LLC on the same terms and conditions as existed prior to the sale. As of December 31, 2011, there are seven remaining leases for child care facilities with Greenstreet Holdings. These leases have an average duration of 15 years from their respective lease commencement dates. Long-Term Debt — Condors, LLC, an affiliate of KC Propco, was the lender under the junior mezzanine loan entered into in connection with the CMF3S financing. This loan was fully repaid during 2011 (sec Note 12). In connection with this loan, KC Propco paid interest to Condors, LLC of $1.5 million and $6.5 million during fiscal years 2011 and 2010, respectively. Knowledge Universe Holdings LLC (KUH), an affiliate of the Company, was the lender under a $100 million loan arrangement with KUE Inc. (see Note 12). In connection with that loan, KUE Inc. paid interest to KUH of $0.8 million and $9.0 million, during the fiscal years 2011 and 2010, respectively. - 34 - EFTA R1 02106203 EFTA02707610 22. COMMITMENTS AND CONTINGENCIES The Company is subject to claims and litigation arising in the ordinary course of business. The Company believes that none of the claims or litigation of which it is aware will materially affect its consolidated financial statements, although assurance cannot be given with respect to the ultimate outcome of any such actions. 23. SUBSEQUENT EVENTS The Company had no other subsequent events to report as evaluated through June 28, 2012, the date the consolidated financial statements were available to be issued. - 35 - EFTA R1 02106204 EFTA02707611