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The vast majority of KLC's net revenues are derived from center operations. The trends and drivers discussed below relate to such center operations.

KLC derives its net revenues primarily from the tuition it charges for attendance by children at its centers. KLC's tuition rates and net revenues can be significantly impacted by the enrollment characteristics at its centers. Key factors include (1) geographic location, because KLC can command higher tuition rates in certain geographic areas; (2) the age mix of children enrolled, because tuition rates depend on the age of the child and are generally higher for younger children; (3) the mix between full- and part-time attendance, because KLC charges comparatively higher rates for part-time enrollment and (4) the level of participation in government subsidy and discount programs.

KLC calculates its average weekly tuition rate as the actual tuition charged at centers that are open at the calculation date, net of discounts, for a specified time period, divided by average "full-time equivalents," or "FTEs" for the related time period. KLC's FTEs are calculated by dividing net revenue by the center's undiscounted average pre-school tuition rate. FTEs do not necessarily reflect the actual number of full- and part-time children enrolled.

Tuition rates at KLC's centers are typically adjusted once per year to coincide with the back-to-school period. KLC typically collects tuition on a weekly basis in advance, the majority of which is paid by individual families. KLC provides discounts to government agencies, employees, families with multiple enrollments, referral sources and organizations KLC partners with for its employer-sponsored centers. In its employer-sponsored centers, tuition may be partly subsidized by such employers.

Approximately 20% of KLC's net revenues are derived from tuition paid at varying levels of subsidy by government agencies. KLC's revenues are therefore affected by changes in the levels of government support for education, which are negatively impacted by weak economic conditions and resulting budget pressure at federal, state and local governments.

KLC reports comparable center revenue trends based on the centers (other than the employer-sponsored centers operated for a management fee) that were open in both periods. Comparable center net revenues do not include revenues generated from centers that have been closed or sold.

Utilization is a measure of the utilization of center capacity. KLC calculates utilization as the total actual child care revenues earned at centers that are open at the calculation date divided by the total potential child care revenue (based upon the center's undiscounted pre-school tuition rate and the center's total licensed capacity) during the related time period.

In addition to tuition charges, KLC records revenues from fees and other income in a majority of its centers. KLC charges a reservation fee, typically at half of the normal tuition charge, for any full week that an enrolled child is absent from its centers. KLC also collects registration fees and fees to cover educational supplies at the time of enrollment and annually thereafter. KLC offers tutorial programs on a supplemental fee basis in the majority of our centers in the areas of literacy and reading, foreign language, mathematics and music. KLC also offers field trips, predominantly during the summer months, for an additional charge. KLC's centers earn other miscellaneous revenue from various sources, including management fees related to certain employer-sponsored centers. In addition to its child care operations, KLC's subsidiary, KC Distance Learning, sells 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.

Cost of Revenue – Trends and Drivers

KLC's costs of revenue include the direct costs related to the operations of its centers. Labor related costs are the largest component of costs of revenue. KLC's time management and scheduling systems, which enable us to adjust staffing levels for peak and reduced attendance periods, allow KLC to manage its labor productivity without adversely impacting the quality of services within its centers.

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