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10. MANAGEMENT'S DISCUSSION AND ANALYSIS OF KLC's PRO FORMA RESULTS OF OPERATIONS

In January 2005, KLC acquired KinderCare and incurred $540 million of term debt (the "Acquisition Term Debt") and $250 million of subordinated bridge debt to finance the acquisition. At the time of the KinderCare acquisition, KinderCare had approximately $300 million of nonrecourse mortgage debt outstanding (the "KinderCare CMBS Debt"). KLC refinanced the bridge debt in February 2005 with $260 million of 7-3/4% senior subordinated notes due 2015 (the "Notes"). In November 2005, KLC completed a transaction (the "Real Estate Transaction") in which KLC divided its business, with substantially all of its real estate owned by special purpose subsidiaries (collectively, KLC PropCo) and all of its customer contracts and operations remaining at KLC and certain other subsidiaries (collectively, KLC OpCo). Management believes that this division represents the best way to analyze the business going forward. In connection with the Real Estate Transaction, KLC PropCo entities incurred $650 million of mortgage debt, $50 million of senior mezzanine debt and $150 million of junior mezzanine debt, which indebtedness is nonrecourse to KLC OpCo, the proceeds of which were primarily used to repay the Acquisition Term Debt and the KinderCare CMBS Debt, and KLC PropCo leased its owned centers back to KLC OpCo. See "KLC: Management's Discussion and Analysis of Financial Condition and Results of Operations for the Fiscal Years Ended 2005, 2004 and 2003" in Appendix B, "KLC: Management's Discussion and Analysis of Financial Condition and Results of Operations for the Quarterly Period Ended April 1, 2006" in Appendix C, "KLC: Management's Discussion and Analysis of Financial Condition and Results of Operations for the Quarterly Period Ended July 1, 2006" in Appendix D and Notes 11 and 21 to KLC's Financial Statements in Appendix E.

The discussion below presents the pro forma results of consolidated KLC (KLC OpCo and KLC PropCo) as if the KinderCare acquisition and the Real Estate Transaction occurred on January 1, 2004. The pro forma results are not adjusted for the costs of operating KLC and KinderCare in parallel for a significant portion of 2005, or for restructuring costs incurred in combining the two businesses. These and other items are reflected as adjustments to EBITDA in our presentation of pro forma Adjusted EBITDA.

Our pro forma results for KLC were not prepared in conformity with Article 11 of Regulation S-X of the SEC (which would not, among other limitations, permit a 2004 pro forma presentation after completion of our 2005 financial statements). In addition, by presenting a pro forma comparison, this discussion and analysis does not include a comparison of KLC's historical GAAP consolidated operating results or segment information that would be required by Item 3-03 of Regulation S-X of the SEC. The presentation of non-GAAP information herein does not purport to comply with Item 10(e) of Regulation S-K or Regulation G of the SEC. For further information see "KLC: Management's Discussion and Analysis of Financial Condition and Results of Operations for the Fiscal Years Ended 2005, 2004 and 2003" in Appendix B, "KLC: Management's Discussion and Analysis of Financial Condition and Results of Operations for the Quarterly Period Ended April 1, 2006" in Appendix C, "KLC: Management's Discussion and Analysis of Financial Condition and Results of Operations for the Quarterly Period Ended July 1, 2006" in Appendix D and the KLC and KinderCare GAAP financial statements in Appendix E.

The pro forma presentation is not shown with adjustments to historical financial statements. Instead, it is based on a "ground up" combination of corporate level expenditures (overhead and capital expenditures) and internal financial statements derived from a center-by-center build up of KLC's results. The primary reasons for the presentation based on internal reports instead of KLC and KinderCare financial statements are the different fiscal year ends and expense classifications between KLC and KinderCare. The "ground up" analysis presented is consistent with management's view of the business.

Key Operating Variables

Net Revenue Trends and Drivers

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