UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

[X]  
  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: July 31, 2012

OR

o   
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from                                  to                                 

Commission file number 0-23255

Copart, Inc.
(Exact name of registrant as specified in its charter)

Delaware
           
94-2867490
(State or other jurisdiction of
incorporation or organization)
           
(I.R.S. Employer
Identification Number)
14185 Dallas Parkway, Suite 300, Dallas, Texas
(Address of principal executive offices)
           
75254
(Zip code)
Registrant’s telephone number, including area code:
(972) 391-5000
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
           
Name of each exchange on which registered
Common Stock, $0.0001 par value
           
The NASDAQ Global Select Market
 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   Yes [X] No  o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes  o  No [X]

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 [X] No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes [X] No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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):

Large Accelerated Filer  [X]
           
Accelerated Filer   o
   
Non-Accelerated Filer   o
   
Smaller Reporting Company   o
 
           
 
   
(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  R

The aggregate market value of the voting and non-voting Common Stock held by non-affiliates of the registrant as of January 31, 2012 (the last business day of the registrant’s most recently completed second fiscal quarter) was $2,504,602,111 based upon the closing sales price reported for such date on the NASDAQ Global Select Market (formerly the NASDAQ National Market). For purposes of this disclosure, shares of Common Stock held by persons who hold more than 5% of the outstanding shares of Common Stock and shares held by officers and directors of the registrant have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily conclusive for other purposes.

At September 28, 2012, registrant had 124,093,869 outstanding shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of our definitive Proxy Statement for the 2012 Annual Meeting of Stockholders, also referred to in this Annual Report on Form 10-K as our Proxy Statement, which will be filed with the Securities and Exchange Commission, or SEC, pursuant to Regulation 14A within 120 days after the registrant’s fiscal year end of July 31, 2012, have been incorporated by reference in Part III hereof. Except with respect to the information specifically incorporated by reference, the Proxy Statement is not deemed to be filed as a part hereof.


Annual Report on Form 10-K
for the Fiscal Year Ended July 31, 2012

TABLE OF CONTENTS

            Page
PART I
     1    
Item 1.
           
Business
         1    
 
           
Industry Overview
         3    
 
           
Operating and Growth Strategy
         5    
 
           
Our Competitive Advantages
         6    
 
           
Our Service Offerings
         7    
 
           
Sales
         10    
 
           
Members
         11    
 
           
Competition
         11    
 
           
Management Information Systems
         11    
 
           
Employees
         12    
 
           
Environmental Matters
         12    
 
           
Governmental Regulations
         13    
 
           
Intellectual Property and Proprietary Rights
         13    
 
           
Seasonality
         13    
Item 1A.
           
Risk Factors
         14    
Item 1B.
           
Unresolved Staff Comments
         25    
Item 2.
           
Properties
         25    
Item 3.
           
Legal Proceedings
         25    
Item 4.
           
Mine Safety Disclosures
         25    
 
PART II
     26    
Item 5.
           
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
         26    
Item 6.
           
Selected Financial Data
         30    
Item 7.
           
Management’s Discussion and Analysis of Financial Condition and Results of Operations
         31    
Item 7A.
           
Quantitative and Qualitative Disclosures About Market Risk
         45    
Item 8.
           
Financial Statements and Supplementary Data
         46    
Item 9.
           
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
         47    
Item 9A.
           
Controls and Procedures
         47    
Item 9B.
           
Other Information
         50    
 
PART III
     51    
Item 10.
           
Directors, Executive Officers of the Registrant and Corporate Governance
         51    
Item 11.
           
Executive Compensation
         51    
Item 12.
           
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
         52    
Item 13.
           
Certain Relationships and Related Transactions, and Director Independence
         52    
Item 14.
           
Principal Accountant Fees and Services
         52    
 
PART IV
     53    
Item 15.
           
Exhibits and Financial Statement Schedules
         53    
 

i


PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K for the fiscal year ended July 31, 2012, or this Form 10-K, including the information incorporated by reference herein, contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-K involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These forward-looking statements are made in reliance upon the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These factors include those listed in Part I, Item 1A under the caption entitled “Risk Factors” in this Form 10-K and those discussed elsewhere in this Form 10-K. Unless the context otherwise requires, references in this Form 10-K to “Copart,” the “Company,” “we,” “us,” or “our” refer to Copart, Inc. We encourage investors to review these factors carefully together with the other matters referred to herein, as well as in the other documents we file with the Securities and Exchange Commission (the SEC). We may from time to time make additional written and oral forward-looking statements, including statements contained in the Company’s filings with the SEC. We do not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.

Although we believe that, based on information currently available to us and our management, the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements.

Item 1.
  Business

Corporate Information

We were incorporated in California in 1982, became a public company in 1994 and we reincorporated into Delaware in January 2012. Our principal executive offices are located at 14185 Dallas Parkway, Suite 300, Dallas, Texas 75254 and our telephone number at that address is (972) 391-5000. Our website is www.copart.com . The contents of our website are not incorporated by reference into this Form 10-K. We provide free of charge through a link on our website access to our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as amendments to those reports, as soon as reasonably practical after the reports are electronically filed with, or furnished to, the SEC.

Copart TM , VB 2TM , CopartDirect TM , BID4U TM , CoPartfinder TM , Outbid TM and CI & Design TM are trademarks of Copart, Inc. This Form 10-K also includes other trademarks of Copart and of other companies.

Overview

We are a leading provider of online auctions and vehicle remarketing services in the United States (U.S.), Canada and the United Kingdom (U.K.).

We provide vehicle sellers with a full range of services to process and sell vehicles over the Internet through our Virtual Bidding Second Generation Internet auction-style sales technology, which we refer to as VB 2 . Vehicle sellers consist primarily of insurance companies, but also include banks and financial institutions, charities, car dealerships, fleet operators and vehicle rental companies. We then sell the vehicles principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers and exporters and, at certain locations, to the general public. The majority of the vehicles sold on behalf of insurance companies

1



are either damaged vehicles deemed a total loss or not economically repairable by the insurance companies or are recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made. We offer vehicle sellers a full range of services that expedite each stage of the vehicle sales process, minimize administrative and processing costs and maximize the ultimate sales price.

In the U.S. and Canada (North America), we sell vehicles primarily as an agent and derive revenue primarily from fees paid by vehicle sellers and vehicle buyers as well as related fees for services such as towing and storage. In the U.K., we operate both on a principal basis, purchasing the salvage vehicle outright from the insurance companies and reselling the vehicle for our own account, and as an agent.

We converted all of our North American and U.K. sales to VB 2 during fiscal 2004 and fiscal 2008, respectively. VB 2 opens our sales process to registered buyers (whom we refer to as members) anywhere in the world who have Internet access. This technology and model employs a two-step bidding process. The first step is an open preliminary bidding feature that allows a member to enter bids either at a bidding station at the storage facility or over the Internet during the preview. To improve the effectiveness of bidding, the VB 2 system lets members see the current high bids on the vehicles they want to purchase. The preliminary bidding step is an open bid format similar to eBay ® . Members enter the maximum price they are willing to pay for a vehicle and VB 2 ’s BID4U feature will incrementally bid on the vehicle on their behalf during all phases of the auction. Preliminary bidding ends one hour prior to the start of a second bidding step, an Internet-only virtual auction. This second step allows bidders the opportunity to bid against each other and the high preliminary bidder. The bidders enter bids via the Internet in real time while BID4U submits bids for the high preliminary bidder, up to their maximum bid. When bidding stops, a countdown is initiated. If no bids are received during the countdown, the vehicle sells to the highest bidder.

We believe the implementation of VB 2 has increased the pool of available buyers for each sale, which has resulted in added competition and an increase in the amount buyers are willing to pay for vehicles. We also believe that it has improved the efficiency of our operations by eliminating the expense and capital requirements associated with live auctions. For fiscal 2012, sales of North American vehicles, on a unit basis, to members registered outside the state where the vehicle is located accounted for 51.1% of total vehicles sold; 28.7% of vehicles were sold to out of state members and 22.4% were sold to out of country members, based on registration. For fiscal 2012, sales of U.K. vehicles, on a unit basis, to members registered outside the country where the vehicle is located accounted for 18.1% of total vehicles sold.

We believe that we offer the highest level of service in the auction and vehicle remarketing industry and have established our leading market position by:

•
  providing coverage that facilitates seller access to buyers around the world, reducing towing and third-party storage expenses, offering a local presence for vehicle inspection stations, and providing prompt response to catastrophes and natural disasters by specially-trained teams;

•
  providing a comprehensive range of customer services that include merchandising services, efficient title processing, timely pick-up and delivery of vehicles, and Internet sales;

•
  establishing and efficiently integrating new facilities and acquisitions;

•
  increasing the number of bidders that can participate at each sale through the ease and convenience of Internet bidding;

•
  applying technology to enhance operating efficiency through Internet bidding, web-based order processing, salvage value quotes, electronic communication with members and sellers, vehicle imaging, and an online used vehicle parts locator service; and

•
  providing the venue for insurance customers through our Virtual Insured Exchange (VIX) product to contingently sell a vehicle through the auction process to establish its true value, allowing the insurance customer to avoid dealing with estimated values when negotiating with owners who wish to retain their damaged vehicles.

2


Historically, we believe our business has grown as a result of (i) acquisitions, (ii) increases in the overall volume in the salvage car market, (iii) growth in market share, (iv) increases in amount of revenue generated per sales transaction resulting from increases in the gross selling price and the addition of value-added services for both members and sellers, and (v) the growth in non-insurance company sellers. For fiscal 2012, which ended July 31, 2012, our revenues were $924.2 million and our operating income was $286.4 million.

On June 14, 2007, we entered the U.K. salvage market through the acquisition of Universal Salvage Plc (Universal). In fiscal 2008, we made the following additional acquisitions: Century Salvage Sales Limited (Century) on August 1, 2007; AG Watson Auto Salvage & Motors Spares Limited (AG Watson) on February 29, 2008; and Simpson Bros. Holdings Limited (Simpson) on April 4, 2008. In fiscal 2010, we acquired D Hales Limited (D Hales) on January 22, 2010. In fiscal 2011, we acquired John Hewitt and Sons, Limited (Hewitt) on March 11, 2011. Universal, Century, AG Watson, D Hales and Hewitt were all leading providers of vehicle auctions and services to the motor insurance and automotive industries. Simpson was primarily an auto dismantler and was acquired primarily for its real estate holdings. In fiscal 2012, we made no acquisitions in the U.K.

In fiscal 2008, we initiated two new programs using VB 2 , (i) Copart Dealer Services (CDS), by which we sell dealer-trade-ins and (ii) CopartDirect, whereby we offer to purchase the cars directly from the public and sell them on our own behalf. Our goal through these two programs was to expand VB 2 ’s application beyond traditional salvage in order to expand our customer base. CDS targets franchise and independent dealerships while CopartDirect targets the general public.

In fiscal 2009, we opened our website to the public, initiated our Registered Broker program by which the public can purchase vehicles through a member, and initiated our Market Maker program by which members can open Copart storefronts with Internet kiosks that enable the general public to browse and view our inventory and purchase vehicles from us through the Market Maker.

In fiscal 2010, we initiated two additional programs using VB 2 : (i) 2nd chance bidding, which allows the second highest bidder of a vehicle the opportunity to purchase the vehicle for the seller’s current minimum bid after the high bidder declines and (ii) Night Cap Sales, which provides sellers an additional opportunity to have members bid on their vehicles, increasing exposure and minimizing cycle time.

In fiscal 2011, in North America, we acquired one new facility located in Hartford City, Indiana, and we opened a new facility in Homestead, Florida.

In fiscal 2012, in North America, we acquired two new facilities located in Calgary and Edmonton, Canada. As of July 31, 2012, we had a total of 155 facilities, comprised of 136 in the U.S., 4 in Canada and 15 in the U.K.

In August 2012, we acquired Ride Safely Middle East Auction, LLC located in Dubai, United Arab Emirates (UAE), our first acquisition outside of North America and the U.K.

Industry Overview

The auction and vehicle remarketing services industry provides a venue for sellers to dispose of or liquidate vehicles to a broad domestic and international buyer pool. In North America, sellers generally auction or sell their vehicles on consignment either for a fixed fee or a percentage of the sales price. On occasion in North America and on a primary basis in the U.K., companies in our industry will purchase vehicles from the largest segment of sellers, insurance companies, and resell the vehicles for their own account. The vehicles are usually purchased at a price based either on a percentage of the vehicles’ estimated pre-accident cash value and/or based on the extent of damage. Vehicle remarketers typically operate from multiple facilities where vehicles are processed, viewed, stored and delivered to the buyer. While most companies in this industry remarket vehicles through a physical auction, we sell all of our vehicles on our Internet selling platform, VB 2 , thus eliminating the requirement for buyers to travel to an auction location to participate in the sales process.

3


Although there are other sellers of vehicles, such as banks and financial institutions, charities, car dealerships, fleet operators and vehicle rental companies, the primary sellers of vehicles are insurance companies.

Automobile manufacturers are incorporating new standard features, including unibody construction utilizing exotic metals, passenger safety cages with surrounding crumple zones to absorb impacts, plastic and ceramic components, airbags, xenon lights, computer systems, heated seats, and navigation systems. We believe that one effect of these additional features is that newer vehicles involved in accidents are more costly to repair and, accordingly, more likely to be deemed a total loss for insurance purposes.

The primary buyers of the vehicles are vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers, exporters and in some states, the general public. Vehicle dismantlers, which we believe are the largest group of vehicle buyers, either dismantle a salvage vehicle and sell parts individually or sell the entire vehicle to rebuilders, used vehicle dealers, or the general public. Vehicle rebuilders and vehicle repair licensees generally purchase salvage vehicles to repair and resell. Used vehicle dealers generally purchase recovered stolen or slightly damaged vehicles for resale.

The majority of our vehicles are sold on behalf of insurance companies and are usually vehicles involved in an accident. Typically the damaged vehicle is towed to a storage facility or a vehicle repair facility for temporary storage pending insurance company examination. The vehicle is inspected by the insurance company’s adjuster, who estimates the costs of repairing the vehicle and gathers information regarding the damaged vehicle’s mileage, options and condition in order to estimate its pre-accident value (PAV), or actual cash value (ACV). The adjuster determines whether to pay for repairs or to classify the vehicle as a total loss based upon the adjuster’s estimate of repair costs, vehicle’s salvage value, and the PAV or ACV, as well as customer service considerations. If the cost of repair is greater than the pre-accident value less the estimated salvage value, the insurance company generally will classify the vehicle as a total loss. The insurance company will thereafter assign the vehicle to a vehicle auction and remarketing services company, settle with the insured and receive title to the vehicle.

We believe the primary factors that insurance companies consider when selecting an auction and vehicle remarketing services company include:

•
  the anticipated percentage return on salvage (i.e., gross salvage proceeds, minus vehicle handling and selling expenses, divided by the actual cash value);

•
  the services provided by the company and the degree to which such services reduce administrative costs and expenses;

•
  the price the company charges for its services;

•
  national coverage;

•
  the ability to respond to natural disasters;

•
  the ability to provide analytical data to the seller; and

•
  in the U.K., the actual amount paid for the vehicle.

In the U.K., insurance companies generally tender periodic contracts for the purchase of salvaged vehicles. The insurance company will generally award the contract to the company that is willing to pay the highest price for the vehicles.

Generally, upon receipt of the pickup order (the assignment), we arrange for the transport of a vehicle to a facility. As a service to the vehicle seller, we will customarily pay advance charges (reimbursable charges paid on behalf of vehicle sellers) to obtain the vehicle’s release from a towing company, vehicle repair facility or impound facility. Advance charges paid on behalf of the vehicle seller are either recovered upon sale of the vehicle or invoiced separately to the seller.

4


The salvage vehicle then remains in storage at one of our facilities until ownership documents are transferred from the insured vehicle owner and the title to the vehicle is cleared through the appropriate state’s motor vehicle regulatory agency, or DMV. In the U.S., total loss vehicles may be sold in most states only after obtaining a salvage title from the DMV. Upon receipt of the appropriate documentation from the DMV, which is generally received within 45 to 60 days of vehicle pick-up, the vehicle is sold either on behalf of the insurance company or for our own account, depending on the terms of the contract. In the U.K., upon release of interest by the vehicle owner, the insurance company notifies us that the vehicle is available for sale.

Generally, sellers of non-salvage vehicles will arrange to deliver the vehicle to one of our locations. At that time, the vehicle information will be uploaded to our system and made available for buyers to review online. The vehicle is then sold either at a live auction or, in our case, on VB 2 typically within 7 days. Proceeds are then collected from the member, seller fees are subtracted and the remainder is remitted to the seller.

Operating and Growth Strategy

Our growth strategy is to increase our revenues and profitability by, among other things, (i) acquiring and developing new facilities in key markets including foreign markets, (ii) pursuing national and regional vehicle supply agreements, (iii) expanding our online auctions and vehicle remarketing service offerings to sellers and members, and (iv) expanding the application of VB 2 into new markets and to new sellers within the vehicle market. In addition, to maximize gross sales proceeds and cost efficiencies at each of our acquired facilities we introduce our (i) pricing structure, (ii) selling processes, (iii) operational procedures, (iv) management information systems, and (v) when appropriate, redeploy existing personnel.

As part of our overall expansion strategy, our objective is to increase our revenues, operating profits, and market share in the vehicle sales industry. To implement our growth strategy, we intend to continue to do the following:

Acquire and Develop New Vehicle Storage Facilities in Key Markets Including Foreign Markets

Our strategy is to offer integrated services to vehicle sellers on a national or regional basis by acquiring or developing facilities in new and existing markets. We integrate our new acquisitions into our global network and capitalize on certain operating efficiencies resulting from, among other things, the reduction of duplicative overhead and the implementation of our operating procedures.

The following table sets forth facilities that we have acquired or opened from August 1, 2009 through July 31, 2012:

Locations
        Acquisition or
Greenfield
    Date
    Geographic Service Area
Bristol, England
           
Acquisition
   
January 2010
   
United Kingdom
Bedford, England
           
Acquisition
   
January 2010
   
United Kingdom
Colchester, England
           
Acquisition
   
January 2010
   
United Kingdom
Gainsborough, England
           
Acquisition
   
*January 2010
   
United Kingdom
Luton, England
           
Acquisition
   
January 2010
   
United Kingdom
Scranton, Pennsylvania
           
Greenfield
   
February 2010
   
Central Pennsylvania
Homestead, Florida
           
Greenfield
   
September 2010
   
Southern Florida
Hartford City, Indiana
           
Acquisition
   
March 2011
   
Central Indiana
Birmingham, England
           
Acquisition
   
March 2011
   
United Kingdom
Atlanta, Georgia
           
Greenfield
   
August 2011
   
Northern Georgia
Edmonton, Canada
           
Acquisition
   
May 2012
   
Canada
Calgary, Canada
           
Acquisition
   
May 2012
   
Canada
 

*
  Closed in fiscal 2010

5


Pursue National and Regional Vehicle Supply Agreements

Our broad national presence enhances our ability to enter into local, regional or national supply agreements with vehicle sellers. We actively seek to establish national and regional supply agreements with insurance companies by promoting our ability to achieve high net returns and broader access to buyers through our national coverage and electronic commerce capabilities. By utilizing our existing insurance company seller relationships, we are able to build new seller relationships and pursue additional supply agreements in existing and new markets.

Expand Our Service Offerings to Sellers and Members

Over the past several years, we have expanded our available service offerings to vehicle sellers and members. The primary focus of these new service offerings is to maximize returns to our sellers and maximize product value to our members. This includes, for our sellers, real-time access to sales data over the Internet, national coverage, the ability to respond on a national scale and, for our members, the implementation of VB 2 real-time bidding at all of our facilities, permitting members at any location worldwide to participate in the sales at all of our yards. We plan to continue to refine and expand our services, including offering software that can assist our sellers in expediting claims and salvage management tools that help sellers integrate their systems with ours.

Our Competitive Advantages

We believe that the following attributes and the services that we offer position us to take advantage of many opportunities in the online vehicle auction and services industry:

National Coverage and Ability to Respond on a National Scale

Since our inception in 1982, we have expanded from a single facility in Vallejo, California to an integrated network of 155 facilities located in the United States, Canada and the U.K. as of July 31, 2012. We are able to offer integrated services to our vehicle sellers, which allow us to respond to the needs of our sellers and members with maximum efficiency. Our coverage provides our sellers with key advantages, including:

•
  a reduction in administrative time and effort;

•
  a reduction in overall vehicle towing costs;

•
  convenient local facilities;

•
  improved access to buyers throughout the world;

•
  a prompt response in the event of a natural disaster or other catastrophe; and

•
  consistency in products and services.

Value-Added Services

We believe that we offer the most comprehensive range of services in our industry, including:

•
  Internet bidding, Internet proxy bidding, and virtual sales powered by VB 2 , which enhance the competitive bidding process;

•
  online payment capabilities via our ePay product, credit cards and dealer financing programs;

•
  e-mail notifications to potential buyers of vehicles that match desired characteristics;

6


•
  sophisticated vehicle processing at storage sites, including ten-view digital imaging of each vehicle and the scanning of each vehicle’s title and other significant documents such as body shop invoices, all of which are available from us over the Internet;

•
  CoPartfinder, our Internet-based used vehicle parts locator that provides vehicle dismantlers with greater resale opportunities for their purchases;

•
  specialty sales, which allow buyers the opportunity to focus on such select types of vehicles as motorcycles, heavy equipment, boats, recreational vehicles and rental cars;

•
  Interactive Online Counter-bidding, which allows sellers who have placed a minimum bid or a bid to be approved on a vehicle to directly counter-bid the current high bidder;

•
  2nd chance bidding, which allows the second highest bidder the opportunity to purchase the vehicle for the seller’s current minimum bid after the high bidder declines; and

•
  Night Cap Sales, which provides an additional opportunity for bidding on vehicles that did not achieve their minimum bid during the virtual sale, counter bidding, or 2nd chance bidding.

Proven Ability to Acquire and Integrate Acquisitions

We have a proven track record of successfully acquiring and integrating vehicle storage facilities. Since becoming a public company in 1994, we have completed the acquisition of 83 facilities in North America, U.K. and the U.A.E. As part of our acquisition and integration strategy, we seek to:

•
  expand our global presence;

•
  strengthen our networks and access new markets;

•
  utilize our existing corporate and technology infrastructure over a larger base of operations; and

•
  introduce our comprehensive services and operational expertise.

We strive to integrate all new facilities, when appropriate, into our existing network without disruption of service to vehicle sellers. We work with new sellers to implement our fee structures and new service programs. We typically retain existing employees at acquired facilities in order to retain knowledge about, and respond to, the local market. We also assign a special integration team to help convert newly acquired facilities to our own management information and proprietary software systems, enabling us to ensure a smooth and consistent transition to our business operating and sales systems.

Technology to Enhance and Expand Our Business

We have developed management information and proprietary software systems that allow us to deliver a fully integrated service offering. Our proprietary software programs provide vehicle sellers with online access to data and reports regarding their vehicles being processed at any of our facilities. This technology allows vehicle sellers to monitor each stage of our vehicle sales process, from pick up to sale and settlement by the buyer. Our full range of Internet services allows us to expedite each stage of the vehicle sales process and minimizes the administrative and processing costs for us as well as our sellers. We believe that our integrated technology systems generate improved capacity and financial returns for our clients, resulting in high client retention, and allow us to expand our national supply contracts.

Our Service Offerings

We offer vehicle sellers a full range of vehicle services, which expedite each stage of the vehicle sales process, maximizing proceeds and minimizing costs. Not all service offerings are available in all markets. Our service offerings include the following:

7


Online Seller Access

Through Copart Access, our Internet-based service for vehicle sellers, we enable sellers to assign vehicles for sale, check sales calendars, view vehicle images and history, view and reprint body shop invoices and towing receipts and view the historical performance of the vehicles sold at our sales.

Salvage Estimation Services

We offer Copart ProQuote, a proprietary service that assists sellers in the vehicle claims evaluation process by providing online salvage value estimates, which help sellers determine whether to repair a particular vehicle or deem it a total loss.

Estimating Services

We offer vehicle sellers in the U.K. estimating services for vehicles taken to our facilities. Estimating services provide our insurance company sellers repair estimates which allow the insurance company to determine if the vehicle is a total loss vehicle. If the vehicle is determined to be a total loss, it is generally assigned to inventory.

End-of-Life Vehicle Processing

In the U.K., we are an authorized treatment facility, or ATF, for the disposal of End-of-Life vehicles, or ELVs.

Virtual Insured Exchange (VIX)

We provide the venue for insurance customers to enter a vehicle into a sealed bid sale to establish its true value, thereby allowing the insurance customer to avoid dealing with estimated values when negotiating with owners who wish to retain their damaged vehicles.

Transportation Services

We maintain contracts with third-party vehicle transport companies, which enable us to pick up most of our sellers’ vehicles within 24 hours. Our national network and transportation capabilities provide cost and time savings to our vehicle sellers and ensure on-time vehicle pick up and prompt response to catastrophes and natural disasters in North America. In the U.K., we perform transportation services through a combination of our fleet of over 100 vehicles and third-party vehicle transport companies.

Vehicle Inspection Stations

We offer some of our major insurance company sellers office and yard space to house vehicle inspection stations on-site at our facilities. We have 77 vehicle inspection stations at our facilities. An on-site vehicle inspection station provides our insurance company sellers with a central location to inspect potential total loss vehicles, which reduces storage charges that otherwise may be incurred at the initial storage or repair facility.

On-Demand Reporting

We provide vehicle sellers with real time data for vehicles that we process for the particular seller. This includes vehicle sellers’ gross and net returns on each vehicle, service charges, and other data that enable our vehicle sellers to more easily administer and monitor the vehicle disposition process. In addition, we have developed a database containing over 240 fields of real-time and historical information accessible by our sellers allowing for their generation of custom ad hoc reports and customer specific analysis.

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DMV Processing

We have extensive expertise in DMV document and title processing for salvage vehicles. We have developed a computer system which provides a direct link to the DMV computer systems of several states, allowing us to expedite the processing of vehicle title paperwork.

Flexible Vehicle Processing Programs

At the election of the seller, we sell vehicles pursuant to our Percentage Incentive Program (PIP), Consignment Program or Purchase Program.

Percentage Incentive Program. Our Percentage Incentive Program is an innovative processing program designed to broadly serve the needs of vehicle sellers. Under PIP, we agree to sell all of the vehicles of a seller in a specified market, usually for a predetermined percentage of the vehicle sales price. Because our revenues under PIP are directly linked to the vehicle’s sale price, we have an incentive to actively merchandise those vehicles to maximize the net return. We provide the vehicle seller, at our expense, with transport of the vehicle to our nearest facility, and DMV document and title processing. In addition, we provide merchandising services such as covering or taping openings to protect vehicle interiors from weather, washing vehicle exteriors, vacuuming vehicle interiors, cleaning and polishing dashboards and tires, making keys for drivable vehicles, and identifying drivable vehicles. We believe our merchandising efforts increase the sales prices of the vehicles, thereby increasing the return on salvage vehicles to both vehicle sellers and us.

Consignment Program. Under our consignment program, we sell vehicles for a fixed consignment fee. Although sometimes included in the consignment fee, we may also charge additional fees for the cost of transporting the vehicle to our facility, storage of the vehicle, and other incidental costs.

Purchase Program. Under the purchase program, we purchase vehicles from a vehicle seller at a formula price, based on a percentage of the vehicles’ estimated pre-accident value (PAV), or actual cash value (ACV), and sell the vehicles for our own account. Currently, the purchase program is offered primarily in the U.K.

Buy It Now

We offer an option to our members to purchase specific pre-qualified vehicles immediately at a set price before the live auction process. This enables us to provide a fast, easy, transparent and comprehensive buying option on these pre-qualified vehicles.

Member Network

We maintain a database of thousands of members in the vehicle dismantling, rebuilding, repair licensee, used vehicle dealer and export industries, as well as the general public as we sell directly to the general public at certain locations. Our database includes each member’s vehicle preference and purchasing history. This data enables us to notify via e-mail prospective buyers throughout the world of vehicles available for bidding that match their vehicle preferences. Listings of vehicles to be sold on a particular day and location are also made available on the Internet.

Sales Process

We offer a flexible and unique sales process designed to maximize the sale prices of the vehicles utilizing VB 2 . VB 2 opens our sales process to registered members anywhere in the world who have Internet access. The VB 2 technology and model employs a two-step bidding process. The first step is an open preliminary bidding feature that allows a member to enter bids either at a bidding station at the storage facility during the preview days or over the Internet. To improve the effectiveness of bidding, the VB 2 system lets a member see the current high bid on the vehicle they want to purchase. The preliminary bidding step is an open bid format similar to eBay. Members enter the maximum price they are willing to pay for a vehicle and VB 2 ’s BID4U feature will incrementally bid the vehicle on their behalf during all steps of the auction. Preliminary bidding

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ends one hour prior to the start of a second bidding step, an Internet-only virtual auction. This second step allows bidders the opportunity to bid against each other and the highest preliminary bidder. The bidders enter bids via the Internet in real time, and then BID4U submits bids for the highest preliminary bidder, up to their maximum bid. When bidding stops, a countdown is initiated. If no bids are received during the countdown, the vehicle sells to the highest bidder.

CoPartfinder

CoPartfinder is our unique Internet “search engine” that enables users to locate used vehicle parts quickly and efficiently. CoPartfinder is accessible by the public through a Copart-sponsored website. CoPartfinder lists vehicles recently sold through VB 2 and identifies certain purchasers. This allows vehicle dismantlers and other resellers to streamline their parts sale process and access a large pool of potential buyers. Parts buyers can use CoPartfinder to search for specific vehicle makes and models and view digital images of vehicles that meet their requirements. Once a specific parts seller is identified for a specific part requirement, buyers have the option to call, fax, or e-mail the dismantler/seller. We believe that CoPartfinder provides an incentive for vehicle dismantlers to purchase their salvage vehicles through our sales process.

Copart Dealer Services

We provide franchise and independent dealers with a convenient method to sell their trade-ins through any of our facilities. We have engaged agents in North America that target these dealers and work with them throughout the sales process.

CopartDirect

We provide the general public with a fast and convenient method to sell their vehicles to any of our North American facilities. Anyone can call 1-888-Sell-it-1 and arrange to obtain a valid offer to purchase their vehicle. Upon acceptance of our offer to purchase their vehicle we give them a check for their vehicle and then sell the vehicle on our own behalf.

U-Pull-It

In the U.K., we have two facilities from which the public can purchase parts from salvaged and end-of-life vehicles. In general, the buyer is responsible for detaching the parts from the vehicle and any associated hauling or transportation of the parts after detachment. After the valuable parts have been removed by the buyer, the remaining parts and car body are sold for their scrap value.

Sales

We process vehicles from hundreds of different vehicle sellers. No single customer accounted for more than 10% of our revenues in fiscal 2012, 2011 and 2010. Of the total number of vehicles processed during fiscal years 2012, 2011 and 2010, we obtained 82%, 82% and 80%, respectively, from insurance company sellers. Our arrangements with our sellers are typically subject to cancellation by either party upon 30 to 90 days notice.

We typically contract with the regional or branch office of an insurance company or other vehicle sellers. The agreements are customized to each vehicle seller’s particular needs and often provide for the disposition of different types of salvage vehicles by differing methods. Our arrangements generally provide that we will sell total loss and recovered stolen vehicles generated by the vehicle seller in a designated geographic area.

We market our services to vehicle sellers through an in-house sales force and independent agents that utilize a variety of sales techniques, including targeted mailing of our sales literature, telemarketing, follow-up personal sales calls, Internet search engines, employee referrals, tow shop referrals, participation in trade shows and vehicle and insurance industry conventions. We market our services to the general public under

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CopartDirect by utilizing an in-house sales force and we market our services to franchise and independent dealerships through a group of independent agents. We may, when appropriate, provide vehicle sellers with detailed analysis of the net return on vehicles and a proposal setting forth ways in which we believe that we can improve net returns on vehicles and reduce administrative costs and expenses.

During the last three years, a majority of our revenue was generated within North America and a majority of our long-lived assets are located within the United States. Please see Note 14. Segments and Other Geographic Information in our Notes to Consolidated Financial Statements for information regarding the geographic location of our sales and our long-lived assets.

Members

We maintain a database of thousands of registered members in the vehicle dismantling, rebuilding, repair licensee, used vehicle dealer and export industries. We believe that we have established a broad international and domestic buyer base by providing members with a variety of programs and services. To become a registered member and gain admission to one of our sales, prospective members must first pay an initial registration fee and an annual fee, provide requested personal and business information, and have, in most states, a vehicle dismantler’s, dealer’s, resale, repair or export license. In certain venues we may sell to the general public. Registration entitles a member to transact business at any of our sales subject to local licensing and permitting requirements. However, non-registered buyers may transact business at any of our sales via a registered broker who meets the local licensing and permitting requirements. A member may also bring guests to a facility for a fee to preview vehicles for sale. Strict admission procedures are intended to prevent frivolous bids that would invalidate the sale. We market to members on the Internet and via e-mail notifications, sales notices, telemarketing, and participation in trade show events.

Competition

We face significant competition from other remarketers of both salvage and non-salvage vehicles. We believe our principal competitors include vehicle auction and sales companies and vehicle dismantlers. These national, regional and local competitors may have established relationships with vehicle sellers and buyers and may have financial resources that are greater than ours. The largest national or regional vehicle auctioneers in North America include KAR Auction Services, Inc. (formerly ADESA, Inc. and Insurance Auto Auctions, Inc.), Auction Broadcasting Company, LLC, and Manheim, Inc. The largest national dismantler is LKQ Corporation, Inc. (LKQ). LKQ, in addition to trade groups of dismantlers such as the American Recycling Association and the United Recyclers Group, LLC, may purchase salvage vehicles directly from insurance companies, thereby bypassing vehicle remarketing companies entirely. In the U.K., our principal competitors are privately held independent remarketers.

Management Information Systems

Our primary management information system consists of an IBM AS/400 mainframe computer system, integrated computer interfaces, and proprietary business operating software that we developed and which tracks salvage sales vehicles throughout the sales process. We have implemented our proprietary business operating software at all of our storage facilities. In addition, we have integrated our mainframe computer system with Internet and Intranet systems in order to provide secure access to our data and images in a variety of formats.

Our auction-style service product, VB 2 , is served by an array of identical high-density, high-performance servers. Each individual sale is configured to run on an available server in the array and can be rapidly provisioned to any other available server in the array as required.

We have invested in a production data center that is designed to run the business in the event of an emergency. The facility’s electrical and mechanical systems are continually monitored. This facility is located in an area considered to be free of weather-related disasters and earthquakes.

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We are planning to convert to a new standard Enterprise Resource Planning (“ERP”) system. Implementation of the new ERP system is scheduled to occur in phases through fiscal 2013 and 2014.

Employees

As of July 31, 2012, we had 2,981 full-time employees, of whom 663 were engaged in general and administrative functions and 2,318 were engaged in yard operations. As of July 31, 2012, we had 2,408 and 573 employees located in North America and the U.K., respectively. We are not currently subject to any collective bargaining agreements and believe our relationships with our employees are good.

Environmental Matters

Our operations are subject to various laws and regulations regarding the protection of the environment. In the salvage vehicle remarketing industry, large numbers of wrecked vehicles are stored at facilities and, during that time, spills of fuel, motor oils and other fluids may occur, resulting in soil, surface water or groundwater contamination. Certain of our facilities store petroleum products and other hazardous materials in above-ground containment tanks and some of our facilities generate waste materials such as solvents or used oils that must be disposed of as non-hazardous or hazardous waste, as appropriate. We have implemented procedures to reduce the amount of soil contamination that may occur at our facilities, and we have initiated safety programs and training of personnel on the safe storage and handling of hazardous materials. We believe that we are in compliance, in all material respects, with all applicable environmental regulations and we do not anticipate any material capital expenditures to remain in environmental compliance. If additional or more stringent requirements are imposed on us in the future, we could incur additional capital expenditures.

In connection with the acquisition of the Dallas, Texas storage facility in 1994, we set aside $3.0 million to cover the costs of environmental remediation, stabilization and related consulting expenses for a six-acre portion of the facility that contained elevated levels of lead due to the activities of the former operators. We began the stabilization process in 1996 and completed it in 1999. We paid all remediation and related costs from the $3.0 million fund and, in accordance with the acquisition agreement, distributed the remainder of the fund to the seller of the Dallas facility, less $0.2 million which was held back to cover the costs of obtaining the no-further-action letter. In September 2002, our environmental engineering consultant issued a report, which concludes that the soil stabilization has effectively stabilized the lead-impacted soil, and that the concrete cap should prevent impact to storm water and subsequent surface water impact. Our consultant thereafter submitted an Operations and Maintenance Plan (Plan) to the Texas Commission on Environmental Quality (TCEQ) providing for a two-year inspection and maintenance plan for the concrete cap, and a two-year ground and surface water monitoring plan. In January of 2003, the TCEQ approved the Plan, subject to the additions of upstream (background) surface water samples from the intermittent stream adjacent to the facility and documentation of any repairs to the concrete cap during the post closure-monitoring period. The first semi-annual water sampling was conducted in April 2003, which reflected that the lead-impacted, stabilized soil is not impacting the ground and/or surface water. The second round of semi-annual water samples collected in October and November 2003 reported concentration of lead in one storm water and one surface water sample in excess of the established upstream criteria for lead. In correspondence, which we received in July 2004, the TCEQ approved with comment our water monitoring report dated February 24, 2004. The TCEQ instructed us to continue with post-closure monitoring and maintenance activities and submit the next report in accordance with the approved schedules. In February 2005, a report from our environmental engineering consultant was transmitted to the TCEQ containing the results of annual monitoring activities consisting of two (2) semi-annual sampling events which occurred in April/June 2004 and October/November 2004. Laboratory analytical results indicated no lead concentrations exceeding the target concentration level set in the Corrective Measures Study for the site, but some results were in excess of Texas surface water quality standards. Our environmental engineering consultant concluded in the February 2005 report to the TCEQ that it is unlikely that lead concentrations detected in the storm water runoff samples are attributable to the lead impacted soils. Based on the results of the 2004 samplings, we requested that no further action be

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taken and that a closure letter be issued by the TCEQ. In September 2007, the TCEQ notified us that they did not concur with our consultant’s conclusions and recommendations. The TCEQ said it would not provide a closure letter until additional sampling of surface water is performed which reflects concentrations of lead below Texas surface water quality standards. In February 2008, the TCEQ provided comments to our proposal for surface water sampling. In March 2008, our environmental engineer submitted to the TCEQ an addendum to the surface water sampling plan, which was approved by the TCEQ in June 2008. Sampling was performed in November 2008. In December 2008, a report was submitted to the TCEQ indicating that lead levels were below Texas surface water quality standards. In May of 2009, the TCEQ approved the Surface Water Sampling Report, as well as the Concrete Cap Inspection Report submitted in December 2008. We have made the necessary repairs to the concrete cap and provided a survey map of the cap. Annual inspections of the cap are required to ensure its maintenance. There is no assurance that we may not incur future liabilities if the stabilization process proves ineffective, or if future testing of surface or ground water reflects concentrations of lead which exceed Texas surface or ground water quality standards.

We do not believe that the above environmental matter will, either individually or in the aggregate, have a material adverse effect on our consolidated results of operations, financial position or cash flows.

Governmental Regulations

Our operations are subject to regulation, supervision and licensing under various federal, national, international, provincial, state and local statutes, ordinances and regulations. The acquisition and sale of damaged and recovered stolen vehicles is regulated by various state, provincial and international motor vehicle departments. In addition to the regulation of sales and acquisitions of vehicles, we are also subject to various local zoning requirements with regard to the location of our storage facilities. These zoning requirements vary from location to location. At various times, we may be involved in disputes with local governmental officials regarding the development and/or operation of our business facilities. We believe that we are in compliance in all material respects with applicable regulatory requirements. We may be subject to similar types of regulations by federal, national, international, provincial, state, and local governmental agencies in new markets.

Intellectual Property and Proprietary Rights

In June 2003, we filed a provisional U.S. patent application on VB 2 in the United States. This provisional patent application was followed by a U.S. utility application filed in July 2003. The patent was issued by the United States Patent and Trademark Office on January 1, 2008. Generally, patents issued in the U.S. are effective for 20 years from the earliest asserted filing date of the patent application. In fiscal 2004, we received a patent from Australia. The duration of foreign patents varies in accordance with the provisions of applicable local law.

We also rely on a combination of trade secret, copyright and trademark laws, as well as contractual agreements to safeguard our proprietary rights in technology and products. In seeking to limit access to sensitive information to the greatest practical extent, we routinely enter into confidentiality and assignment of invention agreements with each of our employees and consultants and nondisclosure agreements with our key customers and vendors.

Seasonality

Historically, our consolidated results of operations have been subject to quarterly variations based on a variety of factors, of which the primary influence is the seasonal change in weather patterns. During the winter months we tend to have higher demand for our services because there are more weather-related accidents.

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Item 1A.     
  Risk Factors

Investing in our common stock involves a high degree of risk. You should consider carefully the risks and uncertainties described below before making an investment decision. Our business could be harmed if any of these risks, as well as other risks not currently known to us or that we currently deem immaterial, materialized. The trading price of our common stock could decline due to the occurrence of any of these risks, and you may lose all or part of your investment. In assessing the risks described below, you should also refer to the other information contained in this Form 10-K, including our consolidated financial statements and the related notes and schedules, and other filings with the SEC.

We depend on a limited number of major vehicle sellers for a substantial portion of our revenues. The loss of one or more of these major sellers could adversely affect our consolidated results of operations and financial position, and an inability to increase our sources of vehicle supply could adversely affect our growth rates.

No single customer accounted for more than 10% of our revenue during the fiscal year ended July 31, 2012. Historically, a limited number of vehicle sellers have collectively accounted for a substantial portion of our revenues. Seller arrangements are either written or oral agreements typically subject to cancellation by either party upon 30 to 90 days notice. Vehicle sellers have terminated agreements with us in the past in particular markets, which has affected the pricing for sales services in those markets. There can be no assurance that our existing agreements will not be cancelled. Furthermore, there can be no assurance that we will be able to enter into future agreements with vehicle sellers or that we will be able to retain our existing supply of salvage vehicles. A reduction in vehicles from a significant vehicle seller or any material changes in the terms of an arrangement with a significant vehicle seller could have a material adverse effect on our consolidated results of operations and financial position. In addition, a failure to increase our sources of vehicle supply could adversely affect our earnings and revenue growth rates.

Our expansion into markets outside North America, including recent expansions in Europe and the Middle East, expose us to risks arising from operating in international markets. Any failure to successfully integrate businesses acquired outside of North America into our operations could have an adverse effect on our consolidated results of operations, financial position or cash flows.

We first expanded our operations outside North America in 2007 with a significant acquisition in the United Kingdom, and we continue to evaluate acquisitions and other opportunities outside North America. In August 2012, we announced our acquisition of a company in the United Arab Emirates. Acquisitions or other strategies to expand our operations outside North America pose substantial risks and uncertainties that could have an adverse effect on our future operating results. In particular, we may not be successful in realizing anticipated synergies from these acquisitions, or we may experience unanticipated costs or expenses integrating the acquired operations into our existing business. We have and may continue to incur substantial expenses establishing new yards or operations in international markets. Among other things, we will ultimately deploy our proprietary auction technologies at all of our foreign operations and we cannot predict whether this deployment will be successful or will result in increases in the revenues or operating efficiencies of any acquired companies relative to their historic operating performance. Integration of our respective operations, including information technology integration and integration of financial and administrative functions, may not proceed as we anticipate and could result in unanticipated costs or expenses (including unanticipated capital expenditures) that could have an adverse effect on our future operating results. We cannot provide any assurances that we will achieve our business and financial objectives in connection with these acquisitions or our strategic decision to expand our operations internationally.

As we continue to expand our business internationally, we will need to develop policies and procedures to manage our business on a global scale. Operationally, acquired businesses typically depend on key seller relationships, and our failure to maintain those relationships would have an adverse effect on our consolidated results of operations and could have an adverse effect on our future operating results.

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In addition, we anticipate our international operations will subject us to a variety of risks associated with operating on an international basis, including:

•
  the difficulty of managing and staffing foreign offices and the increased travel, infrastructure and legal compliance costs associated with multiple international locations;

•
  the need to localize our product offerings, particularly the need to implement our online auction platform in foreign countries;

•
  tariffs and trade barriers and other regulatory or contractual limitations on our ability to operate in certain foreign markets;

•
  exposure to foreign currency exchange rate risk, which may have an adverse impact on our revenues and revenue growth rates;

•
  adapting to different business cultures and market structures, particularly where we seek to implement our auction model in markets where insurers have historically not played a substantial role in the disposition of salvage vehicles;

•
  ensuring compliance with applicable legislation and regulations that affect our international operations, including applicable anticorruption legislation in the United States and United Kingdom and export control and sanctions laws; and

•
  repatriation of funds currently held in foreign jurisdictions to the U.S. may result in higher effective tax rates.

As we continue to expand our business globally, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Our failure to manage any of these risks successfully could harm our international operations and have an adverse effect on our operating results.

In addition, certain acquisitions in the United Kingdom may be reviewed by the Office of Fair Trade (OFT) and/or Competition Commission (U.K. Regulators). If an inquiry is made by U.K. Regulators, we may be required to demonstrate that our acquisitions will not result, or be expected to result, in a substantial lessening of competition in a U.K. market. Although we believe that there will not be a substantial lessening of competition in a U.K. market, based on our analysis of the relevant U.K. markets, there can be no assurance that the U.K. Regulators will agree with us if they decide to make an inquiry. If the U.K. Regulators determine that by our acquisitions of certain assets, there is or likely will be a substantial lessening of competition in a U.K. market, we could be required to divest some portion of our U.K. assets. In the event of a divestiture order by the U.K. Regulators, the assets disposed may be sold for substantially less than their carrying value. Accordingly, any divestiture could have a material adverse effect on our operating results in the period of the divestiture.

We face risks associated with the implementation of our salvage auction model in markets that may not operate on the same terms as the North American market. For example, the U.K. market operates on a principal rather than agent basis, which has tended to have an adverse impact on our gross margin percentages and has exposed us to inventory risks that we do not experience in North America.

Some of our target markets outside North America operate in a manner substantially different than our historic market in North America. For example, the U.K. market operates primarily on the principal model, in which we take title to vehicles, rather than the agency model employed in North America, in which we act as a sales agent for the legal owner of vehicles. As a result, our operations in the U.K. have had and will continue to have an adverse impact on our consolidated gross margin percentages. Operating on a principal basis exposes us to inventory risks, including losses from theft, damage, and obsolescence. In addition, our business in North America and the United Kingdom has been established and grown based largely on our ability to build relationships with insurance carriers. In other markets, insurers have traditionally been less

15



involved in the disposition of salvage vehicles. As we expand into markets outside North America and the United Kingdom, we cannot predict whether markets will readily adapt to our strategy of online auctions of automobiles sourced principally through vehicle insurers.

If the implementation of our new Enterprise Resource Planning (“ERP”) system is not executed efficiently and effectively, our business, financial position, and our consolidated operating results could be adversely affected.

We are in the process of converting our primary management information system to a new standard ERP system, which will occur in phases through 2013 and 2014. In the event this conversion of our primary management information system is not executed efficiently and effectively, the conversion may cause interruptions in our primary management information systems, which may make our website and services unavailable. This type of interruption could prevent us from processing vehicles for our sellers and may prevent us from selling vehicles through our Internet bidding platform, VB 2 , which would adversely affect our consolidated results of operations and financial position.

In addition, our information and technology systems are vulnerable to damage or interruption from computer viruses, network failures, computer and telecommunications failures, infiltration by unauthorized persons and security breaches, usage errors by our employees, power outages and catastrophic events such as fires, tornadoes, floods, hurricanes and earthquakes. Although we have not been the victim of cyber attacks or other cyber incidents that have had a material impact on our consolidated operating results or financial position, we have from time to time experienced cybersecurity breaches such as computer viruses and similar information technology violations in the ordinary course of business. We have implemented various measures to manage our risks related to system and network disruptions. If these systems are compromised, become inoperable for extended periods of time or cease to function properly, we may have to make a significant investment to fix or replace them and our ability to provide many of our electronic and online solutions to our customers may be impaired. If that were to occur, it could have a material adverse effect on our consolidated operating results and financial position.

Implementation of our online auction model in new markets may not result in the same synergies and benefits that we achieved when we implemented the model in North America and the U.K.

We believe that the implementation of our proprietary auction technologies across our operations over the last decade had a favorable impact on our results of operations by increasing the size and geographic scope of our buyer base, increasing the average selling price for vehicles sold through our sales, and lowering expenses associated with vehicle sales. We implemented our online system across all of our North American and U.K. salvage yards beginning in fiscal 2004 and fiscal 2008, respectively, and experienced increases in revenues and average selling prices as well as improved operating efficiencies in both markets. In considering new markets, we consider the potential synergies from the implementation of our model based in large part on our experience in North America and the U.K. We cannot predict whether these synergies will also be realized in new markets.

Failure to have sufficient capacity to accept additional cars at one or more of our storage facilities could adversely affect our relationships with insurance companies or other sellers of vehicles.

Capacity at our storage facilities varies from period to period and from region to region. For example, following adverse weather conditions in a particular area, our yards in that area may fill and limit our ability to accept additional salvage vehicles while we process existing inventories. For example, Hurricanes Katrina and Rita had, in certain quarters, an adverse effect on our operating results, in part because of yard capacity constraints in the Gulf Coast area. We regularly evaluate our capacity in all our markets and, where appropriate, seek to increase capacity through the acquisition of additional land and yards. We may not be able to reach agreements to purchase independent storage facilities in markets where we have limited excess capacity, and zoning restrictions or difficulties obtaining use permits may limit our ability to expand our

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capacity through acquisitions of new land. Failure to have sufficient capacity at one or more of our yards could adversely affect our relationships with insurance companies or other sellers of vehicles, which could have an adverse effect on our consolidated results of operations and financial position.

Because the growth of our business has been due in large part to acquisitions and development of new facilities, the rate of growth of our business and revenues may decline if we are not able to successfully complete acquisitions and develop new facilities.

We seek to increase our sales and profitability through the acquisition of additional facilities and the development of new facilities. There can be no assurance that we will be able to:

•
  continue to acquire additional facilities on favorable terms;

•
  expand existing facilities in no-growth regulatory environments;

•
  increase revenues and profitability at acquired and new facilities;

•
  maintain the historical revenue and earnings growth rates we have been able to obtain through facility openings and strategic acquisitions; or

•
  create new vehicle storage facilities that meet our current revenue and profitability requirements.

As we continue to expand our operations, our failure to manage growth could harm our business and adversely affect our consolidated results of operations and financial position.

Our ability to manage growth depends not only on our ability to successfully integrate new facilities, but also on our ability to:

•
  hire, train and manage additional qualified personnel;

•
  establish new relationships or expand existing relationships with vehicle sellers;

•
  identify and acquire or lease suitable premises on competitive terms;

•
  secure adequate capital; and

•
  maintain the supply of vehicles from vehicle sellers.

Our inability to control or manage these growth factors effectively could have a material adverse effect on our consolidated results of operations, financial position or cash flows.

Our annual and quarterly performance may fluctuate, causing the price of our stock to decline.

Our revenues and operating results have fluctuated in the past and can be expected to continue to fluctuate in the future on a quarterly and annual basis as a result of a number of factors, many of which are beyond our control. Factors that may affect our operating results include, but are not limited to, the following:

•
  fluctuations in the market value of salvage and used vehicles;

•
  the impact of foreign exchange gain and loss as a result of international operations;

•
  our ability to successfully integrate our newly acquired operations in international markets and any additional markets we may enter;

•
  the availability of salvage vehicles;

•
  variations in vehicle accident rates;

•
  member participation in the Internet bidding process;

•
  delays or changes in state title processing;

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•
  changes in international, state or federal laws or regulations affecting salvage vehicles;

•
  changes in local laws affecting who may purchase salvage vehicles;

•
  our ability to integrate and manage our acquisitions successfully;

•
  the timing and size of our new facility openings;

•
  the announcement of new vehicle supply agreements by us or our competitors;

•
  the severity of weather and seasonality of weather patterns;

•
  the amount and timing of operating costs and capital expenditures relating to the maintenance and expansion of our business, operations and infrastructure;

•
  the availability and cost of general business insurance;

•
  labor costs and collective bargaining;

•
  changes in the current levels of out of state and foreign demand for salvage vehicles;

•
  the introduction of a similar Internet product by a competitor;

•
  the ability to obtain necessary permits to operate; and

•
  the impact of our conversion to a new ERP system, if the conversion is not executed efficiently and effectively.

Due to the foregoing factors, our operating results in one or more future periods can be expected to fluctuate. As a result, we believe that period-to-period comparisons of our results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance. In the event such fluctuations result in our financial performance being below the expectations of public market analysts and investors, the price of our common stock could decline substantially.

Our Internet-based sales model has increased the relative importance of intellectual property assets to our business, and any inability to protect those rights could have a material adverse effect on our business, financial position, or results of operations.

Our intellectual property rights include patents relating to our auction technologies as well as trademarks, trade secrets, copyrights and other intellectual property rights. In addition, we may enter into agreements with third parties regarding the license or other use of our intellectual property in foreign jurisdictions. Effective intellectual property protection may not be available in every country in which our products and services are distributed, deployed, or made available. We seek to maintain certain intellectual property rights as trade secrets. The secrecy could be compromised by third parties, or intentionally or accidentally by our employees, which would cause us to lose the competitive advantage resulting from those trade secrets. Any significant impairment of our intellectual property rights, or any inability to protect our intellectual property rights, could have a material adverse effect on our consolidated results of operations, financial position or cash flows.

We have in the past been and may in the future be subject to intellectual property rights claims, which are costly to defend, could require us to pay damages, and could limit our ability to use certain technologies in the future.

Litigation based on allegations of infringement or other violations of intellectual property rights are common among companies who rely heavily on intellectual property rights. Our reliance on intellectual property rights has increased significantly in recent years as we have implemented our auction-style sales technologies across our business and ceased conducting live auctions. As we face increasing competition, the possibility of intellectual property rights claims against us grows. Litigation and any other intellectual property claims, whether with or without merit, can be time-consuming, expensive to litigate and settle, and can divert

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management resources and attention from our core business. An adverse determination in current or future litigation could prevent us from offering our products and services in the manner currently conducted. We may also have to pay damages or seek a license for the technology, which may not be available on reasonable terms and which may significantly increase our operating expenses, if it is available for us to license at all. We could also be required to develop alternative non-infringing technology, which could require significant effort and expense.

If we experience problems with our trucking fleet operations, our business could be harmed.

We rely solely upon independent subhaulers to pick up and deliver vehicles to and from our North American storage facilities. We also utilize, to a lesser extent, independent subhaulers in the U.K. Our failure to pick up and deliver vehicles in a timely and accurate manner could harm our reputation and brand, which could have a material adverse effect on our business. Further, an increase in fuel cost may lead to increased prices charged by our independent subhaulers, which may significantly increase our cost. We may not be able to pass these costs on to our sellers or buyers.

In addition to using independent subhaulers, in the U.K. we utilize a fleet of company trucks to pick up and deliver vehicles from our U.K. storage facilities. In connection therewith, we are subject to the risks associated with providing trucking services, including inclement weather, disruptions in transportation infrastructure, availability and price of fuel, any of which could result in an increase in our operating expenses and reduction in our net income.

We are partially self-insured for certain losses and if our estimates of the cost of future claims differ from actual trends, our results of our operations could be harmed.

We are partially self-insured for certain losses related to medical insurance, general liability, workers’ compensation and auto liability. Our liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. The estimated liability is not discounted and is established based upon analysis of historical data and actuarial estimates. While we believe these estimates are reasonable based on the information currently available, if actual trends, including the severity of claims and medical cost inflation, differ from our estimates, our results of operations could be impacted. Further, we rely on independent actuaries to assist us in establishing the proper amount of reserves for anticipated payouts associated with these self-insured exposures.

Our executive officers, directors and their affiliates hold a large percentage of our stock and their interests may differ from other stockholders.

Our executive officers, directors and their affiliates beneficially own, in the aggregate, 16% of our common stock as of July 31, 2012. If they were to act together, these stockholders would have significant influence over most matters requiring approval by stockholders, including the election of directors, any amendments to our articles of incorporation and certain significant corporate transactions, including potential merger or acquisition transactions. In addition, without the consent of these stockholders, we could be delayed or prevented from entering into transactions that could be beneficial to us or our other investors. These stockholders may take these actions even if they are opposed by our other investors.

We have certain provisions in our certificate of incorporation and bylaws, which may have an anti-takeover effect or that may delay, defer or prevent acquisition bids for us that a stockholder might consider favorable and limit attempts by our stockholders to replace or remove our current management.

Our board of directors is authorized to create and issue from time to time, without stockholder approval, up to an aggregate of 5,000,000 shares of undesignated preferred stock, the terms of which may be established and shares of which may be issued without stockholder approval, and which may include rights superior to

19



the rights of the holders of common stock. In addition, our bylaws establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in control of our company, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire.

If we lose key management or are unable to attract and retain the talent required for our business, we may not be able to successfully manage our business or achieve our objectives.

Our future success depends in large part upon the leadership and performance of our executive management team, all of whom are employed on an at-will basis and none of whom are subject to any agreements not to compete. If we lose the service of one or more of our executive officers or key employees, in particular Willis J. Johnson, our Chairman; A. Jayson Adair, our Chief Executive Officer; and Vincent W. Mitz, our President, or if one or more of them decides to join a competitor or otherwise compete directly or indirectly with us, we may not be able to successfully manage our business or achieve our business objectives.

Our cash investments are subject to numerous risks.

We may invest our excess cash in securities or money market funds backed by securities, which may include U.S. treasuries, other federal, state and municipal debt, bonds, preferred stock, commercial paper, insurance contracts and other securities both privately and publicly traded. All securities are subject to risk, including fluctuations in interest rates, credit risk, market risk and systemic economic risk. Changes or movements in any of these risk factors may result in a loss or impairment to our invested cash and may have a material effect on our consolidated results of operations and financial position.

The impairment of capitalized development costs could adversely affect our consolidated results of operations and financial condition.

We capitalize certain costs associated with the development of new software products, new software for internal use and major software enhancements to existing software. These costs are amortized over the estimated useful life of the software beginning with its introduction or roll out. If, at any time, it is determined that capitalized software provides a reduced economic benefit, the unamortized portion of the capitalized development costs will be expensed, in part or in full, as an impairment, which may have a material impact on our consolidated results of operations and financial position.

New member programs could impact our operating results.

We have or will initiate programs to open our auctions to the general public. These programs include the Registered Broker program through which the public can purchase vehicles through a registered member and the Market Maker program through which registered members can open Copart storefronts with Internet kiosks enabling the general public to search our inventory and purchase vehicles. Initiating programs that allow access to our online auctions to the general public may involve material expenditures and we cannot predict what future benefit, if any, will be derived.

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Factors such as mild weather conditions can have an adverse effect on our revenues and operating results as well as our revenue and earnings growth rates by reducing the available supply of salvage vehicles. Conversely, extreme weather conditions can result in an oversupply of salvage vehicles that requires us to incur abnormal expenses to respond to market demands.

Mild weather conditions tend to result in a decrease in the available supply of salvage vehicles because traffic accidents decrease and fewer automobiles are damaged. Accordingly, mild weather can have an adverse effect on our salvage vehicle inventories, which would be expected to have an adverse effect on our revenue and operating results and related growth rates. Conversely, our inventories will tend to increase in poor weather such as a harsh winter or as a result of adverse weather-related conditions such as flooding. During periods of mild weather conditions, our ability to increase our revenues and improve our operating results and related growth will be increasingly dependent on our ability to obtain additional vehicle sellers and to compete more effectively in the market, each of which is subject to the other risks and uncertainties described in these sections. In addition, extreme weather conditions, although they increase the available supply of salvage cars, can have an adverse effect on our operating results. For example, during the fiscal year ended July 31, 2006, we recognized substantial additional costs associated with the impact of Hurricanes Katrina and Rita in Gulf Coast states. These additional costs, characterized as “abnormal” under ASC 330, Inventory, were recognized during the fiscal year ended July 31, 2006, and included the additional subhauling, payroll, equipment and facilities expenses directly related to the operating conditions created by the hurricanes. In the event that we were to again experience extremely adverse weather or other anomalous conditions that result in an abnormally high number of salvage vehicles in one or more of our markets, those conditions could have an adverse effect on our future operating results.

Macroeconomic factors such as high fuel prices, declines in commodity prices, and declines in used car prices may have an adverse effect on our revenues and operating results as well as our earnings growth rates.

Macroeconomic factors that affect oil prices and the automobile and commodity markets can have adverse effects on our revenues, revenue growth rates (if any), and operating results. Significant increases in the cost of fuel could lead to a reduction in miles driven per car and a reduction in accident rates. A material reduction in accident rates could have a material impact on revenue growth. In addition, under our percentage incentive program contracts, or PIP, the cost of towing the vehicle to one of our facilities is included in the PIP fee. We may incur increased fees, which we may not be able to pass on to our vehicle sellers. A material increase in tow rates could have a material impact on our operating results. Volatility in fuel, commodity, and used car prices could have a material adverse effect on our revenues and revenue growth rates in future periods.

The salvage vehicle sales industry is highly competitive and we may not be able to compete successfully.

We face significant competition for the supply of salvage vehicles and for the buyers of those vehicles. We believe our principal competitors include other auction and vehicle remarketing service companies with whom we compete directly in obtaining vehicles from insurance companies and other sellers, and large vehicle dismantlers, who may buy salvage vehicles directly from insurance companies, bypassing the salvage sales process. Many of the insurance companies have established relationships with competitive remarketing companies and large dismantlers. Certain of our competitors may have greater financial resources than us. Due to the limited number of vehicle sellers, particularly in the U.K., the absence of long-term contractual commitments between us and our sellers and the increasingly competitive market environment, there can be no assurance that our competitors will not gain market share at our expense.

We may also encounter significant competition for local, regional and national supply agreements with vehicle sellers. There can be no assurance that the existence of other local, regional or national contracts entered into by our competitors will not have a material adverse effect on our business or our expansion

21



plans. Furthermore, we are likely to face competition from major competitors in the acquisition of vehicle storage facilities, which could significantly increase the cost of such acquisitions and thereby materially impede our expansion objectives or have a material adverse effect on our consolidated results of operations. These potential new competitors may include consolidators of automobile dismantling businesses, organized salvage vehicle buying groups, automobile manufacturers, automobile auctioneers and software companies. While most vehicle sellers have abandoned or reduced efforts to sell salvage vehicles directly without the use of service providers such as us, there can be no assurance that this trend will continue, which could adversely affect our market share, consolidated results of operations and financial condition. Additionally, existing or new competitors may be significantly larger and have greater financial and marketing resources than us; therefore, there can be no assurance that we will be able to compete successfully in the future.

Government regulation of the salvage vehicle sales industry may impair our operations, increase our costs of doing business and create potential liability.

Participants in the salvage vehicle sales industry are subject to, and may be required to expend funds to ensure compliance with a variety of governmental, regulatory and administrative rules, regulations, land use ordinances, licensure requirements and procedures, including those governing vehicle registration, the environment, zoning and land use. Failure to comply with present or future regulations or changes in interpretations of existing regulations may result in impairment of our operations and the imposition of penalties and other liabilities. At various times, we may be involved in disputes with local governmental officials regarding the development and/or operation of our business facilities. We believe that we are in compliance in all material respects with applicable regulatory requirements. We may be subject to similar types of regulations by federal, national, international, provincial, state, and local governmental agencies in new markets. In addition, new regulatory requirements or changes in existing requirements may delay or increase the cost of opening new facilities, may limit our base of salvage vehicle buyers and may decrease demand for our vehicles.

Changes in laws affecting the importation of salvage vehicles may have an adverse effect on our business and financial condition.

Our Internet-based auction-style model has allowed us to offer our products and services to international markets and has increased our international buyer base. As a result, foreign importers of salvage vehicles now represent a significant part of our total buyer base. Changes in laws and regulations that restrict the importation of salvage vehicles into foreign countries may reduce the demand for salvage vehicles and impact our ability to maintain or increase our international buyer base. For example, in March 2008, a decree issued by the president of Mexico became effective that placed restrictions on the types of vehicles that can be imported into Mexico from the United States. The adoption of similar laws or regulations in other jurisdictions that have the effect of reducing or curtailing our activities abroad could have a material adverse effect on our consolidated results of operations and financial position by reducing the demand for our products and services.

The operation of our storage facilities poses certain environmental risks, which could adversely affect our consolidated financial position, results of operations or cash flows.

Our operations are subject to federal, state, national, provincial and local laws and regulations regarding the protection of the environment in the countries which we have storage facilities. In the salvage vehicle remarketing industry, large numbers of wrecked vehicles are stored at storage facilities and, during that time, spills of fuel, motor oil and other fluids may occur, resulting in soil, surface water or groundwater contamination. In addition, certain of our facilities generate and/or store petroleum products and other hazardous materials, including waste solvents and used oil. In the U.K., we provide vehicle de-pollution and crushing services for End-of-Life program vehicles. We could incur substantial expenditures for preventative, investigative or remedial action and could be exposed to liability arising from our operations, contamination

22



by previous users of certain of our acquired facilities, or the disposal of our waste at off-site locations. Environmental laws and regulations could become more stringent over time and there can be no assurance that we or our operations will not be subject to significant costs in the future. Although we have obtained indemnification for pre-existing environmental liabilities from many of the persons and entities from whom we have acquired facilities, there can be no assurance that such indemnifications will be adequate. Any such expenditures or liabilities could have a material adverse effect on our consolidated results of operations and financial position.

Volatility in the capital and credit markets may negatively affect our business, operating results, or financial condition.

The capital and credit markets have experienced extreme volatility and disruption, which has led to an economic downturn in the U.S. and abroad. As a result of the economic downturn, the number of miles driven may decrease, which may lead to fewer accident claims, a reduction of vehicle repairs, and fewer salvage vehicles. Adverse credit conditions may also affect the ability of members to secure financing to purchase salvaged vehicles which may adversely affect demand. In addition, if the banking system or the financial markets deteriorate or remain volatile our credit facility may be affected.

If we determine that our goodwill has become impaired, we could incur significant charges that would have a material adverse effect on our consolidated results of operations.

Goodwill represents the excess of cost over the fair market value of assets acquired in business combinations. In recent periods, the amount of goodwill on our consolidated balance sheet has increased substantially, principally as a result of a series of acquisitions we have made in the U.K. since 2007. As of July 31, 2012, the amount of goodwill on our consolidated balance sheet subject to future impairment testing was $196.4 million.

Pursuant to ASC 350, Intangibles—Goodwill and Other , we are required to annually test goodwill and intangible assets with indefinite lives to determine if impairment has occurred. Additionally, interim reviews must be performed whenever events or changes in circumstances indicate that impairment may have occurred. If the testing performed indicates that impairment has occurred, we are required to record a non-cash impairment charge for the difference between the carrying value of the goodwill or other intangible assets and the implied fair value of the goodwill or other intangible assets in the period the determination is made. The testing of goodwill and other intangible assets for impairment requires us to make significant estimates about our future performance and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in the definition of a business segment in which we operate; changes in economic, industry or market conditions; changes in business operations; changes in competition; or potential changes in the share price of our common stock and market capitalization. Changes in these factors, or changes in actual performance compared with estimates of our future performance, could affect the fair value of goodwill or other intangible assets, which may result in an impairment charge. For example, continued deterioration in worldwide economic conditions could affect these assumptions and lead us to determine that goodwill impairment is required with respect to our acquisitions in the U.K. We cannot accurately predict the amount or timing of any impairment of assets. Should the value of our goodwill or other intangible assets become impaired, it could have a material adverse effect on our consolidated results of operations and could result in our incurring net losses in future periods.

An adverse outcome of a pending Georgia sales tax audit could have a material adverse effect on our consolidated results of operations and financial condition.

The Georgia Department of Revenue, or DOR, conducted a sales and use tax audit of our operations in Georgia for the period from January 1, 2007 through June 30, 2011. As a result of the audit, the DOR issued a notice of proposed assessment for uncollected sales taxes in which it asserted that we failed to remit sales taxes totaling $73.8 million, including penalties and interest. In issuing the notice of proposed assessment, the

23



DOR stated its policy position that sales for resale to non-U.S. registered resellers are subject to Georgia sales and use tax.

We have engaged a Georgia law firm and outside tax advisors to review the conduct of our business operations in Georgia, the notice of assessment, and the DOR’s policy position. In particular, our outside legal counsel has provided us with an opinion that our sales for resale to non-U.S. registered resellers should not be subject to Georgia sales and use tax. In rendering its opinion, our counsel noted that non-U.S. registered resellers are unable to comply strictly with technical requirements for a Georgia certificate of exemption but concluded that our sales for resale to non-U.S. registered resellers should not be subject to Georgia sales and use tax notwithstanding this technical inability to comply.

Based on the opinion from our outside law firm and advice from outside tax advisors, we have not provided for the payment of this assessment in our consolidated financial statements. We believe we have strong defenses to the DOR’s notice of proposed assessment and intend to defend this matter. We have filed a request for protest or administrative appeal with the State of Georgia. There can be no assurance, however, that this matter will be resolved in our favor or that we will not ultimately be required to make a substantial payment to the Georgia DOR. We understand that Georgia law and DOR regulations are ambiguous on many of the points at issue in the audit, and litigating and defending the matter in Georgia could be expensive and time-consuming and result in substantial management distraction. If the matter were to be resolved in a manner adverse to us, it could have a material adverse effect on our consolidated results of operations and financial position.

New accounting pronouncements or new interpretations of existing standards could require us to make adjustments to accounting policies that could adversely affect the consolidated financial statements.

The Financial Accounting Standards Board, the Public Company Accounting Oversight Board, and the SEC, from time to time issue new pronouncements or new interpretations of existing accounting standards that require changes to our accounting policies and procedures. To date, we do not believe any new pronouncements or interpretations have had a material adverse effect on our consolidated results of operations and financial position, but future pronouncements or interpretations could require a change or changes in our policies or procedures.

Fluctuations in foreign currency exchange rates could result in declines in our reported revenues and earnings.

Our reported revenues and earnings are subject to fluctuations in currency exchange rates. We do not engage in foreign currency hedging arrangements and, consequently, foreign currency fluctuations may adversely affect our revenues and earnings. Should we choose to engage in hedging activities in the future we cannot be assured our hedges will be effective or that the costs of the hedges will exceed their benefits. Fluctuations in the rate of exchange between the U.S. dollar and foreign currencies, primarily the British Pound and Canadian Dollar, could adversely affect our consolidated results of operations and financial position.

Fluctuations in the U.S. unemployment rates could result in declines in revenue from processing insurance vehicles.

Increases in unemployment may lead to an increase in the number of uninsured motorists. Uninsured motorists are responsible for disposition of their vehicle if involved in an accident. Disposition generally is either the repair or disposal of the vehicle. In the situation where the owner of the wrecked vehicle, and not an insurance company, is responsible for its disposition, we believe it is more likely that vehicle will be repaired or, if disposed, disposed through channels other than us.

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If the interest rate swap entered into in connection with our credit facility proves ineffective, it could result in volatility in our operating results, including potential losses, which could have a material adverse effect on our consolidated results of operations and cash flows.

We entered into two interest rate swaps to exchange our variable interest rate payment commitments for fixed interest rate payments on the Term Loan. The notional amount of the two derivative transactions amortizes $18.8 million per quarter until September 30, 2015 and $200 million on December 14, 2015. The first swap agreement fixed our interest rate with respect to a notional amount of $337.5 million of our Term Loan, at 85 basis points plus the one month LIBOR rate. The second swap agreement fixed our interest rate with respect to a notional amount of $106.3 million of our Term Loan, at 69 basis points plus the one month LIBOR rate. The Applicable Rate on our Credit Facility can fluctuate between 1.5% and 2.0% depending on our consolidated net leverage ratio (as defined in the Credit Facility) and, at July 31, 2012 was 1.50%.

We recorded the swap at fair value, and it is currently designated as an effective cash flow hedge under ASC 815, Derivatives and Hedging . Each quarter, we will measure hedge effectiveness using the “hypothetical derivative method” and record in earnings any gains or losses resulting from hedge ineffectiveness. The hedge provided by our swap could prove to be ineffective for a number of reasons, including early retirement of the Term Loan, as is allowed under the Credit Facility, or in the event the counterparty to the interest rate swap is determined in the future to not be creditworthy. Any determination that the hedge created by the swap is ineffective could have a material adverse effect on our results of operations and cash flows and result in volatility in our operating results. In addition, any changes in relevant accounting standards relating to the swap, especially ASC 815, Derivatives and Hedging , could materially increase earnings volatility.

Item 1B.     
  Unresolved Staff Comments

None.

Item 2.
  Properties

Our corporate headquarters are located in Dallas, Texas. This facility consists of approximately 53,000 square feet of leased office space under a lease which expires in fiscal 2024. In addition, we own approximately 10,000 square feet of office space near the previous corporate headquarters in Fairfield, California which houses certain corporate departments that are not currently moving to the Dallas, Texas headquarters. We also own or lease an additional 155 operating facilities. In the U.S., we have facilities in every state except Delaware, New Hampshire, North Dakota, Rhode Island, South Dakota, Vermont and Wyoming. In Canada, we have facilities in the provinces of Ontario and Alberta. In the U.K., we own or lease 15 operating facilities. In August 2012, we acquired a facility in Dubai, UAE. We believe that our existing facilities are adequate to meet current requirements and that suitable additional or substitute space will be available as needed to accommodate any expansion of operations and additional offices on commercially acceptable terms.

Item 3.
  Legal Proceedings

Legal Proceedings

Information with respect to this item may be found in the Notes to Consolidated Financial Statements — Note 15. Commitments and Contingencies , which is incorporated herein by reference.

Item 4.
  Mine Safety Disclosure

Not applicable.

25

PART II

Item 5.
  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information

The following table summarizes the high and low sales prices per share of our common stock for each quarter during the last two fiscal years. As of July 31, 2012, there were 124,393,700 shares outstanding. Our common stock has been quoted on the NASDAQ Global Select Market under the symbol “CPRT” since March 17, 1994. As of July 31, 2012, we had 1,617 stockholders of record. On July 31, 2012, the last reported sale price of our common stock on the NASDAQ Global Select Market was $23.76 per share. Throughout this report, share and per share amounts have been adjusted as appropriate to reflect the two-for-one stock split effected in the form of a stock dividend distributed after close of trading on March 28, 2012.

Fiscal Year 2012
        High
    Low
Fourth Quarter
                 27.88             22.59   
Third Quarter
                 26.84             22.58   
Second Quarter
                 24.55             20.82   
First Quarter
                 22.55             17.88   
 

Fiscal Year 2011
        High
    Low
Fourth Quarter
                 23.99             21.52   
Third Quarter
                 22.82             19.74   
Second Quarter
                 20.44             16.50   
First Quarter
                 18.37             15.64   
 

Dividend Policies

We have not paid a cash dividend since becoming a public company in 1994. We currently intend to retain any earnings for use in our business.

We expect to continue to use cash flows from operations to finance our working capital needs and to develop and grow our business. In addition to our stock repurchase program, we are considering a variety of alternative potential uses for our remaining cash balances and our cash flows from operations. These alternative potential uses include additional stock repurchases, repayments of long-term debt, the payment of dividends and acquisitions.

Repurchase of Our Common Stock

In fiscal 2012, our Board of Directors approved a 40 million share increase in the stock repurchase program, bringing the total current authorization to 98 million shares. The repurchases may be effected through solicited or unsolicited transactions in the open market or in privately negotiated transactions. No time limit has been placed on the duration of the stock repurchase program. Subject to applicable securities laws, such repurchases will be made at such times and in such amounts as we deem appropriate and may be discontinued at any time. For the fiscal year ended July 31, 2012, we repurchased 8,880,708 shares of our common stock at a weighted average price of $22.51. For the fiscal year ended July 31, 2011, we repurchased 13,364,634 shares of our common stock at a weighted average price of $20.42. For the fiscal year ended July 31, 2010, we repurchased 242,502 shares of our common stock at a weighted average price of $18.38. As of July 31, 2012, the total number of shares repurchased under the program was 49,786,782 and 48,213,218 shares were available for repurchase under our program.

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Additionally, on January 14, 2011, we completed a tender offer to purchase up to 21,052,630 shares of our common stock at a price of $19.00 per share. Our directors and executive officers were expressly prohibited from participating in the tender offer by our board of directors under our Securities Trading Policy. In connection with the tender offer, we accepted for purchase 24,344,176 shares of our common stock. The shares accepted for purchase are comprised of the 21,052,630 shares we offered to purchase and an additional 3,291,546 shares purchased pursuant to our right to purchase additional shares up to 2% of our outstanding shares. The shares purchased as a result of the tender offer are not part of our repurchase program. The purchase of the shares of common stock was funded by the proceeds relating to the issuance of long term debt. The dilutive earnings per share impact of all repurchased shares on the weighted average number of common shares outstanding for the year ended July 31, 2012 is $0.04.

The number and average price of shares purchased in each fiscal year are set forth in the table below:

Period
        Total
Number
of Shares
Purchased
    Average
Price Paid
Per Share
    Total Number of
Shares Purchased
as Part of Publicly
Announced Program
    Maximum Number
of Shares That May
Yet Be Purchased
Under the Program
Fiscal 2010
                                                                   
First Quarter
                 —              —              —              30,701,062   
Second Quarter
                 —              —              —              30,701,062   
Third Quarter
                 —              —              —              30,701,062   
Fourth Quarter
                 242,502          $ 18.38             242,502             30,458,560   
Fiscal 2011
                                                                   
First Quarter
                 4,499,652          $ 16.83             4,499,652             25,958,908   
Second Quarter
                 24,344,176          $ 19.00             —              25,958,908   
Third Quarter
                 2,883,084          $ 21.52             2,883,084             23,075,824   
Fourth Quarter
                 5,981,898          $ 22.59             5,981,898             17,093,926   
Fiscal 2012
                                                                   
First Quarter
                 2,139,796          $ 20.26             2,139,796             54,954,130   
Second Quarter
                 3,940,912          $ 23.37             3,940,912             51,013,218   
Third Quarter
                 —              —              —              51,013,218   
May 1, 2012 through May 31, 2012
                 —              —              —              51,013,218   
June 1, 2012 through June 30, 2012
                 2,800,000          $ 23.22             2,800,000             48,213,218   
July 1, 2012 through July 31, 2012
                 —              —              —              48,213,218   
 

In the first quarter of fiscal year 2010, Mr. Jay Adair, Chief Executive Officer (and then President), exercised stock options through cashless exercises. In the fourth quarter of fiscal year 2010, Mr. Willis J. Johnson, Chairman of the Board, exercised stock options through a cashless exercise. In the second, third and fourth quarters of fiscal year 2011 certain executive officers exercised stock options through cashless exercises. In the first, second and third quarters of fiscal year 2012 certain executive officers exercised stock options through cashless exercises. A portion of the options exercised were net settled in satisfaction of the exercise price and federal and state minimum statutory tax withholding requirements. We remitted $2.6 million, $4.2 million and $7.4 million, in fiscal 2012, 2011 and 2010, respectively, to the proper taxing authorities in satisfaction of the employees’ minimum statutory withholding requirements. The exercises are summarized in the following table:

Period
        Options
Exercised
    Exercise
Price
    Shares Net
Settled for
Exercise
    Shares
Withheld
for Taxes(1)
    Net
Shares to
Employee
    Share
Price for
Withholding
    Tax
Withholding
(in 000’s)
FY 2010—Q1
                 647,262          $ 6.52             228,708             191,492             227,062          $ 18.45          $ 3,533   
FY 2010—Q4
                 700,000          $ 6.46             245,844             211,654             242,502          $ 18.38          $ 3,890   
FY 2011—Q2
                 177,500          $ 8.47             76,050             37,834             63,616          $ 19.76          $ 748    
FY 2011—Q3
                 548,334          $ 11.02             295,496             118,032             134,806          $ 20.40          $ 2,408   
FY 2011—Q4
                 180,000          $ 9.48             76,396             48,366             55,238          $ 22.33          $ 1,080   

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Period
        Options
Exercised
    Exercise
Price
    Shares Net
Settled for
Exercise
    Shares
Withheld
for Taxes(1)
    Net
Shares to
Employee
    Share
Price for
Withholding
    Tax
Withholding
(in 000’s)
FY 2012—Q1
                 40,000          $ 9.00             16,082             8,974             14,944          $ 22.39          $ 201    
FY 2012—Q2
                 20,000          $ 9.00             7,506             4,584             7,910          $ 23.98          $ 110    
FY 2012—Q3
                 322,520          $ 10.74             131,298             85,684             105,538          $ 26.38          $ 2,260   
 

(1)
  Shares withheld for taxes are treated as a repurchase of shares for accounting purposes but do not count against our stock repurchase program.

Issuances of Unregistered Securities

There were no issuances of unregistered securities in the quarter ended July 31, 2012.

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Performance Graph

Notwithstanding any statement to the contrary in any of our previous or future filings with the SEC, the following information relating to the price performance of our common stock shall not be deemed “filed” with the SEC or “Soliciting Material” under the Exchange Act, or subject to Regulation 14A or 14C, or to liabilities of Section 18 of the Exchange Act except to the extent we specifically request that such information be treated as soliciting material or to the extent we specifically incorporate this information by reference.

The following is a line graph comparing the cumulative total return to stockholders of our common stock at July 31, 2012 since July 31, 2007, to the cumulative total return over such period of (i) the NASDAQ Composite Index, (ii) the NASDAQ Industrial Index, and (iii) the NASDAQ Q-50 (NXTQ).

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Copart, Inc., the NASDAQ Composite Index,
the NASDAQ Industrial Index, and the NASDAQ Q-50 (NXTQ)

 

        7/07
    7/08
    7/09
    7/10
    7/11
    7/12
Copart, Inc.
              $ 100.00          $ 155.86          $ 125.48          $ 129.50          $ 154.41          $ 168.87   
NASDAQ Composite
              $ 100.00          $ 87.14          $ 82.39          $ 92.16          $ 113.03          $ 117.69   
NASDAQ Industrial
              $ 100.00          $ 85.75          $ 68.73          $ 83.86          $ 110.22          $ 111.19   
NASDAQ Q-50 (NXTQ)
              $ 100.00          $ 90.75          $ 106.56          $ 118.10          $ 155.37          $ 166.78   
 

*
  Assumes that $100.00 was invested on July 31, 2007 in our common stock, in the NASDAQ Composite Index, the NASDAQ Industrial Index and the NASDAQ Q-50 (NXTQ), and that all dividends were reinvested. No dividends have been declared on our common stock. Stockholder returns over the indicated period should not be considered indicative of future stockholder returns.

29


Item 6.
  Selected Financial Data

You should read the following selected consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Company’s consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K.

The following selected consolidated statements of income data for the years ended July 31, 2012, 2011 and 2010 and the consolidated balance data at July 31, 2012 and 2011, are derived from the audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K. The following selected consolidated statements of income data for the years ended July 31, 2009 and 2008 and the consolidated balance sheet data at July 31, 2010, 2009 and 2008, are derived from the audited consolidated financial statements that are not included in this Annual Report on Form 10-K. The historical results are not necessarily indicative of the results to be expected in any future period. As a result of the adoption of Accounting Standards Update 2009—13, Revenue Arrangements with Multiple Deliverables , for the year ended July 31, 2011, we accelerated recognition of $14.4 million in service revenue and $13.5 million in related yard operation expenses.

        Fiscal Years Ending July 31,
   
        2012
    2011
    2010
    2009
    2008
        (in thousands, except per share and other data)    
Operating Data
                                                                                  
Revenues
              $ 924,191          $ 872,246          $ 772,879          $ 743,082          $ 784,848   
Operating income
                 286,353             265,290             239,070             225,325             237,917   
Income from continuing operations before income taxes
                 278,056             263,877             239,495             227,732             249,650   
Income tax expense
                 (95,937 )            (97,502 )            (87,868 )            (88,186 )            (92,718 )  
Income from continuing operations
                 182,119             166,375             151,627             139,546             156,932   
Income from discontinued operations, net of income tax effects
                 —              —              —              1,557             —    
Net income
                 182,119             166,375             151,627             141,103             156,932   
Basic per share amounts:
                                                                                  
Income from continuing operations
              $ 1.42          $ 1.10          $ 0.90          $ 0.84          $ 0.90   
Discontinued operations
                 —              —              —              0.01             —    
Net income per share
              $ 1.42          $ 1.10          $ 0.90          $ 0.85          $ 0.90   
Weighted average shares
                 128,120             151,298             168,330             167,074             174,824   
Diluted per share amounts:
                                                                                  
Income from continuing operations
              $ 1.39          $ 1.08          $ 0.89          $ 0.82          $ 0.87   
Discontinued operations
                 —              —              —              0.01             —    
Net income per share
              $ 1.39          $ 1.08          $ 0.89          $ 0.83          $ 0.87   
Weighted average shares
                 131,428             153,352             170,054             169,860             179,716   
Balance Sheet Data
                                                                                  
Cash, cash equivalents and short-term investments
              $ 140,112          $ 74,009          $ 268,188          $ 162,691          $ 38,954   
Working capital
                 134,908             75,242             330,191             212,349             84,501   
Total assets
                 1,155,066             1,084,436             1,228,812             1,058,032             956,247   
Total debt
                 444,120             375,756             975              1,457             2,240   
Stockholders’ equity
                 561,117             555,172             1,087,234             921,459             798,996   
Other Data
                                                                                  
Number of storage facilities
                 155              153              152              147              143    
 

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Item 7.
  Management’s Discussion and Analysis of Financial Condition and Results of Operations

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K, including the information incorporated by reference herein, contains forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Exchange Act. All statements other than statements of historical facts are statements that could be deemed forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “expect,” “plan,” “intend,” “forecast,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or the negative of these terms or other comparable terminology. The forward-looking statements contained in this Form 10-K involve known and unknown risks, uncertainties and situations that may cause our or our industry’s actual results, level of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these statements. These forward-looking statements are made in reliance upon the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These factors include those listed in Part I, Item 1A.—“Risk Factors” of this Form 10-K and those discussed elsewhere in this Form 10-K. We encourage investors to review these factors carefully together with the other matters referred to herein, as well as in the other documents we file with the SEC. The Company may from time to time make additional written and oral forward-looking statements, including statements contained in the Company’s filings with the SEC. The Company does not undertake to update any forward-looking statement that may be made from time to time by or on behalf of the Company.

Although we believe that, based on information currently available to the Company and its management, the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. You should not place undue reliance on these forward-looking statements.

Overview

We provide vehicle sellers with a full range of services to process and sell vehicles primarily over the Internet through our Virtual Bidding Second Generation Internet auction-style sales technology, which we refer to as VB 2 . Vehicle sellers consist primarily of insurance companies but also include banks and financial institutions, charities, car dealerships, fleet operators and vehicle rental companies. We sell principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers and exporters; however at certain locations, we sell directly to the general public. The majority of the vehicles sold on behalf of the insurance companies are either damaged vehicles deemed a total loss or not economically repairable by the insurance companies or are recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made. We offer vehicle sellers a full range of services that expedite each stage of the salvage vehicle sales process and minimize administrative and processing costs. In the United States and Canada, or North America, we sell vehicles primarily as an agent and derive revenue primarily from fees paid by vehicle sellers and vehicle buyers as well as related fees for services such as towing and storage. In the United Kingdom, or U.K., a significant portion of our business is conducted on a principal basis, purchasing salvage vehicles outright from insurance companies and reselling the vehicles for our own account.

Our revenues consist of sales transaction fees charged to vehicle sellers and vehicle buyers, transportation revenue, purchased vehicle revenues, and other remarketing services. Revenues from sellers are generally generated either on a fixed fee contract basis where we collect a fixed amount for selling each vehicle regardless of the selling price of the vehicle or, under our Percentage Incentive Program, or PIP program, where our fees are generally based on a predetermined percentage of the vehicle sales price. Under the consignment, or fixed fee, program, we generally charge an additional fee for title processing and special preparation. Although sometimes included in the consignment fee, we may also charge additional fees for the cost of transporting the vehicle to our facility, storage of the vehicle, and other incidental costs. Under the consignment programs, only the fees associated with vehicle processing are recorded in revenue, not the actual

31



sales price (gross proceeds). Sales transaction fees also include fees charged to vehicle buyers for purchasing vehicles, storage, loading and annual registration. Transportation revenue includes charges to sellers for towing vehicles under certain contracts. Transportation revenue also includes towing charges assessed to buyers for delivering vehicles. Purchased vehicle revenue includes the gross sales price of the vehicle which we have purchased or are otherwise considered to own and is primarily generated in the U.K.

Operating costs consist primarily of operating personnel (which includes yard management, clerical and yard employees), rent, contract vehicle towing, insurance, fuel, equipment maintenance and repair, and costs of vehicles we sold under purchase contracts. Costs associated with general and administrative expenses consist primarily of executive management, accounting, data processing, sales personnel, human resources, professional fees, research and development and marketing expenses.

During fiscal 2004 and fiscal 2008, we converted all of our North American and U.K. sales, respectively, to an Internet-based auction-style model using our VB 2 Internet sales technology which employs a two-step bidding process. The first step, called the preliminary bid, allows members to submit bids up to one hour before a real time virtual auction begins. The second step allows members to bid against each other, and the high bidder from the preliminary bidding process, in a real-time process over the Internet.

Acquisitions and New Operations

We have experienced significant growth in facilities as we have acquired nine facilities and established three new facilities since the beginning of fiscal 2010 through July 31, 2012. All of these acquisitions have been accounted for using the purchase method of accounting.

As part of our overall expansion strategy of offering integrated services to vehicle sellers, we anticipate acquiring and developing facilities in new regions, as well as the regions currently served by our facilities. We believe that these acquisitions and openings strengthen our coverage as we have 155 facilities located in North America and the U.K. as of July 31, 2012 and are able to provide national coverage for our sellers.

The following table sets forth facilities that we have acquired or opened from August 1, 2009 through July 31, 2012:

Locations
        Acquisition
or Greenfield
    Date
    Geographic Service Area
Bristol, England
           
Acquisition
   
January 2010
   
United Kingdom
Bedford, England
           
Acquisition
   
January 2010
   
United Kingdom
Colchester, England
           
Acquisition
   
January 2010
   
United Kingdom
Gainsborough, England
           
Acquisition
   
*January 2010
   
United Kingdom
Luton, England
           
Acquisition
   
January 2010
   
United Kingdom
Scranton, Pennsylvania
           
Greenfield
   
February 2010
   
Central Pennsylvania
Homestead, Florida
           
Greenfield
   
September 2010
   
Southern Florida
Hartford City, Indiana
           
Acquisition
   
March 2011
   
Central Indiana
Birmingham, England
           
Acquisition
   
March 2011
   
United Kingdom
Atlanta, Georgia
           
Greenfield
   
August 2011
   
Northern Georgia
Edmonton, Canada
           
Acquisition
   
May 2012
   
Canada
Calgary, Canada
           
Acquisition
   
May 2012
   
Canada
 

*
  Closed in fiscal 2010

In January 2010, the Company completed the acquisition of D Hales Limited (D Hales) which operated five locations in the United Kingdom. In fiscal 2011, we acquired John Hewitt and Sons, Limited (Hewitt) which operated one location in the United Kingdom. These acquisitions were undertaken because of their strategic fit with our business in the United Kingdom. In August 2012, we acquired Ride Safely Middle East Auction, LLC located in Dubai, UAE.

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The period-to-period comparability of our consolidated operating results and financial condition is affected by business acquisitions, new openings, weather and product introductions during such periods. In particular, we have certain contracts inherited through our U.K. acquisitions that require us to act as a principal, purchasing vehicles from the insurance companies and reselling them for our own account. It is our intention, where possible, to migrate these contracts to the agency model in future periods. Changes in the amount of revenue derived in a period from principal transactions relative to total revenue will impact revenue growth and margin percentages.

In addition to growth through acquisitions, we seek to increase revenues and profitability by, among other things, (i) acquiring and developing additional vehicle storage facilities in key markets, (ii) pursuing national and regional vehicle seller agreements, (iii) expanding our service offerings to sellers and members, and (iv) expanding the application of VB 2 into new markets. In addition, we implement our pricing structure and auction procedures and attempt to introduce cost efficiencies at each of our acquired facilities by implementing our operational procedures, integrating our management information systems and redeploying personnel, when necessary.

Results of Operations

Fiscal 2012 Compared to Fiscal 2011

Revenues

The following table sets forth information on revenue by class (in thousands, except percentages):

        2012
    Percentage of
Revenue
    2011
    Percentage of
Revenue
Service revenues
              $ 757,272             82 %         $ 713,093             82 %  
Vehicle sales
                 166,919             18 %            159,153             18 %  
 
              $ 924,191             100 %         $ 872,246             100 %  
 

Service Revenues. Service revenues were $757.3 million during fiscal 2012 compared to $713.1 million for fiscal 2011, an increase of $44.2 million, or 6.2%, above fiscal 2011. Growth in unit volume generated $33.5 million in additional service revenue relative to last year and was driven primarily by growth in the number of units sold on behalf of franchise and independent car dealerships, new and expanded contracts with insurance companies and the migration from the principal model to the agency model in the U.K. Growth in the average revenue per car sold generated $11.5 million in additional revenue over last year and was driven by an increase in the average vehicle auction selling price as over 50% of our service revenue is tied in some manner to the ultimate selling price of the vehicle. We believe the increase in the average vehicle auction selling price was driven primarily by: (i) the year over year increase in commodity pricing as we believe that commodity pricing, particularly the per ton price for crushed car bodies, has an impact on the ultimate selling price of vehicles sold for scrap and vehicles sold for dismantling; (ii) the general increase in used car pricing, which we believe has an impact on the average selling price of vehicles which are repaired and retailed or purchased by the end user; (iii) the mix of cars sold as the insurance company cars, which on average command a lower average selling price than non-insurance cars, represented a lower portion of all cars sold; and (iv) in the U.K., the beneficial impact of VB 2 which we introduced in 2008 and which expands our buyer base by opening vehicle sales to buyers worldwide. We cannot determine the impact of the movement of these influences as we cannot determine which vehicles are sold to the end user or for scrap, dismantling, retailing or export. Nor can we predict their future movement. Accordingly, we cannot quantify the specific impact that commodity pricing, used car pricing, product sales mix, and the introduction of VB 2 in the U.K. had on the selling price of vehicles and ultimately on service revenue. The average dollar to pound exchange rate was 1.58 dollars to the pound and 1.60 dollars to the pound for fiscal 2012 and fiscal 2011, respectively, and led to a decrease in service revenue of $0.8 million.

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Vehicle Sales. We have assumed certain contracts through our U.K. acquisitions that require us to act as a principal, purchasing vehicles from the insurance companies and reselling them for our own account. Vehicle sales revenues were $166.9 million during fiscal 2012 compared to $159.2 million for fiscal 2011, an increase of $7.7 million, or 4.8%, above fiscal 2011. The increase in vehicle sales revenue was due to the growth in the average selling price of vehicles which resulted in increased revenue of $20.2 million. The growth in the average selling price per unit was primarily due to: (i) the increase in commodity pricing, particularly the per ton price for crushed car bodies, which has an impact on the ultimate selling price of vehicles sold for scrap and vehicles sold for dismantling and (ii) in the U.K., the continuing beneficial impact of VB 2 which we introduced to the U.K. in 2008 and which expands our buyer base by opening vehicle sales to buyers worldwide. We cannot determine which vehicles are sold directly to the end user or for scrap, dismantling, retailing, or export and, accordingly, cannot quantify the specific impact of commodity pricing nor can we isolate the impact that VB 2 had on the ultimate selling price of vehicles sold in the U.K. The decline in volume resulted primarily from the migration of certain contracts in the U.K. from the principal model to the agency model and resulted in a reduction in vehicle sales revenue of $11.1 million. The detrimental impact on recorded vehicle sales revenue due to the change in the GBP to USD exchange rate was $1.4 million.

Yard Operation Expenses. Yard operation expenses were $377.6 million during fiscal 2012 compared to $374.1 million for fiscal 2011, an increase of $3.5 million, or 0.9%, above fiscal 2011. The increase was driven by volume, which led to an increase of $13.5 million as we processed more vehicles in fiscal 2012 than in fiscal 2011. This increase was offset by a reduction in operating costs of $5.5 million driven by the decline in the cost to process each car. There was a detrimental impact on yard operating expenses due to the change in the GBP to USD exchange rate of $0.5 million. Included in yard operation costs were depreciation and amortization expenses which were $33.0 million and $37.0 million for the fiscal years ended July 31, 2012 and 2011, respectively.

Cost of Vehicle Sales. The cost of vehicles sold was $137.0 million during fiscal 2012 compared to $125.2 million for fiscal 2011, an increase of $11.8 million, or 9.4%. The increase in the cost per unit sold represented a $15.1 million increase relative to last year. Unit volume decrease led to a decrease of $2.3 million. The beneficial impact on the cost of sales due to the change in the GBP to USD exchange rate was $1.0 million.

General and Administrative Expenses. General and administrative expenses, excluding depreciation and amortization, were $99.4 million for fiscal 2012 compared to $98.9 million for fiscal 2011, an increase of less than $0.5 million, or 0.5%. The beneficial impact on general and administrative expenses due to the change in the GBP to USD exchange rate was $0.1 million. General and administrative depreciation and amortization expenses were $15.1 million and $8.7 million for the fiscal years ended July 31, 2012 and 2011, respectively.

Impairment . During the year ended July 31, 2012, we recorded an impairment of $8.8 million associated with the write down to fair market value of certain assets, primarily real estate, computer hardware and our fleet of private aircraft which have been removed from operations and, if not disposed of during the year, are reflected in assets held for sale on the balance sheet.

Other (Expense) Income. Total other expense was $8.3 million during fiscal 2012 compared to $1.4 million during fiscal 2011, an increase of $6.9 million, or 492.9%. Interest expense increased $7.3 million as a result of increased borrowing under the new credit facility, which is further described in the Notes to Consolidated Financial Statements — Note 9. Long-Term Debt , which is incorporated herein by reference. Other income, net, increased $0.5 million due primarily to the gain on sale of assets.

Income Taxes. Our effective income tax rates for fiscal 2012 and 2011 were 34.5% and 36.9%, respectively. The change in tax rates was primarily driven by the geographical allocation of income and the application of new elective tax law starting in fiscal 2012.

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Fiscal 2011 Compared to Fiscal 2010

Revenues

The following table sets forth information on revenue by class (in thousands, except percentages):

        2011
    Percentage of
Revenue
    2010
    Percentage of
Revenue
Service revenues
              $ 713,093             82 %         $ 634,606             82 %  
Vehicle sales
                 159,153             18 %            138,273             18 %  
 
              $ 872,246             100 %         $ 772,879             100 %  
 

Service Revenues. Service revenues were $713.1 million during fiscal 2011 compared to $634.6 million for fiscal 2010, an increase of $78.5 million, or 12.4%, above fiscal 2010. Growth in unit volume generated $62.1 million in additional service revenue relative to fiscal 2010 and was driven primarily by growth in the number of units sold on behalf of franchise and independent car dealerships, new and expanded contracts with insurance companies and the migration from the principal model to the agency model in the U.K. Growth in the average revenue per car sold generated $1.0 million in additional revenue over fiscal 2010 as higher scrap metal and used car pricing led to a general increase in the average selling price, and was offset by growth in the percentage of volume processed from suppliers with below average revenue per car. The higher revenue per car sold was driven by the average selling price per vehicle as over 50% of our service revenue is tied in some manner to the ultimate selling price of the vehicle. We believe the increase in the average selling price was primarily impacted by: (i) the year over year increase in commodity pricing as we believe that commodity pricing, particularly the per ton price for crushed car bodies, has an impact on the ultimate selling price of vehicles sold for scrap and vehicles sold for dismantling; (ii) the general increase in used car pricing, which we believe has an impact on the average selling price of vehicles which are repaired and retailed or purchased by the end user and (iii) in the U.K., the continuing beneficial impact of VB 2 which we introduced to the U.K. in 2008 and which expands our buyer base by opening vehicle sales to buyers worldwide. We cannot determine the impact of the movement of these factors, nor can we predict their future movement. Further, we cannot determine which vehicles are sold to the end user or for scrap, dismantling, retailing or export. Accordingly, we cannot quantify the specific impact that commodity pricing, used car pricing, and the introduction of VB 2 had on the selling price of vehicles and ultimately on service revenue. The average dollar to pound exchange rate was 1.60 dollars to the pound and 1.57 dollars to the pound for fiscal 2011 and fiscal 2010, respectively, and led to an increase in service revenue of $0.9 million.

In addition, on August 1, 2010, we adopted Accounting Standards Update (ASU) 2009-13 , Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (ASU 2009-13). Consequently, we recognized in the period earned certain revenues, primarily towing fees, titling fees and other enhancement service fees, which were previously deferred until the period the car associated with those revenues was sold. As a result of this change, we recognized $14.4 million in additional revenue for the fiscal year ended July 31, 2011, which would have otherwise been recognized in future periods.

Vehicle Sales. We have assumed certain contracts through our U.K. acquisitions that require us to act as a principal, purchasing vehicles from the insurance companies and reselling them for our own account. Vehicle sales revenues were $159.2 million during fiscal 2011 compared to $138.3 million for fiscal 2010, an increase of $20.9 million, or 15.1%, above fiscal 2010. The increase in vehicle sales revenue was due to the growth in the average selling price of vehicles which resulted in increased revenue of $19.1 million. The growth in the average selling price per unit was primarily due to: (i) the increase in commodity pricing, particularly the per ton price for crushed car bodies, which has an impact on the ultimate selling price of vehicles sold for scrap and vehicles sold for dismantling and (ii) in the U.K., the continuing beneficial impact of VB 2 which we introduced to the U.K. in 2008 and which expands our buyer base by opening vehicle sales to buyers worldwide. We cannot determine which vehicles are sold directly to the end user or for scrap, dismantling, retailing, or export and, accordingly, cannot quantify the specific impact of commodity pricing nor can we isolate the impact that VB 2 had on the ultimate selling price of vehicles sold in the U.K. The

35



decline in volume resulted primarily from the migration of certain contracts in the U.K. from the principal model to the agency model and resulted in a reduction in vehicle sales revenue of $0.8 million. The beneficial impact on recorded vehicle sales revenue due to the change in the GBP to USD exchange rate was $2.1 million.

Yard Operation Expenses. Yard operation expenses were $374.1 million during fiscal 2011 compared to $320.2 million for fiscal 2010, an increase of $53.9 million, or 16.8%, above fiscal 2010. The increase was driven primarily by (i) the growth in volume of units processed, (ii) the adoption of ASU 2009-13, (iii) increase in subhauling costs due to the growth in diesel prices on a year over year basis, and (iv) the general growth in program costs associated with new business segments. There was a detrimental impact on yard operating expenses due to the change in the GBP to USD exchange rate of $0.8 million. Included in yard operation costs were depreciation and amortization expenses which were $37.0 million and $34.9 million for the fiscal years ended July 31, 2011 and 2010, respectively.

On August 1, 2010 we adopted ASU 2009-13. Consequently, we recognized certain revenues and expenses associated primarily with towing fees, titling fees and seller storage fees, which were previously deferred until the period the car associated with those revenues and expenses was sold. The expenses recognized for the year ended July 31, 2011, which would have otherwise been recognized in future periods, was $13.5 million.

Cost of Vehicle Sales. The cost of vehicles sold was $125.2 million during fiscal 2011 compared to $104.7 million for fiscal 2010, an increase of $20.5 million, or 19.6%. The increase in the cost per unit sold represented a $19.0 million increase relative to fiscal 2010. Unit volume decrease led to a decrease of $0.6 million. The detrimental impact on the cost of sales due to the change in the GBP to USD exchange rate was $2.1 million.

General and Administrative Expenses. General and administrative expenses, excluding depreciation and amortization, were $98.9 million for fiscal 2011 compared to $100.6 million for fiscal 2010, a decrease of $1.7 million, or 1.7%. The decline in general and administrative costs was due primarily to decreased advertising costs and decreased headcount. Depreciation and amortization expenses were $8.7 million and $8.3 million for the fiscal years ended July 31, 2011 and 2010, respectively. The detrimental impact on general and administrative expenses due to the change in the GBP to USD exchange rate was $0.1 million.

Other Income (Expense). Total other expense was $1.4 million during fiscal 2011 compared to other income of $0.4 million for fiscal 2010, an increase of $1.8 million, or 432.4%. Interest expense increased $3.9 million as a result of increased borrowing under the new credit facility which is further described in the Notes to Consolidated Financial Statements — Note 9. Long-Term Debt , which is incorporated herein by reference. Interest income declined $0.3 million due primarily to reduced interest yields and a lower cash balance. Other income, net, increased $1.7 million due primarily to the gain on sale of assets.

Income Taxes. Our effective income tax rates for fiscal 2011 and 2010 were 36.9% and 36.7%, respectively.

Liquidity and Capital Resources

Our primary source of working capital is cash generated though operations. Potential internal sources of additional working capital are the sale of assets or the issuance of equity through option exercises and shares issued under our Employee Stock Purchase Plan. A potential external source of additional working capital is the issuance of debt and equity. However, with respect to the issuance of equity or debt, we cannot predict if these sources will be available in the future and, if available, if they can be issued under terms commercially acceptable to us.

Historically, we have financed our growth through cash generated from operations, public offerings of common stock, the equity issued in conjunction with certain acquisitions and debt financing. Our primary source of cash generated by operations is from the collection of sellers’ fees, members’ fees and reimbursable

36



advances from the proceeds of auctioned salvage vehicles. Our business is seasonal as inclement weather during the winter months increases the frequency of accidents and, consequently, the number of cars totaled by the insurance companies. During the winter months, most of our facilities process 10% to 30% more vehicles than at other times of the year. This increased volume requires the increased use of our cash to pay out advances and handling costs of the additional business.

Our primary source of working capital is net income. Accordingly, factors affecting net income are the principal factors affecting the generation of working capital. Those primary factors: (i) seasonality, (ii) market wins and losses, (iii) supplier mix, (iv) accident frequency, (v) salvage frequency, (vi) change in market share of our existing suppliers, (vii) commodity pricing, (viii) used car pricing, (ix) foreign currency exchanges rates, (x) product mix, and (xi) contract mix to the extent appropriate, are discussed in the Results of Operations and Risk Factors sections in this Form 10-K.

As of July 31, 2012, we had working capital of $134.9 million, including cash, and cash equivalents of $140.1 million. Cash and cash equivalents consisted primarily of U.S. Treasury Bills and funds invested in money market accounts, which bear interest at a variable rate. Cash and cash equivalents increased by $66.1 million from fiscal 2011 to fiscal 2012. The increase in cash was due primarily to the $125.0 million of proceeds from additional debt, proceeds from the sale of assets held for sale and from stock option exercises and cash from operations which were offset by share repurchase activity, payments on outstanding debt and capital expenditures during fiscal 2012. We believe that our currently available cash and cash equivalents and cash generated from operations will be sufficient to satisfy our operating and working capital requirements for at least the next 12 months. However, if we experience significant growth in the future, we may be required to raise additional cash through the issuance of new debt or additional equity.

As of July 31, 2012, $58.8 million of the $140.1 million of cash and cash equivalents was held by our foreign subsidiaries. If these funds are needed for our operations in the U.S., we would be required to accrue and pay U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations.

Operating Activities

Net cash provided by operating activities decreased by $13.3 million to $229.7 million during fiscal 2012 when compared to fiscal 2011. The decrease was driven in part by increased deferred income taxes of $15.5 million, a $12.1 million increase in vehicle pooling costs as a result of the adoption of ASU 2009-13 in fiscal 2011 offset by an increase in net income of $15.7 million. The remaining decrease of $1.4 million is due to the timing of routine changes in working capital items.

Net cash provided by operating activities increased by $43.5 million to $242.9 million during fiscal 2011 when compared to fiscal 2010. The increase was driven in part by an increase in net income of $14.7 million, a reduction in income tax receivables of $8.6 million and by a reduction in vehicle pooling costs of $14.4 million as a result of the adoption of ASU 2009-13. The remaining increase of $5.8 million is due to the timing of routine changes in working capital items.

Investing Activities

Capital expenditures (excluding those associated with fixed assets attributable to acquisitions) were $54.8 million, $70.2 million and $75.8 million for fiscal 2012, 2011 and 2010, respectively. Our capital expenditures are primarily related to lease buyouts of certain facilities, opening and improving facilities, software development, and acquiring yard equipment. We continue to expand and invest in new and existing facilities and standardize the appearance of existing locations. We have no material commitments for future capital expenditures as of July 31, 2012. During fiscal 2011, we sold our corporate headquarters building in Fairfield, California for $16.5 million and entered into a twenty-one month lease term. During fiscal 2013, we terminated this lease.

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Included in capital expenditures for the year ended July 31, 2012 are capitalized software development costs for new software for internal use and major software enhancements to existing software. The cumulative total capitalized costs were $55.0 million, $46.8 million, and $22.9 million for the years ended July 31, 2012, 2011 and 2010, respectively. If, at any time, it is determined that capitalized software provides a reduced economic benefit, the unamortized portion of the capitalized development costs will be impaired.

During the fiscal year ended July 31, 2011, we used $34.9 million in cash primarily for the purchases of Hewitt and Barodge Auto Pool. During the fiscal year ended July 31, 2010, we used $21.4 million in cash for the acquisition of D Hales.

Financing Activities

In fiscal 2012, 2011 and 2010, we generated $13.7 million, $7.1 million and $6.3 million, respectively, through the exercise of stock options.

In fiscal 2012, 2011 and 2010, we generated $2.0 million, $2.0 million and $2.0 million, respectively, through the issuance of shares under the Employee Stock Purchase Plan.

In fiscal 2012, 2011 and 2010, we used $203.3 million, $739.6 million and $12.7 million, respectively, for the repurchase of common stock.

In fiscal 2012, our Board of Directors approved a 40 million share increase in the stock repurchase program, bringing the total current authorization to 98 million shares. The repurchases may be effected through solicited or unsolicited transactions in the open market or in privately negotiated transactions. No time limit has been placed on the duration of the stock repurchase program. Subject to applicable securities laws, such repurchases will be made at such times and in such amounts as we deem appropriate and may be discontinued at any time. For the fiscal year ended July 31, 2012, we repurchased 8,880,708 shares of our common stock at a weighted average price of $22.51. For the fiscal year ended July 31, 2011, we repurchased 13,364,634 shares of our common stock at a weighted average price of $20.42. For the fiscal year ended July 31, 2010, we repurchased 242,502 shares of our common stock at a weighted average price of $18.38. As of July 31, 2012, the total number of shares repurchased under the program was 49,786,782 and 48,213,218 shares were available for repurchase under our program.

Additionally, on January 14, 2011, we completed a tender offer to purchase up to 21,052,630 shares of our common stock at a price of $19.00 per share. Our directors and executive officers were expressly prohibited from participating in the tender offer by our board of directors under our Securities Trading Policy. In connection with the tender offer, we accepted for purchase 24,344,176 shares of our common stock. The shares accepted for purchase are comprised of the 21,052,630 shares we offered to purchase and an additional 3,291,546 shares purchased pursuant to our right to purchase additional shares up to 2% of our outstanding shares. The shares purchased as a result of the tender offer are not part of our repurchase program. The purchase of the shares of common stock was funded by the proceeds relating to the issuance of long term debt. The dilutive earnings per share impact of all repurchased shares on the weighted average number of common shares outstanding for the year ended July 31, 2012 is $0.04.

In the first quarter of fiscal year 2010, Mr. Jay Adair, Chief Executive Officer (and then President), exercised stock options through cashless exercises. In the fourth quarter of fiscal year 2010, Mr. Willis J. Johnson, Chairman of the Board, exercised stock options through a cashless exercise. In the second, third and fourth quarters of fiscal year 2011 certain executive officers exercised stock options through cashless exercises. In the first, second and third quarters of fiscal year 2012 certain executive officers exercised stock options through cashless exercises. A portion of the options exercised were net settled in satisfaction of the exercise price and federal and state minimum statutory tax withholding requirements. We remitted $2.6 million, $4.2 million and $7.4 million, in fiscal 2012, 2011 and 2010, respectively, to the proper taxing

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authorities in satisfaction of the employees’ minimum statutory withholding requirements. The exercises are summarized in the following table:

Period
        Options
Exercised
    Exercise
Price
    Shares Net
Settled for
Exercise
    Shares
Withheld
for Taxes(1)
    Net
Shares to
Employee
    Share
Price for
Withholding
    Tax
Withholding
(in 000’s)
FY 2010—Q1
                 647,262          $ 6.52             228,708             191,492             227,062          $ 18.45          $ 3,533   
FY 2010—Q4
                 700,000          $ 6.46             245,844             211,654             242,502          $ 18.38          $ 3,890   
FY 2011—Q2
                 177,500          $ 8.47             76,050             37,834             63,616          $ 19.76          $ 748    
FY 2011—Q3
                 548,334          $ 11.02             295,496             118,032             134,806          $ 20.40          $ 2,408   
FY 2011—Q4
                 180,000          $ 9.48             76,396             48,366             55,238          $ 22.33          $ 1,080   
FY 2012—Q1
                 40,000          $ 9.00             16,082             8,974             14,944          $ 22.39          $ 201    
FY 2012—Q2
                 20,000          $ 9.00             7,506             4,584             7,910          $ 23.98          $ 110    
FY 2012—Q3
                 322,520          $ 10.74             131,298             85,684             105,538          $ 26.38          $ 2,260   
 

(1)
  Shares withheld for taxes are treated as a repurchase of shares for accounting purposes but do not count against our stock repurchase program.

Contractual Obligations

We lease certain domestic and foreign facilities, and certain equipment under non-cancelable operating leases. In addition to the minimum future lease commitments presented, the leases generally require the company to pay property taxes, insurance, maintenance and repair costs which are not included in the table because we have determined these items are not material. The following table summarizes our significant contractual obligations and commercial commitments as of July 31, 2012 (in thousands):

        Payments Due By Period
   
Contractual Obligations
        Total
    Less than
1 Year
    1–3 Years
    3–5 Years
    More than
5 Years
    Other
Long-term debt including current portion
              $ 443,750          $ 75,000          $ 150,000          $ 218,750          $ —           $ —    
Interest payments on long-term debt including current portion
                 24,399             9,326             13,484             1,589             —              —    
Operating leases(1)
                 105,283             17,208             24,840             16,839             46,396             —    
Capital leases(1)
                 324              198              126              —              —              —    
Tax liabilities(2)
                 22,531             —              —              —              —              22,531   
Total contractual obligations
              $ 596,287          $ 101,732          $ 188,450          $ 237,178          $ 46,396          $ 22,531   
 

        Amount of Commitment Expiration Per Period
   
Commercial Commitments(3)
        Total
    Less than
1 Year
    1–3 Years
    3–5 Years
    More than
5 Years
    Other
Letters of credit
              $ 6,659          $ 6,659          $ —           $ —           $ —           $ —    
 

(1)
  Contractual obligations consist of future non-cancelable minimum lease payments under capital and operating leases, used in the normal course of business.

(2)
  Tax liabilities include the long-term liabilities in the consolidated balance sheet for unrecognized tax positions. At this time we are unable to make a reasonably reliable estimate of the timing of payments in individual years beyond 12 months due to uncertainties in the timing of tax audit outcomes.

(3)
  Commercial commitments consist primarily of letters of credit provided for insurance programs and certain business transactions.

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Credit Facilities

On December 14, 2010, we entered into an Amended and Restated Credit Facility Agreement (Credit Facility), which supersedes our previously disclosed credit agreement with Bank of America, N.A. (Bank of America). The Credit Facility is an unsecured credit agreement providing for (i) a $100.0 million Revolving Credit Facility, including a $100.0 million alternative currency borrowing sublimit and a $50.0 million letter of credit sublimit (Revolving Credit) and (ii) a term loan facility of $400.0 million (Term Loan). On January 14, 2011 the full $400.0 million provided under the Term Loan was borrowed. On September, 29, 2011, we amended the credit agreement increasing the amount of the term loan facility from $400.0 million to $500.0 million.

The Term Loan, which at July 31, 2012 had $443.8 million outstanding, amortizes $18.8 million each quarter beginning December 31, 2011 with all outstanding borrowings due on December 14, 2015. All amounts borrowed under the Term Loan may be prepaid without premium or penalty. During the year ended July 31, 2012, we made principal repayments of $56.3 million. We currently have $1.6 million deferred financing costs in other assets as of July 31, 2012.

Amounts borrowed under the Credit Facility bear interest, subject to certain restrictions, at a fluctuating rate based on (i) the Eurocurrency Rate; (ii) the Federal Funds Rate; or (iii) the Prime Rate as described in the Credit Facility. We have entered into two interest rate swaps (which is further described in the Notes to Consolidated Financial Statements — Note 10. Derivatives and Hedging ) to exchange our variable interest rate payments commitment for fixed interest rate payments on the Term Loan balance, which at July 31, 2012, totaled $443.8 million. A default interest rate applies on all obligations during an event of default under the credit facility, at a rate per annum equal to 2.0% above the otherwise applicable interest rate. At July 31, 2012, our interest rate is the 0.25% Eurocurrency Rate plus the 1.50% Applicable Rate. The Applicable Rate can fluctuate between 1.5% and 2.0% depending on our consolidated net leverage ratio (as defined in the Credit Facility). The Credit Facility is guaranteed by our material domestic subsidiaries. The carrying amount of the Credit Facility is comprised of borrowing under which the interest accrued under a fluctuating interest rate structure. Accordingly, the carrying value approximates fair value at July 31, 2012.

Amounts borrowed under the Revolving Credit may be repaid and reborrowed until the maturity date, which is December 14, 2015. The Credit Facility requires us to pay a commitment fee on the unused portion of the Revolving Credit. The commitment fee ranges from 0.075% to 0.125% per annum depending on our leverage ratio. We had no outstanding borrowings under the Revolving Credit at the end of the period.

The Credit Facility contains customary representations and warranties and may place certain business operating restrictions on us relating to, among other things, indebtedness, liens and other encumbrances, investments, mergers and acquisitions, asset sales, dividends and distributions and redemptions of capital stock. In addition, the Credit Facility provides for the following financial covenants: (i) earnings before income tax, depreciation and amortization (EBITDA); (ii) leverage ratio; (iii) interest coverage ratio; and (iv) limitations on capital expenditures. The Credit Facility contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, cross-defaults to certain other indebtedness, bankruptcy and insolvency defaults, material judgments, invalidity of the loan documents and events constituting a change of control. We are in compliance with all covenants as of July 31, 2012. Please refer to the tables under the caption “Contractual Obligations” above in the “Long-term debt including current portion” section for the payment schedule.

Restructuring

We relocated our corporate headquarters to Dallas, Texas in 2012. Certain functions currently performed at the Fairfield, California location may transition to the corporate headquarters over the next few years. We recognized $2.2 million and $1.4 million for the year ended July 31, 2012 and 2011, respectively, in general and administrative expense. We also recognized restructuring-related costs of $1.1 million in impairment of long-lived assets and $0.8 million in yard operations expense for the year ended July 31, 2012. Restructuring-

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related costs for the year ended July 31, 2012 are $1.7 million for severance and $2.4 million for the costs of relocating employees to Texas. Restructuring-related costs for the year ended July 31, 2011 are $1.2 million for severance and $0.2 million for the costs of relocating employees to Texas.

Off-Balance Sheet Arrangements

As of July 31, 2012, we had no off-balance sheet arrangements as defined in Item 303(a)(4) of Regulation S-K promulgated under the Exchange Act.

Critical Accounting Policies and Estimates

The preparation of consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to vehicle pooling costs, self-insured reserves, allowance for doubtful accounts, income taxes, revenue recognition, stock-based compensation, long-lived asset impairment calculations and contingencies. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management has discussed the selection of critical accounting policies and estimates with the Audit Committee of the Board of Directors and the Audit Committee has reviewed our disclosure relating to critical accounting policies and estimates in this Annual Report on Form 10-K. Our significant accounting policies are described in the Notes to Consolidated Financial Statements — Note 1. Summary of Significant Accounting Policies . The following is a summary of the more significant judgments and estimates included in our critical accounting policies used in the preparation of our consolidated financial statements. Where appropriate, we discuss sensitivity to change based on other outcomes reasonably likely to occur.

Revenue Recognition

We provide a portfolio of services to our sellers and buyers that facilitate the sale and delivery of a vehicle from seller to buyer. These services include the ability to use our Internet sales technology and vehicle delivery, loading, title processing, preparation and storage. We evaluate multiple-element arrangements relative to our member and seller agreements.

The services we provide to the seller of a vehicle involve disposing of a vehicle on the seller’s behalf and, under most of our current North American contracts, collecting the proceeds from the member. Upon adoption of the new accounting standard for evaluating multiple-element arrangements, pre-sale services, including towing, title processing, preparation and storage sale fees and other enhancement service fees meet the criteria for separate units of accounting. The revenue associated with each service is recognized upon completion of the respective service, net of applicable rebates or allowances. For certain sellers who are charged a proportionate fee based on high bid of the vehicle, the revenue associated with the pre-sale services are recognized upon completion of the sale when the total arrangement is fixed and determinable. The selling price of each service is determined based on management’s best estimate and allotted based on the relative selling price method.

Vehicle sales, where we purchase and remarket vehicles on our own behalf, are recognized on the sale date, which is typically the point of high bid acceptance. Upon high bid acceptance, a legal binding contract is formed with the member, and we record the gross sales price as revenue.

We also provide a number of services to the buyer of the vehicle, charging a separate fee for each service. Each of these services has been assessed to determine whether we have met the requirements to

41



separate them into units of accounting within a multiple-element arrangement. We have concluded that the sale and the post-sale services are separate units of accounting.

The fees for sale services are recognized upon completion of the sale, and the fees for the post-sale services are recognized upon successful completion of those services using the relative selling price method.

We also charge members an annual registration fee for the right to participate in our vehicle sales program, which is recognized ratably over the term of the arrangement, and relist and late-payment fees, which are recognized upon receipt of payment by the member. No provision for returns has been established, as all sales are final with no right of return, although we provide for bad debt expense in the case of non-performance by our members or sellers.

In October 2009, the Financial Accounting Standards Board (FASB) amended the accounting standards for multiple deliverable revenue arrangements to:

(i)
  provide updated guidance on whether multiple deliverables exist, how the deliverables in an arrangement should be separated, and how the arrangement consideration should be allocated;

(ii)
  require an entity to allocate consideration in an arrangement using its best estimate of selling prices (BSP) of deliverables if a vendor does not have vendor-specific objective evidence of selling price (VSOE) or third-party evidence of selling price (TPE); and

(iii)
  eliminate the use of the residual method and require an entity to allocate arrangement consideration using the relative selling price method.

On August 1, 2010, we prospectively adopted ASU 2009-13. Consequently, we recognize in the period earned certain revenues, primarily towing fees, titling fees and other enhancement service fees, which were previously deferred until the period the car associated with those revenues was sold. As a result of this adoption, for the twelve months ended July 31, 2011, we accelerated recognition of $14.4 million in service revenue and $13.5 million in related yard operation expenses.

We allocate arrangement consideration based on the relative estimated selling prices of the separate units of accounting contained within an arrangement containing multiple deliverables. Estimated selling prices are determined using management’s best estimate. Significant inputs in our estimates of the selling price of separate units of accounting include market and pricing trends, pricing customization and practices, and profit objectives for the services. Prior to the adoption of ASU 2009-13, we used the residual method to allocate the arrangement consideration when the fair value of delivered items had not been established and deferred all arrangement consideration when fair value was not available for undelivered items.

Fair Value of Financial Instruments

We record our financial assets and liabilities at fair value in accordance with the framework for measuring fair value in generally accepted accounting principles. In accordance with ASC 820, Fair Value Measurements and Disclosures (ASC 820), as amended by Accounting Standards Update 2011-04, we consider fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants under current market conditions. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:

Level I
           
Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.
Level II
           
Inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly. Interest rate hedges are valued at exit prices obtained from the counter-party.
Level III
           
Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate
 

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The amounts recorded for financial instruments in our consolidated financial statements, which included cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values as of July 31, 2012 and July 31, 2011, due to the short-term nature of those instruments. See the Notes to Consolidated Financial Statements — Note 9. Long-Term Debt .

Derivatives and Hedging

We have entered into interest rate swaps to eliminate interest rate risk on our variable rate Term Loan, and the swaps are designated as effective cash flow hedges under ASC 815, Derivatives and Hedging (see the Notes to Consolidated Financial Statements — Note 10. Derivatives and Hedging ). Each quarter, we measure hedge effectiveness using the “hypothetical derivative method” and record in earnings any hedge ineffectiveness with the effective portion of the hedges change in fair value recorded in other comprehensive income or loss.

Capitalized Software Costs

We capitalize system development costs and website development costs related to our enterprise computing services during the application development stage. Costs related to preliminary project activities and post implementation activities are expensed as incurred. Internal-use software is amortized on a straight line basis over its estimated useful life, generally three years. Management evaluates the useful lives of these assets on an annual basis and tests for impairment whenever events or changes in circumstances occur that could impact the recoverability of these assets. Total capitalized software as of July 31, 2012, 2011 and 2010 was $55.0 million, $46.8 million, and $22.9 million, respectively. Accumulated amortization expense related to software for July 31, 2012, 2011 and 2010 was $19.1 million, $10.2 million, and $9.3, respectively.

Vehicle Pooling Costs

We defer in vehicle pooling costs certain yard operation expenses associated with vehicles consigned to and received by us, but not sold as of the balance sheet date. We quantify the deferred costs using a calculation that includes the number of vehicles at our facilities at the beginning and end of the period, the number of vehicles sold during the period and an allocation of certain yard operation expenses of the period. The primary expenses allocated and deferred are certain facility costs, labor, and vehicle processing. If our allocation factors change, then yard operation expenses could increase or decrease correspondingly in the future. These costs are expensed as vehicles are sold in the subsequent periods on an average cost basis. Given the fixed cost nature of our business there is not a direct correlation in an increase in expenses or units processed on vehicle pooling costs.

We apply the provisions of the guidance for subsequent measurement of inventory to our vehicle pooling costs. The provision requires that items such as idle facility expense, excessive spoilage, double freight and re-handling costs be recognized as current period charges regardless of whether they meet the criteria of “so abnormal” as provided in the guidance. In addition, the guidance requires that the allocation of fixed production overhead to the costs of conversion be based on the normal capacity of production facilities.

Allowance for Doubtful Accounts

We maintain an allowance for doubtful accounts in order to provide for estimated losses resulting from disputed amounts billed to sellers or members and the inability of our sellers or members to make required payments. If billing disputes exceed expectations and/or if the financial condition of our sellers or members were to deteriorate, additional allowances may be required. The allowance is calculated by taking both seller and buyer accounts receivables written off during the previous 12 month period as a percentage of the total accounts receivable balance, i.e. total write-offs/total accounts receivable (write-off percentage). We note that a one percentage point deviation in the write-off percentage would have resulted in an increase or decrease to the allowance for doubtful accounts balance of less than $1.2 million.

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Valuation of Goodwill

We evaluate the impairment of goodwill of our North America and U.K. operating segments annually (or on an interim basis if certain indicators are present) by comparing the fair value of the operating segment to its carrying value. Future adverse changes in market conditions or poor operating results of the operating segments could result in an inability to recover the carrying value of the investment, thereby requiring impairment charges in the future.

Income Taxes and Deferred Tax Assets

We account for income tax exposures as required under ASC 740, Income Taxes . We are subject to income taxes in the U.S., Canada and U.K. In arriving at a provision of income taxes, we first calculate taxes payable in accordance with the prevailing tax laws in the jurisdictions in which we operate; we then analyze the timing differences between the financial reporting and tax basis of our assets and liabilities, such as various accruals, depreciation and amortization. The tax effects of the timing difference are presented as deferred tax assets and liabilities in the consolidated balance sheet. We assess the probability that the deferred tax assets will be realized based on our ability to generate future taxable income. In the event that it is more likely than not the full benefit would not be realized from the deferred tax assets we carry on our consolidated balance sheet, we record a valuation allowance to reduce the carrying value of the deferred tax assets to the amount expected to be realized. As of July 31, 2012, we had $1.2 million of valuation allowance arising from the state operating losses where we had discontinued certain operations previously and from capital losses in the U.S. and the U.K. To the extent we establish a valuation allowance or change the amount of valuation allowance in a period, we reflect the change with a corresponding increase or decrease in our income tax provision in the consolidated statements of income.

Historically, our income taxes have been sufficiently provided to cover our actual income tax liabilities among the jurisdictions in which we operate. Nonetheless, our future effective tax rate could still be adversely affected by several factors, including (i) the geographical allocation of our future earnings, (ii) the change in tax laws or our interpretation of tax laws, (iii) the changes in governing regulations and accounting principles, (iv) the changes in the valuation of our deferred tax assets and liabilities and (v) the outcome of the income tax examinations. As a result, we routinely assess the possibilities of material changes resulting from the aforementioned factors to determine the adequacy of our income tax provision.

Based on our results for the twelve months ended July 31, 2012, a one percentage point change in our provision for income taxes as a percentage of income before taxes would have resulted in an increase or decrease in the provision of $2.8 million.

We apply the provision of ASC 740, which contains a two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement.

Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. We adjust these reserves in light of changing facts and circumstances, such as the closing of a tax audit or the refinement of an estimate. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences will impact the provision for income taxes in the period in which such determination is made. The provision for income taxes includes the impact of reserve provisions and changes to reserves that are considered appropriate, as well as the related net interest settlement of any particular position, could require the use of cash. In addition, we are subject to the continuous examination of our income tax returns by various taxing authorities, including the Internal Revenue Service and U.S. states. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes.

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Long-lived Asset Valuation, Including Intangible Assets

We evaluate long-lived assets, including property and equipment and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the use of the asset. If the estimated undiscounted cash flows change in the future, we may be required to reduce the carrying amount of an asset.

Stock-Based Compensation

We account for our stock-based awards to employees and non-employees using the fair value method. Compensation cost related to stock-based payment transactions are recognized based on the fair value of the equity or liability instruments issued. Determining the fair value of options using the Black-Scholes Merton option pricing model, or other currently accepted option valuation models, requires highly subjective assumptions, including future stock price volatility and expected time until exercise, which greatly affect the calculated fair value on the measurement date. If actual results are not consistent with our assumptions and judgments used in estimating the key assumptions, we may be required to record additional compensation or income tax expense, which could have a material impact on our consolidated results of operations and financial position.

Retained Insurance Liabilities

We are partially self-insured for certain losses related to medical, general liability, workers’ compensation and auto liability. Our insurance policies are subject to a $250,000 deductible per claim, with the exception of our medical policy which is $225,000 per claim. In addition, each of our policies contains an aggregate stop loss which limits our ultimate exposure. Our liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. The estimated liability is not discounted and is established based upon analysis of historical data and actuarial estimates. The primary estimates used in the actuarial analysis include total payroll and revenue. Our estimates have not materially fluctuated from actual results. While we believe these estimates are reasonable based on the information currently available, if actual trends, including the severity of claims and medical cost inflation, differ from our estimates, our consolidated results of operations, financial position or cash flows could be impacted. The process of determining our insurance reserves requires estimates with various assumptions, each of which can positively or negatively impact those balances. The total amount reserved for all policies is $5.7 million as of July 31, 2012. If the total number of participants in the medical plan changed by 10% we estimate that our medical expense would change by $0.6 million and our medical accrual would change by $0.4 million. If our total payroll changed by 10% we estimate that our workers’ compensation expense would change by $50,000 and our accrual for workers’ compensation expenses would change by $50,000. A 10% change in revenue would change our insurance premium for the general liability and umbrella policy by less than $25,000.

Segment Reporting

Our North American and U.K. regions are considered two separate operating segments, which have been aggregated into one reportable segment because they share similar economic characteristics.

Recently Issued Accounting Standards

For a description of the new accounting standards that affect us, refer to the Notes to Consolidated Financial Statements — Note 1. Summary of Significant Accounting Policies.

Item 7A.
  Quantitative and Qualitative Disclosures About Market Risk

Our principal exposures to financial market risk are interest rate risk, foreign currency risk and translation risk.

45


Interest Income Risk

The primary objective of our investment activities is to preserve principal while secondarily maximizing yields without significantly increasing risk. To achieve this objective in the current uncertain global financial markets, as of July 31, 2012, all of our total cash and cash equivalents were held in bank deposits and money market funds. As the interest rates on a material portion of our cash and cash equivalents are variable, a change in interest rates earned on our investment portfolio would impact interest income along with cash flows, but would not materially impact the fair market value of the related underlying instruments. As of July 31, 2012, we held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgaged-backed securities. Based on the average cash balance held during the twelve months ended July 31, 2012, a 10% change in our interest yield would not materially affect our operating results.

Interest Expense Risk

Our total borrowings under the Credit Facility were $443.8 million as of July 31, 2012. Amounts borrowed under the Credit Facility bear interest, subject to certain restrictions, at a fluctuating rate based on (i) the Eurocurrency Rate, (ii) the Federal Funds Rate or (iii) the Prime Rate as described in the Credit Facility. A default interest rate applies on all obligations during an event of default under the Credit Facility, at a rate per annum equal to 2.0% above the otherwise applicable interest rate.

We have entered into two interest rate swaps to exchange our variable interest rate payments commitment for fixed interest rate payments on the Term Loan balance.

Foreign Currency and Translation Exposure

Fluctuations in the foreign currencies create volatility in our reported results of operations because we are required to consolidate the results of operations of our foreign currency denominated subsidiaries. International net revenues result from transactions by our Canadian and U.K. operations and are typically denominated in the local currency of each country. These operations also incur a majority of their expenses in the local currency, the Canadian dollar and the British pound. Our international operations are subject to risks associated with foreign exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors. A hypothetical uniform 10% strengthening or weakening in the value of the U.S. dollar relative to the Canadian dollar and British pound in which our revenues and profits are denominated would result in a decrease/increase to revenue of $19.9 million for the twelve months ended July 31, 2012.

Fluctuations in the foreign currencies create volatility in our reported consolidated financial position because we are required to remeasure substantially all assets and liabilities held by our foreign subsidiaries at the current exchange rate at the close of the accounting period. At July 31, 2012, the cumulative effect of foreign exchange rate fluctuations on our consolidated financial position was a net translation loss of $34.9 million. This loss is recognized as an adjustment to stockholders’ equity through accumulated other comprehensive income. A 10% strengthening or weakening in the value of the U.S. dollar relative to the Canadian dollar or the British pound will not have a material effect on our consolidated financial position.

We do not hedge our exposure to translation risks arising from fluctuations in foreign currency exchange rates.

Item 8.
  Financial Statements and Supplementary Data

The response to this item is submitted as a separate section of this Annual Report on Form 10-K in Item 15. See Part IV, Item 15(a) for an index to the consolidated financial statements and supplementary financial information.

46


Item 9.     
  Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.

Item 9A.     
  Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), or Disclosure Controls, as of the end of the period covered by this Annual Report on Form 10-K. This evaluation, or Controls Evaluation, was performed under the supervision and with the participation of management, including our Chief Executive Officer (our CEO) and our Chief Financial Officer (our CFO). Disclosure Controls are controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act, such as this Annual Report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure Controls include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our CEO and CFO, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our Disclosure Controls include some, but not all, components of our internal control over financial reporting.

Based upon the Controls Evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our Disclosure Controls were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.

Management assessed our internal control over financial reporting as of July 31, 2012, the end of our fiscal year. Management based its assessment on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies, and our overall control environment. This assessment is supported by testing and monitoring performed by our Finance department.

Based on our assessment, management has concluded that our internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external reporting purposes in accordance with generally accepted accounting principles. The certifications of our principal executive officer

47



and principal financial officer attached as Exhibits 31.1 and 31.2 to this report include, in paragraph 4 of such certifications, information concerning our disclosure controls and procedures and internal controls over financial reporting. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.

Our independent registered public accounting firm, Ernst & Young LLP, independently assessed the effectiveness of our internal control over financial reporting as of July 31, 2012. Ernst & Young LLP has issued an attestation report which appears on the following page of this Annual Report on Form 10-K.

48


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Copart, Inc.

We have audited Copart, Inc.’s internal control over financial reporting as of July 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Copart, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Copart, Inc. maintained, in all material respects, effective internal control over financial reporting as of July 31, 2012, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Copart, Inc. as of July 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 2012 of Copart, Inc. and our report dated October 1, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Dallas, Texas
October 1, 2012

49


Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Copart have been detected. These inherent limitations include the realities that judgments in decision making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Changes in Internal Control Over Financial Reporting

There have not been any changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

Item 9B.     
  Other Information

An updated form of indemnification agreement applicable to our directors and certain of our officers was approved in January 2012. The form was intended to update the current form for our reincorporation into Delaware and general developments in corporate law since the adoption of our original form of indemnification agreement and was done as part of our ordinary course of corporate governance matters. A copy of the form of agreement is attached as Exhibit 10.17 to this Report on Form 10-K.

50

PART III

Certain information required by Part III is omitted from this Annual Report on Form 10-K because we intend to file a definitive proxy statement for our 2012 Annual Meeting of Stockholders (the Proxy Statement) not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and certain information to be included therein is incorporated herein by reference.

Item 10.    
  Directors, Executive Officers of the Registrant and Corporate Governance

Information required by this item concerning our Board of Directors, the members of our Audit Committee, our Audit Committee Financial Expert, and compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the sections entitled “Proposal Number One Election of Directors,” “Corporate Governance and Board of Directors” and “Related Person Transactions and Section 16(a) Beneficial Ownership Compliance” in our Proxy Statement (to be filed with the Securities and Exchange Commission within 120 days of our July 31, 2012 fiscal year end).

Information required by this item concerning our Executive Officers is incorporated by reference to the section entitled “Executive Officers” in our Proxy Statement (to be filed with the Securities and Exchange Commission within 120 days of our July 31, 2012 fiscal year end).

Information required by this item with respect to material changes to the procedures by which our stockholders may recommend nominees to our Board of Directors is incorporated herein by reference from the information provided under the heading “Corporate Governance and Board of Directors,” subheading “Director Nomination Process,” of our Proxy Statement (to be filed with the Securities and Exchange Commission within 120 days of our July 31, 2012 fiscal year end).

Code of Ethics

We have adopted the Copart, Inc. Code of Ethics for Principal Executive and Senior Financial Officers (Code of Ethics). The Code of Ethics applies to our principal executive officer, our principal financial officer, our principal accounting officer or controller, and persons performing similar functions and responsibilities who shall be identified by our Audit Committee from time to time.

The Code of Ethics is available at our website, located at http://www.copart.com . It may be found at our website as follows:

1.
  From our main web page, click on “Company Info.”

2.
  Next, click on “Investor Relations.”

3.
  Finally, click on “Code of Ethics for Principal Executive and Senior Financial Officers.”

We intend to satisfy disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of the Code of Ethics by posting such information on our website, at the address and location specified above, or as otherwise required by the NASDAQ Global Select Market.

Item 11.    
  Executive Compensation

The information required by this item is incorporated herein by reference from the Proxy Statement (to be filed with the Securities and Exchange Commission within 120 days of our July 31, 2012 fiscal year end) under the heading “Executive Compensation,” “Compensation of Non-Employee Directors,” and “Corporate Governance and Board of Directors.”

51


Item 12.    
  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this item is incorporated herein by reference from the Proxy Statement (to be filed with the Securities and Exchange Commission within 120 days of our July 31, 2012 fiscal year end) under the headings “Security Ownership” and “Execution Compensation,” subheading “Equity Compensation Plan Information.”

Item 13.    
  Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated herein by reference from the Proxy Statement (to be filed with the Securities and Exchange Commission within 120 days of our July 31, 2012 fiscal year end) under the heading “Related Person Transactions and Section 16(a) Beneficial Ownership Compliance,” “Corporate Governance and Board of Directors,” and “Proposal Number One Election of Directors.”

Item 14.    
  Principal Accountant Fees and Services

The information required by this item is incorporated herein by reference from the section captioned “Proposal Three — Ratification of Appointment of Independent Registered Public Accounting Firm” in the Proxy Statement (to be filed with the Securities and Exchange Commission within 120 days of our July 31, 2012 fiscal year end).

52


PART IV

Item 15.    
  Exhibits and Financial Statement Schedules

The following documents are filed as part of this Form 10-K:

            Page
(a)          1.
           
Financial Statements: Index to Consolidated Financial Statements
               
 
           
Report of Independent Registered Public Accounting Firm
         59    
 
           
Consolidated Balance Sheets at July 31, 2012 and 2011
         60    
 
           
Consolidated Statements of Income for the years ended July 31, 2012, 2011 and 2010
         61    
 
           
Consolidated Statements of Comprehensive Income for the years ended July 31, 2012, 2011 and 2010
         62    
 
           
Consolidated Statements of Stockholders’ Equity for the years ended July 31, 2012, 2011 and 2010
         63    
 
           
Consolidated Statements of Cash Flows for the years ended July 31, 2012, 2011 and 2010
         64    
 
           
Notes to Consolidated Financial Statements
         65    
2.
           
Financial Statement Schedules: All schedules are omitted because they are not applicable or the required information is shown in the consolidated financial statements or notes thereto
               
3.
           
Exhibits: The following Exhibits are filed as part of, or incorporated by reference into this report .
              
 

            Incorporated by reference herein
   
Exhibit
Number
  
Description
  
Form
  
Date
 3.1            
Copart, Inc. Certificate of Incorporation
   
Current Report on
Form 8-K, (File
No. 000-23255),
Exhibit No. 3.1
   
January 10, 2012
 3.2            
Bylaws of Copart, Inc.
   
Current Report on
Form 8-K, (File
No. 000-23255),
Exhibit No. 3.2
   
January 10, 2012
 4.1            
Preferred Stock Rights Agreement, dated as of March 6, 2003, between Copart and Equiserve Trust Company N.A., including the Certificate of Determination, the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A, B and C, respectively
   
8/A-12/G (File
No. 000-23255),
Exhibit No. 4.1
   
March 11, 2003
 4.2            
Amendment to Preferred Stock Rights Agreement, as of March 14, 2006, between the Registrant and Computershare Trust Company, N.A. (formerly Equiserve Trust Company, N.A.)
   
8/A-12G/A (File
No. 000-23255),
Exhibit 4.2
   
March 15, 2006
4.3            
Amendment to Preferred Stock Rights Agreement, as of January 10, 2012, between the Registrant and Computershare Trust Company, N.A. (formerly Equiserve Trust Company, N.A.)
   
8/A-12G/A (File
No. 000-23255),
Exhibit 4.3
   
January 10, 2012
10.1*            
Copart Inc. 2001 Stock Option Plan
   
Registration
Statement on
Form S-8 (File
No. 333-90612),
Exhibit No. 4.1
   
June 17, 2002

53


            Incorporated by reference herein
   
Exhibit
Number
  
Description
  
Form
  
Date
10.2*            
Copart Inc. 2007 Equity Incentive Plan (2007 EIP)
   
Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.1
   
December 12, 2007
10.3*            
Form of Performance Share Award Agreement for use with 2007 EIP
   
Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.2
   
December 12, 2007
10.4*            
Form of Restricted Stock Unit Award Agreement for use with 2007 EIP
   
Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.3
   
December 12, 2007
10.5*            
Form of Stock Option Award Agreement for use with 2007 EIP
   
Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.5
   
December 12, 2007
10.6*            
Form of Restricted Stock Award Agreement for use with 2007 EIP
   
Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.4
   
December 12, 2007
10.7            
Credit Agreement dated as of December 14, 2010 by and between the Registrant and Bank of America, N.A.
   
Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.1
   
December 15, 2010
10.8            
Amendment to Credit Agreement between and between the Registrant and Bank of America, N.A., dated as of September 29, 2011
   
Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.13b
   
October 4, 2011
10.9*            
Copart, Inc. Executive Bonus Plan
   
Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.13
   
August 3, 2006
10.10*            
Amended and Restated Executive Officer Employment Agreement between the Registrant and William E. Franklin, dated September 25, 2008
   
Quarterly Report on
Form 10-Q (File
No. 000-23255),
Exhibit No. 10.1
   
December 10, 2008
10.11*            
Form of Copart, Inc. Stand-Alone Stock Option Award Agreement for grant of options to purchase 2,000,000 shares of the Registrant’s common stock to each of Willis J. Johnson and A. Jayson Adair
   
Registration
Statement on
Form S-8 (File
No. 333-159946),
Exhibit No. 4.1
   
June 12, 2009
10.12*            
Amendment dated June 9, 2010 to Option Agreements dated June 6, 2001, October 21, 2002 and August 19, 2003 between the Registrant and Willis J. Johnson
   
Annual Report on
Form 10-K (File
No. 000-23255),
Exhibit No. 10-17
   
September 23, 2010
10.13            
Executive Officer Employment Agreement between the Registrant and Thomas Wylie, dated September 25, 2008
   
Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.2
   
December 15, 2010

54


            Incorporated by reference herein
   
Exhibit
Number
  
Description
  
Form
  
Date
10.14            
Executive Officer Employment Agreement between the Registrant and Greg A. Tucker, dated October 29, 2008
   
Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.3
   
December 15, 2010
10.15            
Executive Officer Employment Agreement between the Registrant and Vincent Phillips, dated April 12, 2010
   
Current Report on
Form 8-K (File
No. 000-23255),
Exhibit No. 10.4
   
December 15, 2010
10.16            
Standard Industrial/Commercial single tenant lease-net dated January 3, 2011 between Partnership HealthPlan of California and the Registrant
   
Annual Report on
Form 10-K (File
No. 000-23254),
Exhibit No. 10.21
   
September 28, 2011
10.17*            
Form of Indemnification Agreement signed by executive officers and directors
   
—
   
Filed herewith
10.18            
Standard Industrial/Commercial single tenant lease-net dated February 3, 2012 between Garden Centura, L.P. and the Registrant
   
—
   
Filed herewith
14.01            
Code of Ethics for Principal Executive and Senior Financial Officers
   
Annual Report on
Form 10-K (File
No. 000-23254),
Exhibit No. 14-01
   
October 17, 2003
21.1            
List of subsidiaries of Registrant
   
—
   
Filed herewith
23.1            
Consent of Independent Registered Public Accounting Firm
   
—
   
Filed herewith
24.1            
Power of Attorney (included on signature page)
   
—
   
Filed herewith
31.1            
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
—
   
Filed herewith
31.2            
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
—
   
Filed herewith
32.1(1)            
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
—
   
Filed herewith
32.2(1)            
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
—
   
Filed herewith
101.INS(2)            
XBRL Instance Document
                               
101.SCH(2)            
XBRL Taxonomy Extension Schema Document
                               
101.CAL(2)            
XBRL Taxonomy Extension Calculation Linkbase Document
                               
101.DEF(2)            
XBRL Extension Definition
                               
101.LAB(2)            
XBRL Taxonomy Extension Label Linkbase Document
                               
101.PRE(2)            
XBRL Taxonomy Extension Presentation Linkbase Document
                               
 

55


(1)            
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
(2)            
XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Exchange Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 

*
  Management contract, plan or arrangement

56


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 
           
Registrant
 
 
           
C OPART, I NC.
 
 
           
By:
   
/s/ A . J AYSON A DAIR
 
           
 
   
A. Jayson Adair
Chief Executive Officer
 

October 1, 2012

 
           
C OPART, I NC.
 
 
           
By:
   
/s/ W ILLIAM E . F RANKLIN
 
           
 
   
William E. Franklin
Chief Financial Officer
 

October 1, 2012

57


POWER OF ATTORNEY

KNOWN ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints A. Jayson Adair and William E. Franklin, and each of them, as his true and lawful attorneys-in-fact and agents, each with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
  
Capacity in Which Signed
  
Date
/s/ A . J AYSON A DAIR
A. Jayson Adair
           
Chief Executive Officer (Principal Executive Officer and Director)
   
October 1, 2012
 
/s/ W ILLIAM E . F RANKLIN
William E. Franklin
           
Senior Vice President of Finance and Chief Financial Officer (Principal Financial and Accounting Officer)
   
October 1, 2012
 
/s/ W ILLIS J . J OHNSON
Willis J. Johnson
           
Chairman of the Board
   
October 1, 2012
 
/s/ J AMES E . M EEKS
James E. Meeks
           
Director
   
October 1, 2012
 
/s/ S TEVEN D . C OHAN
Steven D. Cohan
           
Director
   
October 1, 2012
 
/s/ D ANIEL E NGLANDER
Daniel Englander
           
Director
   
October 1, 2012
 
/s/ T HOMAS N . T RYFOROS
Thomas N. Tryforos
           
Director
   
October 1, 2012
 
/s/ M ATT B LUNT
Matt Blunt
           
Director
   
October 1, 2012
 
/s/ V INCENT W . M ITZ
Vincent W. Mitz
           
President and Director
   
October 1, 2012
 

58


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of Copart, Inc.

We have audited the accompanying consolidated balance sheets of Copart, Inc. as of July 31, 2012 and 2011, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Copart, Inc. at July 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years in the period ended July 31, 2012, in conformity with U.S. generally accepted accounting principles.

As discussed in Note 1 to the consolidated financial statements, effective August 1, 2010, the Company adopted on a prospective basis Auditing Standards Update 2009 -13, Revenue Arrangements with Multiple Deliverables .

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Copart, Inc.’s internal control over financial reporting as of July 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 1, 2012 expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

Dallas, Texas
October 1, 2012

59


COPART, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)

        July 31,
2012
    July 31,
2011
ASSETS
 
   
Current assets:
                                       
Cash and cash equivalents
              $ 140,112          $ 74,009   
Accounts receivable, net
                 138,966             122,859   
Vehicle pooling costs
                 15,728             17,026   
Inventories
                 8,494             8,016   
Income taxes receivable
                 2,312             5,145   
Deferred income taxes
                 3,600             —    
Prepaid expenses and other assets
                 9,155             14,813   
Assets held for sale
                 3,926             —    
Total current assets
                 322,293             241,868   
Property and equipment, net
                 587,163             600,388   
Intangibles, net
                 7,985             12,748   
Goodwill
                 196,438             198,620   
Deferred income taxes
                 22,280             9,425   
Other assets
                 18,907             21,387   
Total assets
              $ 1,155,066          $ 1,084,436   
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
   
Current liabilities:
                                       
Accounts payable and accrued liabilities
              $ 102,958          $ 101,708   
Deferred revenue
                 5,390             5,636   
Income taxes payable
                 3,082             3,543   
Deferred income taxes
                 —              440    
Current portion of long-term debt and capital lease obligations
                 75,170             50,370   
Other current liabilities
                 785              4,929   
Total current liabilities
                 187,385             166,626   
Deferred income taxes
                 7,186             10,057   
Income taxes payable
                 22,531             24,773   
Long-term debt and capital lease obligations
                 368,950             325,386   
Other liabilities
                 7,897             2,422   
Total liabilities
                 593,949             529,264   
 
Commitments and contingencies
                                       
Stockholders’ equity:
                                       
Preferred stock, $0.0001 par value — 5,000,000 shares authorized; no shares issued and outstanding at July 31, 2012 and July 31, 2011, respectively
                 —              —    
Common stock, $0.0001 par value — 180,000,000 shares authorized; 124,393,700 and 132,011,034 shares issued and outstanding at July 31, 2012 and 2011, respectively
                 12              13    
Additional paid-in capital
                 326,187             313,927   
Accumulated other comprehensive loss
                 (38,043 )            (23,225 )  
Retained earnings
                 272,961             264,457   
Total stockholders’ equity
                 561,117             555,172   
Total liabilities and stockholders’ equity
              $ 1,155,066          $ 1,084,436   
 

The accompanying notes are an integral part of these consolidated financial statements.

60


COPART, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)

        Years Ended July 31,
   
        2012
    2011
    2010
Service revenues and vehicle sales:
                                                       
Service revenues
              $ 757,272          $ 713,093          $ 634,606   
Vehicle sales
                 166,919             159,153             138,273   
Total service revenues and vehicle sales
                 924,191             872,246             772,879   
Operating costs and expenses:
                                                       
Yard operations
                 377,604             374,149             320,212   
Cost of vehicle sales
                 136,971             125,202             104,673   
General and administrative
                 114,492             107,605             108,924   
Impairment of long-lived assets
                 8,771             —              —    
Total operating costs and expenses
                 637,838             606,956             533,809   
Operating income
                 286,353             265,290             239,070   
 
Other (expense) income:
                                                       
Interest expense
                 (11,341 )            (4,078 )            (216 )  
Interest income
                 357              493              205    
Other income, net
                 2,687             2,172             436    
Total other (expense) income
                 (8,297 )            (1,413 )            425    
Income before income taxes
                 278,056             263,877             239,495   
Income taxes
                 95,937             97,502             87,868   
Net income
              $ 182,119          $ 166,375          $ 151,627   
 
Earnings per share — basic
                                                       
Basic net income per share
              $ 1.42          $ 1.10          $ 0.90   
Weighted average common shares outstanding
                 128,120             151,298             168,330   
 
Earnings per share — diluted
                                                       
Diluted net income per share
              $ 1.39          $ 1.08          $ 0.89   
Diluted weighted average common shares outstanding
                 131,428             153,352             170,054   
 

The accompanying notes are an integral part of these consolidated financial statements.

61


COPART, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)

        Years Ended July 31,
   
        2012
    2011
    2010
Net income, as reported
              $ 182,119          $ 166,375          $ 151,627   
Other comprehensive income:
                                                       
Interest rate swap, net of tax effects of $1,762, $0, and $0
                 (3,110 )            —              —    
Foreign currency translation adjustments
                 (11,708 )            9,516             (5,659 )  
Total comprehensive income
              $ 167,301          $ 175,891          $ 145,968   
 

The accompanying notes are an integral part of these consolidated financial statements.

62


COPART, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share amounts)

        Common Stock
   
        Outstanding
Shares
    Amount
    Additional
Paid in
Capital
    Accumulated
Other
Comprehensive
Income (Loss)
    Retained
Earnings
    Stockholders’
Equity
Balances at July 31, 2009
                 167,877,628          $ 17           $ 334,423          $ (27,082 )         $ 614,101          $ 921,459   
Net income
                 —              —              —              —              151,627             151,627   
Currency translation adjustment
                 —              —              —              (5,659 )            —              (5,659 )  
Exercise of stock options, net of
repurchased shares
                 954,930             —              5,351             —              (7,315 )            (1,964 )  
Employee stock-based compensation
and related tax benefit
                 —              —              24,184             —              —              24,184   
Shares issued for Employee Stock
Purchase Plan
                 136,070             —              2,044             —              —              2,044   
Shares repurchased
                 (242,502 )            —              (512 )            —              (3,945 )            (4,457 )  
Balances at July 31, 2010
                 168,726,126             17              365,490             (32,741 )            754,468             1,087,234   
Net income
                 —              —              —              —              166,375             166,375   
Currency translation adjustment
                 —              —              —              9,516             —              9,516   
Exercise of stock options, net of
repurchased shares
                 866,526             —              6,486             —              (3,639 )            2,847   
Employee stock-based compensation
and related tax benefit
                 —              —              22,645             —              —              22,645   
Shares issued for Employee Stock
Purchase Plan
                 127,192             —              1,957             —              —              1,957   
Shares repurchased
                 (37,708,810 )            (4 )            (82,651 )            —              (652,747 )            (735,402 )  
Balances at July 31, 2011
                 132,011,034             13              313,927             (23,225 )            264,457             555,172   
Net income
                 —              —              —              —              182,119             182,119   
Currency translation adjustment
                 —              —              —              (11,708 )            —              (11,708 )  
Interest rate swap, net of tax effects
                 —              —              —              (3,110 )            —              (3,110 )  
Exercise of stock options, net of
repurchased shares
                 1,165,605             —              13,202             —              (2,777 )            10,425   
Employee stock-based compensation
and related tax benefit
                 —              —              26,158             —              —              26,158   
Shares issued for Employee Stock
Purchase Plan
                 97,769             —              1,957             —              —              1,957   
Shares repurchased
                 (8,880,708 )            (1 )            (29,057 )            —              (170,838 )            (199,897 )  
Balances at July 31, 2012
                 124,393,700          $ 12           $ 326,187          $ (38,043 )         $ 272,961          $ 561,117   
 

The accompanying notes are an integral part of these consolidated financial statements.

63


COPART, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)

        Years Ended July 31,
   
        2012
    2011
    2010
Cash flows from operating activities:
                                                      
Net income
              $ 182,119          $ 166,375          $ 151,627   
Adjustments to reconcile net income to net cash provided by operating activities:
                                                       
Depreciation and amortization
                 48,167             45,694             43,242   
Allowance for doubtful accounts
                 (192 )            270              442    
Impairment of long-lived assets
                 8,771             —              —    
Stock-based compensation
                 21,791             19,007             17,955   
Excess benefits from stock-based compensation
                 (4,367 )            (3,547 )            (5,643 )  
(Gain)/loss on sale of property and equipment
                 (143 )            1,882             659    
Deferred income taxes
                 (17,579 )            (2,099 )            (4,512 )  
Changes in operating assets and liabilities, net of effects from acquisitions:
                                                       
Accounts receivable
                 (16,202 )            (12,865 )            2,436   
Vehicle pooling costs
                 1,142             13,201             (1,210 )  
Inventories
                 (218 )            (2,666 )            (256 )  
Prepaid expenses and other current assets
                 6,026             4,785             (8,896 )  
Other assets
                 (1,951 )            739              311    
Accounts payable and accrued liabilities
                 (3,607 )            5,614             8,098   
Deferred revenue
                 (243 )            (5,015 )            (2,527 )  
Income taxes receivable
                 7,082             9,456             861    
Income taxes payable
                 (2,545 )            2,529             (2,740 )  
Other liabilities
                 1,622             (428 )            (440 )  
Net cash provided by operating activities
                 229,673             242,932             199,407   
Cash flows from investing activities:
                                                      
Issuance of notes receivable
                 —              —              (1,300 )  
Purchases of property and equipment
                 (54,832 )            (70,170 )            (75,840 )  
Proceeds from sale of property and equipment
                 1,268             20,602             2,477   
Proceeds from sale of assets held for sale
                 8,041             —              —    
Purchases of assets and liabilities in connection with acquisitions, net of cash
acquired
                 (2,564 )            (34,912 )            (21,362 )  
Net cash used in investing activities
                 (48,087 )            (84,480 )            (96,025 )  
Cash flows from financing activities:
                                                      
Proceeds from the exercise of stock options
                 13,651             7,082             6,285   
Excess tax benefit from stock-based payment compensation
                 4,367             3,547             5,643   
Proceeds from the issuance of Employee Stock Purchase Plan shares
                 1,957             1,957             2,044   
Repurchases of common stock
                 (203,285 )            (739,638 )            (12,706 )  
Proceeds from issuance of long-term debt
                 125,000             400,000             —    
Debt offering costs
                 (313 )            (2,023 )            —    
Principal payments on long-term debt
                 (56,250 )            (25,000 )            —    
Net cash (used in) provided by financing activities
                 (114,873 )            (354,075 )            1,266   
Effect of foreign currency translation
                 (610 )            1,444             849    
Net increase (decrease) in cash and cash equivalents
                 66,103             (194,179 )            105,497   
Cash and cash equivalents at beginning of period
                 74,009             268,188             162,691   
Cash and cash equivalents at end of period
              $ 140,112          $ 74,009          $ 268,188   
Supplemental disclosure of cash flow information:
                                                      
Interest paid
              $ 11,333          $ 3,894          $ 216    
Income taxes paid
              $ 106,581          $ 85,145          $ 93,989   
 

The accompanying notes are an integral part of these consolidated financial statements.

64


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2012, 2011 AND 2010

(1)
  Summary of Significant Accounting Policies

Basis of Presentation and Description of Business

Copart, Inc. was incorporated under the laws of the State of California in 1982. In January 2012, the Company changed the state in which it is incorporated (the “Reincorporation”), and is now incorporated under the laws of the State of Delaware. All references to “we,” “us,” “our,” or “the Company” herein refer to the California corporation prior to the date of the Reincorporation, and to the Delaware corporation on and after the date of the Reincorporation. As a result of the Reincorporation, for the year ended July 31, 2012, the Company reclassified $12,000 to common stock, par value to reflect the change in par value from no par to $.0001 per share.

On March 8, 2012, the Company’s board of directors approved a two-for-one stock split effected in the form of a stock dividend. The additional shares resulting from the stock split were distributed after the closing of trading on March 28, 2012 to stockholders of record on March 23, 2012. The stock dividend increased the number of shares of common stock outstanding and all per share amounts have been adjusted for the stock dividend.

The consolidated financial statements of the Company include the accounts of the parent company and its wholly owned subsidiaries, including its foreign wholly owned subsidiaries Copart Canada, Inc. (Copart Canada) and Copart Europe Limited (Copart Europe) which currently operates solely in the U.K. Significant intercompany transactions and balances have been eliminated in consolidation. Copart Canada was incorporated in January 2003 and Copart Europe was incorporated in June 2007.

The Company provides vehicle sellers with a full range of services to process and sell vehicles over the Internet through the Company’s Virtual Bidding Second Generation (VB 2 ) Internet auction-style sales technology. Sellers are primarily insurance companies but also include banks and financial institutions, charities, car dealerships, fleet operators, and vehicle rental companies. The Company sells principally to licensed vehicle dismantlers, rebuilders, repair licensees, used vehicle dealers and exporters; however at certain locations, the Company sells directly to the general public. The majority of vehicles sold on behalf of insurance companies are either damaged vehicles deemed a total loss or not economically repairable by the insurance companies or are recovered stolen vehicles for which an insurance settlement with the vehicle owner has already been made. The Company offers vehicle sellers a full range of services that expedite each stage of the vehicle sales process, minimize administrative and processing costs and maximize the ultimate sales price. In the United States and Canada, or North America, the Company sells vehicles primarily as an agent and derives revenue primarily from fees paid by vehicle sellers and vehicle buyers as well as related fees for services such as towing and storage. In the United Kingdom, or U.K., the Company operates both on a principal basis, purchasing the salvage vehicle outright from the insurance company and reselling the vehicle for its own account, and as an agent.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Estimates are used for, but not limited to, vehicle pooling costs, self-insured reserves, allowance for doubtful accounts, income taxes, revenue recognition, stock-based compensation, purchase price allocations, long-lived asset and goodwill impairment calculations and contingencies. Actual results could differ from those estimates.

Revenue Recognition

The Company provides a portfolio of services to its sellers and buyers that facilitate the sale and delivery of a vehicle from seller to buyer. These services include the ability to use the Company’s Internet sales

65


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010


technology and vehicle delivery, loading, title processing, preparation and storage. The Company evaluates multiple-element arrangements relative to its member and seller agreements.

The services provided to the seller of a vehicle involve disposing of a vehicle on the seller’s behalf and, under most of the Company’s current North American contracts, collecting the proceeds from the member. On August 1, 2010, the Company prospectively adopted Accounting Standard Update 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements (ASU 2009-13). Upon adoption of this standard, pre-sale services, including towing, title processing, preparation and storage, sale fees and other enhancement services meet the criteria for separate units of accounting. The revenue associated with each service is recognized upon completion of the respective service, net of applicable rebates or allowances. For certain sellers who are charged a proportionate fee based on high bid of the vehicle, the revenue associated with the pre-sale services is recognized upon completion of the sale when the total arrangement is fixed and determinable. The estimated selling price of each service is determined based on management’s best estimate and allotted based on the relative selling price method. As a result of this adoption, for the year ended July 31, 2011, the Company accelerated recognition of $14.4 million in service revenue and $13.5 million in related yard operation expenses. The impact on net income and earnings per share was not material.

Vehicle sales, where vehicles are purchased and remarketed on the Company’s own behalf, are recognized on the sale date, which is typically the point of high bid acceptance. Upon high bid acceptance, a legal binding contract is formed with the member, and the gross sales price is recorded as revenue.

The Company also provides a number of services to the buyer of the vehicle, charging a separate fee for each service. Each of these services has been assessed to determine whether the requirements have been met to separate them into units of accounting within a multiple-element arrangement. The Company has concluded that the sale and the post-sale services are separate units of accounting. The fees for sale services are recognized upon completion of the sale, and the fees for the post-sale services are recognized upon successful completion of those services using the relative selling price method.

The Company also charges members an annual registration fee for the right to participate in its vehicle sales program, which is recognized ratably over the term of the arrangement, and relist and late-payment fees, which are recognized upon receipt of payment by the member. No provision for returns has been established, as all sales are final with no right of return, although the Company provides for bad debt expense in the case of non-performance by its members or sellers.

The Company allocates arrangement consideration based upon management’s best estimate of the selling price of the separate units of accounting contained within an arrangement containing multiple deliverables. Significant inputs in the Company’s estimates of the selling price of separate units of accounting include market and pricing trends, pricing customization and practices, and profit objectives for the services.

Vehicle Pooling Costs

The Company defers in vehicle pooling costs certain yard operation expenses associated with vehicles consigned to and received by the Company, but not sold as of the end of the period. The Company quantifies the deferred costs using a calculation that includes the number of vehicles at its facilities at the beginning and end of the period, the number of vehicles sold during the period and an allocation of certain yard operation costs of the period. The primary expenses allocated and deferred are certain facility costs, labor, transportation and vehicle processing. If the allocation factors change, then yard operation expenses could increase or decrease correspondingly in the future. These costs are expensed as vehicles are sold in the subsequent periods on an average cost basis.

Foreign Currency Translation

The functional currency of the Company is the U.S. dollar. The Canadian dollar and the British pound are the functional currencies of the Company’s foreign subsidiaries, Copart Canada and Copart Europe,

66


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010


respectively, as they are the primary currencies within the economic environment in which each subsidiary operates. The original equity investment in the respective subsidiaries is translated at historical rates. Assets and liabilities of the respective subsidiary’s operations are translated into U.S. dollars at period-end exchange rates, and revenues and expenses are translated into U.S. dollars at average exchange rates in effect during each reporting period. Adjustments resulting from the translation of each subsidiary’s financial statements are reported in other comprehensive income.

The cumulative effects of foreign currency exchange rate fluctuations are as follows (in thousands):

Cumulative loss on foreign currency translation as of July 31, 2010
              $ (32,741 )  
Gain on foreign currency translation
                 9,516   
Cumulative loss on foreign currency translation as of July 31, 2011
              $ (23,225 )  
Loss on foreign currency translation
                 (11,708 )  
Cumulative loss on foreign currency translation as of July 31, 2012
              $ (34,933 )  
 

Fair Value of Financial Instruments

The Company records its financial assets and liabilities at fair value in accordance with the framework for measuring fair value in generally accepted accounting principles. In accordance with ASC 820, Fair Value Measurements and Disclosures (ASC 820), as amended by Accounting Standards Update 2011-04, the Company considers fair value as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants under current market conditions. This framework establishes a fair value hierarchy that prioritizes the inputs used to measure fair value:

Level I
           
Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities traded in active markets.
Level II
           
Inputs other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly. Interest rate hedges are valued at exit prices obtained from the counter-party.
Level III
           
Inputs that are generally unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate
 

The amounts recorded for financial instruments in the Company’s consolidated financial statements, which included cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their fair values as of July 31, 2012 and July 31, 2011, due to the short-term nature of those instruments, and are classified within level II of the fair value hierarchy. See Note 9. Long-Term Debt for fair value disclosures related to the Company’s long-term debt.

Derivatives and Hedging

The Company has entered into interest rate swaps to eliminate interest rate risk on the Company’s variable rate Term Loan, and the swaps are designated as effective cash flow hedges under ASC 815, Derivatives and Hedging (see Note 10. Derivatives and Hedging ). Each quarter, the Company measures hedge effectiveness using the “hypothetical derivative method” and records in earnings any hedge ineffectiveness with the effective portion of the hedges change in fair value recorded in other comprehensive income or loss.

Cost of Vehicle Sales

Cost of vehicle sales includes the purchase price of vehicles sold for the Company’s own account.

67


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010

Yard Operations

Yard operations consist primarily of operating personnel (which includes yard management, clerical and yard employees), rent, contract vehicle towing, insurance, fuel and equipment maintenance and repair. On August 1, 2010, the Company adopted ASU 2009-13. As a result of this adoption, for the twelve months ended July 31, 2011, the Company accelerated recognition of $13.5 million in yard operation expenses.

General and Administrative Expenses

General and administrative expenses consist primarily of executive, accounting and data processing, sales personnel, professional services, system maintenance and enhancements and marketing expenses.

Advertising

All advertising costs are expensed as incurred and are included in general and administrative expenses on the consolidated statements of income. Advertising expenses were $6.5 million, $8.8 million and $12.7 million in fiscal 2012, 2011 and 2010, respectively.

Other (Expense) Income

Other (expense) income consists primarily of interest expense, interest income, gains and losses from the disposal of fixed assets and rental income.

Net Income Per Share

Basic net income per share amounts were computed by dividing consolidated net income by the weighted average number of common shares outstanding during the period. Diluted net income per share amounts were computed by dividing consolidated net income by the weighted average number of common shares outstanding plus dilutive potential common shares calculated for stock options outstanding during the period using the treasury stock method.

Cash, Cash Equivalents and Marketable Securities

The Company considers all highly liquid investments purchased with original maturities of three months or less at the time of purchase to be cash equivalents. Cash and cash equivalents include cash held in checking and money market accounts. The Company periodically invests its excess cash in money market funds and U.S. Treasury Bills. The Company’s cash and cash equivalents are placed with high credit quality financial institutions. The Company generally classifies its investment portfolio not otherwise qualifying as cash and cash equivalents as available-for-sale securities. Available-for-sale securities are reported at fair value, with unrealized gains and losses reported as a component of stockholders’ equity and comprehensive income. Unrealized losses are charged against income when a decline in the fair market value of an individual security is determined to be other than temporary. Realized gains and losses on investments are included in interest income. Cash and cash equivalents are classified within Level I of the fair value hierarchy because they are valued using quoted market prices.

Inventory

Inventories of purchased vehicles are stated at the lower of cost or estimated realizable value. Cost includes the Company’s cost of acquiring ownership of the vehicle. The cost of vehicles sold is charged to cost of vehicle sales as sold on a specific identification basis.

68


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010

Accounts Receivable

Accounts receivable, which consist primarily of advance charges due from insurance companies and the gross sales price of the vehicle due from members, are recorded when billed, advanced or accrued and represent claims against third parties that will be settled in cash.

Allowance for Doubtful Accounts

The Company maintains an allowance for doubtful accounts in order to provide for estimated losses resulting from disputed amounts billed to sellers or members and the inability of sellers or members to make required payments. If billing disputes exceed expectations and/or if the financial condition of sellers or members were to deteriorate, additional allowances may be required. The allowance is calculated by considering both seller and member accounts receivables written off during the previous 12 month period as a percentage of the total accounts receivable balance.

Concentration of Credit Risk

Financial instruments, which subject the Company to potential credit risk, consist of its cash and cash equivalents, short-term investments and accounts receivable. The Company adheres to its investment policy when placing investments. The investment policy has established guidelines to limit the Company’s exposure to credit expense by placing investments with high credit quality financial institutions, diversifying its investment portfolio, limiting investments in any one issuer or pooled fund and placing investments with maturities that maintain safety and liquidity. The Company places its cash and cash equivalents with high credit quality financial institutions. Deposits with these financial institutions may exceed the amount of insurance provided; however, these deposits typically are redeemable upon demand and, therefore, the Company believes that the financial risks associated with these financial instruments are minimal.

The Company performs ongoing credit evaluations of its customers, and generally does not require collateral on its accounts receivable. The Company estimates its allowances for doubtful accounts based on historical collection trends, the age of outstanding receivables and existing economic conditions. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. Past-due account balances are written off when the Company’s internal collection efforts have been unsuccessful in collecting the amount due. The Company does not have off-balance sheet credit exposure related to its customers and to date, the Company has not experienced significant credit related losses.

No single customer accounted for more than 10% of our revenues in fiscal 2012, 2011 and 2010. At July 31, 2012 and 2011 no single customer accounted for more than 10% of the Company’s accounts receivables.

Property and Equipment

Property and equipment is stated at cost, less accumulated depreciation and amortization. Leasehold improvements are amortized on a straight-line basis over the shorter of the lease term or the estimated useful lives of the respective improvements, which is between 5 and 10 years. Significant improvements which substantially extend the useful lives of assets are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation and amortization is computed on a straight-line basis over the estimated useful lives of: 3 to 5 years for internally developed or purchased software; 3 to 7 years for transportation and other equipment; 3 to 10 years for office furniture and equipment; and 15 to 40 years or the lease term, whichever is shorter, for buildings and improvements. Amortization of equipment under capital leases is included in depreciation expense.

69


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010

Long-Lived Asset Valuation

The Company evaluates long-lived assets, including property and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In accordance with ASC 360, Property, Plant, and Equipment , a long-lived asset is initially measured at the lower of its carrying amount or fair value. An impairment loss is recognized when the estimated undiscounted future cash flows expected to be generated from the use of the asset are less than the carrying amount of the asset. The impairment loss is then calculated by comparing the carrying amount with its fair value, which is usually estimated using discounted cash flows expected to be generated from the use of the asset.

Goodwill and Other Identifiable Intangible Assets

In accordance with ASC 350-30-35, Intangibles—Goodwill and Other , goodwill is not amortized but is tested for potential impairment, at a minimum on an annual basis, or when indications of potential impairment exist. The Company performed its annual impairment test for goodwill during the fourth quarter of its 2012 fiscal year utilizing a market value and discounted cash flow approach. The impairment test for identifiable intangible assets not subject to amortization is also performed annually or when impairment indicators exist, and consists of a comparison of the fair value of the intangible asset with its carrying amount. Identifiable intangible assets that are subject to amortization are evaluated for impairment using a process similar to that used to evaluate other long-lived assets.

Assets Held for Sale

The Company has removed certain assets from operations and offered them for sale. These assets, which include its fleet of private jets and certain real estate, are reflected at their fair market value in the financial statements and are a level II fair value measurement based on sales transactions of similar assets. During the year ended July 31, 2012, the Company recorded an impairment of $8.8 million associated with the write down to fair market value of these assets held for sale.

Retained Insurance Liabilities

The Company is partially self-insured for certain losses related to medical, general liability, workers’ compensation and auto liability. The Company’s insurance policies are subject to a $250,000 deductible per claim, with the exception of its medical policy which is $225,000 per claim. In addition, each of the Company’s policies contains an aggregate stop loss which limits its ultimate exposure. The Company’s liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. The estimated liability is not discounted and is established based upon analysis of historical data and actuarial estimates. The primary estimates used in the actuarial analysis include total payroll and revenue. The Company’s estimates have not materially fluctuated from actual results. While the Company believes these estimates are reasonable based on the information currently available, if actual trends, including the severity of claims and medical cost inflation, differ from the Company’s estimates, the Company’s consolidated results of operations, financial position or cash flows could be impacted. The process of determining the Company’s insurance reserves requires estimates with various assumptions, each of which can positively or negatively impact those balances. As of July 31, 2012 and 2011 the total amount reserved for related self-insured claims is $5.7 million and $5.5 million, respectively.

Stock-Based Compensation

The Company accounts for our stock-based awards to employees and non-employees using the fair value method as required by ASC 718, Compensation—Stock Compensation (ASC 718), which requires the measurement and recognition of compensation expense for all stock-based payment awards made to employees, consultants and directors based on estimated fair value. The Company adopted ASC 718 using the modified-prospective transition method. Under this transition method, stock-based compensation cost

70


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010


recognized in the fiscal years ended July 31, 2012, 2011 and 2010 includes stock-based compensation expense for all stock-based payment awards granted prior to, but not yet vested as of August 1, 2005, based on the measurement date (generally the grant date) fair value estimated in accordance with the original provisions of ASC 718, and stock-based compensation expense for all stock-based payment awards granted subsequent to August 1, 2005, based on the measurement date fair value estimated in accordance with the provisions of ASC 718. ASC 718 requires companies to estimate the fair value of stock-based payment awards on the measurement date using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized in expense over the requisite service periods. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the input assumptions can materially affect their fair value estimate, it is the Company’s opinion that the existing models do not necessarily provide a reliable single measure of the fair value of the employee stock options.

The fair value of each option was estimated on the measurement date using the Black-Scholes Merton (BSM) option-pricing model utilizing the following assumptions:

        July 31, 2012
    July 31, 2011
    July 31, 2010
Expected life (in years)
                 5.2 – 6.8             5.3 – 6.8             5.2 – 7.1   
Risk-free interest rate
                 .68 – 1.7 %            1.7 – 2.9 %            2.1 – 3.3 %  
Estimated volatility
                 24 – 26 %            26 – 31 %            28 – 36 %  
Expected dividends
                 0 %            0 %            0 %  
Weighted-average fair value at measurement date
              $ 6.01          $ 6.59          $ 6.60   
 

Expected life—The Company’s expected life represents the period that the Company’s stock-based payment awards are expected to be outstanding and was determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based payment awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based payment awards.

Estimated volatility—The Company uses the trading history of its common stock in determining an estimated volatility factor when using the BSM option-pricing model to determine the fair value of options granted.

Expected dividend—The Company has not declared dividends. Therefore, the Company uses a zero value for the expected dividend value factor when using the BSM option-pricing model to determine the fair value of options granted.

Risk-free interest rate—The Company bases the risk-free interest rate used in the BSM option-pricing model on the implied yield currently available on U.S. Treasury zero-coupon issues with the same or substantially equivalent expected life.

Estimated forfeitures—When estimating forfeitures, the Company considers voluntary and involuntary termination behavior as well as analysis of actual option forfeitures.

Net cash proceeds from the exercise of stock options were $13.7 million, $7.1 million and $6.3 million for the years ended July 31, 2012, 2011 and 2010 respectively. The Company realized an income tax benefit of $4.4 million, $3.5 million and $5.6 million from stock option exercises during the years ended July 31, 2012, 2011 and 2010 respectively. In accordance with ASC 718, the Company presents excess tax benefits from disqualifying dispositions of the exercise of incentive stock options, vested prior to August 1, 2005, if any, as financing cash flows rather than operating cash flows.

71


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010

Comprehensive Income

Comprehensive income includes all changes in stockholders’ equity during a period from non-stockholder sources. For the year ended July 31, 2012 accumulated other comprehensive loss was the effect of foreign currency translation adjustments and the effective portion of the interest rate swaps’ change in fair value. For the years ended July 31, 2011 and 2010 the only item in accumulated other comprehensive loss was the effect of foreign currency translation adjustments. Deferred taxes are not provided on cumulative translation adjustments where the Company expects earnings of a foreign subsidiary to be indefinitely reinvested.

Segment Reporting

The Company’s North American and U.K. regions are considered two separate operating segments, which have been aggregated into one reportable segment because they share similar economic characteristics.

Recently Issued Accounting Standards

As discussed above, in August 2010 the Company adopted ASU 2009-13, addresses the accounting for multiple-deliverable arrangements to enable accounting for products or services separately rather than as a combined unit and modifies the manner in which the transaction consideration is allocated across the separately identified deliverables. The Company prospectively adopted the standard and applied it to its revenue arrangements containing multiple deliverables. See “Revenue Recognition”, above.

In December 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-28, Intangibles-Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts . ASU 2010-28 amends the criteria for performing Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts and requires performing Step 2 if qualitative factors indicate that it is more likely than not that a goodwill impairment exists. ASU 2010-28 was effective for fiscal years, and interim periods beginning after December 15, 2010. The Company’s adoption of ASU 2010-28 did not have a material impact on the Company’s consolidated results of operations and financial position.

In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations , to improve consistency in how the pro forma disclosures are calculated. Additionally, ASU 2010-29 enhances the disclosure requirements and requires description of the nature and amount of any material, nonrecurring pro forma adjustments directly attributable to a business combination. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010 and should be applied prospectively to business combinations for which the acquisition date is after the effective date. The Company’s adoption of ASU 2010-29 did not have a material impact on the Company’s consolidated results of operations and financial position.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS). Under ASU 2011-04 the guidance amends certain accounting and disclosure requirements to ensure that fair value has the same meaning in U.S. GAAP and in IFRS and that the respective fair value measurement and disclosure requirements are the same. ASU 2011-04 is effective for public entities during interim and annual periods beginning after December 15, 2011. The Company’s adoption of ASU 2011-04 did not have a material impact on the Company’s consolidated results of operations and financial position.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead comprehensive income must be reported in either a single continuous statement

72


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010


of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. ASU 2011-05 is effective for public entities during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. The Company’s adoption of ASU 2011-05 did not have a material impact on the Company’s consolidated results of operations and financial position.

In September 2011, the FASB issued ASU 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment , which simplifies how entities test goodwill for impairment. ASU 2011-08 gives entities the option, under certain circumstances, to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether further impairment testing is necessary. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011, and early adoption is permitted. The Company’s adoption of ASU 2011-08 did not have a material impact on the Company’s consolidated results of operations and financial position.

In July 2012, the FASB issued ASU 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment, which amended the guidance in ASU 2011-08 to simplify the testing of indefinite-lived intangible assets other than goodwill for impairment. ASU 2012-02 becomes effective for annual and interim impairment tests performed for fiscal years beginning September 15, 2012 and earlier adoption is permitted. The Company’s adoption of ASU 2012-02 will not have a material impact on the Company’s consolidated results of operations and financial position.

Reclassifications

Certain reclassifications have been made to prior years’ consolidated financial statements to conform to the classifications used in fiscal 2012.

(2)
  Acquisitions

Fiscal 2012 Transactions

The Company had no significant acquisitions during the year ended July 31, 2012. In August 2012, we acquired Ride Safely Middle East Auction, LLC located in Dubai, United Arab Emirates (UAE) for an immaterial amount.

Fiscal 2011 Transactions

In March 2011, the Company completed the cash acquisition of John Hewitt and Sons, Limited (Hewitt) in the United Kingdom through a stock purchase and the acquisition of Barodge Auto Pool (Barodge) in the U.S. through an asset purchase. The consideration paid for these acquisitions consisted of $34.9 million in cash, net of cash acquired. The acquired assets consisted principally of accounts receivables, inventories, property and equipment, goodwill, accounts payable, deferred tax liabilities, taxes payable and covenants not to compete. The acquisitions were accounted for using the purchase method of accounting, and the operating results subsequent to the acquisition dates are included in the Company’s consolidated statements of income. These acquisitions were undertaken because of their strategic fit and have been accounted for using the purchase method in accordance with ASC 805, Business Combinations (ASC 805), which has resulted in the recognition of $19.3 million of goodwill in the Company’s consolidated financial statements. This goodwill arises because the purchase price for Hewitt and Barodge reflects a number of factors including:

•
  its future earnings and cash flow potential;

•
  the multiple to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers;

•
  the competitive nature of the process by which the Company acquired the business; and

73


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010

•
  because of the complementary strategic fit and resulting synergies it brings to existing operations.

In accordance with ASC 805, the assets acquired and liabilities assumed have been recorded at their estimated fair values.

Fiscal 2010 Transactions

In January 2010, the Company completed the acquisition of D Hales Limited (D Hales) which operated five locations in the United Kingdom through a stock purchase. This acquisition was undertaken because of its strategic fit with the United Kingdom business and was accounted for using the purchase method, which has resulted in the recognition of goodwill in the Company’s consolidated financial statements. This goodwill arises because the purchase price for D Hales reflects a number of factors including:

•
  its future earnings and cash flow potential;

•
  the multiple to earnings, cash flow and other factors at which similar businesses have been purchased by other acquirers;

•
  the competitive nature of the process by which the Company acquired the business; and

•
  because of the complementary strategic fit and resulting synergies it brings to existing operations.

In accordance with ASC 805, the D Hales assets acquired and liabilities assumed were recorded at their estimated fair values.

(3)
  Cash, Cash Equivalents and Marketable Securities

As of July 31, 2012, cash and cash equivalents include the following (in thousands):

        Cost
    Unrealized
Gains
    Unrealized
Losses
Less Than
12 Months
    Unrealized
Losses
12 Months
or Longer
    Estimated
Fair Value
Cash
              $ 96,779          $ —           $ —           $ —           $ 96,779   
Money market funds
                 43,333             —              —              —              43,333   
Total
              $ 140,112          $ —           $ —           $ —           $ 140,112   
 

As of July 31, 2011, cash and cash equivalents include the following (in thousands):

        Cost
    Unrealized
Gains
    Unrealized
Losses
Less Than
12 Months
    Unrealized
Losses
12 Months
or Longer
    Estimated
Fair Value
Cash
              $ 42,664          $ —           $ —           $ —           $ 42,664   
Money market funds
                 31,345             —              —              —              31,345   
Total
              $ 74,009          $ —           $ —           $ —           $ 74,009   
 

The Company invests its excess cash in money market funds and U.S. Treasury Bills. The Company’s cash and cash equivalents are placed with high credit quality financial institutions.

74


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010

(4)
  Accounts Receivable, Net

Accounts receivable consists of the following (in thousands):

        July 31,
   
        2012
    2011
Advance charges receivable
              $ 85,237          $ 71,961   
Trade accounts receivable
                 54,229             53,569   
Other receivables
                 2,420             451    
 
                 141,886             125,981   
Less allowance for doubtful accounts
                 (2,920 )            (3,122 )  
 
              $ 138,966          $ 122,859   
 

Advance charges receivable represents unbilled amounts paid to third parties on behalf of insurance companies for which the Company will be reimbursed when the vehicle is sold. Trade accounts receivable includes fees and gross proceeds to be collected from insurance companies and members.

The movements in the allowance for doubtful accounts are as follows (in thousands):

Description and Fiscal Year
        Balance at
Beginning of Year
    Charged to Costs
And Expenses
    Deductions to
Bad Debt
    Balance at
End of Year
July 31, 2012
              $ 3,122          $ 1,626          $ (1,828 )         $ 2,920   
July 31, 2011
                 2,841             478              (197 )            3,122   
July 31, 2010
                 2,405             1,591             (1,155 )            2,841   
 
(5)
  Property and Equipment, Net

Property and equipment consists of the following (in thousands):

        July 31,
   
        2012
    2011
Transportation and other equipment
              $ 52,066          $ 65,009   
Office furniture and equipment
                 53,363             53,411   
Software
                 54,399             46,761   
Land
                 350,463             343,170   
Buildings and leasehold improvements
                 400,302             384,366   
 
                 910,593             892,717   
Less accumulated depreciation and amortization
                 (323,430 )            (292,329 )  
 
              $ 587,163          $ 600,388   
 

Depreciation expense on property and equipment was $34.8 million, $40.2 million and $39.0 million for the fiscal years ended July 31, 2012, 2011 and 2010 respectively. Amortization expense of software was $8.9 million, $0.8 million and $0.3 million for the fiscal years ended July 31, 2012, 2011 and 2010 respectively.

75


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010

(6)
  Goodwill

The change in carrying amount of goodwill is as follows (in thousands):

Balance as of July 31, 2010
              $ 175,870   
Goodwill recorded during the period
                 19,309   
Effect of foreign currency translation
                 3,441   
Balance as of July 31, 2011
              $ 198,620   
Goodwill recorded during the period
                 1,420   
Effect of foreign currency translation
                 (3,602 )  
Balance as of July 31, 2012
              $ 196,438   
 

In accordance with the guidance in ASC 350, goodwill is tested for impairment on an annual basis or upon the occurrence of circumstances that indicate that goodwill may be impaired. The Company’s annual impairment tests were performed in the fourth quarter of fiscal 2012 and 2011 and goodwill was not impaired. As of July 31, 2012 and 2011, the cumulative amount of goodwill impairment losses recognized totaled $21.8 million.

(7)
  Intangibles, Net

Intangible assets consist of the following (in thousands, except remaining useful life):

        July 31, 2012
   
        Gross
Carrying
Amount
    Accumulated
Amortization
    Net Book Value
    Weighted
Average
Remaining
Useful Life
(in years)
Amortized intangible assets:
                                                                       
Covenants not to compete
              $ 11,087          $ (10,685 )         $ 402              4    
Supply contracts
                 26,041             (18,762 )            7,279             6    
Licenses and databases
                 1,316             (1,012 )            304              1    
 
              $ 38,444          $ (30,459 )         $ 7,985                   
 
        July 31 , 2011
   
        Gross
Carrying
Amount
    Accumulated
Amortization
    Net Book Value
    Weighted
Average
Remaining
Useful Life
(in years)
Amortized intangible assets:
                                                                       
Covenants not to compete
              $ 10,896          $ (10,486 )         $ 410              3    
Supply contracts
                 27,238             (15,409 )            11,829             3    
Licenses and databases
                 1,337             (828 )            509              3    
 
              $ 39,471          $ (26,723 )         $ 12,748                   
 

76


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010

Aggregate amortization expense on intangible assets was $4.5 million, $4.7 million and $3.9 million for the fiscal years ended July 31, 2012, 2011 and 2010, respectively. Intangible amortization expense for the next five fiscal years based upon July 31, 2012 intangible assets is expected to be as follows (in thousands):

2013
              $ 3,499   
2014
                 1,186   
2015
                 765    
2016
                 543    
2017
                 317    
Thereafter
                 1,675   
 
              $ 7,985   
 
(8)
  Accounts Payable and Accrued Liabilities

Accounts payable and accrued liabilities consist of the following (in thousands):

        July 31,
   
        2012
    2011
Trade accounts payable
              $ 16,353          $ 12,365   
Accounts payable to sellers
                 36,153             42,190   
Accrued insurance
                 5,686             5,494   
Accrued compensation and benefits
                 16,791             15,605   
Buyer deposits and prepayments
                 19,127             14,229   
Other accrued liabilities
                 8,848             11,825   
 
              $ 102,958          $ 101,708   
 

The Company is partially self-insured for certain losses related to general liability, workers’ compensation and auto liability. Accrued insurance liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date. The estimated liability is not discounted and is established based upon analysis of historical data, including the severity of our frequency of claims, actuarial estimates and is reviewed periodically by management to ensure that the liability is appropriate.

(9)
  Long-Term Debt

On December 14, 2010, the Company entered into an Amended and Restated Credit Facility Agreement (Credit Facility), which supersedes the Company’s previously disclosed credit agreement with Bank of America, N.A. (Bank of America). The Credit Facility is an unsecured credit agreement providing for (i) a $100.0 million revolving credit facility, including a $100.0 million alternative currency borrowing sublimit and a $50.0 million letter of credit sublimit (Revolving Credit) and (ii) a term loan facility of $400.0 million (Term Loan). On January 14, 2011 the full $400.0 million provided under the Term Loan was borrowed. On September, 29, 2011, the Company amended the credit agreement increasing the amount of the term loan facility from $400.0 million to $500.0 million.

The Term Loan, which at July 31, 2012 had $443.8 million outstanding, amortizes $18.8 million each quarter beginning December 31, 2011 with all outstanding borrowings due on December 14, 2015. All amounts borrowed under the Term Loan may be prepaid without premium or penalty. During the twelve months ended July 31, 2012, the Company made principal repayments of $56.3 million. The Company has $1.6 million deferred financing costs in other assets as of July 31, 2012.

Amounts borrowed under the Credit Facility bear interest, subject to certain restrictions, at a fluctuating rate based on (i) the Eurocurrency Rate; (ii) the Federal Funds Rate; or (iii) the Prime Rate as described in the Credit Facility. The Company has entered into two interest rate swaps (see Note 10. Derivatives and Hedging ) to exchange its variable interest rate payments commitment for fixed interest rate payments on the Term Loan

77


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010


balance, which at July 31, 2012, totaled $443.8 million. A default interest rate applies on all obligations during an event of default under the credit facility, at a rate per annum equal to 2.0% above the otherwise applicable interest rate. At July 31, 2012, the Company’s interest rate is the 0.25% Eurocurrency Rate plus the 1.50% Applicable Rate. The Applicable Rate can fluctuate between 1.5% and 2.0% depending on the Company’s consolidated net leverage ratio (as defined in the Credit Facility). The Credit Facility is guaranteed by the Company’s material domestic subsidiaries. The carrying amount of the Credit Facility is comprised of borrowing under which the interest accrued under a fluctuating interest rate structure. Accordingly, the carrying value approximates fair value at July 31, 2012 and is classified within level II of the fair value hierarchy.

Amounts borrowed under the Revolving Credit may be repaid and reborrowed until the maturity date, which is December 14, 2015. The Credit Facility requires the Company to pay a commitment fee on the unused portion of the Revolving Credit. The commitment fee ranges from 0.075% to 0.125% per annum depending on the Company’s leverage ratio. The Company had no outstanding borrowings under the Revolving Credit at the end of the period.

The Credit Facility contains customary representations and warranties and may place certain business operating restrictions on us relating to, among other things, indebtedness, liens and other encumbrances, investments, mergers and acquisitions, asset sales, dividends and distributions and redemptions of capital stock. In addition, the Credit Facility provides for the following financial covenants: (i) earnings before income tax, depreciation and amortization (EBITDA); (ii) leverage ratio; (iii) interest coverage ratio; and (iv) limitations on capital expenditures. The Credit Facility contains events of default that include, among others, non-payment of principal, interest or fees, violation of covenants, inaccuracy of representations and warranties, cross-defaults to certain other indebtedness, bankruptcy and insolvency defaults, material judgments, invalidity of the loan documents and events constituting a change of control. The Company is in compliance with all covenants as of July 31, 2012.

The Company’s Term Loan requires quarterly payments of $18.8 million, and the Term Loan matures and all outstanding borrowings are due on December 14, 2015. At July 31, 2012, future annual payments are as follows (in thousands):

Years Ending July 31,
        Term Loan
2013
              $ 75,000   
2014
                 75,000   
2015
                 75,000   
2016
                 218,750   
 
              $ 443,750   
 
(10)
  Derivatives and Hedging

The Company has entered into two interest rate swaps to exchange its variable interest rate payments commitment for fixed interest rate payments on the Term Loan balance which, at July 31, 2012 totaled $443.8 million. The first swap fixed the Company’s interest rate at 85 basis points plus the one month LIBOR rate on the first $337.5 million of its term debt. The second swap fixed the Company’s interest rate at 69 basis points plus the one month LIBOR rate on the next $106.3 million of its term debt.

The swap is a designated effective cash flow hedge under ASC 815, Derivatives and Hedging , and is recorded in other liabilities at its fair value, which at July 31, 2012 is $4.9 million. Each quarter, the Company measures hedge effectiveness using the “hypothetical derivative method” and records in earnings any hedge ineffectiveness with the effective portion of the hedge’s change in fair value recorded in other comprehensive income or loss.

The notional amount of the swap amortizes until all outstanding borrowings are due on the Term Loan on December 14, 2015 (see Note 9. Long-Term Debt ). At July 31, 2012, the notional amount of the interest rate

78


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010


swaps was equal to the Term Loan balance, $443.8 million. The notional amount of the two derivative transactions amortizes $18.8 million per quarter through September 30, 2015 and $200.0 million on December 14, 2015.

The hedge provided by the swap could prove to be ineffective for a number of reasons, including early retirement of the Term Loan, as allowed under the Credit Facility, or in the event the counterparty to the interest rate swap is determined in the future to not be creditworthy. The Company has no plans for early retirement of the Term Loan.

The interest rate swaps are classified within Level II of the fair value hierarchy as the derivatives are valued using observable inputs. The Company determines fair value of the derivative utilizing observable market data of swap rates and basis rates. These inputs are placed into a pricing model using a discounted cash flow methodology in order to calculate the mark-to-market value of the interest rate swap.

The fair value of the interest rate swaps, a level II financial instrument, are (in thousands):

As of
        Asset or
(Liability)
    Gain or (loss) in
Comprehensive
Income
    Amount
Reclassified into
Earnings
July 31, 2012
              $ (4,872 )         $ (3,110 )         $ —    
July 31, 2011
              $ —           $ —           $ —    
 
(11)
  Stockholders’ Equity

General

The Company has authorized the issuance of 180 million shares of common stock, with a par value of $0.0001, of which 124,393,700 shares were issued and outstanding at July 31, 2012. As of July 31, 2012 and 2011, the Company has reserved 18,170,575 and 19,651,848 shares of common stock, respectively, for the issuance of options granted under the Company’s stock option plans and 1,325,651 and 1,423,420 shares of common stock, respectively, for the issuance of shares under the Copart, Inc. Employee Stock Purchase Plan (ESPP). The Company has authorized the issuance of 5 million shares of preferred stock, with a par value of $0.0001, none of which were issued or outstanding at July 31, 2012 or 2011, which have the rights and preferences as the Company’s Board of Directors shall determine, from time to time.

On March 8, 2012, the Company’s board of directors approved a two-for-one stock split effected in the form of a stock dividend. The additional shares resulting from the stock split were distributed after the closing of trading on March 28, 2012 to stockholders of record on March 23, 2012.

Stock Repurchase

On September 22, 2011, the Company’s board of directors approved a 40 million share increase in the Company’s stock repurchase program, bringing the total current authorization to 98 million shares. The repurchases may be effected through solicited or unsolicited transactions in the open market or in privately negotiated transactions. No time limit has been placed on the duration of the stock repurchase program. Subject to applicable securities laws, such repurchases will be made at such times and in such amounts as the Company deems appropriate and may be discontinued at any time. For the year ended July 31, 2012, the Company repurchased 8,880,708 shares of our common stock at a weighted average price of $22.51. For the year ended July 31, 2011, the Company repurchased 13,364,634 shares of our common stock at a weighted average price of $20.42. For the year ended July 31, 2010, the Company repurchased 242,502 shares of our common stock at a weighted average price of $18.38. As of July 31, 2012, the total number of shares repurchased under the program was 49,786,782 and 48,213,218 shares were available for repurchase under the program. See Note 17. Related Party Transactions , for discussion of related party stock repurchases.

79


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010

Additionally, on January 14, 2011, the Company completed a tender offer to purchase up to 21,052,630 shares of its common stock at a price of $19.00 per share. Directors and executive officers of Copart were expressly prohibited from participating in the tender offer by our board of directors under the Company’s Securities Trading Policy. In connection with the tender offer, the Company accepted for purchase 24,344,176 shares of its common stock. The shares accepted for purchase are comprised of the 21,052,630 shares the Company offered to purchase and an additional 3,291,546 shares purchased pursuant to the Company’s right to purchase additional shares up to 2% of its outstanding shares. The shares purchased as a result of the tender offer are not part of the Company’s repurchase program. The purchase of the shares of common stock was funded by the proceeds relating to the issuance of long term debt. The impact dilutive earnings per share of all repurchased shares on the weighted average number of common shares outstanding for the year ended July 31, 2012 is $0.04.

In the first and fourth quarters of fiscal year 2010, certain executive officers exercised stock options through cashless exercises. In the second, third and fourth quarters of fiscal year 2011, certain executive officers exercised stock options through cashless exercises. In the first, second and third quarters of fiscal year 2012, certain executive officers exercised stock options through cashless exercises. A portion of the options exercised were net settled in satisfaction of the exercise price and federal and state minimum statutory tax withholding requirements. The Company remitted $2.6 million, $4.2 million and $7.4 million, in fiscal 2012, 2011 and 2010, respectively, to the proper taxing authorities in satisfaction of the employees’ minimum statutory withholding requirements. The exercises are summarized in the following table:

Period
        Options
Exercised
    Exercise
Price
    Shares Net
Settled for
Exercise
    Shares
Withheld
for Taxes(1)
    Net
Shares to
Employee
    Share Price
for
Withholding
    Tax
Withholding
(in 000’s)
FY 2010—Q1
                 647,262          $ 6.52             228,708             191,492             227,062          $ 18.45          $ 3,533   
FY 2010—Q4
                 700,000          $ 6.46             245,844             211,654             242,502          $ 18.38          $ 3,890   
FY 2011—Q2
                 177,500          $ 8.47             76,050             37,834             63,616          $ 19.76          $ 748    
FY 2011—Q3
                 548,334          $ 11.02             295,496             118,032             134,806          $ 20.40          $ 2,408   
FY 2011—Q4
                 180,000          $ 9.48             76,396             48,366             55,238          $ 22.33          $ 1,080   
FY 2012—Q1
                 40,000          $ 9.00             16,082             8,974             14,944          $ 22.39          $ 201    
FY 2012—Q2
                 20,000          $ 9.00             7,506             4,584             7,910          $ 23.98          $ 110    
FY 2012—Q3
                 322,520          $ 10.74             131,298             85,684             105,538          $ 26.38          $ 2,260   
 

(1)
  Shares withheld for taxes are treated as a repurchase of shares for accounting purposes but do not count against the Company’s stock repurchase program.

Employee Stock Purchase Plan

The ESPP provides for the purchase of up to an aggregate of 5 million shares of common stock of the Company by employees pursuant to the terms of the ESPP. The Company’s ESPP was adopted by the Board of Directors and approved by the stockholders in 1994. The ESPP was amended and restated in 2003 and again approved by the stockholders. Under the ESPP, employees of the Company who elect to participate have the right to purchase common stock at a 15 percent discount from the lower of the market value of the common stock at the beginning or the end of each six month offering period. The ESPP permits an enrolled employee to make contributions to purchase shares of common stock by having withheld from their salary an amount up to 10 percent of their compensation (which amount may be increased from time to time by the Company but may not exceed 15% of compensation). No employee may purchase more than $25,000 worth of common stock (calculated at the time the purchase right is granted) in any calendar year. The Compensation Committee of the Board of Directors administers the ESPP. The number of shares of common stock issued pursuant to the ESPP during each of fiscal 2012, 2011 and 2010 was 97,769, 127,192 and 136,070, respectively. As of July 31, 2012, 3,674,349 shares of common stock have been issued pursuant to the ESPP and 1,325,651 shares remain available for purchase under the ESPP.

80


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010

Stock Options

In December 2007, the Company adopted the Copart, Inc. 2007 Equity Incentive Plan (Plan), presently covering an aggregate of 8.0 million shares of the Company’s common stock. The Plan provides for the grant of incentive stock options, restricted stock, restricted stock units and other equity-based awards to employees and non-qualified stock options, restricted stock, restricted stock units and other equity-based awards to employees, officers, directors and consultants at prices not less than 100% of the fair market value for incentive and non-qualified stock options, as determined by the Board of Directors at the grant date. Incentive and non-qualified stock options may have terms of up to ten years and vest over periods determined by the Board of Directors. Options generally vest ratably over a five-year period. The Plan replaced the Company’s 2001 Stock Option Plan. At July 31, 2012, 1,991,539 shares were available for future grant under the Plan.

In April 2009, the Compensation Committee of the Company’s Board of Directors, following stockholder approval of proposed grants at a special meeting of stockholders, approved the grant to each Willis J. Johnson, the Company’s Chairman (and then Chief Executive Officer), and A. Jayson Adair, the Company’s Chief Executive Office (and then President), of nonqualified stock options to purchase 4,000,000 shares of the Company’s common stock at an exercise price of $15.11 per share, which equaled the closing price of the Company’s common stock on April 14, 2009, the effective date of grant. Such grants were made in lieu of any cash salary or bonus compensation in excess of $1.00 per year or the grant of any additional equity incentives for a five-year period. Each option will become exercisable over five years, subject to continued service by the executive, with twenty percent (20%) vesting on April 14, 2010, and the balance vesting ratably over the subsequent four years. Each option will become fully vested, assuming continued service, on April 14, 2014, the fifth anniversary of the date of grant. If, prior to a change in control, either executive’s employment is terminated without cause, then one hundred percent (100%) of the shares subject to that executive’s stock option will immediately vest. If, upon or following a change in control, either the Company or a successor entity terminates the executive’s service without cause, or the executive resigns for good reason, then one hundred percent (100%) of the shares subject to his stock option will immediately vest. The total compensation expense to be recognized by the Company over the five year service period is $26.1 million dollars per grant. The Company recognized $10.2 million, $10.2 million, and $10.1 million in compensation expense in fiscal 2012, 2011 and 2010, respectively relating to these grants.

The following table sets forth stock-based compensation expense included in the company’s consolidated statements of income (in thousands):

        Years Ended July 31,
   
        2012
    2011
    2010
General and administrative
              $ 18,802          $ 17,976          $ 16,846   
Yard operations
                 2,989             1,031             1,109   
Total
              $ 21,791          $ 19,007          $ 17,955   
 

There were no material compensation costs capitalized as part of the cost of an asset as of July 31, 2012 and 2011.

81


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010

A summary of the status of the Company’s non-vested shares as of July 31, 2012 and changes during fiscal 2012 is as follows:

        Number of
Shares
(in 000’s)
    Weighted
Average Grant-
date Fair Value
Non-vested shares at July 31, 2011
                 8,328          $ 6.66   
Grants of options
                 880              6.01   
Vested
                 (3,156 )            6.63   
Forfeitures or expirations
                 (39 )            5.33   
Non-vested shares at July 31, 2012
                 6,013          $ 6.59   
 

Option activity for the year ended July 31, 2012 is summarized as follows:

        Shares
(in 000’s)
    Weighted-
Average
Exercise Price
    Weighted-Average
Remaining
Contractual Term
    Aggregate
Intrinsic
Value
(in 000’s)
Outstanding at July 31, 2011
                 16,705          $ 15.50             7.18          $ 103,979   
Grants of options
                 880              22.54             —              —    
Exercises
                 (1,367 )            11.58             —              —    
Forfeitures or expirations
                 (39 )            16.43             —              —    
Outstanding at July 31, 2012
                 16,179          $ 16.24             6.60          $ 121,977   
Exercisable at July 31, 2012
                 10,166          $ 15.38             6.02          $ 85,146   
Vested and expected to vest at July 31, 2012
                 15,533          $ 16.21             6.61          $ 117,326   
 

As required by ASC 718, the Company made an estimate of expected forfeitures and is recognizing compensation cost only for those equity awards expected to vest.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of the year ended July 31, 2012 and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options on July 31, 2012. The aggregate intrinsic value of options exercised was $16.6 million, $16.2 million and $19.0 million in the fiscal years ended July 31, 2012, 2011 and 2010, respectively, and represents the difference between the exercise price of the option and the estimated fair value of the Company’s common stock on the dates exercised. As of July 31, 2012, the total compensation cost related to non-vested stock-based payment awards granted to employees under the Company’s stock option plans but not yet recognized was $35.4 million, net of estimated forfeitures. This cost will be amortized on a straight-line basis over a weighted average remaining term of 2.44 years and will be adjusted for subsequent changes in estimated forfeitures. The fair value of options vested in fiscal 2012, 2011 and 2010 is $20.9 million, $19.6 million and $19.6 million, respectively.

82


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010

A summary of stock options outstanding and exercisable at July 31, 2012 follows:

        Options Outstanding
    Options Exercisable
   
Range of Exercise Prices
        Number
Outstanding at
July 31, 2012
(in 000’s)
    Weighted-
Average
Remaining
Contractual
Life
    Weighted-
Average
Exercise
Price
    Number
Exercisable
at July 31,
2012
(in 000’s)
    Weighted-
Average
Exercise
Price
$3.87–$11.87
                 479              1.25          $ 7.49             479           $ 7.49   
$12.01–$14.95
                 1,090             3.90          $ 12.72             1,089          $ 12.72   
$15.11–$15.11
                 8,000             6.71          $ 15.11             5,200          $ 15.11   
$16.38–$26.08
                 6,610             7.30          $ 18.82             3,398          $ 17.78   
 
                 16,179             6.60          $ 16.24             10,166          $ 15.38   
 

On March 6, 2003, the Company’s Board of Directors declared a dividend of one right (Right) to purchase one-thousandth share of the Company’s Series A Participating Preferred Stock for each outstanding share of Common Stock of the Company. Each Right entitles the registered holder to purchase from the Company one one-thousandth of a share of Series A Preferred Stock at an exercise price of $120.48.

On January 10, 2012, the Company entered into an amendment to the Preferred Stock Rights Agreement, dated as of March 6, 2003, as amended on March 15, 2006, between the Company and Computershare Trust Company, N.A. (formerly Equiserve Trust Company, N.A.), as Rights Agent (collectively the “Rights Agreement”). The Amendment accelerated the Final Expiration Date of the Company’s Series A Participating Preferred Stock purchase rights (the “Rights”) from March 21, 2013 to January 10, 2012, and resulted in a termination of the Rights Agreement and the expiration of all outstanding Rights effective as of January 10, 2012.

(12)
  Income Taxes

Income before taxes consists of the following (in thousands):

        Years Ended July 31,
   
        2012
    2011
    2010
U.S.
              $ 237,596          $ 234,035          $ 217,947   
Non-U.S.
                 40,460             29,842             21,548   
Total income before taxes
              $ 278,056          $ 263,877          $ 239,495   
 

The Company’s income tax expense (benefit) from continuing operations consists of (in thousands):

        Years Ended July 31,
   
        2012
    2011
    2010
Federal:
                                                       
Current
              $ 102,152          $ 84,119          $ 83,791   
Deferred
                 (14,557 )            278              (3,714 )  
 
                 87,595             84,397             80,077   
State:
                                                       
Current
                 3,332             7,186             6,664   
Deferred
                 (461 )            (128 )            473    
 
                 2,871             7,058             7,137   
Foreign:
                                                       
Current
                 8,460             5,818             1,916   
Deferred
                 (2,989 )            229              (1,262 )  
 
                 5,471             6,047             654    
 
              $ 95,937          $ 97,502          $ 87,868   
 

83


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010

A reconciliation by year of the expected U.S. statutory tax rate (35% of income before income taxes) to the actual effective income tax rate is as follows:

        Years Ended July 31,
   
        2012
    2011
    2010
Federal statutory rate
                 35.0 %            35.0 %            35.0 %  
State income taxes, net of federal income tax benefit
                 1.2             1.7             2.0   
Foreign
                 (1.9 )            (0.4 )            (1.7 )  
Compensation and fringe benefits
                 —              0.2             0.2   
Other differences
                 0.2             0.4             1.2   
Effective tax rate
                 34.5 %            36.9 %            36.7 %  
 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities are presented below, (in thousands):

        July 31,
   
        2012
    2011
Deferred tax assets:
                                       
Allowance for doubtful accounts
              $ 1,013          $ 1,063   
Accrued compensation and benefits
                 23,902             18,249   
State taxes
                 625              1,488   
Accrued other
                 2,634             3,006   
Deferred revenue
                 2,056             —    
Property and equipment
                 10,969             3,378   
Losses carried forward
                 1,028             398    
Federal tax benefit
                 7,989             5,758   
Total gross deferred tax assets
                 50,216             33,340   
Less valuation allowance
                 (1,211 )            (948 )  
Net deferred tax assets
                 49,005             32,392   
Deferred tax liabilities:
                                       
Vehicle pooling costs
                 (4,537 )            (4,956 )  
Prepaid insurance
                 (792 )            (1,397 )  
Deferred revenue
                 —              (1,721 )  
Intangibles and goodwill
                 (24,758 )            (25,031 )  
Workers compensation
                 (224 )            (359 )  
Total gross deferred tax liabilities
                 (30,311 )            (33,464 )  
Net deferred tax asset (liability)
              $ 18,694          $ (1,072 )  
 

The above net deferred tax asset and liability has been reflected in the accompanying consolidated balance sheets as follows (in thousands):

        July 31,
   
        2012
    2011
North America current liabilities
              $ 3,601          $ (440 )  
North America non-current assets
                 22,279             9,425   
U.K. non-current liabilities
                 (7,186 )            (10,057 )  
Net deferred tax asset (liability)
              $ 18,694          $ (1,072 )  
 

The Company’s ability to realize deferred tax assets is dependent on its ability to generate future taxable income. Accordingly, the Company has established a valuation allowance in taxable jurisdictions where the

84


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010


utilization of the tax assets is uncertain. Additional timing differences or future tax losses may occur which could warrant a need for establishing additional valuation allowances against certain deferred tax assets. The valuation allowance for the years ended July 31, 2012 and 2011 was $1.2 million and $0.9 million, respectively.

At July 31, 2012 and 2011, if recognized, the portion of liabilities for unrecognized tax benefits that would favorably affect the Company’s effective tax rate is $14.1 million and $13.2 million, respectively. It is possible that the amount of unrecognized tax benefits will change in the next twelve months, due to tax legislation updates or future audit outcomes; however an estimate of the range of the possible change cannot be made at this time.

The following table summarizes the activities related to the Company’s unrecognized tax benefits (in thousands):

        Years Ended July 31,
   
        2012
    2011
    2010
Balance as of August 1
              $ 18,794          $ 18,144          $ 15,965   
Increases related to current year tax positions
                 2,036             1,592             4,514   
Prior year tax positions:
                                                       
Prior year increase
                 618              519              74    
Prior year decrease
                 (952 )            (531 )            (532 )  
Cash settlement
                 (452 )            —              (302 )  
Lapse of statute of limitations
                 (3,098 )            (930 )            (1,575 )  
Balance at July 31
              $ 16,946          $ 18,794          $ 18,144   
 

It is the Company’s continuing practice to recognize interest and penalties related to income tax matters in income tax expense. As of July 31, 2012, 2011 and 2010, the Company had accrued interest and penalties related to the unrecognized tax benefits of $5.6 million, $6.0 million and $5.2 million, respectively.

The Company is currently under audit by the state of New York for fiscal years 2008, 2009 and 2010. The Company is no longer subject to U.S. federal and state income tax examination for fiscal years prior to 2009, with the exception of New York.

In fiscal years 2012, 2011 and 2010, the Company recognized a tax benefit of $4.3 million, $3.6 million and $6.2 million, respectively, upon the exercise of certain stock options which is reflected in stockholders’ equity.

The Company has not provided for U.S. federal income and foreign withholding taxes on its $58.8 million foreign subsidiaries’ undistributed earnings as of July 31, 2012, because the Company intends to reinvest such earnings indefinitely in the operations and potential acquisitions related to its foreign operations. Upon distribution of those earnings in the form of dividends or otherwise, the Company would be subject to U.S. income taxes (subject to an adjustment for foreign tax credits). It is not practical to determine the income tax liability that might be incurred if these earnings were to be distributed.

85


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010

(13)
  Net Income Per Share

The table below reconciles weighted average shares outstanding to weighted average shares and dilutive potential share outstanding (in thousands):

        Years Ended July 31,
   
        2012
    2011
    2010
Weighted average common shares outstanding
                 128,120             151,298             168,330   
Effect of dilutive securities-stock options
                 3,308             2,054             1,724   
Diluted weighted average common shares outstanding
                 131,428             153,352             170,054   
 

There were no adjustments to net income required in calculating diluted net income per share. Excluded from the dilutive earnings per share calculation were 2,208,047, 5,107,978 and 11,785,282 options to purchase the Company’s common stock that were outstanding at July 31, 2012, 2011 and 2010, respectively, because their effect would have been anti-dilutive.

(14)
  Segments and Other Geographic Information

The Company’s North American region and its U.K. region are considered two separate operating segments, which have been aggregated into one reportable segment because they share similar economic characteristics.

The following geographic data is provided in accordance with ASC 280, Segment Reporting . Revenues are based upon the geographic location of the selling facility and are summarized in the following table (in thousands):

        Years Ended July 31,
   
        2012
    2011
    2010
United States
              $ 724,869          $ 674,742          $ 602,794   
Canada
                 6,626             6,532             5,635   
North America
                 731,495             681,274             608,429   
United Kingdom
                 192,696             190,972             164,450   
 
              $ 924,191          $ 872,246          $ 772,879   
 

Long-lived assets based upon geographic location are summarized in the following table (in thousands):

        July 31,
   
        2012
    2011
United States
              $ 510,366          $ 521,558   
Canada
                 4,161             4,579   
North America
                 514,527             526,137   
United Kingdom
                 91,543             95,638   
 
              $ 606,070          $ 621,775   
 
(15)
  Commitments and Contingencies

Leases

The Company leases certain facilities and certain equipment under non-cancelable capital and operating leases. In addition to the minimum future lease commitments presented below, the leases generally require the Company to pay property taxes, insurance, maintenance and repair costs which are not included in the table because the Company has determined these items are not material. Certain leases provide the Company with either a right of first refusal to acquire or an option to purchase a facility at fair value. Certain leases also

86


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010


contain escalation clauses and renewal option clauses calling for increased rents. Where a lease contains an escalation clause or a concession such as a rent holiday or tenant improvement allowance, rent expense is recognized on a straight-line basis over the lease term in accordance with ASC 840, Operating Leases.

At July 31, 2012, future minimum lease commitments under non-cancelable capital and operating leases with initial or remaining lease terms in excess of one year are as follows (in thousands):

Years Ending July 31,
        Capital
Leases
    Operating
Leases
2013
              $ 198           $ 17,208   
2014
                 126              13,684   
2015
                 —              11,156   
2016
                 —              9,184   
2017
                 —              7,655   
Thereafter
                 —              46,396   
 
                 324           $ 105,283   
Less amount representing interest
                 (17 )                  
 
              $ 307                    
 

Facilities rental expense for the fiscal years ended July 31, 2012, 2011 and 2010 aggregated $16.2 million, $17.4 million and $16.8 million, respectively. Yard operations equipment rental expense for the fiscal years ended July 31, 2012, 2011 and 2010 aggregated $2.7 million, $3.3 million and $4.1 million, respectively.

Commitments

Letters of Credit

The Company had outstanding letters of credit of $6.7 million at July 31, 2012 which are primarily used to secure certain insurance obligations.

Contingencies

Legal Proceedings

The Company is subject to threats of litigation and is involved in actual litigation and damage claims arising in the ordinary course of business, such as actions related to injuries, property damage, and handling or disposal of vehicles. The material pending legal proceedings to which the Company is a party to, or of which any of the Company’s property is subject to, include the following matters:

On August 21, 2008, a former employee filed a Charge of Discrimination with the Equal Employment Opportunity Commission, or EEOC, claiming, in part, that he was denied employment based on his race and subjected to unlawful retaliation. The Company responded to the Charge of Discrimination explaining that it has a policy prohibiting the employment of individuals with certain criminal offenses and that the former employee was terminated after it was belatedly discovered that he had been convicted of a felony and other crimes prior to being hired by the Company. The Charge of Discrimination lay dormant at the EEOC for over two years. In January, 2011, however, the EEOC began actively investigating the allegations and challenging the Company’s policy of conducting criminal background checks and denying employment based on certain criminal convictions. It is the EEOC’s position that such a practice is unlawful because it has a disparate impact on minorities. It is the Company’s position that its policy is required by one of its largest auto insurance company customers. Because the Company’s customer is in the insurance and financial services industry, its operations are heavily regulated. The Federal Deposit Insurance Act (12 U.S.C. §1829) prohibits savings and loan holding companies, such as the Company’s customer, from employing “any person who has

87


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010


been convicted of any criminal offense involving dishonesty or a breach of trust or money laundering, or has agreed to enter into a pretrial diversion or similar program in connection with a prosecution for such offense.” In turn, it is the Company’s understanding that its customer is obligated to make sure its vendors, such as the Company, comply with similar hiring restrictions. By letter dated March 16, 2012, the EEOC notified the Company that it had concluded its investigation and was closing its file on this matter. Moreover, the EEOC made a determination of no reasonable cause, meaning that the EEOC had no reasonable cause to believe that discrimination occurred based upon evidence obtained in the investigation, but that the charging party may exercise the right to bring private court action.

On April 23, 2010, Deborah Hill filed suit against the Company in the Twentieth Judicial Circuit of Collier County, Florida, alleging negligent destruction of evidence in connection with a stored vehicle that suffered damage due to a fire at its facility in Florida where the vehicle was being stored. Relief sought is for compensatory damages, costs and interest allowed by law. The Company believes the claim is without merit and intends to continue to vigorously defend the lawsuit.

On September 21, 2010, Robert Ortiz and Carlos Torres filed suit against the Company in Superior Court of San Bernardino County, San Bernardino District, which purported to be a class action on behalf of persons employed by the Company in the positions of facilities managers and assistant general managers in California at any time since the date four years prior to September 21, 2010. The complaint alleges failure to pay wages and overtime wages, failure to provide meal breaks and rest breaks, in violation of various California Labor and Business and Professional Code sections, due to alleged misclassification of facilities managers and assistant general managers as exempt employees. Relief sought includes class certification, injunctive relief, damages according to proof, restitution for unpaid wages, disgorgement of ill-gotten gains, civil penalties, attorney’s fees and costs, interest, and punitive damages. The Company believes the claim is without merit and intends to continue to vigorously defend the lawsuit.

On February 12, 2011, Jose E. Brizuela filed suit against the Company in Superior Court, San Bernardino County, San Bernardino District, which purports to be class action on behalf of persons employed by the Company paid on a hourly basis in California at any time since the date four years prior to February 14, 2011. The complaint alleges failure to pay all earned wages due to an alleged practice of rounding of hours worked to the detriment of the employees. Relief sought includes class certification, injunctive relief, unpaid wages, waiting time penalty-wages, interest, and attorney’s fees and costs of suit. On March 26, 2012, the Company participated in mediation of the case with plaintiffs, which resulted in the parties agreeing to settle this matter. The settlement, in which the Company admits no liability and agrees to pay a non-material cash payment, is subject to approval by the Court.

The Company provides for costs relating to these matters when a loss is probable and the amount can be reasonably estimated. The effect of the outcome of these matters on the Company’s future consolidated results of operations cannot be predicted because any such effect depends on future results of operations and the amount and timing of the resolution of such matters. The Company believes that any ultimate liability will not have a material effect on our consolidated results of operations, financial position or cash flows. However, the amount of the liabilities associated with these claims, if any, cannot be determined with certainty. The Company maintains insurance which may or may not provide coverage for claims made against the Company. There is no assurance that there will be insurance coverage available when and if needed. Additionally, the insurance that the Company carries requires that the Company pay for costs and/or claims exposure up to the amount of the insurance deductibles negotiated when insurance is purchased.

Governmental Proceedings

The Georgia Department of Revenue, or DOR, conducted a sales and use tax audit of the Company’s operations in Georgia for the period from January 1, 2007 through June 30, 2011. As a result of the audit, the DOR issued a notice of proposed assessment for uncollected sales taxes in which it asserted that the Company failed to remit sales taxes totaling $73.8 million, including penalties and interest. In issuing the notice of

88


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010


proposed assessment, the DOR stated its policy position that sales for resale to non-U.S. registered resellers are subject to Georgia sales and use tax.

The Company has engaged a Georgia law firm and outside tax advisors to review the conduct of its business operations in Georgia, the notice of assessment, and the DOR’s policy position. In particular, the Company’s outside legal counsel has provided the Company an opinion that its sales for resale to non-U.S. registered resellers should not be subject to Georgia sales and use tax. In rendering its opinion, the Company’s counsel noted that non-U.S. registered resellers are unable to comply strictly with technical requirements for a Georgia certificate of exemption but concluded that its sales for resale to non-U.S. registered resellers should not be subject to Georgia sales and use tax notwithstanding this technical inability to comply.

Based on the opinion from the Company’s outside law firm and advice from outside tax advisors, the Company has not provided for the payment of this assessment in its consolidated financial statements. The Company believes it has strong defenses to the DOR’s notice of proposed assessment and intends to defend this matter. The Company has filed a request for protest or administrative appeal with the State of Georgia. There can be no assurance, however, that this matter will be resolved in the Company’s favor or that the Company will not ultimately be required to make a substantial payment to the Georgia DOR. The Company understands that Georgia law and DOR regulations are ambiguous on many of the points at issue in the audit, and litigating and defending the matter in Georgia could be expensive and time-consuming and result in substantial management distraction. If the matter were to be resolved in a manner adverse to the Company, it could have a material adverse effect on the Company’s consolidated results of operations and financial position.

Environmental Matters

In connection with the acquisition of the Dallas, Texas facility in 1994, the Company set aside $3.0 million to cover the costs of environmental remediation, stabilization and related consulting expenses for a six-acre portion of the facility that contained elevated levels of lead due to the activities of the former operators. The Company began the stabilization process in 1996 and completed it in 1999. The Company paid all remediation and related costs from the $3.0 million fund and, in accordance with the acquisition agreement, distributed the remainder of the fund to the seller of the Dallas facility, less $0.2 million which was held back to cover the costs of obtaining the no-further-action letter. In September 2002, the Company’s environmental engineering consultant issued a report, which concludes that the soil stabilization has effectively stabilized the lead-impacted soil, and that the concrete cap should prevent impact to storm water and subsequent surface water impact. The Company’s consultant thereafter submitted an Operations and Maintenance Plan (Plan) to the Texas Commission on Environmental Quality (TCEQ) providing for a two-year inspection and maintenance plan for the concrete cap, and a two-year ground and surface water monitoring plan. In January of 2003, the TCEQ approved the Plan, subject to the additions of upstream (background) surface water samples from the intermittent stream adjacent to the facility and documentation of any repairs to the concrete cap during the post closure-monitoring period. The first semi-annual water sampling was conducted in April 2003, which reflected that the lead-impacted, stabilized soil is not impacting the ground and/or surface water. The second round of semi-annual water samples collected in October and November 2003 reported concentration of lead in one storm water and one surface water sample in excess of the established upstream criteria for lead. In correspondence, which the Company received in July 2004, the TCEQ approved with comment the Company’s water monitoring report dated February 24, 2004. The TCEQ instructed the Company to continue with post-closure monitoring and maintenance activities and submit the next report in accordance with the approved schedules. In February 2005, a report from the Company’s environmental engineering consultant was transmitted to the TCEQ containing the results of annual monitoring activities consisting of two (2) semi-annual sampling events which occurred in April/June 2004 and October/November 2004. Laboratory analytical results indicated no lead concentrations exceeding the target concentration level set in the Corrective Measures Study for the site, but some results were in excess of Texas surface water quality standards. The Company’s environmental engineering consultant concluded in the

89


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010


February 2005 report to the TCEQ that it is unlikely that lead concentrations detected in the storm water runoff samples are attributable to the lead impacted soils. Based on the results of the 2004 samplings, the Company requested that no further action be taken and that a closure letter be issued by the TCEQ. In September 2007, the TCEQ notified the Company that they did not concur with their consultant’s conclusions and recommendations. The TCEQ said it would not provide a closure letter until additional sampling of surface water is performed which reflects concentrations of lead below Texas surface water quality standards. In February 2008, the TCEQ provided comments to the Company’s proposal for surface water sampling. In March 2008, the Company’s environmental engineer submitted to the TCEQ an addendum to the surface water sampling plan, which was approved by the TCEQ in June 2008. Sampling was performed in November 2008. In December 2008 a report was submitted to the TCEQ indicating that lead levels were below Texas surface water quality standards. In May of 2009, the TCEQ approved the Surface Water Sampling Report, as well as the Concrete Cap Inspection Report submitted in December 2008. The Company made the necessary repairs to the concrete cap and provided a survey map of the cap. Annual inspections of the cap are required to ensure its maintenance. There is no assurance that the Company may not incur future liabilities if the stabilization process proves ineffective, or if future testing of surface or ground water reflects concentrations of lead which exceed Texas surface or ground water quality standards.

The Company does not believe that the above environmental matter will, either individually or in the aggregate, have a material adverse effect on the Company’s consolidated results of operations, financial position or cash flows.

(16)
  Guarantees—Indemnifications to Officers and Directors

The Company has entered into an updated form of indemnification agreement, which was approved in January 2012. The indemnification agreement to our directors and certain of our officers is to indemnify them to the extent permitted by law against any and all liabilities, costs, expenses, amounts paid in settlement and damages incurred by the directors as a result of any lawsuit, or any judicial, administrative or investigative proceeding in which the directors are sued as a result of their service as members of its Board of Directors. The form was intended to update the current form for our reincorporation into Delaware and general developments in corporate law since the adoption of our original form of indemnification agreement and was done as part of our ordinary course of corporate governance matters.

(17)
  Related Party Transactions

The Company leases certain of its facilities from officers and/or directors of the Company under various lease agreements. Rental payments under these leases aggregated $0.0 million, $0.05 million, and $0.2 million for the fiscal years ended July 31, 2012, 2011 and 2010, respectively.

On November 11, 2010, the Company exercised its option to purchase land that had been leased from Willis J. Johnson, the Company’s Chairman of the Board and a member of the Board of Directors. The purchase price was established through an independent appraisal and the transaction was approved by the Audit Committee of the Company’s Board of Directors.

On June 10, 2010, the Company entered into an agreement with Willis J. Johnson, the Company’s Chairman of the Board and a member of the Board of Directors, pursuant to which the Company acquired 242,502 shares of its common stock at a price of $18.38 per share, or an aggregate purchase price of $4.5 million. The settlement date for the acquisition of the common stock was on or about June 10, 2010, and the purchase was made pursuant to the Company’s existing stock repurchase program. The per share purchase price for the common stock to be acquired was based on the closing price of the Company’s common stock on June 10, 2010 (as reported by The NASDAQ Stock Market). The repurchase was approved by the independent members of the Board of Directors and the Audit Committee of the Board of Directors.

During the year ended July 31, 2011, the Company purchased three houses from executives who relocated to the corporate headquarters in Dallas (see Note 19. Restructuring ). During the year ended July 31,

90


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010


2012, the Company purchased three houses from executives who relocated to the corporate headquarters in Dallas. As of July 31, 2012, one home remains unsold and is reported in assets held for sale.

During the year ended July 31, 2011, the Company purchased 10,620 shares of stock from the Willis Johnson Foundation for $0.5 million. In addition, the Company loaned $0.2 million to the Copart Private Foundation.

On June 28, 2012, the Company entered into an agreement with Willis J. Johnson, the Company’s Chairman of the Board and a member of the Board of Directors, pursuant to which the Company acquired 2.8 million shares of its common stock at a price of $23.22 per share, or an aggregate purchase price of $65.0 million. The settlement date for the acquisition of the common stock was on or about June 28, 2012, and the purchase was made pursuant to the Company’s existing stock repurchase program. The per share purchase price for the common stock to be acquired was based on the closing price of the Company’s common stock on June 28, 2012 (as reported by The NASDAQ Stock Market). The repurchase was approved by the independent members of the Board of Directors and the Audit Committee of the Board of Directors.

On September 27, 2012, the Company entered into an agreement with Thomas W. Smith, the Company’s former member of the Board of Directors, pursuant to which the Company acquired 0.5 million shares of its common stock at a price of $27.77 per share, or an aggregate purchase price of $13.9 million. The settlement date for the acquisition of the common stock was on or about September 27, 2012, and the purchase was made pursuant to the Company’s existing stock repurchase program. The per share purchase price for the common stock to be acquired was based on the closing price of the Company’s common stock on September 27, 2012 (as reported by The NASDAQ Stock Market). The repurchase was approved by the independent members of the Board of Directors and the Audit Committee of the Board of Directors.

There were no amounts due to related parties at July 31, 2012 and 2011.

(18)
  Employee Benefit Plan

The Company sponsors a 401(k) defined contribution plan covering its eligible employees. The plan is available to all U.S. employees who meet minimum age and service requirements and provides employees with tax deferred salary deductions and alternative investment options. The Company matches 20% of employee contributions up to 15% of employee salary deferral. The Company recognized an expense of $0.5 million, $0.4 million and $0.5 million for the fiscal years ended July 31, 2012, 2011 and 2010, respectively, related to this plan.

The Company also sponsors an additional defined contribution plan for most of its U.K. employees, which is available to all U.K. employees who meet minimum service requirements. The Company matches up to 5% of employee contributions. The Company recognized an expense of $0.2 million, $0.2 million, and $0.3 million for the fiscal years ended July 31, 2012, 2011 and 2010, respectively, related to this plan.

(19)
  Restructuring

The Company relocated its corporate headquarters to Dallas, Texas in 2012. The Company recognized $2.2 million and $1.4 million for the year ended July 31, 2012 and 2011, respectively, in general and administrative expense. The Company also recognized restructuring-related costs of $1.1 million in impairment of long-lived assets and $0.8 million in yard operations expense for the year ended July 31, 2012. Restructuring-related costs for the year ended July 31, 2012 are $1.7 million for severance and $2.4 million for the costs of relocating employees to Texas. Restructuring-related costs for the year ended July 31, 2011 are $1.2 million for severance and $0.2 million for the costs of relocating employees to Texas.

        Balance at
July 31, 2011
(in 000’s)
    Expense
(in 000’s)
    Payments
(in 000’s)
    Balance at
July 31, 2012
(in 000’s)
Severance
              $ 1,051             1,675             926           $ 1,800   
 

91


COPART, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JULY 31, 2012, 2011 AND 2010

(20)
  Quarterly Information (in thousands, except per share data) (Unaudited) (1)(3)

        Fiscal Quarter
   
Fiscal Year 2012
        First
    Second
    Third
    Fourth
Revenues
              $ 225,626          $ 227,904          $ 244,105          $ 226,556   
Operating income
              $ 65,376          $ 63,539          $ 87,944          $ 69,494   
Income before income taxes
              $ 63,815          $ 62,216          $ 84,547          $ 67,478   
Net income
              $ 41,149          $ 40,603          $ 55,471          $ 44,896   
Basic net income per share
              $ 0.32          $ 0.32          $ 0.44          $ 0.36   
Diluted net income per share
              $ 0.31          $ 0.31          $ 0.43          $ 0.35   
 
        Fiscal Quarter
   
Fiscal Year 2011 (2)
        First
    Second
    Third
    Fourth
Revenues
              $ 212,667          $ 207,380          $ 236,755          $ 215,443   
Operating income
              $ 59,594          $ 60,195          $ 82,044          $ 63,456   
Income before income taxes
              $ 60,163          $ 60,717          $ 80,350          $ 62,645   
Net income
              $ 37,823          $ 37,893          $ 50,136          $ 40,521   
Basic net income per share
              $ 0.23          $ 0.24          $ 0.36          $ 0.30   
Diluted net income per share
              $ 0.23          $ 0.23          $ 0.35          $ 0.29   
 

(1)
  Earnings per share were computed independently for each of the periods presented; therefore, the sum of the earnings per share amounts for the quarters may not equal the total for the year.

(2)
  Fiscal 2011 results are impacted from the adoption of ASU 2009-13.

(3)
  All per share amounts have been revised to reflect the impact of the two-for-one stock split effected in the form of a stock dividend, which issued one additional share of common stock to each share of common stock outstanding on March 23, 2012.

92

EXHIBIT INDEX

            Incorporated by reference herein
   
Exhibit
Number
  
Description
  
Form
  
Date
10.17 *            
Form of Indemnification Agreement signed by executive officers and directors
   
—
   
Filed herewith
10.18            
Standard Industrial/Commercial single tenant lease-net dated February 3, 2012 between Garden Centura, L.P. and the Registrant
   
—
   
Filed herewith
21.1            
List of subsidiaries of Registrant
   
—
   
Filed herewith
23.1            
Consent of Independent Registered Public Accounting Firm
   
—
   
Filed herewith
24.1            
Power of Attorney (included on signature page)
   
—
   
Filed herewith
31.1            
Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
   
—
   
Filed herewith
31.2            
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
—
   
Filed herewith
32.1 (1)            
Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
   
—
   
Filed herewith
32.2 (1)            
Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
   
—
   
Filed herewith
101.INS (2)            
XBRL Instance Document
                               
101.SCH (2)            
XBRL Taxonomy Extension Schema Document
                               
101.CAL (2)            
XBRL Taxonomy Extension Calculation Linkbase Document
                               
101.DEF (2)            
XBRL Extension Definition
                               
101.LAB (2)            
XBRL Taxonomy Extension Label Linkbase Document
                               
101.PRE (2)            
XBRL Taxonomy Extension Presentation Linkbase Document
                               
   (1)            
In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filings under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.
   (2)            
XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Exchange Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
 

*
  Management contract, plan or arrangement

COPART, INC.

INDEMNIFICATION AGREEMENT

This Indemnification Agreement (this “ Agreement ”) is dated as of [ insert date ], and is between Copart, Inc., a Delaware corporation (the “ Company ”), and [ insert name of indemnitee ] (“ Indemnitee ”).

RECITALS

A. Indemnitee’s service to the Company substantially benefits the Company.

B. Individuals are reluctant to serve as directors or officers of corporations or in certain other capacities unless they are provided with adequate protection through insurance or indemnification against the risks of claims and actions against them arising out of such service.

C. Indemnitee does not regard the protection currently provided by applicable law, the Company’s governing documents and any insurance as adequate under the present circumstances, and Indemnitee may not be willing to serve as a director or officer without additional protection.

D. In order to induce Indemnitee to continue to provide services to the Company, it is reasonable, prudent and necessary for the Company to contractually obligate itself to indemnify, and to advance expenses on behalf of, Indemnitee as permitted by applicable law.

E. This Agreement is a supplement to and in furtherance of the indemnification provided in the Company’s certificate of incorporation and bylaws, and any resolutions adopted pursuant thereto, and this Agreement shall not be deemed a substitute therefor, nor shall this Agreement be deemed to limit, diminish or abrogate any rights of Indemnitee thereunder.

The parties therefore agree as follows:

1.                    Definitions.

(a)                 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) is or becomes the Beneficial Owner (as defined below), directly or indirectly, of securities of the Company representing fifteen percent (15%) or more of the combined voting power of the Company’s then outstanding securities;

                                                                              (ii)             Change in Board Composition. During any period of two consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Company’s board of directors, and any new directors (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in Sections 1(a)(i), 1(a)(iii) or 1(a)(iv)) whose election by the board of directors or nomination for election by the Company’s stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the members of the Company’s board of directors;



                                                                             (iii)             Corporate Transactions. The effective date of a merger or consolidation of the Company with any other entity, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than 50% of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation and with the power to elect at least a majority of the board of directors or other governing body of such surviving entity;

                                                                            (iv)             Liquidation. The approval by the stockholders of the Company of a complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company’s assets; and

                                                                              (v)             Other Events. 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 in response to any similar item on any similar schedule or form) promulgated under the Securities Exchange Act of 1934, as amended, whether or not the Company is then subject to such reporting requirement.

For purposes of this Section 1(a), the following terms shall have the following meanings:

(1)                 “ Person ” shall have the meaning as set forth in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended; provided, however, that “ Person ” shall exclude (i) the Company, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company, and (iii) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.

(2)                 “ Beneficial Owner ” shall have the meaning given to such term in Rule 13d-3 under the Securities Exchange Act of 1934, as amended; provided, however, that “ Beneficial Owner ” shall exclude any Person otherwise becoming a Beneficial Owner by reason of (i) the stockholders of the Company approving a merger of the Company with another entity or (ii) the Company’s board of directors approving a sale of securities by the Company to such Person.

(b)                 “ Corporate Status ” describes the status of a person who is or was a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of the Company or any other Enterprise.

(c)                 “ DGCL ” means the General Corporation Law of the State of Delaware.

(d)                 “ Disinterested Director ” means a director of the Company who is not and was not a party to the Proceeding in respect of which indemnification is sought by Indemnitee.

(e)                 “ Enterprise ” means the Company and any other corporation, partnership, limited liability company, 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, trustee, general partner, managing member, officer, employee, agent or fiduciary.

(f)                  “ Expenses ” include all reasonable attorneys’ fees, retainers, court costs, transcript costs, fees and costs of experts, 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 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


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include (i) Expenses incurred in connection with any appeal resulting from any Proceeding, including without limitation the premium, security for, and other costs relating to any cost bond, supersedeas bond or other appeal bond or their equivalent, and (ii) for purposes of Section 12(c), Expenses incurred by Indemnitee in connection with the interpretation, enforcement or defense of Indemnitee’s rights under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.

(g)                 “ Independent Counsel ” means a law firm, or a partner or member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent (i) the Company or Indemnitee in any matter material to either such party (other than as Independent Counsel with respect to matters concerning 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 Indemnitee’s rights under this Agreement.

(h)                 “ Proceeding ” means any threatened, pending or completed action, suit, arbitration, mediation, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative or investigative nature, including any appeal therefrom and including without limitation any such Proceeding pending as of the date of this Agreement, in which Indemnitee was, is or will be involved as a party, a potential party, a non-party witness or otherwise by reason of (i) the fact that Indemnitee is or was a director or officer of the Company, (ii) any action taken by Indemnitee or any action or inaction on Indemnitee’s part while acting as a director or officer of the Company, or (iii) the fact that he or she is or was serving at the request of the Company as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of the Company or 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 or advancement of expenses can be provided under this Agreement.

(i)                   Reference to “ other enterprises ” shall include employee benefit plans; references to “ fines ” shall include any excise taxes assessed on a person with respect to any employee benefit plan; references to “ serving at the request of the Company ” shall include any service as a director, officer, employee or agent of the Company which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he or she reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “ not opposed to the best interests of the Company ” as referred to in this Agreement.

2.                    Indemnity in Third-Party Proceedings. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 2 if Indemnitee is, or is threatened to be made, a party to or a participant in 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 2, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his or her behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company and, with respect to any criminal action or proceeding, had no reasonable cause to believe that his or her conduct was unlawful.


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3.                    Indemnity in Proceedings by or in the Right of the Company. The Company shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any 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 to the fullest extent permitted by applicable law against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Company. No indemnification for Expenses shall be made under this Section 3 in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged by a court of competent jurisdiction to be liable to the Company, unless and only to the extent that the Delaware Court of Chancery or any court in which the Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification for such expenses as the Delaware Court of Chancery or such other court shall deem proper.

4.                    Indemnification for Expenses of a Party Who is Wholly or Partly Successful. To the extent that Indemnitee is a party to or a participant in and is successful (on the merits or otherwise) in defense of any Proceeding or any claim, issue or matter therein, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith. To the extent permitted by applicable law, if Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, in defense of 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 Indemnitee or on Indemnitee’s behalf in connection with (a) each successfully resolved claim, issue or matter and (b) any claim, issue or matter related to any such successfully resolved claim, issuer or matter. For purposes of this section, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.

5.                    Indemnification for Expenses of a Witness. To the extent that Indemnitee is, by reason of his or her Corporate Status, a witness in any Proceeding to which Indemnitee is not a party, Indemnitee shall be indemnified to the extent permitted by applicable law against all Expenses actually and reasonably incurred by Indemnitee or on Indemnitee’s behalf in connection therewith.

6.                    Additional Indemnification.

(a)                 Notwithstanding any limitation in Sections 2, 3 or 4, the Company shall indemnify Indemnitee to the fullest extent permitted by applicable law if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by Indemnitee or on his or her behalf in connection with the Proceeding or any claim, issue or matter therein.

(b)                 For purposes of Section 6(a), the meaning of the phrase “ to the fullest extent permitted by applicable law ” shall include, but not be limited to:

                                                                                (i)             the fullest extent permitted by the provision of the DGCL that authorizes or contemplates additional indemnification by agreement, or the corresponding provision of any amendment to or replacement of the DGCL; and

                                                                              (ii)             the fullest extent authorized or permitted by any amendments to or replacements of the DGCL adopted after the date of this Agreement that increase the extent to which a corporation may indemnify its officers and directors.


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7.                    Exclusions. Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnity in connection with any Proceeding (or any part of any Proceeding):

(a)                 for which payment has actually been made to or on behalf of Indemnitee under any statute, insurance policy, indemnity provision, vote or otherwise, except with respect to any excess beyond the amount paid;

(b)                 for an accounting or disgorgement of profits pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of federal, state or local statutory law or common law, if Indemnitee is held liable therefor (including pursuant to any settlement arrangements);

(c)                 for any reimbursement of the Company by Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by Indemnitee from the sale of securities of the Company, as required in each case under the Securities Exchange Act of 1934, as amended (including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the “ Sarbanes-Oxley Act ”), or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act), if Indemnitee is held liable therefor (including pursuant to any settlement arrangements);

(d)                 initiated by Indemnitee, including any Proceeding (or any part of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees, agents or other indemnitees, unless (i) the Company’s board of directors authorized the Proceeding (or the relevant part of the Proceeding) prior to its initiation, (ii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law, (iii) otherwise authorized in Section 12(c) or (iv) otherwise required by applicable law; or

(e)                 if prohibited by applicable law.

8.                    Advances of Expenses. The Company shall advance the Expenses incurred by Indemnitee in connection with any Proceeding, and such advancement shall be made as soon as reasonably practicable, but in any event no later than 30 days, after the receipt by the Company of a written statement or statements requesting such advances from time to time (which shall include invoices received by Indemnitee in connection with such Expenses but, in the case of invoices in connection with legal services, any references to legal work performed or to expenditure made that would cause Indemnitee to waive any privilege accorded by applicable law shall not be included with the invoice). Advances shall be unsecured and interest free and made without regard to Indemnitee’s ability to repay such advances. Indemnitee hereby undertakes to repay any advance to the extent that it is ultimately determined that Indemnitee is not entitled to be indemnified by the Company. This Section 8 shall not apply to the extent advancement is prohibited by law and shall not apply to any Proceeding for which indemnity is not permitted under this Agreement, but shall apply to any Proceeding referenced in Section 7(b) or 7(c) prior to a determination that Indemnitee is not entitled to be indemnified by the Company .

9.                    Procedures for Notification and Defense of Claim.

(a)                 Indemnitee shall notify the Company in writing of any matter with respect to which Indemnitee intends to seek indemnification or advancement of Expenses as soon as reasonably practicable following the receipt by Indemnitee of notice thereof. The written notification to the Company shall include, in reasonable detail, a description of the nature of the Proceeding and the facts underlying the Proceeding. The failure by Indemnitee to notify the Company will not relieve the Company from any liability which it may


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have to Indemnitee hereunder or otherwise than under this Agreement, and any delay in so notifying the Company shall not constitute a waiver by Indemnitee of any rights, except to the extent that such failure or delay materially prejudices the Company.

(b)                 If, at the time of the receipt of a notice of a Proceeding pursuant to the terms hereof, the Company has directors’ and officers’ liability insurance in effect, the Company shall give prompt notice of the commencement of the Proceeding to the insurers in accordance with the procedures set forth in the applicable policies. The Company shall thereafter take all commercially-reasonable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies.

(c)                 In the event the Company may be obligated to make any indemnity in connection with a Proceeding, the Company shall be entitled to assume the defense of such Proceeding with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee for any fees or expenses of counsel subsequently incurred by Indemnitee with respect to the same Proceeding. Notwithstanding the Company’s assumption of the defense of any such Proceeding, the Company shall be obligated to pay the fees and expenses of Indemnitee’s counsel to the extent (i) the employment of counsel by Indemnitee is authorized by the Company, (ii) counsel for the Company or Indemnitee shall have reasonably concluded that there is a conflict of interest between the Company and Indemnitee in the conduct of any such defense such that Indemnitee needs to be separately represented, (iii) the fees and expenses are non-duplicative and reasonably incurred in connection with Indemnitee’s role in the Proceeding despite the Company’s assumption of the defense, (iv) the Company is not financially or legally able to perform its indemnification obligations or (v) the Company shall not have retained, or shall not continue to retain, such counsel to defend such Proceeding. The Company shall have the right to conduct such defense as it sees fit in its sole discretion. Regardless of any provision in this Agreement, Indemnitee shall have the right to employ counsel in any Proceeding at Indemnitee’s personal expense. The Company shall not be entitled, without the consent of Indemnitee, to assume the defense of any claim brought by or in the right of the Company.

(d)                 Indemnitee shall give the Company such information and cooperation in connection with the Proceeding as may be reasonably appropriate.

(e)                 The Company shall not be liable to indemnify Indemnitee for any settlement of any Proceeding (or any part thereof) without the Company’s prior written consent, which shall not be unreasonably withheld.

(f)                  The Company shall have the right to settle any Proceeding (or any part thereof) without the consent of Indemnitee.

10.                Procedures upon Application for Indemnification.

(a)                 To obtain indemnification, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and as is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification following the final disposition of the Proceeding. The Company shall, as soon as reasonably practicable after receipt of such a request for indemnification, advise the board of directors that Indemnitee has requested indemnification. Any delay in providing the request will not relieve the Company from its obligations under this Agreement, except to the extent such failure is prejudicial.


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(b)                 Upon written request by Indemnitee for indemnification pursuant to Section 10(a), a determination with respect to Indemnitee’s entitlement thereto shall be made in the specific case (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Company’s board of directors, a copy of which shall be delivered to Indemnitee or (ii) if a Change in Control shall not have occurred, if required by applicable law (A) by a majority vote of the Disinterested Directors, even though less than a quorum of the Company’s board of directors, (B) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Company’s board of directors, (C) if there are no such Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a written opinion to the Company’s board of directors, a copy of which shall be delivered to Indemnitee or (D) if so directed by the Company’s board of directors, by the stockholders of the Company. If it is determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten days after such determination. Indemnitee shall cooperate with the person, persons or entity making the determination with respect to Indemnitee’s entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information that is not privileged or otherwise protected from disclosure and that is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or expenses (including attorneys’ fees and disbursements) reasonably incurred by Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company, to the extent permitted by applicable law.

(c)                 In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 10(b), the Independent Counsel shall be selected as provided in this Section 10(c). If a Change in Control shall not have occurred, the Independent Counsel shall be selected by the Company’s board of directors, 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 Company’s board of directors, 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 days after such written notice of selection shall have been given, 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 1 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 such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or a court has determined that such objection is without merit. If, within 20 days after the later of (i) submission by Indemnitee of a written request for indemnification pursuant to Section 10(a) hereof and (ii) the final disposition of the Proceeding, the parties have not agreed upon an Independent Counsel, 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 other’s selection of Independent Counsel and 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 10(b) hereof. Upon the due commencement of any judicial proceeding pursuant to Section 12(a) of this Agreement, the Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).

(d)                 The Company agrees to pay the reasonable fees and expenses of any Independent Counsel and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.


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11.                Presumptions and Effect of Certain Proceedings.

(a)                 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 (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner 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.

(b)                 For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith to the extent Indemnitee relied in good faith on (i) the records or books of account of the Enterprise, including financial statements, (ii) information supplied to Indemnitee by the officers of the Enterprise in the course of their duties, (iii) the advice of legal counsel for the Enterprise or its board of directors or counsel selected by any committee of the board of directors or (iv) information or records given or reports made to the Enterprise by an independent certified public accountant, an appraiser, investment banker or other expert selected with reasonable care by the Enterprise or its board of directors or any committee of the board of directors. The provisions of this Section 11(b) shall not be deemed to be exclusive or to limit in any way the other circumstances in which Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement.

(c)                 Neither the knowledge, actions nor failure to act of any other director, officer, agent or employee of the Enterprise shall be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.

12.                Remedies of Indemnitee.

(a)                 Subject to Section 12(d), in the event that (i) a determination is made pursuant to Section 10 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 8 or 12(c) of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 10 of this Agreement within 90 days after the later of the receipt by the Company of the request for indemnification or the final disposition of the Proceeding, (iv) payment of indemnification pursuant to this Agreement is not made (A) within ten days after a determination has been made that Indemnitee is entitled to indemnification or (B) with respect to indemnification pursuant to Sections 4, 5 and 12(d) of this Agreement, within 30 days after receipt by the Company of a written request therefor, or (v) the Company or any other person or entity takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or proceeding designed to deny, or to recover from, Indemnitee the benefits provided or intended to be provided to Indemnitee hereunder, Indemnitee shall be entitled to an adjudication by a court of competent jurisdiction of his or her entitlement to such indemnification or advancement of Expenses. Indemnitee shall commence such proceeding seeking an adjudication within 180 days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 12(a); provided, however, that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his or her rights under Section 4 of this Agreement. The Company shall not oppose Indemnitee’s right to seek any such adjudication in accordance with this Agreement.

(b)                 Neither (i) the failure of the Company, its board of directors, any committee or subgroup of the board of directors, Independent Counsel or stockholders to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor (ii) an actual determination by the Company, its board of directors, any committee or subgroup of the board of directors, Independent Counsel or stockholders that Indemnitee has not met the


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applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has or has not met the applicable standard of conduct. In the event that a determination shall have been made pursuant to Section 10 of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding commenced pursuant to this Section 12 shall be conducted in all respects as a de novo trial, on the merits, and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding commenced pursuant to this Section 12, the Company shall, to the fullest extent not prohibited by law, have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be.

(c)                 To the extent not prohibited by law, the Company shall indemnify Indemnitee against all Expenses that are incurred by Indemnitee in connection with any action for indemnification or advancement of Expenses from the Company under this Agreement or under any directors’ and officers’ liability insurance policies maintained by the Company to the extent Indemnitee is successful in such action, and, if requested by Indemnitee, shall (as soon as reasonably practicable, but in any event no later than 30 days, after receipt by the Company of a written request therefor) advance such Expenses to Indemnitee, subject to the provisions of Section 8

(d)                 Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement to indemnification shall be required to be made prior to the final disposition of the Proceeding.

13.                Contribution. To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amounts incurred by Indemnitee, whether for Expenses, judgments, fines or amounts paid or to be paid in settlement, 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 and Indemnitee as a result of the events and transactions giving rise to such Proceeding; and (ii) the relative fault of Indemnitee and the Company (and its other directors, officers, employees and agents) in connection with such events and transactions.

14.                Non-exclusivity. 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 Company’s certificate of incorporation or bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise. 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 Company’s certificate of incorporation and bylaws and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change, subject to the restrictions expressly set forth herein or therein. Except as expressly set forth herein, no right or remedy herein conferred 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. Except as expressly set forth herein, the assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.

15.                No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder (or for which advancement is provided hereunder) if and to the extent that Indemnitee has otherwise actually received payment for such amounts under any insurance policy, contract, agreement or otherwise.


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16.                Insurance. To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, trustees, general partners, managing members, officers, employees, agents or fiduciaries of the Company or any other Enterprise, Indemnitee shall be covered by such policy or policies to the same extent as the most favorably-insured persons under such policy or policies in a comparable position.

17.                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.

18.                Services to the Company. Indemnitee agrees to serve as a director or officer of the Company or, at the request of the Company, as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of another Enterprise, for so long as Indemnitee is duly elected or appointed or until Indemnitee tenders his or her resignation or is removed from such position. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries or any Enterprise) and Indemnitee. Indemnitee specifically acknowledges that any employment with the Company (or any of its subsidiaries or any Enterprise) is at will, and Indemnitee may be discharged at any time for any reason, with or without cause, with or without notice, except as may be otherwise expressly provided in any executed, written employment contract between Indemnitee and the Company (or any of its subsidiaries or any Enterprise), any existing formal severance policies adopted by the Company’s board of directors or, with respect to service as a director or officer of the Company, the Company’s certificate of incorporation or bylaws or the DGCL. No such document shall be subject to any oral modification thereof.

19.                Duration. This Agreement shall continue until and terminate upon the later of (a) ten years after the date that Indemnitee shall have ceased to serve as a director or officer of the Company or as a director, trustee, general partner, managing member, officer, employee, agent or fiduciary of any other Enterprise, as applicable; or (b) one year after the final termination of any Proceeding, including any 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 12

of this Agreement relating thereto.

20.                Successors. This Agreement shall be binding upon the Company and its successors and assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company, and shall inure to the benefit of Indemnitee and Indemnitee’s heirs, executors and administrators. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company, by written agreement, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.

21.                Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company’s inability, pursuant to court order or other applicable law, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (i) the validity, legality and enforceability of the remaining provisions of this Agreement (including without limitation, each portion of any section of this


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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; (ii) 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 (iii) 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.

22.                Enforcement. 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 as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as a director or officer of the Company.

23.                Entire Agreement. 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; provided , however , that this Agreement is a supplement to and in furtherance of the Company’s certificate of incorporation and bylaws and applicable law.

24.                Modification and Waiver. No supplement, modification or amendment to this Agreement shall be binding unless executed in writing by the parties hereto. No amendment, alteration or repeal of this Agreement shall adversely affect 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. No waiver of any of the provisions of this Agreement shall constitute or be deemed a waiver of any other provision of this Agreement nor shall any waiver constitute a continuing waiver.

25.                Notices. All notices and other communications required or permitted hereunder shall be in writing and shall be mailed by registered or certified mail, postage prepaid, sent by facsimile or electronic mail or otherwise delivered by hand, messenger or courier service addressed:

(a)                 if to Indemnitee, to Indemnitee’s address, facsimile number or electronic mail address as shown on the signature page of this Agreement or in the Company’s records, as may be updated in accordance with the provisions hereof; or

(b)                 if to the Company, to the attention of the Chief Executive Officer or Chief Financial Officer of the Company at 4665 Business Center Drive, Fairfield, California 94543, or at such other current address as the Company shall have furnished to Indemnitee, with a copy (which shall not constitute notice) to Robert F. Kornegay, Wilson Sonsini Goodrich & Rosati, P.C., 650 Page Mill Road, Palo Alto, California 94304.

Each such notice or other communication shall for all purposes of this Agreement be treated as effective or having been given (i) if delivered by hand, messenger or courier service, when delivered (or if sent via a nationally-recognized overnight courier service, freight prepaid, specifying next-business-day delivery, one business day after deposit with the courier), or (ii) if sent via mail, at the earlier of its receipt or five days after the same has been deposited in a regularly-maintained receptacle for the deposit of the United States mail, addressed and mailed as aforesaid, or (iii) if sent via facsimile, upon confirmation of facsimile transfer or, if sent via electronic mail, when directed to the relevant electronic mail address, if sent during normal business hours of the recipient, or if not sent during normal business hours of the recipient, then on the recipient’s next business day.


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26.                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 rules. 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 Delaware Court of Chancery, 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 of Chancery for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) appoint, to the extent such party is not otherwise subject to service of process in the State of Delaware, Corporation Service Company, Wilmington, Delaware as its agent in the State of Delaware as such party’s 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 of Chancery, and (v) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Delaware Court of Chancery has been brought in an improper or inconvenient forum.

27.                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. This Agreement may also be executed and delivered by facsimile signature and in 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.

28.                Captions. 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.

( signature page follows )

 


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The parties are signing this Indemnification Agreement as of the date stated in the introductory sentence.

COPART, INC.

 

 

( Signature )

 

 

( Print name )

 

 

( Title )

 

[ INSERT INDEMNITEE NAME ]

 

 

( Signature )

 

 

( Print name )

 

 

( Street address )

 

( City, State and ZIP )

 

( signature page Indemnification Agreement )

EXHIBIT 10.18



OFFICE LEASE









BUILDING:  CENTURA TOWER I


LANDLORD:  GARDEN CENTURA, L.P.


TENANT:  DALLAS COPART SALVAGE AUTO

AUCTIONS LIMITED PARTNERSHIP




OFFICE LEASE

THIS OFFICE LEASE (this "Lease"), dated for reference purposes only as of February 3, 2012, is executed by and between GARDEN CENTURA, L.P., a Texas limited partnership ("Landlord"), and DALLAS COPART SALVAGE AUTO AUCTIONS LIMITED PARTNERSHIP, a Texas limited liability company ("Tenant").

1.

CERTAIN LEASE PROVISIONS

The description and amounts set forth below are qualified by their usage elsewhere in this Lease, including those Sections referred to in parentheses following such descriptions:

1.1

Tenant's address and telephone number.  (Section 19):
Tenant Name:  Dallas Copart Salvage Auto Auctions Limited Partnership
Doing business as (dba):  Copart

Address After the Commencement Date :  14185 Dallas Parkway, Suite 400, Dallas, Texas 75254, Attn. Paul A. Styer, Esq., General Counsel

Address Prior to the Commencement Date :  13747 Montfort Drive, Dallas, TX 75240, Attn. Paul A. Styer, Senior Vice President, General Counsel

1.2

Premises and Building.  (Section 2.1):  The entire rentable square feet located on the third (3 rd ) and fourth (4 th ) floors, as generally depicted in Exhibit B attached hereto and incorporated herein by this reference (the "Premises") of the office building known as Centura Tower and located at 14185 Dallas Parkway, Dallas, Texas 75254 (the "Building").

1.3

Leased Area.  (Section 2.1):  Subject to adjustment as provided in Section 2.1, The Premises contains a total of approximately 53,126 rentable square feet comprised of (i) approximately 26,563 rentable square feet located on the Building’s third (3 rd ) floor ("Suite 300"); and (ii) approximately 26,563 rentable square feet located on the Building’s fourth (4 th ) floor ("Suite 400").  Landlord hereby represents that the floor area of the Premises as set forth in the immediately preceding sentence and the Building as set forth in Section 1.4 below has been determined pursuant to the Standard Method for Measuring Floor Area in Office Buildings, ANSI 1996 BOMA Z65.1 as promulgated by the Building Owners and Manager Association (BOMA) International ("BOMA Standard").

1.4

Total Building Area.  (Section 2.1):  The Building contains 412,526 rentable square feet.

1.5

Tenant's Pro-Rata Share of Building Area.  (Section 2.1):  12.88% ( i.e. , 53,126 rentable square feet in the Premises divided by 412,526 rentable square feet in the Building) but subject to adjustment as provided in Section 2.1 (it being agreed however that for purposes of calculating Tenant's Pro-Rata Share, the common area factor for any single-tenant floor comprising a portion of the Premises shall be 4.62% and the common area factor for any multi-tenant floor comprising a portion of the Premises shall be 18.95%).

1.6

Lease Term. (Section 3.1):  Approximately one hundred forty-four (144) months beginning on the Commencement Date and, unless extended or earlier terminated pursuant to this Lease, expiring on the Expiration Date.  

1.7

Commencement Date.  (Section 3.1):  The earlier to occur of:  (i) the date upon which Substantial Completion (as herein defined) of the Improvements (as defined in the Tenant Work Letter attached hereto as Exhibit B (the "Tenant Work Letter")) has occurred in the entire Premises, and (ii) August 1, 2012 (which August 1, 2012 will be extended by one (1) day for each day Tenant is actually delayed in designing, permitting and constructing the Improvements as a result of an event of Force Majeure (as defined in Section 25.25 hereof) and/or a Landlord Delay (as defined in Section 3.5 of the Tenant Work Letter), but no such extension will continue beyond the date upon which Tenant actually begins to conduct its business in the Premises for the permitted use set forth in Section 1.17 of this Lease.  For purposes of determining the Commencement Date, "Substantial Completion" of the Improvements in the Premises shall occur upon completion of the



 

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following: (i) a final certificate of occupancy (or its equivalent) has been obtained from the City of Farmers Branch, Texas, and (ii) substantial completion of construction of the Improvements in the Premises in substantial conformance with the Approved Working Drawings (as defined in Section 3.4 of the Tenant Work Letter) has occurred.  Notwithstanding the foregoing or anything to the contrary contained in this Lease, Landlord and Tenant hereby acknowledge and agree that Tenant will at Tenant's sole election construct the Improvements in the Premises pursuant to a phased construction schedule and in connection with such phased construction, Tenant shall have the right to commence business from portions of the Premises (the "Early Occupancy Space") during the period (the "Early Occupancy Period") from date of substantial completion of the Improvements (if any) relating to such Early Occupancy Space until the Commencement Date, provided that (a) a temporary certificate of occupancy (or its equivalent or other governmental action ( e.g,. a final sign-off by the Building Inspector for the portion of the Improvements) shall have been issued by the appropriate governmental authorities for the Early Occupancy Space (or portion thereof), and (ii) all of the terms and conditions of this Lease shall apply, including Tenant's obligation to pay separately for reserved parking fees pursuant to the Parking Addendum attached as Exhibit C to this Lease, during the Early Occupancy Period (if any), except that Tenant's obligation to pay monthly Base Rent shall be proportionately reduced to equal an amount equal to the monthly installment of annual rate per rentable square foot ( i.e., $1.83) times the rentable area (based upon the BOMA Standard) within the Early Occupancy Space (as the same may exist from time to time during the Early Occupancy Period) as mutually and reasonably agreed upon in good faith by Landlord and Tenant.  

1.8

Expiration Date.  (Section 3.1, 3.2):  The last day of the month, which is one hundred forty-four (144) months after the Commencement Date.

1.9

Base Rent for Lease Term.  (Section 4.1):  The aggregate sum of all monthly installments of Base Rent required to be paid by Tenant during the Lease Term of this Lease.

1.10

Base Rent, Monthly Installments.  (Section 4.1):  Tenant shall pay to Landlord the following monthly installments of Base Rent for the lease of the Premises.

Full calendar months of
Lease Term

Annual rate per
rentable square foot

Monthly installment
of Base Rent

01 – 13*

$22.00*

$97,397.67  *

14 – 144

$22.00  

$97,397.67    

* NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS LEASE , (i) during the first thirteen (13) full calendar months of the Lease Term, the monthly installments of Base Rent ONLY shall be totally abated; and (ii) if a default by Tenant occurs under this Lease after any applicable notice and cure period and that results in early termination of this Lease pursuant to the provisions of Section 17.2, then Landlord shall be entitled to recover the unamortized balance, as of the date of such termination of this Lease, of the Base Rent that was abated as provided in this Section 1.10.  Amortization pursuant to the immediately preceding sentence shall be calculated on a straight-line basis, based on a one-hundred thirty-one (131) month amortization schedule ( i.e. , the number of months during which Tenant is contractually obligated to pay monthly installments of Base Rent) commencing on the Commencement Date, with interest thereon calculated at a fixed rate of six percent (6%) per annum.

If the Commencement Date is not the first day of a calendar month, Tenant shall pay Base Rent for the initial partial calendar month immediately following the expiration of the abatement period as set forth in this Section 1.10 above, at the amount of the monthly installment of the annual Base Rent rate of $22.00 per rentable square foot of the Premises prorated as set forth in Section 4.1.  All Base Rent required to be paid by Tenant pursuant to this Section 1.10 shall be payable in accordance with the provisions of Section 4.1 of this Lease.



 

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1.11

(a)

 Address of Landlord for rent payments  (Sections 4.1, 4.2):

c/o Regis Property Management, LLC

14185 Dallas Parkway, Suite 110

Dallas, Texas 75254

(b)

Address of Landlord for notices.  (Sections 6.3, 19):

c/o Prime Income Asset Management, Inc.

One Hickory Centre

1800 Valley View Lane, Suite 300

Dallas, Texas 75234

(c)

Address of Tenant for notices (Sections 6.3, 19):

After the Commencement Date

Dallas Copart Salvage Auto Auctions Limited Partnership, a Texas Limited Partnership

14185 Dallas Parkway, Suite 400

Dallas, Texas 75254

Attn. Paul A. Styer, Esq. General Counsel

Prior to the Commencement Date

Dallas Copart Salvage Auto Auctions Limited Partnership, a Texas Limited Partnership

13747 Montfort Drive

Dallas, TX 75240

Attn. Paul A. Styer, Senior Vice President, General Counsel

1.12

 [INTENTIONALLY DELETED].

1.13

[INTENTIONALLY DELETED].

1.14

Landlord's Share of Operating Expenses.  (Section 6.2):  Calendar year 2012 Base Year Operating Expenses per rentable square foot per year.  

1.15

Landlord's Share of Real Estate Taxes.  (Section 6.2):  Calendar year 2012 Base Year Real Estate Taxes per rentable square foot per year.

1.16

[INTENTIONALLY DELETED].

1.17

Use.  (Section 8.1):  General office purpose (including, a call center) and uses incidental thereto and for no other use or purpose, provided at all times during the Lease Term, Tenant's use of the Premises shall be consistent with the character of the Project as a Class A office project and otherwise in accordance with applicable laws and regulations and all covenants, conditions and restrictions governing the Premises.  Notwithstanding anything to the contrary contained in this Lease or any Exhibit attached to this Lease, (i) Tenant’s employees, agents and independent contractors occupying or using Suite 300 at any one time shall not exceed more than seven (7) persons for each 1,000 rentable square feet of Suite 300; (ii) Tenant’s employees, agents and independent contractors occupying or using Suite 400 at any one time shall not exceed more than seven (7) persons for each 1,000 rentable square feet of Suite 400; (iii) Tenant’s employees, agents and independent contractors occupying or using at any one time any portion of the Premises other than Suite 300 or Suite 400 shall not exceed more than seven (7) persons for each 1,000 rentable square feet such portion of the Premises; and (iv) if Tenant or a Tenant Affiliate or Successor Entity (as those terms are defined in Section 16.5 hereof) is not leasing and occupying the Premises (or a portion thereof), then notwithstanding the foregoing provisions of this Section 1.17, the Permitted Use of the portion of the Premises not then being leased and occupied by Tenant, a Tenant Affiliate or a Successor Entity shall be general office purpose only (excluding a call center) and uses incidental thereto and for no other use or purpose.    

1.18

Brokers.  (Section 25.20):  Transwestern ("Landlord’s Broker"); and Minerva Realty ("Tenant’s Broker").



 

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1.19

Prepaid Rent.  (Section 4.1):  $97,397.67, which shall be paid by Tenant to Landlord on the date of Tenant’s execution of this Lease and which shall be applied by Landlord to the payment of the monthly installment of Base Rent due for the fourteenth (14 th ) full calendar month of the Lease Term.

1.20

Guarantor.  (Exhibit G):  COPART, INC., a Delaware corporation (the "Guarantor").  Simultaneously with Tenant’s execution and delivery of this Lease to Landlord, Tenant shall deliver to Landlord an original counterpart of the Guaranty, in the form of Exhibit G attached hereto, executed by the Guarantor.

1.21

Addendum and Exhibit(s).  (Sections 3.2, 4.3, 9.2, 22):  This Lease consists of 25 Articles, plus Addendum to Office Lease and Exhibits A, B, C, D, E, F, G, H I and J attached hereto.

IN WITNESS WHEREOF, each of Landlord and Tenant has executed this Lease on the date set forth opposite its signature below.


LANDLORD :

GARDEN CENTURA, L.P., a Texas limited partnership


By:

Regis Realty Prime, LLC (Authorized Agent)




Date:  February __, 2012

By:

/s/ Scott Porter

______________________________

Scott Porter, Senior Vice President


TENANT :

DALLAS COPART SALVAGE AUTO

AUCTIONS LIMITED PARTNERSHIP, a Texas limited liability company


By:

Copart of Texas, Inc., a Texas corporation, its general partner




Date:  February __, 2012

By:  /s/ Paul A. Styer

______________________________

Paul A. Styer, Secretary

2.

PREMISES .

2.1

Definition .  Landlord hereby leases to Tenant and Tenant leases from Landlord for the Lease Term, at the rental, and upon all of the conditions set forth herein, that certain real property known by suite number and address specified in Section 1.2 hereof, consisting of the approximate amount of rentable square feet specified in Section 1.3 hereof (the "Premises").  The Premises are located in an office building presently consisting of the total number of rentable square feet specified in Section 1.4 hereof, which office building, the real property on which it is situated (the legal description of which is attached hereto as Exhibit A), and any parking facilities or structures appurtenant thereto are hereinafter collectively referred to as the "Building".  The Premises are depicted in Exhibit B attached hereto, but the depiction of possible uses, tenants or locations on Exhibit B shall not be construed to be a warranty or representation by Landlord that any such uses, tenants or locations presently exist or will continue to exist.  Tenant's share of the total amount of square feet of the Building is equal to the pro-rata share specified in Section 1.5 hereof, and such percentage shall hereinafter be referred to as "Tenant's Pro-Rata Share".  For purposes of this Lease, the term "rentable square feet" shall mean "rentable area" calculated pursuant to the BOMA Standard.   Either party hereto shall have the right at its expense, at time prior to the date that is ninety (90) days after the Commencement Date, to cause Landlord’s architect (in consultation with Tenant's architect) to verify the rentable square feet of the Premises in accordance with the BOMA Standard.  The rentable square feet of the Premises, as so verified by the architect in consultation with Tenant's architect (but subject to the cap on the Load Factor as set forth in Section 1.5 above), shall thereupon be binding and conclusive on both parties hereto, and all amounts due hereunder, including Base Rent, Additional Rent and



 

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Tenant’s Pro-Rata Share, that are based on the rentable square feet of the Premises shall be proportionally, retroactively adjusted using the architect’s verification as the actual rentable square feet of the Premises, and promptly after such calculations are made, the parties hereto shall confirm such factually accurate calculations in writing.

2.2

Common Areas .  As long as this Lease remains in effect, Tenant shall have the nonexclusive right, in common with Landlord, other tenants, subtenants and invitees, to use the common areas of the Building which consist of the parking facilities, outside plaza areas, entrance foyer and lobby of the Building, the common corridors on the floor of the Building on which the Premises are situated and other areas appurtenant to or servicing the elevators, shipping and receiving areas and lavatories in the Building, provided that Landlord shall have the right in its reasonable discretion and upon reasonable advance notice to Tenant at any time and from time to time to exclude therefrom such areas as Landlord may determine so long as such common areas are at all times during the Lease Term, consistent with the common areas of other Class A office buildings, which are comparable to the Building in terms of quality and desirability of location, age (based on the date of completion of construction or major renovation), quality of construction, level of services, amenities, height, size and appearance, and are located in the North Tollway submarket of Dallas, Texas (the "Comparable Buildings"), and such exclusion does result in any material interference with Tenant's use and enjoyment of the Premises, access to the Premises or Tenant's parking rights hereunder (it being agreed that Landlord shall use all commercially reasonable efforts to minimize and mitigate any interference with Tenant's permitted use of the Premises).

3.

LEASE TERM .

3.1

Lease Term .  The term of this Lease shall be the Lease Term specified in Section 1.6 hereof, commencing on the Commencement Date specified in Section 1.7 hereof and ending on the Expiration Date specified in Section 1.8 hereof unless sooner terminated or extended pursuant to any provision of this Lease.

3.2

Intentionally Omitted .

3.3

Use of Premises during Pre-Commencement Period .  Landlord must deliver sole and exclusive possession of the Premises to Tenant by no later than the date that is one (1) business day after the date of mutual execution and delivery of this Lease by Landlord and Tenant (the " Delivery Date ") so that Tenant may commence the design and construction of the Improvements.  At Landlord's request, Tenant shall promptly confirm in writing delivered to Landlord the actual date on which Landlord delivered sole and exclusive possession of the Premises to Tenant.  If Landlord fails deliver possession of the Premises to Tenant by the Delivery Date, then each day following the Delivery Date until the date on which Landlord delivers sole and exclusive possession of the Premises to Tenant shall be deemed to be two (2) days of Landlord Delay as set forth in Section 3.5 of the Work Letter.  Notwithstanding the foregoing, Landlord will not be obligated to deliver possession of the Premises to Tenant until Landlord has received from Tenant all of the following:  (i) a copy of this Lease fully executed by Tenant and (ii) copies of policies of insurance or certificates thereof as required under Article 13 of this Lease.   Except as otherwise set forth in Section 1.7 above respecting Tenant's right to occupy the Early Occupancy Space during the Early Occupancy Period, Tenant’s use of and access to the Premises prior to the Commencement Date (the "Pre-Commencement Period") shall be for the purpose of designing and performing construction of the Improvements in accordance with the provisions of the Tenant Work Letter and the Approved Working Drawings (as defined in Section 3.4 of the Tenant Work Letter) and installing Tenant’s furniture, trade fixtures and voice and data equipment, cabling and wiring in the Premises.  Tenant’s use of and access to the Premises during the Pre-Commencement Period shall be subject to all provisions of this Lease (with specific reference to Tenant's indemnity and insurance obligations set forth in Article 13), except that except as otherwise expressly set forth in Section 1,7 above respecting Tenant's right to occupy the Early Occupancy Space during the Early Occupancy Period, Tenant shall not be obligated to pay any Base Rent or Additional Rent during the Pre-Commencement Period.  Tenant shall comply with, and cause Tenant's contractors and subcontractors to comply with, all reasonable and non-discriminatory construction procedures and regulations reasonably promulgated by Landlord from time to time for the prosecution of work in the Building by tenants and occupants, provided such construction procedures and regulations shall not materially and adversely affect Tenant's rights under this Lease and or the Tenant Work Letter or unreasonably delay Tenant's construction schedule.



 

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3.4

Possession .  Subject to the terms and conditions of this Lease with specific reference to Landlord's obligations hereunder, Tenant shall be deemed to have taken possession of the Premises on the first business day after Landlord tenders actual physical possession of the Premises to Tenant.  As used in this Lease, the term "business days" means Mondays through Fridays (excluding legal holidays).

3.5

Holding Over .  If Tenant remains in possession of the Premises or any part thereof after the expiration of the Lease Term, such occupancy shall constitute and be construed as a month-to-month tenancy only, and Tenant shall pay, as holdover rent, on a per month basis (without reduction for partial months during the holdover) (i) during each of the first three (3) months of any such holding over, the sum of (a) Base Rent at a rate equal to one hundred twenty-five percent (125%) of the monthly installment of Base Rent applicable hereunder during the last month of the Lease Term, plus (b) all monthly Additional Rent applicable hereunder during the last month of the Lease Term; and (ii) during each month after the first three (3) month period of any such holding over, the sum of (A) Base Rent at a rate equal to one hundred fifty percent (150%) of the monthly installment of Base Rent applicable hereunder during the last month of the Lease Term, plus (B) all monthly Additional Rent applicable hereunder during the last month of the Lease Term.  The foregoing provisions of this Section 3.5 shall not be construed to give Tenant any right to remain in possession of the Premises or any part thereof after the expiration of the Lease Term, to prevent Landlord from immediate recovery of possession of the Premises by summary proceedings or otherwise, or to waive any of Landlord's rights under this Lease to collect any damages to which it may be entitled, whether direct or consequential; provided, however, that Tenant shall only be liable for consequential damages incurred by Landlord in connection with Tenant’s holdover if (1) Landlord provides Tenant with at least thirty (30) days prior written notice that Landlord has received a bona fide written offer to lease all or any portion of the Premises from an existing tenant of the Building or a prospective tenant, which proposal Landlord is prepared to accept; and (2) Tenant has failed to vacate the Premises within thirty (30) days after receipt of Landlord’s written notice.

4.

RENT .

4.1

Base Rent .  Tenant shall pay Landlord the Base Rent for the Premises specified in Section 1.10 hereof, subject to adjustment of one (1) day for each day of Landlord Delay pursuant to Section 3.3 and/or as set forth in the Tenant Work Letter, on or before the first day of each month of the Lease Term.  Base Rent for any period during the Lease Term, which is less than one (1) calendar month, shall be a pro rata portion of the monthly installment based upon the actual number of days this Lease is in effect during such calendar month.  All rents shall be payable in lawful money of the United States of America without notice or demand and without any deduction, offset or abatement except as otherwise provided in this Lease, and shall be payable to Landlord at the address stated in Section 1.11(a) hereof or to such other persons or at such other places as Landlord may designate in writing.  The payment of Base Rent hereunder shall be an independent covenant.

4.2

Additional Rent .  Except for the Base Rent specified in Section 1.10 hereof, all other amounts, which may from time to time become due under this Lease, shall constitute Additional Rent under this Lease.  Additional Rent shall include, but not be limited to, late charges, interest, Shared Expenses as described in Section 6 hereof, court costs and reasonable attorneys' fees and expenses, which may be expressly required to be paid by Tenant hereunder.  All monies paid by Tenant hereunder shall be first credited to the payment of Base Rent and then to Additional Rent (and allocated among different items of Additional Rent as Landlord may determine).  All payments of Additional Rent shall be in lawful money of the United States of America, shall be paid without any deduction, offset or abatement, except as otherwise provided in this Lease, and shall be payable to Landlord at the address stated in Section 1.11(a) hereof or to such other persons or at such other places as Landlord may designate in writing.  The obligation to make payments of Additional Rent hereunder shall be an independent covenant.

4.3

Adjustment to Actual Operating Expenses .  Notwithstanding anything to the contrary contained herein, if the Building is not fully occupied during any calendar year of the Lease Term, Operating Expenses that vary with occupancy (including, any such Operating Expenses during the Base Year), shall be determined as if the Building had been fully occupied during the entire calendar year and Operating Expenses had been in an amount, which would be normal if the Building were fully occupied.  For the purpose of this Lease, "fully occupied" shall mean occupancy of 95% of the total Rentable Space of the Building.  Landlord, in its good faith



 

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and commercially reasonable discretion (but in a manner that is consistent with standard real estate accounting principles), will determine which Operating Expenses are appropriate to "gross up" for purposes of this subsection.  All "gross ups" shall be consistently and uniformly applied among all tenants and occupants in the Building.

4.4

Electricity .  Beginning on the earlier of the date that Tenant first occupies the Premises or the Commencement Date, and continuing thereafter during the Lease Term, Tenant shall pay to Landlord monthly in advance on the first day of each month, without notice or demand and without any deduction, offset or abatement except as otherwise provided in this Lease, in lawful money of the United States of America, 1/12 of the amount of the Tenant's Pro-Rata Share of the actual out-of-pocket charges paid by Landlord for electricity attributable to the Building ("Electrical Expenses") as reasonably estimated by Landlord (in accordance with substantially the same procedure that applies to Landlord estimated statement of Shared Expenses as set forth in Section 6.2(c) below) to be incurred for the then applicable calendar year (or portion thereof) in which the monthly payments are to be made.  If the Expiration Date is not December 31, then the monthly payments owing hereunder during the last partial calendar year of the Lease shall be appropriately adjusted.  In any event, Electrical Expenses shall be adjusted as follows:  (a) any costs attributable to electrical consumption by tenants and occupants in the Building (including Tenant as provided in Section 9.2(c) hereof) that is excess of the quantities of electricity consumption customarily associated with general office use or, in the case of Tenant, general office use with a call center as permitted hereunder) shall be deducted from Electrical Expenses, and (b) the cost of electricity incurred to provide overtime HVAC to specific tenants (as reasonably estimated by Landlord) shall be deducted from Electrical Expenses.  Subsequent to the end of each full or partial calendar year, Landlord shall send Tenant a statement (in accordance with substantially the same procedure that applies to Landlord's Statement of Shared Expenses as set forth in Section 6.2(d) below) of the actual Electrical Expenses incurred by Landlord during such calendar year and Tenant's Pro Rata Share thereof.  As used in this Lease, the phrase “actual Electrical Expenses” means and includes the total charges for electricity actually paid by Landlord to the electricity provider, including, by way of example, and not by way of limitation, kWh charges, PUC assessments, taxes, distribution charges, transmission service charges, meter charges, etc .  If Tenant’s Pro Rata Share exceeds the estimated amount previously paid by Tenant to Landlord, then Tenant shall pay the difference to Landlord within thirty (30) days after written notice from Landlord (which notice shall be accompanied by reasonable back-up documentation).  If Tenant’s Pro Rata Share is less than the estimated amount previously paid by Tenant to Landlord, then the amount of the overpayment shall be credited against the next succeeding payment due pursuant to this Section 4.4 or, if this Lease has been terminated or the Lease Term has expired, the overpayment shall be refunded by Landlord to Tenant within thirty (30) days after the date of Landlord's statement of the actual Electrical Expenses.  Notwithstanding the foregoing, within nine (9) months after receipt of a statement by Tenant pertaining to Tenant's Pro Rata Share of Electrical Expenses ("Special Review Period"), if Tenant in good faith disputes the amount set forth in the statement, then Tenant's employees, agents or representatives, designated by Tenant, may, after reasonable notice to Landlord and during Landlord’s business hours, inspect and photocopy Landlord's records (pertaining to Landlord's calculation of actual Electrical Expenses) at Landlord's offices, provided that Tenant is not then in monetary or material non-monetary default after expiration of all applicable cure periods.  Notwithstanding the foregoing, Tenant shall only have the right to review Landlord's records one (1) time during any twelve (12) month period and only a single time as to the period covered by any statement of actual Electrical Expenses.  If after such inspection, but within thirty (30) days after the Special Review Period, Tenant notifies Landlord in writing that Tenant still disputes such amounts, then Landlord and Tenant shall, for a period of thirty (30) days thereafter, attempt to resolve such dispute.  In the event such dispute is not resolved within such thirty (30) day period, then the parties shall submit the matter to binding arbitration before a retired judge under the auspices of JAMS (or any successor to such organization) in Dallas, Texas, according to the then rules of commercial arbitration of such organization.  The decision of the arbitrator shall be conclusive, final and binding upon Landlord and Tenant.  Judgment upon the decision of the arbitrator may be entered in any court of competent jurisdiction.  The cost of such arbitration (including reasonable attorneys' fees incurred therein) shall be borne by the losing party as determined by the arbitrator.  In no event shall Landlord or its property manager be required to (i) photocopy any accounting records or other items or contracts unless Tenant agrees to pay for the copying costs, (ii) create any ledgers or schedules not already in existence, (iii) incur any costs or expenses relative to such inspection, or (iv) perform any other tasks other than making available such records as are



 

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described in this paragraph.  The provisions of this Section 4.4 shall be the sole method to be used by Tenant to dispute the amount of Electrical Expenses payable by Tenant under this Lease, and Tenant waives any other rights or remedies relating thereto.

4.5

Parking .  Tenant agrees to pay to Landlord in advance for each month on or before the first day of each month of the Lease Term the amount of Additional Rent, if any, for parking as set forth in the Parking Addendum attached as Exhibit C to this Lease.  

4.6

Acceptance of Rental Payments .  No acceptance by Landlord of a lesser sum than the Base Rent and/or Additional Rent then due shall be deemed to be other than on account of the earliest amount of such rental due (unless Landlord elects otherwise), nor shall any endorsement or statement on any check or any letter accompanying any check or payment as rent be deemed an accord and satisfaction or compromise and settlement, and Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such payments due or to pursue any other remedy as provided in this Lease.

5.

[INTENTIONALLY DELETED] .

6.

SHARED EXPENSES .

6.1

Determination .  The monthly obligations for the Operating Expenses component of Additional Rent as described in Section 4.2 shall be annually adjusted in accordance with the provisions of Section 6.2 below.

6.2

Escalations .  (a)

Landlord agrees to expend as its share of Operating Expenses paid for and sustained by Landlord during any calendar year an amount not greater than that specified in Section 1.14.  Such sum shall constitute the maximum payable by Landlord as its contribution toward Operating Expenses (other than the Landlord Replacement Items as defined in Section 8.4).  The term "Operating Expenses" means the total amounts paid or payable, whether by Landlord or otherwise on behalf of Landlord, in connection with the management, maintenance, repair and operation of the Building (other than the Landlord Replacement Items as defined in Section 8.4 and those excluded expenses, which are described in Section 6.2(b) hereof).  Operating Expenses shall include, without limiting the generality of the foregoing, the aggregate of the amount paid by Landlord or otherwise on behalf of Landlord for the Building (together with the parking garage serving the Building [to the extent that it exclusively serves the Building] and any other improvements, including, but not limited to, landscaping and irrigation equipment which exclusively serve the Building and/or the common elements appurtenant thereto and which are located on the land described on Exhibit A attached hereto) for (i) heating, air conditioning, water, sewer and other utility charges (excluding charges for electricity described in Section 4.4 above); (ii) labor and/or wages (including the cost to Landlord of workmen's compensation and disability insurance, payroll taxes, welfare and fringe benefits) payable to employees for services rendered and materials provided to the Building (which amounts shall be appropriately prorated to the extent such employees are also engaged in services for other projects or buildings, but specifically excluding wages and related benefits of employees above the level of property manager and building engineer); (iii) costs incurred in good faith for any capital improvements or structural repairs to the Building to effect labor savings or otherwise reduce Operating Expenses, or required by law or by any governmental or quasi-governmental authority having jurisdiction over the Building which was not promulgated, or which was promulgated but was not applicable to the Building, as of the Commencement Date, which costs of capital improvements and/or structural repairs in any event shall be amortized in accordance with standard real estate accounting principles over the useful life of the item in question and only the yearly amortized portions of such costs shall be includable in Shared Expenses for any applicable year; (iv) the reasonable cost of accounting services necessary to compute the rent and charges payable by tenants of the Building; (v) fees for management (not to exceed three percent (3%) of annual gross revenues for the Building provided that (a) such management fee shall be grossed up for the Base Year to reflect full occupancy (as defined in Section 4.2), and (b) such percentage rate for the Base Year shall be equal to three percent (3%)), necessary and reasonable inspection and consulting services pertaining to the operation and maintenance of the Building; (vi) the cost of guards and other security services; and (vii) the amount paid for premiums for all insurance procured by Landlord to insure the Building as may be required or permitted under this Lease (including, without limitation, business interruption insurance, and if there is a mortgage or deed of trust on the



 

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Building, such types of insurance as are required by the holder of such mortgage or deed of trust and that are then customarily required by other commercial lenders).  

Notwithstanding the foregoing, Operating Expenses shall not include any of the following : (1) the costs of special services rendered to tenants (including Tenant) for which a special or separate charge is made or which are for the benefit of a specific tenant (including Tenant) but not all tenants of the Building; (2) any costs of preparation of space for new tenants in the Building; (3) any costs borne directly by Tenant under this Lease or by any other tenant or occupant of the Building; (4) leasing commissions; (5) depreciation or interest payments; (6) debt service payments made to a mortgagee or ground lease payments; (7) costs associated with the operation of the business or legal entity that constitutes the Landlord, as the same are distinguished from the costs of Building operations, including, but not limited to, general overhead and administrative expenses, costs of accounting and legal matters, and costs of selling, syndicating, financing, mortgaging or hypothecating any of the Landlord’s interest in the Building; (8) wages, salaries, fees and fringe benefits of any employee who does not devote substantially all of his/her employed time to the Building, unless such wages and benefits are pro-rated to reflect time spent on operating and managing the Building vis-à-vis time spent on matters unrelated to operating and managing the Building (provided, however, that in no event shall operating expenses include wages and/or benefits attributable to personnel above the level of Building Manager or Building Engineer); (9) overhead and profit increment paid to Landlord or to subsidiaries or affiliates of Landlord for goods and/or services to the Building to the extent that the costs of such goods and/or services exceeds the costs that would have been paid had the goods and/or services been provided by unaffiliated third parties on a competitive basis; (10) costs incurred by Landlord in order to comply with the requirements for obtaining or renewing a certificate of occupancy for the Building or any space therein; (11) costs of repair or replacement for any items covered by a warranty and/or insurance proceeds or other third party sources, but only to the extent of any actual recovery by Landlord under the warranty, insurance or other such sources; (12) cash or other consideration paid by Landlord in lieu of the tenant improvement work or alterations; (13) marketing costs, including, without limitation, attorneys’ fees in connection with the negotiation and preparation of letters, deal memos, letters of intent, leases, subleases and/or assignments, space planning costs, and other costs and expenses incurred in connection with lease, sublease and/or assignment negotiations and transactions with Tenant or prospective tenants or other occupants of the Building; (14) advertising and promotional expenditures; (15) rental "takeover expenses" or other obligations that Landlord pays or assumes in connection with the leasing of space in the Building, including, but not limited to, any expenses incurred by Landlord with respect to space located in another building; (16) inducement or "sign-up" payments paid to tenants for signing new leases for the Building, or for the exercise of options under existing leases; (17) capital costs incurred by Landlord for capital improvements, structural repairs and capital replacements, except as expressly permitted under Section 6.2(a)(iii) above , including replacements of major components of major equipment; (18) costs arising from the presence of hazardous materials and substances (as defined by applicable laws in effect on the date the Lease is executed) in or about the Premises, the Building or the Property, including, without limitation, hazardous substances in the ground water or soil, not placed, released or stored in the Premises, the Building or the Property by Tenant or its successors and permitted assigns; (19) costs of any disputes between Landlord and its employees, Building management, or with any tenant; (20) costs incurred to provide services and utilities and taxes attributable to the operation of retail and restaurant operations in the Building, except to the extent the square footage of such operations are included in the rentable square feet of the Building and do not exceed the services, utility and tax costs which would have been incurred had the retail and/or restaurant space been used for general office purposes; (21) costs, including taxes or assessments, incurred in owning, operating, maintaining and repairing any parking facilities associated with the Building for which tenants pay for the use, and any replacement garages or parking facilities and any shuttle services; (22) costs incurred in removing any ex-tenant’s property from the Building: (23) costs associated with the installation, maintenance and removal of any signage associated with the Building identifying the owner or management agent of the Building; (24) costs of constructing, installing, operating or maintaining any special service or facility such as an observatory, retail store, newsstand, broadcasting facility, luncheon club, athletic or recreational club, cafeteria or dining facility; (25) acquisition costs, rental costs, and installation costs (as contrasted with the maintenance) of sculptures, paintings, or other objects of art, whether for interior or exterior use; (26) costs, fees, dues, voluntary contributions or similar expenses for political, charitable, civic, industry association or similar organizations; (27) attorneys’ fees, costs, disbursements and other



 

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expenses incurred in connection with the defense of Landlord's title to or interest in the Building; (28) reserves for future improvements, repairs or additions; (29) reserves for equipment or capital replacement; (30) collection costs, including legal fees, bad debt losses or rental losses, or reserves for bad debt or rental losses; (31) costs, expenses or compensation, including taxes and benefits, paid to clerks, attendants, concierges or other persons working in or managing commercial concessions operated by Landlord or the Building’s manager; (32) income, capital stock, estate, inheritance, franchise (including the so-called "margin" taxes imposed as a result of Texas House Bill 3 enacted by the 79th Texas Legislature in 2006, as same now exists or may hereafter be amended or succeeded) or other taxes payable by Landlord or attributable to other tenants of the Building except as otherwise expressly includable pursuant to Section 6.2(b) hereof; (33) costs of alterations and capital improvements or labor saving or energy-saving devices or other equipment installed at the Property or any other costs which are not treatable as expenses under generally accepted accounting principles (other than as expressly includable pursuant to Section 6.2(a)(iii) above); (34) costs resulting from the gross negligence or willful misconduct of Landlord or any of Landlord’s partners, officers, directors, employees, mortgagees or agents (collectively, the "Landlord Related Parties"); (35) utility services for which any tenant of the Building directly contracts with the utility provider, pays Landlord separately for or which is separately metered; (36) cost of repairs, replacements or other work occasioned by fire, windstorm or other casualty, or the exercise by the governmental authorities of the right of eminent domain, except to the extent of a commercially reasonable deductible limit in Landlord's insurance policies and in no event shall the amount of the deductible in Operating Expenses; provided, however, that with respect to any particular casualty event affecting the Building, Tenant shall not be required to pay to Landlord an amount in excess of Sixty Thousand Dollars ($60,000.00) per occurrence in reimbursement of the insurance deductible incurred by Landlord attributable to such event; (37) costs of correcting defects, including all allowances for same, in the construction of the Building (including latent defects) or equipment used therein (or the replacement of defective equipment), any associated parking facilities, or other improvements, or in the equipment used therein; (38) penalties for late payment where such penalties are within Landlord's control, including, without limitation, in connection with taxes, equipment leases, service contracts, etc., (39) costs for which Landlord is compensated through or reimbursed by insurance or other means of recovery; and (40) management fees in excess of a total of three percent (3%) of the Base Rent received by Landlord for the Building per year, provided that (i) such management fee shall be grossed up for the Base Year to reflect ninety five percent (95%) occupancy, and (ii) such percentage rate for the Base Year shall equal three percent (3%).

In no event shall there be any duplication of expenses among any of the items of regularly recurring Additional Rent.  Further, if Landlord, in any year after the Base Year, adds any new services or substantially increases the level of existing service or otherwise increases the administrative fee charged by Landlord for the Building above one-half (½) of one (1) percent (0.5%) of the Base Rent per year, then for such period of time in which such new services or increased levels of existing service or higher administrative fee apply, Operating Expenses for the Base Year shall be increased by the amount that Landlord reasonably determines it would have incurred had Landlord provided such service or substantially increased the level of such existing service throughout the Base Year.  If Landlord, in any year after the Base Year, discontinues any service or substantially decreases the level of any existing service, then for such period of time in which such services are discontinued or decreased, Operating Expenses for the Base Year shall be decreased by the amount that Landlord reasonably determines it incurred for such service throughout the Base Year.  However, notwithstanding the foregoing, Landlord may only discontinue a service or substantially decrease the level of any existing service, to the extent that the Building would still be operated in a manner consistent with the Comparable Buildings.  

(b)

Landlord agrees to expend as its share of Real Estate Taxes paid for and sustained by Landlord during any calendar year an amount not greater than that specified in Section 1.15.  Such sum shall constitute the maximum payable by Landlord as its contribution toward Real Estate Taxes.  Real Estate Taxes means all real property taxes, assessments, excises, association dues, fees, levies, charges and other taxes of every kind and nature whatsoever, general and special, extraordinary and ordinary, foreseen and unforeseen, including interest on installment payments, which may be levied or assessed against or arise in connection with ownership, use, occupancy, rental, leasing, operation or possession of the Building, or paid as rent under any ground lease, including, but not limited to:  (i) any tax on the rent or other revenue from the Building, or any portion thereof, or as against the business of owning or leasing



 

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the Building, or any portion thereof, including the Texas Margins Tax, or tax in replacement of the Texas Margins Tax payable by Landlord which is attributable to rent or other revenue derived from the Building, now or hereafter imposed by any governmental authority upon Rent received by Landlord or on the revenue of Landlord from the Building; (ii) any assessment, tax, fee, levy, or charge allocable to or measured by the area of the Premises or the Rent payable hereunder, including assessments for special improvement districts and building improvement districts, governmental charges, fees and assessments for police, fire, traffic mitigation or other governmental service of purported benefit to the Building, taxes and assessments levied in substitution or supplementation in whole or in part of any such taxes and assessments; (iii) the Building's share of any real estate taxes and assessments under any reciprocal easement agreement, common area agreement or similar agreement as to the Building; (iv) personal property taxes for property that is owned by Landlord and used in connection with the operation, maintenance and repair of the Building, or any portion thereof; (v)  any assessment, tax, fee, levy or charge substituted, in whole or in part, for a tax previously in existence, or assessed in lieu of a tax increase; and (vii) all out-of-pocket and commercially reasonable costs and fees incurred by Landlord in connection with seeking reductions in any tax liabilities described in (i), (ii), (iii), (iv), (v) and (vi) of this Section 6.2(b), including, but not limited to, any costs incurred by Landlord for compliance, review and appeal of tax liabilities  Further, if at any time during the Lease Term, the method of taxation of real estate prevailing at the time of execution hereof shall be or has been altered so as to cause the whole or any part of the taxes now or hereafter levied, assessed or imposed on real estate to be levied, assessed or imposed upon Landlord, wholly or partially, as a capital levy or otherwise, or on, or measured by the rents received from the Building, then such new or altered taxes attributable to the Premises shall be deemed to be included within the term "Real Estate Taxes" for purposes of this Section 6.2(b).  Notwithstanding anything to the contrary contained in this Section 6.2(b), there shall be excluded from Real Estate Taxes (a) all gift taxes, capital stock taxes, inheritance and succession taxes, estate taxes, federal and state income taxes, and any other taxes to the extent applicable to Landlord's general or net income (as opposed to leasehold taxes or taxes based upon the receipt of rent as set forth in this Section 6.2(b)), (b) any items included as Operating Expenses, (c) any items paid directly by Tenant, (d) documentary or transfer taxes arising out of any financing, transfer or further development or redevelopment of the Building or Property, (e) any items paid by Tenant under Section 12.1 of this Lease, and (f) Real Estate Taxes to the extent attributable to improvements made by Landlord or any tenant after the date of this Lease in any tenant space having a taxable value in excess of the greater of (A) the taxable value for Building-standard tenant space improvements, and (B) the taxable value of the existing improvements in such space as of the date of this Lease.

(c)

Landlord shall endeavor to give Tenant a yearly expense estimate statement which shall set forth Landlord's reasonable estimate of what the total amount of Shared Expenses for the then-current calendar year shall be and the estimated amount of Tenant's Pro-Rata Share of the Shared Expenses.  Commencing on the first day of the first January after the Commencement Date, and continuing thereafter during the Lease Term, Tenant shall pay to Landlord monthly in advance on the first day of each month, without notice or demand and without any deduction, offset or abatement except as otherwise provided in this Lease, in lawful money of the United States of America, 1/12 of the amount of Tenant's Pro-Rata Share of the Shared Expenses as reasonably estimated by Landlord to be incurred for the calendar year in which the monthly payments are to be made.  If the Expiration Date is not December 31, the monthly payments owing hereunder during the last partial calendar year of the Lease shall be appropriately adjusted.   The term "Shared Expenses" shall mean the amount by which Operating Expenses and Real Estate Taxes incurred in any period exceed the amount of Landlord's obligation for the same as specified in Sections 1.14 and 1.15.  Until a new estimate statement is furnished, Tenant shall pay monthly, with the monthly Base Rent installments, an amount equal to one-twelfth (1/12) of the total estimated amount of Tenant's Pro-Rata Share of the Shared Expenses as set forth in the previous estimate statement delivered by Landlord to Tenant.  Notwithstanding the foregoing, Tenant will have no obligation to pay for any Shared Expenses applicable to the first (1 st ) twelve (12) full calendar months of the Lease Term.  Notwithstanding anything to the contrary contained herein, for the purpose of calculating Tenant’s Pro-Rata Share of Shared Expenses under this Lease, the aggregate Controllable Operating Expenses (as herein defined) shall not increase more than five percent (5%) in any calendar year over the maximum amount of Controllable Operating Expenses chargeable for the immediately preceding calendar year ( i.e. , the cap shall be calculated on a cumulative and non-compounded basis), with no limit on the Controllable Operating Expenses during the Base Year ( i.e. , the actual Controllable



 

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Operating Expenses for the Base Year shall be the maximum amount for the Base Year for purposes of this provision).  As used herein "Controllable Operating Expenses" shall mean all Operating Expenses other than Real Estate Taxes, insurance premiums associated with insurance policies maintained by Landlord hereunder and all charges for utilities and waste collection as billed by the provider thereof.

(d)

In each calendar year after the year in which the Commencement Date occurs but in any event on or before the date that is one hundred fifty (150) days after the end of such calendar year during the Lease Term (except as to a particular item not includable in the Landlord's Statement because it is beyond Landlord's reasonable control ( e.g., tax assessments that are late in arriving from the assessor) and further subject to any then pending contests and challenges affecting any Shared Expenses incurred by Landlord as to such calendar year), Landlord shall send to Tenant a Landlord's Statement which shall set forth in reasonable detail the actual amount of Shared Expenses incurred or accrued for such preceding calendar year, with the exception of those States in which real estate taxes are billed on other than a calendar year basis, in that event Landlord's statement of Real Estate Taxes will be based on the Real Estate Tax Fiscal Year and sent within thirty (30) days after receipt of Real Estate Tax Statements, and Tenant's Pro-Rata Share thereof for the preceding calendar year or portion thereof and the estimated amount of Shared Expenses and Tenant's Pro-Rata Share thereof for the calendar year in which Landlord's Statement is given.  Landlord's failure to render a Landlord's Statement with respect to any period shall not eliminate or reduce Tenant's obligation to pay Shared Expenses and shall not prejudice Landlord's right to render a Landlord's Statement with respect to any subsequent period for a period of two (2) years after the expiration of the calendar year for which the Landlord's Statement applies, except where the failure to timely furnish the Landlord's Statement as to any particular item includable in the Landlord's Statement is beyond Landlord's reasonable control and except for tax assessments that are late in arriving from the assessor or that are the subject of a contest action by Landlord (for the period of such contest), in which case such two (2) year limit shall not be applicable.  The provisions of this Section 6.2(d) shall survive the expiration or any sooner termination of the Lease Term.  Within thirty (30) days next following the notification by Landlord of the contents of its Landlord's Statement, Tenant shall pay to Landlord the entire amount of Tenant's Pro-Rata Share of actual Shared Expenses for the prior period covered by Landlord's Statement less the amount of Shared Expenses actually paid by Tenant for such period.  For each month following for the remainder of such calendar year, Tenant shall continue to pay the monthly estimated Shared Expenses set forth in the latest Landlord's Statement delivered to Tenant.  In the event that the estimated payments made by Tenant in the calendar year preceding the date on which Tenant is given notice of Landlord's Statement exceed Tenant's Pro-Rata Share of actual Shared Expenses for such calendar year, the amount of such excess shall be applied by Landlord to the next succeeding installments of monthly estimated payments of Shared Expenses or, if this Lease has been terminated or the Lease Term has expired, the overpayment shall be refunded by Landlord to Tenant within thirty (30) days after the date of Landlord's Statement.

6.3

Statements .  All reasonable determinations by Landlord pursuant to Section 6 shall be presumed to be correct.  Until Tenant is advised of the adjustment in its obligation to pay Shared Expenses, if any, pursuant to the provisions of Section 6.2, Tenant's monthly rental shall continue to be paid at the then current rent (including all prior adjustments thereto pursuant to this Lease).  Upon written notice to Landlord of not less than ten (10) business days, Tenant shall have the right to review Landlord's records and the documentation relied upon by Landlord relating to the computation of Shared Expenses (including those attributable to the Base Year), which review shall occur at the location specified in Section 1.11(b).  All Shared Expenses shall be computed on the actual basis.  In computing Shared Expenses, no cost or expense may be accounted more than once, any expenses which are paid by the proceeds of insurance shall be excluded, and any expenses which are separately metered or billed directly to and separately paid by any other tenant shall be excluded.  Tenant shall have the right to cause an audit to be made of Landlord's computation of Shared Expenses, at the location of the Corporate Office in Dallas, Texas, at Tenant's sole expense (except as otherwise further provided herein), not more frequently than once per calendar year and not more than a single time as to any calendar year in the Lease Term.  If Tenant retains an auditor to review Landlord's computation of Shared Expenses, the auditor must be a certified public accountant or be employed with a certified public accounting firm licensed to do business in the State of Texas and shall not be compensated on a contingency fee basis.  Tenant and its auditor shall not unreasonably interfere with the conduct of Landlord’s business.  Tenant shall not be entitled to withhold or deduct any



 

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portion of Base Rent or Additional Rent during the pendency of any such audit.  Landlord shall cooperate in good faith with Tenant and the accountant to provide Tenant and the accountant with the information upon which the certification is to be based.  If such certification by the accountant indicates that the total amount of Shared Expenses set forth in the Landlord's Statement were overstated by more than five percent (5%), then the actual, documented and commercially reasonable cost of the accountant and such certification shall be paid for by Landlord not to exceed, in the aggregate, the amount of $10,000.  Promptly following the parties receipt of such certification, the parties shall make such appropriate payments or reimbursements, as the case may be, to each other, as are determined to be owing pursuant to such certification.  Landlord shall not be liable for the payment of any contingency fee payments to any auditor or consultant of Tenant.  Any errors disclosed by such audit shall be promptly corrected, provided that Landlord shall have the right at its sole cost and expense to cause another independent audit to be made of such computations, and in the event of a disagreement between the auditors, the parties agree that binding arbitration shall constitute the exclusive remedy for settlement of any such dispute.  If either Landlord or Tenant desires to exercise its right to seek arbitration pursuant to this Section 6.3, the parties hereto shall submit the matter to binding arbitration before a retired judge under the auspices of JAMS (or any successor to such organization) in Dallas, Texas, according to the then rules of commercial arbitration of such organization.  The decision of the arbitrator shall be conclusive, final and binding upon Landlord and Tenant.  Judgment upon the decision of the arbitrator may be entered in any court of competent jurisdiction.  The cost of such arbitration (including reasonable attorneys' fees incurred therein) shall be borne by the losing party as determined by the arbitrator.

7.

[INTENTIONALLY DELETED] .

8.

USE .

8.1

Use .  The Premises shall be used and occupied only for the uses specified in Section 1.17 hereof, provided that the foregoing shall not be construed as a representation or guarantee by Landlord that (i) such business may lawfully be conducted on the Premises; or (ii) the Building, the Building Systems, the Building Structure or the Systems and Equipment are capable of accommodating or servicing more than five (5) persons for each 1,000 rentable square feet of the portion of the Premises located on any single floor of the Building.

8.2

[INTENTIONALLY DELETED] .

8.3

Waste and Nuisance .  Tenant shall not commit any waste, damage (excluding normal wear and tear and damage caused by casualty, condemnation and the acts or omissions of Landlord), disfiguration or injury to the Premises, the common areas in the Building, or the fixtures and equipment located therein or thereon.  Tenant shall not permit or suffer any overloading of the floors thereof, and shall not place therein any heavy business machinery, safes, computers, data processing machines, or other items heavier than customarily used for general office and call center purposes without first obtaining the written consent of Landlord, which consent will not be unreasonably withheld, conditioned or delayed.  Tenant shall not use or permit to be used any part of the Building for any dangerous, noxious or illegal trade or business, and shall not cause or permit any legal nuisance, or unreasonable disturbance of other tenants, in, at or on the Premises.

8.4

Condition of Premises .  Except as otherwise expressly provided in this Lease and the Tenant Work Letter, Tenant hereby acknowledges and agrees that the Premises and the Building are satisfactory to Tenant in all respects, and Tenant hereby accepts the Premises and the Building in their present "AS IS, WHERE IS" and "WITH ALL FAULTS" condition, subject to all applicable zoning, municipal, county and state laws, ordinances and regulations governing and regulating the use of the Premises, and Tenant accepts this Lease subject thereto and to all matters disclosed thereby and by any exhibits attached hereto.  EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS LEASE AND THE TENANT WORK LETTER LANDLORD HEREBY DISCLAIMS ANY AND ALL WARRANTIES, EXPRESS OR IMPLIED, REGARDING THE CONDITION OR SUITABILITY OF THE PREMISES FROM AND AFTER THE DATE ON WHICH LANDLORD TENDERS POSSESSION OF THE PREMISES TO TENANT.  FURTHER AND EXCEPT AS OTHERWISE EXPRESSLY SET FORTH IN THIS LEASE AND THE TENANT WORK LETTER, TO THE EXTENT PERMITTED BY LAW, TENANT WAIVES ANY IMPLIED WARRANTY OF SUITABILITY OR OTHER IMPLIED WARRANTIES THAT LANDLORD WILL



 

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MAINTAIN OR REPAIR THE PREMISES OR ITS APPURTENANCES EXCEPT AS MAY BE CLEARLY AND EXPRESSLY PROVIDED IN THIS LEASE.  Tenant shall at its expense comply promptly with all applicable laws, statutes, ordinances, rules, regulations, orders, restrictions of record, and requirements in effect during all or any portion of the Lease Term regulating the use, possession and occupancy by Tenant of the Premises other than the making of structural changes or changes to the Building's electrical, mechanical, plumbing and HVAC systems and equipment and/or Common Areas (such changes will be made by Landlord at its expense, but subject to reimbursement as an Operating Expense to the extent permitted by Article 6); however, if such changes are required due to the Improvements and/or Tenant's Alterations (other than normal and customary business office improvements) or a particular nature of Tenant's use of the Premises (as opposed to office and call center use generally), Tenant shall, as Additional Rent, reimburse Landlord for the cost thereof within thirty (30) days following receipt of an invoice therefor.  Landlord represents to Tenant that, to the best of Landlord’s knowledge as of the Delivery Date, (i) the Premises and the common areas of the Building shall be in substantial compliance with all applicable laws including, but not limited to, then applicable requirements of the Americans with Disabilities Act; and (ii) the Premises and the common areas of the Building do not contain any Hazardous Substances in violation of applicable laws.  Notwithstanding the foregoing or anything to the contrary in this Lease, Landlord shall on the Delivery Date at its sole cost and expense and not part of Operating Expenses, deliver the Premises to Tenant with the electrical, plumbing, mechanical, HVAC fire sprinkler systems (collectively, the "Systems and Equipment") and electrical and water meters in good working order, and the roof of the Building in good watertight condition.  If, on the Delivery Date, such Systems and Equipment and/or the roof are not in good working order and Tenant notifies Landlord in writing within six (6) months following the Delivery Date that such Systems and Equipment and/or the roof are not in good working order and watertight condition, Landlord shall, at Landlord's sole cost and expense (and not as an Operating Expense reimbursable by Tenant) and as Tenant's sole remedy therefor, put such Systems and Equipment in good working order and/or perform roof repairs required to place the same in good watertight condition.  Additionally, if within twelve (12) months following the Delivery Date Tenant reasonably and in good faith determines that any Systems and Equipment serving the Premises do not have a remaining useful life in excess of the initial Lease Term, then Tenant shall notify Landlord in writing within such period of twelve (12) months specifying which Systems and Equipment do not have a remaining useful life in excess of the initial Lease Term, which notice shall be accompanied by reasonable back-up documentation (to the extent actually in Tenant's control or possession) of engineers, contractors or other persons qualified in the maintenance and repair of the specified Systems and Equipment certifying that Systems and Equipment do not have a remaining useful life in excess of the initial Lease Term.  If Landlord disputes in writing Tenant’s determination, then Landlord and Tenant shall, for a period of thirty (30) days thereafter, attempt to resolve such dispute.  If such dispute is not resolved within such thirty (30) day period, then the parties shall submit the matter to binding arbitration before a retired judge under the auspices of JAMS (or any successor to such organization) in Dallas, Texas, according to the then rules of commercial arbitration of such organization.  The decision of the arbitrator shall be conclusive, final and binding upon Landlord and Tenant.  Judgment upon the decision of the arbitrator may be entered in any court of competent jurisdiction.  The cost of such arbitration (including reasonable attorneys' fees incurred therein) shall be borne by the losing party as determined by the arbitrator.  If the arbitrator determines that the specified Systems and Equipment (or portion thereof) do not have a remaining useful life in excess of the initial Lease Term, then Landlord shall, prior to the expiration of then remaining useful life of such Systems and Equipment (or portion thereof), replace such Systems and Equipment (or portion thereof) at Landlord's sole cost and expense and not as an Operating Expense chargeable to Tenant ("Landlord Replacement Items").  

8.5

Insurance Cancellation .  No use shall be made or permitted to be made of the Premises by Tenant any Tenant Related Parties or Tenant’s contractors or subcontractors, nor acts done which will cause the cancellation of any insurance policy covering the Premises or the Building, and if Tenant's use of the Premises causes an increase in such insurance rates, Tenant shall pay any such increase as Additional Rent, which, together with interest on any amount paid therefor by Landlord, shall be payable by Tenant on the next succeeding date on which a Base Rental payment is due.  Landlord hereby represents to Tenant that Tenant's use of the Premises for general office and call center use in compliance with the provisions of this Lease and applicable laws then in effect will not trigger an increase in such insurance rates.



 

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8.6

Landlord's Rules and Regulations .  Tenant shall faithfully observe and comply with the reasonable rules and regulations that Landlord shall from time to time promulgate, including without limitation any rules and regulations attached to this Lease as Exhibit D, which are hereby incorporated wherein by this reference; provided such rules or regulations or modifications thereto do not materially or unreasonably increase any of Tenant's obligations or materially or unreasonably reduce any of Tenant's rights or benefits under this Lease.  The rules and regulations will be applied in an equitable and non-discriminatory manner as reasonably determined by Landlord.  Subject to the limitation set forth in this Section 8.6 above, Landlord reserves the right from time to time to make all reasonable modifications to such rules and regulations.  The additions and modification to those rules and regulations shall be binding upon Tenant upon Landlord giving notice of them to Tenant.  Landlord shall not be responsible to Tenant for the nonperformance of any of such rules and regulations by any other tenants or occupants but will use commercially reasonable efforts to enforce the same among all tenants and occupants in the Building.  

8.7

No Smoking in Building .  The entire Building, including the Premises, all office space of the Building's other tenants and occupants, twenty (20) feet outside of any exterior entrances and exits, all interior common areas, all elevators, all hallways, all corridors, all stairwells, all restrooms, all storage areas, all garages, all basements and all lobbies are smoke-free.  Smoking in the Building of any tobacco product in any form, including, but not limited to, cigarettes, cigars and pipes, is strictly prohibited at all times.  Smoking is only permitted in the areas outside of the Building as may be designated by Landlord from time to time in its sole discretion.

9.

LANDLORD'S SERVICES .  

9.1

Basic Services .  Landlord shall maintain and operate the Building in a manner consistent with the Comparable Buildings, and provide ingress and egress control services to the Building in a manner consistent with the Comparable Buildings, shall keep the Systems and Equipment and structure of the Building in good condition and repair consistent with the Comparable Buildings.  Tenant shall have access to the Premises twenty four (24) hours per day, seven (7) days per week throughout the Lease Term and any Renewal Term; provided, however, the parties hereto understand and agree that during hours other than as specified in Section 9.1(a) hereof, (i) elevator service may be limited to Tenant's employees' activation of the elevators through the use of Tenant-issued elevator access cards; and (ii) Landlord may log and maintain computerized records of the points of entry of the Building.  Subject to any law, rule or governmental order or regulation, and further subject to any event of Force Majeure or other circumstance beyond the reasonable control of Landlord, Landlord shall furnish the following services during the Lease Term:

(a)

Air conditioning and heat, whichever be required, from 7 a.m. to 6 p.m., Monday through Friday and 8 a.m. through 1 p.m. on Saturday, excluding legal holidays in such reasonable quantities as is reasonably necessary for the comfortable occupancy of the Premises and otherwise reasonably necessary for general office (including call center) use in compliance with applicable codes and consistent with the level of services provided in the Comparable Buildings.  If Tenant desires to use heat, ventilation or air conditioning during hours other than those for which Landlord is obligated to supply such utilities pursuant to the terms of this Section 9.1(a) (the "After Hours HVAC"), Tenant shall give Landlord (i) not less than one (1) hour notice (which  notice may be verbal to Landlord's property manager) prior to the end of normal business hours for the Building for additional HVAC on weekdays and (ii) not less than two (2) hours prior notice (which  notice may be verbal to Landlord's property manager) at any time for additional HVAC on weekends or holidays and Landlord shall supply such After Hours HVAC service to Tenant at such hourly cost to Tenant (which shall be treated as Additional Rent) as Landlord shall from time to time establish (the “After Hours HVAC Cost”); provided that (i) such After Hours HVAC Cost as of the date of this Lease is $50.00 per hour per floor, and (ii) such After Hours HVAC Cost shall only increase to the extent Landlord's costs to provide such services actually increase.  Notwithstanding the foregoing, Landlord hereby agrees that during the calendar months of May through September during the Lease Term the first ten (10) hours of After Hours HVAC used by Tenant during the Lease Term shall be free of charge (the "After Hours HVAC Credit").  

(b)

Hot and cold water for lavatory and general office purposes at the points of supply in the Premises specified in the Approved Working Drawings (as defined in the Work



 

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Letter) and electric current for lighting the Premises and for ordinary office (and call center) appliances and office machines only.  Landlord shall provide adequate electrical wiring to subpanels facilities for Tenant's connection to Tenant's lighting fixtures and incidental use equipment to accommodate a maximum connected electrical load capacity of five (5) watts (exclusive of electricity which is needed for HVAC) per rentable square foot of the Premises and/or ROFR Space, with the electricity so furnished for Tenant's lighting fixtures and equipment to be at a nominal 277/480 volts with no electrical circuit for the supply of such equipment which will require a current capacity exceeding twenty (20) amperes.  If a further supply of water in excess of that reasonably customary for general office (and call center use) is required by Tenant, then Landlord shall notify Tenant of the same (which notice shall be accompanied by a statement of the anticipated costs associated with Landlord's right to install a separate water meter as further provided herein) and unless Tenant thereafter reduces the amount of its water usage within thirty (30) days after its receipt of such notice, Landlord shall have the option, at Tenant's expense, to install and maintain a water meter to register such consumption, and Tenant shall pay as Additional Rent for water consumed, at the actual out-of-pocket cost to Landlord without profit, and for the actual out-of-pocket sewer rents and all other rents and charges based upon such excess consumption of water (without profit);

(c)

General day-to-day janitorial service (excluding carpet shampooing and hard surface floor waxing) five days a week in a manner consistent with the Comparable Buildings, and regular elevator service during the normal business hours for the building as set forth in Section 9.1(a) above (except that during after-hours no less than one (1) passenger elevator and one (1) service elevator must be available to Tenant seven (7) days a week, 24 hours each day (except when elevator service must be suspended because of repairs or emergencies, provided in such event, Landlord must continuously and diligently pursue completion of any required elevator repairs or otherwise take all commercially reasonable steps to restore elevator service to the Premises as quickly as possible) throughout the Lease Term.  Tenant shall not without the prior written consent of Landlord, use heat generating machines or equipment (other than normal office and call center machines, or equipment or lighting other than Building standard lights in the Premises) which adversely and materially affect the temperature otherwise maintained by the air conditioning system required to be provided by Landlord as set forth in Section 9.1(a) above.  If such consent is given, Landlord reserves the right to install supplementary air conditioning units in the Premises, and the actual out-of-pocket costs therefor (without profit), including the cost of installation, operation and maintenance thereof, shall be paid by Tenant to Landlord within thirty (30) days after demand by Landlord (together with reasonable back-up documentation).  If Tenant, as reasonably determined by Landlord in good faith, consumes or requires electric current in the Premises in excess of the specification contained in Section 9.1(b) hereof and such excess consumption continues for thirty (30) days after Tenant's written receipt of notice from Landlord of the same (which notice must be accompanied by a detailed description of Landlord's basis for its good faith determination that Tenant is consuming such excess electricity), then Landlord may, at its election, either cause an electric current meter (or if reasonably possible, a submeter) to be installed in the Premises so as to measure the electric current consumed for such excess use or determine the value of such excess use by causing an independent electrical engineer or consulting firm, selected by Landlord (and whose fees must be commercially competitive with the fees charges by engineers or consultants providing a similar scope of services to the Comparable Buildings), to conduct a survey of Tenant's use of electric current and to certify such determination in writing to Landlord and Tenant.  The actual out-of-pocket and verifiable cost of any such survey or installation and maintenance of such meter shall be borne by Tenant if the survey or meter indicates excess use by Tenant.  Additionally, Tenant agrees to pay to Landlord, as Additional Rent, within thirty (30) days after demand therefor by Landlord, the actual charges for electricity paid by Landlord to the electricity provider (including, by way of example, and not by way of limitation, kWh charges, PUC assessments, taxes, distribution charges, transmission service charges, meter charges, etc .) determined to be due for the electric current consumed in the Premises in excess of the specification contained in Section 9.1(b) hereof, as shown by such meter or as indicated in such survey, as the case may be.

(d)

Notwithstanding anything in this Lease to the contrary, Tenant will not without the prior written consent of Landlord use any apparatus or device in the Premises that in any way increases the amount of water usually furnished or supplied for use of the Premises as general office and call center space.  Tenant shall not connect with any electric current except through existing electrical outlets in the Premises, or to any water pipes, any apparatus or device



 

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for the purposes of using electric current or water.  If Tenant shall require water in excess of that usually furnished or supplied for use of the Premises, Tenant must first procure the written consent of Landlord to the use thereof, which consent shall not be unreasonably withheld, conditioned or delayed, and Tenant shall pay Additional Rent for such excess consumption of water as provided in Section 9.1(b) hereof.  Tenant may maintain and operate data processing equipment on the Premises, but all additional costs in connection therewith (including, but not limited to, additional support flooring, insulation, electrical outlets and temperature maintenance facilities) shall be borne solely by Tenant and the utility services utilized by or for such equipment shall be separately metered and the cost of such utility services with metering shall be borne solely by Tenant.  

(e)

Landlord will provide security in the form of limited access to the Building from the parking garage and the Building’s exterior doors and limited elevator access to the Premises during all times other than the hours specified in Section 9.1(a) hereof in the form of limited key access entry cards or other restricted entry device.  In addition, Monday to Friday, excluding legal holidays, Landlord will provide on-site security services available from 7:00 a.m. to 11:00 p.m. consistent with the security services provided in the Comparable Buildings.  In addition, Monday to Friday, except Building holidays, Landlord's security personnel shall sign in all and notify Tenant's designated contact of all visitors to the Premises or alternatively, Landlord may at its expense provide a sign-in log book and install a dedicated telephone at the security desk, which shall be used by Tenant’s visitors to sign in and notify Tenant's designated contact that the visitor desires an escort and access to the Premises.  In no event will Landlord's security personnel permit any unescorted visitors access the Premises.  Landlord agrees that the foregoing is necessary because Tenant may elect not to have a reception area within the Premises.  Tenant acknowledges and agrees that such security services will not assure the prevention of injury, theft or damage to Tenant or its employees, agents, contractors, licensees or invitees, or to any personal property located in the Building (including the parking garage) and Landlord shall not be liable or responsible, by reason of providing any security services pursuant to this Lease or otherwise, for any injury, theft or damage to Tenant or its employees, agents, contractors, licensees or invitees, or to any personal property located in the Building (including the parking garage), except to the extent that such injury, theft or damage is the result of Landlord’s gross negligence (but subject to the terms and conditions of the waiver of subrogation set forth in Section 13.4) or willful misconduct.  Landlord hereby agrees that the Tenant may upgrade its security system, at its cost and expense, for the Premises; provided, however, that (i) the Approved Working Drawings (as defined in the Work Letter) shall specify such security system in the Premises; (ii) Tenant shall obtain, prior to making any changes or modifications to such security system after the completion of the construction of the Improvements, Landlord’s prior written approval, which approval shall not be unreasonably withheld, delayed or conditioned; (iii) Tenant shall provide Landlord and its property management company with a means to enter the Premises in an emergency for repairs; and (iv)   as to any areas of the Premises which Tenant restricts Landlord and its property management company from entering except in an emergency (the “ Security Areas ”), Tenant hereby expressly relieves and discharges Landlord and its property manager from any obligations under this Lease that Landlord cannot perform (e.g., janitorial service) in the Security Areas.

(f)

Tenant, at its sole expense, may install a supplemental HVAC system in the Premises, for the purpose of servicing the Premises during hours other than the hours specified in Section 9.1(a) hereof or to supplement the HVAC provided to the Premises during the normal Building hours (the "Tenant HVAC System").  If required for such purpose, Tenant may connect into the Building's condenser water system, if and to the extent that  (i) Tenant's use of condenser water pursuant to this Section 9.1(f) will not materially adversely affected the condenser water system or the use thereof by Landlord and the other tenants and occupants of the Building, and (ii) such connection is otherwise approved in writing by Landlord, which approval shall not be unreasonably withheld, conditioned or delayed unless a Design Problem (as defined in Section 3.2 of the Tenant Work Letter) exists.  If Tenant connects into the Building's condenser water system pursuant to the of the foregoing sentence, (x) Tenant shall install, at Tenant's expense, a meter to measure Tenant's use of condenser water, and (y) Tenant shall reimburse Landlord for Tenant's use of condenser water at Landlord's actual out-of-pocket cost therefor (without profit).  Tenant shall be permitted, at Tenant's sole cost and expense, to access 277/480 volts of electricity from the existing bus duct riser in connection with the Tenant HVAC System.  In connection with the foregoing (A) Landlord shall, at Tenant's sole cost and expense, separately meter the electricity utilized by the Tenant HVAC System, and (B) Tenant shall pay,



 

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as Additional Rent, the actual charges for electricity billed or charged to Landlord by the electricity provider (including, by way of example, and not by way of limitation, kWh charges, PUC assessments, taxes, distribution charges, transmission service charges, meter charges, etc .) consumed by the Tenant HVAC System.  Landlord hereby agrees that, at Tenant's sole option, Tenant shall be permitted to remove the Tenant HVAC System, and repair any damages to the Building caused by such removal, or leave same in the Premises, in which event the same shall become a part of the realty and belong to Landlord, without payment to Tenant or credit against the rent, and shall be surrendered by Tenant with the Premises upon the expiration or earlier termination of this Lease.  

(g)

Tenant may install (as part of the Improvements or a subsequent Alteration), maintain, replace, remove or use any communications or computer wires and cables, including, without limitation multiple T-1 lines for use in connection with Tenant's use of VoIP phones and other voice and data lines in the Premises (collectively, the "Lines") at the Building in or serving the Premises, provided that (i) Tenant shall obtain Landlord's prior written consent which will not be withheld as long as no Design Problem exists, use an experienced and qualified contractor approved in writing by Landlord, and comply with all of the other provisions of the Tenant Work Letter or Section 10.4 of this Lease, as the case may be, (ii) the Lines therefor (including riser cables) shall be appropriately insulated to prevent excessive electromagnetic fields or radiation, and shall be surrounded by a protective conduit reasonably acceptable to Landlord, (iii) any new or existing Lines servicing the Premises shall comply with all applicable laws, and (iv) Tenant shall pay all costs in connection with the installation of its Lines.  Upon the expiration or termination of this Lease, Tenant shall leave in place all telecommunications equipment and other facilities for telecommunications transmittal installed in the Premises or the Building for Tenant's use (excluding, however, any satellite dish and other communications equipment and associated cabling and conduit installed and/or operated by or on behalf of Tenant on the Building's roof, which Tenant shall at its expense remove from the roof at the expiration or earlier termination of this Lease and, using Landlord’s roof contractor, make any necessary roof repairs caused by the installation or removal of such dish, equipment, cabling or conduit), including any cable and wiring, which wiring shall be terminated at connectors at both ends and each separate line properly identified with a tag at both ends, in all events, without payment to Tenant or credit against the rent.

9.2

Interruption of Services .  Subject to the further provisions of this Section 9.2, Landlord reserves the right from time to time to install, use, maintain, repair, replace and relocate service to the Premises and other parts of the Building, and to alter or relocate any other facility in the Building; provided the same shall not materially and adversely affect access to the Premises or parking facility or Tenant's use of the Premises for the permitted use.  Landlord at all times, however, shall use commercially reasonable efforts to avoid, and if it cannot avoid, to minimize any interruption, delay or diminution in the furnishing of any services to be provided to the Premises or the Building hereunder.  Interruption or curtailment of any service maintained in the Building, if caused by strikes, mechanical difficulties, actions of Landlord under the first sentence of this Section 9.2, or for any other reason beyond Landlord's control, shall not entitle Tenant to any claim against Landlord or to any abatement in rent (except as provided further herein), nor shall the same constitute constructive or partial eviction.  Unless due to the negligence of Landlord, Landlord shall not be liable to Tenant for any injury or damage resulting from defects in the plumbing, heating, or electrical systems in the Building or for any damage resulting from water seepage into the Building or for any act or failure to act by any other Tenants at the Building or for any damage resulting from wind storm, hurricane or rain storm.  Notwithstanding the foregoing, in the event of an interruption of service or failure to provide access to the Premises or parking facility that is within Landlord’s reasonable control, if such interruption or failure to provide access occurs and, as a result thereof, Tenant’s use of the Premises is materially adversely affected for at least three (3) consecutive business days, then Base Rent, Additional Rent and all other charges shall be entirely abated for each day thereafter until the interrupted service or access is fully restored.

10.

MAINTENANCE, REPAIRS AND ALTERATIONS .

10.1

Landlord's Obligations .  Subject to the provisions of Sections 8.2 and 14, and except for damage caused by any negligent (but subject to the waiver of subrogation set forth in Section 13.4) or intentional act or omission (where Tenant has a duty under this Lease or applicable law to act) of Tenant or Tenant's employees, agents or contractors (collectively, the "Tenant Related Parties"), in which event Tenant shall repair the damage, at its sole expense,



 

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Landlord shall keep in good order, condition and repair the structural portions of the Building, including the foundation, floor/ceiling slabs, roof, exterior wall, window seals, vents, curtain wall, exterior glass and mullions, columns, beams, shafts (including elevator shafts), stairs, landscaping, exterior foundations, stairwells, elevator cabs, men’s and women’s public washrooms located in the Premises, parking areas, and the Building’s common areas (collectively, "Building Structure") and those portions of the Building which are not occupied or leased by any tenant and shall also maintain and repair in good condition and operating order and keep in good repair and condition the basic mechanical, electrical, life safety, plumbing (to all points of supply to the Premises), sprinkler systems (connected to the core and any distribution throughout the Premises) and heating, ventilating and air conditioning systems (including primary loops connected to the core and any distribution throughout the Premises) serving the Premises, and all costs incurred by Landlord in making any such repairs or performing such maintenance shall to the extent expressly permitted by Section 6.2, be Operating Expenses.  Landlord shall also replace Building standard light bulbs and ballasts within the Premises and the Building’s common areas.  Tenant expressly waives the benefits of any statute now or hereafter in effect which would otherwise afford Tenant the right to make repairs at Landlord's expense or to terminate this Lease because of Landlord's failure to keep the Premises in good order, condition and repair.  Other than as specifically provided in this Lease and as to any Code Work required to be made by Landlord pursuant to the Tenant Work Letter), Landlord shall not be obligated to make any repairs or improvements of any kind, in, upon, about, or to the Premises or the Building, including without limitation, the performance of any action, which is the obligation of Tenant or any other tenant or occupant of the Building.  If Landlord fails in the performance of any of Landlord’s obligations under this Lease pertaining to the maintenance or repair of the Premises and/or the Building (expressly excluding, however, any repair obligations resulting from the occurrence of a fire, windstorm or other casualty which shall be governed by Article 14 or caused by the negligence (but subject to the terms and conditions of the waiver of subrogation set forth in Section 13.4) or willful misconduct of Tenant, any Tenant Related Parties) and such failure continues for forty-five (45) days after Landlord’s receipt of written notice thereof from Tenant (except in the case of an emergency in which event such notice and cure period if any shall be to the extent reasonable given the totality of the circumstances giving rise to the emergency or an additional reasonable time after such receipt if (i) such failure cannot be cured within such forty-five (45) day period, and (ii) Landlord commences curing such failure within such forty-five (45) day period and thereafter diligently and continuously pursues the curing of such failure) (each such failure constituting a "Landlord Failure"), then Tenant shall have the right, but not the obligation, to cure such Landlord Failure at Landlord’s expense and submit to Landlord an invoice for the actual out-of-pocket and commercially reasonable costs incurred by Tenant to cure such Landlord Failure (accompanied by reasonable back-up documentation); provided, however, that nothing contained herein shall be deemed, construed or held to give Tenant any right to perform, or cause to be performed, any work on the Building Structure, portions of the Building leased or occupied by other tenants, or the Building’s base building mechanical, electrical, life safety, plumbing (other than the systems, equipment, fixtures and appliances located within or otherwise serving the Premises), sprinkler systems or heating, ventilating and air conditioning systems other than the portion of the heating, ventilating and air conditioning systems from the VAV boxes to the Premises’ interior.  Landlord shall, within thirty (30) days after receipt of such invoice, reimburse Tenant for such reasonable costs.  If Landlord does not reimburse Tenant within thirty (30) days after receipt of Tenant’s invoice and back-up documentation, then, notwithstanding any provisions in this Lease to the contrary, Tenant shall be entitled to offset against the next installments of monthly Base Rent coming due under this Lease an amount equal to the actual reasonable expenses incurred by Tenant in connection with such cure of the Landlord Failure.  Any such offset by Tenant (once realized) shall be deemed and construed to be, (a) a full and final release and discharge of Landlord by Tenant of Landlord’s obligation to cure the Landlord Failure to the extent cured by Tenant; and (b) an express representation, warranty and covenant by Tenant to Landlord and its mortgagee and their respective successors and assigns that (1) Tenant’s cure of the Landlord Failure was performed in accordance with all applicable laws, regulations, codes or ordinances (including, but not limited to, applicable building codes, municipal ordinances, OSHA regulations and regulations and requirements of Fire Insurance Rating Bureau); and (2) in performing any such work, maintenance or repair in connection with Tenant’s cure of the Landlord Failure with specific reference to Tenant's indemnity obligations set forth in Section 10.4(c), Tenant shall comply with its obligation under this Lease respecting lien free completion of such work.  Tenant’s offset of any amounts permitted by this Section 10.1 constitutes Tenant’s sole and



 

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exclusive remedy for any Landlord Failure to the extent of Tenant’s cure of such Landlord Failure.  

10.2

Tenant's Obligations .  Subject to the provisions of Sections 8.2 and 14 and except for damage caused by any negligent (but subject to the waiver of subrogation set forth in Section 13.4) or intentional act or omission (where Landlord has a duty under this Lease or applicable law to act) of Landlord, the Landlord Related Parties or any of their agents, contractor or employees, Tenant, at Tenant's expense, shall keep in good order, condition and repair the Premises and every part thereof including, without limiting the generality of the foregoing, all plumbing equipment beginning at the points of the supply in the Premises, electrical and lighting facilities installed by or on behalf of Tenant in the Premises’ interiors, the Improvements and equipment within the Premises, trade fixtures, interior walls and interior surfaces of exterior walls, non-structural ceilings, interior windows and doors located within the Premises.  All repairs made by Tenant shall be at least of the same quality, design and class as that of the original work.  Subject to Section 8.6 above, Tenant agrees that it will abide by, keep and observe all reasonable rules and regulations which Landlord may make from time to time for the management, safety, care and cleanliness of the Building and grounds, the parking of vehicles and the preservation of good order therein as well as for the convenience of other occupants and tenants of the Building.  All damage or injury to the Building or to the Premises, fixtures, appurtenances and/or equipment caused by Tenant moving property in or out of the Building or the Premises or by Tenant's installation or removal of furniture, fixtures, or other property, or from any other cause of any kind or nature whatsoever due to carelessness, omission, neglect, improper conduct, or other cause of Tenant, any Tenant Related Parties shall be repaired, restored, or replaced promptly by Tenant at its sole cost and expense to the reasonable satisfaction of Landlord.  In the event that Tenant fails to keep the Premises in good order, condition and repair as required pursuant to this Section 10.2 while this Lease remains in effect and such failure continues for forty-five (45) days after Tenant's receipt of written notice thereof from Landlord (except in the case of an emergency in which event such notice and cure period if any shall be to the extent reasonable given the totality of the circumstances giving rise to the emergency or an additional reasonable time after such receipt if (i) such failure cannot be cured within such forty-five (45) day period, and (ii) Tenant commences curing such failure within such forty-five (45) day period and thereafter diligently and continuously pursues the curing of such failure), Landlord may make such repairs to the extent required by this Section 10.2 without liability to Tenant for any loss or damage that may accrue to Tenant's property or business by reason thereof (except to the extent caused by the negligence or willful misconduct of Landlord or its agents, employees or contractors), and upon completion thereof Tenant shall within thirty (30) days after demand (accompanied by reasonable back-up documentation) pay to Landlord as Additional Rent the actual out-of-pocket and commercially reasonable cost of restoring the Premises to such good order and condition.

10.3

Surrender .  On the last day of the Lease Term or on any sooner termination or date on which Tenant ceases to possess the Premises, Tenant shall surrender the Premises to Landlord in good and clean condition, ordinary wear and tear and repairs which are not specifically made the responsibility of Tenant hereunder excepted.  Prior to such surrender Tenant shall repair any damage to the Premises occasioned by its removal of trade fixtures, furnishings and equipment, which repair shall include the patching and filling of holes and repair of structural damage to the extent caused by such removal.  TENANT AGREES TO INDEMNIFY LANDLORD AND HOLD LANDLORD HARMLESS FROM AND AGAINST ANY LIABILITY (INCLUDING REASONABLE ATTORNEYS' FEES) OF LANDLORD TO THIRD PARTIES RESULTING FROM TENANT'S FAILURE TO TIMELY COMPLY WITH THE PROVISIONS OF THIS SECTION 10.3.

10.4

Alterations and Additions .  (a) Excluding the construction of the Improvements to be performed by Tenant in accordance with the provisions of the Tenant Work Letter and the Approved Working Drawings (as defined in the Tenant Work Letter), Tenant shall not, without Landlord's prior written consent, make any alterations, improvements or additions (referred to collectively herein as "Alterations") in, on or about the Premises.  Landlord's consent pursuant to this Section 10.4(a) shall be granted or reasonably withheld by notice to Tenant within fifteen (15) days after Landlord’s receipt of Tenant’s notice requesting Landlord’s consent (but such fifteen (15) day period shall be extended to the extent special circumstances are presented ( e.g., structural engineering review is required)) but such consent may only be withheld to the extent a Design Problem (as defined Section 3.2 of the Tenant Work Letter) exists.  Landlord may require that Tenant remove any or all of such Alterations at the expiration of the Lease Term or the



 

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termination of Tenant’s right of possession of the Premises, and restore the Premises to the condition required in Section 10.3 above; provided, however, that (i) Landlord shall not require Tenant to remove any of the Improvements at the expiration of the Lease Term or the termination of Tenant’s right of possession of the Premises; (ii) if Landlord wishes to require Tenant to remove such Alteration at the expiration of the Lease Term or the termination of Tenant’s right of possession of the Premises, then Landlord shall notify Tenant at the time Tenant makes the request for Landlord’s prior consent or approval of the Alteration whether or not Tenant is required to removal such Alteration at the expiration of the Lease or the termination of Tenant’s right of possession; and (iii) in the case of Cosmetic Alterations (as defined herein), by written notice to Tenant within five (5) business days after Landlord's receipt of Tenant's notice of such Cosmetic Alterations that Landlord requires such Alteration to be removed at the expiration of the Lease or the termination of Tenant’s right of possession of the Premises.  Should Tenant make any Alterations without the prior approval of Landlord, Landlord may require that Tenant immediately remove any or all of such items and/or Landlord may declare a default by Tenant under this Lease; provided, however, that notwithstanding the foregoing, after the Commencement Date, Tenant, without Landlord’s approval, may make the following cosmetic alterations to the Premises (collectively, the “Cosmetic Alterations”) provided that the cost thereof shall not exceed in any period of twelve (12) consecutive months the sum of $75,000.00 for any individual Cosmetic Alteration or $150,000.00 for all Cosmetic Alterations:   (1) cosmetic, interior decorating and refurbishment Alterations ( e.g. , paint, carpet, countertops, etc.) in the Premises; and (2) Alterations in the Premises that do not adversely affect the Building Structure or the basic mechanical, electrical, life safety, plumbing (to all points of supply in the Premises), sprinkler systems (connected to the core and any distribution throughout the Premises) and heating, ventilating and air conditioning systems (including primary loops connected to the core and any distribution throughout the Premises).  Except in connection with normal interior decorating of the Premises, Tenant shall not place any holes in any part of the Premises, and, except to the extent otherwise expressly permitted under this Lease, in no event shall Tenant place any exterior or interior signs or interior drapes, blinds, or similar items visible from the outside of the Premises without the prior written approval of Landlord.

(b)

Any Alterations (other than Cosmetic Alterations and those not requiring building permits) in, on or about the Premises that Tenant shall desire to make shall be presented to Landlord in written form with proposed detailed plans.  If Landlord shall give its consent, the consent shall be deemed conditioned upon Tenant acquiring a permit to do the work from appropriate governmental agencies (to the extent necessary), the furnishing of a copy thereof to Landlord prior to the commencement of the work and the compliance by Tenant with all conditions of such permit and with all specifications in the plans in a prompt and expeditious manner.  Tenant shall not permit any of the work to be performed by persons not currently licensed under any applicable licensing laws or regulations pertaining to the types of work to be performed.  Landlord shall not be deemed unreasonable in the exercise of its discretion for withholding approval of any Alterations which involve or might adversely affect any structural or exterior element of the Building, any area or element outside of the Premises, or any facility serving any area of the Building outside of the Premises, or which will require unusual expense to retrofit the Premises to general office use on the expiration or earlier termination of this Lease.

(c)

Tenant shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Tenant at or for use in the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or the Building.  Tenant shall give Landlord not less than ten (10) days’ notice prior to the commencement of any work in, on or about the Premises, and Landlord shall have the right to post notices of non-responsibility in, on or about the Premises as provided by law.  If any mechanics or other lien shall be filed or delivered with respect to the Premises or the Building, based upon any act of Tenant or of anyone claiming through Tenant, or based upon work performed or materials supplied allegedly for Tenant (by other than Landlord), Tenant shall cause the same to be canceled and discharged of record within thirty (30) days after Tenant receives notice of the filing or delivery thereof.  If Tenant has not so canceled the lien within thirty (30) days as required herein, Landlord may pay such amount, and the amount so paid together with interest thereon from the date of payment and all reasonable legal costs and charges, including reasonable attorneys’ fees, actually incurred by Landlord in connection with such payment and cancellation of the lien or notice of intent shall be Additional Rent and shall be paid by Tenant to Landlord within thirty (30) days after invoice (together with back-up documentation).  Tenant may, prior to the date on which Landlord actually pays to the claimant the amount secured or



 

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intended to be secured by such mechanics or other lien, contest the validity of any such lien or claim, provided that in such circumstances Tenant shall at its expense defend itself and Landlord against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof against Landlord, the Premises or the Building.  Nothing herein contained shall be construed as a consent on the part of Landlord to subject the interest and estate of Landlord to liability under any lien law of the state in which the Premises are situated, for any reason or purpose whatsoever, it being expressly understood that Landlord's interest and estate shall not be subject to such liability and that no person shall have any right to assert any such lien.

(d)

Unless Landlord requires their removal and subject to Tenant's rights, as set forth in Section 10.4(a), all Alterations which may be made on the Premises shall, at the expiration of the Lease Term or such other time at which Tenant ceases to occupy the Premises, become the property of Landlord and remain upon and be surrendered with the Premises.  Notwithstanding the provisions of this Section 10.4(d), Tenant's machinery and equipment, other than that which is affixed to the Premises so that it cannot be removed without material damage to the Premises, shall remain the property of Tenant and may be removed by Tenant subject to the provisions of Section 10.3 hereof.

(e)

Notwithstanding the foregoing and provided Landlord secures the consent of Landlord’s mortgagee (it being agreed that Landlord shall promptly request such consent in writing and shall notify Tenant if the mortgagee gives the requested consent), if Tenant shall lease or finance the acquisition of any specifically enumerated equipment and personal property not paid for in whole or in part by Landlord which Tenant is permitted under this Lease to remove at the expiration or earlier termination of this Lease, Landlord shall, upon written request from Tenant, and at the Tenant's sole cost and expense, enter into a written subordination agreement, expressly subordinating Landlord’s liens and security interests under this Lease to those of Tenant’s lender or equipment lessor, which has made or is making a loan or other extension of credit to Tenant to be secured by liens and security interests in such specifically enumerated equipment and personal property located or to be located in the Premises (but not secured by any right, title or interest of Tenant in this Lease or the leasehold estate created hereby), provided such subordination is pursuant to a written subordination agreement in form and substance mutually satisfactory to Landlord and Tenant’s lender or equipment lessor.  

11.

TENANT'S USE OF COMMON AREAS .

Tenant's non-exclusive use of the common areas described in Section 2.2 shall be subject to such reasonable rules and regulations promulgated by Landlord pursuant to and subject to the limitations set forth in Section 8.6.  Tenant agrees to repair at its cost all damages to the common areas occasioned by the negligence or willful misconduct of Tenant or the Tenant Related Parties (subject to the waiver of subrogation set forth in Section 13.4).

12.

TAXES AND TELEPHONE .

12.1

Personal Property Taxes .  Tenant shall pay prior to delinquency all taxes assessed against and levied upon improvements, fixtures, furnishings, equipment and all other personal property of Tenant contained in the Premises or elsewhere.  If Tenant shall cause such improvements, trade fixtures, furnishings, equipment and all other personal property to be assessed with Landlord's real property, Tenant shall pay Landlord the taxes attributable to Tenant within thirty (30) days after receipt of a written notice from Landlord setting forth the taxes applicable to Tenant's property (except to the extent specifically included or excluded from the definition of Real Estate Tax in Section 6.2(b)  above), excluding state, local and federal personal or corporate income taxes and estate and inheritance taxes, whether or not now customary or within the contemplation of the parties hereto, and if Tenant fails to do so, Landlord may make such payment and the amount so paid, together with interest thereon from the date paid, shall be Additional Rent and shall be due and payable to Landlord on the next succeeding date on which a Base Rental installment is due.

12.2

Intentionally Omitted .  

12.3

Telephone .  Tenant shall separately arrange and pay for the furnishing of and use of all telephone services as Tenant may deem necessary for its use of the Premises, and Landlord shall have no liability in connection therewith.



 

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13.

INSURANCE AND INDEMNITY .

13.1

Liability Insurance .  Tenant shall, at Tenant's expense, obtain and keep in force during the Lease Term a commercial general liability policy of bodily injury and property damage insurance, covering the insuring provisions of this Lease and the performance by Tenant of its indemnity agreements set forth in Section 13.5 of this Lease.  Such insurance shall be in an amount not less than $1,000,000 per occurrence and $2,000,000 aggregate with $4,000,000 umbrella liability coverage.  CGL insurance shall be written on ISO occurrence form CG 00 01 01 96 (or a substitute form providing equivalent coverage). The limits of said insurance shall not, however, limit the liability of Tenant.  If in the reasonable opinion of Landlord the amount of liability insurance required hereunder is not adequate, then Tenant shall increase said insurance coverage as reasonably required by Landlord and applied to all tenants and occupants in the Building but in no event shall such increased amounts of insurance or such other reasonable types of insurance be in excess of that generally required by landlords of Comparable Buildings.  However, the failure of Landlord to require any additional insurance coverage shall not be deemed to relieve Tenant from any obligations under this Lease.  Upon written request from Landlord, Tenant shall cause any Tenant hired contractor or vendor to provide evidence of liability insurance with limits not less than the limits stated above naming Landlord as an Additional Insured.  Landlord shall further procure and maintain commercial general liability insurance with a loss limit at least equal to that required by Tenant as set forth above.  

13.2

Property Insurance .  Landlord shall obtain and keep in force during the Lease Term causes of loss – special form property insurance coverage on the Building (including Building standard improvements) in an amount not less than 90% of the full replacement value of the Building.  Landlord’s insurance required pursuant hereto shall be primary in the event of overlapping coverage which may be carried by Tenant and which covers items for which Landlord is primarily responsible under this Lease (including with respect to claims arising for acts or omissions occurring within the public areas and/or common areas of the Building), and all such coverages shall include coverage of Landlord’s indemnity obligations hereunder.  Notwithstanding the foregoing, the limits of said insurance shall not limit Landlord’s liability.  Landlord may also, but shall not be required to, procure any other insurance policies respecting the Premises or Building which Landlord deems necessary and provided that the type of such insurance and limits thereof are consistent with prudent insurance practices generally followed by commercial landlords in Comparable Buildings.  All such insurance shall be included as part of the Operating Expenses.  Tenant shall also obtain and keep in force during the Lease Term, at Tenant's expense, causes-of-loss special form property damage insurance upon the property of every description and kind owned by Tenant and located in the Premises, including without limitation, furniture, fittings, installations, the Improvements, Alterations, additions, partitions, fixtures and anything in the nature of improvements in an amount not less than 90% of the full replacement cost thereof.  Such insurance shall insure Tenant and Landlord.  If Tenant shall fail to procure and maintain the insurance required hereunder and such failure continues after written notice and expiration of a ten (10) business day cure period, Landlord may but shall not be required to procure and maintain the same, and any amount so paid by Landlord for such insurance shall be Additional Rent which shall be due and payable by Tenant within thirty (30) days after invoice (together with back-up documentation).  

13.3

Insurance Policies .  Insurance required by Tenant and Landlord hereunder shall be in companies rated A-VII (7) or better as rated by AM Best Company or which is otherwise reasonably acceptable to Landlord and licensed to do business in the State of Texas.  Tenant shall deliver to Landlord prior to taking possession of the Premises certificates (on a standard ACORD form) evidencing the existence and amounts of such insurance with loss payable and additional insured clauses as required pursuant to this Article 13.  No such policy shall be cancelable or subject to reduction of coverage or other modification except after ten (10) days' prior written notice to Landlord.  Tenant shall, within ten (10) days prior to the expiration of such policies, furnish Landlord with renewals thereof, or Landlord after written notice to Tenant of such failure and expiration of a ten (10) day cure period, may order such insurance and charge the cost thereof to Tenant, shall be Additional Rent and shall be payable by Tenant within thirty (30) days after invoice (together with back-up documentation).  Tenant shall not do or permit to be done anything, which shall invalidate the insurance policies referred to in Section 13.1.  Tenant shall forthwith, within thirty (30) days after receipt of Landlord's invoice (together with back-up documentation), reimburse Landlord for any additional premiums attributable to any act or omission or operation of Tenant for other than general office and call center use causing an increase in the cost of insurance.



 

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13.4

Waiver of Subrogation .  Anything in this Lease to the contrary notwithstanding, neither party shall be liable to the other party or to any insurance company insuring the other party for any loss (including, deductibles and self-insurance retentions) and Tenant and Landlord each waives any and all rights of recovery against the other, or against the partners, officers, directors employees, agents and representatives of the other for loss or damage to such waiving party or its property or the property of others under its control, where such loss or damage is insured or could have been insured against under any insurance policy described in this Article 13 (other than commercial general liability insurance) even though such loss or damage might have been occasioned by the negligence of such party, its agents or employees; provided that if the existence of such waiver would cause any insurance coverage to be voided or uncollectible absent the consent of the insurance carrier, such waiver shall apply only to the extent that a waiver of subrogation endorsement to insurance policies covering the risks is obtained from said carriers.  Tenant and Landlord shall, upon obtaining the policies of insurance required hereunder, give notice to the insurance carriers that the foregoing mutual waiver of subrogation is contained in this Lease and obtain policies of insurance, if obtainable, which shall include a waiver by the insurer of all right of subrogation against Landlord or Tenant in connection with any loss or damage thereby insured against.  If such waiver (or any other form of permission for the release of the other party) is not or shall cease to be either available at commercially reasonable rates or obtainable at all from the insured party's then current insurance company, the insured party shall so notify the other party promptly after learning thereof, and shall use its reasonable efforts to obtain the same from another insurance company.  

13.5

Indemnity and Hold Harmless .  Tenant shall indemnify, defend and hold Landlord, its partners, and their respective officers, agents, servants, employees and independent contractors (collectively, "Landlord Parties") harmless from any and all loss, expense, claims, liabilities, damages and costs, including, without limitation, court costs and reasonable attorneys’ fees and expenses, incurred by the Landlord Parties (or any of them), which arise from the use of the Premises or the Building by any of the Tenant Related Parties, from the conduct of Tenant’s business, from any activity, work or things performed by Tenant or any of the Tenant Related Parties in, on or about the Premises or the Building, or from any claim brought by any Tenant Related Parties, EVEN IF SUCH CLAIMS, LIABILITIES, DAMAGES OR COSTS RESULT FROM THE NEGLIGENCE (BUT NOT TO THE EXTENT ATTRIBUTABLE TO THE NEGLIGENCE OR WILLFUL MISCONDUCT) OF THE LANDLORD PARTIES (OR ANY OF THEM) , and shall further indemnify, defend and hold the Landlord Parties harmless from and against any and all claims, liabilities, damages and costs, including, without limitation, court costs and reasonable attorneys’ fees and expenses, incurred by the Landlord Parties (or any of them), which arise from Tenant’s breach or default in the performance of any obligation of Tenant pursuant to this Lease, or which, whether they occur in the Premises or other than in the Premises, arise from any negligence of Tenant or any Tenant Related Parties, EVEN IF SUCH CLAIMS, LIABILITIES, DAMAGES OR COSTS RESULT FROM THE NEGLIGENCE (BUT NOT TO THE EXTENT ATTRIBUTABLE TO THE NEGLIGENCE OR WILLFUL MISCONDUCT) OF THE LANDLORD PARTIES (OR ANY OF THE M ) .  Landlord shall indemnify, defend and hold Tenant, its partners, and their respective officers, agents, servants, employees, and independent contractors (collectively, "Tenant Parties") harmless from any and all loss, expense, claims, liabilities, damages and costs, including, without limitation, court costs and reasonable attorneys’ fees and expenses, incurred by Tenant, which arise from Landlord’s breach or default in the performance of any obligation of Landlord pursuant to this Lease or from any negligence or willful misconduct of Landlord or any Landlord Related Parties.  The provisions of this Section 13.5 shall survive the expiration or sooner termination of this Lease with respect to any claims or liability arising in connection with any event occurring prior to such expiration or termination.  Notwithstanding anything to the contrary contained in this Lease, except to the extent provided in Section 3.5 of this Lease, nothing in this Lease shall impose any obligations on Tenant or Landlord to be responsible or liable for, and each hereby releases the other from all liability for, consequential damages.

13.6

Exemption of Landlord from Liability .  Tenant hereby agrees that Landlord shall not be liable for injury to Tenant's business or any loss of income therefrom, including without limitation from any relocation by Landlord of Tenant within the Building (except as expressly provided otherwise in Section 20), or except to the extent caused by the gross negligence or willful misconduct of Landlord or the Landlord Related Parties (but subject to the waiver of subrogation set forth in Section 13.4) for damage to the goods, wares, merchandise or other



 

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property of Tenant, any Tenant Related Parties or any of Tenant’s contractors, subcontractors or invitees, or any other person in, on or about the Premises or Building, nor shall Landlord be liable for injury to the person of Tenant, any Tenant Related Parties or any of Tenant’s contractors, subcontractors or invitees, whether any such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air conditioning or lighting fixtures, or from any other cause, and whether the said damage or injury results from conditions arising upon the Premises or any other cause, and whether the said damage or injury results from conditions arising upon the Premises or Building, or from other sources or places, and regardless of whether the cause of such injury or the means of repairing the same is inaccessible to Landlord or Tenant, unless and to the extent such injury, loss of income or damage is caused by the gross negligence (but subject to the terms and conditions of the waiver of subrogation set forth in Section 13.4) or willful misconduct of Landlord or the Landlord Related Parties.  Landlord shall not be liable for any damages arising from any act or neglect of any other tenant, if any, of the Building.  Tenant hereby assumes all risk of damage to property or injury to persons in, on or about the Premises or the Building from any cause and Tenant hereby waives all claims in respect thereof against Landlord, excepting and to the extent where said damage arises out of the gross negligence (but subject to the terms and conditions of the waiver of subrogation set forth in Section 13.4) or willful misconduct of Landlord or the Landlord Related Parties.

14.

DAMAGE OR DESTRUCTION

14.1

Option to Terminate Lease .  If the Premises or any part thereof shall be damaged or destroyed by fire or other casualty, Landlord shall promptly and diligently: (i) deliver to Tenant within ninety (90) days after the date Landlord learns of the necessity for repairs as a result of damage a good faith estimate (the "Damage Repair Estimate") of the time needed to repair the damage caused by such casualty (the "Completion Date"), which assessment shall be based on the opinion of a contractor reasonably selected by Landlord and experienced in Comparable Buildings; and (ii) subject to reasonable delays for insurance adjustment or other matters beyond Landlord's reasonable control, and subject to all other terms of this Article 14, the base, shell and core of the Building (which includes the Building Systems and Building Structure) to substantially the same condition as existed prior to the casualty, except for modifications required by law, the holder of a mortgage on the Property, or any other modifications to the Common Areas deemed desirable by Landlord, provided that access to the Premises and any common area restroom serving the Premises shall not be materially impaired.  Notwithstanding any other provision of this Lease, and provided that as of the date of the fire or other casualty all insurance that Tenant is required to maintain pursuant to Section 13.2 of this Lease is in full force and effect, then upon the occurrence of any damage to the Premises resulting from fire or other casualty, Tenant shall promptly assign to Landlord all insurance proceeds payable to Tenant pursuant to the insurance maintained by Tenant under Section 13.2, and, provided that Tenant has made such assignment and not otherwise exercised its right to terminate this Lease pursuant to this Article 14, Landlord shall return the Improvements and Alterations to their original condition; provided that if the cost of such repair by Landlord exceeds the amount of insurance proceeds actually received by Landlord from the insurance proceeds assigned by Tenant to Landlord, the cost of such repairs shall be paid by Tenant at its expense to Landlord throughout the course of Landlord's repair of the damage.  Notwithstanding the foregoing, Landlord may, at its option and subject to Section 14.2 hereof, elect not to rebuild and/or restore the Premises and/or Building and instead terminate this Lease by giving notice to Tenant within ninety (90) days after Landlord receives actual notice of the fire or other casualty, and thereupon the Lease Term shall expire by lapse of time upon the ninetieth (90 th ) day after such notice is given  but Landlord may so elect only if the Building shall be damaged by fire or other casualty or cause, whether or not the Premises are affected, and one or more of the following conditions is present:  (i) repairs cannot reasonably be completed within two hundred forty (240) days after the date Landlord learns of the necessity for repairs as the result of damage (when such repairs are made without the payment of overtime or other premiums); or (ii) the holder of any mortgage on the Building or ground or underlying lessor with respect to the Building shall require that the insurance proceeds or any portion thereof be used to retire the mortgage debt, or shall terminate the ground or underlying lease, as the case may be.  Upon electing to repair or restore, Landlord may proceed with reasonable dispatch to perform the necessary work, and the Base Rent to be paid until such work is completed shall be abated in proportion of the Premises being unusable for a period equal to one day or less and in no event



 

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shall Landlord be liable for any loss of profits or income.  Notwithstanding the foregoing, there shall be no abatement, apportionment or reduction in the rental obligations of Tenant if the damage or destruction is caused by the gross negligence or willful misconduct of Tenant or any of the Tenant Related Parties.

14.2

Obligation to Repair or Restore .  If and only if all of the following circumstances exist with respect to damage or destruction to the Premises and the Building, Landlord may not elect to terminate the Lease as provided in Section 14.1 hereof but rather must elect to repair or restore the Premises:

(a)

There is no fault or neglect on the part of Tenant, any Tenant Related Parties or any of Tenant’s contractors, subcontractors or invitees, which contributed to the damage or destruction, or if the loss did not result from any equipment owned, loaned, leased to or rented by Tenant, which contributed to the damage or destruction;

(b)

The damage or destruction to the Building is less than fifty percent (50%) of the replacement cost thereof as reasonably determined by Landlord;

(c)

Landlord is fully insured (or would have been insured if Landlord maintained the insurance required by this Lease) for the casualty that causes the damage or destruction and the insurance proceeds have been made available therefor by the holder or holders of any mortgages or deeds of trust covering the Premises;

(d)

The date of the damage or destruction is greater than one year prior to the Expiration Date of this Lease or any renewal, modification or extension thereof; and

(e)

Less than sixty percent (60%) of the rentable square feet of the Building is so damaged or destroyed, as determined by Landlord, regardless of the percentage of rentable square feet of the Premises, which may be damaged or destroyed.


14.3

Fault of Tenant .  Landlord may exercise its option to repair or restore as described in Section 14.1 even if such damage or destruction is due to the gross negligence or willful misconduct of Tenant, any Tenant Related Parties or any of Tenant’s contractors, or subcontractors, but in such event Landlord's election to repair or restore shall be without prejudice to any other rights and remedies of Landlord under this Lease, and there shall be no apportionment or abatement of any rent of any kind and Landlord shall not be liable for any other loss to Tenant of any nature whatsoever.


14.4

Obligations of Tenant .  Except as provided in this Section 14, none of Tenant's obligations under this Lease shall be affected by any damage or destruction of the Premises by any cause whatsoever.  Tenant hereby expressly waives any and all rights it might otherwise have under any law, regulation or statute, which would act to modify the provisions of the immediately preceding sentence.


14.5

Termination by Tenant .  In the event that more than fifty percent (50%) of rentable square feet of the Premises shall be damaged or destroyed by fire or other casualty not caused by the gross negligence or willful misconduct of Tenant, any Tenant Related Parties or any of Tenant’s contractors or subcontractors, such that in Tenant's good faith business judgment the remainder of the Premises is no longer suitable for Tenant's permitted use, then Tenant may terminate this Lease by giving notice to the Landlord within thirty (30) business days after the date of the fire or other casualty, and upon such termination the rental obligations of Tenant shall be duly apportioned as of the date of such fire or other casualty, provided, however, that Tenant shall have no right to terminate the Lease under this Section 14.5 if Tenant is in monetary or material non-monetary default of any of its obligations under the Lease after any applicable notice and cure period as of the date of the fire or other casualty.  If Landlord does not elect to terminate this Lease pursuant to Landlord's termination right in Section 14.1 above, and the Damage Repair Estimate indicates that repairs cannot be completed within two hundred forty (240) days after the date that Landlord learns of the necessity of the repairs, Tenant may elect, not later than thirty (30) days after Tenant's receipt of the Damage Repair Estimate, to terminate this Lease by written notice to Landlord effective as of the date specified in Tenant's notice.  If this Lease has not been previously terminated and if, as of the date that is thirty (30) days prior to the Completion Date, such repairs are not yet completed, Landlord shall deliver to Tenant a certificate (the "Updated Completion Date Certificate") from the contractor who is performing



 

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the repairs certifying the date, in such contractor's best good faith judgment, by which the repairs will be completed (the "Updated Completion Date") and if the Updated Completion Date extends for at least ninety (90) days beyond the Completion Date (which ninety (90) day period will be extended on a day for day basis as a result of Force Majeure delays), then the sole remedy of Tenant shall be the right to either (a) deliver a termination notice to Landlord, which will mean that this Lease shall thereupon terminate and shall be of no further force and effect, or (b) agree to extend the Completion Date to the Updated Completion Date which is set forth in the Updated Completion Date Certificate.  Failure of Tenant to make an election as set forth in (a) or (b) above in writing within ten (10) business days after receiving the Updated Completion Date Certificate shall be deemed to constitute Tenant's agreement to extend the Completion Date to the Updated Completion Date set forth in the Completion Date Certificate.  If the Completion Date is so extended, Landlord's right to request Tenant to elect to either terminate or further extend the Updated Completion Date shall remain and shall continue to remain, with the response period set forth above, until the repairs are completed or until this Lease is terminated.  Furthermore, if the damage is material and occurs during the last twelve (12) months of the Lease Term (or any applicable Renewal Term), or if the damage to the Improvements and Alterations is not fully covered by Tenant's insurance policies, then in either such case, Tenant shall be entitled to terminate this Lease by written notice to Landlord.  

15.

CONDEMNATION .

If the whole of the Premises are taken under any public or private power of eminent domain, or sold by Landlord under the threat of the exercise of such power (all of which is herein referred to as "condemnation"), or if any material portion of the Building is so condemned so that it would not be practical, in Landlord's good faith judgment, to continue to maintain the Building, this Lease shall terminate as of the date of the condemning authority takes title or possession, whichever occurs first.  If only a portion of the Premises are so condemned, Tenant shall have the right, if a material portion of the Premises are so condemned or access to the Premises and parking facility is substantially impaired so as to render the Premises impractical for Tenant's permitted use (as determined by Tenant in its good faith business discretion) and Landlord is unable to provide Tenant with an alternative, but reasonably comparable access to the Premises and parking facility, to terminate this Lease as of the date the condemning authority takes title or possession, whichever occurs first, by Tenant giving written notice of such termination to Landlord not later than ninety (90) days after such date, but should Tenant elect not to so terminate this Lease, this Lease shall remain in full force and effect as to the portion of the Premises not so taken, and Tenant's rental obligations shall be reduced proportionately to reflect the number of rentable square feet remaining in the Premises, and such rental reduction, if any, shall take effect as of the date on which the condemning authority takes title or possession, whichever first occurs.  If repairs or restorations to that portion of the Premises not so taken are reasonably deemed necessary by Landlord to render such portion reasonably suitable for the permitted use, as mutually agreed by Landlord and Tenant, Landlord shall perform such work at its own cost and expense but in no event shall Landlord be required to expend any amount greater than the amount received by Landlord as compensation for the portion of the Premises taken by the condemnator.  All awards for the taking of any part of the Premises or any payment made under the threat of the exercise of power of eminent domain shall be the property of Landlord, whether made as compensation for diminution of value of the leasehold or for the taking of the fee or as severance damages.  No award for any partial or entire taking shall be apportioned, and Tenant hereby assigns to Landlord any award which may be made in such taking or condemnation, together with any and all rights of Tenant now or hereafter arising in or to the same or any part thereof, except that any award or other compensation made for any taking is subject to the rights of the first mortgagee up to the amount of its lien and of any junior mortgagee, as may be permitted by the first mortgagee, up to the full amount of such junior lien; provided, however, that Tenant shall be entitled to any award for loss of or damage to Tenant's trade fixtures and removable personal property, moving expenses, goodwill and/or for the interruption of or damage to Tenant's business.

16.

ASSIGNMENT AND SUBLETTING

16.1

Landlord's Consent Required .  Except as otherwise expressly provided in Section 16.5 of this Lease, Tenant shall not voluntarily or by operation of law assign, transfer, mortgage, sublet or otherwise transfer or encumber all or any part of Tenant's interest in this Lease or in the Premises without Landlord's prior written consent, which consent shall not be unreasonably withheld or delayed.  Except as otherwise set forth in Section 16.5 hereof, any attempted



 

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assignment, transfer, mortgage, encumbrance or subletting without such consent shall be void and shall constitute a breach of the Lease.  As a condition of obtaining Landlord's consent, Tenant shall submit to Landlord together with its request for consent the name of the proposed assignee or subtenant, the non-proprietary terms and provisions of the proposed transaction, a description of the portion of the Premises to be transferred (the "Subject Space") and such other information as to the identity of the proposed assignee's or subtenant's business and its financial responsibility and standing as Landlord may reasonably require (the "Transfer Notice"), together with the effective date of the proposed transfer which shall be at least thirty (30) days after the date of submission of such information to Landlord.  The parties hereby agree that (a) Landlord shall either grant or deny consent within ten (10) business days after receipt of the Transfer Notice and such other non-proprietary information reasonably required by Landlord relating to the proposed Transfer, and (b) Landlord's failure to consent to any proposed transfer under this Section 16.1 shall not be deemed unreasonably withheld if (i) the occupancy resulting from such transfer will not be consistent with the general character of the business carried on by the tenants of the Building or violates any rights or options held by any other tenant of the building (and of which Tenant has received notice); or (b) the proposed occupant pursuant to the transfer does not have the financial strength and stability to perform its rental obligations in light of the responsibilities involved under the transfer on the date consent is requested and the fact that Tenant will not be released from its obligations under this Lease; or (c) any proposed sublease does not incorporate this Lease in its entirety so as to be subject to this Lease's provisions, or any such sublease does not require the sublessee to attorn to Landlord at Landlord's option in the event of a default by Tenant under this Lease; or (d) if Tenant does not execute an agreement with Landlord requiring Tenant to pay to Landlord, as Additional Rent, fifty percent (50%) of any Transfer Premium received by Tenant from its transferee.  "Transfer Premium" shall mean all rent, additional rent or other consideration payable by such Transferee in excess of the Base Rent and Additional Rent payable by Tenant under this Lease on a per rentable square foot basis if less than all of the Premises is transferred, after deducting the reasonable expenses incurred by Tenant for (i) any changes, alterations and improvements to the Premises in connection with the transfer, and (ii) any brokerage commissions and attorneys' fees incurred by Tenant in connection with the transfer, (iii) marketing expenses, tenant improvement allowances, alterations and cash concessions granted by Tenant in connection with the transfer, (iv) Base Rent paid from the date Tenant vacated the Subject Space and notified Landlord that it was so vacating until the date Tenant is entitled to receive Base Rent from the assignee or subtenant, and (v) the unamortized cost (amortized over the Lease Term with interest imputed at eight percent (8%) per annum) of the initial Improvements or any Alterations to the Subject Space paid for by Tenant (collectively, the "Subleasing Costs").  "Transfer Premium" shall also include, but not be limited to, key money and bonus money paid by Transferee to Tenant in connection with such Transfer, and any payment in excess of fair market value for services rendered by Tenant to the transferee or for assets, fixtures, inventory, equipment, or furniture transferred by Tenant to the transferee in connection with such transfer.  

16.2

No Release of Tenant .  Regardless of Landlord's consent, no subletting or assignment or other transfer described in Section 16.1 shall release Tenant of Tenant's obligation or alter the primary liability of Tenant to pay the rent and to perform all other obligations to be performed by Tenant hereunder.  Consent to one assignment, subletting or other transfer shall not be deemed consent to any subsequent act.  In the event of default by any assignee of Tenant or any successor of Tenant in the performance of any of Tenant’s obligations under this Lease, Landlord may proceed directly against Tenant without the necessity of exhausting remedies against such assignee or successor.  Landlord may consent to subsequent assignments, subletting, or transfers of this Lease or amendments or modifications to this Lease with assignees or successors of Tenant without notifying Tenant and without obtaining its consent thereto and such action shall not relieve Tenant of liability under this Lease.  Notwithstanding anything in this Lease to the contrary, Landlord shall have no obligation to grant consent to any transfer as defined in Section 16.1 if Tenant is in monetary or material non-monetary default under this Lease after any applicable notice and cure period at the time the request for consent is made or at any time thereafter through the effective date of the transfer.  In addition, Tenant acknowledges that its intent in executing this Lease is to occupy the Premises and not to make speculative usage of the Premises, and therefore Landlord shall have no obligation whatsoever to consent to any proposed transfer if the proposed occupant is an existing tenant in the Building and there exists space in the Building available for direct lease from Landlord, which space is reasonably sufficient to satisfy the existing tenant's or occupant's requirements or a potential tenant with whom Landlord is then (as of the time of Tenant’s request for Landlord’s consent) negotiating



 

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regarding the lease of space in the Building of comparable size and configuration to the space being offered by Tenant.  In the event that Tenant proposes to assign its entire interest in this Lease (other than in connection with Permitted Disposition pursuant to Section 16.5 hereof), Landlord shall have the right, exercisable by notice in writing to Tenant ("Recapture Notice") which Recapture Notice must be delivered, if at all, within fifteen (15) business days after receipt of the request by Tenant for Landlord’s consent to such assignment, to terminate this Lease upon execution of an agreement between Landlord and the proposed assignee, provided that Landlord shall not have any such termination right if Tenant withdraws such request within ten (10) days after Tenant's receipt of the Recapture Notice from Landlord.  

16.3

Attorneys’ Fees and Administrative Fees .  In the event Tenant shall request the consent of Landlord to any assignment, subletting or transfer Tenant shall pay Landlord administrative fee of Five Hundred Dollars ($500) incurred in connection with giving such consent.

16.4

Right to Collect Rent .  The acceptance of rent by Landlord from any person other than Tenant shall not be deemed to be a waiver by Landlord of any provision of this Lease.  If the Premises are sublet or occupied by anyone other than Tenant and Tenant is in default hereunder, or this Lease is assigned by Tenant, then, in any such event, Landlord may collect rent from the assignee, subtenant or occupant and apply the net amount collected to the rent reserved in this Lease, but no such collection shall be deemed a waiver of the covenant in this Lease against assignment and subletting or the acceptance of such assignee, subtenant or occupant as tenant, or a release of Tenant from further performance of the covenants contained in this Lease.

16.5

Permitted Disposition .  Notwithstanding anything to the contrary contained in this Lease, Tenant shall have the right from time to time during the initial Lease Term and any Renewal Term without Landlord’s consent or approval to make a Permitted Disposition (as herein defined) provided that each of the following conditions precedent to the proposed Permitted Disposition must first be satisfied as reasonably determined by Landlord:  (i) as of the effective date of the proposed Permitted Disposition, Tenant shall not then be in monetary or material non-monetary default of this Lease after the giving of all applicable notices and the expiration of all applicable grace or cure periods under this Lease; and (ii) Tenant shall, within a reasonable period after the Permitted Disposition, give Landlord written notice of the Permitted Disposition, which notice shall include the name of the assignee or subtenant, the non-proprietary terms and provisions of the Permitted Disposition and the effective date of the Permitted Disposition and the assignment or sublease agreement executed by Tenant and the assignee or subtenant (which assignment or sublease agreement shall expressly provide that the use of the Premises by the assignee or subtenant shall conform to the Permitted Use, the assignee or subtenant shall comply with all of the provisions of this Lease [provided, that in the event of a sublease, said subtenant shall only be required to comply with the provisions of this Lease applicable to the subleased portion of the Premises that do not pertain to the payment of Rent], and in the case of an assignment, the assignee expressly assumes and agrees to pay and perform all of Tenant’s obligations under this Lease accruing from and after the effective date of the Permitted Disposition).  For purposes of this Section 16.5, the term "Permitted Disposition" means, provided all conditions precedent set forth in this Section 16.5 have been satisfied, the right to assign this Lease, or sublease all or any portion of the Premises, without Landlord’s consent or approval to (a) a Tenant Affiliate (as herein defined), provided Tenant remains liable to pay the rent and to perform all other obligations to be performed by Tenant hereunder; or (b) a Successor Entity (as herein defined) (provided that if the effective date of the Permitted Disposition occurs during any Renewal Term only, the net worth (as determined from the Successor Entity’s most recent annual audited financial statements and quarterly unaudited financial statements prior to the transfer) of such Successor Entity must be equal to or greater than the net worth of Tenant as of the Effective Date – it being agreed such net worth requirement shall not apply to any Permitted Disposition occurring during the initial Lease Term).  For purposes of this Section 16.5, the term "Tenant Affiliate" means any corporation, limited liability company, partnership or other entity which (A) is Tenant's parent corporation, (B) is a wholly owned subsidiary of Tenant (C) is a corporation or other entity of which Tenant or Tenant's parent corporation owns or the shareholders of Tenant or Tenant's parent corporation or the owners of the ownership interests other than capital stock of Tenant or Tenant's parent corporation own in excess of fifty percent (50%) of the outstanding capital stock or other ownership interest or (D) controls, is controlled by or under common control with Tenant or its parent.  For purposes of this Section 16.5, the term "Successor Entity" means any corporation,



 

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limited liability company, partnership or other entity (I) that has merged or consolidated with or into Tenant; (II) into which Tenant has merged or consolidated or that purchased of a majority of all of the capital stock or other ownership interests or assets of Tenant or Tenant's parent corporation; (III) that was created from any restructuring or reorganization of Tenant; or (IV) which acquires all or substantially all of the assets or stock of Tenant or (V) that as the result of a change of the domicile of Tenant or the reincorporation of Tenant in another jurisdiction, shall own all or substantially all of the assets of Tenant.  Notwithstanding anything to the contrary contained in this Article 16 of the Lease, "assignment," "transfer," "mortgage," "sublet"  shall not include the following direct or indirect transfers of ownership in Tenant, each of which may occur without being subject to Sections 16.1, 16.2, and 16.3:  (1) any sale or issuance of Tenant's stock in connection with a public offering, (2) any transfer of Tenant's stock traded on a recognized, domestic, national securities exchange or over-the-counter, (3) a pledge or transfer of Tenant's stock as security for any bona-fide debt financing of Tenant's business operations, or (4) Tenant's raising of additional operating capital.

17.

DEFAULTS; REMEDIES

17.1

Defaults .  The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant:


(a)

Tenant abandons the Premises and thereafter fails (following the expiration of any applicable notice and cure period) to fully and timely pay all Base Rent, and Additional Rent; or


(b)

The failure by Tenant to make any payment of Base Rent, Additional Rent or any other payment required to be made by Tenant hereunder, as and when due under this Lease; provided, however, that notwithstanding anything to the contrary contained herein: (i) as to the first two (2) failures by Tenant in any period of twelve (12) consecutive calendar months to make any such payment when due hereunder, Landlord shall give Tenant written notice of such default and an opportunity to cure such default by making such payment to Landlord no later than five (5) business days after Tenant’s receipt of such written notice, and (ii) as to the third and any subsequent failure by Tenant in such period of twelve (12) consecutive calendar months to make any such payment when due hereunder, Landlord shall have no obligation whatsoever to give Tenant any notice, either written or oral, or opportunity to cure such subsequent default or defaults under this Lease; or


(c)

The failure by Tenant to observe or perform any of the covenants, conditions or provisions of this Lease to be observed or performed by Tenant, other than described in paragraph (b) above, where such failure shall continue for a period of thirty (30) days after written notice thereof from Landlord to Tenant; provided, however, that if the nature of Tenant's default as determined by Landlord is such that more than thirty (30) days are reasonably required for its cure, then Tenant shall not be deemed to be in default if Tenant commences such cure as soon as possible within such thirty (30) day period and thereafter diligently prosecutes such cure to completion, and in any case completes such cure within thirty (30) days after the aforesaid written notice; or


(d)

(i)  The insolvency of Tenant or the execution by Tenant of an assignment for the benefit of creditors, or the convening by Tenant of a meeting of its creditors, or any class thereof, for the purposes of effecting a moratorium upon or extension or composition of its debts; or the failure of Tenant to generally pay its debts as they mature; or (ii) the filing by or for reorganization or arrangement under any law relating to bankruptcy (unless in the case of a petition filed against Tenant, the same is dismissed within sixty (60) days); or (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where possession is not restored to Tenant within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Premises or of Tenant's interest in this Lease, where such seizure is not discharged within thirty (30) days.


17.2

Remedies in Default .  (a) In the event of any such default by Tenant after notice and expiration of any applicable cure periods, Landlord shall have the right at any time thereafter, with or without notice or demand and without limiting Landlord in the exercise of any right or remedy which Landlord may otherwise have by reason of such default or breach, to



 

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terminate this Lease at its option or to re-enter and at its option to attempt to re-let without terminating this Lease and remove all persons and property from the Premises in accordance with legal process and without being deemed guilty of trespass.

(b)

If Tenant shall fail to remove any effects which it is entitled to remove from the Premises upon the termination of this Lease, or any extension or renewal hereof, or upon a re-entry by Landlord following a default by Tenant after expiration of applicable cure periods, Landlord, at its option, may remove the same and store or dispose of the such effects without liability for loss or damage thereto, and Landlord, at its option, without notice, may sell such effects, or any of them, at private or public sale and without legal process, for such price or consideration as Landlord may obtain, and apply the proceeds of such sale upon any amounts due under this Lease from Tenant to Landlord, and upon the actual out-of-pocket and verifiable expenses incidental to the removing, cleaning the Premises, selling such effects, and any other expense, rendering the surplus, if any, to Tenant; provided, however, in the event the proceeds of such sale or sales are insufficient to reimburse Landlord, Tenant shall pay such deficiency within thirty (30) days after demand (together with back-up documentation).  Tenant acknowledges and agrees that any such disposition of Tenant's property in the above-described manner by Landlord shall be deemed to be commercially reasonable and that no bailment shall be created by Landlord's exercise of any of its rights under this subparagraph (b).

(c)

Should Landlord elect to re-enter, as herein provided, or should it take possession pursuant to legal proceedings, or pursuant to any notice provided for by law, it may make such alterations, additions, improvements (provided the same are customary with general office use) and repairs as may be necessary in order to re-let the Premises, and may but need not (except as otherwise expressly provided herein) re-let the Premises or any part thereof for such term or terms (which may be for a term extending beyond the Lease Term) and at such rental or rentals and upon such other terms and conditions as Landlord may reasonably determine to be advisable; upon each such re-letting all rentals received by Landlord; shall be applied (i) first to the payment of any costs and expenses of such re-letting, including brokerage fees and reasonable attorneys’ fees and the cost of such alterations, additions, improvements and repairs; (ii) second, to the payment of Base Rent and Additional Rent due and unpaid hereunder, and the residue, if any, shall be held by Landlord and applied in payment of future rent as the same may become due and payable hereunder provided that Tenant shall have no right to claim any interest in all or any portion of such residue and if the rent and other charges paid or to be paid to Landlord by any new tenant pursuant to any re-letting exceed the monetary obligations of Tenant, Tenant shall have no right to claim any interest in all or any portion of such excess.  If such rental received from such re-letting during any month be less than that to be paid during the month by Tenant hereunder, Tenant shall pay any such deficiency to Landlord, and such deficiency shall be calculated and paid monthly on the date on which the rent would have been payable hereunder if possession had not been retaken.  If, during the existing Lease Term, the premises covered thereby include other premises not part of the Premises, a fair apportionment of the rent received from such re-letting and the expenses incurred in connection therewith as provided aforesaid will be made in determining the net proceeds from such re-letting and the expenses incurred in connection therewith as provided aforesaid will be made in determining the net proceeds from such re-letting, and any rent concessions will be equally apportioned over the term of the new lease.  Landlord shall in no event be liable in any way whatsoever for failure to re-let the Premises for any reason, or in the event the Premises are re-let, for failure to collect the rent thereof under such re-letting.  Notwithstanding the foregoing or anything to the contrary contained in this Article 17, upon termination of Tenant's right to possess the Premises, Landlord shall make reasonable efforts to mitigate its damages and relet the Premises.  In attempting to mitigate its damages, Landlord will conclusively be deemed to have done so if Landlord lists the Premises with a real estate broker or agent (which may be affiliated with Landlord) and considers all written proposals to lease the Premises received by such broker or agent; provided, however, that in no event shall Landlord (a) be obligated to expend funds for finish-out requested by a prospective tenant which are in excess of market finish out allowances (as determined by Landlord in its reasonable business judgment) unless Landlord reasonably believes that the excess rent Landlord will receive and the credit of the prospective tenant support such a decision; (b) be required to give preference to the Premises over other spaces then available for lease in the Building; or (c) be required to agree to allow an existing tenant of the Building to relocate from its existing space to all or any portion of the Premises.  In attempting to relet or actually reletting the Premises, Landlord will be free to enter into a direct lease with the proposed replacement tenant and Landlord shall not be acting as Tenant's agent, although the proceeds Landlord



 

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actually receives from a replacement tenant for any time period will be credited against Tenant's obligations for the same time period.  Tenant will not be entitled to any additional credit (for example, if Landlord receives amounts during a particular time period in excess of Tenant's obligations for the same time period, and Landlord will not be required to credit such excess against Tenant's obligations for any other time period).  At such time, if any, as Landlord relets the Premises, Tenant shall pay to Landlord monthly the difference between the monthly rent and other amounts due under this Lease for such calendar month and the amount actually collected by Landlord for such month from the replacement tenant to whom Landlord has re-let the Premises or any portion thereof.  Tenant agrees to pay Landlord on demand any deficiency that may arise by reason of such reletting.  If it is necessary for Landlord to bring an action against Tenant to collect such deficiency, Landlord has the right to allow such deficiencies to accumulate and to bring an action on several or all of the accrued deficiencies at one time.  Any such action shall not prejudice in any way Landlord’s right to bring a similar action against Tenant for any subsequent deficiency or deficiencies.  No such reentry or taking possession of the Premises by Landlord, or any acts pursuant thereto, shall be construed as an election on its part to terminate this Lease unless a written notice of such termination is given to Tenant by Landlord.  No notice from Landlord under this Lease or under any applicable forcible entry and detainer or eviction statue or similar law shall constitute an election by Landlord to terminate this Lease unless such notice specifically so states.  Notwithstanding any such re-letting without termination, Landlord may at any time thereafter elect to terminate this Lease for such previous breach.

(d)

Should Landlord at any time terminate this Lease for any default or breach, in addition to any other remedies it may have, it may recover from Tenant all damages it may incur by reason of such default or breach, including the cost of recovering the Premises, reasonable attorneys’ fees, and including the worth at the time of such termination of the excess, if any, of the amount of rent and such other charges as are required to be paid by Tenant under the provisions of this Lease for the remainder of the stated Lease Term over the then reasonable rental value of the Premises for the remainder of the stated Lease Term, all of which amounts shall be immediately due and  payable from Tenant to Landlord; provided, however, that if the then reasonable rental value of the Premises exceeds the value of the rent and other charges required to be paid by Tenant under this Lease as aforesaid, Tenant shall have no right to claim any interest in all or any portion of such excess.  In determining the rent which would be payable by Tenant hereunder, subsequent to default, the annual rent for each year of the unexpired Lease Term shall be equal to the average annual Base Rent and Additional Rent paid or payable by Tenant from the Commencement Date of this Lease to the time of default, or during the preceding three (3) full calendar years, whichever is shorter; and

(e)

Each of the remedies set forth hereinabove in this Section 17 shall not be exclusive, but rather shall be considered cumulative with any other legal or equitable remedy now or hereafter available to Landlord under the laws or judicial decisions of the state in which the Premises are located.  To the extent such waiver is permitted by law, the parties waive trial by jury in any action or proceeding brought in connection with this Lease.  Landlord may from time to time, at Landlord's election, bring suit or suits for the recovery of the amount of damages set forth hereinabove, and nothing herein shall be deemed to require Landlord to await the date whereon this Lease or the Lease Term would have expired had there been no event of default.  Nothing contained in this Lease shall limit or prejudice the right of Landlord to prove and obtain as liquidated damages in any bankruptcy, insolvency, receivership, reorganization or dissolution proceeding an amount equal to the maximum allowed by any statue or rule of law governing such proceeding and in effect at the time when such damages are to be proved, whether or not such amount be greater, equal to or less than the amounts recoverable, either as damages or rent, referred to in any of the preceding provisions of this Section.

17.2

Default by Landlord .  Landlord shall not be in default unless Landlord fails to perform obligations required of Landlord within thirty (30) days after written notice by Tenant to Landlord and to the holder of any first mortgage or deed of trust covering the Premises, specifying the manner in which Landlord has failed to perform such obligation; provided however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for performance as determined by Landlord, then Landlord shall not be in default if Landlord commences performance within such thirty day period and thereafter diligently and continuously prosecutes the same to completion.  Upon any such uncured default by Landlord and any mortgagee which received notice of such default, Tenant may exercise any of its rights provided in law or at equity; provided, however: (a) Tenant shall have no right to offset or abate



 

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rent in the event of any default by Landlord under this Lease, except to the extent offset rights are specifically provided to Tenant in this Lease; (b) Tenant's rights and remedies hereunder shall be limited to the extent (i) Tenant has expressly waived in this Lease any of such rights or remedies and/or (ii) this Lease otherwise expressly limits Tenant's rights or remedies; and (c) Landlord will not be liable for any consequential damages.  Tenant's remedies upon Landlord's default are further limited by Section 18.3 and 25.2 below.

17.3

Late Charges .  Tenant hereby acknowledges that late payment by Tenant to Landlord of rent and other sums due hereunder will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain.  Such costs include, but are not limited to, processing and accounting charges and late charges which may be imposed on Landlord by the provisions of any mortgage or trust deed covering the Premises.  Accordingly, if any installment of Base Rent, Additional Rent or any other sum due from Tenant shall not be received by Landlord or Landlord's designee within ten (10) days after paid amount is due, then Tenant shall pay to Landlord a late charge equal to five percent (5%) of such overdue amount or the sum of Two Hundred Fifty Dollars ($250.00), whichever is greater.  The parties hereby agree that such late charge represents a fair and reasonable estimate of the cost Landlord will incur by reason of late payment by Tenant and is in addition to interest due under Section 25.4.  Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such overdue amount, or prevent Landlord from exercising any of the other rights and remedies granted hereunder.  As to the first two (2) failures by Tenant in any period of twelve (12) consecutive calendar months to make any payment within ten (10) days after written notice that such payment is due, Tenant shall not be obligated to pay a late charge with respect thereto if Landlord actually receives the entire payment from Tenant within fifteen (15) days after written notice that such payment became due; provided, however, that notwithstanding the foregoing, Tenant shall pay Landlord a late charge, as provided herein, with respect to (i) each subsequent failure by Tenant in such period of twelve (12) consecutive calendar months to make a payment within ten (10) days after such payment became due; and (ii) as to each of the first two (2) failures by Tenant in any period of twelve (12) consecutive calendar months to make any payment within ten (10) days after written notice that such payment became due, if Tenant fails to make such payment within fifteen (15) days after written notice that such payment became due.  Landlord shall not be required to give written notice of Tenant's fails to make such payment more than two (2) times in any period of twelve (12) consecutive calendar months before such late charge shall apply.

18.

RIGHTS OF MORTGAGEES .

18.1

Subordination .  As used throughout this Section 18, the term "mortgagee" shall refer to the holder of a Mortgage or deed of trust or ground lease affecting the Premises.  Subject to Tenant's receipt of an appropriate SNDA(s) as set forth below, this Lease and the rights of Tenant hereunder shall be and are hereby made subject and subordinate to the provisions of any ground lease, mortgage or deed of trust affecting the Premises, and to each advance made or hereafter to be made under the same, and to all renewals, modifications, consolidations and extensions thereof and all substitutions therefor.  Subject to Tenant's receipt of an appropriate SNDA(s) as set forth below, this Section 18 shall be self-operative and no further instrument of subordination shall be required.  However, in confirmation of the provisions of this Section 18, Tenant shall execute and deliver promptly any commercially reasonable certification or instrument that Landlord or any mortgagee may request in form and substance reasonably acceptable to Tenant, and failing to do so within ten (10) business days after written demand, will be deemed to be a default by Tenant.  If any mortgagee or ground lessor shall elect to have this Lease prior to the lien of its mortgage, deed of trust or ground lease, and shall give written notice thereof to Tenant, this Lease shall be deemed prior to such mortgage, deed of trust or ground lease, whether this Lease is dated prior or subsequent to the date of such mortgage, deed of trust or ground lease or the date of recording thereof.  Subject to Tenant's receipt of an appropriate SNDA(s) as set forth below, Tenant shall and does hereby agree to attorn to any mortgagee or successor in title and to recognize such mortgagee or successor as its Landlord in the event any such person or entity succeeds to the interest of Landlord.  Notwithstanding any other provision of this Lease, (i) in the event that any mortgagee or its respective successor in title shall succeed to the interest or Landlord hereunder, the liability of such mortgagee or successor shall exist only so long as it is the owner of the Building, or any interest therein, or is the tenant under such ground lease; and (ii) Landlord shall obtain, within thirty (30) days after full execution of this Lease and the execution of the Guaranty by Guarantor, a subordination, non-disturbance and attornment agreement in the form attached hereto as Exhibit J (the "SNDA")



 

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promulgated by the existing mortgagee of the Building with such revisions therein as are mutually satisfactory to the mortgagee and Tenant.  Landlord represents to Tenant that, as of the date of this Lease, the mortgage holder identified in Exhibit H is the only holder of a mortgage or deed of trust or ground or underlying lease encumbering the Property.  If Landlord fails to provide Tenant with the SNDA within such thirty (30) day period, then Tenant may terminate this Lease at any time prior to earlier to occur of Tenant's receipt of the SNDA or the date that is sixty (60) days after full execution of this Lease and the execution of the Guaranty by Guarantor.  Furthermore, Tenant's subordination of this Lease to any future ground or underlying lease of the Real Property or to the lien of any mortgage or deed of trust is conditioned upon such holder or lessor, as the case may be, entering into an SNDA with Tenant in commercially reasonable form which provides that upon any foreclosure sale or deed in lieu thereof or any termination of any such ground or underlying lease, the purchaser or ground lessor shall accept and be bound by this Lease (including any off-set rights) and not disturb Tenant's occupancy of the Premises, so long as no default by Tenant exists after expiration of any applicable cure period.  Tenant shall not be responsible for any fees charged by any lender or ground lessor for preparing, negotiating or entering into an SNDA.

18.2

Mortgagee's Consent to Amendments .  No assignment of this Lease and no agreement to make or accept any surrender, termination or cancellation of this Lease and no agreement to modify so as to reduce the rent, change the term, or otherwise materially change the rights of Landlord under this Lease, or to relieve Tenant of any obligation or liability under this Lease, shall be valid unless consented to by Landlord's mortgagees of record, if such is required by the mortgagees, in writing and Landlord shall be solely responsible for obtaining such consent and shall warrant to Tenant that such consent has been obtained as part of the documentation entered into by Landlord and Tenant memorializing such assignment, agreement, surrender, or termination of or amendment to this Lease.  No Base Rent, Additional Rent, or any other charge shall be paid more than ten (10) days prior to the due date thereof and payments made in violation of this provision (except to the extent that such payments are actually received by a mortgagee) shall be a nullity as against any such mortgagees of record, and Tenant shall be liable for the amount of such payments to such mortgagees.

18.3

Mortgagee's Right to Cure .  No act or failure to act on the part of Landlord which would entitle Tenant under the provisions of this Lease, or by law, to be relieved of Tenant's obligations hereunder or to terminate this Lease, shall result in a release or termination of such obligations or termination of this Lease unless (a) Tenant shall have first given written notice of Landlord's act of failure to act to Landlord's mortgagees of record (but only to the extent Tenant agreed to provide Landlord's mortgagee notice pursuant to the SNDA), if any, specifying the act or failure to act on the part of Landlord which could or would give basis to Tenant's rights; and (b) such mortgagees, after receipt of such notice, have failed or refused to correct or cure the condition complained of within a reasonable time thereafter provided that nothing contained in this Section shall be deemed to impose any obligation on any such mortgagees to correct or cure any condition (except to the extent agreed upon by Tenant and Landlord's mortgagee pursuant to the SNDA).  

19.

NOTICES .  

Except as provided in Section 17.2(a) and 22, whenever under this lease provision demand is made for any notice or declaration of any kind, or where it is deemed desirable or necessary by either party to give or serve any such notice, demand or declaration to the other party, it shall be in writing and (i) served either personally. (ii) sent by certified United States mail, return receipt requested, postage prepaid or (iii) sent by a nationally recognized courier service ( e.g., Federal Express) for next day delivery, addressed either to the address set forth in Section 1.1 or 1.11(b), or to such other address as may be given by a party to the other by proper notice hereunder, or, in the case of notices to Tenant, to the to the address set forth in Section 1.11(c) or to such other address as may be given by Tenant to the Landlord by proper notice hereunder.  The date of personal delivery (as evidenced by such evidence of service as provided for in such rules) or the date on which the certified mail is deposited with the United States Postal Service or when actually received or refused by the party to whom sent if delivery by courier shall be the date on which any proper notice hereunder shall be deemed given.

20.

[INTENTIONALLY DELETED] .

21.

QUIET POSSESSION .



 

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As long as Tenant is not in default hereunder following any applicable notice and cure periods, Tenant shall, Tenant shall have quiet possession of the Premises for the entire Lease Term, subject to all of the provisions of this Lease without interference by any persons lawfully claiming by or through Landlord.

22.

NO OPTIONS .

Except and only to the extent expressly provided in the Addendum attached to this Lease, Tenant shall have no option or right whatsoever to renew or extend the Lease Term or any option to lease, right of first offer to lease, or right of first refusal to lease any other space Building.  Tenant hereby acknowledges and agrees that it has no option or right to purchase the Premises, the Building or other property of Landlord and no option or right of first refusal to purchase the Premises, the Building or other property of Landlord.

23.

INTENTIONALLY OMITTED .


24.

HAZARDOUS SUBSTANCES .

As used in this Lease, the term "Hazardous Substances" means pollutants, contaminants, toxic or hazardous wastes, hazardous materials or any other substances, the use and/or the removal of which is required or the use of which is restricted, prohibited or penalized by an "Environmental Law", which term shall mean any federal, state or local law, ordinance or other statute of a governmental or quasi-governmental authority relating to pollution or protection of the environment.  Tenant hereby agrees that (i) no activity will be conducted on the Premises that will produce any Hazardous Substances, except for such activities that are part of the ordinary course for Tenant's business activities (the "Permitted Activities") provided such Permitted Activities are conducted in accordance with all Environmental Laws and have been approved in advance in writing by Landlord; Tenant shall be responsible for obtaining any required permits and paying any fees and providing any testing required by any governmental agency; (ii) the Premises will not be used in any manner for the storage of any Hazardous Substances except for the storage of such materials that are used in the ordinary course of Tenant's business ("Permitted Materials") provided such Permitted Materials are properly stored in a manner and location meeting all Environmental Laws; Tenant shall be responsible for obtaining any required permits and paying any fees and providing any testing required by any governmental agency; (iii) no portion of the Premises will be used as a landfill or a dump; (iv) Tenant will not install any underground tanks of any type; (v) Tenant will not allow any surface or subsurface conditions to exist or come into existence as a result of Tenant's actions or the conduct of Tenant's business on the Premises that constitute or with the passage of time may constitute a public or private nuisance; (vi) Tenant will not permit any Hazardous Substances to be brought in or onto the Premises, except for the Permitted Materials described below, or hereafter approved in writing by Landlord and if so brought or found located thereon, the same shall be immediately removed, with proper disposal, and all required cleanup procedures shall be diligently undertaken pursuant to all Environmental Laws.  If Landlord in good faith believes that Tenant has violated the provisions of this Article 24 relating to Hazardous Substances, then Landlord or Landlord's representative shall have the right but not the obligation to enter the Premises upon not less than forty-eight (48) hours' prior written notice to Tenant (which notice shall detail the basis for Landlord's good faith belief that Tenant has violated the provisions of this Article 24) for the purposes of inspecting the storage, use and disposal of Permitted Materials to ensure compliance with all Environmental Laws.  Should it be ultimately determined that such Permitted Materials are being improperly stored, used, or disposed of, then Tenant shall immediately take such corrective action as soon as reasonably practicable to the extent required by Environmental Laws, and if Tenant fails to do so within ten (10) days after receipt of a second written notice from Landlord notifying Tenant of such failure, then Landlord shall have the right to perform such work and Tenant shall promptly reimburse Landlord for any and all out-of-pocket and commercially reasonable costs associated with such work to the extent required by Environmental Laws.  If at any time during or after the Lease Term, the Premises are found to be so contaminated or subject to such conditions, and such contamination is caused by Tenant or the conduct of its business on the Premises, then Tenant shall diligently institute proper and thorough cleanup procedures to the extent required by Environmental Laws at Tenant's sole cost.  Tenant hereby indemnifies, saves and holds Landlord, its property manager and their respective successors and assigns harmless from all and against claims, demands, actions, liabilities, costs,



 

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expenses, damages and obligations of any nature arising, including, without limitation, court costs and reasonable attorneys’ fees and expenses, from or as a result of the use of Hazardous Materials in the Premises by Tenant, EVEN IF SUCH CLAIMS, ACTIONS, LIABILITIES, COSTS, EXPENSES, DAMAGES OR OBLIGATIONS RESULT FROM THE NEGLIGENCE (BUT NOT THE NEGLIGENCE OR WILLFUL MISCONDUCT) OF LANDLORD OR ANY LANDLORD RELATED PARTIES .  The foregoing indemnification and the responsibilities of Tenant shall survive the termination or expiration of this Lease.

PERMITTED MATERIALS:  storage in the Premises of customary office and cleaning supplies in reasonable quantities used by Tenant in the ordinary course of operating and cleaning its office space.

Landlord hereby represents that, to Landlord's current actual knowledge there are no Hazardous Materials, nor any mold or asbestos-containing materials, present in the Premises and/or the Building’s common areas in violation of applicable Environmental Laws as of the date hereof.   Additionally, Landlord shall, at no cost to Tenant (and excluded from Operating Expenses), remove or remediate to the extent required by Environmental Laws any Hazardous Materials introduced to the Building by Landlord after the date of this Lease in violation of applicable Environmental Laws.  Landlord indemnifies Tenant for, from and against any breach by Landlord of the representations, warranties and obligations stated in this grammatical paragraph, and agrees to defend and hold Tenant harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities, or losses which arise during or after the Lease Term as a result of such breach.  Tenant shall not be responsible for and the indemnification and hold harmless obligations set forth in this Article 24 above shall not include any costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal, or restoration work required by any federal, state, or local governmental agency or political subdivision pursuant to any Environmental Law because of Hazardous Material present in the soil or ground water on or under the Premises and/or Building arising from conditions existing on, under or about the Premises, the Building, or adjacent property on or before the Commencement Date.  

25.

GENERAL PROVISIONS .

25.1

Estoppel Certificate .  (a) Tenant shall at any time upon not less than ten (10) days prior written notice from Landlord, execute, acknowledge and deliver to Landlord a statement in writing:  (i) certifying that this Lease is unmodified and in full force and effect (or, if modified, stating the nature of such modification, identifying the instruments of modification and certifying that this Lease, as so modified, is in full force and effect), and the date to which the Base Rent, Additional Rent and other charges are paid in advance, if any, and (ii) acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder, or specifying such defaults, if any, which are claimed.  Any such statement may be conclusively relied upon by any prospective purchaser, encumbrancer or other transferee of the Premises.  Landlord hereby agrees to provide Tenant with an estoppel certificate signed by Landlord, containing the same types of information as set forth above and within the same period of time, with such changes as are reasonably necessary to reflect that the estoppel certificate is being granted and signed by Landlord to Tenant, rather than from Tenant to Landlord or a lender.

(b)

Tenant's failure to deliver such statement within such time shall be a default; and

(c)

If Landlord desires to finance or refinance the Premises or the Building, or any part thereof, Tenant hereby agrees to deliver to Landlord and/or to any lender designated by Landlord a copy of the most recent financial statement of Tenant generated in the ordinary course of Tenant's business; provided, however, that such current financial statement must have been generated by Tenant within eighteen (18) months of the request. In the event Tenant is publicly traded and its financial statements are available on-line, this Section 251(c) shall not apply.  All such financial statements shall be received by Landlord and its lender in confidence and shall be used only for the purposes herein set forth.

25.2

Landlord's Interest and Liability .  The term "Landlord" as used herein shall mean only the owner or owners at the time in question of the fee title or a tenant's interest in a ground lease of the real property on which the improvements comprising the Building are situated.  In the event of any transfer of such title or interest, Landlord herein named (and in case of any



 

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subsequent transfers the then grantor), shall be relieved from and after the date of such transfer of all liability as respects Landlord's obligations thereafter to be performed, provided that (i) any funds in the hands of Landlord or the then grantor at the time of such transfer in which Tenant has an interest shall be delivered to the grantee and (ii) such transferee shall expressly assume all obligations of Landlord hereunder.  The obligations contained in this Lease to be performed by Landlord shall, except as aforesaid, be binding on Landlord's successors and assigns only during their respective periods of ownership.  Anything to the contrary elsewhere in this Lease notwithstanding, Tenant shall look solely to the estate and property of Landlord in the Building for the satisfaction of Tenant's remedies for the collection of a judgment (or other judicial process) requiring the payment of money by Landlord in the event of any default or breach by Landlord with respect to any of the terms, covenants and conditions of the Lease to be observed and/or performed by Landlord, and no other property or assets of Landlord shall be subject to levy, execution or other enforcement procedure for the satisfaction of Tenant's remedies.

25.3

Severability .  The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.

25.4

Interest on Past Due Obligations; Certified Funds .  Except as may expressly be provided in this Lease to the contrary, any amount due to Landlord not paid by Tenant as and when due, where such failure to pay continues after any required notice was given and any applicable grace or cure period has expired shall bear interest at the rate of three percent (3%)  per annum greater than the Wall Street Journal Prime Rate ( i.e. , the United States Prime Rate as listed in the Eastern print edition of the Wall Street Journal) ("Interest Rate"), as the same may fluctuate from and after the date on which the payment was first due through the date on which the payment is made in full, provided, however, that the payment of such interest shall in no event exceed the highest rate allowed under applicable law.  Payment of such interest shall not excuse or cure any default by Tenant under this Lease.  

25.5

Time of The Essence .  Time is of the essence in the performance by Tenant of its obligations hereunder.

25.6

Captions .  Any captions contained in this Lease are not a part hereof, are for convenience only, and are not to be given any substantive meaning in construing this Lease.

25.7

Entire Agreement .  This Lease contains the entire agreement and understanding between the parties hereto.  There are no oral understandings, terms, or conditions, and neither party has relied upon any representations, express or implied, not contained in this Lease.  All prior understandings, terms, or conditions are deemed merged in this Lease.  No modification of this Lease shall be binding unless such modification shall be in writing and signed by the parties hereto.  

25.8

Waivers .  No failure by either party to insist upon the strict performance of any agreement, term, covenant or condition hereof or to exercise any right or remedy consequent upon a breach thereof, and no acceptance of full or partial rent or the continuance of any such breach, shall constitute a waiver of any such breach of such agreement, term, covenant or condition or a relinquishment of the right to exercise such right or remedy.  No agreement, term, covenant or condition hereof to be performed or complied with by either party, and no breach thereof, shall be waived, altered or modified except by a written instrument executed by the other party.  No waiver of any breach shall affect or alter this Lease, but each and every agreement, term, covenant or condition hereof shall continue in full force and effect with respect to any other then existing or subsequent breach thereof.  Notwithstanding any termination of this Lease, the same shall continue in force and effect as to any provisions of the Lease, including remedies, which require or permit observance or performance of Landlord or Tenant subsequent to termination.

25.9

Recording .  Tenant shall not record this Lease.  Any such recordation by Tenant shall be a breach of this Lease.

25.10

Determinations by Party .  Whenever in this Lease a party hereto is to make any determination or decision, such party shall make its determination or decision in the exercise of its reasonable discretion and judgment.



 

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25.11

Cumulative Remedies .  No remedy or election by Landlord or Tenant hereunder shall be deemed exclusive, but shall wherever possible be cumulative with all other remedies at law or in equity to which Landlord or Tenant. as the case may be may be entitled.

25.12

Covenants and Conditions .  Each provision of this Lease performable by Tenant shall be deemed both a covenant and a condition.

25.13

Binding Effect; Choice of Law .  Subject to any provisions hereof restricting assignment, subletting or transfer by Tenant and subject to the provisions of Section 25.2, this Lease shall bind the parties, their personal representatives, heirs, successors and assigns.  This Lease shall be governed by the laws of the state where the Premises are located.

25.14

Attorneys’ Fees .  In the event of litigation relating to this Lease, the prevailing party shall be entitled to recover from the losing party any costs or reasonable attorneys’ fees incurred by the prevailing party in connection with such litigation.  

25.15

Landlord's Access .  Landlord and Landlord's agents, representatives and designees shall have the right at all reasonable times and upon at least twenty four (24) hours’ notice to Tenant to enter the Premises subject to Tenant's reasonable safety and security requirements as reasonably necessary for the purpose of inspecting the same, showing the same to prospective purchasers, tenants, lenders or other transferees (but only within the last twelve (12) months of the Lease Term with respect to prospective tenants), making such alterations, repairs, improvements or additions to the Premises or to the Building if necessary to comply with current Building codes or other applicable laws, or for structural alterations, repairs or improvements to the Building.  Notwithstanding anything to the contrary contained in this Section 25.15, Landlord may enter the Premises at any time to (i) perform services required of Landlord under this Lease; (ii) perform any covenants of Tenant which Tenant fails to perform in accordance with Article 17 of this Lease; or (iii) to address an emergency.  Notwithstanding the foregoing, Landlord agrees to exercise its rights under this Section 25.15 at such times and in such manner as to minimize the impact on Tenant's business and/or operations in the Premises.  If Tenant has designated in writing to Landlord any Security Areas (as defined in Section 9.1(e) hereof), Landlord shall not enter the Security Areas absent an emergency threatening safety or property.  Landlord shall have no obligation to perform janitorial services in any area so designated as a Security Area.  Landlord shall have the right to use reasonable force to gain access to such Security Area in an emergency threatening safety or property; however, Landlord shall otherwise enter such Security Area only on two (2) business days' prior notice to Tenant and only after providing Tenant with the opportunity to have a representative of Tenant present as an escort.

25.16

Auctions .  Tenant shall not conduct any auction (other than internet auctions that are part of Tenant's customary business operations), liquidation sale, or going out of business sale in, on or about the Premises.

25.17

Merger .  The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord, terminate all or any existing sub tenancies or may, at the option of Landlord, operate as an assignment to Landlord of any or all of such subtenancies.

25.18

Authority .  Tenant represents to Landlord that (i) each individual executing this Lease on behalf of Tenant is authorized to do so on behalf of Tenant, (ii) this Lease is binding upon and enforceable against Tenant, and (iii) Tenant is duly organized and legally  existing in the state of Texas and is qualified to do business in the state of Texas.  Landlord represents to Tenant that (a) each individual executing this Lease on behalf of Landlord is authorized to do so on behalf of Landlord, (b) this Lease is binding upon and enforceable against Landlord, (c) Landlord is duly organized and legally existing in the state of Texas and is qualified to do business in the state of Texas, and (d) Landlord owns a fee simple interest in the Building.

25.19

[INTENTIONALLY DELETED].

25.20

Landlord’s Broker and Tenant’s Broker .  The parties hereto acknowledge that the Landlord’s Broker and the Tenant’s Broker identified in Section 1.18 were the sole real estate brokers or agents that represented Landlord and Tenant in connection with this Lease whose commissions shall be payable by Landlord pursuant to a separate agreement, and that no real



 

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estate leasing commissions or other fees or compensation are owed by Landlord to any other real estate brokers or agents whatsoever.  Tenant and Landlord each represents and warrants to the other that (i) except for Landlord’s Broker and Tenant’s Broker, such party has not dealt with any real estate broker, agent or salesperson in connection with this Lease; and (ii) no real estate broker, agent or salesperson other than Landlord's Broker or Tenant’s Broker, as the case may be represented such party in connection with this Lease.  Tenant and Landlord each hereby indemnifies and holds the other party harmless against any claim, demand, action, cause of action, lawsuit, damages, judgment, settlement, cost, expense or other obligation of any kind, including, but not limited to, reasonable attorneys’ fees and court costs incurred by the other party if Tenant’s and/or Landlord's, as the case may be, representation and warranty contained in this Section 25.20 is untrue or inaccurate.

25.21

Guarantor .  The Guarantor identified in Section 1.20 of this Lease shall have the obligations set forth in the Guaranty attached hereto as Exhibit G.

25.22

Governing Law .  This lease shall be governed by and construed in accordance with the laws of the state in which the Building is located.

25.23

Joint and Several Liability .  If two or more individuals, corporations, partnerships or other business associates (or any combination of two or more thereof) shall sign this Lease as Tenant, the liability of each such individual, corporation, partnership or other business association to pay rent and perform all other obligations hereunder shall be deemed to be joint and several, and all notices, payments and agreements given or made by, with or to any one of such individuals, corporations, partnerships or other business associations shall be deemed to have been given or made by, with or to all of them.  In like manner, if Tenant shall be a partnership or other business association, the members of which are, by virtue of statute or federal law, subject to personal liability, the liability of each such member is joint and several.

25.24

No Joint Venture .  Any intention to create a joint venture or partnership relation between the parties hereto is hereby expressly disclaimed.

25.25

Force Majeure.  Any prevention, delay or stoppage due to strikes, lockouts, labor disputes, acts of God, inability to obtain services, labor, or materials or reasonable substitutes therefor, governmental actions, civil commotions, fire or other casualty, and other causes beyond the reasonable control of the party obligated to perform, except with respect to the obligations imposed with regard to Rent and other charges to be paid by Tenant or Landlord's obligation to pay the Tenant Improvement Allowance or other payments to Tenant pursuant to this Lease (collectively, the "Force Majeure"), notwithstanding anything to the contrary contained in this Lease, shall excuse the performance of such party for a period equal to any such prevention, delay or stoppage and, therefore, if this Lease specifies a time period for performance of an obligation of either party, that time period shall be extended by the period of any delay in such party's performance caused by a Force Majeure.

25.26

Americans with Disabilities Act of 1990 .  Landlord shall be responsible for, and shall bear all costs and expenses associated with, any and all alterations to the Building’s common areas, which alterations may be required by the Americans with Disabilities Act of 1990 (the "ADA"), for the accommodation of disabled individuals.  Except as otherwise provided in the Tenant Work Letter and elsewhere in this Lease, Tenant shall be responsible for, and shall bear all costs and expenses associated with, any and all alterations to the Premises, which alterations may be required by the ADA for the accommodation of disabled individuals who may be employed from time to time by Tenant, or any disabled customers, clients, guests, or invitees or sublessees.  

The parties hereto have executed this Lease on the first page hereof on the dates specified immediately below their respective signatures.

(signature page follows)



 

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IN WITNESS WHEREOF, each of Landlord and Tenant has executed this Lease on the date set forth opposite its signature below.


LANDLORD :

GARDEN CENTURA, L.P., a Texas limited partnership

 

 

By:

Regis Realty Prime, LLC (Authorized Agent)

 

 

 

 

 

 

Date:  February __, 2012

By:

/s/Scott Porter

______________________________

 

 

Scott Porter, Senior Vice President

 

 

 

TENANT :

DALLAS COPART SALVAGE AUTO

 

AUCTIONS LIMITED PARTNERSHIP, a Texas limited liability company

 

 

 

By:

Copart of Texas, Inc., a Texas corporation, its general partner

 

 

 

 

 

 

 

 

 

Date:  February __, 2012

By:

/s/ Paul A. Styer

______________________________

 

 

Paul A. Styer, Secretary





 

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ADDENDUM
TO
OFFICE LEASE

THIS ADDENDUM (this "Addendum") is made as of February 3, 2012, by and between GARDEN CENTURA, L.P. ("Landlord") and DALLAS COPART SALVAGE AUTO AUCTIONS LIMITED PARTNERSHIP ("Tenant").

WHEREAS, Landlord and Tenant are the parties to that certain Office Lease (the "Lease") to which this Addendum is attached, providing for the lease of the Premises by Landlord to Tenant; and

WHEREAS, the parties desire to amend the Lease.

NOW THEREFORE, in consideration of the mutual promises and obligations contained herein, the adequacy and sufficiency of which is hereby acknowledged, Landlord and Tenant hereby amend the Lease and covenant and agree as follows:

1.

Defined Terms .  Unless otherwise defined in this Addendum, each of the defined terms used in this Addendum has the same meaning given to such term in the Lease.

2.

Renewal Option .  Provided that on the date of the Renewal Notice (as herein defined) or as of the last day of the then current Lease Term, no monetary or material non-monetary default by Tenant has occurred under the Lease and is continuing after any applicable notice is given and any applicable cure period has expired, Tenant shall have the option of further extending the Lease Term (the "Option to Renew") for up to two (2) additional consecutive renewal terms (each, a "Renewal Term") of sixty (60) months each, subject to and in accordance with the following terms and conditions:  (i) Tenant shall exercise each Option to Renew by giving Landlord written notice (the "Renewal Notice") of Tenant’s exercise of the Option to Renew no earlier than eighteen (18) months and no later than nine (9) months prior to the expiration of the then current Lease Term; (ii) the applicable Renewal Term, if any, shall commence on the day immediately following the last day of the then current Lease Term; (iii) the Base Rent rate applicable to the Renewal Term shall be equal to 95% of the then Fair Market Rate (as herein defined) for the then Premises as determined pursuant hereto; and (iv) if Tenant does not timely exercise the Option to Renew for a Renewal Term, then all of Tenant’s rights to renew or extend the Lease Term shall automatically terminate and be null and void and of no further force or effect.  As used herein, the term "Fair Market Rate" means the amount per rentable square foot of the then Premises that a willing, comparable renewal tenant would pay and a willing, comparable landlord would accept in an arm's length transaction, for delivery on or about the expiration of the then current Lease Term for comparable renewal, non-expansion space in the Building and in other comparable buildings located in the Dallas North Tollway submarket of Dallas, Texas, similarly improved, and taking into account the location, size, quality and age of the respective buildings, any allowances to be provided (such as construction allowances, moving allowances, tenant finish allowances, rent credits, etc. – it being understood that the parties have agreed that Tenant shall be entitled to an actual tenant improvement allowance determined as a component of Fair Market Rent, as opposed to simply taking into consideration the value of such an allowance and also that Landlord and Tenant have agreed that any tenant improvements in the Premises which were paid for and installed by Tenant shall not be included in the consideration of Fair Market Rent), rent abatements, and other rent concessions and occupancy cost comparisons and taking into account the other terms and provisions hereof and any other relevant considerations.  In no event shall the Fair Market Rate impute a value upon leasehold improvements or fixtures installed by Tenant at its expense.  Landlord shall have the obligation to determine the Fair Market Rate and other terms and conditions of the Renewal Term, and to notify Tenant thereof, within thirty (30) days after Landlord’s receipt of the Renewal Notice ("Option Rent Notice").  If Tenant does not accept Landlord’s determination of 95% of the Fair Market Rate of the Renewal Term within thirty (30) days after Tenant’s receipt of Landlord’s Option Rent Notice, or if Landlord fails to timely provide its Option Rent Notice, then Tenant may either (a) retract the Renewal Notice, whereupon Tenant's right to exercise the Option to Renew hereunder shall automatically terminate and be null and void and of no further force or effect, and the Lease shall automatically expire on the expiration of the then current Lease Term; or (b) notify Landlord in writing of Tenant’s appointment of a licensed real estate agent who shall have been active over the five (5)



 


ADDENDUM
TO
OFFICE LEASE
-1-








year period ending on the date of such appointment in the leasing of office space in Comparable Buildings (an "Expert") and the identity and contact information of such Expert.  Upon receipt of written notice from Tenant of the appointment, identity and contact information of an Expert, Landlord shall, within fifteen (15) days thereafter, appoint its own Expert and furnish Tenant with the identity and contact information of such Expert.  The instructions of the two (2) Experts appointed by the parties hereunder shall be to agree to a value of 95% of Fair Market Rate based on the criteria contained in this Paragraph 2.  If the value of 95% of Fair Market Rate determined by one Expert is within five percent (5%) of the value of 95% of Fair Market Rate determined by the other Expert, then the average of the two values of 95% of Fair Market Rates shall be the value of 95% of Fair Market Rate hereunder.  However, if the two (2) Experts are unable to agree within ten (10) business days on the value of 95% of  Fair Market Rate, and the value of 95% of Fair Market Rate determined by one Expert is more than five percent (5%) of the value of 95% of Fair Market Rate determined by the other Expert, then the two (2) Experts will jointly appoint a third Expert (meeting the qualifications above), who shall be subject to the written approval of Landlord and Tenant.  If the two (2) Experts jointly appoint a third Expert who is not approved in writing by either or both of Landlord and Tenant, then the two (2) Experts shall continue to jointly appoint a third Expert until Landlord and Tenant both approve such third Expert and Tenant shall be permitted to extend the then Expiration Date of this Lease by one day for each day of delay, at the same Base Rent as is payable for the last month of the then current Term).  The value of 95% of Fair Market Rate will thereupon be determined by the third Expert based on the criteria contained in this Paragraph 2 and such determination shall be conclusive and binding on Landlord and Tenant unless it is higher than the higher of the first two (2) determinations, in which case, the middle of the three (3) determinations will control for all purposes.  If Tenant is not willing to accept the value of 95% of Fair Market Rental determined in accordance with the foregoing determination process, then Tenant shall have the right, exercisable by giving Landlord written notice no later than ten (10) business days after the conclusion of the determination process and reimbursing to Landlord all of Landlord’s commercially reasonable out-of-pocket costs of the determination not to exceed $10,000.00, to retract the Renewal Notice, whereupon Tenant's right to exercise the Option to Renew hereunder shall automatically terminate and be null and void and of no further force or effect, and this Lease shall automatically expire at the end of the then current Lease Term (as the same may have been extended as set forth above).  NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THIS PARAGRAPH 2, (1) Tenant's rights pursuant to this Paragraph 2 are personal to Tenant and non-transferable except pursuant to an assignment in accordance with the provisions of the Lease to a permitted transferee pursuant to a permitted disposition as set forth in Section 16.5 of the Lease or other assignee receiving assignment of all of Tenant’s interest in and under the Lease and assuming all of Tenant’s obligations accruing under the Lease from and after the date of such assignment; (2) Tenant’s rights pursuant to this Paragraph 2 shall automatically terminate if Tenant fails to timely deliver the Renewal Notice to Landlord; and (3) Tenant’s rights pursuant to this Paragraph 2 shall automatically terminate if, on the date Tenant delivers an Renewal Notice to Landlord or as of the last day of the then current Lease Term, a monetary or material non-monetary default by Tenant has occurred under the Lease and is continuing after any applicable notice was given and any applicable grace or cure period has expired.

3.

Lobby Directory and Standard Suite Signage .  Landlord shall at its expense furnish to Tenant (i) one (1) line in the Building’s lobby directory for Tenant’s corporate identity; and (b) one (1) Building standard suite identification sign at the main entry door to the Premises.  Landlord prescribes a uniform pattern of identification signs for tenants of the Building to be installed on the outside of or next to the doors leading into their respective leased premises, and other than such identification signs, Tenant shall not install, paint, display, inscribe, place or affix, or otherwise attach, any sign, fixture, advertisement, notice, lettering or direction on any part of the interior or exterior of the Building (except for the exterior signage permitted pursuant to Paragraph 5 hereof).

4.

Right of First Refusal .  Provided that, as of the date of any ROFR Notice (as herein defined), no monetary or material non-monetary default by Tenant has occurred under the Lease and is continuing after any applicable notice was given and any applicable grace or cure period has expired, and further expressly subject to Landlord’s commitments to other tenants of the Building pursuant to leases entered into prior to the date of this Lease, including any express renewal option and/or expansion option contained in such existing lease agreement between Landlord and a tenant of the Building, if Landlord receives during the Lease Term (including,



 


ADDENDUM
TO
OFFICE LEASE
-2-








any Renewal Term) a bona fide written offer (the "Third Party Proposal") from a prospective tenant to lease all or any portion of the rentable square feet on the fifth (5 th ) floor of the Building that becomes available for direct lease from Landlord (the "ROFR Space"), then Landlord shall so inform Tenant by written notice (a "ROFR Notice"),  stating the approximate location and configuration of the space to be leased (the "Offer Space"), an estimate of the approximate amount of rentable square feet of the Offer Space, the rental rate or rates and the other charges to be paid by the prospective lessee, the duration of the lease term, and the other terms and conditions of the proposed lease all as set forth in the Third Party Proposal (collectively, the "ROFR Terms").  Tenant shall have five (5) business days (the "Acceptance Period") after receipt of a ROFR Notice to elect to lease ALL (but not less than all) of the Offer Space at the rental rate or rates, for the entire duration of the lease term (except that if as of the date Tenant exercises its right of first refusal to lease such Offer Space there is five (5) years or more remaining on the then current Lease Term, then Tenant shall have the right to have the term of Tenant's lease of such Offer Space run co-terminous with the then remaining Lease Term of this Lease and if, as a result of Tenant's election, the term of the Tenant's lease of the Offer Space is less than the term of the lease of the Offer Space as set forth in the Third Party Proposal, then notwithstanding the ROFR Terms, the amount of Landlord's contribution of any improvement allowance to the cost of design and construction of leasehold improvements in the Offer Space and/or any free rent concessions payable under the ROFR Terms shall be an amount equal to the product of each such amount (as applicable) calculated on a per rentable square foot basis within the Offer Space as set forth in the ROFR Terms multiplied by a fraction, the numerator of which is the number of full calendar months remaining in the then current Lease Term as of the commencement date of Tenant's lease of the Offer Space and the denominator of which is the number of full calendar months of the term of the lease of the Offer Space as set forth in the original ROFR Terms) and otherwise subject to the identical ROFR Terms contained in the ROFR Notice and consistent with the Third Party Proposal by delivering to Landlord, before the Acceptance Period expires, written notice of Tenant’s exercise of its right of first refusal to lease, which notice shall be executed by a duly authorized officer of Tenant; provided, however, that notwithstanding the foregoing, if Tenant timely exercises its right of first refusal to lease such Offer Space and Tenant does not, within thirty (30) days (which thirty (30) day period will be extended by delays caused by the acts or omission of Landlord) after receipt from Landlord of an amendment to the Lease adding such Offer Space to the Premises on the ROFR Terms, execute and deliver such amendment to Landlord, then unless a good faith dispute exists between Landlord and Tenant relating to whether the proposed Amendment accurately memorializes the ROFR Terms Tenant’s acceptance thereof shall thereupon automatically terminate and be null and void and of no force or effect, whereupon Landlord shall thereupon be free to lease such Offer Space to the prospective lessee on ROFR Terms contained in such ROFR Notice but subject to the Second Chance Notice as further provided herein.  If Tenant does not elect to lease such Offer Space before the Acceptance Period expires, then Landlord shall thereupon be free to lease such Offer Space to the prospective lessee on the ROFR Terms contained in such ROFR Notice.  Notwithstanding the foregoing, Tenant's right of first refusal shall continue to apply as to the Offer Space described in the First Refusal Notice in the event that either (i) Landlord does not lease the Offer Space to any such other party within six (6) months after the expiration of the Acceptance Period or (ii) Landlord does lease the Offer Space to such tenant, but such Offer Space once again becomes available during the Lease Term (or Renewal Term).  In addition, if Tenant elects not to exercise its right of first refusal to lease the Offer Space or otherwise Tenant's acceptance thereof automatically terminates as set forth above and during the six (6) month period following such election Landlord intends to enter into a lease for the Offer Space upon ROFR Terms which are materially more favorable to a third (3 rd ) party tenant than those ROFR Terms set forth in the ROFR Notice, then Landlord shall first deliver written notice to Tenant ("Second Chance Notice") providing Tenant with the opportunity to lease the Offer Space described in the ROFR Notice (as the same may have been modified by the materially more favorable ROFR Terms) on such materially more favorable ROFR Terms.  Tenant's failure to elect to lease the Offer Space upon such materially more favorable ROFR Terms by written notice to Landlord within five (5) business days after Tenant's receipt of such Second Chance Notice from Landlord shall be deemed to constitute Tenant's election not to lease such Offer Space upon such materially more favorable ROFR Terms, in which case Landlord shall be entitled to lease such Offer Space to any third (3 rd ) party on terms no more favorable to the third (3 rd ) party than those set forth in the Second Chance Notice.  For purposes of this Paragraph 4, the ROFR Terms shall be considered "materially more favorable" if the financial terms, the size of the Offer Space or the length of the lease term, described in the ROFR Notice change by more than ten percent (10%).  NOTWITHSTANDING ANYTHING TO THE CONTRARY



 


ADDENDUM
TO
OFFICE LEASE
-3-








CONTAINED IN THIS PARAGRAPH 4, (i) Tenant's right of first refusal to lease and other rights pursuant to this Paragraph 4 are expressly subject to Landlord’s commitments to other tenants of the Building pursuant to leases entered into prior to the date of this Lease, including any express renewal option and/or expansion option contained in an existing lease agreement between Landlord and a tenant of the Building and Tenant's rights pursuant to this Paragraph 4 shall be subordinate, junior and inferior to such rights of other tenants of the Building provided that such rights existed prior to the date of the Lease; (ii) Tenant's right of first refusal to lease all or any part of the ROFR Space pursuant to this Paragraph 4 shall automatically expire on the last day of the initial Lease Term, and Landlord has no obligation under this Paragraph 4 to lease any of the ROFR Space to Tenant during any Renewal Term; (iii) Tenant's right of first refusal to lease all or any part of the ROFR Space pursuant to this Paragraph 4 is personal to Tenant and non-transferable except pursuant to an assignment in accordance with the provisions of the Lease to a permitted transferee pursuant to a permitted disposition as set forth in Section 16.5 and shall automatically terminate if Tenant enters into any other assignment of the Lease or any of Tenant’s rights under the Lease to any other person or entity or if Tenant subleases the Premises or any portion thereof to any other person or entity; and (iv) Tenant's right of first refusal to lease all or any part of the Offer Space pursuant to this Paragraph 4 shall automatically terminate if, as of the date of any ROFR Notice, a monetary or material non-monetary default by Tenant has occurred under the Lease and is continuing after any applicable notice was given and any applicable grace or cure period has expired.


5.

Exterior Signage .  Subject to the provisions of this Paragraph 5, Tenant shall have the right to install and maintain in place throughout the Lease Term (and any Renewal Term) the "Copart" name or logo depicted on one (1) sign located on the North side of the Building’s exterior in the location depicted on Exhibit I attached to the Lease, and on one (1) sign located on the exterior of the South side of the parking garage that serves the Building, in the location depicted on Exhibit I, for so long as Tenant leases and occupies at least 30,000 rentable square feet in the Building pursuant to the provisions of the Lease.  Landlord represents that it has previously approved Tenant’s signage criteria contained in Exhibit I attached hereto.  NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN THE LEASE OR THIS PARAGRAPH 5, (i) excluding Tenant’s signage criteria contained in Exhibit I, which Landlord already approved, the location, appearance, color, size, specifications and elements of Tenant’s exterior signage remain subject to Landlord’s prior written approval; (ii) the installation of Tenant’s exterior signage shall not compromise the structural integrity of the Building, including, but not limited to, the curtain wall or load-bearing members of the Building; (iii) the installation of Tenant’s exterior signage shall be performed by a sign contractor mutually and reasonably acceptable to Landlord and Tenant at Tenant’s expense following Tenant’s review and written approval of the contractor’s bid for the installation work; (iv) Tenant’s exterior signage shall conform to all governmental laws, regulations, ordinances and codes and all deed restrictions, covenants, conditions and restrictions, and building association requirements, restrictions and regulations affecting or encumbering the Building and/or the Property from time to time (Tenant hereby acknowledges that, prior to the date of the Lease, Landlord’s Broker provided Tenant with a copy of such deed restrictions, covenants, conditions and restrictions, and building association requirements, restrictions and regulations affecting or encumbering the Building and/or the Property); and (v) Tenant shall pay all costs of maintaining Tenant’s exterior signage throughout the Lease Term and any Renewal Term.  Tenant shall pay for all costs of removing Tenant’s exterior signage from the Building and the garage (including, but not limited to, restoring the exterior surface of the Building and the garage to their condition existing immediately prior to the installation of Tenant’s exterior signage, normal wear and tear and damage by casualty excepted) (1) if the Lease is terminated or expires or if Tenant’s right to possession of the Premises is terminated; (2) if the Lease is assigned to any person or entity other than by a Permitted Disposition; or (3) if Tenant no longer leases and occupies at least 30,000 rentable square feet in the Building pursuant to the provisions of the Lease.  Nothing contained in this Paragraph 5 limits, restricts, prohibits or otherwise impairs Landlord from installing or displaying on the Building or on the garage other exterior signage, whether of Landlord or one or more third parties.  


6.

Satellite Dish .  Landlord shall provide Tenant with reasonable access from the Premises to the Building’s roof area (subject to the provisions of this Paragraph 6) and the Building’s telecommunications hub and chase way for purposes of Tenant’s connecting and operating Tenant’s telecommunication system in the Premises.  Tenant shall be entitled to use at no additional charge a portion of the Building's roof designated by Landlord for the installation,



 


ADDENDUM
TO
OFFICE LEASE
-4-








operation and maintenance of not more than one (1) 18-inch satellite dish provided that (i) Tenant furnishes Landlord with a reasonably detailed specification of such satellite dish and other communications equipment and associated cabling and conduit that Tenant desires to install and operate on the Building's roof; and (ii) Landlord approves (which consent shall not be withheld unless a Design Problem exists or Tenant’s proposed installation interferes with or impairs any existing telecommunications systems or equipment located on the roof) such satellite dish, equipment, cabling and conduit for installation on the roof, whereupon Landlord, as licensor, and Tenant, as licensee, shall execute Landlord’s standard form Roof Area License Agreement subject to reasonable modifications required by Tenant.  Notwithstanding anything to the contrary contained in the Roof Area License Agreement executed by Landlord and Tenant, it shall automatically terminate or expire simultaneously with any termination or expiration of the Lease.  At the expiration or earlier termination of this Lease, Tenant shall at its expense remove any satellite dish and other communications equipment and associated cabling and conduit installed and/or operated by or on behalf of Tenant on the Building's roof and, using Landlord’s roof contractor (provided the fees charged by such contractor are commercially competitive with the fees charged by comparable contractors performing similar services in Comparable Buildings and further provided that Landlord's contractor can accommodate Tenant's reasonable construction schedule for such removal), Tenant shall make any necessary roof repairs caused by the installation or removal of such dish, equipment, cabling or conduit.  In the event of any conflict between the provisions of this Paragraph 6 and any Roof Area License Agreement executed by Landlord and Tenant, the provisions of this Paragraph 6 shall govern and control for all purposes.  The satellite dish and other communications equipment and associated cabling and conduit shall be installed at Tenant's sole cost and expense in a manner to preserve and protect at all times the integrity of the Building's roof and systems.  No satellite dish or other equipment, cabling and conduit installed by Tenant on the Building’s roof shall be installed or affixed in any manner so as to be visible from surrounding streets, highways and buildings.  The satellite dish and other communications equipment and associated cabling and conduit must strictly conform to all applicable governmental ordinances, building codes, regulations and laws.


EXCEPT AS HEREBY AMENDED, all other provisions of the Lease are hereby confirmed and ratified.

(signature page follows)



 


ADDENDUM
TO
OFFICE LEASE
-5-








IN WITNESS WHEREOF, each of Landlord and Tenant has executed this Addendum on the date set opposite its signature below.


LANDLORD :

GARDEN CENTURA, L.P., a Texas limited partnership

 

 

 

 

By:

Regis Realty Prime, LLC (Authorized Agent)

 

 

 

 

 

 

 

 

 

Date:  February __, 2012

By:

/s/ Scott Porter

______________________________

 

 

Scott Porter, Senior Vice President

 

 

 

TENANT :

DALLAS COPART SALVAGE AUTO

 

AUCTIONS LIMITED PARTNERSHIP, a Texas limited liability company

 

 

 

 

By:

Copart of Texas, Inc., a Texas corporation, its general partner

 

 

 

 

 

 

 

 

 

Date:  February __, 2012

By:

/s/ Paul A. Styer

______________________________

 

 

Paul A. Styer, Secretary






 


ADDENDUM
TO
OFFICE LEASE
-6-








EXHIBIT A

LEGAL DESCRIPTION

TO

OFFICE LEASE

BEING a tract or parcel of land situated in the Elisha Fyke Survey, Abstract No. 478, City of Farmers Branch, Dallas County, Texas, and being part of a 4.600 acre tract described in a deed recorded in Volume 72002, Page 384 of the Deed Records of Dallas County, Texas also known as a portion of Block A, Trinity Concrete Products Subdivision, an addition to the City of Farmers Branch, Dallas County, Texas, according to the plat thereof recorded in Volume 67024, Page 6, Map Records, Dallas County, Texas, and being more particularly described as follows:

BEGINNING at a PK nail found for cutback corner in the southerly right-of-way line of Spring Valley Road (R.O.W. varies) at its intersection with the cutback line for Dallas North Tollway (200’ R.O.W);

THENCE, South 48 degrees 41. minutes 28 seconds East, along said cutback line, a distance of 19.07 feet to a 1/2-inch iron pin found for cutback corner;

THENCE, South 00 degrees 18 minutes 19 seconds East, along the westerly right-of-way line of the aforesaid Dallas North Tollway, a distance of 246.44 feet to an iron pin found for the southeasterly corner of the herein described tract;

THENCE, South 89 degrees 57 minutes 12 seconds West, departing said westerly right-of-way line, along the northerly line of the A. and H. Subdivision, an addition to-the City of Farmers Branch as recorded in volume 75174, Page 0748, at 270.33 feet past an iron pin found for the northwesterly corner of said addition, and continuing for a total distance of 370.63 feet to an iron pin found for the southwesterly corner of the herein described tract;

THENCE, North 00 degrees 04 minutes 20 seconds West, a distance of 266.00 feet to an "X" cut in concrete for corner in the aforesaid southerly right-of-way line of Spring Valley Road;

THENCE; South 89 degrees 46 minutes 07 seconds East, along said southerly right-of-way, a distance of 109.46 feet to a PK nail set for corner;

THENCE. South 88 degrees 49 minutes 35 seconds east, along said southerly right-of-way line, a distance of 245.56 feet to the Point of Beginning and containing 2.244 acres of land, more or less.

Also known as a portion of Block A, Trinity Concrete Products Subdivision, an addition to the City of Farmers Branch, Dallas County, Texas, according to the plat thereof recorded in Volume 67024, Page 6, Map Records, Dallas County, Texas.

END OF EXHIBIT A




 


EXHIBIT A
-1-








EXHIBIT B

SITE PLAN OF PREMISES



[LEASE002.GIF]




 


EXHIBIT B
-2-










[LEASE004.GIF]




 


EXHIBIT B
-3-








EXHIBIT C

PARKING ADDENDUM

TO

OFFICE LEASE

So long as no default or breach by Tenant has occurred under the Lease and is continuing after any applicable notice was given and any applicable grace or cure period has expired, Tenant shall have a nonexclusive license to use during the initial Lease Term AT NO CHARGE up to and not in excess of five (5) unassigned and unreserved parking spaces in the parking garage that services the Building for each 1,000 rentable square feet of the Premises; provided, however, that (i) Tenant may at its option substitute up to thirty (30) of such unassigned and unreserved parking spaces for an identical number of reserved parking spaces in the parking garage for which Tenant shall pay to Landlord during the initial Lease Term a monthly reserved parking charge equal to $75.00 (plus all applicable taxes) per reserved parking space, except that the monthly reserved parking charges for ten (10) of such reserved parking spaces shall be abated during the first thirty (30) full calendar months of the initial Lease Term.  This nonexclusive license shall begin on the Commencement Date (or in the first (1 st ) day of any Early Occupancy Period with respect to the Early Occupancy Space, if applicable) and shall terminate on the expiration or termination of the Lease Term.

Notwithstanding the foregoing, the charge to Tenant for its use during any Renewal Term of any parking spaces, including unassigned and unreserved spaces and reserved spaces, shall be determined at the time Tenant exercises its Option to Renew.  Landlord reserves the right to specifically assign and reassign from time to time any or all of such parking spaces among the tenants of the Building in any manner in which Landlord determines in its commercially reasonable discretion; provided, however, that Landlord shall attempt to minimize any interruption to Tenant's business operations in connection with such actions and any such alternate location of Tenant's reserved spaces must provide close and convenient access to the Premises.  Tenant shall, upon not less than thirty (30) days’ notice from Landlord (which notice may not be give more frequently than two (2) times in any calendar year), furnish Landlord with the state automobile license number assigned to its automobile or automobiles and the automobiles of all of its employees and agents employed or working in the Premises, and Tenant agrees to comply (at no cost to Landlord) with such requests as Landlord may reasonably make in Landlord's enforcement of any parking control program (it being agreed that any such enforcement actions shall be uniformly applied among all tenants in the Building).  Notwithstanding the existence of any such control, Landlord shall not be responsible to Tenant, any Tenant Related Parties or any of Tenant’s contractors, subcontractors or invitees for any violation of any parking control program implemented by Landlord.

The provisions of this Addendum supplement and are specifically subject to all provisions of the Lease.




 


EXHIBIT C
-1-








EXHIBIT D

RULES AND REGULATIONS

TO

OFFICE LEASE

It is agreed that the following rules and regulations shall be and are hereby made a part of this Lease, and Tenant agrees that Tenant, the Tenant Related Parties and Tenant’s contractors, subcontractors and invitees and any other persons permitted by Tenant to occupy or enter the Premises will at all times abide by these rules and regulations.

1.

The sidewalks, entries, passages, and stairways shall not be obstructed by Tenant or its agents, or used by them for any purpose other than ingress and egress to and from their offices.

2.

a.

Bulky or heavy furniture, equipment, or supplies shall be moved in or out of the Building only during such hours and in such manner as may be reasonably and uniformly prescribed by Landlord.

b.

No safe or article, the weight of which may constitute a hazard or danger to the Building or its equipment, shall be moved into the Premises.  Safes and other equipment, the weight of which is not excessive, shall be moved into, from or about the Building during such hours and in such manner as shall be reasonably and uniformly prescribed by Landlord, and Landlord shall have the right to reasonably designate the location of such articles in the space hereby demised.

3.

The name of Tenant and/or signs of Tenant shall not be placed upon part of the Premises except as provided by Landlord or otherwise provided in the Lease (with specific reference to Paragraphs 3 and 5 of the Addendum).

4.

Water closets and other water fixtures shall not be used for any purpose other than that for which the same are intended, and any damage resulting to the same from misuse on the part of Tenant or any Tenant Related Parties, shall be paid for by Tenant to the extent provided in the Lease.  No person shall waste water by tying back or wedging the faucets or in any other manner.

5.

No animals (other than service animals) shall be allowed in the office, halls, or corridors of the Building.

6.

The bicycles or other vehicles of Tenant, the Tenant Related Parties and Tenant’s contractors, subcontractors and invitees and any other persons permitted by Tenant to occupy or enter the Premises shall not be permitted in the offices, halls, or corridors of the Buildings, nor shall Tenant expressly permit the Tenant Related Parties and Tenant’s contractors, subcontractors and invitees and any other persons permitted by Tenant to occupy or enter the Premises to obstruct any of sidewalks of entrances of the Building.

7.

No person shall unreasonably disturb the occupants of the Building or adjoining buildings or premises by the use of any television, radio, or musical instrument or equipment, or by the making of loud or improper noises.

8.

No additional lock or locks shall be placed by Tenant on any door in the Building unless written consent of Landlord shall first be obtained except as otherwise provided in the Lease or part of the Approved Construction Drawings.

9.

The use of oil, gas or inflammable liquids for heating, lighting or any other purpose is expressly prohibited.  Explosives or other articles deemed extra hazardous shall not be brought into the Building.

10.

Tenant shall exercise due care and within reasonable limits shall not mark upon, paint or affix upon, cut, drill into, drive nails or screws into, or in any way deface the walls, ceiling, partitions, or floors of the Premises or of the Building (except in connection with the hanging of customary office decorations), and any defacement, damage, or injury caused by Tenant or any Tenant Related Parties, shall be paid for by Tenant.



 


EXHIBIT D
-1-








11.

Intentionally Omitted.

12.

Tenant agrees to use chair pads to be furnished by Tenant under all rolling and ordinary desk chairs in the carpeted areas of the Premises throughout the Lease Term.

13.

Tenant shall not use small heaters at individual desks.  Cold and hot issues shall be called into the management office for adjustment.

14.

Tenant shall advise all personnel as to the location of designated smoking areas.  Landlord reserves the right to relocate these areas with tenant cooperation.

15.

Subject to the limitation set forth in Section 8.6 of the Lease, Landlord reserves the right to make such other and further reasonable rules and regulations as in its judgment may from time to time be necessary and desirable for the safety, care, and cleanliness of the Premises and for the preservation of good order therein.  Such rules and regulations shall be effective upon receipt of notice of such changes and/or additions as provided by the provision for Notice in Section 19 of the Lease.




 


EXHIBIT D
-2-








EXHIBIT E

TENANT WORK LETTER

This Tenant Work Letter shall set forth the terms and conditions relating to the construction of the Improvements (as defined below) in the Premises.  This Tenant Work Letter is essentially organized chronologically and addresses the issues of the construction of the Premises, in sequence, as such issues will arise during the actual construction of the Premises.

SECTION 1

LANDLORD'S INITIAL CONSTRUCTION IN THE PREMISES

To the extent that the applicable governmental authorities require modifications (" Code Work ") to be made to the Premises or any other portion of the Building or any common areas either as a result of Tenant merely obtaining a building permit for the construction of the Improvements (provided such Improvements are customary with the type of office tenant improvements generally utilized by tenants for  general office and call center purposes) or in order for Tenant to receive building permits for the construction of the Improvements (as defined below) to the Premises (but not any such modifications which may be required due to any specific and unique Improvements desired by Tenant, as opposed to normal, customary and typical office tenant improvements generally), such Code Work shall be at Landlord's sole cost and expense.  At Tenant's election, any such Code Work shall be performed (i) by Landlord utilizing a contractor of Landlord's selection, (ii) by Landlord utilizing the Contractor (as that term defined in Section 4.1.1 below) or (iii) by Tenant utilizing the Contractor.  If Tenant elects to perform the Code Work utilizing the Contractor pursuant to subsection (iii) of this Section 1, (a) the costs of such Code Work (which cost shall be reasonably competitive with the costs charged by comparable contractors performing similar scope of services in Comparable Buildings) shall be paid by Landlord pursuant to the same disbursement provisions for the Tenant Improvement Allowance specified in Section 2.2 below and all terms and conditions of Section 2.2 below with respect to payment of the Tenant Improvement Allowance shall also apply with respect to Landlord's obligation to pay for the such cost of the Code Work; (b) Tenant shall submit to Landlord for its written approval and a cost estimate of the Code Work containing by line item a reasonably detailed list of the Code Work to be performed and the cost thereof as reasonably estimated by the Contractor, and the Contractor shall not commence the construction of the Code Work until Landlord has delivered to Tenant Landlord’s written approval of the cost budget which- approval will be given or reasonably denied (in which event Landlord shall detail its reasons for such reasonable disapproval and specify what changes must be made to such estimate in order to obtain Landlord's approval) within five (5) business days of request and if Landlord fails to approve or reasonably disapprove such cost estimate within such five (5) business day period, then such cost estimate will be deemed to be approved; and (c) any delay in construction of the Improvements, installation of Tenant’s furniture, fixtures and equipment and/or moving into the Premises due solely to Contractor’s performance of the Code Work shall not constitute or be deemed or construed to be a Landlord Delay (as defined below).  Tenant shall deliver written notice of Tenant's election under this Section 1 within five (5) business days after making such election.  If Tenant elects to require Landlord to perform the Code Work pursuant to subsections (i) or (ii) above, then Landlord and Tenant agree to work together, in good faith, so that Landlord's performance of the Code Work does not interfere with Tenant's construction of the Improvements and Tenant's construction of the Improvements does not interfere with Landlord's performance of the Code Work.  However, any delay in construction of the Improvements, installation of Tenant's furniture, fixtures and equipment and/or moving into the Premises due to Landlord's performance of the Code Work pursuant to subsections (i) or (ii) (but not due to Contractor’s performance of the Code Work if Tenant elects to perform the Code Work utilizing the Contractor pursuant to subsection (iii) above) shall, subject to Section 3.5 below, constitute a Landlord Delay and any reasonable additional out-of-pocket costs incurred by Tenant in the design and construction of the Improvements due to Landlord's performance of the Code Work shall be borne by Landlord in addition to the Tenant Improvement Allowance, provided that Tenant shall notify Landlord of any such additional costs promptly after Tenant learns of such necessity therefor.



 


EXHIBIT E
-1-








SECTION 2

TENANT IMPROVEMENTS

2.1

Tenant Improvement Allowance .  Tenant shall be entitled to a tenant improvement allowance (the " Tenant Improvement Allowance ") in the amount of $1,859,410.00 (based on $35.00 per rentable square foot of the Premises) for the costs relating to the initial design, permitting, renovating and constructing  improvements in the Premises, which are permanently affixed to the Premises and which are constructed prior to Tenant’s occupancy (except in connection with Tenant's early occupancy of any Early Occupancy Space as set forth in and subject to the terms of Section 1.7 of the Lease) of the Premises or the date on which Tenant first conducts business in the Premises (collectively, the " Improvements "), and for the other Tenant Improvement Allowance Items.  Notwithstanding the foregoing and for the sake of clarity, Landlord and Tenant hereby agree and acknowledge that in the event Tenant determines to construct the Premises in phases as further described in Section 3.4 of this Tenant Work Letter, the Improvements need only consist of the Improvements within the applicable phase.  

2.2

Disbursement of the Tenant Improvement Allowance .

2.2.1

Tenant Improvement Allowance Items .  Except as otherwise set forth in this Tenant Work Letter, the Tenant Improvement Allowance shall be disbursed by Landlord for costs related to the design, permitting and construction of the Improvements (inclusive of data and/or telecom cabling and systems, security systems, white noise systems and speakers above the ceiling) and for the following items and costs (collectively, the " Tenant Improvement Allowance Items "):  (i) payment of all design consultants, project managers and the fees of the "Architect" and the "Engineers," as those terms are defined in Section 3.1 of this Tenant Work Letter; (ii) payment of all governmental and utility service or connection fees, including but not limited to, plan check, permit and license fees relating to the construction of the Improvements, (iii) cost of construction of the Improvements within the Building, including, without limitation, all labor, materials, testing and inspection costs, hoisting and trash removal costs, and contractors' fees and general conditions, (iv) the cost of any changes in the base, shell and core of the Building when such changes are required by the Construction Drawings (but to the extent such changes are required due to Code Work, such costs shall be paid for and absorbed by the Landlord without deduction from the Tenant Improvement Allowance); (v) the cost of any changes to the Construction Drawings or Improvements required by all applicable building codes (the " Code ") (but not to the extent required due to Code Work); (vi) costs of design, construction and installation of Tenant's signage (as described in Paragraph 5 of the Addendum to Lease); (vii) costs to purchase and install furniture systems, telephone systems, audio visual systems, graphic art and cabling not to exceed Seven and 50/100 Dollars ($7.50) per rentable square foot of the Premises; (vii) as a credit against Tenant's obligations to pay Base Rent (which credit, if so elected by Tenant, shall be applied after expiration of the thirteen (13) month abatement period specified in Section 1.10 of the Lease) not to exceed Ten Dollars ($10.00) per rentable square foot of the Premises; (ix) moving costs incurred by Tenant in moving from its present location(s) to the Premises not to exceed Five Dollars ($5.00 per rentable square foot of the Premises; and (x) all other actual out-of-pocket costs to be expended by Tenant and reasonably approved in writing by Landlord in connection with the construction of the Improvements.

2.2.2

Disbursements .  

2.2.2.1

  Disbursement of Tenant Improvement Allowance .  During the construction of the Improvements, Landlord shall make monthly disbursements of the Tenant Improvement Allowance for Tenant Improvement Allowance Items for the benefit of Tenant and shall authorize the release of monies for the benefit of Tenant as follows.

2.2.2.1.1

Monthly Disbursements .  On or before the fifth (5 th ) day of each calendar month during the design or construction of the Improvements (or on such other date as Landlord and Tenant may reasonably agree in writing), Tenant may deliver to Landlord:  (i) a request for payment of the "Contractor" (as defined in Section 4.1.1 below), approved by Tenant, showing the schedule, by trade, of percentage of completion of the Improvements in the Premises, detailing the portion of the Improvements completed and the portion not completed; (ii) invoices from all of "Tenant's Agents" (as defined in Section 4.1.2 below), and from the design consultants, project managers and the "Architect" and the "Engineers", for labor rendered with respect to, and materials delivered to, the Premises for the



 


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period in question; (iii) conditional progress lien waivers in recordable form executed by the Contractor and Tenant’s Agents whose work is the subject of such request for payment (subject only to the receipt of payment therefor); (iv) unconditional progress lien waivers in recordable form executed by the Contractor and Tenant’s Agents with respect to any amounts funded by Landlord more than thirty (30) days prior to the date of the request for payment; and (v) reasonable supporting detail in AIA G702 format (or another format reasonably acceptable to Landlord) including, but not limited to, work orders, invoices, sales receipts, bills of lading, time sheets and material purchase orders for the costs incurred by Tenant reasonably acceptable to Landlord.  Thereafter, Landlord shall deliver a check to Tenant made payable to Tenant (or at Tenant’s option made jointly payable to Contractor and Tenant) in payment of the lesser of:  (a) the amounts so requested by Tenant, as set forth in this Section 2.2.2.1, above, less a ten percent (10%) retention on the amount of the Tenant Improvement Allowance the aggregate amount of such retentions to be known as the " Final Retention "), and (B) the balance of any remaining available portion of the Tenant Improvement Allowance (not including the Final Retention).  Provided that Tenant delivers the items required under the first sentence of this Section 2.2.2.1.1 above to Landlord on or before the fifth (5 th ) business day of a month, such check will be delivered by the last day of such month.  If such items are delivered to Landlord after the fifth (5 th ) business day of a month, then such check shall be delivered to Tenant within thirty (30) days after such items are delivered to Landlord.  Landlord reserves the right, before delivering any such check, upon reasonable prior notice and subject to the terms and conditions set forth in Section 25.15 of the Lease, to conduct an inspection of the portion of the Improvements completed by Tenant.  If Landlord reasonably determines that any of the completed Improvements are not constructed in substantial accordance with the Approved Working Drawings (as defined in Section 3.4 below), Landlord shall deliver written notice to Tenant specifying the deficiency, and Tenant shall cause the Contractor within fifteen (15) business days after receipt of Landlord’s written notice to correct the deficiency to the extent necessary to eliminate any Design Problem (as defined below) or, if such deficiency cannot be so corrected within such fifteen (15) business day period, then Tenant shall cause the Contractor to promptly commence the correction within such fifteen (15) business day period and diligently prosecute such correction to completion.  

2.2.2.1.2

Final Retention .  Subject to the provisions of this Tenant Work Letter, a check for the Final Retention payable to Tenant (or at Tenant's option made payable jointly to Tenant and Contractor) shall be delivered by Landlord to Tenant following the completion of construction of the Improvements, provided that Tenant delivers to Landlord (i) a request for final payment of Contractor, approved by Tenant, showing that all of the Improvements have been completed; (ii) invoices from all of Tenant's Agents and from the design consultants, project managers, the Architect and the Engineers, for labor rendered with respect to, and materials delivered to, the Premises not previously paid by Landlord; (iii) conditional progress lien waivers in recordable form executed by the Contractor and Tenant’s Agents whose work is the subject of such request for payment (subject only to the receipt of payment therefor); (iv) unconditional progress lien waivers in recordable form executed by the Contractor and Tenant’s Agents with respect to all amounts funded by Landlord prior to the date of the request for final payment; (v) reasonable supporting detail in AIA G702 format (or another format reasonably acceptable to Landlord) including, but not limited to, work orders, invoices, sales receipts, bills of lading, time sheets and material purchase orders for the costs incurred by Tenant reasonably acceptable to Landlord; and (vi) a certificate executed and sealed by the Architect, certifying to Tenant, Landlord and Landlord’s mortgagee that all of the Improvements have been finally completed in accordance in all material respects with the Approved Working Drawings and all applicable laws, regulations, codes and ordinances (but subject to standard expectations with respect the Americans with Disabilities Act (ADA) and the Texas Accessibility Standard, as amended (TAS)).  Tenant shall, within five (5) business days after any municipal authority issues a certificate of occupancy covering the Premises or any portion thereof, deliver to Landlord a copy of such certificate.  Within the four (4) months following the Commencement Date, Tenant shall submit to Landlord by electronic mail, Tenant's "as-built drawings" for all of the Improvements.

2.2.2.1.3

Other Terms .  Landlord shall only be obligated to make disbursements from the Tenant Improvement Allowance to the extent costs are incurred by Tenant for Tenant Improvement Allowance Items.  If the total estimated cost of Tenant Improvement Allowance Items (as indicated in the Final Costs in Section 4.2.1 below) exceeds



 


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the Tenant Improvement Allowance, Tenant shall fund such excess after the exhaustion of the Tenant Improvement Allowance.

2.2.2.1.4

Failure to Fund Tenant Improvement Allowance .  If Landlord fails to timely fund any monthly payment of the Tenant Improvement Allowance or the Final Retention of the Tenant Improvement Allowance within the time periods set forth above in this Section 2.2.2.1, then Tenant shall be entitled to deliver written notice (" Payment Notice ") thereof to Landlord.  If Landlord still fails to fulfill any such obligation within ten (10) business days after Landlord's receipt of the Payment Notice from Tenant and if Landlord fails to deliver written notice to Tenant within such ten (10) business day period explaining Landlord's reasons that the amounts described in Tenant's Payment Notice are not due and payable by Landlord (" Refusal Notice "), Tenant shall be entitled to fund such amount(s) itself and to offset such amount(s), together with interest at the Interest Rate from the date of payment by Tenant until the date of offset, against Tenant's first obligations to pay monthly Base Rent after expiration of the thirteen (13) month abatement period specified in Section 1.10 of the Lease.  To the extent, Tenant actually realizes the offset permitted by this Section 2.2.2.1.4, Tenant’s offset of any amounts, including accrued interest thereon, permitted by this Section 2.2.2.1 constitutes Tenant’s sole and exclusive remedy for Landlord’s failure to timely disburse such amounts from the Tenant Improvement Allowance and shall further constitute a full and final release and discharge of Landlord by Tenant of Landlord’s obligation to fund such amounts to the extent offset by Tenant against Tenant’s obligations to pay monthly Base Rent under the Lease but only to the extent, Tenant actually realizes the offset permitted by this Section 2.2.2.1.4.  However, Tenant shall not be entitled to any such offset if Tenant is in monetary or material non-monetary default under the Lease (after expiration of any applicable cure period) at the time that such offset would otherwise be applicable.  If Landlord delivers a Refusal Notice, and if Landlord and Tenant are not able to agree on the amounts to be so paid by Landlord, if any, within ten (10) business days after Tenant's receipt of a Refusal Notice, Landlord or Tenant may elect to have such dispute resolved by binding arbitration before a retired judge under the auspices of JAMS (or any successor to such organization) in Dallas, Texas, according to the then rules of commercial arbitration of such organization.  If Tenant prevails in any such arbitration, Tenant shall be entitled to offset the amount determined to be payable by Landlord in such proceeding together with interest at the Interest Rate from the date of payment to the date of offset against Tenant's next obligations to pay monthly Base Rent after expiration of the thirteen (13) month abatement period specified in Section 1.10 of the Lease.  The cost of such arbitration shall be paid by the prevailing party in connection with such arbitration process.

SECTION 3

CONSTRUCTION DRAWINGS

3.1

Selection of Architect/Construction Drawings .  Tenant shall retain Merriman Associates Architects or another architect(s)/space planner(s)/consultant(s) reasonably approved by Landlord (collectively, the " Architect(s) ") to prepare the "Construction Drawings," as that term is defined in this Section 3.1.  Tenant shall also retain the engineering consultants reasonably approved in writing by Landlord (the " Engineers ") to prepare all plans and engineering working drawings relating to the structural, mechanical, electrical, plumbing, HVAC, life safety, and sprinkler work of the Improvements which approval will be given or reasonably denied (in which event Landlord shall detail its reasons for such reasonable disapproval and recommend alternate consultants that are acceptable to Landlord) within five (5) business days of request. If Landlord fails to approve or reasonably disapprove such engineering consultants within such five (5) business day period, then such consultants will be deemed to be approved.  The plans and drawings to be prepared by Architect and the Engineers hereunder shall be known collectively as the " Construction Drawings ".  All Construction Drawings shall comply with the drawing format and specifications normally used by Landlord and reasonably acceptable to Tenant.  Landlord's review of the Construction Drawings as set forth in this Section 3, shall be for its sole purpose and shall not imply Landlord's review of the same, or obligate Landlord to review the same, for quality, design, Code compliance or other like matters or allow Landlord to charge a fee except for actual out-of-pocket costs reasonably incurred and paid by Landlord to third parties in connection with the review of the Construction Drawings.  Accordingly, notwithstanding that any Construction Drawings are reviewed by Landlord or its space planner, architect, engineers and consultants, and notwithstanding any advice or assistance which may be rendered to Tenant by Landlord or Landlord's space planner, architect, engineers,



 


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and consultants, Landlord shall have no liability whatsoever in connection therewith and shall not be responsible for any omissions or errors contained in the Construction Drawings.

3.2

Final Space Plan .  Tenant shall supply Landlord with four (4) copies signed by Tenant of its final space plan for the Premises.  The final space plan (the " Final Space Plan ") shall include a layout and designation of all offices, rooms and other partitioning and their intended use.  Landlord shall advise Tenant within five (5) business days after Landlord's receipt of the Final Space Plan for the Premises if the same is unsatisfactory (but only to the extent a Design Problem (as defined below) exists) or incomplete but only to the extent that being incomplete could cause a Design Problem in any respect; any failure by Landlord to notify Tenant of its approval or disapproval within such five (5) business day period shall be deemed to be Landlord's approval thereof.  If Tenant is so advised, Tenant shall promptly cause the Final Space Plan to be revised to correct any deficiencies or other matters Landlord may reasonably require to eliminate a Design Problem.  This process shall be repeated until Landlord has approved the Final Space Plan.  Notwithstanding anything to the contrary set forth above, Landlord and Tenant acknowledge that Tenant is designing and constructing the Improvements using a fast-track design/build format.  If Tenant so elects, Tenant may forward to Landlord, for Landlord's approval, Construction Drawings for portions of the Improvement project rather than Construction Drawings for the entire Premises and the time periods set forth herein shall apply to each such submission.  Upon Landlord's approval or deemed approval of any such drawings, the Contractor may be instructed to submit the same to the applicable governmental authorities for receipt of Permits.  A " Design Problem " means, and will only be deemed to exist to the extent, as reasonably determined by the standard that would be applied by a sophisticated and experienced landlord of a comparable building in terms of size and quality located in the Dallas North Tollway submarket of Dallas, Texas:  (a) there may be an impairment of the structural integrity of the Building, (b) there may be an adverse effect on the mechanical, electrical, plumbing, heating, air-conditioning, ventilation, fire life-safety or other systems of the Building, (c) the Alterations or Improvements will be visible from the exterior of the Building, (d) the Improvements are not accomplished in a good and workmanlike manner in accordance with all governmental requirements including, but not limited to, the ADA and the TAS, (e) Tenant fails to obtain all governmental permits, licenses, and approvals required in connection with the construction of the Improvements, (f) the Alterations or Improvements may unreasonably interfere with the use of or access to its leased premises by another tenant of the Building, (g) such Alteration or Improvements may cause a safety issue, or (h) such Alteration or Improvements may result in additional maintenance costs over and above the cost typically expected for general office use unless Tenant agrees to pay for such additional costs.

3.3

Final Working Drawings .  After the Final Space Plan has been approved or deemed approved by Landlord, Tenant shall supply the Engineers with a complete listing of standard and non-standard equipment and specifications to enable the Engineers and the Architect to complete the "Final Working Drawings" (as that term is defined below) in the manner as set forth below.  Tenant shall cause the Architect and the Engineers to complete the architectural and engineering drawings for the Premises, and Architect shall compile a fully coordinated set of architectural, structural, mechanical, electrical and plumbing working drawings (collectively, the " Final Working Drawings ") and shall submit the same to Landlord for Landlord's approval.  Landlord shall advise Tenant within five (5) business days after Landlord's receipt of the Final Working Drawings for the Premises if the same are unsatisfactory (but only to the extent a Design Problem exists) or incomplete but only to the extent being incomplete could cause a Design Problem in any respect; any failure by Landlord to notify Tenant of its approval or disapproval within such five (5) business day period shall be deemed to be Landlord's approval thereof.  If Tenant is so timely advised that a Design Problem exists, then Tenant shall revise the Final Working Drawings in accordance with such review and any disapproval of Landlord in connection therewith to the extent necessary to eliminate a Design Problem.  This process shall be repeated until Landlord has approved or deemed to have approved the Final Working Drawings.

3.4

Permits/Phasing .  The Final Working Drawings shall be approved (or deemed approved as provided above) by Landlord (the " Approved Working Drawings ") before Tenant or the Contractor commence the construction of the Improvements; however, to the extent not prohibited by applicable laws and provided that Tenant obtains any required governmental approvals relating to the same (copies of which will be provided to Landlord), Tenant may at its own risk commence demolition work and limited non-structural interior framing and one-sided drywall installation, immediately upon mutual execution and delivery of the Lease by Landlord



 


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and Tenant and prior to the Construction Drawings having been completed or approved by Landlord (in which case Tenant must correct any Design Problem identified by Landlord in the approval process for the Final Working Drawings).  Landlord acknowledges and agrees that the foregoing acknowledgment by Landlord pertaining to such commencement of such demolition and framing work immediately upon mutual execution and delivery of the Lease by Landlord and Tenant and prior to the Final Working Drawings having been completed or approved by Landlord constitutes material consideration to Tenant entering into the Lease with Landlord.  Tenant shall submit the Approved Working Drawings to the appropriate municipal authorities for all applicable building permits necessary to allow "Contractor" (as defined in Section 4.1.1 below), to commence the construction of the Improvements (the "Permits").   If an asbestos survey of the Premises (or any portion thereof) is required by any municipal authority, Tenant shall obtain such asbestos survey and deliver a copy thereof to Landlord simultaneously with providing the asbestos survey to the municipal authority.  Landlord shall cooperate with Tenant in executing permit applications, communicating with applicable governmental authorities in connection with the design and construction of the Improvements and performing other ministerial acts reasonably necessary to enable Tenant to obtain any such permit or certificate of occupancy and Landlord shall execute as "Owner" the ADA verification and any other documentation required by the applicable governmental authorities with respect to the Code Work and/or the Improvements.  Tenant shall, within five (5) business days after obtaining the issuance of a building permit by the municipal authorities, deliver to Landlord a copy of such permit.  No material changes, modifications or alterations in the Approved Working Drawings (other than those specifically required by applicable governmental authorities) may be made without the prior written consent of Landlord which will be given or denied within five (5) business days of request and shall not be withheld except to the extent a Design Problem exists; any failure by Landlord to notify Tenant of its approval or disapproval within such five (5) business day period shall be deemed to be Landlord's approval thereof.  Notwithstanding anything to the contrary contained herein, Tenant shall be permitted to construct the Improvements in phases, pursuant to a phased construction schedule that is subject to the reasonable of approval of Landlord in accordance with the same manner and procedure as is set forth for Landlord's approval of the Final Space Plan.  

3.5

Landlord Delays and Force Majeure Event .  The August 1, 2012 component of the definition of the Commencement Date as set forth in Section 1.7 of the Lease, shall be deferred one (1) day for each day Tenant is actually delayed in designing, permitting and constructing its Improvements and/or installing its furniture, fixtures and equipment and/or moving into its Premises by Landlord Delays or Force Majeure Events, but no extension shall be applicable once Tenant begins to conduct its business in the Premises for the particular phase(s) of construction then in progress.  " Landlord Delays " means any such delays caused by Landlord including, without limitation, any delays due to Code Work (excluding, however, Contractor’s performance of the Code Work if Tenant elects to perform the Code Work utilizing the Contractor pursuant to subsection (iii) of Section 1 above), any failure by Landlord to comply with any of the time periods for approval of the Construction Drawings and each component thereof (as defined in and pursuant to Section 3 of this Tenant Work Letter), Landlord’s failure to provide Tenant sufficient access to each floor and the Building and the loading dock, ramps, and freight elevator to construct the Improvements and move into the floor without interruptions (subject to Tenant's compliance with Landlord's reasonable rules and regulations regarding move-in and construction), or Landlord’s failure to comply with any other provision of the Lease (after expiration of any applicable cure period) and/or this Tenant Work Letter.  Force Majeure Events shall be as defined in Section 25.25 of the Lease, but shall also include delays in obtaining permits or approvals from the appropriate governmental authorities, despite Tenant's good faith diligent efforts.  In addition, no Landlord Delay or Force Majeure Events shall be deemed to have occurred unless Tenant has given Landlord written notice that an event giving rise to such Landlord Delay or Force Majeure Event is about to occur or has occurred which will cause a delay in the design, permitting and completion of the Improvements (minor punch-list items excepted) and move into the Premises and Landlord has failed to remedy the situation giving rise to the potential Landlord Delay or Force Majeure Event within one (1) business day after Landlord's receipt of such notice, in which case the number of days of actual delay after such notice shall be a Landlord Delay or Force Majeure Event, as appropriate.



 


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SECTION 4

CONSTRUCTION OF THE TENANT IMPROVEMENTS

4.1

Contractor .  

4.1.1

General Contractor .  The contractor which shall construct the Improvements shall be a contractor selected by Tenant and approved by Landlord, such approval not to be unreasonably withheld or delayed.  The subcontractors utilized by the Contractor shall be subject to the provisions set forth in Section 4.1.2 below.  The contractor selected may be referred to herein as the " Contractor ."  Structure Tone, BPM Construction Company, Ron E. Williams Construction Company, and Kevin McDough Construction Company, if used by Tenant, are hereby deemed approved by Landlord as bidding contractors.  Notwithstanding the foregoing, Tenant may retain non-union contractors and subcontractors, subject to Section 5.4 below.

4.1.2

Tenant's Agents .  All subcontractors, materialmen and suppliers used by Tenant (such subcontractors, materialmen and suppliers and the Contractor may be collectively referred to herein as " Tenant's Agents ") must be approved in writing by Landlord, which approval shall not be unreasonably withheld or delayed beyond five (5) business days; any failure by Landlord to notify Tenant of its approval or disapproval within such five (5) business day period shall be deemed to be Landlord's approval thereof.  

4.2

Construction of Improvements by Tenant's Agents .  

4.2.1

Construction Contract; Cost Budget .  Following Tenant's execution of the construction contract and general conditions with Contractor (the " Contract "), Tenant shall submit the Contract and cost budget to Landlord for informational purposes.  Within ten (10) days after Landlord's written request, Tenant shall provide Landlord with Tenant's then current estimate of the cost of design and construction of the Improvements, together with a detailed breakdown, by trade, of such costs.

4.2.2

Tenant's Agents .

4.2.2.1

  Landlord's General Conditions for Tenant's Agents and Tenant Improvement Work .  Tenant's and Tenant's Agent's construction of the Improvements shall comply with the following:  (i) the Improvements shall be constructed without material deviation from the Approved Working Drawings and in such a manner that no Design Problem is created; and (ii) Tenant shall abide by all reasonable and non-discriminatory rules made by Landlord's Building manager with respect to the use of freight, loading dock and service elevators, storage of materials, coordination of work with the contractors of other tenants, and any other matter in connection with this Tenant Work Letter, including, without limitation, the construction of the Improvements to the extent not inconsistent with this Lease and do not unreasonably delay Tenant in the performance of its work under this Tenant Work Letter or unreasonably increase the cost of performing such work.  In no event shall Tenant be charged any logistical coordination or other fee by Landlord (or Landlord's property manager) in connection with the construction of the Improvements except for (a) the actual out-of-pocket and verified costs reasonably incurred and paid by Landlord to third parties in connection with the review of the Construction Drawings; and (b) a construction fee payable to Landlord or its designee not to exceed one percent (1%) of the Tenant Improvement Allowance for construction supervisory services to be performed by Landlord or such designee, which fee shall be funded by Landlord from the Tenant Improvement Allowance.  In no event shall Tenant be required to purchase any pre-stocked materials from Landlord nor shall Landlord charge Tenant for any improvements currently existing in the Premises or the Building.

4.2.2.2

  Indemnity .  Tenant's indemnity of Landlord as set forth in, and subject to, Section 13.5 of this Lease shall also apply with respect to any and all costs, losses, damages, injuries and liabilities related in any way to any act or omission of Tenant or Tenant's Agents, or anyone employed by any of them, or in connection with Tenant's non-payment of any amount arising out of the Improvements and/or Tenant's disapproval of all or any portion of any request for payment, but Tenant's indemnity and liability shall not extend to damage to the Building, Premises (other than the Improvements being constructed by Tenant) or Landlord's



 


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property to the extent covered by insurance carried by Landlord, and as to which the waiver of subrogation is applicable.

4.2.2.3

  Requirements of Tenant's Agents .  Each of Tenant's Agents shall guarantee to Tenant and for the benefit of Landlord that the portion of the Improvements for which it is responsible shall be free from any defects in workmanship and materials for a period of not less than one (1) year from the date of completion thereof.  

4.2.2.4

  Insurance Requirements .

4.2.2.4.1

General Coverages .  All of Tenant's Agents shall carry worker's compensation insurance covering all of their respective employees, and shall also carry general liability insurance, including property damage, all with limits, in form and with companies as are required to be carried by Tenant as set forth in this Lease.

4.2.2.4.2

Special Coverages .  Tenant or the Contractor shall carry (a) "Builder's All Risk" insurance in an amount reasonably approved by Landlord covering the construction of the Improvements; and (b) automobile liability coverage with a limit of not less than One Million Dollars ($1,000,000) combined single limit.  Such insurance shall be in form and with companies as are required to be carried by Tenant as set forth in the Lease.

4.2.2.4.3

General Terms .  Certificates for all insurance carried pursuant to this Section 4.2.2.3 shall be delivered to Landlord as soon as reasonably practicable after mutual execution and delivery of the Lease and prior to the entry into the Premises by the Contractor or any of Tenant’s Agents.  All general liability policies carried under this Section 4.2.2.3 shall name Landlord and Tenant, as their interests may appear, as well as Contractor as additional insureds.  All property insurance maintained by Tenant's Agents and Tenant and Landlord shall preclude subrogation claims by the insurer against anyone insured thereunder.  Such insurance shall provide that it is primary insurance as respects Landlord and that any other insurance maintained by Landlord is excess and noncontributing with the insurance required hereunder.

SECTION 5

MISCELLANEOUS

5.1

Freight Elevators and Loading Area .  Landlord shall, consistent with its obligations to other tenants of the Building, make the freight elevator and loading area available to Tenant at no additional charge in connection with the construction of the Improvements in the Premises and moving into the Premises so that Tenant may, without unreasonable interruptions or delays, construct and install the Improvements and move into the Premises.

5.2

Tenant's Representatives .  Tenant has designated Mr. Loran Kelly as its representative with respect to the matters set forth in this Tenant Work Letter, who, until further notice to Landlord that he no longer has such authority or that others also have such authority, shall have full authority and responsibility to act on behalf of the Tenant as required in this Tenant Work Letter.

5.3

Landlord's Representatives .  Landlord has designated Mr. Scott Porter as its representative with respect to the matters set forth in this Tenant Work Letter, who, until further notice to Tenant that he no longer has such authority or that others also have such authority, shall have full authority and responsibility to act on behalf of Landlord as required in this Tenant Work Letter.

5.4

Tenant's Agents and Landlord's Agents .  Tenant and Landlord shall actively work to prevent and resolve any labor force disruptions or disturbances caused by their respective agents.

5.5

Incidental Costs .  Neither the Tenant (prior to the Lease Commencement Date) nor the Contractor shall be charged directly or indirectly for, and Landlord shall provide, (i) the use of water, electricity and parking, and (ii) during normal business hours, the use of freight elevators, HVAC and Building security, in connection with the design and construction of the Improvements for the Premises and Tenant’s move into the Premises.



 


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5.6

Conflict .  In case of any conflict between the provisions of the Lease and the provisions of this Tenant Work Letter in respect of the construction of the Improvements, the provisions of this Tenant Work Letter shall govern and control for all purposes.



 


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EXHIBIT F

COMMENCEMENT LETTER AGREEMENT

TO

OFFICE LEASE


_____________, 2012

Dallas Copart Salvage Auto Auctions Limited Partnership

14185 Dallas Parkway, Suite 400

Dallas, Texas 75254

Re:

Commencement Letter Agreement pursuant to that Office Lease dated as of _________, 2012 (the "Lease"), between GARDEN CENTURA, L.P. ("Landlord") and DALLAS COPART SALVAGE AUTO AUCTIONS LIMITED PARTNERSHIP ("Tenant") for the lease of certain premises, as more particularly described in the Lease (the "Premises") in the Centura Tower office building located at 14185 Dallas Parkway, Dallas, Texas 75254

Dear Tenant:

Unless otherwise defined herein, each term used in this Commencement Letter Agreement has the same meaning given to such term in the above-referenced Lease.  Landlord and Tenant hereby certify that:

2.

On or about ____________, 2012, Tenant delivered to Landlord the certificate of occupancy for the Premises issued by the City of Farmers Branch, Texas.

3.

Tenant first began to conduct business in the Premises on ____________, 2012.

4.

The actual Commencement Date of the Lease occurred on ____________, 2012.

5.

The actual Expiration Date of the Lease is ________________.

Please acknowledge your agreement to provisions hereof by signing all three (3) counterparts of this Commencement Letter Agreement in the space provided below and returning two (2) fully-executed counterparts to my attention.

Sincerely,


___________________________________

Authorized Signatory for Landlord


AGREED TO AND ACCEPTED

by Tenant on _________, 2012:

DALLAS COPART SALVAGE AUTO AUCTIONS

LIMITED PARTNERSHIP, a Texas limited liability

company

By:

Copart of Texas, Inc., a Texas corporation,
its general partner


By:

____________________________

Name:

____________________________

Its Duly Authorized __________________



 


EXHIBIT F
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EXHIBIT G

GUARANTY

TO

OFFICE LEASE

GUARANTY

FOR VALUE RECEIVED, and in consideration for and as an inducement to Landlord (as herein defined) entering into that certain Office Lease dated as of February 3, 2012 (the "Lease"), between GARDEN CENTURA, L.P., as landlord ("Landlord"), and DALLAS COPART SALVAGE AUTO AUCTIONS LIMITED PARTNERSHIP, as tenant ("Tenant"), for the lease by Tenant of certain premises, as more particularly described in the Lease located in the Centura Tower office building at 14185 Dallas Parkway, Dallas, Texas 75254, the undersigned guarantor ("Guarantor"), jointly and severally, hereby unconditionally guarantees to Landlord and its successors and assigns the full and timely payment, performance and observance by Tenant of all of its covenants, obligations and liabilities contained in the Lease and any and all amendments, modifications, supplements of the Lease (collectively, the "Guaranteed Obligations").  

This is an absolute, continuing and unconditional guaranty of payment and not of collection.  Guarantor shall be liable, jointly and severally, with Tenant and any other guarantor of all or any part of the Guaranteed Obligations.  Guarantor hereby waives (i) promptness, diligence and notice of acceptance of this Guaranty and notice of the incurring of any obligation, indebtedness or liability to which this Guaranty applies or may apply and waives presentment for payment, notice of nonpayment, protest, demand, notice of protest, notice of intent to accelerate, notice of acceleration, notice of dishonor, diligence in enforcement and indulgences of every kind; and (ii) the taking of any other action by Landlord, including without limitation, giving any notice of default or any other notice to, or making any demand on, Tenant, any other guarantor of all or any part of the Guaranteed Obligations or any other party.  Guarantor waives any rights Guarantor now has or may hereafter have or acquire under, or any requirements imposed by, Chapter 34 of the Texas Business and Commerce Code, as in effect on the date of this Guaranty or as it may be amended from time to time.

Landlord may at any time, without the consent of or notice to Guarantor, without incurring responsibility to Guarantor and without impairing, releasing, reducing or affecting the obligations of Guarantor hereunder:  (i) sell, exchange, release, surrender, subordinate, realize upon or otherwise deal with in any manner and in any order any collateral for all or any part of the Guaranteed Obligations or this Guaranty or setoff against all or any part of the Guaranteed Obligations; (ii) neglect, delay, omit, fail or refuse to take or prosecute any action for the collection of all or any part of the Guaranteed Obligations or this Guaranty or to take or prosecute any action in connection with the Lease; (iii) exercise or enforce, or refrain from exercising or enforcing, any rights or remedies against Tenant, or otherwise act or refrain from acting, whether pursuant to the Lease or applicable law; (iv) settle or compromise all or any part of the Guaranteed Obligations and subordinate the payment of all or any part of the Guaranteed Obligations to the payment of other obligations, indebtedness or liabilities that Tenant may owe to others; (v) apply any deposit balance, fund, payment, collections through process of law or otherwise or other collateral of Tenant to the satisfaction and liquidation of any portion of the Guaranteed Obligations; and (vi) apply any sums paid to Landlord by Guarantor, Tenant or others to the Guaranteed Obligations in such order and manner as Landlord, in its sole discretion, may determine.  Other than as expressly set forth herein, Landlord shall have no greater rights against Guarantor than Landlord would have against Tenant, such that the liability of Guarantor hereunder shall be coextensive with that of Tenant; provided, however, the foregoing limitations on Guarantor's liability shall not apply in the event of Tenant's bankruptcy or insolvency.  Notwithstanding anything to the contrary contained herein, in the event Tenant's liability under the Lease is reduced or discharged by mutual agreement between Landlord and Tenant (other than as a result of Tenant's bankruptcy or insolvency), Guarantor's liability hereunder shall be similarly reduced or discharged.

Should Landlord seek to enforce the obligations of Guarantor hereunder by action in any court or otherwise, Guarantor hereby waives any requirement, substantive or procedural, that (i) Landlord first exercise or enforce any rights or remedies against Tenant or any other person or entity liable to Landlord for all or any part of the Guaranteed Obligations, including, without



 


EXHIBIT G
-1-








limitation, that a judgment first be rendered against Tenant or any other person or entity, or that Tenant or any other person or entity should be joined in such cause, or (ii) Landlord shall first exercise or enforce rights and remedies against any collateral which shall ever have been given or pledged to Landlord to secure all or any part of the Guaranteed Obligations or this Guaranty.  Such waiver shall be without prejudice to Landlord's right, at its option, to proceed against Tenant or any other person or entity, whether by separate action or by joinder.

In the event of a default in the payment or performance of all or any part of the Guaranteed Obligations after any applicable notice and cure period, when such Guaranteed Obligations becomes due, whether by its terms, by acceleration or otherwise, Guarantor shall, without notice or demand, promptly pay the amount due thereon to Landlord, in lawful money of the United States, at Landlord's address set forth in the Lease or at such other address as Landlord designates in writing from time to time hereafter.  One or more successive or concurrent actions may be brought against Guarantor, either in the same action in which Tenant is sued or in separate actions, as often as Landlord deems advisable.  The exercise or enforcement by Landlord of any right or remedy under the Lease, this Guaranty or under any other contract or agreement, at law, in equity or otherwise, shall not preclude concurrent or subsequent exercise of any other right or remedy.  No delay on the part of Landlord in exercising or enforcing any right or remedy under this Guaranty or failure to exercise or enforce the same shall operate as a waiver, release or discharge of such right or remedy.  No waiver of the provisions of this Guaranty shall be effective unless such waiver is in writing and duly executed by Landlord, and then only in the specific instance and for the purpose given.

This Guaranty is for the benefit of Landlord and its successors and assigns.  This Guaranty is binding on Guarantor and Guarantor's heirs, executors, administrators, legal representatives, trustees, successors (including, without limitation, any person or entity obligated by operation of law upon the reorganization, merger, consolidation or other change in the organizational structure of Guarantor) and assigns.

Guarantor shall pay on demand by Landlord all costs and expenses, including, without limitation, all court costs and reasonable attorneys' fees and expenses incurred by Landlord in connection with Landlord’s exercise, enforcement and/or collection of this Guaranty.  This covenant shall survive the payment of the Guaranteed Obligations and shall not be merged therein.

If any provision of this Guaranty is held by a court of competent jurisdiction to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable, shall not impair or invalidate the remainder of this Guaranty and the effect thereof shall be confined to the provision held to be illegal, invalid or unenforceable.

No modification or amendment of any provision of this Guaranty, nor consent to any departure by Guarantor therefrom, shall be effective unless such modification, amendment or consent is in writing and duly executed by Landlord and Guarantor, and then shall be effective only in the specific instance and for the purpose for which given.

All rights and remedies of Landlord hereunder are cumulative of each other and of every other right or remedy which Landlord may otherwise have at law or in equity or under the Lease or any other contract or agreement, and the exercise or enforcement by Landlord of one or more of such rights or remedies shall not prejudice or impair Landlord’s concurrent or subsequent exercise of any other rights or remedies.

THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS .  This Guaranty has been entered into in the county in Texas where Landlord's address for notice contained in the Lease is located, and it shall be performable for all purposes in such county.  Courts within the State of Texas shall have jurisdiction over any and all disputes arising under or pertaining to this Guaranty and venue for any such disputes shall be in the county or judicial district where Landlord's address for notice contained in the Lease is located.

Nothing in this Guaranty shall be interpreted to prohibit either Tenant or Guarantor from raising a defense based upon (i) an accounting issue of whether or not, and the extent to which, a required payment has been made to Landlord so long as, and to the extent, such payment has not



 


EXHIBIT G
-2-








been required to be repaid by Landlord to Tenant, Guarantor, or any third party pursuant to any court order or applicable law, or (ii) whether or not the claim is an obligation of Tenant.

Notwithstanding anything in this Guaranty to the contrary, provided there is then no monetary or material non-monetary default on behalf of Tenant under the Lease and no circumstance exists that, with the giving of notice, the passage of time, or both, would constitute a monetary or material non-monetary default under the Lease, Landlord shall, upon the first (1 st ) day of the first (1 st ) Renewal Term (as defined in Paragraph 2 of the Addendum) ("Guaranty Release Date"), release Guarantor from its obligations under this Guaranty for those obligations arising after the Guaranty Release Date.

This Guaranty contains the entire agreement between Guarantor and Landlord regarding the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings, whether oral or written, regarding such subject matter.

IN WITNESS WHEREOF, Guarantor has executed this Guaranty on the date set forth opposite its signature below, but to be effective as of the date of the Lease.


GUARANTOR :

COPART, INC.,

a Delaware corporation




Date:  February __, 2012

By:

____________________________________

Name:

____________________________________

Its duly authorized __________________________

Guarantor's Address:

_________________________________

_________________________________

Guarantor's EIN:  _____________




 


EXHIBIT G
-3-








EXHIBIT H

EXTERIOR SIGNAGE CRITERIA

TO

OFFICE LEASE


Tenant's exterior Building and parking garage signs ("hereinafter called "Sign") shall be designed, built, installed and maintained in strict accordance with the following criteria.


1.

Design :


(A)

The Sign shall be individually lighted letters mounted directly to the Building, or mounted on a continuous metal bar or raceway.  The Sign shall be lighted adequately to achieve an even lighting level across the face of the letter.  All wiring and electrical devices shall be hidden from view.  If a raceway or wiring bar is provided, it shall be colored to match the sign fascia.


(B)

Mounting of the Sign shall be performed in a workmanlike manner.  Tenant accepts responsibility for any damage to the property caused by Tenant's sign installer.


(C)

All materials used in the fabrication and mounting of the Sign, including but not limited to fasteners, bolts and screws, shall be rustproof.  If the sign fascia is metal, then the fascia shall be protected from galvanic reaction with all metal parts of the Sign.


2.

Size :  As defined in Exhibit I of this Lease


3.

Location :  The Sign shall be on the north face of the Building and the south face of the parking garage as defined on Exhibit I of this Lease.


4.

Landlord's Approval :  Tenant, at Tenant's sole expense, shall have prepared and shall submit to Landlord three (3) copies of the plans and specifications for Tenant's Sign, prior to fabrication of the Sign.  The plans shall include detailed information concerning the size, location, materials, color, electrical devices and connections.  Landlord shall have five (5) business days from receipt of the plans to approve/disapprove them.


5.

Applicable Laws :  Tenant is responsible for securing all necessary permits and approvals from governmental authorities having jurisdiction.  Tenant shall further cause the Sign to be fabricated and installed to comply with all applicable laws, rules and ordinances promulgated by the governmental authorities having jurisdiction, and in accordance with the plans as approved by Landlord.


6.

Other Signage :  Tenant shall be prohibited from placing any other signage on, about or in front of the Building, or the Demised Premises, without the prior written consent of Landlord.  This shall include but not be limited to:  banner signs, marquee signs, trailer signs, billboard signs, and window painted signs.  If Tenant violates this restriction, Landlord shall have the right, without notice to Tenant, to remove such sign without liability therefore.


7.

Maintenance :  Tenant shall maintain the Sign during the Term of this Lease and any extension thereof.  The Sign shall be kept clean and in operating condition and Tenant shall develop a continuing maintenance program to ensure same.






 


EXHIBIT H
-1-








EXHIBIT I

TENANT’S APPROVED SIGN RENDERINGS



[LEASE006.GIF]

[LEASE008.GIF]



 


EXHIBIT I
-1-











[LEASE010.GIF] [LEASE012.GIF]



 


EXHIBIT I
-2-









[LEASE014.GIF]



 


EXHIBIT I
-3-








EXHIBIT J

The following Subordination, Nondisturbance and Attornment Agreement is subject to revision and approval by the Building’s existing mortgagee and its legal counsel.



SUBORDINATION

NONDISTURBANCE

AND ATTORNMENT AGREEMENT


NOTICE:

THIS SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT RESULTS IN YOUR LEASEHOLD ESTATE IN THE PROPERTY BECOMING SUBJECT TO AND OF LOWER PRIORITY THAN THE LIEN OF SOME OTHER OR LATER SECURITY INSTRUMENT.

DEFINED TERMS

Execution Date :  __________, 2012

Beneficiary & Address :

Metropolitan Life Insurance Company, a New York corporation, and its affiliates, as applicable

10 Park Avenue

Morristown, New Jersey 07962

Attn:  Senior Vice President

        Real Estate Investments

with a copy to:

Metropolitan Life Insurance Company

___________________________

___________________________

Attn:

___________________________

___________________________

Tenant & Address :  Dallas Copart Salvage Auto Auctions Limited Partnership


Landlord & Address :  Garden Centura, L.P.


Loan:  A first mortgage loan in the original principal amount of $_______ from Beneficiary to Landlord.

Note:  A Promissory Note executed by Landlord in favor of Beneficiary in the amount of the Loan dated as of

Deed of Trust:  A Deed of Trust, Security Agreement and Fixture Filing dated as of _____ executed by Landlord, to __________ as Trustee, for the benefit of Beneficiary securing repayment of the Note to be recorded in the records of the County in which the Property is located.



 


EXHIBIT J
-1-









Lease and Lease Date:  The lease entered into by Landlord and Tenant dated as of _______________ covering the Premises.

Property:  Centura Tower

14185 Dallas Parkway

Dallas, Texas

The Property is more particularly described on Exhibit A .

THIS SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT (the "Agreement") is made by and among Tenant, Landlord, and Beneficiary and affects the Property described in Exhibit A .  Certain terms used in this Agreement are defined in the Defined Terms.  This Agreement is entered into as of the Execution Date with reference to the following facts:

A.

Landlord and Tenant have entered into the Lease covering certain space in the improvements located in and upon the Property (the "Premises").

B.

Beneficiary has made or is making the Loan to Landlord evidenced by the Note. The Note is secured, among other documents, by the Deed of Trust.

C.

Landlord, Tenant and Beneficiary all wish to subordinate the Lease to the lien of the Deed of Trust.

D.

Tenant has requested that Beneficiary agree not to disturb Tenant's rights in the Premises pursuant to the Lease in the event Beneficiary forecloses the Deed of Trust, or acquires the Property pursuant to the trustee's power of sale contained in the Deed of Trust or receives a transfer of the Property by a conveyance in lieu of foreclosure of the Property (collectively, a "Foreclosure Sale") but only if Tenant is not then in default under the Lease (after notice and expiration of applicable cure periods) and Tenant attorns to Beneficiary or a third party purchaser at the Foreclosure Sale (a "Foreclosure Purchaser").

NOW THEREFORE, in consideration of the premises and the mutual covenants contained herein, the parties agree as follows:

1.

Subordination .  The Lease and the leasehold estate created by the Lease and all of Tenant's rights under the Lease are and shall remain subordinate to the Deed of Trust and the lien of the Deed of Trust, to all rights of Beneficiary under the Deed of Trust and to all renewals, amendments, modifications and extensions of the Deed of Trust.

2.

Acknowledgments by Tenant .  Tenant agrees that: (a) Tenant has notice that the Lease and the rent and all other sums due under the Lease have been or are to be assigned to Beneficiary as security for the Loan.  In the event that Beneficiary notifies Tenant of a default under the Deed of Trust and requests Tenant to pay its rent and all other sums due to Landlord under the Lease to Beneficiary, Tenant shall pay such sums directly to Beneficiary or as Beneficiary may otherwise request. (b) Tenant shall send a copy of any default notice or statement under the Lease to Beneficiary at the same time Tenant sends such notice or statement to Landlord. (c) This Agreement satisfies any condition or requirement in the Lease relating to the granting of a nondisturbance agreement with respect to Beneficiary.  Landlord agrees to honor any payments made by Tenant to Beneficiary under Section 2(a) above as if such payment had been made to Landlord under the Lease.

3.

Foreclosure and Sale .  In the event of a Foreclosure Sale,

(a)

So long as Tenant complies with this Agreement and is not in default under any of the provisions of the Lease (after notice and expiration of any applicable cure periods), the Lease shall continue in full force and effect as a direct lease between Beneficiary and Tenant, and Beneficiary will not disturb the possession of Tenant, subject to this Agreement.  To the extent that the Lease is extinguished as a result of a Foreclosure Sale, a new lease shall automatically go into effect upon the same provisions as contained in the Lease between Landlord and Tenant, except as set forth in this Agreement, for the unexpired term of the Lease.  



 


EXHIBIT J
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Tenant agrees to attorn to and accept Beneficiary as landlord under the Lease and to be bound by and perform all of the obligations imposed by the Lease, or, as the case may be, under the new lease, in the event that the Lease is extinguished by a Foreclosure Sale.  Upon Beneficiary's acquisition of title to the Property, Beneficiary will perform all of the obligations imposed on the Landlord by the Lease except as set forth in this Agreement; provided, however, that Beneficiary shall not be:  (i) liable for any act or omission of a prior landlord (including Landlord); or (ii) subject to any offsets or defenses that Tenant might have against any prior landlord (including Landlord), except to the extent the circumstances giving rise to such offset or defense continue beyond the Foreclosure Sale; or (iii) bound by any rent or additional rent which Tenant might have paid in advance to any prior landlord (including Landlord) for a period in excess of one month or by any security deposit, cleaning deposit or other sum that Tenant may have paid in advance to any prior landlord (including Landlord); or (iv) bound by any amendment, modification, assignment or termination of the Lease made without the written consent of Beneficiary; (v) obligated or liable with respect to any representations or warranties; or (vi) liable to Tenant or any other party for any conflict between the provisions of the Lease and the provisions of any other lease affecting the Property which is not entered into by Beneficiary.

(b)

Upon the written request of Beneficiary after a Foreclosure Sale, the parties shall execute a lease of the Premises upon the same provisions as contained in the Lease between Landlord and Tenant, except as set forth in this Agreement, for the unexpired term of the Lease.

(c)

Notwithstanding any provisions of the Lease to the contrary, from and after the date that Beneficiary acquires title to the Property as a result of a Foreclosure Sale, (i) Beneficiary will not be obligated to expend any monies to restore casualty damage in excess of available insurance proceeds (however, if insurance proceeds are not sufficient to restore such casualty damage, Tenant may elect to terminate the Lease); (ii) Tenant shall not have the right to make repairs and deduct the cost of such repairs from the rent without a judicial determination that Beneficiary is in default of its obligations under the Lease; (iii) in no event will Beneficiary be obligated to indemnify Tenant, except where Beneficiary is in breach of its obligations under the Lease or where Beneficiary has been actively negligent in the performance of its obligations as landlord or where otherwise provided in Section 13.5 of the Lease; and (iv) other than determination of fair market value or a dispute regarding Landlord's failure to fund the Tenant Improvement Allowance, no disputes under the Lease shall be subject to arbitration unless Beneficiary and Tenant agree to submit a particular dispute to arbitration.

4.

Subordination and Release of Purchase Options.  Tenant represents that it has no right or option of any nature to purchase the Property or any portion of the Property or any interest in the Landlord.  To the extent Tenant has or acquires any such right or option, these rights or options are acknowledged to be subject and subordinate to the Mortgage and are waived and released as to Beneficiary and any Foreclosure Purchaser.

5.

Acknowledgment by Landlord .  In the event of a default under the Deed of Trust, at the election of Beneficiary by written notice to Tenant, Tenant shall and is directed to pay all rent and all other sums due under the Lease to Beneficiary.  Landlord agrees to honor any payments made by Tenant to Beneficiary under this Section 5 as if such payment had been made to Landlord under the Lease.

6.

Construction of Improvements .  Beneficiary shall not have any obligation or incur any liability with respect to the completion of tenant improvements for the Premises.  However, this provision shall not preclude Tenant from exercising its offset rights should Landlord fail to fund Tenant Improvement Allowance under Section 2.2.2.1.4 of the Tenant Work Letter attached to the Lease as Exhibit "E".

7.

Notice .  All notices under this Agreement shall be deemed to have been properly given if delivered by overnight courier service or mailed by United States certified mail, with return receipt requested, postage prepaid to the party receiving the notice at its address set forth in the Defined Terms (or at such other address as shall be given in writing by such party to the other parties) and shall be deemed complete upon receipt or refusal of delivery.

8.

Miscellaneous .  Beneficiary shall not be subject to any provision of the Lease that is inconsistent with this Agreement.  Nothing contained in this Agreement shall be construed to derogate from or in any way impair or affect the lien or the provisions of the Deed of Trust.  This



 


EXHIBIT J
-3-








Agreement shall be governed by and construed in accordance with the laws of the State of in which the Property is located.

9.

Liability and Successors and Assigns.  In the event that Beneficiary acquires title to the Premises or the Property, Beneficiary shall have no obligation nor incur any liability in an amount in excess of Beneficiary's interest in the Property and Tenant's recourse against Beneficiary shall in no extent exceed the amount of Beneficiary's interest in the Property.  This Agreement shall run with the land and shall inure to the benefit of the parties and, their respective successors and permitted assigns including a Foreclosure Purchaser.  If a Foreclosure Purchaser acquires the Property or if Beneficiary assigns or transfers its interest in the Note and Deed of Trust or the Property, all obligations and liabilities of Beneficiary under this Agreement shall terminate and be the responsibility of the Foreclosure Purchaser or other party to whom Beneficiary's interest is assigned or transferred.  The interest of Tenant under this Agreement may not be assigned or transferred except in connection with an assignment of its interest in the Lease.

10.

OFAC Provisions   Tenant and Beneficiary hereby represent, warrant and covenant to each other, either  that (i) it is regulated by the SEC, FINRA or the Federal Reserve (a " Regulated Entity"), or is a wholly-owned subsidiary or wholly-owned affiliate of a Regulated Entity or (ii) neither it nor any person or entity that directly or indirectly (a) controls it or (b) has an ownership interest in it of twenty-five percent (25%) or more, appears on the list of Specially Designated Nationals and Blocked Persons ("OFAC List") published by the Office of Foreign Assets Control ("OFAC") of the U.S. Department of the Treasury.  

IN WITNESS WHEREOF , the parties have executed this Subordination, Nondisturbance and Attornment Agreement as of the Execution Date.

IT IS RECOMMENDED THAT THE PARTIES CONSULT WITH THEIR ATTORNEYS PRIOR TO THE EXECUTION OF THIS SUBORDINATION, NONDISTURBANCE AND ATTORNMENT AGREEMENT.

BENEFICIARY:

METROPOLITAN LIFE INSURANCE COMPANY,

 

a New York corporation

 

By

 

 

Its

 

TENANT:

DALLAS COPART SALVAGE AND AUTO AUCTIONS LIMITED PARTNERSHIP,

 

a Texas limited partnership

 

By

 

 

Its

 

 

 

 

LANDLORD:

GARDEN CENTURA, L.P.,

 

a Texas limited partnership

 

By

 

 

Its

 





 


EXHIBIT J
-4-








EXHIBIT A

PROPERTY DESCRIPTION

BEING a tract or parcel of land situated in the Elisha Fyke Survey, Abstract No. 478, City of Farmers Branch, Dallas County, Texas, and being part of a 4.600 acre tract described in a deed recorded in Volume 72002, Page 384 of the Deed Records of Dallas County, Texas also known as a portion of Block A, Trinity Concrete Products Subdivision, an addition to the City of Farmers Branch, Dallas County, Texas, according to the plat thereof recorded in Volume 67024, Page 6, Map Records, Dallas County, Texas, and being more particularly described as follows:

BEGINNING at a PK nail found for cutback corner in the southerly right-of-way line of Spring Valley Road (R.O.W. varies) at its intersection with the cutback line for Dallas North Tollway (200’ R.O.W);

THENCE, South 48 degrees 41. minutes 28 seconds East, along said cutback line, a distance of 19.07 feet to a 1/2-inch iron pin found for cutback corner;

THENCE, South 00 degrees 18 minutes 19 seconds East, along the westerly right-of-way line of the aforesaid Dallas North Tollway, a distance of 246.44 feet to an iron pin found for the southeasterly corner of the herein described tract;

THENCE, South 89 degrees 57 minutes 12 seconds West, departing said westerly right-of-way line, along the northerly line of the A. and H. Subdivision, an addition to-the City of Farmers Branch as recorded in volume 75174, Page 0748, at 270.33 feet past an iron pin found for the northwesterly corner of said addition, and continuing for a total distance of 370.63 feet to an iron pin found for the southwesterly corner of the herein described tract;

THENCE, North 00 degrees 04 minutes 20 seconds West, a distance of 266.00 feet to an "X" cut in concrete for corner in the aforesaid southerly right-of-way line of Spring Valley Road;

THENCE; South 89 degrees 46 minutes 07 seconds East, along said southerly right-of-way, a distance of 109.46 feet to a PK nail set for corner;

THENCE. South 88 degrees 49 minutes 35 seconds east, along said southerly right-of-way line, a distance of 245.56 feet to the Point of Beginning and containing 2.244 acres of land, more or less.

Also known as a portion of Block A, Trinity Concrete Products Subdivision, an addition to the City of Farmers Branch, Dallas County, Texas, according to the plat thereof recorded in Volume 67024, Page 6, Map Records, Dallas County, Texas.

END OF EXHIBIT A




 


EXHIBIT A
-1-







 

GUARANTY

FOR VALUE RECEIVED, and in consideration for and as an inducement to Landlord (as herein defined) entering into that certain Office Lease dated as of February 3, 2012 (the “Lease”), between GARDEN CENTURA, L.P., as landlord (“Landlord”), and DALLAS COPART SALVAGE AUTO AUCTIONS LIMITED PARTNERSHIP, as tenant (“Tenant”), for the lease by Tenant of certain premises, as more particularly described in the Lease located in the Centura Tower office building at 14185 Dallas Parkway, Dallas, Texas 75254, the undersigned guarantor (“Guarantor”), jointly and severally, hereby unconditionally guarantees to Landlord and its successors and assigns the full and timely payment, performance and observance by Tenant of all of its covenants, obligations and liabilities contained in the Lease and any and all amendments, modifications, supplements of the Lease (collectively, the “Guaranteed Obligations”).

This is an absolute, continuing and unconditional guaranty of payment and not of collection. Guarantor shall be liable, jointly and severally, with Tenant and any other guarantor of all or any part of the Guaranteed Obligations. Guarantor hereby waives (i) promptness, diligence and notice of acceptance of this Guaranty and notice of the incurring of any obligation, indebtedness or liability to which this Guaranty applies or may apply and waives presentment for payment, notice of nonpayment, protest, demand, notice of protest, notice of intent to accelerate, notice of acceleration, notice of dishonor, diligence in enforcement and indulgences of every kind; and (ii) the taking of any other action by Landlord, including without limitation, giving any notice of default or any other notice to, or making any demand on, Tenant, any other guarantor of all or any part of the Guaranteed Obligations or any other party. Guarantor waives any rights Guarantor now has or may hereafter have or acquire under, or any requirements imposed by, Chapter 34 of the Texas Business and Commerce Code, as in effect on the date of this Guaranty or as it may be amended from time to time.

Landlord may at any time, without the consent of or notice to Guarantor, without incurring responsibility to Guarantor and without impairing, releasing, reducing or affecting the obligations of Guarantor hereunder: (i) sell, exchange, release, surrender, subordinate, realize upon or otherwise deal with in any manner and in any order any collateral for all or any part of the Guaranteed Obligations or this Guaranty or setoff against all or any part of the Guaranteed Obligations; (ii) neglect, delay, omit, fail or refuse to take or prosecute any action for the collection of all or any part of the Guaranteed Obligations or this Guaranty or to take or prosecute any action in connection with the Lease; (iii) exercise or enforce, or refrain from exercising or enforcing, any rights or remedies against Tenant, or otherwise act or refrain from acting, whether pursuant to the Lease or applicable law; (iv) settle or compromise all or any part of the Guaranteed Obligations and subordinate the payment of all or any part of the Guaranteed Obligations to the payment of other obligations, indebtedness or liabilities that Tenant may owe to others; (v) apply any deposit balance, fund, payment, collections through process of law or otherwise or other collateral of Tenant to the satisfaction and liquidation of any portion of the Guaranteed Obligations; and (vi) apply any sums paid to Landlord by Guarantor, Tenant or others to the Guaranteed Obligations in such order and manner as Landlord, in its sole discretion,

 

may determine. Other than as expressly set forth herein, Landlord shall have no greater rights against Guarantor than Landlord would have against Tenant, such that the liability of Guarantor hereunder shall be coextensive with that of Tenant; provided, however, the foregoing limitations on Guarantor's liability shall not apply in the event of Tenant's bankruptcy or insolvency. Notwithstanding anything to the contrary contained herein, in the event Tenant's liability under the Lease is reduced or discharged by mutual agreement between Landlord and Tenant (other than as a result of Tenant's bankruptcy or insolvency), Guarantor's liability hereunder shall be similarly reduced or discharged.

Should Landlord seek to enforce the obligations of Guarantor hereunder by action in any court or otherwise, Guarantor hereby waives any requirement, substantive or procedural, that (i) Landlord first exercise or enforce any rights or remedies against Tenant or any other person or entity liable to Landlord for all or any part of the Guaranteed Obligations, including, without limitation, that a judgment first be rendered against Tenant or any other person or entity, or that Tenant or any other person or entity should be joined in such cause, or (ii) Landlord shall first exercise or enforce rights and remedies against any collateral which shall ever have been given or pledged to Landlord to secure all or any part of the Guaranteed Obligations or this Guaranty. Such waiver shall be without prejudice to Landlord's right, at its option, to proceed against Tenant or any other person or entity, whether by separate action or by joinder.

In the event of a default in the payment or performance of all or any part of the Guaranteed Obligations after any applicable notice and cure period, when such Guaranteed Obligations becomes due, whether by its terms, by acceleration or otherwise, Guarantor shall, without notice or demand, promptly pay the amount due thereon to Landlord, in lawful money of the United States, at Landlord's address set forth in the Lease or at such other address as Landlord designates in writing from time to time hereafter. One or more successive or concurrent actions may be brought against Guarantor, either in the same action in which Tenant is sued or in separate actions, as often as Landlord deems advisable. The exercise or enforcement by Landlord of any right or remedy under the Lease, this Guaranty or under any other contract or agreement, at law, in equity or otherwise, shall not preclude concurrent or subsequent exercise of any other right or remedy. No delay on the part of Landlord in exercising or enforcing any right or remedy under this Guaranty or failure to exercise or enforce the same shall operate as a waiver, release or discharge of such right or remedy. No waiver of the provisions of this Guaranty shall be effective unless such waiver is in writing and duly executed by Landlord, and then only in the specific instance and for the purpose given.

This Guaranty is for the benefit of Landlord and its successors and assigns. This Guaranty is binding on Guarantor and Guarantor's heirs, executors, administrators, legal representatives, trustees, successors (including, without limitation, any person or entity obligated by operation of law upon the reorganization, merger, consolidation or other change in the organizational structure of Guarantor) and assigns.

Guarantor shall pay on demand by Landlord all costs and expenses, including, without limitation, all court costs and reasonable attorneys' fees and expenses incurred by Landlord in connection with Landlord’s exercise, enforcement and/or collection of this Guaranty. This covenant shall survive the payment of the Guaranteed Obligations and shall not be merged therein.

 

-2-

If any provision of this Guaranty is held by a court of competent jurisdiction to be illegal, invalid or unenforceable under present or future laws, such provision shall be fully severable, shall not impair or invalidate the remainder of this Guaranty and the effect thereof shall be confined to the provision held to be illegal, invalid or unenforceable.

No modification or amendment of any provision of this Guaranty, nor consent to any departure by Guarantor therefrom, shall be effective unless such modification, amendment or consent is in writing and duly executed by Landlord and Guarantor, and then shall be effective only in the specific instance and for the purpose for which given.

All rights and remedies of Landlord hereunder are cumulative of each other and of every other right or remedy which Landlord may otherwise have at law or in equity or under the Lease or any other contract or agreement, and the exercise or enforcement by Landlord of one or more of such rights or remedies shall not prejudice or impair Landlord’s concurrent or subsequent exercise of any other rights or remedies.

THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS . This Guaranty has been entered into in the county in Texas where Landlord's address for notice contained in the Lease is located, and it shall be performable for all purposes in such county. Courts within the State of Texas shall have jurisdiction over any and all disputes arising under or pertaining to this Guaranty and venue for any such disputes shall be in the county or judicial district where Landlord's address for notice contained in the Lease is located.

Nothing in this Guaranty shall be interpreted to prohibit either Tenant or Guarantor from raising a defense based upon (i) an accounting issue of whether or not, and the extent to which, a required payment has been made to Landlord so long as, and to the extent, such payment has not been required to be repaid by Landlord to Tenant, Guarantor, or any third party pursuant to any court order or applicable law, or (ii) whether or not the claim is an obligation of Tenant.

Notwithstanding anything in this Guaranty to the contrary, provided there is then no monetary or material non-monetary default on behalf of Tenant under the Lease and no circumstance exists that, with the giving of notice, the passage of time, or both, would constitute a monetary or material non-monetary default under the Lease, Landlord shall, upon the first (1 st ) day of the first (1 st ) Renewal Term (as defined in Paragraph 2 of the Addendum) (“Guaranty Release Date”), release Guarantor from its obligations under this Guaranty for those obligations arising after the Guaranty Release Date.

This Guaranty contains the entire agreement between Guarantor and Landlord regarding the subject matter hereof and supersedes all prior and contemporaneous agreements and understandings, whether oral or written, regarding such subject matter.

(signature page follows)

 

-3-

 

IN WITNESS WHEREOF, Guarantor has executed this Guaranty on the date set forth opposite its signature below, but to be effective as of the date of the Lease.

 

GUARANTOR:

COPART, INC.,
a Delaware corporation

   

Date: February __, 2012

By:

/s/ Paul A. Styer

 

 

Paul A. Styer, Secretary

   
 

Its duly authorized ____________________________


Guarantor's Address:

_________________________________

_________________________________

Guarantor's EIN: _____________

 

 

-4-



EXHIBIT 21.1

COPART, INC. SUBSIDIARIES

ACE AUTO PARTS, INC.
State of incorporation Oregon

COPART CANADA INC.
Doing business as Copart Auto Auctions

COPART CREDIT ACCEPTANCE CORP
State of incorporation California

COPART-DALLAS, INC.
State of incorporation Delaware
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

COPART EUROPE LIMITED

COPART-HOUSTON, INC.
State of incorporation California
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

COPART INVESTMENT HOLDINGS, LLC
Limited Liability Company Delaware

COPART LAND HOLDING, LLC
Limited Liability Company Maryland

CPRT LAND HOLDINGS, INC.
State of incorporation California

COPART LAND HOLDINGS, LLC
Limited Liability Company Connecticut

COPART OF ARIZONA, INC.
State of incorporation Arizona
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

COPART OF ARKANSAS, INC.
State of incorporation Arkansas
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

COPART OF CONNECTICUT, INC.
State of incorporation Connecticut
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

COPART OF FLORIDA, INC.
State of incorporation Florida

COPART OF HOUSTON, INC.
General Partner Texas
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

COPART OF KANSAS, INC.
State of incorporation Kansas
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

COPART OF LOUISIANA, INC.
State of incorporation Louisiana
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

COPART OF MISSOURI, INC.
State of incorporation Missouri
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

COPART OF OKLAHOMA, INC.
State of incorporation Oklahoma
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

COPART OF TENNESSEE, INC.
State of incorporation Tennessee
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

COPART OF TEXAS, INC.
General Partner Texas
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

COPART OF WASHINGTON, INC.
State of incorporation Washington
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

COPART UK LIMITED.
Doing business as Copart UK

DALLAS COPART SALVAGE AUTO AUCTIONS LIMITED PARTNERSHIP
Limited Partnership Texas
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

GULF STORAGE, INC.
State of incorporation Louisiana

HOUSTON COPART SALVAGE AUTO AUCTIONS LIMITED PARTNERSHIP
Limited partnership Texas
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

L&S TOWING AND STORAGE, LLC
Limited Liability Company Florida

MOTORS AUCTION GROUP, INC.
State of incorporation Delaware
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

TDP WEST PALM, INC.
State of incorporation Florida
Doing business as Copart Salvage Auto Auctions
Copart Auto Auctions

TRPC LIMITED

TRAPOC LIMITED
Doing business as Copart UK

U-PULL-IT LIMITED

VB 2 , INC.
State of incorporation Delaware
Doing business as VB 2

D HALES LIMITED

COPART GCC GMBH

COPART DO BRASIL PARTICIPAÇÕES LTDA

OUTBID.COM

COPART CLAIMS HANDLING SERVICES LIMITED

THE COPART PRIVATE FOUNDATION

COPART INC. POLITICAL ACTION COMMITTEE

COPART CHARITABLE FOUNDATION

JOHN HEWITT & SONS (GARAGES) LIMITED

CENTURY SALVAGE SALES LIMITED
Dormant

COPART LTD
Dormant

CORNVILLE LIMITED
Dormant

UNIVERSAL SALVAGE AUCTIONS LIMITED
Dormant

UNIVERSAL SALVAGE LIMITED
Dormant

EXHIBIT 23.1

Consent of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders of Copart, Inc.

We consent to the incorporation by reference in the Post-Effective Amendment No. 1 to Registration Statements (Form S-8 No. 33-81238) pertaining to the Copart 1994 Employee Stock Purchase Plan, (Form S-8 No. 333-93887) pertaining to the Copart 1994 Employee Stock Purchase Plan, (Form S-8 No. 333-90612) pertaining to the Copart 2001 Stock Option Plan, (Form S-8 No. 333-112597) pertaining to the Copart 1994 Employee Stock Purchase Plan, (Form S-8 No. 333-148506) pertaining to the Copart 2007 Equity Incentive Plan, and (Form S-8 No. 333-159946) pertaining to the Copart, Inc. Stand Alone Stock Option Award Agreement dated April 14, 2009 between Copart, Inc. and Willis J. Johnson and the Copart, Inc. Stand Alone Stock Option Award Agreement dated April 14, 2009 between Copart, Inc. and A. Jayson Adair of our reports dated October 1, 2012, with respect to the consolidated financial statements of Copart, Inc. and the effectiveness of internal control over financial reporting of Copart, Inc. included in this Annual Report (Form 10-K) for the year ended July 31, 2012.

/s/ Ernst & Young LLP

Dallas, Texas
October 1, 2012




                             
        EXHIBIT 31.1  
     
  CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002 		 
     
  I, A. Jayson Adair, certify that:  
           
  1.     I have reviewed this report on Form 10-K of Copart, Inc.;  
           
  2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;  
           
  3.     Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;  
           
  4.     The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:  
           
        a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;  
                 
        b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;  
                 
        c)     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  
                 
        d)     Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and  
           
  5.     The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):  
           
        a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and  
                 
        b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.  
     
        Date: October 1, 2012  
           
        /s/ A. Jayson Adair                                            
        A. Jayson Adair  
        Chief Executive Officer  



                             
        EXHIBIT 31.2  
     
  CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
AS ADOPTED PURSUANT TO SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002 		 
     
  I, William E. Franklin, certify that:  
           
  1.     I have reviewed this report on Form 10-K of Copart, Inc.;  
           
  2.     Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;  
           
  3.     Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;  
           
  4.     The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:  
           
        a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;  
                 
        b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;  
                 
        c)     Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and  
                 
        d)     Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and  
           
  5.     The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):  
           
        a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and  
                 
        b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.  
     
        Date: October 1, 2012  
           
        /s/ William E. Franklin                                     
        William E. Franklin  
        Senior Vice President of Finance
and Chief Financial Officer 		 



EXHIBIT 32.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, A. Jayson Adair, hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002, that, to the best of my knowledge, the Annual Report of Copart, Inc. on Form 10-K for the fiscal year ended July 31, 2012 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this Report fairly presents, in all material respects, the financial condition and result of operations of Copart, Inc.

           
  /s/ A. Jayson Adair                                                  
  A. Jayson Adair        
  Chief Executive Officer        

Date: October 1, 2012

A signed original of this written statement required by Section 906 has been provided to Copart, Inc. and will be retained by Copart, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished to the Securities and Exchange Commission pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing except to the extent that the Company specifically incorporates it by reference.



EXHIBIT 32.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, William E. Franklin, hereby certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the SarbanesOxley Act of 2002, that, to the best of my knowledge, the Annual Report of Copart, Inc. on Form 10-K for the fiscal year ended July 31, 2012 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this Form 10-K fairly presents, in all material respects, the financial condition and result of operations of Copart, Inc.

           
  /s/ William E. Franklin                                           
  William E. Franklin        
  Senior Vice President of Finance
and Chief Financial Officer 		       

Date: October 1, 2012

A signed original of this written statement required by Section 906 has been provided to Copart, Inc. and will be retained by Copart, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

The foregoing certification is being furnished to the Securities and Exchange Commission pursuant to 18 U.S.C. Section 1350. It is not being filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing except to the extent that the Company specifically incorporates it by reference.