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incentives to families and employers to offset costs related to employer-provided child care facilities.
However, these tax incentives are subject to change.

KLC OpCo is also subject to the Fair Labor Standards Act, which governs such matters as minimum
wages, overtime compensation and working conditions. All of KLC OpCo's employees are paid at rates
equal to or higher than the federal minimum wage.

KLC OpCo is also subject to laws regulating its transportation of children. In 1998, the National Highway
Traffic Safety Administration, or NHTSA, issued interpretive letters stating that automobile dealers may no
longer sell 12 to 15-passenger vans intended to be used for the transportation of children to and from
school by child care providers and that any vehicle designed to transport 11 persons or more must meet
federal school bus standards if it is likely to be used significantly to transport children to and from school
or school-related events. These interpretations and related changes in state and federal transportation
regulations have affected the type of vehicle that the company may purchase for use in transporting
children between schools and its centers and, in effect, required KLC OpCo to replace its remaining fleet
of vans with school buses over time. These changes have increased the company's costs to transport
children because school buses are more expensive to purchase and maintain and, in some jurisdictions,
require drivers with commercial licenses.

11.12. Insurance

KLC OpCo's insurance program currently includes the following types of policies: workers' compensation,
commercial general liability, automobile liability, property, excess "umbrella" liability, directors' and
officers' liability and employment practices liability. These policies provide for a variety of coverages,
which are subject to various limits, and include substantial deductibles or self-insured retentions. Special
insurance is sometimes obtained with respect to specific hazards, if deemed appropriate and available at
a reasonable cost. Claims in excess of, or not included within, KLC's coverage may be asserted or
coverage may not be available due to insurance company failures or other reasons.

KLC OpCo maintained either a self-insured retention or a deductible for a portion of its general liability,
workers' compensation, auto, property and employee medical insurance programs. It purchases stop
loss coverage in order to mitigate its potential future losses. The nature of these liabilities, which may not
fully manifest themselves for several years, requires significant judgment. KLC OpCo estimates the
obligations for liabilities incurred but not yet reported or paid based on available claims data and historical
trends and experience, as well as future projections of ultimate losses, expenses, premiums and
administrative costs. While the company believes that the amounts accrued for these programs are
sufficient, any significant increase in the number of claims and/or costs associated with claims made
under these programs could have a material adverse effect on the consolidated financial statements.

11.13. Legal Issues

KLC OpCo does not believe that there are any pending or threatened legal proceedings that, if adversely
determined, would have a material adverse effect on its business or operations. However, it is subject to
claims and litigation arising in the ordinary course of business, including claims and litigation involving
allegations of physical or sexual abuse of children. Although KLC OpCo cannot be assured of the
ultimate outcome of the allegations, claims or lawsuits of which it is aware, it has not historically had to
pay any claims exceeding its insurance coverage, and management believes that none of these
allegations, claims or lawsuits, either individually or in the aggregate, will have a material adverse effect
on the Company's financial position, operating results or cash flows. In addition, it cannot predict the
negative impact of publicity that may be associated with any such allegation, claim or lawsuit.

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