UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-Q
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(Mark One)
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þ
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Quarterly Report Pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of 1934
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For the quarterly period ended September 30, 2008.
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OR
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o
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Transition Report Pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of 1934
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For the transition period
from to .
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Commission file number:
001-33883
K12 Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other jurisdiction
of
incorporation or organization)
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95-4774688
(IRS Employer
Identification No.)
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2300 Corporate Park Drive
Herndon, VA
(Address of principal
executive offices)
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20171
(Zip
Code)
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(703) 483-7000
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject
to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a
non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in Rule
12b-2
of the
Exchange Act. (Check one):
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Large
accelerated
filer
o
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Accelerated
filer
o
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Non-accelerated
filer
þ
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Smaller
reporting
company
o
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(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes
o
No
þ
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the close of
business on November 12, 2008.
Common
Stock, $0.0001 par value 28,734,553 shares
K12
Inc.
Form 10-Q
For the Quarterly Period Ended September 30, 2008
Index
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Page
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Number
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Part I.
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Financial Information
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Item 1.
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Financial Statements (Unaudited)
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2
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Item 2.
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Managements Discussion and Analysis of Financial Condition
and Results of Operations
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12
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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18
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Item 4T.
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Controls and Procedures
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19
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Part II.
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Other Information
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Item 1.
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Legal Proceedings
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19
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Item 1A.
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Risk Factors
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20
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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20
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Item 3.
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Defaults Upon Senior Securities
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20
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Item 4.
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Submission of Matters to a Vote of Security Holders
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20
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Item 5.
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Other Information
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20
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Item 6.
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Exhibits
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20
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Signatures
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21
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EXHIBIT
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31.1
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EXHIBIT
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31.2
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EXHIBIT
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32
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1
PART I
FINANCIAL INFORMATION
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Item 1.
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Financial
Statements (Unaudited).
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K12
INC.
UNAUDITED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in
thousands, except share and per share data)
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September 30,
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June 30,
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2008
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2008
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ASSETS
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Current assets
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Cash and cash equivalents
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$
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49,023
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$
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71,682
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Accounts receivable, net of allowance of $1,529 and $1,458 at
September 30, 2008 and June 30, 2008, respectively
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88,969
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30,630
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Inventories, net
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14,000
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20,672
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Current portion of deferred tax asset
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8,575
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8,344
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Prepaid expenses and other current assets
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2,820
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3,648
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Total current assets
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163,387
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134,976
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Property and equipment, net
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35,949
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24,536
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Capitalized curriculum development costs, net
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23,943
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21,366
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Deferred tax asset, net of current portion
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11,037
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12,749
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Goodwill
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1,825
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1,754
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Other assets, net
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6,388
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1,943
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Total assets
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$
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242,529
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$
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197,324
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities
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Accounts payable
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$
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14,021
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$
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14,388
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Accrued liabilities
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7,955
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4,684
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Accrued compensation and benefits
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5,653
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10,049
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Deferred revenue
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24,938
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3,114
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Current portion of capital lease obligations
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10,014
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6,107
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Current portion of notes payable
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326
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413
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Total current liabilities
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62,907
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38,755
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Deferred rent, net of current portion
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1,644
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1,640
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Capital lease obligations, net of current portion
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13,522
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6,445
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Notes payable, net of current portion
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112
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196
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Total liabilities
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78,185
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47,036
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Commitments and contingencies
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Stockholders equity
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Common stock, par value $0.0001; 100,000,000 shares
authorized; 28,697,673 and 27,944,826 shares issued and
outstanding at September 30, 2008 and June 30, 2008,
respectively
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3
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3
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Additional paid-in capital
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331,763
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323,621
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Accumulated deficit
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(167,422
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(173,336
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Total stockholders equity
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164,344
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150,288
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Total liabilities and stockholders equity
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$
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242,529
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$
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197,324
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See notes to unaudited condensed consolidated financial
statements.
2
K12
INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except share and per share data)
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Three Months Ended September 30,
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2008
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2007
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Revenues
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$
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88,625
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$
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59,353
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Cost and expenses
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Instructional costs and services
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54,421
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34,778
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Selling, administrative, and other operating expenses
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22,835
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16,039
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Product development expenses
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2,195
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2,527
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Total costs and expenses
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79,451
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53,344
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Income from operations
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9,174
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6,009
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Interest income (expense), net
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107
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(304
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Income before income tax expense and minority interest
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9,281
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5,705
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Income tax (expense) benefit
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(3,786
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)
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7,117
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Income before minority interest
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5,495
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12,822
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Minority interest in loss of consolidated subsidiaries, net
of tax
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419
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Net income
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5,914
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12,822
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Dividends on preferred stock
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(1,671
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Preferred stock accretion
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(6,560
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Net income attributable to common stockholders
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$
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5,914
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$
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4,591
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Net income attributable to common stockholders per share:
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Basic
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$
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0.21
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$
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2.25
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Diluted
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$
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0.20
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$
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0.20
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Weighted average shares used in computing per share amounts
(see page 7):
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Basic
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28,487,440
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2,043,589
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Diluted
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29,499,102
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22,744,525
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See notes to unaudited condensed consolidated financial
statements.
3
K12
INC.
UNAUDITED
CONDENSED STATEMENTS OF STOCKHOLDERS EQUITY
(in
thousands, except share data)
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Additional
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Common Stock
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Paid-in
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Accumulated
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Shares
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Amount
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Capital
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Deficit
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Total
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Three months ended September 30, 2008
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Balance, June 30, 2008
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27,944,826
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$
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3
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$
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323,621
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$
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(173,336
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)
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$
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150,288
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Exercise of stock options
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752,847
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5,419
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5,419
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Stock compensation expense
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529
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529
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Excess tax benefit from stock-based compensation
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2,194
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2,194
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Net income
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5,914
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5,914
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Balance, September 30, 2008
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28,697,673
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$
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3
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$
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331,763
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$
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(167,422
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)
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$
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164,344
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See notes to unaudited condensed financial statements.
4
K12
INC.
UNAUDITED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
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Three Months Ended September 30,
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2008
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2007
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Cash flows from operating activities
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Net income
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$
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5,914
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$
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12,822
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Adjustments to reconcile net income to net cash used in
operating activities:
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Depreciation and amortization expense
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4,446
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2,252
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Stock based compensation expense
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529
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300
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Excess tax benefit from stock-based compensation
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(2,194
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)
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Deferred income taxes
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3,674
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(7,117
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)
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Provision for doubtful accounts
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70
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21
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Provision for inventory obsolescence
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40
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7
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Provision for (reduction of) student computer shrinkage and
obsolescence
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(6
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)
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161
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Changes in assets and liabilities:
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Accounts receivable
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(58,409
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)
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(34,248
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)
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Inventories
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6,632
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7,029
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Prepaid expenses and other current assets
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828
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261
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Other assets
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(4,440
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)
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(933
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)
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Deposits and other assets
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28
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557
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Accounts payable
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(367
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)
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4,100
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Accrued liabilities
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3,271
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2,374
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Accrued compensation and benefits
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(4,396
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)
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(2,880
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)
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Deferred revenue
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21,825
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12,571
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Deferred rent
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5
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(17
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)
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Net cash used in operating activities
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(22,550
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)
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(2,740
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Cash flows from investing activities
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Purchase of property and equipment
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(2,397
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)
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(1,530
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Purchase of domain name
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(250
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)
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Capitalized curriculum development costs
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(3,618
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)
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(1,622
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)
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Net cash used in investing activities
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(6,015
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)
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(3,402
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)
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Cash flows from financing activities
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Deferred initial public offering costs
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(1,371
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)
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Net borrowings from revolving credit facility
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11,000
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Repayments on capital lease obligations
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(1,466
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)
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(648
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)
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Repayments on notes payable
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(170
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)
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(44
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)
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Proceeds from exercise of stock options
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5,348
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25
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Excess tax benefit from stock-based compensation
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2,194
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Repayment of bank overdraft
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(1,577
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)
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Net cash provided by financing activities
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5,906
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7,385
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Net change in cash and cash equivalents
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(22,659
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)
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1,243
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Cash and cash equivalents
, beginning of period
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71,682
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1,660
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|
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Cash and cash equivalents
, end of period
|
|
$
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49,023
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|
|
$
|
2,903
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|
|
|
|
|
|
|
|
|
|
See notes to unaudited condensed consolidated financial
statements.
5
K12
Inc.
Notes to
Unaudited Condensed Consolidated Financial Statements
|
|
1.
|
Description
of the Business
|
K12 Inc. and its subsidiaries (K12 or the Company) sell online
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. In
contracting with a virtual public school, the Company typically
provides students with access to the K12
on-line
curriculum, offline learning kits, and use of a personal
computer. As of September 30, 2008, the Company served
schools in 21 states and the District of Columbia,
providing curriculum for kindergarten through twelfth grades.
The Company expanded into four new states in fiscal year 2009:
Hawaii, Indiana, Oregon and South Carolina. In addition, the
Company sells access to its on-line curriculum and offline
learning kits directly to individual consumers.
The accompanying condensed consolidated balance sheet as of
September 30, 2008, the condensed consolidated statements
of operations for the three months ended September 30, 2008
and 2007, the condensed consolidated statements of cash flows
for the three months ended September 30, 2008 and 2007, and
the condensed consolidated statement stockholders equity
for the three months ended September 30, 2008 are
unaudited. The unaudited interim financial statements have been
prepared on the same basis as the annual financial statements
and in the opinion of management, reflect all adjustments, which
include only normal recurring adjustments, necessary to present
fairly the Companys financial position as of
September 30, 2008, the results of operations for the three
months ended September 30, 2008 and 2007, the results of
cash flows for the three months ended September 30, 2008
and 2007 and the stockholders equity for the three months
ended September 30, 2008. The results of the three month
periods ended September 30, 2008 are not necessarily
indicative of the results to be expected for the year ended
June 30, 2009 or for any other interim period or for any
other future fiscal year. The consolidated balance sheet as of
June 30, 2008 has been derived from the audited
consolidated financial statements at that date.
The accompanying unaudited condensed consolidated financial
statements of the Company have been prepared in accordance with
accounting principles generally accepted in the United States of
America for interim financial information and with the
instructions to
Form 10-Q
and
Rule 10-01
of
Regulation S-X
of the Securities Exchange Act of 1934, as amended (Exchange
Act). Accordingly, they do not include all of the information
and footnotes required by accounting principles generally
accepted in the United States of America for complete financial
statements. In the opinion of management, these statements
include all adjustments (consisting of normal recurring
adjustments) considered necessary to present a fair statement of
our consolidated results of operations, financial position and
cash flows. Preparation of the Companys financial
statements in conformity with accounting principles generally
accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts
in the financial statements and footnotes. Actual results could
differ from those estimates. This quarterly report on
Form 10-Q
should be read in conjunction with the financial statements and
the notes thereto included in the companys latest annual
report on
Form 10-K
filed on September 26, 2008, which contains the
Companys audited financial statements for the fiscal year
ended June 30, 2008.
6
K12
Inc.
Notes to
Unaudited Condensed Consolidated Financial
Statements (Continued)
|
|
3.
|
Summary
of Significant Accounting Policies
|
Consolidation
The condensed consolidated financial statements include the
accounts of the Company, its wholly-owned subsidiaries and
affiliated companies in which the Company owns, directly or
indirectly, or otherwise controls 50% or more of the outstanding
voting interests. Under the consolidation method, an affiliated
companys results of operations are reflected within the
consolidated statements of operations. Earnings or losses
attributable to other stockholders of a consolidated affiliated
company are classified as minority interest in loss of
consolidated subsidiaries in the Companys
consolidated statements of operations. Minority interest adjusts
the Companys consolidated net results of operations to
reflect only its share of the after-tax earnings or losses of an
affiliated company. Income taxes attributable to minority
interest are determined using the applicable statutory tax rates
in the jurisdictions where such operations are conducted. These
rates vary from country to country. All significant intercompany
transactions and balances have been eliminated in consolidation.
Net
Income Per Common Share
Basic earnings per share is computed by dividing net income
available to common stockholders by the weighted average number
of shares of common stock outstanding during the period. Diluted
earnings per share reflects the potential dilution that could
occur assuming conversion or exercise of all dilutive
unexercised stock options and warrants. The dilutive effect of
stock options was determined using the treasury stock method.
Under the treasury stock method, the proceeds received from the
exercise of stock options, the amount of compensation cost for
future service not yet recognized by the Company, and the amount
of tax benefits that would be recorded in additional paid-in
capital when the stock options become deductible for income tax
purposes are all assumed to be used to repurchase shares of the
Companys common stock. Stock options are not included in
the computation of diluted earnings per share when they are
antidilutive.
The following schedule presents the calculation of basic and
diluted net income per share:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands, except share
|
|
|
|
and per share data)
|
|
|
Net income available to common shareholders basic
and diluted
|
|
$
|
5,914
|
|
|
$
|
4,591
|
|
Weighted average common shares outstanding basic
|
|
|
28,487,440
|
|
|
|
2,043,589
|
|
Weighted average common shares outstanding diluted
|
|
|
29,499,102
|
|
|
|
22,744,525
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.21
|
|
|
$
|
2.25
|
|
Diluted
|
|
$
|
0.20
|
|
|
$
|
0.20
|
|
Recently
Adopted Financial Accounting Pronouncements
The Company adopted the provisions of Financial Accounting
Standards Board (FASB) Statement No. 157 (FAS 157),
Fair Value Measurements, on July 1, 2008. FAS 157
defines fair value, establishes a framework for measuring fair
value under Generally Accepted Accounting Principles (GAAP), and
expands disclosures about fair value measurements. The
implementation of this Statement was not material to the
Companys consolidated financial position or results of
operations.
7
K12
Inc.
Notes to
Unaudited Condensed Consolidated Financial
Statements (Continued)
The provision for income taxes is based on earnings reported in
the condensed consolidated financial statements. A deferred
income tax asset or liability is determined by applying
currently enacted tax laws and rates to the expected reversal of
the cumulative temporary differences between the carrying value
of assets and liabilities for financial statement and income tax
purposes. Deferred income tax expense is measured by the change
in the deferred income tax asset or liability during the year.
Capital
Leases
As of September 30, 2008, computer equipment and software
under capital leases are recorded at a cost of
$30.9 million and accumulated depreciation of
$9.2 million. The Company has an equipment lease line of
credit that expires on April 30, 2009 for new purchases on
the line of credit. The interest rate on new advances under the
equipment lease line is set quarterly. Borrowings under the
equipment lease line have interest rates ranging from 6.4% to
8.8% and 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 the lessor to guarantee
the obligations under this equipment lease and financing
agreement.
Notes
Payable
The Company has purchased computer software licenses and
maintenance services through notes payable arrangements with
various vendors at interest rates ranging up to 11.4% and
payment terms ranging from eighteen months to three years.
The following is a summary as of September 30, 2008 of the
present value of the net minimum payments on capital leases and
notes payable under the Companys commitments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Notes
|
|
|
|
|
September 30,
|
|
Leases
|
|
|
Payable
|
|
|
Total
|
|
|
2009
|
|
$
|
11,324
|
|
|
$
|
327
|
|
|
$
|
11,652
|
|
2010
|
|
|
9,162
|
|
|
|
111
|
|
|
|
9,274
|
|
2012
|
|
|
5,041
|
|
|
|
|
|
|
|
5,041
|
|
2013
|
|
|
156
|
|
|
|
|
|
|
|
156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total minimum payments
|
|
|
25,683
|
|
|
|
438
|
|
|
|
26,123
|
|
Less amount representing interest (imputed interest rate of 7.7%)
|
|
|
(2,147
|
)
|
|
|
|
|
|
|
(2,149
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum payments
|
|
|
23,536
|
|
|
|
438
|
|
|
|
23,974
|
|
Less current portion
|
|
|
(10,014
|
)
|
|
|
(326
|
)
|
|
|
(10,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum payments, less current portion
|
|
$
|
13,522
|
|
|
$
|
112
|
|
|
$
|
13,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
K12
Inc.
Notes to
Unaudited Condensed Consolidated Financial
Statements (Continued)
The Company uses the Black-Scholes method to calculate the fair
value of stock options. Depending on certain substantive
characteristics of the stock option, the Company, where
appropriate, utilizes a binomial model. 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. In December 2007, the SEC issued
SAB 110 which allows companies to continue to use the
simplified method, as defined in SAB 107 to estimate the
expected term of stock options under certain circumstances. The
Company estimates the volatility rate based on historical
closing stock prices of a pool of comparable companies. The
dividend yield is zero as the Company has no present intention
to pay cash dividends.
SFAS 123R 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 2007 Equity Incentive Award Plan was adopted by the
Companys Board of Directors on October 30, 2007.
There were 504,700 stock options granted under the 2007 Equity
Incentive Award Plan for the quarter ended September 30,
2008.
Stock option activity during the three months ended
September 30, 2008 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Life (Years)
|
|
|
Value
|
|
|
Outstanding, June 30, 2008
|
|
|
4,766,849
|
|
|
$
|
11.20
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
504,700
|
|
|
|
23.40
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(752,847
|
)
|
|
|
7.15
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(97,570
|
)
|
|
|
10.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2008
|
|
|
4,421,132
|
|
|
$
|
13.28
|
|
|
|
5.16
|
|
|
$
|
58,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercisable at September 30, 2008
|
|
|
2,098,892
|
|
|
$
|
8.50
|
|
|
|
4.38
|
|
|
$
|
37,770
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total intrinsic value of options exercised during the three
months ended September 30, 2008 was $12.7 million.
The following table summarizes the option grant activity for the
three months ended September 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Options
|
|
|
Weighted-Average
|
|
|
Grant-Date
|
|
|
Intrinsic
|
|
Grant date
|
|
Granted
|
|
|
Exercise Price
|
|
|
Fair Value
|
|
|
Value
|
|
|
July 2008
|
|
|
15,700
|
|
|
$
|
21.94
|
|
|
$
|
9.81
|
|
|
$
|
|
|
August 2008
|
|
|
489,000
|
|
|
$
|
23.45
|
|
|
$
|
10.47
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
504,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
K12
Inc.
Notes to
Unaudited Condensed Consolidated Financial
Statements (Continued)
On December 10, 2007, the Company received majority
stockholder consent, pursuant to Section 228(a) of the
Delaware General Corporation Law (the DGCL),
approving the Companys 2007 Equity Incentive Award Plan
and its 2007 Employee Stock Purchase Plan (which are more fully
described in the Companys registration statement on
Form S-1,
Registration Number
333-144894).
All stockholders were notified of the approval of these plans,
pursuant to Section 228(e) of the DGCL, on
December 20, 2007. The 2007 Equity Incentive Award Plan and
the 2007 Employee Stock Purchase Plan were adopted by the
Companys Board of Directors on October 30, 2007.
There were 504,700 stock options granted under the 2007 Equity
Incentive Award Plan for the quarter ended September 30,
2008.
As of September 30, 2008, there was $7.6 million of
total unrecognized compensation expense related to unvested
stock options granted under the Stock Option Plan adopted in May
2000 and November 2007 and the 2007 Equity Incentive Award Plan.
The cost is expected to be recognized over a weighted average
period of 2.0 years. The total fair value of shares vested
during the three months ended September 30, 2008 was
$5.8 million. During the three months ended
September 30, 2008, the Company recognized
$0.5 million of stock based compensation.
|
|
7.
|
Commitments
and Contingencies
|
Litigation
In the ordinary conduct of business, the Company is subject to
lawsuits, arbitrations and administrative proceedings from time
to time. The Company is currently involved in a lawsuit brought
by a teachers union seeking the closure of the virtual
public school the Company serves in Illinois.
Illinois v.
Chicago Virtual Charter School
On October 4, 2006, the Chicago Teachers Union and
individual taxpayers (CTU or plaintiffs) 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.
After three dismissals of their complaint on procedural grounds,
the Court granted the plaintiffs Fourth Amended Citizen
Complaint on May 20, 2008. CVCS and the Board of Education
of the City of Chicago jointly filed a Motion to Reconsider,
which was denied by Memorandum Opinion and Order dated
August 8, 2008. The case is now in the discovery stage. The
Company continues to participate in the defense of CVCS under an
indemnity obligation in its 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. In
fiscal year 2008 and for the three months ended
September 30, 2008, average enrollments in CVCS were 407
and 586, respectively and the Company derived 1.3% and 1.0%,
respectively of its revenues from CVCS.
The Company expenses legal costs as incurred.
10
K12
Inc.
Notes to
Unaudited Condensed Consolidated Financial
Statements (Continued)
On August 15, 2008, a subsidiary of the Company entered
into an agreement to establish a joint venture with a Middle
East partner. The purpose of the joint venture is to develop and
manage the distribution of the Companys learning system in
the Gulf Cooperating Countries. The Companys investment
into this joint venture consists of $1 million in cash and
contributed assets in return for a 66.7% ownership interest. The
Companys Middle East partner will contribute
$5 million in cash in return for a 33.3% ownership
interest. The Company accounts for this joint venture under the
consolidated method of accounting.
|
|
9.
|
Supplemental
Disclosure of Cash Flow Information
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Cash paid for interest
|
|
$
|
255
|
|
|
$
|
281
|
|
|
|
|
|
|
|
|
|
|
Cash paid for taxes, net of refunds
|
|
$
|
(12
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash investing and financing
activities:
|
|
|
|
|
|
|
|
|
New capital lease obligations
|
|
$
|
12,450
|
|
|
$
|
6,964
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Recent
Accounting Pronouncements
|
In December 2007, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 141R (revised
2007),
Business Combinations
, which replaces SFAS No
141. The statement retains the purchase method of accounting for
acquisitions, but requires a number of changes, including
changes in the way assets and liabilities are recognized in the
purchase accounting. It also changes the recognition of assets
acquired and liabilities assumed arising from contingencies,
requires the capitalization of in-process research and
development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R
is effective for the Company beginning July 1, 2009 and
will apply prospectively to business combinations completed on
or after that date.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB 51
, which changes the
accounting and reporting for minority interests. Minority
interests will be recharacterized as noncontrolling interests
and will be reported as a component of equity separate from the
parents equity, and purchases or sales of equity interests
that do not result in a change in control will be accounted for
as equity transactions. In addition, net income attributable to
the noncontrolling interest will be included in consolidated net
income on the face of the income statement and, upon a loss of
control, the interest sold, as well as any interest retained,
will be recorded at fair value with any gain or loss recognized
in earnings. SFAS No. 160 is effective for the Company
beginning July 1, 2009 and will apply prospectively, except
for the presentation and disclosure requirements, which will
apply retrospectively. The Company does not believe that the
provisions of this statement will have a material effect on its
financial condition, results of operations and disclosures.
In March 2008, the FASB issued SFAS No. 161,
Disclosures About Instruments and Hedging
Activities
amendment of FASB Statement
No. 133 (SFAS No. 161). SFAS No. 161
changes the disclosure requirements for derivative instruments
and hedging activities. SFAS No. 161 is effective for
financial statements issued for fiscal years beginning after
November 15, 2008. As SFAS No. 161 relates only
to disclosure, the Company anticipates that the adoption of
SFAS No. 161 will not have a material effect on its
consolidated financial statements.
11
|
|
Item 2.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations.
|
This Managements Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) is intended to
assist in understanding and assessing the trends and significant
changes in our results of operations and financial condition. As
used in this MD&A, the words, we,
our and us refer to K12 Inc. and its
consolidated subsidiaries. This MD&A should be read in
conjunction with our condensed consolidated financial statements
and related notes included in this report, as well as the
consolidated financial statements and MD&A of our Annual
Report on
Form 10-K
for the fiscal year ended June 30, 2008. The following
overview provides a summary of the sections included in our
MD&A:
|
|
|
|
|
Forward-Looking Statements cautionary information
about forward-looking statements and a description of certain
risks and uncertainties that could cause our actual results to
differ materially from our historical results or our current
expectations or projections.
|
|
|
|
Executive Summary a general description of our
business and key highlights of the three months ended
September 30, 2008.
|
|
|
|
Critical Accounting Policies and Estimates a
discussion of critical accounting policies requiring critical
judgments and estimates.
|
|
|
|
Results of Operations an analysis of our results of
operations in our consolidated financial statements.
|
|
|
|
Liquidity and Capital Resources an analysis of cash
flows, sources and uses of cash, commitments and contingencies,
seasonality in the results of our operations, the impact of
inflation, and quantitative and qualitative disclosures about
market risk.
|
Forward-Looking
Statements
This MD&A contains certain forward-looking statements
within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. Historical results may not
indicate future performance. Our forward-looking statements
reflect our current views about future events, are based on
assumptions and are subject to known and unknown risks and
uncertainties that could cause actual results to differ
materially from those contemplated by these statements. Factors
that may cause differences between actual results and those
contemplated by forward-looking statements include, but are not
limited to, those discussed in Risk Factors in
Part I, Item 1A, of our Annual Report on
Form 10-K
for the fiscal year ended June 30, 2008, including any
updates found in Part II, Item 1A, Risk
Factors, of this quarterly report. We undertake no
obligation to publicly update or revise any forward-looking
statements, including any changes that might result from any
facts, events, or circumstances after the date hereof that may
bear upon forward-looking statements. Furthermore, we cannot
guarantee future results, events, levels of activity,
performance, or achievements.
Executive
Summary
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 $130 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.
12
We deliver our learning system to students primarily through
virtual public schools. 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. As of September 30, 2008, substantially all of
our enrollments were served through 32 virtual public schools to
which we provide full turnkey solutions and seven virtual public
schools to which we provide limited management services, located
in 21 states and the District of Columbia. For the first
quarter of fiscal year 2009 versus the same period in the prior
year, we increased average enrollments in the virtual public
schools we serve to approximately 56,200 students from 39,500
students, an increase of 42.4%, and increased revenues to
$88.6 million from $59.4 million, an increase of 49.3%.
For the three months ended September 30, 2008,
approximately 85.4% of our enrollments were associated with
virtual public schools to which we provide turnkey management
services as compared to 80.8% for the same period in the prior
year. 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.
We generate almost all of our revenues from virtual public
schools and these revenues depend on per pupil funding amounts
financed by federal, state and local taxpayers. Budget
appropriations for education at all levels of government are
determined through the political process, which may also be
affected by conditions in the economy at large. Per pupil
funding levels are typically established on an annual basis and
generally increase at modest levels from year to year. While we
expect these trends to continue over time, the current economic
environment may adversely impact government revenues causing
unanticipated reductions in school funding or delays in payments
which, if material, could adversely impact our revenues and cash
flow.
Parents can also purchase our curriculum and online learning
platform directly to facilitate or supplement their
childrens education. Additionally, we have piloted
portions of our curriculum in brick and mortar classrooms with
promising academic results. We recently launched the K12
International Academy, an online private school which serves
students in the U.S. and throughout the world. The school
utilizes the same K12 curriculum, systems, and teaching
practices as the virtual public schools we serve. The school is
accredited by the Commission on International and Trans-Regional
Accreditation (CITA), the Southern Association of Colleges and
Schools (SACS), and is recognized by the State of Virginia as a
degree granting institution of secondary learning.
On August 15, 2008, a subsidiary of the Company entered
into an agreement to establish a joint venture with a Middle
East partner. The purpose of the joint venture is to develop and
manage the distribution of our learning system in the Gulf
Cooperating Countries. The K12 International Academy has a
branch facility in Dubai, operated under this joint venture. Our
investment into this joint venture consists of $1 million
in cash and contributed assets in return for a 66.7% ownership
interest. Our Middle East partner agreed to contribute
$5 million in cash in return for a 33.3% ownership
interest. Our condensed consolidated financial statements
reflect the results of operations of this joint venture.
Earnings or losses attributable to our partner are classified as
minority interest in loss of consolidated
subsidiaries in our consolidated statements of operations.
Minority interest adjusts our consolidated net results of
operations to reflect only our share of the after-tax earnings
or losses of an affiliated company. Income taxes attributable to
minority interest are determined using the applicable statutory
tax rates in the jurisdictions where such operations are
conducted.
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 changes in the number of enrollments. 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 fiscal quarter, and finish in May
or June, our fourth fiscal quarter. Consequently, our first
13
and fourth fiscal quarters may have fewer than three months of
full operations when compared to the second and third fiscal
quarters. In addition, we experience a seasonal increase in
enrollments in August and September, although students will
enroll to a lesser extent during the school year.
In the first fiscal quarter, we ship and recognize revenues for
materials to students for the beginning of the school year. This
generally results in higher materials revenues and margin in the
first quarter versus other 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. The combined effect of these factors
results in higher revenues in the first fiscal quarter than in
the subsequent quarters.
Operating expenses are also seasonal. Instructional costs and
services expenses 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,
proctored exam related expenses, and community events,)
impacting the quarterly change in instructional costs. The
majority of our recruiting and selling expenses are incurred in
the first and fourth fiscal quarters, as our primary enrollment
season is July through September. A significant portion of our
overhead expenses does not vary with the school year or
enrollment season.
Critical
Accounting Policies and Estimates
The preparation of financial statements in conformity with
United States of America generally accepted accounting
principles requires us to make estimates and assumptions about
future events that affect the amounts reported in our
consolidated financial statements and accompanying notes. Future
events and their effects cannot be determined with certainty.
Therefore, the determination of estimates requires the exercise
of judgment. Actual results could differ from those estimates,
and any such differences may be material to our consolidated
financial statements. Critical accounting policies are disclosed
in our fiscal year 2008 audited consolidated financial
statements, which are included our Annual Report filed on
Form 10-K
for the fiscal year ended June 30, 2008. Other than
described in the condensed consolidated financials, there have
been no significant updates to our critical accounting policies
from those disclosed in the Annual Report.
Results
of Operations
The following table sets forth average enrollment data for each
of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Total enrollments
|
|
|
56,233
|
|
|
|
39,493
|
|
|
|
|
|
|
|
|
|
|
Enrollments associated with managed schools as a percentage of
total enrollments
|
|
|
85.4
|
%
|
|
|
80.8
|
%
|
|
|
|
|
|
|
|
|
|
High School enrollments as a percentage of total enrollments
|
|
|
20.9
|
%
|
|
|
14.5
|
%
|
|
|
|
|
|
|
|
|
|
14
The following table sets forth statements of operations data for
each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
$
|
88,625
|
|
|
$
|
59,353
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
54,421
|
|
|
|
34,778
|
|
Selling, administrative, and other operating expenses
|
|
|
22,835
|
|
|
|
16,039
|
|
Product development expenses
|
|
|
2,195
|
|
|
|
2,527
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
79,451
|
|
|
|
53,344
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
9,174
|
|
|
|
6,009
|
|
Interest income (expense), net
|
|
|
107
|
|
|
|
(304
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
9,281
|
|
|
|
5,705
|
|
Income tax benefit (expense)
|
|
|
(3,786
|
)
|
|
|
7,117
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
5,495
|
|
|
|
12,822
|
|
Minority interest in income of consolidated subsidiaries, net
of tax
|
|
|
419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
5,914
|
|
|
$
|
12,822
|
|
|
|
|
|
|
|
|
|
|
The following table sets forth statements of operations data as
a percentage of revenues for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
Revenues
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Cost and expenses
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
61.4
|
|
|
|
58.6
|
|
Selling, administrative, and other operating expenses
|
|
|
25.7
|
|
|
|
27.0
|
|
Product development expenses
|
|
|
2.5
|
|
|
|
4.3
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
89.6
|
|
|
|
89.9
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
10.4
|
|
|
|
10.1
|
|
Interest income (expense), net
|
|
|
0.1
|
|
|
|
(0.5
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes and minority interest
|
|
|
10.5
|
|
|
|
9.6
|
|
Income tax benefit (expense)
|
|
|
(4.3
|
)
|
|
|
12.0
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
6.2
|
|
|
|
21.6
|
|
Minority interest in income of consolidated subsidiaries, net
of tax
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
6.7
|
%
|
|
|
21.6
|
%
|
|
|
|
|
|
|
|
|
|
We have included below a discussion of our operating results and
significant items which explain the material changes in our
operating results during the last three months versus the prior
year.
Comparison
of the Three Months Ended September 30, 2008 and Three
Months Ended September 30, 2007
Revenues.
Our revenues for the three months ended
September 30, 2008 were $88.6 million, representing an
increase of $29.2 million, or 49.3%, as compared to
revenues of $59.4 million for the three months ended
September 30, 2007. Average enrollments increased 42.4% to
56,233 for the three months ended September 30, 2008 from
39,493 for the three months ended September 30, 2007. The
increase in average
15
enrollments was primarily attributable to 37.5% enrollment
growth in existing states. New school openings in Hawaii,
Indiana, Oregon, and South Carolina contributed approximately
4.8% to enrollment growth. In new and existing states combined,
high school enrollments contributed approximately 15.3% to
enrollment growth. High school enrollments constituted
approximately 20.9% of our enrollments for the three months
ended September 30, 2008 as compared to 14.5% in the prior
period. Also contributing to the growth in revenues was the
increase in the percentage of enrollments associated with
managed schools, which generate higher revenue per enrollment
than non-managed school enrollments. The percentage of
enrollments associated with managed schools increased to 85.4%
for the three months ended September 30, 2008 from 80.8%
for the three months September 30, 2007.
Instructional Costs and Services
Expenses.
Instructional costs and services expenses for
the three months ended September 30, 2008 were
$54.4 million, representing an increase of
$19.6 million, or 56.5% as compared to instructional costs
and services of $34.8 million for the three months ended
September 30, 2007. This increase was primarily
attributable to a $12.4 million increase in expenses to
operate and manage the schools and a $7.2 million increase
in costs to supply books, educational materials and computers to
students, including depreciation and amortization. As a
percentage of revenues, instructional costs increased to 61.4%
for the three months ended September 30, 2008, as compared
to 58.6% for the three months ended September 30, 2007.
This increase as a percentage of revenues is primarily
attributable to three factors: 1) an increase in the
percentage of managed school enrollments relative to total
enrollments from 80.8% to 85.4%. Managed school enrollments
generate more revenue than those associated with non-managed
schools, but have higher instructional costs as a percentage of
revenues; 2) an increase in the percentage of high school
enrollments relative to total enrollments from 14.5% to 20.9%.
High school enrollments have higher costs as a percentage of
revenues due to increased teacher and related services costs;
and 3) incremental freight charges due to expedited student
materials shipments and fuel surcharges, partially offset by
reduced costs of student materials and computers.
Selling, Administrative, and Other Operating
Expenses.
Selling, administrative, and other operating
expenses for three months ended September 30, 2008 were
$22.8 million, representing an increase of
$6.8 million, or 42.4%, as compared to selling,
administrative and other operating expenses of
$16.0 million for the three months ended September 30,
2007. This increase is primarily attributable to a
$2.3 million increase in student recruiting costs, a
$0.9 million increase in personnel costs primarily due to
increased headcount and a $3.7 million increase in other
expenses. As a percentage of revenues, selling, administrative,
and other operating expenses decreased to 25.8% for the three
months ended September 30, 2008 as compared to 27.0% for
the three months ended September 30, 2007 primarily due to
greater leverage on our corporate overhead and fixed selling
resources. Partially offsetting this leverage were increased
investments in demand generating activities and our
international expansion efforts.
Product Development Expenses.
Product development
expenses for the three months ended September 30, 2008 were
$2.2 million, representing a decrease of $0.3 million,
or 13.1%, as compared to product development expenses of
$2.5 million for the three months ended September 30,
2007. 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 decreased to 2.4% for the three months ended
September 30, 2008 as compared to 4.3% for the three months
ended September 30, 2007 as we were able to leverage these
costs over a larger revenue base generated from the growth in
enrollments.
Interest income, net.
Net interest income for the three
months ended September 30, 2008 was $0.1 million, as
compared to a net interest expense of $0.3 million for the
three months ended September 30, 2007. The change is
primarily due to interest income for the three months ended
September 30, 2008 of $0.3 million generated on our
cash balances, partially offset by interest expense on capital
lease obligations for the three months ended September 30,
2008 of $0.2 million.
Income Taxes.
Income tax expense for the three months
ended September 30, 2008 was $3.8 million, or 40.8% of
income before income taxes, as compared to an income tax benefit
of $7.1 million for the three months ended
September 30, 2007. The income tax benefit for the three
months ended September 30, 2007
16
reflects a $9.7 million tax benefit as we were able to
reverse the valuation allowance on net deferred tax assets
generated by our net operating losses that were fully reserved
in prior periods. Had that reversal not occurred, we would have
recorded an income tax expense of $2.6 million, or 45.1% of
income before income taxes.
Minority interest.
Minority interest for the
three months ended September 30, 2008 was
$0.4 million, reflecting losses attributable to
shareholders in our joint venture. There was no minority
interest for the three months ended September 30, 2007.
Liquidity
and Capital Resources
As of September 30, 2008 and June 30, 2008, we had
cash and cash equivalents of $49.0 million and
$71.7 million, respectively. We financed our operating
activities and capital expenditures during the three months
ended September 30, 2008 primarily through the use of cash
on hand and capital lease financing.
Our cash 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 additional computers to
support increases in virtual school enrollments. We expect that
our capital expenditures in the 12 months ended
September 30, 2009 will be approximately $35 million
to $45 million for student computers, curriculum
development and related systems. We expect to be able to fund
these capital expenditures with cash on hand, cash generated
from operations and capital lease financing. We lease all of our
office facilities. We expect to make future payments on existing
leases from cash generated from operations. Based on our current
operating and capital expenditure forecasts, we believe that the
combination of funds currently available and funds to be
generated from operations will be adequate to finance our
ongoing operations for at least the next twelve months.
Operating
Activities
Net cash used in operating activities for the three months ended
September 30, 2008 and 2007 was $22.6 million and
$2.7 million, respectively.
The overall increase of $19.8 million was primarily due to
a decrease in net income of $6.9 million, a
$24.2 million increase in the amount of cash used to
finance accounts receivable, a $4.5 million increase in the
use of cash in accounts payable, a $3.5 million use of cash
in other assets, and a $2.2 million adjustment for the
excess tax benefit from stock compensation expense. These
amounts were partially offset by a $10.8 million change in
adjustments for deferred income taxes, a $9.3 million
increase in the change in deferred revenues, a $2.2 million
increase in depreciation and amortization and $0.6 million
increase in changes in other assets and liabilities.
The increase in accounts receivable is primarily attributable to
the growth in revenues as well as slower initial payments from
new schools and growth in schools with slower payment trends.
Accounts receivable balances tend to be at the highest levels in
the first quarter as we begin billing for students and many of
our billing arrangements include upfront fees. Deferred revenues
are primarily a result of invoicing upfront fees, not cash
payments. Deferred revenue balances tend to be highest in the
first quarter, when the majority of students enroll, and are
generally amortized over the course of the fiscal year. The
decrease in accounts payable is primarily due to slower payments
in the three months ended September 30, 2007 prior to the
completion of our initial public offering.
17
Investing
Activities
Net cash used in investing activities for the three months ended
September 30, 2008 and 2007 was $6.0 million and
$3.4 million, respectively.
Net cash used in investing activities for the three months ended
September 30, 2008 was primarily due to investment in
capitalized curriculum of $3.6 million, primarily related
to the production of high school courses and elementary school
math courses and $2.4 million in property and equipment. In
addition, we financed purchases of $12.5 million of
computers and software, primarily for use by students, through
capital leases.
Net cash used in investing activities for the three months ended
September 30, 2007 was attributable to investment in
capitalized curriculum of $1.6 million, primarily related
to the development of high school courses and $1.5 million
in property and equipment. In addition, we financed purchases of
$7.0 million of computers and software, primarily for use
by students, through capital leases.
Financing
Activities
Net cash provided by financing activities for the three months
ended September 30, 2008 and 2007 was $5.9 million and
$7.4 million, respectively.
For the three months ended September 30, 2008, net cash
provided by financing activities was primarily due to the
proceeds from the exercise of stock options of $5.3 million
and the excess tax benefit from stock compensation expense of
$2.2 million offset by payments on capital leases and notes
payable totaling $1.6 million. As of September 30,
2008, there were no borrowings outstanding on our
$20 million line of credit.
For the three months ended September 30, 2007, net cash
provided by financing activities was primarily due to net
borrowings on our line of credit of $11.0 million offset by
payments and costs of $3.6 million.
Off
Balance Sheet Arrangements, Contractual Obligations and
Commitments
There were no substantial changes to our guarantee and
indemnification obligations in the three months ended
September 30, 2008.
Our contractual obligations consist primarily of leases for
office space, capital leases for equipment and other operating
leases. The total amount due under contractual obligations
increased during the three months ended September 30, 2008
primarily due to approximately $11.0 million for capital
leases related to student computers.
|
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate Risk
At September 30, 2008 and June 30, 2008, we had cash
and cash equivalents totaling $49.0 million and
$71.7 million. Our excess cash has been invested primarily
in U.S. treasury money market funds although we may also
invest in money market accounts, government securities,
corporate debt securities and similar investments. Future
interest and investment income is subject to the impact of
interest rate changes and we may be subject to changes in the
fair value of our investment portfolio as a result of changes in
interest rates.
Our short-term debt obligations under our revolving credit
facility are subject to interest rate exposure, however as we
had no outstanding balance on this facility as of
September 30, 2008, fluctuations in interest rates would
not have a material impact on our interest expense.
18
Foreign
Currency Exchange Risk
We currently operate in a foreign country, but we do not
transact a material amount of business in a foreign currency and
therefore fluctuations in exchange rates will not have a
material impact on our financial statements. However, we
continue to pursue opportunities in international markets. If we
enter into any material transactions in a foreign currency 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.
|
|
Item 4T.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Exchange Act
Rule 13a-15(f))
that are designed to ensure that information required to be
disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the
SECs rules and forms and that such information is
accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating the disclosure controls
and procedures, management recognizes that any controls and
procedures, no matter how well designed and operated, can
provide only reasonable assurance of achieving the desired
control objectives, and management necessarily was required to
apply its judgment in evaluating the cost benefit relationship
of possible controls and procedures.
We carried out an evaluation, under the supervision and with the
participation of management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures as required by
Rules 13a-15(e)
and
15d-15(e)
of
the Exchange Act. Based on this review, our Chief Executive
Officer and Chief Financial Officer concluded that these
disclosure controls and procedures were effective as of
September 30, 2008 at the reasonable assurance level.
Changes
in Internal Control Over Financial Reporting
During the quarter ended September 30, 2008, there were no
changes in our internal control over financial reporting that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Part II.
Other Information
|
|
Item 1.
|
Legal
Proceedings.
|
In the ordinary conduct of our business, we are subject to
lawsuits and other adjudicative proceedings from time to time,
including but not limited to, employment and contractual
disputes. In addition, a lawsuit has been brought by the
teachers union that seeks the closure of the virtual
public school we serve in Illinois. This lawsuit is described in
the condensed consolidated financial statements and in our
Annual Report .
19
There have been no material changes to the risk factors
disclosed in Risk Factors in Part I,
Item 1A, of our Annual Report on
Form 10-K
for the fiscal year ended June 30, 2008.
|
|
Item 2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
None.
|
|
Item 3.
|
Defaults
Upon Senior Securities.
|
None.
|
|
Item 4.
|
Submission
of Matters to a Vote of Security Holders.
|
None.
|
|
Item 5.
|
Other
Information.
|
None.
(a)
Exhibits.
The exhibits listed on the accompanying Exhibit Index are
filed as part of this report and such Exhibit Index is
incorporated herein by reference.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
K12 INC.
Date: November 13, 2008
Ronald J. Packard
Chief Executive Officer
(Principal Executive Officer and Authorized
Signatory)
John F. Baule
Chief Operating Officer and Chief Financial Officer
(Principal Financial Officer and Authorized
Signatory)
21
EXHIBIT INDEX
|
|
|
|
|
Number
|
|
Description
|
|
|
10
|
.1*
|
|
Form of Indemnification Agreement for Non-Management Directors
and for Officers of K12 Inc.
|
|
31
|
.1*
|
|
Certification of Principal Executive Officer Required Under
Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended.
|
|
31
|
.2*
|
|
Certification of Principal Financial Officer Required Under
Rule 13a-14(a)
of the Securities Exchange Act of 1934, as amended.
|
|
32
|
*
|
|
Certification of Principal Executive Officer and Principal
Financial Officer Required Under
Rule 13a-14(b)
of the Securities Exchange Act of 1934, as amended, and
18 U.S.C. Section 1350.
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Exhibit 10.1
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this
Agreement
) is made as of
(the
Effective Date
) by and between K12 Inc., a Delaware corporation (the
Company
),
and
who serves as a director and/or officer of the Company
(
Indemnitee
).
WHEREAS, highly competent persons have become more reluctant to serve corporations as
directors or officers unless they are provided with adequate protection through insurance and/or
indemnification against the risks of claims being asserted against them arising out of their
service to and activities on behalf of such corporations;
WHEREAS, the board of directors of the Company (the
Board
) has determined that, in
order to help attract and retain qualified individuals as directors and officers, the best
interests of the Company and its investors will be served by attempting to maintain, on an ongoing
basis, at the Companys sole expense, insurance to protect persons serving the Company and its
subsidiaries as directors or officers from certain liabilities. Although the furnishing of such
insurance has been a customary and widespread practice among United States-based corporations and
other business enterprises for many years, the Company believes that, given current market
conditions and trends, such insurance may be available to it in the future only at higher premiums
and with more exclusions. At the same time, directors and officers in service to corporations or
business enterprises are being increasingly subjected to expensive and time-consuming litigation;
WHEREAS, the Board has determined that, in order to help attract and retain qualified
individuals as directors and officers, the best interests of the Company and its investors will be
served by assuring such individuals that the Company will indemnify them to the maximum extent
permitted by law;
WHEREAS, the Third Amended and Restated Certificate of Incorporation (the
Certificate of
Incorporation
) of the Company permit, and the Amended and Restated Bylaws (the
Bylaws
) of the Company require, indemnification of the officers and directors of the
Company, and Indemnitee may also be entitled to indemnification pursuant to the Delaware General
Corporation Law (
DGCL
); and
WHEREAS, the Certificate of Incorporation, the Bylaws and the DGCL expressly provide that the
indemnification provisions set forth therein are not exclusive, and thereby contemplate that
contracts may be entered into between the Company and its directors and officers with respect to
indemnification and the advancement of defense costs;
WHEREAS, the Board has determined that the increased difficulty in attracting and retaining
such persons is detrimental to the best interests of the Companys investors and that the Company
should act to assure such persons that there will be increased certainty of such protection in the
future;
WHEREAS, it therefore is reasonable, prudent and necessary for the Company contractually to
obligate itself to indemnify, and to advance defense costs on behalf of, such
persons to the fullest extent permitted by applicable law so that they will serve or continue
to serve the Company free from undue concern that they will not be so indemnified;
WHEREAS, this Agreement is a supplement to and in furtherance of the Certificate of
Incorporation, Bylaws and any resolutions adopted pursuant thereto, and shall not be deemed a
substitute therefor, nor shall it be deemed to diminish or abrogate any rights of Indemnitee
thereunder;
WHEREAS, the Board recognizes that the Indemnitee does not regard the protection available
under the Companys Certificate of Incorporation, the Bylaws and insurance program as adequate in
the present circumstances, and may not be willing to serve or continue to serve as a director,
officer or in such other capacity as the Company may request without adequate protection, and the
Company desires Indemnitee to serve in such capacity; and
WHEREAS, Indemnitee is willing to serve, and continue to serve, as a member of the Board (and
any committee thereof) or as an officer of the Company, on the condition that he or she be
indemnified as provided for herein.
NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the
Company and Indemnitee do hereby covenant and agree as follows:
1.
Services to the Company.
Indemnitee will serve or continue to serve, at the will of the
Company, as a director or officer of the Company for so long as Indemnitee is duly elected or
appointed or until Indemnitee tenders his or her resignation. This Agreement shall not serve as a
binding commitment on the part of Indemnitee to continue to serve in such capacity, or on the part
of the Company to cause him or her to be nominated to successive terms as a director or officer or
to not otherwise be removed for cause or without cause, as permitted under law.
2.
Definitions.
As used in this Agreement:
(a)
Beneficial Owner
shall have the meaning given to such term in Rule 13d-3 issued
under the Exchange Act (as defined below); provided, however, that Beneficial Owner shall exclude
any Person becoming a Beneficial Owner by reason of the stockholders of the Company approving a
merger of the Company with another entity.
(b) A
Change in Control
shall be deemed to occur upon the earliest to occur after
the date of this Agreement of any of the following events:
(i)
Acquisition of Stock by Third Party
. Any Person (as defined below, but excluding
any subsidiary or employee benefit plan of the Company), subsequent to the date of this Agreement,
becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing
fifty percent (50%) or more of the combined voting power of the Companys then outstanding
securities entitled to vote generally in the election of directors, unless (1) the change in the
relative Beneficial Ownership of the Companys securities by any Person results solely from a
reduction in the aggregate number of outstanding shares of securities entitled to vote generally in
the election of directors, or (2) such acquisition was approved in advance by the Continuing
Directors (as defined below) and such acquisition would not constitute a Change in Control under
part (iii) of this definition;
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(ii)
Change in Board of Directors
. Individuals who, as of the date hereof, constitute
the Board, and any new director whose election by the Board or nomination for election by the
Companys stockholders was approved by a vote of at least two thirds of the directors then still in
office who were directors on the date hereof or whose election for nomination for election was
previously so approved (collectively, the
Continuing Directors
), cease for any reason to
constitute at least a majority of the members of the Board;
(iii)
Corporate Transactions
. The effective date of a reorganization, merger or
consolidation of the Company (a
Business Combination
), in each case, unless, following
such Business Combination: (1) all or substantially all of the individuals and entities who were
the Beneficial Owners of securities entitled to vote generally in the election of directors
immediately prior to such Business Combination beneficially own, directly or indirectly, more than
fifty one percent (51%) of the combined voting power of the then outstanding securities entitled to
vote generally in the election of directors of the Company resulting from such Business Combination
(including, without limitation, a corporation which as a result of such transaction owns the
Company or all or substantially all of the Companys assets either directly or through one or more
Subsidiaries) in substantially the same proportions as their ownership, immediately prior to such
Business Combination, of the securities entitled to vote generally in the election of directors;
(2) no Person (excluding any corporation resulting from such Business Combination) is the
Beneficial Owner, directly or indirectly, of fifteen percent (15%) or more of the combined voting
power of the then outstanding securities entitled to vote generally in the election of directors of
such corporation except to the extent that such ownership existed prior to the Business
Combination; and (3) at least a majority of the Board resulting from such Business Combination were
Continuing Directors at the time of the execution of the initial agreement, or of the action of the
Board, providing for such Business Combination;
(iv)
Liquidation
. The approval by the stockholders of the Company of a complete
liquidation of the Company or an agreement or series of agreements for the sale or disposition by
the Company of all or substantially all of the Companys assets, other than factoring the Companys
current receivables or escrows due (or, if such approval is not required, the decision by the Board
to proceed with such a liquidation, sale, or disposition in one transaction or a series of related
transactions); or
(v)
Other Events
. There occurs any other event of a nature that would be required to
be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any
similar item on any similar schedule or form) promulgated under the Exchange Act, whether or not
the Company is then subject to such reporting requirement.
(c)
Corporate Status
shall describe the status of a person who is or was a director,
officer, trustee, partner, member, fiduciary, employee or agent of the Company or of any other
Enterprise (as defined below), which such person is or was serving at the request of the Company.
(d)
Disinterested Director
shall mean a director of the Company who is not and was
not a party to the Proceeding (as defined below) in respect of which indemnification is sought by
Indemnitee.
3
(e)
Enterprise
shall mean any corporation, limited liability company, partnership,
joint venture, trust, employee benefit plan or other enterprise of which Indemnitee is or was
serving at the request of the Company as a director, officer, trustee, administrator, partner,
member, fiduciary, employee or agent.
(f)
Exchange Act
shall mean the Securities Exchange Act of 1934, as amended.
(g)
Expenses
shall include all reasonable attorneys fees, retainers, court costs,
transcript costs, fees of experts and accountants, witness fees, travel expenses, duplicating
costs, printing and binding costs, telephone charges, postage, delivery service fees, and all other
disbursements or expenses of the types and amounts customarily incurred in connection with
prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a
witness in, or otherwise participating in, a Proceeding. Expenses also shall include costs
incurred in connection with any appeal resulting from any Proceeding, including, without
limitation, the premium, security for, and other costs relating to any bond, supersedeas bond, or
other appeal bond or its equivalent. Expenses, however, shall not include amounts paid in
settlement by Indemnitee or the amount of judgments or fines against Indemnitee.
(h)
Independent Counsel
shall mean a law firm, or a member of a law firm, that is
experienced in matters of corporation law and neither presently is, nor in the past five (5) years
has been, retained to represent: (i) the Company or Indemnitee in any matter material to either
such party (other than with respect to matters concerning the Indemnitee under this Agreement, or
other indemnitees under similar indemnification agreements), or (ii) any other party to the
Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing,
the term Independent Counsel shall not include any person who, under the applicable standards of
professional conduct then prevailing, would have a conflict of interest in representing either the
Company or Indemnitee in an action to determine Indemnitees rights under this Agreement.
(i) References to
fines
shall include any excise tax assessed on a person with
respect to any employee benefit plan pursuant to applicable law.
(j) References to
serving at the request of the Company
shall include any service
provided at the request of the Company as a director, officer, trustee, administrator, partner,
member, fiduciary, employee or agent of the Company which imposes duties on, or involves services
by, such director, officer, trustee, administrator, partner, member, fiduciary, employee or agent
with respect to an employee benefit plan, its participants or beneficiaries.
(k)
Person
shall have the meaning set forth in Sections 13(d) and 14(d) of the
Exchange Act; provided, however, that Person shall exclude (i) the Company and (ii) any trustee or
other fiduciary holding securities under an employee benefit plan of the Company or a subsidiary of
the Company.
(l) Any action taken or omitted to be taken by a person for a purpose which he or she
reasonably believed to be in the interests of the participants and beneficiaries of an employee
benefit plan shall be deemed to have been taken in
good faith
and for a purpose
4
which is
not opposed to the best interests of the Company
, as such terms are
referred to in this Agreement and used in the DGCL.
(m) The term
Proceeding
shall include any threatened, pending or completed action,
suit, arbitration, alternate dispute resolution mechanism, investigation, inquiry, administrative
hearing or any other actual, threatened or completed proceeding, whether brought in the right of
the Company or otherwise and whether of a civil, criminal, administrative or investigative nature,
including any related appeal, in which Indemnitee was, is or will be involved as a party or witness
or otherwise by reason of the fact that Indemnitee is or was a director, officer, trustee,
administrator, partner, member, fiduciary, employee or agent of the Company, by reason of any
action taken or not taken by him or her while acting as director, officer, trustee, administrator,
partner, member, fiduciary, employee or agent of the Company, or by reason of the fact that he or
she is or was serving at the request of the Company as a director, officer, trustee, administrator,
partner, member, fiduciary, employee or agent of any other Enterprise, in each case whether or not
serving in such capacity at the time any liability or expense is incurred for which
indemnification, reimbursement, or advancement of expenses can be provided under this Agreement.
3.
Indemnity in Third-Party Proceedings.
The Company shall indemnify and hold harmless Indemnitee
in accordance with the provisions of this Section 3 if Indemnitee is made, or is threatened to be
made, a party to or a participant in (as a witness or otherwise) any Proceeding, other than a
Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this
Section 3, Indemnitee shall be indemnified and held harmless against all judgments, fines,
penalties, amounts paid in settlement, if such settlement is approved in writing in advance by the
Company, which approval shall not be unreasonably withheld, (including, without limitation, all
interest, assessments and other charges paid or payable in connection with or in respect of any of
the foregoing) (collectively, Losses) and Expenses actually and reasonably incurred by Indemnitee
or on his or her behalf in connection with such Proceeding or any action, discovery event, claim,
issue or matter therein or related thereto, if Indemnitee acted in good faith, for a purpose which
he or she reasonably believed to be in or not opposed to the best interests of the Company and, in
the case of a criminal Proceeding, in addition, had no reasonable cause to believe that his or her
conduct was unlawful.
4.
Indemnity in Proceedings by or in the Right of the Company.
The Company shall indemnify
Indemnitee in accordance with the provisions of this Section 4 if Indemnitee is made, or is
threatened to be made, a party to or a participant in (as a witness or otherwise) any Proceeding by
or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 4,
Indemnitee shall be indemnified and held harmless against all Expenses actually and reasonably
incurred by him or her or on his or her behalf in connection with the defense or settlement of such
Proceeding or any action, discovery event, claim, issue or matter therein or related thereto, if
Indemnitee acted in good faith, for a purpose which he or she reasonably believed to be in or not
opposed to the best interests of the Company. No indemnification, however, shall be made under
this Section 4 in respect of any claim, issue or matter as to which Indemnitee shall have been
adjudged to be liable to the Company, unless and only to the extent that the court in which the
Proceeding was brought or, if no Proceeding was brought in a court, any court of competent
jurisdiction, determines upon application that, in view of all the
5
circumstances of the case, Indemnitee fairly and reasonably is entitled to indemnification for such
portion of the Expenses as the court deems proper.
5.
Indemnification for Expenses Where Indemnitee is Wholly or Partly Successful.
Notwithstanding
and in addition to the provisions of Section 3 and 4 of this Agreement, to the extent that
Indemnitee is a party to a Proceeding and is successful, on the merits or otherwise, in the defense
of any claim, issue or matter therein, the Company shall indemnify and hold harmless Indemnitee
against all Expenses actually and reasonably incurred by him or her or on his or her behalf in
connection with such successful defense. For the avoidance of doubt, if Indemnitee is not wholly
successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but
less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee
against all Expenses actually and reasonably incurred by him or her or on his or her behalf in
connection with each successfully resolved claim, issue or matter. For purposes of this Section 5,
and without limitation, the termination of any claim, issue or matter in such a Proceeding by
withdrawal or dismissal, with or without prejudice, shall be deemed to be a successful result as to
such claim, issue or matter.
6.
Indemnification for Expenses of a Witness.
To the extent that Indemnitee is, by reason of his
or her Corporate Status, a witness in or otherwise incurs Expenses in connection with any
Proceeding to which Indemnitee is not a party, he or she shall be indemnified and held harmless by
the Company against all Expenses actually and reasonably incurred by him or her or on his or her
behalf in connection therewith.
7.
Additional Indemnification.
(a) Notwithstanding any limitation in Sections 3, 4, or 5 hereof or in Section 145 of the DGCL
or other applicable statutory provision, the Company shall indemnify Indemnitee to the fullest
extent permitted by law if Indemnitee is made, or is threatened to be made, a party to any
Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its
favor) against all Losses and Expenses actually and reasonably incurred by Indemnitee in connection
with the Proceeding, provided that no indemnification shall be made under this Section 7(a) on
account of Indemnitees conduct which constitutes a breach of Indemnitees duty of loyalty to the
Company or its investors or is an act or omission not in good faith or which involves intentional
misconduct or a knowing violation of the law.
(b) For purposes of Sections 7(a), the meaning of the phrase
to the fullest extent
permitted by law
shall include, but not be limited to:
(i) to the fullest extent authorized or permitted by the then-applicable provisions of the
DGCL or other applicable statutory provision, that authorize or contemplate indemnification by
agreement, or the corresponding provision of any amendment to or replacement of the DGCL or other
applicable statutory provision, and
(ii) to the fullest extent authorized or permitted by any amendments to or replacements of the
DGCL or other applicable statutory provision, adopted after the date of this Agreement that
increase the extent to which a corporation limited liability company or
6
partnership, as applicable, may indemnify its officers, directors or persons holding similar
fiduciary responsibilities.
(c) Indemnitee shall be entitled to the prompt payment of all Expenses reasonably incurred in
enforcing successfully (fully or partially) this Agreement.
8.
Contribution.
To the fullest extent permissible under applicable law, if the indemnification
provided for in this Agreement is unavailable to Indemnitee in whole or in part for any reason
whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount
incurred by Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or to
be paid in settlement and/or for Expenses, in connection with any claim relating to an
indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in
light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits
received by the Company, on the one hand, and Indemnitee, on the other, as a result of the event(s)
and/or transaction(s) giving cause to such Proceeding; and/or (ii) the relative fault of the
Company, on the one hand (and its directors, officers, employees and agents) and Indemnitee, on the
other, in connection with such event(s) and/or transaction(s).
9.
Exclusions.
Notwithstanding any provision in this Agreement, the Company shall not be obligated
under this Agreement to make any indemnity in connection with any claim made against Indemnitee:
(a) for which payment actually has been received by or on behalf of Indemnitee under any
insurance policy or other indemnity provision, except with respect to any excess beyond the amount
actually received under such insurance policy or other indemnity provision;
(b) for an accounting of profits made from the purchase and sale (or sale and purchase) by
Indemnitee of securities of the Company or any subsidiary of the Company within the meaning of
Section 16(b) of the Exchange Act, as amended, or similar provisions of state blue sky law, state
statutory law or common law;
(c) prior to a Change in Control, in connection with any Proceeding (or any part of any
Proceeding) initiated by Indemnitee, including any Proceeding (or any part of any Proceeding)
initiated by Indemnitee against the Company (other than any Proceeding referred to in Sections
14(d) or (e) below or any other Proceeding commenced to recover any Expenses referred to in Section
7(c) above) or its directors, officers, employees or other indemnitees, unless (i) the Board
authorized the Proceeding (or any part of any Proceeding) prior to its initiation or (ii) the
Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the
Company under applicable law; or
(d) if the funds at issue were paid pursuant to a settlement approved by a court and
indemnification would be inconsistent with any condition with respect to indemnification expressly
imposed by the court in approving the settlement.
7
10.
Advances of Expenses; Defense of Claim.
(a) The Company shall advance pursuant to this Section 10(a) the Expenses incurred by
Indemnitee in connection with any Proceeding within thirty (30) days after the receipt by the
Company of a written statement or statements requesting such advances from time to time, whether
prior to or after final disposition of any Proceeding. Advances shall be unsecured and interest
free. Advances shall be made without regard to Indemnitees ability to repay such advances.
Advances shall include any and all reasonable Expenses incurred pursuing an action to enforce such
right to receive advances. Notwithstanding any provision of this Agreement to the contrary, the
Indemnitee shall be entitled to advances of Expenses incurred by him or her or on his or her behalf
in connection with a Proceeding that Indemnitee claims is covered by Sections 3 and 4 hereof, prior
to a final determination of eligibility for indemnification and prior to the final disposition of
the Proceeding, upon the execution and delivery to the Company of an undertaking by or on behalf of
the Indemnitee providing that the Indemnitee will repay such advances to the extent that it
ultimately is determined that Indemnitee is not entitled to be indemnified by the Company. This
Section 10(a) shall not apply to any claim made by Indemnitee for which indemnity is excluded
pursuant to Section 9.
(b) The Company will be entitled to participate in the Proceeding at its own expense.
(c) The Company shall not settle any action, claim or Proceeding (in whole or in part) which
would impose any Expense, judgment, fine, penalty or limitation on the Indemnitee without the
Indemnitees prior written consent, which consent shall not be unreasonably withheld.
11.
Procedure for Notification and Application for Indemnification.
(a) Within sixty (60) days after the actual receipt by Indemnitee of written notice that he or
she is a party to or is requested to be a participant in (as a witness or otherwise) any
Proceeding, Indemnitee shall submit to the Company a written notice identifying the Proceeding.
The failure by the Indemnitee to notify the Company within such sixty (60) day period will not
relieve the Company from any liability which it may have to Indemnitee (i) other than under this
Agreement, and (ii) under this Agreement, provided that if the Company can establish that such
failure to notify the Company in a timely manner resulted in actual prejudice to the Company, then
the Company will be relieved from liability under this Agreement only to the extent of such actual
prejudice.
(b) Indemnitee shall at the time of giving such notice pursuant to Section 11(a) or thereafter
deliver to the Company a written application for indemnification. Such application may be
delivered at such time as Indemnitee deems appropriate in his or her sole discretion. Following
delivery of such a written application for indemnification by Indemnitee, the Indemnitees
entitlement to indemnification shall be determined promptly according to Section 12(a) of this
Agreement and the outcome of such determination shall be reported to Indemnitee in writing within
forty-five (45) days of the submission of such application.
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12.
Procedure Upon Application for Indemnification.
(a) Upon written application by Indemnitee for indemnification pursuant to Section 11(b) or
written statement by Indemnitee for advances of Expenses pursuant to Section 10(a), a determination
with respect to Indemnitees entitlement thereto pursuant to the mandatory terms of this Agreement,
pursuant to statute, or pursuant to other sources of right to indemnity, shall be made in the
specific case: (i) by a majority vote of the Disinterested Directors, whether or not such
directors otherwise would constitute a quorum of the Board; (ii) by a committee of Disinterested
Directors designated by a majority vote of such directors, whether or not such directors would
otherwise constitute a quorum of the Board, (iii) if there are no Disinterested Directors, by
Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to
Indemnitee or (iv) by the stockholders of the Company. Indemnitee shall reasonably cooperate with
the person, persons or entity making the determination with respect to Indemnitees entitlement to
indemnification, including providing to such person, persons or entity upon reasonable advance
request any documentation or information which is not privileged or otherwise protected from
disclosure and which is reasonably available to Indemnitee and reasonably necessary to such
determination. Any costs or Expenses (including attorneys fees and disbursements) incurred by
Indemnitee in so cooperating with the person, persons or entity making such determination shall be
borne by the Company (irrespective of the determination as to Indemnitees entitlement to
indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless from any
such costs and Expenses.
(b) If it is determined that Indemnitee is entitled to the indemnification requested by the
Indemnitee in a written application submitted to the Company pursuant to Section 11(b), payment to
Indemnitee shall be made within ten (10) days after such determination. All advances of Expenses
requested in a written statement by Indemnitee pursuant to Section 10(a) prior to a final
determination of eligibility for indemnification shall be paid in accordance with Section 10.
(c) In the event the determination of entitlement to indemnification or advancement of
Expenses is to be made by Independent Counsel pursuant to Section 12(a) hereof, the Independent
Counsel shall be selected as provided in this Section 12(c). If a Change in Control shall not have
occurred, the Independent Counsel shall be selected by the Board, and the Company shall give
written notice to Indemnitee advising him or her of the identity of the Independent Counsel so
selected. If a Change in Control shall have occurred, the Independent Counsel shall be selected by
Indemnitee (unless Indemnitee shall request that such selection be made by the Board, in which
event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company
advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or
the Company, as the case may be, may, within ten (10) days after such written notice of selection
shall have been received, deliver to the Company or to Indemnitee, as the case may be, a written
objection to such selection; provided, however, that such objection may be asserted only on the
ground that the Independent Counsel so selected does not meet the requirements of Independent
Counsel as defined in Section 2 of this Agreement, and the objection shall set forth with
particularity the factual basis of such assertion. Absent a proper and timely objection, the
person so selected shall act as Independent Counsel. If a written objection is made and
substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and
until such objection is withdrawn or a court of competent
9
jurisdiction has determined that such
objection is without merit. If, within twenty (20) days after submission by Indemnitee of a
written request for advancement of Expenses or indemnification
pursuant to Section 10(a) or 11(b) hereof, no Independent Counsel shall have been selected and
not objected to, either the Company or Indemnitee may petition a court of competent jurisdiction
for resolution of any objection which shall have been made by the Company or Indemnitee to the
others selection of Independent Counsel and/or for the appointment as Independent Counsel of a
person selected by the court or by such other person as the court shall designate, and the person
with respect to whom all objections are so resolved or the person so appointed shall act as
Independent Counsel under Section 12(a) hereof.
(d) The Company shall pay the reasonable fees and expenses of the Independent Counsel and to
fully indemnify such Independent Counsel against any and all Expenses, claims, liabilities and
damages arising out of or relating to this Agreement or its engagement pursuant hereto.
(e) Upon the due commencement of any judicial proceeding or arbitration pursuant to Section
14(a) of this Agreement, any Independent Counsel shall be discharged and relieved of any further
responsibility in such capacity (subject to the applicable standards of professional conduct then
prevailing).
13.
Presumptions and Effect of Certain Proceedings.
(a)
Presumption in Favor of Indemnitee
. In making a determination with respect to
entitlement to indemnification or advancement of Expenses hereunder, the person or persons or
entity making such determination shall presume that Indemnitee is entitled to indemnification or
advancement of Expenses under this Agreement if Indemnitee has submitted an application for
advancement of Expenses in accordance with Section 10(a) of this Agreement or indemnification in
accordance with Section 11(b) of this Agreement, and the Company shall have the burden of proof to
overcome that presumption.
(b)
No Presumption Against Indemnitee
. Neither the failure of the Company (including
by its directors or Independent Counsel) to have made a determination prior to the commencement of
any action pursuant to this Agreement nor an actual determination by the Company (including by its
directors or Independent Counsel) that Indemnitee has not met the applicable standard of conduct
for indemnification shall be a defense to the action or create a presumption that Indemnitee has
not met the applicable standard of conduct.
(c)
Sixty Day Period for Determination
. If the person, persons or entity empowered or
selected under Section 12 of this Agreement to determine whether Indemnitee is entitled to
indemnification or advancement of Expenses shall not have made a determination within sixty (60)
days after receipt by the Company of an application therefor, a determination of entitlement to
indemnification or advancement of Expenses shall be deemed to have been made and Indemnitee shall
be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or
an omission of a material fact necessary to make Indemnitees statement not materially misleading,
in connection with the application for indemnification or advancement of Expenses, or (ii) a
prohibition of such indemnification under applicable law; provided, however, that such sixty (60)
day period may be extended for a reasonable time, not to exceed an
10
additional thirty (30) days, if
the person, persons or entity making the determination with respect
to entitlement to indemnification in good faith requires such additional time for the
obtaining or evaluating of documentation and/or information relating thereto.
(d)
No Presumption from Termination of a Proceeding
. The termination of any
Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction,
or upon a plea of nolo contendere, or its equivalent, shall not of itself adversely affect the
right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good
faith and for a purpose which he or she reasonably believed to be in or not opposed to the best
interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had
reasonable cause to believe that his or her conduct was unlawful.
(e)
Reliance as Safe Harbor
. For purposes of any determination of good faith,
Indemnitee shall be deemed to have acted in good faith if Indemnitees action or failure to act is
based on the records or books of account of the Company or any Enterprise other than the Company,
including financial statements, or on information supplied to Indemnitee by the officers of the
Company or any Enterprise other than the Company in the course of their duties, or on the advice of
legal counsel for the Company or any Enterprise other than the Company or on information or records
given or reports made to the Company or any Enterprise other than the Company by an independent
certified public accountant or by an appraiser or other expert selected by the Company or any
Enterprise other than the Company, except if the Indemnitee knew or had reason to know that such
records or books of account of the Company, information supplied by the officers of the Company,
advice of legal counsel or information or records given or reports made by an independent certified
public accountant or by an appraiser or other expert were materially false or materially
inaccurate. The provisions of this Section 13(e) shall not be deemed to be exclusive or to limit
in any way the other circumstances in which the Indemnitee may be deemed or found to have met any
applicable standard of conduct.
(f)
Actions of Others
. The knowledge and/or actions, or failure to act, of any other
director, officer, trustee, administrator, partner, member, fiduciary, employee or agent of the
Company or any Enterprise other than the Company shall not be imputed to Indemnitee for purposes of
determining the right to indemnification under this Agreement.
14.
Remedies of Indemnitee.
(a)
Adjudication/Arbitration
. In the event that (i) a determination is made pursuant
to Section 12 of this Agreement that Indemnitee is not entitled to indemnification under this
Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 10 of this
Agreement, (iii) subject to Section 13(b), no determination of entitlement to indemnification shall
have been made pursuant to Section 12(a) of this Agreement within sixty (60) days after receipt by
the Company of the application for indemnification, or (iv) payment of indemnification is not made
pursuant to Sections 3, 4, 5, 6, 7 and 12(b) of this Agreement within ten (10) days after a
determination has been made that Indemnitee is entitled to indemnification, or after receipt by the
Company of a written request for any additional monies owed with respect to a Proceeding as to
which it already has been determined that Indemnitee is entitled to indemnification, Indemnitee
shall be entitled to an adjudication by a court of his or her entitlement to such indemnification
or advancement of Expenses. Alternatively, Indemnitee, at
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his or her option, may seek an award in
arbitration to be conducted by a single arbitrator pursuant
to the Commercial Arbitration Rules of the American Arbitration Association. The Company
shall not oppose Indemnitees right to seek any such adjudication or award in arbitration.
(b)
Indemnitee Not Prejudiced by Prior Adverse Determination
. In the event that a
determination shall have been made pursuant to Section 12(a) of this Agreement that Indemnitee is
not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this
Section 14 shall be conducted in all respects as a
de novo
trial, or arbitration, on the
merits, and Indemnitee shall not be prejudiced by reason of the prior adverse determination. In
any judicial proceeding or arbitration commenced pursuant to this Section 14, the Company shall
have the burden of proving Indemnitee is not entitled to indemnification or advancement of
Expenses, as the case may be.
(c)
Company Bound by Prior Determination
. If a determination shall have been made
pursuant to Section 12(a) of this Agreement that Indemnitee is entitled to indemnification, the
Company shall be bound by such determination in any judicial proceeding or arbitration commenced
pursuant to this Section 14, absent (i) a misstatement by Indemnitee of a material fact, or an
omission of a material fact necessary to make Indemnitees statement not materially misleading, in
connection with the application for indemnification, or (ii) a prohibition of such indemnification
under applicable law.
(d)
Expenses
. In the event that Indemnitee, pursuant to this Section 14, seeks a
judicial adjudication of or an award in arbitration to enforce his or her rights under, or to
recover damages for breach of, this Agreement, Indemnitee shall be entitled to recover from the
Company, and shall be jointly and severally indemnified by the Company against, any and all
Expenses actually and reasonably incurred by him or her in such judicial adjudication or
arbitration if it shall be determined in such judicial adjudication or arbitration that Indemnitee
is entitled to receive all or part of the indemnification or advancement of Expenses sought which
the Company had disputed prior to the commencement of the judicial proceeding or arbitration.
(e)
Advances of Expenses
. If requested by Indemnitee, the Company shall (within ten
(10) days after receipt by the Company of a written request therefore) advance to Indemnitee the
Expenses which are incurred by Indemnitee in connection with any judicial proceeding or arbitration
brought by Indemnitee for indemnification or advance of Expenses from the Company under this
Agreement or under any directors and officers liability insurance policies maintained by the
Company, if the Indemnitee has submitted an undertaking to repay such Expenses if Indemnitee
ultimately is determined to not be entitled to such indemnification, advancement of Expenses or
insurance recovery, as the case may be. The Indemnitees financial ability to repay any such
advances shall not be a basis for the Company to decline to make such advances.
(f)
Precluded Assertions by the Company
. The Company shall be precluded from
asserting in any judicial proceeding or arbitration commenced pursuant to this Section 14 that the
procedures and presumptions of this Agreement are not valid, binding and enforceable and shall
stipulate in any such court or before any such arbitrator that the Company is bound by all the
provisions of this Agreement.
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15.
Non-exclusivity; Survival of Rights; Insurance; Subrogation.
(a)
Rights of Indemnitee Not Exclusive
. The rights of indemnification and to receive
advancement of Expenses as provided by this Agreement shall not be deemed exclusive of any other
rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of
Incorporation, or the Bylaws, any agreement, vote of investors or a resolution of directors,
members, partners, or otherwise. No right or remedy herein conferred by this Agreement is intended
to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative
and in addition to every other right and remedy given hereunder or now or hereafter existing at law
or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or
otherwise, shall not prevent the concurrent or subsequent assertion or employment of any other
right or remedy.
(b)
Survival of Rights
. No amendment, alteration or repeal of this Agreement or of
any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in
respect of any action taken or omitted by such Indemnitee in his or her Corporate Status prior to
such amendment, alteration or repeal.
(c)
Change of Law
. To the extent that a change in Delaware law, whether by statute or
judicial decision, permits greater indemnification or advancement of Expenses than would be
afforded currently under the Certificate of Incorporation or the Bylaws, or this Agreement, it is
the intent of the parties hereto that Indemnitee shall enjoy and be conferred by this Agreement the
greater benefits so afforded by such change.
(d)
Insurance
. To the extent that the Company maintains an insurance policy or
policies providing liability insurance for directors, officers, trustees, administrators partners,
members, fiduciaries, employees, or agents of the Company or of any other Enterprise which such
person serves at the request of the Company, Indemnitee shall be covered by such policy or policies
in accordance with its or their terms to the maximum extent of the coverage available for any such
director, trustee, partner, member, fiduciary, officer, employee or agent under such policy or
policies. If, at the time the Company receives notice from any source of a Proceeding as to which
Indemnitee is a party or a participant (as a witness or otherwise) the Company has director and
officer liability insurance in effect that covers Indemnitee, the Company shall give prompt notice
of such Proceeding to the insurers in accordance with the procedures set forth in the respective
policies. The Company shall thereafter take all necessary or desirable action to cause such
insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Proceeding in
accordance with the terms of such policies.
(e)
Subrogation
. In the event of any payment under this Agreement, the Company, shall
be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who
shall execute all papers required and take all action necessary to secure such rights, including
execution of such documents as are necessary to enable the Company to bring suit to enforce such
rights.
(f)
Other Payments
. The Company shall not be liable under this Agreement to make any
payment of amounts otherwise indemnifiable (or for which advancement is
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provided hereunder) if and
to the extent that Indemnitee has otherwise actually received such payment under any insurance
policy, contract, agreement or otherwise.
(g)
Other Indemnification
. The Companys obligation to indemnify or advance Expenses
hereunder to Indemnitee who is or was serving at the request of the Company as a director, officer,
trustee, administrator partner, member, fiduciary, employee or agent of any other Enterprise shall
be reduced by any amount Indemnitee has actually received as indemnification or advancement of
expenses from such Enterprise.
16.
Duration of Agreement.
This Agreement shall continue until and terminate upon the later of:
(a) ten (10) years after the date that Indemnitee shall have ceased to serve as any of the
following: a director, officer, agent or employee of the Company or as a director, officer,
trustee, administrator partner, member, fiduciary, employee or agent of any other corporation,
partnership, joint venture, trust, employee benefit plan or other Enterprise which Indemnitee
served at the request of the Company; or (b) one (1) year after the final termination of any
Proceeding (including after the expiration of any rights of appeal) then pending in respect of
which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of
any proceeding commenced by Indemnitee pursuant to Section 14 of this Agreement (including any
rights of appeal of any Proceeding commenced pursuant to Section 14). This Agreement shall be
binding upon the Company and its respective successors and assigns and shall inure to the benefit
of Indemnitee and his or her heirs, executors and administrators.
17.
Severability.
If any provision or provisions of this Agreement shall be held to be invalid,
illegal or unenforceable for any reason whatsoever: (a) the validity, legality and enforceability
of the remaining provisions of this Agreement (including, without limitation, each portion of any
Section of this Agreement containing any such provision held to be invalid, illegal or
unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be
affected or impaired thereby and shall remain enforceable to the fullest extent permitted by law;
(b) such provision or provisions shall be deemed reformed to the extent necessary to conform to
applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the
fullest extent possible, the provisions of this Agreement (including, without limitation, each
portion of any Section of this Agreement containing any such provision held to be invalid, illegal
or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to
give effect to the intent manifested thereby.
18.
Enforcement.
(a) The Company expressly confirms and agrees that it has entered into this Agreement and
assumed the obligations imposed on it hereby in order to induce Indemnitee to serve, or to continue
to serve, as a director or officer of the Company, and the Company acknowledges that Indemnitee is
relying upon this Agreement in serving or continuing to serve as a director or officer of the
Company.
(b) This Agreement constitutes the entire agreement between the parties hereto with respect to
the subject matter hereof and supersedes all prior agreements and understandings, oral, written and
implied, between the parties hereto with respect to the subject matter hereof.
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19.
Modification and Waiver.
No supplement, modification or amendment of this Agreement shall be
binding unless executed in writing by each of the parties hereto. No waiver
of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any
other provisions of this Agreement nor shall any waiver constitute a continuing waiver.
20.
Successors and Binding Agreement.
(a) The Company will require any successor (whether direct or indirect, by purchase, merger,
consolidation, reorganization or otherwise) and any acquiror of all or substantially all of the
business or assets of the Company by agreement in form and substance reasonably satisfactory to
Indemnitee and/or his or her counsel, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent the Company would be required to perform it if no such
succession had taken place.
(b) This Agreement will be binding upon and inure to the benefit of the Company and any
successor to the Company, including, without limitation, any person acquiring directly or
indirectly all or substantially all of the business or assets of the Company whether by purchase,
merger, consolidation, reorganization or otherwise (and such successor will thereafter be deemed
the Company for purposes of this Agreement), but will not otherwise be assignable or delegatable
by the Company.
(c) This Agreement will inure to the benefit of and be enforceable by the Indemnitees
personal or legal representatives, executors, administrators, successors, heirs, distributees,
legatees and other successors.
(d) This Agreement is personal in nature and neither of the parties hereto will, without the
consent of the other, assign or delegate this Agreement or any rights or obligations hereunder
except as expressly provided in Sections 20(a), (b) and (c). Without limiting the generality or
effect of the foregoing, Indemnitees right to receive payments hereunder will not be assignable,
whether by pledge, creation of a security interest or otherwise, other than by a transfer by the
Indemnitees will, devise, a grantors trust instrument under which the Indemnitee or his estate is
the sole beneficiary, or by the laws of descent and distribution, and, in the event of any
attempted assignment or transfer contrary to this Section 20(d), the Company will have no liability
to pay any amount so attempted to be assigned or transferred.
21.
Notices.
All notices, requests, demands and other communications under this Agreement shall be
in writing and shall be deemed to have been duly given if: (i) delivered by hand and receipted for
by the party to whom said notice or other communication shall have been directed, on the date of
such receipt, or (ii) mailed by certified or registered mail with postage prepaid, on the third
business day after the date on which it is so mailed:
(a) If to Indemnitee, at the address indicated on the signature page of this Agreement, or
such other address as Indemnitee subsequently shall provide in writing to the Company.
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(b) If to the Company to:
K12 Inc.
2300 Corporate Park Drive
Herndon, Virginia 20171
Attention: General Counsel
or to any other address as may have been furnished to Indemnitee in writing by the Company.
22.
Applicable Law and Consent to Jurisdiction.
This Agreement and the legal relations among the
parties shall be governed by, and construed and enforced in accordance with, the laws of the State
of Delaware, without regard to its conflict of laws, principles or rules. Except with respect to
any arbitration commenced by Indemnitee pursuant to Section 14 of this Agreement, the Company and
Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising
out of or in connection with this Agreement shall be brought only in the Chancery Court of the
State of Delaware (the
Delaware Court
), and not in any other state or federal court in
the United States of America or any court in any other country, (ii) consent to submit to the
exclusive jurisdiction of the Delaware Court for purposes of any action or proceeding arising out
of or in connection with this Agreement, (iii) irrevocably appoint, to the extent such party is not
a resident of the State of Delaware, CT Corporation, 1209 Orange Street, Wilmington, New Castle
County, Delaware 19808 as its agent in the State of Delaware as such partys agent for acceptance
of legal process in connection with any such action or proceeding against such party with the same
legal force and validity as if served upon such party personally within the State of Delaware, (iv)
waive any objection to the laying of venue of any such action or proceeding in the Delaware Court,
and (v) waive, and agree not to plead or to make, any claim that any such action or proceeding
brought in the Delaware Court has been brought in an improper or inconvenient forum.
23.
Identical Counterparts.
This Agreement may be executed in one or more counterparts, each of
which shall for all purposes be deemed to be an original but all of which together shall constitute
one and the same Agreement. Only one such counterpart signed by the party against whom
enforceability is sought needs to be produced to evidence the existence of this Agreement.
24.
Miscellaneous.
Use of the masculine pronoun shall be deemed to include usage of the feminine
pronoun where appropriate. The headings of the paragraphs of this Agreement are inserted for
convenience only and shall not be deemed to constitute part of this Agreement or to affect the
construction thereof.
[The remainder of this page is intentionally left blank.]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year
first above written.
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K12 INC.
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INDEMNITEE
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By:
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Name:
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Name:
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Title:
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Address for Notices to Indemnitee:
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