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12. THE REAL ESTATE COMPANY (“KLC PROPCO”)

On November 9, 2005, KLC transferred ownership of 845 ECE centers into wholly owned, bankruptcy remote subsidiaries, which are referred to as KLC PropCo. In October 2005, 713 of the centers were independently appraised at approximately $1.1 billion.36 KLC PropCo then issued $700 million of CMBS debt secured by the 713 appraised centers and the stock of the CMBS borrower, and $150 million of junior mezzanine debt, the proceeds of which were used to repay KLC OpCo debt. The table below summarizes the revised corporate structure at KLC:

[DIAGRAM]
KLC OpCo
• $100.0 million Revolver
• $16.4 million Capital Leases
• $260.0 million Sr. Subordinated Notes

Operating Company
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Real Estate Company

KLC PropCo
• 845 Properties
• $699.4 million CMBS Debt
• $150.0 million Junior Mezzanine Debt(1)
[END DIAGRAM]

(1) Represents face value; book value is approximately $147.3 million.

With 845 ECE centers in 37 states (as of December 31, 2005), KLC PropCo believes it is the largest private owner of education real estate assets in the world. The real estate portfolio is geographically diversified without significant concentrations or ties to any single part of the U.S. KLC PropCo leases its centers to KLC OpCo for an aggregate annual rent of $96.3 million. The lease agreement, which was signed in November 2005, carries an initial term of 15 years with two extensions available for five years each and an escalation of rent by the lesser of 7% or the CPI every fifth year. All of the properties have been leased to KLC OpCo on a “triple-net” basis, requiring KLC OpCo to fund all property taxes, insurance expenses related to the properties and all maintenance capital expenditures. For the fiscal year ended December 31, 2005, KLC PropCo generated pro forma rental revenue of $96.3 million and EBITDA of $88.1 million.

12.1. KLC PropCo Strategy

▪ KLC PropCo was separated from KLC OpCo to create a flexible vehicle to address the growing opportunity in education related real estate. The ongoing need for facility-based education is driving increased demand for real estate assets that can accommodate the facilities.

36 Actual appraisal was for 713 centers and the appraised value was $1.1 billion. The $1.25 billion referred to within this Memorandum is achieved by taking the independent appraisal valuation methodology and extrapolating it to the remaining 132 centers.

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