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Education is one of the largest sectors in the world, representing approximately 5% of global gross national income of $48 trillion.⁴ In 2005 in the U.S. alone, education was a $1 trillion market.⁵ Education is still predominantly provided by public / governmental entities in most countries including the U.S. KUE believes that the industry will converge towards a more balanced public / private system, similar to the evolution observed in the 20th century in other major industries such as healthcare, infrastructure and telecommunications.

The Company's strategy is to grow its existing platforms both domestically and internationally and to expand its assets globally across the pre-K-12 education continuum. In addition to its current investments in ECE and online curriculum, KUE will seek to expand by acquiring education companies offering services or products that can complement its current offering. KUE believes that owning a diversified portfolio of assets in the pre-K-12 education space will allow it to leverage content and best practices across multiple constituencies and to multiple markets. KUE's strategy in U.S. ECE is to expand its existing platform through the opening of new centers, opportunistic acquisitions of smaller competitors and the sale of education-related products and services through existing channels. Internationally, KUE has identified several near-term opportunities to expand into Europe, the Middle-East and Asia, with some of these opportunities in advanced stages of preparation.

Management has a history of successfully growing through acquisitions. In May 2003, KLC acquired Aramark Educational Resources ("AER"), a company three times its size in terms of revenue. Management completed the integration of AER in approximately 12 months, realizing approximately $10 million in net annual synergies and improving operational performance. In January 2005, the Company acquired KinderCare, the largest provider of ECE services in the U.S. at the time. Management achieved approximately $25 million in net annualized synergies through the closing of under-performing centers and the rationalization of corporate overhead. In November 2005, KLC separated its education operations (KLC OpCo) from its real estate assets (KLC PropCo). Management believes this division allows KLC OpCo management to focus on the core business of operating and growing the ECE business while the maximization of the valuable educational real estate portfolio is managed and expanded by a professional real estate firm, Greenstreet Real Estate Partners (formerly Greenstreet Realty Partners, L.P.), and also represents management's view of KLC's component businesses.

Management believes that KUE presents an attractive financial profile with its combination of businesses: (i) KLC OpCo, which generated $1.48 billion in pro forma revenue and $150 million in pro forma Adjusted EBITDA⁶ in 2005, is projected to grow organically to $2.3 billion and $320 million by 2011, respectively and to generate operating cash flow growing from $72 million in 2005 to $214 million in 2011; (ii) a real estate portfolio in KLC PropCo that generated an additional $88 million in pro forma EBITDA in 2005; and (iii) an investment in k12, which continues to deliver top line growth in excess of 25% and has seen its revenue grow at a 133% compounded annual growth rate over the last three fiscal years (from $6.7 million in 2002 to $85.1 million in 2005).

1.2. Investment Rationale

1.2.1 Attractive Industry Characteristics

■ The global for-profit education market is large and growing

⁴ Source: UNESCO Institute for Statistics database.
⁵ Source: US Department of Education National Center for Education Statistics and Training Magazine and Harris Nesbitt research.
⁶ Pro forma for the acquisition of KinderCare and the separation of KLC into KLC OpCo and KLC PropCo.

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