As filed
with the Securities and Exchange Commission on
September 26, 2007
Registration
No. 333-144894
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Amendment No. 1
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
K12 INC.
(Exact name of registrant as
specified in its charter)
|
|
|
|
|
Delaware
|
|
8211
|
|
95-4774688
|
(State or Other Jurisdiction
of
Incorporation or Organization)
|
|
(Primary Standard Industrial
Classification Number)
|
|
(IRS Employer
Identification No.)
|
K12
Inc.
2300 Corporate Park Drive
Herndon, VA 20171
(703) 483-7000
(Address, including zip code,
and telephone number, including area code, of Registrants
principal executive offices)
Ronald J.
Packard
Chief Executive Officer
K12 Inc.
2300 Corporate Park Drive
Herndon, VA 20171
(703) 483-7000
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
|
|
|
|
|
William P.
ONeill, Esq.
|
|
Howard D. Polsky,
Esq.
|
|
Richard D. Truesdell,
Jr., Esq.
|
Blaise F. Brennan,
Esq.
|
|
Senior Vice President, General
Counsel and Secretary
|
|
Davis Polk &
Wardwell
|
Latham & Watkins
LLP
|
|
K12 Inc.
|
|
450 Lexington Avenue
|
555 Eleventh Street,
N.W
|
|
2300 Corporate Park
Drive
|
|
New York, NY 10017
|
Washington, D.C.
20004
|
|
Herndon, VA 20171
|
|
(212) 450-4674
|
(202) 637-2200
|
|
(703) 483-7000
|
|
|
Approximate date of commencement of proposed sale to the
public:
As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following box.
o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering.
o
CALCULATION
OF REGISTRATION FEE
|
|
|
|
|
|
|
Title of Each Class of
|
|
|
Proposed Maximum
|
|
|
Amount of
|
Securities to be Registered
|
|
|
Aggregate Offering Price(a)(b)
|
|
|
Registration Fee
|
Common stock, $0.0001 par value
|
|
|
$172,500,000
|
|
|
$5,296(c)
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Estimated solely for the purpose of
calculating the registration fee in accordance with
Rule 457(o) promulgated under the Securities Act of 1933.
|
(b)
|
|
Including shares of common stock
which may be purchased by the underwriters to cover
overallotments, if any.
|
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities, and we are not soliciting offers to buy these
securities in any state or jurisdiction where the offer or sale
is not permitted.
|
PROSPECTUS
(Subject to Completion)
Issued
September 26, 2007
Shares
K12 Inc.
Common Stock
K12 Inc. is
offering shares
of its common stock. This is our initial public offering and no
public market exists for our shares. We anticipate that the
initial public offering price will be between
$ and
$ per share.
Investing in our common stock involves risks. See
Risk Factors beginning on page 8 to read about
factors you should consider before buying shares of our common
stock.
We intend to apply to list our common stock on the New York
Stock Exchange under the symbol LRN.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting
|
|
|
|
|
|
Proceeds to
|
|
|
|
|
|
|
Discounts and
|
|
|
Proceeds to
|
|
|
Selling
|
|
|
|
Price to Public
|
|
|
Commissions
|
|
|
K12 Inc.
|
|
|
Stockholders
|
|
|
Per Share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
The underwriters may also purchase up to an
additional shares
of common stock from the selling stockholders at the public
offering price, less the underwriting discount within
30 days from the date of this prospectus to cover over
allotments, if any.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock to
purchasers on or
about ,
2007.
|
|
Morgan
Stanley
|
Credit
Suisse
|
,
2007
TABLE OF
CONTENTS
|
|
|
|
|
|
|
Page
|
|
Prospectus Summary
|
|
|
1
|
|
Risk Factors
|
|
|
8
|
|
Cautionary Notice Regarding
Forward-Looking Statements
|
|
|
22
|
|
Use of Proceeds
|
|
|
23
|
|
Dividend Policy
|
|
|
23
|
|
Capitalization
|
|
|
24
|
|
Dilution
|
|
|
25
|
|
Selected Consolidated Financial
Data
|
|
|
27
|
|
Managements Discussion and
Analysis of Financial Condition and Results of Operations
|
|
|
29
|
|
Business
|
|
|
48
|
|
Regulation
|
|
|
66
|
|
Management
|
|
|
70
|
|
Compensation Discussion and
Analysis
|
|
|
78
|
|
Certain Relationships and
Related-Party Transactions
|
|
|
90
|
|
Principal and Selling Stockholders
|
|
|
92
|
|
Description of Capital Stock
|
|
|
95
|
|
Certain United States Federal
Income Tax Considerations to
Non-U.S.
Holders
|
|
|
98
|
|
Shares Eligible for Future Sale
|
|
|
101
|
|
Underwriting
|
|
|
103
|
|
Notice to Canadian Residents
|
|
|
107
|
|
Sales Outside the United States
Other Than Canada
|
|
|
108
|
|
Legal Matters
|
|
|
111
|
|
Experts
|
|
|
111
|
|
Where You Can Find More Information
|
|
|
111
|
|
Index to Consolidated Financial
Statements
|
|
|
F-1
|
|
You should rely only on the information contained in this
prospectus. We and the underwriters have not authorized anyone
to provide you with different or additional information. This
prospectus is not an offer to sell or a solicitation of an offer
to buy our common stock in any jurisdiction where it is unlawful
to do so. The information contained in this prospectus is
accurate only as of its date, regardless of the date of delivery
of this prospectus or of any sale of our common stock.
Until and
including ,
2007, 25 days after the commencement of this offering, all
dealers that affect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
i
This summary highlights selected information contained
elsewhere in this prospectus and does not contain all of the
information you should consider in making your investment
decision. You should read the following summary together with
the more detailed information regarding us and our common stock
being sold in the offering, including the risks of investing in
our common stock discussed under Risk Factors
beginning on page 10 and our consolidated financial
statements and the related notes appearing elsewhere in this
prospectus, before making an investment decision. For
convenience in this prospectus, the Company,
K12,
K
12
,
we, us, and our refer to K12
Inc. and its subsidiaries, taken as a whole. References to
fiscal years refer to the fiscal year ended June 30 of the
year indicated.
K12
Inc.
Our
Company
We are a technology-based education company. We offer
proprietary curriculum and educational services created for
online delivery to students in kindergarten through
12th grade, or K-12. Our mission is to maximize a
childs potential by providing access to an engaging and
effective education, regardless of geographic location or
socio-economic background. Since our inception, we have invested
more than $95 million to develop curriculum and an online
learning platform that promotes mastery of core concepts and
skills for students of all abilities. This learning system
combines a cognitive research-based curriculum with an
individualized learning approach well-suited for virtual schools
and other educational applications. From fiscal year 2004 to
fiscal year 2007, we increased average enrollments in the
virtual public schools we serve from approximately 11,000
students to 27,000 students, representing a compound annual
growth rate of approximately 35%. From fiscal year 2004 to
fiscal year 2007, we increased revenues from $71.4 million
to $140.6 million, representing a compound annual growth
rate of approximately 25%, and improved from a net loss of
$7.4 million to net income of $3.9 million.
We believe we are unique in the education industry because of
our direct involvement in every component of the educational
development and delivery process. Most educational content,
software and service providers typically concentrate on only a
portion of that process, such as publishing textbooks, managing
schools or providing testing and assessment services. This
traditional segmented approach has resulted in an uncoordinated
and unsatisfactory education for many students. Unburdened by
legacy, we have taken a holistic approach to the design of our
learning system. We have developed an engaging curriculum which
includes online lessons delivered over our proprietary school
platform. We combine this with a rigorous system to test and
assess students and processes to manage school performance and
compliance. In addition, our professional development programs
enable teachers to better utilize technology for instruction.
Our end-to-end learning system is designed to optimize the
performance of the schools we serve and enhance student academic
achievement.
As evidence of the benefit of our holistic approach, the virtual
public schools we serve generally test near, and in some cases
above, state averages on standardized achievement tests. These
results have been achieved despite the enrollment of a
significant number of new students each school year who have had
limited exposure to our learning system prior to taking these
required state tests. Students using our learning system for at
least three years usually perform better on standardized tests
relative to state averages than students using it for one year
or less. The efficacy of our learning system has also helped us
achieve high levels of customer satisfaction. According to a
2006 internal survey of parents of students enrolled in virtual
public schools we serve (with an approximately 33% response
rate), approximately 97% of respondents stated that they were
either satisfied or very satisfied with our curriculum and 95%
of respondents stated that they would recommend our curriculum
to other families.
We deliver our learning system to students primarily through
virtual public schools. As with any public school, these schools
must meet state educational standards, administer proctored
exams and are subject to fiscal oversight. The fundamental
difference is that students attend virtual public schools
primarily over the Internet instead of traveling to a physical
classroom. In their online learning environment, students
receive assignments, complete lessons, and obtain instruction
from certified teachers with whom they interact online,
telephonically, and face-to-face. Virtual public schools provide
families with a publicly funded alternative to a traditional
classroom-based education when relocating or private schooling
is not an option, making them the most public of
schools.
1
We offer virtual schools our proprietary curriculum, online
learning platform and varying levels of academic and management
services, which can range from targeted programs to complete
turnkey solutions, under long-term contracts. These contracts
provide the basis for a recurring revenue stream as students
progress through successive grades. Additionally, without the
requirement of a physical classroom, virtual schools can be
scaled quickly to accommodate a large dispersed student
population, and allow more capital resources to be allocated
towards teaching, curriculum and technology rather than towards
a physical infrastructure.
Substantially all of our enrollments are served through
25 virtual public schools to which we provide full turnkey
solutions and seven virtual public schools to which we provide
limited management services, located in 17 states and the
District of Columbia. Parents can also purchase our curriculum
and online learning platform directly to facilitate or
supplement their childrens education. Additionally, we
have piloted our curriculum in brick and mortar classrooms with
promising academic results. We also believe there is additional
widespread applicability for our learning system internationally.
Our
Market
The U.S. market for K-12 education is large and growing.
For example:
|
|
|
|
|
According to the National Center for Education Statistics
(NCES), a division of the U.S. Department of Education,
there were more than 49 million students in K-12 public
schools during the
2005-06
school year. In addition, according to National Home Education
Research, approximately two million students are home schooled
and, according to a March 2006 NCES report, approximately five
million students are enrolled in private schools.
|
|
|
|
|
|
According to the NCES, the public school system alone
encompassed more than 98,000 schools and 17,000 school
districts during the
2005-06
school year.
|
|
|
|
|
|
The NCES estimates that total spending in the public K-12 market
was $558 billion for the
2005-06
school year.
|
Parents and lawmakers are demanding increased standards and
accountability in an effort to improve academic performance in
U.S. public schools. As a result, each state is now
required to establish performance standards and to regularly
assess student progress relative to these standards. We expect
continued focus on academic standards, assessments and
accountability in the near future.
Many parents and educators are also seeking alternatives to
traditional classroom-based education that can help improve
academic achievement. Demand for these alternatives is evident
in the growing number of choices available to parents and
students. For example, charter schools emerged in 1988 to
provide an alternative to traditional public schools. Similarly,
acceptance of online learning initiatives, including not only
virtual schools but also online testing and Internet-based
professional development, has become widespread. As of September
2006, 38 states had some form of online learning initiative.
Virtual public schools represent one approach to online learning
that is gaining acceptance. According to the Center for
Education Reform, as of January 2007 there were 173 virtual
schools with total enrollment exceeding 92,000 students,
operating in 18 states compared to just 86 virtual
schools in 13 states with total enrollment of approximately
31,000 students in the 2004-05 school year. Virtual schools
can offer a comprehensive curriculum and flexible delivery
model; therefore, we believe that a growing number of families
will pursue virtual public schools as an attractive public
school alternative. Given these statistics and the nascence of
this market, we believe there is a significant opportunity for a
high-quality, trusted, national education provider to serve
virtual public schools.
Our
Competitive Strengths
We believe the following to be our key competitive strengths:
Proprietary Curriculum Specifically Designed for a
Technology-Enabled Environment.
We specifically
designed our curriculum for online learning, in contrast to
other online curriculum providers who often just digitize
classroom textbooks for transmission over the Internet. Our
cognitive research-based curriculum contains more
2
than 11,000 discrete lessons that utilize a combination of
innovative technologies, including flash animations, online
interactivity and real-time individualized feedback, which we
combine with textbooks and other offline course materials to
create an engaging and highly effective curriculum and drive
greater, more consistent academic achievement.
Flexible, Integrated Online Learning
Platform.
Our online learning platform provides a
highly flexible and effective means for delivering educational
content to students and allows us to update the content on a
real-time basis. Our platform offers assessment capabilities to
identify the current and targeted academic level of achievement
for each student, measures mastery of each learning objective,
updates each students lesson plan for completed lessons
and enables us to track the effectiveness of each lesson with
each student on a real-time basis.
Expertise in Opening Channels for Virtual
Schooling.
Our education policy experts and
established relationships with key educational authorities have
allowed us to help individual educational policymakers
understand the benefits of virtual schools and establish highly
effective, publicly funded education alternatives for parents
and their children.
Track Record of Student Achievement and Customer
Satisfaction.
The virtual public schools we serve
generally test near, and in some cases above, state averages on
standardized achievement tests. The efficacy of our learning
system has also helped us achieve high levels of customer
satisfaction, which has been a strong contributor to our growth,
helps drive new student referrals and leads to re-enrollments.
Highly Scalable Model.
We have built our
educational model, systems and management team to successfully
and efficiently serve the academic needs of a large, dispersed
student population. Our ability to leverage the historical
investment we made in developing our learning system and our
ability to deliver our offering over the Internet enables us to
successfully serve a greater number of students at a reduced
level of capital investment.
Our
Growth Strategy
We intend to pursue the following strategies to drive our future
growth:
Generate Enrollment Growth at Existing Virtual Public
Schools.
In the
2007-08
school year, we are serving virtual public schools in
17 states and the District of Columbia. We intend to
continue to drive increased enrollments at the virtual public
schools we serve through targeted marketing and recruiting
efforts as well as through referrals.
Enhance Curriculum to Include a Complete High School
Offering.
We believe that serving virtual public
high schools represents a significant growth opportunity for
online education delivery given the increased independence of
high school students and the wide variance in academic
achievement levels and objectives of students who are entering
high school. In the
2005-06
and
2006-07
school years, we began enrolling 9th and 10th grade
students, respectively, and with the launch of our 11th and
12th grades in the
2007-08
school year, we are able to provide a complete high school
offering to satisfy the broad range of high school student
interests.
Expand Virtual Public School Presence into Additional
States.
The flexibility and comprehensiveness of
our learning system allows us to efficiently adapt our
curriculum to meet the individual educational standards of any
state with minimal capital investment. We intend to continue to
seek opportunities to assist states in establishing virtual
public schools and to contract with them to provide our
curriculum, online learning platform and related services.
Strengthen Awareness and Recognition of the
K
12
Brand.
The
K
12
brand already enjoys strong recognition within the virtual
public school community. We have developed a comprehensive brand
strategy and intend to invest in further developing awareness of
both the
K
12
brand and the core philosophy behind our learning system outside
the virtual public school community.
Pursue International Opportunities to Offer Our Learning
System.
We believe there is strong worldwide
demand for high-quality, flexible education alternatives. Given
the highly flexible design and technology-based nature of our
platform, it can be adapted to other languages and cultures
efficiently and with modest capital investment. Additionally,
our ability to operate virtually is not constrained by the need
for a physical classroom or local teachers, which makes our
learning system ideal for use internationally.
3
Develop Additional Channels Through Which to Deliver our
Learning System.
We intend to regularly evaluate
additional delivery channels and to pursue opportunities where
we believe there is likely to be significant demand for our
offering, such as direct classroom instruction, hybrid classroom
models, supplemental educational offerings, and individual
products packaged and sold directly to parents and students.
Certain
Risk Factors
Investing in our common stock involves substantial risk. You
should carefully consider all the information in this prospectus
prior to investing in our common stock and review the section
entitled Risk Factors immediately following this
prospectus summary. These risks and uncertainties include, but
are not limited to, the following:
|
|
|
|
|
Most of our revenues depend on per pupil funding amounts
remaining near the levels existing at the time we execute
service agreements with the virtual public schools we serve. If
those funding levels are materially reduced, new restrictions
adopted or payments delayed, our business, financial condition,
results of operations and cash flows could be adversely affected.
|
|
|
|
|
|
The poor performance or misconduct of other virtual public
school operators could tarnish the reputation of all virtual
public school operators, which could have a negative influence
on our business.
|
|
|
|
Opponents of virtual public schools have sought to challenge the
establishment and expansion of such schools through the judicial
process. If their interests prevail, it could damage our ability
to sustain or grow our current business in certain jurisdictions.
|
|
|
|
We have a limited operating history, and sustained losses of
approximately $90 million before only recently achieving
profitability. If we fail to remain profitable or achieve
further marketplace acceptance for our products and services,
our business, financial condition and results of operations will
be adversely affected.
|
|
|
|
Highly qualified teachers are critical to the success of our
learning system. If we are not able to continue to recruit,
train and retain quality certified teachers, our lessons might
not be effectively delivered to students, compromising their
academic performance and our reputation with the virtual public
schools we serve. As a result, our brand, business and operating
results may be adversely affected.
|
Our
Corporate Information
We were incorporated in Delaware in December 1999. Our principal
executive offices are located at 2300 Corporate Park Drive,
Herndon, VA 20171. Our telephone number is
(703) 483-7000.
Our website address is
www.K12.com
. These are textual
references only. We do not incorporate the information on, or
accessible through, any of our websites into this prospectus,
and you should not consider any information on, or that can be
accessed through, our websites as part of this prospectus.
4
The
Offering
|
|
|
|
|
|
|
|
|
|
Common Stock offered by us
|
|
|
|
shares
|
Common Stock outstanding after the
offering
|
|
|
|
shares
|
Overallotment option
|
|
|
|
shares from the selling
stockholders
|
|
|
|
Proposed New York Stock Exchange symbol
|
|
LRN
|
|
|
|
Use of proceeds from this offering
|
|
We estimate that our net proceeds from this offering will be
approximately $ million,
based on an assumed initial public offering price of
$ per share (which is the midpoint
of the range on the cover page of this prospectus). We intend to
use the net proceeds from this offering for general corporate
purposes, including working capital, capital expenditures and
the development of new courses and product offerings as well as
to repay approximately $12.5 million of borrowings under
our revolving credit facility. The net proceeds will also
provide us with the financial flexibility to make acquisitions
and strategic investments. We will receive no proceeds from the
sale of common stock to be sold by the selling stockholders if
the underwriters exercise their overallotment option. See
Use of Proceeds.
|
The number of shares of common stock outstanding after this
offering is based on 111,798,779 shares outstanding as of
June 30, 2007 and:
|
|
|
|
|
gives effect to the automatic conversion of all of the
outstanding shares of our preferred stock into
101,386,536 shares of our common stock immediately prior to
the completion of this offering;
|
|
|
|
|
|
excludes 18,477,803 shares of common stock issuable upon
the exercise of options outstanding as of June 30, 2007 at
a weighted average exercise price of $1.81 per share,
2,328,358 shares of preferred stock (or upon the
consummation of the offering an equivalent amount of common
stock) that may be issued upon the exercise of warrants
outstanding as of June 30, 2007, all of which are currently
exercisable at a purchase price of $1.34 per share, and
108,649 shares of common stock that may be issued upon the
exercise of warrants outstanding as of June 30, 2007, all
of which are exercisable at a purchase price of $1.60 per
share; and
|
|
|
|
|
|
excludes an
additional shares
of common stock reserved for issuance under our equity incentive
plans.
|
Except as otherwise indicated, all information contained in this
prospectus assumes:
|
|
|
|
|
a
for
stock split of our common stock to be effected prior to
completion of this offering;
|
|
|
|
an initial offering price of $ per
share (which is the midpoint of the range on the cover page of
this prospectus); and
|
|
|
|
the underwriters option to purchase up
to additional
shares of common stock is not exercised.
|
5
SUMMARY
CONSOLIDATED FINANCIAL DATA
We derived the summary consolidated financial data presented
below as of June 30, 2006 and 2007 and for each of the
three years ended June 30, 2005, 2006 and 2007, from our
audited consolidated financial statements included elsewhere in
this prospectus. We derived the summary consolidated financial
data presented below as of June 30, 2005 from our audited
consolidated financial statements that are not included in this
prospectus. Our historical results are not necessarily
indicative of future operating results. You should read the
information set forth below in conjunction with Selected
Consolidated Financial and Operating Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and their related notes included elsewhere
in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(dollars in thousands, except per share data)
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
140,556
|
|
|
$
|
116,902
|
|
|
$
|
85,310
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
76,064
|
|
|
|
64,828
|
|
|
|
49,130
|
|
Selling, administrative, and other
operating expenses
|
|
|
51,159
|
|
|
|
41,660
|
|
|
|
30,031
|
|
Product development expenses
|
|
|
8,611
|
|
|
|
8,568
|
|
|
|
9,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
135,834
|
|
|
|
115,056
|
|
|
|
88,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
4,722
|
|
|
|
1,846
|
|
|
|
(3,261
|
)
|
Interest expense, net
|
|
|
(639
|
)
|
|
|
(488
|
)
|
|
|
(279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income
taxes
|
|
|
4,083
|
|
|
|
1,358
|
|
|
|
(3,540
|
)
|
Income tax expense
|
|
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
3,865
|
|
|
|
1,358
|
|
|
|
(3,540
|
)
|
Dividends on preferred stock
|
|
|
(6,378
|
)
|
|
|
(5,851
|
)
|
|
|
(5,261
|
)
|
Preferred stock accretion
|
|
|
(22,353
|
)
|
|
|
(18,697
|
)
|
|
|
(15,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders
|
|
$
|
(24,866
|
)
|
|
$
|
(23,190
|
)
|
|
$
|
(24,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(2.44
|
)
|
|
$
|
(2.30
|
)
|
|
$
|
(2.46
|
)
|
Basic and diluted (pro
forma)
(1)
|
|
$
|
0.03
|
|
|
$
|
n/a
|
|
|
|
n/a
|
|
Weighted average shares used in
computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
10,208,507
|
|
|
|
10,083,721
|
|
|
|
10,062,587
|
|
Basic (pro
forma)
(1)
|
|
|
111,595,043
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Diluted (pro
forma)
(1)
|
|
|
111,642,987
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
|
5,563
|
|
|
$
|
3,625
|
|
|
$
|
9,697
|
|
Depreciation and amortization
|
|
$
|
7,404
|
|
|
$
|
4,986
|
|
|
$
|
5,509
|
|
Capital
expenditures
(2)
|
|
$
|
13,418
|
|
|
$
|
10,842
|
|
|
$
|
5,133
|
|
EBITDA
(3)
|
|
$
|
12,126
|
|
|
$
|
6,832
|
|
|
$
|
2,248
|
|
Average
enrollments
(4)
|
|
|
27,005
|
|
|
|
20,220
|
|
|
|
15,097
|
|
6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(dollars in thousands)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,660
|
|
|
$
|
9,475
|
|
|
$
|
19,953
|
|
Total assets
|
|
|
61,212
|
|
|
|
48,485
|
|
|
|
41,968
|
|
Total short-term debt
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
|
7,135
|
|
|
|
4,025
|
|
|
|
4,466
|
|
Convertible redeemable preferred
stock
|
|
|
229,556
|
|
|
|
200,825
|
|
|
|
176,277
|
|
Total stockholders deficit
|
|
|
(197,807
|
)
|
|
|
(173,451
|
)
|
|
|
(150,299
|
)
|
Working capital
|
|
|
8,548
|
|
|
|
15,421
|
|
|
|
22,953
|
|
|
|
|
(1)
|
|
Pro forma net income per common
share gives effect to the automatic conversion of all of our
outstanding shares of preferred stock into common stock
immediately prior to the completion to this offering. Assuming
the completion of this offering on June 30, 2007, all of
our outstanding shares of preferred stock would convert into
101,386,536 shares of common stock.
|
|
|
|
(2)
|
|
Capital expenditures consist of the
purchase of property and equipment and new capital lease
obligations.
|
(3)
|
|
EBITDA consists of net income
(loss) minus interest income, plus interest expense, plus income
tax expense and plus depreciation and amortization. Interest
income consists primarily of interest earned on short-term
investments or cash deposits. Interest expense primarily
consists of interest expense for capital leases, long-term and
short-term borrowings. We use EBITDA as a measure of operating
performance. However, EBITDA is not a recognized measurement
under U.S. generally accepted accounting principles, or GAAP,
and when analyzing our operating performance, investors should
use EBITDA in addition to, and not as an alternative for, net
income (loss) as determined in accordance with GAAP. Because not
all companies use identical calculations, our presentation of
EBITDA may not be comparable to similarly titled measures of
other companies. Furthermore, EBITDA is not intended to be a
measure of free cash flow for our managements
discretionary use, as it does not consider certain cash
requirements such as tax payments.
|
|
|
|
We believe EBITDA is useful to an
investor in evaluating our operating performance because it is
widely used to measure a companys operating performance
without regard to items such as depreciation and amortization,
which can vary depending upon accounting methods and the book
value of assets, and to present a meaningful measure of
corporate performance exclusive of our capital structure and the
method by which assets were acquired.
|
Our management uses EBITDA:
|
|
|
|
|
as a measurement of operating performance, because it assists us
in comparing our performance on a consistent basis, as it
removes depreciation, amortization, interest and taxes; and
|
|
|
|
in presentations to the members of our board of directors to
enable our board to have the same measurement basis of operating
performance as is used by management to compare our current
operating results with corresponding prior periods and with the
results of other companies in our industry.
|
The following table provides a reconciliation of net income
(loss) to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(dollars in thousands)
|
|
|
Net income (loss)
|
|
$
|
3,865
|
|
|
$
|
1,358
|
|
|
$
|
(3,540
|
)
|
Interest expense, net
|
|
|
639
|
|
|
|
488
|
|
|
|
279
|
|
Income tax expense
|
|
|
218
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,404
|
|
|
|
4,986
|
|
|
|
5,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
12,126
|
|
|
$
|
6,832
|
|
|
$
|
2,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
|
To ensure that all schools are
reflected in our measure of enrollments, we consider our
enrollments as of the end of September to be our opening
enrollment level, and the number of students enrolled at the end
of May to be our ending enrollment level. To provide
comparability, we do not consider enrollment levels for June,
July and August as all schools are not open during these months.
For each period, average enrollments represent the average of
the month end enrollment levels for each month that has
transpired between September and the end of the period, up to
and including the month of May.
|
7
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors and all
other information contained in this prospectus, including our
consolidated financial statements and the related notes, before
investing in our common stock. The risks and uncertainties
described below are not the only ones we face. Additional risks
and uncertainties that we are unaware of, or that we currently
believe are not material, also may become important factors that
affect us. If any of the following risks materialize, our
business, financial condition or results of operations could be
materially harmed. In that case, the trading price of our common
stock could decline, and you may lose some or all of your
investment.
Risks
Related to Government Funding and Regulation of Public
Education
Most of our revenues depend on per pupil funding amounts
remaining near the levels existing at the time we execute
service agreements with the virtual public schools we serve. If
those funding levels are materially reduced, new restrictions
adopted or payments delayed, our business, financial condition,
results of operations and cash flows could be adversely
affected.
The public schools we contract with are financed with government
funding from federal, state and local taxpayers. Our business is
primarily dependent upon those funds. Budget appropriations for
education at all levels of government are determined through the
political process and, as a result, funding for the virtual
public schools we serve may fluctuate. This political process
creates a number of risks that could have an adverse affect on
our business including the following:
|
|
|
|
|
legislative proposals could result in budget cuts for the
virtual public schools we serve, and therefore reduce or
eliminate the products and services those schools purchase from
us, causing our revenues to decline. From time to time,
proposals are introduced in state legislatures that single out
virtual public schools for disparate treatment. For example, in
its fiscal year
2007-09
education budget appropriation, the Indiana legislature decided
not to fund any virtual public school that provided for the
online delivery of more than 50 percent of its instruction
to students. As a result, we decided not to open a virtual
public school in Indiana that was already approved by a
chartering authority and therefore the anticipated associated
revenues were not realized. Other examples include laws that
decrease per pupil funding for virtual public schools or alter
eligibility and attendance criteria or other funding conditions
that could decrease our revenues and limit our ability to grow;
|
|
|
|
|
|
as a public company, we will be required to file periodic
financial and other disclosure reports with the Securities and
Exchange Commission, or the SEC. This information may be
referenced in the legislative process, including budgetary
considerations, related to the funding of alternative public
school options, including virtual public schools. The disclosure
of this information by a for-profit education company,
regardless of parent satisfaction and student academic
achievement, may nonetheless be used by opponents of virtual
public schools to propose funding reductions; and
|
|
|
|
|
|
from time to time, government funding to schools is not provided
when due, which sometimes causes the affected schools to delay
or cease payments to us for our products and services. These
payment delays have occurred in the past and can deprive us of
significant working capital until the matter is resolved, which
could hinder our ability to implement our growth strategies and
conduct our business. For example, in 2003 the Pennsylvania
state legislature withheld monthly payments for every school
because it was unable to approve an education budget for six
months, which necessitated our borrowing of funds to continue
operations.
|
The poor performance or misconduct of other virtual public
school operators could tarnish the reputation of all virtual
public school operators, which could have a negative impact on
our business.
As a relatively new form of public education, virtual school
operators will be subject to scrutiny, perhaps even greater than
that applied to traditional public schools or charter schools.
Not all virtual public school operators will have successful
academic programs or operate efficiently, and new entrants may
not perform well either. Such underperforming operators could
create the impression that virtual schooling is not an effective
way to educate students, whether or not our learning system
achieves solid performance. Moreover, some virtual school
operators
8
have been subject to governmental investigations alleging the
misuse of public funds or financial irregularities. These
allegations have attracted significant adverse media coverage
and have prompted legislative hearings and regulatory responses.
Although these investigations have focused on specific companies
and individuals, they may negatively impact public perceptions
of virtual public school providers generally, including us. The
precise impact of these negative public perceptions on our
business is difficult to discern, in part because of the number
of states in which we operate and the range of particular
malfeasance or performance issues involved. We have incurred
significant lobbying costs in several states advocating against
harmful legislation which, in our opinion, was aggravated by
negative media coverage of particular virtual school operators.
If these few situations, or any additional misconduct, cause all
virtual public school providers to be viewed by the public
and/or policymakers unfavorably, we may find it difficult to
enter into or renew contracts to operate virtual schools. In
addition, this perception could serve as the impetus for more
restrictive legislation, which could limit our future business
opportunities.
Opponents of virtual public schools have sought to
challenge the establishment and expansion of such schools
through the judicial process. If these interests prevail, it
could damage our ability to sustain or grow our current business
or expand in certain jurisdictions.
We have been, and will likely continue to be, subject to
lawsuits filed against virtual public schools by those who do
not share our belief in the value of this form of public
education. Legal claims have involved challenges to the
constitutionality of authorizing statutes, methods of
instructional delivery, funding provisions and the respective
roles of parents and teachers. We currently face two such
lawsuits pertaining to the Wisconsin Virtual Academy and the
Chicago Virtual Charter School. See Business
Legal Proceedings. An adverse judgment in these cases
could serve as a negative precedent in other jurisdictions where
we do business, and new lawsuits could result in unexpected
liabilities and limit our ability to grow.
The failure of the virtual public schools we serve to
comply with applicable government regulations could result in a
loss of funding and an obligation to repay funds previously
received, which could adversely affect our business, financial
condition and results of operations.
Once authorized by law, virtual public schools are generally
subject to extensive regulation. These regulations cover
specific program standards and financial requirements including,
but not limited to: (i) student eligibility standards;
(ii) numeric and geographic limitations on enrollments;
(iii) prescribed teacher funding allocations from per pupil
revenue; (iv) state-specific curriculum requirements; and
(v) restrictions on open-enrollment policies by and among
districts. State and federal funding authorities conduct regular
program and financial audits of virtual public schools,
including the virtual public schools we serve, to ensure
compliance with applicable regulations. Two virtual public
schools we serve are currently undergoing such audits. See
Business Distribution Channels. If a
virtual public school we serve is found to be noncompliant, it
can be barred from receiving additional funds and could be
required to repay funds received during the period of
non-compliance, which could impair that schools ability to
pay us for services in a timely manner, if at all. Additionally,
the indemnity provisions in our standard service agreements with
virtual public schools may require us to return any contested
funds on behalf of the school. For a more detailed discussion of
the regulations affecting our business, see
Regulation.
Virtual public schools are relatively new, and enabling
legislation therefore is often ambiguous and subject to
discrepancies in interpretation by regulatory authorities, which
may lead to disputes over our ability to invoice and receive
payments for services rendered.
Statutory language providing for virtual public schools is
sometimes interpreted by regulatory authorities in ways that may
vary from year to year, making compliance subject to
uncertainty. For example, in Colorado, the regulators
approach to determining the eligibility of virtual school
students for funding purposes, which is based on a
students substantial completion of a semester in a public
school, has undergone varying interpretations. These regulatory
uncertainties may lead to disputes over our ability to invoice
and receive payments for services rendered, which could
adversely affect our business, financial condition and results
of operations.
9
The operation of virtual public schools depends on the
maintenance of the authorizing charter and compliance with
applicable laws. If these charters are not renewed, our
contracts with these schools would be terminated.
In many cases, virtual public schools operate under a charter
that is granted by a state or local authority to the charter
holder, such as a community group or an established
not-for-profit corporation, which typically is required by state
law to qualify for student funding. In fiscal year 2007,
approximately 90% of our revenues were derived from virtual
public schools operating under a charter. The service agreement
for these schools is with the charter holder or the charter
board. Non-profit charter schools qualifying for exemption from
federal taxation under Internal Revenue Code
Section 501(c)(3) as charitable organizations must also
operate in accordance with Internal Revenue Service rules and
policies to maintain that status and their funding eligibility.
In addition, all state charter school statutes require periodic
reauthorization. While none of the virtual public schools we
serve have failed to maintain their authorizing charter, if a
virtual public school we serve fails to maintain its tax-exempt
status and funding eligibility, or if its charter is revoked for
non-performance or other reasons that may be due to actions of
the independent charter board completely outside of our control,
our contract with that school would be terminated.
Actual or alleged misconduct by our senior management and
directors would make it more difficult for us to enter into new
contracts or renew existing contracts.
If any of our directors, officers or key employees are accused
or found to be guilty of serious crimes, including the
mismanagement of public funds, the schools we serve could be
barred from entering into or renewing service agreements with us
or otherwise discouraged from contracting with us and, as a
result, our business and revenues would be adversely affected.
Risks
Related to Our Business and Our Industry
We have a limited operating history, and sustained losses
of approximately $90 million before only recently achieving
profitability. If we fail to remain profitable or achieve
further marketplace acceptance for our products and services,
our business, financial condition and results of operations will
be adversely affected.
The virtual public schools we serve began enrolling students in
the 2002-03 school year. As a result, we have only a limited
operating history upon which you can evaluate our business and
prospects. Since our inception, we have recorded losses totaling
approximately $90 million until we recently achieved
profitability. We recorded our first profit in the fiscal year
ended June 30, 2006. There can be no assurance that we will
remain profitable, or that our products and services will
achieve further marketplace acceptance. Our marketing efforts
may not generate a sufficient number of student enrollments to
sustain our business plan; our capital and operating costs may
exceed planned levels; and we may be unable to develop and
enhance our service offerings to meet the demands of virtual
public schools and students to the extent that such demands and
preferences change. If we are not successful in managing our
business and operations, our financial condition and results of
operations will be adversely affected.
Highly qualified teachers are critical to the success of
our learning system. If we are not able to continue to recruit,
train and retain quality certified teachers, our curriculum
might not be effectively delivered to students, compromising
their academic performance and our reputation with the virtual
public schools we serve. As a result, our brand, business and
operating results may be adversely affected.
Effective teachers are critical to maintaining the quality of
our learning system and assisting students with their daily
lessons. Teachers in virtual public schools must be state
certified and have strong interpersonal communications skills to
be able to effectively instruct students in a virtual school
setting. They must also possess the technical skills to use our
technology-based learning system. There is a limited pool of
teachers with these specialized attributes and the virtual
public schools we serve must provide competitive compensation
packages to attract and retain such qualified teachers.
The teachers in most virtual public schools we serve are not our
employees and the ultimate authority relating to those teachers
resides with the governing body overseeing the schools. However,
under many of our service agreements with virtual public
schools, we have responsibility to recruit, train and manage
these teachers. We must also provide continuous training to
virtual public school teachers so that they can stay abreast of
changes in student demands, academic standards and other key
trends necessary to teach online effectively. We may not be able
to
10
recruit, train and retain enough qualified teachers to keep pace
with our growth while maintaining consistent teaching quality in
the various virtual public schools we serve. Shortages of
qualified teachers or decreases in the quality of our
instruction, whether actual or perceived, would have an adverse
effect on our business.
The schools we contract with and serve are governed by
independent governing bodies who may shift their priorities or
change objectives in ways adverse to us.
We contract with and provide a majority of our products and
services to virtual public schools governed by independent
boards or similar governing bodies. While we typically share a
common objective at the outset of our business relationship,
over time our interests could diverge. If these independent
boards of the schools we serve subsequently shift their
priorities or change objectives, and as a result reduce the
scope or terminate their relationship with us, our ability to
generate revenues would be adversely affected.
Our contracts with the virtual public schools we serve are
subject to periodic renewal, and each year several of these
agreements are set to expire. If we are unable to renew several
such contracts or if a single significant contract expires
during a given year, our business, financial condition, results
of operations and cash flow could be adversely affected.
For the 2007-08 school year, we have contracts to provide our
full range of products and services to virtual public schools in
17 states and the District of Columbia. Several of these
contracts are scheduled to expire in any given year. For
example, five such contracts are scheduled to expire in 2008,
and we usually begin to engage in renewal negotiations during
the final year of these contracts. In order to renew these
contracts, we have to enter into negotiations with the
independent boards of these virtual public schools. Historically
we have been successful in renewing these contracts, but such
renewals typically contain revised terms, which may be more or
less favorable then the terms of the original contract. For
example, a school in Pennsylvania reduced the term of its
contract from five years to three years when renewing
its contract in 2006, whereas a school in Ohio increased the
term of its contract from five years to 10 years upon
renewal in 2007. While we have no reason to believe that schools
will not continue to renew their contracts upon expiration, we
recognize that each renegotiation is unique and, if we are
unable to renew several such contracts or one significant
contract expiring during a given year, or if such renewals have
significantly less favorable terms than existing contracts, our
business, financial condition, results of operations and cash
flow could be adversely affected.
We generate significant revenues from four virtual public
schools, and the termination, revocation, expiration or
modification of our contracts with these virtual public schools
could adversely affect our business, financial condition and
results of operation.
In fiscal year 2007, we derived more than 10% of our revenues
from each of the Ohio Virtual Academy, the Arizona Virtual
Academy, the Pennsylvania Virtual Charter School and the
Colorado Virtual Academy. In aggregate, these schools accounted
for 49% of our total revenues. If our contracts with any of
these virtual public schools are terminated, the charters to
operate any of these schools are not renewed or are revoked,
enrollments decline substantially, funding is reduced, or more
restrictive legislation is enacted, our business, financial
condition and results of operations could be adversely affected.
We may not be able to effectively address the execution
risks associated with our expansion into the virtual high school
market. Our failure to do so could substantially harm our growth
strategy.
The virtual high school market presents us with a number of
challenges, including the launch of 11th and
12th grade offerings. We are currently using third-party
platforms and some third-party curriculum in our high school
offering. If the quality of the third-party curriculum or
platforms is unsatisfactory, student enrollments could decline.
Furthermore, the subject matter expertise and skills necessary
to teach in high school are fundamentally different than those
necessary to teach kindergarten through 8th grade. If the
high school instructional experience does not meet the
expectations of students previously enrolled in our kindergarten
through 8th grade programs, or new enrollees experience
performance issues with our high school program delivery, the
virtual public schools we serve may decline to offer our high
school program and our business, financial condition and results
of operations may be adversely affected.
11
Our growth strategy anticipates that we will create new
products and distribution channels and expand existing
distribution channels. If we are unable to effectively manage
these initiatives, our business, financial condition, results of
operations and cash flows would be adversely affected.
As we create new products and distribution channels and expand
our existing distribution channels, we expect to face challenges
distinct from those we currently encounter, including:
|
|
|
|
|
our development of public hybrid schools, which will produce
different operational challenges than those we currently
encounter. In addition to the online component, hybrid schools
require us to lease facilities for classrooms, staff classrooms
with teachers, provide meals, adhere to local safety and fire
codes, purchase additional insurance and fulfill many other
responsibilities;
|
|
|
|
our expansion into international markets may require us to
conduct our business differently than we do in the United
States. For example, we may attempt to open a tuition-based
private school or establish a traditional brick and mortar
school. Additionally, we may have difficulty training and
retaining qualified teachers or generating sufficient demand for
our products and services in international markets.
International opportunities will also produce different
operational challenges than those we currently
encounter; and
|
|
|
|
our use of our curriculum in classrooms will produce challenges
with respect to adapting our curriculum for effective use in a
traditional classroom setting.
|
Our failure to manage these new distribution channels, or any
new distribution channels we pursue, may have an adverse effect
on our business, financial condition, results of operations and
cash flows.
Increasing competition in the market segments that we
serve could lead to pricing pressures, reduced operating
margins, loss of market share and increased capital
expenditures.
We face varying degrees of competition from several discrete
education providers because our learning system integrates all
the elements of the education development and delivery process,
including curriculum development, textbook publishing, teacher
training and support, lesson planning, testing and assessment,
and school performance and compliance management. We compete
most directly with companies that provide online curriculum and
support services to
K-12
virtual
public schools. Additionally, we expect increased competition
from for-profit post-secondary and supplementary education
providers that have begun to offer virtual high school
curriculum and services. In certain jurisdictions and states
where we currently serve virtual public schools, we expect
intense competition from existing providers and new entrants.
Our competitors may adopt similar curriculum delivery, school
support and marketing approaches, with different pricing and
service packages that may have greater appeal in the market. If
we are unable to successfully compete for new business, win and
renew contracts or maintain current levels of academic
achievement, our revenue growth and operating margins may
decline. Price competition from our current and future
competitors could also result in reduced revenues, reduced
margins or the failure of our product and service offerings to
achieve or maintain more widespread market acceptance.
We may also face direct competition from publishers of
traditional educational materials that are substantially larger
than we are and have significantly greater financial, technical
and marketing resources. As a result, they may be able to devote
more resources to develop products and services that are
superior to our platform and technologies. We may not have the
resources necessary to acquire or compete with technologies
being developed by our competitors, which may render our online
delivery format less competitive or obsolete.
Our future success will depend in large part on our ability to
maintain a competitive position with our curriculum and our
technology, as well as our ability to increase capital
expenditures to sustain the competitive position of our product.
We cannot assure you that we will have the financial resources,
technical expertise, marketing, distribution or support
capabilities to compete effectively.
If demand for increased options in public schooling does
not continue or if additional jurisdictions do not authorize or
adequately fund virtual public schools, our business, financial
condition and results of operations could be adversely
affected.
According to the Center for Education Reform, as of January 2007
there were 173 virtual schools with total enrollments exceeding
92,000 students, operating in 18 states. However, if the demand
for virtual public schools
12
does not increase, if additional jurisdictions do not authorize
new virtual schools or if the funding of such schools is
inadequate, our business, financial condition and results of
operations could be adversely affected.
Our business is subject to seasonal fluctuations, which
may cause our operating results to fluctuate from
quarter-to-quarter and adversely impact the market price of our
common stock.
Our revenues and operating results normally fluctuate as a
result of seasonal variations in our business, principally due
to the number of months in a fiscal quarter that our virtual
public schools are fully operational and serving students. In
the typical academic year, our first and fourth fiscal quarters
may have fewer than three full months of operations, whereas our
second and third fiscal quarters will have three complete months
of operations. We ship offline learning kits to students in the
beginning of the school year, our first fiscal quarter,
generally resulting in higher offline learning kit revenues and
margins in the first fiscal quarter relative to the other
quarters. In aggregate, the seasonality of our revenues has
generally produced higher revenues in the first fiscal quarter
and lower revenues in the fourth fiscal quarter.
Our operating expenses are also seasonal. Instructional costs
and services increase in the first fiscal quarter primarily due
to the costs incurred to ship offline learning kits at the
beginning of the school year. These instructional costs may
increase significantly quarter-to-quarter as school operating
expenses increase. The majority of our selling and marketing
expenses are incurred in the first and fourth fiscal quarters,
as our primary enrollment season is July through September.
We expect quarterly fluctuations in our revenues and operating
results to continue. These fluctuations could result in
volatility and adversely affect our cash flow. As our business
grows, these seasonal fluctuations may become more pronounced.
As a result, we believe that quarterly comparisons of our
financial results may not be reliable as an indication of future
performance.
Our revenues for a fiscal year are based in part on our
estimate of the total funds each school will receive in a
particular school year and our estimate of the full year
deficits to be incurred by each school. As a result, differences
between our estimates and the actual funds received and deficits
incurred could have an adverse impact on our results of
operations and cash flows.
We recognize revenues from certain of our fees ratably over the
course of our fiscal year. To determine the amount of revenues
to recognize, we estimate the total funds each school will
receive in a particular school year. Additionally, we take
responsibility for any operating deficits at most of the virtual
schools we serve. Because these operating deficits may impair
our ability to collect the full amount invoiced in a period and
collection cannot reasonably be assured, we reduce revenues by
the estimated amount of these deficits. We review our estimates
of total funds and operating deficits periodically, and we
revise as necessary, amortizing any adjustments over the
remaining portion of the fiscal year. Actual funding received
and operating deficits incurred may vary from our estimates or
revisions and could adversely impact our results of operation
and cash flows.
The continued development of our brand identity is
important to our business. If we are not able to maintain and
enhance our brand, our business and operating results may
suffer.
Expanding brand awareness is critical to attracting and
retaining students, and for serving additional virtual public
schools. In order to expand brand awareness, we intend to spend
significant resources on a brand-enhancement strategy, which
includes sales and marketing efforts directed to targeted
locations as well as the national marketplace, the educational
community at large, key political groups, image-makers and the
media. We believe that the quality of our curriculum and
management services has contributed significantly to the success
of our brand. As we continue to increase enrollments and extend
our geographic reach, maintaining quality and consistency across
all of our services and products may become more difficult to
achieve, and any significant and well-publicized failure to
maintain this quality and consistency will have a detrimental
effect on our brand. We cannot provide assurances that our new
sales and marketing efforts will be successful in further
promoting our brand in a competitive and cost effective manner.
If we are unable to further enhance our brand recognition and
increase awareness of our products and services, or if we incur
excessive sales and marketing expenses, our business and results
of operations could be adversely affected.
13
Our intellectual property rights are valuable, and any
inability to protect them could reduce the value of our
products, services and brand.
Our patent, trademarks, trade secrets, copyrights and other
intellectual property rights are important assets for us. For
example, we have been granted a patent relating to the hardware
and network infrastructure of our online school, including the
system components for creating and administering assessment
tests and our lesson progress tracker. Additionally, we are the
registered owner of over 11,000 copyright and copyright
applications covering the lessons in the courses comprising our
proprietary curriculum. Various events outside of our control
pose a threat to our intellectual property rights. For example,
effective intellectual property protection may not be available
in every country in which our products and services are
distributed or made available through the Internet. Also, the
efforts we have taken to protect our proprietary rights may not
be sufficient or effective. Any significant impairment of our
intellectual property rights could harm our business or our
ability to compete. Also, protecting our intellectual property
rights is costly and time consuming. Any unauthorized use of our
intellectual property could make it more expensive to do
business and harm our operating results.
Although we seek to obtain patent protection for our
innovations, it is possible that we may not be able to protect
some of these innovations. In addition, given the costs of
obtaining patent protection, we may choose not to protect
certain innovations that later turn out to be important.
Furthermore, there is always the possibility, despite our
efforts, that the scope of the protection gained will be
insufficient or that an issued patent may be deemed invalid or
unenforceable.
We also seek to maintain certain intellectual property as trade
secrets. This secrecy could be compromised by outside parties,
or by our employees intentionally or accidentally, which would
cause us to lose the competitive advantage resulting from these
trade secrets.
We must monitor and protect our Internet domain names to
preserve their value.
We own the domain names K12 (.com and .org) and K-12 (.com,
.net, and .org) as well as the service mark
K
12
.
Third parties may acquire substantially similar domain names
that decrease the value of our domain names and trademarks and
other proprietary rights which may hurt our business. The
regulation of domain names in the United States and foreign
countries is subject to change. Governing bodies could appoint
additional domain name registrars or modify the requirements for
holding domain names. Governing bodies could also establish
additional top-level domains, which are the portion
of the Web address that appears to the right of the
dot, such as com, gov, or
org. As a result, we may not maintain exclusive
rights to all potentially relevant domain names in the United
States or in other countries in which we conduct business.
We may be sued for infringing the intellectual property
rights of others and such actions would be costly to defend,
could require us to pay damages and could limit our ability or
increase our costs to use certain technologies in the
future.
Companies in the Internet, technology, education, curriculum and
media industries own large numbers of patents, copyrights,
trademarks and trade secrets and frequently enter into
litigation based on allegations of infringement or other
violations of intellectual property rights. As we grow, the
likelihood that we may be subject to such claims also increases.
Regardless of the merits, intellectual property claims are often
time-consuming and expensive to litigate or settle. In addition,
to the extent claims against us are successful, we may have to
pay substantial monetary damages or discontinue any of our
products, services or practices that are found to be in
violation of another partys rights. We also may have to
seek a license and make royalty payments to continue offering
our products and services or following such practices, which may
significantly increase our operating expenses.
We may be subject to legal liability resulting from the
actions of third parties, including independent contractors and
teachers, which could cause us to incur substantial costs and
damage our reputation.
We may be subject, directly or indirectly, to legal claims
associated with the actions of our independent contractors and
teachers. In the event of accidents or injuries or other harm to
students, we could face claims alleging that we were negligent,
provided inadequate supervision or were otherwise liable for
their injuries. Additionally, we could face claims alleging that
our independent curriculum contractors or teachers infringed the
14
intellectual property rights of third parties. A liability claim
against us or any of our independent contractors or teachers
could adversely affect our reputation, enrollment and revenues.
Even if unsuccessful, such a claim could create unfavorable
publicity, cause us to incur substantial expenses and divert the
time and attention of management.
Unauthorized disclosure or manipulation of student,
teacher and other sensitive data, whether through breach of our
network security or otherwise, could expose us to costly
litigation or could jeopardize our contracts with virtual public
schools.
Maintaining our network security is of critical importance
because our Student Administration Management System (SAMS)
stores proprietary and confidential student and teacher
information, such as names, addresses, and other personal
information. Individuals and groups may develop and deploy
viruses, worms and other malicious software programs that attack
or attempt to infiltrate SAMS. If our security measures are
breached as a result of third-party action, employee error,
malfeasance or otherwise, third parties may be able to access
student records and we could be subject to liability or our
business could be interrupted. Penetration of our network
security could have a negative impact on our reputation and
could lead virtual public schools and parents to choose
competitive offerings. As a result, we may be required to expend
significant resources to provide additional protection from the
threat of these security breaches or to alleviate problems
caused by these breaches.
We rely on the Internet to enroll students and to deliver
our products and services to children, which exposes us to a
growing number of legal risks and increasing regulation.
We collect information regarding students during the online
enrollment process, and a significant amount of our curriculum
content is delivered over the Internet. As a result, specific
federal and state laws that could have an impact on our business
include the following:
|
|
|
|
|
the Childrens Online Privacy Protection Act, which
restricts the distribution of certain materials deemed harmful
to children and imposes additional restrictions on the ability
of online companies to collect personal information from
children under the age of 13; and
|
|
|
|
the Family Educational Rights and Privacy Act, which imposes
parental or student consent requirements for specified
disclosures of student information, including online information.
|
In addition, the laws applicable to the Internet are still
developing. These laws impact pricing, advertising, taxation,
consumer protection, quality of products and services, and are
in a state of change. New laws may also be enacted, which could
increase the costs of regulatory compliance for us or force us
to change our business practices. As a result, we may be exposed
to substantial liability, including significant expenses
necessary to comply with such laws and regulations.
System disruptions and vulnerability from security risks
to our online computer networks could impact our ability to
generate revenues and damage our reputation, limiting our
ability to attract and retain students.
The performance and reliability of our technology infrastructure
is critical to our reputation and ability to attract and retain
virtual public schools, parents and students. Any sustained
system error or failure, or a sudden and significant increase in
bandwidth usage, could limit access to our learning system, and
therefore, damage our ability to generate revenues. Our
technology infrastructure could be vulnerable to interruption or
malfunction due to events beyond our control, including natural
disasters, terrorist activities and telecommunications failures.
Substantially all of the inventory for our offline
learning kits is located in one warehouse facility. Any damage
or disruption at this facility would have an adverse effect on
our business, financial condition and results of
operations.
Substantially all of the inventory for our offline learning kits
is located in one warehouse facility operated by a third-party.
A natural disaster, fire, power interruption, work stoppage or
other unanticipated catastrophic event, especially during the
period from May through September when we have received most of
the curriculum materials for the school year and have not yet
shipped such materials to students, could significantly disrupt
our ability to deliver our products and operate our business. If
any of our material inventory were to experience any significant
damage, we would be unable to meet our contractual obligations
and our business would suffer.
15
Any significant interruption in the operations of our data
center could cause a loss of data and disrupt our ability to
manage our network hardware and software and technological
infrastructure.
We host our products and serve all of our students from a
third-party data center facility. While we are developing a risk
mitigation plan, such a plan may not be able to prevent a
significant interruption in the operation of this facility or
the loss of school and operational data due to a natural
disaster, fire, power interruption, act of terrorism or other
unanticipated catastrophic event. Any significant interruption
in the operation of this facility, including an interruption
caused by our failure to successfully expand or upgrade our
systems or manage our transition to utilizing the expansions or
upgrades, could reduce our ability to manage our network and
technological infrastructure, which could result in lost sales,
enrollment terminations and impact our brand reputation.
Additionally, we do not control the operation of this facility
and must rely on a third-party to provide the physical security,
facilities management and communications infrastructure services
related to our data center. Although we believe we would be able
to enter into a similar relationship with another third-party
should this relationship fail or terminate for any reason, our
reliance on a third-party vendor exposes us to risks outside of
our control. If this third-party vendor encounters financial
difficulty such as bankruptcy or other events beyond our control
that causes it to fail to secure adequately and maintain its
hosting facilities or provide the required data communications
capacity, students of the virtual public schools we serve may
experience interruptions in our service or the loss or theft of
important customer data.
Any significant interruption in the operations of our call
center could disrupt our ability to respond to service requests
and process orders and to deliver our products in a timely
manner.
Our call center is housed in a single facility. We do not
currently have a fully functional
back-up
system in place for this facility. While we are developing a
risk mitigation plan, such a plan may not be able to prevent a
significant interruption in the operation of this facility due
to natural disasters, accidents, failures of the inventory
locator or automated packing and shipping systems we use or
other events. Any significant interruption in the operation of
this facility, including an interruption caused by our failure
to successfully expand or upgrade our systems or to manage these
expansions or upgrades, could reduce our ability to respond to
service requests, receive and process orders and provide
products and services, which could result in lost and cancelled
sales, and damage to our brand reputation.
Capacity limits on some of our technology, transaction
processing systems and network hardware and software may be
difficult to project and we may not be able to expand and
upgrade our systems in a timely manner to meet significant
unexpected increased demand.
As the number of virtual public schools we serve increases and
our student base grows, the traffic on our transaction
processing systems and network hardware and software will rise.
We may be unable to accurately project the rate of increase in
the use of our transaction processing systems and network
hardware and software. In addition, we may not be able to expand
and upgrade our systems and network hardware and software
capabilities to accommodate significant unexpected increased
use. If we are unable to appropriately upgrade our systems and
network hardware and software in a timely manner, our operations
and processes may be temporarily disrupted.
We may be unable to manage and adapt to changes in
technology.
We will need to respond to technological advances and emerging
industry standards in a cost-effective and timely manner in
order to remain competitive. The need to respond to
technological changes may require us to make substantial,
unanticipated expenditures. There can be no assurance that we
will be able to respond successfully to technological change.
We may be unable to attract and retain skilled
employees.
Our success depends in large part on continued employment of
senior management and key personnel who can effectively operate
our business. If any of these employees leave us and we fail to
effectively manage a transition to new personnel, or if we fail
to attract and retain qualified and experienced professionals on
acceptable terms, our business, financial conditions and results
of operations could be adversely affected.
16
Our success also depends on our having highly trained financial,
technical, recruiting, sales and marketing personnel. We will
need to continue to hire additional personnel as our business
grows. A shortage in the number of people with these skills or
our failure to attract them to our Company could impede our
ability to increase revenues from our existing products and
services and to launch new product offerings, and would have an
adverse effect on our business and financial results.
We may not be able to effectively manage our growth, which
could impair our ability to operate profitably.
We have experienced significant expansion since our inception,
which has sometimes strained our managerial, operational,
financial and other resources. A substantial increase in our
enrollment or the addition of new schools in a short period of
time could strain our current resources and increase capital
expenditures, without an immediate increase in revenues. Our
failure to successfully manage our growth in a cost efficient
manner and add and retain personnel to adequately support our
growth could disrupt our business and decrease profitability.
We may need additional capital in the future, but there is
no assurance that funds will be available on acceptable
terms.
We may need to raise additional funds in order to achieve growth
or fund other business initiatives. This financing may not be
available in sufficient amounts or on terms acceptable to us and
may be dilutive to existing stockholders. Additionally, any
securities issued to raise funds may have rights, preferences or
privileges senior to those of existing stockholders. If adequate
funds are not available or are not available on acceptable
terms, our ability to expand, develop or enhance services or
products, or respond to competitive pressures will be limited.
Our curriculum and approach to instruction may not achieve
widespread acceptance, which would limit our growth and
profitability.
Our curriculum and approach to instruction are based on the
structured delivery, clarification, verification and practice of
lesson subject matter. The goal of this approach is to make
students proficient at the fundamentals and to instill
confidence in a subject prior to confronting new and complex
concepts. This approach, however, is not accepted by all
academics and educators, who may favor less formalistic methods.
Accordingly, some academics and educators are opposed to the
principles and methodologies associated with our approach to
learning, and have the ability to negatively influence the
market for our products and services.
If student performance falls or parent and student
satisfaction declines, a significant number of students may not
remain enrolled in a virtual public school that we serve, and
our business, financial condition and results of operations will
be adversely affected.
The success of our business depends on a familys decision
to have their child continue his or her education in a virtual
public school that we serve. This decision is based on many
factors, including student achievement and parent and student
satisfaction. Students may perform significantly below state
averages or the virtual school may fail to meet the standards of
the No Child Left Behind Act. For instance, in the
2005-06
school year, an increase in certain enrollments in two of the
virtual schools we served created the need to monitor two
subgroups that did not meet Adequate Yearly Progress
requirements of NCLB, causing those schools not to meet the
Adequate Yearly Progress requirements for that year. We expect
that, as our enrollments increase and the portion of students
that have not used our learning system for multiple years
increases, the average performance of all students using our
learning system may decrease, even if the individual performance
of other students improves over time. Additionally, parent and
student satisfaction may decline as not all parents and students
are able to devote the substantial time and energy necessary to
complete our curriculum. A students satisfaction may also
suffer if his or her relationship with the virtual school
teacher does not meet expectations. If a students
performance or satisfaction declines, students may decide not to
remain enrolled in a virtual public school that we serve and our
business, financial condition and results of operations will be
adversely affected.
Although we do not currently transact business in a
foreign country, we intend to expand into international markets,
which will subject us to additional economic, operational and
political risks that could increase our costs and make it
difficult for us to continue to operate profitably.
One of our growth strategies is to pursue international
opportunities that leverage our current product and service
offerings. The addition of international operations may require
significant expenditure of financial and
17
management resources and result in increased administrative and
compliance costs. As a result of such expansion, we will be
increasingly subject to the risks inherent in conducting
business internationally, including:
|
|
|
|
|
foreign currency fluctuations, which could result in reduced
revenues and increased operating expenses;
|
|
|
|
potentially longer payment and sales cycles;
|
|
|
|
difficulty in collecting accounts receivable;
|
|
|
|
the effect of applicable foreign tax structures, including tax
rates that may be higher than tax rates in the United States or
taxes that may be duplicative of those imposed in the United
States;
|
|
|
|
tariffs and trade barriers;
|
|
|
|
general economic and political conditions in each country;
|
|
|
|
inadequate intellectual property protection in foreign countries;
|
|
|
|
uncertainty regarding liability for information retrieved and
replicated in foreign countries;
|
|
|
|
the difficulties and increased expenses in complying with a
variety of U.S. and foreign laws, regulations and trade
standards, including the Foreign Corrupt Practices Act; and
|
|
|
|
unexpected changes in regulatory requirements.
|
Risks
Related to this Offering
The price of our common stock may be subject to wide
fluctuations and may trade below the initial public offering
price.
Before this offering, there has not been a public market for our
common stock. The initial public offering price of our common
stock will be determined by negotiations between us and
representatives of the underwriters based on numerous factors,
including those that we discuss under Underwriting.
This price may not be indicative of the market price of our
common stock after this offering. We cannot assure you that an
active public market for our common stock will develop or be
sustained after this offering. The market price of our common
stock also could be subject to significant fluctuations. As a
result, you may not be able to sell your shares of our common
stock quickly or at prices equal to or greater than the price
you paid in this offering.
Among the factors that could affect our common stock price are
the risks described in this section and other factors, including:
|
|
|
|
|
quarterly variations in our operating results compared to market
expectations;
|
|
|
|
changes in expectations as to our future financial performance,
including financial estimates or reports by securities analysts;
|
|
|
|
changes in market valuations of similar companies;
|
|
|
|
liquidity and activity in the market for our common stock;
|
|
|
|
sales of our common stock by our stockholders;
|
|
|
|
strategic moves by us or our competitors, such as acquisitions
or restructurings;
|
|
|
|
general market conditions; and
|
|
|
|
domestic and international economic, legal and regulatory
factors unrelated to our performance.
|
Stock markets in general have experienced extreme volatility
that has often been unrelated to the operating performance of a
particular company. These broad market fluctuations could
adversely affect the trading price of our common stock,
regardless of our operating performance.
Sales of substantial amounts of our common stock in the
public markets, or the perception that they might occur, could
reduce the price of our common stock and may dilute your voting
power and your ownership interest in us.
After the completion of this offering, we will
have shares
of common stock outstanding
( shares
of common stock outstanding if the underwriters exercise their
overallotment option in full).
18
This number is comprised of all the shares of our common stock
that we are selling in this offering and the selling
stockholders will sell in this offering if the underwriters
exercise their overallotment option
(including shares
that we expect to be issued upon exercise of stock options by
certain of the selling stockholders and resold in this
offering), which may be resold immediately in the public market.
Subject to certain exceptions described under the caption
Underwriting, we and all of our directors and
executive officers and certain of our stockholders and
optionholders have agreed not to offer, sell or agree to sell,
directly or indirectly, any shares of common stock without the
permission of the underwriters for a period of 180 days
from the date of this prospectus. When this period expires we
and our
locked-up
stockholders will be able to sell our shares in the public
market. As
of ,
2007,
of our outstanding shares were subject to the lock-up
restrictions. Sales of a substantial number of such shares upon
expiration, or early release, of the
lock-up
(or
the perception that such sales may occur) could cause our share
price to fall.
We cannot predict what effect, if any, future sales of our
common stock, or the availability of common stock for future
sale, will have on the market price of our common stock. Sales
of substantial amounts of our common stock in the public market
following our initial public offering, including a secondary
offering by the Company, or the perception that such sales could
occur, could adversely affect the market price of our common
stock and may make it more difficult for you to sell your common
stock at a time and price that you deem appropriate.
We also may issue our shares of common stock from time to time
as consideration for future acquisitions and investments. If any
such acquisition or investment is significant, the number of
shares that we may issue may in turn be significant. In
addition, we may also grant registration rights covering those
shares in connection with any such acquisitions and investments.
Upon completion of this
offering,
of our shares of common stock will be restricted or control
securities within the meaning of Rule 144 under the
Securities Act of 1933, as amended,
( shares
of common stock if the underwriters overallotment option
is exercised in full). The rules affecting the sale of these
securities are summarized under Shares Eligible for Future
Sale.
Our principal stockholders hold (and following completion of
this offering will continue to hold) shares of our common stock
in which they have a large unrealized gain, and these
stockholders may wish, to the extent they may permissibly do so,
to realize some or all of that gain relatively quickly by
selling some or all of their shares.
Investors purchasing common stock in this offering will
experience immediate and substantial dilution.
The assumed initial public offering price of our common stock is
substantially higher than the net tangible book value per
outstanding share of our common stock immediately after this
offering. As a result, you will pay a price per share that
substantially exceeds the book value of our assets after
subtracting our liabilities. Purchasers of our common stock in
this offering will incur immediate and substantial dilution of
$ per share in the net tangible
book value of our common stock from the assumed initial public
offering price of $ per share,
which is the mid-point of the estimated range set forth on the
cover of this prospectus. If the underwriters exercise their
over-allotment option in full, there will be an additional
dilution of $ per share in the net
tangible book value of our common stock, assuming the same
public offering price. See Dilution. In addition, if
outstanding options to purchase shares of common stock are
exercised, there could be substantial additional dilution.
Antitakeover provisions in our charter documents and under
Delaware law could make an acquisition of us, which may be
beneficial to our stockholders, more difficult and may prevent
attempts by our stockholders to replace or remove our current
management.
Provisions in our amended and restated certificate of
incorporation and amended and restated bylaws to be effective
upon the consummation of this offering may delay or prevent an
acquisition of us or a change in our management. These
provisions will include a classified board of directors,
prohibition on actions by written consent of our stockholders,
and the ability of our board of directors to issue preferred
stock without stockholder approval. In addition, because we are
incorporated in Delaware, we are governed by the provisions of
Section 203 of the Delaware General Corporation Law, which
prohibits stockholders owning in excess of 15% of our
outstanding voting stock from merging or combining with us.
Although we believe these provisions collectively provide for an
opportunity to receive higher bids by requiring potential
acquirers to negotiate with our board of directors, they would
apply even if the offer may be considered beneficial by some
stockholders. In addition, these provisions may
19
frustrate or prevent attempts by our stockholders to replace or
remove our current management by making it more difficult for
stockholders to replace members of our board of directors, which
is responsible for appointing the members of our management.
As a result of becoming a public company, we will be
obligated to develop and maintain proper and effective internal
control over financial reporting and will be subject to other
requirements that will be burdensome and costly. We may not
timely complete our analysis of our internal control over
financial reporting, or these internal controls may not be
determined to be effective, which could adversely affect
investor confidence in our company and, as a result, the value
of our common stock.
We will be required, pursuant to Section 404 of the
Sarbanes-Oxley Act of 2002 (Section 404), to furnish a
report by management on, among other things, the effectiveness
of our internal control over financial reporting for the first
fiscal year beginning after the effective date of this offering.
This assessment will need to include disclosure of any material
weaknesses identified by our management in our internal control
over financial reporting. In addition, our auditors will issue
an attestation report on our internal control over financial
reporting.
We are just beginning the costly and challenging process of
compiling the system and processing documentation before we
perform the evaluation needed to comply with Section 404.
We may not be able to complete our evaluation, testing and any
required remediation in a timely fashion. During the evaluation
and testing process, if we identify one or more material
weaknesses in our internal control over financial reporting, we
will be unable to assert that our internal control is effective.
If we are unable to assert that our internal control over
financial reporting is effective, or if our auditors are unable
to issue an unqualified opinion that we maintained, in all
material respects, effective internal control over financial
reporting, we could lose investor confidence in the accuracy and
completeness of our financial reports, which would have a
material adverse effect on the price of our common stock.
Failure to comply with the new rules might make it more
difficult for us to obtain certain types of insurance, including
director and officer liability insurance, and we might be forced
to accept reduced policy limits and coverage
and/or
incur
substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more
difficult for us to attract and retain qualified persons to
serve on our board of directors, on committees of our board of
directors, or as executive officers.
In addition, as a public company, we will incur significant
legal, accounting and other expenses that we did not incur as a
private company, and our administrative staff will be required
to perform additional tasks. For example, in anticipation of
becoming a public company, we will need to create or revise the
roles and duties of our board committees, adopt disclosure
controls and procedures, retain a transfer agent, adopt an
insider trading policy and bear all of the internal and external
costs of preparing and distributing periodic public reports in
compliance with our obligations under federal securities laws.
In addition, changing laws, regulations and standards relating
to corporate governance and public disclosure, and related
regulations implemented by the SEC and the New York Stock
Exchange, are creating uncertainty for public companies,
increasing legal and financial compliance costs and making some
activities more time consuming. These laws, regulations and
standards are subject to varying interpretations, in many cases
due to their lack of specificity, and, as a result, their
application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies. We intend to invest
resources to comply with evolving laws, regulations and
standards, and this investment may result in increased general
and administrative expenses and a diversion of managements
time and attention from revenue-generating activities to
compliance activities. If our efforts to comply with new laws,
regulations and standards differ from the activities intended by
regulatory or governing bodies due to ambiguities related to
practice, regulatory authorities may initiate legal proceedings
against us and our business may be harmed.
Our largest stockholders will continue to have significant
control over us after this offering, and they may make decisions
with which you disagree.
Following the offering, assuming no exercise of the
underwriters overallotment option, our current
stockholders will beneficially own
approximately % of the outstanding
shares of common stock (or
approximately % of the shares of
common stock on a fully diluted basis, after giving effect to
the exercise of all outstanding options and other rights to
acquire common stock). As a result, such current stockholders
may have the ability to control the election of our directors
and the outcome of corporate actions requiring stockholder
approval. This
20
concentration of ownership could have the effect of discouraging
potential take-over attempts and may make attempts by
stockholders to change our management more difficult.
We have not paid and do not expect to pay dividends, and
any return on your investment will likely be limited to the
appreciation of our common stock.
We have never paid dividends on our common stock and do not
anticipate paying dividends on our common stock in the
foreseeable future. If, however, we decide to pay dividends on
our common stock in the future, the payment of dividends will
depend on our earnings, financial condition and other business
and economic factors affecting us at such time as our board of
directors may consider relevant. In addition, our credit
facility with PNC Bank, N.A. (PNC Bank) contains covenants
prohibiting the payment of cash dividends without their consent.
Accordingly, for the foreseeable future, any return on your
investment will be related to the appreciation of our stock
price.
We have broad discretion in the use of the net proceeds
from this offering and may not use them effectively.
We cannot specify with certainty the particular uses of the net
proceeds we will receive from this offering. Our management will
have broad discretion in the application of the net proceeds,
including for any of the purposes described in Use of
Proceeds. The failure by our management to apply these
funds effectively could harm our business. Pending their use, we
may invest the net proceeds from this offering in a manner that
does not produce income or that loses value.
If equity research analysts do not publish research or
reports about our business or if they issue unfavorable
commentary or downgrade our common stock, the price of our
common stock could decline.
The trading market for our common stock will rely in part on the
research and reports that equity research analysts publish about
us and our business. The price of our stock could decline if one
or more securities analysts downgrade our stock or if those
analysts issue other unfavorable commentary or cease publishing
reports about us or our business.
21
CAUTIONARY
NOTICE REGARDING FORWARD-LOOKING STATEMENTS
The Securities and Exchange Commission, or SEC, encourages
companies to disclose forward-looking information so that
investors can better understand a companys future
prospects and make informed investment decisions. This
prospectus contains such forward-looking statements.
All statements other than statements of historical facts
contained in this prospectus, including our disclosure and
analysis concerning our operations, cash flows and financial
position, business strategy and plans and objectives, including,
in particular, the likelihood of our success developing and
expanding our business, are forward-looking statements. In some
cases, you can identify forward-looking statements by terms such
as may, will, should,
expects, plans, anticipates,
could, intends, target,
projects, contemplates,
believes, estimates,
predicts, potential or
continue or the negative of these terms or other
similar words. These statements are only predictions. All
forward-looking statements are managements present
expectations of future events and are subject to a number of
risks and uncertainties that could cause actual results to
differ materially from those described in the forward-looking
statements. These risks include, but are not limited to, the
risks and uncertainties set forth in Risk Factors,
beginning on page 8 of this prospectus.
In light of these assumptions, risks and uncertainties, the
results and events discussed in the forward-looking statements
contained in this prospectus might not occur. You are cautioned
not to place undue reliance on the forward-looking statements,
which speak only as of the date of this prospectus. We are not
under any obligation, and we expressly disclaim any obligation,
to update or alter any forward-looking statements, whether as a
result of new information, future events, or otherwise. All
subsequent forward-looking statements attributable to us or to
any person acting on our behalf are expressly qualified in their
entirety by the cautionary statements contained or referred to
in this section.
This prospectus also contains estimates and other statistical
data made by independent parties and by us relating to market
size and growth and other industry data. These data involves a
number of assumptions and limitations, and you are cautioned not
to give undue weight to such estimates. We have not
independently verified the statistical and other industry data
generated by independent parties and contained in this
prospectus and, accordingly, we cannot guarantee their accuracy
or completeness. In addition, projections, assumptions and
estimates of our future performance and the future performance
of the industries in which we operate are necessarily subject to
a high degree of uncertainty and risk due to a variety of
factors, including those described in Risk Factors,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and elsewhere in this
prospectus. These and other factors could cause results to
differ materially from those expressed in the estimates made by
the independent parties and by us.
22
Assuming an initial public offering price of
$ per share, we estimate that we
will receive net proceeds from this offering of approximately
$ million, after deducting
underwriting discounts and commissions and other estimated
expenses of $ million payable
by us. We will not receive any of the proceeds from the sale of
shares to be sold by the selling stockholders if the
underwriters exercise their overallotment option. A $1.00
increase (decrease) in the assumed initial public offering price
of $ per share would increase
(decrease) the net proceeds to us from this offering by
approximately $ million,
assuming the number of shares offered, as set forth on the cover
page of this prospectus, remains the same and after deducting
the estimated underwriting discounts and commissions and
estimated offering expenses payable by us.
We intend to use the net proceeds from this offering for general
corporate purposes, including working capital, capital
expenditures and the development of new courses and product
offerings. In addition, we intend to repay approximately
$12.5 million of borrowings under our revolving credit
facility, which bears interest at rates of approximately 6.6% to
7.1%, with various maturity dates on or before November 12,
2007 that may be renewed at the then current interest rate. The
net proceeds will also provide us with the financial flexibility
to make acquisitions and strategic investments. Management will
have broad discretion in the allocation of the net proceeds of
this offering. Depending upon future events, we may determine at
a later time to use the net proceeds for different purposes.
Pending their use, we plan to invest the net proceeds in
short-term, investment grade, interest-bearing securities.
We have never paid or declared a dividend on our common stock,
and we intend to retain all future earnings, if any, for use in
the operation of our business and to fund future growth. We do
not anticipate paying any dividends for the indefinite future,
and our credit facility with PNC Bank, N.A. limits our ability
to pay dividends or other distributions on our common stock. The
decision whether to pay dividends will be made by our board of
directors in light of conditions then existing, including
factors such as our results of operations, financial condition
and requirements, business conditions, and covenants under any
applicable contractual arrangements.
23
The following table sets forth our capitalization as of
June 30, 2007:
|
|
|
|
|
on an actual basis;
|
|
|
|
on a pro forma basis, giving effect to the automatic conversion
of all of the outstanding shares of our preferred stock into
101,386,536 shares of our common stock immediately prior to
the completion of this offering; and
|
|
|
|
|
|
on a pro forma basis as discussed in the prior bullet point, as
adjusted to give effect to our receipt of the estimated net
proceeds from the sale
of shares
of common stock offered by us in this offering, assuming an
initial public offering price of
$ , the midpoint of
the estimated price range shown on the cover page of this
prospectus, after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by us and
our use of proceeds from this offering to repay approximately
$12.5 million of outstanding indebtedness under our
revolving credit facility.
|
You should read this table in conjunction with the consolidated
financial statements and the related notes,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and Use of
Proceeds included elsewhere in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2007
|
|
|
|
|
|
|
|
|
|
Pro forma
|
|
|
|
Actual
|
|
|
Pro forma
|
|
|
as
adjusted
(1)
|
|
|
|
(dollars in thousands)
|
|
|
Cash and cash
equivalents
|
|
$
|
1,660
|
|
|
$
|
1,660
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
8,635
|
|
|
|
8,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Convertible
Preferred Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable Convertible
Series C Preferred Stock, par value $0.0001 per share;
55,000,000 shares authorized, 49,861,562 issued and
outstanding, actual; no shares issued and outstanding pro forma
and pro forma as adjusted
|
|
|
91,122
|
|
|
|
|
|
|
|
|
|
Redeemable Convertible
Series B Preferred Stock, par value $0.0001 per share;
76,000,000 shares authorized; 51,524,974 issued and
outstanding, actual; no shares issued and outstanding pro forma
and pro forma as adjusted
|
|
|
138,434
|
|
|
|
|
|
|
|
|
|
Stockholders
deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, par value $0.0001
per share; 170,000,000 shares authorized, 10,412,243 issued
and outstanding, actual; 111,798,779 issued and outstanding, pro
forma; shares
authorized, issued
and outstanding pro forma as adjusted
|
|
|
1
|
|
|
|
11
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
229,546
|
|
|
|
|
|
Accumulated deficit
|
|
|
(197,808
|
)
|
|
|
(197,808
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders (deficit)
equity
|
|
|
(197,807
|
)
|
|
|
31,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
40,384
|
|
|
$
|
40,384
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
A $1.00 increase (decrease) in the
assumed initial public offering price of
$ per share, which is the midpoint
of the range on the cover page of this prospectus, would
increase (decrease) each of cash and cash equivalents,
additional paid-in capital, total stockholders equity and
total capitalization by approximately
$ million, assuming the
number of shares offered by us, as set forth on the cover page
of this prospectus, remains the same and after deducting the
underwriting discounts and commissions and estimated offering
expenses payable by us.
|
24
Dilution is the amount by which the offering price paid by the
purchasers of the common stock to be sold in the offering
exceeds the net tangible book value per share of common stock
after the offering. Net tangible book value per share is
determined at any date by subtracting our total liabilities from
the total book value of our tangible assets and dividing the
difference by the number of shares of common stock deemed to be
outstanding at that date.
Our net tangible book value as of June 30, 2007 was
($197.8) million, or ($19.00) per share. Our pro forma
net tangible book value as of June 30, 2007 was
$31.7 million, or $0.28 per share after giving effect to
the automatic conversion of all of our preferred stock into
shares of common stock in accordance with their terms
immediately prior to the consummation of the offering. This
represents an increase of $229.5 million or $19.28 per
share. After giving effect to our receipt of the estimated net
proceeds from the sale of shares of common stock offered by us
in this offering, assuming an initial public offering price of
$ , the midpoint of the estimated
price range shown on the cover page of this prospectus, after
deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us, our pro forma as
adjusted net tangible book value as of June 30, 2007 would
have been approximately
$ million, or
$ per share. This represents an
immediate increase in pro forma net tangible book value of
$ per share to existing
stockholders and an immediate dilution of
$ per share to new investors
purchasing shares of common stock in the offering. The following
table illustrates this substantial and immediate per share
dilution to new investors:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
Assumed initial public offering
price per share
|
|
|
|
|
|
$
|
|
|
Pro forma net tangible book value
before the offering
|
|
$
|
0.28
|
|
|
|
|
|
Increase per share attributable to
our investors in the offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net tangible book value
after the offering
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilution per share to new investors
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
A $1.00 increase (decrease) in the assumed initial public
offering price of $ per share
would increase (decrease), the as adjusted pro forma net
tangible book value per share after this offering by
$ and the dilution per share to
new investors in this offering by
$ , assuming the number of shares
offered by us, as set forth on the cover page of this
prospectus, remains the same and after deducting the estimated
underwriting discounts and commissions and estimated offering
expenses payable by us.
The following table summarizes on a pro forma as adjusted basis
as of June 30, 2007, giving effect to the automatic
conversion of all of our shares of preferred stock into shares
of common stock in connection with the offering and for
a
for
stock split which will occur prior to the completion of this
offering:
|
|
|
|
|
the total number of shares of common stock purchased from us by
our existing stockholders and by new investors purchasing shares
in this offering;
|
|
|
|
the total consideration paid to us by our existing stockholders
and by new investors purchasing shares in this offering,
assuming an initial public offering price of
$ per share (before deducting the
estimated underwriting discount and commissions and offering
expenses payable by us in connection with this
offering); and
|
|
|
|
the average price per share paid by existing stockholders and by
new investors purchasing shares in this offering:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
|
Total Consideration
|
|
|
Average Price
|
|
|
|
Number
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Per Share
|
|
|
Existing stockholders
|
|
|
111,798,779
|
|
|
|
|
%
|
|
$
|
118,146,245
|
|
|
|
|
%
|
|
$
|
1.06
|
|
Investors in the offering
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
100
|
%
|
|
$
|
|
|
|
|
100
|
%
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
The tables and calculations above assume no exercise of:
|
|
|
|
|
stock options outstanding as of June 30, 2007 to purchase
18,477,803 shares of common stock at a weighted average
exercise price of $1.81 per share;
|
|
|
|
|
|
2,328,358 shares of preferred stock (or upon the
consummation of the offering an equivalent amount of common
stock) that may be issued upon the exercise of warrants
outstanding as of June 30, 2007, all of which are currently
exercisable at a purchase price of $1.34 per share, and
108,649 shares of common stock that may be issued upon the
exercise of warrants outstanding as of June 30, 2007, all
of which are exercisable at a purchase price of $1.60 per
share; or
|
|
|
|
|
|
the underwriters overallotment option.
|
To the extent any of these options are exercised, there will be
further dilution to new investors. For example, if, immediately
after the offering, we were to issue (i) all
18,477,803 shares of common stock issuable upon exercise of
outstanding options and (ii) all 2,437,007 shares of
common stock issuable upon exercise of outstanding warrants and,
in each case, we receive the aggregate exercise price therefrom,
our net tangible book value would be approximately
$ million, or
$ per share. This would represent
immediate further dilution of $
per share to new investors purchasing shares at the initial
public offering price.
26
SELECTED
CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated
statement of operations, balance sheet and other data for the
periods indicated. We have derived our selected consolidated
statement of operations data for the years ended June 30,
2005, 2006 and 2007 and our balance sheet data as of
June 30, 2006 and 2007, from our audited consolidated
financial statements that are included elsewhere in this
prospectus. We have derived our selected consolidated statement
of operations data for the years ended June 30, 2003 and
2004, and our balance sheet data as of June 30, 2003, 2004
and 2005, from our audited consolidated financial statements
that are not included in this prospectus. Our historical results
are not necessarily indicative of future operating results. You
should read the information set forth below in conjunction with
Selected Consolidated Financial and Operating Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our consolidated
financial statements and their related notes included elsewhere
in this prospectus.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
140,556
|
|
|
$
|
116,902
|
|
|
$
|
85,310
|
|
|
$
|
71,434
|
|
|
$
|
30,930
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
76,064
|
|
|
|
64,828
|
|
|
|
49,130
|
|
|
|
39,943
|
|
|
|
25,580
|
|
Selling, administrative, and other
operating expenses
|
|
|
51,159
|
|
|
|
41,660
|
|
|
|
30,031
|
|
|
|
25,656
|
|
|
|
20,903
|
|
Product development expenses
|
|
|
8,611
|
|
|
|
8,568
|
|
|
|
9,410
|
|
|
|
12,750
|
|
|
|
12,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
135,834
|
|
|
|
115,056
|
|
|
|
88,571
|
|
|
|
78,349
|
|
|
|
58,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
4,722
|
|
|
|
1,846
|
|
|
|
(3,261
|
)
|
|
|
(6,915
|
)
|
|
|
(27,969
|
)
|
Interest expense, net
|
|
|
(639
|
)
|
|
|
(488
|
)
|
|
|
(279
|
)
|
|
|
(516
|
)
|
|
|
(388
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before taxes
|
|
|
4,083
|
|
|
|
1,358
|
|
|
|
(3,540
|
)
|
|
|
(7,431
|
)
|
|
|
(28,357
|
)
|
Income tax expense
|
|
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
3,865
|
|
|
|
1,358
|
|
|
|
(3,540
|
)
|
|
|
(7,431
|
)
|
|
|
(28,357
|
)
|
Dividends on preferred stock
|
|
|
(6,378
|
)
|
|
|
(5,851
|
)
|
|
|
(5,261
|
)
|
|
|
(2,667
|
)
|
|
|
|
|
Preferred stock accretion
|
|
|
(22,353
|
)
|
|
|
(18,697
|
)
|
|
|
(15,947
|
)
|
|
|
(15,768
|
)
|
|
|
(11,912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders
|
|
$
|
(24,866
|
)
|
|
$
|
(23,190
|
)
|
|
$
|
(24,748
|
)
|
|
$
|
(25,866
|
)
|
|
$
|
(40,269
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(2.44
|
)
|
|
$
|
(2.30
|
)
|
|
$
|
(2.46
|
)
|
|
$
|
(2.58
|
)
|
|
$
|
(4.02
|
)
|
Basic and diluted (pro
forma)
(1)
|
|
$
|
0.03
|
|
|
$
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Weighted average shares used in
computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
10,208,507
|
|
|
|
10,083,721
|
|
|
|
10,062,587
|
|
|
|
10,017,162
|
|
|
|
10,009,906
|
|
Basic (pro
forma)
(1)
|
|
|
111,595,043
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
Diluted (pro
forma)
(1)
|
|
|
111,642,987
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
operating activities
|
|
$
|
5,563
|
|
|
$
|
3,625
|
|
|
$
|
9,697
|
|
|
$
|
(8,020
|
)
|
|
$
|
(15,990
|
)
|
Depreciation and amortization
|
|
$
|
7,404
|
|
|
$
|
4,986
|
|
|
$
|
5,509
|
|
|
$
|
4,922
|
|
|
$
|
4,005
|
|
Capital
expenditures
(2)
|
|
$
|
13,418
|
|
|
$
|
10,842
|
|
|
$
|
5,133
|
|
|
$
|
4,643
|
|
|
$
|
4,677
|
|
EBITDA
(3)
|
|
$
|
12,126
|
|
|
$
|
6,832
|
|
|
$
|
2,248
|
|
|
$
|
(1,993
|
)
|
|
$
|
(23,964
|
)
|
Average
enrollments
(4)
|
|
|
27,005
|
|
|
|
20,220
|
|
|
|
15,097
|
|
|
|
11,158
|
|
|
|
5,872
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(dollars in thousands)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,660
|
|
|
$
|
9,475
|
|
|
$
|
19,953
|
|
|
$
|
15,881
|
|
|
$
|
7,727
|
|
Total assets
|
|
|
61,212
|
|
|
|
48,485
|
|
|
|
41,968
|
|
|
|
42,714
|
|
|
|
21,331
|
|
Total short-term debt
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
|
7,135
|
|
|
|
4,025
|
|
|
|
4,466
|
|
|
|
3,432
|
|
|
|
1,697
|
|
Convertible redeemable preferred
stock
|
|
|
229,556
|
|
|
|
200,825
|
|
|
|
176,277
|
|
|
|
155,069
|
|
|
|
111,634
|
|
Total stockholders deficit
|
|
|
(197,807
|
)
|
|
|
(173,451
|
)
|
|
|
(150,299
|
)
|
|
|
(125,621
|
)
|
|
|
(99,762
|
)
|
Working capital
|
|
|
8,548
|
|
|
|
15,421
|
|
|
|
22,953
|
|
|
|
24,130
|
|
|
|
6,823
|
|
|
|
|
(1)
|
|
Pro forma net income per common
share gives effect to the automatic conversion of all of our
outstanding shares of preferred stock into common stock
immediately prior to the completion to this offering. Assuming
the completion of this offering on June 30, 2007, all of
our outstanding shares of preferred stock would convert into
101,386,536 shares of common stock.
|
|
|
|
(2)
|
|
Capital expenditures consist of the
purchase of property and equipment and new capital lease
obligations.
|
(3)
|
|
EBITDA consists of net income
(loss) minus interest income, plus interest expense, plus income
tax expense and plus depreciation and amortization. Interest
income consists primarily of interest earned on short-term
investments or cash deposits. Interest expense primarily
consists of interest expense for capital leases, long-term and
short-term borrowings. We use EBITDA as a measure of operating
performance. However, EBITDA is not a recognized measurement
under U.S. generally accepted accounting principles, or GAAP,
and when analyzing our operating performance, investors should
use EBITDA in addition to, and not as an alternative for, net
income (loss) as determined in accordance with GAAP. Because not
all companies use identical calculations, our presentation of
EBITDA may not be comparable to similarly titled measures of
other companies. Furthermore, EBITDA is not intended to be a
measure of free cash flow for our managements
discretionary use, as it does not consider certain cash
requirements such as tax payments.
|
|
|
|
We
believe EBITDA is useful to an investor in evaluating our
operating performance because it is widely used to measure a
companys operating performance without regard to items
such as depreciation and amortization, which can vary depending
upon accounting methods and the book value of assets, and to
present a meaningful measure of corporate performance exclusive
of our capital structure and the method by which assets were
acquired. Our management uses EBITDA:
|
|
|
|
|
|
as a measurement of operating performance, because it assists us
in comparing our performance on a consistent basis, as it
removes depreciation, amortization, interest and taxes; and
|
|
|
|
in presentations to the members of our board of directors to
enable our board to have the same measurement basis of operating
performance as is used by management to compare our current
operating results with corresponding prior periods and with the
results of other companies in our industry.
|
The following table provides a reconciliation of net income
(loss) to EBITDA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,865
|
|
|
$
|
1,358
|
|
|
$
|
(3,540
|
)
|
|
$
|
(7,431
|
)
|
|
$
|
(28,357
|
)
|
|
|
|
|
Interest expense, net
|
|
|
639
|
|
|
|
488
|
|
|
|
279
|
|
|
|
516
|
|
|
|
388
|
|
|
|
|
|
Income tax expense
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
7,404
|
|
|
|
4,986
|
|
|
|
5,509
|
|
|
|
4,922
|
|
|
|
4,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
12,126
|
|
|
$
|
6,832
|
|
|
$
|
2,248
|
|
|
$
|
(1,993
|
)
|
|
$
|
(23,964
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
|
To ensure that all schools are
reflected in our measure of enrollments, we consider our
enrollments as of the end of September to be our opening
enrollment level, and the number of students enrolled at the end
of May to be our ending enrollment level. To provide
comparability, we do not consider enrollment levels for June,
July and August as all schools are not open during these months.
For each period, average enrollments represent the average of
the month end enrollment levels for each month that has
transpired between September and the end of the period, up to
and including the month of May.
|
28
MANAGEMENTS
DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our
consolidated financial statements and the related notes included
elsewhere in this prospectus. This discussion contains
forward-looking statements about our business and operations.
Our actual results may differ materially from those we currently
anticipate as a result of the factors we describe under
Risk Factors and elsewhere in this prospectus.
Our
Company
We are a technology-based education company. We offer
proprietary curriculum and educational services created for
online delivery to students in kindergarten through
12th grade, or K-12. Our mission is to maximize a
childs potential by providing access to an engaging and
effective education, regardless of geographic location or
socio-economic background. Since our inception, we have invested
more than $95 million to develop curriculum and an online
learning platform that promotes mastery of core concepts and
skills for students of all abilities. This learning system
combines a cognitive research-based curriculum with an
individualized learning approach well-suited for virtual schools
and other educational applications. From fiscal year 2004 to
fiscal year 2007, we increased average enrollments in the
virtual public schools we serve from approximately 11,000
students to 27,000 students, representing a compound annual
growth rate of approximately 35%. From fiscal year 2004 to
fiscal year 2007, we increased revenues from $71.4 million
to $140.6 million, representing a compound annual growth
rate of approximately 25%, and improved from a net loss of
$7.4 million to net income of $3.9 million.
We deliver our learning system to students primarily through
virtual public schools. Many states have embraced virtual public
schools as a means to provide families with a publicly funded
alternative to a traditional classroom-based education. We offer
virtual schools our proprietary curriculum, online learning
platform and varying levels of academic and management services,
which can range from targeted programs to complete turnkey
solutions, under long-term contracts. These contracts provide
the basis for a recurring revenue stream as students progress
through successive grades. Additionally, without the requirement
of a physical classroom, virtual schools can be scaled quickly
to accommodate a large dispersed student population, and allow
more capital resources to be allocated towards teaching,
curriculum and technology rather than towards a physical
infrastructure.
Our proprietary curriculum is currently used primarily by public
school students in 17 states and the District of Columbia.
Parents can also purchase our curriculum and online learning
platform directly to facilitate or supplement their
childrens education. Additionally, we have piloted our
curriculum in brick and mortar classrooms with promising
academic results. We also believe there is additional widespread
applicability for our learning system internationally.
Our
History
We were founded in 2000 to utilize the advances in technology to
provide children access to a high-quality public school
education regardless of their geographic location or
socio-economic background. Given the geographic flexibility of
technology-based education, we believed that the pursuit of this
mission could help address the growing concerns regarding the
regionalized disparity in the quality of public school
education, both in the United States and abroad. These concerns
were reflected in the passage of the No Child Left Behind (NCLB)
Act in 2000, which implemented new standards and accountability
requirements for public K-12 education. The convergence of these
concerns and rapid advances in Internet technology created the
opportunity to make a significant impact by deploying a high
quality learning system on a flexible, online platform.
In September 2001, after 18 months of research and
development on our curriculum, we launched our kindergarten
through 2nd grade offering. We initially launched our
learning system in virtual public schools in Pennsylvania and
Colorado, serving approximately 900 students in the two states
combined. During the
2002-03
school year, we added our 3rd through 5th grade
offering and entered into contracts to operate virtual public
schools in California, Idaho, Ohio, Minnesota and Arkansas,
increasing our average enrollment to approximately 5,900
students during the 2002-03 school year. During the
2003-04
and
2004-05
school years, we added 7th and 8th grades,
respectively, and added contracts with virtual public schools in
Wisconsin, Arizona and Florida. By the end of the
2004-05
school year, we had increased enrollment to approximately 15,100
students. In the 2005-06
29
school year, we added contracts to operate virtual public
schools in Washington, Illinois and Texas. Additionally during
the
2006-07
school year, we implemented a hybrid school offering in Chicago
that combines face-to-face time in the classroom with online
instruction. We recently entered the virtual high school market,
enrolling 9th and 10th grade students at the start of
the
2005-06
and
2006-07
school years, respectively, and enrolling 11th and
12th grade students at the start of the
2007-08
school year.
We believe we have significant growth potential. Therefore over
the last three years, we have put a great deal of effort into
developing the infrastructure necessary to scale our business.
We further developed our logistics and technological
infrastructure and implemented sophisticated financial systems
to allow us to more effectively operate a large and growing
company.
Key
Aspects and Trends of Our Operations
Revenues
We generate a significant portion of our revenues from
enrollments in virtual public schools. In each of the past four
years, more than 90% of our revenues have been derived through
contracts with these schools. We anticipate that these revenues
will continue to represent the bulk of our total revenues over
the next
12-24 months,
although the percentage may decline over the longer term as we
identify new channels through which to market our curriculum and
educational services. These contracts provide the channels
through which we can enroll students into the school, and we
execute marketing and recruiting programs designed to create
awareness and generate enrollments for these schools. We
generate our revenues by providing each student with access to
our online lessons and offline learning kits, including use of a
personal computer. In addition, we provide a variety of
management and academic support services to virtual public
schools, ranging from turnkey end-to-end management solutions to
a single service to meet a schools specific needs. We also
generate revenues from sales of our curriculum and offline
learning kits through other channels, including directly to
consumers and pilots in a traditional classroom environment.
Factors affecting our revenues include: (i) the number of
enrollments; (ii) the nature and extent of the management
services provided to the schools and school districts;
(iii) state or district per student funding levels; and
(iv) prices for our products and services.
We define an enrollment as a full-time student using our
provided courses as their primary curriculum. We consider
full-time students to be those utilizing our curriculum
regardless of the nature and extent of the management services
we provide to the virtual public school. Generally, a full-time
student will take five or six courses, except for kindergarten
students who participate in
half-day
programs. We count each
half-day
kindergarten student as an enrollment.
School sessions generally begin in August or September and end
in May or June. We consider the duration of a school year to be
10 months. To ensure that all schools are reflected in our
measure of enrollments, we consider the number of students on
the last day of September to be our opening enrollment level,
and the number of students enrolled on the last day of May to be
our ending enrollment level. To provide comparability, we do not
consider enrollment levels for June, July and August as most
schools are not open during these months. For each period,
average enrollments represent the average of the month-end
enrollment levels for each month that has transpired between
September and the end of the period, up to and including the
month of May. We continually evaluate our enrollment levels by
state, by school and by grade. We track new student enrollments
and withdrawals throughout the year.
We believe that the number of enrollments depends upon the
following:
|
|
|
|
|
the number of states and school districts in which we operate;
|
|
|
|
the appeal of our curriculum to students and families;
|
|
|
|
the effectiveness of our program in delivering favorable
academic outcomes;
|
|
|
|
the quality of the teachers working in the virtual public
schools we serve; and
|
|
|
|
the effectiveness of our marketing and recruiting programs.
|
30
We continually evaluate our trends in revenues by monitoring the
number of enrollments in total, by state, by school and by
grade, assessing the impact of changes in funding levels and the
pricing of our curriculum and educational services. We track
enrollments throughout the year, as students enroll and
withdraw. We also provide our courses for use in a traditional
classroom setting and we sell our courses directly to consumers.
Our classroom course revenues are generally for single courses.
Consumers typically purchase from one to six courses in a year,
however, we do not monitor the progress of these students.
Therefore, we do not include classroom or consumer students in
our enrollment totals.
We closely monitor the financial performance of the virtual
public schools to which we provide turnkey management services.
Under the contracts with these schools, we take responsibility
for any operating deficits that they may incur in a given school
year. These operating deficits represent the excess of costs
over revenues incurred by the virtual public schools as
reflected on their financial statements. The costs include our
charges to the schools. These operating deficits may result from
a combination of cost increases or funding reductions
attributable to the following: 1) costs associated with new
schools including the initial hiring of teachers and the
establishment of school infrastructure; 2) school
requirements to establish contingency reserves; 3) one-time
costs such as a legal claim; 4) funding reductions due to
the inability to qualify specific students for funding; and
5) regulatory or academic performance thresholds which may
initially restrict the ability of a school to fund all expenses.
In these cases, because a deficit may impair our ability to
collect our invoices in full, we reduce revenues by the sum of
these deficits. Over the past three years, these deficits and
the related reduction to revenues have grown substantially
faster than overall revenue growth reflecting a significant
number of new school
start-ups,
the time required to meet performance thresholds in certain
states and funding adjustments in two states related to the
disqualification of certain past enrollments. We expect these
deficits to continue to grow faster than overall revenue growth
as we expand into new states, continue investment in educational
programs, and incur the higher costs associated with our high
school offering.
Our annual growth in revenues may be materially affected by
changes in the level of management services we provide to
certain schools. Currently a significant portion of our
enrollments are associated with virtual public schools to which
we provide turnkey management services. We are responsible for
the complete management of these schools and therefore, we
recognize as revenues the funds received by the schools, up to
the level of costs incurred. These costs are substantial, as
they include the cost of teacher compensation and other
ancillary school expenses. Accordingly, enrollments in these
schools generate substantially more revenues than enrollments in
other schools where we provide limited or no management
services. In these situations, our revenues are limited to
direct invoices and are independent of the total funds received
by the school from a state or district. As a result, changes in
the number of enrollments associated with schools operating
under turnkey arrangements relative to total enrollments may
have a disproportionate impact on average revenues per
enrollment and growth in revenues relative to the growth in
enrollments.
The percentage of enrollments associated with turnkey management
service schools was 77% in fiscal year 2007 as compared to 92%
in fiscal year 2006. This decline was attributable to a
reduction in management services in one large school. Changes in
the mix of enrollments associated with turnkey management
services compared with limited management services may change
the average revenues per enrollment and accordingly impact total
revenues. As we renew our existing management contracts, the
extent of the management services we provide may change. Where
it is beneficial to do so, management intends to renew these
contracts as they expire. Our turnkey management contracts have
terms from three to ten years and none expire prior to the end
of fiscal year 2008. Consequently, we anticipate that the
percentage of enrollments associated with turnkey management
services will remain relatively constant through fiscal year
2008 as compared to fiscal year 2007. As a result, we do not
expect this factor to contribute to variances between enrollment
and revenue growth rates in fiscal year 2008.
In fiscal year 2007, we derived more than 10% of our revenues
from each of the Ohio Virtual Academy, the Arizona Virtual
Academy, the Pennsylvania Virtual Charter School and the
Colorado Virtual Academy. In aggregate, these schools accounted
for 49% of our total revenues. We provide our full turnkey
management solution pursuant to our contract with the Ohio
Virtual Academy, which terminates June 30, 2017 and
provides for the parties to renew the agreement in 2012. This
agreement is renewable automatically for an additional two years
unless the school notifies us one year prior to the expiration
that it elects to terminate the contract. We provide our full
turnkey solution to the Arizona Virtual Academy, pursuant to a
contract with Portable Practical Education Inc.,
31
an Arizona not-for-profit organization holding the charter
under which the school operates, that expires June 30,
2010. We provide our curriculum and online learning platform to
the Pennsylvania Virtual Charter School pursuant to a contract
that terminates June 30, 2009, and which automatically
renews for an additional three-years unless the school notifies
us one year prior to expiration that it elects to terminate the
contract. We provide our full turnkey solution pursuant to our
contract with the Colorado Virtual Academy, which terminates
June 30, 2008. We are currently engaged in negotiations
with the Colorado Virtual Academy for a new contract. Each of
the contracts with these schools provides for termination of the
agreement if the school ceases to hold a valid and effective
charter from the charter-issuing authority in their respective
states or if there is a material reduction in the per enrollment
funding level. The annual revenues generated under each of these
contracts represent a material portion of our total revenues in
fiscal year 2007 and we expect this to continue in fiscal year
2008.
Our annual growth in revenues will also be impacted by changes
in state or district per enrollment funding levels. These
funding levels are typically established on an annual basis, are
usually consistent from grade to grade, and generally increase
at modest levels from year to year. Over our operating history,
per enrollment funding levels have increased annually in almost
every school we operate. These increases are essential to enable
schools to provide for an annual increase in teachers
wages and to offset the impact of inflation on other school
operating costs. For these reasons, we anticipate that per
enrollment funding levels will continue to increase at modest
levels over time. Finally, we may generate modest growth in
revenues from increases in the prices of our curriculum and
educational services. We evaluate our pricing annually against
market benchmarks and conditions and raise them as we deem
appropriate. We do not expect our price increases to have a
significant incremental impact as they are encompassed within
increases in per enrollment funding levels.
Instructional
Costs and Services Expenses
Instructional costs and services expenses include expenses
directly attributable to the educational products and services
we provide. The virtual public schools we manage are the primary
drivers of these costs, including teacher and administrator
salaries and benefits and expenses of related support services.
Instructional costs also include fulfillment costs of student
textbooks and materials, depreciation and reclamation costs of
computers provided for student use, and the cost of any
third-party online courses. In addition, we include in
instructional costs the amortization of capitalized curriculum
and related systems. We measure, track and manage instructional
costs and services as a percentage of revenues and on a per
enrollment basis as these are key indicators of performance and
operating efficiency. As a percentage of revenues, instructional
costs and services expenses decreased slightly for the year
ended June 30, 2007, as compared to the year ended
June 30, 2006 primarily due to lower costs associated with
a renewed virtual school contract that no longer includes
turnkey management services. This was partially offset by higher
school operating costs and the
start-up
costs of new schools. We expect instructional costs and services
expenses as a percentage of revenues to increase as we expand
our high school enrollments, develop new delivery models, and
incur
start-up
costs for new schools.
Over time, we expect high school enrollments to grow as a
percentage of total enrollments. Our high school offering
requires increased instructional costs as a percentage of
revenues compared to our kindergarten to 8th grade
offering. This is due to the following: (i) demand for
numerous electives which requires licensing of third-party
courses to augment our proprietary curriculum;
(ii) generally lower student-to-teacher ratios;
(iii) higher compensation costs for teachers due to the
need for subject-matter expertise; and (iv) ancillary costs
for required student support services including college
placement, SAT preparation and guidance counseling.
We are developing new delivery models, such as the hybrid model,
where students receive both face-to-face and online instruction.
Development costs may include instructional research and
curriculum development. These models necessitate additional
costs including facilities related costs and additional
administrative support, which are generally not required to
operate typical virtual public schools. As a result,
instructional costs as a percentage of revenues may be higher
than our typical offering. In addition, we are pursuing
expansion into new states. If we are successful, we will incur
start-up
costs and other expenses associated with the initial launch of a
virtual public school, which may result in increased
instructional costs as a percentage of revenues.
32
Selling,
Administrative and Other Operating Expenses
Selling, administrative and other operating expenses include the
salaries, benefits and related costs of employees engaged in
business development, sales and marketing, and administrative
functions. We measure and track selling, administrative and
other operating expenses as a percentage of revenues to track
performance and efficiency of these areas. In addition, we track
measures of sales and marketing efficiency including the number
of new enrollment prospects for virtual public schools and our
ability to convert these prospects into enrollments. We also
track various operating, call center and information technology
statistics as indicators of operating efficiency and customer
service. We expect these expenses, as a percentage of revenues,
to decline over time, reflecting the scalability of our
corporate infrastructure, partially offset by increased levels
of spending on marketing and business development activities.
Product
Development Expenses
Product development expenses include research and development
costs and overhead costs associated with the management of
projects to develop curriculum and internal systems. In
addition, product development expenses include the amortization
and internal systems and any impairment charges. We measure and
track our product development expenditures on a per course or
project basis to measure and assess our development efficiency.
In addition, we monitor employee utilization to evaluate our
workforce efficiency. We plan to invest in additional curriculum
development and related software in the future, primarily to
produce additional high school courses, new releases of existing
courses and to upgrade our content management system and our
Online School (OLS). We capitalize most of the costs incurred to
develop our curriculum and software, beginning with application
development, through production and testing.
We account for impairment of capitalized curriculum development
costs in accordance with Statement of Financial Accounting
Standard No. 144 (SFAS No. 144,)
Accounting
for the Impairment or Disposal of Long-Lived Assets
. See
Critical Accounting Policies and Estimates. We did
not record any impairment charge for the year ended
June 30, 2007. Impairment charges recorded were
$0.4 million and $3.3 million for the years ended
June 30, 2006 and 2005, respectively. In fiscal year 2006,
we recognized impairment of capitalized curriculum as the
potential to earn revenues from the use of our curriculum in a
traditional classroom was uncertain. In 2005, we recognized
impairment as we generated a net loss in that year and
development costs exceeded future cash flows.
Other
Factors That May Affect Comparability
Public Company Expenses.
Upon consummation of
our initial public offering, we will become a public company,
and our shares of common stock will be publicly traded on the
New York Stock Exchange. As a result, we will need to comply
with new laws, regulations and requirements that we did not need
to comply with as a private company, including certain
provisions of the Sarbanes-Oxley Act of 2002, other applicable
SEC regulations and the requirements of the New York Stock
Exchange. Compliance with the requirements of being a public
company will require us to increase our general and
administrative expenses in order to pay our employees, legal
counsel and independent registered public accountants to assist
us in, among other things, instituting and monitoring a more
comprehensive compliance and board governance function,
establishing and maintaining internal control over financial
reporting in accordance with Section 404 of the
Sarbanes-Oxley Act of 2002 and preparing and distributing
periodic public reports in compliance with our obligations under
the federal securities laws. In addition, as a public company,
it will make it more expensive for us to obtain directors and
officers liability insurance.
Stock Option Expense.
The adoption of
Statement of Financial Accounting Standard No. 123R,
Share Based Payments
(SFAS No. 123R), requires that we recognize an
expense for stock options granted beginning July 1, 2006.
We incurred approximately $0.2 million in stock
compensation expense for the year ended June 30, 2007. We
expect stock option expense to increase in the future as we
grant additional stock options.
Income Tax Benefits Resulting from Decrease of Valuation
Allowance.
In the period from our inception
through fiscal year 2005, we incurred significant operating
losses that resulted in a net operating loss carryforward for
tax purposes and net deferred tax assets. Through June 30,
2007, we provided a 100% valuation allowance for all net
deferred tax assets based on our limited history of generating
taxable income. Our provision for income taxes for
33
the year ended June 30, 2007 was $0.2 million,
compared to no provision for the year ended June 30, 2006.
Our tax expense for the year ended June 30, 2007 is
primarily related to alternative minimum tax liabilities.
Effectively, no tax expense was recorded in the year ending
June 30, 2006 as we were able to utilize net operating loss
carryforwards that were fully reserved for in prior periods. We
do not expect to record any income tax expense in the next few
years other than alternative minimum tax, unless we decrease the
valuation allowance on net deferred tax assets of
$29.9 million as of June 30, 2007.
Public Funding and Regulation.
Our public
school customers are financed with federal, state and local
government funding. Budget appropriations for education at all
levels of government are determined through a political process
and, as a result, our revenues may be affected by changes in
appropriations. Decreases in funding could result in an adverse
affect on our financial condition, results of operations and
cash flows.
Competition.
The market for providing online
education for grades K-12 is becoming increasingly competitive
and attracting significant new entrants. If we are unable to
successfully compete for new business and contract renewals, our
growth in revenues and operating margins may decline. With the
introduction of new technologies and market entrants, we expect
this competition to intensify.
Critical
Accounting Policies and Estimates
The discussion of our financial condition and results of
operations is based upon our consolidated financial statements,
which have been prepared in accordance with U.S. generally
accepted accounting principles. In the preparation of our
consolidated financial statements, we are required to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, as well as the
related disclosures of contingent assets and liabilities. We
base our estimates on historical experience and on various other
assumptions that we believe to be reasonable under the
circumstances. The results of our analysis form the basis for
making assumptions about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions, and the impact of such differences
may be material to our consolidated financial statements. Our
critical accounting policies have been discussed with the audit
committee of our board of directors.
We believe that the following critical accounting policies
affect the more significant judgments and estimates used in the
preparation of our consolidated financial statements:
Revenue
Recognition
In accordance with SEC Staff Accounting
Bulletin No. 104 (SAB No. 104), we
recognize revenues when each of the following conditions is met:
(1) persuasive evidence of an arrangement exists;
(2) delivery of physical goods or rendering of services is
complete; (3) the sellers price to the buyer is fixed
or determinable; and (4) collection is reasonably assured.
Once these conditions are satisfied, the amount of revenues we
record is determined in accordance with Emerging Issues Task
Force
(EITF 99-19),
Reporting Revenue Gross as a Principal versus Net as an
Agent
.
We generate almost all of our revenues through long-term
contracts with virtual public schools. These schools are
generally funded by state or local governments on a per student
basis. Under these contracts, we are responsible for providing
each enrolled student with access to our OLS, our online
lessons, offline learning kits and student support services
required for their complete education. In most cases, we are
also responsible for providing complete management and
technology services required for the operation of the school.
The revenues derived from these long-term agreements are
primarily dependent upon the number of students enrolled, the
extent of the management services contracted for by the school,
and the level of funding provided to the school for each student.
We have determined that the elements of our contracts are
valuable to schools in combination, but do not have standalone
value. In addition, we have determined that we do not have
objective and reliable evidence of fair value for each element
of our contracts. As a result, the elements within our
multiple-element contracts do not qualify for treatment as
separate units of accounting. Accordingly, we account for
revenues received under multiple element arrangements as a
single unit of accounting and recognize the entire arrangement
based upon the approximate rate at which we incur the costs
associated with each element.
34
We invoice virtual public schools in accordance with the
established contractual terms. Generally, this means that for
each enrolled student, we invoice their school for the following
items: (1) access to our online school and online lessons;
(2) offline learning kits; (3) student personal
computers; and (4) management and technology services. We
apply SAB No. 104 to each of these items as follows:
|
|
|
|
|
Access to the
K
12
Online School and Online Lessons.
Our OLS
revenues come primarily from contracts with charter schools and
school districts. Students are provided access to the OLS and
online lessons at the start of the school year for which they
have enrolled. On a per student basis, we invoice schools an
upfront fee at the beginning of the school year or at the time a
student enrolls and a monthly fee for each month during the
school year in which the student is enrolled. A school year
generally consists of 10 months. The upfront fee is
initially recorded as deferred revenue and is recognized as
revenues ratably over the remaining months of the current school
year. If a student withdraws prior to the end of a school year,
any remaining deferred revenue related to the upfront fee is
recognized ratably over the remaining months of the school year.
The monthly fees are recognized in the month in which they are
earned.
|
The majority of our enrollments occur at the beginning of the
school year in August or September, depending upon the state.
Because upfront fees are generally charged at the beginning of
the school year, the balance in our deferred revenue account
tends to be at its highest point at the end of the first
quarter. Generally, the balance will decline over the course of
the year and all deferred revenue related to virtual public
schools will be fully recognized by the end of our fiscal year
on June 30.
|
|
|
|
|
Offline Learning Kits.
Our offline learning
kit revenues come primarily from contracts with virtual public
schools and our curriculum blends which online and offline
content. The lessons in our online school are meant to be used
in conjunction with selected printed materials, workbooks,
laboratory materials and other manipulative items which we
provide to students. We generally ship all offline learning kits
to a student when their enrollment is approved and invoice the
schools in full for the materials at that time. Once materials
have been shipped, our efforts are substantially complete.
Therefore, we recognize revenues upon shipment. Because offline
learning kits revenues are recognized near the time of
enrollment in its entirety, we generate a majority of these
revenues in our first fiscal quarter which coincides with the
start of the school year.
|
|
|
|
|
|
Student Personal Computers.
In most of our
contracts with virtual public schools, we are responsible for
ensuring that each enrolled student has the ability to access
our online school. To accomplish this, we generally provide each
enrolled student with the use of a personal computer, complete
technical support through our call center, and reclamation
services when a student withdraws or a computer needs to be
exchanged. Schools are invoiced on a per student basis for each
enrolled student to whom we have provided a personal computer.
This may include an upfront fee at the beginning of the school
year or at the time a student enrolls and a monthly fee for each
month during the school year in which the student is enrolled. A
school year generally consists of 10 months. The upfront
fee is initially recorded as deferred revenue and is recognized
as revenues ratably over the remaining months of the current
school year. If a student withdraws prior to the end of a school
year, any remaining deferred revenue related to the upfront fee
is recognized ratably over the remaining months of the school
year. All deferred revenue will be recognized by the end of our
fiscal year, June 30. The monthly fees are recognized in
the month in which they are earned.
|
|
|
|
|
|
Management and Technology Services.
Under most
of our school contracts, we provide the boards of the virtual
public schools we serve with turnkey management and technology
services. We take responsibility for all academic and fiscal
outcomes. This includes responsibility for all aspects of the
management of the schools, including monitoring academic
achievement, teacher recruitment and training, compensation of
school personnel, financial management, enrollment processing
and procurement of curriculum, equipment and required services.
Management and technology fees are generally determined based
upon a percentage of the funding received by the virtual public
school. We generally invoice schools for management and
technology services in the month in which they receive such
funding.
|
We recognize the revenues from turnkey management and technology
fees ratably over the course of our fiscal year. We use
12 months as a basis for recognition because administrative
offices of the school remain open for the entire year. To
determine the amount of revenues to recognize in our fiscal
year, we estimate the
35
total funds that each school will receive in a particular
school year, and our related fees associated with the estimated
funding. Our management and technology service fees are
generally a contracted percentage of yearly school revenues. We
review our estimates of funding periodically, and revise as
necessary, amortizing any adjustments over the remaining portion
of the fiscal year. Actual school funding may vary from these
estimates or revisions, and the impact of these differences
could have a material impact on our results of operations. Since
the end of the school year coincides with the end of our fiscal
year, we are generally able to base our annual revenues on
actual school revenues. As a result, on an annual basis, we have
not had to make any material adjustments to our estimates of
revenue over the last three years.
Under most contracts, we provide the virtual schools we manage
with turnkey management services and agree to operate the school
within per enrollment funding levels. This includes assuming
responsibility for any operating deficits that the schools may
incur in a given school year. These operating deficits represent
the excess of costs over revenues incurred by the virtual public
schools as reflected on their financial statements. The costs
include our charges to the schools. Such deficits may arise from
school
start-up
costs, from funding shortfalls, from temporary or long-term
incremental cost requirements for a particular school, or due to
specific one-time expenses that a school may incur. Up to the
level of school revenues, our collections are reasonably
assured. We consider the operating deficits to estimate any
impairment of collection, and our recognized revenue reflects
this impairment. The fact that a school has an operating deficit
does not mean we anticipate losing money on the contract. We
recognize the impact of these operating deficits by estimating
the full year revenues and full year deficits of schools at the
beginning of the fiscal year. We amortize the estimated deficits
against recognized revenues based upon the percentage of actual
revenues in the period to total estimated revenues for the
fiscal year. We periodically review our estimates of full year
school revenues and full year operating deficits and amortize
the impact of any changes to these estimates over the remainder
of our fiscal year. Actual school operating deficits may vary
from these estimates or revisions, and the impact of these
differences could have a material impact on our results of
operations. Since the end of the school year coincides with the
end of our fiscal year, we are generally able to base our annual
revenues on actual school revenues and use actual costs incurred
in our calculation of school operating deficits. As a result, on
an annual basis, we have not had to make any material
adjustments to our estimates of realizable revenue over the last
three years.
The amount of revenues we record is determined in accordance
with Emerging Issues Task Force Reporting Revenue Gross as a
Principal versus Net as an Agent,
EITF 99-19.
For these schools, we have determined that we are the primary
obligor for substantially all expenses of the school.
Accordingly, we report revenues on a gross basis by recording
the associated per student revenues received by the school from
its funding state or school district up to the expenses incurred
by the school. Revenues are recognized when the underlying
expenses are incurred by the school. For the small percentage of
contracts where we provide individually selected services for
the school, we invoice on a per student or per service basis and
recognize revenues in accordance with SAB No. 104.
Under these contracts, where we do not assume responsibility for
operating deficits, we record revenues on a net basis.
We also generate a small percentage of our revenues through the
sale of our online courses and offline learning kits directly to
consumers. Online course sales are generally subscriptions for
periods of 12 to 24 months and customers have the option of
paying a discounted amount in full upfront or paying in monthly
installments. Payments are generally made with charge cards. For
those customers electing to pay these subscription fees in their
entirety upfront, we record the payment as deferred revenue and
amortize the revenues over the life of the subscription. For
customers paying monthly, we recognize these payments as
revenues in the month earned. Revenues for offline learning kits
are recognized when shipped. Within 30 days of enrollment,
customers can receive a full refund, however customers
terminating after 30 days will receive a pro rata refund
for the unused portion of their subscription less a termination
fee. Historically, the impact of refunds has been immaterial.
Capitalized
Curriculum Development Costs
Our curriculum is primarily developed by our employees and to a
lesser extent, by independent contractors. Generally, our
courses cover traditional subjects and utilize examples and
references designed to remain relevant for
36
long periods of time. The online nature of our curriculum
allows us to incorporate user feedback rapidly and make ongoing
corrections and improvements. For these reasons, we believe that
our courses, once developed, have an extended useful life,
similar to computer software. Our curriculum is integral to our
learning system. Our customers do not acquire our curriculum or
future rights to it.
We capitalize curriculum development costs incurred during the
application development stage in accordance with Statement of
Position (SOP)
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.
SOP 98-1
provides guidance for the treatment of costs associated with
computer software development and defines those costs to be
capitalized and those to be expensed. Costs that qualify for
capitalization are external direct costs, payroll,
payroll-related costs, and interest costs. Costs related to
general and administrative functions are not capitalizable and
are expensed as incurred. We capitalize curriculum development
costs when the projects under development reach technological
feasibility. Many of our new courses leverage off of proven
delivery platforms and are primarily content, which has no
technological hurdles. As a result, a significant portion of our
courseware development costs qualify for capitalization due to
the concentration of our development efforts on the content of
the courseware. Technological feasibility is established when we
have completed all planning, designing, coding, and testing
activities necessary to establish that a course can be produced
to meet its design specifications. Capitalization ends when a
course is available for general release to our customers, at
which time amortization of the capitalized costs begins. The
period of time over which these development costs will be
amortized is generally five years. This is consistent with the
capitalization period used by others in our industry and
corresponds with our product development lifecycle.
Software
Developed or Obtained for Internal Use
We develop our own proprietary computer software programs to
provide specific functionality to support both our unique
education offering and the student and school management
services. These programs enable us to develop courses, process
student enrollments, meet state documentation requirements,
track student academic progress, deliver online courses to
students, coordinate and track the delivery of course-specific
materials to students and provide teacher support and training.
These applications are integral to our learning system and we
continue to enhance existing applications and create new
applications. Our customers do not acquire our software or
future rights to it.
We capitalize software development costs incurred during the
development stage of these applications in accordance with
SOP 98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use
. These development costs are
generally amortized over three years.
Impairment
of Long-lived Assets
Long-lived assets include property, equipment, capitalized
curriculum and software developed or obtained for internal use.
In accordance with Statement of Financial Accounting Standards
No. 144 (SFAS No. 144),
Accounting for the
Impairment or Disposal of Long-Lived Assets
, we review our
recorded long-lived assets for impairment annually or whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be fully recoverable. We determine
the extent to which an asset may be impaired based upon our
expectation of the assets future usability as well as on a
reasonable assurance that the future cash flows associated with
the asset will be in excess of its carrying amount. If the total
of the expected undiscounted future cash flows is less than the
carrying amount of the asset, a loss is recognized for the
difference between fair value and the carrying value of the
asset.
Accounting
for Stock-based Compensation
Prior to July 1, 2006, we accounted for stock-based
compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25,
Accounting
for Stock Issued to Employees
, or APB No. 25 and
related interpretations. Accordingly, compensation cost for
stock options generally was measured as the excess, if any, of
the estimated fair value of our common stock over the amount an
employee must pay to acquire the common stock on the date that
both the exercise price and the number of shares to be acquired
pursuant to the option are fixed.
37
We had adopted the disclosure-only provisions of
SFAS No. 123 which was released in May 1995, and used
the minimum value method of valuing stock options as allowed for
non-public companies.
In December 2004, SFAS No. 123R revised
SFAS No. 123 and superseded APB No. 25.
SFAS No. 123R requires the measurement of the cost of
employee services received in exchange for an award of equity
instruments based on the fair value of the award on the
measurement date of grant, with the cost being recognized over
the applicable requisite service period. In addition,
SFAS No. 123R requires an entity to provide certain
disclosures in order to assist in understanding the nature of
share-based payment transactions and the effects of those
transactions on the financial statements. The provisions of
SFAS No. 123R are required to be applied as of the
beginning of the first interim or annual reporting period of the
entitys first fiscal year that begins after
December 15, 2005.
Effective July 1, 2006, we adopted the fair value
recognition provisions of SFAS No. 123R using the
prospective transition method, which requires the Company to
apply the provisions of SFAS No. 123R only to awards
granted, modified, repurchased or cancelled after the effective
date. Under this transition method, stock- based compensation
expense recognized beginning July 1, 2006 is based on the
fair value of stock awards as of the grant date. As the Company
had used the minimum value method for valuing its stock options
under the disclosure requirements of SFAS No. 123, all
options granted prior to July 1, 2006 continue to be
accounted for under APB No. 25.
The computation of non-cash compensation charges requires a
determination of the fair value of our common stock at various
dates. Such determinations require complex and subjective
judgments. We considered several methodologies to estimate our
enterprise value, including guideline public company analysis,
an analysis of comparable company transactions, and a discounted
cash flow analysis. The results of the public company and
comparable company transactions components of the analyses vary
not only with factors such as our revenue, EBITDA, and income
levels, but also with the performance and public market
valuation of the companies and transactions used in the
analyses. Although the market-based analyses did not include
companies directly comparable to us, the analysis provided
useful benchmarks.
We also considered several equity allocation methodologies to
allocate the estimate of enterprise value to our two classes of
stock including the current value method, the option pricing
method, and the probability weighted expected return method
(PWERM). The final valuation conclusion was based upon the PWERM
equity allocation because it considers the value that would be
attributable to each equity interest under different scenarios.
The PWERM assessed the value of common stock based upon possible
scenarios including completion of an initial public offering, an
advantageous strategic sale of the Company, and remaining a
private company. The significant factors included preliminary
estimates of the public offering price range from underwriters,
the value of comparable company transactions, and discounted
cash flow analysis. Key assumptions included the relative
probability of the three scenarios. The relative probabilities
were based upon where the Company was in the initial public
offering registration process, empirical analysis of companies
that go public after the registration process, and qualitative
characteristics of the Company. The value of common stock was
estimated by applying the relative probability to the value of
common stock under each scenario. Based upon the foregoing, we
believe the analysis provides a reasonable basis for valuing the
common stock.
There are significant factors likely to contribute to the
difference between fair value as of the date of recent grants
and our public offering price. Since the date of the most recent
grant, we have made progress on our business strategy, including
the launch of the 11th and 12th grade offerings and enrolling
new students for the
2007-08
school year. In addition, we expect the completion of our public
offering to add value to our shares for a variety of reasons,
such as strengthening our balance sheet, increased liquidity and
marketability of our common stock, and increased capacity to
consummate acquisitions. However, the amount of such additional
value, if any, cannot be measured with either precision or
certainty, and it is possible that the value of our common stock
will decrease.
The Company accounts for equity instruments issued to
nonemployees in accordance with the provisions of
SFAS No. 123 and
EITF 96-18,
Accounting for Equity Instruments That Are Issued to Other
Than Employees for Acquiring, or in Conjunction with Selling,
Goods or Services
.
38
Deferred
Tax Asset Valuation Allowance
We account for income taxes as prescribed by Statement of
Financial Accounting Standards No. 109
(SFAS No. 109),
Accounting for Income Taxes
.
SFAS No. 109 prescribes the use of the asset and
liability method to compute the differences between the tax
bases of assets and liabilities and the related financial
amounts, using currently enacted tax laws. If necessary, a
valuation allowance is established, based on the weight of
available evidence, to reduce deferred tax assets to the amount
that is more likely than not to be realized. We are in a
cumulative loss position as a result of our cumulative
operations for the years ended June 30, 2005, 2006 and
2007. Recent cumulative losses constitute significant negative
evidence and although we generated net income of
$3.9 million for the year ended June 30, 2007, our
taxable income is expected to be break-even or an immaterial
positive taxable income. Realization of the deferred tax assets,
net of deferred tax liabilities, is principally dependent upon
achievement of sufficient future taxable income offset by
deferred tax liabilities. We exercise significant judgment in
determining our provisions for income taxes, our deferred tax
assets and liabilities and our future taxable income for
purposes of assessing our ability to utilize any future tax
benefit from our deferred tax assets. However, our ability to
forecast sufficient future taxable income is subject to certain
market factors that we may not be able to control such as a
material reduction in per pupil funding levels, legislative
budget cuts reducing or eliminating the products and services we
provide and government regulation. Although we believe that our
tax estimates are reasonable, the ultimate tax determination
involves significant judgments that could become subject to
examination by tax authorities in the ordinary course of
business. We periodically assess the likelihood of adverse
outcomes resulting from these examinations to determine the
impact on our deferred taxes and income tax liabilities and the
adequacy of our provision for income taxes. Changes in income
tax legislation, statutory income tax rates, or future taxable
income levels, among other things, could materially impact our
valuation of income tax assets and liabilities and could cause
our income tax provision to vary significantly among financial
reporting periods.
As of June 30, 2007, we had net operating loss
carry-forwards of $63.4 million that expire between 2020
and 2027 if unused. We recorded a full valuation allowance
against net deferred tax assets, including deferred tax assets
generated by net operating loss carry-forwards. The valuation
allowance on net deferred tax assets was $29.9 million as
of June 30, 2007.
Results
of Operations
The following table presents our selected consolidated statement
of operations data expressed as a percentage of our total
revenues for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
54
|
|
|
|
55
|
|
|
|
58
|
|
Selling, administrative, and other
operating expenses
|
|
|
36
|
|
|
|
36
|
|
|
|
35
|
|
Product development expenses
|
|
|
6
|
|
|
|
7
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
96
|
|
|
|
98
|
|
|
|
104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
4
|
|
|
|
2
|
|
|
|
(4
|
)
|
Interest expense, net
|
|
|
(1
|
)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
before income taxes
|
|
|
3
|
|
|
|
1
|
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
(4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparison
of Years Ended June 30, 2007 and 2006
Revenues.
Our revenues for the year ended
June 30, 2007 were $140.6 million, representing an
increase of $23.7 million, or 20.3%, as compared to
revenues of $116.9 million for the year ended June 30,
2006. Average enrollments increased 33.6% to 27,005 for the year
ended June 30, 2007 from 20,220 for the year ended
June 30,
39
2006. Primarily offsetting the increased revenues related to
enrollment growth, was a decline in average revenues per
enrollment resulting from the impact of a substantial reduction
in the percentage of enrollments associated with schools to
which we provide turnkey management services, as a school to
which we formerly provided turnkey management services switched
to limited service contracts. For the year ended June 30,
2007, 76.9% of our enrollments were associated with turnkey
management service schools, down from 91.7% for the
corresponding period in 2006. The increase in average
enrollments was primarily attributable to new school openings in
Washington and California and in Chicago where we opened our
first hybrid school. In addition, we launched 10th grade in
August 2006 attracting new students as well as prior year 9th
grade students. Price increases of approximately 2% also
generated additional revenues. Finally, increased operating
deficits at certain schools partially offset the growth in
revenues. These deficits were attributable to greater school
operating expenses required to support increased enrollment and
high school services as well as school funding adjustments of
approximately $1.0 million each in schools we operate in
California and Colorado resulting from enrollment audits. See
Business Distribution Channels.
Instructional Costs and Services
Expenses.
Instructional costs and services
expenses for the year ended June 30, 2007 were
$76.1 million, representing an increase of
$11.3 million, or 17.4% as compared to instructional costs
and services of $64.8 million for the year ended
June 30, 2006. This increase was primarily attributable to
a $6.5 million increase in expenses to operate and manage
the schools and a $4.8 million increase in costs to supply
books, educational materials and computers to students,
including depreciation and amortization. As a percentage of
revenues, instructional costs decreased by 1.4% to 54.1% for the
year ended June 30, 2007, as compared to 55.5% for the year
ended June 30, 2006. The decrease in instructional cost and
service expenses as a percentage of revenues is primarily due to
lower costs associated with a renegotiated management and
services agreement, partially offset by a shift in the mix of
enrollments to schools with higher operating costs and the
start-up
costs of new schools.
Selling, Administrative, and Other Operating
Expenses
. Selling, administrative, and other
operating expenses for year ended June 30, 2007 were
$51.2 million, representing an increase of
$9.5 million, or 22.8%, as compared to selling,
administrative and other operating expenses of
$41.7 million for the year ended June 30, 2006. This
increase is primarily attributable to a $2.9 million
increase in marketing, advertising and selling expenses and a
$3.1 million increase in professional services. In
addition, there was a $2.8 million increase in personnel
costs primarily due to increased headcount and higher average
salaries due to annual salary increases in fiscal year 2007. As
a percentage of revenues, selling, administrative, and other
operating expenses increased slightly to 36.4% for the year
ended June 30, 2007 compared to 35.6% for the year ended
June 30, 2006.
Product Development Expenses.
Product
development expenses for the year ended June 30, 2007 were
$8.6 million, relatively stable compared to product
development expenses of $8.6 million for the year ended
June 30, 2006. Employee headcount and contract labor
increased, but was offset by greater utilization of these
resources for capitalized curriculum. As a percentage of
revenues, product development expenses declined to 6.1% for the
year ended June 30, 2007 from 7.3% for the year ended
June 30, 2006.
Net Interest Expense.
Net interest expense for
the year ended June 30, 2007 was $0.6 million, an
increase of $0.1 million, or 31%, from $0.5 million
for the year ended June 30, 2006. The increase in net
interest expense is primarily due to interest charges on
increased capital lease obligations.
Income Taxes.
Our provision for income taxes
for the year ended June 30, 2007 was $0.2 million,
compared with no provision for the year ended June 30,
2006. Our tax expense for the year ended June 30, 2007 is
primarily attributable to state tax liabilities. Effectively, no
tax expense was recorded for the year ended June 30, 2006,
as we were able to utilize net operating loss carry-forwards
that were fully reserved for in prior periods.
Net Income.
Net income for the year ended
June 30, 2007 was $3.9 million, representing an
increase of $2.5 million, or 179%, as compared to net
income of $1.4 million for the year ended June 30,
2007. Net income as a percentage of revenues increased to 2.8%
for the year ended June 30, 2007, as compared to 1.2% for
the year ended June 30, 2006, as a result of the factors
discussed above.
40
Comparison
of Years Ended June 30, 2006 and 2005
Revenues.
Our revenues for the year ended
June 30, 2006 were $116.9 million, representing an
increase of $31.6 million, or 37.0%, as compared to
revenues of $85.3 million for the year ended June 30,
2005. Average enrollments increased 33.9% to 20,220 for the year
ended June 30, 2006 from 15,097 average enrollments for the
year ended June 30, 2005. Our enrollment growth was driven
by the addition of the 9th grade which attracted new students in
addition to students enrolled in 8th grade in the prior year.
Also, average price increases of approximately 4% were
implemented in July 2005. Partially offsetting growth in
revenues as compared to enrollment growth was growth in the
percentage of enrollments attributable to schools where we earn
limited or no services revenues. Enrollments associated with
schools to which we provide turnkey management services declined
from 91.7% for the year ended June 30, 2006 from 94.7% for the
corresponding period in 2005. Finally, increased operating
deficits at certain schools partially offset the growth in
revenues. These deficits were primarily attributable to greater
school operating expenses to support increased enrollment and
high school services. Included in these deficits is the impact
of disallowed enrollments resulting from a regulatory audit in
Colorado totaling $0.9 million. See
Business Distribution Channels.
Instructional Costs and Services
Expenses.
Instructional costs and services
expenses for the year ended June 30, 2006 were
$64.8 million, representing an increase of
$15.7 million, or 31.9%, as compared to instructional costs
and services of $49.1 million for the year ended
June 30, 2005. This increase was primarily attributable to
an $8.7 million increase in expenses to operate and manage
the schools, and a $7.0 million increase in costs to supply
books, educational materials and computers to students. As a
percentage of revenues, instructional costs and services
decreased to 55.5% for the year ended June 30, 2006, as
compared to 57.6% for the year ended June 30, 2005. The
decrease in instructional costs and services as a percentage of
revenues is primarily due to economies in scale in the operation
of the virtual public schools partially offset by higher costs
for books and materials.
Selling, Administrative, and Other Operating
Expenses.
Selling, administrative, and other
operating expenses for the year ended June 30, 2006 were
$41.7 million, representing an increase of
$11.7 million, or 38.7%, as compared to selling,
administrative and other operating expenses of
$30.0 million for the year ended June 30, 2005. This
increase is primarily attributable, to a $4.1 million
increase in personnel costs primarily due to increased headcount
and higher average salaries due to annual salary increases in
fiscal year 2006. In addition, professional services expenses
increased by $3.4 million and marketing, advertising and
selling expenses by $1.5 million. As a percentage of
revenues, selling, administrative, and other operating expenses
remained relatively stable at 35.6% for the year ended
June 30, 2006 compared to 35.2% for the year ended
June 30, 2005.
Product Development Expenses.
Product
development expenses for the year ended June 30, 2006 were
$8.6 million, representing a decrease of $0.8 million,
or 8.9%, as compared to product development expenses of
$9.4 million for the year ended June 30, 2005. This
decrease is primarily attributable to a year over year decrease
of $2.9 million in impairment charges. Offsetting this
decrease is an increase in personnel and contract labor. As a
percentage of revenues, product development expenses decreased
to 7.3% for the year ended June 30, 2006 compared to 11.0%
for the year ended June 30, 2005. This decrease is
primarily attributable to the factors described above and our
ability to leverage these costs over an increasing number of
enrollments.
Net Interest Expense.
Net interest expense for
the year ended June 30, 2006 was $0.5 million, an
increase of $0.2 million, or 66.7%, from $0.3 million
for the year ended June 30, 2005. The increase in interest
expense is primarily due to debt of $4.0 million borrowed
in June 2005.
Income Taxes.
Our provision for income taxes
for the year ended June 30, 2006 was zero as we were able
to utilize net operating loss carry-forwards that were fully
reserved for in prior periods. We also recorded no income tax
expense for the year ended June 30, 2005 as the Company had
a net loss.
Net Income (Loss).
Net income for the year
ended June 30, 2006 was $1.4 million, representing an
increase of $4.9 million as compared to a net loss of
$3.5 million for the year ended June 30, 2005. Net
income as a percentage of revenues was 1.2% for the year ended
June 30, 2006, as compared to a net loss of 4.1% for the
year ended June 30, 2005, as a result of the factors
discussed above.
41
Quarterly
Results of Operations
The following tables set forth selected unaudited quarterly
consolidated statement of operations data for the seven most
recent quarters, as well as each line item expressed as a
percentage of total revenues. The information for each of these
quarters has been prepared on the same basis as the audited
consolidated financial statements included in this prospectus
and, in the opinion of management, includes all adjustments
necessary for the fair presentation of the results of operations
for such periods. This data should be read in conjunction with
the audited consolidated financial statements and the related
notes included in this prospectus. These quarterly operating
results are not necessarily indicative of our operating results
for any future period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Sep 30, 2005
|
|
|
Dec 31, 2005
|
|
|
Mar 31, 2006
|
|
|
Jun 30, 2006
|
|
|
Sep 30, 2006
|
|
|
Dec 31, 2006
|
|
|
Mar 31, 2007
|
|
|
Jun 30, 2007
|
|
|
Revenues
|
|
$
|
31,176
|
|
|
$
|
28,245
|
|
|
$
|
30,667
|
|
|
$
|
26,814
|
|
|
$
|
37,743
|
|
|
$
|
32,356
|
|
|
$
|
34,831
|
|
|
$
|
35,626
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
17,416
|
|
|
|
15,696
|
|
|
|
15,361
|
|
|
|
16,355
|
|
|
|
19,177
|
|
|
|
18,022
|
|
|
|
17,904
|
|
|
|
20,961
|
|
Selling, administrative, and other
|
|
|
8,742
|
|
|
|
8,402
|
|
|
|
11,259
|
|
|
|
13,257
|
|
|
|
11,385
|
|
|
|
11,030
|
|
|
|
12,644
|
|
|
|
16,100
|
|
Product development expenses
|
|
|
1,864
|
|
|
|
1,862
|
|
|
|
1,861
|
|
|
|
2,981
|
|
|
|
2,206
|
|
|
|
1,566
|
|
|
|
2,083
|
|
|
|
2,756
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and
expenses
|
|
|
28,022
|
|
|
|
25,960
|
|
|
|
28,481
|
|
|
|
32,593
|
|
|
|
32,768
|
|
|
|
30,618
|
|
|
|
32,631
|
|
|
|
39,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations
|
|
|
3,154
|
|
|
|
2,285
|
|
|
|
2,186
|
|
|
|
(5,779
|
)
|
|
|
4,975
|
|
|
|
1,738
|
|
|
|
2,200
|
|
|
|
(4,191
|
)
|
Interest expense, net
|
|
|
(135
|
)
|
|
|
(127
|
)
|
|
|
(132
|
)
|
|
|
(94
|
)
|
|
|
(94
|
)
|
|
|
(263
|
)
|
|
|
(117
|
)
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes
|
|
|
3,019
|
|
|
|
2,158
|
|
|
|
2,054
|
|
|
|
(5,873
|
)
|
|
|
4,881
|
|
|
|
1,475
|
|
|
|
2,083
|
|
|
|
(4,356
|
)
|
Income tax (expense) benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(146
|
)
|
|
|
(30
|
)
|
|
|
(51
|
)
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,019
|
|
|
$
|
2,158
|
|
|
$
|
2,054
|
|
|
$
|
(5,873
|
)
|
|
$
|
4,735
|
|
|
$
|
1,445
|
|
|
$
|
2,032
|
|
|
$
|
(4,347
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth statements of operations data as
a percentage of revenues for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Sep 30, 2005
|
|
|
Dec 31, 2005
|
|
|
Mar 31, 2006
|
|
|
Jun 30, 2006
|
|
|
Sep 30, 2006
|
|
|
Dec 31, 2006
|
|
|
Mar 31, 2007
|
|
|
Jun 30, 2007
|
|
|
Revenues
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
56
|
|
|
|
56
|
|
|
|
50
|
|
|
|
61
|
|
|
|
51
|
|
|
|
56
|
|
|
|
52
|
|
|
|
59
|
|
Selling, administrative, and other
|
|
|
28
|
|
|
|
30
|
|
|
|
37
|
|
|
|
50
|
|
|
|
30
|
|
|
|
34
|
|
|
|
36
|
|
|
|
45
|
|
Product development expenses
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
11
|
|
|
|
6
|
|
|
|
5
|
|
|
|
6
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and
expenses
|
|
|
90
|
|
|
|
92
|
|
|
|
93
|
|
|
|
122
|
|
|
|
87
|
|
|
|
95
|
|
|
|
94
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations
|
|
|
10
|
|
|
|
8
|
|
|
|
7
|
|
|
|
(22
|
)
|
|
|
13
|
|
|
|
5
|
|
|
|
6
|
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes
|
|
|
10
|
|
|
|
8
|
|
|
|
7
|
|
|
|
(22
|
)
|
|
|
13
|
|
|
|
4
|
|
|
|
6
|
|
|
|
(12
|
)
|
Income tax expense, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
10
|
%
|
|
|
8
|
%
|
|
|
7
|
%
|
|
|
(22
|
)%
|
|
|
13
|
%
|
|
|
4
|
%
|
|
|
6
|
%
|
|
|
(12
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discussion
of Quarterly Results of Operations
Our revenues and operating results normally fluctuate as a
result of seasonal variations in our business, principally due
to the number of months that our virtual public school are fully
operational and serving students in a fiscal quarter. While
school administrative offices are generally open year round, a
school typically serves students during a 10 month academic
year. A schools academic year will typically start in
August or September, our first
42
fiscal quarter, and finish in May or June, our fourth fiscal
quarter. Consequently, our first and fourth fiscal quarters may
have fewer than three months of full operations when compared to
the second and third fiscal quarters.
In the first and fourth fiscal quarters, online curriculum and
computer revenues are generally lower as these revenues are
primarily earned during the school academic year which may
provide for only one or two months of these revenues in these
quarters versus the second and third fiscal quarters. In
addition, we ship materials to students in the beginning of the
school year, our first fiscal quarter, generally resulting in
higher materials revenues and margin in the first fiscal quarter
versus other quarters. The overall impact of these factors is
partially offset by students enrolling after the start of the
academic year. The seasonality of our business produces higher
revenues in the first fiscal quarter.
Operating expenses are also seasonal. Instruction costs and
services expenses will increase in the first fiscal quarter
primarily due to the costs incurred to ship student materials at
the beginning of the school year. Instructional costs may
increase significantly quarter-to-quarter as school operating
expenses increase. For example, enrollment growth will require
additional teaching staff, thereby increasing salary and
benefits expense. School events may be seasonal, (e.g.
professional development and community events,) impacting the
quarterly change in instructional costs. The majority of our
marketing and selling expenses are incurred in the first and
fourth fiscal quarters, as our primary enrollment season is July
through September.
Financial
Condition
Certain accounts in our balance sheet are subject to seasonal
fluctuations. The bulk of our materials are shipped to students
prior to the beginning of the school year, usually in July or
August. In order to prepare for the upcoming school year, we
generally build up inventories during the fourth quarter of our
fiscal year. Therefore, inventories tend to be at the highest
levels at the end of our fiscal year. In the first quarter of
our fiscal year, inventories tend to decline significantly as
materials are shipped to students. Accounts receivable balances
tend to be at the highest levels in the first quarter of our
fiscal year as we begin billing for all enrolled students and
our billing arrangements include upfront fees for many of the
elements of our offering. These upfront fees along with direct
sales of subscriptions to private customers result in seasonal
fluctuations to our deferred revenue balances. In general, this
deferred revenue has not been a significant source of funds to
the Company since the offsetting entry is usually to accounts
receivable. In a few cases, virtual public schools may have
funds to pay these invoices in a timely manner and this provides
the Company with liquidity. However, in most cases, schools
receive funding over the course of the year and pay invoices in
a corresponding manner. Thus, liquidity associated with
increases in deferred revenue is usually offset by increased
accounts receivable balances. Since the upfront fees are charged
to the schools at the time of enrollment, deferred revenue
balances related to the schools tend to be highest in the first
quarter, when the majority of students enroll. Since the
deferred revenue is amortized over the course of the school
year, which ends in June, the balance would be at its lowest at
the end of our fiscal year. The deferred revenue related to our
direct-to-consumer business results from advance payments for
twelve and twenty-four month subscriptions to our on-line
school. These advance payments are amortized over the life of
the subscription and tend to be highest at the end of the fourth
quarter and first quarter, when the majority of subscriptions
are sold. Year end balances in deferred revenue are primarily
related to the direct-to-consumer sales. Billings related to the
direct-to-consumer sales are small relative to those of public
virtual schools; however, they do represent a source of
liquidity.
Liquidity
and Capital Resources
As of June 30, 2007 and June 30, 2006, we had cash and
cash equivalents of $1.7 million and $9.5 million,
respectively. Net cash provided by operating activities during
the year ended June 30, 2007, was $5.6 million,
primarily due to net income of $3.9 million, depreciation
and amortization of $7.4 million and increases in deferred
revenue of $1.2 million and accrued compensation and
benefits of $1.1 million. This was primarily offset by an
increase in accounts receivable of $3.2 million, an
increase in inventory of $2.8 million, a change in accounts
receivable allowance of $0.9 million, and a decrease in
accrued liabilities of $0.8 million.
We financed our operating activities and capital expenditures
during the year ended June 30, 2007 through cash provided
by operating activities, capital lease financing and short-term
debt. During the years ended June 30, 2006 and 2005, we
financed our operating activities and capital expenditures
through a combination of cash provided by operating activities,
long-term debt and capital lease financing. Prior to 2005, we
financed our operating activities
43
and capital expenditures primarily with sales of equity to
private investors. From the Companys founding in 2001
through December 2003, we raised over $115 million from the
sale of equity.
In December 2006, we entered into a $15 million revolving
credit agreement with PNC Bank (the Credit Agreement). Pursuant
to the terms of the Credit Agreement, we agreed that the
proceeds of the term loan facility were to be used primarily for
working capital requirements and other general business or
corporate purposes. Because of the seasonality of our business
and timing of funds received, the school expenditures are higher
in relation to funds received in certain periods during the
year. The Credit Agreement provides the ability to fund these
periods until cash is received from the schools; therefore,
borrowings against the Credit Agreement are primarily going to
be short-term.
Borrowings under the Credit Agreement bear interest based upon
the term of the borrowings. Interest is charged, at our option,
either at: (i) the higher of (a) the rate of interest
announced by PNC Bank from time to time as its prime
rate and (b) the federal funds rate plus 0.5%; or
(ii) the applicable London interbank offered rate (LIBOR)
divided by a number equal to 1.00 minus the maximum aggregate
reserve requirement which is imposed on member banks of the
Federal Reserve System against eurocurrency
liabilities plus the applicable margin for such loans,
which ranges between 1.250% and 1.750%, based on the leverage
ratio (as defined in the Credit Agreement). We pay a quarterly
commitment fee which varies between 0.150% and 0.250% on the
unused portion of the credit agreement (depending on the
leverage ratio). The working capital line includes a
$5.0 million letter of credit facility. Issuances of
letters of credit reduce the availability of permitted
borrowings under the Credit Agreement.
Borrowings under the Credit Agreement are secured by
substantially all of our assets. The Credit Agreement contains a
number of financial and other covenants that, among other
things, restrict our and our subsidiaries abilities to
incur additional indebtedness, grant liens or other security
interests, make certain investments, become liable for
contingent liabilities, make specified restricted payments
including dividends, dispose of assets or stock, including the
stock of its subsidiaries, or make capital expenditures above
specified limits and engage in other matters customarily
restricted in senior secured credit facilities. We must also
maintain a minimum net worth (as defined in the credit
agreement) and maximum debt leverage ratios. These covenants are
subject to certain qualifications and exceptions. Through
June 30, 2007, we were in compliance with these covenants.
As of June 30, 2007, $1.5 million of borrowings were
outstanding on the working capital line of credit and
approximately $2.3 million outstanding for letters of
credit. From July 1, 2007 through September 15, 2007,
we borrowed an additional $11.0 million.
One of our subsidiaries has an equipment lease line of credit
for new purchases with Hewlett-Packard Financial Services
Company that expires on March 31, 2008 for new purchases on
the line of credit. The interest rate on new borrowings under
the equipment lease line is set quarterly. For the year ended
June 30, 2007, we borrowed $6.9 million to finance the
purchase of student computers and related equipment at interest
rates ranging from 8.5% to 8.8%. These leases include a 36-month
payment term with a bargain purchase option at the end of the
term. Accordingly, we include this equipment in property and
equipment and the related liability in capital lease
obligations. In addition, we have pledged the assets financed
with the equipment lease line to secure the amounts outstanding.
A substantial portion of our revenues are generated through our
contractual arrangements with virtual public schools. The
virtual public schools are generally funded on a per student
basis by their state and local governments and the timing of
funding varies by state. Funding receipts by an individual
school may vary over the year and may be in arrears. Because our
receivables represent obligations indirectly due from
governments, we have not historically had an issue with
non-payment and believe the risk of non-payment is minimal
although we cannot guarantee this will continue.
Our operating requirements consist primarily of day-to-day
operating expenses, capital expenditures and contractual
obligations with respect to facility leases, capital equipment
leases and other operating leases. Capital expenditures are
expected to increase in the next several years as we invest in
additional courses, new releases of existing courses and
purchase computers to support increases in virtual school
enrollments. We expect our capital expenditures in the next 12
months will be approximately $22 million to
$30 million for curriculum development and related systems
as well as computers for students. We expect to be able to fund
these capital expenditures with cash generated from operations,
short-term debt and capital lease financing. We lease all of our
office facilities. We
44
expect to make future payments on existing leases from cash
generated from operations. We believe that our existing cash
balances and continued cash generated from operations, our
revolving credit facility, and in-part, the net proceeds from
this offering, will provide sufficient resources to meet our
projected operating requirements,
start-up
costs to open new schools, and planned capital expenditures for
at least the next 12 months. In addition, we expect that
the net proceeds from this offering will allow us to meet our
long-term liquidity needs and provide us with the financial
flexibility to execute our strategic objectives, including the
ability to make acquisitions and strategic investments. Our
ability to generate cash, however, is subject to our
performance, general economic conditions, industry trends and
other factors. To the extent that funds from this offering,
combined with existing cash and operating cash flow are
insufficient to fund our future activities and requirements, we
may need to raise additional funds through public or private
equity or debt financing.
Operating
Activities
Net cash provided by operating activities during the year ended
June 30, 2007, was $5.6 million. Net cash provided by
operating activities in fiscal year 2006 and 2005 was
$3.6 million and $9.7 million, respectively.
The cash provided by operations in the year ended June 30,
2007 was primarily due to net income of $3.9 million,
depreciation and amortization of $7.4 million and increases
in deferred revenue of $1.2 million and accrued
compensation and benefits of $1.1 million. This was
primarily offset by an increase in accounts receivable of
$3.2 million, an increase in inventory of
$2.8 million, a change in accounts receivable allowance of
$0.9 million, and a decrease in accrued liabilities of
$0.8 million.
The cash provided by operations in fiscal year 2006 was
primarily due to net income of $1.4 million, depreciation
and amortization of $5.0 million, an increase in accounts
payable of $1.6 million, an increase of accrued
compensation and benefits of $1.8 million, and an increase
in deferred rent of $1.6 million. This was primarily offset
by an increase in inventory of $5.4 million and an increase
of accounts receivable of $2.7 million.
The cash provided by operations in fiscal year 2005 was
primarily due to depreciation and amortization of
$5.5 million, a decrease in accounts receivable of
$3.4 million, impairment charges of $3.3 million, an
increase in accrued liabilities of $1.2 million, and an
increase in accrued compensation and benefits of
$1.0 million. This was primarily offset by a net loss of
$3.5 million and an increase in inventories, prepaid and
other assets of $1.5 million.
Investing
Activities
Net cash used in investing activities for the year ended
June 30, 2007 was $14.0 million. Net cash used in
investing activities for the fiscal year 2006 and 2005 was
$11.5 million and $8.5 million, respectively.
Net cash used in investing activities for the year ended
June 30, 2007 was due to capitalized curriculum of
$8.7 million and purchases of property and equipment of
$5.4 million. This does not include $8.1 million of
student computers and other equipment and software financed with
capital leases. Purchases of property and equipment for the
fiscal year ended 2006 and 2005 were $10.8 million and
$4.7 million, respectively. In fiscal year 2005, we also
financed with capital leases, purchases of student computers in
the amount of $0.4 million. Capitalized curriculum for the
fiscal year ended 2006 and 2005 were $0.7 million and
$3.8 million, respectively.
Financing
Activities
Net cash provided by financing activities for the year ended
June 30, 2007 was $0.7 million. This was primarily due
to the release of cash from a restricted escrow account of
$2.3 million, a bank overdraft of $1.6 million, and
net borrowings from our revolving credit facility of
$1.5 million. This was offset by a payment on a related
party note payable of $4.0 million and repayments of
capital lease obligations of $1.4 million. Net cash used in
financing activities for fiscal year 2006 was $2.6 million
primarily attributable to cash invested in a restricted escrow
account of $2.2 million and repayments for capital lease
obligations of $0.4 million.
Net cash provided by financing activities for the fiscal year
2005 was $2.9 million primarily due to proceeds from a
related party note payable of $4.0 million and the release
of cash from a restricted escrow account of $2.2 million.
This was partially offset by repayments of capital lease
obligations of $3.4 million.
45
Contractual
Obligations
Our contractual obligations consist primarily of leases for
office space, capital leases for equipment and other operating
leases. The following summarizes our long-term contractual
obligations as of June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months Ending June 30,
|
|
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
|
|
(dollars in thousands)
|
|
|
Contractual Obligations at
June 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
leases
(1)
|
|
$
|
7,531
|
|
|
$
|
3,238
|
|
|
$
|
2,888
|
|
|
$
|
1,399
|
|
|
$
|
6
|
|
|
$
|
|
|
|
$
|
|
|
Operating leases
|
|
|
17,221
|
|
|
|
2,138
|
|
|
|
2,127
|
|
|
|
1,576
|
|
|
|
1,386
|
|
|
|
1,367
|
|
|
|
8,627
|
|
Line of
credit
(2)
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
obligations
(1)
|
|
|
396
|
|
|
|
193
|
|
|
|
132
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
commitments
(3)
|
|
|
120
|
|
|
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,768
|
|
|
$
|
7,189
|
|
|
$
|
5,147
|
|
|
$
|
3,046
|
|
|
$
|
1,392
|
|
|
$
|
1,367
|
|
|
$
|
8,627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes interest expense.
|
(2)
|
|
Pertains to revolving line of
credit and excludes interest expense due to short-term repayment
period.
|
(3)
|
|
For employment agreement.
|
Under most contracts, we provide the virtual schools we manage
with turnkey management services and take responsibility for any
operating deficits that the school may incur. These deficits are
recorded as a reduction in revenues, and therefore are not
included as a commitment or obligation in the above table.
In connection with our service agreement with the Northern
Ozaukee School District (and the Wisconsin Virtual Academy),
there is an indemnification provision which arguably could be
asserted by the school district for certain expenses in the
event the plaintiff prevails and the Court enjoins open
enrollment payments to the district that otherwise would cover
those expenses. We have assessed the likelihood of a claim as
remote, and therefore it has not been included as a commitment
or obligation in the table above.
Off-Balance
Sheet Arrangements
We do not have any off-balance sheet arrangements that have or
are reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures
or capital resources that are material to investors.
Impact of
Inflation
We believe that inflation has not had a material impact on our
results of operations for any of the years in the three year
period ended June 30, 2007. We cannot assure you that
future inflation will not have an adverse impact on our
operating results and financial condition.
Quantitative
and Qualitative Disclosures About Market Risk
Interest
Rate Risk
We had unrestricted cash and cash equivalents totaling
$1.7 million and $9.5 million as of June 30, 2007
and June 30, 2006, respectively. Unrestricted cash and cash
equivalents are maintained primarily in non-interest bearing
accounts and are used for working capital purposes. Because we
currently do not have balances in interest bearing accounts,
fluctuations in interest rates would not have a material impact
on our investment income.
Our interest rate exposure is related to short-term debt
obligations under our revolving credit facility. A significant
portion of our interest expense is based upon changes in the
LIBOR benchmark interest rate. Due to the short-term nature of
our outstanding debt subject to variable interest rates as of
June 30, 2007 of $1.5 million, fluctuations in the
LIBOR rate would not have a material impact on our interest
expense.
Foreign
Currency Exchange Risk
We currently do not operate in a foreign country or transact
business in a foreign currency and therefore we are not subject
to fluctuations due to changes in foreign currency exchange
rates. However, we intend to pursue opportunities in
international markets in the future. If we enter into any
material transactions in a foreign currency
46
or establish or acquire any subsidiaries that measure and record
their financial condition and results of operation in a foreign
currency, we will be exposed to currency transaction risk
and/or
currency translation risk. Exchange rates between
U.S. dollars and many foreign currencies have fluctuated
significantly over the last few years and may continue to do so
in the future. Accordingly, we may decide in the future to
undertake hedging strategies to minimize the effect of currency
fluctuations on our financial condition and results of
operations.
Recent
Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123R, which
revised SFAS No. 123, and supersedes APB Opinion
No. 25. The revised statement addresses the accounting for
share-based payment transactions with employees and other third
parties, eliminates the ability to account for share-based
compensation transactions using APB Opinion No. 25 and
requires that the compensation costs relating to such
transactions be recognized in the statements of operations. We
adopted SFAS No. 123R for the fiscal year ended
June 30, 2007.
In February 2006, FASB issued Statement of Financial Accounting
Standard No. 155 (SFAS No. 155),
Accounting
for Certain Hybrid Financial Instruments An
Amendment of FASB Statements No. 133 and 140
. This
Statement is effective for all financial instruments acquired or
issued after the beginning of an entitys first fiscal year
that begins after September 15, 2006. At adoption, any
difference between the total carrying amount of the individual
components of the existing bifurcated hybrid financial
instrument and the fair value of the combined hybrid financial
instrument should be recognized as a cumulative effect
adjustment to beginning retained earnings. We do not believe
that the adoption of SFAS No. 155 will have a material
impact on our consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation (FIN) 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
. FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with SFAS No. 109,
Accounting for Income
Taxes
. This interpretation defines the minimum recognition
threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 is effective
for fiscal years beginning after December 15, 2006. We
adopted FIN 48 on July 1, 2007. We believe the adoption of
this guidance will not have a material effect on our financial
position and results of operations. We are currently evaluating
the effect that the adoption of FIN 48 will have on our
financial position and results of operations.
In September 2006, the FASB issued Statement of Financial
Accounting Standard No. 157 (SFAS No. 157),
Fair Value Measurements,
which defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. We are in the process of
evaluating the impact of this statement on our consolidated
financial statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standard No. 159 (SFAS No. 159),
The Fair Value Option for Financial Assets and Financial
Liabilities.
This statement permits companies and
not-for-profit organizations to make a one-time election to
carry eligible types of financial assets and liabilities at fair
value, even if fair value measurement is not required under
GAAP. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. Early adoption is permitted if the
decision to adopt the standard is made after the issuance of
this statement but within 120 days after the first day of
the fiscal year of adoption, provided no financial statements
have yet been issued for any interim period and provided the
requirements of SFAS No. 157, Fair Value Measurements, are
adopted concurrently with SFAS No. 159. The Company does
not believe that it will adopt the provisions of this statement.
47
Our
Company
We are a technology-based education company. We offer
proprietary curriculum and educational services created for
online delivery to students in kindergarten through
12th grade, or K-12. Our mission is to maximize a
childs potential by providing access to an engaging and
effective education, regardless of geographic location or
socio-economic background. Since our inception, we have invested
more than $95 million to develop curriculum and an online
learning platform that promotes mastery of core concepts and
skills for students of all abilities. This learning system
combines a cognitive research-based curriculum with an
individualized learning approach well-suited for a virtual
school and other educational applications. From fiscal year 2004
to fiscal year 2007, we increased average enrollments in the
virtual public schools we serve from approximately 11,000
students to 27,000 students, representing a compound annual
growth rate of approximately 35%. From fiscal year 2004 to
fiscal year 2007, we increased revenues from $71.4 million
to $140.6 million, representing a compound annual growth
rate of approximately 25%, and improved from a net loss of
$7.4 million to net income of $3.9 million.
We believe we are unique in the education industry because of
our direct involvement in every component of the educational
development and delivery process. Most educational content,
software and service providers typically concentrate on only a
portion of that process, such as publishing textbooks, managing
schools or providing testing and assessment services. This
traditional segmented approach has resulted in an uncoordinated
and unsatisfactory education for many students. Unburdened by
legacy, we have taken a holistic approach to the design of our
learning system. We have developed an engaging curriculum which
includes online lessons delivered over our proprietary school
platform. We combine this with a rigorous system to test and
assess students and processes to manage school performance and
compliance. In addition, our professional development programs
enable teachers to better utilize technology for instruction.
Our end-to-end learning system is designed to maximize the
performance of the schools we serve and enhance student academic
achievement.
As evidence of the benefit of our holistic approach, the virtual
public schools we serve generally test near, and in some cases
above, state averages on standardized achievement tests. These
results have been achieved despite the enrollment of a
significant number of new students each school year who have had
limited exposure to our learning system prior to taking these
required state tests. Students using our learning system for at
least three years usually perform better on standardized tests
relative to state averages than students using it for one year
or less. The efficacy of our learning system has also helped us
achieve high levels of customer satisfaction. According to a
2006 internal survey of parents of students enrolled in virtual
public schools we serve, approximately 97% of respondents stated
that they were either satisfied or very satisfied with our
curriculum and 95% of respondents stated that they would
recommend our curriculum to other families.
We deliver our learning system to students primarily through
virtual public schools. As with any public school, these schools
must meet state educational standards, administer proctored
exams and are subject to fiscal oversight. The fundamental
difference is that students attend virtual public schools
primarily over the Internet instead of traveling to a physical
classroom. In their online learning environment, students
receive assignments, complete lessons, and obtain instruction
from certified teachers with whom they interact online,
telephonically, and face-to-face. Many states have embraced
virtual public schools as a means to provide families with a
publicly funded alternative to a traditional classroom-based
education. For parents who believe their child is not thriving
and for whom relocating or private school is not an option,
virtual public schools can provide a compelling choice. This
widespread availability makes them the most public
of schools. From an education policy standpoint, virtual public
schools often represent a savings to the taxpayers when compared
with traditional public schools because they are generally
funded at a lower per pupil level than the per pupil state
average reported by the U.S. Department of Education. Finally,
because parents are not required to pay tuition, virtual public
schools make our learning system available to the broadest range
of students.
We offer virtual schools our proprietary curriculum, online
learning platform and varying levels of academic and management
services, which can range from targeted programs to complete
turnkey solutions, under long-term contracts. These contracts
provide the basis for a recurring revenue stream as students
progress through successive grades. Additionally, without the
requirement of a physical classroom, virtual schools can be
scaled quickly to
48
accommodate a large dispersed student population, and allow more
capital resources to be allocated towards teaching, curriculum
and technology rather than towards a physical infrastructure.
Substantially all of our enrollments are served through
25 virtual public schools to which we provide full turnkey
solutions and seven virtual public schools to which we provide
limited management services, located in 17 states and the
District of Columbia. In addition, a small number of enrollments
are served by an additional 27 schools, located in these
and other states, to which we provide limited management
services. Parents can also purchase our curriculum and online
learning platform directly to facilitate or supplement their
childrens education. Additionally, we have piloted our
curriculum in brick and mortar classrooms with promising
academic results. We also believe there is additional widespread
applicability for our learning system internationally.
Families that choose our learning system for their children come
from a broad range of social, economic and academic backgrounds.
They share, however, the desire for an individualized learning
program to maximize their childrens potential. Examples
include, but are not limited to, families with: (i) students
seeking to learn faster or slower than they could in a one
size fits all traditional classroom; (ii) safety concerns
about their local school; (iii) students with disabilities for
which traditional classrooms are problematic; (iv) students with
geographic or travel constraints; and (v) student athletes and
performers who are not able to attend regularly scheduled
classes. Our individualized learning approach allows students to
optimize their individual academic performance and, therefore,
their chances of achieving their goals.
Our
History
We were founded in 2000 to utilize the advances in technology to
provide children access to a high-quality public school
education regardless of their geographic location or
socio-economic background. Given the geographic flexibility of
technology-based education, we believed that the pursuit of this
mission could help address the growing concerns regarding the
regionalized disparity in the quality of public school
education, both in the United States and abroad. These concerns
were reflected in the passage of the No Child Left Behind (NCLB)
Act in 2000, which implemented new standards and accountability
requirements for public K-12 education. The convergence of these
concerns and rapid advances in Internet technology created the
opportunity to make a significant impact by deploying a high
quality learning system on a flexible, online platform.
In September 2001, after 18 months of research and
development on our curriculum, we launched our kindergarten
through 2nd grade offering. We initially launched our
learning system in virtual public schools in Pennsylvania and
Colorado, serving approximately 900 students in the two states
combined. During the
2002-03
school year, we added our 3rd through 5th grade
offering and entered into contracts to operate virtual public
schools in California, Idaho, Ohio, Minnesota and Arkansas,
increasing our average enrollment to approximately 5,900
students during the 2002-03 school year. During the
2003-04
and
2004-05
school years, we added 7th and 8th grades,
respectively, and added contracts with virtual public schools in
Wisconsin, Arizona and Florida. By the end of the
2004-05
school year, we had increased enrollment to approximately 15,100
students. In the 2005-06 school year, we added contracts to
operate virtual public schools in Washington, Illinois and
Texas. Additionally during the
2006-07
school year, we implemented a hybrid school offering in Chicago
that combines face-to-face time in the classroom with online
instruction. We recently entered the virtual high school market,
enrolling 9th and 10th grade students at the start of
the
2005-06
and
2006-07
school years, respectively, and enrolling 11th and
12th grade students at the start of the
2007-08
school year.
We believe we have significant growth potential. Therefore over
the last three years, we have put a great deal of effort into
developing the infrastructure necessary to scale our business.
We further developed our logistics and technological
infrastructure and implemented sophisticated financial systems
to allow us to more effectively operate a large and growing
company.
Our
Market
The U.S. market for K-12 education is large and growing.
For example:
|
|
|
|
|
According to the National Center for Education Statistics
(NCES), a division of the U.S. Department of Education,
there were more than 49 million students in K-12 public
schools during the 2005-06 school year.
|
49
|
|
|
|
|
In addition, according to National Home Education Research,
approximately two million students are home schooled and,
according to a March 2006 NCES report, approximately five
million students are enrolled in private schools.
|
|
|
|
|
|
According to the NCES, the public school system alone
encompassed more than 98,000 schools and 17,000 districts during
the 2005-06 school year.
|
|
|
|
|
|
The NCES estimates that total spending in the public K-12 market
was $558 billion for the 2005-06 school year.
|
Parents and lawmakers are demanding increased standards and
accountability in an effort to improve academic performance in
U.S. public schools. As a result, each state is now required to
establish performance standards and to regularly assess student
progress relative to these standards. We expect continued focus
on academic standards, assessments and accountability in the
near future.
Many parents and educators are also seeking alternatives to
traditional classroom-based education that can help improve
academic achievement. Demand for these alternatives is evident
in the growing number of choices available to parents and
students. For example, charter schools emerged in 1988 to
provide an alternative to traditional public schools. Currently,
40 states and the District of Columbia have passed charter
school legislation and there are approximately 4,000 charter
schools in the U.S. with an estimated enrollment of over
1.1 million students according to the Center for Education
Reform. Similarly, acceptance of online learning initiatives,
including not only virtual schools but also online testing and
Internet-based professional development, has become widespread.
As of September 2006, 38 states had established some form
of online learning initiative, and Michigan recently became the
first state to pass legislation mandating that high school
students take part in an online learning experience
in order to graduate.
Virtual public schools represent one approach to online learning
that is gaining acceptance. According to the Center for
Education Reform, as of January 2007 there were 173 virtual
schools with total enrollment exceeding 92,000 students,
operating in 18 states compared to just 86 virtual schools
in 13 states with total enrollment of 31,000 students in the
2004-05 school year. Virtual schools can offer a comprehensive
curriculum and flexible delivery model; therefore, we believe
that a growing number of families will pursue virtual public
schools as an attractive public school alternative. Given these
statistics and the nascence of this market, we believe there is
a significant opportunity for a high-quality, trusted, national
education provider to serve virtual public schools.
Our
Competitive Strengths
We believe the following to be our key competitive strengths:
Proprietary Curriculum Specifically Designed for a
Technology-Enabled Environment.
We specifically
designed our curriculum for online learning, in contrast to
other online curriculum providers who often just digitize
classroom textbooks for transmission over the Internet. Our
lessons utilize a combination of innovative technologies,
including flash animations, online interactivity and real-time
individualized feedback, which we combine with textbooks and
other offline course materials to create an engaging and highly
effective curriculum. Our curriculum contains more than 11,000
discrete lessons, each of which addresses specific learning
objectives and can be utilized in the manner most appropriate
for each student. We continuously measure student performance
and use this information to improve our curriculum and drive
greater, more consistent academic achievement, a valuable
competitive advantage we enjoy by virtue of our integration into
all aspects of the educational development and delivery process.
We believe our curriculum is the most advanced cognitive
research-based curriculum in
K-12
education.
Flexible, Integrated Online Learning
Platform.
Our online learning platform provides a
highly flexible and effective means for delivering educational
content to students. Our platform offers assessment capabilities
to identify the current and targeted academic level of
achievement for each individual student, and then incorporates
this information into a detailed lesson plan. As students
progress through their studies, our learning platform measures
mastery of each learning objective to ensure that students grasp
each concept prior to proceeding to the next lesson.
Additionally, our learning platform updates each students
lesson plan for completed lessons and enables us to track the
effectiveness of each lesson with each student on a real-time
basis. Finally, the fact that our
50
learning system is Internet-based allows us to update our
proprietary content and incorporate user feedback on a real-time
basis. For example, our content for the 2006-07 school year
reflected the fact that Pluto is no longer considered a planet,
which was announced in August 2006.
Expertise in Opening Channels for Virtual
Schooling.
Our education policy experts and
established relationships with key educational authorities have
allowed us to participate effectively in advocating for virtual
public schools. Specifically, we have demonstrated our expertise
in helping individual educational policymakers understand the
benefits of virtual schools and in managing the regulatory
requirements once new virtual schools are opened. Since our
inception, we have partnered with individual state governing
bodies to establish highly effective, publicly funded education
alternatives for parents and their children. Our experience in
opening up these new channels gives us a valuable first-mover
advantage over potential competitors.
Track Record of Student Achievement and Customer
Satisfaction.
The virtual public schools we serve
generally test near, and in some cases above, state averages on
standardized achievement tests. These results have been achieved
despite the enrollment of a significant number of new students
each school year who have had limited exposure to our learning
system prior to taking these required state tests. Students
using our learning system for at least three years usually
perform better on standardized tests relative to state averages
than students using it for one year or less. Additionally, in
California, the virtual public schools we serve performed in the
50th to 70th percentile of all public schools in the
state during the
2005-06
school year. Among statewide virtual public schools, those using
the
K
12
learning system outperform other providers in terms of academic
performance. The efficacy of our learning system has also helped
us achieve high levels of customer satisfaction. According to a
2006 internal survey of parents of students enrolled in virtual
public schools we serve, approximately 97% of respondents stated
that they were either satisfied or very satisfied with our
curriculum and 95% of respondents stated that they would
recommend our curriculum to other families. This high degree of
customer satisfaction has been a strong contributor to our
growth, helps drive new student referrals and leads to
re-enrollments.
Highly Scalable Model.
We have built our
educational model systems and management team to successfully
and efficiently serve the academic needs of a large dispersed
student population. We generate high levels of recurring revenue
as a result of our long-term contracts with schools (typically
five years in length), the extended duration over which an
individual student can utilize our learning system (kindergarten
through 12th grade) and our high level of customer
satisfaction. Since our inception, we have invested over
$95 million to develop our learning system, incurring
significant losses. Our ability to leverage this historical
investment in our learning system and our ability to deliver our
offering over the Internet enables us to successfully serve a
greater number of students at a reduced level of capital
investment.
Our
Growth Strategy
We intend to pursue the following strategies to drive our future
growth:
Generate Enrollment Growth at Existing Virtual Public
Schools.
From fiscal year 2004 to fiscal year
2007, we increased average enrollments in the virtual public
schools we serve from more than 11,000 students to more than
27,000 students. In the
2007-08
school year, substantially all of our enrollments are served
through virtual public schools in 17 states and the
District of Columbia. We intend to continue to drive increased
enrollments at the virtual public schools we serve through
targeted marketing and recruiting efforts as well as through
referrals. Our marketing and recruiting efforts utilize both
traditional and online media as well as community events to
communicate the effectiveness of our solution to parents who are
evaluating educational alternatives for their children.
Historically, we have also enrolled a significant number of new
students each year through referrals from families who have had
a positive experience with our learning system and recommended
K
12
to their friends and family members.
Enhance Curriculum to Include a Complete High School
Offering.
We believe that serving virtual public
high schools represents a significant growth opportunity for
online education delivery given the increased independence of
high school students and the wide variance in academic
achievement levels and objectives of students who are entering
high school.
Americas Digital Schools 2006
, a
survey sponsored by Discovery Education and Pearson Education,
projects that the percentage of U.S. high school students
enrolled in online courses will increase from 3.8% in 2006 to
15.6% in 2011. We believe that our early offering of our
integrated
K-8
learning
system and our experience serving K-8 virtual public schools
positions us well for growth in serving virtual public
51
high schools. In the 2005-06 and 2006-07 school years, we began
enrolling 9th and 10th grade students, respectively, and with
the launch of our 11th and 12th grades in the
2007-08
school year, we are able to provide a complete high school
offering. We are developing our high school curriculum to
satisfy the broad range of high school student interests with a
broad variety of required and elective courses, supplemented by
selected courses from other content providers.
Expand Virtual Public School Presence into Additional
States.
We work closely with state policymakers
and school districts to assist them in considering virtual
public schools as an effective educational choice for parents
and students. A virtual public school program can help state
administrations or school districts quickly establish and offer
an alternative to traditional classroom-based education,
expanding the range of choices available to parents and
students. The flexibility and comprehensiveness of our learning
system allows us to efficiently adapt our curriculum to meet the
individual educational standards of any state with minimal
capital investment. We intend to continue to seek opportunities
to assist states in establishing virtual public schools and to
contract with them to provide our curriculum, online learning
platform and related services.
Strengthen Awareness and Recognition of the
K
12
Brand.
Within the virtual public school
community, we enjoy strong brand recognition among parents and
students as a leading provider of virtual education. Outside of
this community, however, the
K
12
brand is not as well recognized. We have developed a
comprehensive brand strategy and intend to invest in further
developing awareness of both the
K
12
brand and the core philosophy behind our learning system. The
recent launch of our Unleash the
x
Potential
campaign is a strong first step towards this goal of creating
broader brand awareness. We believe that a strong and recognized
brand will result in an increased presence among virtual public
schools, attract more student applications and facilitate our
entry into adjacent markets.
Pursue International Opportunities to Offer Our Learning
System.
We believe there is strong worldwide
demand for high-quality, flexible education alternatives. In
many countries, students seek a U.S. accredited education
to gain access to higher education and improved employment
opportunities. Given the highly flexible design and
technology-based nature of our platform, it can be adapted to
other languages and cultures efficiently and with modest capital
investment. Additionally, our ability to operate virtually is
not constrained by the need for a physical classroom or local
teachers, which makes our learning system ideal for use
internationally.
Develop Additional Channels Through Which to Deliver our
Learning System.
We believe there are many
additional channels through which the
K
12
learning system can be offered. These include direct classroom
instruction, hybrid models, and as a supplemental educational
offering. For example, in an urban public school in
Philadelphia, we piloted our
K-5
curriculum in traditional classrooms and were able to generate
meaningful improvements in academic performance. Additionally,
we have recently implemented a hybrid classroom offering in
Chicago that combines face-to-face time in the classroom with
online instruction. Outside the public school channels, the
flexibility of our learning system enables us to package lessons
to be sold as individual products directly to parents and
students. We intend to regularly evaluate additional delivery
channels and to pursue opportunities where we believe there is
likely to be significant demand for our offering.
Educational
Philosophy
The design, development and delivery of our learning system is
based on the following set of guiding principles:
|
|
|
|
|
Apply Tried and True Educational Approaches for
Instruction.
Our learning system is designed to utilize both
tried and true methods to drive academic
success. True methodologies are based on cognitive
research regarding the way in which individuals learn. We also
supplement our learning system with teaching tools and
methodologies that have been tested, or tried, and
proven to be effective. This tried and true
philosophy allows us to benefit from both decades of research
about learning, and effective methods of teaching.
|
|
|
|
Employ Technology Appropriately for Learning.
While all
of our courses are delivered primarily through an online
platform and generally include a significant amount of online
content, we employ technology only where we feel it is
appropriate and can enhance the learning process. In addition to
online content, our curriculum includes a rich mix of offline
course materials, including engaging textbooks and hands-on
|
52
|
|
|
|
|
materials such as phonics kits and musical instruments. We
believe our balanced use of technology and offline materials
helps to maximize the effectiveness of our learning system.
|
|
|
|
|
|
Base Learning Objectives on Rich Content and Big
Ideas.
We refer to big ideas as the key,
subconscious frameworks that serve as the foundation to a
students future understanding of a subject matter. For
example, an understanding of waves is fundamental to a
physicists understanding of quantum mechanics; therefore,
we teach 1st graders the fundamentals of waves. We use
these big ideas to organize and provide the master
objectives of every course we develop. We then utilize rich,
engaging content to best communicate these concepts to students
to promote mastery of the topics.
|
|
|
|
Assess Every Objective to Ensure Mastery.
Ongoing
assessments are the most effective way to evaluate a
students mastery of a lesson or concept. To facilitate
effective assessment, our curriculum establishes clear
objectives for each lesson. Throughout a course, each
students progress is assessed and evaluated by a teacher
at a point when each objective is expected to be mastered,
providing direction for appropriate pacing. These periodic and
well-timed assessments reinforce learning and promote mastery of
a topic before a student moves to the next lesson or course.
|
|
|
|
Facilitate Flexibility as the Level, Pace and Hours Spent on
Each Objective Vary by Child.
We believe that each student
should be challenged appropriately. Generally, adequate progress
for most students is to complete one academic years
curriculum within a nine-month school year. Each individual
student may take greater or fewer instructional hours and more
or less effort than the average student to achieve this
progress. Our learning system is designed to facilitate this
flexibility in order to ensure that the appropriate amount of
time and effort is allocated to each lesson.
|
|
|
|
Prioritize Important, Complex Objectives.
We have
developed a clear understanding of those subjects and concepts
that are difficult for students. Greater instructional effort is
focused on the most important and difficult concepts and skills.
We use existing research, feedback from parents and students and
experienced teacher judgments to determine these priorities, and
to modify our learning system to guide the allocation of each
students time and effort.
|
Products
and Services
Our
Products
K
12
Curriculum
Our curriculum consists of the
K
12
online lessons, offline learning kits and teachers guides.
We have developed an extensive catalogue of proprietary courses,
consisting of more than 11,000 lessons, designed to teach
concepts to students from kindergarten through 10th grade.
Each lesson is designed to last approximately 45 to
60 minutes, although students are able to work at their own
pace. A single course generally consists of 120 to
180 individual lessons.
Online Lessons.
Our online lessons are
accessed through our Online School (OLS) platform. Each online
lesson provides the roadmap for the entire lesson including
direction to specific online and offline materials, online
lesson content and a summary of the major objectives for the
lesson. Lessons utilize a combination of innovative technologies
including flash animations and online interactivity, coordinated
textbooks and hands-on materials and individualized feedback to
create an engaging, responsive and highly effective curriculum.
Each lesson also contains an online assessment to ensure that
students have mastered the material and are ready to proceed to
the next lesson, allowing them to work at their own pace.
Pronunciation guides for key words and references to suggested
additional resources, specific to each lesson and each
students assessment, are also included.
53
Offline Learning Kits.
All of our courses
utilize a series of offline learning kits in conjunction with
the online lessons to help maximize the effectiveness of our
learning system. In addition to receiving access to our online
lessons through the Internet, each student receives a shipment
of offline materials, including textbooks, art supplies,
laboratory supplies (e.g. microscopes and scales) and other
reference materials which are incorporated throughout our
curriculum. This approach is consistent with our guiding
principle to utilize technology where appropriate in our
learning system. Most of the textbooks we use are proprietary
textbooks that are written in a way that is designed to be
engaging to students and to compliment the online experience. We
believe that our ability to combine online lessons and offline
materials so effectively is a competitive advantage.
Teachers Guides.
All of our courses are
paired with a teachers guide. Each guide outlines the
course objectives, refers back to all of the course content that
is contained in the online and offline course materials,
includes answers and explanations to the exercises that the
students complete and contains suggestions for explaining
difficult concepts to students.
54
Courses
Offered
The following table provides a list of our proprietary courses
and selected third-party courses (shown in italics) that we are
offering during the 2007-08 school year. We also offer an
additional 33 third-party courses at the high school level.
|
|
|
|
|
|
|
|
|
|
|
|
|
English and Language
Arts
|
|
Mathematics
|
|
Science
|
|
|
|
Elementary School
Middle School
High School
Elementary School
Middle School
High School
|
|
Kindergarten Language Arts
Kindergarten Phonics
1st Grade Language Arts
1st Grade Phonics
2nd Grade Language Arts
3rd Grade Language Skills
3rd Grade Spelling
3rd Grade Literature
4th Grade Language Skills
4th Grade Spelling
4th Grade Literature
5th Grade Language Skills
5th Grade Spelling
5th Grade Literature
Intermediate Language Skills A
Intermediate Language Skills B
Intermediate Literature A
Intermediate Literature B
Literary Analysis and Composition
Literary Analysis and Composition I Foundations
Literary Analysis and Composition I
Literary Analysis and Composition II
American Literature
AP English Literature and Composition
World Literature and Language
History
Kindergarten History
1st Grade History
2nd Grade History
3rd Grade History
4th Grade History
American History Before 1865
American History Since 1865
Intermediate World History A
Intermediate World History B
Modern World Studies
World History
U.S. History
AP U.S. History
American Government and Economics
Macroeconomics
|
|
Kindergarten Math
1st Grade Math
2nd Grade Math
3rd Grade Math
4th Grade Math
5th Grade Math
Pre-Algebra A
Pre-Algebra B
Algebra I
Pre-Algebra
Pre-Algebra Foundations
Algebra Foundations
Algebra I
Geometry
Algebra II
Art
Kindergarten Art
1st Grade Art
2nd Grade Art
3rd Grade Art
4th Grade Art
Intermediate Art: American A
Intermediate Art: American B
Intermediate Art: World A
Intermediate Art: World B
Art History
Fine Art and Art Appreciation
|
|
Kindergarten Science
1st Grade Science
2nd Grade Science
3rd Grade Science
4th Grade Science
5th Grade Science
Kindergarten Science (classroom)
1st Grade Science (classroom)
2nd Grade Science (classroom)
3rd Grade Science (classroom)
Earth Science
Life Science
Physical Science
Earth Science Foundations
Physical Science Foundations
Biology Foundations
Earth Science
Biology
Physical Science
Music/Other
Preparatory Music
Beginning 1 Music
Beginning 2 Music
Introduction to Music
Intermediate 1 Music
Intermediate 2 Music
Intermediate 3 Music
Exploring Music
Music Concepts A
Music Concepts B
Music Appreciation
Learning Online
Physical Education
Spanish I, II, III, AP
French I, II, III, AP
German I, II
Latin I, II
Chinese I
|
55
K-8 Courses.
From kindergarten through 8th grade,
our courses are categorized into six major subject areas:
English and Language Arts, Mathematics, Science, History, Art
and Music. Our proprietary curriculum includes all of the
courses that students need to complete their core kindergarten
through 8th grade education. These courses focus on
developing fundamental skills and teaching the key knowledge
building blocks or schemas that each student will need to master
the major subject areas, meet state standards and complete more
advanced coursework. Unlike a traditional classroom education,
our learning system offers the flexibility for each student to
take courses at different grade levels in a single academic
year, providing flexibility for students to progress at their
own level and pace within each subject area. In addition, the
flexibility of our learning system allows us to tailor our
curriculum to state specific requirements. For example, we have
developed eight courses specifically for use in Texas public
schools.
High School Courses.
The curriculum sought by students in
each of the high school grades is much broader and varies from
student to student, largely as a result of the increased
flexibility in course selection required for high school
students. In order to offer a full suite of courses, including
the many elective courses required to meet the needs of high
school students, we offer a combination of proprietary courses
and selected rigorously tested courses licensed from
third-parties. We have 16 proprietary high school courses for
the 2007-08 school year (including eight courses that have one
or more lessons that remain under development for delivery prior
to their first scheduled use later in the school year). The high
school students we serve using our proprietary courses account
for approximately 60% of the total course enrollment of our high
school students in the
2007-08
school year.
Online
School Platform
Our Online School (OLS) platform is an intuitive, web-based
software platform that provides access to our online lessons as
well as our lesson planning and scheduling tools and our
progress tracking tool, both of which serve a key role in
assisting parents and teachers in managing each students
progress. Because the OLS is a web-based platform, students,
parents and teachers can access our online tools and lessons
through the OLS from anywhere with an Internet connection at any
time of the day or night.
|
|
|
|
|
Lesson Planning and Scheduling Tools.
In a school year, a
typical student will complete between 800 and 1,200 lessons
across six or more subject areas. Our lesson planning and
scheduling tools enable teachers and parents to establish a
master plan for completing these lessons. These tools are
designed to dynamically update the lesson plan as a student
progresses through each lesson and course, allowing flexibility
to increase or decrease the pace at which the student moves
through the curriculum while ensuring that the student
progresses towards completion in the desired time frame. For
example, the schedule can easily be adapted to accommodate a
student who desires to attend school six days a week, a student
who is interested in studying during the winter holidays to take
time off during the spring, or a student who chooses to take two
math classes a day for the first month of the school year and
delay art classes until the second month of the school year.
Moreover, changes can be made to the schedule at any point
during the school year and the remainder of the students
schedule will automatically adjust in the OLS.
|
|
|
|
Progress Tracking Tools.
Once a master schedule has been
established, the OLS delivers lessons based upon the specified
parameters. Each day, a student is initially directed to a
screen listing the syllabus for that particular day and begins
the school day by selecting one of the listed lessons. As each
lesson is completed, the student returns to the days
syllabus to proceed to the next subject. If a student does not
complete a lesson during the session, the lesson will be
rescheduled to the next day and will resume at the point where
the student left off. Our progress tracking tool allows
students, parents and teachers to monitor student progress. In
addition, information collected by our progress tracking tool
regarding student performance, attendance and other data is
transferred to our proprietary management system for use in
providing administrative support services.
|
Student
Administration Management System
Our Student Administration Management System (SAMS) organizes,
updates and reports information that is automatically collected
through interfaces with our OLS and related management systems.
SAMS collects and provides us with all of the information
required to manage student enrollment and monitor student
performance.
56
SAMS is also central to collecting and managing all
administrative data required to operate a virtual public school.
In addition, the information provided by SAMS feeds our
proprietary Order Management System (OMS) that generates orders
for offline learning kits and computers to be delivered to
students.
Student
Community Tools
We place a strong emphasis on the importance of building a sense
of community in the schools we manage. Accordingly, we offer a
combination of tools that foster communication and interaction
among virtual public school students and parents. Our
K
12
Community Chest website for virtual public school students
includes discussion boards, blogs, games, competitions and other
functions. Additionally, our
K
12
Family Directory web-based tool enables parents of virtual
public school students to organize online and offline social
activities for their children. Parents can run searches based on
criteria such as their childs location, age or interests
(such as hobbies or sports) to locate and contact other parents
of children with similar interests to facilitate student
interaction.
Our
Services
We provide a wide array of services to students and their
families as well as directly to virtual public schools. Our
services can be categorized broadly into academic support
services and management and technology services.
Academic
Support Services
Teachers and Related Services.
Teachers are
critical to the educational success of students in virtual
public schools. Teachers in the virtual public schools that we
serve are generally employed by the school, with the ultimate
authority over these teachers residing with the schools
governing body. Under our service agreements, we recruit, train
and provide management support for these teachers. Historically,
we have seen significant demand for teaching positions in the
virtual public schools that we serve. For example, for the
virtual public schools we serve in California, we recently
received approximately six applications for each teaching
position filled for the
2006-07
school year.
We use a rigorous evaluation program for making hiring
recommendations to the virtual public schools we serve. We hire
teachers who, at a minimum, are state certified and meet the
federal requirements for designation as a Highly Qualified
Teacher, and generally have at least three years of
teaching experience. We also seek to recruit teachers who have
the skill set necessary to be successful in a virtual public
school environment. Teaching in a virtual public school is
characterized by heightened
one-on-one
student-teacher and parent-teacher interaction, so virtual
public school teachers must have strong interpersonal
communications skills. Additionally, a virtual public school
teacher must be creative in finding ways to effectively connect
with their students and integrate themselves into the daily
lives of the students families.
New virtual public school teachers attend our comprehensive
training program during which, among other things, they are
introduced to our educational philosophy, our curriculum and our
OLS and other technology applications, and are provided
strategies for communicating and connecting with students and
their families in a virtual public school environment. We also
provide ongoing training opportunities for teachers so that they
may stay abreast of changing educational standards and key
learning trends, which we believe enhances their teaching
abilities and effectiveness.
Gifted and Special Education Services.
We
believe that our individualized learning system is able to
effectively address the educational needs of gifted and special
education students because it is self-paced and employs flexible
teaching methods. For students requiring special attention, we
employ a national director who is an expert on the delivery of
special education services in a virtual public school
environment and who oversees and directs the special education
programs at the virtual public schools we serve. We direct and
facilitate the development and implementation of
individualized education plans for students with
special needs. Our special education program is compliant with
the federal Individuals with Disabilities Education Act and all
state special education requirements. Each special needs student
is assigned a certified special education teacher who arranges
for any required ancillary services, including speech and
occupational therapy, and any required assistive technologies,
such as special computer displays or speech recognition software.
57
Student Support Services.
We provide students
attending virtual public schools that we serve and their
families with a variety of support services to ensure that we
effectively meet their educational needs and goals. Each student
is assigned a guidance counselor to assist them with academic
achievement planning. Additionally, we provide tutors as
necessary to help students with courses that they find
difficult. We also plan and coordinate social events to offer
students opportunities to meet and socialize with their virtual
public school peers. Finally, we offer our
K
12
HUG (Help, Understanding and Guidance) program to address
any other questions or concerns that students and their parents
have during the course of their matriculation.
Management
Services
Under many of our contracts, we provide virtual public schools
with turnkey management services. In these circumstances, we
take responsibility for all aspects of the management of the
schools, including monitoring academic achievement, teacher
hiring and training, compensation of school personnel, financial
management, enrollment processing and procurement of curriculum,
equipment and required services. In 2007, the Commission on
International and Trans-regional Accreditation (CITA), a leading
worldwide education accreditation agency, thoroughly evaluated
our school management services and we ultimately received the
prestigious CITA accreditation.
Compliance and Tracking Services.
Operating a
virtual public school entails most of the compliance and
regulatory requirements of a traditional public school. We have
developed management systems and processes designed to ensure
that schools we serve are in compliance with all applicable
requirements, including tracking appropriate student information
and meeting various state reporting requirements. For example,
we collect enrollment related information, monitor attendance
and administer proctored state tests. As we have expanded into
new states, our processes have grown increasingly robust, and we
believe our compliance and tracking processes provide us with a
distinct competitive advantage.
Financial Support Services.
We provide each
school we serve with a dedicated business manager who oversees
the preparation of the annual budget and coordinates with the
schools directors to determine their annual objectives. In
addition, we implement an internal control framework, develop
policies and procedures, provide accounting services and payroll
administration, oversee all federal entitlement programs and
arrange for external audits.
Facility, Operations and Technology Support
Services.
We operate administrative offices and
all other facilities on behalf of the virtual public schools we
serve. We provide these schools with a complete technology
infrastructure. In addition, we provide a comprehensive student
help desk solution.
Human Resources Support Services.
We are
actively involved in hiring virtual public school
administrators, teachers and staff, through a thorough interview
and orientation process. To better facilitate the hiring
process, we review and analyze the profiles of teachers that
have been highly effective in our learning system to identify
the attributes desired in future new hires. We also negotiate
and secure employment benefits for teachers on behalf of virtual
public schools and administer employee benefit plans for virtual
public school employees. Additionally, we assist the virtual
schools we serve in drafting and implementing administrative
policies and procedures.
Product
Development
We develop our products and related service offerings through a
highly collaborative process that blends cognitive research with
an innovative development approach by utilizing best practices
from the education industry and other industries. Our approach
provides for effective content and rapid time to market. Unlike
many traditional content companies that may take several years
to develop a new course, our course development process usually
takes between six and 12 months, depending upon grade and
subject. Our development team includes professionals from the
following disciplines:
|
|
|
|
|
Cognitive Scientists, Evaluation and Research
Specialists
conduct and review cognitive
research to determine how students master the key ideas in a
subject area, the common misconceptions that present obstacles
to mastery and available techniques that can effectively address
common misconceptions.
|
58
|
|
|
|
|
Curriculum and Teaching
Specialists
bring deep subject matter
knowledge and experience with a variety of pedagogical
approaches to our course design process.
|
|
|
|
Writers and Editors
script out the text
of the lessons, ensuring that the information is accurate,
meaningful and suitable for the age group we are trying to reach.
|
|
|
|
Instructional Designers
weave together
all elements of a lesson and determine the extent to which
online, multi-media components, textbooks and other offline
materials, and activities can be integrated to achieve the
desired learning outcomes.
|
|
|
|
Graphic Artists/Media Specialists/Flash
Designers
ensure overall visual integrity
of each lesson and build creative and interactive content.
|
|
|
|
Print Designers
design and publish our
proprietary textbooks and printed learning materials.
|
|
|
|
User Experience Specialists
work closely
with our design teams to ensure that lessons are easy for
students to navigate and understand.
|
|
|
|
Training Specialists
concurrent with the
development of the courses, develop training materials and
programs to support the effective delivery of our curriculum by
teachers.
|
|
|
|
Project Managers
coordinate all of the
activities, including the work of the above-listed resources to
develop the product as designed, on time, and on budget.
|
Using these highly skilled resources, we follow a six-stage
product development process beginning with idea-generation and
carrying through to post-production evaluation. Our ability to
continually modify our products based upon student, parent and
teacher feedback and assessment data is one of the significant
advantages of our online curriculum. All of our lessons contain
a user feedback button that allows us to identify learning
issues on a real-time basis. In a given week, we receive
hundreds of feedback items from students, parents and teachers.
The related descriptions below illustrate each stage in our
product development process.
Blueprint Stage.
During this stage of
development, we gather the key requirements for a new product,
which may be a new course or a group of related courses. We
conduct a thorough review to identify all of the cognitive
research related to learning of the subject and gain an
understanding of the stages a student will go through in
mastering the subject material. We also look at how experts
perform in the subject. Expert-novice research has shown that an
experts knowledge of a domain is contained in a
subconscious framework, the components of which can help guide
the development of a course. During this stage, we also analyze
state standards to confirm that we are encompassing the elements
of the nations highest state standards and that we are
building courses which meet or surpass all state standards.
Design Stage.
We begin the design stage by developing the
learning environment in which the product will be used. This
includes understanding the types of students that will be using
the product, how the course will be taught, the learning
objectives within the course and what online and offline
materials can be utilized. We then produce a design document and
our creative teams develop a work plan for every aspect of the
product, including the look and feel of the product, level of
functionality and length of the course. We produce, test and
refine prototypes with focus groups of students, teachers and
parents.
Pre-production Stage.
With the work plan complete, a
pre-production team is assembled to develop the scope and
sequence of the course. The scope and sequence is an ordered
collection of learning objectives based on cognitive research
and state standards. These learning objectives, once organized,
guide the production team in the creation of the individual
course lessons. The pre-production team also creates the list of
materials that will be required and provides this list to our
logistics group for sourcing.
Production Stage.
During this stage, the product is built
in accordance with the work plan. First, manuscripts,
storyboards and lesson design specifications are created. Online
screens, offline materials such as textbooks, simulations,
photographs, and other reference materials are then created,
reviewed and refined. Rights for licensed materials are cleared
at this point, if needed. Each lesson then goes through a
rigorous quality review before being released.
59
Support Stage.
The goal during this stage is to support
the initial launch and ongoing utilization of our lessons and to
enhance the products during the course of their useful life. We
break this stage down into three components: (i) content
development, where we design and develop teacher and student
training packages; (ii) alignment and standards analysis,
where we examine performance on state tests to determine the
extent to which we should refine or adjust the standard
alignments initially developed during the blueprint stage; and
(iii) long-term maintenance, where we maintain and update
the online and offline materials on an ongoing basis based upon
feedback from teachers, parents and students.
Evaluation Stage.
The final stage of the product
development cycle is the evaluation stage. During this phase, we
evaluate the overall performance of our product against the
original design specifications. We obtain measurement feedback
from a number of sources, including:
|
|
|
|
|
User Feedback
we receive a substantial
amount of feedback from teachers, parents and students. Some
feedback is directly incorporated into course modifications. In
addition, we observe students in our usability labs and visit
students and parents to better understand how our products are
being used;
|
|
|
|
Progress Reports
through our OLS, we are
able to monitor each students progress through a course.
This data helps us identify portions of a course that may be
especially difficult for students, and may require revision or
enhancements; and
|
|
|
|
State Test Scores
students in the
virtual public schools we serve participate in proctored state
exams. These tests provide an impartial assessment of how these
students are performing against established benchmarks and
within their state.
|
Using these sources of feedback, we can revise our courses as
necessary to achieve the desired learning objectives. We believe
that this ability to proactively respond to feedback and other
data in an efficient manner is a key competitive advantage
within the educational industry.
Channel
Development
K
12
receives numerous inquiries from school districts, legislators,
community leaders, educators and parents who express the desire
to offer a virtual public school alternative. Our school
development and public affairs groups work together with these
interested parties to identify and pursue opportunities to
expand the use of our products and services through new channels
and in new jurisdictions. Where interested parties seek to offer
a virtual public school alternative in their state, our public
affairs group works with them to establish the legal framework,
advocate for appropriate legislation and explain the educational
and fiscal benefits of our learning system. Our public affairs
group also seeks to increase public awareness and ensure
transparency in virtual schooling by supporting accountability
standards for virtual public schools.
Once there is legal and regulatory authorization for, as well as
sufficient interest in, a virtual public school, our school
development group engages state and school district officials,
legislators, community leaders, educators and parent groups
seeking to open a virtual public school, and initiates a dialog
with these interested parties to explain the steps necessary to
pursue this public school alternative in their jurisdiction. Our
school development group works with these officials and parent
groups in planning, developing and launching the virtual school.
We also offer assistance to independent school boards with
charter application and authorization processes.
After virtual public schools are approved and established, our
school development group engages school administrators and
maintains relationships with school officials in order to ensure
that they are aware of our product and services offerings and
that we understand their specific needs and goals.
Distribution
Channels
We distribute our products and services primarily to virtual
public schools and directly to consumers. We derive revenues
from virtual public schools by providing access to our OLS,
offline learning kits, student computers and a variety of
management and academic support services, ranging from turnkey
end-to-end management solutions to a single service to meet a
schools specific needs.
60
In fiscal year 2007, we derived more than 10% of our revenues
from each of the Ohio Virtual Academy, the Arizona Virtual
Academy, the Pennsylvania Virtual Charter School and the
Colorado Virtual Academy. In aggregate, these schools accounted
for 49% of our total revenues. As with all of the virtual public
schools we serve, each of these schools is subject to periodic
audits. Two such audits of the Colorado Virtual Academy have
initially resulted in the disallowance of funding with respect
to approximately 63 students alleged not to have satisfied
enrollment requirements and approximately 290 students alleged
not to have satisfied certain other documentation requirements
in the
2004-05
school year and approximately 90 students alleged not to have
satisfied enrollment requirements in the
2005-06
school year (out of total enrollments of approximately 2,000
students in 2004-05 and approximately 2,500 students in
2005-06). Certain of these determinations are being appealed,
but to the extent determined adversely to these schools, we
would be obligated to reimburse these schools pursuant to our
agreements with them to forgive expenses that they incur in
excess of their revenues. We have not received written notice of
any other claims or litigation involving these schools. We
provide our full turnkey solution pursuant to our contract with
the Ohio Virtual Academy, which terminates June 30, 2017
and provides for the parties to review the agreement in 2012.
The agreement is renewable automatically for an additional two
years unless the school notifies us one year prior to expiration
that it elects to terminate the contract. We provide our full
turnkey solution to the Arizona Virtual Academy, pursuant to a
contract with Portable Practical Education, Inc., an Arizona
not-for-profit organization holding the charter under which the
school operates, that expires June 30, 2010. We provide our
curriculum and online learning platform to the Pennsylvania
Virtual Charter School pursuant to a contract that terminates
June 30, 2009, and which automatically renews for an
additional three-years unless the school notifies us one year
prior to expiration that it elects to terminate the contract. We
provide turnkey solution pursuant to our contract with the
Colorado Virtual Academy, which terminates June 30, 2008.
We are currently engaged in negotiations with the Colorado
Virtual Academy for a new contract. Each of the contracts with
these schools provides for termination of the agreement if the
school ceases to hold a valid and effective charter from the
charter-issuing authority in their respective states.
Our direct-to-consumer product is purchased through our customer
call center or online by parents, who are looking either to
educate their children outside the public school system or as a
supplement to their childs existing public school
curriculum. The flexibility of our curriculum combined with the
assessment capabilities of our online delivery platform enables
us to modularize and repackage lesson modules that can be sold
as individual products. For example, if a child has particular
difficulties with fractions, the parent could purchase our
fractions module. The ability to rebundle individual lessons is
highly scalable and we believe this opportunity is significant.
In addition to these primary distribution channels, we are
continuously pursuing additional channels through which to offer
our learning system, including direct classroom instruction and
hybrid models. For example, we have piloted select grades and
subjects of our curriculum in classrooms in 11 states.
Although our in-class offering business is at a nascent stage,
we believe that this distribution channel offers significant
potential. Additionally, we have recently implemented a hybrid
offering in Chicago that combines some face-to-face time for
students and teachers in a traditional classroom setting along
with online instruction. In addition to expanding our offering
to additional jurisdictions within the United States, we intend
to pursue international opportunities where we believe there is
significant demand for a quality online education.
Student
Recruitment and Marketing
Our student recruitment and marketing team consisted of
44 employees as of June 30, 2007, and is responsible
for promoting our corporate brand, generating new student
enrollments and enhancing the experience of students and
families enrolled in the virtual public schools we serve. This
team employs a variety of strategies designed to better
understand and address the requirements of our target markets.
First, this team is responsible for defining our brand image and
associating our brand with the many positive attributes of our
learning system. We believe that a strong brand provides the
basis for our expansion into new states and other markets.
Second, our student recruitment and marketing team generates new
enrollments in the virtual public schools we serve through
targeted recruiting programs, which utilize coordinated direct
mailings, email marketing, print and radio advertising and
search engine marketing. In addition, our marketing team
conducts information sessions and workshops that provide
teachers and parents with the opportunity to learn about
K
12
and the products and services that we offer. We conducted more
than 2,500 such events during fiscal year 2007. We have found
that
61
effectively communicating the details and benefits of our
learning system is an important first step towards building a
core group of interested parties. Additionally, we believe that
our consistently high customer satisfaction rates serve as the
foundation for word-of-mouth referrals which supplement our
other recruiting efforts.
Finally, this team is responsible for enhancing our relationship
with students enrolled in the virtual public schools that we
serve to complement the relationship that these students have
with their teachers and school. In order to maintain a sense of
community, we host the
K
12
Community Chest website for students to interact online with our
Chief Learning Officer and with each other. We also send welcome
packages, conduct art contests, survey parents and provide
support to students through assigned support counselors under
our
K
12
HUG program.
Technology
As of June 30, 2007, we employed 59 employees in our
technology department. Our learning system, along with our back
office systems supporting order management, logistics and
e-commerce,
are built on our proprietary Service Oriented Architecture, or
SOA, to ensure high availability and redundancy and allow
flexibility and security to be core principles of our
systems foundation.
Service Oriented Architecture.
All of our
systems leverage our SOA built on top of Enterprise Java that
separates an implemented capability from a request flow that
utilizes those capabilities. This leverage provides us with the
ability to deliver different presentations against a single
request workflow. Additionally, this flexibility allows
iterative solutions to be developed expeditiously to meet both
present and future market needs. Our high availability and
scalability are also facilitated by this architecture. The SOA
also enables seamless integration with third-party solutions in
our platform with ease and efficiency.
Availability and Redundancy.
Our SOA allows
for a hardware topology where primary and secondary equipment
can be utilized at all network and application tiers. Each
application layer is load balanced across multiple servers,
which, along with our sophisticated state management
capabilities, allows for additional hardware to be inserted into
our network providing us with impressive scalability and
availability as evidenced by our greater than 99.9999% uptime
with our ever growing user base. We regularly backup critical
data and store this backup data at an offsite location.
Security.
Our security measures and policies
include dividing application layers into multiple zones
controlled by firewall technology. Sensitive communications are
encrypted between client and server and our server-to-server
accessibility is strictly controlled and monitored.
Physical Infrastructure.
We utilize the best
of breed hardware from industry leading vendors including Cisco,
F5, Oracle, Sun, Microsoft, Dell, Intel, and NetApp to provide a
foundation for our SOA. Our systems are housed offsite in a
state of the art data center that provides robust, redundant
network backbone and power. We vigilantly monitor our physical
infrastructure for security, availability, and performance.
Competition
We face varying degrees of competition from a variety of
education companies because our learning system encompasses many
components of the educational development and delivery process.
We compete primarily with companies that provide online
curriculum and school support services to
K-12
virtual
public schools. These companies include Connections Academy,
LLC, White Hat Management, LLC and National Network of Digital
Schools. We also face competition from curriculum developers,
including traditional textbook publishers such as the
McGraw-Hill Companies, Harcourt, Inc., Pearson plc and Houghton
Mifflin Riverdeep Group plc. Additionally, we expect increased
competition from post-secondary and supplementary education
providers that have begun to establish a presence in the
K-12
virtual
school sector, including Apollo Group, Pearson plc and Kaplan,
Inc.
We believe that the primary factors on which we compete are:
|
|
|
|
|
track record of academic results and customer satisfaction;
|
|
|
|
quality of curriculum and online delivery platform;
|
|
|
|
qualifications and experience of teachers;
|
62
|
|
|
|
|
comprehensiveness of school management and student support
services; and
|
|
|
|
cost of the solution.
|
We are unable to provide meaningful data with respect to our
market share. We believe that we serve the market for public
education, and in any jurisdiction in which we operate, we serve
far less than 1% of the public school students in the geographic
area in which virtual school enrollments are drawn. In addition,
our integrated learning system consists of components that face
competition from many different education industry segments,
such as traditional textbook publishers, test and assessment
firms and private education management companies. Finally, our
learning system is designed to operate domestically and
internationally over the Internet, and thus the geographic
addressable market is global and indeterminate in size.
Intellectual
Property
Since our inception, we have invested more than $95 million
to develop our proprietary curriculum and OLS. We continue to
invest in our intellectual property as we develop more courses
for new grades and expand into adjacent education markets, both
in the U.S. and overseas. These intellectual property
assets are critical to our success and we avail ourselves of the
full protections provided under the patent, copyright, trademark
and trade secrets laws. We also routinely utilize
confidentiality and licensing agreements with our employees,
students, the virtual public schools that we serve,
direct-to-consumer customers, independent contractors and other
businesses and persons with which we have commercial
relationships.
On May 1, 2007, the United States Patent and Trademark
Office (USPTO) granted us the patent for our System and
Method of Virtual Schooling (Patent No. 7,210,938),
which provides us with a period of exclusive use until
January 26, 2024. In general terms, this patent covers the
hardware and network infrastructure of our online school,
including the system components for creating and administering
assessment tests, the planner, lesson progress tracker and
instructional sequencer. We also have four additional
international and five additional U.S. patents pending, and
several pending provisional U.S. patent applications.
We own the copyright in over 11,000 lessons contained in 87
courses that make up our proprietary curriculum, including our
online lessons and offline learning kits, and we register this
growing lesson portfolio with the U.S. Copyright Office as
each new course is completed or updated. We own and use the
domain names K12 (.com, .org) and
K-12
(.com,
.net, .org) as well as the trademark and service mark,
K
12
.
In addition, we have applied to the USPTO to register the
trademark Unleash the
x
Potential.
Students who enroll in the virtual public schools we serve are
granted a license to use our software in order to access our
learning system. Similarly, virtual public schools are granted a
license to use our learning system in order to access SAMS and
our other systems. These licenses are intended to protect our
ownership and the confidentiality of the embedded information
and technology contained in our software and systems. We also
own the trademarks and service marks that we use as part of the
student recruitment and branding services we provide to virtual
public schools. Those marks are licensed to the schools for use
during the term of the products and services agreements.
Our employees, contractors and other parties with access to our
confidential information sign agreements that prohibit the
unauthorized use or disclosure of our proprietary rights,
information and technology.
Operations
An essential component of the
K
12
courses are the offline learning kits that accompany our online
lessons. A student enrolling in one of our courses receives
multiple textbooks, art supplies, laboratory supplies
(e.g. microscopes and scales) and other reference materials
designed to enhance the learning experience. We package these
books and materials into course-specific learning kits. Because
each students curriculum is customized, the combination of
kits for each student must also be customized. In fiscal year
2007, we assembled approximately 2.5 million items into
more than 200,000 kits.
Over our six years of operation, we believe that we have gained
significant experience in the fulfillment of offline materials
and that this experience provides us with an advantage over many
of our current and potential future competitors. We have
developed strong relationships with partners allowing us to
source goods at favorable
63
price, quality and service levels. Through our fulfillment
partner located in Harrisonburg, Virginia, we store our
inventory, build our learning kits and ship the kits to students
throughout the United States. We have invested in systems
including our Order Management System (OMS), to automatically
translate the curriculum selected by each enrolled student into
an order to build the corresponding learning kit. In 2008, we
plan to establish a second logistics and fulfillment center in
the western portion of the United States to support our growth
and to mitigate single-location fulfillment risk.
For many of our virtual public school customers, we attempt to
reclaim any materials that are not consumed during the course of
the school year. These items, once returned to our fulfillment
center, are refurbished and included in future learning kits.
This reclamation process allows us to maintain lower materials
costs.
In order to ensure that students in virtual public schools have
access to our OLS, we often provide students with a computer and
all necessary support. We source computers and ship them to
students when they enroll and reclaim the computers at the end
of a school year or upon termination of their enrollment or
withdrawal from the virtual public school in which they are
enrolled. As of June 30, 2007, we had approximately
20,370 personal computers deployed for use by students.
Our fulfillment activities are highly seasonal, and are centered
around the start of school in August or September. Accordingly,
approximately 70% of our annual materials receiving occurs
between March and May, approximately 75% of our annual offline
learning kit assembly is accomplished between May and July, and
approximately 75% of customer item fulfillment and shipping
occurs between July and October.
Properties
The Companys headquarters are located in approximately
70,000 square feet of office space in Herndon, Virginia
under a lease that expires in April 2013 and a sublease that
expires in September 2009.
Employees
As of June 30, 2007, we had 557 employees. In
addition, there are more than 650 teachers who are employed
by virtual schools we serve, but who we manage under turnkey
solution contracts with those schools. No
K
12
employees are union employees; however, certain virtual public
schools we serve employ unionized teachers. We believe that our
employee relations are good.
We have an agreement with a professional employer organization
(PEO), to manage all payroll processing, workers
compensation, health insurance, and other employment-related
benefits for our employees. The PEO is a co-employer of our
employees along with us. Although the PEO processes our payroll
and pays our workers compensation, health insurance and
other employment-related benefits, we are ultimately responsible
for such payments and are responsible for complying with state
and federal employment regulations. We pay the PEO a fee based
on the number of employees we have.
Legal
Proceedings
In the ordinary conduct of our business, we are subject to
lawsuits and other legal proceedings from time to time. There
are currently two pending lawsuits in which we are involved,
Johnson v. Burmaster
and
Illinois v. Chicago Virtual
Charter School
that, in each case, have been brought by
teachers unions seeking the closure of the virtual public
schools we serve in Wisconsin and Illinois, respectively.
While we prevailed on summary judgment at the circuit court
level in
Johnson v. Burmaster
, and recently won a
preliminary motion in
Illinois v. Chicago Virtual Charter
School
, it is not possible to predict the final outcome of
these matters with any degree of certainty. Even so, we do not
believe at this time that a loss in either case would have a
material adverse impact on our future results of operations,
financial position or cash flows. Depending on the legal theory
advanced by the plaintiffs, however, there is a risk that a loss
in these cases could have a negative precedential effect if like
claims were to be advanced and succeed under similar laws in
other states where we operate. The cumulative effect under those
circumstances could be material.
64
Johnson v.
Burmaster
In 2003, the Northern Ozaukee School District (NOSD) in the
State of Wisconsin established a virtual public school, the
Wisconsin Virtual Academy (WIVA), and entered into a service
agreement with us for online curriculum and school management
services. On January 6, 2004, Stan Johnson, et al.,
and the Wisconsin Education Association Council (WEAC) filed
suit in the Circuit Court of Ozaukee County against the
Superintendent of the Department of Public Instruction (DPI),
Elizabeth Burmaster, the NOSD and K12 Inc. The plaintiffs
alleged that the NOSD violated the state charter school, open
enrollment and teacher-licensure statutes when it authorized
WIVA.
On March 16, 2006, the Circuit Court issued a Decision and
Order upholding on Summary Judgment that WIVA complies with
applicable law
(No. 04-CV-12
). WEAC and DPI filed an appeal in the Wisconsin Court of
Appeals, District II
(No. 2006-AP/01380).
Should the plaintiff prevail and state funding of open
enrollment payments to the NOSD are enjoined, a claim could be
made that the Company must indemnify the NOSD for expenses
approximating $2.5 million.
Illinois v.
Chicago Virtual Charter School
On October 4, 2006, the Chicago Teachers Union (CTU) filed
a citizen taxpayers lawsuit in the Circuit Court of Cook County
challenging the decision of the Illinois State Board of
Education to certify the Chicago Virtual Charter School (CVCS)
and to enjoin the disbursement of state funds to the Chicago
Board of Education under its contract with the CVCS.
Specifically, the CTU alleges that the Illinois charter school
law prohibits any home-based charter schools and
that CVCS does not provide sufficient direct
instruction by certified teachers of at least five clock
hours per day to qualify for funding. K12 Inc. and K12 Illinois
LLC were also named as defendants. On May 16, 2007, the
Court dismissed K12 Inc. and K12 Illinois LLC from the case and
on June 15, 2007, the plaintiffs filed a second amended
complaint. We continue to participate in the defense of CVCS
under an indemnity obligation in our service agreement with that
school, which requires us to indemnify CVCS against certain
liabilities arising out of the performance of the service
agreement and certain other claims and liabilities, including
liabilities arising out of challenges to the validity of the
virtual school charter.
65
We and the virtual public schools that purchase our curriculum
and management services are subject to regulation by each of the
states in which we operate, including Colorado, Arizona, Idaho,
Florida, Wisconsin, Arkansas, Texas, Illinois, Minnesota,
Kansas, Utah, Nevada, California, Georgia, Ohio, Pennsylvania,
Washington and the District of Columbia. The state laws and
regulations that directly impact our business are those that
authorize or restrict our ability to operate virtual public
schools, and those that restrict virtual public school growth
and funding. In addition, there are state laws and regulations
that are applicable to virtual public schools that indirectly
affect our business insofar as they affect these virtual public
schools ability to operate and receive funding. Finally,
to the extent a virtual school obtains federal funds, such as
through a grant program or financial support dedicated for the
education of low-income families, these schools then become
subject to additional federal regulation. These federal
regulations have not had a material impact on our business.
State Laws Authorizing or Restricting Virtual Public
Schools.
The authority to operate a virtual
public school is dependent on the laws and regulations of each
state. Laws and regulations vary significantly from one state to
the next and are constantly evolving. In states that have
implemented specific legislation to support virtual public
schools, the schools are able to operate under these statutes.
Other states provide for virtual public schools under existing
charter school legislation or provide that school districts
and/or
state
education agencies may authorize them. Some states do not
currently have legislation that provides for virtual public
schools or have requirements that effectively prohibit virtual
public schools and, as a result, may require new legislation
before virtual public schools can open in the state.
State Laws and Regulations Applicable to Virtual Public
Schools.
Virtual public schools that purchase our
curriculum and management services are often governed and
overseen by a non-profit or local or state education agency,
such as an independent charter school board, local school
district or state education authority. We generally receive
funds for products and services rendered to operate virtual
schools under detailed service agreements with that governing
authority. Virtual public schools are typically funded by state
or local governments on a per student basis. A virtual school
that fails to comply with the state laws and regulations
applicable to it may be required to repay these funds and could
become ineligible for receipt of future state funds. We are not
aware of any material
non-compliance
with these state regulations by the virtual public schools we
serve.
To be eligible for state funding, some states require that
virtual schools be organized under not-for-profit charters
exempt from taxation under Section 501(c)(3) of the
Internal Revenue Code. The schools must then be operated
exclusively for charitable educational purposes, and not for the
benefit of private, for-profit management companies. The board
or governing authority of the not-for-profit virtual school must
retain ultimate accountability for the schools operations
to retain its tax-exempt status. It may not delegate its
responsibility and accountability for the schools
operations. Our service agreements with these virtual schools
are therefore structured to ensure the full independence of the
not-for-profit board and preserve its ability to exercise its
fiduciary obligations to operate a virtual public school.
Laws and regulations affect many aspects of operating a virtual
public school. They can dictate the content and sequence of the
curriculum, the requirements to earn a diploma, use of approved
textbooks, the length of the school year and the school day, the
assessment of student performance, and any accountability
requirements. In addition, a virtual public school may be
obligated to comply with state requirements to offer programs
for specific populations, such as students at risk of dropping
out of school, gifted and talented students, non-English
speaking students, pre-kindergarten students, and students with
disabilities. Tutoring services and the use of technology may
also be regulated. Other state laws and regulations may affect
the schools compulsory attendance requirements, treatment
of absences and
make-up
work, and access by parents to student records and teaching and
testing materials. Additionally, states have various
requirements concerning the reporting of extensive student data
that may apply to the school. A virtual public school may have
to comply with state requirements that school campuses report
various types of data as performance indicators of the success
of the program.
States have laws and regulations concerning certification,
training, experience and continued professional development of
teachers and staff with which a virtual public school may be
required to comply. There are also numerous laws pertaining to
employee salaries and benefits, statewide teacher retirement
systems, workers compensation, unemployment benefits, and
matters related to employment agreements and procedures for
66
termination of school employees. A virtual public school must
also comply with requirements for performing criminal background
checks on school staff, reporting criminal activity by school
staff and reporting suspected child abuse.
As with any public school, virtual public schools must comply
with state laws and regulations applicable to governmental
entities, such as open meetings laws, which may require the
board of trustees of a virtual public school to hold its
meetings open to the public unless an exception in the law
allows an executive session. Failure to comply with these
requirements may lead to personal civil
and/or
criminal penalties for board members or officers. Virtual public
schools must also comply with public information or open records
laws, which require them to make school records available for
public inspection, review and copying unless a specific
exemption in the law applies. Additionally laws pertaining to
records privacy and retention and to standards for maintenance
of records apply to virtual public schools.
Other types of regulation applicable to virtual public schools
include restrictions on the use of public funds, the types of
investments made with public funds, the collection of and use of
student fees, and controlling accounting and financial
management practices.
There remains uncertainty about the extent to which we may be
required to comply with state laws and regulations applicable to
traditional public schools because the concept of virtual public
schools is relatively new. Although we receive state funds
indirectly, according to the terms of each service agreement
with the local public school entity, our receipt of state funds
subjects us to extensive state regulation and scrutiny. Several
states have commenced audits, some of which are still pending,
to verify enrollment, attendance, fiscal accountability, special
education services, and other regulatory issues. While we may
believe that a virtual public school we serve is compliant with
state law, an agencys different interpretation of law in a
particular state could result in non-compliance, potentially
affecting funding.
Regulations Restricting Virtual Public School Growth and
Funding.
As a new public schooling alternative,
some state and regulatory authorities have elected to proceed
cautiously with virtual public schools while providing
opportunities for taxpayer families seeking this alternative.
Regulations that control the growth of virtual public schools
range from prescribing the number of schools in a state to
limiting the percentage of time students may receive instruction
online. Funding regulations can also have this effect.
Regulations that hinder our ability to serve certain
jurisdictions include: restrictions on student eligibility, such
as mandating attendance at a traditional public school prior to
enrolling in a virtual public school or course completion
(Arizona and Colorado); caps on the total number of students in
a virtual school (Arkansas, Idaho, Wisconsin, Texas, Illinois,
Florida and the District of Columbia); restrictions on grade
levels served (Nevada and Arkansas); geographic limitations on
enrollments (California); fixing the percentage of per pupil
funding that must be paid to teachers; state-specific curriculum
requirements; and limits on the number of charters that can be
granted in a state.
Funding regulations for virtual schools can take a variety of
forms. These regulations include:
(i) attendance some state daily attendance
rules were designed for traditional classroom procedures and
applying them to track daily attendance and truancy in an online
setting can cause disputes to arise over interpretation and
funding; (ii) enrollment eligibility some states
place restrictions on the students seeking to enroll in virtual
schools, resulting in lower aggregate funding levels; and
(iii) teacher contact time some states have
regulations that specify minimum levels of teacher-student
face-to-face time, which can create logistical challenges for
statewide virtual schools, reduce funding and eliminate some of
the economic, academic and technological advantages of virtual
learning.
Federal and State Grants.
We have worked with
certain entities to secure public and grant funding that flows
to virtual public schools that we serve. These grants are
awarded to the not-for-profit entity that holds the charter of
the virtual public school on a competitive basis in some
instances and on an entitlement basis in other instances. Grants
awarded to public schools and programs whether by a
federal or state agency or nongovernmental
organization often include reporting requirements,
procedures, and obligations.
Federal Laws and Regulations Applicable to Education
Programs.
Some of the virtual public schools we
serve may receive federal funds under Title I (funding for
education of children from low-income families), Title II
67
(funding for the professional development of teachers),
Title III (funding for technology programs), Title VII
(funding for bilingual education programs) and Title X
(start-up
funding for charter schools) of the Elementary and Secondary
Education Act. The schools must comply with applicable federal
laws and regulations to remain eligible for receipt of federal
funds. The schools we manage could lose all or part of these
funds if they fail to comply with the applicable statutes or
regulations, if the federal authorities reduce the funding for
the programs or if the schools are determined to be ineligible
to receive funds under such programs. Under the terms of our
service agreements, we assist virtual public schools in
fulfilling these reporting requirements.
Four primary federal laws are directly applicable to the
day-to-day provision of educational services we provide to
virtual public schools:
|
|
|
|
|
No Child Left Behind (NCLB) Act.
Through the
funding of the Title I programs for disadvantaged students
under NCLB, the federal government requires public schools to
develop a state accountability system based on academic
standards and assessments developed by the state, which are
applicable to all public school students. Each state must
determine a proficiency level of academic achievement based on
the state assessments, and must determine what constitutes
adequate yearly progress (AYP) toward that goal. NCLB has a
timeline to ensure that no later than the
2013-14
school year, all students, including those in all identified
subgroups (such as economically disadvantaged, limited English
proficient and minority students,), will meet or exceed the
state proficient level of academic achievement on state
assessments. The progress of each school is reviewed annually to
determine whether the school is making adequate yearly progress.
If a Title I school does not make adequate yearly progress
as defined in the states plan, the local education agency
(LEA) is required to identify the school as
needing school
improvement
, and to provide all students enrolled in the
school with the option to transfer to another public school
served by the LEA, which may include a virtual public school.
The LEA must develop a school improvement plan for each school
identified as needing improvement in consultation with parents,
staff and outside experts and this plan must be implemented not
later than the beginning of the next full school year. If the
school does not make adequate yearly progress in subsequent
years, the school transfer option remains open to students and
other corrective action must be taken ranging from providing
supplemental education services to the students who remain in
the school to taking corrective action including, but not
limited to, replacing school staff, implementing a new
curriculum, appointing outside experts to advise the school,
extending the school year or the school day, reopening the
school as a public charter school with a private management
company or turning over the operation of the school to the state
educational agency.
|
Another provision of NCLB requires public school programs to
ensure that all teachers are highly qualified. A highly
qualified teacher means one who has: (1) obtained full
state certification or licensure as a teacher and who has not
had certification or licensure requirements waived on an
emergency, temporary or provisional basis; (2) obtained a
bachelors degree; and (3) demonstrated competence in
the academic subject the teacher teaches. All teacher aides
working in a school supported with Title I funds must be
highly qualified which means the person must have a high school
diploma or its equivalent and one of the following: completed at
least two years of study in an institution of higher education,
obtained an associates or higher degree, or met a rigorous
standard of quality demonstrated through a formal state or local
assessment. Virtual public schools using our products and
services may be required to meet these requirements for any
persons who perform instructional services.
Virtual schools that receive Title I funding and use our
products and services may be required to provide parents of
Title I students with a variety of notices regarding the
teachers and teachers aides that teach their children. In
addition, if these schools serve limited English proficient
(LEP) children, they may be required to provide a variety of
notices to the parents regarding the identification of the
student as LEP and certain information about the instruction to
be provided to the student, as well as the right to remove or
refuse to enroll the student in the LEP program. Finally, these
schools may also be required annually to develop, with input
from parents of Title I students, and implement a written
policy on parental involvement in the education of their
children, to hold annual meetings with these parents and to
provide these parents with assistance in various areas to help
the parents to work with their children to improve student
achievement.
68
Under NCLB, even schools that do not receive Title I
funding must provide certain notices to parents. For example,
schools may be required to provide a school report card and
identify whether any school has been identified as needing
improvement and for how long. Parents also must be provided data
that will be used to determine adequate yearly progress. Virtual
public schools may be contacted by military recruiters who have
the right to access the names, addresses and telephone numbers
of secondary school students for military recruiting purposes.
Additionally, virtual public schools may be required to notify
parents that they have the option to request that this
information not be released to military recruiters or to
institutions of higher education.
|
|
|
|
|
Individuals with Disabilities Education Act
(IDEA).
The IDEA is implemented through
regulations governing every aspect of the special education of a
child with one or more of the specific disabilities listed in
the act. The IDEA created a responsibility on the part of a
school to identify students who may qualify under the IDEA and
to perform periodic assessments to determine the students
needs for services. A student who qualifies for services under
the IDEA must have in place an individual education plan, which
must be updated at least annually, created by a team consisting
of school personnel, the student, and the parent. This plan must
be implemented in a setting where the child with a disability is
educated with non-disabled peers to the maximum extent
appropriate. The act provides the student and parents with
numerous procedural rights relating to the students
program and education, including the right to seek mediation of
disputes and make complaints to the state education agency. The
schools we manage are responsible for ensuring the requirements
of this act are met. The virtual schools could be required to
comply with requirements in the act concerning teacher
certification and training. We or the virtual public school
could be required to provide additional staff, related services
and supplemental aids and services at our own cost to comply
with the requirement to provide a free appropriate public
education to each child covered under the IDEA. If we fail
to meet this requirement, we or the virtual public school could
lose federal funding and could be liable for compensatory
educational services, reimbursement to the parent for
educational service the parent provided, and payment of the
parents attorneys fees.
|
|
|
|
Section 504 of the Rehabilitation Act of
1973.
A virtual public school receiving federal
funds is subject to Section 504 of the Rehabilitation Act
of 1973 (Section 504) insofar as the regulations
implementing the act govern the education of students with
disabilities as well as personnel and parents. Section 504
prohibits discrimination against a person on the basis of
disability in any program receiving federal financial assistance
if the person is otherwise qualified to participate in or
receive benefit from the program. Students with disabilities not
specifically listed in the IDEA may be entitled to specialized
instruction or related services pursuant to Section 504 if
their disability substantially limits a major life activity.
There are many similarities between the regulatory requirements
of Section 504 and the IDEA; however this is a separate law
which may require a virtual public school to provide a qualified
student with a plan to accommodate his or her disability in the
educational setting. If a school fails to comply with the
requirements and the procedural safeguards of Section 504,
it may lose federal funds even though these funds flow
indirectly to the school through a local board. In the case of
bad faith or intentional wrongdoing, some courts have awarded
monetary damages to prevailing parties in Section 504
lawsuits.
|
|
|
|
Family Educational Rights and Privacy
Act.
Virtual public schools are subject to the
Family Educational Rights and Privacy Act which protects the
privacy of a students educational records and generally
prohibits a school from disclosing a students records to a
third-party without the parents prior consent. The law
also gives parents certain procedural rights with respect to
their minor childrens education records. A schools
failure to comply with this law may result in termination of its
eligibility to receive federal education funds.
|
If we fail to comply with other federal laws, including federal
civil rights laws not specific to education programs, we could
be determined ineligible to receive funds from federal programs
or face criminal or civil penalties.
69
Directors,
Executive Officers and Other Key Employees
The following table sets forth information concerning our
directors, executive officers and other key members of our
management team as of September 21, 2007:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
|
Executive
Officers
|
|
|
|
|
|
|
Ronald J. Packard
|
|
|
43
|
|
|
Chief Executive Officer, Founder
and Director
|
John F. Baule
|
|
|
43
|
|
|
Chief Operating Officer and Chief
Financial Officer
|
Bruce J. Davis
|
|
|
42
|
|
|
Executive Vice President, School
Services
|
Nancy Hauge
|
|
|
53
|
|
|
Senior Vice President, Human
Resources
|
Howard D. Polsky
|
|
|
56
|
|
|
Senior Vice President, General
Counsel and Secretary
|
Bror V. H. Saxberg
|
|
|
47
|
|
|
Chief Learning Officer
|
Celia M. Stokes
|
|
|
43
|
|
|
Chief Marketing Officer
|
Key Employees
|
|
|
|
|
|
|
Mary C. Desrosiers
|
|
|
43
|
|
|
Senior Vice President, Strategic
Relationships
|
Bryan W. Flood
|
|
|
41
|
|
|
Senior Vice President, Public
Affairs
|
George B. Hughes
|
|
|
48
|
|
|
Senior Vice President, School
Services
|
John P. Olsen
|
|
|
40
|
|
|
Senior Vice President, High School
Programs
and Classroom Solutions
|
Peter G. Stewart
|
|
|
38
|
|
|
Senior Vice President, School
Development
|
Maria A. Szalay
|
|
|
41
|
|
|
Senior Vice President, Product
Development
|
Elton R. Williams
|
|
|
45
|
|
|
Senior Vice President, Systems and
Technology
|
Nonemployee
Directors
|
|
|
|
|
|
|
Andrew H. Tisch
|
|
|
57
|
|
|
Chairman
|
Liza A. Boyd
|
|
|
32
|
|
|
Director
|
Guillermo Bron
|
|
|
55
|
|
|
Director
|
Steven B. Fink
|
|
|
55
|
|
|
Director
|
Dr. Mary H. Futrell
|
|
|
67
|
|
|
Director
|
Thomas J. Wilford
|
|
|
64
|
|
|
Director
|
Executive
Officers
Ronald
J. Packard, Chief Executive Officer, Founder and
Director
Ronald J. Packard started
K
12
in 2000 and has served as Chief Executive Officer since May 2007
after having served as Chairman of the Board of Directors.
Previously, Mr. Packard served as Vice President of
Knowledge Universe from 1997 to 2000, and he served as Chief
Executive Officer of Knowledge Schools, a provider of early
childhood education and after school companies, from 1998 to
2002. Mr. Packard has also held positions at
McKinsey & Company from 1989 to 1993 and Goldman Sachs
in mergers and acquisitions from 1986 to 1988. Additionally,
Mr. Packard has served on the Advisory Board of the
Department of Defense Schools since 2002, and from 2004 to 2006
served as a director of Academy 123. Mr. Packard holds B.A.
degrees in Economics and Mechanical Engineering from the
University of California at Berkeley, an M.B.A. from the
University of Chicago, and he was a Chartered Financial Analyst.
70
John
F. Baule, Chief Operating Officer and Chief Financial
Officer
John F. Baule joined us in March 2005, and serves as Chief
Operating Officer and Chief Financial Officer. Previously,
Mr. Baule spent five years at Headstrong, a global
consultancy services firm, first serving as Senior Vice
President of Finance from 1999 until 2001 and later as Chief
Financial Officer from 2001 to 2004. Prior to Headstrong,
Mr. Baule worked for Bristol-Myers Squibb (BMS) from 1990
to 1999, initially joining their corporate internal audit
division. He then spent six years with BMS based in the Asia
Pacific region, first as the Director of Finance for BMS
Philippines, and then as the Regional Finance Director for BMS
Asia-Pacific. He later served as Director of International
Finance for the BMS Nutritional Division. Mr. Baule began
his career working in the audit services practice at KPMG from
1986 to 1990. Mr. Baule holds a B.B.A. in Accounting from
the College of William and Mary and he is a Certified Public
Accountant.
Bruce
J. Davis, Executive Vice President, School
Services
Bruce J. Davis joined us January 2007, and serves as Executive
Vice President, School Services. From 2002 until joining us,
Mr. Davis ran his own strategy consultancy where his
clients included Laureate Education, Discovery Communications,
Pearson Publishing, Sylvan Learning Systems, Educate Inc.,
AICPA, and USAID. Mr. Davis previously held the position of
Chief Executive Officer at Medasorb Technologies, a
biotechnology company, from 2001 to 2002 and at Mindsurf
Networks, a wireless educational system provider, from 1999 to
2000. He also served as Chief Operating Officer of Prometric, a
computer test administration company, from 1994 to 1999. Prior
to Prometric, he was a senior consultant with Deloitte and
Touche from 1985 to 1991 in the Information Systems Strategy
group where he managed their IT practice in Egypt.
Mr. Davis holds a B.S. in Computer Science from Loyola
College and an M.B.A. from Columbia University.
Nancy
Hauge, Senior Vice President, Human Resources
Nancy H. Hauge joined us in February 2006, and serves as Senior
Vice President, Human Resources. From 2004 to 2006,
Ms. Hauge served as Chief Customer Advocate and Senior Vice
President of Human Resources for Ruckus Network, a digital media
company. Prior to Ruckus, she founded and operated
54th Street Partners, an international management
consulting company, from 1999 to 2004. Ms. Hauge has also
held the position of Vice President of Human Resources at Ridge
Technologies, Crag Technologies, Noahs New York Bagels,
and Gymboree Corporation. Previously, Ms. Hauge held
multiple senior management positions in human resources,
strategic planning and quality at Sun Microsystems from 1984 to
1994.
Howard
D. Polsky, Senior Vice President, General Counsel and
Secretary
Howard D. Polsky joined us in June 2004, and serves as Senior
Vice President, General Counsel and Secretary. Mr. Polsky
previously held the position of Vice President and General
Counsel of Lockheed Martin Global Telecommunications from 2000
to 2002. Prior to Lockheed Martin, Mr. Polsky worked at
COMSAT Corporation from 1992 to 2000, initially serving as Vice
President and General Counsel of COMSATs largest operating
division, and subsequently serving on the executive management
team as Vice President of Federal Policy and Regulation. From
1983 to 1992, Mr. Polsky was a partner at Wiley,
Rein & Fielding after having worked at
Kirkland & Ellis. Mr. Polsky began his legal
career at the Federal Communications Commission. Mr. Polsky
received a B.A. in Government from Lehigh University, and a J.D.
from Indiana University.
Bror
V. H. Saxberg, Chief Learning Officer
Bror V.H. Saxberg joined us in February 2000, and serves as
Chief Learning Officer. From 1998 to 2000, Dr. Saxberg
served as Vice President of Operations at Knowledge Testing
Enterprises, a developer of web-based assessments for IT skills
owned by Knowledge Universe; he was a Vice President at
Knowledge Universe from 1997 through 2000 as well. Prior to
Knowledge Universe, Dr. Saxberg held the position of
Publisher and General Manager at DK Multimedia, the North
American subsidiary of educational and reference publisher
Dorling Kindersley, from 1995 to 1997. Previously,
Dr. Saxberg also worked as a consultant at
McKinsey & Company from 1990 to 1995. Dr. Saxberg
holds B.S. degrees in Electrical Engineering and Mathematics
from the University of
71
Washington, an M.A. in Mathematics from Oxford University, an
M.A. and Ph.D. in Electrical Engineering and Computer Science
from Massachusetts Institute of Technology, and an M.D. from
Harvard University.
Celia
M. Stokes, Chief Marketing Officer
Celia M. Stokes joined us in March 2006, and serves as Chief
Marketing Officer. Before joining
K
12
,
Ms. Stokes served as Vice President of Marketing at
Independence Air from 2003 to 2006. Previously, Ms. Stokes
ran her own marketing firm providing consulting services to
organizations such as Fox TV, PBS, the National Gallery of Art,
JWalter Thompson, and ADP. From 1993 to 1998, Ms. Stokes
served in successive roles leading to Vice President of
Marketing at Bell Atlantic and at a joint venture of Bell
Atlantic and two other Regional Bell Operating Companies. From
1990 to 1993, Ms. Stokes was Manager of Marketing at
Software AG, and from 1988 to 1990, was Client Group Manager at
Targeted Communications, an Ogilvy & Mather Direct
company. Ms. Stokes holds a B.A. in Economics from the
University of Virginia.
Key
Employees
Mary
C. Desrosiers, Senior Vice President, Strategic
Relationships
Mary C. Desrosiers joined us in May 2000, and currently serves
as Senior Vice President, Strategic Relationships. From May 2000
to October 2003 she headed our Product Development department.
From May 1999 until joining us, Ms. Desrosier was managing
director at Origin Technology
,
a national
e-business
practice. At Origin Technology, Ms. Desrosiers designed and
produced applications for the educational, training, and
commercial markets. Previously, she was a senior director for
Philips Electronics NV, where she established Fountain Works, an
internal Internet technology organization, and helped develop
and implement global
e-business
strategies. Ms. Desrosiers also established and managed
Studio Interactive, a division of Philips Media, which produced
award-winning educational software. Ms. Desrosiers started
her career at Booz, Allen. Ms. Desrosier holds a B.S. from
St. Marys College and an M.B.A. from Marymount
University.
Bryan
W. Flood, Senior Vice President, Public Affairs
Bryan W. Flood joined us in June 2002, and serves as Senior Vice
President, Public Affairs. From 1996 to 2001, Mr. Flood
served as Vice President of the MPGH Agency, a public affairs
consulting firm. Mr. Flood previously served as National
Spokesman for the Lamar Alexander for President campaign from
1995 to 1996. Prior to that, Mr. Flood served as spokesman
for the reelection campaign for Gov. John Engler (MI) in
1994. Additionally, Mr. Flood held the positions of
Director of Communications for the Michigan Republicans State
Committee from 1991 to 1993 and as Spokesman for Rinfret for
Governor (NY). Mr. Flood started his career as a
Legislative Aide for the Town of Brookhaven, New York.
Mr. Flood holds a B.A. in Public Policy from New College of
Florida.
George
B. (Chip) Hughes, Jr., Senior Vice President, School
Services
George B. (Chip) Hughes, Jr. joined us in July 2007,
and serves as Senior Vice President, School Services. From 1997
until joining us, Mr. Hughes was a co-founder and Managing
Director of Blue Capital Management, L.L.C., a middle-market
private equity firm. Mr. Hughes previously served as a
Partner of McKinsey & Company, Inc., a global
management consulting firm, in McKinseys Los Angeles and
New Jersey offices, where he was a member of the firms
Strategy and Health Care practices. Mr. Hughes serves on
the National Board of Recording for the Blind &
Dyslexic, and on the Board of Councilors of the College of
Letters, Arts & Sciences at the University of Southern
California. Previously he was a member of the Board of Trustees
at Big Brothers of Greater Los Angeles and of Big Brothers Big
Sisters of Morris, Bergen, and Passaic Counties (New Jersey).
Mr. Hughes holds a B.A. in Economics from the University of
Southern California and an M.B.A. from Harvard University.
John
P. Olsen, Senior Vice President, High School Programs and
Classroom Solutions
John Olsen joined us in March 2004 and currently serves as
Senior Vice President, High School Programs and Classroom
Solutions. From March 2004 to October 2006 Mr. Olsen served as
Senior Vice President, Operations and from October 2004 to March
2006 was also head of our Marketing department. Prior to joining
us, he was Vice President of Performance Improvement for America
Onlines Broadband, Premium, and Advanced Technology
72
Services. Mr. Olsen previously served as a management
consultant at Diamond Technology Partners where he practiced in
the telecommunications, financial services and consumer products
industries. From May 1989 to August 1997 Mr. Olsen served
in the U.S. Navy as a Supply Officer in activities ranging
from aviation logistics to major weapons systems acquisition to
duty as a White House Social Aide. Mr. Olsen holds a B.S.
from the United States Naval Academy and an MBA from the
University of Michigan.
Peter
G. Stewart, Senior Vice President, School
Development
Peter G. Stewart joined us in September 2000, and serves as
Senior Vice President, School Development. From 1990 to 2000,
Mr. Stewart worked at urban, rural, and international
schools in various roles including teacher, school principal,
head of school and curriculum director. Mr. Stewart holds a
B.A. in English from Williams College and a M.A. from Columbia
University Teachers College.
Maria
A. Szalay, Vice President, Product Development
Maria A. Szalay joined us in March 2001, and serves as Vice
President, Product Development. From 1999 to 2001,
Ms. Szalay served as Practice Director at Operon Partners,
an
e-business
consulting firm. Prior to that, Ms. Szalay worked at
Telecom New Zealand from 1994 to 1999 and served as a management
consultant at KPMG from 1990 to 1994. Previously,
Ms. Szalay served as a Client Portfolio Analyst at Shearson
Lehman from 1988 to 1990. Ms. Szalay holds a B.S. in
Finance and a B.A. in German Literature from Virginia
Polytechnic Institute & State University and an M.B.A.
from American University.
Elton
R. Williams, Senior Vice President, Systems and
Technology
Elton R. Williams joined us in August 2006, and serves as Senior
Vice President, Systems and Technology. From 2005 to 2006,
Mr. Williams served as Senior Vice President of Product
Development and Operations for Ruckus Network, a digital media
company. From 1993 to 2004, Mr. Williams held multiple
technology positions at America Online leading up to Senior
Technical Director. Mr. Williams previously served as a
software developer at Software A.G., a software infrastructure
solutions company from 1988 to 1993. Mr. Williams holds a
B.S. in Computer Science from Rochester Institute of Technology.
Nonemployee
Directors
Andrew
H. Tisch, Chairman
Andrew H. Tisch joined us as director in August 2001, and has
served as Chairman of the Board of Directors since May 2007.
Since 1985, Mr. Tisch has been a director of Loews
Corporation, and is Co-Chairman of its Board, Chairman of its
Executive Committee and, since 1999, has been a member of its
Office of the President. In addition, Mr. Tisch has served
as past Chairman of the board of directors of Bulova Corporation
and a director since 1979. Mr. Tisch has also served as
director on the board of directors of CNA Financial Corporation
since 2006, at Texas Gas Transmission, LLC and Boardwalk
Pipelines, LLC since 2005 and Lord & Taylor, Inc.
since 2006. Mr. Tisch holds a B.S. in Hotel Administration
from Cornell University and an M.B.A. from Harvard University.
Liza
A. Boyd, Director
Liza A. Boyd joined us as director in April 2006. Ms. Boyd
has been employed with Constellation Ventures, a venture capital
fund affiliated with The Bear Stearns Companies, Inc. investing
in early to mid-stage companies, since 2000, and has been a
Managing Director since 2006. At Constellation Ventures,
Ms. Boyd focuses on investments in software and services
and online media technologies. Ms. Boyd has served as a
director on the board of directors of Widevine Technologies
since 2004, Fathom Online since August 2005, Siperian since
2006, Avolent since 2006 and Orchestria since 2006. Ms Boyd
holds a B.A. in Mathematical Economics from Colgate University.
Guillermo
Bron, Director
Guillermo Bron joined us as a director in July 2007.
Mr. Bron has served as Chairman of the Board and a director
of United Pan Am Financial Corp. (UPFC) since April 1994, and as
a director of Pan American Bank, FSB
73
(Pan American), a federally chartered savings association and
former wholly owned subsidiary of UPFC, from 1994 until its
dissolution in February 2005. Mr. Bron is a Managing
Director of Acon Funds Management LLC, a private equity firm,
and the Managing Member of PAFGP, LLC, the sole general partner
of Pan American Financial, L.P. From 2000 to 2002, Mr. Bron
was a director of Telemundo Group, Inc. Mr. Bron founded
UPFC and organized a Hispanic investor group that acquired
certain assets and assumed certain liabilities of Pan
Americans predecessor from the Resolution
Trust Corporation in April 1994. From 1994 to 2003,
Mr. Bron was an officer, director and principal stockholder
of a general partner of Bastion Capital Fund, L.P., a private
equity investment fund primarily focused on the Hispanic Market.
Previously, Mr. Bron was a Managing Director of Corporate
Finance and Mergers and Acquisitions at Drexel Burnham Lambert.
Mr. Bron holds a B.S. in Electrical Engineering and
Management from Massachusetts Institute of Technology and an
M.B.A. from Harvard University.
Steven
B. Fink, Director
Steven B. Fink joined us as director in October 2003. Since
2000, Mr. Fink has been the Chief Executive Officer of
Lawrence Investments, LLC, a technology and biotechnology
private equity investment firm, and since 1996, Mr. Fink
has served as a Vice Chairman of Knowledge Universe (now Mounte
LLC), a private company focused on building leading companies in
areas relating to education, technology and career management.
Since 1995, Mr. Fink has also served as Chairman and Vice
Chairman of Heron International, a European real estate
development company. Mr. Fink has served as non-executive
Chairman of Spring Group PLC, an information technology services
company in the United Kingdom affiliated with Knowledge
Universe, from 1997 to 2000 and again from 2002 to the present,
and has served as a director of Leapfrog, Inc. since 1999 and as
Chairman of the board since 2004. Mr. Fink has also served
as a director of Nextera Enterprises, Inc. since 1997.
Mr. Fink holds a B.S. in Psychology from the University of
California, Los Angeles and a J.D. and an L.L.M. from New York
University.
Dr. Mary
H. Futrell, Director
Dr. Mary H. Futrell joined us as a director in August 2007.
Dr. Futrell is currently the director of the George
Washington Institute for Curriculum Standards and Technology and
the founding president of the World Confederation of the
Teaching Profession. Previously, she served as president of the
Virginia Education Association, Education International, and
ERAmerica. After teaching and holding various administrative
positions in different secondary schools, Dr. Futrell
joined the faculty at the George Washington University, while
earning her Ph.D. and in 1995 was promoted to dean of the
Graduate School of Education and Human Development.
Dr. Futrell is best known for serving six years as
president of the National Education Association from 1983 to
1989. Dr. Futrell has also served on the boards of the
Kettering Foundation and the Carnegie Foundation for the
Advancement of Teaching Leadership, and on the editorial board
of Phi Delta Kappa. She has published articles in a number of
scholarly journals, such as Education Record, Foreign Language
Annals, and Education Administration Quarterly. Dr. Futrell
holds a B.A. in Business Education from Virginia State
University, a M.A. from and a Ph.D. in Education Policy Studies
from George Washington University. She is also the recipient of
numerous honors and awards, including more than twenty honorary
degrees.
Thomas
J. Wilford, Director
Thomas J. Wilford joined us as director in November 2002. Since
1993, Mr. Wilford has served as director of Alscott, Inc.,
privately held a real estate investment company, and since 1997
has served as President. Since 2003, Mr. Wilford has served
as Chief Executive Officer of the J.A. and Kathryn Albertson
Foundation, a foundation focused on education within Idaho.
Mr. Wilford has served as director on the board of
directors of Idacorp, Inc. since 2004, and has served on its
Audit Committee since 2005. Previously, Mr. Wilford served
as an Office Managing Partner of Ernst & Young LLP
from 1979 to 1993. Mr. Wilford holds a B.S., and a M.S. in
Business from the University of Minnesota and he is a Certified
Public Accountant.
74
Board of
Directors and Director Independence
Our board of directors is authorized to have nine members and is
currently composed of six nonemployee members and our Chief
Executive Officer, Ronald J. Packard. Our executive
officers and key employees serve at the discretion of our board
of directors.
All directors are elected for a period of one year at our annual
meeting of stockholders and serve until their successors are
duly elected and qualified. Additionally, our stockholders will
have the ability to remove directors with cause by the
affirmative vote of a majority of the common stock.
Director
Independence
Our board has determined that each of our directors, with the
exception of Mr. Packard, is independent as
defined in the currently applicable listing standards of the New
York Stock Exchange. Mr. Packard is not independent because
he is one of our executive officers.
Board
Committees
Our board directs the management of our business and affairs as
provided by Delaware law and conducts its business through
meetings of the board of directors, an audit committee, a
nominating and corporate governance committee and a compensation
committee. Further, from time to time, other committees may be
established under the direction of the board when necessary to
address specific issues. The composition of the board committees
will comply, when required, with the applicable rules of the New
York Stock Exchange and applicable law.
Audit Committee.
Our audit committee is
responsible for, among other things, making recommendations
concerning the engagement of our independent public accountants,
reviewing with the independent public accountants the plans and
results of the audit engagement, approving professional services
provided by the independent public accountants, reviewing the
independence of the independent public accountants, considering
the range of audit and non-audit fees, and reviewing the
adequacy of our internal accounting controls. Our audit
committee comprises Steven B. Fink, Liza A. Boyd and
Thomas J. Wilford. Mr. Fink is the chairman of the
audit committee. Each of Mr. Fink and Mr. Wilford has been
designated as an audit committee financial expert as
such term is defined in Item 401(h) of
Regulation S-K.
Both Mr. Fink and Mr. Wilford are independent as such
term is defined in
Rule 10A-3(b)(1)
under the Securities Exchange Act of 1934, as amended, or the
Exchange Act, and under the currently applicable listing
standards of the New York Stock Exchange. Ms. Boyd is not
independent within the meaning of
Rule 10A-3(b)(1)
under the Exchange Act.
In accordance with
Rule 10A-3(b)(1)
under the Exchange Act and the listing standards of the New York
Stock Exchange, we plan to modify the composition of the audit
committee within 12 months after the effectiveness of our
registration statement relating to this offering so that all of
our audit committee members will be independent as such term is
defined in
Rule 10A-3(b)(1)
under the Exchange Act and under the listing standards of the
New York Stock Exchange.
Our board of directors has adopted a written charter for the
audit committee, which will be effective immediately prior to
the effectiveness of our registration statement relating to this
offering.
Nominating and Corporate Governance
Committee.
Our nominating and corporate
governance committee provides assistance to the board of
directors by identifying qualified candidates to become board
members, selecting nominees for election as directors at
stockholders meetings and to fill vacancies, developing
and recommending to the board a set of applicable corporate
governance guidelines and principles as well as oversight of the
evaluation of the board and management. Our nominating and
corporate governance committee comprises Mr. Steven B. Fink, Mr.
Guillermo Bron and Mr. Andrew H. Tisch. Mr. Tisch is the
chairman of the nominating and corporate governance committee.
Mr. Fink, Mr. Bron and Mr. Tisch are independent as
defined in the currently applicable listing standards of the New
York Stock Exchange.
Our board of directors has adopted a written charter for the
nominating and corporate governance committee, which will be
effective immediately prior to the pricing of our common stock
to be sold in this offering and will be available on our website
upon consummation of this offering.
75
Compensation Committee.
The compensation
committee is responsible for determining compensation for our
executive officers and administering our amended and restated
stock option plans and other compensation programs. The
compensation committee is also charged with establishing,
periodically re-evaluating and, where appropriate, adjusting and
administering policies concerning compensation of management
personnel, including the Chief Executive Officer and all of our
other executive officers. Our compensation committee comprises
Andrew H. Tisch, Dr. Mary H. Futrell and Liza A. Boyd.
Mr. Tisch is the chairman of the compensation committee. Mr.
Tisch, Dr. Futrell and Ms. Boyd are independent as
defined in the currently applicable listing standards of the New
York Stock Exchange.
Our board of directors has adopted a written charter for the
compensation committee, which will be effective immediately
prior to the effectiveness of our registration statement
relating to this offering.
Compensation
Committee Interlocks and Insider Participation
None of the members of our compensation committee at any time
has been one of our executive officers or employees. None of our
executive officers currently serves, or in the past year has
served, as a member of the board of directors or compensation
committee of any entity that has one or more executive officers
serving on our board of directors or compensation committee. Our
entire board of directors made all compensation decisions prior
to the creation of our compensation committee.
Limitation
of Liability and Indemnification of Officers and
Directors
As permitted by Section 102 of the Delaware General
Corporation Law, upon consummation of this offering, we expect
that our amended and restated certificate of incorporation and
amended and restated bylaws will limit or eliminate the personal
liability of our directors for a breach of their fiduciary duty
of care as directors. The duty of care generally requires that
when acting on behalf of the corporation, directors exercise an
informed business judgment based on all material information
reasonably available to them. Consequently, a director will not
be personally liable to us or our stockholders for monetary
damages or breach of fiduciary duty as a director, except for
liability for:
|
|
|
|
|
any breach of the directors duty of loyalty to us or our
stockholders;
|
|
|
|
any act or omission not in good faith or that involves
intentional misconduct or a knowing violation of law;
|
|
|
|
any act related to unlawful stock repurchases, redemptions or
other distributions or payment of dividends; or
|
|
|
|
any transaction from which the director derived an improper
personal benefit.
|
These limitations of liability do not alter liability under the
federal securities laws and do not affect the availability of
equitable remedies such as injunction or rescission. As
permitted by Section 145 of the Delaware General
Corporation Law, upon consummation of this offering, we expect
that our amended and restated certificate of incorporation and
amended and restated bylaws will authorize us to indemnify or
officers, directors and other agents to the fullest extent
permitted under Delaware law and provide that:
|
|
|
|
|
we may indemnify our directors, officers and employees to the
fullest extent permitted by the Delaware General Corporation
Law, subject to limited exceptions;
|
|
|
|
we may advance expenses to our directors, officers and employees
in connection with a legal proceeding to the fullest extent
permitted by the Delaware General Corporation Law, subject to
limited exceptions; and
|
|
|
|
the rights provided in our amended and restated bylaws are not
exclusive.
|
Contemporaneously with the completion of this offering, we
intend to enter into indemnification agreements with each of our
executive officers and directors which will be in addition to
and may be broader than the indemnification provided for in our
charter documents. These agreements will provide that we will
indemnify each of our directors to the fullest extent permitted
by law and advance expenses to each indemnitee in connection
with any proceeding in which indemnification is available.
76
We also maintain general liability insurance that covers certain
liabilities of our directors and officers arising out of claims
based on acts or omissions in their capacities as directors or
officers and intend to obtain a policy of directors and officers
liability insurance that will be effective upon completion of
this offering which will also cover certain liabilities arising
under the Securities Act of 1933, as amended. Insofar as
indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, or persons controlling
the registrant pursuant to the foregoing provisions, we have
been informed that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
These provisions may discourage stockholders from bringing a
lawsuit against our directors for breach of their fiduciary
duty. These provisions may also have the effect of reducing the
likelihood of derivative litigation against directors and
officers, even though such an action, if successful, might
otherwise benefit us and our stockholders. Furthermore, a
stockholders investment may be adversely affected to the
extent we pay the costs of settlement and damage awards against
directors and officers pursuant to these indemnification
provisions. We believe that these provisions, the
indemnification agreements and the insurance are necessary to
attract and retain talented and experienced directors and
officers.
At present, there is no pending litigation or proceeding
involving any of our directors, officers, employees or agents in
which any of them is seeking indemnification from us, nor are we
aware of any threatened litigation or proceeding that may result
in a claim for indemnification.
77
COMPENSATION
DISCUSSION AND ANALYSIS
Objectives
and Philosophy of Executive Compensation
The Compensation Committee, composed entirely of independent
directors, administers our executive compensation programs. The
Compensation Committees role as described in its charter
is to discharge the boards responsibilities relating to
compensation of our executives, including the named executive
officers, and to oversee and advise the board on the adoption of
policies that govern our compensation and benefit programs. Our
executive compensation programs are designed to:
|
|
|
|
|
Attract and retain individuals of superior ability and
managerial talent;
|
|
|
|
Ensure senior executive compensation is aligned with our
corporate strategies, business objectives and the long-term
interests of our stockholders;
|
|
|
|
Provide an incentive to achieve key strategic and financial
performance measures by linking incentive award opportunities to
the achievement of performance goals in these areas; and
|
|
|
|
Enhance the executives incentive to increase our stock
price and maximize stockholder value, as well as promote
retention of key people, by providing a portion of total
compensation opportunities for senior management in the form of
direct ownership in our stock through stock options.
|
To achieve these objectives, the Compensation Committee has
implemented and maintains compensation plans that tie a
substantial portion of the executives overall compensation
to key strategic financial and operational goals such as our
annual revenues and operating earnings. The Compensation
Committee also evaluates individual executive performance with
the goal of setting compensation at levels the Compensation
Committee believes are comparable with executives in other
companies of similar size and stage of development that operate
in the major education and high-technology industries, taking
into account our relative performance and our strategic goals.
Determination
of Compensation Awards
The Compensation Committee has the authority to determine and
recommend the compensation awards available to our named
executive officers. Historically, we have set base salaries and
annual incentive targets based on both individual performance
and position. Base salaries and annual incentive targets for the
named executive officers are determined as of the date of hire.
Base salaries and annual incentive targets are reviewed annually
by the Compensation Committee and may be adjusted to reflect
individual performance and any changes in position within the
Company to both reward the executives for superior performance
and to further our goals of attracting and retaining managerial
talent. To aid the Compensation Committee in making its
determination, the CEO and COO/CFO provide recommendations
annually to the Compensation Committee regarding the
compensation of all executive officers, excluding themselves.
Each named executive officer other than our CEO and COO/CFO, in
turn, participates in an annual performance review with either
the CEO or the COO/CFO to provide input regarding the named
executive officers contributions to our success for the
period being assessed. The performance of our CEO and COO/CFO is
reviewed annually by the Compensation Committee.
In 2007, the Compensation Committee retained an independent
compensation consultant, Radford Surveys + Consulting, to assist
the Compensation Committee with determining the key elements of
our compensation programs for fiscal year 2008 and future fiscal
years. Radford Surveys + Consulting is an independent consultant
specializing in compensation matters in both the technology and
education industries. The compensation consultant provides
advice to the Compensation Committee with respect to competitive
practices and the amounts and nature of compensation paid to the
named executive officers. The compensation consultant also
advises us on, among other things, structuring our various
compensation programs and determining the appropriate levels of
salary, bonus and other incentive awards payable to our named
executive officers. Based upon the compensation
consultants recommendations, our executive compensation
package continues to consist of a fixed base salary and variable
cash and option-based incentive awards, with a significant
portion weighted towards the variable components to ensure that
total compensation reflects our overall success or failure and
to motivate executive officers to meet appropriate performance
measures, thereby maximizing total return to stockholders.
Within our performance-based compensation program, we aim to
compensate the named executive officers in a manner that is tax
effective for us.
78
Compensation
Benchmarking and Peer Group
For the fiscal year ending in 2008, we set base salary
structures and annual incentive targets at slightly above the
median of a peer group of major education and high-technology
companies. An important component of setting and structuring
compensation for our named executive officers is determining the
compensation packages offered by leading education and
high-technology companies in order for us to offer competitive
compensation within that group of companies. With the assistance
of the compensation consultant, we surveyed the compensation
practices of a peer group of companies in the United States to
assess our competitiveness. The peer group generally consists of
15 leading education companies. This Peer Group of
companies for our fiscal year ending in 2008 includes: Audible,
Inc; Blackboard Inc; Capella Education Company; CNET Networks,
Inc; Corinthian Colleges, Inc.; Courier Corporation; DeVry Inc.;
eCollege.com; Educate, Inc.; IHS Inc.; ITT Educational Services,
Inc.; Learning Tree International, Inc.; PLATO Learning, Inc.;
Renaissance Learning, Inc.; and Strayer Education. Overall, our
independent compensation consultant determined that our
compensation programs, as structured, achieve our market
philosophy relative to our Peer Group.
Elements
of Compensation
Base
Salary
Base salaries for our named executive officers are generally
established in line with the scope of their responsibilities,
taking into account competitive market compensation paid by
other companies for similar positions, and recognizing cost of
living considerations. Base salaries are reviewed at least
annually, and are adjusted from time to time according to
performance and inflation and to realign salaries with market
levels. Based upon competitive data and in keeping with the
compensation philosophy, the named executive officers
respective base salaries at the close of fiscal year 2007 were
at the following ratio to the median of the comparable position
at companies in the Peer Group: Mr. Packard 1.00;
Mr. Baule 1.15; Mr. Davis 1.32; Mr. Saxberg 1.13;
and Ms. Stokes 1.00. Salaries among the named executive officers
reflect the legacy of their position at hire and subsequent
adjustments for parity or new responsibilities assigned. None of
Mr. Packard, Mr. Baule or Mr. Saxberg received
salary increases in fiscal year 2007. Mr. Packard,
Mr. Baule and Mr. Saxberg received increases in the
fourth quarter of fiscal year 2006 when they each acquired
additional responsibilities. Ms. Stokes received a salary
increase in the first quarter of fiscal year 2007. At the time
of their respective salary increases, Mr. Packard was
appointed Chief Executive Officer, Mr. Baule assumed
responsibility for the operations of the enterprise,
Mr. Saxberg assumed a role with expanded customer
interface, and Ms. Stokes assumed responsibility related to
marketing functions. Mr. Davis salary was negotiated
at hire as a combination of external market and internal value
associated with his experience and position.
Annual
Performance Bonus
We maintain an annual cash performance bonus program, the
Executive Bonus Plan, which is intended to reward executive
officers based on our performance and the individual named
executive officers contribution to that performance. In
determining the performance-based compensation awarded to each
named executive officer, the Compensation Committee may
generally evaluate our performance and the executives
performance in a number of areas, which could include revenues,
operating earnings, student retention, efficiency in product and
systems development, marketing investment efficacy, new
enrollment and developing company leaders. The Compensation
Committee believes that the performance bonus program provides
incentives necessary to retain executives and reward them for
our short-term performance.
For fiscal year 2007, the amounts payable under our annual cash
performance bonus program were primarily determined based upon
our financial performance including earnings, revenue and EBITDA
factors representing improvement in comparison to the prior
fiscal year. Other key factors considered included achieving
product development goals, enrollment growth and efforts in
preparing the company for an initial public offering. The
performance bonuses were not, however, predicated or tied to
predetermined objective targets for any financial or other
metric. Rather, the Compensation Committee made a subjective
determination regarding the extent to which these corporate
goals were achieved by the executive team as a whole. In 2007
the Compensation Committee and the executives agreed upon a
philosophy and practice of one-team-one-goal. The
accomplishment of these
79
performance measures was a substantial accomplishment, which
required all executives to remain focused, not merely on
individual goal-sets, but on the achievement of these corporate
goals.
For fiscal year 2007, Mr. Packards target bonus was
100% of base salary, Mr. Baules target bonus was 50%
of base salary, Mr. Davis target bonus was 40% of
base salary, Mr. Saxbergs target bonus was 30% of
base salary and Ms. Stokes target bonus was 30% of
base salary. Bonus targets have historically been negotiated at
the time of hire. The legacy of these at-hire negotiations have
clustered bonus targets at the 40% -50% range of base salary for
the Chief Financial Officer and any Executive Vice President,
and 30% for the Senior Vice President roles.
Mr. Davis fiscal year 2007 bonus was guaranteed at
$120,000 as part of his employment agreement to offset an earned
bonus he left behind with his previous employer. The
Compensation Committee determined that Mr. Packard and
Mr. Saxberg received their full target bonus for fiscal
year 2007, Mr. Baule received a bonus equal to 68% of his
base salary in recognition of his expanded role and
Ms. Stokes received a bonus equal to 36% of her base salary
in recognition of her success in product demand creation.
The performance goals for fiscal year 2007 were difficult to
achieve in the view of the Compensation Committee, as executives
were required to improve the financial performance of the
Company while simultaneously focusing on establishing corporate
governance standards, improving accounting practices, creating
effective internal control systems and maintaining operational
stability. The results of performance are set forth in the
section entitled Summary Compensation Table below.
Using peer group data, the Compensation Committee plans to
review each of the executive bonus targets in fiscal year 2008
and set objectively determinable goals for the 2008 fiscal year
to reflect the stated compensation philosophy. Executive bonuses
will be based in part on the Company achieving revenue and
EBITDA targets. The Compensation Committee believes these
targets are difficult to achieve because they will require the
Company to expand the jurisdictions in which it operates in
order to achieve the targeted growth, which is not assured in
any given time period, particularly in light of factors beyond
our control. Additionally, each executive will have an
individual set of goals (in addition to the corporate
objectives) upon which his or her performance will be measured.
Stock
Options
The Companys named executive officers, along with a large
portion of our employees, are eligible to participate in our
Amended and Restated Stock Option Plan, pursuant to which we
grant awards of stock options. We have also granted stock
options to some of our named executive officers pursuant to
stand-alone agreements. Initial stock option grants are
typically made as of the date of hire and then additional stock
options may be granted to realign the recipients stock
option holdings with the stock option holdings of similarly
situated employees. Participants, including the named executive
officers, become eligible for stock option grants based on
individual performance, as determined by the Compensation
Committee; however, historically the amount of stock options
granted to each participant has generally been determined using
a procedure approved by the Compensation Committee based upon
several factors, including our financial performance, measured
generally based on revenue and EBITDA, the value of the stock
option at the time of grant and the recipients
contributions to the Company. Option grants in 2006 were not,
however, tied to objective targets for any financial or other
metric. Additional grants may be made following a significant
change in job responsibility or in recognition of a significant
achievement. In addition, since we hired an independent
compensation consultant, we have begun to review external
factors such as market data and equity award policies of
comparable companies when determining the grants of stock
options to participants, including the named executive officers.
Providing long-term incentive awards through the grant of stock
options enhances our goal of aligning executive compensation
with the long-term interests of our stockholders by linking
compensation to our stock price and maximizing stockholder value.
Stock options granted under our Amended and Restated Stock
Option Plan generally have a four-year vesting schedule in order
to provide an incentive for continued employment. The exercise
price of options granted under the stock option plan is equal to
or greater than 100% of the fair market value of the underlying
stock on the date of grant. During fiscal year 2007,
Messrs. Packard and Davis received stock option grants
pursuant to stand-alone agreements. These stand alone agreements
were used to include vesting and pricing elements that our
standard stock option plan did not accommodate.
Mr. Davis option grant pursuant to his stand alone
agreement is subject to a time-
80
based vesting schedule. However, to align
Mr. Packards equity compensation with our success, we
developed a dual vesting schedule with a portion of his option
grant subject to a time-based vesting schedule and a portion of
his option grant subject to a vesting schedule based upon the
Companys achievement of performance metrics or the fair
market value of our common stock reaching a certain price.
Similarly, in connection with board approval of the amendments
of Mr. Packards and Mr. Baules employment
agreements discussed below on July 12, 2007, we granted
options to Mr. Packard and Mr. Baule that utilize this
dual vesting schedule. This dual vesting takes into
consideration Mr. Packards role as Chief Executive
Officer and steward of achieving the corporate goals, as well as
his role as an individual contributor to business development
and revenue generation. The dual vesting model of
Mr. Baules options was designed to align his
incentives with the Chief Executive Officers.
Additionally, the vesting model is reflective of his dual roles,
including both his position as Chief Financial Officer, with the
long term perspective that role implies, and his position as the
Chief Operating Officer, with the quarterly and annual
performance goals resident in that responsibility. For the same
reasons as stated above with respect to the performance metrics
relating to annual performance bonuses for executives, the
Compensation Committee believes the achievement of these
performance metrics will be difficult. Certain stock options
granted to Messrs. Packard and Davis have exercise prices
in excess of the fair market value of the underlying stock on
the date of grant. For fiscal year 2007, we granted 4,850,000
stock options to Mr. Packard and 500,000 stock options to
Mr. Davis as part of their respective employment
arrangements. The determination of the amounts of the option
grants for Messrs. Packard and Davis was based on a
combination of market data and internal value ascribed to their
respective positions by the Compensation Committee.
Messrs. Baule and Saxberg and Ms. Stokes did not
receive option grants during fiscal year 2007.
Deferred
Compensation Plan
While we do not currently maintain a deferred compensation plan,
effective January 2008, members of our senior executive
management team (including our named executive officers) and all
vice presidents will be eligible to defer up to 100% of any cash
component of the annual incentive bonus earned. The amounts may
be deferred up to a maximum of 10 years and are expected to
earn a fixed interest rate. The addition of a deferred
compensation plan provides a means for us to provide benefits to
our executive team to further our philosophy of attracting and
retaining individuals of superior ability.
Defined
Contribution Plan
We maintain a Section 401(k) Savings/Retirement Plan (the 401(k)
Plan), which covers our eligible employees, including our named
executive officers. The 401(k) Plan allows participants to defer
up to 50% of their annual compensation, subject to certain
limitations imposed by the Internal Revenue Code. The
employees elective deferrals are immediately vested and
nonforfeitable upon contribution to the 401(k) Plan. We
currently provide matching contributions equal to $0.25 for each
dollar of participant contributions, up to a maximum of 4% of
the participants annual salary and subject to certain
other limits. Our matching contributions are subject to a
four-year vesting schedule.
Employment,
Severance and Change in Control Arrangements
We currently have employment agreements in place with each of
our named executive officers that provide for severance payments
in connection with certain terminations of employment. During
our fiscal year ending in 2007, Mr. Packard had an
employment agreement with us that provided for salary
continuation for 450 days following a termination of his
employment without cause by us or due to constructive
termination. In addition, each of the other named executive
officers have employment agreements with us that provide for
employment on an at will basis and provide for
severance payments ranging from six months to 12 months
(plus benefit continuation in certain cases) generally in
connection with terminations of employment without cause by us
or for good reason by the executive. These agreements were
generally negotiated at hire and the potential severance
payments were determined considering the following: market data
from the peer group; the executives perceived
marketability; and the desired length of a non-standard
non-competition agreement. On July 12, 2007, our board of
directors approved an amended and restated employment agreement
for Mr. Packard and an amendment to Mr. Baules
employment agreement, which are discussed below. Severance is
considered by us and our employees to be an integral part of the
overall compensation package. We provide severance to the
executives as a means to attract and
81
retain individuals with superior ability and managerial talent.
The severance arrangements impact annual compensation decisions
regarding levels of salary and bonus because the severance is
provided in the form of salary continuation.
While the named executive officers are generally not entitled to
receive payments solely as a result of a change in control of
the Company, upon certain corporate transactions (including a
sale of all or substantially all of the assets, certain mergers
or consolidations and certain sales of our outstanding stock)
all outstanding options will become fully vested and exercisable.
We believe that providing the named executive officers with
severance payments upon certain terminations of employment and
accelerated vesting of stock options upon a change in control
are key retention tools that assist us with remaining
competitive with the companies in our Peer Group, further our
goal of attracting and retaining key executives with superior
ability and managerial talent and protect our intellectual
capital and competitive position. These employment agreements,
including the revised terms of Mr. Packards agreement
approved by the board of directors and change in control
arrangements, are further described below under the section
entitled Potential Payments Upon Termination or Change in
Control.
Summary
Compensation Table for 2007
The following table provides information regarding the
compensation that we paid to our named executive officers during
the fiscal year ended June 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonequity
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
Incentive Plan
|
|
All Other
|
|
|
Name and Principal
Position
|
|
Year
|
|
Salary
|
|
Bonus
(1)
|
|
Awards
(2)
|
|
Compensation
|
|
Compensation
(3)
|
|
Total
|
|
Ronald J. Packard
|
|
|
2007
|
|
|
$
|
410,000
|
|
|
$
|
410,000
|
|
|
$
|
116,436
|
|
|
$
|
|
|
|
$
|
2,050
|
|
|
$
|
938,486
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John F. Baule
|
|
|
2007
|
|
|
|
300,000
|
|
|
|
210,000
|
|
|
|
|
|
|
|
|
|
|
|
1,646
|
|
|
|
511,646
|
|
Chief Operating Officer and Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce J. Davis
|
|
|
2007
|
|
|
|
144,423
|
|
|
|
120,000
|
(5)
|
|
|
4,791
|
|
|
|
|
|
|
|
|
|
|
|
269,214
|
|
Executive Vice President of School
Services
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bror V. H. Saxberg
|
|
|
2007
|
|
|
|
310,000
|
|
|
|
93,000
|
|
|
|
|
|
|
|
|
|
|
|
2,713
|
|
|
|
405,713
|
|
Chief Learning Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Celia M. Stokes
|
|
|
2007
|
|
|
|
221,052
|
|
|
|
80,000
|
|
|
|
|
|
|
|
|
|
|
|
1,847
|
|
|
|
302,899
|
|
Chief Marketing Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
This column represents cash awards
to the named executive officers for performance with respect to
fiscal year ended June 30, 2007. These awards were paid in
September 2007. These awards were generally based upon corporate
performance, but were not determined based upon the achievement
of specific objective performance targets.
|
|
|
|
(2)
|
|
This column represents the dollar
amount recognized by us for financial statement reporting
purposes of the fair value of stock options granted in fiscal
year ended June 30, 2007, and prior years in accordance
with FAS 123R, assuming no forfeitures. For additional
information, including information regarding the assumptions
used when valuing the stock options, refer to note 9 of our
consolidated financial statements filed herewith. The amounts
set forth in this column reflect our accounting expense for
these awards and do not correspond to the actual value that may
be realized by the named executive officer receiving the awards.
See the Grants of Plan-Based Awards Table for additional
information on stock options granted during fiscal year ended
June 30, 2007.
|
|
|
|
(3)
|
|
The amounts in this column consist
of 401(k) matching contributions paid by us.
|
|
|
|
(4)
|
|
Mr. Davis commenced his
employment with us on January 8, 2007. Amounts included in
the table reflect Mr. Davis compensation from his
date of hire through the end of the fiscal year ended on
June 30, 2007.
|
|
|
|
(5)
|
|
Pursuant to the terms of his
employment agreement, Mr. Davis was entitled to a
guaranteed bonus of $120,000 for fiscal year 2007 which was paid
on July 8, 2007.
|
82
Grants of
Plan-Based Awards During 2007
The following table provides information regarding grants of
plan-based awards to our named executive officers during the
fiscal year ended June 30, 2007. The awards described in
the following table were granted under our Executive Bonus Plan
and stand-alone stock option agreements. The performance metrics
considered when the awards were granted, if any, are described
in previous subsections of the Compensation Discussion and
Analysis above. No awards were granted to any named executive
officer under our Amended and Restated Stock Option Plan during
the fiscal year ended June 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Possible
|
|
|
|
|
|
|
|
All
|
|
|
|
|
|
|
|
|
|
|
Payouts
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
Grant
|
|
|
|
|
Under
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
Date
|
|
|
|
|
Nonequity
|
|
|
|
|
|
|
|
Awards:
|
|
|
|
Closing
|
|
Fair
|
|
|
|
|
Incentive
|
|
Estimated Future Payouts
|
|
Number of
|
|
Exercise or
|
|
Market
|
|
Value
|
|
|
|
|
Plan
|
|
Under Equity
|
|
Securities
|
|
Base
|
|
Price
|
|
of
|
|
|
|
|
Awards
|
|
Incentive Plan
Awards
(1)
|
|
Underlying
|
|
Price
|
|
on Date
|
|
Option
|
|
|
Grant
|
|
Target
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Options
(2)
|
|
of Option
|
|
of
|
|
Awards
|
Name and Principal Position
|
|
Date
|
|
($)
|
|
(#)
|
|
(#)
|
|
(#)
|
|
(#)
|
|
Awards
|
|
Grant
(3)
|
|
($/Sh)
|
|
Ronald J. Packard
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Executive
|
|
|
7/27/2006
|
|
|
|
|
|
|
|
|
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
$
|
1.50
|
|
|
$
|
0.58
|
|
|
$
|
14,802
|
|
Officer
|
|
|
7/27/2006
|
|
|
|
|
|
|
|
|
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
1.50
|
|
|
|
0.58
|
|
|
|
87,206
|
|
|
|
|
7/27/2006
|
|
|
|
|
|
|
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
1.50
|
|
|
|
0.58
|
|
|
|
6,178
|
|
|
|
|
7/27/2006
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
1.50
|
|
|
|
0.58
|
|
|
|
16,715
|
|
|
|
|
7/27/2006
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
1.50
|
|
|
|
0.58
|
|
|
|
19,986
|
|
|
|
|
7/27/2006
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
1.50
|
|
|
|
0.58
|
|
|
|
4,996
|
|
|
|
|
7/27/2006
|
|
|
|
|
|
|
|
150,000
|
|
|
|
1,200,000
|
|
|
|
|
|
|
|
|
|
|
1.50
|
|
|
|
0.58
|
|
|
|
171,652
|
|
|
|
|
7/27/2006
|
|
|
|
|
|
|
|
75,000
|
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
1.50
|
|
|
|
0.58
|
|
|
|
85,826
|
|
|
|
|
7/27/2006
|
|
|
|
|
|
|
|
|
|
|
|
1,500,000
|
|
|
|
|
|
|
|
|
|
|
6.00
|
|
|
|
0.58
|
|
|
|
113,217
|
|
John F. Baule
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Operating Officer and Chief
Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce J. Davis
|
|
|
2/1/2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500,000
|
|
|
|
1.80
|
|
|
|
0.83
|
|
|
|
153,117
|
|
Executive Vice President of School
Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bror V. H. Saxberg
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Learning Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Celia M. Stokes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chief Marketing Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Stock options were granted pursuant
to stand-alone stock option agreements with exercise prices in
excess of the fair market value of a share of our common stock
subject to such option on the date of grant, expire on
December 31, 2012, and are subject to performance vesting
schedules, as further described in the footnotes to the
Outstanding Equity Awards at Fiscal Year End Table. The stock
options with performance vesting schedules do not have maximum
payout amounts.
|
|
|
|
(2)
|
|
Stock options were granted pursuant
to stand-alone stock option agreements with exercise prices in
excess of the fair market value of a share of our common stock
subject to such option on the date of grant, expire on
December 31, 2014 and are subject to a four year
time-based vesting schedule.
|
|
|
|
(3)
|
|
The closing market price of our
common stock on the date of grant is based upon our analysis of
its fair market value. For a discussion of this analysis, see
Managements Discussion and Analysis of Financial
Condition and Results of Operations Critical
Accounting Policies and Estimates Accounting for
Stock-based Compensation.
|
83
Outstanding
Equity Awards at Fiscal Year End for 2007
The following table provides information regarding outstanding
equity awards held by our named executive officers as of
June 30, 2007. All such equity awards consist of stock
options granted pursuant to our Amended and Restated Stock
Option Plan or stand-alone stock option agreements, and no
restricted stock awards have been granted to any of the named
executive officers. The section titled Stock Options
in this Compensation Discussion and Analysis section provides
additional information regarding the outstanding equity awards
set forth in this table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
|
|
|
|
|
|
Equity Incentive Plan
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Number of
|
|
|
Awards: Number of
|
|
|
|
|
|
|
|
|
|
Securities Underlying
|
|
|
Securities Underlying
|
|
|
Securities Underlying
|
|
|
Option
|
|
|
Option
|
|
|
|
Unexercised Options
|
|
|
Unexercised Options
|
|
|
Unexercised Unearned
|
|
|
Exercise
|
|
|
Expiration
|
|
Name and Principal Position
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Options
|
|
|
Price
|
|
|
Date
|
|
|
Ronald J. Packard
|
|
|
350,000
|
|
|
|
|
|
|
|
|
|
|
$
|
1.50
|
|
|
|
7/27/2014
|
|
Chief Executive
Officer
(1)
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
1.50
|
|
|
|
7/27/2014
|
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
1.50
|
|
|
|
7/27/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
1.50
|
|
|
|
7/27/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
1.50
|
|
|
|
7/27/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
1.50
|
|
|
|
7/27/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
1,200,000
|
|
|
|
1.50
|
|
|
|
7/27/2014
|
|
|
|
|
300,000
|
|
|
|
|
|
|
|
300,000
|
|
|
|
1.50
|
|
|
|
7/27/2014
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500,000
|
|
|
|
6.00
|
|
|
|
7/27/2014
|
|
|
|
|
675,000
|
|
|
|
|
|
|
|
|
|
|
|
1.34
|
|
|
|
7/1/2011
|
|
|
|
|
900,000
|
|
|
|
|
|
|
|
|
|
|
|
1.34
|
|
|
|
7/23/2010
|
|
John F. Baule
|
|
|
100,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
1.50
|
|
|
|
6/1/2014
|
|
Chief Operating Officer
|
|
|
450,000
|
|
|
|
350,000
|
|
|
|
|
|
|
|
1.34
|
|
|
|
3/24/2013
|
|
and Chief Financial
Officer
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce J. Davis
|
|
|
|
|
|
|
500,000
|
|
|
|
|
|
|
|
1.80
|
|
|
|
2/1/2015
|
|
Executive Vice President of School
Services
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bror V. H. Saxberg
|
|
|
75,000
|
|
|
|
225,000
|
|
|
|
|
|
|
|
1.50
|
|
|
|
4/26/2014
|
|
Chief Learning
Officer
(4)
|
|
|
50,625
|
|
|
|
39,375
|
|
|
|
|
|
|
|
1.34
|
|
|
|
3/1/2013
|
|
Celia M. Stokes
|
|
|
56,250
|
|
|
|
143,750
|
|
|
|
|
|
|
|
1.50
|
|
|
|
4/26/2014
|
|
Chief Marketing
Officer
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Mr. Packards outstanding
unvested options are subject to performance-based vesting.
200,000 options with exercise prices of $1.50 per share will
vest in each of fiscal year ending June 30, 2008 and 2009
contingent upon our attaining revenues and EBITDA goals during
each of the respective preceeding fiscal years. 50,000 options
with exercise prices of $1.50 per share will vest in fiscal year
ending June 30, 2009 contingent upon Mr. Packard
attaining leadership goals during the preceeding fiscal year.
1,200,000 options with exercise prices of $1.50 per share will
vest on dates that jurisdictional expansion and related EBITDA
goals are obtained, if any. 300,000 options with vesting
schedules contingent upon jurisdictional expansion and
enrollment targets and with exercise prices of $1.50 per share
have fully vested as of June 30, 2007. 1,500,000 options
with exercise prices of $6.00 per share will vest upon the fair
market value of a share of our common stock equaling $6.00.
|
|
|
|
(2)
|
|
Mr. Baules outstanding
unvested options are subject to time-based vesting. 25,000
options with exercise prices of $1.50 per share will vest every
three months beginning on September 1, 2007 through
June 1, 2010. 50,000 options with exercise prices of $1.34
per share will vest every three months beginning on
September 24, 2007 through March 24, 2009.
|
84
|
|
|
(3)
|
|
Mr. Daviss outstanding
unvested options are subject to time-based vesting. 125,000
options will vest on February 1, 2008 and 31,250 options
will vest every three months thereafter beginning on May 1,
2008 through February 1, 2011.
|
(4)
|
|
Mr. Saxbergs outstanding
unvested options are subject to time-based vesting. 18,750
options will vest every three months beginning on July 27,
2007 through April 27, 2010, and 5,625 will vest every
three months beginning on September 24, 2007 through
March 24, 2009.
|
|
|
|
(5)
|
|
Ms. Stokes outstanding
unvested options are subject to time-based vesting. 6,250
options vest every three months beginning on July 27, 2007
through April 27, 2010, and 6,250 vest every three months
beginning on September 21, 2007 through March 21, 2010.
|
Option
Exercises and Stock Vested
The following table provides information for the named executive
officers regarding the stock options each named executive
officer exercised, and the value realized, if any, during fiscal
year ended June 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
Option Awards
|
|
|
|
Number of
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
Acquired
|
|
|
Value Realized
|
|
Name and Principal
Position
|
|
on
Exercise
(1)
|
|
|
on Exercise
|
|
|
Ronald J. Packard
|
|
|
|
|
|
$
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
|
|
John F. Baule
|
|
|
|
|
|
|
|
|
Chief Operating Officer and Chief
Financial Officer
|
|
|
|
|
|
|
|
|
Bruce J. Davis
|
|
|
|
|
|
|
|
|
Executive Vice President of School
Services
|
|
|
|
|
|
|
|
|
Bror V. H. Saxberg
|
|
|
200,000
|
|
|
|
64,000
|
(2)
|
Chief Learning Officer
|
|
|
|
|
|
|
|
|
Celia M. Stokes
|
|
|
|
|
|
|
|
|
Chief Marketing Officer
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
None of the named executive
officers other than Mr. Saxberg exercised any stock options
during fiscal year ended June 30, 2007.
|
|
|
|
(2)
|
|
Represents the exercise of
200,000 options on May 29, 2007, each with an exercise
price of $1.34 per share. The estimated fair market value of a
share of our common stock on the date of exercise was $1.66. For
a discussion of the analysis of the fair market value of our
common stock, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and
Estimates Accounting for Stock-based
Compensation.
|
Potential
Payments Upon Termination or Change in Control
The Company has employment agreements with each of our named
executive officers that provide for severance payments and, in
some cases, other benefits upon certain terminations of
employment.
Employment
Agreements
Mr. Packards employment agreement, effective as of
January 1, 2006, provides for a term of employment through
January 1, 2009, unless terminated earlier pursuant to the
terms of the agreement. Upon a termination of
Mr. Packards employment by us without cause or due to
a constructive termination (generally, a material
reduction in Mr. Packards duties, responsibilities or
title), Mr. Packard is entitled to salary continuation for
450 days following termination and he may exercise his
outstanding vested stock options until the earlier of
90 days following the expiration of any
lock-up
period applicable to our initial underwritten public offering,
or the expiration of the option term. Upon termination of
Mr. Packards employment due to his death, his estate
will receive salary continuation payments for 180 days
following his death. The agreement also provides that
Mr. Packard is subject to restrictive covenants during the
term of the agreement and for certain periods following
termination of employment, including confidentiality restrictive
covenants during the term and for three years following
termination, intellectual property restrictive covenants during
the term, and nonsolicitation and noncompetition restrictive
covenants during the period that Mr. Packard receives any
compensation from us (including severance) and one year
thereafter.
85
On July 12, 2007, our board of directors approved an
amended and restated employment agreement for Mr. Packard.
This amended and restated agreement extends the term of
Mr. Packards employment until January 1, 2011,
and provides for (i) an annual base salary of $425,000,
(ii) an annual cash bonus to be awarded by the board of
directors in its discretion with a target amount of 100% of base
salary, (iii) additional stock option grants subject to
both time-based and performance-based vesting, (iv) full
vesting of all outstanding stock options upon a change in
control of the Company, and (v) severance upon a
termination of Mr. Packards employment without cause
by us or due to constructive termination equal to
18 months of base salary and the extension of the exercise
date for Mr. Packards outstanding stock options to
the earlier of 90 days following expiration of any
lock-up
period in connection with the Companys initial public
offering and the expiration of the term of the stock options.
Mr. Baules employment agreement, dated March 4,
2005, provides for his employment with us on an
at-will basis. Upon a termination of
Mr. Baules employment for good reason
(generally, a material reduction in Mr. Baules
compensation, assignment of a materially different title and
responsibilities effectively resulting in a demotion, relocation
of Mr. Baules place of work more than 50 miles
from our headquarters, or we otherwise materially breach the
employment agreement), or by us for any reason other than cause,
death or disability, Mr. Baule is entitled to severance
equal to 365 days of his then-current salary, paid in six
monthly installments following termination, and medical and
dental benefit continuation for 365 days, or if earlier,
until eligible for benefits elsewhere (or reimbursement of COBRA
costs to the extent our employee benefit plans do not allow
post-termination participation by Mr. Baule). The agreement
also provides that Mr. Baule will be subject to the terms
of the Companys Confidentiality, Proprietary Rights and
Non-Solicitation Agreement, which generally prohibits the
unauthorized disclosure of our confidential information during
and after the period of employment, ensures our right of
ownership of any intellectual property developed during the
period of employment, prohibits the solicitation of employees
for one year following termination of employment and requires
that any disputes regarding employment or termination of
employment be subject to binding arbitration.
On July 12, 2007, our board of directors approved an amendment
to Mr. Baules employment agreement. This amendment
provides for (i) an annual base salary of $340,000,
(ii) an annual cash bonus to be awarded by the board of
directors in its discretion with a target amount of 70% of base
salary, (iii) additional stock option grants subject to
both time-based and performance-based vesting, and
(iv) full vesting of all stock options upon a change in
control of the company.
Mr. Davis employment agreement, effective as of
January 3, 2007, provides for his employment with us on an
at-will basis. Upon a termination of
Mr. Davis employment for good reason
(generally, a material breach of the employment agreement by us
that is not cured within 60 days, a reduction in base
salary, a diminution or adverse change to title or the person to
whom Mr. Davis reports prior to a change in control of the
Company, a material diminution in authority, responsibilities or
duties, a relocation of place of employment more than
25 miles from our headquarters, a material reduction in
Mr. Davis compensation, assignment of a materially
different title and responsibilities effectively demoting
Mr. Davis, or if the employment agreement is not assumed by
the successor within 90 days following a change in control
of the Company), or by us without cause, Mr. Davis is
entitled to 180 days of salary continuation if the
termination occurs prior to January 1, 2008, and
365 days of salary continuation if the termination occurs
after January 1, 2008. The agreement also provides that
Mr. Davis will be subject to the terms of our
Confidentiality, Proprietary Rights and Non-Solicitation
Agreement which generally prohibits the unauthorized disclosure
of our confidential information during and after the period of
employment, ensures our right of ownership of any intellectual
property developed during the period of employment, prohibits
the solicitation of employees for one year following termination
of employment and requires that any disputes regarding
employment or termination of employment be subject to binding
arbitration.
Mr. Saxbergs employment agreement, dated June 1,
2006, provides for his employment with us on an
at-will basis. Upon a termination of
Mr. Saxbergs employment for good reason
(Mr. Saxbergs resignation within 40 days after
his discovery of a material breach of the agreement by us which
is not cured within 30 days after written notice from
Mr. Saxberg), or by us without cause,
Mr. Saxberg is entitled to 180 days of salary
continuation, reduced by any compensation resulting from new
employment. The agreement also provides that Mr. Saxberg
will be subject to the terms of our Confidentiality, Proprietary
Rights and Non-Solicitation Agreement which generally prohibits
the unauthorized disclosure of our confidential information
during and after the period of employment, ensures our right of
ownership of any intellectual property developed during the
period of
86
employment, prohibits the solicitation of employees for one year
following termination of employment and requires that any
disputes regarding employment or termination of employment be
subject to binding arbitration.
Ms. Stokes employment agreement, dated March 10,
2006, provides for her employment with us on an
at-will
basis. Upon a termination of Ms. Stokes employment
for good reason (Ms. Stokes resignation
within 40 days after her discovery of a material breach of
the agreement by us which is not cured within 30 days after
written notice from Ms. Stokes), or by us without
cause, Ms. Stokes is entitled to 180 days of
salary continuation, reduced by any compensation resulting from
new employment. The agreement also provides that Ms. Stokes
will be subject to the terms of our Confidentiality, Proprietary
Rights and Non-Solicitation Agreement which generally prohibits
the unauthorized disclosure of our confidential information
during and after the period of employment, ensures our right of
ownership of any intellectual property developed during the
period of employment, prohibits the solicitation of employees
for one year following termination of employment and requires
that any disputes regarding employment or termination of
employment be subject to binding arbitration.
Change
in Control Arrangements
Except for certain stock options granted to Mr. Packard and
Mr. Baule during our fiscal year ending in 2007, the stock
option agreements for outstanding stock options generally
provide for accelerated and full vesting of unvested stock
options upon certain corporate events. As described above, on
July 12, 2007, our board of directors approved an amended
and restated employment agreement for Mr. Packard, which
provides that all of his outstanding options will become fully
vested upon a change in control of the Company. Additionally, on
July 12, 2007, our board of directors also approved the
terms of a new option agreement for Mr. Baule, which
provides that all of his outstanding options will become fully
vested upon a change in control of the Company. Those events
include a sale of all or substantially all of our assets, a
merger or consolidation which results in the Companys
stockholders immediately prior to the transaction owning less
than 50% of our voting stock immediately after the transaction,
and a sale of our outstanding securities (other than in
connection with an initial public offering) which results in our
stockholders immediately prior to the transaction owning less
than 50% of our voting stock immediately after the transaction.
In addition, as described above, Mr. Davis is entitled to
voluntarily terminate his employment and receive the severance
payments described above if his employment agreement is not
assumed by the successor entity within 90 days following a
change in control of the Company. Other than the foregoing, none
of the named executive officers is entitled to any additional
payments upon a change in control of the Company.
87
Potential
Value of Termination and Change in Control
Benefits
The following table provides the dollar value of potential
payments and benefits that each named executive officer would be
entitled to receive upon certain terminations of employment and
upon a change in control of the Company, assuming that the
termination or change in control occurred on June 30, 2007,
and the price per share of our common stock subject to the stock
options equaled $1.82, the value of a share on June 30,
2007. For a discussion of our analysis of the fair market value
of our common stock, see Managements Discussion and
Analysis of Financial Condition and Results of
Operations Critical Accounting Policies and
Estimates Accounting for Stock-based
Compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without
|
|
|
Good
|
|
|
Change in
|
|
Name
|
|
Payment
|
|
Death
|
|
|
Cause
|
|
|
Reason
|
|
|
Control
|
|
|
Ronald J.
Packard
(1)
|
|
Salary continuation
|
|
$
|
202,192
|
|
|
$
|
505,479
|
|
|
$
|
505,479
|
|
|
$
|
|
|
|
|
Benefit continuation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
624,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John F.
Baule
(2)
|
|
Salary continuation
|
|
|
|
|
|
|
300,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
Benefit continuation
|
|
|
|
|
|
|
16,734
|
|
|
|
16,734
|
|
|
|
|
|
|
|
Option vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
264,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce J. Davis
|
|
Salary continuation
|
|
|
|
|
|
|
147,945
|
|
|
|
147,945
|
|
|
|
|
|
|
|
Benefit continuation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bror V. H. Saxberg
|
|
Salary continuation
|
|
|
|
|
|
|
152,877
|
|
|
|
152,877
|
|
|
|
|
|
|
|
Benefit continuation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Celia M. Stokes
|
|
Salary continuation
|
|
|
|
|
|
|
109,012
|
|
|
|
109,012
|
|
|
|
|
|
|
|
Benefit continuation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,000
|
|
|
|
|
(1)
|
|
Amounts do not reflect the terms of
Mr. Packards amended and restated employment agreement
effective July 12, 2007. If Mr. Packards amended
and restated employment agreement was in effect as of
June 30, 2007, Mr. Packards salary continuation
upon death, termination without cause or termination for good
reason would have been $209,589, $637,500 and $637,500,
respectively. The value of Mr. Packards option
vesting would not have changed because the exercise price of the
new stock options would have exceeded the value of a share of
our common stock on such date.
|
|
|
|
(2)
|
|
Amounts do not reflect the terms of
Mr. Baules amended employment agreement or stock
option agreement effective July 12, 2007. If
Mr. Baules amended employment agreement and option
agreement were in effect as of June 30, 2007,
Mr. Baules salary continuation upon termination
without cause or termination for good reason would have been
$340,000. The value of Mr. Baules option vesting
would not have changed because the exercise price of the new
stock options would have exceeded the value of a share of our
common stock on such date. The value of the benefit continuation
would not have changed.
|
Director
Compensation
For fiscal year ended June 30, 2007, and prior fiscal
years, we compensated our nonemployee directors solely through
grants of stock options. None of our nonemployee directors
received any other form of compensation for service during
fiscal year ended June 30, 2007, such as cash fees for
retainer, committee service, service as chairman of the board of
directors or meeting attendance. For service during fiscal year
ended June 30, 2007, each nonemployee director received
options to purchase 25,000 shares of our common stock. In
addition, members of the Executive Committee of the board during
fiscal year ended June 30, 2007, which included
Messrs. Tisch, Milken, Fink and Ms. Boyd, received
options to purchase an additional 25,000 shares of our
common stock in compensation
88
for their increased time commitments with respect to serving on
the Executive Committee. Directors who are also our employees
receive no additional compensation for serving on the board or
its committees.
|
|
|
|
|
|
|
|
|
|
|
Option
|
|
|
|
|
Name
|
|
Awards
(1)
|
|
|
Total
(1)
|
|
|
Andrew H. Tisch
|
|
$
|
708
(2)
|
|
|
$
|
708
|
|
Arthur H. Bilger
|
|
|
354
(3)
|
|
|
|
354
|
|
Chester E. Finn Jr.
|
|
|
354
(4)
|
|
|
|
354
|
|
Liza A. Boyd
|
|
|
708
(5)
|
|
|
|
708
|
|
Lowell J. Milken
|
|
|
708
(6)
|
|
|
|
708
|
|
Steven B. Fink
|
|
|
708
(7)
|
|
|
|
708
|
|
Thomas J. Wilford
|
|
|
354
(8)
|
|
|
|
354
|
|
|
|
|
(1)
|
|
This column represents the dollar
amount recognized by us for financial statement reporting
purposes of the fair value of stock options granted in fiscal
year ended June 30, 2007, and prior years under our Amended
and Restated Stock Option Plan in accordance with FAS 123R,
assuming no forfeitures. For additional information, including
information regarding the assumptions used when valuing the
stock options, refer to note 9 of our consolidated
financial statements filed herewith. The amounts set forth in
this column reflect our accounting expense for these awards and
do not correspond to the actual value that may be realized by
the directors receiving the awards.
|
|
|
|
(2)
|
|
During fiscal year ended
June 30, 2007, Mr. Tisch was granted 50,000 options on
May 17, 2007 with a fair value of $33,975. As of
June 30, 2007, Mr. Tisch held options to purchase
275,000 shares of common stock, consisting of 50,000
granted on May 17, 2007; 50,000 granted on April 27,
2006; 50,000 granted on March 24, 2005; 50,000 granted on
March 31, 2004; 50,000 granted on February 10, 2003;
and 25,000 granted on July 23, 2002.
|
|
|
|
(3)
|
|
During fiscal year ended
June 30, 2007, Mr. Bilger was granted 25,000 options
on May 17, 2007 with a fair value of $16,988. As of
June 30, 2007, Mr. Bilger held options to purchase
150,000 shares of common stock, consisting of 25,000
granted on May 17, 2007; 25,000 granted on April 27,
2006; 25,000 granted on March 24, 2005; 25,000 granted on
March 31, 2004; 25,000 granted on February 10, 2003;
and 25,000 granted on July 23, 2002. Mr. Bilger
resigned from the board of directors on June 29, 2007.
|
|
|
|
(4)
|
|
During fiscal year ended
June 30, 2007, Mr. Finn was granted 25,000 options on
May 17, 2007 with a fair value of $16,988. As of
June 30, 2007, Mr. Finn held options to purchase
210,000 shares of common stock, consisting of 25,000
granted on May 17, 2007; 25,000 granted on April 27,
2006; 25,000 granted on March 24, 2005; 25,000 granted on
March 31, 2004; 25,000 granted on February 10, 2003;
25,000 granted on July 23, 2002; and 60,000 granted on
August 31, 2000. Mr. Finn resigned from the board of
directors on July 19, 2007.
|
|
|
|
(5)
|
|
Ms. Boyd serves as a director
on behalf of certain funds managed by Constellation Ventures.
During fiscal year ended June 30, 2007, Ms. Boyd was
granted 50,000 options on May 17, 2007 with a fair value of
$33,975, which have been assigned to these funds. The options
granted to the director serving on behalf of these funds in
prior years have also been assigned to these funds. As of
June 30, 2007, these funds held options to purchase
237,500 shares of common stock, consisting of 50,000
granted on May 17, 2007; 50,000 granted on April 27,
2006; 50,000 granted on March 24, 2005; 50,000 granted on
March 31, 2004; and 37,500 granted on February 10,
2003.
|
|
|
|
(6)
|
|
During fiscal year ended
June 30, 2007, Mr. Milken was granted 50,000 options
on May 17, 2007 with a fair value of $33,975. As of
June 30, 2007, Mr. Milken held options to purchase
275,000 shares of common stock, consisting of 50,000
granted on May 17, 2007; 50,000 granted on April 27,
2006; 50,000 granted on March 24, 2005; 50,000 granted on
March 31, 2004; 50,000 granted on February 10, 2003;
and 25,000 granted on July 23, 2002. Mr. Milken
resigned from the board of directors on July 11, 2007.
|
|
|
|
(7)
|
|
During fiscal year ended
June 30, 2007, Mr. Fink was granted 50,000 options on
May 17, 2007 with a fair value of $33,975. As of
June 30, 2007, Mr. Fink held options to purchase
205,685 shares of common stock, consisting of 50,000
granted on May 17, 2007; 50,000 granted on April 27,
2006; 50,000 granted on March 24, 2005; 50,000 granted on
March 31, 2004; 959 granted on December 18, 2003; and
4,726 granted on October 24, 2003.
|
|
|
|
(8)
|
|
During fiscal year ended
June 30, 2007, Mr. Wilford was granted
25,000 options on May 17, 2007 with a fair value of
$16,988. As of June 30, 2007, Mr. Wilford held options
to purchase 125,000 shares of common stock, consisting of
25,000 granted on May 17, 2007; 25,000 granted on
April 27, 2006; 25,000 granted on March 24, 2005;
25,000 granted on March 31, 2004; and 25,000 granted on
February 10, 2003.
|
89
CERTAIN
RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
The following is a summary of transactions since July 1,
2004 to which we have been a party in which the amount involved
exceeded $120,000 and in which any of our executive officers,
directors or beneficial holders of more than 5% of our capital
stock had or will have a direct or indirect material interest,
other than compensation arrangements that are described under
the section of this prospectus entitled Compensation
Discussion and Analysis.
Policies
and Procedures for Related-Party Transactions
We recognize that related party transactions present a
heightened risk of conflicts of interest and in connection with
this offering, have adopted a policy to which all related party
transactions shall be subject. Pursuant to the policy, the audit
committee of our board of directors, or in the case of a
transaction in which the aggregate amount is, or is expected to
be, in excess of $250,000, the board of directors will review
the relevant facts and circumstances of all related party
transactions, including, but not limited to, (i) whether
the transaction is on terms comparable to those that could be
obtained in arms length dealings with an unrelated third
party and (ii) the extent of the related partys
interest in the transaction. Pursuant to the policy, no
director, including the chairman of the audit committee may
participate in any approval of a related party transaction to
which he or she is a related party.
The audit committee will then, in its sole discretion, either
approve or disapprove the transaction.
Certain types of transactions, which would otherwise require
individual review, have been pre-approved by the audit
committee. These types of transactions include, for example,
(i) compensation to an officer or director where such
compensation is required to be disclosed in our proxy statement,
(ii) transactions where the interest of the related party
arises only by way of a directorship or minority stake in
another organization that is a party to the transaction and
(iii) transactions involving competitive bids or fixed
rates.
All of the transactions set forth below were approved by a
majority of the board of directors, including a majority of the
independent and disinterested members of the board of directors
prior to the adoption of our related party transaction policy.
We believe that we have executed all of the transactions set
forth below on terms no less favorable to us than we could have
obtained from unaffiliated third parties.
Loan
From Director Stockholders
On June 28, 2005, the Company entered into a loan
commitment with certain of its director stockholders and their
affiliates. The loan, which was made to supplement our working
capital, entitled us to borrow up to $8.050 million in two
installments. In June 2005, we borrowed $4.025 million. The
loan was secured by our accounts receivable and certain other
assets and was to mature on December 31, 2006. However, we
paid the loan in full, including $1.0 million in interest, on
December 21, 2006 and all obligations relating to the loan
have since been released.
Stockholders
Agreement
We entered into a Second Amended and Restated Stockholders
Agreement, dated December 19, 2003, with the holders of our
common stock and the holders of our Series B and
Series C preferred stock. We refer to this agreement below
as the stockholders agreement. The stockholders agreement
contains certain transfer restrictions, preemptive rights and
drag-along rights, each of which will terminate upon completion
of this offering.
Pursuant to the stockholders agreement, holders of shares of our
common stock and preferred stock have the registration rights
described below. These registration rights are subject to
certain conditions and limitations, including the right of the
underwriters of an offering to limit the number of shares
included in such registration and our right to postpone a
requested registration for a period of no more than
120 days if our board determines such registration would be
detrimental to us.
The holders of at least one-third of the shares of our common
stock issued or issuable to our preferred stockholders upon
conversion of their preferred stock, subject to certain
exceptions, may require us to file a registration statement
under the Securities Act at our expense with respect to such
shares of common stock. We are
90
not obligated to take any action to effect any registration
demanded pursuant to the stockholders agreement during the
period starting 60 days prior to and ending six months
following the effective date of any registration statement
pertaining to any of our securities. The stockholders agreement
grants three such demand registration rights.
Beginning six months after this offering, if we propose to
register any shares of our common stock, persons owning or
having the right to acquire shares of our common stock are
entitled to notice of such registration and are entitled to
include shares of their common stock therein.
We are obligated to pay all registration expenses, other than
underwriting commissions, brokerage fees or transfer taxes
related to any demand or piggyback registration. Each holder
agrees not to undertake any public sale or distribution of
shares of our common stock during the
180-day
period following the closing of an initial public offering of
our common stock. The stockholders agreement contains customary
indemnification provisions.
Individual
Stockholder Agreements
We entered into a Stockholder Agreement with our Chief Executive
Officer, Ronald J. Packard, and Knowledge Universe Learning,
Inc. (KULI) dated April 26, 2000. Pursuant to that
agreement, Mr. Packard granted to KULI an irrevocable proxy
to vote
and/or
give
written consents with respect to any and all shares of the
Company owned by Mr. Packard
and/or
standing in the name of Mr. Packard on the books and
records of the Company or with respect to which Mr. Packard
otherwise may be entitled to vote at any and all annual or
special meetings of the stockholders of the Company or by
written consent. Upon the completion of this offering, this
agreement shall automatically terminate.
We entered into a Stockholder Agreement with William J. Bennett
and KULI on February 20, 2000. Dr. Bennett resigned as
a director and our Chairman in October 2005, at which time
certain terms of this agreement were amended in connection with
his resignation. Upon the closing of the offering, any
antidilution rights that remain in the agreement will terminate.
The agreement initially prohibited sales by Dr. Bennett of
the 1,500,000 shares he was issued in 2000, and now limits
him to sales of no more than 20% of such shares per year.
Employment
Agreements
We have entered into employment with certain of our executive
officers. For more information regarding these agreements. See
Compensation Discussion and Analysis
Employment Agreements.
91
PRINCIPAL
AND SELLING STOCKHOLDERS
The following table provides certain information regarding the
beneficial ownership of our outstanding capital stock as of
June 30, 2007, after giving effect to
a
for stock split, for:
|
|
|
|
|
each person or group who beneficially owns more than 5% of our
capital stock on a fully diluted basis;
|
|
|
|
each of the executive officers named in the Summary Compensation
Table;
|
|
|
|
each of our directors;
|
|
|
|
each of the selling stockholders; and
|
|
|
|
all of our directors and executive officers as a group.
|
The selling stockholders will only offer shares in this offering
if, and to the extent, that the underwriters exercise their
overallotment option.
Unless otherwise noted, the address for each director and
executive officer is c/o K12 Inc., 2300 Corporate Park
Drive, Herndon, VA 20171.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Shares Beneficially
|
|
|
|
|
|
|
|
|
|
Percentage of
|
|
|
Shares to be
|
|
|
Owned After
|
|
|
|
|
|
|
|
|
|
Ownership After
|
|
|
Sold in This
|
|
|
This Offering if
|
|
|
|
Shares Beneficially
|
|
|
This Offering if
|
|
|
Offering if the
|
|
|
the Underwriters
|
|
|
|
Owned Prior
|
|
|
the Underwriters
|
|
|
Underwriters
|
|
|
Exercise Their
|
|
|
|
to This
|
|
|
Do Not Exercise
|
|
|
Exercise Their
|
|
|
Overallotment
|
|
|
|
Offering
(1)
|
|
|
Their Overallotment
|
|
|
Overallotment
|
|
|
Option in
Full
(1)
|
|
Name of Beneficial Owner
|
|
Number
|
|
|
Percent
|
|
|
Option
|
|
|
Option in Full
|
|
|
Number
|
|
|
Percent
|
|
|
Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ronald J.
Packard
(2)
|
|
|
4,681,369
|
|
|
|
4.07
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
John F.
Baule
(3)
|
|
|
550,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bror V. H.
Saxberg
(4)
|
|
|
444,375
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Howard
D. Polsky
(5)
|
|
|
101,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nancy
Hauge
(6)
|
|
|
68,125
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Celia M.
Stokes
(7)
|
|
|
62,500
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce J. Davis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Andrew H.
Tisch
(8)
|
|
|
5,532,243
|
|
|
|
4.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas J.
Wilford
(9)
|
|
|
4,206,345
|
|
|
|
3.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Guillermo
Bron
(10)
|
|
|
432,738
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Steven B.
Fink
(11)
|
|
|
105,269
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liza A.
Boyd
(12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dr. Mary H. Futrell
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Directors and Executive
Officers as a Group (13 persons)
|
|
|
16,183,964
|
|
|
|
13.92
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial Owners of 5% or More
of Our Outstanding Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Learning Group
LLC
(13)
|
|
|
27,521,420
|
|
|
|
24.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CV II
Entities
(14)
|
|
|
17,573,842
|
|
|
|
15.70
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mollusk Holdings,
LLC
(15)
|
|
|
13,002,086
|
|
|
|
11.51
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Less than 1% beneficial ownership.
|
|
(1)
|
|
Beneficial ownership of shares is
determined in accordance with the rules of the Securities and
Exchange Commission and generally includes any shares over which
a person exercises sole or shared voting or investment power.
Except as indicated by footnote, and subject to
|
92
|
|
|
|
|
applicable community property
laws, to our knowledge, each stockholder identified in the table
possesses sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by the
stockholder. The number of shares beneficially owned by a person
includes shares of common stock subject to options and warrants
held by that person that are currently exercisable or
exercisable within 60 days of June 30, 2007 and not
subject to repurchase as of that date. Shares issuable pursuant
to options and warrants are deemed outstanding for calculating
the percentage ownership of the person holding the options and
warrants but are not deemed outstanding for the purposes of
calculating the percentage ownership of any other person. For
purposes of this table, the number of shares of common stock
outstanding as of June 30, 2007 is deemed to be
111,798,779, after giving effect to the conversion of our
outstanding preferred stock into 101,386,536 shares of
common stock immediately prior to the closing of this offering.
For purposes of calculating the percentage beneficially owned by
any person, shares of common stock issuable to such person upon
the exercise of any options or warrants exercisable within
60 days of June 30, 2007 are also assumed to be
outstanding.
|
|
|
|
(2)
|
|
Includes options for
3,175,000 shares of common stock, warrants to purchase
6,369 shares of common stock and 1,500,000 shares of common
stock. These totals include both shares and options held
individually and in the 2006 Packard Investment Partnership, L.P.
|
|
(3)
|
|
Includes options for
550,000 shares of common stock.
|
|
(4)
|
|
Includes 300,000 shares of
common stock and options for 144,375 shares of common stock.
|
|
|
|
(5)
|
|
Includes options for
101,000 shares of common stock.
|
|
|
|
(6)
|
|
Includes options for
68,125 shares of common stock.
|
|
|
|
(7)
|
|
Includes options for
62,500 shares of common stock.
|
|
|
|
(8)
|
|
Includes options for
175,000 shares of common stock and warrants to purchase
12,739 shares of common stock. Also includes
1,248,900 shares of common stock issuable upon conversion
of preferred stock held Andrew H. Tisch 1991 Trust #2,
182,130 shares of common stock issuable upon conversion of
preferred stock held by KAL Family Partnership and
182,129 shares of common stock issuable upon conversion of
preferred stock held by KSC Family Partnership. Mr. Tisch
has voting and investment control with respect to the shares
held by these entities. The address of these stockholders is
c/o Loews
Corporation, 667 Madison Avenue, 7th Floor,
New York, New York 10021. Also includes 3,731,345
shares of common stock issuable upon conversion of preferred
stock held by Continental Casualty Company. Mr. Tisch is on
the board of directors of CNA Financial Corporation, which is
affiliated with Continental Casualty Company. Mr. Tisch
disclaims beneficial ownership of the shares held by Continental
Casualty Company. The address for Continental Casualty Company
is c/o CNA Financial Corporation, CNA Center, Chicago, Illinois
60685.
|
|
|
|
(9)
|
|
Includes options for
75,000 shares of common stock. Also includes 4,131,345
shares of common stock held by Alscott Investments, LLC.
Mr. Wilford has voting and investment power with respect to
shares held by this stockholder. The address of Alscott
Investments, LLC is 501 Baybrook Court, Boise, Idaho 83706.
Mr. Wilford disclaims beneficial ownership of the shares
held by Alscott Investment, LLC except to the extent of his
pecuniary interest therein.
|
|
|
|
(10)
|
|
Includes 432,738 shares of common
stock issuable upon conversion of preferred stock held by The
Bron Trust, dated July 27, 1998. Mr. Bron is not the
trustee of The Bron Trust, however, he is the beneficiary of The
Bron Trust and, therefore, is deemed to beneficially own such
shares. Mr. Bron disclaims beneficial ownership of the
shares held by The Bron Trust except to the extent of his
pecuniary interest, if any, therein.
|
|
|
|
(11)
|
|
Includes options for
105,269 shares of common stock. Does not include the shares
of common stock or preferred stock held by Mollusk Holdings,
LLC. Mr. Fink is the Chief Executive Officer of Lawrence
Investments, LLC. Lawrence Investments, LLC is a managing member
of Mollusk Holdings, LLC. Mr. Fink does not have voting
power nor investment power with respect to the common stock
directly or beneficially owned by Mollusk Holdings, LLC.
|
|
|
|
(12)
|
|
Does not include the shares of
preferred stock or options to acquire common stock held by
Constellation Venture Capital II, L.P., Constellation Venture
Capital Offshore II, L.P., The BSC Employee Fund IV, L.P.
and CVC II Partners, LLC (See note (14)). Ms. Boyd is a
Managing Director of Constellation Ventures. Ms. Boyd does
not have voting power nor investment power with respect to the
common stock beneficially owned by such funds.
|
|
|
|
(13)
|
|
Includes 23,791,931 shares of
common stock issuable upon conversion of preferred stock,
3,106,774 shares of common stock, warrants to purchase
40,625 shares of common stock and warrants to purchase 582,090
shares of preferred stock convertible into an equivalent amount
of shares of common stock upon consummation of this offering.
Learning Group LLC may be deemed to be controlled by Michael R.
Milken and/or Lowell J. Milken and as such, Michael R. Milken
and/or Lowell J. Milken may be deemed to have the power to
exercise investment and voting control over, and to share in the
beneficial ownership of, the shares beneficially owned by
Learning Group LLC. The address for Messrs. M. Milken and
L. Milken and Learning Group LLC is 1250 Fourth Street, Santa
Monica, CA 90401.
|
|
|
|
(14)
|
|
The CV II Entities consist of
(i) Constellation Venture Capital II, L.P. (CVC II),
(ii) Constellation Venture Capital Offshore II, L.P.
(Offshore), (iii) The BSC Employee Fund IV, L.P. (BSC)
and (iv) CVC II Partners, LLC (CVC II Partners, and
together with CVC II, Offshore and BSC, the Constellation
Funds). Constellation Ventures Management II LLC is the
sole general partner of CVC II, the sole general partner of
Offshore and the sole managing general partner of BSC. Bear
Stearns Asset Management Inc. is the managing member of CVC II
Partners and the investment adviser to each Constellation Fund.
Clifford Friedman is a member of Constellation Ventures
Management II, LLC and a senior managing director of Bear
Stearns Asset Management Inc. The Bear Stearns Companies Inc., a
registered broker-dealer, is the sole managing member of
Constellation Ventures Management II, LLC and the parent
corporation of Bear Stearns Asset Management Inc. Constellation
Ventures Management II, LLC, Bear Stearns Asset Management Inc.
and Mr. Friedman share investment and voting control of
shares beneficially owned by CVC II, Offshore and BSC. Bear
Stearns Asset Management Inc. exercises sole investment and
voting control of the shares beneficially owned by CVC II
Partners. The address for each such entity and person is 237
Park Avenue, New York, New York 10017.
|
|
|
|
|
|
The holdings of the CV II Entities
include: (i) 9,220,061 shares of common stock issuable upon
conversion of preferred stock held by CVC II and options for
72,710 shares of common stock assigned to CVC II by
Ms. Boyd or a former director appointed by the
Constellation Funds; (ii) 4,358,964 shares of common stock
issuable upon conversion of preferred stock held by Offshore and
options for 34,375 shares of common stock assigned to Offshore
by Ms. Boyd or a former director appointed by the
Constellation Funds; (iii) 3,652,763 shares of common stock
issuable upon conversion of preferred stock held by BSC and
options for 28,806 shares of common stock assigned to BSC by Ms.
Boyd or a former director appointed by the Constellation Funds;
and (iv) 204,554 shares of common stock issuable upon conversion
of preferred stock held by CVC II Partners and options for 1,609
shares of common stock assigned to CVC II Partners by
Ms. Boyd or a former
|
93
|
|
|
|
|
director appointed by the
Constellation Funds. Ms. Boyd is affiliated with the
Constellation Funds but disclaims beneficial ownership of the
shares held by them. The CV II Entities has informed us that it
purchased the shares being registered on their behalf in the
ordinary course of business and, at the time of their purchase,
had no agreement or understanding, directly or indirectly, with
any person to distribute those shares.
|
|
|
|
(15)
|
|
Includes 7,962,395 shares of
common stock issuable upon conversion of preferred stock held,
3,875,512 shares of common stock and warrants to purchase
1,164,179 shares of preferred stock convertible into an
equivalent amount of shares of common stock upon consummation of
this offering. The address of this stockholder is
101 Ygnacio Valley Road, Suite 310, Walnut Creek,
California 94596. Cephalopod Corporation and Lawrence
Investments, LLC are the members of Mollusk Holdings, LLC.
Cephalopod Corporation is the managing member of Mollusk
Holdings, LLC. Mr. Lawrence J. Ellison is the Chief
Executive Officer of Cephalopod Corporation. The Lawrence J.
Ellison Revocable Trust U/D/D 12/8/95 (Ellison
Trust), Philip B. Simon and Steven B. Fink are the members
of Lawrence Investments, LLC. Mr. Fink is the Chief
Executive Officer of Lawrence Investments, LLC and
Mr. Simon is the President of Lawrence Investments, LLC.
Mr. Ellison is the sole beneficiary and co-trustee of the
Ellison Trust. Mr. Simon is the other co-trustee.
Mr. Ellison may be deemed to exercise investment and voting
control over the shares beneficially owned by Mollusk Holdings,
LLC. The address for Mr. Ellison is 500 Oracle Parkway,
Redwood Shores, California 94065.
|
94
DESCRIPTION
OF CAPITAL STOCK
The following description of our capital stock is only a
summary, and is qualified in its entirety by reference to the
actual terms and provisions of the capital stock contained in
our Amended and Restated Certificate of Incorporation, as
amended, Bylaws, as amended, and other agreements to which we
and our stockholders are parties.
As of June 30, 2007, there were 10,412,243 shares of
common stock outstanding, held of record by
35 stockholders, and there were 51,524,974 shares of
Series B preferred stock and 49,861,562 shares of
Series C preferred stock outstanding, held of record by 62
and 39 stockholders, respectively.
Immediately prior to the completion of this offering, all
outstanding shares of our preferred stock will be converted into
shares of our common stock pursuant to the terms thereof without
any further action required by us or the holders of the
preferred stock. Upon completion of this offering, our
authorized capital stock will consist
of shares
of common stock, par value $0.0001 per share,
and shares
of preferred stock, par value $0.0001 per share, all of
which shares of preferred stock will be undesignated.
Common
Stock
The holders of our common stock are entitled to the following
rights:
Voting
Rights
Each share of our common stock entitles its holder to one vote
per share on all matters to be voted upon by the stockholders.
There is no cumulative voting, which means that a holder or
group of holders of more than 50% of the shares of our common
stock can elect all of our directors.
Dividend
Rights
The holders of our common stock are entitled to receive
dividends when and as declared by our board of directors from
legally available sources, subject to any restrictions in our
Amended and Restated Certificate of Incorporation, as amended,
or prior rights of the holders of our preferred stock. See
Dividend Policy.
Liquidation
Rights
In the event of our liquidation or dissolution, the holders of
our common stock are entitled to share ratably in the assets
available for distribution after the payment of all of our debts
and other liabilities, subject to the prior rights of the
holders of our preferred stock.
Other
Matters
The holders of our common stock have no subscription, redemption
or conversion privileges. Our common stock does not entitle its
holders to preemptive rights. All of the outstanding shares of
our common stock are fully paid and nonassessable. The rights,
preferences and privileges of the holders of our common stock
are subject to the rights of the holders of shares of any series
of preferred stock which we may issue in the future.
Preferred
Stock
Our board of directors has the authority to issue preferred
stock in one or more classes or series and to fix the
designations, powers, preferences, and rights, and the
qualifications, limitations or restrictions thereof including
dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any class or
series, without further vote or action by the stockholders. The
issuance of preferred stock may have the effect of delaying,
deferring, or preventing a change in control of our company
without further action by the stockholders and may adversely
affect the voting and other rights of the holders of our common
stock. As of June 30, 2007, there was
51,524,974 shares of Series B preferred stock and
49,861,562 of Series C preferred stock issued and
outstanding.
95
Governing
Documents and Delaware Law that May Have an Antitakeover
Effect
The provisions of (1) Delaware law, (2) our amended
and restated certificate of incorporation to be effective upon
completion of this offering, and (3) our amended and
restated bylaws to be effective upon completion of this
offering, which are discussed below, could discourage or make it
more difficult to accomplish a proxy contest or other change in
our management or the acquisition of control by a holder of a
substantial amount of our voting stock.
Amended
and Restated Certificate of Incorporation and Amended and
Restated Bylaws
Upon consummation of the offering, we expect that our amended
and restated certificate of incorporation and amended and
restated bylaws will contain provisions that could have the
effect of discouraging potential acquisition proposals or tender
offers or delaying or preventing a change of control of the
Company. In particular, we expect that our amended and restated
certificate of incorporation and amended and restated bylaws, as
applicable, among other things, will:
|
|
|
|
|
provide that special meetings of the stockholders may be called
only by our Chairman of the Board, Chief Executive Officer, by
the request in writing of a majority of the members of the board
of directors or by the request in writing of stockholders
holding in aggregate at least 40 % of the number of shares
outstanding;
|
|
|
|
|
|
establish procedures with respect to stockholder proposals and
stockholder nominations, including requiring advance written
notice of a stockholder proposal or director nomination;
|
|
|
|
|
|
not permit action by stockholders by written consent in lieu of
a meeting of stockholders;
|
|
|
|
|
|
not include a provision for cumulative voting in the election of
directors. Under cumulative voting, a minority stockholder
holding a sufficient number of shares may be able to ensure the
election of one or more directors. The absence of cumulative
voting may have the effect of limiting the ability of minority
stockholders to effect changes in the board of directors and, as
a result, may have the effect of deterring a hostile takeover or
delaying or preventing changes in control or management of our
company;
|
|
|
|
provide that vacancies on our board of directors may be filled
by a majority of directors in office, although less than a
quorum, and not by the stockholders;
|
|
|
|
|
|
require that the vote of holders of
66
2
/
3
%
of the voting power of the outstanding shares entitled to vote
generally in the election of directors is required to amend our
amended and restated certificate of incorporation and amended
and restated bylaws; and
|
|
|
|
|
|
provide that the board of directors has the power to alter,
amend or repeal the bylaws without stockholder approval.
|
Following the completion of this offering, our amended and
restated certificate of incorporation will authorize our board
of directors, without further vote or action by the
stockholders, to issue up
to shares
of preferred stock, par value $0.0001 per share, in one or more
classes or series, and to fix or alter:
|
|
|
|
|
the number of shares constituting any class or series;
|
|
|
|
the designations, powers and preferences of each class or series;
|
|
|
|
the relative, participating, optional and other special rights
of each class or series; and
|
|
|
|
any qualifications, limitations or restrictions on each class or
series.
|
The above provisions are intended to promote continuity and
stability in the composition of our board of directors and in
the policies formulated by the board, and to discourage certain
types of transactions that may involve an actual or threatened
change of control. These provisions are expected to reduce our
vulnerability to unsolicited acquisition attempts as well as
discourage certain tactics that may be used in proxy fights.
Such provisions, however, could discourage others from making
tender offers for our shares and, as a consequence, may also
inhibit fluctuations in the market price of our common stock
that could result from actual or rumored takeover attempts.
These provisions could also operate to prevent changes in our
management.
96
Delaware
Takeover Statute
We are subject to the provisions of Section 203 of the
Delaware General Corporation Law, or the DGCL. Subject to
certain exceptions, Section 203 prohibits a Delaware
corporation from engaging in a business combination
with an interested stockholder for a period of three
years after the time that the stockholder became an interested
stockholder, unless:
|
|
|
|
|
prior to the date of the business combination, the board of
directors of the corporation approved either the business
combination or the transaction that resulted in the stockholder
becoming an interested stockholder;
|
|
|
|
on consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the voting stock
outstanding (but not the outstanding voting stock of the
interested stockholder) those shares owned:
|
|
|
|
|
|
by persons who are directors and also officers, and
|
|
|
|
by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held
subject to the plan will be tendered in a tender or exchange
offer; or
|
|
|
|
at or subsequent to such time, the business combination is
approved by the board of directors and authorized at an annual
or special meeting of stockholders, and not by written consent,
by the affirmative vote of at least
66
2
/
3
%
of the outstanding voting stock that is not owned by the
interested stockholder.
|
A business combination includes:
|
|
|
|
|
any merger or consolidation involving the corporation and the
interested stockholder;
|
|
|
|
any sale, transfer, pledge or other disposition of 10% or more
of the assets of the corporation involving the interested
stockholder;
|
|
|
|
subject to certain exceptions, any transaction that results in
the issuance or transfer by the corporation of any stock of the
corporation to the interested stockholder;
|
|
|
|
|
|
any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or
series of the corporation beneficially owned by the interested
stockholder; or
|
|
|
|
the receipt by the interested stockholder of the benefit of any
loans, advances, guarantees, pledges or other financial benefits
provided by or through the corporation.
|
Subject to various exceptions, an interested
stockholder is an entity or person who, together with
affiliates and associates, owns (or within three years from the
date of determination, did own) 15% or more of the
corporations outstanding voting stock. This statute could
delay, defer or prohibit a merger or other takeover or a change
of control of the Company.
New York
Stock Exchange
We will apply to list our common stock on the New York Stock
Exchange under the symbol LRN.
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock will be
Registrar and Transfer Company.
97
CERTAIN
UNITED STATES FEDERAL INCOME TAX
CONSIDERATIONS TO
NON-U.S.
HOLDERS
The following is a summary of the material U.S. federal
income tax consequences to
non-U.S. holders
of the ownership and disposition of our common stock, but does
not purport to be a complete analysis of all the potential tax
considerations relating thereto. This summary is based upon the
provisions of the Internal Revenue Code of 1986, as amended, or
the Code, U.S. Department of the Treasury regulations
promulgated thereunder, administrative rulings and judicial
decisions, all as of the date hereof. These authorities may be
changed, possibly retroactively, so as to result in
U.S. federal income tax consequences different from those
set forth below. This summary is applicable only to
non-U.S. holders
who hold our common stock as a capital asset (generally, an
asset held for investment purposes). We have not sought any
ruling from the Internal Revenue Service, or the IRS, with
respect to the statements made and the conclusions reached in
the following summary, and there can be no assurance that the
IRS will agree with such statements and conclusions.
This summary also does not address the tax considerations
arising under the laws of any foreign, state or local
jurisdiction. In addition, this discussion does not address tax
considerations applicable to an investors particular
circumstances or to investors that may be subject to special tax
rules, including, without limitation:
|
|
|
|
|
banks, insurance companies, or other financial institutions;
|
|
|
|
persons subject to the alternative minimum tax;
|
|
|
|
tax-exempt organizations;
|
|
|
|
dealers in securities or currencies;
|
|
|
|
traders in securities that elect to use a mark-to-market method
of accounting for their securities holdings;
|
|
|
|
entities treated as partnerships for U.S. federal income
tax purposes or investors in such entities;
|
|
|
|
|
|
controlled foreign corporations, passive
foreign investment companies and corporations that
accumulate earnings to avoid U.S. federal income tax;
|
|
|
|
|
|
U.S. expatriates or former long-term residents of the
United States;
|
|
|
|
persons who hold our common stock as a position in a hedging
transaction, straddle, conversion
transaction or other risk reduction transaction; or
|
|
|
|
persons deemed to sell our common stock under the constructive
sale provisions of the Code.
|
In addition, if a partnership or other entity treated as a
partnership for U.S. federal income tax purposes holds our
common stock, the tax treatment of a partner generally will
depend on the status of the partner and upon the activities of
the partnership. Accordingly, partnerships which hold our common
stock and partners in such partnerships should consult their tax
advisors.
This discussion is for general information only and is not
tax advice. You are urged to consult your tax advisor with
respect to the application of the U.S. federal income tax
laws to your particular situation, as well as any tax
consequences of the purchase, ownership and disposition of our
common stock arising under the U.S. federal estate or gift
tax rules or under the laws of any state, local, foreign or
other taxing jurisdiction or under any applicable tax treaty.
Non-U.S.
Holder Defined
For purposes of this discussion, you are a
non-U.S. holder
if you are a holder that, for U.S. federal income tax
purposes, is not a U.S. person. For purposes of this
discussion, you are a U.S. person if you are:
|
|
|
|
|
an individual who is a citizen or resident of the United States,
including an alien individual who is a lawful permanent resident
of the United States or who meets the substantial
presence test under Section 7701(b) of the Code;
|
98
|
|
|
|
|
a corporation, or other entity taxable as a corporation for
U.S. tax purposes, created or organized in the United
States or under the laws of the United States or of any state
therein or the District of Columbia;
|
|
|
|
an estate whose income is subject to U.S. federal income
tax regardless of its source; or
|
|
|
|
a trust (1) whose administration is subject to the primary
supervision of a U.S. court and which has one or more
U.S. persons who have the authority to control all
substantial decisions of the trust or (2) which has made an
election to be treated as a U.S. person.
|
Distributions
As discussed under Dividend Policy above, we do not
currently expect to pay dividends or other distributions on our
common stock.
If distributions are made on shares of our common stock, those
payments will constitute dividends for U.S. tax purposes to
the extent paid from our current or accumulated earnings and
profits, as determined under U.S. federal income tax
principles. To the extent those distributions exceed both our
current and our accumulated earnings and profits, they will
constitute a return of capital and will first reduce your basis
in our common stock, but not below zero, and then will be
treated as gain from the sale of stock.
Any dividend paid to you generally will be subject to
U.S. withholding tax either at a rate of 30% of the gross
amount of the dividend or such lower rate as may be specified by
an applicable tax treaty. In order to receive a reduced treaty
rate, you must provide the appropriate withholding agent with an
IRS
Form W-8BEN
or other appropriate version of IRS
Form W-8
certifying qualification for the reduced rate.
Dividends received by you that are effectively connected with
your conduct of a U.S. trade or business (and, where a tax
treaty applies, are attributable to a U.S. permanent
establishment maintained by you) are exempt from such
withholding tax. In order to obtain this exemption, you must
provide the appropriate withholding agent with an IRS
Form W-8ECI
properly certifying such exemption. Such effectively connected
dividends, although not subject to withholding tax, are taxed at
the same graduated rates applicable to U.S. persons, net of
any allowable deductions and credits. In addition, if you are a
corporate
non-U.S. holder,
dividends you receive that are effectively connected with your
conduct of a U.S. trade or business may also be subject to
a branch profits tax at a rate of 30% or such lower rate as may
be specified by an applicable tax treaty.
If you are eligible for a reduced rate of withholding tax
pursuant to a tax treaty, you may obtain a refund of any excess
amounts currently withheld if you file an appropriate claim for
refund with the IRS in a timely manner.
Gain on
Disposition of Common Stock
You generally will not be required to pay U.S. federal
income tax on any gain realized upon the sale or other
disposition of our common stock unless:
|
|
|
|
|
the gain is effectively connected with your conduct of a
U.S. trade or business (and, where a tax treaty applies, is
attributable to a U.S. permanent establishment maintained
by you);
|
|
|
|
you are an individual who is present in the United States for a
period or periods aggregating 183 days or more during the
calendar year in which the sale or disposition occurs and
certain other conditions are met; or
|
|
|
|
our common stock constitutes a U.S. real property interest
by reason of our status as a United States real property
holding corporation (a USRPHC) for U.S. federal
income tax purposes at any time within the shorter of the
five-year period preceding the disposition or your holding
period for our common stock.
|
We believe that we are not currently and will not become a
USRPHC. However, because the determination of whether we are a
USRPHC depends on the fair market value of our U.S. real
property relative to the fair market value of our other business
assets, there can be no assurance that we will not become a
USRPHC in the future. Even if we become USRPHC, however, as long
as our common stock is regularly traded on an established
securities market, such common stock will be treated as
U.S. real property interests only if you actually or
constructively hold more than 5% of our common stock.
99
If you are a
non-U.S. holder
described in the first bullet above, you will be required to pay
tax on the net gain derived from the sale under regular
graduated U.S. federal income tax rates, and corporate
non-U.S. holders
described in the first bullet above may be subject to the branch
profits tax at a 30% rate or such lower rate as may be specified
by an applicable income tax treaty. If you are an individual
non-U.S. holder
described in the second bullet above you will be required to pay
a flat 30% tax on the gain derived from the sale, which tax may
be offset by U.S. source capital losses. You should consult
any applicable income tax treaties that may provide for
different rules.
Backup
Withholding and Information Reporting
Generally, we must report annually to the IRS the amount of
dividends paid to you, your name and address, and the amount of
tax withheld, if any. A similar report will be sent to you.
These information reporting requirements apply even if
withholding is not required. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax
authorities in your country of residence.
Payments of dividends made to you will not be subject to backup
withholding if you establish an exemption, for example, by
properly certifying your
non-U.S. status
on a
Form W-8BEN
or another appropriate version of
Form W-8.
Notwithstanding the foregoing, backup withholding at a current
rate of 28%, may apply if either we or our paying agent has
actual knowledge, or reason to know, that you are a
U.S. person.
Payments of the proceeds from a disposition of our common stock
effected outside the United States by a
non-U.S. holder
made by or through a foreign office of a broker generally will
not be subject to information reporting or backup withholding.
However, information reporting (but not backup withholding) will
apply to such a payment if the broker is a U.S. person, a
controlled foreign corporation for U.S. federal income tax
purposes, a foreign person 50% or more of whose gross income is
effectively connected with a U.S. trade or business for a
specified three-year period, or a foreign partnership with
certain connections with the United States, unless the broker
has documentary evidence in its records that the beneficial
owner is a
non-U.S. holder
and specified conditions are met or an exemption is otherwise
established.
Payments of the proceeds from a disposition of our common stock
by a
non-U.S. holder
made by or through the U.S. office of a broker is generally
subject to information reporting and backup withholding unless
the
non-U.S. holder
certifies as to its
non-U.S. holder
status under penalties of perjury or otherwise establishes an
exemption from information reporting and backup withholding.
Backup withholding is not an additional tax. Rather, the
U.S. income tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund or
credit may be obtained, provided that the required information
is furnished to the IRS in a timely manner.
100
SHARES
ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our common
stock, including shares issued upon the exercise of outstanding
options or warrants, in the public market following the
offering, the market price of our common stock could decline.
These sales also might make it more difficult for us to sell
equity or equity-related securities in the future at a time and
price that we deem appropriate.
Upon completion of the offering, we will have outstanding an
aggregate
of shares
of our common stock, assuming no exercise of the
underwriters overallotment option and no exercise of
outstanding options. Of these shares, all of the shares sold in
the offering will be freely tradable without restriction or
further registration under the Securities Act, unless the shares
are purchased by affiliates as that term is defined
in Rule 144 under the Securities Act. This
leaves shares
eligible for sale in the public market as follows:
|
|
|
Number of
|
|
|
Shares
|
|
Date
|
|
|
|
After days
from the date of this prospectus (subject, in some cases, to
volume limitations).
|
|
|
At various times after
180 days from the date of this prospectus as described
below under Lock-up Agreements.
|
Rule 144
In general, under Rule 144 as currently in effect,
beginning 90 days after the date of this prospectus, a
person who has beneficially owned shares of our common stock for
at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the
greater of:
|
|
|
|
|
1% of the number of shares of our common stock then outstanding,
which will equal
approximately shares
immediately after the offering; or
|
|
|
|
the average weekly trading volume of our common stock on the New
York Stock Exchange during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to that sale.
|
Sales under Rule 144 are also subject to manner of sale
provisions and notice requirements and to the availability of
current public information about us. The Securities and Exchange
Commission has a proposal pending to shorten the
one-year
holding period to six months.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been
one of our affiliates at any time during the three months
preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years, including the
holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner
of sale, public information, volume limitation or notice
provisions of Rule 144. The Securities and Exchange
Commission has a proposal pending to shorten the two-year
holding period to six months.
Lock-Up
Agreements
All of our officers and directors and certain of our
stockholders have entered into
lock-up
agreements under which they agreed not to transfer or dispose
of, directly or indirectly, any shares of our common stock or
any securities convertible into or exercisable or exchangeable
for shares of our common stock, except for shares sold in this
offering by the selling stockholders, for a period of
180 days after the date of this prospectus without the
prior written consent of Morgan Stanley & Co. Incorporated
and Credit Suisse Securities (USA) LLC on behalf of the
underwriters.
In addition, at our request, the underwriters have reserved up
to shares
of the shares of common stock offered for sale pursuant to this
prospectus for sale to some of our directors, executive
officers, employees and business associates in a directed share
program. Any of these directed shares purchased by our
directors, executive officers, employees and business
associates, such as clients or suppliers, will be subject to a
180-day
lock-up
101
restriction. Accordingly, the number of shares freely
transferable upon completion of this offering will be reduced by
the number of directed shares purchased by our directors,
executive officers, employees and business associates, and there
will be a corresponding increase in the number of shares that
become eligible for sale after 180 days from the date of
this prospectus.
Rule 701
In general, under Rule 701 of the Securities Act as
currently in effect, any of our employees, consultants or
advisors who purchase shares of our common stock from us in
connection with a compensatory stock or option plan or other
written agreement is eligible to resell those shares
90 days after the effective date of the offering in
reliance on Rule 144, but without compliance with some of
the restrictions, including the holding period, contained in
Rule 144.
The Securities and Exchange Commission has indicated that
Rule 701 will apply to typical stock options granted by an
issuer before it becomes subject to the reporting requirements
of the Securities Exchange Act of 1934, along with the shares
acquired upon exercise of such options, including exercises
after the date of this prospectus. Securities issued in reliance
on Rule 701 are restricted securities and, subject to the
contractual restrictions described above, beginning 90 days
after the date of this prospectus, may be sold by persons other
than affiliates, as defined in Rule 144,
subject only to the manner of sale provisions of Rule 144
and by affiliates under Rule 144 without
compliance with its one-year minimum holding period requirement.
Following the offering, we intend to file a registration
statement on
Form S-8
under the Securities Act covering
approximately shares
of common stock issued or issuable upon the exercise of stock
options, subject to outstanding options or reserved for issuance
under our employee and director stock benefit plans.
Accordingly, shares registered under the registration statement
will, subject to Rule 144 provisions applicable to
affiliates, be available for sale in the open market, except to
the extent that the shares are subject to vesting restrictions
or the contractual restrictions described above. See
Compensation Discussion and Analysis Elements
of Compensation Stock Options.
102
Under the terms and subject to the conditions contained in an
underwriting agreement dated the date of this prospectus, the
underwriters named below, for whom Morgan Stanley &
Co. Incorporated and Credit Suisse Securities (USA) LLC are
acting as representatives, have severally agreed to purchase,
and we have agreed to sell to them, severally, the number of
shares indicated below:
|
|
|
|
|
|
|
Number of
|
|
Underwriters
|
|
Shares
|
|
|
Morgan Stanley & Co.
Incorporated
|
|
|
|
|
Credit Suisse Securities (USA) LLC
|
|
|
|
|
Robert W. Baird & Co.
Incorporated
|
|
|
|
|
BMO Capital Markets Corp.
|
|
|
|
|
ThinkEquity Partners LLC
|
|
|
|
|
Subtotal
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
The underwriters are offering the shares of common stock subject
to their acceptance of the shares from us and subject to prior
sale. The underwriting agreement provides that the obligations
of the several underwriters to pay for and accept delivery of
the shares of common stock offered by this prospectus are
subject to the approval of certain legal matters by their
counsel and to certain other conditions. The underwriters are
obligated to take and pay for all of the shares of common stock
offered by this prospectus if any such shares are taken.
However, the underwriters are not required to take or pay for
the shares covered by the underwriters overallotment
option described below.
The underwriters initially propose to offer part of the shares
of common stock directly to the public at the public offering
price listed on the cover page of this prospectus and part to
certain dealers at a price that represents a concession not in
excess of $ a share under the
public offering price. Any underwriter may allow, and such
dealers may reallow, a concession not in excess of
$ a share to other underwriters or
to certain dealers. After the initial offering of the shares of
common stock, the offering price and other selling terms may
from time to time be varied by the representatives.
The selling stockholders have granted to the underwriters an
option, exercisable for 30 days from the date of this
prospectus, to purchase up to an aggregate
of
additional shares of common stock at the public offering price
listed on the cover page of this prospectus, less underwriting
discounts and commissions. The underwriters may exercise this
option solely for the purpose of covering overallotments, if
any, made in connection with the offering of the shares of
common stock offered by this prospectus. They may exercise this
option during the
30-day
period from the date of this prospectus. To the extent the
option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase approximately the
same percentage of the additional shares of common stock as the
number listed next to the underwriters name in the
preceding table bears to the total number of shares of common
stock listed next to the names of all underwriters in the
preceding table. If the underwriters option is exercised
in full, the total price to the public would be
$ , the total underwriters
discounts and commissions would be
$ , total proceeds to us would be
$ and total proceeds to the
selling stockholders would be $ .
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed 5% of the total number of
shares of common stock offered by them.
We intend to apply to have the common stock approved for listing
on the New York Stock Exchange under the symbol LRN.
103
The following table shows the per share and total underwriting
discounts that we and the selling stockholders will pay to the
underwriters:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid by Us
|
|
|
Paid by Selling Stockholders
|
|
|
|
Without
|
|
|
With
|
|
|
Without
|
|
|
With
|
|
|
|
Overallotment
|
|
|
Overallotment
|
|
|
Overallotment
|
|
|
Overallotment
|
|
|
Per Share
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
We will pay all of the expenses of the offering, including those
of the selling stockholders if the underwriters exercise their
overallotment option (other than underwriting discounts and
commissions relating to the shares sold by the selling
stockholders). We estimate that the expenses of this offering
other than underwriting discounts and commissions payable by us
will be
$ .
We, our directors, our executive officers and certain of our
stockholders have agreed that subject to certain exceptions,
without the prior written consent of Morgan Stanley &
Co. Incorporated and Credit Suisse Securities (USA) LLC on
behalf of the underwriters, we and they will not, during the
period ending 180 days after the date of this prospectus:
|
|
|
|
|
offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of directly or indirectly, any
shares of common stock or any securities convertible into or
exercisable or exchangeable for common stock;
|
|
|
|
file any registration statement with the Securities and Exchange
Commission relating to the offering of any shares of common
stock or any securities convertible into or exercisable or
exchangeable for common stock; or
|
|
|
|
enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences
of ownership of the common stock;
|
whether any such transaction described above is to be settled by
delivery of common stock or such other securities, in cash or
otherwise. The restrictions described in this paragraph do not
apply to:
|
|
|
|
|
the sale of shares to the underwriters;
|
|
|
|
the issuance by us of shares of common stock upon the exercise
of an option or a warrant or the conversion of a security
outstanding on the date of this prospectus of which the
underwriters have been advised in writing;
|
|
|
|
any shares of common stock issued upon the exercise of options
granted under existing employee option plans, grants of employee
stock options or restricted stock in accordance with the terms
in effect on the date hereof and the filing by the Company of
any registration statement with the SEC on
Form S-8
relating to the offering of securities pursuant to the terms of
a plan in effect on the date hereof;
|
|
|
|
the issuance by us of shares of common stock or any security
convertible into shares of common stock in connection with a
bona fide merger or acquisition transaction; provided, however,
that the aggregate number of shares issued in these transactions
shall not exceed 5% of the total shares offered in this offering
and that any recipient of these shares executes a copy of the
lock-up
agreement;
|
|
|
|
|
|
transactions relating to shares of common stock or other
securities acquired in open market transactions after completion
of this offering, provided, however, that no filing under the
Securities Exchange Act of 1934, as amended (Exchange Act),
shall be required or shall be voluntarily made in connection
with such transaction (other than a filing on Form 4 after
the expiration of the lock-up period or on a Form 5 made
when required); or
|
|
|
|
|
|
the transfer of shares of common stock (i) pursuant to a
will, other testamentary document or applicable laws of descent,
(ii) as a bona fide gift or (iii) to a family member
or trust, provided that, in each case, the transferee agrees to
be bound in writing by the terms of the
lock-up
agreement prior to such transfer and no filing by any
|
104
|
|
|
|
|
party (donor, donee, transferor or transferee) under the
Exchange Act shall be required or shall be voluntarily made in
connection with such transfer (other than a filing on a
Form 5 made when required) and such transfer does not
involve a disposition for value.
|
The
180-day
restricted period described above is subject to extension such
that, in the event that either (1) during the last
17 days of the restricted period, we issue an earnings
release or material news or a material event relating to us
occurs or (2) prior to the expiration of the restricted
period, we announce that we will release earnings results during
the
16-day
period beginning on the last day of the applicable restricted
period, the
lock-up
restrictions described above will, subject to limited
exceptions, continue to apply until the expiration of the
18-day
period beginning on the earnings release or the occurrence of
the material news or material event.
As
of ,
2007,
of our outstanding shares were subject to the abovementioned
restrictions.
In order to facilitate the offering of the common stock, the
underwriters may engage in stabilizing transactions,
overallotment transactions, syndicate covering transactions,
penalty bids.
|
|
|
|
|
Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
|
|
|
|
Overallotment involves sales by the underwriters of shares in
excess of the number of shares the underwriters are obligated to
purchase, which creates a syndicate short position. The short
position may be either a covered short position or a naked short
position. In a covered short position, the number of shares
over-allotted by the underwriters is not greater than the number
of shares that they may purchase in the overallotment option. In
a naked short position, the number of shares involved is greater
than the number of shares in the overallotment option. The
underwriters may close out any covered short position by either
exercising their overallotment option
and/or
purchasing shares in the open market.
|
|
|
|
Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the overallotment option. If the underwriters sell more shares
than could be covered by the over-allotment option, a naked
short position, the position can only be closed out by buying
shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there could
be downward pressure on the price of the shares in the open
market after pricing that could adversely affect investors who
purchase in the offering.
|
|
|
|
Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
|
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of the common stock. As a result,
the price of our common stock may be higher than the price that
might otherwise exist in the open market. The underwriters are
not required to engage in these activities, and may end any of
these activities at any time.
We and the underwriters have agreed to indemnify each other
against certain liabilities, including liabilities under the
Securities Act.
Directed
Share Program
At our request, Morgan Stanley & Co. Incorporated has
reserved for sale, at the initial public offering price, up to
10% of the shares offered in this prospectus for our directors,
officers, employees, business associates and related persons.
The number of shares of common stock available for sale to the
general public will be reduced to the extent such persons
purchase such reserved shares. Any reserved shares which are not
so purchased will be offered by Morgan Stanley & Co.
Incorporated to the general public on the same basis as the
other shares offered in this prospectus.
105
Pricing
of the Offering
Prior to this offering, there has been no public market for the
shares of common stock. The initial public offering price will
be determined by negotiations among us and the representatives.
Among the factors to be considered in determining the initial
public offering price will be the future prospects of us and our
industry in general and our sales, earnings and certain other
financial operating information in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of
securities and certain financial and operating information of
companies engaged in activities similar to us. The estimated
initial public offering price range set forth on the cover page
of this preliminary prospectus is subject to change as a result
of market conditions and other factors.
106
NOTICE TO
CANADIAN RESIDENTS
Resale
Restrictions
The distribution of the shares in Canada is being made only on a
private placement basis exempt from the requirement that we
prepare and file a prospectus with the securities regulatory
authorities in each province where trades of the shares are
made. Any resale of the shares in Canada must be made under
applicable securities laws which will vary depending on the
relevant jurisdiction, and which may require resales to be made
under available statutory exemptions or under a discretionary
exemption granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal
advice prior to any resale of the shares.
Representations
of Purchasers
By purchasing shares in Canada and accepting a purchase
confirmation, a purchaser is representing to us and the dealer
from whom the purchase confirmation is received that:
|
|
|
|
|
the purchaser is entitled under applicable provincial securities
laws to purchase the shares without the benefit of a prospectus
qualified under those securities laws,
|
|
|
|
where required by law, that the purchaser is purchasing as
principal and not as agent,
|
|
|
|
the purchaser has reviewed the text above under Resale
Restrictions, and
|
|
|
|
the purchaser acknowledges and consents to the provision of
specified information concerning its purchase of the shares to
the regulatory authority that by law is entitled to collect the
information.
|
Further details concerning the legal authority for this
information is available on request.
Rights of
Action Ontario Purchasers Only
Under Ontario securities legislation, certain purchasers who
purchase a security offered by this prospectus during the period
of distribution will have a statutory right of action for
damages, or while still the owner of the shares, for rescission
against us in the event that this prospectus contains a
misrepresentation without regard to whether the purchaser relied
on the misrepresentation. The right of action for damages is
exercisable not later than the earlier of 180 days from the
date the purchaser first had knowledge of the facts giving rise
to the cause of action and three years from the date on which
payment is made for the shares. The right of action for
rescission is exercisable not later than 180 days from the
date on which payment is made for the shares. If a purchaser
elects to exercise the right of action for rescission, the
purchaser will have no right of action for damages against us.
In no case will the amount recoverable in any action exceed the
price at which the shares were offered to the purchaser and if
the purchaser is shown to have purchased the securities with
knowledge of the misrepresentation, we will have no liability.
In the case of an action for damages, we will not be liable for
all or any portion of the damages that are proven to not
represent the depreciation in value of the shares as a result of
the misrepresentation relied upon. These rights are in addition
to, and without derogation from, any other rights or remedies
available at law to an Ontario purchaser. The foregoing is a
summary of the rights available to an Ontario purchaser. Ontario
purchasers should refer to the complete text of the relevant
statutory provisions.
Enforcement
of Legal Rights
All of our directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may
not be possible for Canadian purchasers to effect service of
process within Canada upon us or those persons. All or a
substantial portion of our assets and the assets of those
persons may be located outside of Canada and, as a result, it
may not be possible to satisfy a judgment against us or those
persons in Canada or to enforce a judgment obtained in Canadian
courts against us or those persons outside of Canada.
Taxation
and Eligibility for Investment
Canadian purchasers of the shares should consult their own legal
and tax advisors with respect to the tax consequences of an
investment in the shares in their particular circumstances and
about the eligibility of the shares for investment by the
purchaser under relevant Canadian legislation.
107
SALES
OUTSIDE THE UNITED STATES OTHER THAN CANADA
No common stock has been offered to the public or will be
offered to the public in the United Kingdom prior to the
publication of a prospectus in relation to the common stock and
the approval of the offer by the Financial Services Authority
(FSA) or, where appropriate, approval in another Member State
and notification to the FSA, all in accordance with the
Prospectus Directive, except that an offer of the stock may be
made to persons who fall within the definition of
qualified investor as that term is defined in
Section 86(1) of the Financial Services and Markets Act
2000 (FSMA) or otherwise in circumstances which do not result in
an offer of transferable securities to the public in the United
Kingdom within the meaning of the FSMA;
Each underwriter has only communicated or caused to be
communicated and will only communicate or cause to be
communicated any invitation or inducement to engage in
investment activity (within the meaning of Section 21 of
the FSMA) received by it in connection with the issue or sale of
any stock in circumstances in which Section 21(1) of the
FSMA does not apply to us or to persons who have professional
experience in matters relating to investments falling within
Article 19(5) of the FSMA; and
Each underwriter has complied and will comply with all
applicable provisions of the FSMA with respect to anything done
by it in relation to the stock in, from or otherwise involving
the United Kingdom.
No prospectus (including any amendment, supplement or
replacement thereto) has been prepared in connection with the
offering of the shares of our common stock that has been
approved by Frances Autorité des marchés
financiers or by the competent authority of another state that
is a contracting party to the Agreement on the European Economic
Area and notified to the Autorité des marchés
financiers; no shares of our common stock have been offered or
sold and will be offered or sold, directly or indirectly, to the
public in France except to permitted investors (Permitted
Investors) consisting of persons licensed to provide the
investment service of portfolio management for the account of
third parties, qualified investors (investisseurs
qualifiés) acting for their own account
and/or
investors belonging to a limited circle of investors (cercle
restraint dinvestisseurs) acting for their own account,
with qualified investors and limited circle of
investors having the meaning ascribed to them in
Articles L. 411-2,
D. 411-1,
D. 411-2,
D. 411-4,
D. 734-1,
D. 744-1,
D. 754-1
and
D. 764-1
of the French Code Monétaire et Financier and applicable
regulations thereunder; none of this prospectus or any other
materials related to the offering or information contained
therein relating to the shares of our common stock has been
released, issued or distributed to the public in France except
to Permitted Investors; and the direct or indirect resale to the
public in France of any Securities acquired by any Permitted
Investors may be made only as provided by
Articles L. 411-1,
L. 411-2,
L. 412-l
and
L. 621-8
to
L. 621-8-3
of the French Code Monétaire et Financier and applicable
regulations thereunder.
The offering of shares of our common stock has not been cleared
by the Italian Securities Exchange Commission (Commissione
Nazionale per le Società e la Borsa, the CONSOB) pursuant
to Italian securities legislation and, accordingly, each
underwriter acknowledges and agrees that the shares of our
common stock may not and will not be offered, sold or delivered,
nor may or will copies of this prospectus or any other documents
relating to the shares of our common stock be distributed in
Italy, except (i) to professional investors (operatori
qualificati), as defined in Article 31, second paragraph,
of CONSOB Regulation No. 11522 of July 1, 1998,
as amended (the Regulation No. 11522), or (ii) in
other circumstances which are exempted from the rules on
solicitation of investments pursuant to Article 100 of
Legislative Degree No. 58 of February 24, 1998 (the
Financial Service Act) and Article 33, first paragraph, of
CONSOB Regulation No. 11971 of May 14, 1999, as
amended.
Any offer, sale or delivery of shares of our common stock or
distribution of copies of this prospectus or any other document
relating to the shares of our common stock in Italy may and will
be effected in accordance with all Italian securities, tax,
exchange control and other applicable laws and regulations, and,
in particular, will be: (1) made by an investment firm,
bank or financial intermediary permitted to conduct such
activities in Italy in accordance with the Financial Services
Act, Legislative Decree No. 385 of September 1, 1993,
as amended (the Italian Banking Law),
Regulation No. 11522 and any other applicable laws and
regulations; (2) in compliance with Article 129 of the
Italian Banking Law and the implementing guidelines of the Bank
of Italy; and (3) in compliance with any other applicable
notification requirement or limitation which may be imposed by
CONSOB or the Bank of Italy.
108
In relation to each Member State of the European Economic Area
which has implemented the Prospectus Directive (each, a Relevant
Member State), and effective as of the date on which the
Prospectus Directive is implemented in that Relevant Member
State (the Relevant Implementation Date), no common stock have
been offered to the public in that Relevant Member State prior
to the publication of a prospectus in relation to the common
stock which has been approved by the competent authority in that
Relevant Member State or, where appropriate, approved in another
Relevant Member State and brought to the attention of the
competent authority in that Relevant Member State, all in
accordance with the Prospectus Directive. Notwithstanding the
foregoing, an offer of common stock may be made effective as of
the Relevant Implementation Date to the public in that Relevant
Member State at any time:
(1) to legal entities which are authorized or regulated to
operate in the financial markets or, if not so authorized or
regulated, whose corporate purpose is solely to invest in
securities;
(2) to any legal entity which has two or more of
(a) an average of at least 250 employees during the
last financial year; (b) a total balance sheet of more than
43,000,000 and (c) an annual net turnover of more
than 50,000,000, as shown in its last annual or
consolidated accounts; or
(3) in any other circumstances which do not require the
publication by the issuer of a prospectus pursuant to
Article 3 of the Prospectus Directive. For the purposes of
this paragraph, the expression an offer of common stock to
the public in relation to any common stock in any Relevant
Member State means the communication in any form and by any
means of sufficient information on the terms of the offer and
the common stock to be offered so as to enable an investor to
decide to purchase or subscribe for the common stock, as the
same may be varied in that Member State by any measure
implementing the Prospectus Directive in that Member State and
the expression Prospectus Directive means Directive 2003/71/EC
and includes any relevant implementing measure in each Relevant
Member State.
This prospectus does not constitute a public offer to sell any
common stock to any member of the public in the Cayman Islands.
The common stock may not be offered or sold in Hong Kong, by
means of any document, other than to persons whose ordinary
business is to buy or sell stock or debentures, whether as
principal or agent, or in circumstances which do not constitute
an offer to the public within the meaning of the Companies
Ordinance (Cap. 32) of Hong Kong. No advertisement,
invitation or document relating to the common stock, whether in
Hong Kong or elsewhere, may be issued, which is directed at, or
the contents of which are likely to be accessed or read by, the
public of Hong Kong (except if permitted to do so under the
securities laws of Hong Kong) other than with respect to common
stock which are or are intended to be disposed of only to
persons outside Hong Kong or only to professional
investors within the meaning of the Securities and Futures
Ordinance (Cap. 571) of Hong Kong and any rules made
thereunder.
The common stock have not been and will not be registered under
the Securities and Exchange Law of Japan (Law No. 235 of
1948 as amended) (the Securities Exchange Law) and disclosure
under the Securities Exchange Law has not been and will not be
made with respect to the common stock. Accordingly, the common
stock may not be, directly or indirectly, offered or sold in
Japan or to, or for the benefit of, any resident of Japan or to
others for re-offering or re-sale, directly or indirectly in
Japan or to, or for the benefit of, any resident of Japan except
pursuant to an exemption from the registration requirements of,
and otherwise in compliance with, the Securities Exchange Law
and other relevant laws, regulations and ministerial guidelines
of Japan. As used in this paragraph, resident of
Japan means any person residing in Japan, including any
corporation or other entity organized under the laws of Japan.
This prospectus has not been and will not be registered as a
prospectus with the Monetary Authority of Singapore under the
Securities and Futures Act (Cap. 289) of Singapore, or the
Securities and Futures Act. Accordingly, the common stock may
not be offered or sold or made the subject of an invitation for
subscription or purchase nor may this prospectus or any other
document or material in connection with the offer or sale, or
invitation for subscription or purchase of such common stock be
circulated or distributed, whether directly or indirectly, to
the public or any members of the public in Singapore other than:
(1) to an institutional investor or other person falling
within Section 274 of the Securities and Futures Act,
(2) to a sophisticated investor, and in accordance
109
with the conditions specified in Section 275 of the
Securities and Futures Act or (3) pursuant to, and in
accordance with the conditions of any other applicable provision
of the Securities and Futures Act.
The common stock have not been registered under the South Korean
Securities and Exchange Law. The common stock has not been
offered, sold or delivered and will not be offered, sold or
delivered, directly or indirectly, in South Korea or to, or for
the account or benefit of, any resident of South Korea, except
as otherwise permitted by applicable South Korean laws and
regulations; and any securities dealer to whom any Underwriter
sells common stock will agree that it will not offer any common
stock, directly or indirectly, in South Korea or to any resident
of South Korea, except as permitted by applicable South Korean
laws and regulations, or to any other dealer who does not so
represent and agree.
The underwriters will not circulate or distribute this
prospectus in the Peoples Republic of China (PRC) and have
not offered or sold, and will not offer or sell to any person
for re-offering or resale directly or indirectly, any securities
to any resident of the PRC except pursuant to applicable laws
and regulations of the PRC.
No action may be taken in any jurisdiction other than the United
States that would permit a public offering of the common stock
or the possession, circulation or distribution of this
prospectus in any jurisdiction where action for that purpose is
required. Accordingly, the common stock may not be offered or
sold, directly or indirectly, and neither the prospectus nor any
other offering material or advertisements in connection with the
common stock may be distributed or published in or from any
country or jurisdiction except under circumstances that will
result in compliance with any applicable rules and regulations
of any such country or jurisdiction.
110
The validity of the shares of common stock offered hereby will
be passed upon for us by our counsel, Latham & Watkins
LLP, Washington, DC. Various legal matters relating to this
offering will be passed upon for the underwriters by Davis
Polk &Wardwell, New York, New York.
The consolidated financial statements and schedules included in
this Prospectus and in the Registration Statement have been
audited by BDO Seidman, LLP, an independent registered public
accounting firm, to the extent and for the periods set forth in
their report appearing elsewhere herein and in the Registration
Statement, and are included in reliance upon such report given
upon the authority of said firm as experts in auditing and
accounting.
WHERE
YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement under the Securities Act of 1933, as
amended with respect to the shares of our common stock offered
by this prospectus. This prospectus, filed as a part of the
registration statement, does not contain all of the information
set forth in the registration statement or the exhibits and
schedules thereto as permitted by the rules and regulations of
the SEC. For further information about us and our common stock,
you should refer to the registration statement. This prospectus
summarizes provisions that we consider material of certain
contracts and other documents to which we refer you. Because the
summaries may not contain all of the information that you may
find important, you should review the full text of those
documents. We have included copies of those documents as
exhibits to the registration statement.
The registration statement and the exhibits thereto filed with
the SEC may be inspected, without charge, and copies may be
obtained at prescribed rates, at the public reference facility
maintained by the SEC at 100 F Street, NE, Washington, DC 20549.
You may obtain information on the operation of the public
reference room by calling the SEC at 1-800-SEC-0330. The
registration statement and other information filed by us with
the SEC are also available at the SECs website at
www.sec.gov
.
As a result of the offering, we and our stockholders will become
subject to the proxy solicitation rules, annual and periodic
reporting requirements, restrictions of stock purchases and
sales by affiliates and other requirements of the Securities
Exchange Act of 1934. We will furnish our stockholders with
annual reports containing audited consolidated financial
statements by an independent registered accounting firm and
quarterly reports containing unaudited financial statements for
the first three quarters of each fiscal year.
111
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
Audited Financial
Statements:
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
Schedule II
Valuation and Qualifying Accounts
|
|
|
F-23
|
|
F-1
Report
of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
K12 Inc.
Herndon, Virginia
We have audited the accompanying consolidated balance sheets of
K12 Inc. and subsidiaries (the Company) as of June 30, 2007
and 2006 and the related consolidated statements of operations,
redeemable convertible preferred stock and stockholders
deficit, and cash flows for each of the three years in the
period ended June 30, 2007. We have also audited the
schedules listed in the accompanying index. These financial
statements and schedules are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and
schedules are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audits
included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys
internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements and schedules, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements and schedules. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of K12 Inc. and subsidiaries at June 30, 2007 and
2006, and the results of their operations and their cash flows
for each of the three years in the period ended June 30,
2007, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2 to the consolidated financial
statements, effective July 1, 2006, the Company adopted
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment.
Also, in our opinion, the schedules present fairly, in all
material respects, the information set forth therein.
/s/ BDO Seidman, LLP
Bethesda, Maryland
September 25, 2007
F-2
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(in thousands,
|
|
|
|
except share and
|
|
|
|
per share data)
|
|
ASSETS
|
Current assets
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,660
|
|
|
$
|
9,475
|
|
Restricted cash
|
|
|
|
|
|
|
2,332
|
|
Accounts receivable, net of
allowance of $589 and $1,440 at June 30, 2007 and
June 30, 2006, respectively
|
|
|
15,455
|
|
|
|
11,449
|
|
Inventories, net
|
|
|
13,804
|
|
|
|
11,110
|
|
Prepaid expenses and other current
assets
|
|
|
1,245
|
|
|
|
568
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
32,164
|
|
|
|
34,934
|
|
Property and equipment, net
|
|
|
17,234
|
|
|
|
10,388
|
|
Capitalized curriculum development
costs, net
|
|
|
9,671
|
|
|
|
1,470
|
|
Other assets, net
|
|
|
1,182
|
|
|
|
1,054
|
|
Deposits and other assets
|
|
|
961
|
|
|
|
639
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
61,212
|
|
|
$
|
48,485
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES, REDEEMABLE
CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS DEFICIT
|
Current liabilities
|
|
|
|
|
|
|
|
|
Bank overdraft
|
|
$
|
1,577
|
|
|
$
|
|
|
Line of credit
|
|
|
1,500
|
|
|
|
|
|
Accounts payable
|
|
|
6,928
|
|
|
|
6,349
|
|
Accrued liabilities
|
|
|
1,819
|
|
|
|
2,643
|
|
Accrued compensation and benefits
|
|
|
6,200
|
|
|
|
5,100
|
|
Deferred revenue
|
|
|
2,620
|
|
|
|
1,396
|
|
Current portion of capital lease
obligations
|
|
|
2,780
|
|
|
|
|
|
Current portion of notes payable
|
|
|
192
|
|
|
|
|
|
Notes payable related
party
|
|
|
|
|
|
|
4,025
|
|
|
|
|
|
|
|
|
|
|
Total current
liabilities
|
|
|
23,616
|
|
|
|
19,513
|
|
Deferred rent, net of current
portion
|
|
|
1,684
|
|
|
|
1,598
|
|
Capital lease obligations, net of
current portion
|
|
|
3,974
|
|
|
|
|
|
Notes payable, net of current
portion
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
29,463
|
|
|
|
21,111
|
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable convertible preferred
stock
|
|
|
|
|
|
|
|
|
Redeemable Convertible
Series C Preferred stock, par value $0.0001;
55,000,000 shares authorized; 49,861,562 and
45,328,693 shares issued and outstanding at 2007 and 2006,
respectively; liquidation value of $133,629 and $121,481 at 2007
and 2006, respectively
|
|
|
91,122
|
|
|
|
76,211
|
|
|
|
|
|
|
|
|
|
|
Redeemable Convertible
Series B Preferred stock, par value $0.0001;
76,000,000 shares authorized; 51,524,974 shares issued
and outstanding at 2007 and 2006, respectively; liquidation
value of $138,087 at 2007 and 2006
|
|
|
138,434
|
|
|
|
124,614
|
|
|
|
|
|
|
|
|
|
|
Stockholders
deficit
|
|
|
|
|
|
|
|
|
Common stock, par value $0.0001;
170,000,000 shares authorized; 10,412,243 and
10,194,414 shares issued and outstanding at 2007 and 2006,
respectively
|
|
|
1
|
|
|
|
1
|
|
Accumulated deficit
|
|
|
(197,808
|
)
|
|
|
(173,452
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders
deficit
|
|
|
(197,807
|
)
|
|
|
(173,451
|
)
|
|
|
|
|
|
|
|
|
|
Total liabilities, redeemable
convertible preferred stock and stockholders
deficit
|
|
$
|
61,212
|
|
|
$
|
48,485
|
|
|
|
|
|
|
|
|
|
|
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-3
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands, except per share data)
|
|
|
Revenues
|
|
$
|
140,556
|
|
|
$
|
116,902
|
|
|
$
|
85,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
76,064
|
|
|
|
64,828
|
|
|
|
49,130
|
|
Selling, administrative, and other
operating expenses
|
|
|
51,159
|
|
|
|
41,660
|
|
|
|
30,031
|
|
Product development expenses
|
|
|
8,611
|
|
|
|
8,568
|
|
|
|
9,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and
expenses
|
|
|
135,834
|
|
|
|
115,056
|
|
|
|
88,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from
operations
|
|
|
4,722
|
|
|
|
1,846
|
|
|
|
(3,261
|
)
|
Interest expense, net
|
|
|
(639
|
)
|
|
|
(488
|
)
|
|
|
(279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
4,083
|
|
|
|
1,358
|
|
|
|
(3,540
|
)
|
Income tax expense
|
|
|
(218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
3,865
|
|
|
|
1,358
|
|
|
|
(3,540
|
)
|
Dividends on preferred
stock
|
|
|
(6,378
|
)
|
|
|
(5,851
|
)
|
|
|
(5,261
|
)
|
Preferred stock
accretion
|
|
|
(22,353
|
)
|
|
|
(18,697
|
)
|
|
|
(15,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders
|
|
$
|
(24,866
|
)
|
|
$
|
(23,190
|
)
|
|
$
|
(24,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(2.44
|
)
|
|
$
|
(2.30
|
)
|
|
$
|
(2.46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in
computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
10,208,507
|
|
|
|
10,083,721
|
|
|
|
10,062,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-4
CONSOLIDATED
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
Redeemable
|
|
|
Stockholders Deficit
|
|
|
|
Convertible Series C
|
|
|
Convertible Series B
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
|
|
(dollars in thousands)
|
|
|
Balance, June 30, 2004
|
|
|
37,461,730
|
|
|
$
|
54,629
|
|
|
|
51,524,974
|
|
|
$
|
100,440
|
|
|
|
10,019,232
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
(125,622
|
)
|
|
$
|
(125,621
|
)
|
Employee exercised options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,994
|
|
|
|
|
|
|
|
70
|
|
|
|
|
|
|
|
70
|
|
Accretion of Preferred Stock
|
|
|
|
|
|
|
4,403
|
|
|
|
|
|
|
|
11,544
|
|
|
|
|
|
|
|
|
|
|
|
(70
|
)
|
|
|
(15,877
|
)
|
|
|
(15,947
|
)
|
Series C 10% Stock Dividend
|
|
|
3,746,173
|
|
|
|
5,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,261
|
)
|
|
|
(5,261
|
)
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,540
|
)
|
|
|
(3,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2005
|
|
|
41,207,903
|
|
|
|
64,293
|
|
|
|
51,524,974
|
|
|
|
111,984
|
|
|
|
10,079,226
|
|
|
|
1
|
|
|
|
|
|
|
|
(150,300
|
)
|
|
|
(150,299
|
)
|
Employee exercised options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,188
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
38
|
|
Accretion of Preferred Stock
|
|
|
|
|
|
|
6,067
|
|
|
|
|
|
|
|
12,630
|
|
|
|
|
|
|
|
|
|
|
|
(38
|
)
|
|
|
(18,659
|
)
|
|
|
(18,697
|
)
|
Series C 10% Stock Dividend
|
|
|
4,120,790
|
|
|
|
5,851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,851
|
)
|
|
|
(5,851
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,358
|
|
|
|
1,358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2006
|
|
|
45,328,693
|
|
|
|
76,211
|
|
|
|
51,524,974
|
|
|
|
124,614
|
|
|
|
10,194,414
|
|
|
|
1
|
|
|
|
|
|
|
|
(173,452
|
)
|
|
|
(173,451
|
)
|
Employee exercised options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217,829
|
|
|
|
|
|
|
|
292
|
|
|
|
|
|
|
|
292
|
|
Record stock compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
218
|
|
|
|
|
|
|
|
218
|
|
Accretion of Preferred Stock
|
|
|
|
|
|
|
8,533
|
|
|
|
|
|
|
|
13,820
|
|
|
|
|
|
|
|
|
|
|
|
(510
|
)
|
|
|
(21,843
|
)
|
|
|
(22,353
|
)
|
Series C 10% Stock Dividend
|
|
|
4,532,869
|
|
|
|
6,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,378
|
)
|
|
|
(6,378
|
)
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,865
|
|
|
|
3,865
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2007
|
|
|
49,861,562
|
|
|
$
|
91,122
|
|
|
|
51,524,974
|
|
|
$
|
138,434
|
|
|
|
10,412,243
|
|
|
$
|
1
|
|
|
$
|
|
|
|
$
|
(197,808
|
)
|
|
$
|
(197,807
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-5
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(in thousands)
|
|
|
Cash Flows from Operating
Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
3,865
|
|
|
$
|
1,358
|
|
|
$
|
(3,540
|
)
|
Adjustments to reconcile net
income (loss) to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
expense
|
|
|
7,404
|
|
|
|
4,986
|
|
|
|
5,509
|
|
Stock based compensation expense
|
|
|
218
|
|
|
|
|
|
|
|
|
|
Provision for (reduction of)
doubtful accounts
|
|
|
(852
|
)
|
|
|
(275
|
)
|
|
|
1,113
|
|
Provision for (reduction of)
inventory obsolescence
|
|
|
95
|
|
|
|
(39
|
)
|
|
|
(50
|
)
|
Provision for (reduction of)
student computer shrinkage and obsolescence
|
|
|
(48
|
)
|
|
|
174
|
|
|
|
(256
|
)
|
Impairment of curriculum
development costs
|
|
|
|
|
|
|
362
|
|
|
|
2,118
|
|
Impairment of software development
costs
|
|
|
|
|
|
|
|
|
|
|
1,188
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(3,154
|
)
|
|
|
(2,718
|
)
|
|
|
3,434
|
|
Inventories
|
|
|
(2,790
|
)
|
|
|
(5,359
|
)
|
|
|
(555
|
)
|
Prepaid and other current assets
|
|
|
(763
|
)
|
|
|
100
|
|
|
|
(431
|
)
|
Other assets
|
|
|
(255
|
)
|
|
|
(258
|
)
|
|
|
(468
|
)
|
Deposits
|
|
|
(322
|
)
|
|
|
(268
|
)
|
|
|
(56
|
)
|
Accounts payable
|
|
|
579
|
|
|
|
1,559
|
|
|
|
(163
|
)
|
Accrued liabilities
|
|
|
(824
|
)
|
|
|
122
|
|
|
|
1,208
|
|
Accrued compensation and benefits
|
|
|
1,100
|
|
|
|
1,782
|
|
|
|
994
|
|
Deferred revenue
|
|
|
1,224
|
|
|
|
501
|
|
|
|
(348
|
)
|
Deferred rent
|
|
|
86
|
|
|
|
1,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
5,563
|
|
|
|
3,625
|
|
|
|
9,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
(5,366
|
)
|
|
|
(10,842
|
)
|
|
|
(4,692
|
)
|
Capitalized curriculum development
costs
|
|
|
(8,683
|
)
|
|
|
(655
|
)
|
|
|
(3,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing
activities
|
|
|
(14,049
|
)
|
|
|
(11,497
|
)
|
|
|
(8,479
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds (payments on) from notes
payable related party
|
|
|
(4,025
|
)
|
|
|
|
|
|
|
4,025
|
|
Proceeds from notes payable
|
|
|
441
|
|
|
|
|
|
|
|
|
|
Payments on notes payable
|
|
|
(62
|
)
|
|
|
|
|
|
|
|
|
Net borrowings from revolving
credit facility
|
|
|
1,500
|
|
|
|
|
|
|
|
|
|
Repayments for capital lease
obligations
|
|
|
(1,384
|
)
|
|
|
(441
|
)
|
|
|
(3,432
|
)
|
Proceeds from exercise of stock
options
|
|
|
292
|
|
|
|
38
|
|
|
|
70
|
|
Bank overdraft
|
|
|
1,577
|
|
|
|
|
|
|
|
|
|
Cash invested in restricted escrow
account
|
|
|
2,332
|
|
|
|
(2,203
|
)
|
|
|
2,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
671
|
|
|
|
(2,606
|
)
|
|
|
2,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash
equivalents
|
|
|
(7,815
|
)
|
|
|
(10,478
|
)
|
|
|
4,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
, beginning
of year
|
|
|
9,475
|
|
|
|
19,953
|
|
|
|
15,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
, end of year
|
|
$
|
1,660
|
|
|
$
|
9,475
|
|
|
$
|
19,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying summary of accounting policies and notes to
consolidated financial statements.
F-6
Notes to
Consolidated Financial Statements
|
|
1.
|
Description
of the Business
|
K12 Inc. and its subsidiaries (K12 or the Company) sell on-line
curriculum and educational books and materials designed for
students in grades K-12 and provide management and technology
services to virtual public schools. The K12 proprietary
curriculum is research based and combines content with
innovative technology to allow students to receive an
outstanding education regardless of geographic location. The
Company provides complete management and technology services to
virtual public schools. Through these schools, the Company
typically provides students with access to the K12 on-line
curriculum, offline learning kits, and use of a personal
computer. In addition, the company sells access to its on-line
curriculum and offline learning kits directly to individual
consumers. For the year ended June 30, 2007, the Company
served schools in 15 states and the District of Columbia,
providing curriculum for grades kindergarten through tenth.
Basis
of Presentation
The consolidated financial statements include our accounts and
those of our wholly-owned subsidiaries. Intercompany accounts
and transactions have been eliminated in consolidation.
|
|
2.
|
Summary
of Significant Accounting Policies
|
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions affecting
the amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Revenue
Recognition and Concentration of Revenues
Revenues are principally earned from long-term contractual
agreements to provide on-line curriculum, books, materials,
computers and management services to public charter schools and
school districts. In addition to providing the curriculum, books
and materials, under most contracts, the Company is responsible
to the virtual public schools for all aspects of the management
of schools, including monitoring academic achievement, teacher
hiring and training, compensation of school personnel, financial
management, enrollment processing and procurement of curriculum,
equipment and required services. The schools receive funding on
a per student basis from the state in which the public school or
school district is located. Where the Company has determined
that they are the primary obligor for substantially all expenses
under these contracts, the Company records the associated per
student revenue received by the school from its state funding
school district up to the expenses incurred in accordance with
Emerging Issues Task Force (EITF)
99-19,
Reporting Revenue Gross as a Principal Versus Net as an
Agent.
As a result, amounts recorded as revenues and
instructional costs and services for the years ended
June 30, 2007, 2006 and 2005 were $38.5 million,
$35.6 million and $29.6 million, respectively. For
contracts in which the Company is not the primary obligor, the
Company records revenue based on its net fees earned per the
contractual agreement.
The Company generates revenues under contracts with public
virtual schools which include multiple elements. These elements
include providing each of a schools students with access
to the Companys on-line school and the on-line component
of lessons; offline learning kits which include books and
materials designed to complement and supplement the on-line
lessons; the use of a personal computer and associated
reclamation services; internet access and technology support
services; the services of a state-certified teacher and; all
management and technology services required to operate a public
virtual school.
We have determined that the elements of our contracts are
valuable to schools in combination, but do not have standalone
value. In addition, we have determined that we do not have
objective and reliable evidence of fair value for each element
of our contracts. As a result, the elements within our
multiple-element contracts do not qualify for
F-7
K12
Inc.
Notes to
Consolidated Financial Statements
treatment as separate units of accounting. Accordingly, we
account for revenues received under multiple element
arrangements as a single unit of accounting and recognize the
entire arrangement based upon the approximate rate at which we
incur the costs associated with each element.
Under the contracts with the schools where the Company provides
turnkey management services, the Company has generally agreed to
absorb any operating deficits of the schools in a given school
year. These operating deficits represent the excess of costs
over revenues incurred by the virtual public schools as
reflected on their financial statements. The costs include
Company charges to the schools. These operating deficits may
impair the Companys ability to collect invoices in full.
Accordingly, the Companys amount of recognized revenue
reflects this impairment. For the years ended June 30,
2007, 2006 and 2005, the Companys revenue reflected
impairment from these operating deficits of $13.7 million,
$7.0 million and $5.5 million, respectively. Included
in these deficits is the impact of certain disallowed
enrollments stemming from regulatory audits in Colorado totaling
$0.9 million in 2006 and $1.0 million in 2007, and
$1.0 million in California in 2007.
Other revenues are generated from individual customers who
prepay and have access for 12 or 24 months to curriculum
via the Companys Web site. The Company recognizes these
revenues pro rata over the maximum term of the customer
contract, which is either 12 or 24 months. Revenues from
associated offline learning kits are recognized upon shipment.
During the years ended June 30, 2007, 2006 and 2005,
approximately 97%, 94% and 96%, respectively, of the
Companys revenues were recognized from virtual public
schools. In fiscal year 2007, we had contracts with four schools
that individually represented 16%, 11%, 11% and 11% of revenues.
In fiscal year 2006, we had contracts with three schools that
individually represented 28%, 16% and 10% of revenues. In fiscal
year 2005, we had contracts with four schools that individually
represented 32%, 17%, 11% and 10% of revenues.
Research
and Development Costs
All research and development costs are expensed as incurred in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 2,
Accounting for Research and Development
Costs.
Cash
and Cash Equivalents
Cash and cash equivalents generally consist of cash on hand and
cash held in money market and demand deposit accounts. For
purposes of the statements of cash flows, the Company considers
all highly liquid investments with maturities of three months or
less when purchased to be cash equivalents. The Company
maintains funds in accounts in excess of FDIC insurance limits;
however, management believes it minimizes risk by maintaining
deposits in well-capitalized financial institutions.
Restricted
Cash
Restricted cash consists primarily of cash held in escrow
related to the lease on our primary office facility. There was
no balance in restricted cash as of June 30, 2007, as the
result of the release of certain letters of credit related to
operating leases. The letters of credit were incorporated into
our revolving credit facility (see Note 6).
Fair
Value of Financial Instruments
The carrying values reflected in our consolidated balance sheets
for cash and cash equivalents, receivables, inventory and short
and long term debt approximate their fair values.
Allowance
for Doubtful Accounts
The Company maintains an allowance for uncollectible accounts
primarily for estimated losses resulting from the inability,
failure or refusal of individual customers to make required
payments. These losses have been within
F-8
K12
Inc.
Notes to
Consolidated Financial Statements
managements expectations. The Company analyzes accounts
receivable, historical percentages of uncollectible accounts and
changes in payment history when evaluating the adequacy of the
allowance for uncollectible accounts. Management believes that
an allowance for doubtful accounts of $0.6 million and
$1.4 million as of June 30, 2007 and 2006,
respectively, is adequate. However, actual write-offs might
exceed the recorded allowance.
Inventory
Inventory consists primarily of schoolbooks and curriculum
materials, a majority of which are leased to virtual schools and
utilized directly by students. Inventory represents items that
are purchased and held for sale and are recorded at the lower of
cost
(first-in,
first-out method) or market value.
Other
Assets
Other assets consist primarily of schoolbooks and curriculum
materials which have been returned to the Company upon the
completion of the school year. These assets are amortized over a
period of two years which is included in instructional costs and
services on the accompanying consolidated statement operations.
Materials not returned are expensed as part of instructional
costs and services.
Property
and Equipment
Property and equipment, which includes capitalized software
development, are stated at cost less accumulated depreciation
and amortization. Depreciation expense is calculated using the
straight-line method over the estimated useful life of the asset
(or the lesser of the term of the lease and the estimated useful
life of the asset for fixed assets under capital leases).
Amortization of assets capitalized under capital lease
arrangements is included in depreciation expense. Property and
equipment are depreciated over the following lives:
|
|
|
|
|
|
|
Useful Life
|
|
|
Computer hardware
|
|
|
3 years
|
|
Computer software and capitalized
software development costs
|
|
|
3 years
|
|
Office equipment
|
|
|
5-6 years
|
|
Furniture and fixtures
|
|
|
5-6 years
|
|
Leasehold Improvements
|
|
|
3-12 years
|
|
Leasehold improvements are amortized over the lesser of the
lease term or the estimated useful life of the asset. The
Company determines the lease term in accordance with Statement
of Financial Accounting Standards No. 13 (FAS 13),
Accounting for Leases
, as the fixed non-cancelable term
of the lease plus all periods for which failure to renew the
lease imposes a penalty on the lessee in an amount such that
renewal appears, at the inception of the lease, to be reasonably
assured. Accordingly, the Company has determined the lease term
as defined herein to be twelve years.
Software
Developed or Obtained for Internal Use
The Company develops software for internal use. Software
development costs incurred during the application development
stage are capitalized in accordance with Statement of Position
(SOP)
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use
. The Company amortizes these costs
over the estimated useful life of the software which is
generally three years.
Software development costs incurred totaled $3.1 million,
$1.4 million and $0.5 million for the years ended
June 30, 2007 and 2006 and 2005, respectively. These
amounts are recorded on the balance sheet as part of property
and equipment, net of amortization and impairment charges. The
estimated aggregate amortization expense for each of the three
succeeding years ending June 30, 2008, 2009 and 2010 is $1.2
million, $1.0 million and $0.6 million, respectively.
F-9
K12
Inc.
Notes to
Consolidated Financial Statements
Capitalized
Curriculum Development Costs
The Company internally develops its curriculum, which is
provided as web content and accessed via the Internet.
We capitalize curriculum development costs incurred during the
application development stage in accordance with Statement of
Position (SOP)
98-1,
Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use.
SOP 98-1
provides guidance for the treatment of costs associated with
computer software development and defines those costs to be
capitalized and those to be expensed. Costs that qualify for
capitalization are external direct costs, payroll,
payroll-related costs, and interest costs. Costs related to
general and administrative functions are not capitalizable and
are expensed as incurred. We capitalize curriculum development
costs when the projects under development reach technological
feasibility. Many of our new courses leverage off of proven
delivery platforms and are primarily content, which has no
technological hurdles. As a result, a significant portion of our
courseware development costs qualify for capitalization due to
the concentration of our development efforts on the content of
the courseware. Technological feasibility is established when we
have completed all planning, designing, coding, and testing
activities necessary to establish that a course can be produced
to meet its design specifications. Capitalization ends when a
course is available for general release to our customers, at
which time amortization of the capitalized costs begins. The
period of time over which these development costs will be
amortized is generally five years. This is consistent with the
capitalization period used by others in our industry and
corresponds with our product development lifecycle.
Total capitalized curriculum development costs incurred were
$8.7 million, $0.7 million and $3.8 million for
the years ended June 30, 2007, 2006 and 2005, respectively.
These amounts are recorded on the accompanying consolidated
balance sheet, net of amortization and impairment charges.
Amortization and impairment charges are recorded in product
development expenses on the accompanying consolidated statement
of operations. The estimated aggregate amortization expense for
each of the five succeeding years ending June 30, 2008, 2009,
2010, 2011 and 2012 is $1.6 million, $1.6 million, $1.5 million,
$1.4 million and $1.2 million, respectively.
Web
Site Development Costs
The Company accounts for web site development costs in
accordance with Emerging Issues Task Force Issue
No. 00-2
,
Accounting for Web Site Development Costs
(EITF 00-2).
Total capitalized web site development costs incurred for the
year ended June 30, 2007 were $0.4 million. For the
years ended June 30, 2006 and 2005 all web site development
costs occurred in the operating stage and were expensed as
incurred.
Impairment
of Long-Lived Assets
Long-lived assets include property, equipment, capitalized
curriculum and software developed or obtained for internal use.
In accordance with SFAS No. 144,
Accounting for the
Impairment or Disposal of Long-Lived Assets
, the Company
reviews its recorded long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be fully recoverable. If the total of
the expected undiscounted future cash flows is less than the
carrying amount of the asset, a loss is recognized for the
difference between fair value and the carrying value of the
asset. Impairment charges recorded were $0.4 million and
$3.3 million for the years ended June 30, 2006 and
2005, respectively. There was no impairment for the year ended
June 30, 2007.
Income
Taxes
The Company accounts for income taxes in accordance with
SFAS No. 109,
Accounting for Income Taxes.
Under SFAS No. 109, deferred tax assets and
liabilities are computed based on the difference between the
financial reporting and income tax bases of assets and
liabilities using the enacted marginal tax rate.
SFAS No. 109 requires that the net deferred tax asset
be reduced by a valuation allowance if, based on the weight of
available evidence, it is more likely than not that some portion
or all of the net deferred tax asset will not be realized.
F-10
K12
Inc.
Notes to
Consolidated Financial Statements
Stock-Based
Compensation
The Company adopted SFAS No. 123(R),
Share-Based
Payment (Revised 2004)
, as of July 1, 2006, which
replaces SFAS No. 123,
Accounting for Stock-Based
Compensation,
and supersedes Accounting Principles Board
Opinion No. 25 (APB No. 25),
Accounting for Stock
Issued to Employees
. The Company adopted SFAS 123(R)
using the prospective application method. SFAS No. 123(R)
eliminates the intrinsic value method that was previously used
by the Company as an alternative method of accounting for
stock-based compensation. SFAS No. 123(R) requires an
entity to recognize the grant date fair value of stock options
and other equity-based compensation issued to employees in the
consolidated statement of operations. The Company applied
SFAS 123(R) to all new awards granted after July 1,
2006.
Advertising
and Marketing Expenses
Advertising and marketing costs consist primarily of print media
and brochures and are expensed when incurred. The advertising
and marketing expenses recorded were $5.2 million,
$2.9 million and $2.1 million during the years ended
June 30, 2007, 2006 and 2005, respectively.
Net
Loss Per Common Share
The Company calculates net income (loss) per share in accordance
with SFAS No. 128,
Earnings Per Share
. Under
SFAS No. 128, basic net income (loss) per common share
is calculated by dividing net income (loss) by the
weighted-average number of common shares outstanding during the
reporting period. Diluted net income (loss) per common share
includes the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or
converted into common stock. The potentially dilutive securities
consist of convertible preferred stock, stock options and
warrants.
As of June 30, 2007, 2006 and 2005, the shares of common
stock issuable in connection with convertible preferred stock,
stock options, and warrants of 118,626,692, 107,638,157 and
100,579,529, respectively, were not included in the diluted loss
per common share calculation since their effect was
anti-dilutive.
Recent
Accounting Pronouncements
In February 2006, FASB issued SFAS No. 155,
Accounting for Certain Hybrid Financial
Instruments An Amendment of FASB Statements
No. 133 and 140
. This Statement is effective for all
financial instruments acquired or issued after the beginning of
an entitys first fiscal year that begins after
September 15, 2006. At adoption, any difference between the
total carrying amount of the individual components of the
existing bifurcated hybrid financial instrument and the fair
value of the combined hybrid financial instrument should be
recognized as a cumulative effect adjustment to beginning
retained earnings. The Company does not believe that the
adoption of SFAS No. 155 will have a material impact
on its consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation (FIN) 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of FASB Statement No. 109
. FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in
accordance with SFAS No. 109,
Accounting for Income
Taxes
. This interpretation defines the minimum recognition
threshold a tax position is required to meet before being
recognized in the financial statements. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The
Company will adopt FIN 48 on July 1, 2007. The
Companys adoption of this guidance will not have a
material effect on its financial position and results of
operations.
In September 2006, the FASB issued Statement of Financial
Accounting Standard No. 157 (SFAS No. 157),
Fair Value Measurements,
which defines fair value,
establishes a framework for measuring fair value, and expands
disclosures about fair value measurements.
SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. The Company is in the process of
evaluating the impact of this statement on the consolidated
financial statements.
F-11
K12
Inc.
Notes to
Consolidated Financial Statements
In February 2007, the FASB issued Statement of Financial
Accounting Standard No. 159 (SFAS No. 159),
The Fair Value Option for Financial Assets and Financial
Liabilities.
This Statement permits companies and
not-for-profit organizations to make a one-time election to
carry eligible types of financial assets and liabilities at fair
value, even if fair value measurement is not required under
GAAP. SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007. Early adoption is permitted if the
decision to adopt the standard is made after the issuance of the
Statement but within 120 days after the first day of the
fiscal year of adoption, provided no financial statements have
yet been issued for any interim period and provided the
requirements of SFAS No. 157, Fair Value Measurements, are
adopted concurrently with SFAS No. 159. The Company does
not believe that it will adopt the provisions of this Statement.
|
|
3.
|
Property
and Equipment
|
Property and equipment consists of the following at:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Student computers
|
|
$
|
20,208
|
|
|
$
|
12,617
|
|
Computer hardware
|
|
|
5,811
|
|
|
|
6,615
|
|
Computer software
|
|
|
3,390
|
|
|
|
4,127
|
|
Capitalized software and web site
development costs
|
|
|
4,905
|
|
|
|
1,717
|
|
Leasehold improvements
|
|
|
2,270
|
|
|
|
2,130
|
|
Furniture and fixtures
|
|
|
809
|
|
|
|
752
|
|
Office equipment
|
|
|
784
|
|
|
|
1,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,177
|
|
|
|
29,041
|
|
Less accumulated depreciation and
amortization
|
|
|
(20,943
|
)
|
|
|
(18,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,234
|
|
|
$
|
10,388
|
|
|
|
|
|
|
|
|
|
|
The Company recorded depreciation expense related to property
and equipment reflected in selling, administrative and other
operating expenses of $1.9 million, $1.1 million and
$0.8 million during the years ended June 30, 2007,
2006 and 2005, respectively. Depreciation expense of
$5.1 million, $3.5 million and $3.9 million
related primarily to computers leased to students reflected in
instructional costs and services was recorded during the years
ended June 30, 2007, 2006 and 2005, respectively. Included
in depreciation expense reflected in instructional costs and
services for the year ended June 30, 2007 was
$0.5 million of depreciation related to the reduction in
useful life of a portion of our software related to our on-line
school. Amortization expense of $0.4 million,
$0.1 million and $0.2 million related to capitalized
software development reflected in product development expenses
was recorded during the years ended June 30, 2007, 2006 and
2005, respectively.
In the course of its normal operations, the Company incurs
maintenance and repair expenses. Those are expensed as incurred
and amounted to $0.4 million, $0.2 million and
$0.1 million for the years ended June 30, 2007, 2006
and 2005, respectively.
F-12
K12
Inc.
Notes to
Consolidated Financial Statements
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of the
Companys net deferred income taxes consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
25,376
|
|
|
$
|
25,445
|
|
Intangible assets
|
|
|
4,202
|
|
|
|
5,247
|
|
Reserves
|
|
|
613
|
|
|
|
935
|
|
Property and equipment
|
|
|
491
|
|
|
|
857
|
|
Accrued expenses
|
|
|
486
|
|
|
|
671
|
|
Deferred rent
|
|
|
180
|
|
|
|
|
|
Charitable contributions
carryforward
|
|
|
131
|
|
|
|
130
|
|
Stock compensation expense
|
|
|
87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
31,566
|
|
|
|
33,285
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Capitalized development costs
|
|
|
(1,378
|
)
|
|
|
(522
|
)
|
Other assets
|
|
|
(262
|
)
|
|
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(1,640
|
)
|
|
|
(758
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset
|
|
|
29,926
|
|
|
|
32,527
|
|
Valuation allowance
|
|
|
(29,926
|
)
|
|
|
(32,527
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The Company requires a valuation allowance to reduce the
deferred tax assets reported if, based on the weight of the
evidence, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. The utilization of
recorded net operating loss carryforwards and other deferred tax
assets is subject to the Companys ability to generate
future taxable income. As the Company has historically generated
tax losses and therefore has no tax earnings history, the net
deferred tax assets have been fully reserved. At June 30,
2007, the Company has available net operating loss carryforwards
of $63.4 million that expire between 2020 and 2027 if
unused. When the Company begins to generate taxable income, a
change in the Companys ownership of outstanding classes of
stock as defined in Internal Revenue Code Section 382 could
prohibit or limit the Companys ability to utilize its net
operating losses.
The provision for income taxes can be reconciled to the income
tax that would result from applying the statutory rate to the
net income (loss) before income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
U.S. federal tax at statutory rates
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
Permanent items
|
|
|
20.22
|
|
|
|
55.77
|
|
|
|
(20.19
|
)
|
State taxes, net of federal benefit
|
|
|
13.65
|
|
|
|
12.98
|
|
|
|
2.12
|
|
Change in valuation allowance
|
|
|
(63.56
|
)
|
|
|
(103.75
|
)
|
|
|
(16.93
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for income taxes
|
|
|
5.31
|
%
|
|
|
|
%
|
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
K12
Inc.
Notes to
Consolidated Financial Statements
As of June 30, 2007, computer equipment and software under
capital leases are recorded at a cost of $8.1 million and
accumulated depreciation of $1.7 million. The Company has
an equipment lease line of credit with Hewlett-Packard Financial
Services Company that expires on March 31, 2008 for new
purchases on the line of credit. The interest rate on new
advances under the equipment lease line is set quarterly. Prior
borrowings under the equipment lease line had interest rates
ranging from 8.5% to 8.8%. The prior borrowings include a
36-month payment term with a $1 purchase option at the end of
the term. The Company has pledged the assets financed with the
equipment lease line to secure the amounts outstanding. The
Company entered into a guaranty agreement with Hewlett-Packard
Financial Services Company to guarantee the obligations under
this equipment lease and financing agreement.
The following is a summary as of June 30, 2007 of the
present value of the net minimum lease payments on capital
leases under the Companys commitments:
|
|
|
|
|
|
|
Year ending June 30,
|
|
|
2008
|
|
$
|
3,238
|
|
2009
|
|
|
2,888
|
|
2010
|
|
|
1,399
|
|
2011
|
|
|
6
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
7,531
|
|
Less amount representing interest
(imputed interest rate of 8.6%)
|
|
|
(777
|
)
|
|
|
|
|
|
Net minimum lease payments
|
|
|
6,754
|
|
Less current portion
|
|
|
(2,780
|
)
|
|
|
|
|
|
Present value of net minimum
payments, less current portion
|
|
$
|
3,974
|
|
|
|
|
|
|
The Company has fixed non-cancelable operating leases expiring
in 2013. Office leases generally contain renewal options and
certain leases provide for scheduled rate increases over the
lease terms.
In December 2005, the Company entered into an operating lease
for non-owned facilities commencing in May 2006. The term of the
lease is seven years with the option to extend the lease for two
five year periods. In accordance with the lease terms, the
Company delivered to the landlord an unconditional and
irrevocable letter of credit in the amount of $2.1 million
for a term ending 90 days after the expiration of the
lease. The letter of credit can be reduced up to 25% on the
first day of each of the fourth, fifth and sixth years if
certain covenants are met. Additionally, in December 2005, the
Company entered into an operating sublease for non-owned
facilities commencing in January 2006. The term of the sublease
is through September 2009. In accordance with the lease terms,
the Company delivered to the sublandlord an unconditional and
irrevocable letter of credit in the amount of $0.2 million
for a term ending 60 days after the expiration of the
lease. In November 2006, the Company entered into an operating
lease for non-owned facilities commencing in January 2007. The
term of the lease is through April 2013. Rent expense was
$2.1 million, $1.8 million and $1.4 million for
the years ended June 30, 2007, 2006 and 2005, respectively.
F-14
K12
Inc.
Notes to
Consolidated Financial Statements
Future minimum lease payments under noncancelable operating
leases with initial terms of one year or more as follows:
|
|
|
|
|
|
|
Year Ending
|
|
|
|
June 30,
|
|
|
2008
|
|
$
|
2,138
|
|
2009
|
|
|
2,127
|
|
2010
|
|
|
1,576
|
|
2011
|
|
|
1,386
|
|
2012
|
|
|
1,367
|
|
Thereafter
|
|
|
8,627
|
|
|
|
|
|
|
Total future minimum lease payments
|
|
$
|
17,221
|
|
|
|
|
|
|
In December 2006, the Company entered into a $15 million
revolving credit agreement with PNC Bank (the Credit
Agreement). Pursuant to the terms of the Credit Agreement,
the proceeds of the term loan facility were to be used primarily
for working capital requirements and other general business or
corporate purposes. Because of the seasonality of our business
and timing of funds received from the state, expenditures are
higher in relation to funds received in certain periods during
the year. The Credit Agreement provides the ability to fund
these periods until cash is received from the schools;
therefore, borrowings against the Credit Agreement are primarily
going to be short term.
Borrowings under the Credit Agreement bear interest based upon
the term of the borrowings. Interest is charged, at either:
(i) the higher of (a) the rate of interest announced
by PNC Bank from time to time as its prime rate and
(b) the federal funds rate plus 0.5% or (ii) the
applicable London interbank offered rate divided by a number
equal to 1.00 minus the maximum aggregate reserve requirement
which is imposed on member banks of the Federal Reserve System
against eurocurrency liabilities as defined in
Regulation D as promulgated by the Board of Governors of
the Federal Reserve System, plus the applicable margin for such
loans, which ranges between 1.250% and 1.750%, based on the
leverage ratio (as defined in the Credit Agreement).
The Company pays a commitment fee on the unused portion of the
Credit Agreement, quarterly in arrears, during the term of the
credit agreement which varies between 0.150% and 0.250%
depending on the leverage ratio. The commitment fees incurred
for the year ended June 30, 2007 were minimal. We are also
required to pay certain letter of credit and audit fees.
The working capital line includes a $5.0 million letter of
credit facility. Issuances of letters of credit reduce the
availability of permitted borrowings under the Credit Agreement.
Borrowings under the Credit Agreement are secured by
substantially all of our assets of the Company. The Credit
Agreement contains a number of financial and other covenants
that, among other things, restrict our and our
subsidiaries abilities to incur additional indebtedness,
grant liens or other security interests, make certain
investments, become liable for contingent liabilities, make
specified restricted payments including dividends, dispose of
assets or stock, including the stock of its subsidiaries, or
make capital expenditures above specified limits and engage in
other matters customarily restricted in senior secured credit
facilities. We must also maintain a minimum net worth (as
defined in the Credit Agreement) and maximum debt leverage
ratios. These covenants are subject to certain qualifications
and exceptions.
In March 2007, certain letters of credit in the amount of
$2.3 million in connection with an operating lease
commenced in May 2006 and an operating sublease that commenced
in January 2006 were cancelled and reissued under our Credit
Agreement.
F-15
K12
Inc.
Notes to
Consolidated Financial Statements
As of June 30, 2007, $1.5 million was outstanding on
the working capital line of credit at an interest rate of 8.25%
and approximately $2.3 million under the letter of credit
facility with an interest rate of 1.25%.
From July 1, 2007 to September 15, 2007, the Company
borrowed additional funds of $11.0 million under the Credit
Agreement at interest rates of 6.6% to 7.1%. As of
September 15, 2007, $12.5 million was outstanding on
the working capital line of credit and $2.3 million was
outstanding related to letters of credit.
All of the warrants for Series B Preferred Stock and common
stock are still outstanding at June 30, 2007. These
consisted of (i) 2,328,358 warrants to purchase an
equivalent number of Series B Preferred Stock at a price of
$1.34 per share that expire in April 2008 and
(ii) 108,649 warrants to purchase an equivalent number of
common stock at a price of $1.60 per share that expire in
March 2010. For the years ended June 30, 2007, 2006 and
2005 there were no warrants issued or exercised.
In June 2005, the Company closed on an $8.1 million loan
from certain shareholders, $4.0 million of which was funded
at closing and the remainder to be funded, at the Companys
option, within 120 days of the closing date. The
outstanding loan amount has a term of thirteen months and an
interest rate of 15%. During the 120 day period during
which funds are committed but not yet provided, the commitment
carries an interest rate of 2% on an annual basis. The Company
has chosen not to call upon the remaining portion of the loan.
The loan is secured by assets of the Company and there are no
penalties for prepayment.
In July 2006, the term for repayment of the outstanding loan
amount was extended to December 31, 2006. In December 2006,
the Company repaid the loan and all accrued interest.
In January and April 2007, the Company entered into a two
financing arrangements totaling $0.4 million for software
purchases and hardware maintenance support, respectively. The
payment terms range from 24 to 36 months at interest rates
ranging up to 11.4%. The balance outstanding on these financing
arrangements at June 30, 2007 is $0.4 million.
Common
Stock
On July 27, 2001, all holders of Class A Common stock
(1,500,000 shares outstanding) and Class B Common
stock (8,500,000 shares outstanding) converted these shares
into 10,000,000 shares of common stock. The Company has
reserved sufficient shares of common stock for potential
issuance from exercise of stock options and warrants and
conversion of Redeemable Convertible Series B and
Series C Preferred stock.
Redeemable
Convertible Series B Preferred Stock
During the years ended June 30, 2003 and 2002, K12 issued
approximately 21.6 million and 40.1 million shares of
Redeemable Convertible Series B Preferred stock
(Series B Preferred), respectively.
The Series B Preferred shares are convertible into common
stock at a conversion rate equal to the original amount invested
divided by $1.34. The Series B Preferred shares convert
automatically upon certain events, including a qualified initial
public offering by the Company. These shares have a liquidation
preference over common stock shares equal to the greater of
(i) two times the invested amount per share and
(ii) the amount the Series B shareholders would have
received had they converted their Series B shares into
common stock immediately prior to the Liquidation. The
Series B Preferred shares have voting rights equal to the
number of common stock shares into which the Series B
Preferred shares are convertible. The Series B Preferred
shares are entitled to dividends when and if declared by the
board of directors and are not cumulative. In the event the
Board declares a dividend on the common stock, the Series B
Preferred shareholders will receive dividends equal to the
amount of such dividend had the shares been converted into
common stock.
F-16
K12
Inc.
Notes to
Consolidated Financial Statements
The Series B Preferred shares are redeemable at the option
of the holder on December 31, 2006 at a price of two times
the amount invested to the extent the Series B Preferred
shares have not been previously converted into common shares. It
is classified as temporary equity on the balance sheet based
upon guidance in EITF Topic D-98,
Classification and
Measurement of Redeemable Securities
. The Company accounts
for the difference between the invested amount and the
redemption value by increasing the book value under the
effective interest method, charging the accretion to accumulated
deficit each period. As discussed below, the redemption date for
the Series B Preferred shares was extended to December 2008.
Redeemable
Convertible Series C Preferred Stock
The Series C Preferred shares are convertible into common
stock at a conversion rate equal to the original amount invested
divided by $1.34. The Series C Preferred shares convert
automatically upon certain events, including a qualified initial
public offering by the Company. These shares have a liquidation
preference over common stock shares equal to the greater of
(i) two times the invested amount per share and
(ii) the amount the Series C shareholders would have
received had they converted their Series C shares into
common stock immediately prior to the Liquidation. The
Series C shares have voting rights equal to the number of
common stock shares into which the Series C shares are
convertible.
The Series C shares are entitled to dividends, which accrue
at the rate of 10% per annum, compounded annually and shall be
paid on January 2 of each year in additional Series C
shares or, at the option of the Company, in cash. No dividends
are paid to any other classes of capital stock unless any and
all accrued but unpaid dividends on the Series C shares
have been declared and paid in full. For any other dividends or
similar distributions, the Series C shares participate with
Common Stock on an as-if-converted basis.
The Series C shares are redeemable at the option of the
holder on December 31, 2008 at a price of two times the
amount invested, to the extent the Series C shares had not
previously been converted into common stock. It is classified as
temporary equity on the balance sheet based upon guidance in
EITF Topic D-98,
Classification and Measurement of Redeemable
Securities
. The Company accounts for the difference between
the invested amount and the redemption value by increasing the
book value using the effective interest method, charging the
accretion to accumulated deficit each period.
In accordance with the Series C placement, the redemption
date for the Series B shares was extended to
December 31, 2008.
In July 2006, the Company amended its Certificate of
Incorporation, to effect an increase in the authorized number of
shares of Series C Convertible Preferred Stock to
55,000,000 as well as a corresponding increase in the authorized
number of shares of Preferred Stock and Common Stock into which
such shares are convertible.
The Company adopted a Stock Option Plan (the Plan) in May 2000.
Under the Plan, employees, outside directors and independent
contractors are able to participate in the Companys future
performance through the awards of nonqualified stock options to
purchase common stock. In December 2003, the Board increased the
total number of common stock shares reserved and available for
grant and issuance pursuant to the Plan to
13,000,000 shares. Each stock option is exercisable
pursuant to the vesting schedule set forth in the stock option
agreement granting such stock option, generally over four years.
Unless a shorter period is provided by the Board or a stock
option agreement, each stock option may be exercisable until
December 31, 2009, the term of the Plan. No stock option
shall be exercisable after the expiration of its option term.
The Company also grants stock options to executive officers
under stand-alone agreements outside the Plan. These options
totaled 7,350,000 as of June 30, 2007.
Effective July 1, 2006, the Company adopted the fair value
recognition provisions of SFAS No. 123 (revised 2004),
Share-Based Payment
(SFAS 123R), using the prospective transition
method which requires the
F-17
K12
Inc.
Notes to
Consolidated Financial Statements
Company to apply the provisions of SFAS 123R only to awards
granted, modified, repurchased or cancelled after the effective
date. Equity-based compensation expense for all equity-based
compensation awards granted after July 1, 2006 is based on
the grant-date fair value estimated in accordance with the
provisions of SFAS 123R. The Company recognizes these
compensation costs on a straight-line basis over the requisite
service period, which is generally the vesting period of the
award.
The Company uses the Black-Scholes-Merton method to calculate
the fair value of stock options. The use of option valuation
models requires the input of highly subjective assumptions,
including the expected stock price volatility and the expected
term of the option. In March 2005, the Securities and Exchange
Commission (SEC) issued SAB No. 107 (SAB 107)
regarding the SECs interpretation of SFAS 123R and
the valuation of share-based payments for public companies. For
options issued subsequent to July 1, 2006, the Company has
applied the provisions of SAB 107 in its adoption of
SFAS 123R. Under SAB 107, the Company has estimated
the expected term of granted options to be the weighted average
mid-point between the vesting date and the end of the
contractual term. The Company estimates the volatility rate
based on historical closing stock prices.
The following weighted-average assumptions were used for options
granted in the year ended June 30, 2007 and a discussion of
the Companys methodology for developing each of the
assumptions used in the valuation model follows:
|
|
|
|
|
Year Ended
|
|
|
June 30, 2007
|
|
Dividend yield
|
|
0.0%
|
Expected volatility
|
|
51%
|
Risk-free interest rate
|
|
4.53% to 5.01%
|
Expected life of the option term
(in years)
|
|
3.25 6.40
|
Forfeiture rate
|
|
20% to 30%
|
Dividend yield The Company has never declared or
paid dividends on its common stock and has no plans to do so in
the foreseeable future.
Expected volatility Volatility is a measure of the
amount by which a financial variable such as a share price has
fluctuated (historical volatility) or is expected to fluctuate
(expected volatility) during a period. Since the Company s
common shares are not publicly traded, the basis for the
standard option volatility calculation is derived from known
publicly traded comparable companies. The annual volatility for
these companies is derived from their historical stock price
data.
Risk-free interest rate The assumed risk free rate
used is a zero coupon U.S. Treasury security with a
maturity that approximates the expected term of the option.
Expected life of the option term This is the period
of time that the options granted are expected to remain
unexercised. Options granted during the quarter have a maximum
term of eight years. The Company estimates the expected life of
the option term based on an average life between the dates that
options become fully vested and the maximum life of options
granted in the year ended June 30, 2007.
Forfeiture rate This is the estimated percentage of
options granted that are expected to be forfeited or canceled
before becoming fully vested. The Company uses a forfeiture rate
that is based on historical forfeitures at various
classification levels with the Company.
On a contemporaneous basis, the Company estimated the value of
its common stock as of December 31, 2006, March 31,
2007 and June 27, 2007. The fair value applied to the
option grants in July 2006 was based on the December 31,
2006 valuation applied retrospectively. The fair value applied
to option grants in February 2007 and May 2007 was based on the
contemporaneous valuations.
F-18
K12
Inc.
Notes to
Consolidated Financial Statements
SFAS 123(R) requires management to make assumptions
regarding the expected life of the options, the expected
liability of the options and other items in determining
estimated fair value. Changes to the underlying assumptions may
have significant impact on the underlying value of the stock
options, which could have a material impact on our financial
statements.
The Company also grants stock options to executive officers
under stand-alone agreements outside the plan. These options
totaled 7,350,000 and 2,000,000 as of June 30, 2007 and
2006, respectively.
A summary of the Companys stock option activity including
stand-alone agreements is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Outstanding, June 30, 2005
|
|
|
10,457,617
|
|
|
$
|
1.34
|
|
Granted
|
|
|
3,121,000
|
|
|
|
1.47
|
|
Exercised
|
|
|
(115,188
|
)
|
|
|
0.32
|
|
Canceled
|
|
|
(647,140
|
)
|
|
|
1.38
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2006
|
|
|
12,816,289
|
|
|
|
1.38
|
|
Granted
|
|
|
6,372,185
|
|
|
|
2.62
|
|
Exercised
|
|
|
(217,829
|
)
|
|
|
1.34
|
|
Canceled
|
|
|
(492,842
|
)
|
|
|
1.39
|
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2007
|
|
|
18,477,803
|
|
|
$
|
1.81
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the years
ended June 30, 2007 and 2006 was $0.1 million and $0,
respectively.
The following table summarizes the option grant activity for the
year ended June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Options
|
|
|
Weighted-Average
|
|
|
Grant-Date
|
|
|
|
|
Grant date
|
|
Granted
|
|
|
Exercise Price
|
|
|
Fair Value
|
|
|
Intrinsic Value
|
|
|
July 2006
|
|
|
5,136,385
|
|
|
$
|
2.81
|
|
|
$
|
0.58
|
|
|
$
|
0.00
|
|
February 2007
|
|
|
960,800
|
|
|
$
|
1.80
|
|
|
$
|
0.95
|
|
|
$
|
0.00
|
|
May 2007
|
|
|
275,000
|
|
|
$
|
1.80
|
|
|
$
|
1.58
|
|
|
$
|
0.00
|
|
A summary of the Companys unvested stock options,
including those related to stand-alone agreements, as of
June 30, 2006 and changes during the year ended
June 30, 2007 are presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Unvested options outstanding,
June 30, 2006
|
|
|
4,936,899
|
|
|
$
|
1.42
|
|
Granted
|
|
|
6,372,185
|
|
|
|
0.68
|
|
Vested
|
|
|
(2,860,026
|
)
|
|
|
0.96
|
|
Exercised
|
|
|
(217,829
|
)
|
|
|
1.34
|
|
Canceled
|
|
|
(492,842
|
)
|
|
|
1.37
|
|
|
|
|
|
|
|
|
|
|
Unvested options outstanding,
June 30, 2007
|
|
|
7,738,387
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
|
F-19
K12
Inc.
Notes to
Consolidated Financial Statements
As of June 30, 2007, there was $0.7 million of total
unrecognized compensation expense related to unvested stock
options granted under the Plan. The cost is expected to be
recognized over weighted average period of 3.1 years. The
total fair value of shares vested during the year ended
June 30, 2007 was $4.2 million. During the year ended
June 30, 2007, the Company recognized $0.2 million of
stock based compensation.
The stock option agreements generally provide for accelerated
and full vesting of unvested stock options upon certain
corporate events. Those events include a sale of all or
substantially all of the Companys assets, a merger or
consolidation which results in the Companys stockholders
immediately prior to the transaction owning less than 50% of the
Companys voting stock immediately after the transaction,
and a sale of the Companys outstanding securities (other
than in connection with an initial public offering) which
results in the Companys stockholders immediately prior to
the transaction owning less than 50% of the Companys
voting stock immediately after the transaction.
The following table summarizes information about stock options
outstanding, including those related to stand-alone agreements,
as of June 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted-
|
|
|
|
|
|
Weighted-
|
|
Range of
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Average
|
|
Exercise
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
Prices
|
|
Outstanding
|
|
|
Life
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
|
$.20 - $1.80
|
|
|
16,977,803
|
|
|
|
5.3 years
|
|
|
$
|
1.44
|
|
|
|
10,739,416
|
|
|
$
|
1.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$6.00
|
|
|
1,500,000
|
|
|
|
5.5 years
|
|
|
$
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options outstanding and exercisable
at June 30, 2007 was $6.5 million and
$4.7 million, respectively.
|
|
10.
|
Commitments
and Contingencies
|
Litigation
In the ordinary conduct of the Companys business, we are
subject to lawsuits and other legal proceedings from time to
time. There are currently two pending lawsuits in which the
Company is involved,
Johnson v. Burmaster
and
Illinois
v. Chicago Virtual Charter School
that, in each case, have
been brought by teachers unions seeking the closure of the
virtual public schools the Company serves in Wisconsin and
Illinois, respectively.
While the Company prevailed on summary judgment at the circuit
court level in
Johnson v. Burmaster
, and recently won a
preliminary motion in
Illinois v. Chicago Virtual Charter
School
, it is not possible to predict the final outcome of
these matters with any degree of certainty. Even so, the Company
does not believe at this time that a loss in either case would
have a material adverse impact on our future results of
operations, financial position or cash flows. Depending on the
legal theory advanced by the plaintiffs, however, there is a
risk that a loss in these cases could have a negative
precedential effect if like claims were to be advanced and
succeed under similar laws in other states where the Company
operates. The cumulative effect under those circumstances could
be material.
Johnson
v. Burmaster
In 2003, the Northern Ozaukee School District (NOSD) in the
State of Wisconsin established a virtual public school, the
Wisconsin Virtual Academy (WIVA), and entered into a service
agreement with us for online curriculum and school management
services. On January 6, 2004, Stan Johnson, et al.,
and the Wisconsin Education Association Council (WEAC) filed
suit in the Circuit Court of Ozaukee County against the
Superintendent of the Department of Public Instruction (DPI),
Elizabeth Burmaster, the NOSD and K12 Inc. The plaintiffs
alleged that the NOSD violated the state charter school, open
enrollment and teacher-licensure statutes when it authorized
WIVA.
On March 16, 2006, the Circuit Court issued a Decision and
Order upholding on Summary Judgment that WIVA complies with
applicable law
(No. 04-CV-12
). WEAC and DPI filed an appeal in the Wisconsin Court of
Appeals, District II
(No. 2006-AP/01380).
Should the plaintiff prevail, and state funding of open
enrollment
F-20
K12
Inc.
Notes to
Consolidated Financial Statements
payments to the NOSD are enjoined, a claim could be made that
the Company must indemnify the NOSD for expenses approximating
$2.5 million.
Illinois
v. Chicago Virtual Charter School
On October 4, 2006, the Chicago Teachers Union (CTU) filed
a citizen taxpayers lawsuit in the Circuit Court of Cook County
challenging the decision of the Illinois State Board of
Education to certify the Chicago Virtual Charter School (CVCS)
and to enjoin the disbursement of state funds to the Chicago
Board of Education under its contract with the CVCS.
Specifically, the CTU alleges that the Illinois charter school
law prohibits any home-based charter schools and
that CVCS does not provide sufficient direct
instruction by certified teachers of at least five clock
hours per day to qualify for funding. K12 Inc. and K12 Illinois
LLC were also named as defendants. On May 16, 2007, the
Court dismissed K12 Inc. and K12 Illinois LLC from the case and
on June 15, 2007, the plaintiffs filed a second amended
complaint. The Company continues to participate in the defense
of CVCS under an indemnity obligation in the Companys
service agreement with that school, which requires the
Company to indemnify CVCS against certain liabilities arising
out of the performance of the service agreement and certain
other claims and liabilities, including liabilities arising out
of challenges to the validity of the virtual school charter. The
Company is not able to estimate the range of potential loss if
the plaintiff were to prevail and a claim was made against the
Company for indemnification.
The Company expenses legal costs as incurred in connection with
a loss contingency.
Employment
Agreements
The Company has entered into employment agreements with certain
executive officers that provide for severance payments and, in
some cases other benefits, upon certain terminations of
employment. Except for one agreement that has a three year
term, all other agreements provide for employment on an
at-will basis. If the employee is terminated for
good reason or without cause, the employee is
entitled to salary continuation, and in some cases benefit
continuation, for varying periods depending on the agreement.
On July 12, 2007, the Companys board of directors
approved an amended and restated employment agreement for an
executive officer. The amended and restated agreement extends
the term of employment until January 1, 2011 and amended
certain elements of compensation including salary, stock options
and severance. Additionally, on July 12, 2007, the
Companys board of directors also approved the terms of a
new option agreement for an executive officer which provides
that all outstanding options will become fully vested upon a
change in control of Company.
The Company maintains an annual cash performance bonus program
that is intended to reward executive officers based on our
performance and the individual named executive officers
contribution to that performance. In determining the
performance-based compensation awarded to each named executive
officer, the Company may generally evaluate the Companys
and the executives performance in a number of areas, which
could include revenues, operating earnings, student retention,
efficiency in product and systems development, marketing
investment efficacy, new enrollment and developing company
leaders.
Vendor
Payment Commitments
In April 2007, the Company entered into a master services and
license agreement with a third party that provides for the
Company to license their proprietary computer system. The
agreement is effective through July 2010. In exchange for the
license of the computer system, the Company agrees to pay a
service fee per enrollment. In the event the fees paid over the
term of the contract do not exceed $1 million (the minimum
commitment fee), the Company agrees to pay the difference
between the actual fees paid and the minimum commitment fee.
|
|
11.
|
Related
Party Transactions
|
Affiliates of the Company, controlled by a major investor,
rendered $0.3 million, $0.1 million and
$0.1 million of professional services to the Company during
the years ended June 30, 2007, 2006 and 2005, respectively.
These costs include administrative operations, consulting and
curriculum development services, and other operating charges.
F-21
K12
Inc.
Notes to
Consolidated Financial Statements
In June 2005, the Company closed on an $8.1 million loan
from certain shareholders, $4.0 million of which was funded
at closing and the remainder to be funded, at the Companys
option, within 120 days of the closing date. The Company
has chosen not to call upon the remaining portion of the loan.
In July 2006, the term for repayment of the outstanding loan
amount was extended to December 31, 2006. In
December 2006, the Company repaid the loan and all accrued
interest.
The Company is party to a Section 401(k) Salary Deferral
Plan (the 401(k) Plan). Under the 401(k) Plan, employees at
least 18 years of age having been employed for at least
30 days may voluntarily contribute up to 15% of their
compensation. The 401(k) Plan provides for a matching Company
contribution of 25% of the first 4% of each participants
compensation, which begins following six months of service and
vests after three years of service. Under the 401(k) Plan, the
Company expensed $0.1 million during each of the years
ended June 30, 2007, 2006 and 2005.
|
|
13.
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash paid for interest
|
|
$
|
1,317
|
|
|
$
|
33
|
|
|
$
|
446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non
cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
New capital lease obligations
|
|
$
|
8,052
|
|
|
$
|
|
|
|
$
|
441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters
of Intent
On July 3, 2007, the Company entered into a non-binding
letter of intent (LOI) with Socratic Network L.P., Socratic
Learning, Inc. and Tutors Worldwide (India) Private Ltd.
(individually and collectively referred to as Socratic) to
acquire all, substantially all or a selected set of assets (as
determined in the Companys sole discretion) of Socratic,
or all the equity interest in Socratic or any of its affiliates
or subsidiaries, for the aggregate purchase price of
$2.2 million plus 300,000 shares of the common stock
of the Company. Socratic is an education company whose primary
asset is its India based tutoring and development center.
On August 2, 2007, the Company entered into a non-binding letter
of intent (LOI) with a curriculum content developer to acquire
substantially all of its assets or all of the equity interest in
the developer (as determined in the Companys sole
discretion) for the aggregate purchase price up to 1,000,000
shares of the Companys common stock and the assumption of
up to $1.2 million in liabilities.
Initial
Public Offering
On July 12, 2007, the Companys Board of Directors
authorized management to file a
Form S-1
Registration Statement Under the Securities Act of
1933
in order to pursue a public offering of the
Companys common stock. Immediately prior to the completion
of this offering, all outstanding shares of Redeemable
Convertible Series B and Series C preferred stock will
be converted into shares of our common stock without any further
action required by us or the holders of the preferred stock.
Stock
Options
On July 3, 2007, the Board approved the grant of 3,287,965
stock options with an exercise price of $2.68 per share subject
to amendment of the Stock Option Plan. On July 12, 2007,
the Board authorized the Company to seek shareholder approval to
amend the Stock Option Plan by increasing the number of shares
reserved for issuance from 13 million to 20 million.
F-22
SCHEDULE II
K12
INC
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED JUNE 30, 2006, 2005 AND 2004
1.
ALLOWANCE
FOR DOUBTFUL ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Deductions
|
|
|
|
|
|
|
Beginning of
|
|
|
Cost and
|
|
|
from
|
|
|
Balance at End
|
|
|
|
Period
|
|
|
Expenses
|
|
|
Allowance
|
|
|
of Period
|
|
|
June 30, 2007
|
|
$
|
1,440,499
|
|
|
|
106,038
|
|
|
|
957,566
|
|
|
$
|
588,972
|
|
June 30, 2006
|
|
$
|
1,715,781
|
|
|
|
174,895
|
|
|
|
450,177
|
|
|
$
|
1,440,499
|
|
June 30, 2005
|
|
$
|
602,919
|
|
|
|
1,407,143
|
|
|
|
294,281
|
|
|
$
|
1,715,781
|
|
2.
INVENTORY
RESERVE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Deductions
|
|
|
|
|
|
|
Beginning of
|
|
|
Cost and
|
|
|
Shrinkage and
|
|
|
Balance at End
|
|
|
|
Period
|
|
|
Expenses
|
|
|
Obsolescence
|
|
|
of Period
|
|
|
June 30, 2007
|
|
$
|
232,055
|
|
|
|
320,960
|
|
|
|
225,407
|
|
|
$
|
327,608
|
|
June 30, 2006
|
|
$
|
270,611
|
|
|
|
|
|
|
|
38,556
|
|
|
$
|
232,055
|
|
June 30, 2005
|
|
$
|
320,809
|
|
|
|
19,572
|
|
|
|
69,770
|
|
|
$
|
270,611
|
|
3.
COMPUTER
RESERVE (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
(Deductions)
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Deductions
|
|
|
|
|
|
|
Beginning of
|
|
|
Cost and
|
|
|
Shrinkage and
|
|
|
Balance at End
|
|
|
|
Period
|
|
|
Expenses
|
|
|
Obsolescence
|
|
|
of Period
|
|
|
June 30, 2007
|
|
$
|
664,186
|
|
|
|
(47,825
|
)
|
|
|
|
|
|
$
|
616,361
|
|
June 30, 2006
|
|
$
|
490,533
|
|
|
|
173,653
|
|
|
|
|
|
|
$
|
664,186
|
|
June 30, 2005
|
|
$
|
746,294
|
|
|
|
(255,761
|
)
|
|
|
|
|
|
$
|
490,533
|
|
|
|
|
(1)
|
|
A reserve account is maintained against potential shrinkage and
obsolescence for those computers provided to our students. The
reserve is calculated based upon several factors including
historical percentages, the net book value and remaining useful
life.
|
4.
INCOME
TAX VALUATION ALLOWANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Changes in Net
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Deferred
|
|
|
Income Tax
|
|
|
Balance at End
|
|
|
|
Period
|
|
|
Tax Assets
|
|
|
Benefit Realized
|
|
|
of Period
|
|
|
June 30, 2007
|
|
$
|
32,527,019
|
|
|
|
(2,601,121
|
)
|
|
|
|
|
|
$
|
29,925,898
|
|
June 30, 2006
|
|
$
|
33,866,482
|
|
|
|
(1,339,463
|
)
|
|
|
|
|
|
$
|
32,527,019
|
|
June 30, 2005
|
|
$
|
33,267,514
|
|
|
|
598,968
|
|
|
|
|
|
|
$
|
33,866,482
|
|
F-23
PART II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
Set forth below is a table of the registration fee for the
Securities and Exchange Commission, the filing fee for the
National Association of Securities Dealers, Inc., the listing
fee for the New York Stock Exchange and estimates of all other
expenses to be incurred in connection with the issuance and
distribution of the securities described in the registration
statement, other than underwriting discounts and commissions:
|
|
|
|
|
SEC registration fee
|
|
$
|
5,296
|
|
NYSE listing fee
|
|
|
*
|
|
NASD fee
|
|
|
17,750
|
|
Printing and engraving expenses
|
|
|
*
|
|
Legal fees and expenses
|
|
|
*
|
|
Accounting fees and expenses
|
|
|
*
|
|
Transfer agent and registrar fees
|
|
|
*
|
|
Miscellaneous
|
|
|
*
|
|
|
|
|
|
|
Total
|
|
$
|
*
|
|
|
|
|
|
|
|
|
|
*
|
|
To be completed by amendment.
|
|
|
Item 14.
|
Indemnification
of Directors and Officers
|
K12 Inc. is incorporated under the laws of the State of
Delaware. Reference is made to Section 102(b)(7) of the
Delaware General Corporation Law, or DGCL, which enables a
corporation in its original certificate of incorporation or an
amendment thereto to eliminate or limit the personal liability
of a director for violations of the directors fiduciary
duty, except (1) for any breach of the directors duty
of loyalty to the corporation or its stockholders, (2) for
acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (3) pursuant to
Section 174 of the DGCL, which provides for liability of
directors for unlawful payments of dividends of unlawful stock
purchase or redemptions or (4) for any transaction from
which a director derived an improper personal benefit.
Reference is also made to Section 145 of the DGCL, which
provides that a corporation may indemnify any person, including
an officer or director, who is, or is threatened to be made,
party to any threatened, pending or completed legal action, suit
or proceeding, whether civil, criminal, administrative or
investigative, other than an action by or in the right of such
corporation, by reason of the fact that such person was an
officer, director, employee or agent of such corporation or is
or was serving at the request of such corporation as a director,
officer, employee or agent of another corporation or enterprise.
The indemnity may include expenses (including attorneys
fees), judgments, fines and amounts paid in settlement actually
and reasonably incurred by such person in connection with such
action, suit or proceeding, provided such officer, director,
employee or agent acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the
corporations best interest and, for criminal proceedings,
had no reasonable cause to believe that his conduct was
unlawful. A Delaware corporation may indemnify any officer or
director in an action by or in the right of the corporation
under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director
is adjudged to be liable to the corporation. Where an officer or
director is successful on the merits or otherwise in the defense
of any action referred to above, the corporation must indemnify
him against the expenses that such officer or director actually
and reasonably incurred.
Our Amended and Restated Certificate of Incorporation provides
for, and upon consummation of this offering, our amended and
restated bylaws will provide for indemnification of the officers
and directors to the full extent permitted by applicable law.
The Underwriting Agreement provides for indemnification by the
underwriters of the registrant and its officers and directors
for certain liabilities arising under the Securities Act of
1933, as amended, or otherwise.
II-1
|
|
Item 15.
|
Recent
Sales of Unregistered Securities
|
Set forth in chronological order is information regarding all
securities sold and employee stock options granted from June
2004 to date by the Company. Also included is the consideration,
if any, received for such securities, and information relating
to the section of the Securities Act and the rules of the
Securities and Exchange Commission pursuant to which the
following issuances were exempt from registration. None of these
securities were registered under the Securities Act. No award of
options involved any sale under the Securities Act. No sale of
securities involved the use of an underwriter and no commissions
were paid in connection with the sales of any securities.
1. At various times during the period from July 2004
through July 2007, we granted options to purchase an
aggregate of 12,405,765 shares of common stock to current
and prior employees and directors at a weighted average exercise
price of exercise prices of $2.09 per share, of which 6,415,965
are subject to shareholder approval.
2. In addition to the foregoing option grants, at various
times during the period from July 2004 through July 2007, we
granted options to purchase 7,350,000 shares of our common
stock to current and prior employees related to stand-alone
agreements at a weighted average exercise price of $2.42 per
share.
3. In December 2003, we issued and sold an aggregate of
18,656,896 shares of Series C Preferred Stock.
Pursuant to the payment in kind dividend feature of
Series C Preferred Stock, we have issued an aggregate of
12,399,833 additional shares of Series C Preferred Stock
through a series of stock dividends to existing Series C
Preferred stockholders from January 2005 through January 2007.
The issuances of the securities described in paragraph 1
were exempt from registration under the Securities Act under
Rule 701, as transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under
such Rule 701. The recipients of such options and common
stock were related to compensation. Appropriate legends were
affixed to any share certificates issued in such transactions.
All recipients either received adequate information from us or
had adequate access, through their employment with us or
otherwise, to information about us.
The issuances of the securities described in paragraphs 2
and 3 were exempt from registration under the Securities Act in
reliance on Section 4(2) because the issuance of securities
to recipients did not involve a public offering. The recipient
of securities in each such transaction represented their
intention to acquire the securities for investment only and not
with a view to resale or distribution thereof, and appropriate
legends were affixed to share certificates and warrants issued
in such transactions. Each of the recipients of securities in
the transactions described in paragraphs 2 and 3 were
accredited or sophisticated investors and had adequate access,
through employment, business or other relationships, to
information about us.
All of the shares of Series C Preferred Stock described in
paragraph 3 will automatically convert into shares of
common stock prior to completion of this offering.
|
|
Item 16.
|
Exhibits
and Financial Statement Schedule
|
(a) Exhibits
|
|
|
|
|
Exhibit No.
|
|
Description of
Exhibit
|
|
|
1
|
.1*
|
|
Form of Underwriting Agreement
|
|
3
|
.1**
|
|
Amended and Restated Certificate
of Incorporation
|
|
3
|
.2**
|
|
Bylaws (as amended)
|
|
3
|
.3*
|
|
Form of Amended and Restated
Certificate of Incorporation to be effective upon completion of
this offering
|
|
3
|
.4*
|
|
Form of Amended and Restated
Bylaws to be effective upon completion of this offering
|
|
4
|
.1*
|
|
Form of stock certificate of
common stock
|
|
4
|
.2**
|
|
Amended and Restated Stock Option
Plan and Amendment thereto
|
|
4
|
.3**
|
|
Form of Stock Option
Contract Employee
|
|
4
|
.4**
|
|
Form of Stock Option
Contract Director
|
II-2
|
|
|
|
|
Exhibit No.
|
|
Description of
Exhibit
|
|
|
4
|
.5**
|
|
Form of Second Amended and
Restated Stockholders Agreement
|
|
4
|
.6**
|
|
Form of Common Stock Warrant
Agreement
|
|
4
|
.7**
|
|
Form of Series B Convertible
Preferred Stock Warrant Agreement
|
|
5
|
.1*
|
|
Opinion of Latham &
Watkins LLP
|
|
10
|
.1**
|
|
Revolving Credit Agreement and
Certain Other Loan Documents by and among K12 Inc., School
Leasing Corporation, American School Supply Corporation and PNC
Bank, N.A.
|
|
10
|
.2**
|
|
Stockholders Agreement dated as of
April 26, 2000 (as amended) by and among Premierschool.com,
Inc., Knowledge Universe Learning, Inc. and
Ronald J. Packard
|
|
10
|
.3**
|
|
Stockholders Agreement dated as of
February 20, 2000 (as amended) by and among
Premierschool.com, Inc., Knowledge Universe Learning, Inc. and
William J. Bennett
|
|
10
|
.4**
|
|
Series B Convertible Preferred
Stock Warrant Agreement of Mollusk Holdings LLC
|
|
10
|
.5*
|
|
Stock Option Agreement of
Ronald J. Packard
|
|
10
|
.6**
|
|
Stock Option Agreement of
Bruce J. Davis
|
|
10
|
.7**
|
|
Stock Option Agreement of John
Baule
|
|
10
|
.8**
|
|
Stock Option Agreement of Bror
Saxberg
|
|
10
|
.9*
|
|
Employment Agreement of
Ronald J. Packard
|
|
10
|
.10
|
|
Employment Agreement of
John F. Baule and Amendment thereto
|
|
10
|
.11
|
|
Employment Agreement of
Bruce J. Davis
|
|
10
|
.12
|
|
Employment Agreement of Bror V. H.
Saxberg
|
|
10
|
.13
|
|
Deed of Lease by and between
ACP/2300 Corporate Park Drive, LLC and K12 Inc.
|
|
10
|
.14
|
|
Sublease between France Telecom
Long Distance USA, LLC and K12 Inc.
|
|
10
|
.15
|
|
Employment Agreement of Celia M.
Stokes
|
|
10
|
.16
|
|
Employment Agreement of Howard D.
Polsky
|
|
21
|
.1**
|
|
Subsidiaries of K12 Inc.
|
|
23
|
.1
|
|
Consent of BDO Seidman, LLP
|
|
23
|
.2*
|
|
Consent of Latham &
Watkins LLP (included in Exhibit 5.1)
|
|
24
|
.1**
|
|
Power of Attorney (excluding Dr.
Mary H. Futrell)
|
|
24
|
.2
|
|
Power of Attorney of Dr. Mary
H. Futrell
|
|
|
|
*
|
|
To be filed by amendment.
|
(b)
Financial Statement Schedules:
See Schedule II Valuation and
Qualifying Accounts contained on
page F-33.
All other schedules are omitted as the information is not
required or is included in the Registrants financial
statements and related notes.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid
by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a
II-3
court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issues.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting
Agreement, certificates in such denomination and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
II-4
Signatures
Pursuant to the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this registration
statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Herndon, Commonwealth
of Virginia on September 25, 2007.
K12 INC.
|
|
|
|
By:
|
/s/
Ronald
J. Packard
|
|
|
|
|
Name:
|
Ronald J. Packard
|
|
Title:
|
Chief Executive Officer
|
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/
Ronald
J. Packard*
Ronald
J. Packard
|
|
Chief Executive Officer
(Principal Executive Officer)
|
|
September 25, 2007
|
|
|
|
|
|
/s/
John
F. Baule*
John
F. Baule
|
|
Chief Operating Officer and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
|
|
September 25, 2007
|
|
|
|
|
|
/s/
Andrew
H. Tisch*
Andrew
H. Tisch
|
|
Chairman of the Board and Director
|
|
September 25, 2007
|
|
|
|
|
|
/s/
Guillermo
Bron*
Guillermo
Bron
|
|
Director
|
|
September 25, 2007
|
|
|
|
|
|
/s/
Liza
A. Boyd*
Liza
A. Boyd
|
|
Director
|
|
September 25, 2007
|
|
|
|
|
|
/s/
Steven
B. Fink*
Steven
B. Fink
|
|
Director
|
|
September 25, 2007
|
|
|
|
|
|
/s/
Dr. Mary
H. Futrell*
Dr. Mary
H. Futrell
|
|
Director
|
|
September 25, 2007
|
|
|
|
|
|
/s/
Thomas
J. Wilford*
Thomas
J. Wilford
|
|
Director
|
|
September 25, 2007
|
|
|
|
|
|
|
|
*By:
|
|
/s/
Howard
D. Polsky
Howard
D. Polsky
|
|
Attorney-in-Fact
|
|
|
II-5
Exhibit 10.13
DEED OF LEASE
By and Between
ACP/2300 CORPORATE PARK DRIVE, LLC
(Landlord)
and
K12 INC.
(Tenant)
* * * *
* *
South Pointe II
2300 Corporate Park Drive
Herndon, Virginia 20171
HOLLAND & KNIGHT LLP
2099 Pennsylvania Avenue, N.W.
Suite 100
Washington, D.C. 20006
(202) 955-3000
(202) 955-5564 (Fax)
TABLE OF CONTENTS
|
|
|
Page
|
|
1.
BASIC LEASE TERMS
|
|
|
1
|
|
2.
PREMISES
|
|
|
2
|
|
3.
TERM AND COMMENCEMENT OF TERM
|
|
|
2
|
|
4.
RENT
|
|
|
3
|
|
5.
SECURITY DEPOSIT
|
|
|
6
|
|
6.
USE
|
|
|
8
|
|
7.
ASSIGNMENT AND SUBLETTING
|
|
|
9
|
|
8.
IMPROVEMENTS AND FIXTURES
|
|
|
11
|
|
9.
UTILITIES AND SERVICES
|
|
|
12
|
|
10.
RIGHTS OF LANDLORD
|
|
|
14
|
|
11.
LIABILITY
|
|
|
15
|
|
12.
INSURANCE
|
|
|
16
|
|
13.
FIRE OR CASUALTY
|
|
|
16
|
|
14.
EMINENT DOMAIN
|
|
|
17
|
|
15.
SUBORDINATION AND ESTOPPEL CERTIFICATES
|
|
|
17
|
|
16.
DEFAULT AND REMEDIES
|
|
|
18
|
|
17.
BANKRUPTCY
|
|
|
20
|
|
18.
PAYMENT OF TENANTS
OBLIGATIONS BY LANDLORD AND UNPAID
RENT
|
|
|
21
|
|
19.
VOLUNTARY SURRENDER
|
|
|
21
|
|
20.
ABANDONMENT OF PERSONAL PROPERTY
|
|
|
21
|
|
21.
HOLD-OVER
|
|
|
21
|
|
22.
OPTION TO EXTEND TERM
|
|
|
21
|
|
23.
RIGHT OF FIRST OFFER
|
|
|
23
|
|
24.
USA PATRIOT ACT AND
ANTI-TERRORISM LAWS
|
|
|
24
|
|
25.
QUIET ENJOYMENT
|
|
|
24
|
|
26.
PARKING
|
|
|
24
|
|
27.
NOTICES
|
|
|
24
|
|
28.
BROKERS
|
|
|
24
|
|
29.
ENVIRONMENTAL CONCERNS
|
|
|
25
|
|
30.
LANDLORDS LIEN
|
|
|
25
|
|
31.
RULES AND REGULATIONS
|
|
|
25
|
|
32.
ROOFTOP COMMUNICATIONS
EQUIPMENT
|
|
|
25
|
|
33.
EXTERIOR SIGNAGE
|
|
|
27
|
|
34.
MUST-TAKE SPACE
|
|
|
28
|
|
35.
SUPPLEMENTAL HVAC SYSTEM
|
|
|
28
|
|
36.
MISCELLANEOUS PROVISIONS
|
|
|
30
|
|
i
DEED OF LEASE
THIS
DEED OF LEASE
(this Lease) is made as of the
7
th
day
of December,
2005 (the
Effective Date), by and between
ACP/2300 CORPORATE PARK DRIVE, LLC,
a Delaware limited liability
company (Landlord), and
K12
INC., a Delaware corporation (Tenant), who agree as follows:
The following terms shall have the following meanings in this Lease:
|
|
|
|
|
|
|
|
|
a.
|
|
Premises:
|
|
Approximately 35,740 rentable square feet of space (subject to
increase pursuant to the terms of Section 34 of the Lease) comprising
and a portion of the first (1
st
) floor, and the entire
second (2
nd
) floor, of the Building (described in Section
1.b., below), as outlined on the floor plan attached hereto as
Exhibit A
.
|
|
|
|
|
|
|
|
|
|
b.
|
|
Building:
|
|
2300 Corporate Park Drive, Herndon, Virginia (the Building),
containing approximately 158,897 rentable square feet of office
space, measured in accordance with a modified Building Owners and
Managers Association Standard Method for Measuring Floor Area
(ANSI/BOMA Z65.1-1996).
|
|
|
|
|
|
|
|
|
|
c.
|
|
Commencement Date:
|
|
Defined in Section 3.a, below
|
|
|
|
|
|
|
|
|
|
|
|
Rent Commencement Date:
|
|
May 1, 2006
|
|
|
|
|
|
|
|
|
|
d.
|
|
Lease Expiration Date:
|
|
The last day of the seventh (7
th
) Lease Year
|
|
|
|
|
|
|
|
|
|
e.
|
|
Initial Annual Base Rent*:
|
|
$27.50 per rentable square foot
$982,850.04 per annum
$81,904.17 per month
|
|
|
|
|
|
|
|
[*subject to escalation as provided for in this Lease]
|
|
|
|
|
|
|
|
|
|
f.
|
|
Base Year:
|
|
Calendar Year 2006
|
|
|
|
|
|
|
|
|
|
g.
|
|
Tenants Pro Rata Share
|
|
22.49%*
|
|
|
|
|
(Operating Expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tenants Pro Rata Share
|
|
22.49%*
|
|
|
|
|
(Real Estate Taxes):
|
|
|
[*subject to adjustments provided for in this Lease, including the
adjustment resulting from the inclusion in the Premises of the Must Take Space
pursuant to Section 34 of this Lease]
|
|
|
|
|
|
|
|
|
h.
|
|
Address for Notices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Landlord:
|
|
ACP/2300 Corporate Park Drive, LLC
444 Brickell Avenue
Suite 900
Miami, Florida 33131
Attention: Chief Operating
Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACP/2300 Corporate Park Drive, LLC
c/o ACP Mid-Atlantic
LLC, as Agent
2350 Corporate Park Drive
Suite 110
Herndon, Virginia 20171
Attention: Asset Manager
|
|
|
|
|
|
|
|
|
|
|
|
With a copy to:
|
|
Holland & Knight LLP
2099 Pennsylvania Avenue, N.W.
Suite 100
Washington, D.C. 20006
Attention: David S. Kahn,
Esquire
|
|
|
|
|
|
|
|
|
|
|
|
To Tenant:
|
|
At the Premises
|
1
|
|
|
|
|
|
|
|
|
|
|
With a copy to:
|
|
Kelley Drye & Warren LLP
8000 Towers
Crescent Drive
Suite 1200
Vienna, Virginia
22182
Attention: Joseph B. Hoffman,
Esquire
|
|
|
|
|
|
|
|
|
|
i.
|
|
Landlords Address for
Payment of Rent:
|
|
ACP/Woodland Park, LLC
P.O. Box
01-9741
Miami, Florida 33101-9741
Landlords Tax Identification Number: 20-0194026
|
|
|
|
|
|
|
|
|
|
j.
|
|
Extension Option:
|
|
Two (2) five (5) year options
|
|
|
|
|
|
|
|
|
|
k.
|
|
Security Deposit:
|
|
$2,136,535.98 (Letter of Credit)
|
2. PREMISES.
a. Premises.
In consideration of Tenants agreement to pay Annual Base Rent
(hereinafter defined) and Additional Rent (hereinafter defined) and subject to the covenants and
conditions hereinafter set forth, Landlord hereby leases to Tenant, and Tenant hereby hires and
leases from Landlord, upon the terms and conditions set forth herein, those certain premises
described in Section 1.a. hereof and located in the Building (the Premises). The Premises are
located in the Building described in Section 1.b. hereof. The lease of the Premises to Tenant
includes the non-exclusive right, together with other tenants of the Building and members of the
public, to use the common public areas of the Building and the land on which the Building is
situated (the Land), but includes no other rights not specifically set forth. The parties hereto
acknowledge that the Building constitutes one of three (3) office buildings owned by Landlord or
Landlords affiliates in the office project known as Woodland Park, the other buildings having a
street address of 2250 Corporate Park Drive and 2350 Corporate Park Drive, Herndon, Virginia
(collectively, along with the Building, the Buildings). For all purposes hereunder, the
Buildings, the land on which the Buildings are located (the Project Land) and all common areas,
roadways and public areas therein or thereon are collectively referred to herein as the Project.
b. Improvements.
Landlord shall deliver the Premises to Tenant in its as-is condition
without (A) any obligation on Landlords part to undertake or, except for the Improvement Allowance
(as defined in the Work Agreement (hereinafter defined)) to be provided by Landlord pursuant to the
Work Agreement, pay for, any improvements or alterations therein; or (B) except as otherwise
expressly set forth herein, any representations or warranties regarding the condition thereof.
Tenant shall, at Tenants sole cost and expense, subject to the application of the Improvement
Allowance, construct in the Premises the Tenant Improvements (as defined in the Work Agreement)
described in the Work Agreement attached hereto as
Exhibit B
(the Work Agreement), in
substantial accordance with the terms and conditions of the Work Agreement. In the event that
Landlord and Tenant have not finally agreed upon the scope and details of the Tenant Improvements
as of the Effective Date, Tenants submissions to Landlord of plans and specifications detailing
such work shall be subject to Landlords written approval in accordance with the Work Agreement.
The Tenant Improvements shall be subject to Landlords prior written approval, shall comply with
all applicable building codes, laws and regulations (including, without limitation, the Americans
with Disabilities Act, as amended (the ADA)), shall not require any changes to or modifications
of any of the mechanical, electrical, plumbing or other systems of the Building, and shall
otherwise be constructed in strict accordance with the terms of the
Work Agreement. The cost of
all design, architectural and engineering work, demolition costs, construction costs, construction
supervision, contractors overhead and profit, licenses and permits, and all other costs and
expenses incurred in connection with the Tenant Improvements shall be at Tenants sole cost and
expense, subject to the application of the Improvement Allowance pursuant to the terms and
conditions of the Work Agreement. Landlord shall disburse the Improvement Allowance as provided
in the Work Agreement. All costs incurred with respect to the Tenant Improvements in excess of the
Improvement Allowance shall be paid by Tenant as provided in the Work Agreement. Any portion of the
Improvement Allowance not expended by Tenant in undertaking the Tenant Improvements within nine (9)
months after the Effective Date shall be retained by Landlord.
3. TERM AND COMMENCEMENT OF TERM.
a. Term.
This Lease shall be in full force and effect from the Effective Date. The term of
this Lease (the Term) shall commence on the date on which Landlord delivers possession of the
Premises to Tenant (the Commencement Date) and shall expire on the last day of the seventh
(7
th
) Lease Year (hereinafter defined) (the Lease Expiration Date), unless otherwise
extended or terminated in accordance with the terms hereof. Landlord shall deliver possession of
the Premises to Tenant within five (5) business days of the Effective Date. As used herein, the
term Lease Year means (i) each twelve (12)-month period commencing on the Rent Commencement Date
(hereinafter defined), and (ii) each successive period of twelve (12) calendar months thereafter
during the Term. As used herein, the term Rent Commencement Date means May 1, 2006. Reference is
made to the form of Declaration of Commencement Date (the Declaration) attached hereto as
Exhibit C.
Promptly after the Rent Commencement Date, Landlord shall complete the
Declaration and deliver the completed Declaration to Tenant. Within ten (10) business days after
Tenant receives the completed Declaration from Landlord, Tenant shall execute and return the
Declaration to Landlord to confirm the Commencement Date, the Rent Commencement Date, the Term and
the actual number of rentable square feet in the Premises. Failure to execute the Declaration shall
not affect the commencement or expiration of the Term. As used
2
herein, the term business day shall mean all days other than Saturdays, Sundays and
Holidays (hereinafter defined).
b. Delays.
No delay by Tenant in completing the Tenant Improvements shall delay or otherwise
affect the Rent Commencement Date or Tenants obligation to pay Rent from and after such date.
4. RENT.
Beginning on the Rent Commencement Date, Tenant covenants and agrees to pay as Rent for
the Premises the following amounts set forth in this Section 4 and as otherwise provided in this
Lease. Additional Rent shall mean such costs, expenses, charges and other payments to be made by
(or on behalf of) Tenant to Landlord (or to a third party if required under this Lease), whether
or not the same be designated as such. Rent or rent shall mean all Annual Base Rent and
Additional Rent due hereunder.
a. Annual Base Rent.
(i) During each Lease Year, Tenant shall pay annual base rent in the amounts set forth
immediately below (the Annual Base Rent), which amounts shall be payable in equal monthly
installments (the Monthly Base Rent) as set forth immediately below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Base Rent
|
|
|
|
|
Lease
|
|
per Rentable
|
|
Annual
|
|
Monthly
|
Year
|
|
Square Foot
|
|
Base Rent
|
|
Base Rent
|
1
|
|
$
|
27.50
|
|
|
$
|
982,850.04
|
|
|
$
|
81,904.17
|
|
2
|
|
$
|
28.19
|
|
|
$
|
1,007,510.64
|
|
|
$
|
83,959.22
|
|
3
|
|
$
|
28.89
|
|
|
$
|
1,032,528.60
|
|
|
$
|
86,044.05
|
|
4
|
|
$
|
29.61
|
|
|
$
|
1,058,261.40
|
|
|
$
|
88,188.45
|
|
5
|
|
$
|
30.35
|
|
|
$
|
1,084,709.04
|
|
|
$
|
90,392.42
|
|
6
|
|
$
|
31.11
|
|
|
$
|
1,111,871.40
|
|
|
$
|
92,655.95
|
|
7
|
|
$
|
31.89
|
|
|
$
|
1,139,748.60
|
|
|
$
|
94,979.05
|
|
(ii) In addition to the payment of Annual Base Rent, Tenant shall be responsible for
the payment of Tenants Pass-Through Costs (hereinafter defined) pursuant to Section 4.b. hereof.
(iii) All installments of Monthly Base Rent shall be payable in advance, with the first
monthly installment due and payable upon execution of this Lease.
b. Tenants Pass-Through Costs.
(i) As used in this Lease:
(1)
Operating Expenses
shall mean any and all expenses, costs and disbursements (but not
specific costs billed to and paid by specific tenants) of every kind and nature incurred by
Landlord in connection with the ownership, management, operation, maintenance, servicing and repair
of the Building and appurtenances thereto, including, without limitation, the common areas thereof,
and the Land, including, but not limited to, employees wages, salaries, welfare and pension
benefits and other fringe benefits; payroll taxes; telephone service; painting of common areas of
the Building; exterminating service; detection and security services; concierge services; sewer
rents and charges; premiums for fire and casualty, liability, rent, workmens compensation,
sprinkler, water damage and other insurance; repairs and maintenance; building supplies; uniforms
and dry cleaning; snow removal; the cost of obtaining and providing electricity, water and other
public utilities to all areas of the Building; trash removal; janitorial and cleaning supplies; and
janitorial and cleaning services; window cleaning; service contracts for the maintenance of
elevators, boilers, HVAC and other mechanical, plumbing and electrical equipment; fees for all
licenses and permits required for the ownership and operation of the Building; business license
fees and taxes; the rental value of the management office maintained in the Building, if any; all
costs of operating and maintaining equipment in the health and fitness facility located in the
Building; sales, use and personal property taxes payable in connection with tangible personal
property and services purchased for the management, operation, maintenance, repair, cleaning,
safety and administration of the Buildings; legal fees; accounting fees relating to the
determination of Operating Expenses and the tenants share thereof and the preparation of
statements required by tenants leases; management fees, whether or not paid to any person having
an interest in or under common ownership with Landlord; purchase and installation of indoor plants
in the common areas; and landscaping maintenance and the purchase and replacement of landscaping
services, plants and shrubbery. If Landlord makes an expenditure for a capital improvement to the
Building (or any portion thereof) by installing energy conservation or labor-saving devices to
reduce Operating Expenses, or to comply with any law, ordinance or regulation pertaining to the
Building (each, a Permitted Capital Expenditure), and if, under generally accepted accounting
principles, such expenditure is not a current expense, then the cost thereof shall be amortized
over a period equal to the useful life of such improvement, determined in accordance with generally
accepted accounting principles, and the amortized costs allocated to each calendar year during the
Term, together with an imputed interest amount calculated on the unamortized portion thereof using
an interest rate of twelve percent (12%) per annum,
3
shall be treated as an Operating Expense. In the event that any costs with respect to the
operation and management of more than one of the Buildings are allocated among the Building and
any other building owned by Landlord, the costs so allocated to the Building shall be included in
the calculation of Operating Expenses. Notwithstanding anything to the contrary contained in this
Section 4.b(i)(1), Operating Expenses shall not include (i) costs of capital improvements or
capital expenditures determined under generally accepted accounting principles, except for
Permitted Capital Expenditures; (ii) interest, principal, late charges, prepayment penalties or
premiums on any debt owed by Landlord (including any mortgage debt) and depreciation; (iii)
expenses resulting from the negligence or willful misconduct of Landlord, its agents or employees,
but only if such expenses would not have been incurred but for such negligence or willful
misconduct; (iv) legal fees, space planners fees, real estate brokers leasing commissions and
advertising expenses incurred in connection with the leasing of space in the Building; (v) costs
for which Landlord is reimbursed by insurance (by Landlords carrier, Tenants carrier or by any
third partys insurance carrier) or pursuant to any warranty; (vi) any bad debt loss, rent loss,
or reserves for replacements; (vii) costs associated with the operation of the limited liability
company which constitutes Landlord, as opposed to costs associated with the operation of the
Building; (viii) costs of selling, syndicating, financing, mortgaging or hypothecating any of
Landlords interest in the Building; (ix) litigation costs relating to suits filed by or against
Landlord and/or the Building (expressly excluding tax assessment appeals); (x) fines and
penalties; (xi) amounts paid as ground rent by Landlord; (xii) the portion of any costs paid to
affiliates of Landlord for services at the Building to the extent that such costs exceed the cost
of such services if rendered by unaffiliated third parties on an arms-length basis; (xiii) rentals
and other related expenses incurred in leasing air conditioning systems, elevators or other
equipment ordinarily considered to be of a capital nature if purchased (excluding equipment not
affixed to the Building which is used in providing janitorial or similar services); (xiv) the cost
of all items and services with respect to which Landlord receives reimbursement (excluding
reimbursement by way of Tenants Pass-Through Costs paid by Tenant or other tenants); (xv) costs
incurred by Landlord due to the violation by Landlord of the terms and conditions of any space
lease in the Building, provided that such costs would not have been incurred by Landlord but for
such violation; (xvi) attorneys fees, costs and expenses incurred by Landlord in connection with
disputes with tenants or prospective tenants of the Building; (xvii) costs incurred in connection
with the sale, financing, refinancing, mortgaging or sale of the Building, including brokerage
commissions, attorneys and accountants fees, closing costs, title insurance premiums, transfer
taxes and interest charges; (xviii) costs of correcting any violations of law applicable to the
Building, which violations existed on the Effective Date; (xix) Landlords political or charitable
contributions; (xx) Real Estate Taxes; (xxi) costs incurred in connection with work or services or
other benefits that are not offered to Tenant but that are provided to another tenant or occupant
of the Building without additional cost; (xxii) federal income taxes assessed against Landlord;
(xxiii) costs of remediating Hazardous Materials (hereinafter defined) in the Building to the
extent such Hazardous Materials (A) were present in the Building on the Commencement Date in
violation of any Environmental Laws (hereinafter defined) or (B) were introduced to the Building
by Landlord, or its agents or employees; or (xxiv) the costs of constructing any health and
fitness facility located in the Building and the cost of purchasing, installing or replacing any
equipment in such health and fitness facility. Landlord shall not duplicate any component of
Operating Expenses under the terms of this Lease.
(2) Real Estate Taxes
shall mean all taxes, assessments and charges levied upon or with
respect to the Land (or any portion thereof), the Building, and any improvements adjacent thereto
(computed as payable in installments as permitted by law regardless of whether so paid), including,
without limitation, vault rents, if any, franchise taxes, any tax, fee or excise on rents, on the
square footage of the Premises including the Fairfax County Business License Tax, on the act of
entering into this Lease, on the occupancy of Tenant, on account of the rent hereunder or the
business of renting space now or hereafter levied or assessed against Landlord by the United States
of America or the state, county, city or town in which the Building are located, or any political
subdivision, public corporation, district or other political or public entity; and shall also
include any other tax to the extent that such tax is imposed in lieu of or in addition to such Real
Estate Taxes. Reasonable legal fees, costs and disbursements incurred by Landlord in connection
with any proceedings for appeal or reduction of any Real Estate Taxes shall also be considered Real
Estate Taxes for the year in question. In the event that Real Estate Taxes for the Land and the
Building are not separately assessed, Landlord shall allocate to the Land and the Building the
portion of the total Real Estate Tax assessment that fairly represents the relative values of all
properties that have been assessed together.
(3) Tenants
Pro Rata Share (Operating Expenses),
as of the date hereof, shall be as provided in Section 1.g., representing the ratio that the rentable area of the Premises bears to
the total rentable area of office space in the Building. If either the rentable area of the
Premises or the total rentable area of the Building, shall be increased or decreased, as reasonably
determined by Landlord, Tenants Pro Rata Share (Operating Expenses) shall be adjusted accordingly.
(4) Tenants Pro Rata Share (Real Estate Taxes),
as of the date hereof, shall be as provided
in Section 1.g., representing the ratio that the rentable area of the Premises bears to the total
rentable area of the Building. If either the rentable area of the, Premises or the total rentable
area of the Building, shall be increased or decreased, as reasonably determined by Landlord,
Tenants Pro Rata Share (Real Estate Taxes) shall be adjusted accordingly.
(5) Base Year
means calendar year 2006.
(ii) If, in any calendar year during the Term, the total amount of Operating Expenses for the
Buildings exceed the amount of Operating Expenses in the Base Year, then Tenant shall pay to
Landlord, as Additional Rent, commencing on January 1, 2007, an amount which is the product of (1)
the amount of such increase in Operating Expenses, multiplied by (2) Tenants Pro Rata Share
(Operating
4
Expenses). Tenants Pro Rata Share (Operating Expenses) of increases in Operating Expenses for any
partial calendar year during the Term shall be determined by multiplying the amount of Tenants
Pro Rata Share (Operating Expenses) of increases in Operating Expenses for the full calendar year
by a fraction, the numerator of which is the number of days during such calendar year falling
within the Term and the denominator of which is three hundred sixty-five (365). If in any calendar
year during the Term, the amount of Real Estate Taxes exceeds the amount of Real Estate Taxes for
the Base Year, then Tenant shall pay, as Additional Rent, commencing on January 1, 2007, an amount
which is the product of (x) the amount of such increase in Real Estate Taxes, multiplied by (y)
Tenants Pro Rata Share (Real Estate Taxes). Tenants Pro Rata Share (Real Estate Taxes) of
increases in Real Estate Taxes for any partial calendar year during the Term shall be determined
by multiplying the amount of Tenants Pro Rata Share (Real Estate Taxes) of increases in Real
Estate Taxes for the full calendar year by a fraction, the numerator of which is the number of
days during such calendar year falling within the Term and the denominator of which is three
hundred sixty-five (365).
(iii) If at any time during the Base Year, or during any subsequent calendar year
(Subsequent Year), less than ninety-five percent (95%) of the total rentable square feet of
office space in the Building is occupied by tenants, the amount of Operating Expenses for the Base
Year, or for any such Subsequent Year, as the case may be, shall be deemed to be the amount of
Operating Expenses as reasonably estimated by Landlord that would have been incurred if the
percentage of occupancy of the Building during the Base Year or any such Subsequent Year was
ninety-five percent (95%). If at any time during any calendar year, any part of the Building is
leased to a tenant (hereinafter referred to as a Special Tenant) who, in accordance with the
terms of its lease, provides its own utilities, cleaning or janitorial services or other services
or is not otherwise required to pay a share of Operating Expenses in accordance with the
methodology set forth in this Section 4.b., and Landlord does not incur the cost of such services,
Operating Expenses for such calendar year shall be increased by the additional costs for cleaning
and janitorial services and such other applicable expenses as reasonably estimated by Landlord
that would have been incurred by Landlord if Landlord had furnished and paid for cleaning and
janitorial services and such other services for the space occupied by the Special Tenant, or if
Landlord had included such costs in operating expenses as defined in the Special Tenants lease.
(iv) During the month of December, 2006 (or as soon thereafter as is reasonably practicable),
and thereafter during the month of December of each Lease Year (or as soon thereafter as is
reasonably practicable), Landlord shall use reasonable efforts to furnish to Tenant a statement of
Landlords estimate of Tenants Pass-Through Costs for the next calendar year. Tenants
Pass-Through Costs shall be an amount equal to the sum of (1) Tenants Pro Rata Share (Operating
Expenses) multiplied by the difference between Operating Expenses incurred during any calendar
year during the Term, and Operating Expenses incurred in the Base Year; plus (2) Tenants Pro Rata
Share (Real Estate Taxes) multiplied by the difference between Real Estate Taxes for any calendar
year during the Term and Real Estate Taxes incurred during the Base Year. Such statement shall
show the amount of Tenants Pass-Through Costs, if any, payable by Tenant for such calendar year
pursuant to this Section 4.b. on the basis of Landlords estimate. Commencing on January 1, 2007,
and continuing on each monthly rent payment date thereafter until further adjustment pursuant to
this Section 4.b.(iv), Tenant shall pay to Landlord one-twelfth (1/12) of the amount of said
estimated Tenants Pass-Through Costs. Within one hundred and twenty (120) days after the
expiration of each calendar year during the Term, Landlord shall furnish to Tenant a statement
(the Expense Statement) showing the actual Operating Expenses and Real Estate Taxes for such
calendar year. The Expense Statement shall be conclusive and binding on Tenant, unless objected to
in writing by Tenant within sixty (60) days following Tenants receipt thereof. In case of an
underpayment, Tenant shall, within thirty (30) days after the receipt of such statement, pay to
Landlord an amount equal to such underpayment. In case of an overpayment, Landlord shall credit
the next monthly rental payment by Tenant with an amount equal to such overpayment. Additionally,
if this Lease shall have expired, Landlord shall apply such excess against any sums due from
Tenant to Landlord and shall refund any remainder to Tenant within sixty (60) days after the
expiration of the calendar year in which the Term ends.
(v) Tenant shall be entitled to the following audit right with respect to a Expense Statement
delivered by Landlord. Such audit right shall be exercisable by Tenants providing Landlord with
written notice of Tenants exercise of such audit right within sixty (60) days of Tenants receipt
of such Expense Statement, time being of the essence. Tenants notice shall contain a statement of
Tenants reasonable objections to such Expense Statement. If, within forty-five (45) days after
Landlords receipt of Tenants written notice, Landlord and Tenant are unable to resolve Tenants
objections, then not later than fifteen (15) days after the expiration of such forty-five (45)-day
period Tenant shall deliver to Landlord written notice (the Audit Notice) that it wishes to
employ on an hourly rate (and not a contingency fee) basis an independent certified public
accounting firm reasonably acceptable to Landlord to inspect and audit Landlords books and records
at the Building relating to the objections raised in Tenants notice. If Tenant elects to employ
such accounting firm as set forth above, then Tenant shall deliver to Landlord a confidentiality
and nondisclosure agreement satisfactory to Landlord executed by Tenant and such accounting firm,
and provide Landlord not less than fifteen (15) days notice of the date on which the accounting
firm desires to examine Landlords books and records at the Building during regular business hours;
provided, however, that such date shall be between thirty (30) and ninety (90) days after Tenant
delivers to Landlord the Audit Notice. Such audit shall be limited to a determination of whether
Landlord calculated the Expense Statement in accordance with the terms and conditions of this
Lease. Except as otherwise expressly set forth below, all costs and expenses of any such audit
shall be paid by Tenant. Notwithstanding anything contained herein to the contrary, Tenant shall be
entitled to exercise its right to audit pursuant to this Section 4.b(v) only in strict accordance
with the foregoing procedures and each such audit shall relate only to the calendar year covered by
the Expense Statement most recently delivered by Landlord. As a condition precedent to exercising
its audit rights, Tenant shall
5
pay to Landlord all monies which Landlord claims are owing by Tenant, as shown on the Expense
Statement. Except for an Affiliate (hereinafter defined) of Tenant to which Tenant has assigned
its interest in this Lease, the audit rights pursuant to this Section 4b(v) shall not transfer or
apply to any subtenant or any other person or entity other than K12 Inc. If on account of any
demonstrated errors in the Expense Statement under audit, Tenant is entitled to a refund of the
amount paid by Tenant for Tenants Pass-Through Costs for the calendar year under audit because
such Expense Statement overstated the amounts to which Landlord was entitled hereunder, Landlord
shall credit the next monthly rental payment by Tenant with an amount equal to such refund. If the
Expense Statement under audit overstated the amounts to which Landlord was entitled to hereunder
by more than four percent (4%), then Landlord shall promptly reimburse Tenant for its reasonable
costs and expenses incurred in such audit in an amount not to exceed Two Thousand Five Hundred
Dollars ($2,500.00). In the event the audit reveals an underpayment by Tenant for Tenants
Pass-Through Costs, Tenant shall pay to Landlord an amount equal to such underpayment within
thirty (30) days.
(vi) All monies received from Tenant as Tenants Pass-Through Costs shall be received by
Landlord to pay Operating Expenses and Real Estate Taxes of the Building and the Land.
Notwithstanding the foregoing, Landlord shall have the right to commingle Tenants Pass-Through
Costs with other funds collected by Landlord.
(vii) Tenants obligation to pay Tenants Pass-Through Costs pursuant to the provisions of
this Section 4.c. shall survive the expiration or other termination of this Lease with respect to
any period during the Term hereof and with respect to any holdover period of occupancy following
the expiration of the Term.
(viii) Notwithstanding anything contained in this Section 4.b. to the contrary, Landlord
reserves the right, at any time in the future, to aggregate some or all of the Operating Expenses
and/or Real Estate Taxes with the expenses and/or taxes, respectively, incurred in connection with
the operation of all the Buildings in the Project, in which event Tenants Pro Rata Share
(Operating Expenses) and/or Tenants Pro Rate Share (Real Estate Taxes), as applicable, shall be
adjusted accordingly by Landlord.
c. Payment of Rent.
All Rent shall be paid in lawful money of the United States of America
without deduction, diminution, set-off, counterclaim or prior notice or demand, at the office of
Landlord as provided in Section 1.i. hereof or at such other place as Landlord may hereafter
designate in writing, on the first day of every calendar month during the Term. All such payments
shall be made by good checks payable to Landlord or such other person, firm or corporation as
Landlord may hereafter designate in writing. No payment by Tenant or receipt and acceptance by
Landlord of a lesser amount than the Monthly Base Rent or Additional Rent shall be deemed to be
other than partial payment of the full amount then due and payable; nor shall any endorsement or
statement on any check or any letter accompanying any check, payment of Rent or other payment, be
deemed an accord and satisfaction; and Landlord may accept, but is not obligated to accept, such
partial, payment without prejudice to the Landlords right to recover the balance due and payable
or to pursue any other remedy provided in this Lease or by law. If Landlord shall at any time or
times accept Rent after it becomes due and payable, such acceptance shall not excuse a subsequent
delay or constitute a waiver of Landlords rights hereunder. Any Rent owed by Tenant to Landlord,
including, without limitation, Annual Base Rent, Additional Rent, Tenants Pass-Through Costs and
Late Charges, which is not paid within five (5) days after the date such payment is due shall bear
interest from the due date at a rate equal to the prime rate on corporate loans quoted in the
Wall
Street Journal
(the Prime Rate) plus two percent (2%). In addition, if any amount of Rent
required to be paid by Tenant to Landlord under the terms of this Lease is not paid within five (5)
days after the date such payment is due, then in addition to paying the amount of Rent then due,
Tenant shall pay to Landlord a late charge (the Late Charge) equal to four percent (4%) of the
amount of Rent then required to be paid; provided, however, that Landlord agrees to waive the first
(1
st
) such Late Charge in any Lease Year during the Term, provided that Tenant pays the
Rent then due within three (3) days after Tenants receipt of written notice from Landlord.
Payment of such Late Charge will not excuse the untimely payment of Rent. In the event Tenant
makes any payment of Rent by check and said check is returned by the bank unpaid, Tenant shall pay
to Landlord the sum of Seventy-Five Dollars ($75.00) to cover the costs and expenses of processing
the returned check, in addition to the Rent payment and any other charges provided for herein. Any
interest, Late Charge and other amounts charged hereunder shall constitute Additional Rent.
d. Separate Metering and Rent Reduction.
Landlord may elect to discontinue the distribution
or furnishing of electricity and/or water to the Premises if such services are available and may
feasibly be furnished directly to Tenant by the utility company supplying same. In the event of any
such election by Landlord: (i) Landlord agrees to give reasonable advance notice of such
discontinuance to Tenant; (ii) Landlord agrees to permit Tenant to receive electricity and/or water
directly from the utilities supplying such service to the Building and to permit the existing
feeders, risers, wiring, pipes and other facilities serving the Premises to be used by Tenant for
such purpose to the extent they are suitable and safely capable of carrying Tenants requirements;
(iii) Landlord agrees to pay such charges and costs, if any, as such public utility may impose in
connection with the installation of Tenants meters; (iv) Landlord shall install, at Landlords
expense, any additional equipment reasonably required by the utility company which may be necessary
to furnish such service to Tenant; and (v) the amount of Additional Rent payable in respect to the
Operating Expenses shall be decreased appropriately to reflect such discontinuance. This Lease
shall remain in full force and effect and such discontinuance shall not constitute an actual or
constructive eviction, in whole or in part, or relieve Tenant from any of its obligations under
this Lease.
5. SECURITY DEPOSIT.
6
a.
Landlord acknowledges receipt from Tenant of the Letter of Credit (hereinafter defined) in
the amount set forth in Section 5.b, below to be held by Landlord during the Term as collateral
security (the Security Deposit) (and not prepaid rent), for the payment of Annual Base Rent and
Additional Rent and for the faithful performance by Tenant of all other covenants, conditions and
agreements of this Lease. Landlord shall not be obligated to hold the Letter of Credit or any
proceeds thereof in a separate account. The Security Deposit shall not earn interest. If any sum
payable by Tenant to Landlord shall be overdue and unpaid, or if Landlord makes any payments on
behalf of Tenant, or if Tenant fails to perform any of the terms of this Lease, then Landlord, at
its option and without prejudice to any other remedy which Landlord may have, may apply all or part
of the Security Deposit to compensate Landlord for the payment of Annual Base Rent or Additional
Rent, or any loss or damage sustained by Landlord. Tenant shall restore the Security Deposit to the
original sum deposited upon demand. Provided that Tenant shall have made all payments and performed
all covenants and agreements of this Lease, Landlord shall return the Security Deposit to Tenant
(except to the extent of any portion of the Security Deposit which has been applied by Landlord and
not restored by Tenant) within ninety (90) days after the expiration of this Lease or the vacation
of the Premises by Tenant.
b.
Contemporaneously with Tenants execution and delivery to Landlord of this Lease, Tenant
has delivered to Landlord an unconditional and irrevocable letter of credit issued by a federally-insured banking institution reasonably acceptable to Landlord in the face amount of Two Million One
Hundred Thirty-Six Thousand Five Hundred Thirty-Five and 98/100 Dollars ($2,136,535.98) (the
Letter of Credit), as a Security Deposit to be held by Landlord until disposed of in accordance
with the provisions of this Section 5. The Letter of Credit shall be in the form attached hereto
as
Exhibit E
, and shall be issued for a term ending ninety (90) days after the Lease
Expiration Date (or, if applicable, the last day of any applicable Extension Period (hereinafter
defined)). If the Letter of Credit (or any replacement thereof) is issued for an effective period
of time ending less than ninety (90) days after the expiration of the Term of this Lease (or any
renewal thereof), Tenant shall from time to time, and not later than sixty (60) days prior to the
expiration of the Letter of Credit, replace each such expiring Letter of Credit with a new Letter
of Credit in the same amount and upon the same terms. The Letter of Credit (and any replacement
thereof) may be drawn upon by Landlord under the terms and conditions as provided in this Section
5. Failure of Tenant to renew the Letter of Credit at least sixty (60) days prior to its expiration
shall constitute an Event of Default (hereinafter defined) under this Lease and shall entitle
Landlord, in addition to the other remedies contained in this Lease, to draw upon the Letter of
Credit.
c.
Landlord (or the beneficiary under the Letter of Credit, if such beneficiary is not
Landlord) shall have the right to draw upon the Letter of Credit in any of the following
circumstances (in addition to any other right to draw on the Letter of Credit that is set forth in
this Section 5): (i) if the credit rating of the issuer of the Letter of Credit is downgraded from
the credit rating of such issuer at the time of the issuance of the Letter of Credit, the issuer of
the Letter of Credit shall enter into any supervisory agreement with any governmental authority, or
the issuer of the Letter of Credit shall fail to meet any capital requirements imposed by
applicable law, and Tenant fails to deliver to Landlord (or the beneficiary under the Letter of
Credit, if such beneficiary is not Landlord) a replacement Letter of Credit complying with the
terms of this Lease within thirty (30) days of request from
Landlord, (ii) if Tenant fails to
provide Landlord with any renewal or replacement Letter of Credit complying with the terms of this
Lease at least sixty (60) days prior to expiration of the then-current Letter of Credit where the
issuer of such Letter of Credit has advised Landlord of its intention not to renew the Letter of
Credit, (iii) if Tenant fails to provide Landlord with any renewal or replacement Letter of Credit
complying with the terms of this Lease at least sixty (60) days prior to the final expiration date
(i.e.,
the date that, by the terms of the Letter of Credit, the Letter of Credit expires and is
either not subject to any automatic renewal or extension or the conditions to such automatic
renewal or extension have not then been satisfied) of the then-current Letter of Credit if such
Letter of Credit expires prior to the date that is ninety (90) days after the end of the Term, or
(iv) any voluntary or involuntary proceedings are filed by or against Tenant under any bankruptcy,
insolvency or similar laws. In the event the Letter of Credit is drawn upon due solely to the
circumstances described in the foregoing clauses (i), (ii), (iii) or (iv), the amount drawn shall
be held by Landlord as a cash Security Deposit in accordance with the terms of this Section 5, and
shall be otherwise retained, expended or disbursed by Landlord for any amounts or sums due under
this Lease to which the proceeds of the Letter of Credit could have been applied pursuant to this
Lease, and Tenant shall be liable to Landlord for restoration, by way of a Letter of Credit
complying with the terms of this Lease or, at Landlords sole option, cash, of any amount so
expended to the same extent as set forth in this Section 5.
d.
In the event of the sale or transfer of Landlords interest in the Building, Landlord shall
transfer the Letter of Credit to the purchaser or assignee, in which event Tenant shall look only
to the new landlord for the return of the Letter of Credit, and Landlord shall thereupon be
released from all liability to Tenant for the return of the Security Deposit. Tenant hereby agrees
not to look to the mortgagee, as mortgagee, mortgagee in possession, or successor in title to the
property, for accountability for any security deposit required by the Landlord hereunder, unless
said sums have actually been received by said mortgagee as security for Tenants performance of
this Lease. In the event of any permitted assignment of Tenants interest in this Lease, the
Letter of Credit may, at Landlords sole option, be held by Landlord as a deposit made by the
assignee, and Landlord shall have no further liability to Tenant with respect to the return of the
Letter of Credit.
e.
Notwithstanding anything to the contrary contained in this Section 5, and provided that, as
of the applicable Reduction Date (hereinafter defined): (a) Tenant is not in default of its
obligations under the Lease, and (b) Landlord determines in its sole discretion that (i) Tenants
Net Worth (hereinafter defined) equals or exceeds Twenty-Five Million Dollars ($25,000,000.00),
(ii) Tenants Net Worth has increased during the immediately-preceding twelve (12) month period,
(iii) Tenants ratio of current assets (minus good will and other intangibles) to current
liabilities (i.e., current assets divided by current
7
liabilities) is no less than 1.0, and (iv) Tenants ratio of total debt to total equity (i.e.,
total debt divided by total equity) as of the Reduction Date is not greater than 1.5, then the
then-current face amount of the Letter of Credit shall be reduced by twentyfive percent (25%) as
of the first day of each of the fourth (4
th
), fifth (5
th
) and sixth
(6
th
) Lease Years (each, a Reduction Date). In no event shall the face amount of the
Letter of Credit be reduced below Five Hundred Thirty-Four Thousand One Hundred Thirty-Four
Dollars ($534,134.00) pursuant to the terms of this Section 5.e). No such reduction in the face
amount of the Letter of Credit shall be undertaken by the Tenant or the issuer of the Letter of
Credit unless and until Landlord notifies such issuer in writing that Tenant has satisfied the
conditions precedent to such reduction (Landlords Reduction Notification). The foregoing
reductions shall be effected by Tenant replacing the Letter of Credit then being held by Landlord
with a new Letter of Credit (complying with the terms of this Lease) in the amount then required
to be maintained with Landlord pursuant to the foregoing provisions (or amending the then existing
Letter of Credit to the amount then required to be maintained with Landlord pursuant to the
foregoing provisions). At least thirty (30) days prior to the then-applicable Reduction Date,
Tenant shall submit audited financial statements to Landlord containing financial information
which Landlord confirms is sufficient to enable Landlord to determine whether Tenant has satisfied
the conditions precedent set forth in subparagraph (b), above (the Security Deposit Reduction
Financial Statements). The Security Deposit Reduction Financial Statements provided must be as of
a date not more than six (6) months prior to the applicable Reduction Date. As used herein, the
term Net Worth shall mean an amount equal to Tenants assets (excluding good will and other
intangibles) as of the applicable Reduction Date minus Tenants liabilities as of the applicable
Reduction Date. Provided Tenant has timely submitted the applicable Security Deposit Reduction
Financial Statements to Landlord in accordance with the terms of this
Section 5.e, Landlord shall use reasonable efforts to deliver the Landlords Reduction Notification to the issuer of the
Letter of Credit within sixty (60) days after the applicable reduction date.
6. USE.
a.
Tenant covenants with the Landlord not to use the Premises for any purpose other than
general office use for the conduct of the Tenants business. Tenant shall not use the Premises or
allow the Premises to be used (i) for any other purpose without the prior written consent of the
Landlord; or (ii) in any manner or for any purpose which violates any applicable Legal Requirements
(hereinafter defined). Except as otherwise set forth immediately below or in Section 9.f, below,
Tenant, at Tenants expense, shall comply with all laws, codes, rules, orders, ordinances,
directions, regulation, and requirements of federal, state, county, and municipal authorities, now
in force or which may hereafter be in force, which shall impose any duty upon Landlord or Tenant
with respect to the condition, maintenance, use, occupation, operation or alteration of the
Premises, or the conduct of Tenants business therein, including, without limitation, the ADA and
all applicable zoning, recycling and environmental laws and regulations. Tenant hereby agrees to
indemnify and hold harmless Landlord and its agents, officers, directors and employees from and
against any cost, damage, claim, liability and expense (including attorneys fees) arising out of
claims or suits brought by third parties (including governmental authorities) against Landlord, its
agents, officers, directors and employees alleging or relating to the failure of the Premises to
comply with the terms of the ADA or any other law or regulation applicable to the Premises and/or
its occupancy by Tenant. Notwithstanding the foregoing, the indemnity set forth in the
immediately preceding sentence shall not apply to claims or suits arising out of the failure by the
Sole Occupant Bathrooms (hereinafter defined) to comply with the terms of the ADA. As used herein,
the term Sole Occupant Bathrooms means the bathrooms located in those portions of the Premises
which are located on floors of the Building on which Tenant occupies one hundred percent (100%) of
the rentable square footage of space on such floor. Tenant shall not use or permit the Premises or
any part thereof to be used in any manner that constitutes waste, nuisance or unreasonable
disturbances to other tenants of the Building or for any disorderly, unlawful or hazardous purpose
and will not store or maintain therein any hazardous, toxic or highly combustible items other than
usual and customary office supplies intended for Tenants use and in such event, only in such
amounts as permitted by applicable law. Tenant covenants not to change Tenants use of the Premises
without the prior written approval of Landlord.
b.
Tenant shall not put the Premises to any use, the effect of which use is reasonably likely
to cause cancellation of any insurance covering the Premises or the Building, or an increase in the
premium rates for such insurance. In the event that Tenant performs or commits any act, the effect
of which is to raise the premium rates for such insurance, Tenant shall pay Landlord the amount of
the additional premium, as Additional Rent payable by Tenant upon demand therefor by Landlord.
The Premises shall not be used for any illegal purpose or in violation of any regulation of any
governmental body or the regulations or directives of Landlords insurance carriers, or in any
manner which interferes with the quiet enjoyment of any other tenant of the Building. Tenant will
not install or operate in the Premises any electrical or other equipment, other than such equipment
as is commonly used in modern offices (specifically excluding mainframe computers), without first
obtaining the prior written consent of Landlord, who may condition such consent upon the payment by
Tenant of Additional Rent in compensation for excess consumption of water, electricity and/or other
utilities, excess wiring and other similar requirements, and any changes, replacements or additions
to any base building system, as may be occasioned by the operation of said equipment or machinery.
c.
Tenant agrees to maintain the Premises, and the Tenant Improvements and other Alterations
(hereinafter defined) therein, in good order, repair and condition during the Term at Tenants sole
cost and expense, and Tenant will, at the expiration or other termination of the Term, surrender
and deliver the same and all keys, locks and other fixtures connected therewith (excepting only
Tenants personal property) in good order, repair and condition, as the same shall be at the
Commencement Date, except as repaired, rebuilt, restored, altered or added to pursuant to this
Lease, and except for ordinary wear and tear. Landlord shall have no obligation to Tenant to make
any repairs in or to the Premises, the
8
Tenant Improvements or any Alterations, except as otherwise expressly set forth herein. Any and
all damage or injury to the Premises (including, but not limited to, the Tenant Improvements), the
Building or the Land caused by Tenant, or by any employee, agent, contractor, assignee, subtenant,
invitee or customer of Tenant shall be promptly reported to Landlord and repaired by Tenant at
Tenants sole cost; provided, however, that Landlord shall have the option of repairing any such
damage, in which case Tenant shall reimburse Landlord for all actual costs incurred by Landlord in
respect thereof as Additional Rent within twenty (20) days after Tenant receives Landlords notice
of such costs.
d.
Tenant shall not place a load upon the floor of the Premises exceeding the designated
floor load capacity of the Building
(e.g.
100 pounds per square foot: 80 pounds per square foot,
live load, and 20 pounds per square foot, dead load) without Landlords prior written consent.
Business machines, mechanical equipment and materials belonging to Tenant which cause vibration,
noise, cold, heat or fumes that may be transmitted to the Building or to any other leased space
therein to such a degree as to be objectionable to Landlord or to any other tenant in the
Building shall be placed, maintained, isolated, stored and/or vented by Tenant at its sole expense
so as to absorb and prevent such vibration, noise, cold, heat or fumes.
7. ASSIGNMENT AND SUBLETTING.
a.
Tenant shall not, without the prior written consent of Landlord in each instance: (i)
assign or otherwise transfer this Lease or any of Tenants rights hereunder, (ii) sublet the
Premises or any part thereof, or permit the use of the Premises or any part thereof by any persons
other than Tenant or its employees, agent and invitees, or (iii) permit the assignment or other
transfer of this Lease or any of Tenants rights hereunder by operation of law. Landlords consent
to a proposed assignment or sublease shall not be unreasonably withheld, conditioned or delayed,
provided Landlord reasonably determines that the proposed assignee or subtenant (A) is of a type
and quality consistent with the first-class nature of the Building, (B) has the financial capacity
and creditworthiness to undertake and perform the obligations of this Lease or the sublease, (C) is
not a party by whom any suit or action could be defended on the ground of sovereign immunity or
diplomatic immunity and (D) will not impose any additional material burden upon Landlord in the
operation of the Building (to an extent greater than the burden to which Landlord would have been
had Tenant continued to use such part of the Premises). In addition, the following conditions must
be satisfied at the time Tenant requests Landlords consent to an assignment or sublease:
(1) no Event of Default (hereinafter defined) exists and no event has occurred which, with
notice and/or the passage of time, would constitute an Event of Default if not cured within the
time, including any applicable grace period, specified herein;
(2) Landlord receives at least thirty (30) days prior written notice of Tenants intention to
assign this Lease or sublet any portion of the Premises (Tenants Transfer Notice);
(3) the proposed use of the Premises will not violate any agreement affecting the Premises or
the Building (provided, that if such proposed use will violate any such agreement, Landlord shall
notify Tenant thereof after Landlords receipt of Tenants Transfer Notice);
(4) Tenant submits to Landlord, within five (5) days after Landlords request therefor,
whatever information Landlord reasonably requires in order to permit Landlord to approve of or
disapprove of the proposed subletting or assignment, including without limitation the name,
business experience, financial history, net worth and business references of the proposed assignee
or subtenant (and each of its principals), an in-depth description of the transaction, and the
consideration delivered to Tenant for the assignment or sublease; and
(5) Tenant has paid to Landlord an administrative fee in the amount of Seven Hundred
Fifty Dollars ($750.00) which shall be retained by Landlord whether or not such consent is granted.
b.
All proposed subleases and assignments shall be on a form of sublease or assignment,
whichever is applicable, reasonably acceptable to Landlord; and shall contain,
inter alia,
the
following provisions: (i) any such assignment or sublease shall include an assumption by the
assignee or subtenant, from and after the effective date of such assignment or sublease, of the
performance and observance of the covenants and conditions to be performed and observed on the part
of Tenant as contained in this Lease, and (ii) any such sublease or assignment shall specify that
this Lease or sublease shall not be further assigned nor the Premises further sublet (except in
strict accordance with the terms and conditions of this Lease) and shall specify that the term of
such sublease shall not extend beyond one (1) day prior to the expiration of this Lease. The
consent by Landlord to any assignment, transfer or subletting to any person or entity shall not be
construed as a waiver or release of Tenant from any provision of this Lease, unless expressly
agreed to in writing by Landlord (it being understood that Tenant shall remain primarily liable as
a principal and not as a guarantor or surety), nor shall the collection or acceptance of rent from
any such assignee, transferee, subtenant or occupant constitute a waiver or release of Tenant from
any such provision. No consent by Landlord to any such assignment, transfer or subletting in any
one instance shall constitute a waiver of the necessity for such consent in a subsequent instance.
c.
In the event that Tenant assigns this Lease or sublets all or any portion of the Premises,
Tenant shall pay to Landlord, as Additional Rent, fifty percent (50%) of the difference between (i)
all sums
9
paid to Tenant or its agent by or on behalf of such assignee or subtenant under the assignment or
sublease after deducting Tenants reasonable, actual expenses of obtaining such assignment or
subleasing, including, but not limited to, brokerage commissions, tenant improvement or other
allowances or concessions granted and actually paid out by Tenant, advertising and marketing
costs incurred, and legal fees (with all such expenses amortized on a straight-line basis over the
term of the proposed sublease or over the term of the assignment), and (ii) the Annual Base Rent
and Additional Rent paid by Tenant under this Lease and attributable to the portion of the
Premises assigned or sublet.
d.
For purposes of this Section 7, a transfer, conveyance, grant or pledge, directly or
indirectly, in one or more transactions, of an interest in Tenant (whether stock, partnership
interest or other form of ownership or control, or the issuance of new interests) by which an
aggregate of more than fifty percent (50%) of the beneficial interest in Tenant shall be vested in
a party or parties who are not holders of such interest(s) as of the date hereof) shall be deemed
an assignment of this Lease; provided, however, that this limitation shall not apply to any
corporation, all of the outstanding voting stock of which is listed on a national securities
exchange as defined in the Securities Exchange Act of 1934. The merger or consolidation of Tenant
into or with any other entity, the sale of all or substantially all of Tenants assets, or the
dissolution of Tenant shall each be deemed to be an assignment within the meaning of this Section.
e.
Any assignment or subletting not in conformance with the terms of this Lease shall be void
ab initio
and shall, subject to the provisions of Section 16, constitute a default under the Lease.
f.
Except in connection with an assignment of this Lease or a subletting of all or any portion
of the Premises to an Affiliate of Tenant, upon receipt of Tenants Transfer Notice, Landlord may,
at its option, in lieu of approving or rejecting the proposed assignment or subletting, exercise
all or any of the following rights by written notice to Tenant of Landlords intent to do so within
fifteen (15) business days of Landlords receipt of Tenants Transfer Notice:
(i) with respect to a proposed assignment of this Lease, the right to terminate this Lease on
the effective date of proposed assignment as though it were the Lease Expiration Date;
(ii) with respect to a proposed sublease of the entire Premises for a sublease term ending
during the last Lease Year of the Term, the right to terminate this Lease on the effective date of
the sublease as though it were the Lease Expiration Date; or
(iii) with respect to a proposed sublease of less than the entire Premises for a sublease
term ending during the last six (6) months of the Term, the right to terminate this Lease as to
the portion of the Premises affected by such sublease on the effective date of the sublease, as
though it were the Lease Expiration Date, in which case Tenant shall execute and deliver to
Landlord an appropriate modification of this Lease, in form satisfactory to Landlord in all
respects within ten (10) days of Landlords notice of partial termination, which modification of
this Lease shall provide that the number of rentable square feet of the Premises shall be
decreased by, and the Monthly Base Rent and Additional Rent payable by Tenant hereunder shall be
adjusted in proportion to, the number of rentable square feet of the Premises affected by such
termination, as determined by Landlord.
g.
If Landlord exercises any of its options under Section 7.f., above, Landlord may then lease
(or sublease) the Premises or any portion thereof to Tenants proposed assignee or subtenant, as
the case may be, without any liability whatsoever to Tenant.
h.
Except as otherwise expressly set forth in Sections 22 and 23, below, upon any
assignment of this Lease or sublease of all or a portion of the Premises (except to an Affiliate
of Tenant), any and all option rights, rights of first refusal, rights of first negotiation, and
expansion rights shall terminate, it being understood that any and all such rights are personal to
Tenant (and not to any assignee or subtenant) and are not appurtenant to the Premises or this
Lease. Further, except as otherwise expressly set forth in Sections 22 and 23, below, Tenant shall
not have the right to exercise any such rights unless Tenant (and not any assignee or subtenant of
Tenant) shall be in occupancy of all of the Premises at the time of the exercise of any such
right. In addition to the administrative fee described in
Section 7.a.(7), above, Tenant shall
reimburse Landlord for its reasonable attorneys fees (which fees shall in no event exceed Two
Thousand Dollars ($2,000.00)) and other third party expenses incurred in reviewing any requested
consent whether or not such consent is granted. Tenant shall not collaterally assign, mortgage,
pledge, hypothecate or otherwise encumber this Lease or any of Tenants rights hereunder without
the prior written consent of Landlord, which consent Landlord may withhold in its sole discretion.
i.
Notwithstanding any consent by Landlord to an assignment or subletting, Tenant shall remain
primarily liable for the performance of all covenants and obligations contained in this Lease. Each
approved assignee or subtenant shall also automatically become liable for the obligations of Tenant
hereunder. Landlord shall be permitted to enforce the provisions of this Lease directly against
Tenant and/or against any assignee or sublessee without proceeding in any way against any other
person. Collection or acceptance of Annual Base Rent or Additional Rent from any such assignee,
subtenant or occupant shall not constitute a waiver or release of Tenant from the terms of any
covenant or obligation contained in this Lease, hor shall such collection or acceptance in any way
be construed to relieve Tenant from obtaining the prior written consent of Landlord to such
assignment or subletting or any subsequent assignment or subletting.
10
j.
Notwithstanding anything contained herein to the contrary, the consent requirement
set forth in Section 7a, above, shall not be applicable to any assignment of this Lease or
subletting of the Premises to an Affiliate (hereinafter defined) of Tenant; provided, however,
that in each instance, Tenant shall give Landlord at least fifteen (15) days prior written notice
of any proposed sublease or assignment to an Affiliate, which notice shall contain information and
documentation reasonably acceptable to Landlord evidencing to Landlords reasonable satisfaction
that the proposed assignee or subtenant is an Affiliate, and a copy of the proposed assignment or
sublease document. As used herein, the term Affiliate shall refer to a person or entity that
controls (hereinafter defined), is controlled by, or is under common control with Tenant.
Control as used herein shall mean the possession, direct or indirect, of the power to direct or
cause the direction of the management and policies of the entity in question, whether through
ownership of voting securities or by contract.
8. IMPROVEMENTS AND FIXTURES.
a.
Tenant shall neither make nor allow any alterations, decorations, replacements,
changes, additions or improvements (collectively referred to as Alterations) to the Premises or
any part thereof that will or may affect the mechanical, electrical, plumbing, HVAC or other
systems or the exterior or structure of the Building, without the prior written consent of
Landlord, which may be withheld by Landlord in its sole discretion. Tenant shall not make or allow
any other kind of Alterations to the Premises or any part thereof without the prior written consent
of Landlord, which consent shall not be unreasonably withheld, conditioned or delayed. All of such
Alterations, structural or otherwise, must conform to (i) the Construction Rules and Regulations
(as defined in the Work Agreement); and (ii) such other rules and regulations as are established
from time to time by Landlord. All Alterations must be performed in a good and workmanlike manner,
must comply with all applicable building codes, laws and regulations (including, without
limitation, the Americans With Disabilities Act, as amended), shall not require any changes to or
modifications of any of the mechanical, electrical, plumbing, HVAC or other systems or the exterior
or structure of the Building, and shall otherwise be constructed in strict accordance with the
terms and conditions of this Section 8. Notwithstanding anything to the contrary contained herein,
Tenant shall have the right to make Cosmetic Alterations (hereinafter defined) in or to the
Premises without Landlords prior consent, but upon at least ten (10) days prior written notice to
Landlord. As used herein, the term Cosmetic Alterations shall mean nonstructural Alterations in
or to the Premises (e.g., paint, wallpaper or carpet) which are consistent with the design
standards of the Tenant Improvements, which do not require a building permit to undertake, which
cost in the aggregate less than Thirty Thousand Dollars ($30,000.00) to undertake, and which do not
affect the structure or any of the systems of the Building. Tenant shall certify to Landlord in
writing at least ten (10) days prior to undertaking any Cosmetic Alterations that the proposed
Alterations are Cosmetic Alterations and describing the same in detail. If Landlord determines, in
its reasonable discretion, that the proposed Alterations are not Cosmetic Alterations, Tenant shall
request Landlords consent for such Alterations in accordance with this Section 8. If any
Alterations made by or on behalf of Tenant requires Landlord to make any alterations or
improvements to any part of the Building in order to comply with applicable law (including without
limitation the Americans With Disabilities Act, as amended), Tenant shall pay all costs and
expenses incurred by Landlord in connection with such alterations or improvements. Prior to
undertaking any Alterations in the Premises, Tenant shall furnish to Landlord duplicate original
policies or certificates thereof of workers compensation insurance (covering all persons to be
employed by Tenant, and Tenants contractors and subcontractors in connection with such
Alteration), builders all- risk insurance, and comprehensive public liability insurance (including
property damage coverage) in such form, with such companies, for such periods and in such amounts
as Landlord may reasonably require, naming Landlord and its agents, and any mortgagee as additional
insureds.
b.
It is understood and agreed by Landlord and Tenant that any Alterations undertaken in the
Premises shall be constructed at Tenants sole expense. The costs of Alterations shall include,
without limitation, the cost of all architectural work, engineering studies, materials, supplies,
plans, permits and insurance. If requested by Landlord, Tenant shall provide to Landlord
reasonably satisfactory evidence of Tenants ability to pay for such Alterations (including, but
not limited to, a payment or performance bond). No consent by Landlord to any Alterations shall
be deemed to be an agreement or consent by Landlord to subject Landlords interest in
the Premises, the Building or the Land to any mechanics or materialmans liens which may be filed
in respect to such Alterations made by or on behalf of Tenant. If Landlords prior consent to any
Alteration is required pursuant to the terms of this Section 8, and Landlord gives its consent as
specified in Section 8.a., above, Landlord may impose as a condition to such consent such
requirements as Landlord may deem reasonably necessary or desirable, in its sole discretion
exercised in good faith, including, without limitation, the right to approve the plans and
specifications for any work, supervision of the work by Landlord or its agents or by Landlords
architect or contractor and, if Landlord or Landlords contractors undertake the construction of
such Alteration, the payment to Landlord or its agents, architect or contractor of a reasonable
construction supervision fee in connection therewith (provided, however, that Tenant shall not be
obligated to pay Landlord, its agents, architects or contractors, such fee in connection with
Tenants undertaking any Cosmetic Alterations), the right to require security for the full payment
of any work and the right to impose requirements as to the manner in which or the time or times at
which work may be performed. Landlord shall also have the right to approve the contractor or
contractors who shall perform any Alterations, repairs in, to or about the Premises, such approval
not to be unreasonably withheld, conditioned or delayed, and to post notices of non-responsibility
and similar notices, as appropriate. Tenant shall reimburse Landlord for all of Landlords
reasonable costs and expenses incurred in reviewing and approving Tenants plans and specifications
for such Alterations within thirty (30) days after receipt of an invoice therefor. In addition,
unless otherwise specifically agreed to in writing by and between Landlord and Tenant, immediately
after completion of any Alterations, Tenant shall assign to Landlord any and all warranties
applicable to such Alterations and shall provide Landlord with as-built plans of the Premises
depicting such Alterations.
11
c.
Tenant shall keep the Premises free from any liens arising out of any work performed
on, or materials furnished to, the Premises, or arising from any other obligation incurred by
Tenant. If any mechanics or materialmens lien is filed against the Premises, the Building
and/or the Land for work claimed to have been done for or materials claimed to have been furnished
to Tenant, such lien shall be discharged by Tenant within thirty (30) days thereafter, at Tenants
sole cost and expense, by the payment thereof or by filing any bond required by law. If Tenant
shall fail to timely discharge any such mechanics or materialmans lien, Landlord may, at its
option, discharge the same and treat the cost thereof as Additional Rent payable with the
installment of rent next becoming due; it being expressly covenanted and agreed that such discharge
by Landlord shall not be deemed to waive or release the default of Tenant in not discharging the
same. Tenant shall indemnify and hold harmless Landlord, the Premises and the Building from and
against any and all expenses, liens, claims, actions or damages to person or property in connection
with any such lien or the performance of such work or the furnishing of such materials. Tenant
shall be obligated to, and Landlord reserves the right to, post and maintain on the Premises at any
time such notices as shall in the reasonable judgment of Landlord be necessary to protect Landlord
against liability for all such liens or actions.
d.
Unless otherwise specifically agreed to in writing by and between Landlord and Tenant, any
Alterations of any kind to the Premises or any part thereof, except Tenants furniture and moveable
trade fixtures, shall at once become part of the realty and belong to Landlord and shall be
surrendered with the Premises, as a part thereof, at the end of the Term hereof; provided, however,
that Landlord may, by written notice to Tenant at least thirty (30) days prior to the end of the
Term, require Tenant to remove any Alterations (including all telecommunications cabling in the
Premises or running between the Premises and any other portion of the Building) and to repair any
damage to the Premises caused by such removal, all at Tenants sole expense. Any article of
personal property, including business and trade fixtures, not attached to or built into the
Premises, which were installed or placed in the Premises by Tenant at its sole expense, shall be
and remain the property of Tenant and may be removed by Tenant at any time during the Term provided
that Tenant repairs any damage to the Premises or the Building caused by such removal.
9. UTILITIES AND SERVICES.
a.
Landlord shall furnish the following utilities and services to the Premises: electric
current (for lighting and operation of normal desk-type office machines); hot and cold water;
lavatory supplies; heat and air-conditioning during the appropriate seasons of the year as
reasonably required; elevator service; and trash removal/cleaning and char service (after 6:00 p.m.
on Monday through Friday, excluding Holidays). Heating and air conditioning shall be provided to
the Premises only during the following days and hours (Normal Business Hours): (i) Monday through
Friday 8:00 a.m. to 6:00 p.m., and (ii) Saturday 9:00 a.m. to 1:00 p.m., excluding Holidays. As
used herein, the term Holidays shall mean New Years Day, Martin Luther Kings Birthday,
Presidents Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Thanksgiving Day and
Christmas Day. At times other than the Normal Business Hours and days aforesaid, central air
conditioning and heating shall be provided to Tenant upon at least twenty-four (24) hours prior
notice from Tenant, and upon payment by Tenant of the hourly charge established by Landlord from
time to time for each hour (or a portion thereof) of after-hours usage. The current hourly charge
for each hour (or any portion thereof) of after-hours usage of central air conditioning and heating
is Forty-Five Dollars ($45.00) per hour (or any portion thereof), which charge reasonably
approximates the cost to Landlord of providing such after-hours service as of the Effective Date.
Landlord shall use reasonable efforts to ensure that at least one (1) passenger elevator is
operating in the Building twenty-four (24) hours per day, seven (7) days per week. All Building
standard light bulbs and tubes in the Premises shall be replaced by Landlord and the cost thereof
shall be included in Operating Expenses. In addition, Landlord may impose a reasonable additional
charge for any additional or unusual services required to be provided by Landlord to Tenant because
of the carelessness of Tenant, the nature of Tenants business or the removal of any refuse and
rubbish from the Premises except for discarded material placed in wastepaper baskets and left for
emptying as an incident to Tenants normal cleaning of the Premises. In the event that Landlord
must temporarily suspend or curtail services because of accident and repair, Landlord shall have no
liability to Tenant for such suspension or curtailment or due to any restrictions on use arising
therefrom or relating thereto, and Landlord shall proceed diligently to restore such service. No
interruption or malfunction of any such services shall constitute an actual or constructive
eviction or disturbance of Tenants use and possession of the Premises, the Building or the parking
garage or parking areas in or around the Building or constitute a breach by Landlord of any of its
obligations hereunder or render Landlord liable for damages or entitle Tenant to be relieved from
any of Tenants obligations hereunder (including the obligation to pay rent) or grant Tenant any
right of setoff or claim against Landlord or constitute a constructive or other eviction of Tenant.
Notwithstanding the foregoing, in the event that the interruption or cessation of any essential
service(s) or utilities required to be provided by Landlord hereunder: (i) results from
Landlords negligence or willful misconduct; (ii) is not caused by Tenant, its agents, employees,
contractors or invitees; (iii) renders the Premises untenantable for Tenants business use therein;
and (iv) exists for more than ten (10) consecutive business days, then, provided Tenant in fact
ceases to use the Premises during the entirety of such period of cessation or interruption,
commencing on the eleventh (11th) business day after such interruption, Monthly Base Rent hereunder
shall be abated until such services or utilities are restored. The foregoing abatement of Monthly
Base Rent shall be Tenants sole and exclusive remedy resulting from such interruption or
cessation. In the event of any such interruption, Landlord shall use reasonable diligence to
restore such services.
b.
Except in any Electricity Meter Areas (hereinafter defined) in which submeters have been
installed, Tenant will not, without the prior written consent of Landlord, use any apparatus or
device in the Premises, including without limitation electric data processing machines, punch card
machines and
12
machines using current in excess of 110 volts (or in excess of .60 kilowatt hours per square foot
of usable area in the Premises per month, as determined by Landlord) which will in any way
increase the amount of the electricity or water which would otherwise be furnished or supplied for
the intended use of the Premises under this Section 9; and Tenant will not connect to electric
current any apparatus or device for the purpose of using electric current or water, except through
existing electrical outlets in the Premises or water pipes. If Tenant shall require water or
electricity in excess of that which would otherwise be furnished or supplied for the intended use
of the Premises, Tenant shall first secure the written consent of Landlord for the use thereof,
which consent Landlord may not unreasonably withhold, but which
consent may be conditioned by
Landlord as set forth in this Section 9.b. Landlord may condition its consent on, among other
things, the installation by Tenant at its sole cost of additional electric transformers and
electric panels designated by Landlord (the Additional Electrical Equipment). Tenant shall be
responsible for maintaining throughout the Term at Tenants sole cost all such Additional
Electrical Equipment installed by Tenant (or, at Landlords sole option, by Landlord, at Tenants
sole cost and expense). Furthermore, Landlord may condition its consent upon the requirement that
a water meter or electric current meter be installed in the Premises, so as to measure the amount
of water and electric current consumed for any such excess use. The parties acknowledge that the
following areas within the Premises shall constitute Electricity Meter Areas: (i) all laboratory
space (Lab Space) or space in which is located Tenants local area network (LAN Space); (ii)
all portions of the Premises in which are located equipment which is or will be tied into the
Supplemental HVAC System (hereinafter defined) or the Supplemental Electrical System (hereinafter
defined); and (iii) all portions of the Premises in which the equipment therein is causing Excess
Electricity Consumption (hereinafter defined). As used herein, the term Supplemental Electrical
System means the 3000 amp electrical utility service (including but not limited to all feeder and
distribution cables, busses and buss ducts, switchboards, transfer switches, disconnects, panel
boards, circuit breakers, fuses, transformers, battery chargers, uninterruptible power supply
(UPS) units, power distribution units (PDU), and generator sets) installed in the Building and on
the roof of the Building. Tenant shall pay for all electricity consumed in the Electricity Meter
Areas. Tenant shall be responsible for paying its proportionate share (which proportionate share
shall be based on Tenants share of the distributed electrical capacity of the Supplemental
Electrical System) all costs incurred by Landlord in repairing and maintaining the Supplemental
Electrical System. The cost of all meters and submeters installed in the Premises, and the cost of
installation, maintenance and repair thereof, the cost of any such utility use as shown by said
meter, the cost of any new or additional utility installations, including, without limitation,
wiring and plumbing, resulting from such utility use, and the cost of any additional expenses by
Landlord incurred in keeping count of such utility use shall be paid by Tenant promptly upon
demand by Landlord or, if Tenant is billed separately therefor, promptly upon receipt of a bill
for same. Whenever heat generating machines or equipment are used in the Premises which affect the
temperature otherwise maintained by the air conditioning system, Landlord reserves the right to
install supplementary air conditioning units in the Premises and the cost thereof, including the
cost of installation, operation and maintenance thereof, shall be paid by Tenant to Landlord upon
demand by Landlord.
c.
Tenant shall have the right to install and operate in the Premises personal computers and
other electrically-operated office equipment normally used in modern offices. Subject to the
provisions of Section 9.b, above, Tenant shall not install equipment of any kind or nature
whatsoever nor engage in any practice or use which will or may necessitate any changes,
replacements or additions to, or in the use of, the water system, heating system, plumbing system,
air conditioning system, electrical system, floor load capacities, or other mechanical or
structural system of the Premises or the Building without first obtaining the prior written consent
of Landlord, which consent may be conditioned upon, but not limited to, Tenant first securing at
its expense additional capacity for any said service in the Building; provided, however, Tenant
shall be responsible for paying for any excess utility consumption arising from any such change,
replacement, use or addition, such payments to be based on Landlords reasonable estimate or, at
Landlords option, a submeter or similar device to measure such usage (said device to be installed
at Tenants expense). Additionally, in the event that Landlord determines that Tenants
electrical consumption exceeds standard office use (Excess Electricity Consumption), tenant shall
pay the amount of such excess electrical consumption, as reasonably determined by Landlord, within
thirty (30) days after demand therefor. Machines, equipment and materials belonging to Tenant
which cause vibration, noise, cold, heat, fumes or odors that may be transmitted outside of the
Premises to such a degree as to be objectionable to Landlord in Landlords sole opinion or to any
other tenant in the Building shall be treated by Tenant at its sole expense so as to eliminate such
objectionable condition, and shall not be allowed to operate until such time as the objectionable
condition is remedied to Landlords satisfaction.
d.
Tenant shall comply, at its sole cost and expense, with all orders, requirements and
conditions now or hereafter imposed by any ordinances, laws, orders and/or regulations (hereinafter
collectively called regulations) of any governmental body having jurisdiction over the Premises
or the Building, whether required of Landlord or otherwise, regarding the collection, sorting,
separation and recycling of waste products, garbage, refuse and trash (hereinafter collectively
called waste products) including, but not limited to, the separation of such waste products into
receptacles reasonably approved by Landlord and the removal of such receptacles in accordance with
any collection schedules prescribed by such regulations. Landlord reserves the right (i) to refuse
to accept from Tenant any waste products that are not prepared for collection in
accordance with any such regulations, (ii) to require Tenant to arrange for waste product
collection at Tenants sole cost and expense, utilizing a contractor reasonably satisfactory to
Landlord, and (iii) to require Tenant to pay all costs, expenses, fines, penalties, or damages that
may be imposed on Landlord or Tenant by reason of Tenants failure to comply with any
such regulations. Notwithstanding the foregoing, if Tenant is unable to comply with Landlords
standard procedures regarding the internal collection, sorting, separation and recycling of waste
products, Landlord
13
shall use reasonable efforts to arrange for alternative procedures for Tenant, and Tenant shall
pay Landlord all additional costs incurred by Landlord with respect thereto.
e.
Throughout the Term, Tenant shall be provided with access to the Building and the Premises
twenty-four (24) hours a day, 365 days a year, subject to applicable law and events of force
majeure. The Buildings main entrance doors and elevators shall be equipped with a card reader
security system or other similar security access system. Prior to the Commencement Date, Landlord
shall provide Tenant with one hundred (100) access cards, at no cost to Tenant. Tenant shall be
responsible for the cost of any additional or replacement access cards requested by Tenant. Subject
to Landlords review and approval of the plans and specifications for such system, Tenant shall be
entitled to install, at Tenants sole cost and expense, a card reader access system for the
Premises, which Tenant shall be permitted to coordinate with the Buildings main security access
system; provided that Tenant shall provide Landlord with a reasonable number of access cards by
which Landlord may gain access to the Premises using Tenants card reader access system. Tenant
hereby agrees to indemnify and hold Landlord and its agents, officers, directors and employees
harmless from and against any cost, damage, claim, liability or expense (including attorneys fees)
incurred by or claimed against Landlord and its agents, officers, directors and employees, directly
or indirectly, as a result of or in any way arising from Tenants installation or use of such card
reader access system.
f.
Throughout the Term, Landlord shall cause the common areas of the Building (and the Sole
Occupant Bathrooms) to be in compliance with all applicable laws, rules, orders, ordinances,
regulations and requirements of all applicable governmental authorities now or hereafter in effect,
unless such non-compliance is the result of (i) any act or omission of Tenant, its agents,
contractors or employees, or (ii) Tenants particular use of the Premises.
g.
As of the Commencement Date, all base-Building systems serving the Premises shall be in
working order.
10. RIGHTS OF LANDLORD.
a.
Landlord reserves the following rights:
(i) to change the name or street address of the Building with thirty (30) days prior notice
to Tenant; provided that if Landlord changes the street address of the Building and such change is
not made by, directed by or requested by, the postal service or any governmental or
quasi-governmental authority, then Landlord shall reimburse Tenant for the actual cost of the
letterhead, business cards and other stationary on hand which bears the old address of the
Building, but in no event more than Two Thousand Five Hundred Dollars ($2,500.00);
(ii) to approve the design, location, number, size and color of all signs or lettering on the
Premises or visible from the exterior of the Premises;
(iii) to have pass keys and/or access cards to the Premises;
(iv) to grant to anyone the exclusive right to conduct any particular business or undertaking
in the Building, provided the granting of such exclusive right shall not materially and adversely
affect Tenants business operations in the Premises;
(v) to enter the Premises at any reasonable time for inspection upon reasonable prior notice
to Tenant (which notice may be oral), or at any time, without prior notice, in the event of any
emergency; to supply any service to be provided by Landlord hereunder; to submit the Premises to
prospective purchasers; during the last twelve (12) months of the Term, to submit the Premises to
prospective tenants; to post notices of non-responsibility; during the last twelve (12) months of
the Term, to affix and display For Rent signs; and to make repairs, alterations, additions or
improvements to the Premises or the Building; and
(vi) to approve the design, location, number, size and color of all signs located on the
exterior of the Building.
b.
Without limiting the generality of the provisions of Section 10.a., above, at any time
during the Term of this Lease, Landlord shall have the right to remove, alter, improve, renovate or
rebuild the common areas of the Building (including, but not limited to, the lobby, hallways and
corridors thereof), and to install, repair, replace, alter, improve or rebuild in the Premises,
other tenants premises and/or the common areas of the Building (including the lobby, hallways and
corridors thereof), any mechanical, electrical, water, sprinkler, plumbing, heating, air
conditioning and ventilating systems, at any time during the Term of this Lease. In connection
with making any such installations, repairs, replacements, alterations, additions and improvements
under the terms of this Section 10, Landlord shall, upon reasonable prior notice to Tenant (except
in the event of an emergency, in which case no notice shall be required), have the right to access
through the Premises as well as the right to take into and upon and through the Premises or any
other part of the Building, all materials that may be required to make any such repairs,
replacements, alterations, additions or improvements, as well as the right in the course of such
work to close entrances, doors, corridors, elevators or other facilities located in the Building or
temporarily to cease the operations of any services or facilities therein or to take portion(s) of
the Premises reasonably necessary in connection with such work, without being deemed or held guilty
of an eviction of Tenant; provided, however that Landlord agrees to use all reasonable efforts not
to interfere
14
with or interrupt Tenants business operation in the Premises. Landlord shall have the right to
install, use and maintain pipes and conduits in and through the Premises, including, without
limitation, telephone and computer installations, provided that they do not permanently adversely
affect (i) Tenants access to or use of the Premises, or (ii) the aesthetic appearance of the
Premises. In connection with Landlords activities pursuant to this Section 10.b, Landlord will
use reasonable efforts not to materially and adversely interfere with Tenants business
operations in the Premises.
c.
Except for injury or death to persons or damage to property caused by the negligence or
willful misconduct of Landlord, its agents or employees, Landlord shall not be liable to Tenant
for any
expense, injury, loss or damage resulting from Landlords exercise of any rights under this
Section 10, all claims against Landlord for any and all such liability being hereby expressly
released by Tenant. Landlord shall not be liable to Tenant for damages by reason of
interference with the business of Tenant or inconvenience or annoyance to Tenant or the
customers of Tenant. The Rent reserved herein shall not abate while the Landlords rights
under this Section 10 are exercised, and Tenant shall not be entitled to any set-off or
counterclaims for damages of any kind against Landlord by reason thereof, all such claims
being hereby expressly released by Tenant.
d.
Landlord shall have the right to use any and all means which Landlord may deem proper to
open all of the doors in, upon and about the Premises, excluding Tenants vaults and safes, in any
emergency in order to obtain entry to the Premises. Any entry to the Premises obtained by Landlord
by any of said means shall not be construed or deemed to be a forcible or unlawful entry into, or
a detainer of, the Premises, or an eviction of Tenant from the Premises or any portion thereof.
11. LIABILITY.
a.
Except for injury or death to persons or damage to property caused by the negligence or
willful misconduct of Landlord, its agents or employees, Landlord and its agents, officers,
directors and employees assume no liability or responsibility whatsoever with respect to the
conduct or operation of the business to be conducted in the Premises and shall have no liability
for any claim of loss of business or interruption of operations (or any claim related thereto).
Landlord and its agents, officers, directors and employees shall not be liable for any accident
to or injury to any person or persons or property in or about the Premises which is caused by the
conduct and operation of said business or by virtue of equipment or property of Tenant in said
Premises. Tenant agrees to hold Landlord and its agents, officers, directors and employees
harmless against all such claims, except to the extent resulting from Landlords negligence or
willful misconduct. Landlord and its agents, officer, directors and employees shall not be
liable to Tenant, its employees, agents, business invitees,
licensees, customers, clients, family members or guests for any damage, compensation or claim arising out of or related to managing
the Premises or the Building, repairing any portion of the Premises or the Building, the
interruption in the use of the Premises, accident or damage resulting from the use or operation
(by Landlord and its agents, officers, directors and employees, Tenant, or any other person or
persons whatsoever) or failure of elevators, or heating, cooling, electrical or plumbing
equipment or apparatus, or the termination of this Lease by reason of the destruction of the
Premises, or from any fire, robbery, theft, mysterious disappearance and/or any other casualty,
or from any leakage in any part of portion of the Premises or the Building, or from water, rain
or snow that may leak into or flow from any part of the Premises or the Building, or from any
other cause whatsoever, unless occasioned by the negligence or willful misconduct of Landlord,
its agents or employees. In no event shall Landlord be liable for punitive or consequential
damages, nor shall Landlord be liable with respect to utilities furnished to the Premises, or the
lack of any utilities. Any goods, property or personal effects, stored or placed by Tenant in or
about the Premises or in the Building, shall be at the sole risk of Tenant, and Landlord and its
agents, officers, directors and employees shall not in any manner be held responsible therefor,
except if such injury or damage results from the negligence or willful misconduct of Landlord,
its agents or employees. The agents and employees of Landlord are prohibited from receiving any
packages or other articles delivered to the Building for Tenant, and if any such agent or
employee receives any such package or articles, such agent or employee shall be the agent of
Tenant for such purposes and not of Landlord.
b.
Tenant hereby agrees to indemnify and hold Landlord and its agents, officers, directors
and employees harmless from and against any cost, damage, claim, liability or expense (including
attorneys fees) incurred by or claimed against Landlord and its agents, officers, directors and
employees, directly or indirectly, as a result of or in any way arising from (i) Tenants use and
occupancy of the Premises or in any other manner which relates to the business of Tenant,
including, but not limited to, any cost, damage, claim, liability or expense arising from any
violation of any zoning, health, environmental or other law, ordinance, order, rule or regulation
of any governmental body or agency; (ii) the negligence or willful misconduct of Tenant, its
officers, directors, employees and agents; (iii) any default, breach or violation of this Lease
by Tenant; or (iv) injury or death to individuals or damage to property sustained in or about the
Premises.
c.
Notwithstanding any other provision of this Lease to the contrary, Landlord and Tenant
agree that in the event that the Building, the Premises or the contents thereof are damaged or
destroyed by fire or other casualty, each party hereto waives its rights, if any, against the
other party with respect to such damage or destruction to the extent such damage or destruction
is covered under the property insurance policy(ies) of the party waiving such rights (or would
have been covered had the party waiving such rights carried the property insurance required
hereunder to be carried by such party). All policies of fire and/or extended coverage or other
insurance covering the Premises or the contents thereof obtained by Landlord or Tenant shall
contain a clause or endorsement providing in substance that (i) such insurance shall not be
prejudiced if the insureds thereunder have waived in whole or in part the right of recovery from
any person or persons prior to the date and time of loss or damage, if any, and (ii) the
15
insurer waives any rights of subrogation against Landlord (in the case of Tenants
insurance policy) or Tenant (in the case of Landlords insurance policy), as the case may be.
12. INSURANCE.
a.
Tenant shall maintain at all times during the Term hereof and at its sole cost and
expense, broad-form commercial general liability insurance for bodily injury and property damage
naming Landlord as an additional insured, in such amounts as are adequate to protect Landlord and
Landlords managing agents against liability for injury to or death of any person in connection
with the use, operation or condition of the Premises. Such insurance at all times shall be in an
amount of not fewer than Five Million Dollars ($5,000,000) combined single limit aggregate for
bodily injury or death or damage to property. If, in the reasonable opinion of the insurance broker
retained by Landlord, the amount of public liability and property damage insurance coverage at any
time during the Term is not adequate, Tenant shall increase the insurance coverage as reasonably
required by Landlords insurance broker. In no event shall the limits of such policy be
considered as limiting the liability of Tenant under this Lease.
b.
Tenant shall at all times during the Term hereof maintain in effect policies of insurance
covering the Tenant Improvements (including any Alterations, additions or improvements as may be
made by Tenant after the Commencement Date), plate glass, trade fixtures, merchandise and all other
personal property from time to time in or on the Premises, in an amount not less than one hundred
percent (100%) of their actual replacement cost, providing protection against all risks covered by
standard form of Fire and Extended Coverage Insurance, together with insurance against vandalism
and malicious mischief. Tenant shall also maintain at its sole cost and expense workmans
compensation insurance in the maximum amount required by law.
c.
All insurance required to be carried by Tenant shall be issued by responsible insurance
companies, qualified to do business in the Commonwealth of Virginia and reasonably acceptable to
Landlord. Each policy shall name Landlord and the property management company retained by Landlord
at the Building, as additional insureds, and shall contain a provision that the same may not be
cancelled or reduced without providing Landlord not fewer than thirty (30) days prior written
notice. Certificates of insurance (ACORD 28 only) evidencing the existence and amounts of said
insurance shall be delivered to Landlord no later than five (5) days prior to the Commencement
Date, and renewals thereof shall be delivered to Landlord at least ten (10) days prior to the
expiration of any such policy. If Tenant fails to adhere to the requirements of this Section 12,
Landlord may order such insurance and charge the cost thereof to Tenant, which amount shall be
deemed Additional Rent hereunder and shall be payable by Tenant upon demand. Tenants failure to
provide and keep in force the aforementioned insurance shall be regarded as a material default
hereunder, entitling Landlord to exercise any or all of the remedies provided in this Lease, Any
policy may be carried under so-called blanket coverage form of insurance policies. Tenant shall
obtain and furnish evidence to Landlord of the waiver by Tenants insurance carriers of any right
of subrogation against Landlord and Landlords management company at the Building.
d.
Each party hereby waives any and every right or cause of action for any and all loss of, or
damage to, any of its property (whether or not such loss or damage is caused by the fault or
negligence of the other party or anyone for whom said other party may be responsible), which loss
or damage is covered by valid and collectible fire, extended coverage, All Risk or similar
policies, maintained by such party or required to be maintained by such party under this Lease, but
only to the extent that such loss or damage is recovered under said insurance policies (if such
policy or policies have been obtained) or would have been recovered if such party had obtained the
required insurance coverage hereunder. Written notice of the terms of said mutual waivers shall be
given to each insurance carrier and said insurance policies shall be properly endorsed, if
necessary, to prevent the invalidation of said insurance coverages by reason of said waivers.
e.
During the Term, Landlord shall maintain a policy of casualty insurance covering the
Building in such amounts and with such other coverages as are normally and customarily carried by
prudent owners of comparable office buildings located in the Dulles Toll Road Corridor submarket.
13. FIRE OR CASUALTY.
a.
If the Premises or any part thereof shall be damaged by fire or any other cause,
Tenant shall give prompt notice thereof to Landlord. If, in the reasonable judgment of Landlords
architect, restoration of the Premises is feasible within a period of nine (9) months from the date
of the damage, and provided such damage was not caused by Tenant, its agents, servants or invitees,
Landlord shall restore the Premises to the condition existing as of the Commencement Date, provided
that adequate insurance proceeds are made available to Landlord. Tenant agrees to make all proceeds
of Tenants insurance policies available to Landlord in accordance with Tenants insurance
obligations set forth in Section 12, above. In addition, Tenant shall repair and restore, at
Tenants sole expense, all Alterations, furniture, fixtures and other property of Tenant located in
the Premises prior to such casualty. If the Premises are Unusable, in whole or in part, during such
restoration, the Monthly Base Rent and Additional Rent hereunder shall be abated to the extent and
for the period that the Premises are unusable; provided, however, that if such damage or
destruction shall result from the act or omission of Tenant, its employees, agents or invitees,
tenant shall not be entitled to any abatement of Monthly Base Rent or Additional Rent.
16
b.
If restoration is not feasible in the reasonable judgment of Landlords architect
within the aforesaid nine (9) month period, Landlord shall so notify Tenant, and Landlord and
Tenant shall each have the right to terminate this Lease by giving written notice thereof to the
other party within sixty (60) days after the occurrence of such damage, in which event this Lease
and the tenancy hereunder shall terminate as of the date of such damage or destruction and the
Monthly Base Rent and Additional Rent will be apportioned as of the date of such damage or
destruction. If neither party exercises its right of termination, the Premises shall be restored
as provided above. Landlords architect shall use reasonable efforts to determine, within sixty
(60) days after the date of the casualty, the approximate amount of time that will be required in
order to restore the Premises in accordance with the terms of this Lease.
c.
In case the Building is so severely damaged by fire or other casualty (although the
Premises may not be affected) that Landlord shall decide in its sole discretion not to rebuild or
reconstruct such Building, then this Lease and the tenancy hereunder shall terminate on the date
specified by Landlord in a notice given to Tenant no later than forty-five (45) days after the date
of such casualty.
14. EMINENT DOMAIN.
If the Premises or any part thereof shall be taken or condemned by any governmental or
quasi-governmental authority pursuant to the power of eminent domain or otherwise, Tenant shall
make no claim for compensation in such proceedings and shall have no right to participate in any
condemnation proceedings under any statutes, laws or ordinances of the Commonwealth of Virginia.
All sums awarded or agreed upon between Landlord and the condemning authority for the taking of
the interest of Landlord or Tenant, whether as damages or as compensation, will be the property of
Landlord. In the event of such taking, Rent shall be paid to the date of vesting of title in the
condemning authority. Notwithstanding the foregoing, Tenant may assert any claim that it may have
against the condemning authority for compensation for any fixtures and personalty owned by Tenant
(which were not paid for out of the proceeds of the Improvement Allowance) and for any relocation
expense compensable by statute, and receive such award therefor as may be allowed in the
condemnation proceedings, if such award shall be made in addition to, and stated separately from,
the award made for the Land and the Building or the part thereof so taken, and shall not reduce
any award otherwise payable to Landlord.
15. SUBORDINATION AND ESTOPPEL CERTIFICATES.
a.
This Lease shall be subject and subordinate at all times to all ground or underlying leases
which now exist or may hereafter be executed affecting the Building or any part thereof or the
Land, and to the lien of any mortgages or deeds of trust in any amount or amounts whatsoever now or
hereafter placed on or against the Building or any part thereof or the Land, or on or against
Landlords interest or estate therein or on or against any ground or underlying lease without the
necessity of having further instruments on the part of Tenant to effect such subordination. Upon
request of Landlord, Tenant will execute any further written instrument necessary to subordinate
its rights hereunder to any such underlying leases or liens. If, at any time, or from time to
time during the Term, any mortgagee shall request that this Lease have priority over the lien of
such mortgage, and if Landlord consents thereto, this Lease shall have priority over the lien of
such mortgage and all renewals, modifications, replacements, consolidations and extensions thereof
and all advances made thereunder and interest thereon, and Tenant shall, within ten (10) business
days after receipt of a request therefor from Landlord, execute, acknowledge and deliver any and
all documents and instruments confirming the priority of this Lease. In any event, however, if this
Lease shall have priority over the lien of a first mortgage, this Lease shall not become subject or
subordinate to the lien of any subordinate mortgage, and Tenant shall not execute any subordination
documents or instruments for any subordinate mortgagee, without the written consent of the first
mortgagee. Notwithstanding the foregoing, the subordination of the Lease pursuant to this Section
15.a shall be conditioned upon the receipt by Tenant from the current mortgagee of a subordination
non-disturbance and attornment agreement (SNDA) for Tenants benefit on such mortgagees standard
form of SNDA. Throughout the Term, upon Tenants written request, Landlord shall use reasonable
efforts to obtain from any future mortgagee a SNDA for Tenants benefit on such mortgagees
standard form of SNDA. Tenant shall pay for (or reimburse Landlord for) all costs (including
reasonable attorneys fees) incurred by Landlord or any such mortgagee in connection with the
negotiation and drafting of any such SNDA, whether or not Landlord is ultimately able to obtain
same for Tenants benefit.
b.
In the event of: (i) a transfer of Landlords interest in the Building, (ii) the
termination of any ground or underlying lease of the Building, or the Land, or both, or (iii) the
purchase or other acquisition of the Building, or Landlords interest therein in a foreclosure sale
or by deed in lieu of foreclosure under any mortgage or deed of trust, or pursuant to a power of
sale contained in any mortgage or deed of trust, then in any of such events Tenant shall, at the
request of Landlord or Landlords successor in interest, attorn to and recognize the transferee or
purchaser of Landlords interest or the interest of the lessor under the terminated ground or
underlying lease, as the case may be, as Landlord under this Lease for the balance then remaining
of the Term, and thereafter this Lease shall continue as a direct lease between such person or
entity, as Landlord, and Tenant, as Tenant, except that such lessor, transferee or purchaser
shall not be liable for any act or omission of Landlord before such lease termination or before
such persons succession to title, nor be subject to any offset, defense or counterclaim accruing
before such lease termination or before such persons succession to title, nor be bound by any
payment of Monthly Base Rent or Additional Rent before such lease termination or before such
persons succession to title for more than one month in advance.
c.
Tenant agrees, at any time, and from time to time, upon not fewer than fifteen (15) days
prior notice by Landlord, to execute, acknowledge and deliver to Landlord, a statement in writing
17
certifying, to the extent accurate, that (i) this Lease is unmodified and in full force and effect
(or if there have been modifications, that the same is in full force and effect as modified and
stating the modifications); (ii) the Term of the Lease has commenced and the full rental is now
accruing hereunder; (iii) Tenant has accepted possession of the Premises and is presently occupying
the same; (iv) all improvements required by the terms of the Lease to be made by Landlord have
been completed and all tenant improvement allowances have been paid in full; (v) there are no
offsets, counterclaims, abatements or defenses against or with respect to the payment of any rent
or other charges due under the Lease; (vi) no rent under the Lease has been paid more than thirty
(30) days in advance of its due date; (vii) to the best of the knowledge of the Tenant, Landlord
is not in default in the performance of any covenant, agreement, provision or condition contained
in the Lease or, if so, specifying each such default of which Tenant may have knowledge; (viii)
the address for notices to be sent to Tenant; (ix) the only security deposit tendered by Tenant is
as set forth in the Lease, and such security deposit has been paid to Landlord; and (x) any other
information reasonably requested by Landlord or any mortgagee or ground lessor of the Building
and/or the Land it being intended that any such statement delivered pursuant hereto may be relied
upon by any prospective purchaser or lessee of the Building or any part thereof, any mortgagee or
prospective mortgagee thereof, any prospective assignee of any mortgage thereof, any ground lessor
or prospective ground lessor of the Land and/or the Building, or any prospective assignee of any
such ground lease. Tenant also agrees to execute and deliver from time to time such estoppel
certificates as an institutional lender may reasonably require with respect to this Lease.
16. DEFAULT AND REMEDIES.
a.
If Tenant shall (i) fail to pay any installment of Monthly Base Rent, although no legal or
formal demand has been made therefor, within five (5) calendar days after the due date therefor, or
(ii) fail to make any payment of Additional Rent or any other payment required by the terms and
provisions hereof, within five (5) days after notice or demand therefor; or (iii) convey, assign,
mortgage or sublet this Lease, the Premises or any part thereof, or Tenants interest therein, or
attempt any of the foregoing, without the prior written consent of Landlord; or (iv) abandon the
Premises for a period of ten (10) consecutive calendar days (coupled with the non-payment of Rent
as such amounts become due pursuant to the terms of this Lease); or (v) commit or suffer to exist
an Event of Bankruptcy (hereinafter defined), or (vi) fail to maintain the insurance coverage
required by Section 12, above, or (vii) violate or fail to perform any of the other terms,
conditions, covenants, or agreements herein made by Tenant and fails to cure such default within
thirty (30) calendar days after notice, provided, however, that if the nature of Tenants failure
is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not
be in default if it begins such cure within the thirty (30) day period described above and
thereafter diligently prosecutes such cure to completion within an additional thirty (30) days;
then there shall be deemed to have been committed an Event of Default. Notwithstanding the
foregoing cure periods, in the event that Tenant breaches its covenant set forth in Section 6.a.
hereof on more than two (2) occasions in any nine (9) consecutive month period, then any subsequent
breach of such covenant during the Term of this Lease shall be deemed to be an immediate Event of
Default. Upon an Event of Default, at Landlords option, this Lease shall terminate, without
prejudice however, to the right of Landlord to recover from Tenant all rent and any other sums
accrued up to the later of: (1) the date of termination of this Lease or (2) the date Landlord
recovers possession of the Premises, and without release of Tenant from any indemnification
obligations to Landlord under this Lease, which indemnification obligations arose or accrued
prior to the later of: (a) the date of termination of this Lease or (b) the date Landlord recovers
possession of the Premises. The foregoing is not intended to, and shall not, limit Landlord in the
exercise of any other remedy for such immediate Event of Default.
b.
In the event of any Event of Default by Tenant as defined in Section 16.a., Landlord may at
any time thereafter, without notice and demand and without limiting Landlord in the exercise of any
other right or remedy which Landlord may have by reason of such default or breach do any of the
following:
(i) Landlord may terminate this Lease, by giving written notice of such termination to
Tenant, whereupon this Lease shall automatically cease and terminate and Tenant shall be
immediately obligated to quit the Premises. Any other notice to quit or notice of Landlords
intention to re-enter the Premises is hereby expressly waived. If Landlord elects to terminate
this Lease, everything contained in this Lease on the part of Landlord to be done and performed
shall cease without prejudice, subject, however, to the right of Landlord to recover from Tenant
all rent and any other sums accrued up to the time of termination or recovery of possession by
Landlord, whichever is later.
(ii) With or without the termination of this Lease, Landlord may proceed to recover possession
of the Premises under and by virtue of the provisions of the laws of the jurisdiction in which the
Building is located, or by such other proceedings, including re-entry and possession, as may be
applicable. If this Lease is terminated or Landlord recovers possession of the Premises before the
expiration of the Term by reason of Tenants default as hereinabove provided, or if Tenant shall
abandon or vacate the Premises before the Lease Expiration Date for a period of ten (10)
consecutive calendar days (coupled with the non-payment of Rent as such amounts become due pursuant
to the terms of this Lease), Landlord shall have the option to take reasonable steps to relet the
Premises for such rent and upon such terms as are not unreasonable under the circumstances and, if
the full rental reserved under this Lease (and any of the costs, expenses or damages indicated
below) shall not be realized by Landlord, Tenant shall be liable for all damages sustained by
Landlord, including, without limitation, deficiency in rent during any period of vacancy or
otherwise; the costs of removing and storing the property of Tenant or of any other occupant; all
reasonable expenses incurred by Landlord in enforcing Landlords remedies, including, without
limitation, reasonable attorneys fees and Late Charges as provided herein, and advertising,
brokerage fees and expenses of placing the Premises in first class
18
rentable condition. Landlord, in putting the Premises in good order or preparing the same for
rerental may, at Landlords option, make such alterations, repairs, or replacements in the
Premises as Landlord, in its sole judgment, considers advisable and necessary for the purpose of
reletting the Premises, and the making of such alterations, repairs, or replacements shall not
operate or be construed to release Tenant from liability hereunder as aforesaid. If Tenant
requests in writing that Landlord attempt to relet the Premises after an Event of Default by
Tenant hereunder and Tenant states in such writing that an Event of Default has occurred and is
continuing under the Lease, Landlord agrees to use commercially reasonable efforts to relet the
Premises to another tenant (a Substitute Tenant) on terms and conditions determined by Landlord
in its sole discretion; provided, however, notwithstanding anything contained herein to the
contrary (a) Landlord shall have no obligation to solicit or entertain negotiations with any other
prospective tenants for the Premises until Landlord obtains full and complete possession of the
Premises; (b) Landlord shall not be obligated to offer the Premises to a prospective tenant when
other premises in the Building suitable for that prospective tenants use are (or soon will be)
available; (c) Landlord may, but shall not be obligated to, lease the Premises to a Substitute
Tenant for a rental less than the current fair market rental then prevailing for similar office
uses in comparable buildings in the same market area as the Building, nor shall Landlord be
obligated to enter into a new lease under other terms and conditions that are unacceptable to
Landlord in its sole discretion; (d) Landlord shall not be obligated to enter into a lease with
any proposed tenant whose use would: (1) violate any restriction, covenant or requirement
contained in the lease of another tenant of the Building; (2) adversely affect the reputation of
the Building; or (3) be incompatible with the operation of the Building as a first class building;
and (e) Landlord shall not be obligated to enter into a lease with any proposed Substitute Tenant
which does not have, in Landlords reasonable opinion, sufficient financial resources or operating
experience to operate the Premises in a first class manner and pay all Rent on time and fulfill
all of its obligations under such new lease. Tenant agrees to use commercially reasonable efforts
to mitigate any damages that Tenant may suffer as a result of any default by Landlord hereunder.
(iii) Any damage or loss of rent sustained by Landlord may be recovered by Landlord, at
Landlords option, at the time of termination of this Lease, the time of the reletting, or in
separate actions, from time to time, as said damage shall have been made more easily ascertainable
by successive relettings, or at Landlords option in a single proceeding deferred until the
expiration of the Term (in which event Tenant hereby agrees that the cause of action shall not be
deemed to have accrued until the date of expiration of said Term) or in a single proceeding prior
to either the time of reletting or the expiration of the Term. If the Landlord elects to repossess
the Premises without terminating this Lease, then Tenant shall be liable for and shall pay to
Landlord all Rent and other indebtedness accrued to the date of such repossession, plus Rent
required to be paid by Tenant to Landlord during the remainder of this Lease until the date of
expiration of the Term, diminished by any net sums thereafter received by Landlord through
reletting the Premises during such period (after deducting expenses incurred by Landlord as
provided in Section 16.b,(ii), above). In no event shall Tenant be entitled to any excess of any
Rent obtained by reletting over and above the Rent herein reserved. Actions to collect amounts due
from Tenant as provided in this Section 16.a.(iii) may be brought from time to time, on one or
more occasions, without the necessity of Landlords waiting until expiration of this Lease term.
c.
Notwithstanding the foregoing, if Landlord terminates this Lease pursuant
to Section 16.b.(i), above, Landlord shall be entitled to recover from Tenant, and Tenant shall pay
to Landlord on demand, as and for liquidated and agreed final damages for Tenants default, an
amount equal to the difference between (i) all Monthly Base Rent, Additional Rent and other sums
which would be payable under this Lease from the date of such demand (or, if it is earlier, the
date to which Tenant shall have satisfied in full its obligations under Section 16.b.(ii), above)
for what would be the then unexpired Term in the absence of such termination, and (ii) the fair
market rental value of the Premises over the same period (net of all expenses and all vacancy
periods reasonably projected by Landlord to be incurred in connection with the reletting of the
Premises), with such differential discounted at the rate of seven percent (7%) per annum. Nothing
herein shall be construed to affect or prejudice Landlords right to prove, and claim in full,
unpaid Rent or any other amounts accrued prior to termination of this Lease.
d.
Notwithstanding anything herein to the contrary, upon the occurrence of an Event of Default
hereunder, Landlord, with or without terminating the Lease, may immediately reenter and take
possession of the Premises and evict Tenant therefrom in accordance with applicable law, without
being liable for or guilty of trespass, forcible entry or any other tort.
e.
Tenant hereby expressly waives any and all rights of redemption granted by or under any
present of future laws in the event Tenant is evicted or dispossessed for any cause, or in the
event Landlord obtains possession of the Premises, by reason of the violation by Tenant of any of
the covenants and conditions of this Lease or otherwise. In addition, Tenant hereby expressly
waives any and all rights to bring any action whatsoever against any tenant taking possession after
Tenant has been dispossessed or evicted hereunder, or to make any such tenant or party to any
action brought by Tenant against Landlord.
f.
Landlord and Tenant shall and each does hereby waive trial by jury in any action,
proceeding or counterclaim brought by either of the parties hereto against the other on any matters
whatsoever arising out of or in any way connected with this Lease or its termination, the
relationship of Landlord and Tenant, Tenants use or occupancy of the Premises or any claim of
injury or damage and any emergency statutory or any other statutory remedy. In the event Landlord
commences any summary proceeding for nonpayment of Rent or Additional Rent, or commences any other
action or proceeding against Tenant in connection with this Lease, Tenant will interpose no
counterclaim of whatever nature or description in any such proceeding, except mandatory
counter-claims.
19
g.
Nothing contained herein shall prevent the enforcement of any claim Landlord may have
against Tenant for anticipatory breach of the unexpired Term. In the event of a breach or
anticipatory breach by Tenant of any of the covenants or provisions hereof, Landlord shall have
the right of injunction and the right to invoke any remedy allowed at law or in equity as if
reentry, summary proceedings and other remedies were not provided for herein.
h.
In the event of any default by Landlord, Tenants exclusive remedy shall be an action for
damages (Tenant hereby waiving the benefit of any laws granting Tenant a lien upon the property of
Landlord or upon Rent due Landlord), but prior to any such action Tenant will give Landlord and
any mortgagee notice specifying such default with particularity, and Landlord and/or such
mortgagee shall have thirty (30) days after receipt of such notice in which to cure any such
default; provided, however, that if such default cannot, by its nature, be cured within such
period, Landlord shall not be deemed in default if Landlord and/or such mortgagee shall within
such period commence to cure such default and shall diligently prosecute the same to completion.
Unless and until Landlord and/or any mortgagee fails so to cure any default after notice, Tenant
shall have no remedy or cause of action by reason thereof. All obligations of Landlord hereunder
will be construed as covenants, not conditions; all such obligations will be binding upon Landlord
only during the period of its ownership of the Building and not thereafter (provided that any
uncured default by Landlord of any of its obligations hereunder which occurs during Landlords
ownership of the Building shall not be extinguished as a result of the transfer or any other
disposition of the Building by Landlord, unless any purchaser, transferee or subsequent owner of
the Building assumes the obligations of Landlord under this Lease); and no default or alleged
default by Landlord shall relieve or delay performance by Tenant of its obligations to continue to
pay Annual Base Rent and Additional Rent hereunder as and when the
same shall be due.
17. BANKRUPTCY.
a.
For purposes of this Lease, the following shall be deemed Events of Bankruptcy: (i) if a
receiver or custodian is appointed for any or all of Tenants property or assets, or if there is
instituted a foreclosure action on any of Tenants property; or (ii) if Tenant files a voluntary
petition under 11 U.S.C. Article 101,
et seq.,
as amended (the Bankruptcy Code), or under the
insolvency laws of any jurisdiction (the Insolvency Laws); or (iii) if there is filed an
involuntary petition against Tenant as the subject debtor under the Bankruptcy Code or Insolvency
Laws, which is not dismissed within sixty (60) days of filing; or (iv) if Tenant makes or consents
to an assignment of its assets, in whole or in part, for the benefit of creditors, or a common law
composition of creditors.
b.
Upon the occurrence of an Event of Bankruptcy, Landlord, at its option and sole discretion,
may terminate this Lease by written notice to Tenant (subject, however to applicable provisions of
the Bankruptcy Code or Insolvency Laws during the pendency of any action thereunder). If this Lease
is terminated under this Section 17, Tenant shall immediately surrender and vacate the Premises,
waives all statutory or other notice to quit, and agrees that Landlord shall have all rights and
remedies against Tenant provided in Section 16 in case of an Event of Default by Tenant.
c.
If Tenant becomes the subject debtor in a case pending under the Bankruptcy Code (the
Bankruptcy Case), Landlords right to terminate this Lease under this Section 17 shall be subject
to the applicable rights (if any) of the debtor-in-possession or the debtors trustee in bankruptcy
(collectively, the Trustee) to assume or assign this Lease as then provided for in the Bankruptcy
Code, however, the Trustee must give to Landlord, and Landlord must receive, proper written notice
of the Trustees assumption or rejection of this Lease, within sixty (60) days (or such other
applicable period as is provided pursuant to the Bankruptcy Code) after the commencement of the
Bankruptcy Case; it being agreed that failure of the Trustee to give notice of such assumption
hereof within said period shall conclusively and irrevocably constitute the Trustees rejection of
this Lease and waiver of any right of the Trustee to assume or assign this Lease. The Trustee
shall not have the right to assume or assign this Lease unless said Trustee (i) promptly and fully
cures all defaults under this Lease, (ii) promptly and fully compensates Landlord and any third
party (Including other tenants) for all monetary damages incurred as a result of such default, and
(iii) provides to Landlord adequate assurance of future performance. Landlord and Tenant (which
term may include the debtor or any permitted assignee of debtor) hereby agree in advance that
adequate assurance of performance as used in this paragraph, shall mean that all of the following
minimum criteria must be met: (1) the source of Monthly Base Rent, Additional Rent, and other
consideration due under this Lease, and the financial condition and operating performance of
Tenant, and its guarantor, if any, shall be similar to the financial condition and operating
performance of Tenant as of the Commencement Date; (2) Trustee or Tenant must pay to Landlord all
Monthly Base Rent and Additional Rent payable by Tenant hereunder in advance pursuant to the terms
of this Lease, (3) Trustee or Tenant must agree (by writing delivered to Landlord) that the use of
the Premises shall be used only for the permitted use as stated in this Lease, and that any
assumption or assignment of this Lease is subject to all of the provisions thereof and will not
violate or affect the rights or agreements of any other tenants or occupants in the Building or of
Landlord (including any mortgage or other financing agreement for the Building, (4) Trustee or
Tenant must pay to Landlord at the time the next Monthly Base Rent is due under this Lease, in
addition to such installment of Monthly Base Rent, an amount equal to the installments of Monthly
Base Rent and Additional Rent due under this Lease for the next four (4) months of this Lease, said
amount to be held by Landlord in escrow until either Trustee or Tenant defaults in its payment of
Monthly Base Rent and Additional Rent or other obligations under this Lease (whereupon Landlord
shall have the right to draw on such escrowed funds) or until the expiration of this Lease
(whereupon the funds shall be returned to Trustee or Tenant except to the extent the funds have
been drawn and not replaced); and (5) Trustee or Tenant must agree to pay to Landlord at any time
Landlord is authorized to and does draw oh the escrow account the amount necessary to restore such
escrow account to the original level required by clause (4), above. The criteria stated above are
not
20
intended to be exhaustive or all-inclusive and Landlord may reasonably determine that the
circumstances of Tenant or of this Lease require other or further assurances of future
performance. In the event Tenant is unable to: (a) cure its defaults, (b) reimburse Landlord for
its monetary damages, (c) pay the Monthly Base Rent and Additional Rent due under this Lease on
time, or (d) meet that criteria and obligations imposed by (1) through (5), above, then
Tenant hereby agrees in advance that it has not met its burden to provide adequate assurance of
future performance, and this Lease may be terminated by Landlord in accordance with Section 17.b.,
above.
18. PAYMENT OF TENANTS OBLIGATIONS BY LANDLORD AND UNPAID RENT.
All covenants and agreements to be performed by Tenant under any of the terms of this
Lease shall be performed by Tenant at Tenants sole cost and expense. If Tenant shall fail to pay
any sum of money, other than Rent, required to be paid by it hereunder or shall fail to perform
any other act on its part to be performed hereunder, and such failure shall continue beyond, any
applicable grace period set forth in this Lease, Landlord may, without waiving or releasing Tenant
from any of its obligations hereunder, make any such payment or perform any such other required
act on Tenants part. All sums so paid by Landlord, and all necessary incidental costs, together
with interest thereon at two percentage points (2%) over the Prime Rate then in effect, from the
date of such payment by Landlord, shall be payable by Tenant to Landlord as Additional Rent
hereunder, upon receipt of an invoice therefor, and Tenant covenants and agrees to pay any such
sums. Landlord shall have (in addition to any other right or remedy of Landlord hereunder or at
law) the same rights and remedies in the event of the nonpayment thereof by Tenant as in the case
of default by Tenant in the payment of Additional Rent. In addition, any Rent, including, without
limitation, Annual Base Rent, Additional Rent, Tenants Pass-Through Costs and/or Late Charges,
which is not paid timely will accrue interest per annum at two percentage points (2%) over the
Prime Rate from the date such payment is due until the date paid in full (including all accrued
interest).
19. VOLUNTARY SURRENDER.
The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof,
shall not work a merger, and shall, at the sole option of Landlord, terminate all or any existing
subleases or subtenancies, or may, at the sole option of Landlord, operate as an assignment to
Landlord of any or all such subleases or subtenancies; provided however, that if Landlord elects
to treat such termination as an assignment of any such sublease, Landlord shall have no obligation
or liability to the subtenant thereunder for any claim, damage or injury which accrued prior to
the date of surrender or mutual cancellation hereunder.
20. ABANDONMENT OF PERSONAL PROPERTY.
Upon the expiration of the Term or earlier termination of this Lease, Tenant shall forthwith
remove Tenants goods and effects and those of any other persons claiming through or under Tenant,
or subtenancies assigned to it, and quit and deliver the Premises to the Landlord peaceably and
quietly. Goods and effects not removed by Tenant after termination of this Lease (or within
forty-eight (48) hours after a termination by reason of Tenants default) shall be considered
abandoned. Landlord shall give Tenant notice of right to reclaim abandoned property pursuant to
applicable local law and may thereafter dispose of the same as Landlord deems expedient, including
public or private sale and/or storage in a public warehouse or elsewhere at the sole cost, and for
the account, of Tenant, and Tenant shall promptly upon demand reimburse Landlord for any expenses
incurred by Landlord in connection therewith, including reasonable attorneys fees.
21. HOLD-OVER.
If Tenant shall not immediately surrender the Premises at the expiration of the Term then
Tenant shall, by virtue of the provisions of this Section 21, become a tenant by the month. In
such event Tenant shall be required to pay one hundred fifty percent (150%) of the amount of the
Monthly Base Rent then in effect and as subsequently escalated in accordance with the provisions
hereof, together with all Additional Rent in effect during the last month of the Term commencing
said monthly tenancy with the first day next after the end of the Term; and said Tenant, as a
month-to-month tenant, shall be subject to all of the conditions and covenants of this Lease as
though the same had originally been a monthly tenancy, except as otherwise provided above with
respect to the payment of Rent. Each party hereto shall give to the other at least thirty (30)
days written notice to quit the Premises, except in the event of non-payment of Rent provided for
herein when due, or of the breach of any other covenant by the said Tenant, in which event, Tenant
shall not be entitled to any notice to quit, the usual thirty (30) days notice to quit being
expressly waived; provided, however, that in the event that Tenant shall hold over after
expiration of the Term, and if Landlord shall desire to regain possession of said Premises
promptly at the expiration of the Term, then at any time prior to the acceptance of the Rent by
Landlord from Tenant, as a monthly tenant hereunder, Landlord, at its election or option, may
reenter and take possession of the Premises forthwith, without process, or by any legal action or
process in the Commonwealth of Virginia.
22. OPTION TO EXTEND TERM.
a.
Tenant shall have and is hereby granted the option to extend the Term hereof for two (2)
periods of five (5) years each (each, an Extension Period) commencing on the date immediately
following the Lease Expiration Date, or on the date immediately following the last day of the first
Extension Period, as applicable, provided that: (i) Tenant delivers written notice (the Extension
Notice)
21
to Landlord, not more than fifteen (15), or less than twelve (12), months prior to the Lease
Expiration Date, or prior to last day of the first Extension Period, as applicable, time being of
the essence, of Tenants irrevocable election to exercise such extension option (provided,
however, that if the Premises contains more than 63,492 rentable square feet, Tenant shall deliver
the Extension Notice to Landlord not more than eighteen (18), or less than fifteen (15), months
prior to the Lease Expiration Date, or prior to last day of the first Extension Period, as
applicable); (ii) no event exists at the time of the exercise of such option or arises subsequent
thereto, which event by notice and/or the passage of time would constitute an Event of Default if
not cured within the applicable cure period; and (iii) Tenant has not assigned its interest in the
Lease or sublet more than thirty-five percent (35%) of the Premises (except to an Affiliate of
Tenant. Notwithstanding the foregoing, Tenant may elect to extend the Term hereof pursuant to the
terms of this Section 22 with respect to the entire Premises, or alternatively, with respect to
any full floor(s) which comprise the Premises as of the date Tenant delivers the Extension Notice
to Landlord, which notice shall set forth the portion of the Premises which shall be subject to
the applicable Extension Period. Notwithstanding the foregoing, if Tenant delivers to Landlord,
not more than nineteen (19), or less than sixteen (16), months prior to the Lease Expiration Date,
or prior to the last day of the first Extension Period, as applicable, written notice (the
Extension Period Proposed Rent Notice) requesting that Landlord furnish Tenant with Landlords
proposed Annual Base Rent, Base Year and other material economic terms and conditions for the
first or second (2
nd
) Extension Period, as applicable, Landlord shall furnish Tenant
with such proposed terms and conditions within thirty (30) days after Landlords receipt of the
Extension Period Proposed Rent Notice (provided, however, that if the Premises contains more than
63,492 rentable square feet, Tenant shall deliver the Extension Period Proposed Rent Notice to
Landlord not more than twenty-one (21), or less than eighteen (18), months prior to the Lease
Expiration Date, or prior to last day of the first Extension Period, as applicable).
b.
All terms and conditions of the Lease, including without limitation all provisions
governing the payment of Additional Rent and annual increases in Annual Base Rent, shall remain in
full force and effect during the any Extension Period, except that (i) Annual Base Rent (on a per
rentable square foot basis) payable during each Extension Period shall equal the Fair Market Rental
Rate (hereinafter defined) at the time of the commencement of the applicable Extension Period; (ii)
Landlord shall provide a market improvement allowance, rental abatement and other tenant
concessions in connection with the Extension Period; and (iii) the Base Year for Tenants
Proportionate Share of increases in Operating Expenses and Tenants Proportionate Share of
increases in Real Estate Taxes shall be mutually determined by and between Landlord and Tenant. As
used in this Lease, the term Fair Market Rental Rate shall mean the fair market rental rate that
would be agreed upon between a landlord and a tenant entering into a lease for comparable space as
to location, configuration, size and use, in a comparable building as to quality, reputation and
age which is located in the Dulles Toll Road Corridor submarket, with a comparable build-out and a
comparable term assuming the following: (A) the landlord and tenant are informed and well-advised
and each is acting in what it considers its own best interests; (B) the landlord shall provide a
market tenant improvement allowance, free rent period and other tenant concessions typically
provided to tenants of comparable space in comparable buildings for leases having terms comparable
to the applicable Extension Period; and (C) the tenant will continue to pay its proportionate share
of increases (over a new Base Year as negotiated by and between Landlord and Tenant) in Operating
Expenses and Real Estate Taxes as described above.
c.
Landlord and Tenant shall negotiate in good faith to determine the Annual Base Rent for
each Extension Period, for a period of thirty (30) days after the date on which Landlord receives
the Extension Notice. In the event Landlord and Tenant are unable to agree upon the Annual Base
Rent for any Extension Period within said thirty (30)-day period, the Fair Market Rental Rate for
the Premises shall be determined by a board of three (3) licensed real estate brokers, one of whom
shall be named by the Landlord, one of whom shall be named by Tenant, and the two so appointed
shall select a third (the Third Broker). Each real estate broker so selected shall be licensed in
the Commonwealth of Virginia as a real estate broker specializing in the field of office leasing in
Fairfax County, having no fewer than ten (10) years experience in such field, and recognized as
ethical and reputable within the field. Landlord and Tenant agree to make their
appointments promptly within ten (10) days after the expiration of the thirty (30)-day period, or
sooner if mutually agreed upon. The two (2) brokers selected by Landlord and Tenant shall select
the Third Broker within ten (10) days after they both have been appointed, and all three (3)
brokers shall, within fifteen (15) days after the Third Broker is selected, submit his or her
determination of the Fair Market Rental Rate. The Third Broker shall determine which determination
of Fair Market Rental Rate made by Landlords broker or Tenants broker is closest to the
determination of Fair Market Rental Rate made by the Third Broker (the Closest Determination).
The Fair Market Rental Rate hereunder shall be the mean of the Closest Determination and the
determination of Fair Market Rental Value made by the Third Broker. Landlord and Tenant shall
each pay the fee of the broker selected by it, and they shall equally share the payment of the fee
of the Third Broker.
d.
Should the Term of the Lease be extended hereunder, Tenant shall, if required by Landlord,
execute an amendment (the Extension Amendment) modifying the Lease within ten (10) business days
after Landlord presents same to Tenant, which Extension Amendment shall accurately set forth the
Annual Base Rent for each year of the applicable Extension Period and the other economic terms and
provisions in effect during such Extension Period, as determined pursuant to the terms of this
Section 22. Should Tenant fail to execute the Extension Amendment (which Extension Amendment
accurately sets forth the terms and provisions in effect during the applicable Extension Period)
within ten (10) business days after presentation of same by Landlord, time being of the essence,
Tenants right to extend the Term of the Lease shall, at Landlords sole option, terminate, and
Landlord shall be permitted to lease such space to any other person or entity upon whatever terms
and conditions are acceptable to Landlord in its sole discretion.
22
23. RIGHT OF FIRST OFFER.
a.
Subject to (i) any expansion rights, renewal rights, rights of first offer or refusal or
other rights possessed by any tenant in the Building with respect to the Right of First Offer Space
(hereinafter defined) or any portion thereof existing as of the Effective Date, (ii) any renewal
rights granted by Landlord after the Effective Date to any tenant of all or any portion of the
Right of First Offer Space, and (iii) the right of any tenant of the Right of First Offer Space (or
any portion thereof) to negotiate an extension of the term of its lease of such space or a new
lease demising such space, Tenant shall be granted during the initial Term the following rights
with respect to the Right of First Offer Space. As used herein, the term Right of First Offer
Space shall mean any space in the Building (other than the Premises) which becomes available for
lease by third parties with respect to which Landlord receives during the initial Term an Offer
(hereinafter defined) to lease such space. Notwithstanding any provision of the Lease to the
contrary Tenant shall have no rights with respect to the Right of First Offer Space or any other
rights of first offer or refusal, or first right to negotiate, or any other expansion rights
whatsoever, except as expressly provided in this Section 23. Landlord represents and warrants to
Tenant that, other than the renewal rights of France Telecom USA set forth in its lease with
Landlord, no other tenant in the Building possesses any renewal rights, rights of first offer or
refusal or other expansion rights with respect to the portion of the Right of First Offer Space
which is located on the sixth (6
th
) floor of the Building.
b.
If, during the initial Term, Landlord receives a bona fide offer from a prospective tenant
which is not related to Landlord (a Prospective Tenant) to lease all or any portion of the Right
of First Offer Space (an Offer), the financial terms of which Landlord is prepared to accept,
Landlord shall notify Tenant in writing of such Offer (the ROFO Notice), and Landlord shall set
forth in the ROFO Notice: (i) a description of the portion of the Right of First Offer Space that
is subject to the Offer (the Available Space), (ii) the base rent, tenant concessions and other
terms and conditions pursuant to which Landlord would agree to lease the Available Space to Tenant
(which terms need not be those contained in the Offer), and (iii) the date on which Landlord
anticipates that the Available Space would become available for lease by Tenant (the ROFO
Availability Date). Provided that (A) no Event of Default then exists under the Lease; (B)
Tenant has not assigned the Lease, or sublet thirty-five percent (35%) or more of the Premises
(other than to an Affiliate of Tenant); (C) not less than thirty-six (36) months remain in the Term
as of the ROFO Availability Date; and (D) Tenant notifies Landlord, in writing, within ten (10)
business days after Tenant receives the ROFO Notice, time being of the essence, of Tenants
irrevocable election to lease all (but not less than all) of the Available Space described in the
ROFO Notice on the terms and conditions set forth in the ROFO Notice (the ROFO Tenant Election
Notice), Tenant shall have the right to lease all, but not less than all, of the Available Space
described in the ROFO Notice on the terms and conditions set forth in the ROFO Notice.
c.
In the event that Tenant timely delivers a ROFO Tenant Election Notice to Landlord,
Landlord shall prepare an amendment modifying the Lease to incorporate the Available Space (the
ROFO Amendment), which amendment shall accurately set forth, among other things: (i) the amount
of Annual Base Rent for the Available Space (based on the per rentable square foot rental rate set
forth in the ROFO Notice); (ii) the adjustments to Tenants obligation to pay Additional Rent
caused by the addition of the Available Space; and (iii) any other term and condition applicable to
the Available Space and mutually agreed to by and between Landlord and Tenant. The term of the
demise of the Available Space (the Right of First Offer Space Term) shall commence on the date on
which Landlord delivers such Available Space to Tenant (the ROFO Space Commencement Date), at
which time all of Tenants obligations with respect to the Available Space shall commence,
including the obligation to pay Annual Base Rent. In all instances, the Right of First Offer Space
Term shall be coterminous with the Term of this Lease.
d.
In the event that Landlord and Tenant enter in a ROFO Amendment, and Landlord is unable to
deliver to Tenant possession of the Available Space demised thereunder on the ROFO Availability
Date in vacant, broom-clean condition for any reason whatsoever, including without limitation the
failure of an existing tenant to vacate such space, Landlord shall not be liable or responsible for
any claims, damages or liabilities in connection therewith or by reason thereof/provided that (i)
Landlord shall use reasonable efforts to obtain possession of such space (which reasonable efforts
shall include the commencement of eviction proceedings) and deliver same to Tenant as soon as
reasonably practicable thereafter; and (ii) rent with respect to the Available Space shall abate
until Landlord delivers the Available Space to Tenant. In the event that Landlord is unable to
deliver the Available Space to Tenant by the date which is one hundred twenty (120) days after the
ROFO Availability Date, subject to a day-for- day extension for matters of Force Majeure (the
Available Space Outside Delivery Date), Tenant shall have the right, but not the obligation, to
terminate the applicable ROFO Amendment upon ten (10) business days prior written notice to
Landlord, in which event the applicable ROFO Amendment shall be null and void and of no further
force or effect; provided that if Landlord delivers the Available Space to Tenant during such ten
(10) business day period, the applicable ROFO Amendment shall not terminate and shall continue in
full force and effect in accordance with its terms.
e.
In the event Tenant fails timely to deliver a ROFO Tenant Election Notice to Landlord or,
having done so, Tenant fails to execute the ROFO Amendment tendered by Landlord within ten (10)
business days after Landlord tenders such amendment to Tenant: (i) Landlord may lease the Available
Space (or any portion thereof) described in the ROFO Notice to any person or entity of Landlords
choice, on whatever terms and conditions are selected by Landlord in its sole discretion; and (ii)
this Section 23 shall terminate automatically, and Tenant shall have no further right to lease any
Right of First Offer Space.
23
24. USA PATRIOT ACT AND ANTI-TERRORISM LAWS.
a.
Landlord and Tenant each represents and warrants to, and covenants with, the other
party that neither it, nor any of its respective constituent owners or affiliates currently are, or
shall be at any time during the Term hereof, in violation of any laws relating to terrorism or
money laundering (collectively, the Anti-Terrorism Laws), including without limitation Executive
Order No. 13224 on Terrorist Financing, effective September 24, 2001 and relating to Blocking
Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support
Terrorism (the Executive Order) and/or the Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Public Law 107-56) (the
USA Patriot Act).
b.
Landlord and Tenant each covenants with the other party that neither it nor any of its
respective constituent owners or affiliates is or shall be during the Term hereof a Prohibited
Person, which is defined as follows: (i) a person or entity that is listed in the Annex to, or is
otherwise subject to, the provisions of the Executive Order; (ii) a person or entity owned or
controlled by, or acting for or on behalf of, any person or entity that is listed in the Annex to,
or is otherwise subject to the provisions of, the Executive Order; (iii) a person or entity with
whom Landlord or Tenant, as applicable, is prohibited from dealing with or otherwise engaging in
any transaction by any Anti-Terrorism Law, including without limitation the Executive
Order and the USA Patriot Act; (iv) a person or entity who commits, threatens or conspires to
commit or support terrorism as defined in Section 3(d) of the Executive Order; (v) a person or
entity that is named as a specially designated national and blocked person on the then-most
current list published by the U.S. Treasury Department Office of Foreign Assets Control at its
official website,
http://www.treas.gov/offices/eotffc/ofac/sdn/t11 sdn.pdf
or at any
replacement website or other replacement official publication of such list; and (vi) a
person or entity who is affiliated with a person or entity listed in
items (i) through (v), above.
c.
At any time and from time-to-time during the Term, Landlord or Tenant, as applicable, shall
deliver to the other party, within ten (10) days after receipt of a written request therefor, a
written certification or such other evidence reasonably acceptable to such requesting party
evidencing and confirming the other partys compliance with this Section 24.
25. QUIET ENJOYMENT.
Landlord covenants that, if Tenant is not in default hereunder, Tenant shall at all
times during the Term peaceably and quietly have, hold and enjoy the Premises without disturbance
from Landlord, subject to the terms of this Lease and to the rights of the parties presently or
hereinafter secured by any deed of trust or mortgage against the Building.
26. PARKING.
a.
Tenant shall be provided, without charge during the initial Term of the Lease, the
right to park, on an unreserved basis, one hundred forty-two (142) automobiles (or 3.98 automobiles
per 1,000 r.s.f. of the Premises then being leased by Tenant) belonging to Tenants employees,
agents and guests on the surface lot adjacent to the Building (the Surface Lot) and/or the
parking structure adjacent to the Building (the Parking Structure), as determined by Landlord in
its sole discretion.
b.
Tenant agrees that it and its employees shall observe reasonable safety precautions in the
use of the Surface Lot and/or the Parking Structure, and shall at all times abide by all rules and
regulations promulgated by Landlord or the parking operator governing the use of the Surface Lot
and/or the Parking Structure. Landlord shall not intentionally discriminate against Tenant in
Landlords enforcement of such rules and regulations. Tenant understands and agrees that Landlord
does not assume any responsibility for any damage or loss to any automobiles parked on the Surface
Lot and/or the Parking Structure, or to any personal property located therein or thereon, or for
any injury sustained by any person in or about the Surface Lot and/or the Parking Structure.
27. NOTICES.
Any and all notices or demands required or permitted herein shall be in writing and
served (a) personally, (b) by certified mail, return receipt requested, or (c) by guaranteed
overnight courier, at the addresses provided in Section 1.h, above. If served personally, service
shall be conclusively deemed made at the time of such delivery. If served by certified mail,
service shall be conclusively deemed made seventy-two (72) hours after the deposit thereof in the
United States mail, postage prepaid, pursuant to this Section 27. If served by overnight courier,
service shall be conclusively deemed made one (1) business day after deposit with such courier.
Either party may specify a different address according to the terms of this Section 27.
28. BROKERS.
Landlord and Tenant recognize ACP Mid-Atlantic LLC, as Landlords broker, and The
Staubach Company Northeast, Inc., as Tenants broker (collectively, the Brokers), as the sole
brokers with respect to this Lease and Landlord agrees to be responsible for the payment of any
leasing commissions owed to the aforesaid Brokers in accordance with the terms of separate
commission agreements entered into between Landlord and each of said Brokers. Landlord and Tenant
each represents and warrants to the other that, except for the Brokers, no other broker has been
employed in carrying on any negotiations
24
relating to this Lease and shall each indemnify and hold harmless the other from any claim for
brokerage or other commission arising from or out of any breach of the foregoing representation
and warranty.
29. ENVIRONMENTAL CONCERNS.
a.
Tenant, its agents, employees, contractors or invitees shall not (i) cause or permit any
Hazardous Materials to be brought upon, stored, used or disposed on, in or about the Premises
and/or the Building, or (ii) knowingly permit the release, discharge, spill or emission of any
Hazardous Material in or from the Premises. Notwithstanding the foregoing, Hazardous Materials
which are prohibited by the terms of this Section 29 shall not include cleaning solvents, office
supplies, or similar materials used in the ordinary course of a general office use (the Office
Product Materials) provided that such Office Product Materials are used and stored by Tenant in
strict accordance with all applicable Environmental Laws. In no event shall the foregoing sentence
be construed to permit Tenant to engage in research, product testing, or other non-office uses in
the Premises that involve the use of any Office Product Materials.
b.
Tenant hereby agrees that it is and shall be fully responsible for all costs, expenses,
damages or liabilities (including, but not limited to those incurred by Landlord and/or its
mortgagee) which may occur from the use, storage, disposal, release, spill, discharge or emissions
of Hazardous Materials by Tenant whether or not the same may be permitted by this Lease. Tenant
shall defend, indemnify and hold harmless Landlord, its mortgagee and its agents from and against
any claims, demands, administrative orders, judicial orders, penalties, fines, liabilities,
settlements, damages, costs or expenses (including, without limitation, reasonable attorney and
consultant fees, court costs and litigation expenses) of whatever kind, or nature, known or
unknown, contingent or otherwise, arising out of or in any way related to the use, storage,
disposal, release, discharge, spill or emission of any Hazardous Material, or the violation of any
Environmental Laws, by Tenant, its agents, employees, contractors or invitees. The provisions of
this Section 29 shall be in addition to any other obligations and liabilities Tenant may have to
Landlord at law or in equity and shall survive the transactions contemplated herein or any
termination of this Lease.
c.
As used in this Lease, the term Hazardous Materials shall include, without limitation:
(i) those substances included within the definitions of hazardous substances, hazardous
materials, toxic substances, or solid waste in the Comprehensive Environmental Response
Compensation and Liability Act of 1980 (42 U.S.C. §9601
et seq.)
(CERCLA), as amended by
Superfund Amendments and Reauthorization Act of 1986 (SARA), the Resource Conservation and
Recovery Act of 1976 (RCRA), and the Hazardous Materials Transportation Act, and in the
regulations promulgated pursuant to said laws, all as amended;
(ii) those substances listed in the United States Department of Transportation Table (49 CFR
172.101 and amendments thereto) or by the Environmental Protection Agency (of any successor
agency) as hazardous substances (40 CFR Part 302 and amendments thereto); and
(iii) any material, waste or substance which is (A) petroleum, (B) asbestos, (C)
polychlorinated biphenyl, (D) designated as a hazardous substance pursuant to Section 311 of the
Clean Water Act, 33 U.S.C. §1251
et seq.
(33 U.S.C. .§1321) or listed pursuant to Section of the
Clean Water Act (33 U.S.C. §1317); (E) flammables or explosives; or (F) radioactive materials.
d.
All federal, state or local laws, statutes, regulations, rules, ordinances, codes,
standards, orders, licenses and permits of any governmental authority or issued or promulgated
thereunder shall be referred to as the Environmental Laws.
30. LANDLORDS LIEN.
Intentionally Omitted.
31. RULES AND REGULATIONS.
Tenant shall at all times comply with the rules and regulations set forth in
Exhibit
D
attached hereto and with any reasonable additions thereto and modifications thereof adopted
from time to time by Landlord; Tenant shall be given five (5) business days written notice of any
such additions and modifications. Each such rule or regulation shall be deemed to be a covenant of
this Lease to be performed and observed by Tenant. Landlord shall not discriminate against Tenant
in its enforcement of the rules and regulations. In the event of any conflict between the rules
and regulations and the terms and conditions of this Lease, the terms and conditions of this Lease
shall control.
32. ROOFTOP COMMUNICATIONS EQUIPMENT.
a.
Tenant shall have the non-exclusive right, at no additional charge during the initial Term
hereof, to use a portion of the roof of the Building (the Roof) selected by Landlord and
reasonably agreeable to Tenant, the area of which shall not exceed sixty-four (64) square feet, for
the installation of one (1) microwave dish and one (1) antennae (collectively, the Communications
Equipment), provided that (i) the Communications Equipment sought to be installed by Tenant is
permitted under, and conforms to the requirements of, the laws, rules and regulations of the Town
of Herndon, Fairfax County, the Commonwealth of Virginia, any other governmental or
quasi-governmental authorities having appropriate jurisdiction over the Building, and any
restrictive covenants or other documents governing the use of the Project; (ii) Tenant obtains and
maintains all permits, licenses, variances, authorizations and approvals
25
that may be required in order to install such Communications Equipment; (iii) Tenant shall obtain
insurance coverages required by Landlord relating to the installation and operation of such
Communications Equipment; (iv) Tenant shall install any screen or other covering for the
Communications Equipment that Landlord may require in order to camouflage or conceal the
Communications Equipment; (v) Landlord shall have approved in its sole discretion the dimensions
and specifications for the Communications Equipment, and the proposed method of attaching the
Communications Equipment to the Roof; and (vi) Landlords engineer determines that the portion of
the Roof on which Tenant desires to install the Communications Equipment is capable of bearing
the weight of the Communications Equipment.
b.
Prior to or contemporaneous with requesting Landlords approval of the installation of the
Communications Equipment, Tenant shall provide to Landlord: (i) plans and specifications for the
Communications Equipment; (ii) copies of all required governmental and quasi-governmental permits,
licensees, special zoning variances, and authorizations for the installation and operation of the
Communications Equipment, all of which Tenant shall, obtain at its own cost and expense; and (iii)
a policy or certificate of insurance evidencing such insurance coverage as may be required by
Landlord for the installation, operation and maintenance of the Communications Equipment and
sufficient to cover,
inter alia,
the indemnities from Tenant to Landlord provided in the Lease
relating to the installation, maintenance, operation and removal of the Communications Equipment.
Landlord may withhold its approval of the installation of the Communications Equipment if the
installation, operation or removal of the Communications Equipment may (A) damage the structural
integrity of the Building or void any warranty or guaranty applicable to the Roof or the Building;
or (B) cause the violation of any zoning ordinance or other governmental or quasi-governmental law,
rule or regulation applicable to the Building. Landlord may require as a precondition to its
approval of the installation of the Communications Equipment that Tenant (or, at Landlords option,
Landlord), at Tenants sole cost and expense, install additional structural support (in a manner
determined by Landlords engineer in its sole discretion) to the portion of the Roof on which
Tenant desires to install the Communications Equipment. Tenant shall not be entitled to rely on any
such approval as being a representation by Landlord that such installation and operation is
permitted by or in accordance with any zoning ordinance or other governmental or quasi-governmental law, rule or regulation applicable to the Building.
c.
Landlord shall be provided with access to the Roof, including the portion of the Roof on
which the Communications Equipment is located, in order to inspect the Communications Equipment and
Roof to determine,
inter alia,
if the Communications Equipment is causing damage to the Roof or any
other part of the Building and/or to repair the Roof or remove or relocate the Communications
Equipment. Landlord, at its sole option and discretion, may require Tenant, at any time prior to
the expiration of the Lease, to terminate the operation of the Communications Equipment if it is
causing physical damage to the structural integrity of the Building or voids any warranty or
guaranty applicable to the Roof or the Building, or is interfering with any satellite dish,
antennae or other telecommunications device being operated on the Roof or elsewhere in the Building
by any tenant in the Building or other licensee authorized by Landlord, or causing the violation of
any condition or provision of the Lease or any governmental or quasi-governmental law, rule or
regulation (now or hereafter in effect) applicable to the Building.
d.
Tenant acknowledges that the rights contained in this Section 32 are non-exclusive, and
that Landlord may grant such rights to any other tenant in the Building or any other licensee of
Landlords choice (whether or not such licensee is a tenant of the Building). Tenant expressly
acknowledges that it may not (i) license or otherwise permit third parties to install on the Roof
of the Building or anywhere else in the Premises, any Communications Equipment; (ii) permit any
third party to use any portion of the Roof for any purpose whatsoever; or (iii) utilize the
Communications Equipment as a direct means of generating revenue. The breach of this provision
shall constitute an Event of Default under this Lease.
e.
Prior to the expiration or earlier termination of the Lease, Tenant, at Tenants sole cost,
shall remove the Communications Equipment and all cabling and other equipment relating thereto from
the Building, and Tenant shall restore the area where the Communications Equipment was located to
its condition existing prior to such installation in a manner and with materials determined by
Landlord. In the event Tenant fails to promptly do so, Tenant hereby authorizes Landlord to remove
the Communications Equipment and all cabling and other, equipment relating thereto and restore the
area of the roof and the other portions of the Building affected thereby, reasonable wear and tear
excepted, and charge Tenant for all reasonable costs and expenses incurred in connection therewith.
Tenants obligation to perform and observe this covenant shall survive the expiration or earlier
termination of the Term of the Lease.
f.
Tenant covenants and agrees that the installation, operation and removal of the
Communications Equipment shall be at its sole cost and risk. Tenant covenants and agrees absolutely
and unconditionally to indemnify, defend and hold Landlord harmless from and against all claims,
actions, damages, liability, judgments, settlements, costs and expenses (including attorneys fees
and expenses) suffered or sustained by Landlord arising out of the installation, operation,
maintenance or removal of the Communications Equipment, including without limitation any loss or
injury resulting from transmissions from the Communications Equipment.
g.
The rights contained in this Section 32 shall transfer to any assignee of Tenant, or any
subtenant of all of the Premises for a sublease term which expires during the last Lease Year of
the Term hereof.
h.
Tenant shall be entitled to connect the Communications Equipment to the Buildings
electric power source; provided, however, that: (i) the method of connecting any component of
the
26
Communications Equipment to the Buildings electric power source and the specific location in the
Building at which such connection shall be effected, shall be subject to Landlords prior approval;
and (ii) such connection shall be undertaken by licensed contractor(s) approved by Landlord. The
cost of connecting the Communications Equipment to the Buildings electric power source and the
cost of all electricity consumed by the Communications Equipment shall be borne solely by Tenant.
Except in the event of the negligence or willful misconduct of Landlord, its agents or employees,
Tenant hereby agrees to indemnify and hold Landlord and its agents, officers, directors and
employees harmless from and against any cost, damage, claim, liability or expense (including
attorneys fees) incurred by or claimed against Landlord and its agents, officers, directors and
employees, directly or indirectly, as a result of or in
,
any way relating to the connection of any
component of the Communications Equipment to, or the removal of any component of the Communications
Equipment from, the Buildings electric power source
33. EXTERIOR SIGNAGE.
a.
Tenant shall have the right to install, at Tenants sole cost and expense, a sign bearing
Tenants name and corporate logo (the Exterior Sign) on the top level of the exterior of the
Building, in the location which is currently occupied by the exterior sign previously installed by
France Telecom USA). All attributes of the Exterior Sign, including without limitation size,
materials and color, shall be subject to Landlords prior approval, which shall not be unreasonably
withheld, conditioned or delayed by Landlord, the approval of the Woodland Park Owners Association
(the Association) and the approval of Fairfax County. Prior to installing the Exterior Sign,
Tenant shall submit to Landlord for its approval a drawing of the Exterior Sign, which drawing
shall specify the dimensions, materials, color and other attributes of the Exterior Sign which
Tenant desires to install. Tenants right to install the Exterior Sign shall be subject to Tenants
receipt of all necessary permits and governmental approvals for such installation; provided that
the failure to obtain such permits or approvals shall not affect the Lease (or Tenants obligations
hereunder) in any way. The exact placement of the Exterior Sign on the Building shall be subject
to Landlords approval regarding structural support issues. Tenant shall be solely responsible for
obtaining and maintaining all permits and governmental approvals necessary for the installation and
operation of the Exterior Sign, including without limitation the approval of the Association.
Tenant shall be responsible for repairing and maintaining the Exterior Sign installed by Tenant in
a first-class condition throughout the Term and shall pay for the cost of all electricity consumed
by the Exterior Sign. The Exterior Sign shall be installed by a licensed contractor acceptable to
Landlord using a mounting procedure approved by Landlord in its sole discretion. Tenant shall cause
its insurance carrier to include the Exterior Sign in the coverage required to be obtained by
Tenant pursuant to Section 12, above. The right to install the Exterior Sign shall be personal to
K12 Inc. and shall not be applicable to any assignee or sublessee of Tenant (other than an
Affiliate of Tenant). Tenant agrees to indemnify Landlord and hold it harmless from and against all
claims, damage or liability (including attorneys fees) sustained or suffered by Landlord arising
out of or related to the installation, maintenance or removal of the Exterior Sign. Tenant shall
remove the Exterior Sign upon the date (the Exterior Sign Removal Date) which is the earlier to
occur of (1) the date on which Tenant has subleased in excess of forty percent (40%) of the
rentable square feet of the Premises (as the Premises may be expanded pursuant to the terms of this
Lease), or (2) the Lease Expiration Date (or any earlier termination date of the Lease), subject to
any extension thereof, and Tenant shall restore the portions of the Building affected by such
removal to their condition immediately prior to the installation of such sign, reasonable wear and
tear excepted. If Tenant fails to remove the Exterior Sign on or before the Exterior Sign Removal
Date or fails to restore the portions of the Building affected by such removal in accordance with
the terms of this Lease, Landlord may, but shall not be obligated to remove the Exterior Sign
and/or restore the portion of the Building affected thereby, and Tenant shall reimburse Landlord
for all reasonable costs and expenses incurred by Landlord with respect to such removal and/or
restoration immediately upon demand therefor.
b.
If, during the Term hereof, Landlord constructs a monument sign adjacent to the Building
for use by tenants of the Building, Tenant, at Tenants sole cost and expense, shall be permitted
to install a plaque bearing Tenants name (the Monument Plaque), on the upper-most position of
such monument sign. All attributes of the Monument Plaque, including without limitation size,
design, materials, and color, shall be subject to Landlords approval. Tenants right to install
the Monument Plaque shall be subject to Tenants receipt of all necessary permits and governmental
approvals for such installation; provided that the failure to obtain such permits or approvals
shall not affect the Lease (or Tenants obligations hereunder) in any way. Tenant shall be
responsible for repairing and maintaining the Monument Plaque in a first-class condition throughout
the Term. The Monument Plaque shall be installed by Landlord at Tenants sole cost and expense. The
right to install the Monument Plaque shall transfer to Tenants assignees or any subtenant of the
all of the Premises for a sublease term which expires in the last Lease Year of the Term hereof.
Tenant agrees to indemnify Landlord and hold it harmless from and against all claims, damage or
liability (including reasonable attorneys fees) sustained or suffered by Landlord arising out of
or related to the installation, maintenance or removal of the Monument Plaque. Tenant shall remove
the Monument Plaque upon the date (the Monument Plaque Removal Date) which is the earlier to
occur of (1) the date on which Tenant has subleased in excess of forty percent (40%) of the
rentable square feet of the Premises (as the Premises may be expanded pursuant to the terms of this
Lease), or (2) the Lease Expiration Date (or any earlier termination date of the Lease), subject to
any extension thereof, and Tenant shall restore the portion of Landlords monument sign affected by
such removal to its condition immediately prior to the installation of such Monument Plaque,
reasonable wear and tear excepted. If Tenant fails to remove the Monument Plaque from the monument
sign on or before the Monument Plaque Removal Date or fails to restore the portions of the monument
plaque affected by such removal in accordance with the terms of this Lease, Landlord may, but shall
not be obligated to remove the Monument Plaque and/or restore the portion of the monument sign
affected thereby, and Tenant shall reimburse Landlord for all reasonable costs and expenses
incurred by Landlord with respect to such removal and/or restoration immediately upon demand
therefor.
27
34. MUST-TAKE SPACE.
a.
Landlord and Tenant hereby acknowledge and agree that, subject to the terms and conditions
of this Section 34: (i) Landlord shall lease to Tenant, and Tenant shall lease from Landlord, for a
term commencing on the Must-Take Space Commencement Date (hereinafter defined) and ending on the
Lease Expiration Date, approximately 27,752 rentable square feet of office space comprising the
entire fifth (5
th
) floor of the Building (the Must-Take Space, as shown on the
attached
Exhibit A-1);
and (ii) the Must-Take Space is currently leased to France Telecom
USA (the Current Tenant) pursuant to a lease (the FTUSA Lease) the term of which expires on
September 30, 2009. Promptly after the expiration or earlier termination of the term of the FTUSA
Lease, Landlord shall use commercially reasonable efforts to regain possession of the Must-Take
Space and deliver same to Tenant. As used herein, the term Must-Take Space Commencement Date
shall mean the date Landlord delivers the Must-Take Space to Tenant. Landlord shall deliver the
Must-Take Space to Tenant promptly after the Current Tenant vacates the Must-Take Space and
delivers possession thereof to Landlord.
b.
Landlord shall deliver the Must-Take Space to Tenant in its as-is condition without (i)
any obligation on Landlords part to undertake or pay for any improvements or alterations therein;
or (ii) any representations or warranties regarding the condition thereof.
c.
Effective as of the Must-Take Space Commencement Date, Tenant shall pay Annual Base Rent to
Landlord for the Must-Take Space only (Must-Take Space Annual Base Rent) in the amounts set forth
immediately below, in accordance with the terms and provisions of Section 4, above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Must Take space
|
|
Must Take Space
|
|
Must take Space
|
Lease
|
|
Annual Base Rent
|
|
Annual
|
|
Monthly
|
Year
|
|
per Square Foot
|
|
Base Rent
|
|
Base Rent
|
1
|
|
$
|
27.50
|
|
|
$
|
763,180.00
|
|
|
$
|
63,598.33
|
|
2
|
|
$
|
28.19
|
|
|
$
|
782,259.48
|
|
|
$
|
65,188.29
|
|
3
|
|
$
|
28,89
|
|
|
$
|
801,815.99
|
|
|
$
|
66,818.00
|
|
4
|
|
$
|
29.61
|
|
|
$
|
821,861.39
|
|
|
$
|
68,488.45
|
|
5
|
|
$
|
30.35
|
|
|
$
|
842,407.92
|
|
|
$
|
70,200.66
|
|
6
|
|
$
|
31.11
|
|
|
$
|
863,468.12
|
|
|
$
|
71,955.68
|
|
7
|
|
$
|
31.89
|
|
|
$
|
885,054.82
|
|
|
$
|
73,754.57
|
|
d.
From and after the Must-Take Space Commencement Date: (i) the aggregate number of rentable
square feet demised under the Lease shall be 63,492; (ii) wherever the term Premises appears in
the Lease, it is hereby deemed to mean the entire 63,492 rentable square feet (consisting of the
initial Premises and the Must-Take Space); and (iii) Tenants Pro Rata Share (Operating Expenses)
and Tenants Pro Rata Share (Real Estate Taxes) as set forth in Section 1.g, above, shall each be
increased to thirty-nine and ninety-six hundredths percent (39.96%). Tenant hereby acknowledges and
agrees that the Base Year shall remain calendar year 2006 from and after the Must-Take Space
Commencement Date.
e.
In the event that Landlords delivery of the Must-Take Space to Tenant is delayed for any
reason, Tenant shall remain obligated to lease the Must-Take Space from Landlord pursuant to the
terms of this Section 34 and Tenant shall have no claim against Landlord by reason of any such
delay. Tenant hereby acknowledges and agrees that Landlords obligation to deliver the Must-Take
Space to Tenant is expressly contingent upon the surrender to Landlord of the Must-Take Space by
the Current Tenant.
f.
In the event Tenant refuses to accept delivery of the Must-Take Space on the Must-Take
Space Commencement Date, time being of the essence, such refusal shall constitute an Event of
Default hereunder, whereupon Landlord may elect to (i) pursue all of its remedies as provided in
Section 16, above; and/or (ii) lease the Must-Take Space to any person or entity of Landlords
choice on whatever terms and conditions Landlord elects in its sole discretion.
35. SUPPLEMENTAL HVAC SYSTEM.
a.
At any time during the Term, Tenant shall have the right to elect to use the supplemental
HVAC units, if any, and the equipment related thereto, if any, located at the Premises on the
Effective Date, which equipment shall include any ceiling mounted supplemental HVAC units serving
the Premises (collectively, the Supplemental HVAC Units). Notwithstanding the foregoing, prior to
using any Supplemental HVAC Units, Tenant shall provide Landlord With all equipment plans and
specifications relating to the loads that would be imposed upon the Supplemental HVAC System
(hereinafter defined), and Landlord shall have the right to deny Tenant use of the Supplemental
HVAC Units if Landlord determines the Supplemental HVAC System will not or might not be adequate to
meet Tenants demand. In the event that Landlord rejects Tenants proposed plans and specifications
relating to the Supplemental HVAC Units and/or Tenants use of the Supplemental HVAC System,
Landlord shall work with Tenants engineers to design modifications to the Supplemental HVAC System
(the HVAC System Modifications) that would permit Tenant to use the Supplemental HVAC Units and
the Supplemental HVAC System in the manner envisioned by Tenant; provided that all HVAC System
Modifications (i) shall be subject to Landlords approval in its sole discretion; (ii) if approved
by Landlord, shall be undertaken by Landlord at
28
Tenants sole cost and expense; and (iii) shall, at Landlords sole option, either (A) be removed
by Tenant at the end of the Term (and the portions of the Supplemental HVAC System and the
Building which are affected by such removal restored to their condition immediately prior to the
installation of the HVAC System Modifications, reasonable wear and tear excepted), or (B) remain
in the Building and owned by Landlord; provided however that if Landlord desires that Tenant
remove any HVAC System Modifications at the end of the Term, Landlord must so indicate to Tenant
at the time Tenant submits its plans and specifications describing the HVAC System Modifications
proposed by Tenant; provided further however that Tenant shall not be obligated to remove the
Existing HVAC Units at the end of the Term. Throughout the Term, Tenant shall bear all costs
associated with the operation and repair of the HVAC System Modifications, as well as all
incremental repair and maintenance costs to the Supplemental HVAC Units and the Supplemental HVAC
System caused by the installation or use of the HVAC System Modifications, all as determined by
Landlord, and Tenant shall reimburse Landlord for all such costs within forty-five (45) days after
demand by Landlord. If Landlord approves of Tenants use of the Supplemental HVAC Units,
Landlords engineer or contractor will activate Tenants use of the Supplemental HVAC Units. The
minimum period for which Tenant can elect to use a Supplemental HVAC Unit is thirty (30) days and
Tenant shall provide Landlord with at least fifteen (15) days prior written notice if Tenant
elects at any time to discontinue using any Supplemental HVAC Unit.
b.
Except with respect to emergency repairs, Landlord will maintain, repair and make any
capital repairs or replacements of the Supplemental HVAC Units. If any Supplemental HVAC Units
require emergency repairs, Tenant shall send Landlord prompt written notice of such emergency and
Tenant shall make arrangements for such repairs directly with Landlords Supplemental HVAC Unit
contractor. Landlord will provide Tenant with written notice from time to time of the name and
telephone number of Landlords Supplemental HVAC Unit contractor. Landlord will maintain, repair
and make any capital repairs or replacements to any equipment relating to the operation of the
Supplemental HVAC Units that is not located at the Premises, which shall include the cooling
tower(s) located on the roof of the Building that generally serve(s) the supplemental HVAC units
presently located in the Building (collectively, the Supplemental Common Equipment). The
Supplemental HVAC Units and the Supplemental Common Equipment are together called the Supplemental
HVAC System.
c.
Beginning on the date on which Tenant commences to use the Supplemental HVAC System and
continuing thereafter during the Term, for so long as Tenant has elected to use any Supplemental
HVAC Unit:
(i) Tenant shall pay all costs incurred by Landlord and/or Tenant during the Term in
connection with the ordinary maintenance and emergency and non-emergency repairs and replacements
to the Supplemental HVAC Units (whether for parts, labor, warranty coverage or otherwise) (the
Supplemental Maintenance Costs). If Tenant directly incurs any Supplemental Maintenance Costs,
Tenant shall pay such Supplemental Maintenance Costs as and when due and owing to the applicable
Supplemental HVAC Unit service provider.
(ii) Tenant shall pay Tenants Supplemental Share (hereinafter defined) of all costs incurred
by Landlord in connection with the ordinary maintenance and emergency and non-emergency repairs
and replacements of the Supplemental Common Equipment (whether for parts, labor, warranty coverage
or otherwise) (the Supplemental Common Costs). As used herein, the term Tenants Supplemental
Share means a fraction, the numerator of which shall be the tonnage rating of the Supplemental
HVAC Units in the Premises and the denominator of which shall be the tonnage rating of all
supplemental HVAC units in the Building (exclusive of any such units that are owned by a tenant of
the Building) that any tenant of the Building from time to time elects to use.
(iii) In addition to Tenants payment of Supplemental Maintenance Costs and Tenants
Supplemental Share, Tenant shall pay to Landlord the monthly electricity charge for the
Supplemental HVAC System as reasonably established from time to time by Landlord (the
Supplemental Charge). The current Supplemental Charge is $70.00 per ton per month.
(iv) All sums payable by Tenant to Landlord under this Section 35 shall constitute Additional
Rent and shall be due and payable to Landlord within thirty (30) days after Landlord sends Tenant
an invoice therefor. Landlord will be entitled to an administrative charge of ten percent (10%) of
all costs payable by Tenant under this Section, other than the Supplemental Charge (the
Supplemental Administrative Fee).
d.
Except for liability resulting from the negligence or willful misconduct of Landlord, its
agents or employees, Landlord shall have no liability arising from any failure of the Supplemental
HVAC System or any component thereof to operate properly or at all at any time including, without
limitation, no liability if any such failure results in the Premises not being reasonably
comfortable or useable at all, any of Tenants equipment not functioning or not functioning fully
or properly, Tenant missing or being delayed in meeting any business or other deadlines, or Tenant
incurring any other costs or damages.
e.
Tenant shall cooperate with Landlord and shall abide by the rules and regulations which
Landlord may reasonably prescribe for the proper functioning and protection of the Supplemental
HVAC System. Landlord shall not discriminate against Tenant in its enforcement of such rules and
regulations.
f.
In the event that Landlord elects to discontinue the operation of the Supplemental HVAC
System at any time during the Term: (i) Landlord shall provide Tenant with at least thirty (30)
days prior written notice thereof; and (ii) Landlord, at Landlords sole cost, shall (A) connect
Tenants Supplemental
29
HVAC Units to the base Building HVAC System; and (B) install one or more meters or submeters to
measure Tenants consumption of electricity relating to the operation of the Supplemental HVAC
Units. Landlord shall bill Tenant monthly for the cost of such electricity consumption by Tenant,
as measured by such meters or submeters. Landlord shall determine in its reasonable discretion the
specifications, location and number of meters or submeters to be installed. Tenant agrees to pay
all charges for such electricity within thirty (30) days of written demand by Landlord. In
addition, Tenant shall pay to Landlord, within thirty (30) days after written demand by Landlord,
a reasonable monthly charge determined by Landlord for the additional maintenance and repair costs
with respect to the operation of the base Building HVAC System incurred by. Landlord as a result
of the connection of the Supplemental HVAC Units to the base Building HVAC System.
36. MISCELLANEOUS PROVISIONS.
a. Time is of the essence with respect to all of Tenants and Landlords obligations under
this Lease.
b. The waiver by Landlord or Tenant of any term, covenant or condition herein contained shall
not be deemed to be a waiver of such term, covenant or condition of any prior or subsequent breach
of the same or any other term, covenant or condition herein contained. The subsequent acceptance of
rent hereunder by Landlord shall not be deemed to be a waiver of any prior breach by Tenant of any
term, covenant or condition of this Lease, other than the failure of Tenant to pay the particular
rental so accepted, regardless of Landlords knowledge of such prior breach at the time of
acceptance of such rent.
c. In the event of any action or proceeding brought by either party against the other under
this Lease, the prevailing party shall be entitled to recover from the other party the fees of its
attorneys in such action or proceeding in such amount as the court may judge to be reasonable for
such attorneys fees.
d. Except as expressly otherwise provided in this Lease, all of the provisions of this Lease
shall bind and inure to the benefit of the parties hereto and to their heirs, successors,
representatives, executors, administrators, transferees and assigns. The term Landlord, as used
herein, shall mean only the owner of the Building and the Land or of a lease of the Building and
the Land, at the time in question, so that in the event of any transfer or transfers of title to
the Building and the Land, or of Landlords interest in a lease of the Building and the Land, the
transferor shall be and hereby is relieved and freed of all obligations of Landlord under this
Lease accruing before such transfer, and it shall be deemed, without further agreement, that such
transferee has assumed and agreed to perform and observe all obligations of Landlord herein during
the period it is the holder of Landlords interest under this Lease.
e. At Landlords request, Tenant will execute a memorandum of this Lease in recordable form
setting forth such provisions hereof as Landlord deems desirable. Further, at Landlords request,
Tenant shall acknowledge before a notary public its execution of this Lease, so that this Lease
shall be in form for recording. The cost of recording this Lease or memorandum thereof shall be
borne by Landlord.
f. Notwithstanding any provision to the contrary herein, Tenant shall look solely to the
estate and property of Landlord in and to the Land and the Building in the event of any claim
against Landlord arising out of or in connection with this Lease, the relationship of Landlord and
Tenant, or Tenants use of the Premises, and Tenant agrees that the liability of Landlord arising
out of or in connection with this Lease, the relationship of Landlord and Tenant, or Tenants use
of the Premises, shall be limited to such estate and property of Landlord in and to the Land and
the Building. No properties or assets of Landlord other than the estate and property of Landlord
in and to the Building and no property owned by any partner of Landlord shall be subject to levy,
execution or other enforcement procedures for the satisfaction of any judgment (or other judicial
process) or for the satisfaction of any other remedy of Tenant arising out of or in connection with
this Lease, the relationship of Landlord and Tenant or Tenants use of the Premises.
g. Landlord and Landlords agents have made no representations or promises with respect to the
Building, the Land or the Premises except as herein expressly set forth.
h. Landlord and Tenant shall be excused from performing an obligation or undertaking provided
for in this Lease so long as such performance is prevented or delayed, retarded or hindered by an
Act of God, force majeure, fire, earthquake, flood, explosion, action of the elements, war,
invasion, insurrection, riot, mob violence, sabotage, inability to procure or a general shortage of
labor, equipment, facilities, materials or supplies in the open market, failure of transportation,
strike, lockout, action of labor unions, a taking by eminent domain, requisition, laws, orders of
government, or of civil, military or naval authorities, inability to obtain, or delays in
obtaining, permits or other governmental approvals, or any other cause whether similar or
dissimilar to the foregoing, not within the reasonable control of Landlord or Tenant, as
applicable, including delays in obtaining permits or governmental approvals or delays for
adjustments of insurance (collectively, Force Majeure); provided, however, that no such event or
cause shall relieve Tenant of its obligations hereunder to make full and timely payments of Rent as
provided herein.
i. Tenant hereby elects domicile at the Premises for the purpose of service of all notices,
writs of summons or other legal documents or process in any suit, action or proceeding which
Landlord or any mortgagee may undertake under this Lease.
30
j. Landlord shall not be liable to Tenant for any damage caused by other tenants or persons
in the Building or caused by operations of others in the construction of any private, public or
quasi-public work.
k. If in this Lease it is provided that Landlords consent or approval as to any matter will
not be unreasonably withheld or delayed, and it is established by a court or body having final
jurisdiction thereover that Landlord has been unreasonable, the sole effect of such finding shall
be that Landlord shall be deemed to have given its consent or approval, but Landlord shall not be
liable to Tenant in any respect for money damages or expenses incurred by Tenant by reason of
Landlord having withheld its consent. Nothing contained in this paragraph shall be deemed to limit
Landlords right to give or withhold consent unless such limitation is expressly contained in the
paragraph to which such consent pertains.
l. If any governmental entity or authority hereafter imposes a tax or assessment upon or
against any of the rent or other charges payable by Tenant to Landlord hereunder (whether such tax
takes the form of a lease tax, sales tax or other tax), Tenant shall be responsible for the timely
payment thereof. Unless Landlord and Tenant otherwise agree in writing with respect to the payment
thereof, Tenant shall pay the applicable tax to Landlord in monthly installments on the date upon
which Tenant pays to Landlord the installments of Monthly Base Rent due under this Lease.
m. This Lease and the Exhibits hereto constitute the entire agreement between the parties,
and supersedes any prior agreements or understandings between them. This Lease is not effective
until executed and delivered by Landlord and Tenant and approved by any current mortgagee of the
Building and/or the Land. The provisions of this Lease may not be modified in any way except by
written agreement signed by both parties.
n. This Lease shall be subject to and construed in accordance with the laws of the
Commonwealth of Virginia.
o. All voice, data, video, audio, and other low-voltage control transport system cabling
and/or cable bundles installed in the Building shall be (a) plenum rated and/or have a composition
makeup suited for its environmental use in accordance with NFPA 70/National Electrical Code; (b)
labeled every 3 meters with the Tenants name and origination and destination points; (c)
installed in accordance with all EIA/TIA standards and the National Electric Code; (d) installed
and routed in accordance with a routing plan showing as built or as installed configurations
of cable pathways, outlet identification numbers, locations of all wall, ceiling and floor
penetrations, riser cable routing and conduit routing if applicable, and such other information as
Landlord may request. The routing plan shall be available to Landlord and its agents at the
Building upon request.
p. Tenant (and any guarantor of this Lease), within fifteen (15) business days after Landlord
delivers to Tenant (or such guarantor) written request therefor (Landlords Financial Statement
Request), will provide Landlord with a copy of its most recent financial statements, consisting
of a Balance Sheet, Earnings Statement, Statement of Changes in Financial Position, Statement of
Changes in Owners Equity, and related footnotes, prepared in accordance with generally accepted
accounting principles. Such financial statements must be either certified by a certified public
accountant or sworn to as to their accuracy by Tenants (or the guarantors, if applicable) chief
financial officer. The financial statements provided must be as of a date not more than twelve
(12) months prior to the date of request. Landlord shall retain such statements in confidence, but
may provide copies to lenders and potential lenders as required. Notwithstanding the foregoing,
Landlord shall not deliver to Tenant (or any guarantor of this Lease) more than one (1) Landlord
Financial Statement Request in any twelve (12) month period, unless such Landlord Financial
Statement Request is delivered (i) at the request of Landlords lender or prospective Lender, (ii)
at the request of a potential purchaser of the Building, or (iii) after a default by Tenant under
the Lease.
q. It is generally understood that mold spores are present essentially everywhere and that
mold can grow in most any moist location. Emphasis is properly placed on prevention of moisture and
on good housekeeping and ventilation practices. Tenant acknowledges the necessity of housekeeping,
ventilation, and moisture control (especially in kitchens, janitors closets, bathrooms, break
rooms and around outside walls) for mold prevention. Tenant represents that they have first
inspected the aforementioned Premises and certifies that they have not observed mold, mildew or
moisture within the Premises. Tenant agrees to immediately notify Landlord if they observe
mold/mildew and/or moisture conditions (from any source, including leaks), and allow Landlord to
evaluate and make recommendations and/or take appropriate corrective action. Except in the event of
the negligence or willful misconduct of Landlord, its agents or employees, Tenant releases Landlord
from any liability for any personal injury or damages to property caused by or associated with
moisture or the growth of or occurrence of mold or mildew on the Premises. In addition, execution
of this Lease constitutes acknowledgement by Tenant that control of moisture and mold prevention
are integral to its obligations under this Lease.
31
IN WITNESS WHEREOF,
duly authorized representatives of Landlord and Tenant have
executed this Deed of Lease under seal on the day and year first above written.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LANDLORD:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACP/2300 CORPORATE PARK DRIVE, LLC,
a Delaware limited liability company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
ACP/Woodland Park, LLC, a Delaware limited
liability company, its sole member
|
|
|
|
|
|
|
|
|
|
|
|
WITNESS:
|
|
|
|
|
|
By:
|
|
ACP/Woodland Park Manager, LLC,
a Delaware limited liability company, its Manager
|
|
|
|
|
|
|
|
|
|
|
|
/s/
John Fleby
|
|
|
|
|
|
|
|
By:
|
|
/s/ Douglas Fleet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name: Douglas Fleet
|
|
|
|
|
|
|
|
|
|
|
Title: Managing Member
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TENANT:
|
|
|
|
|
|
|
|
|
|
|
|
WITNESS:
|
|
|
|
K12 INC.,
a Delaware corporation
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Howard Polsky
|
|
|
|
By:
|
|
/s/ John Baule
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name: John Baule
Title: CFO
|
|
|
|
LIST OF EXHIBITS
|
|
EXHIBIT A:
|
|
Floor Plan of Premises
|
EXHIBIT A-1:
|
|
Floor Plan of Must-Take Space
|
EXHIBIT B:
|
|
Work Agreement
|
EXHIBIT C:
|
|
Declaration of Commencement Date
|
EXHIBIT D:
|
|
Rules and Regulations
|
EXHIBIT E:
|
|
Form of Letter of Credit
|
32
EXHIBIT A
FLOOR PLAN OF PREMISES
EXHIBIT A-1
FLOOR PLAN OF MUST TAKE SPACE
EXHIBIT B
WORK AGREEMENT
This Work Agreement (the Work Agreement) is attached to and made a part of that certain
Deed of Lease (the Lease) dated November ___, 2005 by and between
ACP/2300 CORPORATE PARK
DRIVE, LLC,
as landlord (Landlord), and
K12 INC.,
as tenant (Tenant), for the premises (the
Premises) described therein in the building having a street address of 2300 Corporate Park
Drive, Herndon, Virginia (the Building). It is the intent of this Work Agreement that Tenant
shall be permitted freedom in the design and layout of the Premises, consistent with applicable
building codes and requirements of law, including without limitation the Americans with
Disabilities Act, and with sound architectural and construction practice in first-class office
buildings, provided that neither the design nor the implementation of the Tenant Improvements
(hereinafter defined) shall cause any interference to the operation of the Buildings HVAC,
mechanical, plumbing, life safety, electrical or other systems or to other Building operations or
functions, nor shall they increase maintenance or utility charges for operating the Building.
Capitalized terms not otherwise defined in this Work Agreement shall have the meanings set forth
in the Lease. In the event of any conflict between the terms hereof and the terms of the Lease,
the terms hereof shall prevail for the purposes of design and construction of the Tenant
Improvements.
A.
TENANT IMPROVEMENTS.
1.
As-ls Condition.
Landlord shall have no obligation to perform or cause the performance or
construction of any improvements in or to the Premises and Landlord shall deliver the Premises to
Tenant in its as is condition; provided, however, that Landlord shall deliver the Premises to
Tenant vacant and in broom-clean condition. Tenant hereby acknowledges that Landlord has made no
representations or warranties to Tenant with respect to the condition of the Premises or the
working order of any systems or improvements therein existing as of the date of delivery.
2.
Tenant Improvements.
Tenant, at its sole cost and expense, shall furnish and install in the
Premises in accordance with the terms of this Work Agreement, the improvements set forth in the
Tenants Plans (hereinafter defined) which are subject to Landlords approval in accordance with
Paragraph B.3, below (the Tenant Improvements). All costs of all design, space planning, and
architectural and engineering work for or in connection with the Tenant Improvements, including
without limitation all drawings, plans, specifications, licenses, permits or other approvals
relating thereto, and all insurance and other requirements and conditions hereunder, and all costs
of construction, including supervision thereof, shall be at Tenants sole cost and expense, subject
to the application of the Improvement Allowance in accordance with the terms of this Work
Agreement.
B.
PLANS AND SPECIFICATIONS
1.
Space Planner.
Tenant shall retain the services of The M Group (the Space Planner) to
design the Tenant Improvements in the Premises and prepare the Final Space Plan (hereinafter
defined) and the Contract Documents (hereinafter defined). The Space Planner shall meet with the
Landlord and/or Landlords building manager from time to time to obtain information about the
Building and to insure that the improvements envisioned in the Contract Documents do not interfere
with and/or affect the Building or any systems therein. The Space Planner shall prepare all space
plans, working drawings, and plans and specifications described in Paragraph B.3, below, in
conformity with the base Building plans and systems, and the Space Planner shall coordinate its
plans and specifications with the Engineers (hereinafter defined) and Landlord. All fees of the
Space Planner shall be borne solely by Tenant, subject to application of the Improvement Allowance
as hereinafter provided.
2.
Engineers.
Tenant shall retain the services of mechanical, electrical, plumbing and
structural engineers reasonably acceptable to Landlord (the Engineers) to (i) design the type,
number and location of all mechanical systems in the Premises, including without limitation the
heating, ventilating and air conditioning system therein, fire alarm system and to prepare all of
the mechanical plans, (ii) to assist Tenant and the Space Planner in connection with the electrical
design of the Premises, including the location and capacity of light fixtures, electrical
receptacles and other electrical elements, and to prepare all of the electrical plans, (iii) to
assist Tenant and the Space Planner in connection with plumbing-related issues involved in
designing the Premises and to prepare all of the plumbing plans and (iv) assist Tenant and the
Space Planner in connection with the structural elements of the Space Planners design of the
Premises and to prepare all of the structural plans. All fees of the Engineers shall be borne
solely by Tenant, subject to application of the Improvement Allowance as hereinafter provided.
3.
Time Schedule.
a. Tenant
shall furnish to Landlord for its review and approval a proposed detailed space plan
for the Tenant Improvements (the Final Space Plan) prepared by the Space Planner, in consultation
with Landlord and the Engineers. The Final Space Plan shall contain the information and otherwise
comply with the requirements therefor described in
Schedule B-1
attached hereto. Landlord
shall advise Tenant of Landlords approval or disapproval of the Final Space Plan within seven (7)
business days after Tenant submits the Final Space Plan to Landlord. Tenant shall promptly revise
the proposed Final Space Plan to meet Landlords objections, if any, and resubmit the Final Space
Plan to Landlord for its review and approval within five (5) days of Tenants receipt of Landlords
objections, if any.
b. Within ten (10) business days after Landlord approves the Final Space Plan, Tenant shall
furnish to Landlord for its review and approval, all architectural plans, working drawings and
specifications (the Contract Documents) necessary and sufficient (i) for the construction of the
Tenant Improvements; and (ii) to enable Tenant to obtain a building permit for the construction of
the Tenant Improvements by the Contractor (hereinafter defined). The Contract Documents shall
contain the information and otherwise comply with the requirements therefore described in
Schedule B-2
attached hereto and shall set forth the location of any core drilling by
Tenant (the approval of same shall be subject to Landlords approval in its sole discretion).
Landlord shall advise Tenant of Landlords approval or disapproval of the Contract Documents, or
any of them, within ten (10) business days after Tenant submits the Contract Documents to Landlord.
Tenant shall promptly revise the Contract Documents to meet Landlords objections, if any, and
resubmit the Contract Documents to Landlord for its review and approval within five (5) days of
Tenants receipt of Landlords objections, if any. Landlord shall advise Tenant of Landlords
approval or disapproval of the revised Contract Documents within five (5) business days after
Tenant submits same. Notwithstanding anything herein to the contrary, approval by Landlord of the
Contract Documents shall not constitute an assurance by Landlord that the Contract Documents: (a)
satisfy Legal Requirements (hereinafter defined), (b) are sufficient to enable Tenant to obtain a
building permit for the undertaking of the Tenant Improvements in the Premises, or (c) will not
interfere with, and/or otherwise affect, base Building or base Building systems.
c. The Final Space and the Contract Documents are referred to collectively herein as the
Tenants Plans.
d. The Tenant Improvements shall be of first-class quality, commensurate with the level of
improvements for a first-class tenant in a first-class office building in the Herndon, Virginia
area. The Tenants Plans shall be prepared in accordance with a Data Cadd or convertible DXF format
for working drawings (using 1/8 reproducible drawings) in conformity with the base Building plans
and Building systems and with information furnished by and in coordination with Landlord and
Engineers. Tenants Plans shall comply with all applicable building codes, laws and regulations
(including without limitation the Americans with Disabilities Act), shall not contain any
improvements which interfere with or require any changes to or modifications of the Buildings
HVAC, mechanical, electrical, plumbing, life safety or other systems or to other Building
operations or functions, and, unless Tenant agrees in writing to pay all such excess costs or
charges, shall not increase maintenance or utility charges for operating the Building in excess of
the standard requirements for normal first-class office buildings in the Herndon, Virginia area.
Notwithstanding anything to the contrary contained in this Work Agreement, Landlord shall have the
right to disapprove, in its sole discretion, any portion of the Tenants Plans that Landlord
reasonably believes will or may affect the exterior or structure of the Building or will or may
affect the mechanical, electrical, plumbing, life safety, HVAC or other base Building systems.
e. Notwithstanding anything to the contrary contained herein, Tenant shall reimburse Landlord,
within ten (10) business days after demand therefor, for all reasonable costs and expenses incurred
by Landlord in connection with Landlords, or its agents, review of Tenants Plans.
4.
Base Building Changes.
If Tenant requests work to be done in the Premises or for the
benefit of the Premises that necessitates revisions or changes in the design or construction of the
base Building or affect Building systems, any such changes shall be subject to the prior written
approval of Landlord, in its sole discretion. Tenant shall be responsible for all costs and delays
resulting from such design revisions or construction changes, including architectural and
engineering charges, and any special permits or fees attributed thereto.
5.
Changes.
a. In the event that Tenant requests any changes to the Contract Documents or the Final Space
Plan after Landlord has approved same, or if it is determined that the Contract Documents prepared
in accordance with the Final Space Plan do not conform to the plans for the base Building, deviate
from applicable Legal Requirements or contain improvements which will or may interfere with and/or
affect the base Building or any of the base Building systems, or in the event of any change orders,
Tenant shall be responsible for all costs and expenses and all delay resulting therefrom, including
without limitation costs or expenses relating to (i) any additional architectural or engineering
services and related design expenses, (ii) any changes to materials in process of fabrication,
(iii) cancellation or modification of supply or fabricating contracts, (iv) removal or alteration
of work or plans completed or in process, or (v) delay claims made by any subcontractor.
b. No changes shall be made to the Contract Documents without the prior written approval of
Landlord, which approval shall not be unreasonably withheld, conditioned or delayed, provided,
however, that Landlord shall have the right to disapprove, in its sole discretion, any such change
that Landlord believes will affect the exterior or structure of the Building or will affect the
mechanical, electrical plumbing, life safety, HVAC or other base Building systems. Landlord shall
not be responsible for delay in occupancy by Tenant because of any changes to the Final Space Plan
or the Contract Documents after approval by Landlord, or because of delay caused by or attributable
to any deviation by the Contract Documents from applicable Legal Requirements. Tenant shall be
required to pay to Landlord the reasonable costs incurred by Landlord in connection with Landlords
review of any changes to the Contract Documents or Final Space Plan, in full, within thirty (30)
days after invoice. As used herein, the term Legal Requirements shall mean any laws, ordinances,
regulations and orders of the United States of America, the Commonwealth of Virginia and any other
governmental authority with jurisdiction over the Building or the construction of the Tenant
Improvements.
C.
COST OF TENANT IMPROVEMENTS/ALLOWANCES
1.
Construction Costs.
All costs of design and construction of the Tenant Improvements,
including without limitation the costs of all space planning, architectural and engineering work
related thereto, all governmental and quasi-governmental approvals and permits required therefor,
any costs incurred by Landlord because of changes to the base Building or the base Building
systems, all construction costs, contractors overhead and profit, Tenants construction
management fees, insurance and other requirements, the cost of Tenants telecommunications cabling
and wiring, the cost of Tenants initial furniture, fixtures and equipment installed in the
Premises, and all other costs and expenses incurred in connection with the Tenant Improvements
(collectively, Construction Costs), shall be paid by Tenant, subject, however, to the
application of the Improvement Allowance in accordance with Paragraph C.2, below, not previously
disbursed pursuant to this Work Agreement (the Available Allowance).
2
Improvement Allowance.
Provided Tenant is not in default of the Lease, Landlord agrees to
provide to Tenant an allowance (the Improvement Allowance) in an amount up to One Million Five
Hundred Eighteen Thousand Nine Hundred Fifty Dollars ($1,518,950,00) (or Forty-Two and 50/100
Dollars ($42.50) per rentable square foot of the Premises) to be applied solely to the
Construction Costs. Notwithstanding the foregoing, Tenant hereby expressly acknowledges and agrees
that Tenant shall expend no less than One Million One Hundred Sixty-One Thousand Five Hundred
Fifty Dollars ($1,161,550.00) (or Thirty-Two and 50/100 Dollars ($32.50). per rentable square foot
of the Premises) on Construction Costs associated with the construction of the Tenant
Improvements. Provided that Tenant has fully performed all of its obligations under the Lease and
this Work Agreement, Construction Costs shall be disbursed by Landlord from the Available
Allowance, as and when such costs are actually incurred by Tenant. Tenant shall submit to
Landlord, from time to time, but not more often then once per calendar month, requests for direct
payments to third parties, of or for reimbursement to Tenant for Construction Costs incurred by
Tenant out of the Available Allowance, which requests shall be accompanied by (a) paid receipts
or invoices substantiating the costs for which payment is requested; (b) a signed statement from
Tenant certifying that the costs were actually incurred for the stated amount; (c) lien waivers
from the party supplying the services or materials for which payment is sought; and (d) such other
information as Landlord reasonably requires. Provided Tenant delivers to Landlord an approved draw
request, prepared as set forth above, Landlord shall pay the costs covered by such payment request
within thirty (30) days following receipt thereof (but Landlord shall not be obligated to make
more than one (1) such payment in any calendar month). Notwithstanding the foregoing, in no event
shall Landlord be obligated to pay, in the aggregate, an amount in excess of ninety percent (90%)
of the Improvement Allowance until satisfaction of the following conditions: (A) Tenants
occupancy of the Premises; (B) if previously submitted by Landlord to Tenant, Tenants execution
and delivery to Landlord of the Declaration attached to the Lease as
Exhibit C;
(C)
receipt by Landlord of appropriate paid receipts or invoices and a final lien waiver from each
subcontractor and supplier covering all work performed by the subcontractors and all materials
used in connection with the construction of the Tenant Improvements; and (D) Tenants delivery to
Landlord of all receipts, invoices or other documentation necessary to substantiate all costs
payable by Landlord hereunder. If Tenant does not expend all of the Improvement Allowance for
Construction Costs as permitted hereunder within nine (9) months of the Effective Date, any unused
portion of the Improvement Allowance not so used shall be retained by Landlord. Notwithstanding
the foregoing, Tenant may elect to use all or any portion of the unused Improvement Allowance (but
in no event more than Three Hundred Fifty-Seven Thousand Four Hundred Dollars ($357,400.00) (or
Ten Dollars ($10.00) per rentable square foot of the Premises)) to defray (x) Annual Base Rent
payable by Tenant pursuant to the Lease, provided that Tenant gives written notice to Landlord of
Tenants election to utilize such credit at least ten (10) business days prior to the due date of
any installment of Annual Base Rent for which Tenant elects to use such credit, or (y) Tenants
costs associate with its move to the Premises (excluding legal fees).
3.
Test Fit Allowance.
In addition to the Improvement Allowance, Landlord grants to
Tenant a Test Fit Allowance of up to Three Thousand Five
Hundred Seventy-Four Dollars ($3,574.00)
(or Ten Cents ($0.10) per rentable square foot of the Premises), which Test Fit Allowance shall be
used solely to reimburse Tenant for any architectural expenses incurred by Tenant in connection
with the preparation of test fit plans and drawings for the Premises (the Test Fit Plans).
Any costs and expenses relating to the preparation of the Test Fit Plans which exceed the Test Fit
Allowance shall be payable by Tenant. Landlord shall reimburse Tenant for the cost of the Test Fit
Plans, up to the amount of the Test Fit Allowance, promptly after Landlords receipt of a paid
invoice evidencing Tenants payment of such cost. Landlord shall retain any portion of the Test Fit
Allowance not expended by Tenant prior to the Rent Commencement Date.
4.
Costs Exceeding Available Allowance.
All Construction Costs in excess of the Available
Allowance shall be paid solely by Tenant on or before the date such costs are due and payable (or
if previously paid by Landlord, shall be reimbursed to Landlord by Tenant within ten (10) days of
receipt by Tenant of invoices therefor from Landlord), and Tenant agrees to indemnify Landlord from
and against any such costs. All amounts payable by Tenant pursuant to this Work Agreement shall
be deemed to be Additional Rent for purposes of the Lease. If required by Landlord, Tenant shall
provide evidence reasonably satisfactory to Landlord that Tenant has sufficient funds available to
pay all Construction Costs in excess of the Improvement Allowance.
D.
CONSTRUCTION
1.
General Contractor.
The general contractor undertaking construction of the Tenant
Improvements (the Contractor) shall be licensed in the Commonwealth of Virginia and mutually
selected by Landlord and Tenant. The Contractor shall be responsible for obtaining, at Tenants
cost, all permits and approvals required for the construction of the Tenant Improvements.
2.
Construction By The Contractor.
In undertaking the Tenant Improvements, Tenant and the
Contractor shall strictly comply with the following conditions:
a. No work involving or affecting the Buildings structure or the plumbing, mechanical,
electrical or life/safety systems of the Building shall be undertaken without (i) the prior written
approval of Landlord in its sole discretion, whether pursuant to its approval of Tenants Plans or
otherwise, (ii) the supervision of Landlords building engineer, the actual cost of which shall be
borne by Tenant, subject to the application of the Improvement Allowance, if more than one (1) hour
of such engineers time is spent in connection with the Tenant Improvements during any single day;
(iii) compliance by Tenant with the insurance requirements set forth in Paragraph D.2(c), below;
and (iv) compliance by Tenant with all of the terms and provisions of this Work Agreement;
b. All Tenant Improvement work shall be performed in strict conformity with (i) the final
approved Tenants Plans; (ii) all applicable codes and regulations of governmental authorities
having jurisdiction over the Building and the Premises; (iii) valid building permits and other
authorizations from appropriate governmental agencies, when required, which shall be obtained by
Tenant, at Tenants expense; and (iv) Landlords construction policies, rules and regulations
attached hereto as
Schedule B-3,
as the same may be reasonably modified by Landlord from
time to time (Construction Rules). Any work not acceptable to the appropriate governmental
agencies or not reasonably satisfactory to Landlord shall be promptly replaced at Tenants sole
expense. Notwithstanding any failure by Landlord to object to any such work, Landlord shall have no
responsibility therefor; and
c. Before
any work is commenced or any of Tenants, Contractors or any subcontractors
equipment is moved onto any part of the Building, Tenant shall deliver to Landlord policies or
certificates evidencing the following types of insurance coverage in the following minimum amounts,
which policies shall be issued by companies approved by Landlord, shall be maintained by Tenant at
all times during the performance of the Tenant Improvements, and which shall name Landlord as
additional insured:
(1) Workers compensation coverage in the maximum amount
required by law and employers liability insurance in an amount not less than $500,000.00 and
$500,000.00 per disease;
(2) Comprehensive general liability policy to
include
products/completed operations, premises/operations, blanket contractual broad form property damage
and contractual liability with limits in an amount per occurrence of not less than $1,000,000.00
Combined Single Limit for bodily injury and property damage and $1,000,000.00 for personal injury;
and
(3) Automobile liability coverage, with bodily injury limits of at least $1,000,000.00 per
accident.
3.
Construction Supervision.
All Tenant Improvements shall be performed by the Contractor.
Landlord shall retain ACP Mid-Atlantic LLC (Construction Supervisor) as Landlords construction
supervisor in connection with the construction of the Tenant Improvements, and Landlord shall pay
the Construction Supervisor a construction supervision fee (Construction Supervision Fee) equal
to five percent (5%) of the cost of the Tenant Improvements, to cover the costs of coordination and
supervision of the Tenant Improvements work. Landlord shall not deduct any portion of the
Construction Supervision Fee from the Improvement Allowance and Tenant shall not otherwise be
responsible for the payment of any portion of the Construction Supervision Fee.
4.
Reimbursement of Landlords Costs.
Notwithstanding anything contained herein to the
contrary, Tenant shall reimburse Landlord for all reasonable third-party expenses which Landlord
incurs in connection with Landlords review of the Tenants Plans.
E.
PERMITS AND LICENSES.
Tenant shall be solely responsible for procuring, at its sole cost
and expense, all permits and licenses necessary to undertake the Tenant Improvements and, upon
completion of the Tenant Improvements, to occupy the Premises. Tenants inability to obtain, or
delay in obtaining, any such license or permit shall not delay or otherwise affect the Commencement
Date or any of Tenants obligations under this Lease.
F.
INSPECTION.
Landlord is authorized, at its sole cost and expense, to make such
inspections of the Premises during construction as it deems reasonably necessary or advisable.
G.
INDEMNIFICATION.
Tenant shall indemnify Landlord and hold it harmless from and against
all claims, injury, damage or loss (including reasonable attorneys fees) sustained by Landlord as
a result of the construction of the Tenant Improvements in the Premises.
LIST OF SCHEDULES
|
|
|
Schedule B-1
|
|
Requirements for Final Space Plan
|
Schedule B-2
|
|
Requirements for Contract Documents
|
Schedule B-3
|
|
Construction Rules and Regulations
|
SCHEDULE B-1
REQUIREMENTS FOR FINAL SPACE PLAN
Floor
plans, together with related information for mechanical, electrical and plumbing design
work, showing partition arrangement and reflected ceiling plans (three (3) sets), including
without limitation the following information:
|
a.
|
|
identify the location of conference rooms and density of occupancy;
|
|
|
b.
|
|
indicate the density of occupancy for all rooms;
|
|
|
c.
|
|
identify the location of any food service areas or vending equipment rooms;
|
|
|
d.
|
|
identify areas, if any, requiring twenty-four (24) hour air conditioning;
|
|
|
e.
|
|
indicate those partitions that are to extend from floor to underside of
structural slab above or require special acoustical treatment;
|
|
|
f.
|
|
identify the location of rooms for, and layout of, telephone equipment other
than building core telephone closet;
|
|
|
g.
|
|
identify the locations and types of plumbing required for toilets (other than
core facilities), sinks, drinking fountains, etc.;
|
|
|
h.
|
|
indicate light switches in offices, conference rooms and all other rooms in the
Premises;
|
|
|
i.
|
|
indicate the layouts for specially installed equipment, including computer and
duplicating
equipment, the size and capacity of mechanical and electrical services required and
heat rejection of the equipment;
|
|
|
j.
|
|
indicate the dimensioned location of: (A) electrical receptacles (one hundred twenty
(120)
volts), including receptacles for wall Clocks, and telephone outlets and their
respective locations (wall or floor), (B) electrical receptacles for use in the
operation of Tenants business equipment which requires two hundred eight (208)
volts or separate electrical circuits, (C) electronic calculating and CRT systems,
etc., and (D) special audio-visual requirements;
|
|
|
k.
|
|
indicate proposed layout of sprinkler and other life safety and fire
protection equipment, including any special equipment and raised flooring;
|
|
|
l.
|
|
indicate the swing of each door;
|
|
|
m.
|
|
indicate a schedule for doors and frames, complete with hardware, if applicable;
and
|
|
|
n.
|
|
indicate any special file systems to be installed.
|
SCHEDULE B-2
REQUIREMENTS FOR CONTRACT DOCUMENTS
Final architectural detail and working drawings, finish schedules and related plans
(three (3) reproducible sets) including without limitation the following information and/or
meeting the following conditions:
|
a.
|
|
materials, colors and designs of wallcoverings, floor coverings and window coverings
and
finishes;
|
|
|
b.
|
|
paintings and decorative treatment required to complete all construction;
|
|
|
c.
|
|
complete, finished, detailed mechanical, electrical, plumbing and structural
plans and specifications for the Tenant Improvements, including but not limited to the
fire and life safety systems and all work necessary to connect any special or
non-standard facilities to the Buildings base mechanical systems;
|
|
|
d.
|
|
all final drawings and blueprints must be drawn to a scale of one-eighth (1/8)
inch to one (1) foot. Any architect or designer acting for or on behalf of Tenant shall
be deemed to be Tenants agent and authorized to bind Tenant in all respects with
respect to the design and construction of the Premises; and
|
|
|
e.
|
|
notwithstanding anything to the contrary set forth herein, in the Work Agreement or in
the
Lease, Tenant shall not request any work which would: (1) require changes to
structural components of the Building or the exterior design of the Building; (2)
require any material modification to the Buildings mechanical installations or
installations outside the Premises; (3) not comply with all applicable laws, rules,
regulations and requirements of any governmental department having jurisdiction over
the construction of the Building and/or the Premises, including specifically, but
without limitation, the Americans with Disabilities Act; (4) be incompatible with
the building plans filed with the appropriate governmental agency from which a
building permit is obtained for the construction of the Tenant Improvements or with
the occupancy of the Building as a first-class office building; or (5) delay the
completion of the Premises or any part thereof. Tenant shall not oppose or delay
changes required by any governmental agency affecting the construction of the
Building and/or the Tenant Improvements in the Premises.
|
SCHEDULE B-3
CONSTRUCTION RULES AND REGULATIONS
|
1.
|
|
Tenant and/or the general contractor will supply Landlord with a copy of all permits (if
applicable) prior to the start of any work.
|
|
|
2.
|
|
Tenant and/or the general contractor will post the building permit (if applicable) on a wall
of the construction site while work is being performed.
|
|
|
3.
|
|
Public area corridor, and carpet, is to be protected by plastic runners or a series of
walk-off mats from the elevator to the suite under reconstruction.
|
|
|
4.
|
|
Walk-off mats are to be provided at entrance doors.
|
|
|
5.
|
|
Contractors will remove their trash and debris daily, or as often as necessary to maintain
cleanliness in the Building. Building trash containers are not to be used for construction
debris. Landlord reserves the right to bill Tenant for any cost incurred to clean up debris
left by the general contractor or any subcontractor. Further, the Building staff is instructed
to hold the drivers license of any employee of the contractor while using the freight
elevator to ensure that all debris is removed from the elevator.
|
|
|
6.
|
|
No utilities (electricity, water, gas, plumbing) or services to the tenants are to be cut off
or interrupted without first having requested, in writing, and secured, in writing, the
permission of Landlord.
|
|
|
7.
|
|
No electrical services are to be put on the emergency circuit, without specific written
approval from Landlord.
|
|
|
8.
|
|
When utility meters are installed, the general contractor must provide the property manager
with a copy of the operating instructions for that particular meter.
|
|
|
9.
|
|
Landlord will be notified of all work schedules of all workmen on the job and will be
notified, in writing, of names of those who may be working in the building after normal
business hours.
|
|
|
10.
|
|
Passenger elevators shall not be used for moving building
materials and shall not be used for
construction personnel except in the event of an emergency. The designated freight elevator is
the only elevator to be used for moving materials and construction personnel. This elevator
may be used only when it is completely protected as determined by Landlords Building
engineer.
|
|
|
11.
|
|
Contractors or personnel will use loading dock area for all deliveries and will not use
loading dock for vehicle parking.
|
|
|
12.
|
|
Contractors will be responsible for daily removal of waste foods, milk and soft drink
containers, etc. to trash room and will not use any building trash receptacles but trash
receptacles supplied by
them.
|
|
|
13.
|
|
No building materials are to enter the Building by way of main lobby, and no materials are to
be stored in any lobbies at any time.
|
|
|
14.
|
|
Construction personnel are not to eat in the lobby or in front of Building nor are they to
congregate in the lobby or in front of Building.
|
|
|
15.
|
|
Landlord is to be contacted by Tenant when work is completed for inspection. All damage to
the Building will be determined at that time.
|
|
|
16.
|
|
All key access, fire alarm work, or interruption of security hours must be arranged with
Landlords Building engineer.
|
|
|
17.
|
|
There will be no radios allowed on job site.
|
|
|
18.
|
|
All workers are required to wear a shirt, shoes, and full length trousers.
|
|
|
19.
|
|
Protection of hallway carpets, wall coverings, and elevators from damage with masonite board,
carpet, cardboard, or pads is required.
|
|
|
20.
|
|
Public spaces corridors, elevators, bathrooms, lobby, etc. must be cleaned immediately
after use. Construction debris or materials found in public areas will be removed at Tenants
cost.
|
|
|
21.
|
|
There will be no smoking, eating, or open food containers in the elevators, carpeted areas or
public lobbies.
|
|
|
22.
|
|
There will be no yelling or boisterous activities.
|
|
23.
|
|
All construction materials or debris must be stored within the project confines or in an
approved lock-up.
|
|
|
24.
|
|
There will be no alcohol or controlled substances allowed or tolerated.
|
|
|
25.
|
|
The general contractor and Tenant shall be responsible for all loss of their materials and
tools and shall hold Landlord harmless for such loss and from any damages or claims resulting
from the work.
|
EXHIBIT C
DECLARATION OF COMMENCEMENT DATE
This
Declaration of Commencement Date is made as of
, 200
, by
ACP/2300 CORPORATE PARK DRIVE, LLC
(Landlord), and
K12 INC.
(Tenant), who agree as
follows:
1. Landlord
and Tenant entered into a Deed of Lease dated
, 2005, in
which Landlord leased to Tenant, and Tenant leased from Landlord, certain Premises described
therein in the office building located at 2300 Corporate Park Drive, Herndon, Virginia 20171 (the
Building). All capitalized terms herein are as defined in the Lease.
2. Pursuant to the Lease, Landlord and Tenant agreed to and do hereby confirm the following
matters as of the Commencement Date of the Term:
|
a.
|
|
the Commencement Date of the Lease is
, 200_;
|
|
|
b.
|
|
the Rent Commencement Date of the Lease is May 1, 2006;
|
|
|
c.
|
|
the Lease Expiration Date of the Lease is April 30, 2013;
|
|
|
d.
|
|
the number of rentable square feet of the Premises is 35,740;
|
|
|
e.
|
|
Tenants Pro Rata Share (Operating Expenses) is 22.49%; and
|
|
|
f.
|
|
Tenants Pro Rata Share (Real Estate Taxes) is 22.49%.
|
3. Tenant confirms that:
|
a.
|
|
it has accepted possession of the Premises as provided in the Lease;
|
|
|
b.
|
|
Landlord is not required to perform any work or furnish any
improvements to the Premises under the Lease; provided, however, that Landlord
is required to furnish the Improvement Allowance to Tenant pursuant to the
terms of the Lease;
|
|
|
c.
|
|
Landlord has fulfilled all of its obligations under the Lease as of the date
hereof;
|
|
|
d.
|
|
the Lease is in full force and effect and has not been
modified, altered, or amended, except as follows:
; and
|
|
|
e.
|
|
there are no set-offs or credits against Rent, and no Security
Deposit or prepaid Rent has been paid except as provided by the Lease.
|
4. The provisions of this Declaration of Commencement Date shall inure to the benefit of, or
bind, as the case may require, the parties and their respective successors and assigns, and to all
mortgagees of the Building, subject to the restrictions on assignment and subleasing contained in
the Lease, and are hereby attached to and made a part of this Lease.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LANDLORD:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACP/2300 CORPORATE PARK DRIVE, LLC,
a Delaware limited liability company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
ACP/Woodland Park, LLC, a Delaware limited
liability company, its sole member
|
|
|
|
|
|
|
|
|
|
|
|
WITNESS:
|
|
|
|
|
|
By:
|
|
ACP/Woodland Park Manager, LLC,
a Delaware limited liability
company,
its Manager
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name :
|
|
|
|
|
|
|
|
|
|
|
Title:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TENANT:
|
|
|
|
|
|
|
|
|
|
|
|
WITNESS:
|
|
|
|
K12 INC.,
a Delaware corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name:
Title:
|
EXHIBIT D
RULES & REGULATIONS
1.
|
|
The water and wash closets and other plumbing fixtures shall not be used for any purposes
other than those for which they were constructed, and no sweepings, rubbish, rags or other
substances (including, without limitation, coffee grounds) shall be thrown therein. All
damages resulting from misuse of the fixtures shall be borne by Tenant if Tenant or its
servants, employees, agents, visitors or licensees shall have caused the same.
|
|
2.
|
|
No cooking (except for hot-plate and microwave cooking by Tenants employees for their own
consumption, the location and equipment of which is first approved by Landlord), sleeping or
lodging shall be permitted by any tenant on the Premises. No tenant shall cause or permit any
unusual or objectionable odors to be produced upon or permeate from the Premises.
|
|
3.
|
|
No inflammable, combustible, or explosive fluid, material, chemical or substance shall be
brought or kept upon, in or about the Premises. Fire protection devices, in and about the
Building, shall not be obstructed or encumbered in any way.
|
|
4.
|
|
Canvassing, soliciting and peddling in the Building is prohibited and each tenant shall
cooperate to prevent the same.
|
|
5.
|
|
There shall not be used in any space, or in the public halls of the Building, either by any
tenant or by its agents, contractors, jobbers or others, in the delivery or receipt of
merchandise, freight, or other matters, any hand trucks or other means of conveyance except
those equipped with rubber tires, rubber side guards, and such other safeguards as Landlord
may require, and Tenant shall be responsible to Landlord for any loss or damage resulting from
any deliveries to Tenant in the Building. Deliveries of mail, freight or bulky packages shall
be made through the freight entrance or through doors specified by Landlord for such purpose.
|
|
6.
|
|
Mats, trash or other objects shall not be placed in the public corridors. The sidewalks,
entries, passages, elevators, public corridors and staircases and other parts of the Building
which are not occupied by Tenant shall not be obstructed or used for any other purpose than
ingress or egress.
|
|
7.
|
|
Tenant shall not install or permit the installation of any awnings, shades, draperies and/or
other similar window coverings, treatments or like items visible from the exterior of the
Premises other than those approved by the Landlord in writing.
|
|
8.
|
|
Tenant shall not construct, maintain, use or operate within said Premises or elsewhere in the
Building or on the outside of the Building, any equipment or machinery which produces music,
sound or noise which is audible beyond the Premises.
|
|
9.
|
|
Bicycles, motor scooters or any other type of vehicle shall not be brought into the lobby or
elevators of the Building or into the Premises except for those vehicles which are used by a
physically disabled person in the Premises.
|
|
10.
|
|
All blinds for exterior windows shall be building standard and shall be maintained by Tenant.
|
|
11.
|
|
No additional locks shall be placed upon doors to or within the Premises except as shall be
necessary adequately to safeguard United States Government security classified documents
stored with the Premises. The doors leading to the corridors or main hall shall be kept
closed during business hours, except as the same may be used for ingress or egress.
|
|
12.
|
|
Tenant shall maintain and clean all areas or rooms within the Premises in which security
classified work is being conducted or in which such work is stored; Landlord shall not provide
standard janitorial service to such areas, the provisions of Section 9 of this
Lease notwithstanding.
|
|
13.
|
|
Landlord reserves the right to shut down the air conditioning, electrical systems, heating,
plumbing and/or elevators when necessary by reason of accident or emergency, or for repair,
alterations, replacements or improvement.
|
|
14.
|
|
No carpet, rug or other article shall be hung or shaken out of any window of the Building;
and Tenant shall not sweep or throw or permit to be swept or thrown from the Premises any dirt
or other substances into any of the corridors or halls, elevator, or out of the doors or
windows or stairways of the Building. Tenant shall not use, keep or permit to be used or kept
any foul or noxious gas or substance in the Premises, or permit or surfer the Premises to be
occupied or used in a manner offensive or objectionable to Landlord or other occupants of the
Building by reason of noise, odors and/or vibrations, or interfere in any way with other
tenants or those having business therein, nor shall any animals or birds be kept in or about
the Building. Smoking or carrying lighted cigars or cigarettes in the elevators of the
Building is prohibited.
|
|
15.
|
|
Landlord reserves the right to exclude from the Building on weekdays between the hours of
6:00 p.m. and 8:00 a.m. and at all hours on weekends and legal holidays, all persons who do
not present a pass to the Building signed by Landlord; provided, however, that reasonable
access for
|
|
|
Tenants employees and customers shall be accorded. Landlord will furnish passes to persons
for whom Tenant requires same in writing. Tenant shall be responsible for all persons for
whom it requests such passes and shall be liable to Landlord for all acts of such persons.
|
|
16.
|
|
Tenant agrees to keep all windows closed at all times and to abide by all rules and
regulations issued by Landlord with respect to the Buildings air conditioning and ventilation
systems.
|
|
17.
|
|
Tenant will replace all broken or cracked plate glass windows and doors at its own expense,
with glass of like kind and quality, provided that such windows and doors are not broken or
cracked by Landlord, its employees, agents or contractors.
|
|
18.
|
|
In the event it becomes necessary for the Landlord to gain access to the underfloor electric
and telephone distribution system for purposes of adding or removing wiring, then upon request
by Landlord, Tenant agrees to temporarily remove the carpet over the access covers to the
underfloor ducts for such period of time until work to be performed has been completed. The
cost of such work shall be borne by Landlord except to the extent such work was requested by
or is intended to benefit Tenant or the Premises, in which case the cost shall be borne by
Tenant.
|
|
19.
|
|
Violation of these rules, or any amendments thereof or additions thereto, may be considered a
default of Tenants lease and shall be sufficient cause for termination of this Lease at the
option of Landlord.
|
EXHIBIT E
FORM OF LETTER OF CREDIT
LETTER OF CREDIT
|
|
|
[Lending Institution Name]
|
|
|
[Address of Lending Institution]
|
|
Date:
, 200_
|
IRREVOCABLE STANDBY LETTER OF CREDIT NO.
|
|
|
|
|
Account Party:
|
|
K12 Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In favor of:
|
|
|
|
|
|
|
ACP/2300 Corporate Park Drive, LLC
|
|
|
|
|
c/o ACP Mid-Atlantic LLC, as Agent
|
|
|
|
|
2350 Corporate Park Drive
|
|
|
|
|
Suite 110
|
|
|
|
|
Herndon, Virginia 20171
|
|
|
|
|
Attention: Asset Manager
|
|
|
|
|
|
AMOUNT
|
|
EXPIRY DATE:
, 200_
|
USD $
|
|
|
U.S. Dollars Only
|
|
|
Gentlemen:
We hereby establish our irrevocable letter of credit in favor of ACP/2300 Corporate Park Drive,
LLC in the amount of
($
) (U.S. Dollars Only), effective immediately.
Funds under this Letter of Credit are available to you by your draft at sight drawn on the
[Lending Institution Name, Lending Institution Address],
bearing the clause Drawn under
[Lending
Institution Name]
Letter of Credit No.
dated
, 200___, and accompanied by the following document:
Beneficiarys signed statement stating that: The undersigned Beneficiary is entitled to draw upon
this Letter of Credit pursuant to the terms of that Deed of Lease dated
, 2005, for
premises at 2300 Corporate Park Drive, Herndon, Virginia between K12 Inc., as tenant, and
ACP/2300 Corporate Park Drive, LLC, as landlord, as such Deed of Lease may have been
modified or amended to date. The undersigned Beneficiary hereby makes demand for the
payment of
of the Letter of Credit.
Such statement shall be conclusive as to such matters and we will accept such statement as
binding and correct without having to investigate or having to be responsible for the accuracy,
truthfulness or validity thereof or any part thereof and notwithstanding the claim of any person
to the contrary.
This Letter of Credit is transferable to any transferee of Beneficiarys interest as landlord in that
Deed of Lease dated
, 2005, for premises at 2300 Corporate Park Drive, Herndon, Virginia
between K12 Inc., as tenant, and ACP/2300 Corporate Park Drive, LLC, as landlord, as the same may
be amended or modified from time to time. There shall be no fee payable by Beneficiary in
connection with such transfer.
This Letter of Credit sets forth in full the terms of our undertaking and such undertaking
shall not in any way be modified, amended, or amplified by reference to any document(s),
instrument(s), contract(s), or agreement(s) referred to herein or in which this Letter of Credit
relates, and any such reference shall not be deemed to incorporate herein by reference any
document(s), instrument(s), contract(s), or agreement(s).
It is a condition of this Letter of Credit that it shall be deemed automatically extended
without amendment for one (1) year from the present or any future expiration date of this Letter
of Credit unless at least sixty (60) days prior to the then current expiration date we notify the
Beneficiary by registered letter that we elect not to consider this Letter of Credit renewed for
such additional period. If such notice is given, then during such notice period (i.e. the sixty
(60) day period commencing on the date of such notice and ending with the then applicable
expiration date of this Letter of Credit), this Letter of Credit shall remain in full force and
effect and Beneficiary may draw up to the full amount of the sum when accompanied by a statement
described above in the first paragraph of this Letter of Credit.
If a demand for payment made hereunder does not, in any instance, conform to the terms and
conditions of this Letter of Credit, we shall give you prompt notice that the purported
negotiation of this Letter of Credit was not effected in accordance with the terms and conditions
of this Letter of Credit, stating the reasons therefor and that we are holding any documents at
your disposal or are returning them to you, as you may elect. Upon being notified that the
purported negotiation of this Letter of Credit was not effected in conformity with this Letter of
Credit, you may attempt to correct any such nonconforming demand for payment.
We hereby agree with you that drafts drawn and presented in compliance with the terms of this
Letter of Credit will be honored by us immediately if presented at any of our offices on or before
the Expiry Date, as such date may be extended pursuant to the terms hereof.
Unless otherwise stated in this Letter of Credit, this Letter of Credit is subject to The
Uniform Customs and Practice for Documentary Credits (1993 Revision), International Chamber of
Commerce Publication No. 500, which is incorporated by reference herein.
Exhibit 10.14
SUBLEASE
This
Sublease (Sublease) is dated as of the
9
th
day
of December, 2005
(Effective Date) by and between
FRANCE TELECOM LONG DISTANCE USA, LLC,
a Delaware limited
liability company (Sublandlord), and
K12 Inc.,
a Delaware corporation (Subtenant).
RECITALS
:
R-l. TST WOODLAND FUNDING I, L.L.C., a Delaware limited liability company (Original
Landlord), as landlord and Sublandlord, as tenant, entered into that certain Deed of Lease dated
as of October 1, 2002 (Prime Lease) for premises containing approximately 55,504 square feet of
rentable space (Premises) located on the fifth (5
th
) and sixth (6
th
) floors
of the office building known as 2300 Corporate Park Drive, Woodland
Park, Herndon, Virginia 20171
(Building). A true and correct copy (except for certain financial information which has been
redacted) of the Prime Lease is attached hereto as
EXHIBIT A
.
R-2. ACP/2300 CORPORATE PARK DRIVE, LLC is the successor-in-interest to the Original Landlord
(Prime Landlord).
R-3. Sublandlord desires to sublease to Subtenant, and Subtenant desires to sublease from
Sublandlord, that certain space containing approximately 27,752 rentable square feet and located
on the fifth (5
th
) floor of the Building, as more particularly described herein, upon
the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and
other good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Sublandlord and Subtenant hereby agree as follows:
1.
Recitals
. The foregoing recitals are true and correct and are incorporated
herein.
2.
Integration
. The terms in this Sublease shall have the meanings subscribed to
them in the Prime Lease except as otherwise provided herein.
3.
Subleased Premises
. Sublandlord hereby subleases to Subtenant, and Subtenant
hereby subleases from Sublandlord that certain space located on the fifth (5
th
) floor of
the Building containing approximately twenty-seven thousand seven hundred fifty-two (27,752)
rentable square feet of space (Subleased Premises), as more particularly identified on
EXHIBIT B
attached hereto and made a part hereof.
4.
Term
. The term (Term) of this Sublease shall commence on January 15, 2006
(Commencement Date) and shall expire on September 29, 2009 (Expiration Date); provided,
however, that notwithstanding anything to the contrary in this Sublease, if Sublandlord fails, for
any reason other than the acts or omissions of either Subtenant or the Prime Landlord (including
without limitation the Prime Landlords failure to timely consent to this Sublease) or the agents
or employees of Subtenant or Prime Landlord, to provide possession of the Subleased Premises
within thirty (30) days of the Commencement Date, the Rent Commencement Date (as hereinafter
defined) will be extended for each day of delay beyond such date and provided further that if
Sublandlord fails to provide possession of the Subleased Premises on or before February 2, 2006
(subject to the exceptions set forth above), then Subtenant shall have the right to terminate this
Sublease by written notice delivered to Sublandlord on or before February 7, 2006, upon which the
parties shall have no further obligations to each other under this Sublease.
5.
Condition, Acceptance and Use of Subleased Premises
.
(a) Upon the Commencement Date, Subtenant shall accept the Subleased Premises in their
existing condition and state of repair WHERE-IS, AS-IS; provided, however, that such condition and
state of repair shall be substantially and materially similar to the Subleased Premises condition
and state of repair as of the date of final walkthrough prior to execution. Other than as may be
contained in the Prime Lease or in this Sublease, Subtenant acknowledges that no representations,
statements or warranties, express or implied, have been made by or on behalf of the Sublandlord in
respect to the condition of the Premises, compliance with any laws, ordinances, statutes, or
regulations, including, but not limited to, the Americans with Disabilities Act of 1991, 42 USC §
1201
et seq.
and all regulations applicable thereto promulgated as of the date hereof
(collectively ADA), or the use or occupation that may be made thereof, and that Sublandlord shall
in no event whatsoever be liable for any latent defects in the Subleased Premises or in the
equipment therein. Sublandlord shall use reasonable efforts to enforce the provisions of the Prime
Lease with regard to Prime Landlords obligations to provide services to the Subleased Premises and
common areas of the Building to the extent required of the Prime Landlord under the Prime Lease,
but subject to all terms, conditions and limitations of the Prime Lease. Unless such failure is a
result of Sublandlords default under the Prime Lease, or Sublandlords gross negligence or willful
misconduct, Sublandlord shall in no event whatsoever be liable to Subtenant for the failure by
Prime Landlord to keep and perform, according to the terms of the Prime Lease, Prime Landlords
duties, covenants, agreements, obligations, restrictions, conditions and provisions, nor for any
delay or interruption in Prime Landlords keeping and performing the same.
(b) Acceptance of the Subleased Premises by Subtenant shall be construed as recognition that
the Subleased Premises are in a satisfactory state of repair and in sanitary condition. Unless such
failure is a result of Sublandlords default under the Prime Lease, or its gross negligence or
willful misconduct, Sublandlord shall not be liable for any losses or damages incurred by Subtenant
due to the failure of operation of the heating, cooling or other utility equipment or due to the
necessity of repair of same.
(c) The Subleased Premises shall be used or occupied by Subtenant solely for the Permitted
Uses as defined in
Section 3.1
of the Prime Lease and shall not be used for any other
purpose. Subtenant shall not use or occupy the Subleased Premises for any unlawful
purpose.
2
(d) Subtenant warrants that Subleased Premises at the Expiration Date, or upon other
termination of the Sublease hereunder, shall be in the same condition as when Subtenant took
possession, reasonable wear and tear excepted.
(e) Subject to the terms and conditions of the Prime Lease, Subtenant shall have access to
the Subleased Premises twenty-four (24) hours per each day of the year. Sublandlord shall
provide one hundred (100) of its electronic access cards for the Subleased Premises and shall
instruct the Prime Landlord to reprogram the electric access system such that only the foregoing
100 cards shall provide access to the Subleased Premises (except with respect to the Prime
Landlord and Sublandlord as permitted and limited by this Sublease), or pay the costs associated
with obtaining such cards if such cards provide access to the Premises in excess of the
Subleased Premises.
6.
Rent
.
(a) Subtenant covenants and agrees to pay Sublandlord as minimum rent (Minimum Rent) for
the Subleased Premises without notice or demand, and without set-off, deduction or abatement,
the amount of Twenty Four Dollars and Fifty Cents ($24.50) per annum per rentable square foot of
the Subleased Premises. Minimum Rent shall be paid in equal monthly installments, in advance,
on the Rent Commencement Date and thereafter on the first (1st) day of each and every successive
month thereafter of the Term of this Sublease. If the Rent Commencement Date does not occur on
the first day of a calendar month, Subtenant shall pay a prorated monthly installment on the
Rent Commencement Date for the period from the Rent Commencement Date to the first day of the
next calendar month.
(b) Commencing on the first anniversary of the Rent Commencement Date, and on each annual
anniversary thereafter of the Term, Minimum Rent shall be increased by four percent (4.0%), as
set forth on
EXHIBIT C
attached hereto and made a part hereof. If the Rent Commencement
Date does not occur on the first day of a calendar month, the increase in Minimum Rent shall be
effective on the first day of the first full calendar month after each annual anniversary of the
Rent Commencement Date.
(c) Subtenant shall commence the payment of Minimum Rent on May 1, 2006 (Rent Commencement
Date). Notwithstanding the foregoing, Subtenant shall tender payment of the first full monthly
installment of Minimum Rent upon Subtenants execution of the Sublease.
(d) Minimum Rent includes all Operating Expenses and Taxes contemplated under the Prime
Lease and Sublandlord hereby acknowledges and agrees that Subtenant shall not be responsible for
any other costs not specifically and expressly provided for herein, including but not limited to
costs or charges for Building or common area maintenance, utilities or taxes. However,
except as otherwise expressly provided in this Sublease, Subtenant shall pay any other additional
costs or expenses incurred under the Prime Lease related to the Sublease Premises or
Subtenants occupancy thereof (including, without limitation, the cost of all overtime HVAC,
energy and other services costs provided to Subtenant and/or the Sublease Premises and not
included in Operating
3
Expenses or Taxes. Unless such costs and expenses can be paid directly to Prime Landlord,
Subtenant shall reimburse Sublandlord for such other amounts within ten (10) business days of
receipt of an invoice (attaching the charges of the Prime Landlord) from Sublandlord therefor. For
the purposes of this Sublease and all of Subtenants obligations hereunder, Minimum Rent and any
other sums due to Sublandlord from Subtenant under this Sublease shall together constitute Rent.
(e) All Rent payable pursuant to this Sublease shall be payable to Sublandlord at the
address set forth for notices to Sublandlord in
Section 17
below or at such other place as
Sublandlord may from time to time designate in writing.
7.
Assumption
of Obligations; Exclusion
.
(a) Subtenant agrees to assume and perform, according to the terms of the Prime Lease, all of
the duties, covenants, agreements and obligations of Sublandlord under the Prime Lease, as and when
required by the Prime Lease, with respect to the Subleased Premises, except Sublandlords duty to
make rent payments to Prime Landlord. Subtenant further agrees to keep and obey, according to the
terms of the Prime Lease, all of the rules, restrictions, conditions and provisions which pertain
to the Subleased Premises, and are imposed by the terms of the Prime Lease upon Sublandlord with
respect to the Subleased Premises or upon the use of the Subleased Premises. Subtenant agrees that
it will take good care of the Subleased Premises, and will not knowingly commit waste, and will not
do, suffer, or permit to be done any injury to the same. It is hereby understood and agreed that
Subtenants rights to use, possess and enjoy the Subleased Premises are subject to the terms,
conditions, rules and regulations of the Prime Lease and the rights and remedies of Prime Landlord
thereunder. Any failure by Subtenant to perform, keep and obey the same and a failure to cure
within the applicable cure period on notice from the Prime Landlord or Sublandlord shall be a
default by Subtenant hereunder.
(b) To the extent applicable to the Subleased Premises only, Sublandlord hereby transfers and
subleases and Subtenant agrees to assume all of the rights, duties, obligations and privileges
granted to Sublandlord under the Prime Lease with regard to nonexclusive parking rights at the
ratio of 3.98 parking spaces per 1,000 rentable square feet of the Subleased Premises and as
otherwise described in
Section 3.2
of the Prime Lease, provided that Subtenant shall have
no right to any reserved parking spaces. The parties hereto recognize and agree that Sublandlord is
expressly retaining and is not transferring or subleasing, and Subtenant shall have no right
whatsoever to exercise any or all of Sublandlords: (i) rights pursuant to
EXHIBITS A-3, C, F
and I
of the Prime Lease, or (ii) any and all termination rights, right of first offer, renewal
options or expansion rights granted by Prime Landlord to Sublandlord pursuant to the terms of the
Prime Lease or otherwise, and Sublandlord expressly retains all such rights and privileges;
provided, however, that Sublandlord shall immediately surrender the
Subleased Premises to the Prime
Landlord, to the extent Sublandlord has the legal right to effect such surrender to the Prime
Landlord, on (y) the termination of this Sublease or the Prime Lease prior to the expiration of
this Sublease for reasons other than Subtenants default under this Sublease, and (z) on the
expiration of this Sublease. With regard to
EXHIBITS G, H
4
and I
, the parties hereto recognize and agree that Sublandlord is expressly retaining and
is not transferring or subleasing, and Subtenant shall have no right whatsoever to exercise fifty
percent (50%) of Sublandlords rights pursuant to
EXHIBITS G and H
, but Subtenant shall be
entitled to exercise such rights pursuant to
EXHIBITS G and H
on the remaining fifty
percent (50%) thereof.
8.
Title and Possession
. Sublandlord covenants, agrees and represents that (a) it has
full right and authority to enter into this Sublease for the full Term hereof, that to the best of
Sublandlords knowledge after reasonable inquiry and investigation, Sublandlord is not in default
under the Prime Lease (and to the best of Sublandlords knowledge, after reasonable inquiry and
investigation there exists no event which would constitute an Event of Default under the Prime
Lease but for the giving of any required notice and passage of any applicable grace or cure
period), (b) the person or persons executing this Sublease for Sublandlord are fully authorized to
so act and no other action is required to bind Sublandlord to this Sublease; (c) Sublandlord has
the right and power to execute and deliver this Sublease and to perform its obligations hereunder,
subject only to the Prime Landlords consent thereto and (d) this Sublease constitutes the legal,
valid and binding agreement of Sublandlord and is enforceable in accordance with its terms and that
Subtenant, subject to the provisions of the Prime Lease and upon paying the rents and other sums
provided herein and upon performing the duties, covenants, agreements and obligations hereof and
upon keeping and obeying all of the restrictions, conditions and provisions hereof, will have, hold
and enjoy quiet possession of the Subleased Premises, free from claims of persons claiming by or
through Sublandlord for the Term herein granted but subject to all of the duties, covenants,
agreements, obligations, restrictions, conditions and provisions set forth or incorporated herein.
Sublandlord, as of the Effective Date, has not received written notice of any mechanics liens
charged against the Premises. During the Term of this Sublease, the Sublandlord agrees not to amend
or modify the Prime Lease in such a manner as to increase Subtenants obligations under this
Sublease or adversely impact Subtenants rights under this Sublease without prior written notice to
and reasonable approval by Subtenant. During the Term of this Sublease, Sublandlord shall not
voluntarily terminate the Prime Lease with respect to the Subleased Premises, nor will Sublandlord
knowingly act or knowingly fail to act in such a manner as to cause the termination of the Prime
Lease. Notwithstanding the foregoing, if the Prime Lease is terminated for any reason whatsoever
during the Term, this Sublease shall terminate simultaneously therewith.
5
9.
Insurance
. Subtenant agrees, during the Term hereof, to carry and maintain
insurance of such types and in such amounts as required under
Section 11.1
of the Prime
Lease, with a company reasonably satisfactory to Sublandlord, insuring Subtenant, with Sublandlord
and Prime Landlord as additional insureds, against any liability with respect to property damage or
events occurring on or about the Subleased Premises or arising out of the use and occupancy thereof
by the Subtenant. The policy or policies maintained by Subtenant shall be issued by a company
licensed to do business in Virginia, and prior to the Commencement Date, Subtenant shall deliver to
Sublandlord a certificate evidencing Subtenants compliance with the provisions hereof. Said policy
or policies shall contain a provision requiring the insurer to give Sublandlord and Prime Landlord
thirty (30) days written notice before canceling or terminating the policy for any reason,
including expiration of the policy period and a provision naming Sublandlord as a loss payee under
the policy. Subtenant agrees to indemnify, protect, defend and hold Sublandlord and Prime Landlord
harmless against any and all claims, suits, actions, liabilities, actual costs and expenses,
including reasonable attorneys fees, arising out of a third party claim for injury or death to
persons or damage to property (including specifically, Furniture listed below in
EXHIBIT D
and Specialty Equipment listed below in
EXHIBIT E)
to the extent resulting from any act or
omission of Subtenant, its employees, agents or contractors during the Term hereof.
10.
Sublandlords Liability
. Except as specifically provided herein, Sublandlord shall
have no responsibility whatsoever with respect to the Subleased Premises, the condition thereof or
Subtenants property situated therein, except for loss, injury or damage caused by
Sublandlords gross negligence or willful misconduct. Unless such failure is a result of
Sublandlords default under the Prime Lease, Sublandlord shall not be liable for the failure by
Prime Landlord to keep and perform, according to the terms of the Prime Lease, Prime Landlords
duties, covenants, agreements, obligations, restrictions, conditions and provisions, nor for any
delay or interruption in Prime Landlords keeping and performing the same. Sublandlord hereby
assigns to Subtenant, for so long as this Sublease shall be in force and effect, any and all rights
of Sublandlord under the Prime Lease with respect to the Subleased Premises and causes of action
which Sublandlord may have against Prime Landlord with respect to the Subleased Premises due to
default by Prime Landlord under the Prime Lease, excluding however (i) those provisions of the
Prime Lease set forth in
subsection 7(b)
hereof in which certain rights under the Prime
Lease are retained by Sublandlord, and (ii) any right of self help or rent abatement. Sublandlord
agrees to cooperate with and, if requested by Subtenant, join Subtenant in any claims or suits
brought by Subtenant against Prime Landlord under the Prime Lease, provided that such participation
shall be without unreasonable cost or expense to Sublandlord and shall in no event exceed Five
Hundred Dollars ($500.00). No allowances for moving, plans or tenant improvements are provided to
Subtenant.
11.
Sublease and Assignment
.
(a) Subtenant shall not assign this Sublease or further sublease all or any portion of the
Subleased Premises without first providing thirty (30) days prior written notice to the
Sublandlord, subject, however, to all the terms and conditions of the Prime Lease. This Sublease
shall not be assigned by operation of law. Subtenant shall not pledge its interest hereunder, or
allow liens to be placed on such interest, or suffer this Sublease or any portion
6
thereof to be attached or taken upon execution. Any attempt to sell, assign or sublet without
compliance with the Prime Lease shall be deemed a default by Subtenant.
(b) Sublandlord shall have the right to terminate this Sublease upon a proposed assignment or
subletting of this Sublease to the extent the Prime Lease is so terminated by the Prime Landlord.
Sublandlord may exercise such right to terminate by giving notice to Subtenant at any time within
thirty (30) days after the date on which Subtenant has furnished to Sublandlord all of the items
required under
Section 13.3
of the Prime Lease. If Sublandlord exercises such right to
terminate, Sublandlord shall be entitled to recover possession of, and Subtenant shall surrender
the Subleased Premises on the effective date of the proposed assignment or subletting.
(c) In the event Sublandlord does not terminate the Prime Lease and this Sublease under
Subsection 11(b)
hereof, the following shall apply: (i) Subtenant shall remain fully liable
for the performance of all of Subtenants obligations hereunder jointly and severally with any
assignee or subtenant; and (ii) Subtenant shall pay to Sublandlord fifty percent (50%) of all rent
and other consideration (less all reasonable out of pocket costs and expenses actually paid by
Subtenant in connection with consummating such transfer, including without limitation brokerage
commissions, attorneys fees, construction and improvements costs) as and when received by
Subtenant in connection with such assignment or subletting to the extent due to Prime Landlord
under the Prime Lease; and (iii) Subtenant shall pay to Sublandlord all third party attorneys or
other out-of-pocket fees and expenses incurred by Sublandlord in connection with Sublandlords
review of any proposed assignment or sublease; provided that such fees and expenses shall not
exceed in each instance the lesser of: (i) Four Thousand Dollars ($4,000.00); and (ii) the amount
payable by Sublandlord to the Prime Landlord plus One Thousand Dollars ($1,000.00).
(d) Notwithstanding anything to the contrary contained herein, Sublandlord shall have the
unconditional right to assign this Sublease and/or the Prime Lease to any Affiliate (as such term
is defined in the Prime Lease); provided that the original Sublandlord remains liable under this
Sublease and the assignment is made in accordance with the terms of the Prime Lease or otherwise
with Prime Landlords consent.
12.
Damage, Destruction or Condemnation
. In the event of damage or destruction of the
Subleased Premises or the taking of all or any part thereof under the power of eminent domain, this
Sublease shall terminate only if the Prime Lease is terminated as a result thereof, and the rent
payable hereunder shall abate only as long as and to the extent that the rent due from Sublandlord
to Prime Landlord under the Prime Lease with respect to the Subleased Premises abates as a result
thereof. Subtenant shall have no claim to insurance or condemnation proceeds (other than moving
expenses or a taking of or damage to Subtenants fixtures or personal property other than its
leasehold interest in the Subleased Premises and then only to the extent the same does not diminish
any award payable to Prime Landlord).
13.
Release
and Waiver of Sburogation
. Sublandlord and Subtenant each hereby
releases all causes of action and rights of recovery against each other and their respective
agents,
7
officers and employees for any loss, regardless of cause or origin, to the extent of any recovery
to either party from any policy(s) of insurance carried or required to be carried hereunder.
Sublandlord and Subtenant agree that any policies presently existing or obtained on or after the
date hereof (including renewals of present policies) shall include a clause or endorsement to the
effect that any such release shall not adversely affect or impair said policies or prejudice the
right of the releasor to recover thereunder.
14.
Alterations, Improvement
.
(a) No alterations, additions or improvements in or upon the Subleased Premises shall be made
by Subtenant without the prior written consent by Sublandlord, which consent shall not be
unreasonably withheld, conditioned or delayed, and the consent of Prime Landlord. Subtenant shall
comply with the provisions of
Article 5
of the Prime Lease with respect to any such
alterations, additions or improvements. All alterations, additions and improvements shall be
made in accordance with applicable building codes and laws.
(b) If Subtenant requests that Sublandlord approve of any such proposed additions, alterations
or improvements in or upon the Subleased Premises and the same are acceptable to Sublandlord within
ten (10) business days of receipt of such request, Sublandlord shall send such request and
accompanying documentation to the Prime Landlord; provided, however, that if such proposed
additions, alterations or improvements are unacceptable to Sublandlord, within ten (10) business
days of receipt of such request, written notice of the reasons for such determination shall be
provided to Subtenant with reasonably sufficient detail provided so that Subtenant, if possible,
could remedy such objections and resubmit the request. Upon the expiration of the Term hereof, all
such alterations, additions and improvements shall be and remain part of the Subleased Premises and
shall not be removed by Subtenant unless such removal is required or permitted by Prime Landlord,
in which case Subtenant shall remove the same and restore the Subleased Premises to the same
condition in which they were on the Commencement Date, reasonable wear and tear excepted. If
Subtenant shall fail to remove the same and restore the Subleased Premises, then Sublandlord may,
but shall not be obligated to, do so at the expense of Subtenant. Personal property, business and
trade fixtures, machinery and equipment, furniture and movable partitions owned by Subtenant shall
be and remain the property of Subtenant and may be removed by Subtenant at any time during the Term
hereof. Subtenant shall repair any damage caused by such removal. Subtenant covenants and agrees to
indemnify, protect and defend Sublandlord against, and hold Sublandlord harmless from, all liens,
whether for labor or materials arising as the result of alterations, additions, repairs or
improvements to the Subleased Premises made by Subtenant during the Term.
15.
Furniture/Existing Infrastructure/Data Center & Equipment
(a) Sublandlord and Subtenant acknowledge that certain furniture described on the attached
EXHIBIT D
(the Furniture) is currently located in the Subleased Premises. Subtenant
shall have the right to use the Furniture without charge throughout the Term, provided that (i)
Subtenant shall maintain the Furniture in the condition that the Furniture is in on the
Commencement Date (normal wear and tear excepted); (ii) if necessary to return the Furniture to
8
its Commencement Date condition, Subtenant shall repair the Furniture at Subtenants expense, and
(iii) at no time shall the Subtenant remove any Furniture during the Term. Sublandlord represents
and warrants that, to the best of Sublandlords knowledge after reasonable inquiry and
investigation, as of the Effective Date, the Furniture is free and clear of any liens or other
interests which could impede transfer of the Furniture and/or title to the Furniture to Subtenant
pursuant to this Sublease. Unless there is an earlier termination of the Sublease not caused by
the Sublandlord, upon the Expiration Date, Sublandlord shall transfer title of the Furniture for
the sum of One Dollar ($1.00) and such transfer shall be free and clear of any liens or other
interests which could impede transfer of the Furniture.
(b) Subject to the terms and conditions of the Prime Lease, which shall not be amended or
modified from October 1, 2002 without written notice to and reasonable approval by Subtenant,
Subtenant shall have the right, with Prime Landlords consent pursuant to the Prime Lease, to
connect certain equipment into the Prime Landlords emergency power generator and uninterrupted
power supply systems (Emergency Power System), provided, however, that Subtenants maximum usage
of the Emergency Power System shall not exceed 72.03% of its total capacity. Subtenant shall pay
directly to the Prime Landlord all costs and expenses related to the Subtenants actual usage of
the Emergency Power System. In the event that Subtenant is not permitted to pay such costs
directly, then Sublandlord shall pay the costs and expenses of the Emergency Power System and the
Subtenant shall promptly reimburse the Sublandlord for Sublandlords actual costs incurred with
respect to the Subleased Premises; provided that Sublandlord submits reasonable supporting
documentation regarding such costs. In addition, upon the Commencement Date, Subtenant shall agree
to assume all of the Sublandlords responsibilities, obligations, and liabilities under the Prime
Lease related to the Emergency Power System; provided that, the parties acknowledge and agree that
any contracts, agreements or other understandings between Sublandlord and a third party concerning
the Emergency Power System (the EPS Contracts) shall be terminated as of the Commencement Date
and replaced with such contracts or agreement for regular maintenance and repair of the Emergency
Power System as are reasonably acceptable to Sublandlord, and Subtenant shall have no rights or
obligations with regard to the EPS Contracts. Within ten (10) business days of the Effective Date
(and thereafter as may be reasonably requested by Subtenant), Sublandlord shall provide Subtenant
with access to all records related to the maintenance and operations of the Emergency Power
System, but Sublandlord does not, and shall not, make any warranty or representation of any type
related to the Emergency Power System. Subtenant shall assume all of the aforementioned costs as
of the Commencement Date.
(c) Sublandlord and Subtenant acknowledge that certain equipment described on the attached
EXHIBIT E
(the Specialty Equipment) is currently located in the Subleased Premises.
Subtenant accepts all Specialty Equipment WHERE-IS, AS-IS and Sublandlord makes no representation
as to the operating quality of the Specialty Equipment or the suitability of the Specialty
Equipment with regard to the Subtenants operations and requirements or otherwise; provided,
however, that as of the Effective Date, Sublandlord represents and warrants that to the best of
Sublandlords knowledge after reasonable inquiry and investigation, the Specialty Equipment is
free and clear of any liens or other interests which could impede transfer
of the Specialty Equipment. Within ten (10) business days of the Effective Date (and thereafter
9
as may be reasonably requested by Subtenant in writing), Sublandlord shall provide Subtenant with
all available information and records related to the Specialty Equipment. From the Commencement
Date and all times thereafter during the Term, Subtenant will, at its sole cost and expense adopt a
formal maintenance and repair program for the Specialty Equipment, which shall include the
engagement at all times of a reputable maintenance and repair contractor experienced in working
with equipment that this the same or substantially similar to the Specialty Equipment, and such
program and contractor shall be reasonably acceptable to Sublandlord. The parties acknowledge and
agree that any contracts, agreements or other understandings between Sublandlord and a third party
concerning the Specialty Equipment (the SE Contracts) shall be terminated as of the Commencement
Date and Subtenant shall have no rights or obligations with regard to the SE Contracts. In the
event that the Subtenant is not permitted to pay any or all of the costs associated with the
Specialty Equipment directly to the Prime Landlord or other provider, then the Sublandlord shall
pay all costs and expenses and Subtenant shall within thirty (30) days reimburse the Sublandlord
for the actual costs incurred; provided that Sublandlord submits reasonable supporting
documentation regarding such costs. Subtenant shall not, without the Sublandlords prior written
approval, remove or replace any of the Specialty Equipment during the term of this Sublease. Unless
there is an earlier termination of the Sublease not caused by the Sublandlord, upon the Expiration
Date, the Specialty Equipment shall convey to the Subtenant for one dollar ($1.00) and such
transfer shall be free and clear of any liens or other interests which could impede transfer of the
Specialty Equipment.
(d) To the best of Sublandlords knowledge, the Premises as constructed were designed by
Gensler Design and were properly permitted within Fairfax County, Virginia and Sublandlord has not
received written notice of any violation or alleged violation of the Americans with Disabilities
Act with respect to the Premises.
16.
Default
. Subtenant shall be considered to be in default of this Sublease to the
extent that Subtenant fails to abide by the terms or conditions of this Sublease and/or the Prime
Lease, with Subtenant being afforded the same rights as to notice of default and curing of default,
if any, as those provided to Sublandlord in
Article 15
of the Prime Lease. Furthermore, if
any default under the Prime Lease shall occur with respect to Subtenant or the performance by
Subtenant of any of its covenants and obligations under this Sublease, then and in any of said
cases, Subtenant shall be deemed in default, and Sublandlord shall have the following rights and
remedies against Subtenant (in addition to all other rights and remedies provided by law or in
equity): (i) to terminate this Sublease, (ii) to cure or attempt to cure the default, whereupon
Subtenant shall upon demand reimburse Sublandlord for all costs thus expended together with
interest thereon at the lesser rate (the Interest Rate) of the highest rate permitted by law or
twelve percent (12%) per annum, (iii) to sue for Subtenants performance, whereupon, if Sublandlord
is the prevailing party in such suit in a court of competent jurisdiction, Subtenant shall upon
demand reimburse Sublandlord for all costs thus expended together with interest thereon at the
Interest Rate; (iv) to exercise all remedies set forth in the Prime Lease as if Sublandlord were
the Prime Landlord and Subtenant were the Tenant thereunder, or (v) to re-enter and take possession
of the Subleased Premises, and to remove any property therein, without liability for damage to, and
without the obligation to store such property but may store same at Subtenants reasonable expense.
In the event of such re-entry, Sublandlord may, but shall not be
10
obligated to, relet the Subleased Premises, or any part thereof, from time to time, in the name of
Sublandlord or Subtenant, without further notice, for such term or terms, on such conditions and
for such uses and purposes as Sublandlord, in its sole discretion,
may determine, and
Sublandlord
may collect and receive all rents derived therefrom and apply the same, after deduction of all
appropriate expenses (including brokers, consultants and attorneys fees, if incurred, and the
expenses of putting the property in leasable condition), to the payment of the Rent and other sums
payable hereunder, Subtenant remaining liable for any deficiency. Sublandlord shall not be
responsible or liable for any failure to relet the Subleased Premises or any part thereof, or for
failure to collect any rent connected therewith. The exercise by Sublandlord of any remedy shall
not preclude the subsequent or simultaneous exercise of any other remedy. No delay in exercising
any remedy shall be deemed a waiver thereof. In addition, any payment not made when due shall bear
interest until paid at the Interest Rate.
17.
Notices
. Any notice or communication required or permitted to be given or served
by either party hereto upon the other shall be deemed given or served in accordance with the
provisions of this Sublease when mailed in a sealed wrapper by United States registered or
certified mail, return receipt requested, or delivered to a nationally recognized overnight
courier, postage prepaid, properly addressed as follows:
|
|
|
If to Sublandlord
:
|
|
France Telecom Long Distance USA, LLC
|
|
|
Building 3
|
|
|
2355 Dulles Corner Boulevard
|
|
|
Herndon, VA 20171
|
|
|
Attn: VP Corporate Affairs
|
|
|
|
|
|
With a copy to
:
|
|
|
France Telecom North America, LLC
|
|
|
1717 K Street, NW, Suite 507
|
|
|
Washington, DC 20036-5346
|
|
|
Attn: General Counsel
|
|
|
|
If to Subtenant
:
|
|
At the Subleased Premises
|
|
|
Attn: Howard Polsky, Esq.
|
|
|
|
|
|
With a copy to
:
|
|
|
Kelley Drye & Warren LLP
|
|
|
8000 Towers Crescent Drive, Suite 1200,
|
|
|
Vienna, VA 22182
|
|
|
Attn: Joseph B. Hoffman
|
Each mailed notice or communication shall be deemed to have been given to, or served upon,
the party to which addressed on the date the same is deposited in the United States registered or
certified mail, postage prepaid or delivered for overnight delivery to such courier, properly
addressed in the manner above provided. Any party hereto may change its address for the
11
service of notice hereunder by serving written notice hereunder upon the other party hereto, in
the manner specified above, at least ten (10) days prior to the effective date of such change.
18.
Surrender of Subleased Premises
. Upon an early termination of this Sublease,
Subtenant shall quit and surrender possession of the Subleased Premises to Sublandlord in as good
order and condition as the same are now or hereafter may be improved by Prime Landlord or
Subtenant, reasonable wear and tear and repairs which are Prime Landlords obligation excepted, and
shall, without expense to Sublandlord, remove or cause to be removed from the Subleased Premises
all debris and rubbish, all furniture, equipment, business and trade fixtures, free-standing
cabinet work, movable partitioning and other articles of personal property owned by Subtenant or
installed or placed by Subtenant at its expense in the Subleased Premises, and all similar articles
of any other persons claiming under Subtenant, and Subtenant shall repair all damage to the
Subleased Premises resulting from such removal. If, as a result of a default by Subtenant under
this Sublease or any action taken by the Prime Landlord pursuant to the Prime Lease, Sublandlord or
Prime Landlord re-enters or re-takes possession of the Subleased Premises prior to the normal
expiration of this Sublease, Sublandlord or Prime Landlord shall have the right, but not the
obligation, to remove from the Subleased Premises all personal property located therein belonging
to Subtenant, and either party may discard such debris, rubbish and personal property or place such
personal property in storage in a public warehouse, all at the reasonable expense and risk of
Subtenant.
19.
Termination of Prime Lease
. It is understood and agreed by and between the
parties hereto that the existence of this Sublease is dependent and conditioned upon the continued
existence of the Prime Lease and this Sublease shall automatically terminate on the termination,
cancellation or expiration of the Prime Lease.
20.
Waiver
. No provision of this Sublease shall be deemed to have been waived unless
such waiver is in writing signed by the party charged with such waiver. A waiver by Sublandlord
of any default, breach or failure of Subtenant under this Sublease shall not be construed as a
waiver of any subsequent or different default, breach or failure.
21.
Holding Over
. If Subtenant or anyone claiming under Subtenant holds over after the
early termination of the Term hereof without the express written consent of Sublandlord, Subtenant
shall become a tenant at sufferance only, at one hundred fifty percent (150%) of the rental rate
per square foot in effect under the Prime Lease upon such date, or such greater amount payable to
Prime Landlord as a result of such holdover, including any holdover costs for the Subleased
Premises and/or Premises as described in the Prime Lease, and otherwise upon the terms, covenants
and conditions herein specified, so far as applicable. Acceptance by Sublandlord of Rent after
such termination shall not constitute a consent to a holdover hereunder or result in a renewal.
The foregoing provisions of this section are in addition to and do not affect or diminish
Sublandlords right of reentry or any other rights of Sublandlord hereunder or as otherwise
provided by law and Subtenant shall be liable to Sublandlord for any holding over after the early
termination of the Term hereof.
12
22.
Successors and Assigns
. All of the terms, covenants, provisions and conditions of
this Sublease shall be binding upon and inure to the benefit of the successors and assigns of
Sublandlord and on the successors and assigns of Subtenant but only to the extent herein specified.
23.
Captions
. The captions herein are for convenience only and are not a part of this
Sublease.
24.
Interest
. Subtenant shall pay to Sublandlord interest on all sums of whatever
nature to be paid by Subtenant to Sublandlord hereunder from the time said sum shall become due and
payable until the same is paid at the Interest Rate.
25.
Relationship of Parties
. This Sublease does not and shall not create the
relationship of principal and agent, or of partnership, or of joint venture, or of any other
association between Sublandlord and Subtenant, except that of sublandlord and subtenant.
26.
Brokerage
. Sublandlord and Subtenant each represents to the other that no real
estate brokers or agents are involved in this Sublease, except (i) Spaulding & Slye Colliers, and
(ii) The Staubach Company Northeast, Inc., both of which shall be compensated by Sublandlord
pursuant to a separate agreement. Sublandlord and Subtenant each shall indemnify and hold the other
harmless from any breach by it of this representation.
27.
Security Deposit
.
(a) Upon Subtenants execution of this Sublease, Subtenant shall deliver to Sublandlord a
letter of credit equal to the sum of One Hundred Ninety Five Thousand Dollars ($195,000.00) (the
Security Deposit), which Security Deposit shall be in the form of an unconditional, irrevocable
and transferable letter of credit (hereinafter the Letter of Credit) issued for the account of
Sublandlord by a bank reasonably acceptable to Sublandlord, in form and substance reasonably
satisfactory to Sublandlord and shall comply with all requirements set forth in Section 27(b)
below. The Security Deposit shall be held by Sublandlord as security for the performance of
Subtenants obligations and covenants under this Sublease. Subtenant acknowledges and agrees that
the Security Deposit is not an advance rental deposit or a measure of Sublandlords damages in
case Subtenant fails to faithfully uphold and perform the terms and obligations of this Sublease
and the Prime Lease. If Subtenant fails to so uphold and perform the terms and conditions of this
Sublease or the Prime Lease (after expiration of the applicable notice and cure periods of this
Sublease or the Prime Lease, as applicable), or if upon an early termination of this Sublease
Subtenant fails to surrender the Subleased Premises in the condition required by this Sublease,
Sublandlord shall have the right (but not the obligation), and without prejudice to any other
remedy which Sublandlord may have on account thereof, to apply all or any portion of the Security
Deposit to cure such default or to remedy the condition of the Subleased Premises. If Sublandlord
so applies the Security Deposit or any portion thereof before the Expiration Date or earlier
termination of this Sublease, Subtenant shall increase the Security Deposit, upon demand, by the
amount necessary to restore the Security Deposit to its original amount. Any remaining balance of
the Security Deposit shall be returned to Subtenant at such
13
time after the Expiration Date that all of Subtenants obligations under this Sublease have been
fulfilled, but in no event later than forty-five (45) days following the Expiration Date.
Sublandlord shall conduct a Post Termination Inspection of the Subleased Premises within
fifteen (15) days after the termination of this Sublease.
(b) The Letter of Credit shall designate an address in Fairfax County, Virginia for
presentment. The Letter of Credit shall permit Sublandlord or its duly authorized
representative (1) to draw thereon up to the full amount of the credit evidenced thereby upon
presentation of the Letter of Credit in a sight draft in the amount to be drawn, together with
Sublandlords written statement that it is entitled to draw thereon pursuant to the terms of this
Sublease, and (2) to draw the full amount thereof to be held as the Security Deposit pursuant to
this
Section 27
if Sublandlord receives notice form the bank or Subtenant that (i) the
Letter of Credit is not being renewed, or (ii) that the Letter of Credit may no longer be presented
for payment in Fairfax County, Virginia and, in either case, Subtenant has not delivered to
Sublandlord a replacement cash security deposit or Letter of Credit which is presentable in Fairfax
County, Virginia by thirty (30) days prior to the expiration date of the Letter of Credit, or the
date when presentment may no longer be made in Fairfax County, Virginia, as the case may be, any
which replacement Letter of Credit shall comply with the terms of this
Section 27
. The
Letter of Credit shall provide that the bank shall give Sublandlord at least sixty (60) days prior
written notice (by means of a receipted delivery) that the Letter of Credit is not being renewed or
that the place of presentment is being changed from the address set forth in the Letter of Credit.
The term of the Letter of Credit, as the same may be extended, shall not expire prior to the date
which is sixty (60) days after the Sublease Term. The Letter of Credit shall be fully transferable
by Sublandlord and its successors and assigns. If Sublandlord presents the Letter of Credit for
payment, the proceeds of the Letter of Credit shall become the Security Deposit hereunder and shall
be held, applied and returned by Sublandlord in accordance with the terms provided in this
Paragraph 27. Subtenant shall pay all expenses, points or fees incurred by it in obtaining the
Letter of Credit.
(c) Provided that Subtenant does not default under this Sublease or the Prime Lease, beyond
any applicable grace or cure period, during the first two (2) years of the Term of this Sublease,
then upon the third annual anniversary of the Rent Commencement Date, the security deposit shall be
reduced to Eighty Thousand Two Hundred Dollars ($80,200.00), where it shall remain through the
expiration or termination of the Sublease.
28.
Approval of Parties
. Notwithstanding the foregoing, this Sublease is contingent
upon the approval of Prime Landlord. Sublandlord shall use commercially reasonable efforts to
obtain such consent in writing within the twenty (20) day period following the execution of this
Sublease by Sublandlord and Subtenant.
29.
Severability
. In the event any part of this Sublease is held to be unenforceable
or invalid, for any reason, the balance of this Sublease shall not be affected and shall remain in
full force and effect during the term of this Sublease.
14
30.
Costs of Suit/Attorneys Fees
. In the event of any action or proceeding brought
by either party against the other under this Sublease, the prevailing party shall be entitled to
recover from the other party the fees of its attorneys in such action or proceeding in such amount
as the court may judge to be reasonable for such attorneys fees.
31.
Counterparts
. This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, and all of which together shall constitute one and the same
instrument.
[Remainder intentionally left blank]
15
IN WITNESS WHEREOF, the parties hereto have caused this Sublease to be executed as of
the day and year first above written.
|
|
|
|
|
|
|
|
|
WITNESS
:
|
|
|
|
SUBLANDLORD
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FRANCE TELECOM LONG DISTANCE USA,
|
|
|
|
|
LLC,
a Delaware limited liability company
|
|
|
|
|
|
|
|
|
|
/s/
Heather Logan
|
|
|
|
By:
|
|
/s/ M. Sorensen
|
|
[SEAL]
|
|
|
|
|
|
|
|
|
|
Name:
Heather Logan
|
|
|
|
Name:
|
|
M. Sorensen
|
|
|
|
|
|
|
Title:
|
|
VP Corporate Affairs.
|
|
|
[Subtenants signature follows]
16
|
|
|
|
|
|
|
|
|
WITNESS/ATTEST
:
|
|
|
|
SUBTENANT
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
K12 INC,
|
|
|
|
|
a Delaware corporation
|
|
|
|
|
|
|
|
|
|
/s/
Howard Polsky
|
|
|
|
By:
|
|
/s/ John Baule
|
|
[SEAL]
|
|
|
|
|
|
|
|
|
|
Name: Howard Polsky
|
|
|
|
Name:
|
|
John Baule
|
|
|
|
|
|
|
Title:
|
|
CFO
|
|
|
17
LIST OF EXHIBITS
:
|
|
|
EXHIBIT A
:
|
|
PRIME LEASE
|
EXHIBIT B
:
|
|
SUBLEASED PREMISES
|
EXHIBIT C
:
|
|
RENT TABLE
|
EXHIBIT D
:
|
|
FURNITURE LIST
|
EXHIBIT E
:
|
|
SPECIALTY EQUIPMENT LIST
|
EXHIBIT A
PRIME LEASE
[Attached]
DEED OF LEASE
TST WOODLAND FUNDING I, L.L.C.,
a Delaware limited liability company,
Landlord
and
FRANCE TELECOM LONG DISTANCE USA LLC,
a Delaware limited liability company
Tenant
South Pointe II
2300 Corporate Park Drive
Suite 600
Woodland Park
Herndon, Virginia 20171
October 1, 2002
TABLE OF CONTENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
|
ARTICLE 1.
|
|
BASIC LEASE PROVISIONS
|
|
|
1
|
|
ARTICLE 2.
|
|
PREMISES, TERM, RENT
|
|
|
4
|
|
|
|
|
2.1
|
|
|
Lease of Premises
|
|
|
4
|
|
|
|
|
2.2
|
|
|
Commencement Date
|
|
|
5
|
|
|
|
|
2.3
|
|
|
Payment of Rent
|
|
|
5
|
|
|
|
|
2.4
|
|
|
First Months Rent
|
|
|
5
|
|
ARTICLE 3.
|
|
USE AND OCCUPANCY
|
|
|
5
|
|
|
|
|
3.1
|
|
|
Permitted Uses
|
|
|
5
|
|
|
|
|
3.2
|
|
|
Parking Facilities
|
|
|
5
|
|
ARTICLE 4.
|
|
CONDITION OF THE PREMISES
|
|
|
6
|
|
|
|
|
4.1
|
|
|
Condition
|
|
|
6
|
|
ARTICLE 5.
|
|
ALTERATIONS
|
|
|
7
|
|
|
|
|
5.1
|
|
|
Tenants Alterations
|
|
|
7
|
|
|
|
|
5.2
|
|
|
Manner and Quality of Alterations
|
|
|
8
|
|
|
|
|
5.3
|
|
|
Removal of Tenants Property
|
|
|
8
|
|
|
|
|
5.4
|
|
|
Mechanics Liens
|
|
|
9
|
|
|
|
|
5.5
|
|
|
Labor Relations
|
|
|
9
|
|
|
|
|
5.6
|
|
|
Tenants Costs
|
|
|
9
|
|
|
|
|
5.7
|
|
|
Tenants Equipment
|
|
|
9
|
|
|
|
|
5.8
|
|
|
Legal Compliance
|
|
|
9
|
|
|
|
|
5.9
|
|
|
Floor Load
|
|
|
10
|
|
ARTICLE 6.
|
|
REPAIRS
|
|
|
10
|
|
|
|
|
6.1
|
|
|
Landlords Repair and Maintenance
|
|
|
10
|
|
|
|
|
6.2
|
|
|
Tenants Repair and Maintenance
|
|
|
10
|
|
|
|
|
6.3
|
|
|
Restorative Work
|
|
|
10
|
|
|
|
|
6.4
6.5
|
|
|
Supplemental HVAC System
Emergency Power System
|
|
|
11
13
|
|
ARTICLE 7.
|
|
INCREASES IN TAXES AND OPERATING EXPENSES
|
|
|
15
|
|
|
|
|
7.1
|
|
|
Definitions
|
|
|
15
|
|
|
|
|
7.2
|
|
|
Tenants Tax Payment
|
|
|
17
|
|
|
|
|
7.3
|
|
|
Tenants Operating Payment
|
|
|
18
|
|
|
|
|
7.4
|
|
|
Non-Waiver; Disputes
|
|
|
19
|
|
|
|
|
7.5
|
|
|
Final Year of Term
|
|
|
20
|
|
|
|
|
7.6
|
|
|
No Reduction in Rent
|
|
|
20
|
|
ARTICLE 8.
|
|
REQUIREMENTS OF LAW
|
|
|
20
|
|
|
|
|
8.1
|
|
|
Compliance with Requirements
|
|
|
20
|
|
|
|
|
8.2
|
|
|
Fire and Life Safety
|
|
|
21
|
|
ARTICLE 9.
|
|
SUBORDINATION
|
|
|
22
|
|
|
|
|
9.1
|
|
|
Subordination and Attornment
|
|
|
22
|
|
|
|
|
9.2
|
|
|
Mortgage or Superior Lease Defaults
|
|
|
23
|
|
|
|
|
9.3
|
|
|
Tenants Termination Right
|
|
|
23
|
|
- i -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
9.4
|
|
|
Provisions
|
|
|
24
|
|
ARTICLE 10.
|
|
SERVICES
|
|
|
24
|
|
|
|
|
10.1
|
|
|
Electricity
|
|
|
24
|
|
|
|
|
10.2
|
|
|
Excess Electricity
|
|
|
25
|
|
|
|
|
10.3
|
|
|
Elevators
|
|
|
25
|
|
|
|
|
10.4
|
|
|
Heating, Ventilation and Air Conditioning
|
|
|
25
|
|
|
|
|
10.5
|
|
|
Overtime HVAC
|
|
|
26
|
|
|
|
|
10.6
|
|
|
Cleaning
|
|
|
26
|
|
|
|
|
10.7
|
|
|
Water
|
|
|
27
|
|
|
|
|
10.8
|
|
|
Refuse Removal
|
|
|
27
|
|
|
|
|
10.9
|
|
|
Directory
|
|
|
27
|
|
|
|
|
10.10
|
|
|
Tenant Access to Premises
|
|
|
27
|
|
|
|
|
10.11
|
|
|
Service Interruptions
|
|
|
27
|
|
ARTICLE 11.
|
|
INSURANCE; PROPERTY LOSS OR DAMAGE
|
|
|
28
|
|
|
|
|
11.1
|
|
|
Tenants Insurance
|
|
|
28
|
|
|
|
|
11.2
|
|
|
Waiver of Subrogation
|
|
|
30
|
|
|
|
|
11.3
|
|
|
Restoration
|
|
|
30
|
|
|
|
|
11.4
|
|
|
Landlords Termination Right
|
|
|
31
|
|
|
|
|
11.5
|
|
|
Tenants Termination Right
|
|
|
31
|
|
|
|
|
11.6
|
|
|
Final 18 Months
|
|
|
31
|
|
|
|
|
11.7
|
|
|
Landlords Liability
|
|
|
31
|
|
|
|
|
11.8
|
|
|
Landlords Insurance
|
|
|
32
|
|
ARTICLE 12.
|
|
EMINENT DOMAIN
|
|
|
33
|
|
|
|
|
12.1
|
|
|
Taking
|
|
|
33
|
|
|
|
|
12.2
|
|
|
Awards
|
|
|
33
|
|
|
|
|
12.3
|
|
|
Temporary Taking
|
|
|
34
|
|
ARTICLE 13.
|
|
ASSIGNMENT AND SUBLETTING
|
|
|
34
|
|
|
|
|
13.1
|
|
|
Consent Requirements
|
|
|
34
|
|
|
|
|
13.2
|
|
|
Tenants Notice
|
|
|
34
|
|
|
|
|
13.3
|
|
|
Conditions to Assignment/Subletting
|
|
|
35
|
|
|
|
|
13.4
|
|
|
Binding on Tenant; Indemnification of Landlord
|
|
|
37
|
|
|
|
|
13.5
|
|
|
Tenants Failure to Complete
|
|
|
38
|
|
|
|
|
13.6
|
|
|
Profits
|
|
|
38
|
|
|
|
|
13.7
|
|
|
Transfers
|
|
|
38
|
|
|
|
|
13.8
|
|
|
Assumption of Obligations
|
|
|
39
|
|
|
|
|
13.9
|
|
|
Tenants Liability
|
|
|
39
|
|
|
|
|
13.10
|
|
|
Listings in Building Directory
|
|
|
40
|
|
|
|
|
13.11
|
|
|
Lease Disaffirmance or Rejection
|
|
|
40
|
|
|
|
|
13.12
|
|
|
Lender Consent
|
|
|
40
|
|
ARTICLE 14.
|
|
ACCESS TO PREMISES
|
|
|
41
|
|
|
|
|
14.1
|
|
|
Landlords Access
|
|
|
41
|
|
|
|
|
14.2
|
|
|
Building Name
|
|
|
41
|
|
ARTICLE 15.
|
|
DEFAULT
|
|
|
42
|
|
|
|
|
15.1
|
|
|
Tenants Defaults
|
|
|
42
|
|
|
|
|
15.2
|
|
|
Landlords Remedies
|
|
|
42
|
|
- ii -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
15.3
|
|
|
Landlords Damages
|
|
|
44
|
|
|
|
|
15.4
|
|
|
Interest
|
|
|
44
|
|
|
|
|
15.5
|
|
|
Other Rights of Landlord
|
|
|
45
|
|
|
|
|
15.6
|
|
|
Maintenance Default
|
|
|
45
|
|
ARTICLE 16.
|
|
LANDLORDS RIGHT TO CURE; FEES AND EXPENSES
|
|
|
46
|
|
ARTICLE 17.
|
|
NO REPRESENTATIONS BY LANDLORD; LANDLORDS APPROVAL
|
|
|
46
|
|
|
|
|
17.1
|
|
|
No Representations
|
|
|
46
|
|
|
|
|
17.2
|
|
|
No Money Damages
|
|
|
47
|
|
|
|
|
17.3
|
|
|
Reasonable Efforts
|
|
|
47
|
|
ARTICLE 18.
|
|
END OF TERM
|
|
|
47
|
|
|
|
|
18.1
|
|
|
Expiration
|
|
|
47
|
|
|
|
|
18.2
|
|
|
Holdover Rent
|
|
|
47
|
|
ARTICLE 19.
|
|
QUIET ENJOYMENT
|
|
|
48
|
|
ARTICLE 20.
|
|
NO SURRENDER; NO WAIVER
|
|
|
48
|
|
|
|
|
20.1
|
|
|
No Surrender or Release
|
|
|
48
|
|
|
|
|
20.2
|
|
|
No Waiver
|
|
|
48
|
|
ARTICLE 21.
|
|
WAIVER OF TRIAL BY JURY; COUNTERCLAIM
|
|
|
49
|
|
|
|
|
21.1
|
|
|
Jury Trial Waiver
|
|
|
49
|
|
|
|
|
21.2
|
|
|
Waiver of Counterclaim
|
|
|
49
|
|
ARTICLE 22.
|
|
NOTICES
|
|
|
49
|
|
ARTICLE 23.
|
|
RULES AND REGULATIONS
|
|
|
49
|
|
ARTICLE 24.
|
|
BROKER
|
|
|
50
|
|
ARTICLE 25.
|
|
INDEMNITY
|
|
|
50
|
|
|
|
|
25.1
|
|
|
Tenants Indemnity
|
|
|
50
|
|
|
|
|
25.2
|
|
|
Landlords Indemnity
|
|
|
50
|
|
|
|
|
25.3
|
|
|
Defense and Settlement
|
|
|
51
|
|
ARTICLE 26.
|
|
MISCELLANEOUS
|
|
|
51
|
|
|
|
|
26.1
|
|
|
Delivery & Authority
|
|
|
51
|
|
|
|
|
26.2
|
|
|
Transfer of Real Property
|
|
|
51
|
|
|
|
|
26.3
|
|
|
Limitation on Liability
|
|
|
51
|
|
|
|
|
26.4
|
|
|
Rent
|
|
|
52
|
|
|
|
|
26.5
|
|
|
Entire Document
|
|
|
52
|
|
|
|
|
26.6
|
|
|
Governing Law
|
|
|
52
|
|
|
|
|
26.7
|
|
|
Unenforceability
|
|
|
52
|
|
|
|
|
26.8
|
|
|
Lease Disputes
|
|
|
52
|
|
|
|
|
26.9
|
|
|
Landlords Agent
|
|
|
53
|
|
|
|
|
26.10
|
|
|
Estoppel
|
|
|
53
|
|
|
|
|
26.11
|
|
|
Certain Interpretational Rules
|
|
|
53
|
|
|
|
|
26.12
|
|
|
Parties Bound
|
|
|
53
|
|
|
|
|
26.13
|
|
|
Memorandum of Lease
|
|
|
54
|
|
|
|
|
26.14
|
|
|
Counterparts
|
|
|
54
|
|
|
|
|
26.15
|
|
|
Survival
|
|
|
54
|
|
|
|
|
26.16
|
|
|
Inability to Perform
|
|
|
54
|
|
|
|
|
26.17
|
|
|
Substitute Premises
|
|
|
54
|
|
|
|
|
26.18
|
|
|
Deed of Lease/Landlords Agent for Service of Process
|
|
|
54
|
|
- iii -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page
|
|
|
|
26.19
|
|
|
Lien for Payment of Rent
|
|
|
54
|
|
|
|
|
26.20
|
|
|
Financial Statements
|
|
|
55
|
|
|
|
|
26.21
|
|
|
Telecommunications
|
|
|
55
|
|
ARTICLE 27.
|
|
SECURITY DEPOSIT
|
|
|
55
|
|
|
|
|
27.1
|
|
|
Security Deposit
|
|
|
55
|
|
|
|
|
27.2
|
|
|
Letter of Credit
|
|
|
55
|
|
|
|
|
27.3
|
|
|
Application of Security
|
|
|
56
|
|
|
|
|
27.4
|
|
|
Transfer
|
|
|
56
|
|
|
|
|
27.5
|
|
|
Reduction
|
|
|
56
|
|
EXHIBITS
|
|
|
Exhibit A
|
|
Floor Plan
|
Exhibit A-1
|
|
Real Property Description
|
Exhibit A-2
|
|
Reserved Parking Spaces
|
Exhibit A-3
|
|
NOC Facilities
|
Exhibit B
|
|
Definitions
|
Exhibit C
|
|
Work Letter
|
Exhibit D
|
|
Cleaning Specifications
|
Exhibit E
|
|
Rules and Regulations
|
Exhibit F
|
|
Existing Furnishings
|
Exhibit G
|
|
Antenna
|
Exhibit H
|
|
Signage
|
Exhibit I
|
|
Generator
|
Exhibit J
|
|
Rooftop HVAC
|
Exhibit K
|
|
Design Standards
|
Exhibit L
|
|
Conduit Connection
|
- iv -
DEED OF LEASE
This Deed of Lease (the
Lease
) is made as of the 1
st
day of
October, 2002 (
Effective Date
), between
TST WOODLAND FUNDING I, L.L.C.,
a Delaware
limited liability company
(Landlord),
and
FRANCE TELECOM LONG DISTANCE USA LLC,
a Delaware limited liability company (
Tenant
).
Landlord and Tenant hereby agree as follows:
ARTICLE 1
BASIC LEASE PROVISIONS
|
|
|
PREMISES
|
|
The entire rentable area of the 5
th
and
6
th
floors of the Building, as more particularly
shown on
Exhibit A
.
|
|
|
|
BUILDING
|
|
The building, fixtures, equipment and other improvements and
appurtenances now located or hereafter erected, located or
placed upon the land known as 2300 Corporate Park Drive,
Woodland Park, Herndon, Virginia 20171 (commonly known as
South Pointe II).
|
|
|
|
REAL PROPERTY
|
|
The Building, the Common Areas and the real property upon
which the Building and the Common Areas stand, as more fully
described in
Exhibit A-l
.
|
|
|
|
COMMENCEMENT DATE
|
|
October 1, 2002.
|
|
|
|
RENT
COMMENCEMENT
DATE
|
|
October 1, 2002.
|
|
|
|
EXPIRATION DATE
|
|
September 30, 2009.
|
|
|
|
TERM
|
|
The period commencing on the Commencement Date and ending on
the Expiration Date.
|
|
|
|
PERMITTED USES
|
|
Executive and general offices and normal office-related
ancillary uses permitted under the Requirements (
e.g.
, an
employee-only cafeteria or an employee-only work-out
facility (to the extent so permitted)), subject to the
Prohibited Uses.
|
|
|
|
BASE YEAR
|
|
Calendar year 2002.
|
- 1 -
|
|
|
TENANTS
PROPORTIONATE
SHARE
|
|
34.77%
|
|
|
|
AGREED AREA
OF BUILDING
|
|
159,633 rentable square feet, as
mutually agreed by Landlord and Tenant.
|
|
|
|
AGREED AREA
OF PREMISES
|
|
55,504 rentable square feet, as
mutually agreed by Landlord and Tenant.
|
FIXED RENT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Rent per
|
|
|
|
|
|
|
|
|
|
|
rentable square
|
|
|
|
|
|
|
|
|
|
|
foot of the
|
|
Fixed Rent
|
|
Monthly
|
Lease Year
|
|
|
|
Premises
|
|
Per Annum
|
|
Fixed Rent
|
|
1
|
|
|
|
|
$
|
25.50
|
|
|
$
|
1,415,352.00
|
|
|
$
|
117,946.00
|
|
|
2
|
|
|
|
|
$
|
26.27
|
|
|
$
|
1,458,090.08
|
|
|
$
|
121,507.51
|
|
|
3
|
|
|
|
|
$
|
27.05
|
|
|
$
|
1,501,383.20
|
|
|
$
|
125,115.27
|
|
|
4
|
|
|
|
|
$
|
27.86
|
|
|
$
|
1,546,341.44
|
|
|
$
|
128,861.79
|
|
|
5
|
|
|
|
|
$
|
28.70
|
|
|
$
|
1,592,964.80
|
|
|
$
|
132,747.07
|
|
|
6
|
|
|
|
|
$
|
29.56
|
|
|
$
|
1,640,698.24
|
|
|
$
|
136,724.85
|
|
7 through
Expiration Date
|
|
|
|
$
|
30.45
|
|
|
$
|
1,690,096.80
|
|
|
$
|
140,841.40
|
|
Lease Year means each period of 12 successive months commencing on the
Commencement Date or any anniversary thereof, except that (i) with respect to the first Lease
Year, (x) Base Rent shall commence on the Rent Commencement Date and, (y) if the Commencement
Date is a day other than the first day of a month, the first Lease Year will end on the last
day of the month in which the first anniversary of the Commencement Date occurs, and (ii) the
last Lease Year of the Term might contain fewer than 12 months if the period between the
expiration of the then preceding Lease Year and the Expiration Date contains fewer than 12
months.
|
|
|
ADDITIONAL RENT
|
|
All sums other than Fixed Rent
payable by Tenant to Landlord under
this Lease, including Tenants Tax
Payment, Tenants Operating Payment,
late charges, overtime or excess
service charges, damages, and interest
and other costs related to Tenants
failure to perform any of its
obligations under this Lease.
|
- 2 -
|
|
|
RENT
|
|
Fixed Rent and Additional Rent, collectively.
|
|
|
|
INTEREST RATE
|
|
The lesser of (i) 2% per annum above the
then-current Base Rate, and (ii) the maximum rate
permitted by applicable law.
|
|
|
|
SECURITY DEPOSIT
|
|
$700,000
|
|
|
|
TENANTS ADDRESS
FOR NOTICES
|
|
Until Tenant commences business operations from the
Premises:
|
|
|
|
|
|
France Telecom Long Distance USA LLC
|
|
|
South Pointe II
|
|
|
2300 Corporate Park Drive, Suite 600
|
|
|
Woodland Park
|
|
|
Herndon, Virginia 20171
|
|
|
Attn: Vice President of Corporate Affairs
|
|
|
|
with a copy to:
|
|
France Telecom North America
|
|
|
1717 K Street, N.W., Suite 507
|
|
|
Washington, D.C. 20036
|
|
|
Attn: General Counsel
|
|
|
|
and:
|
|
Watt, Tieder, Hoffar & Fitzgerald, L.L.P.
|
|
|
7929 Westpark Drive, Suite 400
|
|
|
McLean, Virginia 22102
|
|
|
Attn: John G. Lavoie, Esquire
|
|
|
|
LANDLORDS
ADDRESS FOR
NOTICES
|
|
TST Woodland Funding I, L.L.C.
|
|
|
c/o Tishman Speyer Properties, L.P.
|
|
|
520 Madison Avenue, Sixth Floor
|
|
|
New York, New York 10022
|
|
|
Attn: Chief Financial Officer
|
|
|
|
|
|
Copies to:
|
|
|
|
|
|
TST Woodland Funding I, L.L.C.
|
|
|
c/o Tishman Speyer Properties, L.P.
|
|
|
8270 Greensboro Drive, Suite 810
|
|
|
McLean, Virginia 22102
|
|
|
Attn: James A. Evans
|
- 3 -
|
|
|
|
|
and:
|
|
|
|
|
|
Tishman Speyer Properties, L.P.
|
|
|
520 Madison Avenue, Sixth Floor
|
|
|
New York, New York 10022
|
|
|
Attn: General Counsel
|
|
|
|
MORTGAGEES
ADDRESS FOR
NOTICES UNDER
ARTICLE 13:
|
|
Deutsche Bank Trust Company Americas
31 West 52
nd
Street
New York, New York 10019
Attention: Craig Friedman
|
|
|
|
|
|
With a copy to:
|
|
|
|
|
|
Deutsche Bank Trust Company Americas
|
|
|
31 West 52
nd
Street
|
|
|
New York, New York 10019
|
|
|
Attention: Amy Sinensky
|
|
|
|
TENANTS
BROKER
|
|
Spaulding & Slye, LLC.
|
|
|
|
LANDLORDS
AGENT
|
|
Tishman Speyer Properties, L.P. or any
other person designated at any time and from
time to time by Landlord as Landlords Agent and
their successors and assigns.
|
|
|
|
LANDLORDS
CONTRIBUTION
|
|
Six Hundred Five Thousand Twenty-Three
and 76/100 Dollars ($605,023.76).
|
Other capitalized terms used in this Lease without definition are defined in
Exhibit B
.
ARTICLE 2
PREMISES, TERM, RENT
Section 2.1 Lease of Premises.
Subject to the terms of this Lease, Landlord
leases to Tenant and Tenant leases from Landlord the Premises for the Term. In addition,
Landlord grants to Tenant, its employees, invitees, licensees and other visitors the right to
use, on a non-exclusive basis and in common with other tenants, the Common Areas.
Landlord represents and warrants to Tenant that: (i) Landlord is duly organized, and
in good standing under the laws of the state of its formation as set forth in the initial
paragraph of this Lease, (ii) Landlord has all necessary power and authority to lease the
Premises to Tenant and to perform its obligations under this Lease, (iii) Landlord has taken
all actions required for
- 4 -
Landlords due execution and delivery of this Lease, and (iv) this Lease constitutes
Landlords valid and binding obligation, enforceable in accordance with its terms.
Section 2.2 Commencement Date.
Upon the Effective Date, the terms and provisions hereof shall
be fully binding on Landlord and Tenant. Tenant acknowledges that prior to the date hereof,
Landlord has delivered possession of the Premises to Tenant. The Term of this Lease shall commence
on the Commencement Date and, unless sooner terminated or extended as hereinafter provided, shall
end on the Expiration Date. Landlord agrees that Tenant shall have no liability under this Lease
for any breach by Global One Communications, LLC (
Global
) of its obligations under Globals Deed
of Lease.
Section 2.3 Payment of Rent.
Tenant shall pay to Landlord, without notice or demand, and
without any set-off, counterclaim, abatement or deduction whatsoever, except as may be expressly
set forth in this Lease, in lawful money of the United States by wire transfer of funds or by check
drawn upon a bank reasonably acceptable to Landlord, (i) Fixed Rent in equal monthly installments,
in advance, on the first day of each month during the Term (as the same may be extended),
commencing on the Rent Commencement Date, and (ii) Additional Rent, at the times and in the manner
set forth in this Lease.
Section 2.4 First Months Rent.
On the Rent Commencement Date, Tenant shall pay Fixed Rent for
the period from the Rent Commencement Date through the last day of the month in which the Rent
Commencement Date falls.
ARTICLE 3
USE AND OCCUPANCY
Section 3.1 Permitted Uses.
Tenant shall use and occupy the Premises for the Permitted
Uses and for no other purpose. Tenant shall not use or occupy or permit the use or occupancy of
any part of the Premises in a manner constituting a Prohibited Use. If Tenant uses the Premises
for a purpose constituting a Prohibited Use, violating any Requirement, or causing the Building to
be in violation of any Requirement, then Tenant shall promptly discontinue such use upon notice of
such violation. Tenant, at its expense, shall procure and at all times maintain and comply with
the terms and conditions of all licenses and permits required for the lawful conduct of the
Permitted Uses in the Premises. Landlord represents that the Real Property is currently zoned I-4
under the Zoning Ordinance and Regulations for Fairfax County,
Virginia.
Section 3.2 Parking Facilities.
Tenant shall have the right to use 3.98 parking spaces per
1,000 rentable square feet in the Premises for no additional Rent (except for Additional Rent
payable in accordance with Article 7 below) during the Term (as the same may be extended).
Parking spaces shall be provided on an unreserved basis in common with other Building tenants.
Notwithstanding the foregoing, Tenant acknowledges that Landlord may temporarily relocate, or
specifically designate the location of, Tenants parking spaces from time to time as a result of
emergencies or repair and maintenance work. Tenant agrees that it and its employees shall observe
reasonable safety precautions in the use of the parking structure and surface lots, and shall at
all times abide by all reasonable rules and regulations promulgated by Landlord, (or any
- 5 -
parking operator selected by Landlord) governing the use of the parking structure and surface
lots. It is understood and agreed that Landlord does not assume any responsibility for any damage
or loss to any automobiles parked in the parking structure or surface lots or to any personal
property located therein, or for any injury sustained by any person in or about the parking
structure or surface lots. Landlord shall use commercially reasonable efforts to provide Tenant
with 5 days prior written notice of any repair and maintenance work to be performed to the parking
facilities if Landlord anticipates that such work will materially and adversely affect Tenants
parking rights. If Landlord renders the parking areas for the Building and/or Tenants parking
space allocation unusable, Landlord shall use commercially reasonable efforts to promptly provide
comparable substitute parking for Tenant. Landlord agrees that 5 of Tenants parking spaces will
be marked as Reserved for France Telecom or a similar statement (the
Reserved Spaces
) as shown
on
Exhibit A-2 Reserved Parking Spaces
. Tenant
shall have the right to use the Reserveds
Spaces for no additional rental throughout the Term and any extensions thereof.
ARTICLE 4
CONDITION OF THE PREMISES
Section 4.1 Condition.
Tenant accepts the Premises in AS IS condition as of the
date of delivery of possession to Tenant, without any warranty or representation, express or
implied, by or on behalf of Landlord as to the condition or usability thereof. Except as otherwise
expressly provided in this Lease to the contrary, Landlord shall have no obligation to provide
Tenant with any leasehold improvement allowance, painting allowance, build-out allowance,
contribution or other inducement therefor, except as expressly set forth in this Lease to the
contrary. Except as otherwise expressly provided in this Lease to the contrary, Landlord shall have
no obligation to make, or have made, any demolition, alteration, addition, repair, replacement or
improvement in or to the Premises, including, without limitation, to perform any Landlord work to
make the Premises ready for occupancy. Tenant acknowledges that as of the Commencement Date the
Premises contains certain furniture, fixtures and equipment, including, without Limitation, the
furniture described on
Exhibit F Existing Furnishings
to this Lease (the
Existing
Furnishings).
On or before December 31, 2002, Landlord and Tenant shall prepare an inventory of
the Existing Furnishings, and to the extent necessary, substitute a revised
Exhibit F
Existing Furnishings
to this Lease. Landlord represents that the Existing Furnishings
comprise a portion of the personal property described in that certain Warranty Bill of Sale, dated
May 3, 2002, from Winstar Communications, LLC
(Winstar)
to Landlord. Tenant shall have the right
to use the Existing Furnishings without charge throughout the Term, provided that (i) Tenant shall
maintain the Existing Furnishings in the condition that the Existing Furnishings are in on the
Commencement Date (normal wear and tear excepted) and Tenant shall repair the Existing Furnishings
at Tenants expense, (ii) the Existing Furnishing shall at all times remain Landlords property and
shall be during the Term (subject to the following paragraph), (iii) at no time shall Tenant remove
any of the Existing Furnishings from the Premises (subject to the following paragraph), and (iv)
Tenant shall be surrender the Existing Furnishings to Landlord upon the expiration or sooner
termination of this Lease in good order and repair, reasonable wear and tear excepted. Tenant shall
have a one-time right to require Landlord to remove some or all of the Existing Furniture from the
Premises. If Tenant elects to exercise such right, Tenant shall give Landlord written notice of
such election within the 6 month period following the Rent
- 6 -
Commencement Date. Promptly after receipt of such notice, Landlord and Tenant will schedule
a date and time and make all other necessary arrangements for Landlords removal of the designated
Existing Furniture. Within 30 days after receipt of an invoice therefor, Tenant will reimburse
Landlord for Landlords out-of-pocket expenses incurred in connection with Landlords removal of
the designated Existing Furniture including, without limitation, moving company and electrician
charges. Landlords out-of-pocket expenses will not include any storage charges for the designated
Existing Furniture. Once the designated Existing Furniture has been removed, such Existing
Furniture will no longer be considered part of the Existing Furniture and neither Tenant nor any
party claiming by, through or under Tenant shall have any interest in or claim upon such Existing
Furniture.
Notwithstanding the foregoing, provided no Event of Default then exists, promptly after the
expiration of the 3
rd
Lease Year, Tenant shall pay $10.00 to Landlord for the Existing
Furnishings and Landlord shall transfer Landlords title to the Existing Furnishings to Tenant by
bill of sale. Following conveyance of the Existing Furnishings, the restrictions concerning
Tenants use of the Existing furnishings set forth in this Section shall no longer apply. Tenant
shall pay the sales tax (if any) due upon such transfer of the Existing Furnishings to Tenant.
ARTICLE 5
ALTERATIONS
Section 5.1 Tenants Alterations.
(a) Tenant shall not make any alterations, additions or other physical changes in or about the
Premises (collectively,
Alterations
) (other than decorative Alterations such as painting, wall
coverings and floor coverings (collectively,
Decorative Alterations
)) without Landlords prior
written consent. Landlord shall not unreasonably withhold its consent for normal and customary
alterations typically made by office tenants in Comparable Buildings, provided that (i) such
Alterations are non-structural, do not affect any Building Systems and do not tie into the backup
generator, supplemental cooling unit or uninterruptible power supply serving the Building, (ii)
[Intentionally Omitted], (iii) such Alterations affect only the Premises and are not visible from
outside of the Premises, (iv) such Alterations do not invalidate or violate the non-residential use
permit issued for the Building or the Premises, (v) such Alterations do not violate any
Requirement, and (vi) prior to the Expiration Date, Tenant shall, unless otherwise directed by
Landlord, at Tenants expense, remove any such Alterations. Notwithstanding the foregoing, at the
time Tenant requests Landlords consent for any such Alteration, Tenant may, by written notice to
Landlord, request Landlords written decision as to whether Landlord shall require Tenant to remove
such Alteration at the end of the Term, which decision shall be irrevocable and shall be promptly
given. Subject to the provisions of Section 5.3, Tenant shall repair and restore, in a good and
workmanlike manner, any damage to the Premises or the Building caused by Tenants removal of any
such Alterations, and upon default thereof, Tenant shall reimburse Landlord for Landlords actual
cost of repairing and restoring such damage.
(b)
Plans and Specifications.
Prior to making any Alterations, Tenant, at its expense,
shall (i) submit to Landlord for its approval, detailed plans and specifications (
Plans
) of each
proposed Alteration (other than Decorative Alterations), and with respect to any
- 7 -
Alteration affecting any Building System, evidence that the Alteration has been designed by,
or reviewed and approved by, Landlords designated engineer for the affected Building System, whose
current name, address and contact information has been previously provided to Tenant, (ii) obtain
all permits, approvals and certificates required by any Governmental
Authorities, (iii) furnish to
Landlord duplicate original policies or certificates of workers compensation (covering all persons
to be employed by Tenant, and Tenants contractors and subcontractors in connection with such
Alteration) and commercial general liability (including property damage coverage) insurance and
Builders Risk coverage (as described in Article 11) all in such form, with such companies, for
such periods and in such amounts as Landlord may reasonably require, naming Landlord, Landlords
Agent, any Lessor and any Mortgagee as additional insureds, and (iv) furnish to Landlord reasonably
satisfactory evidence of Tenants ability to complete and to fully pay for such Alterations (other
than Decorative Alterations). Tenant shall give Landlord not less than 5 Business Days notice
prior to performing any Decorative Alteration, which notice shall contain a description of such
Decorative Alteration.
(c)
Governmental Approvals.
Tenant, at its expense, shall, as and when required,
promptly obtain certificates of partial and final approval of such Alterations required by any
Governmental Authority and shall furnish Landlord with copies thereof, together with as-built
Plans for such Alterations prepared on an AutoCAD Computer Assisted Drafting and Design System (or
such other system or medium as Landlord may reasonably accept), using naming conventions issued by
the American Institute of Architects in June, 1990 (or such other naming conventions as Landlord
may reasonably accept) and magnetic computer media of such record drawings and specifications
translated in DFX format or another format acceptable to Landlord.
(d)
Tenant Improvements.
Landlord and Tenant agree the provisions of this Article 5 shall not
apply to the construction and installation of the Tenant Improvements. Reference is hereby made to
the provisions of
Exhibit C - Work Letter
concerning the construction and installation of
the Tenant Improvements.
Section 5.2 Manner and Quality of Alterations.
All Alterations shall be performed (a) in a
good and workmanlike manner and free from defects, (b) substantially in accordance with the
Plans, and by contractors reasonably approved by Landlord, and (c) in compliance with all
Requirements, the terms of this Lease and all construction procedures and regulations reasonably
prescribed by Landlord including, without limitation, the Construction Rules and Regulations
attached as
Exhibit C-3
to this Lease. All materials and equipment shall be of first
quality and at least equal to the applicable standards for the Building then established by
Landlord.
Section 5.3 Removal of Tenants Property.
Tenants Property shall remain the property
of Tenant and Tenant may remove the same at any time on or before the Expiration Date. On or
prior to the Expiration Date, Tenant shall, unless otherwise directed by Landlord, at Tenants
expense, remove any Specialty Alteration and close up any slab penetrations in the Premises.
Tenant shall repair and restore, in a good and workmanlike manner, any damage to the Premises or
the Building caused by Tenants removal of any Alterations or Tenants Property or by the closing
of any slab penetrations, and upon default thereof, Tenant shall reimburse Landlord for
Landlords actual out-of-pocket cost of repairing and restoring such damage. Any
- 8 -
Specialty Alterations or Tenants Property not so removed by the Expiration Date shall be
deemed abandoned and Landlord may remove and dispose of same, and repair and restore any damage
caused thereby, at Tenants cost and without accountability to Tenant. All other Alterations shall
become Landlords property upon termination of this Lease.
Any provision of this Lease to the contrary notwithstanding, upon the expiration or
earlier termination of this Lease, Tenant shall not be required to remove the Tenant Improvements
(including, without limitation, the Rooftop HVAC Units) shown on the *space plan attached as
Exhibit C-l
to
Exhibit C-
Work Letter.
Section 5.4 Mechanics Liens.
Tenant, at its expense, shall discharge any lien or charge
recorded or filed against the Real Property in connection with any work done or claimed to have
been done by or on behalf of, or materials furnished or claimed to have been furnished to, Tenant,
within 20 days after Tenants receipt of notice thereof by payment, filing the bond required by
law or otherwise in accordance with law.
Section 5.5 Labor Relations.
Tenant shall not employ, or permit the employment of, any
contractor, mechanic or laborer, or permit any materials to be delivered to or used in the
Building, if, in Landlords reasonable judgment, such employment, delivery or use will interfere
or cause any conflict with other contractors, mechanics or laborers engaged in the construction,
maintenance or operation of the Building by Landlord, Tenant or others. If such interference or
conflict occurs, upon Landlords request, Tenant shall cause all contractors, mechanics or
laborers causing such interference or conflict to leave the Building immediately.
Section 5.6 Tenants Costs.
If Landlord and Tenant agree in writing that Landlord will
perform any Alterations, Tenant shall pay promptly to Landlord, within 30 days after Landlords
written demand an administrative fee in an amount equal to 2% of the total cost of such
Alterations performed by Landlord. The foregoing fee shall be inclusive of costs incurred in
connection with (a) Landlords review of the Alterations (including review of requests for
approval thereof) and (b) the provision of Building personnel during the performance of any
Alteration, to operate elevators or otherwise to facilitate Tenants Alterations.
Section 5.7
Tenants Equipment.
Tenant shall provide notice to Landlord prior to moving any
heavy machinery, heavy equipment, freight, bulky matter or fixtures (collectively,
Equipment
)
into or out of the Building and shall pay to Landlord any out-of-pocket costs actually incurred
by Landlord in connection therewith. If such Equipment requires special handling, Tenant agrees
(a) to employ only persons holding all necessary licenses to perform such work, (b) all work
performed in connection therewith shall comply with all applicable Requirements and (c) such work
shall be done only during hours designated by Landlord.
Section 5.8 Legal Compliance.
The approval of Plans, or consent by Landlord to the
making of any Alterations, does not constitute Landlords representation that such Plans or
Alterations comply with any Requirements. Except as otherwise expressly provided in this Lease to
the contrary, Landlord shall not be liable to Tenant or any other party in connection with
Landlords approval of any Plans, or Landlords consent to Tenants performing any Alterations.
If, after completion of the any Alterations made by or on behalf of Tenant, require Landlord to
- 9 -
make any alterations or improvements to any part of the Building in order to comply with any
Requirements, Tenant shall, subject to the terms of this Lease, pay all costs and expenses
reasonably incurred by Landlord in connection with such alterations or improvements.
Section 5.9 Floor Load.
Tenant shall not place a load upon any floor of the Premises that
exceeds 80 pounds per square foot live load. Landlord reserves the right to reasonably designate
the position of all Equipment which Tenant wishes to place within the Premises, and to place
limitations on the weight thereof.
ARTICLE 6
REPAIRS
Section 6.1 Landlords Repair and Maintenance.
Landlord shall operate, maintain and, except
as provided in Section 6.2 hereof, make all necessary repairs (both structural and nonstructural)
to (i) the Building Systems, and (ii) the Common Areas, in conformance with this Lease and
standards applicable to Comparable Buildings.
Section
6.2
Tenants Repair and Maintenance.
Tenant shall promptly, at its expense and in
compliance with Article 5, make all nonstructural repairs to the Premises and the fixtures,
equipment and appurtenances therein (including any supplemental HVAC (other than as set forth in
Section 6.4(b) to the contrary with respect to the Supplemental HVAC Units), specialty lighting or
Specialty Alteration) (collectively
Tenant Fixtures
) as and when needed to preserve the Premises
in good working order and condition, except for reasonable wear and tear and damage for which
Tenant is not responsible and subject to the terms and provisions of Articles 11 and 12 with
respect to casualties and condemnations, respectively. All damage to the Building or to any
portion thereof, or to any Tenant Fixtures requiring structural or nonstructural repair caused by
or resulting from any act, omission, neglect or improper conduct of a Tenant Party or the moving
of Tenants Property or Equipment into, within or out of the Premises by a Tenant Party, shall be
repaired at Tenants expense by (i) Tenant, if the required repairs are nonstructural in nature
and do not affect any Building System, or (ii) Landlord, if the required repairs are structural in
nature, involve replacement of exterior window glass or affect any Building System. All Tenant
repairs shall be of good quality utilizing new construction materials.
Section 6.3 Restorative Work.
Landlord reserves the right to make all changes, alterations,
additions, improvements, repairs or replacements to the Building and Building Systems, including
changing the arrangement or location of entrances or passageways, doors and doorways, corridors,
elevators, stairs, toilets or other Common Areas (collectively,
Restorative Work
), as Landlord
deems reasonably necessary or desirable, and in compliance with this Lease, and to take all
material into the Premises required for the performance of such Restorative Work provided that
(a) the square footage of the Premises shall not be permanently decreased, (b) the level of any
Building service shall not decrease in any material respect from the level required of Landlord
in this Lease as a result thereof (other than temporary changes in the level of such services
during the performance of any such Restorative Work) and (c) access to the Premises is not
materially interfered with. Landlord shall use reasonable efforts to minimize interference with
Tenants use and occupancy of the Premises during the performance of such
- 10 -
Restorative Work. Any provision of this Lease to the contrary notwithstanding, if such Restorative
Work continues for more than 3 consecutive Business Days and shall render any portion of the
Premises unusable for the normal conduct of Tenants business, and if Tenant in fact does not use
or occupy such portion of the Premises during such Restorative Work, then the Fixed Rent and
Tenants payment of Operating Expenses and Taxes payable hereunder with respect to such portion of
the Premises which Tenant does not occupy shall be abated retroactively to the 1
st
Business Day of such Restorative Work and shall continue until the earlier of (i) such portion of
the Premises is substantially restored, or (ii) Tenant recommencing occupancy of such portion of
the Premises. Except as set forth in the immediately preceding sentence, there shall be no Rent
abatement or allowance to Tenant for a diminution of rental value, no actual or constructive
eviction of Tenant, in whole or in part, no relief from any of Tenants other obligations under
this Lease, and no liability on the part of Landlord by reason of inconvenience, annoyance or
injury to business arising from Landlord, Tenant or others performing, or failing to perform, any
Restorative Work. Except in the case of a bonafide emergency, Landlord shall use commercially
reasonable efforts to provide Tenant with 5 days prior notice of the date on which Landlord intends
to commence performance of any Restorative Work that Landlord anticipates will materially and
adversely affect Tenants use of the Premises.
Notwithstanding the foregoing, except in the case of a bonafide emergency, Landlord shall not
be permitted to perform any Restorative Work that directly, materially and adversely impacts
Tenants Network Operation Center (the
NOC Facilities
) without Tenants prior written consent,
which consent shall not to be unreasonably withheld, conditioned or delayed. The NOC Facilities
are shown on
Exhibit A-3 NOC Facilities
. If Landlord desires to perform Restorative Work
within the NOC Facilities, Landlord and Tenant shall reasonably cooperate with each other so that
Landlord can promptly perform such Restorative Work and Landlord shall comply with Tenants
reasonable requests with respect to the performance of such Restorative Work including, without
limitation, methodology, timing and materials. All Restorative Work within the NOC Facilities
shall be completed by contractors reasonably acceptable to Tenant and on an escorted basis only.
Section 6.4 Supplemental HVAC System.
(a) (i) At any time during the Term, Tenant shall have the right to elect to use the
supplemental HVAC units and the equipment related thereto located at the Premises on the date of
this Lease (collectively, the
Supplemental HVAC Units
).
Prior to using any Supplemental HVAC Units, Tenant shall provide Landlord with all
equipment plans and specifications relating to the loads that would be imposed upon the
Supplemental HVAC System (hereinafter defined) (the
Supplemental HVAC Plans
). Landlord shall
have the right to deny Tenant use of the Supplemental HVAC Units if Landlord reasonably
determines the Supplemental HVAC System will not be adequate to meet Tenants demand when used in
conjunction with the Base Building HVAC system and Tenants Rooftop HVAC Units; provided,
however, if Landlord has approved Tenants use of the Supplemental HVAC Units, Landlord will not
have the right to thereafter revoke such approval.
- 11 -
Following Landlords receipt of the Supplemental HVAC Plans, Landlord shall provide
written notice approving the Supplemental HVAC Plans or notice in reasonable detail of Landlords
reasonable disapproval of such Supplemental HVAC Plans (
Landlords Supplemental HVAC Plan
Response
). If Landlord has not delivered to Tenant Landlords Supplemental HVAC Plan Response
within 7 days after Landlords receipt of the Supplemental HVAC Plans, Tenant shall send a second
notice which must state SECOND AND FINAL REQUEST at the top of the notice (the
Second HVAC
Notice
). If Landlord has not delivered to Tenant Landlords Supplemental HVAC Plan Response
within 7 days after Landlord receives the Second HVAC Notice, Landlord shall be deemed to have
approved the Supplemental HVAC Plans.
If Landlord approves of Tenants use of the Supplemental HVAC Units, Landlords engineer or
contractor will activate Tenants use of the Supplemental HVAC Units. The minimum period for which
Tenant can elect to use a Supplemental HVAC Unit is 30 days and Tenant shall provide Landlord with
at least 30 days prior written notice if Tenant elects at any time to discontinue using any
Supplemental HVAC Unit.
(ii) If Tenant does not use the Supplemental HVAC System, Landlord shall have the right to
lock-off the Supplemental HVAC Units at Landlords expense.
(b) (i) Except with respect to emergency repairs, Landlord will maintain, repair and
make any capital repairs or replacements of the Supplemental HVAC Units.
(ii) If any Supplemental HVAC Units require emergency repairs, Tenant shall send Landlord
prompt written or telephonic notice of such emergency and Tenant shall make arrangements for such
repairs directly with Landlords Supplemental HVAC Unit contractor. Landlord will provide Tenant
with written notice from time to time of the name and telephone number of Landlords Supplemental
HVAC Unit contractor.
(iii) Landlord will maintain, repair and make any capital repairs or replacements to any
equipment relating to the operation of the Supplemental HVAC Units that is not located at the
Premises, which shall include the cooling tower(s) located on the roof of the Building that
generally serve(s) the supplemental HVAC units presently located in the Building (collectively,
the
Supplemental Common Equipment
). The Supplemental HVAC Units and the Supplemental Common
Equipment are together called the
Supplemental HVAC System.
(c) Beginning on the date on which Tenant commences to use the Supplemental HVAC System
and continuing thereafter during the Term for so long as Tenant has elected to use any Supplemental
HVAC Unit:
(i) Tenant shall pay all out-of-pocket third-party costs incurred by Landlord and/or Tenant
during the Term in connection with the ordinary maintenance and emergency and non-emergency
repairs and replacements to the Supplemental HVAC Units (whether for parts, labor, warranty
coverage or otherwise) (the
Supplemental Maintenance Costs
). If Tenant directly incurs any
Supplemental Maintenance Costs, Tenant shall pay such Supplemental Maintenance Costs as and when
due and owing to the applicable Supplemental HVAC Unit service provider.
- 12 -
(ii) Tenant shall pay Tenants Supplemental Share of all out-of-pocket third-party
costs incurred by Landlord in connection with the ordinary maintenance and emergency and
non-emergency repairs and replacements of the Supplemental Common Equipment (whether for parts,
labor, warranty coverage or otherwise) (the
Supplemental
Common Costs
)
.
Tenants Supplemental
Share
means a fraction, the numerator of which shall be the tonnage rating of the Supplemental
HVAC Units in the Premises and the denominator of which shall be the tonnage rating of all
supplemental HVAC units in the Building (exclusive of any such units that are owned by a tenant of
the Building) that any tenant of the Building from time to time elects to use.
(iii) In addition to Tenants of Supplemental Maintenance Costs and Tenants Supplemental
Share of Supplemental Common Costs, Tenant shall pay to Landlord the monthly electricity charge
for the Supplemental HVAC System as reasonably established from time to time by Landlord (the
Supplemental Charge
). The current Supplemental Charge is $70 per ton per month. Any increases in
the Supplemental Charge shall be limited to actual increases in utility costs.
(iv) All sums payable by Tenant to Landlord under this Section shall constitute Additional
Rent and shall be due and payable to Landlord within 30 days after Landlord sends Tenant an
invoice therefor. Landlord will be entitled to an administrative charge of 10% of Tenants
Supplemental Maintenance Costs and Tenants Supplemental Share of Supplemental Common Costs
(together, the
Supplemental Administrative Fee
).
(d) Landlord shall have no liability arising from any failure of the Supplemental
HVAC System or any component thereof to operate properly or at all at any time including, without
limitation, no liability if any such failure results in the Premises not being reasonably
comfortable or useable at all, any of Tenants equipment not functioning or not functioning fully
or properly, Tenant missing or being delayed in meeting any business or other deadlines, or Tenant
incurring any other costs or damages.
(e) Tenant shall cooperate with Landlord and shall abide by the rules and regulations which
Landlord may reasonably prescribe for the proper functioning and protection of the Supplemental
HVAC System.
(f) Any provision of this Lease to the contrary notwithstanding, the terms of this Section
shall not apply to the Rooftop HVAC Units (as defined in
Exhibit J
to this Lease).
Section 6.5 Emergency Power System.
(a) The Building is equipped with an emergency power generator and an uninterrupted
power supply system (collectively, the
Emergency Power System
). At any time during the Term,
Tenant shall have the right to elect to connect certain equipment at the Premises to the
Emergency Power System. Prior to connecting any equipment to the Emergency Power System, Tenant
shall provide Landlord with all equipment plans and specifications relating to the loads that
would be imposed upon the Emergency Power System (the
EPS Plans
). Landlord shall have the right
to deny Tenant use of the Emergency Power System to the extent that Landlord determines that
Tenants usage might or would exceed Tenants EPS Share (hereinafter
- 13 -
defined) of the Emergency Power System; provided, however, if Landlord has approved Tenants use
of the Emergency Power System, Landlord will not have the right to thereafter revoke such
approval.
Following Landlords receipt of the EPS Plans, Landlord shall provide written notice approving
the EPS Plans or notice in reasonable detail of Landlords reasonable disapproval of such EPS Plans
(
Landlords EPS Plan Response
). If Landlord has not delivered to Tenant Landlords EPS Plan
Response within 7 days after Landlords receipt of the EPS Plans, Tenant shall send a second notice
which must state SECOND AND FINAL REQUEST at the top of the notice (the
Second EPS Notice
). If
Landlord has not delivered to Tenant Landlords EPS Plan Response within 7 days after Landlord
receives the Second EPS Notice, Landlord shall be deemed to have approved the EPS Plans.
If Landlord approves of Tenants use of the Emergency Power System, at Landlords election,
either Landlords contractor will connect Tenants approved equipment to the Emergency Power
System or Tenants contractor will connect Tenants approved equipment to the Emergency Power
System, in either case, at Tenants expense.
(b) Landlord will operate, maintain, repair and make any capital repairs or replacements to
the Emergency Power System.
(c) (i) If Tenant elects to connect any equipment to the Emergency Power System, Tenant
shall pay to Landlord Tenants EPS Share of all costs and expenses incurred by Landlord on or after
the date on which such equipment is connected to the Emergency Power System in connection with the
operation, maintenance, repair and replacement of the Emergency Power System (
EPS Costs
).
Tenants EPS Share
means 72.03%.
(ii) All sums payable by Tenant to Landlord under this Section shall constitute Additional
Rent and shall be due and payable to Landlord within 30 days after Landlord sends Tenant an
invoice therefor. Landlord will be entitled to an administrative charge of 10% of Tenants EPS
Share (the
EPS Fee
).
(d) Landlord shall have no liability arising from any failure of the Emergency Power System or
any component thereof to operate properly or at all at any time including, without limitation, no
liability if any such failure results in any of Tenants equipment not functioning or not
functioning fully or properly, Tenant losing any data, Tenant missing or being delayed in meeting
any business or other deadlines, or Tenant incurring any other costs or damages.
(e) Tenant shall cooperate with Landlord and shall abide by the rules and regulations
which Landlord may reasonably prescribe for the proper functioning and protection of the Emergency
Power System.
(f) Landlord agrees that if Tenant installs a separate un-interruptible power system (in
accordance with the applicable provisions of this Lease), Landlord shall not allocate to any third
party(ies) a share of the Emergency Power System exceeding 27.97%, which Landlord
- 14 -
and Tenant acknowledge is the aggregate of the usage of Deica Communications and Agere
Systems.
(g) Not more frequently than 4 times in any calendar year, following reasonable prior written
notice, Tenant shall be permitted to audit the Emergency Power System to confirm (i) Tenants EPS
Share and the other locations of the Emergency Power System described in this Section, and (ii)
that the Emergency Power System is being maintained in accordance with the requirements of this
Lease and in a manner necessary to retain the benefit any and all manufacturers warranty(ies) for
the Emergency Power System.
ARTICLE 7
INCREASES IN TAXES AND OPERATING EXPENSES
Section 7.1 Definitions.
For the purposes of this Article 7, the following terms shall
have the meanings set forth below:
(a)
Assessed Valuation
shall mean the amount for which the Real Property is assessed by the
County Assessor of Fairfax County for the purpose of imposition of Taxes.
(b)
Base Operating Expenses
shall mean the Operating Expenses for the Base Year.
(c)
Base Taxes
shall mean the Taxes payable on account of the Base Year.
(d)
Comparison Year
shall mean any calendar year commencing subsequent to the
Base Year.
(e)
Operating Expenses
shall mean the aggregate of all costs and expenses paid or incurred
by or on behalf of Landlord in connection with the operation, repair and maintenance of the Real
Property, including (i) capital improvements only if such capital improvement either (A) is
reasonably intended to result in a reduction in Operating Expenses (as for example, a labor-saving
improvement) provided, the amount included in Operating Expenses in any Comparison Year shall not
exceed the lesser of the actual cost of such improvement amortized (with interest at the Base Rate
in effect on the date Landlord incurred the cost or expense of such improvement) over its useful
life, as reasonably determined by Landlord, or an amount equal to the savings reasonably estimated
by Landlord as having resulted from the installation and operation of such improvement, and/or (B)
is made during any Comparison Year in compliance with Requirements, (ii) reasonable rent for the
management office, if any, in the Building not in excess of 1,000 square feet, and (iii) all costs
relating to the ownership, operation, repair and maintenance of the Building and any parking
facilities serving the Building (including, without limitation, costs and expenses relating to
monitoring the Buildings air quality). Any such capital improvements made in compliance with
Requirements shall be amortized (with interest at the Base Rate) on a straight-line basis over its
useful life as Landlord shall reasonably determine, and the amount included in Operating Expenses
in any Comparison Year shall be equal to the annual amortized amount. Operating Expenses shall
not include any Excluded Expenses. If during all or part of the Base Year or any Comparison Year,
Landlord shall not
- 15 -
furnish any particular item(s) of work or service (which would otherwise constitute an
Operating Expense) to any leasable portions of the Building for any reason, then, for purposes of
computing Operating Expenses for such period, the amount included in Operating Expenses for such
period shall be increased by an amount equal to the costs and expenses that would have been
reasonably incurred by Landlord during such period if Landlord had furnished such item(s) of work
or service to such portion of the Building. In determining the amount of Operating Expenses for the
Base Year or any Comparison Year, if less than 95% of the Building rentable area is occupied by
tenants at any time during any such Base Year or Comparison Year, Operating Expenses that vary with
the Building occupancy level shall be determined for such Base Year or Comparison Year to be an
amount equal to the like expenses which would normally be expected to be incurred had such
occupancy been 95% throughout such Base Year or Comparison Year. Operating Expenses shall be
calculated using generally accepted accounting principles consistently applied.
(f)
Statement
shall mean a statement containing a comparison of (i) the Taxes payable for
the Base Year and for any Comparison Year, or (ii) the Base Operating Expenses and the Operating
Expenses payable for any Comparison Year.
(g)
Taxes
shall mean (i) all real estate taxes, assessments, sewer and water rents, rates
and charges and other governmental levies, impositions or charges, whether general, special,
ordinary, extraordinary, foreseen or unforeseen, which may be assessed, levied or imposed upon all
or any part of the Real Property, and (ii) all expenses (including reasonable attorneys fees and
disbursements and experts and other witnesses fees) incurred in contesting any of the foregoing
or the Assessed Valuation of the Real Property. Taxes shall not include (x) interest or penalties
incurred by Landlord as a result of Landlords late payment of Taxes, (y) franchise, transfer,
gift, inheritance, estate or net income taxes imposed upon Landlord, (z) franchise, excise, capital
stock, estate or succession. For purposes hereof,
Taxes
for any calendar year shall be deemed
to be the Taxes which are assessed, levied or imposed for such calendar year regardless of when due
or paid. If Landlord elects to pay any assessment in annual installments, then (i) such assessment
shall be deemed to have been so divided and to be payable in the maximum number of installments
permitted by law, and (ii) there shall be deemed included in Taxes for each Comparison Year the
installments of such assessment becoming payable during such Comparison Year, together with
interest (but only if the Tax Payment is not overdue) payable during such Comparison Year on such
installments and on all installments thereafter becoming due as provided by law, all as if such
assessment had been so divided. If at any time the methods of taxation prevailing on the Effective
Date shall be altered so that in lieu of or as an addition to the whole or any part of Taxes, there
shall be assessed, levied or imposed (1) a tax, assessment, levy, imposition or charge based on the
income or rents received from the Real Property whether or not wholly or partially as a capital
levy or otherwise, (2) a tax, assessment, levy, imposition or charge measured by or based in whole
or in part upon all or any part of the Real Property and imposed upon Landlord, (3) a license fee
measured by the rents, or (4) any other tax, assessment, levy, imposition, charge or license fee
however described or imposed, including business improvement district impositions then all such
taxes, assessments, levies, impositions, charges or license fees or the part thereof so measured or
based shall be deemed to be Taxes.
- 16 -
Section 7.2
Tenants Tax Payment.
(a) If the Taxes payable for any Comparison Year exceed the Base Taxes, Tenant shall
pay to Landlord Tenants Proportionate Share of such excess (
Tenants Tax Payment
). For each
Comparison Year, Landlord shall furnish to Tenant a statement setting forth Landlords reasonable
estimate of Tenants Tax Payment for such Comparison Year (the
Tax Estimate
). Tenant shall pay
to Landlord on the 1
st
day of each month during such Comparison Year an amount equal to
1/12 of the Tax Estimate for such Comparison Year. If Landlord furnishes a Tax Estimate for a
Comparison Year subsequent to the commencement thereof, then (i) until the 1
st
day of
the month following the month in which the Tax Estimate is furnished to Tenant, Tenant shall pay to
Landlord on the 1
st
day of each month an amount equal to the monthly sum payable by
Tenant to Landlord under this Section 7.2 during the last month of the preceding Comparison Year,
(ii) promptly after the Tax Estimate is furnished to Tenant or together therewith, Landlord shall
give notice to Tenant stating whether the installments of Tenants Tax Estimate previously made for
such Comparison Year were greater or less than the installments of Tenants Tax Estimate to be made
for such Comparison Year in accordance with the Tax Estimate, and (x) if there shall be a
deficiency, Tenant shall pay the amount thereof within 30 days after written demand therefor, or
(y) if there shall have been an overpayment, Landlord shall credit the amount thereof against the
next occurring (and if necessary, to subsequent payments of Rent due hereunder, unless Tenant
requests a refund and there exists no Event of Default, in which case Landlord will promptly
deliver Tenants portion to Tenant, and (iii) on the 1
st
day of the month following the
month in which the Tax Estimate is furnished to Tenant, and on the 1
st
day of each month
thereafter throughout the remainder of such Comparison Year, Tenant shall pay to Landlord an amount
equal to 1/12 of the Tax Estimate.
Any provision of this Section to the contrary notwithstanding, Tenants obligation to pay
Tenants Tax Payment shall commence on the first anniversary of the Rent Commencement Date.
(b) As soon as reasonably practicable after Landlord has determined the Taxes for a Comparison
Year, Landlord shall furnish to Tenant a Statement for such Comparison Year. If the Statement shall
show that the sums paid by Tenant under Section 7.2(a) exceeded the actual amount of Tenants Tax
Payment for such Comparison Year, Landlord shall credit the amount of such excess against next
occurring (and if necessary, subsequent) payments of Rent due hereunder. If the Statement for such
Comparison Year shall show that the sums so paid by Tenant were less than Tenants Tax Payment for
such Comparison Year, Tenant shall pay the amount of such deficiency within 30 days after delivery
of the Statement to Tenant.
(c) Only Landlord may institute proceedings to reduce the Assessed Valuation of the
Real Property and the filings of any such proceeding by Tenant without Landlords consent shall
constitute an Event of Default. If the Taxes payable for the Base Year are reduced, the Base Taxes
shall be correspondingly revised, the Additional Rent previously paid or payable on account of
Tenants Tax Payment hereunder for all Comparison Years shall be recomputed on the basis of such
reduction, and Tenant shall pay to Landlord within 10 Business Days after being billed therefor,
any deficiency between the amount of such Additional Rent previously computed and paid by Tenant to
Landlord, and the amount due as a result of such recomputations. If
- 17 -
Landlord receives a refund of Taxes for any Comparison Year, Landlord shall credit against
subsequent payments of Rent due hereunder, an amount equal to Tenants Proportionate Share of the
refund, net of any expenses incurred by Landlord in achieving such refund, which amount shall not
exceed Tenants Tax Payment paid for such Comparison Year. Landlord shall not be obligated to file
any application or institute any proceeding seeking a reduction in Taxes or the Assessed Valuation.
The benefit of any exemption or abatement relating to all or any part of the Real Property shall
accrue solely to the benefit of Landlord and Taxes shall be computed without taking into account
any such exemption or abatement.
Any provision of this Section to the contrary notwithstanding, upon Tenants written request,
Landlord shall meet with Tenant at a mutually convenient time to discuss the Assessed Valuation of
the Real Property. In connection with any such meeting, Tenant may submit a written report of any
independent tax consultant obtained by Tenant, at Tenants expense.
(d) Tenant shall be responsible for any applicable occupancy or rent tax now in effect or
hereafter enacted and, if payable by Landlord, Tenant shall promptly pay such amounts to Landlord,
within 30 days after Landlords demand.
Section 7.3
Tenants Operating Payment.
(a) If the Operating Expenses payable for any Comparison Year exceed the Base Operating
Expenses, Tenant shall pay to Landlord Tenants Proportionate
Share of such excess (
Tenants
Operating Payment
). For each Comparison Year, Landlord shall furnish to Tenant a written statement
setting forth Landlords reasonable estimate of Tenants Operating Payment for such Comparison
Year, based upon such years budget (the
Estimate
). Tenant shall pay to Landlord on the
1
st
day of each month during such Comparison Year an amount equal to 1/12 of Landlords
estimate of Tenants Operating Payment for such Comparison Year. If Landlord furnishes an Estimate
for a Comparison Year subsequent to the commencement thereof, then (a) until the 1
st
day
of the month following the month in which the Estimate is furnished to Tenant, Tenant shall pay to
Landlord on the 1
st
day of each month an amount equal to the monthly sum payable by
Tenant to Landlord under this Section 7.3 during the last month of the preceding Comparison Year,
(b) promptly after the Estimate is furnished to Tenant or together therewith, Landlord shall give
notice to Tenant stating whether the installments of Tenants Operating Payment previously made for
such Comparison Year were greater or less than the installments of Tenants Operating Payment to be
made for such Comparison Year in accordance with the Estimate, and (i) if there shall be a
deficiency, Tenant shall pay the amount thereof within 30 Business Days after written demand
therefor, or (ii) if there shall have been an overpayment, Landlord shall credit the amount thereof
against subsequent payments of Rent due hereunder, and (c) on the 1
st
day of the month
following the month in which the Estimate is furnished to Tenant, and on the 1
st
day of
each month thereafter throughout the remainder of such Comparison Year, Tenant shall pay to
Landlord an amount equal to 1/12 of Tenants Operating Payment shown on the Estimate.
(b) On or before May 1
st
of each Comparison Year, Landlord shall
furnish to Tenant a Statement for the immediately preceding Comparison Year. If the Statement shows
that
- 18 -
the sums paid by Tenant under Section 7.3(a) exceeded the actual amount of Tenants Operating
Payment for such Comparison Year, Landlord shall credit the amount of such excess against
subsequent payments of Rent due hereunder. If the Statement shows that the sums so paid by Tenant
were less than Tenants Operating Payment for such Comparison Year, Tenant shall pay the amount of
such deficiency within 30 Business Days after Tenants receipt of the Statement.
Any provision of this Section to the contrary notwithstanding, Tenants obligation to pay
Tenants Operating Payment shall commence on the first anniversary of the Rent Commencement Date.
Section 7.4 Non-Waiver; Disputes.
(a) Landlords failure to render any Statement on a timely basis with respect to any
Comparison Year shall not prejudice Landlords right to thereafter render a Statement with respect
to such Comparison Year or any subsequent Comparison Year, nor shall the rendering of a Statement
prejudice Landlords right to thereafter render a corrected Statement for that Comparison Year.
(b) Landlord agrees to retain the books and records substantiating the Operating Expenses
incurred in each calendar year for a period of at least 3 years from the date Landlord submits a
Statement to Tenant. Each Statement sent to Tenant shall be conclusively binding upon Tenant unless
Tenant (i) pays to Landlord when due the amount set forth in such Statement, without prejudice to
Tenants right to dispute such Statement, and (if) within 1 year after such Statement is sent,
sends a notice to Landlord objecting to such Statement and specifying the reasons therefor. Tenant
agrees that Tenant will not employ, in connection with any dispute under this Lease, any person who
is to be compensated in whole or in part, on a contingency fee basis. If the parties are unable to
resolve any dispute as to the correctness of such Statement within 30 days following such notice of
objection (during which time Landlord shall make available reasonably detailed supporting
documentation), either party may refer the issues raised to a nationally recognized public
accounting firm (other than Arthur Andersen) selected reasonably acceptable to the other party, and
the decision of such accountants shall be conclusively binding upon Landlord and Tenant. In
connection therewith, Tenant and such accountants shall execute and deliver to Landlord a
confidentiality agreement, in form and substance reasonably satisfactory to Landlord, whereby such
parties agree not to disclose to any third party any of the information obtained in connection with
such review. Any audit that discloses a discrepancy of more than 3% in the annual Operating
Expenses shall be at Landlords expense and Landlord shall reimburse Tenant for such cost
(including reasonable attorneys fees) within 30 days of the result of the audit. Any discrepancy
shall be promptly corrected by a payment of any shortfall to Landlord by Tenant within 30 days
after the applicable audit, or by a credit against the next payments) of rent hereunder or (at
Tenants election) a refund from Landlord of the overpaid amount within 30 days, as may be
applicable. If Tenant does not contest a Statement of Operating Expenses within 1 year after it is
rendered, such Statement shall become binding and conclusive on both Landlord and Tenant, except
that any such Statement which contains material and intentional misrepresentations shall not be
binding and conclusive on Tenant.
- 19 -
Section 7.5 Final Year of Term.
If the Expiration Date occurs on a date other than
December 31
st
, any Additional Rent under this Article 7 for the Comparison Year in which
such Expiration Date occurs shall be apportioned on the basis of the number of days is the period
from January 1
st
to the Expiration Date. Upon the expiration or earlier termination of
this Lease, any Additional Rent under this Article 7 shall be paid or adjusted within 30 days after
submission of the Statement to Tenant.
Section 7.6 No Reduction in Rent.
in no event shall any decrease in Operating Expenses or
Taxes in any Comparison Year below the Base Operating Expenses or Base Taxes, as the case may be,
result in a reduction in the Fixed Rent or any other component of Additional Rent payable
hereunder.
ARTICLE 8
REQUIREMENTS OF LAW
Section 8.1 Compliance with Requirements.
(a)
Compliance.
To the extent that Tenant is not required under the terms of this Lease to
comply therewith, Landlord shall indemnify Tenant for any failure of the Building and the Common
Areas (other than areas of the Building leased to tenants) to comply with any Requirements,
including, but not limited to, any applicable laws, rules, regulations and codes; provided,
however, the foregoing indemnification shall (i) include the Building Standard Installations in the
Premises as it exists on the date hereof, (ii) not limit Landlords obligations under 8.1(c) and
(iii) not limit the inclusion of any costs related thereto as Operating Expenses to the extent such
costs qualify as Operating Expenses under Article 7.
After the Commencement Date, Tenant, at its expense, shall comply with all Requirements
applicable to the Premises (excluding those applicable to the Building Standard Installations in
the Premises as it exists on the date hereof); provided, however, that Tenant shall not be
obligated to comply with any Requirements requiring any structural alterations to the Building
unless the application of such Requirements arises from (i) the specific manner and nature of
Tenants use or occupancy of the Premises, as distinct from the Permitted Uses, (ii) Alterations
made by Tenant, or (iii) an Event of Default. Any such repairs or alterations shall be made at
Tenants expense by Tenant (1) in compliance with Article 5 if such repairs or alterations are
nonstructural and do not affect any Building System, or (2) by Landlord if such repairs or
alterations are structural or affect any Building System. If Tenant obtains knowledge of any
failure to comply with any Requirements applicable to the Premises, Tenant shall give Landlord
prompt notice thereof.
(b)
Hazardous Materials.
Tenant shall not cause or permit (i) any Hazardous Materials to be
brought into the Building, (ii) the storage or use of Hazardous Materials in any manner other than
in full compliance with any Requirements, or (iii) the escape, disposal or release of any Hazardous
Materials within or in the vicinity of the Building. Nothing herein shall be deemed to prevent
Tenants use of any Hazardous Materials customarily used in the ordinary course of office work and
cleaning, provided such use is in accordance with all Requirements. Tenant shall be responsible, at
its expense, for all matters directly or indirectly based on, or arising or resulting from the
presence of Hazardous Materials in the Building which is caused or
- 20 -
permitted by a Tenant Party. Tenant shall promptly provide to Landlord copies of all
communications received by Tenant with respect to any Requirements relating to Hazardous
Materials, and/or any claims made in connection therewith. Landlord or its agents may perform
environmental inspections of the Premises at any time. Landlord represents that Landlord has
delivered to Tenant a true and correct copy of the environmental report that Landlord caused to
be prepared when Landlord acquired the Building.
(c)
Landlords Compliance.
Landlord shall comply with (or cause to be complied with) all
Requirements applicable to the Building which are not the obligation of Tenant, to the extent that
non-compliance would materially impair Tenants use and occupancy of the Premises for the Permitted
Uses. To the extent that Tenant is not required under the terms of this Lease to comply therewith,
Landlord shall indemnify Tenant against any claim or liability arising from the failure of the
Building (other than areas of the Building leased to tenants) to comply with all Requirements
including, without limitation, the ADA. Any provision of this Section to the contrary
notwithstanding, to the extent that Landlord incurs any costs in causing the Building or any
portion thereof to comply with any applicable Requirements and such costs qualify as Operating
Expenses, such costs shall be included as Operating Expenses. The foregoing notwithstanding, to
the extent that the Building is not in compliance with any Requirements as of the Commencement Date
and Landlord incurs any costs in causing the Building or any portion thereof to comply with any
such Requirements, such costs shall be paid by Landlord and shall not be included as Operating
Expenses.
(d)
Landlords Insurance.
Tenant shall not cause or permit any action or condition that would
(i) invalidate or conflict with Landlords insurance policies, (ii) violate applicable rules,
regulations and guidelines of the Fire Department, Fire Insurance Rating Organization or any other
authority having jurisdiction over the Building, (iii) cause an increase in the premiums of fire
insurance for the Building over that payable with respect to Comparable Buildings, or (iv) result
in Landlords insurance companies refusing to insure the Building or any property therein in
amounts and against risks as reasonably determined by Landlord. If fire insurance premiums increase
as a result of Tenants failure to comply with the provisions of this Section 8.1, Tenant shall
promptly cure such failure and shall reimburse Landlord for the increased fire insurance premiums
paid by Landlord as a result of such failure by Tenant.
Section 8.2 Fire and Life Safety.
Landlord shall cause the Common Areas to comply with all
applicable fire and life safety Requirements. The foregoing notwithstanding, to the extent that
the Common Areas do not comply with all applicable fire and life safety Requirements as of the
Commencement Date and Landlord incurs any costs in causing the Building or any portion thereof to
comply with any such fire and life safety Requirements, such costs shall be paid by Landlord and
shall not be included as Operating Expenses. Any modifications to the fire alarm and life safety
systems installed in the Premises required by Tenant shall be at Tenants sole cost and expense.
If the Fire Insurance Rating Organization or any Governmental Authority or any of Landlords
insurers requires or recommends any modifications and/or alterations be made or any additional
equipment be supplied in connection with the sprinkler system or fire alarm and life-safety
system serving the Building by reason of Tenants business, any Alterations performed by Tenant
following the Commencement Date, Tenants Property, or other contents of the Premises, Landlord
(to the extent outside of the
- 21 -
Premises) or Tenant (to the extent within the Premises) shall make such modifications and/or
Alterations, and supply such additional equipment, in either case at Tenants expense.
ARTICLE 9
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT
Section 9.1 Subordination and Attornment.
(a) Tenant acknowledges that prior to the date hereof, Landlord has provided Tenant with the
standard form non-disturbance and attornment agreement presently used by Landlords existing
Mortgagee. Within 60 days after Landlords receipt of Tenants comments to such standard form,
Landlord shall obtain for Tenant a subordination, non-disturbance and attornment agreement from
Landlords existing Mortgagee, in such standard form (provided that such form is commercially
reasonable). In addition, Landlord shall use commercially reasonable efforts (but without being
obligated to commence any legal or arbitration proceeding and without the expenditure of
unreimbursed sums (other than reasonable expenses that a landlord normally incurs in attempting to
obtain a subordination, non-disturbance and attornment agreement for its tenant, such as Landlords
attorneys fees)) to obtain for Tenant a subordination, non-disturbance and attornment agreement
from all future Mortgagees and Lessors, in the standard form customarily employed by such Mortgagee
and/or Lessor (provided that such form is commercially reasonable). Upon Landlords satisfaction
of the foregoing, which shall include the Mortgagee or Lessor, as applicable, agreeing to recognize
and be bound by the terms of this Lease (as herein set forth) upon a foreclosure or deed-in-lieu
thereof or termination of any such ground lease, this Lease shall be subject and subordinate to all
Mortgages and Superior Leases, and, at the request of any Mortgagee or Lessor, Tenant shall attorn
to such Mortgagee or Lessor, its successors in interest or any purchaser in a foreclosure sale.
(b) Subject to the provisions of Section 9.l(a), if a Lessor or Mortgagee or any other person
or entity shall succeed to the rights of Landlord under this Lease, whether through possession or
foreclosure action or the delivery of a new lease or deed, then at the request of the successor
landlord and upon such successor landlords written agreement to accept Tenants attornment and to
recognize Tenants interest under this Lease, Tenant shall be deemed to have attorned to and
recognized such successor landlord as Landlord under this Lease. The provisions of this Section 9.1
are self-operative and require no further instruments to give effect hereto; provided, however,
that Tenant shall promptly execute and deliver any instrument that such successor landlord may
reasonably request (i) evidencing such attornment, (ii) setting forth the terms and conditions of
Tenants tenancy, and (iii) containing such other terms and conditions as may be required by such
Mortgagee or Lessor, provided that (i) such terms and conditions do not increase the Rent,
materially increase Tenants obligations or materially and adversely affect Tenants rights under
this Lease, and (ii) Tenant shall have no obligation to execute such instrument until Landlord
delivers the subordination, non-disturbance and attornment agreement described in and in accordance
with Section 9.1(a). Upon such attornment this Lease shall continue in full force and effect as
a direct lease between such successor landlord and Tenant upon all of the terms, conditions and
covenants set forth in this Lease except that such successor landlord shall not be:
- 22 -
(i) liable for any act or omission of Landlord (except to the extent such act or omission
continues beyond the date when such successor landlord succeeds to Landlords interest and Tenant
gives notice of such act or omission);
(ii) subject to any defense, claim, counterclaim, set-off or offsets which Tenant may have
against Landlord;
(iii) bound by any prepayment of more than one months Rent to any prior landlord;
(iv) bound by any obligation to make any payment to Tenant which was required to be
made prior to the time such successor landlord succeeded to Landlords interest;
(v) bound by any obligation to perform any work or to make improvements to the Premises
except for (x) repairs and maintenance required to be made by Landlord under this Lease, and (y)
repairs to the Premises as a result of damage by fire or other casualty or a partial condemnation
pursuant to the provisions of this Lease, but only to the extent that such repairs can reasonably
be made from the net proceeds of any insurance or condemnation awards, respectively, actually made
available to such successor landlord;
(vi) bound by any modification, amendment, or renewal of this Lease made without successor
landlords consent;
(vii) bound by any provisions of the Lease with respect to the Existing Furnishings;
(viii) liable for the repayment of any security deposit or surrender of any letter of credit,
unless and until such security deposit actually is paid or such letter of credit is actually
delivered to such successor landlord; or
(ix) liable for the payment of any unfunded tenant improvement allowance, refurbishment
allowance or similar obligation.
(c) Tenant shall from time to time within 15 days of request from Landlord, but not more
frequently than 3 times in any 12 month period, execute and deliver any documents or instruments
that may be reasonably required by any Mortgagee or Lessor to confirm any subordination.
Section 9.2 Mortgage or Superior Lease Defaults.
Any Mortgagee may elect that this
Lease shall have priority over the Mortgage and, upon notification to Tenant by such Mortgagee,
this Lease shall be deemed to have priority over such Mortgage, regardless of the date of this
Lease. In connection with any financing of the Real Property, Tenant shall consent to any
reasonable modifications of this Lease requested by any lending institution, provided such
modifications do not increase the Rent, materially increase the obligations, or materially and
adversely affect the rights, of Tenant under this Lease.
Section 9.3 Tenants Termination Right.
As long as any Superior Lease or Mortgage exists,
Tenant shall not seek to terminate this Lease by reason of any act or omission of
- 23 -
Landlord unless (a) Tenant shall have given notice of such act or omission to all Lessors
and Mortgagees, and (b) no such Lessor or Mortgagee promptly commences to remedy and thereafter
diligently proceeds to remedy such act or omission; provided that in no event shall the Lessor
and/or Mortgagees cure period be for fewer than 30 days nor shall it exceed 75 days after Lessors
or Mortgagees receipt of the aforementioned written notice. No Lessor or Mortgagee shall have any
obligation to attempt to cure any act of omission of Landlord. If any Lessor or Mortgagee elects to
attempt to cure any act or omission of Landlord, no such Lessor or Mortgagee shall have any
obligation to continue to proceed to attempt to such any such act or omission and such Lessor or
Mortgagee shall have the right to abandon such attempt to cure such act or omission of Landlord at
any time without liability.
Section 9.4 Provisions.
The provisions of this Article 9 shall inure to the benefit of
Landlord, any future owner of the Building or the Real Property, Lessor or Mortgagee and any
sublessor thereof.
ARTICLE 10
SERVICES
Section 10.1 Electricity.
Subject to any Requirements or any public utility rules or
regulations governing energy consumption, Landlord shall make or cause to be made, customary
arrangements with utility companies and/or public service companies to furnish electric current to
the Premises for Tenants use. If Landlord reasonably determines by the use of an electrical
consumption survey or by other reasonable means that Tenant is using electric current (including
overhead fluorescent fixtures) in excess of .60 kilowatt hours per square foot of usable area in
the Premises per month, as determined on an annualized basis (
Excess Electrical Usage
), then
Landlord shall have the right to charge Tenant an amount equal to Landlords reasonable estimate of
Tenants Excess Electrical Usage, and shall have the further right to install an electric current
meter, sub-meter or check meter for the NOC Facilities, the Rooftop HVAC Units and/or the Premises
(a
Meter
) to measure the amount of electric current consumed in or by the NOC Facilities, the
Rooftop HVAC Units and/or the Premises, provided Landlord gives Tenant evidence of such Excess
Electrical Usage and Tenant has the right to verify the same for at least 30 days prior to the
installation of such Meter. The cost of such Meter special conduits, wiring and panels needed in
connection therewith and the installation, maintenance and repair thereof shall be paid by Tenant.
Tenant shall pay to Landlord, from time to time, but no more frequently than monthly, for its
Excess Electrical Usage at the Premises, plus Landlords charge equal to 10% of Tenants Excess
Electrical Usage for Landlords costs of maintaining, repairing and reading such Meter. The rate to
be paid by Tenant for submetered electricity shall include any taxes or other charges in connection
therewith.
In addition, upon 30 days prior written notice to Landlord, Tenant shall have the
right to install a Meter for the NOC Facilities, the Rooftop HVAC Units and/or the Premises, in
which event the cost of such Meter, special conduits, wiring and panels needed in connection
therewith and the installation, maintenance and repair thereof shall be paid by Tenant. If Tenant
installs any such Meter for the NOC Facilities, Tenant shall pay to Landlord, from time to time,
but no more frequently than monthly, for its Excess Electrical Usage at or by the NOC Facilities,
the Rooftop HVAC Units and/or the Premises, plus Landlords charge equal to 10% of Tenants
- 24 -
Excess Electrical Usage for Landlords costs of maintaining, repairing and reading such Meter.
The rate to be paid by Tenant for submetered electricity shall include any taxes or other charges
in connection therewith.
Section 10.2 Excess Electricity.
Tenant shall at all times comply with the rules and
regulations of the utility company supplying electricity to the Building. Tenant shall not use any
electrical equipment which, in Landlords reasonable judgment, would exceed the capacity of the
electrical equipment serving the Premises. If Landlord determines that Tenants electrical
requirements necessitate installation of any additional risers, feeders or other electrical
distribution equipment (collectively,
Electrical Equipment
)) or if Tenant provides Landlord with
evidence reasonably satisfactory to Landlord of Tenants need for excess electricity and requests
that additional Electrical Equipment be installed, Landlord shall, at Tenants expense, install
such additional Electrical Equipment, provided that Landlord, in its sole judgment, determines that
(a) such installation is practicable and necessary, (b) such additional Electrical Equipment is
permissible under applicable Requirements, and (c) the installation of such Electrical Equipment
will not cause permanent damage to the Building or the Premises, cause or create a hazardous
condition, entail excessive or unreasonable alterations, interfere with or limit electrical usage
by other tenants or occupants of the Building or exceed the limits of the switchgear or other
facilities serving the Building, or require power in excess of that available from the utility
company serving the Building.
Section 10.3 Elevators.
Landlord shall provide elevator service to the Premises 24 hours
per day, 7 days per week, subject to the Rules and Regulations attached hereto as
Exhibit
E
.
Section 10.4 Heating, Ventilation and Air Conditioning.
Landlord shall furnish to the
Premises heating, ventilation and air-conditioning (
HVAC
) in accordance with the
Exhibit
K
-Design Standards during Ordinary Business Hours. Landlord shall have access to all
air-cooling, fan, ventilating and machine rooms and electrical closets and all other mechanical
installations of Landlord (collectively,
Mechanical Installations
), and Tenant shall not
construct partitions or other obstructions which may interfere with Landlords access thereto or
the moving of Landlords equipment to and from the Mechanical Installations. No Tenant Party shall
at any time enter the Mechanical Installations or tamper with, adjust, or otherwise affect such
Mechanical Installations. Landlord shall not be responsible if the HVAC System fails to provide
cooled or heated air, as the case may be, to the Premises in accordance with the Design Standards
by reason of (i) any equipment installed by, for or on behalf of Tenant, which has an electrical
load in excess of the average electrical load and human occupancy factors for the HVAC System as
designed, or (ii) any rearrangement of partitioning or other Alterations made or performed by, for
or on behalf of Tenant. Tenant shall cooperate with Landlord and shall abide by the rules and
regulations which Landlord may reasonably prescribe for the proper functioning and protection of
the HVAC System.
To the extent arising from Landlords gross negligence or willful misconduct,
Landlord shall indemnify Tenant for the failure of the Buildings HVAC system to comply with all
applicable air-quality Requirements. Landlord shall monitor the indoor air quality at least once
per Lease Year and provide copies of the annual test results to Tenant. Landlord represents to
Tenant that the Building is a non-smoking building (for all tenants, guests and invitees) other
- 25 -
Landlords approval, such approval not to be unreasonably withheld, conditioned or delayed.
If Landlord approves Tenants cleaning service provider (i) Landlord shall thereafter have no
obligation to provide cleaning services to the Premises, (ii) Operating Expenses shall thereafter
exclude the cost of providing cleaning services to the Premises and all other tenanted areas of
the Building, and (iii) Landlord shall reduce Base Operating Expenses by an amount Landlord
reasonably determines reflects the cost of providing cleaning services to the Premises and all
other tenanted areas of the Building during the Base Year.
Section 10.7 Water.
Landlord, at Landlords expense, shall provide water in the core lavatories, drinking fountains and janitors closets on each floor of the Building.
Section 10.8 Refuse Removal.
Landlord shall provide refuse removal services at the Building.
Tenant shall pay to Landlord, Landlords reasonable charge for such removal to the extent that
the refuse generated by Tenant exceeds the refuse customarily generated by general office
tenants. Tenant shall not dispose of any refuse in the Common Areas, and if Tenant does so,
Tenant shall be liable for Landlords reasonable charge for such removal.
Section 10.9 Directory.
Landlord shall list Tenant on the Building directory located in the
first floor lobby without additional charge to Tenant. The Building directory will be shared with
other Building tenants and space on the directory shall be equitably apportioned among tenants.
Reference is hereby made to the provisions of
Exhibit H Signage
concerning other
signage rights.
Section 10.10 Tenant Access to Premises.
Tenant shall have access to the Premises 24 hours a
day, 7 days a week. Outside of Ordinary Business Hours, Building and floor access will be
monitored by an electronic key security and access system installed and maintained by Landlord.
Tenant shall be responsible for access control to the Premises at Tenants sole cost and expense.
Any provision of this Section to the contrary notwithstanding, Landlord shall provide Tenant with
90 electronic access cards for the Premises and Building at no cost to Tenant
Section 10.11 Service Interruptions.
Landlord reserves the right to suspend any service when
necessary, by reason of Unavoidable Delays, accidents or emergencies, or for Restorative Work
which, in Landlords reasonable judgment, are necessary or appropriate until such Unavoidable
Delay, accident or emergency shall cease or such Restorative Work is completed and Landlord shall
not be liable for any interruption, curtailment or failure to supply services. Landlord shall use
reasonable efforts to minimize interference with Tenants use and occupancy of the Premises as a
result of any such failure, defect or interruption of any such service, or change in the supply,
character and/or quantity of, electrical service, and to restore any such services, remedy such
situation and minimize any interference with Tenants business. The exercise of any such right or
the occurrence of any such failure by Landlord shall not constitute an actual or constructive
eviction, in whole or in part, entitle Tenant to any compensation, abatement or diminution of Rent,
relieve Tenant from any of its obligations under this Lease, or impose any liability upon Landlord
or any Indemnified Party by reason of inconvenience to Tenant, or interruption of Tenants
business, or otherwise. Landlord shall not be liable in any way to Tenant for any failure, defect
or interruption of, or change in the supply, character and/or
- 26 -
quantity of electrical service furnished to the Premises for any reason except if
attributable to the gross negligence or willful misconduct of Landlord.
Any provision of this Lease to the contrary notwithstanding, if any failure or stoppage of
Landlords services, including the Emergency Power System, (i) renders any portion of the Premises
untenantable for the normal conduct of Tenants business at the Premises and Tenant does not in
fact use or occupy such portion of the Premises; (ii) was not caused by Tenant, its employees,
invitees or agents; and (iii) extends for a period longer than 3 consecutive days, the Rent payable
hereunder shall be abated beginning on the 1
st
day of such interruption and continue for
so long as the Premises or any portion thereof is untenantable and vacant. In the event of a
casualty or Taking (hereinafter defined), the applicable provisions of this Lease shall prevail
over the rent abatement provisions of this Section.
Except in the case of an emergency, Landlord shall use commercially reasonable efforts to
give Tenant at least 5 days prior notice if Landlord intends to interrupt any of Landlords
services.
ARTICLE 11
INSURANCE; PROPERTY LOSS OR DAMAGE
Section 11.1 Tenants Insurance.
(a) Tenant, at its expense, shall obtain and keep in full force and effect during
the Term:
(i) a policy of commercial general liability insurance on an occurrence basis against claims
for personal injury, bodily injury, death and/or property damage occurring in or about the
Building, under which Tenant is named as the insured and Landlord, Landlords Agent and any
Lessors and any Mortgagees whose names have been furnished to Tenant are named as additional
insureds (the
Insured Parties
). Such insurance shall provide primary coverage without
contribution from any other insurance carried by or for the benefit of the Insured Parties, and
Tenant shall obtain blanket broad-form contractual liability coverage to insure its indemnity
obligations set forth in Article 25. The minimum limits of liability shall be a combined single
limit with respect to each occurrence in an amount of not less than $5,000,000; provided,
however, that Landlord shall retain the right to require Tenant to increase such coverage from
time to time to that amount of insurance that is then being customarily required by landlords for
similar office space in Comparable Buildings. The deductible or self insured retention for such
policy shall not exceed $50,000;
(ii) insurance against loss or damage by fire, and such other risks and hazards as
are insurable under then available standard forms of Special Form Causes of Loss or All Risk
property insurance policies, insuring Tenants Property and all Alterations and improvements to
the Premises (including the initial installations) to the extent such Alterations and
improvements exceed the cost of the improvements typically performed in connection with the
initial occupancy of tenants in the Building (
Building Standard Installations
), for the full
- 28 -
insurable value thereof or replacement cost thereof, having a deductible amount, if any,
not in excess of $25,000;
(iii) during the performance of any Alteration, until completion thereof, Builders Risk
insurance on an all risk basis and on a completed value form including a Permission to Complete
and Occupy endorsement, for full replacement value covering the interest of Landlord and Tenant
(and their respective contractors and subcontractors) in all work incorporated in the Building and
all materials and equipment in or about the Premises;
(iv) Workers Compensation Insurance, as required by law; and
(v) Business Interruption Insurance; and
(vi) such other insurance in such amounts as the Insured Parties may reasonably require from
time to time in the exercise of Landlords prudent business judgment, if other landlords are
requiring the same for Comparable Buildings.
(b) All insurance required to be carried by Tenant (i) shall contain a provision that (x) no
unintentional act or omission of Tenant shall affect or limit the obligation of the insurance
company to pay the amount of any loss sustained, and (y) shall be noncancellable and/or no material
change in coverage shall be made thereto unless the Insured Parties receive 30 days prior notice
of the same (except in the case of non-payment of premiums, in which case only 10 days prior
notice shall be required), by certified mail, return receipt requested, and (ii) shall be effected
under valid and enforceable policies issued by reputable insurers permitted to do business in the
Commonwealth of Virginia and rated in Bests Insurance Guide, or any successor thereto as having a
Bests Rating of A- or better and a Financial Size Category of at least X or better or, if
such ratings are not then in effect, the equivalent thereof or such other financial rating as
Landlord may at any time consider appropriate.
(c) On or prior to the Commencement Date, Tenant shall deliver to Landlord appropriate
policies of insurance, including evidence of waivers of subrogation required to be carried pursuant
to this Article 11 and that the Insured Parties are named as additional insureds (the
Policies
).
Evidence of each renewal or replacement of the Policies shall be delivered by Tenant to Landlord at
least 10 days prior to the expiration of the Policies. In lieu of the Policies, Tenant may deliver
to Landlord a certification from Tenants insurance company (on the form currently designated
Acord 27 (Evidence of Property Insurance) and Acord 25-S (Certificate of Liability Insurance),
or the equivalent, provided that attached thereto is an endorsement to Tenants commercial general
liability policy naming the Insured Parties as additional insureds) which shall be binding on
Tenants insurance company, and which shall expressly provide that such certification (i) conveys
to the Insured Parties all the rights and privileges afforded under the Policies as primary
insurance, and (ii) contains an unconditional obligation of the insurance company to advise all
Insured Parties in writing by certified mail, return receipt requested, at least 30 days in advance
of any termination or change to the Policies that would affect the interest of any of the Insured
Parties.
- 29 -
Section 11.2 Waiver of Subrogation.
Landlord and Tenant shall each procure an appropriate
clause in or endorsement to any property insurance covering the Real Property and personal
property, fixtures and equipment located therein, wherein the insurer waives subrogation or
consents to a waiver of right of recovery, and Landlord and Tenant agree not to make any claim
against, or seek to recover from, the other for any loss or damage to its property or the property
of others resulting from fire or other hazards to the extent covered by such property insurance;
provided, however, that the release, discharge, exoneration and covenant not to sue contained
herein shall be limited by and be coextensive with the terms and provisions of the waiver of
subrogation or waiver of right of recovery. Tenant acknowledges that Landlord shall not carry
insurance on, and shall not be responsible for, (i) damage to any Above Building Standard
Installations, (ii) Tenants Property, and (iii) any loss suffered by Tenant due to interruption of
Tenants business.
Section 11.3 Restoration.
(a) If the Premises are damaged by fire or other casualty, or if the Building is damaged such
that Tenant is deprived of reasonable access to the Premises, the damage shall be repaired by
Landlord, to substantially the condition of the Premises prior to the damage, subject to the
provisions of any Mortgage or Superior Lease, but Landlord shall have no obligation to repair or
restore (i) Tenants Property or (ii) except as provided in Section 11.3(b), any Alterations or
improvements to the Premises, to the extent such Alterations or improvements exceed Building
Standard Installations (
Above Building Standard Installations
). So long as no Event of Default
exists and is continuing, and provided Tenant timely delivers to Landlord either Tenants
Restoration Payment (as hereinafter defined) or the Restoration Security (as hereinafter defined)
or Tenant expressly waives any obligation of Landlord to repair or restore any of Tenants Above
Building Standard Installations, then until the restoration of the Premises is Substantially
Completed or would have been Substantially Completed but for Tenant Delay, Fixed Rent, Tenants Tax
Payment and Tenants Operating Payment shall be reduced in the proportion by which the area of the
part of the Premises which is not usable (or accessible ) and is not used by Tenant bears to the
total area of the Premises.
(b) As a condition precedent to Landlords obligation to repair or restore any Above Building
Standard Installations, Tenant shall (i) pay to Landlord upon demand a sum (
Tenants Restoration
Payment
) equal to the amount, if any, by which (A) the cost, as estimated by a reputable
independent contractor designated by Landlord, of repairing and restoring all Alterations and
Tenant Improvements in the Premises to their condition prior to the damage, exceeds (B) the cost of
restoring the Premises with Building Standard Installations, or (ii) furnish to Landlord security
(the
Restoration Security
) in form and amount reasonably acceptable to Landlord to secure
Tenants obligation to pay all costs in excess of restoring the Premises with Building Standard
Installations. If Tenant shall fail to deliver to Landlord either (1) Tenants Restoration Payment
or the Restoration Security, as applicable, or (2) a waiver by Tenant, in form satisfactory to
Landlord, of all of Landlords obligations to repair or restore any of the Above Building Standard
Installations, in either case within 15 days after Landlords demand therefor, Landlord shall have
no obligation to restore any Above Building Standard Installations and Tenants abatement of Fixed
Rent, Tenants Tax Payment and Tenants
- 30 -
Operating Payment shall cease when the restoration of the Premises (other than any Above
Building Standard Installations) is Substantially Complete.
Section 11.4 Landlords Termination Right.
Notwithstanding anything to the contrary contained
in Section 11.3, if the Premises are totally damaged or are rendered wholly untenantable, or if the
Building shall be so damaged that, in Landlords reasonable opinion, substantial alteration,
demolition, or reconstruction of the Building shall be required (whether or not the Premises are so
damaged or rendered untenantable), then in either of such events, Landlord may, not later than 60
days following the date of the damage, terminate this Lease by notice to Tenant, provided that if
the Premises are not damaged, Landlord may not terminate this Lease unless Landlord similarly
terminates the leases of other tenants in the Building aggregating at least 50% of the portion of
the Building occupied for office purposes immediately prior to such damage. If this Lease is so
terminated, (a) the Term shall expire upon the 30
th
day after such notice is given, (b) Tenant shall
vacate the Premises and surrender the same to Landlord, (c) Tenants liability for Rent shall cease
as of the date of the damage, and (d) any prepaid Rent for any period after the date of the damage
shall be refunded by Landlord to Tenant.
Section 11.5 Tenants Termination Right.
If the Premises are totally damaged and are thereby
rendered wholly untenantable, or if the Building shall be so damaged that Tenant is deprived of
reasonable access to the Premises, and if Landlord elects to restore the Premises, Landlord shall,
within 60 days following the date of the damage, cause a contractor or architect selected by
Landlord to give notice (the
Restoration Notice
) to Tenant of the date by which such contractor
or architect estimates the restoration of the Premises (excluding any Above Building Standard
Installations) shall be Substantially Completed. If such date, as set forth in the Restoration
Notice, is more than 12 months from the date of such damage, or if Landlord does not Substantially
Complete Landlords restoration obligations with respect to the Premises within 12 months (subject
to Unavoidable Delay), then Tenant shall have the right to terminate this Lease by giving notice
(the
Termination Notice
) to Landlord not later than 30 days following delivery of the
Restoration Notice to Tenant. If Tenant delivers a Termination Notice, this Lease shall be deemed
to have terminated as of the date of the giving of the Termination Notice, in the manner set forth
in the second sentence of Section 11.4.
Section 11.6 Final 18 Months.
Notwithstanding anything to the contrary in this Article 11,
if any damage during the final 18 months of the Term renders the Premises wholly untenantable,
either Landlord or Tenant may terminate this Lease by notice to the other parry within 30 days
after the occurrence of such damage and this Lease shall expire on
the 30
th
day after the date of
such notice. For purposes of this Section 11.6, the Premises shall be deemed wholly untenantable
if Tenant shall be precluded from using more than 50% of the Premises for the conduct of its
business and Tenants inability to so use the Premises is reasonably expected to continue for
more than 90 days. If either Landlord or Tenant terminates this Lease pursuant to the provisions
of this Section 11.6, this Lease shall be deemed to have terminated as of the effective date of
the terminating partys notice.
Section 11.7 Landlords Liability.
Any Building employee to whom any property shall
be entrusted by or on behalf of Tenant shall be deemed to be acting as Tenants agent with
respect to such property and neither Landlord nor its agents shall be liable for any damage to
- 31 -
such property, or for the loss of or damage to any property of Tenant by theft or otherwise.
Except as otherwise expressly provided in this Lease to the contrary, none of the Insured Parties
shall be liable for any injury or damage to persons or property or interruption of Tenants
business resulting from fire or other casualty, any damage caused by other tenants or persons in
the Building or the parking facilities or by construction of any private, public or quasi-public
work, or any latent defect in the Premises, the Building or the parking facilities (except that
Landlord shall be required to repair the same to the extent provided in Article 6). No penalty
shall accrue for delays which may arise by reason of adjustment of fire insurance on the part of
Landlord or Tenant, or for any Unavoidable Delays arising from any repair or restoration of any
portion of the Building, provided that Landlord shall use reasonable and diligent efforts to
minimize interference with Tenants use and occupancy of the Premises during the performance of any
such repair or restoration.
Section 11.8 Landlords Insurance.
Beginning on the Lease Commencement Date and at all times
thereafter during the Term of this Lease, the Landlord shall maintain at least the following
insurance:
(i) standard all-risk fire and casualty insurance, covering the Building in amounts at least
equal to one hundred percent (100%) of the replacement cost of the Building (exclusive of any
above-Building Standard Installations and any Specialty Alterations) at the time in question, but
in no event less than such coverage as is required to avoid coinsurance provisions;
(ii) comprehensive public liability insurance with minimum limits of $2,000,000 for injury to
or death of one or more persons in any one occurrence and third-party property damage, and
$5,000,000 for third-party property damage (all such coverage may be through primary and/or excess
umbrella policies);
(iii) employers liability insurance with a minimum limit of $1,000,000 for bodily injury;
(iv) workmens compensation insurance in statutory limits; and
(v) such other insurance coverage as is customarily carried in respect of Comparable
Buildings.
At the Tenants request the Landlord shall furnish the Tenant a certificate or
certificates of insurance certifying that the insurance coverage required hereby is in force. Any
insurance required by the terms of this Lease to be carried by the Landlord may be under a
blanket policy (or policies) covering other properties of the Landlord and/or its related or
affiliated corporations. If such insurance is maintained under a blanket policy, the Landlord
shall procure and deliver to the Tenant a statement from the insurer or general agent of the
insurer setting forth the coverage maintained and the amounts thereof allocated to the risks
intended to be insured hereunder.
- 32 -
ARTICLE 12
EMINENT DOMAIN
Section 12.1 Taking.
(a)
Total Taking.
If all or substantially all of the Real Property, the Building or the
Premises shall be acquired or condemned for any public or quasi-public purpose (a
Taking
), this
Lease shall terminate and the Term shall end as of the date of the vesting of title and Rent shall
be prorated and adjusted as of such date.
(b)
Partial Taking.
Upon a Taking of only a part of the Real Property, the Building or the
Premises then, except as hereinafter provided in this Article 12, this Lease shall continue in full
force and effect, provided that from and after the date of the vesting of title, Fixed Rent and
Tenants Proportionate Share shall be modified to reflect the reduction of the Premises and/or the
Building as a result of such Taking.
(c)
Landlords Termination Right.
Whether or not the Premises are affected, Landlord may, by
notice to Tenant, within 60 days following the date upon which Landlord receives notice of the
Taking of all or a portion of the Real Property, the Building or the Premises, terminate this
Lease, provided that Landlord elects to terminate leases (including this Lease) affecting at least
100% of the rentable area of the office space in the Building.
(d)
Tenants Termination Right.
If the part of the Real Property so Taken contains more than
20% of the total area of the Premises leased by Tenant immediately prior to such Taking, or if, by
reason of such Taking, Tenant no longer has reasonable means of access to the Premises or any
material Building amenities or services are materially impaired, Tenant may terminate this Lease by
notice to Landlord given within 30 days following the date upon which Tenant is given notice of
such Taking. If Tenant so notifies Landlord, this Lease shall end and expire upon the
30
th
day following the giving of such notice as if such day were the original Expiration
Date under this Lease. If a part of the Premises shall be so Taken and this Lease is not terminated
in accordance with this Section 12.1 Landlord, without being required to spend more than it
collects as an award, shall, subject to the provisions of any Mortgage or Superior Lease, restore
that part of the Premises not so Taken to a self-contained rental unit substantially equivalent
(with respect to character, quality, appearance and services) to that which existed immediately
prior to such Taking, excluding Tenants Property and Above Building Standard Installations.
(e)
Apportionment of Rent.
Upon any termination of this Lease pursuant to the provisions of
this Article 12, Rent shall be apportioned as of, and shall be paid or refunded up to and
including, the date of such termination.
Section 12.2 Awards.
Upon any Taking, Landlord shall receive the entire award for any
such Taking, and Tenant shall have no claim against Landlord or the condemning authority for the
value of any unexpired portion of the Term or Tenants Alterations. Nothing contained in this
Article 12 shall be deemed to prevent Tenant from making a separate claim in any condemnation
proceedings for the then value of any Tenants Property or Above Building
- 33 -
Standard Installations included in such Taking and for any moving expenses, provided any
such award is in addition to, and does not result in a reduction of, the award made to Landlord.
Section 12.3 Temporary Taking.
If all or any part of the Premises is Taken for a period of 30
days or less for any public or quasi-public use or purpose, Tenant shall give prompt notice to
Landlord and the Term shall not be reduced or affected in any way and Tenant shall continue to pay
all Rent payable by Tenant without reduction or abatement and to perform all of its other
obligations under this Lease, except to the extent prevented from doing so by the condemning
authority, and Tenant shall be entitled to receive any award or payment from the condemning
authority for such use, which shall be received, held and applied by Tenant as a trust fund for
payment of the Rent falling due.
ARTICLE 13
ASSIGNMENT AND SUBLETTING
Section 13.1 Consent Requirements.
(a)
Assignment or Subletting.
Except as expressly set forth in Section 13.3(a), Tenant
shall not assign, mortgage, pledge, encumber, or otherwise transfer this Lease, whether by
operation of law or otherwise, and shall not sublet, or permit, or suffer the Premises or any part
thereof to be used or occupied by others (whether for desk space, mailing privileges or otherwise)
(any such action being a
Transfer
), without Landlords prior consent in each instance.. Reference
is hereby made to
Section 13.3
concerning conditions to assignments and sublets and
Section 13.7(a)
concerning certain permitted transfers. Any assignment, sublease, mortgage,
pledge, encumbrance or transfer in contravention of the provisions of this Article 13 shall be void
and shall constitute an Event of Default.
(b)
Collection of Rent.
If, without Landlords consent (where such consent is required), this
Lease is assigned, or any part of the Premises is sublet or occupied by anyone other than Tenant or
this Lease is encumbered (by operation of law or otherwise), Landlord may collect rent from the
assignee, subtenant or occupant, and apply the net amount collected to the Rent herein reserved. No
such collection shall be deemed a waiver of the provisions of this Article 13, an acceptance of the
assignee, subtenant or occupant as tenant, or a release of Tenant from the performance of Tenants
covenants hereunder, and in all cases Tenant shall remain fully liable for its obligations under
this Lease.
(c)
Further Assignment/Subletting.
Landlords consent to any assignment or subletting shall
not relieve Tenant from the obligation to obtain Landlords consent to any further assignment or
subletting as required under this Lease. In no event shall any permitted subtenant assign or
encumber its sublease or further sublet any portion of its sublet space, or otherwise suffer or
permit any portion of the sublet space to be used or occupied by others.
Section 13.2 Tenants Notice.
If Tenant desires to assign this Lease or sublet all or any
portion of the Premises, Tenant shall give notice thereof to Landlord, which shall be accompanied
by (a) with respect to an assignment of this Lease, the date Tenant desires the assignment to be
effective, and (b) with respect to a sublet of all or a part of the Premises, a description of
the portion of the Premises to be sublet and the commencement date of such
- 34 -
sublet. Such notice shall be deemed an irrevocable offer from Tenant to Landlord of the
right, at Landlords option, (1) to terminate this Lease if the proposed transaction is an
assignment of this Lease, upon the terms and conditions hereinafter
set forth, or (2) if the proposed
transaction is a subletting of 50% or more of the rentable square footage of the Premises (but
excluding space subleased to Related Entities and/or under Permitted Subleases), in the aggregate
with all other portions of the Premises then subleased (but excluding space subleased to Related
Entities and/or under Permitted Subleases) and expiring during the last 12 months of the Term
(without regard to any then unexercised extension rights under the Lease, but considering all
extension options granted under the proposed sublease), to terminate this Lease with respect to
such space as Tenant proposes to sublease (the
Partial Space
). Such option may be exercised by
notice from Landlord to Tenant within 30 days after delivery of Tenants notice. If Landlord
exercises its option to terminate all or a portion of this Lease, (a) this Lease shall end and
expire with respect to all or a portion of the Premises, as the case may be, on the date that such
assignment or sublease was to commence, (b) Rent shall be apportioned, paid or refunded as of such
date, (c) Tenant, upon Landlords request, shall enter into an amendment of this Lease ratifying
and confirming such total or partial termination, and setting forth any appropriate modifications
to the terms and provisions hereof, and (d) Landlord shall be free to lease the Premises (or any
part thereof) to Tenants prospective assignee or subtenant. Tenant shall pay all costs to make the
Partial Space a self-contained rental unit and to install any required Building corridors. Any
provision of this Section to the contrary notwithstanding, the terms of this Section 13.2 shall not
apply to any sublease or assignment to a Related Entity or to any sublease to a Permitted Subtenant
(hereinafter defined) pursuant to Section 13.7(a).
Section 13.3 Conditions to Assignment/Subletting.
(a) If
Landlord does not exercise its termination option provided under
Section 13.2
,
and provided no monetary Event of Default then exists, Landlords consent to the proposed
assignment or subletting shall not be unreasonably withheld, conditioned or delayed. Such consent
shall be granted or denied within 20 days after delivery to Landlord of (i) a true and complete
statement reasonably detailing the identity of the proposed assignee or subtenant (
Transferee
),
the nature of its business and its proposed use of the Premises, (ii) current financial
information with respect to the Transferee, including its most recent financial statements, and
(iii) any other information Landlord may promptly and reasonably request, provided that:
(i) in Landlords reasonable judgment, the Transferee is engaged in a business or activity,
and the Premises will be used in a manner, which (1) is for the Permitted Uses, and (2) does not
violate any restrictions set forth in this Lease, any Mortgage or Superior Lease;
(ii) the Transferee has sufficient financial means to perform all of its obligations under
this Lease or the sublease, as the case may be;
(iii) [Intentionally Omitted];
- 35 -
(iv) the Transferee is not a person or entity (or affiliate of a person or entity) with
whom Landlord is then or has been within the prior 30 days negotiating in connection with the
rental of space in the Building;
(v) [Intentionally Omitted];
(vi) Tenant shall, upon demand, reimburse Landlord for all reasonable third-party
out-of-pocket expenses incurred by Landlord in connection with such assignment or sublease,
including any investigations as to the acceptability of the Transferee and all reasonable legal
costs (not to exceed $1,000) reasonably incurred in connection with the granting of any requested
consent; and
(vii) the Transferee shall not be entitled, directly or indirectly, to diplomatic or
sovereign immunity, regardless of whether the Transferee agrees to waive such diplomatic or
sovereign immunity, and shall be subject to the service of process in, and the jurisdiction of the
courts of, the County of Fairfax and Commonwealth of Virginia.
(b) With respect to each and every subletting and/or assignment approved by
Landlord under the provisions of this Lease (for which Landlords approval is required):
(i) the form of the proposed assignment or sublease shall be reasonably satisfactory to
Landlord;
(ii) no sublease shall be for a term ending later than one day prior to the Expiration Date;
(iii) no Transferee shall take possession of any part of the Premises, until an executed
counterpart of such sublease or assignment has been delivered to Landlord and approved by Landlord
as provided in Section 13.3; and
(iv) each sublease shall be subject and subordinate to this Lease and to the matters
to which this Lease is or shall be subordinate; and Tenant and each Transferee shall be deemed to
have agreed mat upon the occurrence and during me continuation of an Event of Default hereunder,
Tenant has hereby assigned to Landlord, and Landlord may, at its option, accept such assignment of,
all right, title and interest of Tenant as sublandlord under such sublease, together with all
modifications, extensions and renewals thereof then in effect and such Transferee shall, at
Landlords option, attorn to Landlord pursuant to the then executory provisions of such sublease,
except that Landlord shall not be (A) liable for any previous act or omission of Tenant under such
sublease, (B) subject to any counterclaim, offset or defense not expressly provided in such
sublease, which theretofore accrued to such Transferee against Tenant, (C) bound by any previous
modification of such sublease not consented to by Landlord or by any prepayment of more than one
months rent, (D) bound to return such Transferees security deposit, if any, except to the extent
Landlord shall receive actual possession of such deposit and such Transferee shall be entitled to
the return of all or any portion of such deposit under the terms of its sublease, or (E) obligated
to make any payment to or on behalf of such Transferee, or to perform any work in the subleased
space or the Building, or in any way to prepare the subleased space for occupancy, beyond
Landlords obligations under this Lease. The
- 36 -
provisions of this Section 13.3(b)(v) shall be self-operative, and no further instrument
shall be required to give effect to this provision, provided that the Transferee shall execute and
deliver to Landlord any instruments Landlord may reasonably request to evidence and confirm such
subordination and attornment.
(c) Tenant shall deliver to Landlord (i) a true and complete statement reasonably
detailing the identity of the proposed assignee or subtenant (
Transferee
), (ii) the nature of the
Transferees business and its proposed use of the Premises, (iii) current financial information
with respect to the Transferee, including its most recent financial statements, and (iv) any other
information Landlord may reasonably request.
If, within 10 days after delivery to Landlord of the items and information required by
Section 13.3(a) and this Section 13.3(c), Tenant has not received Landlords written consent or
denial of consent to a proposed assignment or subletting, Tenant shall have the right to
thereafter send Landlord a second written request for approval of the proposed assignment or
sublease, which request must state SECOND AND FINAL REQUEST-LANDLORD HAS 10 DAYS TO RESPOND at
the top of the first page of the request (the
Second Request
). If Landlord does not give Tenant
written notice of Landlords consent or denial of consent of the proposed assignment or sublease
within 10 days after receipt of the Second Request, Landlord shall be deemed to have consented to
Tenant entering the proposed assignment or sublease, but Landlord shall not be estopped by or
deemed to have approved any specific terms of the assignment or sublease (such as, for example, if
the assignment document were to release Tenant from any further liability under this Lease or if
the sublease provides for a sublease term extending beyond the term of this Lease). All notices
given to Landlord under this Section and elsewhere in this Lease must be given in accordance with
the requirements set forth in Article 23.
(d) Provided Landlord does not exercise its termination option under Section 13.2 and Tenant
does not consummate the proposed assignment or sublease upon the terms set forth in the
bona fide
term sheet or letter of intent within 180 days after Landlord elects not to exercise such
termination, Landlords termination rights shall be reinstated under Section 13.2 and Tenant shall
again comply with the notice and other procedures set forth in Section 13.2.
Section 13.4 Binding on Tenant; Indemnification of Landlord.
Notwithstanding any assignment
or subletting or any acceptance of rent by Landlord from any Transferee, Tenant shall remain
fully liable for the payment of all Rent due and for the performance of all the covenants, terms
and conditions contained in this Lease on Tenants part to be observed and performed, and any
Event of Default under this Lease by any Transferee or anyone claiming under or through any
Transferee shall be deemed to be an Event of Default under this Lease by Tenant. Tenant shall
indemnify, defend, protect and hold harmless Landlord from and against any and all Losses
resulting from any claims that may be made against Landlord by the Transferee or anyone claiming
under or through any Transferee or by any brokers or other persons claiming a commission or
similar compensation in connection with the proposed assignment or sublease, irrespective of
whether Landlord shall give or decline to give its consent to any proposed assignment or
sublease, or if Landlord shall exercise any of its options under this Article 13.
- 37 -
Section 13.5 Tenants Failure to Complete.
If Landlord consents to a proposed
assignment or sublease (where such consent is required) and Tenant fails to execute and deliver
to Landlord such assignment or sublease within 90 days after the giving of such consent, then
Tenant shall again comply with all of the provisions and conditions of Section 13.2 before
assigning this Lease or subletting all or part of the Premises.
Section 13.6 Profits.
Except with respect to those assignments and sublets which may be
consummated without Landlords consent pursuant to the provisions of Section 13.7(a), if Tenant
enters into any assignment or sublease permitted hereunder or consented to by Landlord, Tenant
shall, within 60 days of Landlords consent to such assignment or sublease, deliver to Landlord a
list of Tenants reasonable third-party brokerage fees, reasonable tenant concessions, legal fees,
advertising costs, construction costs and architectural fees paid or to be paid in connection with
such transaction and any actual costs incurred by Tenant in separately demising the subleased space
(collectively,
Transaction Costs
), together with a list of all of Tenants Property to be
transferred to such Transferee. The Transaction Costs shall be amortized, on a straight-line basis,
over the term of any sublease. Tenant shall deliver to Landlord evidence of the payment of such
Transaction Costs promptly after the same are paid. In consideration of such assignment or
subletting, Tenant shall pay to Landlord:
(a) In the case of an assignment, on the effective date of the assignment, 50% of all sums and
other consideration paid to Tenant by the Transferee for or by reason of such assignment (including
sums paid for the sale or rental of Tenants Property, less, the then fair market or rental value
thereof, as reasonably determined by Landlord) after first deducting the Transaction Costs; or
(b) In the case of a sublease, 50% of any consideration payable under the sublease to Tenant
by the Transferee which exceeds on a per square foot basis the Fixed Rent and Additional Rent
accruing during the term of the sublease in respect of the subleased space (together with any sums
paid for the sale or rental of Tenants Property, less, the then fair market or rental value
thereof, as reasonably determined by Landlord) after first deducting the monthly amortized amount
of Transaction Costs. The sums payable under this clause shall be paid by Tenant to Landlord
monthly as and when paid by the subtenant to Tenant.
Section 13.7 Transfers.
(a)
Related Entities.
If Tenant or Tenants parent company is a legal entity, the transfer
(by one or more transfers) of a majority of the stock or other beneficial ownership interest in
Tenant (collectively
Ownership Interests
) shall be deemed a voluntary assignment of this Lease;
provided, however, that the provisions of this Article 13 shall not apply to the transfer of
Ownership Interests in Tenant if and so long as Tenant (or, if applicable, Tenants parent
company) is publicly traded on a nationally recognized stock exchange. For purposes of this
Section 13.7 the term transfers shall be deemed to include the issuance of new Ownership
Interests which results in a change of control of Tenant.
The provisions of Section 13.1 shall not apply to transactions with a business entity into
or with which Tenant is merged or consolidated or to which substantially all of Tenants assets
are transferred so long as (i) such transfer was made for a legitimate independent business
- 38 -
purpose and not for the purpose of transferring this Lease, (ii) the successor to Tenant has
a net worth computed in accordance with generally accepted accounting principles at least equal to
the net worth of Tenant immediately prior to such merger, consolidation or transfer, and (iii)
proof satisfactory to Landlord of such net worth is delivered to Landlord at least 10 days prior to
the effective date of any such transaction. Tenant may also, upon prior notice to Landlord and
Mortgagee (but without Landlords consent), assign this lease to any business entity which
controls, is controlled by, or is under common control with the original Tenant (a
Related
Entity
) or permit a Related Entity to sublet all or part of the Premises for any Permitted Use for
so long as such entity remains a Related Entity. Such sublease shall not be deemed to vest in any
such Related Entity any right or interest in this Lease. No sublease or assignment shall relieve,
release, impair or discharge any of the obligations of the initial tenant herein named. For the
purposes hereof, control shall be deemed to mean ownership of not less than 20% of all of the
Ownership Interests of such corporation or other business entity.
Any provision of this Article to the contrary notwithstanding, Landlords consent, recapture
and profit sharing rights shall not apply to one or more subleases of the Premises to Permitted
Subtenants (hereinafter defined) which, in the aggregate, do not exceed, in the aggregate, 10,000
square feet of the rentable area of the Premises (
Permitted Subleases
).
Permitted Subtenants
means Tenants contractors, subcontractors or vendors provided that such Permitted Subtenants are
using such space for legitimate business purposes and not for the purpose of circumventing the
Landlord consent provisions of Article 13. Except as otherwise expressly provided in this Section,
the provisions of Article 13 shall apply to subleases to Permitted Subtenants. The space sublet to
any Permitted Subtenants shall not be separately demised or have separate entrances.
(b)
Applicability.
The limitations set forth in this Section 13.7 shall apply to
Transferee(s) and guarantor(s) of this Lease, if any, and any transfer by any such entity in
violation of this Section 13.7 shall be a transfer in violation of Section 13.1.
(c)
Modifications, Takeover Agreements.
Any modification, amendment or extension of a
sublease and/or any other agreement by which a landlord of a building other than the Building
agrees to assume the obligations of Tenant under this Lease shall be deemed a sublease for the
purposes of Section 13.1 hereof.
Section 13.8 Assumption of Obligations.
No assignment or transfer shall be effective unless
and until the Transferee executes, acknowledges and delivers to Landlord an agreement in form and
substance reasonably satisfactory to Landlord whereby the assignee (a) assumes Tenants
obligations under this Lease and (b) agrees that, notwithstanding such assignment or transfer,
the provisions of Section 13.1 hereof shall be binding upon it in respect of all future
assignments and transfers.
Section 13.9 Tenants Liability.
The joint and several liability of Tenant and any
successors-in-interest of Tenant and the due performance of Tenants obligations under this Lease
shall not be discharged, released or impaired by any agreement or stipulation made by Landlord,
or any grantee or assignee of Landlord, extending the time, or modifying any of the
- 39 -
terms and provisions of this Lease, or by any waiver or failure of Landlord, or any grantee or
assignee of Landlord, to enforce any of the terms and provisions of this Lease.
Section 13.10 Listings in Building Directory.
The listing of any name other than that of
Tenant on the doors of the Premises, the Building directory or elsewhere shall not vest any right
or interest in this Lease or in the Premises, nor be deemed to constitute Landlords consent to
any assignment or transfer of this Lease or to any sublease of the Premises or to the use or
occupancy thereof by others. Any such listing shall constitute a privilege revocable in Landlords
reasonable discretion by notice to Tenant, but only upon the occurrence of an Event of Default.
Section 13.11 Lease Disaffirmance or Rejection.
If at any time after an assignment by Tenant
named herein, this Lease is not affirmed or is rejected in any bankruptcy proceeding or any similar
proceeding, or upon a termination of this Lease due to any such proceeding, Tenant named herein,
upon request of Landlord given after such disaffirmance, rejection or termination (and actual
notice thereof to Landlord in the event of a disaffirmance or rejection or in the event of
termination other than by act of Landlord), shall (a) pay to Landlord all Rent and other charges
due and owing by the assignee to Landlord under this Lease to and including the date of such
disaffirmance, rejection or termination, and (b) as tenant, enter into a new lease of the
Premises with Landlord for a term commencing on the effective date of such disaffirmance, rejection
or termination and ending on the Expiration Date, at the same Rent and upon the then executory
terms, covenants and conditions contained in this Lease, except that (i) the rights of Tenant named
herein under the new lease shall be subject to the possessory rights
of the assignee under this
Lease and the possessory rights of any persons claiming through or under such assignee or by virtue
of any statute or of any order of any court, (ii) such new lease shall require all defaults
existing under this Lease to be cured by Tenant named herein with due diligence, and (iii) such new
lease shall require Tenant named herein to pay all Rent which, had this Lease not been so
disaffirmed, rejected or terminated, would have become due under the
provisions of this Lease after
the date of such disaffirmance, rejection or termination with respect to any period prior thereto.
If Tenant named herein defaults in its obligations to enter into such new lease for a period of 10
days after Landlords request, then, in addition to all other rights and remedies by reason of
default, either at law or in equity, Landlord shall have the same rights and remedies against
Tenant named herein as if it had entered into such new lease and such new lease had thereafter been
terminated as of the commencement date thereof by reason of Tenants default thereunder.
Section 13.12 Lender Consent.
If Landlords consent is required for any Transfer, Tenant
shall also obtain Mortgagees written consent to such Transfer. Tenant shall send notices to
Mortgagee as and when Tenant is required to send notices to Landlord under this Article.
Mortgagee shall have the same amount of time to respond to notices given to Mortgagee under this
Article as Landlord is entitled to under this Article, with such time period commencing upon
Mortgagees receipt of any such notices from Tenant. Notwithstanding the foregoing, Mortgagees
consent shall not be required in connection with the assignment of this Lease to a Related Entity
or in connection with space subleased to Related Entities or to Permitted Subtenants.
- 40 -
ARTICLE 14
ACCESS TO PREMISES
Section 14.1 Landlords Access.
(a) Landlord, Landlords agents and utility service providers servicing the Building
may erect, use and maintain concealed ducts, pipes and conduits in and through the Premises
provided such use does not cause the usable area of the Premises to be reduced beyond a
de minimis
amount. Landlord shall promptly repair any damage to the Premises caused by any work performed
pursuant to this Article 14. Notwithstanding the foregoing, except in case of an emergency,
Landlord shall provide notice of not less than 72 hours prior to entering the Premises for any such
activities. Landlord shall comply with Tenants reasonable security procedures when in the
Premises. Notwithstanding the foregoing, after the Commencement Date Landlord shall not erect or
install wiring, ducts, pipes or conduits in the Premises (except to the extent the same replace any
wiring, ducts, pipes or conduits which exist in the Premises prior to the Commencement Date).
(b) Landlord, any Lessor or Mortgagee and any other party designated by Landlord and their
respective agents shall have the right to enter the Premises at all reasonable times, upon
reasonable notice (which notice may be oral) except in the case of emergency, to examine the
Premises, to show the Premises to prospective purchasers, Mortgagees, Lessors or tenants and their
respective agents and representatives or others and to perform Restorative Work to the Premises or
the Building.
(c) All parts (except surfaces facing the interior of the Premises) of all walls, windows and
doors bounding the Premises, all balconies, terraces and roofs adjacent to the Premises, all space
in or adjacent to the Premises used for shafts, stacks, stairways, mail chutes, conduits and other
mechanical facilities, Building Systems; Building faculties and Common Areas are not part of the
Premises, and Landlord shall have the use thereof and access thereto through the Premises for the
purposes of Building operation, maintenance, alteration and repair. In the performance of any such
work, Landlord shall use commercially reasonable efforts to avoid disruption of Tenants use and
occupancy of the Premises. If, in exercising its rights under this Article, Landlord interferes
with Tenants ability to operate Tenants business in the Premises and Tenant ceases to operate
Tenants business in the Premises as a result thereof, then Tenant should be entitled to an
abatement of Fixed Rent, Tenants Operating Payment and Tenants Tax Payment until Tenant can once
again operate Tenants business in the Premises. Except in the case of an emergency, Landlord shall
not have access to the NOC Facilities without Tenants prior written consent, such consent not to
be unreasonably withheld, and without an escort designated by Tenant. To the extent that Landlord
incurs any expense arising from the requirement that Landlord must be accompanied by a
Tenant-designated escort (such as the Tenant-designated escort not being available at a
pre-arranged time), Tenant shall reimburse Landlord for such expense within 30 days after Tenants
receipt of an invoice therefor.
Section 14.2 Building Name.
Landlord has the right at any time to change the name,
number or designation by which the Building is commonly known. Landlord shall use commercially
reasonable efforts to notify Tenant of any name change. If Landlord changes the
- 41 -
name, number or designation by which the Building is commonly known, Landlord shall
reimburse Tenant for Tenants third-party out-of-pocket expenses (not to exceed $2,500) incurred
in replacing Tenants then existing stationery, business card stocks and marketing materials.
ARTICLE 15
DEFAULT
Section 15.1 Tenants Defaults.
Each of the following events shall be an
Event of
Default
hereunder:
(a) Tenant fails to pay when due any installment of Rent and such default shall
continue for 5 Business Days after written notice of such default is
given to Tenant except that if
Landlord shall have given two such notices of default in the payment of any Rent in any 12-month
period, Tenant shall not be entitled to any further notice of its delinquency in the payment of any
Rent or an extended period in which to make payment until such time as 12 consecutive months shall
have elapsed without Tenant having failed to make any such payment when due, and the occurrence of
any default in the payment of any Rent within such 12-month period after the giving of 2 such
notices shall constitute an Event of Default; or
(b) Tenant fails to observe or perform any other term, covenant or condition of this Lease and
such failure continues for more than 30 days after notice by Landlord to Tenant of such default, or
if such default is of a nature that it cannot be completely remedied within 30 days, failure by
Tenant to commence to remedy such failure within said 30 days, and thereafter diligently prosecute
to completion all steps necessary to remedy such default, provided in all events the same is
completed within 90 days; or
(c) if Landlord applies or retains any part of the Security Deposit, and Tenant fails to
deposit with Landlord the amount so applied or retained by Landlord, or to provide Landlord with a
replacement Letter of Credit (as hereinafter defined), if applicable, within 10 Business Days after
notice by Landlord to Tenant stating the amount applied or retained; or
Upon the occurrence of any one or more of such Events of Default, Landlord may, at its sole
option, give to Tenant notice of cancellation of this Lease (or of Tenants possession of the
Premises), in which event this Lease and the Term (or Tenants possession of the Premises) shall
terminate (whether or not the Term shall have commenced) with the same force and effect as if the
date set forth in the notice was the Expiration Date stated herein; and Tenant shall then quit
and surrender the Premises to Landlord, but Tenant shall remain liable for damages as provided in
this Article 15. Any notice of cancellation of the Term (or Tenants possession of the Premises)
may be given simultaneously with any notice of default given to Tenant; provided the same shall
not limit Tenants cure rights under this Lease.
Section 15.2 Landlords Remedies.
(a)
Possession/Reletting.
If this Lease and the Term, or Tenants right to
possession of the Premises, terminate as provided in
Section 15.1:
- 42 -
(i)
Surrender of Possession.
Tenant shall quit and surrender the Premises to Landlord,
and Landlord and its agents may immediately, or at any time after such termination, re-enter the
Premises or any part thereof, without notice, either by summary proceedings, or by any other
applicable action or proceeding, or by force (to the extent permitted by law) or otherwise in
accordance with applicable legal proceedings (without being liable to indictment, prosecution or
damages therefor), and may repossess the Premises and dispossess Tenant and any other persons from
the Premises and remove any and all of their property and effects from the Premises.
(ii)
Landlords Reletting.
Landlord, at Landlords option, may relet all or any part of the
Premises from time to time, either in the name of Landlord or otherwise, to such tenant or
tenants, for any term ending before, on or after the Expiration Date, at such rental and upon such
other conditions (which may include concessions and free rent periods) as Landlord, in its sole
but reasonable discretion, may determine. Landlord shall have no obligation to accept any tenant
offered by Tenant and shall not be liable for failure to relet or, in the event of any such
reletting, for failure to collect any rent due upon any such reletting; and no such failure shall
relieve Tenant of, or otherwise affect, any liability under mis Lease. However, to the extent
required by law, Landlord shall use reasonable efforts to mitigate its damages but shall not be
required to divert prospective tenants from any other portions of the Building. Landlord, at
Landlords option, may make such alterations, decorations and other physical changes in and to the
Premises as Landlord, in its sole discretion, considers advisable or necessary in connection with
such reletting or proposed reletting, without relieving Tenant of any liability under this Lease
or otherwise affecting any such liability.
(b)
Tenants Waiver.
Tenant, on its own behalf and on behalf of all persons claiming through
or under Tenant, including all creditors, hereby waives all rights which Tenant and all such
persons might otherwise have under any Requirement (i) to redeem, or to re-enter or repossess the
Premises, or (ii) to restore the operation of this Lease, after (A) Tenant shall have been
dispossessed by judgment or by warrant of any court or judge, or (B) any expiration or early
termination of the term of this Lease, whether such dispossess, re-entry, expiration or termination
shall be by operation of law or pursuant to the provisions of this Lease. The words re-enter,
re-entry and re-entered as used in this Lease shall not be deemed to be restricted to their
technical legal meanings.
(c)
Tenants Breach.
Upon the breach by Tenant, or any persons claiming through or under
Tenant, of any term, covenant or condition of this Lease, after the expiration of any applicable
notice and cure period Landlord shall have the right to enjoin such breach and to invoke any other
remedy allowed by law or in equity as if re-entry, summary proceedings and other special remedies
were not provided in this Lease for such breach. The rights to invoke the remedies set forth above
are cumulative and shall not preclude Landlord from invoking any other remedy allowed at law or in
equity.
- 43 -
Section 15.3 Landlords Damages.
(a)
Amount of Damages.
If this Lease and the Term, or Tenants right to possession of the
Premises, terminate as provided in Section 15.1, then:
(i) Tenant shall pay to Landlord all items of Rent payable under this Lease by Tenant
to Landlord prior to the date of termination;
(ii) Landlord may retain (to the maximum extent of its damages) all monies, if any, paid by
Tenant to Landlord, whether as prepaid Rent, a Security Deposit or otherwise, which monies, to the
extent not otherwise applied to amounts due and owing to Landlord, shall be credited by Landlord
against any damages payable by Tenant to Landlord and Landlord will promptly deliver to Tenant any
excess proceeds to which Tenant is entitled;
(iii) Tenant shall pay to Landlord, in monthly installments, on the days specified in this
Lease for payment of installments of Fixed Rent, any Deficiency; it being understood that
Landlord shall be entitled to recover the Deficiency from Tenant each month as the same shall
arise, and no suit to collect the amount of the Deficiency for any month, shall prejudice
Landlords right to collect the Deficiency for any subsequent month by a similar proceeding; and
(iv) whether or not Landlord shall have collected any monthly Deficiency, Tenant shall pay to
Landlord, on demand, in lieu of any further Deficiency and as liquidated and agreed final damages,
a sum equal to the amount by which the Rent for the period which otherwise would have constituted
the unexpired portion of the Term (assuming the Additional Rent during such period to be the same
as was payable for the year immediately preceding such termination or re-entry, increased in each
succeeding year by 4% (on a compounded basis)) exceeds the then fair and reasonable rental value
of the Premises, for the same period (with both amounts being discounted to present value at a rate
of interest equal to 2% below the then Base Rate) less the aggregate amount of Deficiencies
theretofore collected by Landlord pursuant to the provisions of Section 15.3(a)(iii) for the same
period.
(b)
Reletting.
If the Premises, or any part thereof, shall be relet together with other space
in the Building, the rents collected or reserved under any such reletting and the reasonable
third-party out-of-pocket expenses of any such reletting shall be equitably apportioned for the
purposes of this Section 15.3. Tenant shall not be entitled to any rents collected or payable
under any reletting, whether or not such rents exceeds the Fixed Rent reserved in this Lease.
Nothing contained in Article 15 shall be deemed to limit or preclude the recovery by Landlord from
Tenant of the maximum amount allowed to be obtained as damages by any Requirement, or of any sums
or damages to which Landlord may be entitled in addition to the damages set forth in this Section
15.3.
Section 15.4 Interest.
If any payment of Rent is not paid within 5 Business Days
after the same is due, interest shall accrue on such payment, from the date such payment became
due until paid at the Interest Rate. Tenant acknowledges that late payment by Tenant of Rent
will cause Landlord to incur costs not contemplated by this Lease, the exact amount of such
costs being extremely difficult and impracticable to fix. Such costs include, without
limitation,
- 44 -
processing and accounting charges, and late charges that may be imposed on Landlord by the
terms of any note secured by a Mortgage covering the Premises. Therefore, in addition to interest,
if any amount is not paid within 5 Business Days after the same is due, a late charge equal to 5%
of such amount shall be assessed; provided, however, that on 2 occasions during any calendar year
of the Term, Landlord shall give Tenant notice of such late payment and Tenant shall have a period
of 5 Business Days thereafter in which to make such payment before any late charge is assessed.
Such interest and late charges are separate and cumulative and are in addition to and shall not
diminish or represent a substitute for any of Landlords rights or remedies under any other
provision of this Lease.
Section 15.5 Other Rights of Landlord.
If Tenant fails to pay any Additional Rent when due,
Landlord, in addition to any other right or remedy, shall have the same rights and remedies as in
the case of a default by Tenant in the payment of Fixed Rent. If Tenant is in arrears in the
payment of Rent, Tenant waives Tenants right, if any, to designate the items against which any
payments made by Tenant are to be credited, and Landlord may apply any payments made by Tenant to
any items Landlord sees fit, regardless of any request by Tenant.
Any provision of this Lease to the contrary notwithstanding, Landlord shall not look to any
property or assets of any partner, member, manager, shareholder, director, officer, principal, or
employee of Tenant (collectively, the
Tenant Parties
) in seeking either to enforce Tenants
obligations under this Lease or to satisfy a judgment for Tenants failure to perform such
obligations; and none of the Tenant Parties shall be personally liable for the performance of
Tenants obligations under this Lease.
Any provision of this Section to the contrary notwithstanding, Landlord shall not discontinue
providing utilities (other than overtime HVAC service) to the Premises due to any default of
Tenant, until Landlord has obtained a court order or other similar determination by an applicable
judicial or arbitrative body authorizing such discontinuance.
Section 15.6
Maintenance Default.
If Landlord fails to perform any repair or maintenance which
is Landlords obligation under this Lease, or fails to perform Landlords obligations under
Section 8.1(c) of the Lease, and such failure materially and adversely impacts Tenants use and
enjoyment of the Premises for the Permitted Use (a
Repair Problem)
, Tenant shall send Landlord a
written notice detailing the nature of the Repair Problem (the
First Notice
). If such Repair
Problem continues for 15 days after Landlord receives the First Notice, Tenant shall send a second
notice which must state SECOND AND FINAL REQUEST at the top of the notice (the
Second Notice)
.
If the Repair Problem continues for 15 days after Landlord receives the Second Notice, Tenant may
make such repairs or perform such maintenance at Tenants cost provided that Tenant shall be
solely responsible for any damage or injury, or death caused by or arising therefrom. Any
provision of this Section to the contrary notwithstanding, if Landlord commences repair of the
Repair Problem within 15 days after receipt of the Second Notice and thereafter prosecutes such
repair to completion with reasonable diligence, Landlord shall have a reasonable period after
receipt of the Second Notice to complete the Repair Problem. All notices given to Landlord under
this Section and elsewhere in this Lease must be given in accordance with the requirements set
forth in Article 23.
- 45 -
If Tenant complies with the provisions of this Section, upon Tenants completion of the
Repair Problem Landlord shall (subject to Article 7 of this Lease and to the restrictions of this
Section) pay Tenants reasonable out-of-pocket costs, for making such repairs or performing such
maintenance promptly upon presentation of a bill therefor. Notwithstanding the foregoing, Tenant
shall have no right (i) to undertake any action which would affect the Building Systems, (ii) to
undertake any action which would affect the Buildings exterior walls, floor slabs, roof or
structure, or (iii) to set off or deduct any amounts due from Landlord hereunder from the Fixed
Rent or Additional Rent due under this Lease.
Any provision of this Section 15.6 to the contrary notwithstanding, in the event of an
emergency requiring repairs to the Emergency Power System, if Landlord does not promptly and
diligently perform the repairs, Tenants self-help right under this Section shall apply to the
Emergency Power System without the requirement of providing the First Notice or the Second Notice
to Landlord.
ARTICLE 16
LANDLORDS RIGHT TO CURE; FEES AND EXPENSES
If Tenant defaults in the performance of its obligations under this Lease, Landlord,
without waiving such default, may perform such obligations at Tenants expense:
(a) immediately, and without notice, in the case of emergency threatening imminent harm to any
person or property or if the default (i) materially interferes with the use by any other tenant of
the Building, (ii) materially interferes with the efficient operation of the Building, (iii)
results in a violation of any Requirement, or (iv) results or will result in a cancellation of any
insurance policy maintained by Landlord, and (b) in any other case if such default continues after
30 days from the date Landlord gives notice of Landlords intention to perform the defaulted
obligation. All costs and expenses incurred by Landlord in connection with any such performance by
it and all costs and expenses, including reasonable counsel fees and disbursements, incurred by
Landlord in any action or proceeding (including any unlawful detainer proceeding) brought by
Landlord to enforce any obligation of Tenant under this Lease and/or right of Landlord in or to the
Premises, shall be paid by Tenant to Landlord within 30 days after demand, with interest thereon at
the Interest Rate from the date incurred by Landlord. Except as expressly provided to the contrary
in this Lease, all costs and expenses which, pursuant to this Lease are incurred by Landlord and
payable to Landlord by Tenant, and all charges, amounts and sums payable to Landlord by Tenant for
any property, material, labor, utility or other services which, pursuant to this Lease or at the
request and for the account of Tenant, are provided, furnished or rendered by Landlord, shall
become due and payable by Tenant to Landlord within 30 days after receipt of Landlords invoice for
such amount.
ARTICLE 17
NO REPRESENTATIONS BY LANDLORD; LANDLORDS APPROVAL
Section 17.1 No Representations.
Except as expressly set forth herein, Landlord and
Landlords agents have made no warranties, representations, statements or promises with respect
to the Building, the Real Property or the Premises and no rights, easements or licenses are
acquired by Tenant by implication or otherwise. Tenant is entering into this Lease after full
- 46 -
investigation and is not relying upon any statement or representation made by Landlord not
embodied in this Lease.
Section 17.2. No Money Damages.
Wherever in this Lease Landlords consent or approval is
required, Landlord hereby acknowledges its duty to act in each such case consistent with a covenant
of good faith and fair dealing (but Landlord shall not otherwise be subject to a reasonableness
standard where Landlord has reserved its right to act in its sole discretion). If Landlord refuses
to grant such consent or approval, whether or not Landlord expressly agreed that such consent or
approval would not be unreasonably withheld, conditioned or delayed, Tenant shall not make, and
Tenant hereby waives, any claim for money damages (including any claim by way of set-off,
counterclaim or defense) based upon Tenants claim or assertion that Landlord unreasonably
withheld, conditioned or delayed its consent or approval. Tenants sole remedy shall be an action
or proceeding to enforce such provision, by specific performance, injunction or declaratory
judgment, provided that such remedy can be obtained during the pendency of the Lease.
If Tenant is unable to obtain such remedy during the pendency of the Lease, then
notwithstanding the foregoing, Tenant shall be entitled money damages equal to the diminished
value of Tenants leasehold estate proximately caused by Landlord acting in bad faith in
withholding its consent or approval, as determined by a final non-appealable judgment from a court
of competent jurisdiction. Except as otherwise expressly provided in this Lease to the contrary,
in no event shall either party be liable to the other for any indirect, consequential or punitive
damages, including loss or profits or business opportunity, arising under or in connection with
this Lease. Notwithstanding the foregoing, Tenants waiver to set forth in the second sentence of
this Section shall not apply to any final non-appealable judgment that Tenant obtains from a court
of competent jurisdiction that Landlord acted in bad faith in withholding its consent or approval.
Section 17.3 Reasonable Efforts.
For purposes of this Lease, reasonable efforts by Landlord
or Tenant shall not include an obligation to employ contractors or labor at overtime or other
premium pay rates or to incur any other overtime costs or additional expenses whatsoever.
ARTICLE 18
END OF TERM
Section 18.1 Expiration.
Upon the expiration or other termination of this Lease, Tenant
shall quit and surrender the Premises to Landlord vacant, broom clean and in good order and
condition, ordinary wear and tear and damage for which Tenant is not responsible under the terms
of this Lease excepted, and except as otherwise expressly provided in Section 5.3 to the
contrary, Tenant shall remove all of Tenants Property and to the extent Tenant is required
elsewhere in this Lease to remove Tenants Specialty Alterations.
Section 18.2
Holdover Rent.
Landlord and Tenant recognize that Landlords damages resulting
from Tenants failure to timely surrender possession of the Premises may be substantial, may
exceed the amount of the Rent payable hereunder, and will be impossible to accurately measure.
Accordingly, if possession of the Premises is not surrendered to Landlord on the Expiration Date
or sooner termination of this Lease, in addition to any other rights or remedies
- 47 -
Landlord may have hereunder or at law, Tenant shall (a) pay to Landlord for each month (or any
portion thereof) during which Tenant holds over in the Premises after the Expiration Date or sooner
termination of this Lease, a sum equal to 150% of the Rent payable under this Lease for the last
full calendar month of the Term for the first 60 days of such holdover and 200% of the Rent payable
under this Lease for the last full calendar month of the Term for any holdover in excess of 60
days, (b) be liable to Landlord for (i) any payment or rent concession which Landlord may be
required to make to any tenant obtained by Landlord for all or any part of the Premises (a
New
Tenant
) in order to induce such New Tenant not to terminate its lease by reason of the
holding-over by Tenant, and (ii) the loss of the benefit of the bargain if any New Tenant shall
terminate its lease by reason of the holding-over by Tenant, and (c) indemnify Landlord against all
claims for damages by any New Tenant. No holding-over by Tenant, nor the payment to Landlord of the
amounts specified above, shall operate to extend the Term hereof. Nothing herein contained shall be
deemed to permit Tenant to retain possession of the Premises after the Expiration Date or sooner
termination of this Lease, and no acceptance by Landlord of payments from Tenant after the
Expiration Date or sooner termination of this Lease shall be deemed to be other than on account of
the amount to be paid by Tenant in accordance with the provisions of this Section 18.2. Any
provision of this Section to the contrary notwithstanding, in connection with any such holdover,
Tenant shall have a 60 day grace period prior to being liable for any consequential or punitive
damages as a result of such holdover.
ARTICLE 19
QUIET ENJOYMENT
Provided this Lease is in full force and effect and no Event of Default by Tenant then
exists, Tenant may peaceably and quietly enjoy the Premises and Tenants possession of the
Premises and the rights afforded to Tenant hereunder shall not be disturbed, without hindrance by
Landlord or any person lawfully claiming through or under Landlord, subject to the terms and
conditions of this Lease.
ARTICLE 20
NO SURRENDER; NO WAIVER
Section 20.1 No Surrender or Release.
No act or thing done by Landlord or Landlords
agents or employees during the Term shall be deemed an acceptance of a surrender of the Premises,
and no provision of this Lease shall be deemed to have been waived by Landlord, unless such
waiver is in writing and is signed by Landlord.
Section 20.2 No Waiver.
The failure of either party to seek redress for violation of, or to
insist upon the strict performance of, any covenant or condition of this Lease, or any of the
Rules and Regulations, shall not be construed as a waiver or relinquishment for the future
performance of such obligations of this Lease or the Rules and Regulations, or of the right to
exercise such election but the same shall continue and remain in full force and effect with
respect to any subsequent breach, act or omission. The receipt by Landlord of any Rent payable
pursuant to this Lease or any other sums with knowledge of the breach of any covenant of this
Lease shall not be deemed a waiver of such breach. No payment by Tenant or receipt by Landlord of
a lesser amount than the monthly Rent herein stipulated shall be deemed to be other than a
payment on
- 48 -
account of the earliest stipulated Rent, or as Landlord may elect to apply such payment,
nor shall any endorsement or statement on any check or any letter accompanying any check or
payment as Rent be deemed an accord and satisfaction, and Landlord may accept such check or
payment without prejudice to Landlords right to recover the balance of such Rent or pursue any
other remedy provided in this Lease.
ARTICLE 21
WAIVER OF TRIAL BY JURY; COUNTERCLAIM
Section 21.1 Jury Trial Waiver.
Landlord and Tenant hereby waive trial by jury in any
action, proceeding or counterclaim brought by either party against the other on any matters in
any way arising out of or connected with this Lease, the relationship of Landlord and Tenant,
Tenants use or occupancy of the Premises, or the enforcement of any remedy under any statute,
emergency or otherwise.
Section 21.2 Waiver of Counterclaim.
If Landlord commences any summary proceeding against
Tenant, Tenant will not interpose any counterclaim of any nature or description in any such
proceeding (unless failure to interpose such counterclaim would preclude Tenant from asserting in
a separate action the claim which is the subject of such counterclaim), and will not seek to
consolidate such proceeding with any other action which may have been or will be brought in any
other court by Tenant.
ARTICLE 22
NOTICES
Except as otherwise expressly provided in this Lease, all consents, notices, demands,
requests, approvals or other communications given under this Lease shall be in writing and shall
be deemed sufficiently given or rendered if delivered by hand (provided a signed receipt is
obtained) or if sent by registered or certified mail (return receipt requested) or by a nationally
recognized overnight delivery service making receipted deliveries, addressed to Landlord and
Tenant as set forth in Article 1, and to any Mortgagee or Lessee who shall require copies of
notices and whose address is provided to Tenant, or to such other address(es) as Landlord, Tenant
or any Mortgagee or Lessor may designate as its new address(es) for such purpose by notice given
to the other in accordance with the provisions of this Article 22. Any such approval, consent,
notice, demand, request or other communication shall be deemed to have been given on the date of
receipted delivery, refusal to accept delivery or when delivery is first attempted but cannot be
made due to a change of address for which no notice is given or 3 Business Days after it shall
have been mailed as provided in this Article 22, whichever is earlier.
ARTICLE 23
RULES AND REGULATIONS
All Tenant Parties shall observe and comply with the Rules and Regulations, as
reasonably supplemented or amended from time to time. Landlord reserves the right, from time to
time, to adopt additional Rules and Regulations and to amend the Rules and Regulations then in
effect. Nothing contained in this Lease shall impose upon Landlord any obligation to enforce the
Rules and Regulations or terms, covenants or conditions in any other lease against any other
- 49 -
Building tenant, and Landlord shall not be liable to Tenant for violation of the same by any
other tenant, its employees, agents, visitors or licensees, provided that Landlord shall enforce
the Rules or Regulations against Tenant in a non-discriminatory fashion. Landlord shall not enforce
any Rules and Regulations other than in a uniform, non-discriminatory manner.
ARTICLE 24
BROKER
Landlord has retained Landlords Agent as leasing agent in connection with this Lease
and Landlord will be solely responsible for any fee that may be payable to Landlords Agent.
Landlord agrees to pay a commission to Tenants Broker pursuant to a separate agreement. Each of
Landlord and Tenant represents and warrants to the other that neither it nor its agents have dealt
with any broker in connection with this Lease other than Landlords Agent and Tenants Broker and
that no other broker, finder or like entity procured or negotiated this Lease or is entitled to
any fee or commission in connection herewith. Each of Landlord and Tenant shall indemnify, defend,
protect and hold the other party harmless from and against any and all Losses which the
indemnified party may incur by reason of any claim of or liability to any broker, finder or like
agent (other than Landlords Agent and Tenants Broker) arising out of any dealings claimed to
have occurred between the indemnifying party and the claimant in connection with this Lease,
and/or the above representation being false.
ARTICLE 25
INDEMNITY
Section 25.1 Tenants Indemnity.
Tenant shall not do or permit to be done any act or
thing upon the Premises or the Building which may subject Landlord to any liability or
responsibility for injury, damages to persons or property or to any liability by reason of any
violation of any Requirement, and shall exercise such control over the Premises as to fully
protect Landlord against any such liability. Tenant shall indemnify, defend, protect and hold
harmless each of the Indemnitees from and against any and all Losses, resulting from any claims
(i) against the Indemnitees arising from any act, omission or negligence of any of the Tenant
Parties, (ii) against the Indemnitees arising from any accident, injury or damage whatsoever
caused to any person or to the property of any person and occurring in or about the Premises, and
(iii) against the Indemnitees resulting from any breach, violation or nonperformance of any
covenant, condition or agreement of this Lease on the part of Tenant to be fulfilled, kept,
observed or performed. The foregoing indemnity shall be deemed to exclude liability arising from
the gross negligence or intentional misconduct of the Indemnitees, or any of them.
Section 25.2 Landlords Indemnity.
Landlord shall indemnify, defend and hold harmless Tenant
from and against all Losses incurred by Tenant arising from (i) any act, omission or negligence
of Landlord, (ii) any accident, injury or damage whatsoever caused to any person or the property
of any person in or about the Real Property (exclusive of the Premises) to the extent
attributable to the negligence or willful misconduct of Landlord or its employees or agents,
and/or (iii) any breach, violation or nonperformance of any covenant, condition or agreement of
this Lease on the part of Landlord to be fulfilled, kept, observed or performed.
- 50 -
Any provision of this Lease to the contrary notwithstanding, neither Landlord nor any of
its employees, agents or contractors shall be liable under any theory of liability to Tenant for
any indirect, special, incidental, remote or consequential damages arising under or in connection
with this Lease, whether in an action for or arising out of breach of contract, business
interruption, tort, or otherwise.
Section 25.3 Defense and Settlement.
If any claim, action or proceeding is made or brought
against any Indemnitee, then upon demand by an Indemnitee, Tenant, at its sole cost and expense,
shall resist or defend such claim, action or proceeding in the lndemnitees name(if necessary), by
attorneys reasonably approved by the Indemnitee, which approval shall not be unreasonably
withheld, conditioned or delayed (attorneys for Tenants insurer shall be deemed approved for
purposes of this Section 25.3). Notwithstanding the foregoing, an Indemnitee may retain its own
attorneys to participate or assist in defending any claim, action or proceeding involving
potential liability in excess of the amount available under Tenants liability insurance carried
under Section 11.1 for such claim and Tenant shall pay the reasonable fees and disbursements of
such attorneys. If Tenant fails to diligently defend or if there is a legal conflict or other
conflict of interest, then Landlord may retain separate counsel at Tenants expense.
Notwithstanding anything herein contained to the contrary, Tenant may direct the Indemnitee to
settle any claim, suit or other proceeding provided that (a) such settlement shall involve no
obligation on the part of the Indemnitee other than the payment of money, (b) any payments to be
made pursuant to such settlement shall be paid in full exclusively by Tenant at the time such
settlement is reached, (c) such settlement shall not require the Indemnitee to admit any
liability, and (d) the Indemnitee shall have received an unconditional release from the other
parties to such claim, suit or other proceeding.
ARTICLE 26
MISCELLANEOUS
Section 26.1 Delivery
&
Authority.
This Lease shall not be binding upon Landlord or
Tenant unless and until Landlord shall have executed and delivered a fully executed copy of this
Lease to Tenant. Landlord represents to Tenant that Landlord has the authority to enter into this
Lease and perform Landlords obligations hereunder
Section 26.2 Transfer of Real Property.
Landlords obligations under this Lease shall not be
binding upon the Landlord named herein after the sale, conveyance, assignment or transfer by such
Landlord (or upon any subsequent landlord after such subsequent landlords transfer) of its
interest in the Building or the Real Property, as the case may be, and in the event of any such
transfer, Landlord (and any such subsequent Landlord) shall be entirely freed and relieved of all
covenants and obligations of Landlord hereunder arising from and after the date of such transfer
and the transferee of Landlords interest (or that of such subsequent Landlord) in the Building
or the Real Property, as the case may be, shall be deemed to have assumed all obligations under
this Lease arising from and after the date of such transfer.
Section 26.3 Limitation on Liability.
The liability of Landlord for Landlords obligations
under this Lease shall be limited to Landlords interest in the Real Property and Tenant shall
not look to any other property or assets of Landlord or the property or assets of any
- 51 -
direct or indirect partner, member, manager, shareholder, director, officer, principal,
employee or agent of Landlord (collectively, the
Parties
) in seeking either to enforce
Landlords obligations under this Lease or to satisfy a judgment for Landlords failure to perform
such obligations; and none of the Parties shall be personally liable for the performance of
Landlords obligations under this Lease.
Section 26.4 Rent.
All amounts payable by Tenant to or on behalf of Landlord under this Lease,
whether or not expressly denominated Fixed Rent, Tenants Tax Payment, Tenants Operating Payment,
Additional Rent or Rent, shall constitute rent for the purposes of Section 502(b)(6) of the United
States Bankruptcy Code.
Section 26.5 Entire Document.
This Lease (including any Schedules and Exhibits referred to
herein and all supplementary agreements provided for herein) contains the entire agreement between
the parties and all prior negotiations and agreements are merged into this Lease. All of the
Schedules and Exhibits attached hereto are incorporated in and made a part of this Lease, provided
that in the event of any inconsistency between the terms and provisions of this Lease and the
terms and provisions of the Schedules and Exhibits hereto, the terms and provisions of this Lease
shall control.
Section 26.6 Governing Law.
This Lease shall be governed in all respects by the laws of the
Commonwealth of Virginia (but not including the choice of law rules thereof).
Section 26.7 Unenforceability.
If any provision of this Lease, or its application to any
Person or circumstance, shall ever be held to be invalid or unenforceable, then in each such event
the remainder of this Lease or the application of such provision to any other Person or any other
circumstance (other than those as to which it shall be invalid or unenforceable) shall not be
thereby affected, and each provision hereof shall remain valid and enforceable to the fullest
extent permitted by law.
Section 26.8 Lease Disputes.
(a) Tenant agrees that all disputes arising, directly or indirectly, out of or relating to
this Lease, and all actions to enforce this Lease, shall be dealt with and adjudicated in the state
courts of the Commonwealth of Virginia or the United States District Court for the Eastern District
of Virginia and for that purpose hereby expressly and irrevocably submits itself to the
jurisdiction of such courts. Tenant agrees that so far as is permitted under applicable law, this
consent to personal jurisdiction shall be self-operative and no further instrument or action, other
than service of process in one of the manners specified in this Lease, or as otherwise permitted by
law, shall be necessary in order to confer jurisdiction upon it in any such court.
(b) To the extent that Tenant has or hereafter may acquire any immunity from jurisdiction
of any court or from any legal process (whether through service or notice, attachment prior to
judgment, attachment in aid of execution, execution or otherwise) with respect to itself or its
property, Tenant irrevocably waives such immunity in respect of its obligations under this Lease.
- 52 -
Section 26.9 Landlords Agent.
Unless Landlord delivers written notice to Tenant to the
contrary, Landlords Agent is authorized to act as Landlords agent in connection with the
performance of this Lease, and Tenant shall be entitled to rely upon correspondence received from
Landlords Agent. Tenant acknowledges that Landlords Agent is acting solely as agent for Landlord
in connection with the foregoing; and neither Landlords Agent nor any of its direct or indirect
partners, members, managers, officers, shareholders, directors, employees, principals, agents or
representatives shall have any liability to Tenant in connection with the performance of this
Lease, and Tenant waives any and all claims against any and all of such parties arising out of, or
in any way connected with, this Lease, the Building or the Real Property.
Section 26.10 Estoppel.
Within 15 days following request from Landlord, any Mortgagee or any
Lessor, but not more frequently than 3 times in any 12 month period during the Term, Tenant shall
deliver to Landlord a statement executed and acknowledged by Tenant, in form reasonably
satisfactory to Landlord, (a) stating the Commencement Date, the Rent Commencement Date and the
Expiration Date, and that this Lease is then in full force and effect and has not been modified
(or if modified, setting forth all modifications), (b) setting forth the date to which the Fixed
Rent and any Additional Rent have been paid, together with the amount of monthly Fixed Rent and
Additional, Rent then payable, (c) stating whether or not, to the best of Tenants knowledge,
Landlord is in default under this Lease, and, if Landlord is in default, setting forth the
specific nature of all such defaults, (d) stating the amount of the Security Deposit, if any,
under this Lease, (e) stating whether there are any subleases or assignments affecting the
Premises, (f) stating the address of Tenant to which all notices and communications under the
Lease shall be sent, and (g) responding to any other matters reasonably requested by Landlord,
such Mortgagee or such Lessor. Tenant acknowledges that any statement delivered pursuant to this
Section 26.10 may be relied upon by any purchaser or owner of the Real Property or the Building or
all or any portion of Landlords interest in the Real Property or the Building or any Superior
Lease, or by any Mortgagee, or assignee thereof or by any Lessor, or assignee thereof. Within 10
Business Days following request from Tenant, but not more frequently than twice in any 12 month
period, Landlord shall deliver to Tenant a statement executed and acknowledged by Landlord, in
form reasonably satisfactory to Tenant, containing the above information.
Section 26.11 Certain Interpretational Rules.
For purposes of this Lease, whenever the words
include, includes, or including are used, they shall be deemed to be followed by the words
without limitation and, whenever the circumstances or the context requires, the singular shall
be construed as the plural, the masculine shall be construed as the feminine and/or the neuter
and vice versa. This Lease shall be interpreted and enforced without the aid of any canon, custom
or rule of law requiring or suggesting construction against the party drafting or causing the
drafting of the provision in question.
The captions in this Lease are inserted only as a matter of convenience and for reference
and in no way define, limit or describe the scope of this Lease or the intent of any provision
hereof.
Section 26.12 Parties Bound.
The terms, covenants, conditions and agreements contained in
this Lease shall bind and inure to the benefit of Landlord and Tenant and, except as
- 53 -
otherwise provided in this Lease, to their respective legal representatives, successors, and
assigns.
Section 26.13 Memorandum of Lease.
This Lease shall not be recorded; however, at Landlords
request, Landlord and Tenant shall promptly execute, acknowledge and deliver a memorandum with
respect to this Lease sufficient for recording and Landlord may record the memorandum. Any
recording fees payable in connection with Landlords request shall be Landlords sole cost and
expense. Within 10 days following the end of the Term, Tenant shall enter into such reasonable and
customary documentation as is reasonably required by Landlord to remove the memorandum of record.
Section 26.14 Counterparts.
This Lease may be executed in 2 or more counterparts, each of
which shall constitute an original, but all of which, when taken together, shall constitute but
one instrument. Signatures transmitted by facsimile shall be deemed as original signatures
effective on transmission provided that the originals are delivered within 2 Business Days.
Section 26.15 Survival.
All obligations and liabilities of Landlord or Tenant to the other
which accrued before the expiration or other termination of this Lease, and all such obligations
and liabilities which by their nature or under the circumstances can only be, or by the provisions
of this Lease may be, performed after such expiration or other termination, shall survive the
expiration or other termination of this Lease. Without limiting the generality of the foregoing,
the rights and obligations of the parties with respect to any indemnity under this Lease, and with
respect to any Rent and any other amounts payable under this Lease, shall survive the expiration
or other termination of this Lease.
Section 26.16 Inability to Perform.
Landlord and Tenant shall be excused from performing any
obligation or undertaking provided for in this Lease so long as such performance is prevented or
delayed, retarded or hindered by an Unavoidable Delay; provided, however, that no such event or
cause shall relieve Tenant of its obligations hereunder to make full and timely payments of Rent
as provided herein. Landlord and Tenant each shall use reasonable efforts to promptly notify the
other of any Unavoidable Delay which prevents the notifying party from fulfilling any of its
obligations under this Lease.
Section 26.17 Special Services.
[Intentionally Omitted]
Section 26.18 Deed of Lease/Landlords Agent for Service of Process.
For purposes of Section
55-2, Code of Virginia (1950), as amended, this Lease is and shall be deemed to be a deed of
lease. For purposes of Section 55-218.1, Code of Virginia (1950), as amended, Landlords resident
agent for service of process is: James C. Brincefield, Jr., Attorney at Law, 526 King Street,
Alexandria, Virginia 22314.
Section 26.19 Lien for Payment of Rent.
Landlord hereby waives the benefit of any statutory
or common law lien right in Tenants personal property at the Premises.
- 54 -
Section 26.20 Financial Statements.
Tenant agrees to deliver to Landlord by April 30 of each
year a balance sheet of Tenant as of the end of the preceding calendar year and an income and loss
statement of Tenant for the 12 month period ending on such date.
Section 26.21 Telecommunications.
Tenant shall have the right to select Tenants
telecommunications companies, including but not limited to local exchange telecommunications
companies and alternative access vendor services companies (
Tenants Telecommunications
Companies)
. Landlord, without charge to Tenant, shall provide Tenant and Tenants
Telecommunications Companies with reasonable use of the Buildings risers and conduits, and with
reasonable access from the point(s) of entry where Tenants Telecommunications Companies cables
enter the Real Estate, in connection with the installation and/or maintenance of the
Telecommunications Companies cables running to the Premises.
ARTICLE 27
SECURITY DEPOSIT
Section 27.1 Security Deposit.
Tenant shall deposit the Security Deposit with Landlord within
5 days after execution of this Lease as security for the faithful performance and observance by
Tenant of the terms, covenants and conditions of this Lease.
Section 27.2 Letter of Credit.
Tenant shall deliver the Security Deposit to Landlord in the
form of a clean, irrevocable, non-documentary and unconditional letter of credit (the
Letter of
Credit
) issued by and drawable upon (i) any commercial bank or financial institution reasonably
satisfactory to Landlord with offices for banking purposes in the Washington, D.C. or New York,
N.Y., metropolitan area (the
Issuing Bank
)
,
which has outstanding unsecured, uninsured and
unguaranteed indebtedness, or shall have issued a letter of credit or other credit facility that
constitutes the primary security for any outstanding indebtedness (which is otherwise uninsured and
unguaranteed), that is then rated, without regard to qualification of such rating by symbols such
as + or - or numerical notation, Aa or better by Moodys Investors Service and AA or better
by Standard & Poors Rating Service, and has combined capital, surplus and undivided profits of not
less than $500,000,000, (ii) Societé Generale or (iii) Citibank. Such Letter of Credit shall (a)
name Landlord as beneficiary, (b) be in the amount of the Security Deposit, (c) have a term of not
less than one year, (d) permit multiple drawings, (e) be fully transferable by Landlord without the
payment of any fees or charges by Landlord, and (f) otherwise be in form and content reasonably
satisfactory to Landlord. If upon any transfer of the Letter of Credit, any fees or charges shall
be so imposed, then such fees or charges shall be payable solely by Tenant and the Letter of Credit
shall so specify. The Letter of Credit shall provide that it shall be deemed automatically
renewed, without amendment, for consecutive periods of one year each thereafter during the Term
(and in no event shall the Letter of Credit expire prior to the 45
th
day following the
Expiration Date) unless the Issuing Bank sends a notice (the
Non-Renewal Notice
) to Landlord by
certified mail, return receipt requested, not less than 45 days next preceding the then expiration
date of the Letter of Credit stating that the Issuing Bank has elected not to renew the Letter of
Credit. Landlord shall have the right, upon receipt of the Non-Renewal Notice, to draw the full
amount of the Letter of Credit, by sight draft on the Issuing Bank, and shall thereafter hold or
apply the cash proceeds of the Letter of Credit pursuant to the terms of this Article 27, until
Tenant delivers to Landlord a substitute Letter of Credit
- 55 -
which meets the requirements of this Section 27.2. The Issuing Bank shall agree with all
drawers, endorsers and bonafide holders that drafts drawn under and in compliance with the terms of
the Letter of Credit will be duly honored upon presentation to the Issuing Bank at an office
location in New York City, New York or such other location if presentment may be accomplished by
facsimile. The Letter of Credit shall be subject in all respects to the Uniform Customs and
Practice for Documentary Credits (1993 revision), International Chamber of Commerce Publication No.
500.
Section 27.3 Application of Security.
If an Event of Default by Tenant occurs in the
payment or performance of any of the terms, covenants or conditions of this Lease, including the
payment of Rent, or Landlord receives a Non-Renewal Notice, Landlord may apply or retain the whole
or any part of any cash Security Deposit and/or Landlord may notify the Issuing Bank and thereupon
receive all or a portion of the Security Deposit represented by the Letter of Credit and use,
apply, or retain the whole or any part of such proceeds, as the case may be, to the extent
required for the payment of any Fixed Rent or any other sum as to which Tenant is in default
including (i) any sum which Landlord may expend or may be required to expend by reason of Tenants
default, and/or (i) any damages to which Landlord is entitled pursuant to this Lease, whether such
damages accrue before or after summary proceedings or other reentry by Landlord. If Landlord
applies or retains any part of the Security Deposit, Tenant, within 10 days after demand, shall
deposit with Landlord (or provide an additional letter of credit meeting the requirements of
Article 27) the amount so applied or retained so that Landlord shall have the full Security
Deposit on hand at all times during the Term. If Landlord receives any amount represented by the
Letter of Credit, Landlord shall retain, as a cash Security Deposit, any sum not applied by
Landlord in accordance with provisions of Article 27. Landlord shall hold any such cash Security
Deposit in accordance with the provisions of Article 27. If Tenant shall comply with all of the
terms, covenants and conditions of this Lease, the Security Deposit shall be returned to Tenant
within 30 days following the Expiration Date and Tenants surrender of the Premises as required by
this Lease.
Section 27.4 Transfer.
Upon a sale or other transfer of the Real Property or the Building,
or any financing of Landlords interest therein, Landlord shall have the right to transfer the
Security Deposit to its transferee or lender. With respect to the Letter of Credit, within 10
days after notice of such transfer or financing, Tenant shall arrange for the transfer of the
Letter of Credit to the new landlord or the lender, as designated by Landlord in the foregoing
notice or have the Letter of Credit reissued in the name of the new landlord or the lender.
Tenant shall pay any Letter of Credit transfer fees for the first transfer and Landlord shall pay
any Letter of Credit transfer fees for the second and all subsequent transfers. Upon such
Transfer Tenant shall look solely to the new landlord or lender for the return of such cash
Security Deposit or Letter of Credit and the provisions hereof shall apply to every transfer or
assignment made of the Security Deposit to a new landlord. Tenant shall not assign or encumber or
attempt to assign or encumber the cash Security Deposit or Letter of Credit and neither Landlord
nor its successors or assigns shall be bound by any such action or attempted assignment, or
encumbrance.
Section 27.5 Reduction.
If (a) no more than 2 monetary Events of Default have occurred (with
each monetary default or missed payment constituting, for purposes of this Section, a separate
Event of Default) during the 3
rd
or 4
th
Lease Year, and (b) no Event of Default
- 56 -
exists as of the last day of the 4
th
Lease Year, then, provided that Tenant
complies with the provisions of this Section 27.5, (i) on first day of the 5
th
Lease
Year, the Security Deposit shall be reduced to $350,000. The Security Deposit shall be reduced as
follows: Tenant shall deliver to Landlord an amendment to the Letter of Credit (which amendment
must be reasonably acceptable to Landlord in all respects), reducing the amount of the Letter of Credit by the amount of the
permitted reduction, and Landlord shall execute the amendment and such other documents as are
reasonably necessary to reduce the amount of the Letter of Credit in accordance with the terms
hereof. If Tenant delivers to Landlord an amendment to the Letter of Credit in accordance with the
terms hereof, Landlord shall, within 10 Business Days after delivery
of such
a mendment,
either (1)
provide its reasonable objections to such amendment or (2) execute such amendment of the Letter of
Credit in accordance with the terms hereof. If any portion of the Security Deposit is in the form
of cash and Tenant would be entitled to a reduction in the Security Deposit under this Section if
the entire Security Deposit were in the form of the Letter of Credit, Landlord shall deliver to
Tenant the net permitted reduction in the Security Deposit on or before the 15
th
day of
the 5
th
Lease Year.
[SIGNATURES FOLLOW]
- 57 -
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year
first above written.
|
|
|
|
|
|
LANDLORD:
|
|
|
|
|
|
|
|
|
|
TST WOODLAND FUNDING I, L.L.C.,
|
|
|
|
a Delaware limited liability company
|
|
|
|
|
|
|
|
|
|
By:
Name:
|
|
/s/ Paul A. Galiano
Paul A. Galiano
|
|
[Seal]
|
|
Title:
|
|
Vice President
|
|
|
|
|
|
|
|
|
|
TENANT:
|
|
|
|
|
|
|
|
|
|
FRANCE TELECOM LONG DISTANCE USA LLC,
|
|
|
|
a Delaware limited liability company
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/
Janet M. Matulie
|
|
[Seal]
|
|
Name:
|
|
Janet M. Matulie
|
|
|
|
Title:
|
|
President
|
|
|
|
Exhibit A
Floor Plan
The floor plans which follow are intended solely to identify the general location of the Premises,
and should not be used for any other purpose. All areas, dimensions and locations are approximate,
and any physical conditions indicated may not exist as shown.
Exhibit A
Exhibit
A
Exhibit A-l
Real Property Description
Beginning at a point on the easterly line of Part of Lot 6, Woodland Associates Limited
Partnership, the property of TST Woodland One, L.L.C., said point being N 39 degrees 21 35 E,
393.11 feet from a point on the northerly right of way line of Sunrise Valley Drive (Route 5320)
marking the southeasterly corner of said Part of Lot 6, Woodland Associates Limited Partnership, the
property of TST Woodland One, L.L.C. with said part of Parcel 6, Woodland Associates Limited
Partnership, the property of TST Woodland One, L.L.C., the following three (3) courses; N 39
degrees 21 35 E, 126.89 feet to a point; N 13 degrees 07 22 E, 49.43 feet to a point and East
80.00 feet to a point; thence with the southwesterly and southeasterly lines of Part of Lot 6,
Woodland Associates Limited Partnership, the property of TST Woodland, L.L.C., the following four
(4) courses; South 18.03 feet to a point; N 77 degrees 17 22 E, 294.84 feet to a point; S 25
degrees 47 23 E, 107.36 feet to the point of curvature of a curve to the left and 50.29 feet
along the arc of said curve having a radius of 333.00 feet and a chord bearing and chord of S 30
degrees 06 58 E, 50.24 feet respectively, to a point; thence continuing with said the
southwesterly line of part of Lot 6, Woodland Associates Limited Partnership, the property of TST
Woodland, L.L.C., and with the southwesterly right of way line of Corporate Drive S 34 degrees 26
34 E, 159.48 feet to a point on the said southwesterly right of way line of proposed Corporate
Drive marking the point of curvature of a curve to the right; thence continuing with the said
southwesterly right of way line of proposed Corporate Drive 341.75 feet along the arc of said curve
having a radius of 333.00 feet and a chord bearing and chord of S 05 degrees 02 33 E, 326.95 feet
respectively, to a point; thence departing from said Corporate Drive and through Part of Lot 6,
Woodland Associates Limited Partnership, the property of TST Southpointe I, L.L.C., the following
eight (8) courses; N 71 degrees 56 40 W, 190.69 feet to a point; N 72 degrees 39 06 W, 194.07
feet to a point; N 17 degrees 20 54 E, 11.99 feet to a point; N 72 degrees 34 21 W, 175.00 feet
to a point; N 17 degrees 20 54 E, 114.27 feet to a point; N 72 degrees 39 06 W, 117.00 feet to
a point; N 17 degrees 20 54 E, 37.11 feet to a point and N 50 degrees 38 25 W, 69.44 feet to
the point of beginning.
Exhibit A-3
Exhibit B
Definitions
Base Rate:
The annual rate of interest publicly announced from time to time by Citibank, N.A.,
or its successor, in New York, New York as its base rate (or such other term as may be used by
Citibank, N. A., from time to time, for the rate presently referred to as its base rate).
Building Systems:
The mechanical, electrical, plumbing, sanitary, sprinkler, heating,
ventilation and air conditioning, security, life-safety, elevator and other service systems or
facilities of the Building, including Building standard fluorescent lighting, but excluding any
specialty lighting, Specialty Alterations or supplemental HVAC systems of tenants.
Business Days:
All days, excluding Saturdays, Sundays and all days observed by the Federal
Government as a legal holiday.
Code:
The Internal Revenue Code of 1986, as amended, and the regulations promulgated
thereunder, as amended.
Common Areas:
The lobby, parking facilities, plaza and sidewalk areas, garage and other
similar areas of general access and the areas on individual multi-tenant floors in the Building
devoted to corridors, elevator lobbies, restrooms, and other similar facilities serving the
Premises.
Comparable Buildings:
First class office buildings of comparable age, size and quality in the
Reston/Herndon submarket of Fairfax County, Virginia.
Covenants:
That certain Declaration of Protective Covenants for Woodland Park, recorded among
the land records of Fairfax County, Virginia in Book 6324 at Page 514, as amended and supplemented
and any other covenant, condition or restriction affecting the Real Property.
Deficiency:
The difference between (a) the Fixed Rent and Additional Rent for the period
which otherwise would have constituted the unexpired portion of the Term (assuming the Additional
Rent for each year thereof to be the same as was payable for the year immediately preceding such
termination or re-entry), and (b) the net amount, if any, of rents collected under any reletting
effected pursuant to the provisions of the Lease for any part of such period (after first
deducting from such rents all expenses incurred by Landlord in connection with the termination of
this Lease, Landlords re-entry upon the Premises and such reletting, including repossession
costs, brokerage commissions, attorneys fees and disbursements, and alteration costs).
Excluded Expenses:
(a) Taxes; (b) franchise or income taxes imposed upon Landlord; (c)
mortgage amortization and interest; (d) leasing commissions; (e) the cost of tenant installations
and decorations incurred in connection with preparing space for any Building tenant, including
permits, inspections, allowances, Work Letters and concessions; (f) fixed rent under
Exhibit B
Page 1 of 5
Superior Leases, if any; (g) management fees to the extent in excess of 3% of the gross
rentals and other revenues collected for the Real Property; (h) wages, salaries and benefits paid
to any persons above the grade of Building Manager and their immediate supervisor (i) legal and
accounting fees relating to (A) disputes with tenants, prospective tenants or other occupants of
the Building, (B) disputes with purchasers, prospective purchasers, mortgagees or prospective
mortgagees of the Building or the Real Property or any part of either, or (C) negotiations of
leases, contracts of sale or mortgages; (j) costs of services provided to other tenants of the
Building on a rent-inclusion basis which are not provided to Tenant on such basis; (k) costs that
are reimbursed out of insurance, warranty or condemnation proceeds, or which are reimbursable by
Tenant (including, without limitation, Tenants Excess Electrical Usage) or other tenants other
than pursuant to an expense escalation clause; (1) costs in the nature of penalties or fines; (m)
costs for services, supplies or repairs paid to any related entity in excess of costs that would be
payable in an arms length or unrelated situation for comparable services, supplies or repairs;
(n) allowances, concessions or other costs and expenses of improving or decorating any demised or
demisable space in the Building; (o) appraisal, advertising and promotional expenses in connection
with leasing of the Building; (p) the costs of installing, operating and maintaining a specialty
improvement, including a cafeteria, lodging or private dining facility, or an athletic, luncheon or
recreational club unless Tenant is permitted to make use of such facility without additional cost
or on a subsidized basis consistent with other users; (q) any costs or expenses (including fines,
interest, penalties and legal fees) arising out of Landlords failure to timely pay Operating
Expenses or Taxes; I costs incurred in connection with the testing, surveying, containing, removal,
encapsulation or other treatment of asbestos or any other Hazardous Materials (classified as such
on the Effective Date) existing in the Premises as of the date hereof, (s) the cost of capital
improvements other than those expressly included in Operating Expenses pursuant to Section 7.1, (t)
mortgage payments or other financing costs; (u) depreciation (except as to tools and equipment used
exclusively in the maintenance of the Building); (v) Landlords general corporate overhead and
general and administrative expenses related to personnel above the level of the immediate
supervisor of the property manager for the Building; (w) advertising and promotional expenditures;
(x) charitable or political contributions; (y) reserves for expenses beyond current year
anticipated expenses; (z) any compensation paid or costs incurred in connection with commercial
concessions operated by Landlord; (aa) costs incurred in connection with the sale or transfer of
the Real Property, including, without limitation, transfer taxes, recording fees, title insurance
premiums, appraisal costs and escrow fees; (bb) expenses for replacements arising from the initial
defective or improper construction of the Building regardless of whether such expenses are
reimbursed to Landlord by virtue of warranties from contractors or suppliers; (cc) except to the
extent of any cost savings, costs and expenses paid or incurred by Landlord to convert, modify or
replace HVAC components in the Building using chlorofluorocarbons to alternative refrigerant
technology; (dd) costs of reconstruction or repair of the Building pursuant to Article 11 or
Article 12 of this Lease; (ee) costs of electrical power for which any tenant directly contracts
with the applicable utility provider; (ff) costs or expenses due to Landlords negligence or
willful misconduct, or Landlords failure to comply with the terms of this Lease; and (gg) costs
incurred in connection with a sale or other change in ownership of the Building, including without
limitation, brokerage commissions, attorneys and accountants fees, closing costs, title insurance
premiums and transfer taxes.
Exhibit B
Page 2 of 5
Landlord shall equitably prorate all Operating Expenses and Taxes (if any) which relate
both to the Building and any other property owned by Landlord or an affiliate of Landlord. In no
event shall Landlord bill tenants of the Building in the aggregate for more than 100% of the cost
actually incurred by Landlord for any item of Operating Expense. The foregoing schedule of
exclusions is intended to function solely as an exclusionary listing and shall not be interpreted
to permit or authorize any cost or expense which would not otherwise be considered to be an
Operating Expense.
Governmental Authority:
The United States of America, the County of Fairfax, or Commonwealth
of Virginia, or any political subdivision, agency, department, commission, board, bureau or
instrumentality of any of the foregoing, now existing or hereafter created, having jurisdiction
over the Real Property.
Hazardous Materials
: Any substances, materials or wastes currently or in the future deemed or
defined in any Requirement as hazardous substances, toxic substances, contaminants,
pollutants or words of similar import.
HVAC System
: The Building System designed to provide heating, ventilation and air
conditioning.
Indemnitees:
Landlord, Landlords Agent, each Mortgagee and Lessor, and each of their
respective direct and indirect partners, officers, shareholders, directors, members, managers,
members, trustees, beneficiaries, employees, principals, contractors, servants, agents, and
representatives.
Lessor
: A lessor under a Superior Lease.
Losses:
Any and all losses, liabilities, damages, claims, judgments, fines, suits, demands,
costs, interest and expenses of any kind or nature (including reasonable attorneys fees and
disbursements) incurred in connection with any claim, proceeding or judgment and the defense
thereof, and including all costs of repairing any damage to the Premises or the Building or the
appurtenances of any of the foregoing to which a particular indemnity and hold harmless agreement
applies.
Mortgage(s):
Any mortgage, trust indenture or other financing document which may now or
hereafter affect the Premises, the Real Property, the Building or any Superior Lease and the
leasehold interest created thereby, and all renewals, extensions, supplements, amendments,
modifications, consolidations and replacements thereof or thereto, substitutions therefor, and
advances made thereunder.
Mortgagee(s):
Any mortgagee, trustee or other holder of a Mortgage.
Observed Holidays:
New Years Day, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day.
Exhibit B
Page 3 of 5
Ordinary Business Hours:
8:00 a.m. to 6:00 p.m. on weekdays and 9:00 a.m. to 1:00 p.m. on
Saturdays, excluding Observed Holidays.
Prohibited Use
: Any use or occupancy of the Premises that in Landlords reasonable judgment
would: (a) cause damage to the Building or any equipment, facilities or other systems therein; (b)
impair the appearance of the Building; (c) interfere with the efficient and economical maintenance,
operation and repair of the Premises or the Building or the equipment, facilities or systems
thereof; (d) adversely affect any service provided to, and/or the use and occupancy by, any
Building tenant or occupants; (e) violate the non-residential use permit issued for the Premises or
the Building; (f) materially and adversely affect the first-class image of the Building, or (g)
result in protests or civil disorder or commotions at, or other disruptions of the normal business
activities in, the Building; or violate any Requirements or the Covenants.
Prohibited Use
also
includes the use of any part of the Premises for: (i) a restaurant or bar; (ii) the preparation,
consumption, storage, manufacture or sale of food or beverages (except in connection with vending
machines (provided that each machine, where necessary, shall have a waterproof pan thereunder and
be connected to a drain) and/or warming kitchens installed for the use of Tenants employees only),
liquor, tobacco or drugs; (iii) the business of photocopying, multilith or offset printing (except
photocopying in connection with Tenants own business); (iv) a school or classroom; (v) lodging or
sleeping; (vi) the operation of retail facilities (meaning a business whose primary patronage
arises from the generalized solicitation of the general public to visit Tenants offices in person
without a prior appointment) of a savings and loan association or retail facilities of any
financial, lending, securities brokerage or investment activity; (vii) a payroll office; (viii) a
barber, beauty or manicure shop; (ix) an employment agency or similar enterprise; (x) offices of
any Governmental Authority, any foreign government, the United Nations, or any agency or department
of the foregoing; (xi) the manufacture, retail sale, storage of merchandise or auction of
merchandise, goods or property of any kind to the general public which could reasonably be expected
to create a volume of pedestrian traffic substantially in excess of that normally encountered in
the Premises; (xii) the rendering of medical, dental or other therapeutic or diagnostic services;
or (xiii) any illegal purposes or any activity constituting a nuisance.
Requirements:
All present and future laws, rules, orders, ordinances, regulations, statutes,
requirements, codes and executive orders, extraordinary and ordinary of (i) all Governmental
Authorities, including the Americans With Disabilities Act, 42 U.S.C. §12,101 (et seq.), and any
law of like import, and all rules, regulations and government orders with respect thereto, and any
of the foregoing relating to Hazardous Materials, environmental matters, public health and safety
matters, (ii) any applicable fire rating bureau or other body exercising similar functions,
affecting the Real Property or the maintenance, use or occupation thereof, or any street, avenue
or sidewalk comprising a part of or in front thereof or any vault in or under the same, (iii) all
requirements of all insurance bodies affecting the Premises, and (iv) utility service providers.
Rules and Regulations:
The rules and regulations annexed to and made a part of this Lease as
Exhibit E,
as they may be modified from time to time by Landlord.
Exhibit B
Page 4 of 5
Specialty Alterations:
Above Building Standard Alterations which are not standard office
installations, such as kitchens, pantries, executive bathrooms, raised computer floors, computer
room installations, supplemental HVAC equipment, safe deposit boxes, vaults, libraries or file
rooms requiring reinforcement of floors, internal staircases, slab penetrations, conveyors,
dumbwaiters, non-Building standard life safety systems, security systems or lighting and other
Alterations of a similar character.
Substantial Completion:
As to any construction performed by any party, Substantial
Completion or Substantially Completed means that such work has been completed, as reasonably
determined by Landlords architect, in accordance with (a) the provisions of this Lease applicable
thereto, (b) the plans and specifications for such work, and (c) all applicable Requirements,
except for minor details of construction, decoration and mechanical adjustments, if any, the
noncompletion of which does not materially interfere with Tenants use of the Premises or which in
accordance with good construction practices should be completed after the completion of other work
in the Premises or Building.
Superior Lease(s):
Any ground or underlying lease of the Real Property or any part thereof
heretofore or hereafter made by Landlord and all renewals, extensions, supplements, amendments,
modifications, consolidations, and replacements thereof.
Tenant Party:
Tenant and any subtenants or occupants of the Premises and their respective
agents, contractors, subcontractors, employees, invitees or licensees.
Tenants Property:
Tenants movable fixtures and movable partitions, telephone and other
equipment, computer systems, trade fixtures, furniture, furnishings, and other items of personal
property which are removable without material damage to the Premises or the Building.
Unavoidable Delays:
(i) Landlords or Tenants inability to fulfill or delay in fulfilling
any of its obligations under this Lease expressly or impliedly to be performed by such party other
than the payment of money or Tenants surrender and vacation of the Premises upon the expiration
or earlier termination of the Term, or (ii) Landlords inability to make or delay in making any
repairs, additions, alterations, improvements or decorations or Landlords inability to supply or
delay in supplying any equipment or fixtures, if Landlords inability or delay is due to or arises
by reason of strikes, labor troubles or by accident, or by any cause whatsoever beyond Landlords
reasonable control, including governmental preemption in connection with a national emergency,
Requirements or shortages, or unavailability of labor, fuel, steam, water, electricity or
materials, or delays caused by Tenant or other tenants, mechanical breakdown, acts of God, enemy
action, civil commotion, fire or other casualty.
Exhibit B
Page 5 of 5
Exhibit C
Work Letter
This Exhibit C (this
Exhibit)
is attached to and made a part of that certain Deed of
Lease dated as of
, 2002 (the
Lease
), by and between
TST
WOODLAND FUNDING I, L.L.C.
, a Delaware limited liability company
(Landlord)
, and
FRANCE TELECOM
LONG DISTANCE USA LLC,
a Delaware limited liability company
(Tenant)
. Terms used but not defined
in this Exhibit shall have the meaning ascribed to them in the Lease.
1.
Authorized Representatives.
(a) Tenant hereby designates Morten Sorensen
(Tenants Authorized Representative)
as the
individual authorized to approve and initial all plans, drawings, change orders and approvals
pursuant to this Exhibit and the act of Tenants Authorized Representative shall be sufficient to
bind Tenant. Landlord shall not be obligated to respond to or act upon any such item until such
item has been approved by Tenants Authorized Representative. Any notices required pursuant to
this Exhibit shall be conclusively deemed given to Tenant when such notice is delivered to
Tenants Authorized Representative.
(b) Landlord designates Rustom Cowasjee
(Construction Supervisor)
as Landlords
construction supervisor in connection with the construction of the Tenant Improvements, at
no additional cost of expense to Tenant. The Construction Supervisor shall be permitted access to
the Premises at any time upon 24 hours prior notice to Tenant (except in the case of an emergency,
for which no prior notice shall be required) to make periodic inspections of the Premises during
construction of the Tenant Improvements; provided, however, neither Landlord nor Construction
Supervisor will have any obligation to so inspect the Tenant Improvements and, if Landlord or
Construction Supervisor elects to so inspect the performance of all or any portion of the Tenant
Improvements, such inspection shall not give rise to any liability by Landlord or Construction
Supervisor to Tenant or to any other person or entity.
2.
Initial Improvements.
(a) Landlord has, at Landlords expense, constructed the base building core and shell (the
Base Building
) in substantial conformity with the plans prepared by HOK Architects dated
September 27, 1999, as the same have been amended from time to
time (the
Base Building Plans
)
and beyond which the Tenant Improvements (as defined below) shall be completed in accordance with
the terms contained herein. Landlord shall deliver the Premises to Tenant on the Commencement
Date in as-is condition at such time. Landlord shall not have any obligation whatsoever with
respect to the finishing of the Premises for Tenants use and occupancy. The design, permitting
and construction of the improvements to the Premises, as approved by Landlord and Tenant pursuant
to this Exhibit (the
Tenant Improvements
), shall be performed by Tenant pursuant to this
Exhibit of the Lease and all other applicable provisions including, without limitation,
insurance, damage and indemnification provisions of the Lease.
Exhibit C
Page 1 of 8
(b) All
Tenant Improvement work involving the roof of the Building or any other work
that may void a Building warranty, shall be performed by Landlords designated contractor or
subcontractor at Tenants expense. Without limiting the foregoing, if Tenant requests work to be
done in the Premises or for the benefit of the Premises that necessitates revisions or changes in
the design or construction of the Base Building or materially or adversely
affects any Base Building system(s), any such changes shall be subject to the prior written
approval of Landlord, in its sole discretion. Tenant shall be responsible for all costs and delays
resulting from such design revisions or construction changes, including architectural and
engineering charges, and any special permits or fees attributed thereto. Before any such design
and/or construction changes are made, Tenant shall pay to Landlord the full costs to be incurred
by Landlord in connection with such changes. At Landlords option, any Tenant Improvements which
affect the exterior or structure of the Building or the Base Building system(s) (including,
without limitation, any Tenant Improvements that may affect any connection with the fire alarm
system and the Buildings HVAC controls) shall be performed by contractors and subcontractors
selected by Landlord or approved by Landlord in its sole discretion but at the sole cost and
expense of Tenant. Landlord shall have the option to retain an architect or independent engineer to
review and/or inspect the Tenants plans and specifications at any time prior to Landlords
approval thereof and/or the Tenant Improvements, at all reasonable times; Tenant shall be
responsible for the fees and expenses of such architect and engineer, not to exceed One and 00/100
Dollars ($1.00) per rentable square foot of the Premises.
(c) From the Base Building Plans specified above, Tenant shall cause its architect and
engineer (each, as approved by Landlord,
Tenants Architect
and
Tenants Engineer
), to prepare
and submit to Landlord final architectural and engineering working drawings, mechanical,
electrical and plumbing plans, and all other construction documents approved by Tenant (such
documents, as approved by Landlord,
Tenants
Construction Documents)
and generally in accordance
with the space plan attached hereto as
Exhibit C-l.
The selection of Tenants Architect
and Tenants Engineer shall be mutually agreed to between Landlord and Tenant. Tenants
Construction Documents shall include: master legend, construction plan, reflected ceiling plan,
telephone and electrical outlet layout, finish plan and all architectural details, elevations
and specifications necessary to construct the Tenant Improvements. Tenants
Construction Documents and the Tenant Improvements shall conform to and be in accordance with the
Minimum Build-Out Standards set forth on
Exhibit C-2.
and shall, in any event, use design,
construction practices and materials consistent with Comparable Buildings. All of Tenants plans
shall be prepared by Tenants Architect, Tenants Engineer or a licensed architect and engineer
reasonably approved by Landlord and shall be accurate, complete and, in the professional judgment
of Tenants Architect and Tenants Engineer, sufficient to secure the approval of any governmental
or quasi-governmental authorities with jurisdiction over the approval thereof
(Authority Having
Jurisdiction).
Exhibit C
Page 2 of 8
(d) All plans, drawings and other documents ( and changes thereto) shall be prepared in
accordance with the requirements set forth on
Exhibit C-4
and subject to Landlords prior
written approval, which approval shall not be unreasonably withheld, conditioned or delayed.
Landlord must respond to submissions within 10 Business Days after Landlords receipt thereof; but
shall use commercially reasonable efforts to deliver its response within 7 days (other than for
the NOC plans) after Landlords receipt thereof. Landlords approval of a submission shall not
constitute either (i) approval of any delay caused by Tenant or a waiver of any right or remedy
that may arise as a result of such delay, or (ii) Landlords representation that Tenants
Construction Documents (or changes thereto) are accurate or comply with all Requirements. Any
deficiency in design or construction, although the same had prior approval of Landlord, shall be
solely the responsibility of Tenant. Within 5 Business Days after the receipt of Landlords
comments, Tenants Architect and Tenants Engineer shall make the required modifications (if any)
and resubmit 1 full set to Landlord of Tenants Construction Documents, initialed by Tenants
Authorized Representative. Tenant may submit Tenants Construction Documents for permitting and
Landlords approval at the same time.
(e) Tenant shall endeavor to expeditiously file all applications, plans and specifications,
pay all fees and obtain all permits, certificates and other approvals required by the Authority
Having Jurisdiction in connection with the commencement and completion of the Tenant Improvements,
and diligently and in good faith pursue same so that all permits and approvals are issued as soon
as practicable. If minor modifications are at any time required by government authorities to any
such plans or specifications, then Tenant shall make such modifications. Tenant shall obtain a
nonresidential use permit (or its equivalent) and all other approvals required for Tenant to use
and occupy the Premises and to open for business to the public. Copies of all permits are to be
forwarded to Landlord promptly after Tenants receipt thereof.
3.
General Requirements.
(a) All materials and equipment incorporated into the Tenant Improvements shall be new or
like-new and all work shall be done in a first-class workmanlike manner. All work shall be
performed in accordance with the rules and regulations set forth on
Exhibit C-3.
(b) The Tenant Improvements shall proceed only on the basis of approved drawings. Changes
that occur during actual construction that differ from the approved drawings will require revised
drawings to be submitted for Landlords approval; otherwise, Tenant at its own expense may be
required to bring the construction into compliance with approved drawings. No drawings are
considered approved unless they bear Landlords signature of approval.
(c) Landlord shall have no obligation or responsibility to Tenant in respect of any
deviations in the actual dimensions of the Premises. Tenant shall have the affirmative
obligation (or shall cause Tenants Architect or Tenants Engineer) to conduct an on-site
verification of all measurements, dimensions and conditions affecting the Tenant Improvements
prior to letting any contracts for the performance of the Tenant Improvements and prior to
ordering the fabrication of any trade fixtures. Landlord shall have the right to inspect the Tenant
Improvements at all reasonable times.
Exhibit C
Page 3 of 8
(d) Tenant and Landlord will coordinate their work schedules so that the construction
of the Tenant Improvements may proceed in an efficient and timely manner, and such the Tenant
Improvements will be performed at times and in a manner which will not interfere with completion
of any other work being performed in the Building. Tenant shall cause the Tenant Improvements to
be performed and completed in compliance with all Requirements (including Fairfax County Building
Codes) and such rules and regulations as Landlord and its architect and contractor, or
contractors, may make.
(e) Upon Landlords approval of Tenants Construction Documents and prior to the commencement
of any construction, Tenant shall submit the following:
(i) names of all general contractors and major subcontractors including, without limitation,
mechanical, electrical, plumbing, HVAC and life-safety, related to the Tenant Improvements (all of
which shall be subject to Landlords approval), it being agreed that, prior to bidding out the
work, Landlord and Tenant shall agree upon a list of mutually acceptable general contractors from
which list Tenant shall select the general contractor to perform the Tenant Improvements;
(ii) contractors certificates of insurance;
(iii) payment for the Tenant Improvements to be performed by Landlord at Tenants expense, if
any;
(iv) copy of all building permit(s);
(v) construction schedule from Tenants contractor;
(vi) evidence of approval from Tenants insurance company for work to be performed within
Premises and that all insurance required hereunder has been obtained naming Landlord and
Landlords Agent as additional insured; and
(vii) a copy of Landlords Contractor Rules and Regulations executed by each contractor and
acknowledging such contractors agreement to comply with such rules and regulations.
(f) Tenant shall have the right to require that access to the Premises by Landlord, its
agents or contractors be on an escorted basis only.
4.
Completion of the Tenant Improvements.
Upon the earlier of such time as the
Tenant Improvements shall be completed or 18 months after the Commencement Date, Tenant, at
Tenants expense, shall:
(a) furnish final lien waivers and other evidence satisfactory to Landlord that all of the
Tenant Improvements has been completed and paid for in full, that any and all liens therefor that
have been or might be filed have been discharged of record ( by payment, bond,
Exhibit C
Page 4 of 8
order of a court of competent jurisdiction or otherwise) or waived, and that no security interests
relating thereto are outstanding;
(b) reimburse Landlord for the cost of any the Tenant Improvements done for Tenant by
Landlord (it being agreed, however, that Landlord shall have no obligation to perform the same);
(c) furnish to Landlord all certifications and approvals with respect to the Tenant
Improvements that may be required from any governmental authority and any board of fire
underwriters or similar body for the use and occupancy of the Premises;
(d) within 30 after completion of the Tenant Improvements, Tenant shall cause Tenants
Architect and Tenants Engineer to furnish a full set of as-built drawings and Tenants
Construction Documents to Landlord in blue-line form and on disc in an AUTOCADD Version 14 format;
(e) furnish an affidavit from Tenants architect certifying that all work performed in the
Premises is in accordance with the Tenants Construction Documents approved by Landlord;
(f) furnish all guaranties and/or warranties relating to any portion of the Tenant
Improvements;
(g) furnish a certified HVAC air balancing report (reasonably satisfactory to Landlord);
(h) furnish Landlord with copies of all O&M information, manuals, etc.; and
(i) a nonresidential use permit (NonRUP) or its equivalent.
5.
Cost and Allowances
(a) Tenant shall be responsible for and shall directly pay all costs and expenses incurred in
connection with the Tenant Improvements (the Improvement Costs) and any other expenses
associated with Tenants occupancy of the Premises. Any provision of this Exhibit to the contrary
notwithstanding, Landlord shall not charge Tenant an administrative fee in connection with the
Tenant Improvements. Landlord shall provide to Tenant an allowance
(Landlords Contribution)
in
order to help Tenant pay for the Improvement Costs in the amount of Six Hundred Five Thousand
Twenty-Three and 76/100 Dollars ($605,023.76). Landlords Contribution shall be applied towards
(i) the costs to design and permit the Tenant Improvements; (ii) the costs to purchase materials
and install and construct the Tenant Improvements; (iii) the cost of any improvements or
alterations requested by Tenant (and approved by Landlord in Landlords sole discretion) to be
made to the Base Building on account of the Tenant Improvements; (iv) the costs to purchase and
install Building signage (if any) as permitted in the Lease; and (v) and for no other purpose.
Landlord shall have the right to deduct
Exhibit C
Page 5 of 8
all amounts due from Tenant to Landlord under this Exhibit from Landlords Contribution.
Contemporaneously with any such deduction, Landlord shall provide Tenant with written notice.
(b) Provided no Event of Default exists under the Lease, Landlord shall disburse portions
thereof to Tenant in accordance with this Exhibit. Landlord shall have no obligation to disburse
any amount (x) until the work that is the subject of the payment requisition is complete, and (y)
that is greater than the sums that are actually invoiced by Tenants contractors as evidenced by
Tenants delivery to Landlord of an invoice approved by Tenant together with any written contract
between Tenant and Tenants contractors, appropriate lien releases and any other reasonable
information or documentation required by Landlord, and (iii) Landlord shall have no obligation to
reimburse Tenant for any invoice that is not received by Landlord (together with the other items
required pursuant to this Exhibit in connection with the disbursement) before the end of the
18
th
monthly anniversary of the Commencement Date. Landlord shall reimburse Tenant
within 30 days after receipt of each such requisition, provided that the conditions to each such
requisition are satisfied in Landlords reasonable discretion, and Tenant provides Landlord all
supporting documentation and any other reasonable information required by Landlord simultaneously
with the submission of such requisition. If a condition of a requisition is not reasonably
satisfactory to Landlord, Landlord will promptly notify Tenant of same so that it can be
corrected.
(c) Landlord
shall be entitled to withhold from any requested disbursement for payment a
retainage equal to the greater of the retainage set forth in the construction contract or 10% of
amount due under the construction contract (the
Retainage).
The Retainage shall be disbursed to
Tenant 30 days after Substantially Completion of the Tenant Improvements; provided, that in no
event shall the Retainage be disbursed to Tenant until such time as Tenant has complied with the
disbursement requirements set forth in this Exhibit.
(d) All
Improvement Costs in excess of Landlords Contribution shall be paid by Tenant
(or if previously paid by Landlord, shall be reimbursed to Landlord by Tenant) within 30 days
after receipt by Tenant of invoices therefor. In the event that the sum of the contract price for
construction of the Tenant Improvements (as modified from time to time by change orders), plus any
other estimated Improvement Costs exceeds Landlords Contribution
(Excess Cost)
, Tenant shall
deliver to Landlord such documentation as Landlord might reasonably require
(e.g.,
cancelled
checks, invoices marked paid and lien waivers) to demonstrate that Tenant has paid such Excess
Cost from Tenants funds (which shall not include any portion of Landlords Contribution) prior to
Landlord having an obligation to disburse any portion of Landlords Contribution or to commence or
continue any work and any delay caused by Tenants failure to timely perform its obligations with
respect to the Excess Cost shall be deemed a tenant delay. Once Tenant has paid the full amount
of the Excess Cost for Improvement Costs, Landlord shall apply Landlords Contribution to
Improvement Costs as provided above. All Improvement Costs outstanding upon exhaustion of the
Landlords Contribution shall be borne exclusively by Tenant, and Tenant agrees to indemnify
Landlord from and against any such costs. All amounts payable by Tenant pursuant to this Exhibit
shall be deemed to be Additional Rent for purposes of the Lease.
Exhibit C
Page 6 of 8
6.
Contractor Requirements.
(a) Tenants contractors and subcontractors shall be required to provide, in addition to the
insurance required of Tenant pursuant to Article 13 of the Lease, the following types of
insurance:
(i)
Builders Risk Insurance.
At all times during the period between the
commencement of construction of the Tenant Improvements and the date that Tenant completes the
Tenant Improvements and satisfies Tenants obligations under Section 4 of this Exhibit (the
Completion Date
), Tenant shall maintain, or cause to be maintained, casualty insurance in
Builders Risk Form, in an amount not less than $3,000,000, covering Landlord, Landlords
architects, Landlords contractor or subcontractors, Tenant and Tenants contractors, as their
interest may appear, against loss or damage by fire, vandalism, and malicious mischief and other
such risks as are customarily covered by the so-called broad form extended coverage endorsement
upon all the Tenant Improvements in place and all materials stored at the site of the Tenant
Improvements, and all materials, equipment, supplies and temporary structures of all kinds incident
to the Tenant Improvements and builders machinery, tools and equipment, all while forming a part
of, or on the Premises, or when adjacent thereto, while on drives, sidewalks, streets or alleys,
all on a completed value basis for the full insurable value at all times. Said Builders Risk
Insurance shall contain an express waiver of any right of subrogation by the insurer against
Landlord, its agents, employees and contractors.
(ii)
Workers Compensation.
At all times during the period of construction of the
Tenant Improvements, Tenants contractors and subcontractors shall maintain in effect statutory
workers compensation as required by the jurisdiction in which the Building is located.
(b) the Tenant Improvements shall be coordinated with Landlords Work and any other work
being performed by Landlord and other tenants in the Building so that the Tenant Improvements will
not interfere with or delay the completion of any other construction work in the Building.
(c) It shall be Tenants responsibility to cause each of Tenants contractors and
subcontractors to provide adequate protection to the structure, systems, finishes and all other
components of the Base Building. Such protective measures shall be mutually agreed on by
Landlord and Tenant.
(d) It
shall be Tenants responsibility to cause each of Tenants contractors and
subcontractors to remove and dispose of, at Tenants sole cost and expense, at least daily and
more frequently as Landlord may direct, all debris and rubbish caused by or resulting from the
Tenant Improvements, and upon completion, to remove all temporary structures, surplus materials,
debris and rubbish of whatever kind remaining on any part of the Building or in proximity thereto
which was brought in or created in the performance of the Tenant Improvements (including stocking
refuse). If at any time Tenants contractors and subcontractors shall neglect, refuse or fail to
remove any debris, rubbish, surplus materials, or temporary
Exhibit C
Page 7 of 8
structures, Landlord at its sole option may remove the same at Tenants expense without
prior notice.
7.
Miscellaneous.
(a)
Roof.
Except as otherwise expressly agreed in the Lease, Landlord retains
the sole right to disallow any and all roof penetrations by Tenant and roof installation of
equipment and/or structures by Tenant.
(b)
Loads.
No item shall be mounted on or hung from the interior or exterior
of the Building by Tenant without Landlords prior written approval; provided such approval is not
required for non-structural wall and picture hangings done solely within the Premises. If Tenant
desires to mount or hang anything, Tenant shall notify Landlord of the loads involved and shall
pay all costs involved.
(c)
Ducts.
Subject to the terms of the Lease, Landlord shall have the right to
install, maintain, repair and replace in the ceiling space and/or under the concrete slab, adjacent
to demising partitions and free standing columns, electrical, water or other lines and/or ducts
that may be required to serve the Common Areas or others in the Building.
(d)
Access.
Throughout the construction of the Tenant Improvements, Tenant and
Tenants contractors shall have reasonable access to the Buildings freight elevator and loading
dock (at no additional charge), subject to reasonable coordination with Landlord.
Exhibit C
Page 8 of 8
Exhibit C-2
Minimum Build-Out Standards
PARTITIONING:
|
|
Demising walls shall be 25 gauge metal stud with
1
/
2
gypsum wallboard each side, 2
1
/
2
sound insulation slab-to-slab height/caulked on the top and bottom.
|
|
|
|
Interior partitioning shall be constructed of 25 gauge metal studs with
1
/
2
gypsum
wallboard on each side to the underside of the ceiling. All building standard partitions
shall include a 4 vinyl or wood base on each side. Partitioning ending at the exterior
wall of the building shall meet a wall or a column without interfering with the glazing
surfaces.
|
|
|
|
Painting for all partitioning, columns and walls shall receive two (2) coats of flat latex
paint.
|
DOORS:
|
|
Suite entry door shall be 30 x 80, solid core, stain grade red oak veneer installed in
a painted metal frame and furnished with two (2) polished lever handle lock sets.
|
|
|
|
Interior doors shall be 30 x 80, solid core, stain grade red oak veneer installed in a
hollow metal painted frame with cylindrical stainless steel passage lever hardware.
|
CEILING:
|
|
2x 2 lay-in fissured acoustic tile within a fineline ceiling system.
|
|
FLOOR COVERINGS:
|
|
|
|
$1.50 per usable square foot to furnish and install floor covering.
|
LIGHT FIXTURES:
|
|
2x 4 building standard fluorescent lighting fixtures with a parabolic style thirty-two
(32) cell reflector w/T8 3,000 k lamps. All light fixtures shall have an electronic
ballast. Single-pole light switch, with cover plate, mounted at standard height in building
standard partition.
|
ELECTRICAL AND TELEPHONE OUTLETS:
|
|
Interior wall mounted, 120 volt, 20 amp duplex outlet. Interior wall-mounted opening with
plaster ring and pull string for telephone connection.
|
Exhibit C-2
Page 1 of 2
SPRINKLERS:
|
|
Fully recessed concealed sprinkler head, installed with piping, as required by the code and
regulatory agency.
|
HEATING, VENTILATING AND AIR CONDITIONING:
|
|
The Building shall be heated and cooled by a state-of-the-art variable air volume system.
Each floor shall be controlled by two (2) separate fan units, which will each control half
a floor. The Tenants distribution shall include diffusers and return air grilles as
specified in the Base Building drawings.
|
|
|
|
All demising walls shall adequately provide the appropriate openings required for the
return air which may need to be ducted as required.
|
Exhibit C-2
Page 2 of 2
Exhibit C-3
Construction Rules and Regulations
1.
|
|
Tenant and/or the general contractor will supply Landlord with a copy of all permits prior to
the start of any work.
|
|
2.
|
|
Tenant and/or the general contractor will post the building permit on a wall of the
construction site while work is being performed.
|
|
3.
|
|
Tenant shall provide, in writing, prior to commencement of the work, the names and emergency
numbers of all subcontractors, the general contractor superintendent, general contractors
Project Manager and the Construction Manager.
|
|
4.
|
|
No construction is to be started until proper drawings have been submitted and approved in
writing by Landlord.
|
|
5.
|
|
Landlord is to be contacted by Tenant when work is completed for inspection. All damage to
building will be determined at that time.
|
|
6.
|
|
Any work that is to be performed in other than tenants premises must be reviewed and
scheduled in advance with Building management.
|
|
7.
|
|
Landlord will be notified of all work schedules of all workmen on the job and will be
notified, in writing, of names of those who may be working in the building after Ordinary
Business Hours.
|
|
8.
|
|
Construction personnel must carry proper identification at all times.
|
|
9.
|
|
All workers are required to wear a shirt, shoes, and full length trousers.
|
|
10.
|
|
Landlord must approve all roof top equipment and placement. All penetrations must be cut and
flashed by the roof warranty holder of the existing roof system.
|
|
11.
|
|
Landlord or Tenant shall designate contractor-parking areas.
|
|
12.
|
|
Contractor must notify landlord two days prior to an independent air balancing service by a
certified air balance company. Landlords building engineer will accompany the contractor
during their work.
|
|
13.
|
|
Before landlord makes final payment, five sets of as-builts and O&M manuals must be
submitted to landlord.
|
Exhibit C-3
Page 1 of 5
14.
|
|
The general contractor (other than Landlords contractor(s)) and Tenant shall be
responsible for all loss of their materials and tools and shall hold Landlord harmless for such
loss and from any damages or claims resulting from the work.
|
|
15.
|
|
The general contractor shall maintain insurance coverage throughout the job of a type(s), in
amounts and issued by an insurance company, reasonably satisfactory to Landlord. Prior to the
commencement of work, a Certificate of Insurance must be submitted with the limits of coverage
per the limits noted in the lease with the following names as additional insured: TST Woodland
Funding I, L.L.C., and Tishman Speyer Properties, L.P.
|
|
16.
|
|
All key access, fire alarm work, or interruption of security hours must be arranged with the
Landlords building engineer.
|
|
17.
|
|
Proper supervision shall be maintained at the job site at all times and Tenants workmen,
mechanics and contractors must not cause or effect any inconvenience to or interfere with the
Buildings operations or Landlord. Tenants workmen, mechanics and contractors shall work in
harmony with and shall not interfere with any labor employed by Manager or any other Tenant,
or their workmen, mechanics and contractors.
|
|
18.
|
|
Landlord shall be notified in advance of all ties into building systems, welding, or any
work affecting the Base Building or other tenant spaces unless agreed to otherwise, all
tie-ins to Base Building fire alarm systems are performed by the Landlord, designated
contractor and cost borne by the Tenant.
|
|
19.
|
|
The following work, in which Landlord is to be notified in advance, must be done on overtime
and not during Ordinary Business Hours once any portion of the Building is occupied:
|
|
§
|
|
Demolition which per building managers judgment may cause disruption to other tenants.
|
|
|
§
|
|
Oil base painting (on multi-tenant floors)
|
|
|
§
|
|
Gluing of carpeting (on multi-tenant floors)
|
|
|
§
|
|
Shooting of studs for mechanical fastenings
|
|
|
§
|
|
Testing of life safety system, sprinkler tie-ins
|
|
|
§
|
|
Work performed in occupied spaces.
|
|
|
§
|
|
Welding, brazing, soldering and burning with proper fire protection and ventilation
|
|
|
§
|
|
Other activities that, in Building managers judgment, may disturb other tenants
|
Exhibit C-3
Page 2 of 5
20.
|
|
All building shutdowns electrical, plumbing, HVAC equipment, Fire & Life must be
coordinated with Building Management in advance. Landlord and Factory Mutual procedures for hot
work, Fire Alarm and Sprinkler shutdowns must be followed. Our on-site engineer will detail the
requirements summarized below:
|
|
§
|
|
Smoke detectors must be bagged or cleaned daily and placed back in service at the end
of each day.
|
|
|
§
|
|
Call outs for fire alarm and sprinkler systems must be made with and only with
Landlords personnel and with the attached forms. All systems must be put back into
service at the end of each work day and working correctly.
|
|
|
§
|
|
Hot work
(i.e.,
torch burning/cutting and welding) must be permitted through
Landlords personnel and contractor must use Landlords form.
|
|
|
§
|
|
When welding, contractor shall provide a fused disconnect switch for connection to
building power supply and a Fire Watch.
|
|
|
§
|
|
Forms are to be provided at kickoff meeting.
|
21.
|
|
Fire extinguishers supplied by the general contractor must be on the job-site at all times
during demolition and construction
|
|
22.
|
|
No building materials are to enter the building by way of main lobby, and no materials are
to be stored in any lobbies at any time.
|
|
23.
|
|
Contractors or personnel will use loading dock area for all deliveries and will not use
loading dock for vehicle parking.
|
|
24.
|
|
Passenger elevators shall not be used for moving building materials and shall not be used
for construction personnel except in the event of an emergency. The designated freight
elevator and one or more protected passenger elevators are the only elevators to be used for
moving materials and construction personnel. These elevators may be used only when they are
completely protected as determined by Landlords building engineer.
|
|
25.
|
|
Protection of hallway carpets, wall coverings, and elevators from damage with masonite
board, carpet, cardboard, or pads is required.
|
|
26.
|
|
Public spaces, corridors, elevators, bathrooms, lobby, etc. must be cleaned immediately
after use. Construction debris or materials found in public areas will be removed at
Tenants cost.
|
|
27.
|
|
Contractors will remove their trash and debris daily or as often as necessary to maintain
cleanliness in the building. Building trash containers are not to be used for construction
debris. Landlord reserves the right to bill Tenant for any cost incurred to clean up debris
left by the general contractor or any subcontractor. Further, the building staff is
instructed to hold
|
Exhibit C-3
Page 3 of 5
|
|
the drivers license of any employee of the contractor while using the freight elevator to
ensure that all debris is removed from the elevator.
|
|
28.
|
|
All construction materials or debris must be stored within the project confines or in an
approved lock-up.
|
|
29.
|
|
Contractors will be responsible for daily removal of waste foods, milk and soft drink
containers, etc. to trash room and will not use any building trash receptacles but trash
receptacles supplied by them.
|
|
30.
|
|
Construction personnel are not to eat in the lobby or in front of building nor are they to
congregate in the lobby or in front of building.
|
|
31.
|
|
There will be no smoking, eating, or open food containers in the elevators, carpeted areas
or public lobbies.
|
|
32.
|
|
There will be no alcohol or controlled substances allowed or tolerated.
|
|
33.
|
|
There will be no yelling or boisterous activities.
|
|
34.
|
|
Radios shall not be played at unreasonably loud levels on job site.
|
|
35.
|
|
Landlord shall grant access to the Base Building electrical, telephone and mechanical rooms.
|
|
36.
|
|
No utilities (electricity, water, gas, plumbing) or services to the tenants are to be cut
off or interrupted without first having requested, in writing, and secured, in writing, the
permission of the Landlord.
|
|
37.
|
|
No electrical services are to be put on the emergency circuit, without specific written
approval from the Landlord
|
|
38.
|
|
When utility meters are installed, the general contractor must provide the property manager
with a copy of the operating instructions for that particular meter.
|
|
39.
|
|
All public areas such as elevator lobbies, corridors, toilets and service halls shall be
protected with masonite and other such materials to the satisfaction of the building
manger/representative or representative.
|
|
40.
|
|
Trash and debris resulting from the work shall be confined to either the interior of the
space under construction or an on-site dumpster. If it is a dumpster then such debris shall
be kept within the confines of the dumpster. The general contractor shall coordinate the
location of the dumpster with the landlord and plywood shall be used to protect the surface
from damage.
|
Exhibit C-3
Page 4 of 5
41.
|
|
Contractor is responsible to keep the construction area safe and in a workmanlike manner.
Machinery noise shall not interfere with the peaceful enjoyment of any tenant or their invitees
to the building. Once occupied, radios in the construction area will not be permitted. No
smoking in the building will be allowed at any time.
|
|
42.
|
|
Clear access to be provided at all times to stairwells, mechanical/electrical equipment and
rooms, elevators, fire hoses, valves, fire dampers and maintenance sensitive equipment.
|
|
43.
|
|
Adequate lighting is to be provided in construction to achieve a safe working environment.
|
|
44.
|
|
A Tenant valve tag chart shall be submitted to the Building manager.
|
|
45.
|
|
All piping and wiring systems shall be adequately supported from building structure.
|
|
46.
|
|
The cleaning of condenser water pipes shall be done in the presence of the Landlords
representative with the chemical used per the buildings chemical treatment companys
recommendation.
|
|
47.
|
|
All mechanical and electrical equipment shall have permanent identification labels affixed.
|
|
48.
|
|
Kitchen exhaust access doors must be clearly identified and accessible for periodic
inspection by property manager as required by law.
|
|
49.
|
|
All telecommunication cabling in common areas, mechanical equipment rooms, etc. shall be
installed in an enclosed raceway and shall be identified.
|
|
50.
|
|
All Air Handlers CAV boxes and VAV boxes need pre-filters (Construction Filters) installed
over filter bank and may require periodic changes during the construction period until each
floor is complete at which time a change out of filters is required. All units will be
required to be cleaned thoroughly if the system is contaminated and this procedure is not
maintained.
|
|
51.
|
|
After all tenant construction is complete, the elevator systems need to be cleaned by the
elevator service provider at tenant contractors expense. This includes rails, pits, tops of
cabs, machine rooms.
|
|
52.
|
|
All mechanical, telephone, electrical and pump room floors must be painted at the end of the
job. Damaged, stained or new walls and pipe, etc. must be painted to match existing pipes and
new pipes must match Landlords standard colors.
|
Exhibit C-3
Page 5 of 5
Exhibit C-4
Requirements for Plans and Specifications
Final architectural detail and working drawings, finish schedules and related plans
(three (3) reproducible sets) including without limitation the following information and/or
meeting the following conditions:
|
a.
|
|
specifications of all materials, colors and suppliers/manufacturers of
wallcoverings, floor coverings, ceiling systems, window coverings and other finishes;
all millwork shall be fully detailed to the appropriate level for pricing and
construction; all specialty items shall be identified as particular products; and
paintings and decorative treatment required to complete all construction;
|
|
|
b.
|
|
complete, finished, detailed mechanical, electrical, plumbing and structural
plans and specifications for the Tenant Improvements, including but not limited to the
fire and life safety systems and all work necessary to connect any special or nonstandard facilities to the Buildings base mechanical systems; and
|
|
|
c.
|
|
all final floor plans must be drawn to a scale of one-eighth (1/8) inch to one
(1) foot except for larger scaled detailed drawings. Any architect or designer acting
for or on behalf of Tenant shall be deemed to be Tenants agent in all respects with
respect to the design and construction of the Premises.
|
Exhibit D
Cleaning Specifications
NIGHTLY
General Offices:
1.
|
|
All hard surfaced flooring to be swept using approved dustdown preparation.
|
|
2.
|
|
Carpet sweep all carpets, moving only light furniture (desks, file cabinets, etc. not to be
moved).
|
|
3.
|
|
Hand dust and wipe clean all furniture, fixtures and window sills.
|
|
4.
|
|
Empty all waste receptacles and remove wastepaper.
|
|
5.
|
|
Wash clean all Building water fountains and coolers.
|
|
6.
|
|
Sweep all private stairways.
|
Lavatories:
1.
|
|
Sweep and wash all floors, using proper disinfectants.
|
|
2.
|
|
Wash and polish all mirrors, shelves, bright work and enameled surfaces.
|
|
3.
|
|
Wash and disinfect all basins, bowls and urinals.
|
|
4.
|
|
Wash all toilet seats.
|
|
5.
|
|
Hand dust and clean all partitions, tile walls, dispensers and receptacles in lavatories and
restrooms.
|
|
6.
|
|
Empty paper receptacles, fill receptacles from tenant supply and remove wastepaper.
|
|
7.
|
|
Fill toilet tissue holders from tenant supply.
|
|
8.
|
|
Empty and clean sanitary disposal receptacles.
|
Exhibit D
Page 1 of 2
WEEKLY
1.
|
|
Vacuum all carpeting and rugs.
|
|
2.
|
|
Dust all door louvers and other ventilating louvers within a persons normal reach.
|
|
3.
|
|
Wipe clean all brass and other bright work.
|
QUARTERLY
High dust premises complete including the following:
1.
|
|
Dust all pictures, frames, charts, graphs and similar wall hangings not reached in nightly
cleaning.
|
|
2.
|
|
Dust all vertical surfaces, such as walls, partitions, doors, bucks and other surfaces not
reached in nightly cleaning.
|
|
3.
|
|
Dust all Venetian blinds.
|
|
4.
|
|
Wash all windows.
|
Exhibit D
Page 2 of 2
Exhibit E
Rules and Regulations
1. Nothing shall be attached to the outside walls of the Building. Other than Building
standard blinds, no curtains, blinds, shades, screens or other obstructions shall be attached to or
hung in or used in connection with any exterior window or entry door of the Premises, without the
prior consent of Landlord.
2. No sign, advertisement, notice or other lettering visible from the exterior of the
Premises shall be exhibited, inscribed, painted or affixed to any part of the Premises without the
prior written consent of Landlord. All lettering on doors shall be inscribed, painted or affixed
in a size, color and style acceptable to Landlord.
3. The grills, louvers, skylights, windows and doors that reflect or admit light and/or air
into the Premises or Common Areas shall not be covered or obstructed by Tenant, nor shall any
articles be placed on the window sills, radiators or convectors.
4. Landlord shall have the right to prohibit any advertising by any Tenant which, in
Landlords opinion, tends to impair the reputation of the Building, and upon written notice from
Landlord, Tenant shall refrain from or discontinue such advertising.
5. The Common Areas shall not be obstructed or encumbered by any Tenant or used for any
purposes other than ingress of egress to and from the Premises and for delivery of merchandise and
equipment in a prompt and efficient manner, using elevators and passageways designated for such
delivery by Landlord.
6. Except in those areas designated by Tenant as security areas, all locks or bolts of any
kind shall be operable by the Buildings Master Key. No locks shall be placed upon any of the
doors or windows by Tenant, nor shall any changes be made in locks or the mechanism thereof which
shall make such 1ocks inoperable by the Buildings Master Key. Tenant shall, upon the termination
of its Lease, deliver to Landlord all keys of stores, offices and lavatories, either furnished to
or otherwise procured by Tenant and in the event of the loss of any keys furnished by Landlord,
Tenant shall pay to Landlord the cost thereof.
7. Tenant shall keep the entrance door to the Premises closed at all times.
8. All movement in or out of any freight, furniture, boxes, crates or any other large object
or matter of any description must take place during such times and in such elevators as Landlord
may prescribe. Landlord reserves the right to inspect all articles to be brought into the Building
and to exclude from the Building all articles which violate any of these Rules and Regulations or
the Lease. Landlord may require that any person leaving the public areas of the Building with any
article to submit a pass, signed by an authorized person, listing each article being removed, but
the establishment and enforcement of such requirement shall not impose any responsibility on
Landlord for the protection of any Tenant against the removal of property from the Premises.
Exhibit E
Page 1 of 3
9. All hand trucks shall be equipped with rubber tires, side guards and such other safeguards
as Landlord may require.
10. No Tenant Party shall be permitted to have access to the Buildings roof, mechanical,
electrical or telephone rooms without permission from Landlord except as otherwise expressly
provided in
Exhibit G
to the contrary.
11. Tenant shall not permit or suffer the Premises to be occupied or used in a manner
offensive or objectionable to Landlord or other occupants of the Building by reason of noise,
odors, vibrations or interfere in any way with other tenants or those having business therein.
12. Tenant shall not employ any person or persons other than the janitor of Landlord for the
purpose of cleaning the Premises, unless otherwise agreed to by Landlord. Tenant shall not cause
any unnecessary labor by reason of such Tenants carelessness or indifference in the preservation
of good order and cleanliness.
13. Tenant shall store all its trash and recyclables within its Premises. No material shall
be disposed of which may result in a violation of any Requirement. All refuse disposal shall be
made only though entry ways and elevators provided for such purposes and at such times as Landlord
shall designate. Tenant shall use the Buildings hauler.
14. Tenant shall not deface any part of the Building. No boring, cutting or stringing of
wires shall be permitted, except with prior consent of Landlord, and as Landlord may direct.
15. The water and wash closets, electrical closets, mechanical rooms, fire stairs and other
plumbing fixtures shall not be used for any purposes other than those for which they were
constructed and no sweepings, rubbish, rags, acids or other substances shall be deposited therein.
All damages resulting from any misuse of the fixtures shall be borne by Tenant where a Tenant
Party caused the same.
16. Tenant, before closing and leaving the Premises at any time, shall see that all lights,
water faucets, etc. are turned off. All entrance doors in the Premises shall be kept locked by
Tenant when the Premises are not in use.
17. No bicycles, in-line roller skates, vehicles or animals of any kind (except for seeing
eye dogs) shall be brought into or kept by any Tenant in or about the Premises or the Building.
18. Canvassing or soliciting in the Building is prohibited.
19. Employees of Landlord or Landlords Agent shall not perform any work or do anything
outside of the regular duties, unless under special instructions from the office of Landlord or in
response to any emergency condition.
20. Tenant is responsible for the delivery and pick up of all mail from the United States
Post Office.
Exhibit E
Page 2 of 3
21. Landlord reserves the right to exclude from the Building during other than Ordinary
Business Hours all persons who do not present a valid Building pass. Tenant shall be responsible
for all persons for whom a pass shall be issued at the request of Tenant and shall be liable to
Landlord for all acts of such persons.
22. Landlord shall not be responsible to Tenant or to any other person for the non-observance
or violation of these Rules and Regulations by any other tenant or other person. Tenant shall be
deemed to have read these Rules and Regulations and to have agreed to abide by them as a condition
to its occupancy of the Premises.
Exhibit E
Page 3 of 3
Exhibit F
Existing Furnishings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workstations:
|
|
Manufacturer:
|
|
Floor 5
|
|
Floor 6
|
|
Total
|
Cubicles
|
|
Teknion
|
|
|
128
|
|
|
|
124
|
|
|
|
252
|
|
B/B/Files
|
|
Teknion
|
|
|
128
|
|
|
|
136
|
|
|
|
264
|
|
Overhead Bin & Task Lt
|
|
Teknion
|
|
|
128
|
|
|
|
124
|
|
|
|
252
|
|
Whiteboard Dividers
|
|
Teknion
|
|
|
64
|
|
|
|
62
|
|
|
|
126
|
|
Work Carts at Cubes
(Windows)
|
|
Teknion
|
|
|
30
|
|
|
|
30
|
|
|
|
60
|
|
Desk Chairs
|
|
Teknion Amicus
|
|
|
128
|
|
|
|
124
|
|
|
|
252
|
|
Touchdowns, Desk Chairs
|
|
Teknion Amicus
|
|
|
118
|
|
|
|
106
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corridors:
|
|
Manufacturer:
|
|
Floor 5
|
|
Floor 6
|
|
Total
|
Lateral Files
|
|
Teknion, 3 High
|
|
|
60
|
|
|
|
56
|
|
|
|
116
|
|
Storage Cabinets
|
|
Teknion, 3 High
|
|
|
13
|
|
|
|
12
|
|
|
|
25
|
|
Lateral Files
|
|
Teknion, 2 High
|
|
|
8
|
|
|
|
8
|
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conference Rooms:
|
|
Manufacturer:
|
|
Floor 5
|
|
Floor 6
|
|
Total
|
Tables with LAN Access
|
|
Vecta
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
Leather Chairs
|
|
Dauphin
|
|
|
40
|
|
|
|
40
|
|
|
|
80
|
|
Whiteboard Cabinets & Moveable
|
|
Egan Visual (2 cabs/1moveab)
|
|
|
3
|
|
|
|
3
|
|
|
|
6
|
|
TV, Catering Carts
|
|
Bretford
|
|
|
3
|
|
|
|
3
|
|
|
|
6
|
|
Moveable Tables
|
|
Vecta
|
|
|
6
|
|
|
|
6
|
|
|
|
12
|
|
Team Room Tables
|
|
Teknion
|
|
|
4
|
|
|
|
2
|
|
|
|
6
|
|
Whiteboards, Wall Mounted
|
|
Egan Visual
|
|
|
4
|
|
|
|
3
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Labs:
|
|
Manufacturer:
|
|
Floor 5
|
|
Floor 6
|
|
Total
|
Storage Cabinet
|
|
Teknion, 2 High
|
|
|
4
|
|
|
|
4
|
|
|
|
8
|
|
Tables
|
|
Teknion
|
|
|
4
|
|
|
|
4
|
|
|
|
8
|
|
Computer Furniture
|
|
EDP
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freestanding Lounge:
|
|
Manufacturer:
|
|
Floor 5
|
|
Floor 6
|
|
Total
|
Sofas
|
|
Bernhardt
|
|
|
4
|
|
|
|
4
|
|
|
|
8
|
|
Chairs to Match
|
|
Bernhardt
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
Occasional Tables
|
|
Bernhardt
|
|
|
3
|
|
|
|
4
|
|
|
|
7
|
|
Stuffed Seating with
Table Arm
|
|
Metro
|
|
|
8
|
|
|
|
8
|
|
|
|
16
|
|
Banquette Seating Sections
|
|
Martin Brattrud
|
|
|
8
|
|
|
|
8
|
|
|
|
16
|
|
Hi/Low Tables (Round)
|
|
Metro
|
|
|
5
|
|
|
|
5
|
|
|
|
10
|
|
Square Work Tables
|
|
Teknion, Wood Tops
|
|
|
4
|
|
|
|
5
|
|
|
|
9
|
|
Triangle Work Tables
|
|
Teknion, Wood Tops
|
|
|
5
|
|
|
|
5
|
|
|
|
10
|
|
Bar Stools
|
|
|
|
|
12
|
|
|
|
12
|
|
|
|
24
|
|
Exhibit F
Page 1 of 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Miscellaneous Pieces:
|
|
Manufacturer:
|
|
Floor 5
|
|
Floor 6
|
|
Total
|
Large Refrigerators
|
|
|
|
|
2
|
|
|
|
2
|
|
|
|
4
|
|
Small Refrigerators
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
Small Refrigerators/Ice
Maker
|
|
|
|
|
0
|
|
|
|
1
|
|
|
|
1
|
|
Ice Makers
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
Dish Washers
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
Ceiling Hung Projectors
|
|
|
|
|
1
|
|
|
|
0
|
|
|
|
1
|
|
Projector Screens
|
|
|
|
|
1
|
|
|
|
1
|
|
|
|
2
|
|
Exhibit F
Page 2 of 2
Exhibit G
Antenna
1.
Right to Install
. So long as no Event of Default has occurred, Tenant shall have
the right, at its sole cost and expense, and for its own use, to purchase, install, maintain and
operate upon a portion of the rooftop of the Building certain telecommunications equipment (the
Rooftop Communications Equipment).
Tenant shall furnish detailed plans and specifications for the
Rooftop Communications Equipment (or modification) to Landlord for approval, which approval will
not be unreasonably withheld; provided, Landlord shall have the right, in its sole discretion, to
limit the location, size, height, width and weight of the Rooftop Communications Equipment and to
prohibit any Rooftop Communications Equipment which Landlord reasonably determines not to be
aesthetically acceptable. The square footage on the roof of the Building that Tenant shall be
permitted to use for Tenants Rooftop Communications Equipment shall be equal to 35% of the total
square footage of the portion of the roof of the Building that Landlord permits to be used for
rooftop communications equipment. In no event shall the Rooftop Communications Equipment (including
without limitation any guy wires) be located outside the portion of the rooftop allocated to Tenant
(which allocation shall include the non-exclusive easement provided under Section 4 of this
Exhibit). If Landlord determines it to be reasonably necessary, Landlord shall have the right to
require, at Tenants expense, that a structural engineering report be prepared prior to Landlords
approval of any proposed Rooftop Communications Equipment. Tenant will use the Rooftop
Communications Equipment solely for Tenants and Tenants customers communications and data
transfer operations and for no other purpose.
2.
Costs
. Tenant shall pay all costs of purchase, design, installation, operation,
permitting, utilization, insurance, replacement, maintenance and removal of the Rooftop
Communications Equipment. Any provision of the Lease or this Exhibit to the contrary
notwithstanding, Landlord shall have the right to separately meter the Rooftop Communications
Equipment for electricity or to cause Tenant to separately meter the Rooftop Communications
Equipment for electricity, in either case, at Tenants expense, and, in such case, Tenant shall
pay as Additional Rent the electricity charges for the Rooftop Communications Equipment directly
to Landlord or to the electricity provider, as Landlord shall determine.
3.
Other Parties Rights
. Landlord has advised Tenant that other tenants of the
Building have certain rights to erect communications systems on the roof of the Building. Landlord
shall have the right for itself and to permit other current and future tenants to use portions of
the roof for communications equipment or for any other use so long as such use does not materially
interfere with Tenants use. Tenant covenants that it will not use its Rooftop Communications
Equipment in a manner that will interfere with Landlords and/or any current or future tenants
use of the roof of the Building for communications equipment (provided such current tenants use
exists as of the Commencement Date, or such future tenants use exists prior to Tenants use that
interferes with such future tenants then existing use) or for any other use. Tenant shall not
permit the Rooftop Communications Equipment to constitute a nuisance or to
Exhibit G
Page 1 of 2
interfere with the operations of Landlord or other tenants occupying the Building or using other
portions of the roof of the Building for communications systems.
4.
Easements
. Tenant is hereby granted such nonexclusive easements and licenses for
(i) use of any Building shafts required to install the electrical or communication wiring; (ii)
access to the roof at all reasonable times and in emergencies; and (iii) use of a mutually agreed
upon area of the roof to install and operate the Rooftop Communications Equipment. The Rooftop
Communication Equipment shall be connected to the Premises by cable (or other appropriate means),
the installation of which shall be performed by Tenant at Tenants cost.
5.
Permits and Approvals
. Tenant shall be responsible for procuring all licenses and
permits may be required for the installation, use or operation of the Rooftop Communications
Equipment, and Landlord makes no warranties or representations as to the permissibility or the
permitability of the Rooftop Communications Equipment under applicable laws, rules or regulations.
Prior to installing the Rooftop Communications Equipment, Tenant will deliver to Landlord
reasonable evidence of Tenants having obtained all necessary governmental approvals (if any such
approval are required) for the installation of the Rooftop Communications Equipment.
6.
Installation
. Upon Landlords written approval of the plans and specifications and
the installation contract for the Rooftop Communications Equipment, the Rooftop Communications
Equipment shall be installed by Tenants communications equipment contractor, which contractor
shall be subject to Landlords reasonable approval. Tenant shall (i) construct, maintain and
operate the Rooftop Communications Equipment in compliance with all applicable laws, rules and
regulations of all Federal, state and local governmental authorities including, without
limitation, the Federal Communications Commission; (ii) have the Rooftop Communications Equipment
designed, installed, utilized and operated so as not to adversely affect or impact the structural,
communications or other systems of or serving the Building; and (iii) have the Rooftop
Communications Equipment installed in accordance with the Building rules and regulations or any
other reasonable regulations promulgated by Landlord pertaining to construction in or on the
Building by third-party contractors. Upon installation of the Rooftop Communications Equipment,
Tenant shall furnish Landlord with an as built drawing of the Rooftop Communications Equipment
certified by Tenants architect or such other professional as Landlord shall reasonably approve.
7.
Charges
. Landlord will not charge Tenant rent for the rooftop space occupied by
the Rooftop Communications Equipment. Tenant will pay Landlord within 30 days after written
demand for any expenses incurred by Landlord arising from any damage caused to the Building in
connection with the installation, maintenance, operation or removal of the Rooftop Communications
Equipment and all special cabling associated therewith.
8.
Removal
. Upon the expiration or earlier termination of this Lease, Tenant shall
remove all Rooftop Communications Equipment and all special cabling associated therewith and
repair any damage caused to the Building by the Rooftop Communications Equipment or the removal
thereof.
Exhibit G
Page 2 of 2
Exhibit H
Signage
1.
Parapet Sign
. Tenant shall have the non-exclusive right, at no additional charge,
to have an illuminated sign listing Tenants trade name (or a reasonable variation thereof) placed
at the top of the Building on a side of the Building mutually agreeable to Landlord and Tenant and
as otherwise specified and located as shown on
Schedule H-A
(together with any replacements
thereof, the
Parapet Sign).
The Parapet Sign shall not exceed 100 square feet and shall otherwise
be in accordance with Fairfax County regulations and shall be substantially similar to the Winstar
parapet sign presently located at South Pointe I.
2.
Installation
. Upon Landlords written approval of the plans and specifications and
the installation contract for the Parapet Sign, the Parapet Sign shall be installed by Tenants
sign contractor under Landlords supervision, which contractor shall be subject to Landlords
reasonable approval. Tenant shall (i) construct, maintain and operate in compliance with all
applicable Requirements; (ii) have the Parapet Sign designed, installed, utilized and operated so
as not to materially adversely affect or impact the structural or other systems of or serving the
Building; and (iii) have the Parapet Sign constructed in accordance with the Building rules and
regulations or any other reasonable regulations promulgated by Landlord pertaining to construction
in or on the Building by third-party contractors. Upon installation of the Parapet Sign, Tenant
shall furnish Landlord with an as built drawing of the Parapet certified by Tenants architect
or such other professional as Landlord shall reasonably approve.
3.
Specifications
.
Parapet Sign
. Prior to installing the Parapet Sign, Tenant
shall furnish detailed plans and specifications (including the size, color, material, letter
style, type of sign and all other relevant specifications) for the Parapet Sign (or any
modification) to Landlord. If Landlord determines it to be reasonably necessary, Landlord shall
have the right to require, at Tenants expense, that a structural engineering report be prepared
prior to Landlords approval of the plans and specifications for the Parapet Sign. The size,
color, material, lettering style, type of sign, location and all other aspects of the Parapet Sign
shall be subject to Landlords reasonable approval provided that the current logo of Tenant in
terms of color and design is hereby approved by Landlord. Landlord shall have the right to prohibit
any aspect of the Parapet Sign that Landlord reasonably determines not to be aesthetically
acceptable.
Following Tenants request for Landlords consent to the plans and specifications of the
Parapet Sign, Landlord shall deliver to Tenant written notice approving such plans and
specifications or providing the reasons for Landlords disapproval thereof (a
Parapet Plan
Response).
If Landlord has not delivered a Parapet Plan Response within 10 days after Tenants
request, Tenant shall send a second notice, conspicuously captioned SECOND REQUEST FOR
LANDLORDS APPROVAL. If Landlord has not delivered a Parapet Plan Response on or before the
10
th
day following delivery of such second notice, Landlord shall thereafter be deemed
to have consented to the plans and specifications previously delivered by Tenant.
Exhibit H
Page 1 of 2
4.
Rights Not Assignable
. Tenants rights under this Exhibit shall not be separately
assignable by Tenant, but shall be transferred together with all of Tenants other rights and
obligations under this Lease in connection with any assignment of subletting by Tenant permitted
under Article 13 of this Lease.
5.
Costs
. Tenant shall pay all costs of design, manufacture, installation, operation,
permitting, utilization, insurance, replacement, maintenance and removal of the Parapet Sign.
6.
Easements
. Landlord shall reasonably cooperate with Tenant in obtaining any
easements necessary for the Parapet Sign.
7.
Permits and Approvals
. Tenant shall be responsible for procuring all licenses and
permits may be required for the installation, use or operation of the Parapet Sign, and Landlord
makes no warranties or representations as to the permissibility or the permitability of the
Parapet Sign under applicable laws, rules or regulations. Prior to installing the Parapet Sign,
Tenant will deliver to Landlord reasonable evidence of Tenants having obtained all necessary
governmental approvals for the installation of the Parapet Sign. Landlord and Tenant will
cooperate with each other in good faith to attempt to obtain from all owner associations, tenant
associations, architectural control committees and similar organizations or authorities at
Woodland Park the consents or approvals of such parties to the extent required (as determined by
Landlord) in connection with the Parapet Sign. Landlord shall use commercially reasonable efforts,
but without being required to incur any out-of-pocket expenses, to assist Tenant in obtaining all
required approvals.
8.
Removal
. Upon the earlier of the expiration or earlier termination of this Lease
or the occurrence of any of the events set forth in Section 9, Tenant shall remove the Parapet
Sign and repair any damage to the Building caused by the Parapet Sign or the removal thereof.
9.
Conditions
. Tenants rights under this Exhibit shall cease if any of the
following occurs: (a) a monetary Event of Default exists for more man 30 days; or (b) Tenant
assigns this Lease or sublets more than 50% of the total number of rentable square feet contained
in the original Premises to entities which are not Related Entities.
Exhibit H
Page 2 of 2
\
Exhibit I
Generator
1.
Right to Install
. Tenant shall have the right, at Tenants expense and for its
own
use, to purchase, install, maintain and operate at the Building an emergency power generator (the
Generator)
and a fuel tank (the
Tank)
for the Generator. Tenant shall deliver to Landlord
detailed plans and specifications for the Generator and the Tank (including the proposed location
of and screening for the Generator and the Tank) and a copy of Tenants contract for installing the
Generator and the Tank, which plans and specifications and contract shall be subject to Landlords
reasonable approval; provided, however, Landlord shall have the right, in its sole discretion, to
prohibit any Generator and Tank which Landlord determines not to be aesthetically acceptable. The
Generator shall be located approximately as shown on
Schedule I-A
to this Exhibit. If
Landlord determines it to be reasonably necessary, Landlord shall have the right to require, at
Tenants expense, that an engineering or other report be prepared prior to Landlords approval of
the proposed Generator and Tank.
Following Tenants request for Landlords consent to the plans and specifications for the
Generator and Tank, Landlord shall deliver to Tenant written notice approving such plans and
specifications or providing the reasons for Landlords disapproval thereof (a
Generator Plan
Response)
. If Landlord has not delivered a Generator Plan Response within 10 days after Tenants
request, Tenant shall send a second notice, conspicuously captioned SECOND REQUEST FOR LANDLORDS
APPROVAL. If Landlord has not delivered a Generator Plan Response on or before the
10
th
day following delivery of such second notice, Landlord shall thereafter be deemed
to have consented to the plans and specifications previously delivered by Tenant.
2.
Costs
. Tenant shall pay all costs of purchase, installation, maintenance,
replacement, governmental inspection, permitting, insurance, clean up and operation (no part of
which shall be paid by Landlord or from Landlords Contribution) of the Generator and the Tank.
3.
Other Parties Rights
. Tenant covenants that it will not use its Generator or the
Tank in a manner that will unreasonably interfere with Landlords and/or any current or future
tenants use of the Project.
4.
Easements
. Tenant is hereby granted such nonexclusive easements and licenses for
(i) use of any Building shafts required to install the electrical wiring for the Generator and
Tank; and (ii) access to the Generator and the Tank at all reasonable times and in emergencies.
The Generator shall be connected to the Premises by electrical wiring, the installation of which
shall be performed by Tenants contractor, at Tenants expense.
5.
Permits
. Tenant shall be responsible for procuring all licenses and permits
required for the installation, use or operation of the Generator and the Tank, and Landlord makes
no representations or warranties regarding the permissibility or the permitability of the
Generator and the Tank under applicable laws.
Exhibit I
Page 1 of 2
6.
Installation
. Upon Landlords written approval of the plans and specifications and
of the installation contract for the Generator and Tank, the Generator and Tank shall be installed,
at Tenants expense, by a contractor reasonably acceptable to Landlord. The Generator and Tank
shall, by Tenant and at Tenants expense, (i) be constructed, installed and maintained in
compliance with all applicable laws and regulations; (ii) be designed, installed, utilized and
operated so as not to adversely affect or impact the structural, communications or other systems of
or serving the Building; and (iii) be constructed, installed and maintained in accordance with the
Building rules and regulations or any other reasonable regulations promulgated by Landlord
pertaining to construction in or on the Building by third-party contractors. Upon installation of
the Generator and Tank, Tenant shall furnish Landlord with an as built drawing of the Generator
and Tank certified by Tenants architect or such other professional as Landlord shall reasonably
approve.
7.
Removal
. At the time Landlord approves Tenants plans and specifications for the
Generator and/or Tank, Landlord shall advise Tenant in writing if Landlord will require Tenant to
remove the Generator and/or Tank at the expiration or earlier termination of this Lease. If
Landlord advises Tenant that such removal is required, upon the expiration or earlier termination
of this Lease, Tenant, at its sole cost and expense, shall remove the Generator and the Tank and
related wiring and other equipment associated therewith and shall repair any damage to the Project
caused by such removal. If Landlord does not require such removal, the Generator and/or the Tank
shall remain at the Building without payment by Landlord and Tenant shall deliver to Landlord an
executed bill of sale for the Generator and Tank upon Landlords request.
8.
Charges
. Landlord shall not charge Tenant for Tenants use or placement of the
Generator and Tank at the Project, other than for any electricity (and, if Tenant uses Landlords
tank, diesel or other fuel used by Tenant) in operating the Generator and Tank.
9.
Insurance
. Tenant shall insure the Generator and Tank under such policies, with
such insurers, in such amounts and upon such terms as Landlord shall reasonably require. Tenant
shall pay Landlord within 30 days after demand by Landlord any increase(s) in Landlords insurance
premium(s) attributable to the Tenants Generator and Tank.
10.
Indemnification
. Tenants indemnification obligations set forth in the Lease
with regard to the Premises shall also apply to the Generator and the Tank.
Exhibit I
Page 2 of 2
Exhibit J
Rooftop HVAC
1.
Right to Install
. So long as no Event of Default has occurred, Tenant shall have
the right, at its sole cost and expense, and for its own use, to purchase, install, maintain and
operate upon a portion of the rooftop of the Building 2 supplemental HVAC units which shall serve
the Premises
(Rooftop HVAC Units)
in accordance with the plans and specifications attached hereto
as
Schedule J-A
at the location shown thereon. Tenant shall furnish detailed plans and
specifications for the Rooftop HVAC Units (or modification) to Landlord for approval, which
approval will not be unreasonably withheld; provided, Landlord shall have the right, in its sole
discretion, to limit the location, size, height, capacity, width and weight of the Rooftop HVAC
Units and to prohibit any Rooftop HVAC Units which Landlord reasonably determines not to be
aesthetically acceptable. In no event shall the Rooftop HVAC Units be located outside the portion
of the rooftop allocated to Tenant (which allocation shall include the non-exclusive easement
provided under Section 4 of this Exhibit). If Landlord determines it to be reasonably necessary,
Landlord shall have the right to require, at Tenants expense, that a structural engineering report
be prepared prior to Landlords approval of any proposed Rooftop HVAC Units.
2.
Costs
. Tenant shall pay all costs of purchase, design, installation, operation,
permitting, utilization, insurance, replacement, maintenance and removal of the Rooftop HVAC
Units. Any provision of the Lease or this Exhibit to the contrary notwithstanding, Landlord shall
have the right to separately meter the Rooftop HVAC Units and related equipment for electricity or
to cause Tenant to separately meter the Rooftop HVAC Units and related equipment for electricity,
in either case, at Tenants expense, and, in such case, Tenant shall pay as Additional Rent the
electricity charges for the Rooftop HVAC Units and related equipment directly to Landlord or to
the electricity provider, as Landlord shall determine.
3.
Other Parties Rights
. Tenant covenants that it will not use its Rooftop HVAC
Units in a manner that will interfere with Landlords and/or any current tenants current use of
the roof of the Building.
4.
Easements
. Tenant is hereby granted such nonexclusive easements and licenses for
(i) use of any Building shafts required to install the electrical or communication wiring; (ii)
access to the roof at all reasonable times and in emergencies; and (iii) use of a mutually agreed
upon area of the roof to install and operate the Rooftop HVAC Units. The Rooftop HVAC Units shall
be connected to the Premises by pipes, conduit or cables (or other appropriate means), the
installation of which shall be performed by Tenant at Tenants cost.
5.
Permits and Approvals
. Tenant shall be responsible for procuring all licenses and
permits may be required for the installation, use or operation of the Rooftop HVAC Units, and
Landlord makes no warranties or representations as to the permissibility or the permitability of
the Rooftop HVAC Units under applicable laws, rules or regulations. Prior to installing the
Rooftop HVAC Units, Tenant will deliver to Landlord reasonable evidence of Tenants having
obtained all necessary governmental approvals (if any such approval are required) for the
installation of the Rooftop HVAC Units.
6.
Installation
. Upon Landlords written approval of the plans and specifications and
the installation contract for the Rooftop HVAC Units, the Rooftop HVAC Units shall be installed by
Tenants communications equipment contractor, which contractor shall be subject to Landlords
reasonable approval. Tenant shall (i) construct, maintain and operate the Rooftop HVAC Units in
compliance with all applicable laws, rules and regulations of all Federal, state and local
governmental authorities; (ii) have the Rooftop HVAC Units designed, installed, utilized and
operated so as not to adversely affect or impact the structural, communications or other systems
of or serving the Building; and (iii) have the Rooftop HVAC Units installed in accordance with the
Building rules and regulations or any other reasonable regulations promulgated by Landlord
pertaining to construction in or on the Building by third-party contractors. Upon installation of
the Rooftop HVAC Units, Tenant shall furnish Landlord with an as built drawing of the Rooftop
HVAC Units certified by Tenants architect or such other professional as Landlord shall reasonably
approve.
7.
Charges
. Landlord will not charge Tenant rent for the rooftop space occupied by
the Rooftop HVAC Units. Tenant will pay Landlord within 30 days after written demand for any
expenses incurred by Landlord arising from any damage caused to the Building in connection with
the installation, maintenance, operation or removal of the Rooftop HVAC Units and all special
cabling associated therewith.
Exhibit K
Design Standards
Structure
Poured in place concrete, 80 lb./sq. ft. live load, 20 lb./sq. ft. partition
load capacity.
Column Spacing
44-6 x 20-0 bay spacing
Exterior
Precast architectural spandrel panels and column covers with unitized windows
and curtainwall system.
Roof
Hot Applied rubberized asphalt system with a 15 year system warranty
Electrical System
1. The building power distribution system will be served from a pad mounted Virginia Power
Transformer. The building power will be distributed from a 4000 AMP, 277/480V, 3
f
, 4W
distribution switchboard, through one (1) vertical busduct up the building serving all tenant
floors. Power is distributed to the tenant floor from busduct plug-in units. Panelboards in each
of the typical floor electric rooms are as follows:
|
A.
|
|
1 400 AMP, 277/480V, 3
f
, 4W 42-pole for tenant area lighting, heating
and air conditioning.
|
|
|
B.
|
|
1 400 AMP, 120/208V, 3
f
, 4W 84-pole for tenant area receptacles.
|
|
|
C.
|
|
1112.5 KVA K-13 rated transformer.
|
|
|
|
|
All bussing in panelboards, busduct and switchboard is copper.
|
2.
|
|
The building load densities are as follows:
|
|
|
|
|
|
A.
|
|
Building Total
|
|
19 Watts/Sq. Ft.
|
B.
|
|
Lighting (Tenant)
|
|
2 Watts/Sq. Ft.
|
C.
|
|
Receptacles (Tenant)
|
|
4 Watts/Sq. Ft.
|
D.
|
|
HVAC
|
|
7 Watts/Sq. Ft.
|
E.
|
|
Miscellaneous
|
|
1 Watt/Sq. Ft.
|
F.
|
|
Spare (Tenant)
|
|
5 Watts/Sq. Ft.
|
3.
|
|
Tenant may obtain spare capacity from extension of the vertical busduct in a spare bus-tap
opening.
|
Mechanical System
Exterior and interior zones shall be air conditioned by packaged, water-cooled self-contained
variable air volume (VAV) air conditioning units with integral water economizer (one unit per
floor) conveying air through medium pressure loop ductwork to VAV boxes. Perimeter zones of each
floor and the interior of the 6
th
floor will be served by series type, fan powered VAV
boxes
with electric resistance heating coils. The interior of all other floors will be served by
cooling only shut-off type VAV boxes.
VAV zones have been designed at an approximate ratio of 1 box per 750 S.F. and 1 box per 1500 S.F.
for the perimeter and interior zones respectively.
Heating and Cooling design parameters:
|
|
|
Indoor Conditions:
|
|
|
Summer
|
|
75°F db / 50% RH
|
Winter
|
|
72°F db / no humidity control
|
Outdoor Conditions:
|
|
|
Summer
|
|
95°F db / 78°F wb
|
Winter
|
|
0°Fdb
|
Outdoor air will be provided at a rate of 20 CFM per person (as per latest edition of the
International Mechanical Code). The number of people will be based on normal office occupancy of 7
people/ 1000 s.f. In addition, 5% of the occupied office space has been calculated as conference
rooms (at 50 people/1000 s.f). A constant supply of outdoor air will be introduced on each floor.
The entire basebuilding HVAC system will be installed as part of the core and shell scope with the
exception of the low pressure ductwork downstream of all VAV boxes and supply and return
diffusers.
Wet Columns
2 wet columns per floor for use by Tenant.
Window Covering
1 inch thin slat Venetian blinds provided for perimeter windows.
Elevators
Electric geared elevators, 350 fpm. Three 3500 lb. capacity passenger elevators and one 3500 lb.
combination passenger/freight elevator.
Life Safety
Vertical sprinkler distribution to each floor. Fire standpipe and basebuilding fire alarm provided
pursuant to the applicable building codes. Main sprinkler line installed with upturned heads at a
ratio of 1 head per 225 rentable square feet. Any sprinkler heads required in excess of this number
will be part of the tenant improvements.
A closed-circuit, electrically supervised, non-coded addressable fire alarm system will be
provided, consisting of a main control panel, manual fire alarm stations, sprinkler water flow
alarm devices, smoke detection devices, flashing signal, horns, voice communication, supervisory
control and supervisory annunciated remote-indicating annunciators and all other items of
equipment required to erect a complete fire alarm system to comply with local fire codes.
The emergency service is provided by a pad mounted diesel generator which produces 175 KW at
277/480V, 3ø, 4W. The generator will provide emergency power to all white lights and exit
signs, fire alarm system, security system, fire pump and elevator.
Empty conduits have been provided for a tenant supplied generator which would be placed adjacent
to the emergency generator.
Energy Management and Control Systems
A building management system will be provided to monitor and control mechanical equipment. The
system will be a PC based computer-based, stand-alone type. System will be capable of monitoring
and control of all functions from a remote location via modem.
Exhibit L
Conduit Connection
1.
Connection
. Tenant shall have the non-exclusive right, in accordance with the terms
of this Exhibit, to connect the Premises to the telecommunications room in the South Pointe I
building via cabling to be located in the underground conduit that links the Building and South
Pointe I so that Tenant can participate in a Public Synchronous Optical Network (
SONET
) provided
by local telephone company.
2.
Arrangements for and Maintenance of SONET Service
.
a. Tenant will cause the local telephone company to prepare an engineering assessment for
SONET service for Tenant for greater data and voice transmission reliability. Promptly after Tenant
receives the engineering report, Tenant will provide Landlord with a copy of the report. If Tenant
then decides to obtain SONET service at the Premises, Tenant will make all necessary arrangements
for such service and Tenant will coordinate the installation of such service with Landlord. Tenant
shall, at Tenants expense, (i) obtain all necessary studies, reports and permits pertaining to the
SONET service, (ii) pay all SONET service and equipment acquisition, rent and other charges, and
(iii) perform in a timely manner all installation, maintenance, repair and removal work arising in
connection with the SONET service and equipment.
b. Landlord shall have no obligation (i) to bring or provide SONET service to the Building or
to South Pointe I; (ii) for any SONET equipment failure; (iii) for any cessation in the SONET
service; (iv) for any change in the terms or charges under which SONET service is provided to
Tenant; (v) to install, maintain, repair or remove any SONET service equipment.
3.
SONET Equipment
.
a. The location and the amount of space in the communications closet(s) and in the
underground conduit at the Building and at South Pointe I available for SONET service equipment
(which shall include any necessary wiring) must be determined and approved in writing by Landlord
prior to installation of any equipment therein. Tenant shall have no collocation rights.
b. Tenant shall cause the SONET equipment to be installed in a good and workmanlike manner
and in accordance with all applicable Requirements by a certified, qualified contractor. The
installation must not damage, interact or interfere with existing tenants, future tenants or any
base building equipment. Prior to installing any SONET equipment, Tenant must deliver to Landlord
a copy of all governmental permits required for such installation, together with a current
certificate of insurance reasonably satisfactory to Landlord.
c. Tenant shall give Landlord notice to the extent that Tenant needs access to any SONET
equipment located outside of the Premises and Landlord will make reasonable arrangements to
provide Tenant will such access. Landlord shall have the right to require that a
Landlord-designated engineer or other professional accompany Tenant and Tenants contractors,
at Tenants expense, when Tenant or Tenants contractors are accessing any SONET equipment located
outside of the Premises.
4.
Proportionate Share
. Within 30 days after receipt of an invoice therefore, Tenant
shall reimburse Landlord for Tenants proportionate share of any conduit repair and maintenance
costs.
5.
Removal
. Tenant shall remove the SONET equipment at the Building and at South
Pointe I (including the conduit wiring) within 60 days after the earlier of the SONET service no
longer being provided for Tenant, the occurrence of an Event of Default or the Expiration Date. If
any SONET equipment remains in place beyond the aforementioned removal date, Landlord shall have
the right to remove the SONET equipment and to repair any damage caused by such removal, at
Tenants expense.
6.
Landlords Liability
. In connection with any transfer of Landlords interest in
the South Pointe I building, Landlord shall cause the purchaser thereof to assume Landlords
obligations under this Exhibit as they pertain to the South Pointe I land and building, from the
date of such transfer and continuing thereafter during such transferees period of ownership of
South Point I. Subject to foregoing, following any such transfer, Tenant shall look solely to such
transferee in connection with the enforcement, exercise and performance of Tenants rights and
Landlords obligations under this Exhibit as they pertain to the South Pointe I building. In
connection with any transfer of Landlords interest in the Building, Tenant shall look solely to
Landlord in connection with the enforcement, exercise and performance of Tenants rights and
Landlords obligations under this Exhibit as they pertain to the South Pointe I building for so
long as Landlord owns South Point I.
EXHIBIT B
SUBLEASED PREMISES
[Attached]
EXHIBIT C
RENT TABLE
|
|
|
|
|
|
|
|
|
|
|
Minimum Rent Per
|
|
|
|
|
Square Foot
|
|
Minimum Rent
|
Sublease Year
|
|
(Annual)
|
|
(Monthly)
|
First Sublease Year
|
|
$
|
24.50
|
|
|
$
|
56,660.33
|
|
Second Sublease Year
|
|
$
|
25.48
|
|
|
$
|
58,926.75
|
|
Third Sublease Year
|
|
$
|
26.50
|
|
|
$
|
61,283.82
|
|
Fourth Sublease Year
|
|
$
|
27.56
|
|
|
$
|
63,735.17
|
|
EXHIBIT D
FURNITURE LIST
[Attached]
Exhibit D
Standard Cubes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cabinet,
|
|
|
|
|
|
|
|
|
Nameplate,
|
|
Desk, Cube
|
|
Desk, Cube
|
|
Cabinet,
|
|
Rolling
|
|
Chair, Swivel
|
|
Divider with
|
Location
|
|
Type
|
|
Numbered
|
|
(3 pieces)
|
|
(1 piece)
|
|
Overhead
|
|
(3 Drawers)
|
|
(Cloth, 2 Arms)
|
|
Whiteboard
|
5102
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5103
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5112
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5113
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5122
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5123
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5132
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5133
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5602
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5603
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5612
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5613
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5622
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5623
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5625
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5626
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5632
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5633
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5635
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5636
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5642
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5643
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5645
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5646
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5652
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5653
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5655
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5656
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5702
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5703
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5705
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5706
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5712
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5713
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5715
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5716
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5722
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5723
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5725
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5726
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5732
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5733
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5735
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5736
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5742
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5743
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5745
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5746
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5752
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5753
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5755
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5756
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5902
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5903
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5905
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5906
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
Page 1 of 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cabinet,
|
|
|
|
|
|
|
|
|
Nameplate,
|
|
Desk, Cube
|
|
Desk, Cube
|
|
Cabinet,
|
|
Rolling
|
|
Chair, Swivel
|
|
Divider with
|
Location
|
|
Type
|
|
Numbered
|
|
(3
pieces)
|
|
(1
piece)
|
|
Overhead
|
|
(3 Drawers)
|
|
(Cloth, 2 Arms)
|
|
Whiteboard
|
5912
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5913
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5915
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5916
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5922
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5923
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5925
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5926
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5932
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5933
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5935
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5936
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5942
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5943
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5945
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5946
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5952
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5953
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5955
|
|
Cube
|
|
1
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1/2
|
5956
|
|
W Cube
|
|
1
|
|
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1/2
|
Ghost
|
|
Cube
|
|
18
|
|
18
|
|
|
|
18
|
|
18
|
|
18
|
|
9
|
Ghost
|
|
W
|
|
6
|
|
|
|
6
|
|
6
|
|
6
|
|
6
|
|
3
|
Total
|
|
|
|
100
|
|
78
|
|
22
|
|
100
|
|
100
|
|
100
|
|
50
|
Non-Standard Cubes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cabinet,
|
|
Cabinet,
|
|
Cabinet,
|
|
Chair, Swivel
|
|
|
|
|
|
|
|
|
Nameplate,
|
|
Desk, Cube
|
|
Desk, Cube
|
|
Overhead
|
|
Rolling
|
|
Rolling
|
|
(Cloth, 2
|
|
Divider with
|
Location
|
|
Type
|
|
Numbered
|
|
(2
pieces)
|
|
(3
pieces)
|
|
(3
sizes)
|
|
(2 Drawers)
|
|
(3
Drawers)
|
|
Arms)
|
|
Whiteboard
|
Enclosed Area
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
|
11
|
|
|
|
26
|
|
|
|
16
|
|
|
|
10
|
|
|
|
13
|
|
|
|
|
|
TOTAL
|
|
|
|
|
|
|
0
|
|
|
|
2
|
|
|
|
11
|
|
|
|
26
|
|
|
|
16
|
|
|
|
10
|
|
|
|
13
|
|
|
|
0
|
|
Other Areas
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cabinet, Metal,
|
|
Cabinet, Metal,
|
|
Cabinet, Metal,
|
|
Table,
|
|
Chair (Cloth,
|
|
|
|
|
|
|
|
|
Chair, Swivel
|
|
|
|
Horizontal
|
|
Horizontal
|
|
Vertical
|
|
Conference,
|
|
Green, w/Arm
|
|
|
|
|
Location
|
|
Type
|
|
(Leather, 2 Arms)
|
|
Blinds, Vertical
|
|
(3
Drawer)
|
|
(2
Drawer)
|
|
(2 Door)
|
|
Curved
|
|
Table)
|
|
Refrigerator
|
|
Kit, First Aid
|
5054
|
|
Conf
|
|
12
|
|
3
|
|
|
|
|
|
|
|
6
|
|
3
|
|
|
|
|
5822
|
|
Conf
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5322
|
|
Conf
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
SW
|
|
|
|
|
|
9
|
|
0
|
|
2
|
|
|
|
|
|
|
|
|
Q2
|
|
NW
|
|
|
|
|
|
10
|
|
2
|
|
2
|
|
|
|
|
|
|
|
|
Q3
|
|
NE
|
|
|
|
|
|
22
|
|
2
|
|
5
|
|
|
|
|
|
|
|
|
Q4
|
|
SE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q Total
|
|
All
|
|
|
|
|
|
41
|
|
4
|
|
9
|
|
|
|
|
|
|
|
|
Fin
|
|
Fin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kitchen
|
|
N
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
1
|
Kitchen
|
|
S
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
1
|
5615
|
|
Lab
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
|
|
|
|
12
|
|
3
|
|
82
|
|
8
|
|
18
|
|
6
|
|
3
|
|
2
|
|
2
|
Page 2 of 3
Offices
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
,
|
|
Chair, Swivel
|
|
Chair, Swivel
|
|
|
|
|
|
|
|
|
|
|
Nameplate,
|
|
|
|
Desk,
|
|
Cabinet,
|
|
Cabinet,
|
|
(Leather, 2
|
|
(Cloth 2
|
|
|
|
|
|
Blinds,
|
Location
|
|
Type
|
|
Numbered
|
|
Desk, Office
|
|
Extension
|
|
Desktop
|
|
Upright
|
|
Arms)
|
|
Arms)
|
|
Whiteboard
|
|
Wastebasket
|
|
Vertical
|
5072
|
|
Office
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
2
|
5015A
|
|
Office
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
0
|
5115A
|
|
Office
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
0
|
5215A
|
|
Office
|
|
0
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
0
|
5315A
|
|
Office
|
|
0
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
0
|
5415A
|
|
Office
|
|
0
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
0
|
5515A
|
|
Office
|
|
0
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
0
|
5A13
|
|
Office
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
2
|
5A15
|
|
Office
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
2
|
5A17
|
|
Office
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
2
|
5C19
|
|
Office
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
2
|
5D10
|
|
Office
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
2
|
5G01
|
|
Office
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
0
|
5G04
|
|
Office
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
0
|
5K18
|
|
Office
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
4
|
5K21
|
|
Office*
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
3
|
|
|
*desk configuration different; reconfigured from extra pieces
|
|
|
|
|
|
|
|
|
|
|
5K22
|
|
Office
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
1
|
|
2
|
|
1
|
|
1
|
|
2
|
TOTAL
|
|
|
|
13
|
|
17
|
|
17
|
|
16
|
|
17
|
|
17
|
|
34
|
|
17
|
|
17
|
|
21
|
Page 3 of 3
EXHIBIT E
SPECIALTY EQUIPMENT LIST
[Attached]
Exhibit E
Data Center
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Manufacturer
|
|
Model Number
|
|
Serial Number
|
|
Quantity
|
Air Conditioning Unit (15 ton)
|
|
Liebert
|
|
DH192G-AAEI
|
|
441473-001
|
|
|
1
|
|
Air Conditioning Unit (15 ton)
|
|
Liebert
|
|
DH192G-AAEI
|
|
441473-002
|
|
|
1
|
|
Air Conditioning Unit (15 ton)
|
|
Liebert
|
|
DH192G-AAEI
|
|
441473-003
|
|
|
1
|
|
Air Conditioning Unit (15 ton)
|
|
Liebert
|
|
DH192G-AAEI
|
|
441473-004
|
|
|
1
|
|
Dry Cooler (roof mounted)
|
|
Liebert
|
|
DNT620A
|
|
0318C63032
|
|
|
1
|
|
Dry Cooler (roof mounted)
|
|
Liebert
|
|
DNT620A
|
|
0318C63043
|
|
|
1
|
|
Pump Enclosure (roof mounted)
(includes two 10 HP pumps)
|
|
Liebert
|
|
RP020GY02S0758
|
|
NA
|
|
|
1
|
|
Transformer (3 Phase)
|
|
Cutler-Hammer
|
|
V48M28T15B
|
|
J03D05358
|
|
|
1
|
|
Power Distribution Unit (75 KVA)
|
|
Power Distribution, Inc
|
|
PP13-4-075-G-641
|
|
110-1222
|
|
|
1
|
|
Uninterruptible Power Supply
(130 KVA) (includes two sealed
battery units)
|
|
Liebert
|
|
NPOWER 100-130
|
|
37SA130A0A6S093
|
|
|
1
|
|
Pre-action Sprinkler System
|
|
Victualic
|
|
NA
|
|
NA
|
|
|
1
|
|
Fire Alarm Control Panel
|
|
Gamewell
|
|
NA
|
|
NA
|
|
|
1
|
|
Environmental Alarm Panel
|
|
General Electric
|
|
NA
|
|
NA
|
|
|
1
|
|