EFTA01203161.pdf

Knowledge Universe Education ■. and Subsidiaries Consolidated Financial Statements as of and for the Years Ended December 31, 2013 and 2012, and Independent Auditors' Report EFTA01203161 KNOWLEDGE UNIVERSE EDUCATION ■. AND SUBSIDIARIES TABLE OF CONTENTS Page INDEPENDENT AUDITORS' REPORT CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012: Balance Sheets 3-4 Statements of Operations 5 Statements of Comprehensive Income 6 Statements of Partners' Equity 7 Statements of Cash Flows 8-9 Notes to Consolidated Financial Statements 10-35 EFTA01203162 Deloitte Deloitte Et Touche LIP Suite 200 350 South Grand Avenue Los Angeles, CA 90071-3462 USA Tel: +I 2136880800 Fax: +I 213 6.98 0100 www.deicitte.com INDEPENDENT AUDITOR'S REPORT To the Board of Directors of KUE Management Inc., General Partner of Knowledge Universe Education ■. and Subsidiaries Santa Monica, California We have audited the accompanying consolidated financial statements of Knowledge Universe Education ■. and subsidiaries (the "Company"), which comprise the consolidated balance sheets as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, partners' equity, and cash flows for the years then ended, and the related notes to the consolidated financial statements. Management's Responsibility for the Consolidated Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors' Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors' judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Company's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Member of Nieto* Touche Tohmatau tented EFTA01203163 Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2013 and 2012, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. eragat_ap June 30, 2014 -2- EFTA01203164 KNOWLEDGE UNIVERSE EDUCATION ■. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2013 AND 2012 (Dollars in thousands) 2013 2012 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 396,757 $ 259,391 Short-term marketable securities 755 1,015 Accounts receivable — net 60,323 60,681 Income tax receivable 2,474 3,864 Deferred income taxes 31,402 28,427 Assets held for sale 82 26,578 Prepaid expenses and other current assets 27,746 30,352 Assets related to discontinued operations 28 Total current assets 519,539 410,336 PROPERTY AND EQUIPMENT — Net 886,466 920,814 LONG-TERM INVESTMENTS 3,820 155,937 GOODWILL 383,336 384,702 OTHER INTANGIBLE ASSETS — Net 95,286 99,245 ASSETS HELD FOR SALE 250,642 DEFERRED INCOME TAXES 30,002 29,914 OTHER ASSETS 67,988 51,540 ASSETS RELATED TO DISCONTINUED OPERATIONS 2,025 TOTAL $1,986,437 $2,305,155 (Continued) -3- EFTA01203165 KNOWLEDGE UNIVERSE EDUCATION M. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2013 AND 2012 (Dollars in thousands) 2013 2012 LIABILITIES AND EQUITY CURRENT LIABILITIES: Accounts payable $ 23,076 $ 21,157 Current portion of self-insurance 22,910 21,712 Income taxes payable 650 231 Accrued property and other taxes 16,178 12,810 Deferred revenue 65,607 61,941 Accrued interest 6,233 7,231 Accrued compensation and related expenses 55,619 49,249 Other accrued liabilities 30,626 34,737 Current portion of long-term debt 19,856 18,061 Current portion of capital lease obligations 3,031 3,840 Current portion of liabilities associated with assets held for sale 64,165 Total current liabilities 243,786 295,134 LONG-TERM DEBT 885,437 910,207 CAPITAL LEASE OBLIGATIONS 8,027 10,903 DEFERRED INCOME TAXES 65,762 70,328 LIABILITIES ASSOCIATED WITH ASSETS HELD FOR SALE 154,663 OTHER LONG-TERM LIABILITIES 64,910 60,419 Total liabilities 1,267,922 1,501,654 EQUITY: Partners' equity: Common partner units — 2,239,551 units issued and outstanding 388,141 757,383 Accumulated other comprehensive income 6,812 53,119 Retained earnings (accumulated deficit) 308,559 (20,344) Total parts equity attributable to Knowledge Universe Education. 703,512 790,158 Noncontrolling interests 15,003 13,343 Total equity 718,515 803,501 TOTAL $1,986,437 $2,305,155 See notes to consolidated financial statements. (Concluded) -4 - EFTA01203166 KNOWLEDGE UNIVERSE EDUCATION ■. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (Dollars in thousands) 2013 2012 REVENUE $ 1,564,669 $1,531,173 COST OF REVENUE 1,113,640 1,104,494 GROSS MARGIN 451,029 426,679 OPERATING EXPENSES: General and administrative 286,568 291,660 Depreciation 86,820 98,197 Amortization of intangibles 3,067 4,209 Loss on closure of centers and other expenses 12,655 4,317 Total operating expenses — net 389,110 398,383 INCOME FROM OPERATIONS 61,919 28,2% NONOPERATING EXPENSE (INCOME): Gain on investments (166,598) (1,446) Gain on extinguishment of debt (52) (6,439) Interest expense 62,817 64,507 Interest income (697) (3,353) Other income (expense) — net 4,352 (1,722) Nonoperating (income) expense — net (100,178) 51,547 INCOME (LOSS) BEFORE INCOME TAXES 162,097 (23,251) INCOME TAX BENEFIT 4,416 18,318 INCOME (LOSS) FROM CONTINUING OPERATIONS — Net of taxes 166,513 (4,933) INCOME FROM DISCONTINUED OPERATIONS 165,662 9,472 NET INCOME 332,175 4,539 LESS NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS (3,272) (2,503) NET INCOME ATTRIBUTUIE TO KNOWLEDGE UNIVERSE EDUCATION M. $ 328,903 $ 2.036 See notes to consolidated financial statements. -5- EFTA01203167 KNOWLEDGE UNIVERSE EDUCATION ■. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (Dollars in thousands) 2013 2012 NET INCOME $ 332,175 $ 4,539 OTHER COMPREHENSIVE INCOME (LOSS): Foreign currency translation adjustments 3,648 3,775 Unrealized gain on investment — K12, Inc. 117,695 18,380 Reclassification of unrealized gain on K-12 Inc. investment to income upon distribution to shareholders (167,708) Comprehensive income 285,810 26,694 LESS COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS: Noncontrolling interest in net income 3,272 2,503 Foreign currency translation adjustments (58) 50 COMPREHENSIVE INCOME ATTRIBUTAUB TO KNOWLEDGE UNIVERSE EDUCATION M. $ 282,596 $ 24,141 See notes to consolidated financial statements. -6- EFTA01203168 KNOWLEDGE UNIVERSE EDUCATION ■. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF PARTNERS' EQUITY FOR THE YEARS ENDED DECEMBER 31. 2013 AND 2012 (Dollars in thousands) Knowledge Universe Education ■. (Accumulated Accumulated Deficit) Other Total Common Retained Comprehensive Partners' Noncontrolling Total Partner Units Amount Earnings Income Equity Interests Equity BALANCE —January I. 2012 2239,551 $ 757,383 (22.3801 31.014 766.017 10.290 776,307 Net income 2,036 2.036 2.503 4.539 Contribution by noncontrolling interest in KUE US LLC 500 500 Other comprehensive income (loss): Foreign currency translation adjustments 3,725 3,725 50 3,775 Unrealized gain on investments — K12 Inc. 18.380 18.380 18.380 BALANCE —December 31. 2012 2.239.551 757.383 (20.344) 53,119 790.158 13.343 803301 Net income 328.903 328.903 3.272 332.175 Other comprehensive income (loss): Foreign currency translation adjustments 3,706 3,706 (58) 1648 Unrealized gain on investment —1C12 Inc. 117,695 117,695 117.695 Reclassification of unrealized gain on K-12 Inc. investment to income upon distribution to shareholders (167,708) (167,708) (167.708) Noncontrolling interest related to sale of Busy Bees (1.554) (1.554) Cash distribution to partners (100,000) (100.000) (100.000) Distribution of KI2 Inc. shares to partners (269,242) (269.242) (269242) BALANCE — December 31.2013 2 239 551 $ 388.141 $ 308.559 $ 6.812 $ 703.512 5 15 003 $ 718.515 See notes to consolidated financial statements. -7- EFTA01203169 KNOWLEDGE UNIVERSE EDUCATION ■. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (Dollars in thousands) 2013 2012 OPERATING ACTIVITIES: Net income S 332.175 S 4539 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 83.508 90,471 Impairment of fixed assets 6.445 11,935 Impairment of goodwill 545 Stock-based compensation 1.216 (182) Loss on sale of property and equipment and software rights 1,169 Loss on sales of debt securities 1,574 Gain on extinguishment of debt (52) (6,439) Gains on sale of investments (167,708) Gain on sale of discontinued operations (165,662) (9,472) Loss on liquidated discontinued operations Loss on sale of centers 41 Unrealized gains on marketable securities and derivatives (2.997) (236) Return on equity method investments (836) Amortization of deferred financing and other costs 3.468 4964 Interest expense capitalized as long-term debt (5) Foreign currency exchange gain (loss) 7.552 (10.790) Changes in: Accounts receivable 1,120 12.270 Prepaid expenses and other current assets 15,653 1855 Income tax receivable 2.992 6.956 Assets held for sale (82) 117 Deferred income taxes (9.153) (11.827) Other assets (1.764) 2,897 Accounts payable 2,785 (19,310) Accrued expenses and other liabilities (358) 21.014 Net cash provided by discontinued operations 29.883 20.798 Net cash provided by operating activities 139.602 123.467 INVESTING ACTIVMES: Purchases of property and equipment (78,592) (84.287) Proceeds from sale of properly and equipment 7,954 1,081 Proceeds from sale of investments 206,427 5,147 Increase in restricted cash (17,365) (14442) Proceeds from insurance recoveries 795 Purchases of shop-term marketable securities (4.910) Proceeds from sales of short-term marketable securities 250 44.220 Acquisitions of businesses (95.977) Investment in Open Realty Advisors 609 Net cash provided by (used in) investing activities 120.078 (149.368) (Continued) -8- EFTA01203170 KNOWLEDGE UNIVERSE EDUCATION ■. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 (Dollars in thousands) 2013 2012 FINANCING ACTIVMES: Payments on long-term debt and capital leases S (21,668) S (108.242) Proceeds from long-term debt 138.225 Contribution by noncontrolling interest 500 Distribution to partners (100,000) Debt issuance costs (646) (6.949) Net cash (used in) provided by financing activities (122.314) 23334 NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 137,366 (2.367) CASH AND CASH EQUIVALENTS — Beginning of year 259.391 261.758 CASH AND CASH EQUIVALENTS — End of year S 396.757 S 259.391 SUPPLEMENTAL DISCLOSURES OF CASII FLOW INFORMATION: Cash paid for interest S 62.186 S 75.597 Cash paid (refunded) for income taxes — net S 414 S (3.081) NONCASH INVESTING AND FINANCING ACTIVMES: Purchases of property and equipment included in current liabilities S 1.591 S 104 Assets acquired under capital leases S 202 S 2.027 Noncash distribution of K-I2 shares to Partners S 269.242 S - See notes to consolidated financial statements. (Concluded) -9- EFTA01203171 KNOWLEDGE UNIVERSE EDUCATION ■. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE YEARS ENDED DECEMBER 31, 2013 AND 2012 1. GENERAL Knowledge Universe Education was formed in April 2006 as a Cayman Islands exempted limited partnership. Knowledge Universe Education.. is a holding company, whose subsidiaries specialize in education in the preschool to 12th grade segment, mainly in the United States and Asia (collectively, KUE ■. or the "Company"). The major subsidiaries are as follows: KUE US LLC — KUE US LLC ("KUE US") was formed in January 2012 as a holding company for the domestic early childhood education operations of the Company. Its main subsidiary is Knowledge Universe Education Holdings Inc. Knowledge Universe Education Holdings Inc. — Knowledge Universe Education Holdings Inc. (KUEH) was formed in May 2011 as a holding company for the early childhood education operations of its wholly owned subsidiary, Knowledge Universe Education LLC (KUE LLC) and related subsidiaries and offers early childhood education programs to children ages six weeks through 12 years. The services provided include toddler care, preschool and kindergarten classes, and before- and after-school programs. KUE LLC provides education and care programs within the following three categories: Early Childhood Education and Care — KUEH provides early childhood education and care services, primarily marketed under the names of KinderCare Learning Centers and Knowledge Beginnings. These services are provided through 1,506 community centers with a licensed capacity of 200,258 in 38 states. Employer-Sponsored Early Childhood Education and Care — KUEH provides employer-sponsored early childhood education and care services, as well as back-up care, generally marketed under the name of Children's Creative Learning Centers (CCLC), through 97 centers and four programs with a licensed capacity of 11,932 in 22 states and the District of Columbia. CCLC operates in partnership with employer sponsors under a variety of arrangements, such as discounted rent, enrollment guarantees, or an arrangement whereby the center is managed by CCLC in return for a management fee. Before- and After-School Educational Enrichment Programs — KUEH provides customized before- and after-school educational enrichment programs for school-age children and preschool programs in connection with elementary schools under the name of Champions. Champions offers 386 educational enrichment programs in 16 states and the District of Columbia. These programs primarily operate at elementary school facilities. Knowledge Universe Global Inc. — Knowledge Universe Global Inc. ("KU Global") was formed in June 2012 as a holding company for the international early childhood education operations of the Company. Its main subsidiaries are: Knowledge Universe Pte. Ltd — Knowledge Universe Pte. Ltd (KUPL) is a Singapore holding company for the early childhood education and international school operations of its wholly owned subsidiaries in Asia. Its primary operations include Pat's Schoolhouse, Learning Vision @ Work, Asian International College, Learning Horizon, Global Educare, Odyssey The Global Preschool, Canadian International School Pte. Ltd., and Brighton Montessori Centres. It operates with a capacity of more than 6,105 children, excluding Canadian International School. - 10- EFTA01203172  Global Educare Sdn Bbd — The Company acquired Global Educare Sdn Bhd ("Global") on May 14, 2010. The principal activity of Global is providing child care and educational services in Malaysia. It operates with a capacity of 1,085 children. Canadian International School Pte. Ltd. — The Company acquired a 60% joint venture interest in Canadian International School Pte. Ltd. (CIS) on June 5, 2010. CIS offers an International Baccalaureate program for students from early childhood education to K12. CIS has two campuses in Singapore with the new 463,000 square foot Lakeside campus in Jurong operating since October 2011. It operates with a capacity of more than 4,238 children (see Note 22). Busy Bees Group Limited — The Company owned approximately 85% of Busy Bees Group Limited ("Busy Bees"). Busy Bees is the UK's largest provider of care and education for children up to school age (five years of age). It operates more than 122 child care centers across the UK with a capacity of more than 11,000 children. The nurseries provide complete child care services with child development programs and curricula designed to develop creativity, individuality, and self-confidence in the children. Busy Bees was sold on October 31, 2013 (see Note 3). Just Learning Group — The Company acquired 100% of Just Learning Group (JLG) on August 17, 2012 (see Note 4). JLG is a UK early childhood education provider with 71 centers and operates with a capacity of more than 6,664 children. JLG was sold on October 31, 2013, as part of Busy Bees (see Note 3). KU Education Inc. — KU Education Inc. (KUE Inc.) was formed in March 2003 and is a holding company for the real estate operations of the Company. Its main subsidiary is KC Propco Holdings II LLC ("KC Propco"). 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation — The consolidated financial statements include the accounts of KUE and its wholly owned subsidiaries, KUE US, KU Global, KUE Inc., and Learning Group LLC. All intercompany balances and transactions are eliminated in consolidation. The noncontrolling interests represent the 40% noncontrolling interest in CIS as of December 31, 2013 and 2012 (see Notes 15 and 22). Use of Estimates — The consolidated financial statements are presented in conformity with accounting principles generally accepted in the United States of America. The preparation thereof requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared based on the most current and best available information, and actual results could differ from those estimates. The most significant estimates underlying the consolidated financial statements include the allowance for doubtful accounts; long-lived assets, other intangible assets, and goodwill valuations and any resulting impairment; self-insurance obligations; valuation of stock appreciation rights; and recognition and measurement of uncertain tax positions and valuation allowances against deferred tax assets. Revenue Recognition — The recognition of revenues meets the following criteria: the existence of an arrangement through an enrollment agreement, the rendering of child care and tutoring services, an age-specific tuition rate and/or fees, and probable collection. Tuition, fees, and other income are recognized as the related services are provided. Payments for these types of services may be received in advance of services being rendered, in which case the revenue is deferred and recognized over the EFTA01203173 appropriate service period. Deferred revenue for nonrefundable registration fees is recognized over the average enrollment period, not to exceed 12 months. The Company's primary source of revenue is tuition paid by parents and supplemented, in some cases, by employer sponsors and government agencies. Revenues also include management fees paid by employer sponsors. In addition to tuition revenue and management fees, the Company receives fees for registration and other ancillary services. Tuition revenue recognized pursuant to state and federal programs was approximately 24.0% and 23.7% of total revenue for 2013 and 2012, respectively. Cash and Cash Equivalents — Cash and cash equivalents include interest-earning securities that mature within three months or less from the date purchased. Restricted Cash — At December 31, 2013 and 2012, restricted cash of $48.0 million and $30.6 million, respectively, is included within other assets in the Company's consolidated balance sheets. Restricted cash of $38.5 million and $20.5 million at December 31, 2013 and 2012, respectively, is related to debt service requirements for properties sold that are held as collateral under the collateralized mortgaged-backed security (CMBS) facility; consisting of a $650.0 million mortgage loan and $50.0 million senior mezzanine loan (see Note 11). Restricted cash of $5.1 million at December 31, 2013, is held under an agreement regarding the distributed K12 Inc. shares (see Note 17). Restricted cash of $4.4 million and $10.1 million at December 31, 2013 and 2012, respectively, is held as collateral on the Company's foreign currency hedge (see Note 13). Concentration of Credit Risk — Financial instruments that subject the Company to credit risk consist primarily of cash and cash equivalents and trade receivables. Cash and cash equivalents are placed with high credit quality financial institutions. Concentration of credit risk with respect to trade receivables is generally diversified due to the large customer base and its geographic dispersion. The Company performs ongoing credit evaluations of its customers and maintains an allowance for doubtful accounts. Accounts Receivable — Accounts receivable are composed primarily of tuition and reimbursable expenses due from government agencies, parents, and employers. Accounts receivable are presented at estimated net realizable value. The Company uses estimates in determining the ability to collect accounts receivable and must rely on its evaluation of historical experience, specific customer issues, governmental funding levels, and current economic trends to arrive at appropriate reserves. Investments — The Company classifies investments in debt and equity securities as trading, held to maturity, or available for sale. At December 31, 2013, available-for-sale securities include debt and equity securities, which the Company records at fair value, with unrealized gains and losses reported as part of accumulated other comprehensive income in the consolidated balance sheets. Trading securities include investments in short-term corporate debt securities. Unrealized gains and losses on these short-term marketable securities are included in nonoperating income in the consolidated statements of operations. - 12 - EFTA01203174 Investments at December 31, 2013 and 2012, consisted of the following (in thousands): 2013 2012 Available-for-sale equity securities — K-12 Inc. $ - $ 151,565 Trading — short-term marketable securities 755 1,015 Equity method investments 3,820 4,372 Total investments 4,575 156,952 Less short-term marketable securities 755 1,015 Total long-term investments $ 3.820 S 155.937 Investments in available-for-sale equity securities and trading short-term marketable securities at December 31, 2013 and 2012, consisted of the following (in thousands): 2013 2012 Gross Estimated Gross Estimated Unrealized Fair Unrealized Fair Cost Gain Value Cost Gain Value Available for sale — equity securities — K-I2 Inc. $ - $ - $ - $101,465 $50,100 $151,565 Trading — short-term marketable securities 747 8 755 995 20 1,015 Property and Equipment — Property and equipment are stated at cost, less accumulated depreciation. Depreciation is computed on a straight-line basis over the useful lives of the assets or, in the case of leasehold improvements, the lesser of the tenn of the related lease or the useful lives of the improvements. A summary of estimated useful lives is as follows: Buildings 5-50 years Land improvements 2-15 years Furniture, fixtures, and equipment 2-10 years Building and leasehold improvements 2-60 years Maintenance, repairs, and minor refurbishments are expensed as incurred. Goodwill — Goodwill represents the excess of the cost over the fair value of the identifiable net assets of businesses acquired. The Company tests its goodwill for impairment on an annual basis, or more frequently, if circumstances indicate reporting unit carrying values exceed their fair values. Fair value is estimated by projecting future discounted cash flows from the applicable reporting unit in addition to other quantitative and qualitative analyses. If the carrying amount of goodwill exceeds the implied estimated fair value (based on discounted cash flows), an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value. In 2013, there was goodwill impairment of $0.5 million. There was no impairment of goodwill in 2012. - 13 - EFTA01203175 Other Intangible Assets — Other intangible assets consist of customer lists, contract rights, accreditations, proprietary curricula, covenants not to compete, trade names, and trademarks. Other intangible assets subject to amortization are amortized on a straight-line basis over their estimated useful lives. The Company reviews and evaluates the remaining useful lives of such assets if events or changes in circumstances require impairment testing and/or a revision to the remaining period of amortization. Any such impairment analysis is based on a comparison of the carrying values to expected future cash flows. Other intangible assets with indefinite useful lives are tested for impairment on an annual basis, or more frequently, if circumstances indicate the carrying values exceed their fair values. If the carrying amount exceeds the implied estimated fair value, an impairment charge to current operations is recorded to reduce the carrying value to the implied estimated fair value. There was no impairment of other intangibles during 2013 or 2012. Long•Lived Assets — The Company reviews and evaluates its long-lived assets, other than goodwill and indefinite-lived intangible assets, for impairment when events or changes in circumstances indicate that the carrying value of assets may not be recoverable through future undiscounted cash flows. Any impairment is measured as the amount by which the carrying values of such assets exceed their fair value (based on discounted cash flows). Impairment losses related to child care center property and equipment totaled $6.4 million for 2013 and $11.9 million for 2012. The impairment charges are included as a component of depreciation expense in the consolidated statements of operations. Financial Instruments — The Company calculates the fair value of financial instruments and includes this information in the Company's notes to consolidated financial statements when the fair value is different than the book value of those financial instruments. When fair value is equal to book value, no disclosure is made. The carrying values of cash and cash equivalents, accounts receivable, accounts payable, accrued compensation, and related expenses and other accrued liabilities, excluding derivatives, approximate fair value due to the short-term nature of these assets and liabilities. The Company's derivatives include an interest rate swap agreement, an interest rate cap agreement, and a four-year forward currency hedge based on the British pound. These instruments are recognized in the consolidated balance sheets at fair value. None of these instruments have been designated as a hedge of specific underlying interest rate exposure and therefore they are not subjected to hedge accounting. Rather, the interest rate swaps and caps are marked to market with the resulting gains or losses recognized as a component of interest expense in the consolidated statements of operations, and changes in the market value of the foreign currency hedge are included as a component of gains and losses on investments. Deferred Financing Costs — Included in other assets are deferred financing costs incurred in connection with the issuance of debt. Deferred financing costs are amortized over the lives of the related debt facilities using a method that approximates the effective interest method (see Note 10). Income Taxes — The Company accounts for income taxes under the asset and liability method. Under this method, deferred tax liabilities and assets are recognized for the expected future consequences of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. If it is more likely than not that some portion or all of a deferred tax asset will not be realized, a valuation allowance is established to reduce the amount - 14- EFTA01203176 of that deferred tax asset to the amount, more likely than not, to be recognized. Uncertain tax positions and the related interest and penalties are recognized in other liabilities and income tax expense (see Note 19). Other Comprehensive Income — Accounting Standards Codification (ASC) 320-10 requires that investment securities with readily determinable market values be marked to market at each reporting period. Accumulated other comprehensive income includes unrealized gains and losses on marketable securities classified as available for sale, net of the related tax effects, and adjustments to reclassify losses to the consolidated statements of operations for securities that have been determined to have other-than-temporary impairment — net of any related tax effects. ASC 323-10, Investments-Equity Method and Joint Ventures, requires that a transaction of an investee of a capital nature should be recorded based on the investor's proportionate share of stockholder's equity of the investee. Therefore, the Company has recorded its proportionate share of the investee's adjustments to other comprehensive income. Advertising Costs — Costs incurred to produce media advertising for seasonal campaigns are expensed when the advertising first takes place. All other advertising costs are expensed as incurred. Total advertising expense was $13.8 million and $10.9 million for 2013 and 2012, respectively, and is included in general and administrative expenses. Self-Insurance — KUEH is self-insured for certain levels of general liability, workers' compensation, auto, property, and employee medical insurance coverage. Estimated costs of these self-insurance programs are accrued at the undiscounted value of projected settlements for known and anticipated claims incurred. The self-insurance reserves established and claims paid at December 31 are as follows (in thousands): 2013 2012 Balance — beginning of year $ 42,084 $ 43,207 Expense 109,458 102,473 Claims paid (107,881) (103,596) Balance — end of year $ 43,661 $ 42,084 Recent Accounting Pronouncements — In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryfonvard, a Similar Tax Loss, or a Tax Credit Carryfonvard Exists (Topic 740). This ASU requires that liabilities related to unrecognized tax benefits offset deferred tax assets for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In situations in which a carryforward cannot be used or the deferred tax asset is not intended to be used for such purpose, the unrecognized tax benefit should be recorded as a liability and should not offset deferred tax assets. The guidance is effective for annual and interim reporting periods beginning after December 15, 2013, and permits early adoption. The Company has adopted the provisions of this new guidance for the tax year ended December 31, 2013. On September 13, 2013, the Internal Revenue Service released final tangible property regulations under Sections 162(a) and 263(a) of the Internal Revenue Code of 1986 (the "Code"), regarding the deduction and capitalization of expenditures related to tangible property. Also released were proposed regulations under Section 168 of the Code regarding dispositions of tangible property. These regulations replace - 15 - EFTA01203177  previously issued temporary regulations and are effective for tax years beginning January I, 2014, or for the Company's fiscal year ending March 31, 2015, with optional adoption permitted in 2013. The Company is in the process of analyzing the impact of these new regulations but does not believe they will have a material impact on the Company's financial statements. In May 2014, the FASB issued ASU 2014-09, Revenuefrom Contracts with Customers. For nonpublic entities, the standard is effective for fiscal years ending on or after December 15, 2017, which will be the Company's fiscal year ending December 31, 2017. The Company is in the process of evaluating the potential impacts adoption of the new standard will have on its financial position, results of operations, and cash flows. 3. DISCONTINUED OPERATIONS On January 3, 2011, KUE Digital sold its wholly owned subsidiaries, KUE Digital Inc., ExLogica, and Excelsior, for approximately $140 million, and recognized a gain of approximately $110 million after consideration of noncontrolling interests. During 2012, an additional $5.1 million of gain was recognized due to the release of escrow reserves. On October 31, 2013, the Company sold its 85% interest in Busy Bees and its wholly owned subsidiary, Just Learning Group (collectively, the "UK Subsidiaries"), for approximately $205.1 million, and recognized a gain of approximately $169.2 million. The tab