SECOND SUPPLEMENT TO LIMITED OFFERING MEMORANDUM

Transcription

1 SECOND SUPPLEMENT TO LIMITED OFFERING MEMORANDUM $27,500,000 CALIFORNIA SCHOOL FINANCE AUTHORITY EDUCATIONAL FACILITIES REVENUE BONDS (TRI-VALLEY LEARNING CORPORATION PROJECT), SERIES 2012A This document supplements the Limited Offering Memorandum for the above referenced issue dated September 6, 2012, as supplemented by the Supplement to the Limited Offering Memorandum dated September 25, 2012 (as so supplemented, the Limited Offering Memorandum ). All capitalized terms not defined herein shall have the meanings ascribed thereto in the Limited Offering Memorandum. The first two paragraphs contained in the Limited Offering Memorandum under the subheading SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Loan Repayments and Base Rental Payments; Limited Obligations are amended and restated in its entirety, as follows: The Borrower will pay to the Authority from the Gross Revenues as repayment of the Loan, the Loan Repayments, and as rent under the Sublease, the Base Rental Payments, no later than the last Business Day before any date upon which any amounts payable with respect to the Bonds will become due, whether upon redemption, maturity or otherwise, including any Interest Payment Date and Principal Payment Date (each a Bond Payment Date ), until the principal of, premium, if any, and interest on, the Bonds will have been fully paid or provision for such payment will have been made as provided in the Indenture, a sum equal to the amount payable on such Bond Payment Date as principal of and premium, if any, and interest on, the Bonds as provided in the Indenture (with respect to the Loan, the Loan Repayments and with respect to the Sublease, the Base Rental Payments ). Such Loan Repayments and Base Rental Payments will be made in federal funds or other funds immediately available at the Corporate Trust Office of the Trustee, as assignee of the Authority, through the Intercept (as described more fully below). Such Loan Repayments combined with the Base Rental Payments will at all times be sufficient to pay the total amount of interest and principal (whether at maturity or upon redemption) and premium, if any, becoming due and payable on the Bonds on each Bond Payment Date; provided, any amount held by the Trustee in the Revenue Fund will be credited against the installment due on such Bond Payment Date to the extent available for such purpose under the terms of the Indenture; and provided further that if at any time the amounts held by the Trustee in the Revenue Fund are sufficient to pay all of the principal of and interest and premium, if any, on, the Bonds as such payments become due, the applicable Borrower will be relieved of any obligation to make any further payments under the Loan Agreement and the Sublease. Notwithstanding the foregoing, if on any date the amount held by the Trustee in the Revenue Fund is insufficient to make any required payments of principal of (whether at maturity or upon redemption) and interest and premium, if any, on the Bonds as such payments become due, the applicable Borrower will forewith pay such deficiency as a Loan Repayment under the Loan Agreement and/or a Base Rental Payment under the Sublease. The entire subsection in the Limited Offering Memorandum under the subheading CERTAIN COVENANTS OF THE BORROWER Limitation on Incurrence of Additional Indebtedness is amended and restated in its entirety, as follows: Except as provided below, the Borrower will not incur any additional Indebtedness (including, without limitation, Indebtedness for borrowed money, capital leases and installment sale agreements, but excluding trade payables and operating leases in the ordinary course of business). The Borrower may incur Indebtedness which meets the following requirements: (i) the stated term of such Indebtedness (taking into account all extension or renewals thereof which may

2 be made at the sole option of the Borrower) does not exceed five years; and (ii) the Maximum Annual Debt Service on such Indebtedness (the greatest aggregate amount of principal and interest payable in the then current or any future Fiscal Year), when added to the Maximum Annual Debt Service on any other Indebtedness of the Borrower incurred under this paragraph and then outstanding, does not exceed the greater of $200,000 or 2.0% of total unrestricted expenses of the Borrower for the then most recent Fiscal Year for which audited financial statements have been delivered. The Borrower may incur any Indebtedness (including additional parity Indebtedness secured in whole or in part by a deed of trust on the Facility and a security interest in the Gross Revenues on a parity with amounts secured by a deed of trust on the Facility and the security interest in the Gross Revenues granted by the Loan Agreement) only upon providing to the Trustee a Certificate of the Borrower, accompanied by a confirming accountant s certificate, to the effect that (i) based on the audited financial statements of the Borrower, the Debt Service Coverage Ratio for the most recent Fiscal Year, including the additional Indebtedness in such calculation, was at least 1.25, and (ii) the pro forma Debt Service Coverage Ratio for the thencurrent Fiscal Year, annualized to reflect twelve months of operations and including the additional Indebtedness in such calculation, is at least The Borrower may incur indebtedness for borrowed money, capital leases and installment sale agreements, but excluding trade payables and operating leases in the ordinary course of business, on a basis subordinate to the obligations of the Borrower under the Loan Agreement and liens on the Facility, Gross Revenues or other assets of the Borrower securing such subordinate indebtedness, so long as (i) such indebtedness is subordinate to the Deed of Trust and obligations under the Loan Agreement, and (ii) the pro forma Debt Service Coverage Ratio for the thencurrent Fiscal Year, annualized to reflect twelve months of operations and including such subordinate indebtedness in such calculation, is at least 1.0. The Borrower may incur any Interim Indebtedness to finance or refinance existing capital needs as in its judgment is deemed expedient, provided that in no event will the Borrower incur Interim Indebtedness, together with outstanding Short-Term Indebtedness, on a combined basis, in excess of the lesser of (i) the maximum amount of advance apportionment and principal apportionment due to the Schools in any fiscal year that is deferred at any time or subject to deferral pursuant to Section of the California Education Code or Sections and of the California Government Code, or any subsequent legislation authorizing additional deferrals of such apportionments, or (ii) 38% of the Operating Expenses for the Fiscal Year prior to the date of calculation (or during the Borrower s first Fiscal Year, its Operating Expenses during such Fiscal Year). The Borrower may incur any Short-Term Indebtedness for working capital purposes as in its judgment is deemed expedient, provided that in no event will the Borrower incur Short-Term Indebtedness, together with outstanding Interim Indebtedness, on a combined basis, in excess of the lesser of (i) the maximum amount of advance apportionment and principal apportionment due to the Schools in any fiscal year that is deferred at any time or subject to deferral pursuant to Section of the California Education Code or Sections and of the California Government Code, or any subsequent legislation authorizing additional deferrals of such apportionments, or (ii) 38% of the Operating Expenses for the Fiscal Year prior to the date of calculation (or during the Borrower s first Fiscal Year, its Operating Expenses during such Fiscal Year). Indebtedness means all obligations for borrowed money, installment sales and capitalized lease obligations, incurred or assumed by the Borrower, including Guaranties, Long- Term Indebtedness, Interim Indebtedness, Short-Term Indebtedness or any other obligation for payments of principal and interest with respect to money borrowed, except obligations subordinate to the obligations of the Borrower under the Loan Agreement and liens on the Project, Gross 2

3 Revenues or other assets of the Borrower securing such subordinate obligations, so long as same are subordinate to the Deeds of Trust and obligations under the Loan Agreement. Guaranty means all loan commitments and all obligations of any Borrower guaranteeing in any manner whatever, whether directly or indirectly, any obligation of any other Person (other than the applicable Borrower) that would, if such other Person were the applicable Borrower, constitute Indebtedness. Long-Term Indebtedness means Indebtedness having an original maturity greater than one year or renewable at the option of Tri-Valley for a period greater than one year from the date of original incurrence or issuance thereof unless, by the terms of such Indebtedness, no Indebtedness is permitted to be outstanding thereunder for a period of at least twenty (20) consecutive days during each calendar year. Interim Indebtedness means all Indebtedness having an original maturity less than or equal to five years and not renewable at the option of the Borrower for a term greater than five years from the date of original incurrence of issuance. Short-Term Indebtedness means all Indebtedness having an original maturity less than or equal to one year and not renewable at the option of the Borrower for a term greater than one year from the date of original incurrence or issuance unless, by the terms of such Indebtedness, no Indebtedness is permitted to be outstanding thereunder for a period of at least twenty (20) consecutive days during each Fiscal Year. *** The delivery of this Second Supplement to Limited Offering Memorandum has been authorized by the Authority. This Second Supplement to Limited Offering Memorandum has been reviewed and approved by the Borrower. Dated: October 3, 2012 LIVERMORE VALLEY CHARTER SCHOOL and LIVERMORE VALLEY CHARTER PREPARATORY HIGH SCHOOL, OPERATED AS TRI-VALLEY LEARNING CORPORATION By: TRI-VALLEY LEARNING CORPORATION, a California nonprofit public benefit corporation 3

4 SUPPLEMENT TO LIMITED OFFERING MEMORANDUM $27,500,000 CALIFORNIA SCHOOL FINANCE AUTHORITY EDUCATIONAL FACILITIES REVENUE BONDS (TRI-VALLEY LEARNING CORPORATION PROJECT), SERIES 2012A This document supplements the Limited Offering Memorandum for the above referenced issue dated September 6, 2012 (the Limited Offering Memorandum ). All capitalized terms not defined herein shall have the meanings ascribed thereto in the Limited Offering Memorandum. The information contained in the Limited Offering Memorandum under the subheading THE BONDS Redemption of Bonds Optional Redemption is amended and restated in its entirety, as follows: Optional Redemption. The Bonds are also subject to redemption prior to their respective stated maturities, at the option of the Borrower (a copy of which request shall be delivered to the Trustee not less than thirty-five (35) days prior to the date fixed for such redemption, or such shorter period as agreed to in writing by the Trustee in its sole discretion), from any amounts in the Redemption Fund, in whole or in part on any date on or after June 1, 2020, at the following redemption prices (expressed as a percentage of the principal amount of the Bonds to be redeemed) plus accrued interest to the date fixed for redemption: Redemption Period (Dates Inclusive) Redemption Price June 1, 2020 through May 31, % June 1, 2021 through May 31, % June 1, 2022 and thereafter 100% *** The delivery of this Supplement to Limited Offering Memorandum has been authorized by the Authority. This Supplement to Limited Offering Memorandum has been reviewed and approved by the Borrower. Dated: September 24, 2012 LIVERMORE VALLEY CHARTER SCHOOL and LIVERMORE VALLEY CHARTER PREPARATORY HIGH SCHOOL, OPERATED AS TRI-VALLEY LEARNING CORPORATION By: TRI-VALLEY LEARNING CORPORATION, a California nonprofit public benefit corporation

5 NEW ISSUE BOOK-ENTRY ONLY RATING: NOT RATED In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority, based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986 and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate alternative minimum taxable income. Bond Counsel expresses no opinion regarding any other tax consequences related to the ownership or disposition of, or the accrual or receipt of interest on, the Bonds. See TAX MATTERS herein. $27,500,000 CALIFORNIA SCHOOL FINANCE AUTHORITY EDUCATIONAL FACILITIES REVENUE BONDS (TRI-VALLEY LEARNING CORPORATION PROJECT), SERIES 2012A Dated: Date of Delivery Due: June 1, as shown on the inside cover This cover page is not a summary of this issue; it is only a reference to the information contained in this Limited Offering Memorandum. Investors must read the entire Limited Offering Memorandum to obtain information essential to the making of an informed investment decision. The California School Finance Authority Educational Facilities Revenue Bonds (Tri-Valley Learning Corporation Project), Series 2012A (the Bonds ), in the above-referenced aggregate principal amount, will be issued by the California School Finance Authority (the Authority ) pursuant to the California School Finance Authority Act (the Act ) and an Indenture, dated as of October 1, 2012 (the Indenture ), between the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee ). The Authority will loan the proceeds of the Bonds to Livermore Valley Charter School and Livermore Valley Charter Preparatory High School, both operating as Tri-Valley Learning Corporation, a California nonprofit public benefit corporation (the Borrower ) pursuant to a Loan Agreement, dated as of October 1, 2012, by and between the Authority and the Borrower (the Loan Agreement ). The Bonds are limited obligations of the Authority payable solely from Payments and any other amounts (excluding proceeds of the sale of the Bonds) held in any fund or account (except the Rebate Fund) established by the Indenture. Proceeds of the Bonds will be applied to fund (i) a loan to the Borrower to finance the acquisition, construction, improvement and equipping of certain public charter school facilities to be used and operated by the Borrower as a charter school; (ii) the rent payable by the Authority under the Site Lease (as defined herein); (iii) a debt service reserve fund for the Bonds; and (iv) certain costs of issuance and costs of delivery. The Bonds shall mature on June 1 in each of the years and in the principal amounts and shall bear interest at the rates as set forth in the tables on the inside cover hereof. The Bonds will bear interest on each June 1 and December 1, commencing December 1, Payments of principal of and interest on the Bonds will be made by the Trustee to The Depository Trust Company, New York, New York ( DTC ), for subsequent disbursement to DTC Participants, who will remit such payments to the Beneficial Owners of the Bonds. See THE BONDS General herein. The Bonds will be issued as fully registered bonds and initially be registered in the name of Cede & Co., as nominee of DTC. Purchasers will not receive certificates representing their interests in the Bonds. See THE BONDS Form and Registration of Bonds and APPENDIX E: BOOK-ENTRY SYSTEM herein. The Bonds are subject to optional, mandatory and extraordinary redemption prior to maturity as described herein. See THE BONDS Redemption of Bonds herein. THE PURCHASE AND HOLDING OF THE BONDS INVOLVE RISKS THAT MAY NOT BE APPROPRIATE FOR CERTAIN INVESTORS. THE BONDS ARE TO BE OFFERED AND SOLD (INCLUDING IN SECONDARY MARKET TRANSACTIONS) ONLY TO APPROVED INSTITUTIONAL BUYERS (DEFINED AS A QUALIFIED INSTITUTIONAL BUYER UNDER RULE 144A OF THE SECURITIES ACT OF 1933) AND ACCREDITED INVESTORS (AS DEFINED IN REGULATION D OF THE SECURITIES ACT OF 1933). THE BONDS AND BENEFICIAL INTERESTS THEREIN MAY BE TRANSFERRED, UPON SATISFACTION OF CERTAIN CONDITIONS, ONLY TO CERTAIN APPROVED INSTITUTIONAL BUYERS OR ACCREDITED INVESTORS. IN ADDITION, THE INITIAL PURCHASER OF THE BONDS WILL BE REQUIRED TO SUBMIT AN INVESTOR LETTER TO THE AUTHORITY AND THE TRUSTEE. SEE NOTICE TO INVESTORS AND TRANSFER RESTRICTIONS. THE BONDS ARE NOT AND SHALL NOT BE DEEMED TO CONSTITUTE A DEBT OR LIABILITY OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF, OTHER THAN THE AUTHORITY, AND ARE NOT AND SHALL NOT BE DEEMED TO BE A PLEDGE OF THE FAITH AND CREDIT OF THE STATE, OR ANY POLITICAL SUBDIVISION THEREOF, BUT SHALL BE PAYABLE SOLELY FROM THE FUNDS PROVIDED THEREFOR UNDER THE INDENTURE. NEITHER THE STATE NOR THE AUTHORITY SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF THE BONDS, OR THE REDEMPTION PREMIUM OR INTEREST THEREON, EXCEPT FROM THE FUNDS PROVIDED THEREFOR UNDER THE INDENTURE. THE ISSUANCE OF THE BONDS SHALL NOT DIRECTLY, INDIRECTLY OR CONTINGENTLY OBLIGATE THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF TO LEVY OR TO PLEDGE ANY FORM OF TAXATION OR TO MAKE ANY APPROPRIATION FOR THEIR PAYMENT. THE AUTHORITY HAS NO TAXING POWER. NOTHING IN THE INDENTURE, THE ACT OR OTHERWISE IS AN UNDERTAKING BY THE AUTHORITY OR THE STATE OR ANY POLITICAL SUBDIVISION THEREOF TO FUND THE TRANSFERS DESCRIBED IN THE INTERCEPT NOTICE (DEFINED HEREIN) OR TO MAKE STATE APPORTIONMENTS OR OTHER FUNDS AVAILABLE TO THE BORROWER IN ANY AMOUNT OR AT ANY TIME. The Bonds are offered when, as and if issued by the Authority and received by the Underwriter, subject to prior sale and approval of legality by Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel to the Authority. Certain legal matters will be passed upon for the Borrower by its counsel, Derek Austin, Esq., Campbell, California, and for the Authority by the Honorable Kamala D. Harris, Attorney General of the State of California and Orrick, Herrington & Sutcliffe LLP, San Francisco, California, as Disclosure Counsel. It is expected that the Bonds in definitive form will be available for delivery through the Depository Trust Company on or about October 4, Dated: September 6, WESTHOFF, CONE & HOLMSTEDT

6 MATURITY SCHEDULE $27,500,000 CALIFORNIA SCHOOL FINANCE AUTHORITY EDUCATIONAL FACILITIES REVENUE BONDS (TRI-VALLEY LEARNING CORPORATION PROJECT), SERIES 2012A $500, % Term Bond due June 1, 2022 Price: Yield: 5.500% CUSIP : AE0 $650, % Term Bond due June 1, 2032 Price: Yield: 6.625% CUSIP : AF7 $26,350, % Term Bond due June 1, 2047 Price: Yield: 7.000% CUSIP : AG5 Copyright 2012, American Bankers Association. CUSIP is a registered trademark of the American Bankers Association. The CUSIP data herein is provided by Standard & Poor s, CUSIP Service Bureau, a division of The McGraw-Hill Companies, Inc. CUSIP numbers are provided for convenience of reference only. The CUSIP numbers have been assigned by an independent company not affiliated with the Authority and are provided solely for convenience and reference. Neither the Authority, the Borrower nor the Underwriter take responsibility for the accuracy of the CUSIP numbers.

7 This Limited Offering Memorandum does not constitute an offer to sell the Bonds or the solicitation of an offer to buy, nor shall there be any sale of the Bonds by any person in any state or other jurisdiction to any person to whom it is unlawful to make such offer, solicitation or sale in such state or jurisdiction. No dealer, salesperson or any other person has been authorized to give any information or to make any representation other than those contained herein in connection with the offering of the Bonds, and, if given or made, such information or representation must not be relied upon. The information set forth herein under the captions THE AUTHORITY and ABSENCE OF MATERIAL LITIGATION The Authority has been furnished by the Authority. All other information set forth herein has been obtained from the Borrower and other sources that are believed to be reliable. The adequacy, accuracy or completeness of such information is not guaranteed by, and is not to be construed as a representation of, the Authority or the Underwriter. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Limited Offering Memorandum, nor any sale made hereunder, shall under any circumstances create any implication that there has been no change in the affairs of the Authority, The Depository Trust Company or the Borrower since the date hereof. The Underwriter has provided the following sentence for inclusion in this Limited Offering Memorandum. The Underwriter has reviewed the information in this Limited Offering Memorandum in accordance with, and as part of, its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of these transactions, but the Underwriter does not guarantee the accuracy or completeness of this information. IN CONNECTION WITH THE OFFERING OF THE BONDS, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE BONDS OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS IN THIS LIMITED OFFERING MEMORANDUM Certain statements included or incorporated by reference in this Limited Offering Memorandum constitute forward-looking statements. Such statements generally are identifiable by the terminology used such as plan, expect, estimate, budget or other similar words. Such forward-looking statements include but are not limited to certain statements contained in the information under the captions RISK FACTORS and APPENDIX A: INFORMATION CONCERNING THE PROJECT AND THE BORROWER in this Limited Offering Memorandum. The achievement of certain results or other expectations contained in such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements described to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The Borrower does not plan to issue any updates or revisions to those forward-looking statements if or when its expectations or events, conditions or circumstances on which such statements are based occur.

8 NOTICE TO INVESTORS The Bonds are to be offered and sold (including in secondary market transactions) only to Approved Institutional Buyers (defined as a qualified institutional buyer under Rule 144A of the Securities Act of 1933) and Accredited Investors (as defined in Regulation D of the Securities Act of 1933). The Indenture under which the Bonds will be issued contains provisions limiting transfers (except under certain limited circumstances described herein) of the Bonds to Approved Institutional Buyers and Accredited Investors. In addition, the face of each Bond contains a legend to the effect that such Bond can only be owned by Approved Institutional Buyers or Accredited Investors. In addition, the initial purchasers of the Bonds will be required to submit an investor letter in the form attached hereto as APPENDIX G to the Authority and the Trustee. BY ITS PURCHASE OF ANY BOND, EACH APPROVED INSTITUTIONAL BUYER AND ACCREDITED INVESTOR WHO IS A PURCHASER OF ONE OR MORE BONDS WILL BE DEEMED: 1. TO HAVE EXPERIENCE IN THE BOND MARKET, HAVE KNOWLEDGE AND EXPERIENCE IN FINANCIAL AND BUSINESS MATTERS AND BE CAPABLE OF EVALUATING THE MERITS AND RISKS OF THE BONDS, AND ABLE TO BEAR THE ECONOMIC RISK OF ITS INVESTMENT IN THE BONDS, INCLUDING A TOTAL LOSS OF PURCHASER S INVESTMENT; 2. TO REPRESENT THAT IT IS PURCHASING THE BONDS FOR ITS OWN ACCOUNT OR FOR THE ACCOUNTS OF ONE OR MORE APPROVED INSTITUTIONAL BUYERS FOR WHICH IT IS ACTING AS A FIDUCIARY OR AGENT, IN EACH CASE FOR INVESTMENT, AND NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION THEREOF IN VIOLATION OF THE SECURITIES ACT OR OTHER APPLICABLE SECURITIES LAWS, SUBJECT TO ANY REQUIREMENT OF LAW THAT THE DISPOSITION OF ITS PROPERTY OR THE PROPERTY OF SUCH APPROVED INSTITUTIONAL BUYER BE AT ALL TIMES WITHIN ITS OR THEIR CONTROL AND SUBJECT TO ITS OR THEIR ABILITY TO RESELL SUCH BONDS TO PARTIES THAT THE PURCHASER DEEMS IN GOOD FAITH TO BE SUITABLE INVESTORS; 3. TO ACKNOWLEDGE THAT THE BONDS (A) HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT AND ARE NOT REGISTERED OR OTHERWISE QUALIFIED FOR SALE UNDER THE BLUE SKY LAWS AND REGULATIONS OF ANY STATE, (B) WILL NOT BE LISTED ON ANY STOCK OR OTHER SECURITIES EXCHANGE, AND (C) MAY NOT BE READILY MARKETABLE; AND 4. ACKNOWLEDGE THAT THE AUTHORITY, THE BORROWER, THE TRUSTEE, THE UNDERWRITER AND OTHERS WILL RELY UPON THE TRUTH AND ACCURACY OF THE FOREGOING ACKNOWLEDGMENTS, REPRESENTATIONS AND AGREEMENTS.

9 TABLE OF CONTENTS Page INTRODUCTION...1 General...1 The Bonds...1 Security for the Bonds...1 THE PROJECT...2 General...2 Acquisition and Construction Costs of the Facilities...3 Construction Contract and the Contractor...3 Appraisal of Facilities...4 Environmental Status and Report...4 THE BONDS...7 Authority for Issuance; Purpose...7 General...7 Form and Registration of Bonds...8 Transfer of Bonds...8 Redemption of Bonds...8 Selection of Bonds for Redemption...9 Notice of Redemption...10 Right to Rescind Notice...10 Defeasance...10 TRANSFER RESTRICTIONS...12 PLAN OF FINANCE...13 SCHEMATIC REPRESENTATION PLAN OF FINANCE...14 ESTIMATED SOURCES AND USES OF FUNDS OF BONDS...15 DEBT SERVICE SCHEDULE...16 SECURITY AND SOURCES OF PAYMENT FOR THE BONDS...17 General...17 The Loan and the Sublease...17 Loan Repayments and Base Rental Payments; Limited Obligations...18 Intercept...19 Reserve Fund...20 Capital Maintenance and Operating Fund...22 Liquidity Fund...22 Additional Payments...23 Deeds of Trust on the Facilities...24 CERTAIN COVENANTS OF THE BORROWER...25 Annual Budget Covenant...25

10 TABLE OF CONTENTS (continued) Page Limitation on Incurrence of Additional Indebtedness...25 Cash on Hand...26 Debt Service Covenant...27 Other Covenants...27 SUBORDINATE OBLIGATIONS...27 Subordination Agreement...27 Subordinate Lease and Sublease...28 Subordinate Base Rental Payments...28 Default and Remedies...29 Intercreditor Agreement...29 CHARTER SCHOOLS...29 General...29 Chartering Authority...30 Elements of a Charter Petition...30 Charter Management Organizations...31 Charter Revocation...32 Amendments to the Charter School Law...32 Growth in Charter Schools in California...33 STATE FUNDING OF EDUCATION...33 General...33 Allocation of State Funding to Charter Schools...38 CONSTITUTIONAL AND STATUTORY PROVISIONS...40 AFFECTING EDUCATION REVENUES AND APPROPRIATION...40 Limitation on Revenues...40 THE AUTHORITY...41 RISK FACTORS...41 General...41 Possible Offsets to State Apportionment...42 California Budget Deficit...42 Bankruptcy...43 Factors Associated with the Borrower s Operations...44 Claims and Insurance Coverage...44 Risk Relating to Philanthropy and Grants...44 Limitations on Value of the Facilities and to Remedies Under the Deed of Trust...44 Purchases and Transfers of Bonds Restricted to Approved Institutional Buyers and Accredited Investors...45 Specific Risks of Charter Schools...46 Tax Related Issues...46 ii

11 TABLE OF CONTENTS (continued) Page Other Limitations on Enforceability of Remedies...48 ABSENCE OF MATERIAL LITIGATION...48 The Authority...48 The Borrower...48 TAX MATTERS...48 APPROVAL OF LEGALITY...50 NO RATING...50 LIMITED OFFERING OF BONDS...51 CONTINUING DISCLOSURE...51 UNDERWRITING...51 MISCELLANEOUS...52 APPENDIX A INFORMATION CONCERNING THE PROJECT AND THE BORROWER... A-1 APPENDIX B AUDITED FINANCIAL STATEMENTS OF TRI-VALLEY FOR THE FISCAL YEAR ENDED JUNE 30, B-1 APPENDIX C SUMMARY OF PRINCIPAL DOCUMENTS...C-1 APPENDIX D FORM OF CONTINUING DISCLOSURE AGREEMENT... D-1 APPENDIX E BOOK-ENTRY SYSTEM...E-1 APPENDIX F FORM OF OPINION OF BOND COUNSEL... F-1 APPENDIX G FORM OF INVESTOR LETTER... G-1 iii

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13 LIMITED OFFERING MEMORANDUM $27,500,000 CALIFORNIA SCHOOL FINANCE AUTHORITY EDUCATIONAL FACILITIES REVENUE BONDS (TRI-VALLEY LEARNING CORPORATION PROJECT), SERIES 2012A INTRODUCTION General This Limited Offering Memorandum, including the cover page and Appendices hereto (the Limited Offering Memorandum ), is provided to furnish information with respect to the sale and delivery of $27,500,000 aggregate principal amount of Educational Facilities Revenue Bonds (Tri-Valley Learning Corporation Project), Series 2012A (the Bonds ) of the California School Finance Authority (the Authority ). Capitalized terms not otherwise defined herein shall have the meanings set forth in the Indenture (defined below). The Bonds The Bonds will be issued pursuant to Chapter 18 (commencing with Section 17170) of Part 10 of Division 1 of Title 1 of the Education Code of the State of California (the Act ) and an Indenture, dated as of October 1, 2012 (the Indenture ), between the Authority and The Bank of New York Mellon Trust Company, N.A., as trustee (the Trustee ). The Bonds will bear interest on each June 1 and December 1, commencing December 1, 2012 (each an Interest Payment Date ) and will be subject to redemption prior to maturity as set forth under THE BONDS Redemption of Bonds herein. Proceeds of the Bonds will be (a) loaned (the Loan ) to the Livermore Valley Charter School and Livermore Valley Charter Preparatory High School, both operating as Tri-Valley Learning Corporation, a California nonprofit public benefit corporation (the Borrower ) pursuant to a Loan Agreement, dated as of October 1, 2012 (the Loan Agreement ), between the Authority and the Borrower, and applied to finance the acquisition, construction, improvement and equipping of certain public charter school facilities to be used and operated by the Borrower as a charter school (as more fully described herein, the Facility or Facilities ); (b) used to fund the rent payable by the Authority under the Site Lease, dated as of October 1, 2012 (the Site Lease ), between the Authority, as lessee and Montevina Phase I, LLC, as lessor; (c) used to fund a debt service reserve fund for the Bonds; and (d) used to pay certain costs of issuance of the Bonds and costs of delivery of the Montevina Leases (as defined herein). Simultaneously with the execution, delivery and recordation of the Site Lease, the Authority will enter into a Sublease, dated as of October 1, 2012 (the Sublease ), between the Authority, as sublessor and the Borrower, as sublessee. See THE PROJECT and APPENDIX A: INFORMATION CONCERNING THE PROJECT AND THE BORROWER herein. Security for the Bonds The principal of and interest on the Bonds are payable solely from all Payments and any other amounts (excluding proceeds of the sale of Bonds) held in any fund or account (other than the Rebate Fund and the Indemnification Fund) established pursuant to the Indenture. Pursuant to the Indenture, all of the Payments (except Payments with respect to the Intercept, as described below) and other amounts (excluding proceeds of the sale of Bonds) held in any fund or account (other than the Rebate Fund and the Indemnification Fund) established pursuant to the Indenture and all of the right, title and interest of the Authority in, to and under the Loan Agreement (except for the Retained Rights, as defined under SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Loan and the Sublease ) are pledged to the Trustee for the benefit of the Holders from time to time of the Bonds. The Trustee will be entitled to and will receive all of the Payments, and any Payments collected or received by the Authority will be deemed to be held, and to have been collected or received, by the Authority as the agent of the Trustee and will forthwith be paid by the Authority to the Trustee.

14 Payments under the Indenture means (i) all moneys (except any money received to be used for the payment of Administrative Fees and Expenses) received by the Trustee with respect to the Intercept (as discussed below), (ii) all moneys, if any, received by the Trustee directly from, or on behalf of, the Borrower, pursuant to the Loan Agreement (excluding Additional Payments as defined herein), (iii) all moneys, if any, received by the Trustee directly from, or on behalf of, the Borrower, pursuant to the Sublease (excluding Additional Payments as defined herein) and (iv) all income derived from the investment of any money in any fund or account established pursuant to the Indenture. Payments does not include Subsidy Payments (as defined below). All Payments shall be held in trust for the benefit of the Holders from time to time of the Bonds but shall nevertheless be disbursed, allocated and applied solely for the uses and purposes set forth in the Indenture. As further security for the Bonds, in connection with the issuance of the Bonds, the Borrower will provide instructions to the State Controller s Office (the Controller ) to make an apportionment to the Trustee in amounts and on dates provided in a written notice (the Intercept Notice ) sufficient to repay the Bonds and pay necessary and incidental costs. Funds received by the Trustee pursuant to the Intercept described in clause (i) of the definition of Payments will be held in trust and will be disbursed, allocated and applied solely for the uses and purposes set forth in the Indenture, including if necessary, the payment of debt service on the Bonds. Under state law, no party, including the Borrower or any of its creditors will have any claim to the money apportioned or to be apportioned to the Trustee by the State Controller pursuant to the Intercept. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Intercept and RISK FACTORS Bankruptcy below. General THE PROJECT At present, the Borrower operates two charter schools at leased facilities from the Livermore Valley Joint Unified School District pursuant to Proposition 39. The Project consists of the acquisition, leasing, construction, improvement and equipping of the Facilities (including, but not limited to, the improvement of certain of the existing buildings into classrooms and administrative spaces and the construction of hard courts and a multiple purpose field for athletic and extracurricular use), which will house the Livermore Valley Charter School ( LVCS ), grades K-8, and athletic facilities for LVCS and Livermore Valley Charter Preparatory High School ( LVCP ), grades See APPENDIX A: INFORMATION CONCERNING THE PROJECT AND THE BORROWER herein for more information. Upon completion of construction, LVCS will vacate the current facility located on Sonoma Avenue in the City of Livermore and will move to the new site described below. LVCP will remain at its present location at 2451 Portola Avenue in the City of Livermore. See the Location Map on page 5 for more information about the location of these sites. The Borrower intends to acquire or lease or sublease 16 office buildings totaling 98,400 square feet on 9.88 acres (the Campus Buildings ) and the adjoining vacant 12.4-acres parcel (the Campus Lot ) located on North Canyons Parkway at its intersection with Constitution Drive in the City of Livermore (collectively, the Montevina Campus ). The owner of 14 of the 16 Campus Buildings (the Montevina Buildings ) and the entirety of the Campus Lot have agreed under the Site Lease and the Limited Obligation Site Lease, dated as of October 1, 2012 (the Subordinate Site Lease ), between Montevina Phase II, LLC and the Authority, to lease such Facilities to the Authority, who will sublease such Facilities to the Borrower pursuant to the Sublease and the Subordinate Sublease, dated as of October 1, 2012 (the Subordinate Sublease ), between the Authority and the Borrower. Phase I consists of the lease and sublease of 12 of the 14 Montevina Buildings (the Phase I Montevina Buildings ). Phase II consists of the lease and sublease of the remaining two Montevina Buildings (the Phase II Montevina Buildings ) and the Campus Lot. After the term of such leases, the current owner will convey fee title in the Facilities, free and clear at the end of the 23-year lease term (the term length allowed under the Qualified School Construction Bond ( QSCB ) rules). The Site Lease, the Subordinate Site Lease, the Sublease and the Subordinate Sublease are collectively referred to herein as the Montevina Leases. As further described below, the Borrower intends to acquire fee title to the 15th Campus Building (the Administration Building ), with proceeds of the Bonds, and to lease the remaining 16th Campus Building (the Rental Building ) from its owner, which lease will not be financed with proceeds of the Bonds. 2

15 The Campus Buildings located on the Montevina Campus comprise one and two-story office buildings ranging in size from 3,600 to 13,200 square feet, averaging 6,560 square feet per building. The Montevina Buildings to be leased and subleased pursuant to the Montevina Leases have never been sold and are in shell condition with no interior walls, finished ceilings, bathrooms, or floor coverings, but the electrical panels and roofmounted HVAC units have been installed. Four of the Montevina Buildings are two-stories with installed elevators. The Administration Building, located at 3252 Constitution Drive, will be acquired by the Borrower through financing with proceeds of the Bonds. The Rental Building, located at 3110 Constitution Drive, will be leased by the Borrower from such building s owner. Such lease of the Rental Building will not be financed with proceeds of the Bonds. The Borrower acquired a conditional use permit for use as a school on the Montevina Campus on February 1, The required construction permits will be acquired by the City of Livermore upon the closing of this financing and payment to the contractors. At the date of delivery of the Bonds, Montevina Phase I, LLC and Montevina Phase II, LLC will be owned in their entirety by Anthony Cone and Mark Holmstedt, who are principals of Westhoff, Cone & Homstedt, the underwriter of the Bonds. Acquisition and Construction Costs of the Facilities Structures currently on the Facilities site will be renovated for use as school buildings. The costs of the Facilities are estimated by the Borrower to be approximately as follows (including contingencies): Acquisition of Land and Buildings Phase I Montevina Phase II Montevina Administration Construction Contract and the Contractor $ 7,400,000 15,000,000 3,140,000 Improvements 13,000,000 Design, Engineering, Legal and Other Consultants 1,273,000 Total $39,813,000 Source: The Borrower. The Borrower initially expected to begin construction in June 2012 and to complete construction by September 2012 in time for occupancy in the fall of Due to various reasons, the acquisition of the Montevina Campus and construction and renovation therein were delayed. The Borrower has worked with its design and construction team to accommodate such delay. As a result of the revised plan and scheduling, the Borrower expects to start the upcoming school year at the two currently leased school facilities for LVCS and LVCP, which facilities can accommodate the enrolled student population until the Borrower is able to occupy the Montevina Campus. The Borrower plans to move to the Montevina Campus in January 2013, after the winter holiday. If necessary, the Borrower is able to defer noncritical elements of construction to future breaks in the academic calendar to avoid disruptions to school operations. In the event that there are further delays and the Montevina Campus is not ready for school operations by January 2013, the Borrower can maintain its leases on both of the current facilities for LVCS and LVCP. When construction commences, it is expected that the Facilities will be renovated by Devcon Construction Incorporated (the Contractor ) of Stockton, California under a Standard Design-Build Agreement (the Construction Contract ) at a maximum price of $13,000,000. The Construction Contract is only for construction and does not include furnishing the Facilities. The Borrower believes that the fiscal impact from the planned move to the Montevina Campus in January 2013 will not prevent the Borrower from meeting its fiscal covenants associated with the Bonds and the Montevina Leases. 3

16 The Contractor was founded in 1976 and in its thirty-six year history, the Contractor has built over 30 million square feet of office, commercial, K-12, higher education and industrial space throughout Northern California. Sales volume for the Contractor in 2011 was approximately $435 million. For more information about the Contractor see APPENDIX A: INFORMATION CONCERNING THE PROJECT AND THE BORROWER THE PROJECT. Appraisal of Facilities Phase I and Phase II were appraised on May 18, 2011, by CB Richard Ellis. The appraisal includes the Administration Building which will be acquired in fee simple upon the delivery of the Bonds and is fully built out and functional. The total appraisal value of the property in Phase I and Phase II being acquired by the Borrower is $19,275,000. This appraisal value does not consider the improvements to the Montevina Buildings, which will be completed with proceeds from the Bonds, or the construction of athletic fields and facilities. A summary of the appraisal report is available upon request from the Borrower, currently located at 2451 Portola Avenue, Livermore, California. Environmental Status and Report A Phase I Environmental Site Assessment was conducted by Tetra Tech EM Inc., dated March 5, 2007 (the 2007 ESA Report ), prior to the construction of the 16 buildings located on the Montevina Campus. The 2007 ESA Report concluded that the site in question had no recognized environmental concerns. At the request of the Borrower, R&M Environmental and Infrastructure Engineering, Inc. prepared an update to the 2007 ESA Report, dated November 23, 2010 (the 2010 ESA Report ), to take into account, among other things, changes in the condition of the Montevina Campus as well as changes, if any, in the neighboring land uses that may have brought about or can potentially bring about recognized environmental concerns. The 2010 ESA Report confirms the finding of the 2007 ESA Report of the absence of recognized environmental conditions as defined in the American Society for Testing and Materials Standard Practice E , Standard Practice for Environmental Site Assessment Practice. 4

17 Tri-Valley Learning Corporation Location Map Montevina Campus Site 5

18 Tri-Valley Learning Corporation Aerial View of Project Site (Montevina) The Montevina Campus is shown in the photo above. The Campus Buildings are located immediately below the open space in the center of the picture and bounded by the court on their right. The green, vacant land to the right of the court is the Campus Lot and represents a portion of Phase II. 6

19 THE BONDS The following is a summary of certain provisions of the Bonds. Reference is made to the Bonds for the complete text thereof and to the Indenture for all of the provisions relating to the Bonds. The discussion herein is qualified by such reference. For a summary of the Indenture, see APPENDIX C: SUMMARY OF PRINCIPAL DOCUMENTS herein. Authority for Issuance; Purpose The Bonds are issued pursuant to the Act, resolutions adopted by the Authority and the Borrower, and the Indenture to fund (i) a loan to the Borrower to finance the acquisition, construction, improvement and equipping of certain public charter school facilities to be used and operated by the Borrower as a charter school; (ii) the rent payable by the Authority under the Site Lease; (iii) a debt service reserve fund for the Bonds; and (iv) certain costs of issuance of the Bonds and costs of delivery of the Montevina Leases. General The Bonds are being issued in the aggregate principal amount set forth on the cover of this Limited Offering Memorandum. The Bonds will be initially delivered as registered Bonds in denominations of $250,000 and any integral multiple of $5,000 in excess thereof (the Authorized Denominations ). The Authorized Denominations may be modified subject to meeting the requirements outlined in TRANSFER RESTRICTIONS below. The Bonds will be dated their dated date of issuance and will bear interests at the rate set forth on the inside cover page hereof from their dated date. Interest on the Bonds will be calculated on the basis of a 360-day year of twelve 30-day months and will be payable in arrears on each Interest Payment Date. The Bonds will mature in the amounts and in each of the years as set forth in the inside cover page hereof. The Bonds, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company (the Depository ), and will be evidenced by one Bond for each maturity in the total aggregate principal amount of the Bonds of such maturity. Registered ownership of the Bonds, or any portion thereof, may not thereafter be transferred except as set forth in the Indenture. So long as Cede & Co. is the registered owner of the Bonds, as nominee of the Depository, references herein to the bondholders, holders or registered owners will mean Cede & Co. as aforesaid and will not mean the beneficial owners of the Bonds. The principal of and interest on the Bonds will be payable in lawful money of the United States of America upon surrender at the Principal Corporate Trust Office of the Trustee. The interest on any Bond will be payable to the person whose name appears on the registration books of the Trustee as the registered owner thereof as of the close of business on the fifteenth day of the calendar month immediately preceding the Interest Payment Date (the Record Date ), such interest to be paid by check mailed by first class mail, postage prepaid, on the Interest Payment Date, to the registered owner at his or her address as it appears on such registration books. Notwithstanding the foregoing, however, any holder of all the Bonds and any holder of $1,000,000 or more in an aggregate principal amount of the Bonds will be entitled to receive payments of interest on the Bonds held by it by wire transfer of immediately available funds to such bank or trust company located within the United States of America as such other holder will designate in writing to the Trustee by the first Record Date for such payment. So long as Cede & Co. is the registered owner of the Bonds, principal of and interest on the Bonds are payable in same day funds by the Trustee to Cede & Co., as nominee for the Depository. Any interest not punctually paid or duly provided for will thereafter cease to be payable to the bondholder on the Record Date and will be paid to the person in whose name the Bond is registered at the close of business on a date established by the Trustee pursuant to the Indenture as a record date (the Special Record Date ) for the payment of such defaulted interest. The Special Record Date will be fixed by the Trustee, notice thereof being given to the bondholders not less than 10 days prior to such Special Record Date. 7

20 Form and Registration of Bonds Individual purchases of the Bonds will initially be made in Book-Entry form only under the Book-Entry System, in Authorized Denominations. Except in the event that use of the Book-Entry System is discontinued for the Bonds, Beneficial Owners (defined herein) will not receive physical certificates representing their ownership interests in the Bonds. Principal of and interest on the Bonds will be paid by the Trustee to DTC, which will in turn remit such principal and interest to its Participants (defined herein), for subsequent distribution to the Beneficial Owners of the Bonds, as described herein. The Bonds may be transferred or exchanged in the manner described in the Bonds and as referenced in the Indenture. See APPENDIX E: BOOK-ENTRY SYSTEM herein. Transfer of Bonds The Bonds will be issued in book-entry only form, as described in the preceding paragraph. Registered ownership of the Bonds, or any portion thereof, may not thereafter be transferred, except as provided in the Indenture: (i) to any successor of Cede & Co., as nominee of DTC, or its nominee, or to any designated substitute depository, (ii) to any substitute depository selected by the Authority upon (1) the resignation of DTC or its successor from its function as depository, or (2) because DTC or its successor is no longer able to carry out its function as depository; or (iii) to any person as provided in the Indenture upon (1) the resignation of DTC or its successor from its function as depository, or (2) a determination by the Authority to remove DTC or its successor from its function as depository. Transfer of the Bonds is restricted as described in TRANSFER RESTRICTION herein. Redemption of Bonds Extraordinary Optional Redemption From Insurance and Condemnation Proceeds. The Bonds are subject to redemption prior to their stated maturity, at the option of the Borrower as a whole or in part on any date from moneys required to be transferred from the Insurance and Condemnation Proceeds Fund to the Redemption Fund at a redemption price equal to the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium. See APPENDIX C: SUMMARY OF PRINCIPAL DOCUMENTS THE LOAN AGREEMENT Maintenance, Taxes, Insurance and Condemnation herein. Extraordinary Optional Construction Related Redemption. The Bonds are also subject to redemption in part prior to their stated maturity, at the option of the Borrower, from amounts transferred from the Project Fund following completion of the Project in accordance with the Indenture. See APPENDIX C: SUMMARY OF PRINCIPAL DOCUMENTS THE INDENTURE Funds Project Fund. Optional Redemption. The Bonds maturing on or after June 1, 2032 are also subject to redemption prior to their respective stated maturities, at the option of the Borrower (a copy of which request shall be delivered to the Trustee not less than thirty-five (35) days prior to the date fixed for such redemption, or such shorter period as agreed to in writing by the Trustee in its sole discretion), from any amounts in the Redemption Fund, in whole or in part on any date on or after June 1, 2022, at a redemption price equal to 100% of the principal amount of the Bonds called for redemption, plus accrued interest to the date fixed for redemption. Mandatory Sinking Account Redemption. The Bonds maturing on June 1, 2022 are also subject to redemption prior to their respective stated maturities in part, by lot, from Mandatory Sinking Account Payments established pursuant to the Indenture on June 1 in each of the years and in the respective principal amounts set forth in the following schedule, at a redemption price equal to the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium: Mandatory Redemption Date Principal (June 1) Amount 2021 $125, * 375,000 * Final Maturity 8

21 The Bonds maturing on June 1, 2047 are also subject to redemption prior to their respective stated maturities in part, by lot, from Mandatory Sinking Account Payments established pursuant to the Indenture on June 1 in each of the years and in the respective principal amounts set forth in the following schedule, at a redemption price equal to the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium: Selection of Bonds for Redemption Mandatory Redemption Date (June 1) Principal Amount 2014 $ 220, , , , , , , , , , , , , , , , , , , , , , ,015, ,085, ,160, ,240, ,330, ,420, ,520, ,625, ,740, ,865, * 1,995,000 * Final Maturity When any redemption is made pursuant to any of the provisions of the Indenture and less than all of the Outstanding Bonds are to be redeemed, the Trustee will select the Bonds to be redeemed from the Outstanding Bonds not previously called for redemption, by lot within a maturity and, if from more than one maturity, in inverse order of maturity or in such other order of maturity as will be specified in a Request of the Borrower and the Mandatory Sinking Account Payments will be reduced pro-rata. In no event will Bonds be redeemed in amounts other than whole multiples of Authorized Denominations. For purposes of redeeming Bonds in denominations greater than minimum Authorized Denominations, the Trustee will assign to such Bonds a distinctive number for each such principal amount and, in selecting Bonds for redemption by lot, will treat such amounts as separate Bonds. The Trustee will promptly notify the Authority in writing of the numbers of the Bonds selected for redemption 9

22 Notice of Redemption Notice of extraordinary optional redemption and optional redemption will be given by the Trustee upon the written request of the Borrower. Notice of redemption of the Bonds will be mailed postage prepaid, not less than thirty (30) nor more than sixty (60) days prior to the redemption date (i) by first class mail to the respective Holders of the Bonds at the addresses appearing on the registration books of the Trustee. Each notice of redemption will contain all of the following information: (i) the date of such notice; (ii) the name of the affected Bonds and the date of issue of the Bonds; (iii) the redemption date; (iv) the redemption price, if available; (v) the dates of maturity of the Bonds to be redeemed; (vi) if less than all of the Bonds are to be redeemed, the distinctive numbers of the Bonds of each maturity to be redeemed; (vii) in the case of Bonds to be redeemed in part only, the respective portions of the principal amount of the Bonds of each maturity to be redeemed; (viii) the CUSIP number, if any, of each maturity of Bonds to be redeemed; (ix) a statement that such Bonds must be surrendered by the Holders at the Principal Corporate Trust Office of the Trustee, or at such other place or places designated by the Trustee; (x) a statement that any such redemption notice can be rescinded as provided in the Indenture; and (xi) notice that further interest on such Bonds, if any, will not accrue from and after the designated redemption date. Each notice of redemption may provide that no representation is made as to the accuracy or correction of any CUSIP numbers provided therein or on the Bonds. The actual receipt by the Holder of any Bond, or any other party, of notice of redemption will not be a condition precedent to redemption, and failure to receive such notice, or any defect in the notice given, will not affect the validity of the proceedings for the redemption of such Bonds or the cessation of interest on the date fixed for redemption. When notice of redemption has been given substantially as described above, and when the redemption price of the Bonds called for redemption is set aside for such purpose, the Bonds designated for redemption will become due and payable on the specified redemption date and interest, if any, will cease to accrue thereon as of the redemption date, and upon presentation and surrender of such Bonds, at the place specified in the notice of redemption, such Bonds will be redeemed and paid at the redemption price thereof out of the money provided therefor. The Holders of such Bonds so called for redemption after such redemption date shall look for the payment of such Bonds and the redemption premium thereon, if any, only to the escrow fund established for such purpose. All Bonds redeemed shall be cancelled forthwith by the Trustee and shall not be reissued. Right to Rescind Notice Upon oral notice, promptly confirmed by written notice from the Borrower that the Borrower has cured the conditions that caused the Bonds to be subject to extraordinary redemption, the Borrower may rescind any extraordinary redemption and notice thereof on any date prior to the date fixed for redemption by causing written notice of the rescission to be given to the Holders of the Bonds so called for redemption, with a copy to the Trustee. Notice of rescission of redemption will be given in the same manner in which notice of redemption was originally given. The actual receipt by the Holder of any Bond of notice of such rescission will not be a condition precedent to rescission, and failure to receive such notice or any defect in such notice will not affect the validity of the rescission. Defeasance Discharge of Indenture. Bonds may be paid by the Authority in any of the following ways, provided that the Authority also pays or causes to be paid any other sums payable under the Indenture by the Authority: (i) by paying or causing to be paid the principal of and interest on the Bonds Outstanding as and when the same become due and payable; (ii) by depositing with the Trustee, in trust, at or before maturity, money or securities in the necessary amount (as described under Defeasance Deposit of Money or Securities with Trustee herein) to pay or redeem Bonds Outstanding; or (iii) by delivering to the Trustee, for cancellation by it, all Bonds Outstanding. If the Authority pays all Bonds then Outstanding as provided above and will also pay or cause to be paid all other sums payable under the Indenture by the Authority, then and in that case, at the election of the Authority (evidenced by a Certificate of the Authority, filed with the Trustee, signifying the intention of the Authority to 10

23 discharge all such indebtedness and the Indenture), and notwithstanding that any Bonds will not have been surrendered for payment, the Indenture and the pledge of Payments made under the Indenture and all covenants, agreements and other obligations of the Authority under the Indenture will cease, terminate, become void and be completely discharged and satisfied, except as provided in the Indenture. In such event, upon request of the Authority, the Trustee will cause an accounting for such period or periods as may be requested by the Authority to be prepared and filed with the Authority and will execute and deliver to the Authority all such instruments as may be necessary or desirable to evidence such discharge and satisfaction, and the Trustee will pay over, transfer, assign or deliver to the Authority all moneys or securities or other property held by it pursuant to the Indenture which are not required for the payment of Bonds not theretofore surrendered for such payment and which are not required for the payment of fees and expenses of the Trustee. Discharge of Liability on Bonds. Upon the deposit with the Trustee, in trust, at or before maturity, of money or securities in the necessary amount to pay any Outstanding Bond, whether upon or prior to its maturity, then all liability of the Authority in respect of such Bond shall cease, terminate and be completely discharged, except only that thereafter the Holder thereof shall be entitled to payment of the principal of and interest on such Bond by the Authority, and the Authority shall remain liable for such payment but only out of the money or securities deposited with the Trustee as aforesaid for its payment. The Authority may at any time surrender to the Trustee for cancellation by it any Bonds previously issued and delivered, which the Authority may have acquired in any manner whatsoever, and such Bonds, upon such surrender and cancellation, shall be deemed to be paid and retired. Deposit of Money or Securities with Trustee. Whenever in the Indenture it is provided or permitted that there be deposited with or held in trust by the Trustee money or securities in the amount necessary to pay any Bonds, such amount (which may include money or securities held by the Trustee in the funds established pursuant to the Indenture) will be equal (taking into account income which will accrue from the investment thereof on the date of deposit of such funds but without taking into account any income from the subsequent reinvestment thereof) to the principal amount of such Bonds and all unpaid interest thereon to maturity, and will be: (a) lawful money of the United States of America; or (b) noncallable bonds, bills and bonds issued by the Department of the Treasury (including without limitation (1) obligations issued or held in book-entry form on the books of the Department of the Treasury and (2) the interest component of Resolution Funding Corporation strips for which separation of principal and interest is made by request to the Federal Reserve Bank of New York in book-entry form), United States Treasury Obligations State and Local Government Series and Zero Coupon United States Treasury Bonds; provided, in each case, that the Trustee will have been irrevocably instructed (by the terms of the Indenture or by Request of the Authority) to apply such money to the payment of such principal of and interest on such Bonds and provided, further, that the Authority and the Trustee will have received (i) an Opinion of Bond Counsel to the effect that such deposit shall not cause interest on the Bonds to be included in the gross income of the Holder thereof for federal income tax purposes and that the Bonds to be discharged are no longer Outstanding; and (ii) a verification report of a firm of certified public accountants or other financial services firm acceptable to the Authority verifying that the money or securities so deposited or held together with earnings thereon will be sufficient to make all payments of principal of and interest on the Bonds to be discharged to and including their maturity date. Payment of Bonds After Discharge of Indenture. Notwithstanding any provision of the Indenture, and subject to applicable escheat laws, any moneys held by the Trustee in trust for the payment of the principal of or interest on any Bonds and remaining unclaimed for one year after the principal of all the Outstanding Bonds has become due and payable (whether at maturity or by declaration as provided in the Indenture), if such moneys were so held at such date, or two years after the date of deposit of such moneys if deposited after said date when all of the Bonds became due and payable, shall be repaid to the Borrower free from the trusts created by the Indenture, and all liability of the Trustee with respect to such moneys shall thereupon cease; provided, however, that before the repayment of such moneys to the Borrower as aforesaid, the Trustee may (at the cost of the Authority) first mail to the Holders of Bonds which have not yet been paid, at the addresses shown on the registration books maintained by the Trustee, a notice, in such form as may be deemed appropriate by the Trustee, with respect to the Bonds so payable and not presented and with respect to the provisions relating to the repayment to the Borrower of the moneys held for the payment thereof. 11

24 TRANSFER RESTRICTIONS The Bonds are to be offered and sold (including in secondary market transactions) only to Approved Institutional Buyers (defined as a qualified institutional buyer under Rule 144A of the Securities Act of 1933) or Accredited Investors (as defined in Regulation D of the Securities Act of 1933). The Indenture contains provisions limiting transfers of the Bonds and beneficial ownership interests in the Bonds only to Approved Institutional Buyers and Accredited Investors and requiring that the Authorized Denominations of the Bonds be $250,000 and any multiple of $5,000 in excess thereof. In addition, the face of each Bond will contain a legend indicating it can only be registered in the name of, or transferred to, Approved Institutional Buyers and Accredited Investors, and that by acceptance of such Bond the Holder represents that it is an Approved Institutional Buyer or is an Accredited Investor. See RISK FACTORS Purchases and Transfers of Bonds Restricted to Approved Institutional Buyers and Accredited Investors herein. In addition, the initial purchasers of the Bonds will be required to submit an investor letter in the form attached hereto as APPENDIX G to the Authority and the Trustee The Authority may remove the restrictions described in the immediately preceding paragraph without consent of any Bondholder. At such time as the Borrower shall provide to the Authority and the Trustee written evidence to the effect that any Rating Agency has rated the Bonds BBB- or equivalent, or higher (without regard for gradation within a rating category and without regard for credit enhancement unless such credit enhancement extends through the final maturity date of the Bonds), the restrictions from the Indenture restricting the Bonds to be offered, sold, and transferred only to Approved Institutional Buyers or Accredited Investors will be of no further force or effect and the Authorized Denominations shall be $5,000 and any multiple in excess thereof. Upon receipt of such written evidence, the Trustee will immediately notify each Bondholder of the Bonds that such restrictions set forth in the Indenture requiring that the beneficial owners of the Bonds be Approved Institutional Buyers or Accredited Investors will be of no further force or effect. 12

25 PLAN OF FINANCE The Project consists of (i) the acquisition of the Montevina Buildings and the Campus Lot by the Borrower through a lease-purchase arrangement evidenced by, with respect to the Phase I Montevina Buildings, the Site Lease and the Sublease, and with respect to the Phase II Montevina Buildings and the Campus Lot, the Subordinate Site Lease and Subordinate Sublease, (ii) the costs of the acquisition of the Administration Building and (iii) the costs of renovation, improvement and equipping of the Facilities for use as public charter schools. See THE PROJECT above. The total Project cost of approximately $39.8 million will be funded from two primary sources: (i) approximately $24.8 million will be funded from the proceeds of the Bonds, and (ii) $15 million will be funded through the Subordinate Sublease. On the Closing Date, a one-time rent payment of $7.4 million will be made by the Authority for the Phase I Montevina Buildings pursuant to the Site Lease from the proceeds of the Bonds. Under the Sublease, the Authority will lease to the Borrower the Phase I Montevina Buildings in exchange for the Borrower s agreement to complete the Project thereon using proceeds of the Bonds. In addition, the Bonds will finance the acquisition of the Administration Building, which is one of the two Campus Buildings not owned by Montevina Phase I, LLC or Montevina Phase II, LLC. Finally, the proceeds of the Bonds will be used to pay other costs of the Project, the funding of a debt service reserve fund for the Bonds, and the payment of certain costs of issuance of the Bonds and costs of delivery of the Montevina Leases. Under the Subordinate Sublease, the Authority will lease to the Borrower the Phase II Montevina Buildings and the Campus Lot in exchange for base rental payments, which includes principal and interest components (also referred to as QSCBs). The principal components of such base rental payments, totaling $15 million, will be due in a lump sum on the date of expiration of the Subordinate Sublease. The interest components of such base rental payments under the Subordinate Sublease will be paid solely by the Subsidy Payments. The interest rate that comprises this interest component will be set at the federal subsidy rate on the date of delivery of the Bonds. The Borrower s obligation to pay rent under the Subordinate Sublease are subordinate to the Borrower s obligations to make Loan Repayments under the Loan Agreement and Base Rental Payments under the Sublease. See SUBORDINATE OBLIGATIONS herein. The issuance of the Bonds, together with the Borrower entering into the Sublease and the Subordinate Sublease allows the Borrower, upon the expiration of the leases, to acquire all the Montevina Buildings and the Campus Lot. With the separate acquisition of the Administration Building and the lease of the Rental Building, the Borrower plans to acquire the entire Montevina Campus and complete the renovation and equipping of the site for the Schools. Subsidy Payments means each of the payments of refundable tax credits in respect of the principal component of Lease Payments under the Subordinate Site Lease from the United States Department of Treasury actually received by the Trustee pursuant to Section 6431(f) of the Internal Revenue Code of 1986 (the Code ). 13

26 SCHEMATIC REPRESENTATION PLAN OF FINANCE State Controller s Office $18.8 Million + + Interest (Loan n) $7.4 Million + + Interest (Rent t) Loan Agreement Bond Maturity $18.8 (Bond (L T V L C Sublease 1 Sublease 2 Term: QSCB Limit 8 Million Proceeds) Loan) Term: QSCB Limit (extendable to 25 years) United States Department of the Treasury Rent (Interest C Component) QSCB Sub bsidy Indenture C S F A Trustee Paying Agent Paying Agent Agreement $26.2 Million Lease 1 QSCB Lease 2 I)Term: QSCB LimitTerm: QSCB Limit (extendable to 25 years) (P & I Senior Bondholders Intercreditor Agreement Parcel 2 mortgage lender cannot exercise remedies while senior bonds outstanding; except may foreclose on Parcel 2 at expiration of Sublease 2 Subordination Agreement Parcel 1 mortgage loan subordinate to leasehold deed of trust in favor of bond trustee $7.4 M (Bond Pro (Ren Million oceeds) nt) Montevina Phase I, LLC (Fee Owner Parcel 1) mortgage in favor of mortgage lender (subject to Subordination Agreement) Mortgage Lender Montevina Phase II, LLC (Fee Owner Parcel 2) mortgage in favor of mortgage lender (subject to t t Intercreditor Agreement) Senior Bond Proceeds Senior Payments Subordinate Payments The above is a schematic representation of the plan of finance. Such representation is incomplete and in summary form and reference is made to the Indenture, the Loan Agreement, themontevina Leases and other related documents for a full summary of their provisions. A summary of certain of these documents is included in APPENDIX C: SUMMARY OF PRINCIPAL DOCUMENTS herein. 14

27 ESTIMATED SOURCES AND USES OF FUNDS OF BONDS The following table sets forth the estimated sources and uses of funds related to the Bonds. Total Sources: Par Amount of Bonds $27,500,000 Total Sources $27,500,000 Uses: Costs of the Project $24,813,987 Reserve Fund 2,136,013 Costs of Issuance (1) 550,000 Total Uses $27,500,000 (1) Includes underwriting discount and other costs of issuance. 15

28 DEBT SERVICE SCHEDULE The annual debt service payment requirements of the Bonds are set forth in the table below. Year Ending June 30 Principal Interest Total 2013 $ - $ 1,260,749 $ 1,260, ,000 1,915,063 2,135, ,000 1,899,663 2,134, ,000 1,883,213 2,133, ,000 1,865,713 2,135, ,000 1,846,813 2,131, ,000 1,826,863 2,131, ,000 1,805,513 2,135, ,000 1,782,413 2,132, ,000 1,759,788 2,134, ,000 1,739,163 2,134, ,000 1,711,513 2,131, ,000 1,682,113 2,132, ,000 1,650,613 2,135, ,000 1,616,663 2,131, ,000 1,580,613 2,135, ,000 1,541,763 2,131, ,000 1,500,463 2,135, ,000 1,456,013 2,136, ,000 1,408,413 2,133, ,000 1,360,100 2,135, ,000 1,305,850 2,135, ,000 1,247,750 2,132, ,000 1,185,800 2,130, ,015,000 1,119,650 2,134, ,085,000 1,048,600 2,133, ,160, ,650 2,132, ,240, ,450 2,131, ,330, ,650 2,134, ,420, ,550 2,131, ,520, ,150 2,132, ,625, ,750 2,130, ,740, ,000 2,132, ,865, ,200 2,135, ,995, ,650 2,134,650 Total $27,500,000 $46,300,912 $73,800,912 16

29 SECURITY AND SOURCES OF PAYMENT FOR THE BONDS THE BONDS ARE NOT AND SHALL NOT BE DEEMED TO CONSTITUTE A DEBT OR LIABILITY OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF, OTHER THAN THE AUTHORITY, AND ARE NOT AND SHALL NOT BE DEEMED TO BE A PLEDGE OF THE FAITH AND CREDIT OF THE STATE, OR ANY POLITICAL SUBDIVISION THEREOF, BUT SHALL BE PAYABLE SOLELY FROM THE FUNDS PROVIDED THEREFOR UNDER THE INDENTURE. NEITHER THE STATE NOR THE AUTHORITY SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF THE BONDS, OR THE REDEMPTION PREMIUM OR INTEREST THEREON, EXCEPT FROM THE FUNDS PROVIDED THEREFOR UNDER THE INDENTURE. THE ISSUANCE OF THE BONDS SHALL NOT DIRECTLY, INDIRECTLY OR CONTINGENTLY OBLIGATE THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF TO LEVY OR TO PLEDGE ANY FORM OF TAXATION OR TO MAKE ANY APPROPRIATION FOR THEIR PAYMENT. THE AUTHORITY HAS NO TAXING POWER. NOTHING IN THE INDENTURE, THE ACT OR OTHERWISE IS AN UNDERTAKING BY THE AUTHORITY OR THE STATE OR ANY POLITICAL SUBDIVISION THEREOF TO FUND THE TRANSFERS DESCRIBED IN THE INTERCEPT NOTICE (DEFINED HEREIN) OR TO MAKE STATE APPORTIONMENTS OR OTHER FUNDS AVAILABLE TO THE BORROWER IN ANY AMOUNT OR AT ANY TIME. General The principal of and interest on the Bonds are payable solely from all Payments and any other amounts (excluding proceeds of the sale of Bonds) held in any fund or account (other than the Rebate Fund and the Indemnification Fund) established pursuant to the Indenture. Pursuant to the Indenture, all of the Payments (except Payments with respect to the Intercept) and other amounts (excluding proceeds of the sale of Bonds) held in any fund or account (other than the Rebate Fund and the Indemnification Fund) established pursuant to the Indenture and all of the right, title and interest of the Authority in, to and under the Loan Agreement (except for the Retained Rights, as defined under SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Loan and the Sublease ) are pledged to the Trustee for the benefit of the Holders from time to time of the Bonds. The Trustee will be entitled to and will receive all of the Payments, and any Payments collected or received by the Authority will be deemed to be held, and to have been collected or received, by the Authority as the agent of the Trustee and will forthwith be paid by the Authority to the Trustee. Payments under the Indenture means (i) all moneys (except any money received to be used for the payment of Administrative Fees and Expenses) received by the Trustee with respect to the Intercept (as discussed below), (ii) all moneys, if any, received by the Trustee directly from, or on behalf of, the Borrower, pursuant to the Loan Agreement (excluding Additional Payments as defined herein), (iii) all moneys, if any, received by the Trustee directly from, or on behalf of, the Borrower, pursuant to the Sublease (excluding Additional Payments as defined herein) and (iv) all income derived from the investment of any money in any fund or account established pursuant to the Indenture. Payments do not include Subsidy Payments. All Payments shall be held in trust for the benefit of the Holders from time to time of the Bonds but shall nevertheless be disbursed, allocated and applied solely for the uses and purposes set forth in the Indenture. As further security for the Bonds, the Borrower will instruct the Controller to make an apportionment to the Trustee in amounts and on dates provided in the Intercept Notice sufficient to repay the Bonds and pay necessary and incidental costs. Funds received by the Trustee pursuant to the Intercept described in clause (i) of the definition of Payments will be held in trust and will be disbursed, allocated and applied solely for the uses and purposes set forth in the Indenture, including if necessary, the payment of debt service on the Bonds. Under state law, no party, including the Borrower or any of its creditors will have any claim to the money apportioned or to be apportioned to the Trustee by the State Controller pursuant to the Intercept. See Intercept and RISK FACTORS Bankruptcy below. The Loan and the Sublease As described above, the Bonds are payable from Payments that include Loan Repayments under the Loan Agreement and Base Rental Payments under the Sublease, which are both payable from Gross Revenues of the Borrower. 17

30 Pursuant to the Loan Agreement, the Authority will loan to the Borrower that portion of the proceeds received by the Authority from the sale of the Bonds in the amount of $20,100,000, by causing such proceeds to be deposited with the Trustee for disposition as provided in the Loan Agreement and in the Indenture. Pursuant to the Site Lease, the Authority leases from Montevina Phase I, LLC the land located at Phase I, including the real property and improvements now and hereafter situated thereon. The term of the Site Lease commences on the date of delivery of the Bonds and ends on October 1, 2035 (the Lease Expiration Date ) (corresponding to the QSCB term limit), unless it is sooner terminated as provided in the Site Lease. The proceeds of the Bonds in the amount of $7,400,000 will be used by the Authority to pay the Lease Payment due under the Site Lease on the date of issuance of the Bonds. Pursuant to the Sublease, the Authority subleases to the Borrower the Phase I Montevina Buildings. The term of the Sublease commences on the date of delivery of the Bonds and ends on the Lease Expiration Date, unless it is sooner terminated as provided in the Sublease. The Authority, pursuant to the Senior Assignment Agreement, dated as of October 1, 2012 (the Assignment Agreement ), between the Authority and the Trustee, has assigned to the Trustee for the benefit of the Bondholders all of the Authority s right, title and interest in and to the Site Lease and the Sublease, including, without limitation, its right to receive the Base Rental Payments (as defined below) to be paid by the Borrower under and pursuant to the Sublease; provided, however, that the Authority will retain its Retained Rights. Retained Rights means the Authority right to payment of the Administrative Fees and Expenses, any Additional Payments, any Additional Rent, any right to be indemnified, held harmless or defended, any right to receive information, reports, certifications or other documents and any right to notice, consent or inspection under the Indenture or under the Loan Agreement or under the Sublease. Pursuant to the Site Lease, Montevina Phase I, LLC agrees, upon the Lease Expiration Date, to convey fee simple title to the Phase I Montevina Buildings, free of any encumbrances, to the Borrower; provided that upon (i) an Event of Default under the Sublease and (ii) the written direction of the Trustee, the Site Lease will be terminated and Montevina Phase I, LLC will convey fee simple title to the Phase I Montevina Buildings, free of any encumbrances, to the Trustee. Loan Repayments and Base Rental Payments; Limited Obligations The Borrower will pay to the Authority from the Gross Revenues (as defined below) as repayment of the Loan, the Loan Repayments, and as rent under the Sublease, the Base Rental Payments, on or before any date upon which any amounts payable with respect to the Bonds will become due, whether upon redemption, maturity or otherwise, including any Interest Payment Date and Principal Payment Date (each a Bond Payment Date ), until the principal of, premium, if any, and interest on, the Bonds will have been fully paid or provision for such payment will have been made as provided in the Indenture, a sum equal to the amount payable on the next Bond Payment Date as principal of and premium, if any, and interest on, the Bonds as provided in the Indenture (with respect to the Loan, the Loan Repayments and with respect to the Sublease, the Base Rental Payments ). Such Loan Repayments and Base Rental Payments will be made in federal funds or other funds immediately available at the Corporate Trust Office of the Trustee, as assignee of the Authority, through the Intercept (as described more fully below). Such Loan Repayments combined with the Base Rental Payments will at all times be sufficient to pay the total amount of interest and principal (whether at maturity or upon redemption) and premium, if any, becoming due and payable on the Bonds on each Bond Payment Date; provided, any amount held by the Trustee in the Revenue Fund will be credited against the installment due on the next Bond Payment Date to the extent available for such purpose under the terms of the Indenture; and provided further that if at any time the amounts held by the Trustee in the Revenue Fund are sufficient to pay all of the principal of and interest and premium, if any, on, the Bonds as such payments become due, the applicable Borrower will be relieved of any obligation to make any further payments under the Loan Agreement and the Sublease. Notwithstanding the foregoing, if on any date the amount held by the Trustee in the Revenue Fund is insufficient to make any required payments of principal of (whether at maturity or upon redemption) and interest and premium, if any, on the Bonds as such payments become due, the applicable Borrower will forewith pay such deficiency as a Loan Repayment under the Loan Agreement and/or a Base Rental Payment under the Sublease. 18

31 The Borrower will pay, or cause to be paid, the Loan Repayments and the Base Rental Payments from the Gross Revenues, including through the Intercept (as described below), without any further notice thereof except as may otherwise be specifically required by the Loan Agreement and the Sublease, as applicable. The obligations of the Borrower to pay the Loan Repayments, the Base Rental Payments and Additional Payments (as defined below), and to perform and observe any and all of the other covenants and agreements on its part contained in the Loan Agreement and the Sublease, will be absolute and unconditional irrespective of any defense or any rights of setoff, recoupment, or counterclaim which the Borrower may otherwise have against the Authority, the Trustee or otherwise; provided, however, that such obligations are limited to the Borrower paying the Loan Repayments, Base Rental Payments and Additional Payments solely from Gross Revenues attributable to Livermore Valley Charter School and Livermore Valley Charter Preparatory High School (each a School and collectively, Schools ). The liability of the Borrower under the Loan Agreement and the Sublease to any person or entity, including, but not limited to, the Trustee or the Authority and their successors and assigns, is limited to recourse only to the Gross Revenues attributable to the Schools and the amounts held in certain funds and accounts created under the Indenture, and such persons and entities will look exclusively thereto, or to such other security as may from time to time be given for the payment of obligations arising out of the Loan Agreement, the Sublease or any other agreement securing the obligations of the Borrower with respect to the Bonds. In the event the Borrower will fail to deposit, or fail to cause to be deposited, with the Trustee any Loan Repayments, Base Rental Payments or Additional Payments as required by the Loan Agreement and the Sublease, the Loan Repayments, Base Rental Payments, Additional Payments or other payments required under the Loan Agreement and the Sublease not paid from the Gross Revenues will continue as an obligation under the Loan Agreement or the Sublease, as applicable, until the amount in default will have been fully paid. Gross Revenues means the revenues of the Borrower, limited to all revenues, income, receipts and money received by or apportioned to the Schools or with respect to any school operated or to be operated as Tri- Valley Learning Corporation ( Tri-Valley ) at the Facility, including payments from the State with respect to the school(s) operated or to be operated by the Borrower at the Facility pursuant to the Charter School Law and any regulations promulgated pursuant thereto, but excluding the Subsidy Payments. Intercept The Bonds are issued pursuant to the Act, which authorizes the Authority to issue bonds to finance loans for capital projects and working capital for (among others) any charter school in California. California Education Code section (a) allows a borrower to elect to guarantee payment on the loans and any other costs necessary or incidental to the bonds issued to provide the moneys for a loan. The guarantee instructs the Controller to make an apportionment to the Trustee in amounts and on dates provided in the Intercept Notice sufficient to repay the Bonds and pay necessary and incidental costs. The Controller is required to make the apportionment only from moneys in Section A of the State School Fund designated for apportionment to the borrower pursuant to (in the case of a charter school) Section of the Education Code, from moneys available as part of the charter school categorical block grant pursuant to Section of the Education Code, and moneys available to charter schools for nonclassroom-based instruction, pursuant to Section of the Education Code. Section (b)(3) of the Education Code provides that the borrower and its creditors do not have a claim to funds apportioned or anticipated to be apportioned to the Trustee by the Controller pursuant to the Intercept Notice. The Borrower will make such election, and will deliver the Intercept Notice to the Controller simultaneously with issuance of the Bonds. Amounts specified in the Intercept Notice for transfer to the Trustee will be limited to State Apportionments. State Apportionment means the state aid portion of the Borrower s general purpose entitlement, categorical block grant funding and any other monies apportioned to the Borrower by the State, but solely as it relates to the Gross Revenues, from Section A of the State School Fund calculated by the State Superintendent of Public Instruction pursuant to Section of the Education Code and from any other fund or account of the State lawfully available therefor. The Borrower will, not later than the twentieth (20th) calendar day of any month in which payment is scheduled, amend, supplement or restate the Intercept Notice and deliver such to the Controller from time to time as 19

32 necessary or appropriate (including without limitation as a result of redemption prior to maturity) to indicate transfers to the Trustee to pay the amounts due under the Loan Agreement and the Sublease and other costs necessary or incidental to the financing pursuant to the Act relating to the Bonds, as they come due and to cure any delinquency in payment of such amounts. The Borrower will cooperate with the Trustee in any manner the Trustee may request in connection with amending, supplementing or restating the Intercept Notice. If at any time the Intercept Notice is amended, supplemented or restated for any reason, the Borrower will promptly provide the Authority, the Department of Education and the Trustee with a copy of such amended, supplemented or restated Intercept Notice. The Intercept Notice may provide additional amounts payable to the Trustee for purposes set forth in the Indenture; provided the Borrower will not grant preference or any prior right of funding access or security in respect of the State Apportionment to any other payment indicated in the Intercept Notice or any other notice delivered pursuant to Section of the Education Code. All deposits of moneys derived from the Intercept under the Loan Agreement and the Sublease will be made at the corporate trust office of the Trustee set forth in the Intercept Notice. The Borrower will timely amend, supplement or restate the Intercept Notice to require transfers to such other location as will be designated in writing by the Trustee to the Borrower. The Trustee will, on each Interest Payment Date and the Principal Payment Date on which a transfer from the Controller to the Trustee is scheduled pursuant to the Intercept Notice, notify the Authority and the Borrower of any shortfall in amounts received by the Trustee from the Controller compared to the amounts set forth in the Intercept Notice for such date. If, subsequent to any shortfall for which the Trustee has sent notice pursuant to the preceding sentence, the Trustee receives payment of amounts sufficient to cure such shortfall, the Trustee will, within ten (10) business days thereof, notify the Authority and the Borrower of the receipt of such payment. The Borrower can give no assurance to bondholders that the State Apportionment will be provided in amounts sufficient and at such times as would provide for the Loan Repayments and Base Rental Payments. The State is undertaking no obligation to provide any level of State Apportionment in respect of the Borrower. The State may delay, alter, amend or eliminate State Apportionment funding in respect of the Borrower at any time. Reserve Fund All amounts in the Reserve Fund will be used and withdrawn by the Trustee solely for the purpose of making up any deficiency in the Interest Account or the Principal Account, or (together with any other funds available) for the payment or redemption of all Outstanding Bonds. Amounts on deposit in the Reserve Fund will be valued by the Trustee at their fair market value each July 1, and the Trustee will notify the Borrower of the results of such valuation. If the amount on deposit in the Reserve Fund on the first (1st) Business Day following such valuation is less than one hundred percent (100%) of the Reserve Fund Requirement, the Borrower has agreed in the Loan Agreement to make the deposits to the Reserve Fund required by the Indenture. If the amount on deposit in the Reserve Fund on the first (1st) Business Day following such valuation is greater than the Reserve Fund Requirement, the excess will be withdrawn from the Reserve Fund and transferred to the Revenue Fund. Reserve Fund Requirement means as of any date of calculation, an amount which will be equal to the least of (a) ten percent (10%) of the proceeds of the Bonds; (b) Maximum Annual Debt Service with respect to the Bonds Outstanding, (c) one hundred twenty-five percent (125%) of average annual debt service with respect to the Bonds, or (d) for the last Bond Year only, the total debt service with respect to the Bonds Outstanding. Annual debt service and average annual debt service, for purposes of this definition, will be calculated on the basis of twelvemonth periods ending on July 1 of any year in which Bonds are Outstanding. Maximum Annual Debt Service means the highest Debt Service Requirement for the current or any succeeding period of measurement. Debt Service Requirement means for any period of time for which such determination is made, the aggregate of the scheduled payments to be made with respect to principal (or mandatory sinking fund or installment purchase price or lease rental or similar payments) and interest on Outstanding Long-Term Indebtedness of Tri- Valley during such period, taking into account at the option of Tri-Valley: 20

33 (a) With respect to Indebtedness represented by a Guaranty of obligations of a Person, as long as any such Guaranty is a contingent liability under generally accepted accounting principles, the principal and interest deemed payable with respect to such Guaranty will be deemed to be the lowest percentage of debt service requirements set forth immediately following this paragraph (determined after giving effect to any other paragraph of this definition at the election of the Obligated Group Representative), if the debt service coverage ratio (determined in a manner as nearly as practicable to the determination of the Debt Service Requirement hereunder) of the Person primarily obligated on the obligations effectively guaranteed by such Guaranty for the immediately preceding Fiscal Year, or any other 12-month period ending within 180 days prior to the date of calculation, will be greater than the amount specified opposite such percentage below: Debt Service Coverage Ratio of Accommodated Person Percentage of Debt Service Requirements % % Less than % If any such Guaranty becomes a noncontingent liability but thereafter becomes a contingent liability, during the period such Guaranty is a noncontingent liability and for two years after such Guaranty becomes a contingent liability, 100% of the annual debt service on the indebtedness being guaranteed will be added to the computation of the Debt Service Requirement. (b) With respect to Balloon Indebtedness, the amount of principal and interest deemed payable during such period will be determined as if such Balloon Indebtedness were being repaid in substantially equal annual installments of principal and interest over a term over which Tri-Valley could reasonably be expected to borrow, not to exceed twenty-five (25) years from the date of incurrence of such Balloon Indebtedness, and bearing interest at an interest rate (determined as of the date of calculation of the Debt Service Requirement) equal to the rate at which Tri-Valley could reasonably be expected to borrow for such term, not to exceed twenty-five (25) years, by issuing Indebtedness, all as set forth in a Certificate of Tri-Valley accompanied by a letter of a banking or investment banking institution knowledgeable in matters of charter school facility finance, confirming that the borrowing term and interest rate assumptions set forth in such statement comply with the requirements of this subsection. (c) With respect to Variable Rate Indebtedness, if the actual interest rate on such Variable Rate Indebtedness cannot be determined for the period for which the Debt Service Requirement is being calculated, the amount of interest deemed payable during such period on such Variable Rate Indebtedness will be assumed to be equal to the average interest rate per annum which was in effect (or, if such Variable Rate Indebtedness was not Outstanding during such eighteen month period, which would have been in effect) for any twelve (12) consecutive calendar months specified in a Certificate of Tri-Valley during the eighteen (18) calendar months immediately preceding the date of calculation of the Debt Service Requirement. (d) With respect to Indebtedness payable from an Irrevocable Deposit, the amount of principal or interest taken into account during such period will be assumed to equal only the principal or interest not payable from such Irrevocable Deposit and the investment income from such funds. (e) With respect to Long-Term Indebtedness incurred to finance or refinance the construction of capital improvements, principal and interest with respect to such Long-Term Indebtedness will be excluded from the determination of the Debt Service Requirement but only in proportion to the amount of principal and interest on such Long-Term Indebtedness which is payable in the then current Fiscal Year from the proceeds of such Long-Term Indebtedness. (f) With respect to Long-Term Indebtedness with respect to which a Financial Products Agreement has been entered into by Tri-Valley, interest on such Long-Term Indebtedness will be included in the determination of the Debt Service Requirement by including for each Fiscal Year an amount equal to 21

34 the amount of interest payable on such Long-Term Indebtedness in such Fiscal Year at the rate or rates stated in such Long-Term Indebtedness plus any Financial Product Payments payable in such Fiscal Year minus any Financial Products Receipts receivable in such Fiscal Year; provided that in no event will any calculation made pursuant to this clause result in a number less than zero being included in the determination of the Debt Service Requirement and provided, further, if the actual interest rate on such Long-Term Indebtedness or the actual amount of Financial Product Payments or Financial Products Receipts cannot be determined for the period for which the Debt Service Requirement is being calculated, the amount of interest deemed payable during such period on such Long-Term Indebtedness will be determined by applying the average interest rate per annum which was in effect (or, if such Long-Term Indebtedness was not Outstanding during such eighteen month period, which would have been in effect) or the average Financial Product Payments which would have been paid, or the average Financial Products Receipts which would have been received, as the case may be, for any twelve (12) consecutive calendar months specified in a Certificate of Tri-Valley during the eighteen (18) calendar months immediately preceding the date of calculation of the Debt Service Requirement. For definitions of certain undefined capitalized terms, see APPENDIX C: SUMMARY OF PRINCIPAL DOCUMENTS DEFINITIONS herein. Capital Maintenance and Operating Fund The Borrower, on August 25 of each year, commencing August 25, 2013, will deposit with the Trustee for deposit in the Capital Maintenance and Operating Fund the amount necessary to increase the balance in the Capital Maintenance and Operating Fund to the Capital Maintenance and Operating Fund Requirement. See Additional Payments herein. Capital Maintenance and Operating Fund Requirement means (i) on August 25, 2013, $25,000, (ii) on August 25, 2014, $50,000, (iii) on August 25, 2015, $75,000, and (iv) on and after August 25, 2016, $100,000, unless adjusted pursuant to the Loan Agreement and as further described in the next paragraph. Beginning with the Fiscal Year ending June 30, 2017 and continuing once every five Fiscal Years thereafter, the Borrower will engage an Independent Consultant to determine whether the Capital Maintenance and Operating Fund Requirement should be adjusted based on physical and operation conditions at the Facility. The Borrower will follow the recommendations of the Independent Consultant by adjusting the definition, including the timing and annual payment amount, of the Capital Maintenance and Operating Fund Requirement under the Indenture. Moneys in the Capital Maintenance and Operating Fund may be withdrawn by the Borrower to pay any repair, replacement or additional improvement related to the Project. In addition, moneys in the Capital Maintenance and Operating Fund may be used and withdrawn by the Trustee for the purposes of making up any deficiency in the Interest Account or the Principal Account, or (together with any other funds available) for the payment or redemption of all Outstanding Bonds, pursuant to a Request of the Borrower. Liquidity Fund The Borrower, on or before December 31 of each year, commencing December 31, 2013, will deposit with the Trustee for deposit in the Liquidity Fund an amount equal to the lesser of (i) 50% of the Gross Revenues less Operating Expenses less Senior Debt Service as reported in Tri-Valley s audited financial statements for the previous Fiscal Year and (ii) the amount necessary to increase the balance in the Liquidity Fund to an amount equal to the Maximum Annual Debt Service, which is $2,136,013. See Additional Payments herein. Moneys in the Liquidity Fund can be withdrawn by the Borrower for any legal and valid purpose of the Borrower, except for payment of amounts due under the Subordinate Sublease. Senior Debt Service means, for any period, (i) all Loan Repayments and Additional Payments payable by the Borrower pursuant to the Senior Loan Agreement, (ii) all Base Rental Payments and Additional Rent payable by 22

35 the Borrower pursuant to the Sublease, and (iii) all other payments or deposits (whether arising pursuant to an indemnity obligation or otherwise) payable or to be deposited under the Loan Agreement, the Sublease, the Indenture, or under any refundings, refinancing, or modifications of such documents to the extent not prohibited by the Intercreditor Agreement. Operating Expenses means the expenses of the Borrower in connection with its operation of a school at the Facility before extraordinary items, determined in accordance with generally accepted accounting principles. Additional Payments Pursuant to the Loan Agreement, the Borrower will also pay from time to time from the Gross Revenues, including as may be set forth in the Intercept Notice (as defined below), the following costs and expenses (which collectively constitute the Additional Loan Payments ), to the extent such costs and expenses are not paid from the proceeds of the sale of the Bonds: (i) Ordinary Administrative Fees and Expenses of the Trustee and reasonable extraordinary fees and expenses of the Trustee, if any, payable to the Trustee for services or indemnity under the Indenture and the Borrower Documents (including services in connection with the administration and enforcement thereof and compliance therewith), and the fees and other costs, including reasonable counsel fees, incurred for services of any banking institution designated pursuant to the Indenture as an additional paying agent; (ii) the reasonable fees and expenses of the Authority or any agent or attorney selected by the Authority to act on its behalf in connection with the Borrower Documents, the Bonds, the Indenture or the Loan, including, without limitation, any and all reasonable expenses incurred in connection with the authorization, issuance, sale and delivery of any such Bonds or in connection with any litigation, investigation, inquiry or other proceeding which may at any time be instituted involving the Borrower Documents or otherwise as a result of the transactions contemplated by the Borrower Documents or the Indenture, the Bonds or the Indenture or any of the other documents contemplated thereby, or in connection with the reasonable supervision or inspection of the Borrower, its properties, assets or operations or otherwise in connection with the administration of the Borrower Documents; (iii) the reasonable fees and expenses incurred for services of such attorneys, independent consultants, independent accountants and other experts as are engaged by the Authority or the Trustee, with notice to the Borrower, to prepare audits, financial statements, reports, opinions or provide such other services required pursuant to the Borrower Documents, or the Indenture; (iv) all fees and expenses of the Rating Agency and any rebate analyst, and if a deposit is required to be made to the Rebate Fund as a result of any calculation made pursuant to the Indenture, the amount of such deposit, which shall be deposited in the Rebate Fund not later than the tenth day of the calendar month immediately following the date on which such calculation was made; (v) on or before August 25 of each year, commencing August 25, 2013, an amount deposited in the Capital Maintenance and Operating Fund equal to the amount necessary to increase the balance in the Capital Maintenance and Operating Fund to an amount equal to the Capital Maintenance and Operating Fund Requirement definition in the Indenture; provided however, if the Capital Maintenance and Operating Fund Requirement has been amended pursuant to the Loan Agreement within the five year period immediately preceding the date of such Additional Payment, then an amount deposited in the Capital Maintenance and Operating Fund equal to the amount necessary to increase the balance in the Capital Maintenance and Operating Fund to an amount equal to the previous Capital Maintenance and Operating Fund Requirement plus one-fifth of the difference between the new Capital Maintenance and Operating Fund Requirement and the previous Capital Maintenance and Operating Fund Requirement (see Capital Maintenance and Operating Fund herein); (vi) on or before December 31 of each year, commencing December 31, 2013, an amount deposited in the Liquidity Fund equal to the lesser of (a) 50% of the (Gross Revenues less Operating 23

36 Expenses less Senior Debt Service) reported in Tri-Valley s audited financial statements for the previous Fiscal Year and (b) the amount necessary to increase the balance in the Liquidity Fund to an amount equal to the Maximum Annual Debt Service (see Liquidity Fund herein); (vii) amounts required by the Indenture to be deposited by the Borrower into the Indemnification Fund; and (viii) all amounts advanced by the Authority or the Trustee or payable under provisions of the Loan Agreement or the Indenture that the Borrower is obligated to repay. Pursuant to the Sublease, the Borrower will also pay the following amounts (herein called the Additional Rent and together with the Additional Loan Payments, the Additional Payments ) for the payment of (1) all taxes and assessments of any type or nature charged to the Authority or the Borrower or affecting the Facility or the respective interests or estates of the Authority or the Borrower therein, (2) all costs and expenses incurred by the Authority in connection with the execution, performance or enforcement of the Sublease, the Site Lease and the Indenture, in connection with its interest in the Facility and the sublease of the Facility to the Borrower, including but not limited to payment of all fees, costs and expenses and all administrative costs of the Authority related to the Facility including, without limiting the generality of the foregoing, salaries and wages of employees, all expenses, compensation and indemnification of the Trustee payable by the Authority under the Indenture, fees of auditors, accountants, attorneys or architects, and all other necessary administrative costs of the Authority or charges required to be paid by it in order to maintain its existence or to comply with the terms of the Indenture, and (3) all other payments required to be paid by the Borrower under the provisions of the Sublease or the Indenture; but not including in Additional Rent amounts required to pay the principal component or interest component of the Base Rental Payments. Such Additional Rent shall be billed to the Borrower by the Authority or the Trustee from time to time, together with a statement certifying that the amount billed has been paid by such party for one or more of the items above described, or that such amount is then payable by such party for such items. All such payments will be made by the Borrower from the Gross Revenues for payment to the Person or Persons entitled to such payments or for deposit to the appropriate fund or account held by the Trustee under the Indenture. For definitions of certain undefined capitalized terms, see APPENDIX C: SUMMARY OF PRINCIPAL DOCUMENTS DEFINITIONS herein. Deeds of Trust on the Facilities To secure the payment of Loan Repayments, Additional Payments, Base Rental Payments and Additional Rent, (a) with respect to the Phase I Montevina Buildings, (i) Montevina Phase I, LLC will enter into the Deed of Trust with Assignment of Rent, Security Agreement and Fixture Filing, dated as of October 1, 2012 (the Phase I Fee Deed of Trust ), executed by Montevina Phase I, LLC, as trustor, in favor of the trustee thereunder, creating a lien on Montevina Phase I, LLC s fee interest in the Phase I Montevina Buildings, and (ii) the Borrower will enter into the Leasehold Deed of Trust with Assignment of Rent, Security Agreement and Fixture Filing, dated as of October 1, 2012 (the Phase I Leasehold Deed of Trust ), executed by Tri-Valley, as trustor, in favor of the trustee thereunder, creating a lien on the Borrower s subleasehold interest in the Phase I Montevina Buildings; and (b) with respect to the Administration Building, the Borrower will enter into the Deed of Trust with Assignment of Rent, Security Agreement and Fixture Filing, dated as of October 1, 2012 (the Administration Building Fee Deed of Trust ), executed by the Tri-Valley, as trustor, in favor of the trustee thereunder, creating a lien on the Borrower s fee interest in the Administration Building. The Phase I Fee Deed of Trust, the Phase I Leasehold Deed of Trust and the Administration Building Fee Deed of Trust are collectively referred to herein as the Deeds of Trust. The Borrower agrees that the Deeds of Trust will be recorded simultaneously with the acquisition of the fee interest in the Administration Building and the subleasehold interest in the Phase I Montevina Buildings. The Borrower agrees, as long as any of the Loan Repayments remain unpaid, to supplement the Phase I Leasehold Deed of Trust and the Administration Building Fee Deed of Trust or to execute and deliver such other deeds of trust in substantially the form of such Deeds of Trust as may be necessary from time to time to grant the Trustee a first priority Lien on such Facilities. In particular, upon expiration of the Sublease and conveyance of the fee simple interest in the Phase I Montevina Buildings from Montevina Phase I, LLC to the Borrower, the Borrower has covenanted to execute and deliver a deed of trust in the Phase I Montevina Buildings to the Trustee as security for the Bonds. 24

37 The Borrower will obtain, at its own cost and expense, one or more ALTA policies of title insurance, or an endorsement to such policy or policies at the time of and dated as of the date of acquisition or lease of the real property underlying the Phase I Facilities, in an aggregate amount not less than the aggregate principal amount of the Bonds, payable to the Trustee, insuring the title of the Borrower to the Phase I Facilities owned or leased by the Borrower, subject only to Permitted Liens, issued by a title insurance company qualified to do business in the State. The Borrower will execute and cause to be filed Uniform Commercial Code financing statements, and will execute and deliver such other documents (including, but not limited to, continuation statements) as may be necessary or reasonably requested by the Trustee in order to perfect or maintain as perfected such security interest or give public notice thereof. Property will be released from the applicable Deed of Trust if (i) such property is sold or otherwise disposed of in compliance with the Loan Agreement or (ii) all outstanding Bonds are subject to redemption pursuant to the Indenture. Annual Budget Covenant CERTAIN COVENANTS OF THE BORROWER The Borrower will set its annual budget to achieve a Debt Service Coverage Ratio of at least 1.25 for each Fiscal Year. In the annual budget, the Borrower shall also make provisions for a minimum contingency or reserve of four percent (4%) of its operational expenses, as calculated in the previous Fiscal Year s Audited Financial Statements of Tri-Valley. Debt Service Coverage Ratio means, for any period of time, the ratio determined by dividing the Income Available for Debt Service for such period by the Maximum Annual Debt Service. Income Available for Debt Service means, unless the context provides otherwise, with respect to the Borrower as to any period of time, its combined excess of revenues over expenses (excluding income from all Irrevocable Deposits), before depreciation, amortization, and interest expense, as determined in accordance with generally accepted accounting principles; provided, that no determination thereof will take into account: (a) any gain or loss resulting from either the early extinguishment or refinancing of Indebtedness or the sale, exchange or other disposition of capital assets not made in the ordinary course of business; (b) gifts, grants, bequests, donations or contributions, and income therefrom, to the extent specifically permanently restricted by the donor or by law to a particular purpose inconsistent with their use for the payment of principal of, redemption premium and interest on Indebtedness or the payment of operating expenses; (c) the net proceeds of insurance (other than business interruption insurance) and condemnation awards; (d) adjustments to the value of assets or liabilities resulting from changes in generally accepted accounting principles; (e) unrealized gains or losses that do not result in the receipt or expenditure of cash; (f) nonrecurring items which involve the receipt, expenditure or transfer of assets; and (g) gifts, grants, donations or contributions to the Borrower for use at the Facilities. Limitation on Incurrence of Additional Indebtedness Except as provided in this paragraph, the Borrower will not incur any additional Indebtedness (including, without limitation, Indebtedness for borrowed money, capital leases and installment sale agreements, but excluding trade payables and operating leases in the ordinary course of business) with the exception of indebtedness which meets the following requirements: (i) the stated term of such Indebtedness (taking into account all extension or renewals thereof which may be made at the sole option of the Borrower) does not exceed five years; and (ii) the Maximum Annual Debt Service on such Indebtedness (the greatest aggregate amount of principal and interest payable in the then current or any future Fiscal Year), when added to the Maximum Annual Debt Service on any other Indebtedness of the Borrower incurred under this paragraph and then outstanding, does not exceed the greater of $200,000 or 2.0% of total unrestricted expenses of the Borrower for the then most recent Fiscal Year for which audited financial statements have been delivered. The Borrower may incur any other Indebtedness (including additional parity Indebtedness secured in whole or in part by a deed of trust on the Facility and a security interest in the Gross Revenues on a parity with amounts 25

38 secured by a deed of trust on the Facility and the security interest in the Gross Revenues granted by the Loan Agreement) only upon providing to the Trustee a Certificate of the Borrower, accompanied by a confirming Accountant s Certificate, to the effect that (i) based on the audited financial statements of the Borrower, the Debt Service Coverage Ratio for the most recent Fiscal Year, including the additional Indebtedness in such calculation, was at least 1.25, and (ii) the pro forma Debt Service Coverage Ratio for the then-current Fiscal Year, annualized to reflect twelve months of operations and including the additional Indebtedness in such calculation is at least Indebtedness means all obligations for borrowed money, installment sales and capitalized lease obligations, incurred or assumed by the Borrower, including Guaranties, Long-Term Indebtedness, Short-Term Indebtedness or any other obligation for payments of principal and interest with respect to money borrowed, except obligations subordinate to the obligations of the Borrower under the Loan Agreement and liens on the Project, Gross Revenues or other assets of the Borrower securing such subordinate obligations, so long as same are subordinate to the Deeds of Trust and obligations under the Loan Agreement. Guaranty means all loan commitments and all obligations of any Borrower guaranteeing in any manner whatever, whether directly or indirectly, any obligation of any other Person (other than the applicable Borrower) that would, if such other Person were the applicable Borrower, constitute Indebtedness. Long-Term Indebtedness means Indebtedness having an original maturity greater than one year or renewable at the option of Tri-Valley for a period greater than one year from the date of original incurrence or issuance thereof unless, by the terms of such Indebtedness, no Indebtedness is permitted to be outstanding thereunder for a period of at least twenty (20) consecutive days during each calendar year. Short-Term Indebtedness means all Indebtedness having an original maturity less than or equal to one year and not renewable at the option of the Borrower for a term greater than one year from the date of original incurrence or issuance unless, by the terms of such Indebtedness, no Indebtedness is permitted to be outstanding thereunder for a period of at least twenty (20) consecutive days during each Fiscal Year. Cash on Hand Pursuant to the terms of the Loan Agreement, the Borrower covenants and agrees to comply with the following Cash on Hand requirement. Cash on Hand means the sum of cash, cash equivalents, liquid investments and unrestricted marketable securities (valued at the lower of cost or market) of the Borrower, including all amounts held in the Liquidity Fund. Days Cash on Hand means: (a) Cash on Hand of the Borrower, as shown on its month-end financial statements as of the test date (as provided below); divided by (b) the quotient of Operating Expenses, as shown on the audited financial statements for the preceding Fiscal Year, divided by 365. The Cash on Hand requirement will be tested as of June 30 in each Fiscal Year, commencing June 30, 2013, and will be equal to or greater than, the lesser of (a) $1,000,000 and (b) 120 Days Cash on Hand, for such test date. The Cash on Hand requirement will be tested as of June 30 in each Fiscal Year, commencing June 30, 2014, and will be equal to or greater than, the lesser of (a) $2,000,000 and (b) 120 Days Cash on Hand, for such test date and every year thereafter. The Borrower will employ its auditor to provide the Trustee by no later than December 31 of each year, commencing December 31, 2013, with a certification that the Days Cash on Hand requirement has been met as of the preceding June 30 test date. The foregoing is subject to the qualification that if applicable state or federal laws or regulations, or the rules and regulations of agencies having jurisdiction, will not permit the Borrower to accumulate such level of Cash on Hand, then the Borrower will conform to the then prevailing laws, rules or regulations. If the Borrower does not maintain Cash on Hand pursuant to the requirements of the Loan Agreement, the Borrower will promptly employ an Independent Consultant to review and analyze the operations and administration of the Borrower, inspect the Facility, and submit to the Borrower and Trustee written reports, and make such recommendations to the operation and administration of the Borrower as such Independent Consultant deems appropriate, including any recommendation as to a revision of the methods of operation thereof. The Borrower agrees to consider any recommendations by the Independent Consultant and, to the fullest extent practicable, to adopt and carry out such recommendations. So long as the Borrower is otherwise in full compliance with the obligations under the Loan Agreement, including following, to the fullest extent practicable, the recommendations of the Independent Consultant, it will not 26

39 constitute an Event of Default if the Cash on Hand for any Fiscal Year ending on or after June 30, 2013, is greater than or equal to $800,000. Debt Service Covenant The Borrower covenants and agrees to maintain its revenues and expenditures so that the Debt Service Coverage Ratio at the end of each Fiscal Year is not less than 1.25:1. The Debt Service Coverage Ratio requirement will be tested as of June 30 in each Fiscal Year, commencing June 30, The Borrower will employ its auditor to provide the Trustee by no later than December 31 of each year, commencing December 31, 2013, with a certification that the Debt Service Coverage Ratio requirement has been met as of the preceding June 30 test date. The foregoing is subject to the qualification that if applicable state or federal laws or regulations, or the rules and regulations of agencies having jurisdiction, will not permit the Borrower to accumulate such level of Cash on Hand, then the Borrower will conform to the then prevailing laws, rules or regulations. Commencing December 31, 2013, if the Debt Service Coverage Ratio is less than 1.15:1 as of any test date, then upon written direction of a majority of the Beneficial Owners in principal amount of the Bonds, the Borrower will promptly employ an Independent Consultant to review and analyze the operations and administration of the Borrower, inspect the Facility, and submit to the Borrower and Trustee written reports, and make such recommendations to the operation and administration of the Borrower as such Independent Consultant deems appropriate, including any recommendation as to a revision of the methods of operation thereof. The Borrower agrees to consider any recommendations by the Independent Consultant and, to the fullest extent practicable, to adopt and carry out such recommendations. So long as the Borrower is otherwise in full compliance with the obligations under the Loan Agreement, including following, to the fullest extent practicable, the recommendations of the Independent Consultant, if one is employed, it will not constitute an Event of Default if the Debt Service Coverage Ratio for any Fiscal Year ending on or after June 30, 3013, is not less than 1:1. Other Covenants Under the Loan Agreement, the Borrower has also covenanted, among other things, to: (i) operate and maintain the Facilities in accordance in all material respects with governmental laws, ordinances, approvals, rules, regulations and requirements; (ii) keep (or cause to be kept) insurance (including builder s all-risk insurance) against loss or damage to any structure constituting any part of the Facilities by fire and lightning, with extended coverage for vandalism, business interruption insurance and other insurance on the Facilities and operations thereon in amounts which are customarily carried and against such risks as are customarily insured against by other corporations in connection with the ownership and operations of facilities of similar character and size to the Facilities; (iii) to maintain books and records separate from any other person or entity, to maintain its accounts separate from any other person or account and other financial covenants; and (iv) to make all required contributions to all employee benefit plans, if any. For more information about the covenants of the Borrower under the Loan Agreement, see APPENDIX C: SUMMARY OF PRINCIPAL DOCUMENTS THE LOAN AGREEMENT herein. Subordination Agreement SUBORDINATE OBLIGATIONS In connection with the original development of the Montevina Campus, Monevina Phase I, LLC and Monevina Phase II, LLC entered into certain mortgage loans (the Original Mortgages ) with a lender (the Mortgage Lender ) that will be outstanding as of the date of the delivery of the Bonds. Contemporaneously with the delivery of the Bonds and execution of the Montevina Leases, the Mortgage Lender will restructure the Original Mortgages, so that amounts due and payable pursuant to the Original Mortgages are equal to amounts due and payable under the Subordinate Site Lease and the Subordinate Sublease. In addition, the Mortgage Lender will enter into a subordination agreement (the Subordination Agreement ), dated the delivery date of the Bonds, with the 27

40 Trustee and the Borrower, providing that the rights of the Mortgage Lender pursuant to the Original Mortgage on the Phase I parcel will be subordinate to the rights of the Trustee pursuant to the Leasehold Deed of Trust. Upon the discharge of the rent obligations under the Subordinate Site Lease, the obligations under the Original Mortgages, as amended, will be discharged permitting Montevina Phase I, LLC and Montevina Phase II, LLC to convey fee title to the Borrower free and clear of any encumbrances as provided in the Leases. For a summary of certain provisions of the Subordination Agreement, see APPENDIX C: SUMMARY OF PRINCIPAL DOCUMENTS SUBORDINATION AGREEMENT herein. Subordinate Lease and Sublease Simultaneously with the issuance of the Bonds, the Authority will enter into (a) the Subordinate Site Lease with Montevina Phase II, LLC (the Subordinate Lender ), (b) the Subordinate Sublease with the Borrower, (c) the Subordinate Assignment Agreement (the Subordinate Assignment Agreement ) with the Subordinate Lender, and (d) the Paying Agent Agreement (the Subordinate Paying Agent Agreement ) with the Subordinate Lender, the Borrower, and The Bank of New York Mellon Trust Company, N.A., as subordinate paying agent (the Subordinate Paying Agent ). Pursuant to the Subordinate Site Lease, the Authority leases from Montevina Phase II, LLC the Phase II Montevina Buildings and the Campus Lot, including the real property and improvements now and hereafter situated thereon. The term of the Subordinate Site Lease commences on the date of delivery of the Bonds and ends on October 1, 2035 (the Subordinate Lease Expiration Date ) (corresponding to the QSCB term limit), unless it is sooner terminated or extended as provided in the Subordinate Site Lease. Pursuant to the Subordinate Sublease, the Authority subleases to the Borrower, such Phase II Facilities. The term of Subordinate Sublease commences on the date of delivery of the Bonds and ends on the Subordinate Lease Expiration Date, unless it is sooner terminated or extended as provided in the Subordinate Sublease. The Authority, pursuant to the Subordinate Assignment Agreement, has assigned to the Subordinate Lender all of the Authority s right, title and interest in and to the Subordinate Sublease, including, without limitation, its right to receive the base rental payments under the Subordinate Sublease to be paid by the Borrower under and pursuant to the Subordinate Sublease (the Subordinate Base Rental Payments ); provided, however, that the Authority will retain its Retained Rights. Pursuant to the Subordinate Site Lease, Montevina Phase II, LLC agrees, upon the Subordinate Site Lease Expiration Date, provided all amounts payable under the Subordinate Site Lease have been paid in full, to convey fee simple title to the Phase II Facilities, free of any encumbrances, to the Borrower. Subordinate Base Rental Payments The principal component of the Subordinate Lease Payments under the Subordinate Site Lease totals $15,000,000. The lease payments under the Subordinate Site Lease are designated by the Authority as QSCBs under Section 54F of the Code. The Subsidy Payments are assigned by the Authority directly to the Subordinate Paying Agent under the Subordinate Paying Agent Agreement for the benefit of the Subordinate Lender. The interest component of the Subordinate Base Rental Payments is limited to what is received as the Subsidy Payment. The principal component of the Subordinate Base Rental Payments is payable by the Borrower in a lump sum on October 1, 2035 (the Subordinate Principal Payment Date ) (corresponding to the QSCB term limit). Under the terms of the Subordinate Sublease, the Borrower covenants to set aside, from time to time, certain amounts in a sinking fund held by the Subordinate Paying Agent. The principal component of, and set aside amounts with respect to, the Subordinate Base Rental Payments are payable from Net Revenues of the Borrower, which are defined as, for any period of time, the revenues of the Borrower, limited to all revenues, income, receipts and money received by or apportioned to the Schools or with respect to any school operated or to be operated as Tri-Valley at the Facility, including payments from the State with respect to the school(s) operated or to be operated by the Borrower at the Facility pursuant to the Charter School Law and any regulations promulgated pursuant thereto, but excluding (i) the Subsidy Payments, (ii) Senior Debt Service payable during such period, and (iii) the Operating Expenses payable during such period. 28

41 Default and Remedies The Subordinate Sublease is structured to cause the Bonds and the Borrower s obligations with respect to the Bonds to be and remain payable on a basis senior to the obligations of the Borrower with respect to the Subordinate Sublease, including in the event of a default under the Subordinate Sublease. Failure by the Borrower to transfer to the Subordinate Paying Agent pursuant to the Subordinate Sublease any Subordinate Sinking Fund Deposit does not constitute an event of default under the Subordinate Sublease. In addition, any delay or reduction in the Subsidy Payments does not constitute an event of default under the Subordinate Sublease. From the commencement date through the initial Subordinate Lease Expiration Date, the Borrower is not responsible for payment of the interest component of the Subordinate Base Rental Payments; provided, however, if at any time the Subsidy Payments are not paid to the Trustee, such unpaid Subordinate Base Rental Payments shall remain due and payable and the term of the Subordinate Sublease will be extended by the Subordinate Lender to July 1, During such extension period, the Borrower would be required to pay such amounts, if any, from Net Revenues, as defined above. If the Borrower defaults under the Subordinate Sublease, the Subordinate Lender can exercise its rights to foreclose upon the Phase II Montevina Buildings and the Campus Lot; however, as discussed herein, such right can only be exercised on and after July 1, Default by the Borrower under the Loan Agreement or the Sublease constitutes an event of default under the Subordinate Sublease, subject however to the terms of the Intercreditor Agreement. Intercreditor Agreement The Borrower, the Subordinate Lender, and the Trustee will enter into an Intercreditor and Subordination Agreement, dated as of October 1, 2012 (the Intercreditor Agreement ), which sets forth the respective rights, remedies and interests of the Subordinate Lender and the Trustee, as representative of the Bondholders. On the terms and to the extent in the manner set forth in the Intercreditor Agreement, the payment of the Subordinate Base Rental Payments is and will be expressly subordinate and junior in right to payment and exercise of remedies to the prior indefeasible payment in full in cash of the amounts paid by the Borrower to pay the principal of and interest on the Bonds, and the Subordinate Base Rental Payments is subordinated as a claim against the Borrower or any of their assets to such extent and in such manner to their prior indefeasible payment in full in cash of the amounts paid by the Borrower to pay the principal of and interest on the Bonds. Under the Intercreditor Agreement, the Borrower agrees not to make, and the Subordinate Lender will not accept or receive, any payment or distribution on or in respect of the Subordinate Base Rental Payments of any kind or character, including by way of setoff or otherwise, except that, provided the Borrower has not defaulted in any of its obligations to pay interest or principal on the Bonds, (i) all or any portion of the amounts due to the Subordinate Lender and/or the Subordinate Lender on or after the Lease Expiration Date, to the extent of Net Revenues and deposits into the Subordinate Revenue Fund after deducting any amounts to be deposited in the Liquidity Fund in accordance with the Senior Loan Agreement, and (ii) indemnity payments, if any, owing to the Subordinate Lender by the Borrower to the extent of Net Revenues, after deducting any amounts to be deposited in the Liquidity Fund in accordance with the Senior Loan Agreement, and deposits into the Subordinate Revenue Fund, after deducting any amounts to be deposited in the Liquidity Fund in accordance with the Senior Loan Agreement. For a summary of certain provisions of the Intercreditor Agreement, see APPENDIX C: SUMMARY OF PRINCIPAL DOCUMENTS INTERCREDITOR AGREEMENT herein. General CHARTER SCHOOLS Under State Law, charter schools are largely independent schools operating as part of the public school system under the exclusive control of the officers of the public schools. A charter school located in a unified school district may provide instruction in any of grades K-12, as its charter permits. A charter school is usually created or organized by a group of teachers, parents and community leaders, or a community-based organization, and is usually sponsored by an existing local public school district or county board of education. Specific goals and operating procedures for the charter school are detailed in a charter granted by the sponsoring board to the charter organizers. 29

42 A charter school is generally exempt from the laws governing school districts, except where specifically noted in the law. Charter schools in the State are created pursuant to Part 26.8 (commencing with Section 47600) of Division 4 of Title 2 of the State Education Code (the Charter School Law ). The law also requires that a public charter school be nonsectarian in its programs, admission policies, employment practices and all other operations, and prohibits the conversion of a private school to a charter school. Public charter schools may not charge tuition and may not discriminate against any pupil on the basis of ethnicity, national origin, gender or disability. State public charter schools are required to participate in the State Testing and Reporting Program. According to the Charter School Law, the purpose of a charter school is to: (1) improve pupil learning; (2) increase learning opportunities for all pupils, with special emphasis on expanded learning experiences for pupils identified as academically low achieving; (3) encourage the use of different and innovative teaching methods; (4) create new professional opportunities for teachers, including the opportunity to be responsible for the learning program at the school site; (5) provide parents and students with expanded choices in the types of educational opportunities that are available within the public school system; (6) hold schools accountable for meeting measurable pupil outcomes and provide schools a way to shift from a rule-based to a performance-based system of accountability; and (7) provide competition within the public school system to stimulate improvements in all public schools. Anyone may write a charter. However, for a new charter school (not conversion of existing public schools), charter developers must present a petition to the governing board of the local school district (or other chartering authority) containing the signatures of either: (1) a number of teachers meaningfully interested in teaching at the school equal to at least 50 percent of the number of teachers the charter school estimates will be employed, or (2) a number of parents representing at least 50 percent of the number of pupils expected to enroll at the school in its first year. For conversion schools, the Charter School Law requires signatures of at least 50 percent of the teachers at the school to be converted. Pupils may not be required to attend a charter school nor may teachers be compelled to teach there. Charters are granted for a maximum term of five years, and may be renewed for new five-year terms without limitation upon satisfaction of certain criteria described below. Generally, each charter school is funded to its statutory entitlement after the local contribution is taken into account. Local funding comes from the chartering school district or other sponsoring local education agency in lieu of property taxes (generally funded from the school district s own property tax receipts), while the State funds the balance directly through the county office of education. The proportion coming from the State will vary from district to district depending on the amount of local property taxes collected. In addition, charter schools receive State categorical block grant funding and lottery funds based upon pupil attendance, and may be eligible for other special programmatic aid from State and federal grants. Charter schools are prohibited from charging tuition under the Charter School Law. See RISK FACTORS Specific Risks of Charter Schools herein Chartering Authority Under the Charter School Law, the local school district governing board serves as the primary chartering authority. A petitioner may seek approval of a charter from a county board of education if the pupils to be served are pupils that would normally be provided direct education and related services by the county office of education. A petitioner may seek approval directly from the State Board of Education (the State Board ) only if the State Board finds that the proposed state charter school will provide instructional services of statewide benefit that cannot be provided by a charter school operating in only one school district or county. Charter school petitioners may also request the county board of education or the State Board to review a charter petition if the petition has been previously denied by the local school district governing board. The State Board is the chartering authority for the Schools. Elements of a Charter Petition Each charter petition, at a minimum, must contain reasonably comprehensive descriptions of each of sixteen required elements. They are: 1. A description of the educational program of the charter school. 30

43 2. The measurable pupil outcomes identified for use by the charter school. 3. The method by which pupil progress in meeting those pupil outcomes is to be measured. 4. The charter school s governance structure, including parental involvement. 5. The qualifications to be met by individuals employed by the charter school. 6. Procedures to ensure health and safety of pupils and staff. 7. The means by which the charter school will achieve racial and ethnic balance among pupils, reflective of the general population residing in the chartering district. 8. Admission requirements, if applicable. 9. The manner in which annual financial audits will be conducted, and the manner in which audit exceptions and deficiencies will be resolved to the satisfaction of the chartering authority. 10. The procedures by which pupils may be suspended or expelled. 11. Provisions for employee coverage under the State Teachers Retirement System, the Public Employees Retirement System, or federal social security. 12. The public school alternatives for pupils residing within the district who choose not to attend charter schools. 13. A description of the rights of any employee of the school district upon leaving the employment of the school district to work in a charter school, and of any rights of return to the school district after employment at a charter school. 14. The procedures to be followed by the charter school and the entity granting the charter to resolve disputes relating to provisions of the charter. 15. A declaration of whether or not the charter school will be deemed the exclusive public school employer of the employees of the charter school for purposes of the Educational Employment Relations Act. 16. A description of the procedures for closure of the school and disposition of assets. Under the accountability requirements of AB 1137, signed into law in October 2003, districts or other agencies that grant charter authority must identify a contact person for charter schools, visit each charter school at least once a year, and ensure that charter schools submit all required reports (including fiscal reports that must be sent four times a year to the district and local county office of education). In addition, the district must monitor the fiscal condition of its charter schools and notify the State Department of Education whenever a charter is granted, denied, revoked, or the charter school will cease operation. AB 1137 also required that charter schools show a certain level of academic performance to have their charters renewed. Charter Management Organizations As the number of charter schools operating pursuant to the Charter School Law has increased over time, non-profit organizations have been established, referred to as charter management organizations ( CMOs ), to manage the operations of several charter schools for the purpose of achieving certain economic and operational efficiencies. CMOs centralize or share certain functions and resources among multiple charter schools, including but not limited to accounting, human resources, marketing, purchasing, property management and administration. 31

44 CMOs may operate at the regional or statewide level. The Schools are managed by Tri-Valley as their CMO. See APPENDIX A: INFORMATION CONCERNING THE PROJECT AND THE BORROWER herein. Charter Revocation A charter may be revoked if the charter granting authority finds, based on substantial evidence, that a charter school (i) has committed a material violation any of the conditions, standards or procedures set forth in its charter, or (ii) has failed to meet or to pursue any of the student outcomes identified in its charter, or (iii) has failed to meet generally accepted accounting principles, or engages in fiscal mismanagement, or (iv) has violated any provision of law. Prior to revoking a charter, the charter granting authority must notify the charter school of the violation, afford the charter school a reasonable opportunity to remedy the violation, and, upon failure to do so, give written notice of intent to revoke and hold a public hearing on the matter. An adverse decision by a school district governing board may be appealed to the county board of education, and an adverse decision by the county board directly or on appeal may be appealed to the State Board. In addition, the State Board, whether or not it is the charter granting authority, may take action based on the recommendation of the State Superintendent of Public Instruction, including but not limited to revocation of a school s charter, upon a finding of (i) gross financial mismanagement that jeopardizes the financial stability of the charter school, (ii) illegal or substantially improper use of charter school funds for the personal benefit of any officer, director or fiduciary of the charter school, or (iii) substantial and sustained departure from measurably successful practices such that continuing departure would jeopardize the education development of the school s pupils. Regulations promulgated by the State Board that became effective February 13, 2011 require the California Department of Education to identify and notify the State Board of each charter school that is determined to warrant action pursuant to clause (iii) of the immediately preceding sentence by November 1 of each year. Under these regulations, charter schools so notified are required to be given an opportunity to submit written information as to why its charter should not be revoked. Any resulting action to revoke a charter is effective at the end of the fiscal year in which the action is taken, unless the State Board identifies departures at the school that are so significant as to be cause for immediate revocation and closure of the charter school. The regulations require the State Board to hold a public hearing to consider action including but not limited to charter revocation not later than March 31. See RISK FACTORS Specific Risks of Charter Schools Non-Renewal or Revocation of Charters herein. The Borrower has not received any notice from the California State Board of Education or the California Department of Education, regarding any violation or proposal to revoke the School s charter or of any other violation requiring corrective action. Amendments to the Charter School Law The Legislature has amended the Charter School Law frequently since its initial adoption in 1992, and legislative and public attitudes are still evolving. The Borrower has no control over State legislative or regulatory decision making that could affect its operations or ongoing funding sources. For example, certain currently pending legislation affecting the Charter Schools Act and/or related law include: Assembly Bill 1594 ( AB 1594 ) which would require charter schools to provide each needy pupil with one nutritionally adequate free or reduced-price meal during each school day, excluding those charter schools that offer only non-classroom based instruction or only online instructions; Assembly Bill 1819 ( AB 1819 ) which would require charter schools to make the State Teacher s Retirement Plan and the Public Employees Retirement Plan available to its employees, as specified; Senate Bill 1290 ( SB 1290 ) which would require the chartering authority to consider increases in pupil academic achievement for all groups of pupils as the most important factor in determining whether to grant a charter renewal or revoke a charter; Assembly Bill 644 ( AB 644 ) which would, beginning in fiscal year , allow school districts and county offices of education to claim average daily attendance based on a pupil s attendance in an online course in accordance with specified rules and regulations, and Senate Bill 1028 ( SB 1028 ) which would amend the provisions of the California School Finance Authority Act to remove limitations on the sources from which state apportionment funding may be transferred by the Controller through the Intercept. The Borrower makes no representation as to whether AB 1594, AB 1819, SB 1290, AB 644, SB 1028 or any other proposed amendments to Charter School Law will be enacted into law. For legislative updates see The parties to this transaction take no responsibility for the continued accuracy of this internet address or for the 32

45 accuracy, completeness or timeliness of information posted there, and such information is not incorporated herein by such reference. Growth in Charter Schools in California California has the largest concentration of charters in the nation with over 350,000 students enrolled in charter schools. The California Charter Schools Association reported that the number of charter schools in California grew by 103 in the school year. The total in Alameda County grew to approximately 50. The following table shows the growth of charter schools in California. General Source: Legislative Analyst s Office STATE FUNDING OF EDUCATION The Charter School Law provides that the legislature intended each charter school be provided with operational funding that is equal to the total funding that would be available to a similar school district servicing a similar pupil population... As is true for school districts in the State, charter schools revenue is derived primarily from two sources: a State portion funded from the State s general fund and a locally generated portion derived from each sponsoring school district s share of the local ad valorem property tax. Decreases in State revenues, or in the legislative appropriations made to fund education, may significantly affect charter schools operations. State Budget Process. According to the State Constitution, the Governor must propose a budget to the State Legislature no later than January 10 of each year, and a final budget must be adopted no later than June 15. Historically, the budget required a two-thirds vote of each house of the State Legislature for passage. However, on November 2, 2010, the State s voters approved Proposition 25, which amended the State Constitution to lower the vote requirement necessary for each house of the State Legislature to pass a budget bill and send it to the Governor. Specifically, the vote requirement was lowered from two thirds to a simple majority (50% plus one) of each house of the State Legislature. The lower vote requirement also would apply to trailer bills that appropriate funds and are identified by the State Legislature as related to the budget in the budget bill. The budget becomes law upon the signature of the Governor, who may veto specific items of expenditure. Under Proposition 25, a two thirds vote of the State Legislature is still required to override any veto by the Governor. School district budgets must generally be adopted by July 1, and revised by the school board within 45 days after the Governor signs the budget act to reflect any changes in budgeted revenues and expenditures made necessary by the adopted State budget. The Governor signed the fiscal year State budget on June 27,

46 When the State budget is not adopted on time, basic appropriations and the categorical funding portion of each charter school s State funding are affected differently. Under the rule of White v. Davis (also referred to as Jarvis v. Connell), a State Court of Appeal decision reached in 2002, there is no constitutional mandate for appropriations to charter schools, school districts without an adopted budget or emergency appropriation, and funds for State programs cannot be disbursed by the State Controller until that time unless the expenditure is (i) authorized by a continuing appropriation found in statute, (ii) mandated by the State Constitution (such as appropriations for salaries of elected state officers), or (iii) mandated by federal law (such as payments to State workers at no more than minimum wage). The State Controller has consistently stated that basic State funding for schools is continuously appropriated by statute, but that special and categorical funds may not be appropriated without an adopted budget. Should the State Legislature fail to pass a budget or emergency appropriation before the start of any fiscal year, the Borrower might experience delays in receiving certain expected revenues. State income tax and other receipts can fluctuate significantly from year to year, depending on economic conditions in the State and the nation. Because funding for education is closely related to overall State income, as described in this section, funding levels can also vary significantly from year to year, even in the absence of significant education policy changes. A brief description of the adopted State budget for is included below; however, no prediction can be made as to how State income or State education funding will vary over the entire term to maturity of the Bonds, and none of the Borrower or the Authority takes any responsibility for informing owners of the Bonds as to any such annual fluctuations. Information about the State budget and State spending for education is regularly available at various State maintained websites. Text of proposed and adopted budgets may be found at the website of the Department of Finance located at An impartial analysis of the budget is posted by the Office of the Legislative Analyst at In addition, various State of California official statements, many of which contain a summary of the current and past State budgets and the impact of those budgets on school districts in the State, may be found at the website of the State Treasurer, currently located at and the Electronic Municipal Market Access (EMMA) website of the Municipal Securities Rulemaking Board, currently located at The information referred to is prepared by the respective State agency maintaining each website and not by the Borrower or the Authority, and neither the Borrower nor the Authority can take any responsibility for the continued accuracy of these internet addresses or for the accuracy, completeness or timeliness of information posted there, and such information is not incorporated herein by these references. The information referred to above should not be relied upon in making an investment decision with respect to the Bonds. Aggregate State Education Funding. Under Proposition 98, a constitutional and statutory amendment adopted by the State s voters in 1988 and amended by Proposition 111 in 1990 (no found at Article XVI, Sections 8 and 8.5 of the Constitution), a minimum level of funding is mandated for school districts, community college districts, and other State agencies that provide direct elementary and secondary instructional programs, including charter schools. The Proposition 98 guaranteed amount for education is based on prior-year funding, as adjusted through various formulas and tests that take into account State proceeds of taxes, local property tax proceeds, school enrollment, per-capita personal income, and other factors. The State s share of the guaranteed amount is based on State general fund tax proceeds and is not based on the general fund in total or on the State budget. The local share of the guaranteed amount is funded from local property taxes. The total guaranteed amount varies from year to year and throughout the stages of any given fiscal year s budget, from the Governor s initial budget proposal to actual expenditures to post-year-end revisions, as better information regarding the various factors becomes available. Over the long run, the guaranteed amount will increase as enrollment and per capita personal income grow. If, at year-end, the guaranteed amount is calculated to be higher than the amount actually appropriated in that year, the difference becomes an additional education funding obligation, referred to as settle-up. If the amount appropriated is higher than the guaranteed amount in any year, that higher funding level permanently increases the base guaranteed amount in future years. The Proposition 98 guaranteed amount is reduced in years when general fund revenue growth lags personal income growth, and may be suspended for one year at a time by enactment of an urgency statute. In either case, in subsequent years when State general fund revenues grow faster than personal income (or sooner, as the Legislature may determine), the funding level must be restored to the guaranteed amount, the obligation to do so being referred to as maintenance factor. In recent years, the State s response to fiscal difficulties has had a significant impact on Proposition 98 funding and settle-up treatment. The State has sought to avoid or delay paying settle-up amounts when funding has 34

47 lagged the mandated amount. In response, teachers unions, the State Superintendent and others sued the State or Governor in 1995, 2005, 2009 and 2011 to force them to fund schools in the full amount required. The settlement of the 1995 and 2005 lawsuits has so far resulted in over $4 billion in accrued State settle-up obligations. However, legislation enacted to pay down the obligations through additional education funding over time, including the Quality Education Investment Act of 2006, have also become part of annual budget negotiations, resulting in repeated adjustments and deferrals of the settle-up amounts. The State has also sought to preserve general fund cash while avoiding increases in the base guaranteed amount through various mechanisms: by treating any excess appropriations as advances against subsequent years Proposition 98 minimum funding levels rather than current year increases; by temporarily deferring apportionments of Proposition 98 funds from one fiscal year to the next; by permanently deferring apportionments of Proposition 98 funds from one fiscal year to the next; by suspending Proposition 98, as the State did in fiscal year , fiscal year , fiscal year and fiscal year (see State Budget and State Cash Management Legislation below); and by proposing to amend the Constitution s definition of the guaranteed amount and settle-up requirement under certain circumstances. Legal Challenge to State Funding Education. On May 20, 2010, a plaintiff class of numerous current California public school students and the Alameda Unified School District, the Alpine Union School District, the Del Norte County Unified School District, the Folsom Cordova Unified School District, the Hemet Unified School District, the Porterville Unified School District, the Riverside Unified School District, the San Francisco Unified School District and the Santa Ana Unified School District, together with the California Congress of Parents, Teachers & Students, the Association of California School Administrators and the California School Boards Association filed suit in Alameda County Superior Court challenging the system of financing for public schools in California as unconstitutional. In Robles-Wong, et al. v. State of California ( Robles-Wong ), the plaintiffs seek declaratory and injunctive relief, including a permanent injunction compelling the State to abandon the existing system of public school funding and replace it with a system that is based on what is needed to meet the State s program requirements and the needs of individual students. After a demurrer was sustained with leave to amend on January 14, 2011, a first amended complaint was filed by the plaintiff class on March 16, A demurrer with leave to amend on the first amended complaint was sustained on July 26, 2011, however, the plaintiffs elected not to amend their complaint within the time provided by the court. Accordingly, the court dismissed all of the plaintiff s claims and entered a judgment on November 3, The plaintiffs, on January 24, 2012, filed a notice of appeal to the Court of Appeal of the State of California, First Appellate District, from the judgment entered on November 3, 2011 dismissing the case in its entirety and all orders incorporated therein, including the order entered on July 26, 2011 sustaining the demurrer. The Borrower and the Authority cannot predict the likelihood of success of such appeal or how such appeal, if successful, could result in a change in how school funding of education is implemented in the State. Prohibitions on Diverting Local Revenues for State Purposes. Beginning in , the State satisfied a portion of its Proposition 98 obligations by shifting part of the property tax revenues otherwise belonging to cities, counties, special districts, and redevelopment agencies, to school and college districts through a local Educational Revenue Augmentation Fund (ERAF) in each county. Local agencies, objecting to invasions of their local revenues by the State, sponsored a statewide ballot initiative intended to eliminate the practice. In response, the State Legislature proposed an amendment to the State Constitution, which the State s voters approved as Proposition 1A at the November 2004 election. That measure was generally superseded by the passage of a new initiative constitutional amendment at the November 2010 election, known as Proposition 22. The effect of Proposition 22 is to prohibit the State, even during a period of severe fiscal hardship, from delaying the distribution of tax revenues for transportation, redevelopment, or local government projects and services. It prevents the State from redirecting redevelopment agency property tax increment to any other local government, including school districts, or from temporarily shifting property taxes from cities, counties and special districts to schools, as in the ERAF program. This is intended to, among other things, stabilize local government revenue sources by restricting the State s control over local property taxes. One effect of this amendment will be to deprive the State of fuel tax revenues to pay debt service on most State bonds for transportation projects, reducing the amount of State general fund resources available for other purposes, including education. 35

48 Prior to the passage of Proposition 22, the State invoked Proposition 1A to divert $1.935 billion in local property tax revenues in from cities, counties, and special districts to the State to offset State general fund spending for education and other programs, and included another diversion in the adopted State budget of $1.7 billion in local property tax revenues from local redevelopment agencies. Redevelopment agencies had sued the State over this latter diversion. However, the lawsuit was decided against the California Redevelopment Association on May 1, Because Proposition 22 reduces the State s authority to use or shift certain revenue sources, fees and taxes for State general fund purposes, the State will have to take other actions to balance its budget in some years such as reducing State spending or increasing State taxes, and school and community college districts that receive Proposition 98 or other funding from the State will be more directly dependent upon the State s general fund. State Cash Management Legislation. On March 1, 2010, the Governor signed a bill (and on March 4, 2010, subsequently signed a clean-up bill to clarify certain provisions of such bill) to provide additional cash management flexibility to State fiscal officials (the Cash Management Bill ). The Cash Management Bill authorized deferral of certain payments during the fiscal year for school districts (not to exceed $2.5 billion in the aggregate at any one time, and a maximum of three deferrals during the fiscal year). The Cash Management Bill permitted deferrals of payments to K-12 schools in July 2010, October 2010 and March 2011, for not to exceed 60, 90 and 30 days, respectively, but, depending on actual cash flow conditions at the time, allowed the State Controller, Treasurer and Director of Finance to either accelerate or delay the deferrals up to 30 days or reduce the amounts deferred. The Cash Management Bill also permitted the State to move a deferral to the prior month or to a subsequent month upon 30 days written notice by the State Department of Finance to the Legislative Budget Committee, except that the Cash Management Bill provided that the deferral for March 2011 was required to be paid prior to April 30. The Cash Management Bill provided for exceptions to the deferrals for school districts that could demonstrate hardship. The Cash Management Bill made it necessary for many school districts (and other affected local agencies) to increase the size and/or frequency of their cash flow borrowings during fiscal year Similar legislation was enacted for fiscal year The fiscal year legislation, however, set forth a specific deferral plan for K-12 education payments. Pursuant to such legislation, both the July 2011 and August 2011 K-12 payments of $1.4 billion were deferred and the October 2011 payment of $2.4 billion was deferred. In September 2011, $700 million of the July deferral was paid, in January 2012, $4.5 billion from the remaining July, August and October deferrals were paid, and in March 2012, $1.4 billion was deferred and paid in April The State Legislature enacted similar legislation for fiscal year that provides for $1.2 billion of K- 12 payments to be deferred in July 2012, $600 million to be deferred in August 2012, $800 million to be deferred in October 2012 and $900 million to be deferred in March Of such deferred amounts, $700 million of the deferral made in July 2012 is to be paid in September 2012, the remaining $1.9 billion deferred in July, August and October of 2012 is to be paid in January 2013, and the $900 million deferred in March 2013 is to be repaid in April State Budget. The Governor signed the fiscal year State budget (the State Budget ) on June 27, The State Budget closes a $15.7 billion budget gap and builds a reserve of nearly $1 billion with (i) $8.1 billion in expenditure reductions, (ii) $6 billion in increased revenues (which assumes the approval by the voters of temporary taxes at the November 2012 election, as further described below) and (iii) $2.5 billion from certain loan and transfer measures. This $15.7 billion budget gap is less than the $26.6 billion budget gap encountered for fiscal year The State Budget purports to position the State to have a balanced budget in an ongoing manner for the first time in over a decade, with future spending expected to stay within available revenues. The State Budget assumes the passage of The Schools and Local Public Safety Protection Act (the Temporary Tax Measure ) at the November 2012 election. Such measure, if approved by the voters, would increase the personal income tax on the State s wealthiest taxpayers by up to three percent for a period of seven years, and increase the sales tax by one-quarter percent for a period of four years. The State Budget projects that the Temporary Tax Measure will generate an estimated $8.5 billion in revenues in fiscal year Such additional revenues would increase the State s Proposition 98 obligation by $2.9 billion and provide a net benefit of $5.6 billion to the State s general fund. 36

49 The Temporary Tax Measure would create an Education Protection Account funded from newly imposed sales and income taxes. The State Budget defers a portion of the funding for schools until June, 2013, when, if the Temporary Tax Measure passes, such deferrals will be repaid from the proceeds of the newly imposed taxes. Should the Temporary Tax Measure pass, there is no guarantee that the newly imposed taxes will generate sufficient revenue to repay the entire deferral, but any shortfall is required pursuant to the State Budget to be paid by the State in July. Should the Temporary Tax Measure fail, there is no guarantee that schools will recuperate the amount deferred in the first half of the year. With the assumed voter approval of the Temporary Tax Measure, the State Budget provides $53.6 billion in Proposition 98 funding for K-12 schools and community colleges, a $6.7 billion (or 14%) increase from fiscal year Of such increased amount, $6.1 billion is designated for K-12 schools. The State Budget maintains level Proposition 98 programmatic funding for all K-12 schools, pays off $2.2 billion in the amount of payments to K-12 schools and community colleges that are deferred each year, and funds the Quality Education Investment Act program (as described below) within the Proposition 98 guarantee. According to the State Budget, the Temporary Tax Measure is expected to increase Proposition 98 funding for K-12 schools and community colleges by an aggregate amount of $17.2 billion (or 37%) over the next four fiscal years when compared to fiscal year This projected increase reverses years of cuts in funding for K-12 schools and community colleges. The State Budget includes a trigger reduction if the Temporary Tax Measure does not pass. The State Budget sets forth a trigger cut of approximately $2.74 billion, in the form of a decrease in the revenue limit applicable to school districts, county offices education and charter schools. The State estimates that this would result in a funding reduction of approximately 8.8% for charter schools in the fiscal year. K-12 adjustments provided in the State Budget include: Proposition 98 Adjustments. A decrease of approximately $630 million due to (i) eliminating the hold-harmless adjustment provided to K-12 schools from the elimination of the sales tax on gasoline in fiscal year , and (ii) using a consistent current value methodology to rebench the Proposition 98 minimum guarantee for the exclusion of child care programs, the inclusion of special education mental health services, and new property tax shifts. Redevelopment Agency Asset Liquidation. An increase of $1.3 billion in local property taxes for fiscal year to reflect the distribution of cash assets previously held by redevelopment agencies, which increase in local revenues also reduces Proposition 98 general fund by an identical amount. Charter Schools. An increase of $53.7 million in Proposition 98 funding for charter school categorical programs to fund growth in charter school enrollment. Additionally, the State Budget provides for (i) the expansion of the ability of school districts to convey surplus property to charter schools, (ii) the authorization of county treasurers to provide charter schools with short-term cash loans, and (iii) the authorization of charter schools to participate in the temporary revenue anticipation note financing mechanisms that are currently available to school districts and county offices of education. Quality Education Investment Act. A decrease of $450 million in funding for fiscal year with respect to the Quality Education Investment Act. The overappropriation in fiscal year will be used to prepay the $450 million required to be provided on top of the Proposition 98 minimum guarantee in fiscal year The program will be funded within the Proposition 98 minimum guarantee to achieve one-time savings of $450 million for fiscal year K-12 Deferrals. An increase of $2.1 billion in Proposition 98 funding to reduce K-12 inter-year budgetary deferrals from $9.5 billion to $7.4 billion. Mandates Block Grant. An increase of $86.2 million from fiscal year to provide a total of $166.6 million for K-12 mandates through a new voluntary block grant, in which participating school districts and county offices of education would receive $28 per student and participating charter 37

50 schools would receive $14 per student. School districts and county offices of education that choose not to participate in the block grant program would retain their right to submit claims for reimbursement, subject to audit by the State Controller. Child Care. Total savings of $294.3 million from (i) the inclusion of part-day centerbased services for 3- and 4- year-olds within the State Preschool Program funded through Proposition 98, (ii) the reduction of child care provider contracts, and (iii) not providing the statutory cost-of-livingadjustment for non-calworks programs. As stated above, the increased Proposition 98 funding for K-12 schools, among other things, is contingent upon the approval of the Temporary Tax Measure. If the Temporary Tax Measure is not approved by the voters at the November 2012 election, the State Budget includes a backup plan of $6 billion in trigger cuts which would go into effect on January 1, With respect to K-12 schools, such cuts would (i) reduce funding for K-12 schools and community colleges by $5.4 billion a funding decrease equivalent to three weeks of instruction, and (ii) eliminate the ability of the State to begin repaying funding deferrals. The complete State Budget is available from the California Department of Finance website at The Borrower and the Authority can take no responsibility for the continued accuracy of this internet address or for the accuracy, completeness or timeliness of information posted there, and such information is not incorporated herein by such reference. Future Budgets and Budgetary Actions. The Borrower and the Authority cannot predict what actions will be taken in the future by the State Legislature and the Governor to address changing State revenues and expenditures or the impact such actions will have on State revenues available in the current or future years for education. The State budget will be affected by national and State economic conditions and other factors over which the School will have no control. Certain actions could result in a significant shortfall of revenue and cash, and could impair the State s ability to fund schools during fiscal year and in future fiscal years. Continued State budget shortfalls in fiscal year and future fiscal years could have a material adverse financial impact on the School. Private citizens have qualified an alternative revenue measure ( Proposition 38 ) for the November, 2012 ballot. Proposition 38 would increase tax revenues with a primary goal of increasing public school funding. The State has not provided information relating to the specific changes to funding of school districts, community college districts and charter schools that would occur if Proposition 38 becomes effective and the Temporary Tax Measure does not. In that case, the State Legislature could adopt changes to the State Budget. Allocation of State Funding to Charter Schools Under the Charter School Law, each charter school is calculated to have a general purpose entitlement, which is based on the statewide average amount of State aid, local property taxes and other revenue received by school districts of similar type and serving similar pupil populations. The general purpose entitlement is calculated on a per student basis at each of four grade level ranges and is multiplied by the charter school s Average Daily Attendance (ADA) in each grade level range. Each charter school s general purpose entitlement is funded from local funding in lieu of property taxes and, to the extent such funding is insufficient to fulfill the entire entitlement, from money appropriated by the State from the State s general fund for education. The local share, which must be transferred in monthly installments to the charter school by the chartering school district in lieu of property taxes, is the average amount of property taxes per ADA received by the district, including charter school students, multiplied by the charter school s ADA. In addition, each charter school is entitled to a categorical block grant. School districts must qualify for categorical aid on the basis of the actual number of students in attendance who qualify for one or more special programs, and may only spend the aid for the restricted purposes of the program. Charter school students do not need to qualify individually for each program of certain categorical aid. Instead, a charter school categorical block grant is computed annually. In , the amount available to the School was based upon $412 per ADA plus an allowance for economically impacted students based upon individual school data. Categorical block grant funding 38

51 may be used for any purpose determined by the charter school. In addition, charter schools may apply for and receive separate categorical funds for many programs that are not included in the block grants, if otherwise eligible, but may not receive aid for programs exclusively or almost exclusively provided by a county office of education. The following tables describe ADA based state funding of California charter school education for Fiscal Year through : Table 1 STATE FUNDING OF CALIFORNIA CHARTER SCHOOL EDUCATION FISCAL YEAR (Dollars per unit of ADA) Grades K General Purpose Block Grant $5,047 $5,121 $5,271 $6,134 Categorical Block Grant Lottery*** Per-ADA Reduction for 08-09** (253) (253) (253) (253) Total* $5,373 $5,447 $5,597 $6,460 Table 2 STATE FUNDING OF CALIFORNIA CHARTER SCHOOL EDUCATION FISCAL YEAR (Dollars per unit of ADA) Grades K General Purpose Block Grant $5,077 $5,153 $5,306 $6,158 Categorical Block Grant Lottery*** Total* $5,606 $5,682 $5,835 $6,687 Table 3 STATE FUNDING OF CALIFORNIA CHARTER SCHOOL EDUCATION FISCAL YEAR (Dollars per unit of ADA) Grades K General Purpose Block Grant $5,090 $5,166 $5,319 $6,163 Categorical Block Grant Lottery*** Total* $5,631 $5,707 $5,860 $6,704 * Excludes special education, No Child Left Behind, class size reduction, supplemental instruction, economic impact aid, and National School Lunch Program funding and any private philanthropy, grants, or other fund-raising. ** Estimated. *** A one-time per-ada reduction was applied to ADA and deducted from general purpose block grants. The deduction per ADA was $ Source: California Charter Schools Association; California Department of Education For a description of the School s revenue sources, see APPENDIX A: INFORMATION CONCERNING THE PROJECT AND THE BORROWER herein. 39

52 Limitation on Revenues CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING EDUCATION REVENUES AND APPROPRIATION Article XIIIA of the California Constitution. Article XIIIA of the State Constitution, adopted and known as Proposition 13, was approved by the voters in June Section 1(a) of Article XIIIA limits the maximum ad valorem tax on real property to one percent of full cash value, and provides that such tax will be collected by the counties and apportioned according to State law. Section 1(b) of Article XIIIA provides that the one-percent limitation does not apply to ad valorem taxes levied to pay interest and redemption charges on: (i) indebtedness approved by the voters prior to July 1, 1978, or (ii) bonded indebtedness for the acquisition or improvement of real property approved on or after July 1, 1978, by two-thirds of the votes cast on the proposition, or (iii) bonded indebtedness incurred by a school district or community college district for the construction, reconstruction, rehabilitation or replacement of school facility or the acquisition or lease of real property for school facility, approved by 55% of the voters of the district, but only if certain accountability measures are included in the bond proposition. Charter schools may not conduct bond elections or issue bonds payable from property taxes, but may benefit from the proceeds of bonds issued by the school district in which the charter school is located. Section 2 of Article XIIIA defines full cash value to mean the county assessor s valuation of real property as shown on the Fiscal Year tax bill, or, thereafter, the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred. The full cash value may be adjusted annually to reflect inflation at a rate not to exceed 2% per year, or to reflect a reduction in the consumer price index or comparable data for the area under taxing jurisdiction, or may be reduced in the event of declining property value caused by substantial damage, destruction or other factors. The Revenue and Taxation Code permits county assessors who have reduced the assessed valuation of a property as a result of natural disasters, economic downturns or other factors, to subsequently recapture such value (up to the pre-decline value of the property) at an annual rate higher than 2%, depending on the assessor s measure of the restored value of the damaged property. The California courts have upheld the constitutionality of this procedure. Legislation enacted by the State Legislature to implement Article XIIIA provides that, notwithstanding any other law, local agencies may not levy any ad valorem property tax except the 1% base tax levied by each County and taxes to pay debt service on indebtedness approved by the voters as described above. Since its adoption, Article XIIIA has been amended a number of times. These amendments have created a number of exceptions to the requirement that property be reassessed when purchased, newly constructed or a change in ownership has occurred. These exceptions include certain transfers of real property between family members, certain purchases of replacement dwellings for persons over age 55 and by property owners whose original property has been destroyed in a declared disaster, and certain improvements to accommodate disabled persons and for seismic upgrades to property. These amendments have resulted in marginal reductions in the property tax revenues of local school districts. Both the California State Supreme Court and the United States Supreme Court have upheld the validity of Article XIIIA. Section 51 of the Revenue and Taxation Code permits county assessors who have reduced the assessed valuation of a property as a result of natural disasters, economic downturns or other factors, to subsequently recapture such value (up to the pre-decline value of the property) at an annual rate higher than 2%, depending on the assessor s measure of the restoration of value of the damaged property. The constitutionality of this procedure was challenged in a lawsuit brought in 2001 in the Orange County Superior Court and in similar lawsuits brought in other counties, on the basis that the decrease in assessed value creates a new base year value for purposes of Proposition 13 and that subsequent increases in the assessed value of a property by more than 2% in a single year violate Article XIIIA. On appeal, the California Court of Appeal upheld the recapture practice in 2004, and the State Supreme Court declined to review the ruling, leaving the recapture law in place. Charter schools are not directly dependent on local property taxes. To the extent local property taxes fund the general purpose entitlement, losses in local property tax income are required to be made up by the State. 40

53 Future Initiatives. Articles XIIIA and Proposition 98 were each adopted as measures that qualified for the ballot pursuant to the State s initiative process. From time to time, other initiative measures could be adopted, further affecting State and local revenues for education, and the ability or obligation of these government agencies to expend revenues for charter school purposes. THE AUTHORITY The Authority is a public instrumentality of the State of California created pursuant to provisions of the Act. The Authority is authorized to issue the Bonds under the Act and to make the loan contemplated by the Loan Agreement and to secure the Bonds by a pledge of the Payments and certain other funds and accounts as provided in the Indenture. RISK FACTORS Investment in the Bonds involves substantial risks. The following information should be considered by prospective investors in evaluating the Bonds. However, the following does not purport to be an exclusive listing of risks and other considerations which may be relevant to investing in the Bonds, and the order in which the following information is presented is not intended to reflect the relative importance of any such risks. Certain factors which could result in a reduction of revenues available to the Schools and a corresponding reduction in payments made to the Authority by the Borrower are discussed herein. A number of factors could have an adverse impact on the ability of the Schools to generate sufficient revenues, which could, in turn, have an effect on the Borrower's ability to make the Loan Repayments and pay Base Rental Payments. The ability of the Schools to generate sufficient revenues is dependent upon a number of elements, including California State budget pressures, demand for charter schools, the ability of the Schools to provide the educational services and classes demanded by parents or to attract students generally, changes in the level of confidence in the public school system in general or public charter schools in particular, competition, faculty recruitment, demographic changes, legislation, governmental regulations, changes in immigration policy, litigation and the ability to achieve and maintain enrollment levels. This, in turn, is affected by numerous circumstances both within and outside the control of the Borrower and the Schools, including a continuation of favorable governmental policies and programs with respect to public charter schools (see CHARTER SCHOOLS herein); the competitive appeal and perceived quality of the Schools curriculum; the Schools ability and energy of its faculty and administration; and the benevolence of supporters of the Schools. There can be no assurance given that revenues of the Schools will not decrease. Any and all financial projections are only good faith estimates and are not intended as a representation or warranty as to the future financial condition of the Schools. In addition, certain risks related to the owner of the Montevina Buildings could affect the Borrower s use and occupancy of the Facility. See APPENDIX A: INFORMATION CONCERNING THE PROJECT AND THE BORROWER hereto for more detailed information regarding the Borrower and the Schools. General The Bonds are payable primarily from Loan Repayments made by the Borrower under the Loan Agreement and Base Rental Payments made by the Borrower under the Sublease. The liability of the Borrower under the Loan Agreement and Sublease to any person or entity, including, but not limited to, the Trustee or the Authority and their successors and assigns, is limited to recourse only to the Gross Revenues attributable to the Schools and the amounts held in certain funds and accounts created under the Indenture, and such persons and entities will look exclusively thereto, or to such other security as may from time to time be given for the payment of obligations arising out of the Loan Agreement, the Sublease or any other agreement securing the obligations of the Borrower with respect to the Loan Repayments, Base Rental Payments or the Bonds. THE BONDS ARE NOT AND SHALL NOT BE DEEMED TO CONSTITUTE A DEBT OR LIABILITY OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF, OTHER THAN THE AUTHORITY, AND ARE NOT AND SHALL NOT BE DEEMED TO BE A PLEDGE OF THE FAITH AND CREDIT OF THE STATE, OR ANY POLITICAL SUBDIVISION THEREOF, BUT SHALL BE PAYABLE 41

54 SOLELY FROM THE FUNDS PROVIDED THEREFOR. NEITHER THE STATE NOR THE AUTHORITY SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF THE BONDS, OR THE REDEMPTION PREMIUM OR INTEREST THEREON, EXCEPT FROM THE FUNDS PROVIDED THEREFOR UNDER THE INDENTURE. THE ISSUANCE OF THE BONDS SHALL NOT DIRECTLY, INDIRECTLY OR CONTINGENTLY OBLIGATE THE STATE OF CALIFORNIA OR ANY POLITICAL SUBDIVISION THEREOF TO LEVY OR TO PLEDGE ANY FORM OF TAXATION OR TO MAKE ANY APPROPRIATION FOR THEIR PAYMENT. THE AUTHORITY HAS NO TAXING POWER. NOTHING IN THE INDENTURE, THE ACT OR OTHERWISE IS AN UNDERTAKING BY THE AUTHORITY OR THE STATE OR ANY POLITICAL SUBDIVISION THEREOF TO FUND THE TRANSFERS DESCRIBED IN THE INTERCEPT NOTICE (DEFINED HEREIN) OR TO MAKE STATE APPORTIONMENTS OR OTHER FUNDS AVAILABLE TO THE BORROWER IN ANY AMOUNT OR AT ANY TIME. Possible Offsets to State Apportionment Section of the Education Code provides that if an audit or review requires the Borrower to repay prior year apportionments because of significant audit exceptions, including penalty payments ( Audit Exceptions ), the Superintendent of Public Instruction (the Superintendent ) and the Director of the Department of Finance (the Director ), or their designees, will jointly establish a plan for the annual repayment of Audit Exceptions (the Audit Repayment Plan ) which under certain circumstances can extend for a period of up to eight equal annual payments. The Controller withholds from the State School Fund the amounts specified in the Audit Repayment Plan. If the Superintendent and the Director do not establish an Audit Repayment Plan, the Controller withholds the entire amount of the Audit Exceptions from the next apportionment. Included in the principal apportionment is the general-purpose entitlement for charter schools, which are a portion of the funds subject to intercept pursuant to Section of the Education Code. Specifically, with respect to the general-purpose entitlement the funds subject to intercept is the Borrower s total general-purpose entitlement less the estimated in-lieu property taxes. This is also known as the state aid portion of the general purpose entitlement. Because the apportionment is the sum of multiple program entitlement calculations as well as prior adjustments, the monthly amount available may be more or less than the calculated amount of funds subject to intercept. The amount available for intercept is therefore the lesser of the monthly calculated funds subject to intercept and the amount of cash provided to the Borrower in the total principal apportionment payment schedule (the Funds Available for Intercept ). The Controller may reduce the funding available in the principal apportionment payment schedule to offset for funds owing to the State. These offsets include, but are not limited to, the following: Charter School Revolving Loan (Education Code Section 41365), Class Size Reduction (Education Code Section 52124); Audit Repayment (Education Code Sections 41341, 41344); and Accounts Receivable (Government Code Section ), in addition to other possible authorized or required offsets, or additional offsets not yet authorized by legislation. None of the foregoing offsets are applicable to the Borrower s State Apportionment. California Budget Deficit In recent years the State of California has struggled with large budget deficits, leading to cuts in a number of programs, including K-12 education. See STATE FUNDING OF EDUCATION herein. Reductions in State K-12 funding have been significant in the last few years and future reductions may occur, reducing State revenues of the Schools. Such reductions may be material and may adversely affect the ability of the Borrower to make Loan Repayments under the Loan Agreement and/or Base Rental Payments under the Sublease. In addition, future deferral of State Apportionment in connection with State budget legislation may adversely affect sufficiency of the Borrower s State Apportionment for purposes of the Intercept. 42

55 Bankruptcy If the Borrower were to become the subject of a voluntary or involuntary bankruptcy case, there could be adverse affects on the owners of the Bonds. These adverse effects could include, but may not be limited to, one or more of the following. The automatic stay provisions of the Bankruptcy Code could prevent (unless approval of the bankruptcy court was obtained) any action to collect any amount owing by the Borrower or any action to enforce any obligation of the Borrower. In particular, the Trustee may be prevented from foreclosing on the Borrower s Gross Revenues or any other collateral belonging to the Borrower. These restrictions may also prevent the Trustee from making payments to the owners of the Bonds from funds in the Trustee s possession during the pendency of the bankruptcy case. Notwithstanding the provisions of state law regarding the Intercept, the bankruptcy court could determine that the Intercept is invalid in bankruptcy, and thus that the funds subject to the Intercept are property of the Borrower and subject to the claims of the Borrower s creditors. The Borrower intends to take the necessary actions so that if the funds subject to the Intercept are determined to be property of the Borrower, the Trustee will have a first priority perfected security interest in those funds. If, however, the Borrower fails to, or is unable to, take the necessary action to perfect the security interest, the owners of the Bonds may have no rights to the funds that are subject to the Intercept. Even if the Trustee does have a perfected security interest in the funds that are the subject of the Intercept, enforcement of that security interest may be subject to the automatic stay as discussed above. With the authorization of the bankruptcy court, the Borrower may be able to repudiate some or all of its agreements relating to the Bonds and stop performing its obligations (including payment obligations) under such agreements. Such a repudiation could also excuse the other parties to such agreements from performing any of their obligations. In addition, with the authorization of the bankruptcy court, the Borrower may be able to assign its rights and obligations under the agreements to which it is a party, to another entity, despite any contractual provisions prohibiting such assignment. The Borrower may be able to cause any of its property that is subject to the lien of Indenture or any other agreement relating to the Bonds, possibly including the funds that are subject to the Intercept, to be released to it, free and clear of such lien, as long as the bankruptcy court determines that the rights of the Trustee and the owners of the Bonds will be adequately protected. The Borrower may be able to borrow additional money that is secured by a lien on any of its property (including any collateral that is subject to the lien of Indenture or any other agreement relating to the Bonds and possibly including the funds subject to the Intercept), which lien will have priority over the lien of Indenture or any other agreement relating to the Bonds, as long as the bankruptcy court determines that the rights of the Trustee and the owners of the Bonds will be adequately protected. The Trustee may be required to return to the Borrower, as preferential transfers, any property that became subject to the lien of the Indenture or any other agreement relating to the Bonds within the 90 days (or in some cases one year) immediately preceding the filing of the bankruptcy petition. This could include funds that were the subject of the Intercept during the 90 days (or in some cases one year) prior to the bankruptcy filing. Payments previously made to the owners of the Bonds (possibly including payments made from funds that were subject to the Intercept) during the 90 days (or in some cases one year) immediately preceding the filing of the bankruptcy petition may be avoided as preferential payments, so that the owners of the Bonds would be required to return such payments to the Borrower. The lien of the Indenture and the other documents relating to the Bonds may not attach to any property, including any revenues and possibly including any funds that are subject to the Intercept, that the Borrower acquires after the filing of a bankruptcy petition. The Borrower may be able, in a confirmed plan, without the consent and over the objection of the Issuer, the Trustee and the owners of the Bonds, to alter the priority, interest rate, payment terms, collateral, maturity dates, payment sources, covenants (including tax-related covenants), and other terms or provisions of the Indenture, the Bonds, or any other agreement relating to the Bonds to which the Borrower is a party, and may be able to invalidate or eliminate the Intercept, as long as the bankruptcy court determines that the alterations are fair and equitable. 43

56 There may be delays in payments on the Bonds while the court considers any of these issues. There may be other possible effects of a bankruptcy of the Borrower that could result in delays or reductions in payments on the Bonds, or result in losses to the owners of the Bonds. Regardless of any specific adverse determinations in a Borrower bankruptcy case, the fact of a Borrower bankruptcy case could have an adverse effect on the liquidity or value of the Bonds. Factors Associated with the Borrower s Operations There are a number of factors affecting schools generally that could have an adverse effect on the Borrower s financial position and ability to make the Loan Repayments and Base Rental Payments. These factors include, but are not limited to, failure to qualify for statutory reimbursement under state programs; increasing costs of compliance with federal, state or local laws or regulations, including, but not limited to, failure to qualify for statutory reimbursement under state programs; increasing costs of compliance with federal, state or local laws or regulations, including, but not limited to, laws or regulations concerning environmental quality, work safety and accommodation of persons with disabilities; taxes or other charges imposed by federal, state or local governments; the ability to attract a sufficient number of students; changes in existing statutes pertaining to the powers of the Borrower and disruption of the Borrower s operations by real or perceived threats against the Borrower, its staff members or students. The Borrower and the Schools cannot assess or predict the ultimate effect of such factors on its operations or financial results of its operations or on the Borrower s ability to make the Loan Repayments and Base Rental Payments. Claims and Insurance Coverage Litigation could arise from the corporate and business activities of the Borrower, including from its status as an employer. Many of these risks are covered by insurance, but some are not. For example, claims arising from wrongful termination or sexual molestation claims and business disputes may not be covered by insurance or other sources and may, in whole or in part, be a liability of the affected school if determined or settled adversely. The Borrower covenants and agrees in the Loan Agreement that it will maintain, or caused to be maintained, property, general liability and business interruption insurance with respect to the Facilities and its operations at levels set forth in the Loan Agreement. The Borrower is not obligated by the Loan Agreement to maintain earthquake insurance and there can be no assurance that the Borrower will obtain such coverage in the future. See APPENDIX C: SUMMARY OF PRINCIPAL DOCUMENTS THE LOAN AGREEMENT herein. Risk Relating to Philanthropy and Grants In the past, the Borrower has received income from unrestricted gifts and donations or grants to supplement operating revenues to finance its respective operations and capital needs. Gifts, grants and donations are expected to continue. However, there can be no assurance that projections of such non-operating revenue will be realized or will not decrease, adversely affecting the financial condition of the Borrower. Limitations on Value of the Facilities and to Remedies Under the Deed of Trust Maintenance of Value. There can be no assurance that should the Borrower default in making the payments due under the Loan Agreement and the Sublease, the Facilities could be foreclosed upon and sold for the amount owed with respect to the Bonds. Hazardous Substances. While governmental taxes, assessments and charges are common claims against the value of property, other less common claims may be relevant. One of the most serious in terms of the potential reduction in the value that may be realized is a claim with regard to hazardous substances. In general, the Borrower may be required by law to remedy conditions of the Facilities relating to release of hazardous substances. The federal Comprehensive Environmental Response, Compensation and Liability Act of 1980, sometimes referred to as CERCLA or the Superfund Act, is the most well-known and widely applicable of these laws. California laws with regard to hazardous substances are stringent and similar to certain federal acts. Under many of these laws, the 44

57 owner (or operator) is obligated to remedy a hazardous substance condition of property whether or not the owner (or operator) had or has anything to do with the creation or handling of the hazardous substance. The effect, therefore, should the Facilities be affected by a hazardous substance, is generally to reduce the marketability and value of the parcel by the cost of remedying the condition. Further, such liabilities may arise not simply from the existence of a hazardous substance but from the method of handling the hazardous substance. Any of these potentialities could significantly affect the value of the Facilities that would be realized upon a default and foreclosure Foreclosure. There are two methods of foreclosing on a deed of trust or mortgage under California law, by nonjudicial sale and by judicial sale. Foreclosure under a deed of trust may be accomplished by a nonjudicial trustee s sale under the power of sale provision in the deed of trust. Prior to such sale, the trustee must record a notice of default and election to sell and send a copy to the trustor, to any person who has recorded a request for a copy of the notice of default and notice of sale, to any successor in interest of the trustor and to certain other parties discernable from the real property records. The trustee then must wait for the lapse of at least three months after the recording of the notice of default and election to sell before establishing the trustee s proposed sale date and giving a notice of sale (in a form mandated by California statutes). The notice of sale must be posted in a public place and published once a week for three consecutive calendar weeks, with the first such publication preceding the trustee s sale by at least 20 days. Such notice of sale must be posted on the property and sent, at least 20 days prior to the trustee s sale, to the trustor, to each person who has requested a copy, to any successor in interest of the trustor, to the beneficiary of any junior deed of trust and to certain other parties discernable from the real property records. In addition, the notice of sale must be recorded with the county recorder at least 14 days prior to the date of sale. The trustor, any successor in interest of the trustor in the trust property, or any person having a junior lien or encumbrance of record may, during the statutory reinstatement period, which extends to five days prior to the sale date, cure any monetary default by paying any delinquent installments of the debt then due under the terms of the deed of trust and certain other obligations secured thereby (exclusive of principal due by virtue of acceleration upon default) plus costs and expenses actually incurred in enforcing the obligation and certain statutorily limited attorneys and trustees fees. Following a nonjudicial sale, neither the trustor nor any junior lienholder has any right of redemption, and the beneficiary may not ordinarily obtain a deficiency judgment against the trustor. Should foreclosure under a deed of trust be sought in the form of a judicial foreclosure, it is generally subject to most of the delays and expenses of other lawsuits, and may require several years to complete. The primary advantage of a judicial foreclosure is that the beneficiary is entitled, subject to other limitations, to obtain a deficiency judgment against the trustor to the extent that the amount of the debt is in excess of the fair market value of the property. Following a judicial foreclosure sale, the trustor or its successors in interest may redeem the property for a period of one year (or a period of only three months if the proceeds of sale are sufficient to satisfy the debt, plus interest and costs). In addition, in order to assure collection of any rents assigned as additional collateral under a deed of trust, a receiver for the Facilities may be appointed by a court. Seismic. The Facilities is located in a seismically active region of California. The occurrence of severe seismic activity could result in substantial damage to the Facilities, which could adversely affect the ability of the Borrower to operate the Facilities and/or make Loan Repayments and Base Rental Payments and could adversely affect the value of the Facilities. Purchases and Transfers of Bonds Restricted to Approved Institutional Buyers and Accredited Investors As described in the NOTICE TO INVESTORS that precedes the Table of Contents of this Limited Offering Memorandum, the Bonds are to be sold (including in secondary market transactions) only to Approved Institutional Buyers or Accredited Investors. The Indenture contains provisions limiting transfers of the Bonds (except under certain limited circumstances described herein) to Approved Institutional Buyers and Accredited Investors. The face of each Bond will contain a legend to the effect that such Bond can only be transferred to and owned by Approved Institutional Buyers or Accredited Investors. The Bonds will be issued in minimum denominations of $250,000 or any integral multiple of $5,000 in excess thereof. In light of these restrictions, purchasers should not expect that there will be an active secondary market for the Bonds. As a result of the matters described above, there is no public market for the Bonds and none is expected to develop in the future. Therefore, investors should be aware that they might be required to bear the financial risks of 45

58 this investment for an indefinite period of time and/or that to the extent there is a secondary market for the Bonds, the secondary market price of the Bonds may be affected as a result of the restrictions. If a trading market for the Bonds develops, future trading prices of such Bonds will depend on many factors, including, among other things, prevailing interest rates and the market for similar instruments. Depending upon those and other factors, the Bonds may trade at a discount from their principal amount. Specific Risks of Charter Schools Charter School Law. The Charter School Law is evolving. Amendments are made relatively frequently and legislative and public attitudes are still forming. It is likely that additional changes will be made in the future, some of which may be adverse to charter schools in general and to the Schools in particular. See CHARTER SCHOOLS Amendments to the Charter School Law herein. Non-Renewal or Revocation of Charters. The Charter School Law enables charter authorizers to grant five-year charters which may be renewed after evaluation and can be revoked at any time by the charter granting authority or by the State Board due to educational non-performance, fiscal mismanagement or other factors. See CHARTER SCHOOLS herein. Management of the Borrower believes that it has a stable relationship with the State Board, its charter authorizer for the Schools, which, under appropriate circumstances is authorized to grant charters under the Charter School Law. See APPENDIX A: INFORMATION CONCERNING THE PROJECT AND THE BORROWER herein. Budgetary Constraints. Charter Schools are funded primarily from State and local tax revenues and budgetary pressures at the State or local level may jeopardize future funding levels, which may adversely affect the ability of the Borrower to make Loan Repayments. See STATE FUNDING OF EDUCATION above. Enrollment Levels. The Borrower s revenues and financial strength will depend in part upon maintaining certain enrollment levels at the Schools. A reduction in enrollment will have a direct result of reducing ADA payable with respect to the affected charter school. Risk of Reduction in ADA Funding. Since the vast majority of funds for the Borrower s operations come from the State on the basis of ADA, each school is subject to State funding reductions or restrictions that might affect all public school districts and charter schools. Among other such risks, over time the State may not increase ADA-based funding commensurate with increases in the cost of Borrower operations, or the State may even decrease ADA-based funding. ADA-based funding is determined by actual attendance, and not by student enrollment data. Regardless of the statewide level of ADA-based funding, the Borrower is subject to loss of revenue if enrollment should decrease, or if average daily attendance should decrease even if enrollment remains steady, whether due to student illness, truancy or other factors. Such a loss of revenues could adversely effect the ability of the Borrower to make Loan Repayments under the Loan Agreement and Base Rental Payments under the Sublease. In addition, the Charter School Law prohibits a charter school from imposing fees or charges for its educational services. Therefore, the Borrower is dependent upon receipt of ADA funding relating to its charter school as well as philanthropic support. There is little any school can do to increase revenues, other than to admit a larger number of students. Tax Related Issues Tax-Exempt Status of Interest on the Bonds. The Code imposes a number of requirements that must be satisfied for interest on state and local obligations, such as the Bonds, to be excludable from gross income for federal income tax purposes. These requirements include limitations on the use of Bond proceeds, limitations on the investment of Bond proceeds prior to expenditure, a requirement that certain investment earnings on Bond proceeds be paid periodically to the United States and a requirement that the issuers file an information return with the Internal Revenue Service (the IRS ). The Authority, the Borrower and the Schools have covenanted in certain of 46

59 the documents referred to herein that they will comply with such requirements. Failure by any of the foregoing to comply with the requirements stated in the Code and related regulations, rulings and policies may result in the treatment of interest on the Bonds as taxable, retroactively to the date of issuance of the Bonds. Maintenance of the Tax-Exempt Status. The tax exempt status of the Bonds depends upon the maintenance by each of Tri-Valley of their status as an organization described in section 501(c)(3) of the Code. The maintenance of such status is contingent on compliance with general rules promulgated in the Code and related regulations regarding the organization and operation of tax-exempt entities, including the operation for charitable and educational purposes and avoidance of transactions which may cause the assets of either to inure to the benefit of private individuals. In recent years, the IRS has increased the frequency and scope of its audit and other enforcement activity regarding tax-exempt organizations and, in particular, charter schools. As a result, tax-exempt organizations are increasingly subject to a greater degree of scrutiny. The primary penalty available to the IRS under the Code with respect to a tax-exempt entity engaged in unlawful private benefit is the revocation of tax-exempt status. Although the IRS has not frequently revoked the 501(c)(3) tax-exempt status of nonprofit corporations, it could do so in the future. Loss of tax-exempt status by Tri-Valley could potentially result in loss of tax exemption of interest on the Bonds and of other existing and future tax-exempt debt of the Borrower, if any, and defaults in covenants regarding the Bonds and other existing and future tax-exempt debt, if any, would likely be triggered. Less onerous sanctions have been enacted which focus enforcement on private persons who transact business with a tax-exempt organization rather than the tax-exempt organization, but these sanctions do not replace the other remedies available to the IRS as mentioned above. State Income Tax Exemption. The loss by Tri-Valley of federal tax exemption might trigger a challenge to its State income tax exemption. Such event could be adverse and material. Unrelated Business Income. In recent years, the IRS and state, county and local taxing authorities have been undertaking audits and reviews of the operations of tax-exempt organizations with respect to their exempt activities and the generation of unrelated business taxable income ( UBTI ). The Borrower and the Schools currently report no UBTI. The Borrower and the Schools, though, may participate in activities which generate UBTI in the future. If so, the Borrower and the Schools believe they would properly account for and report UBTI; nevertheless, an investigation or audit could lead to a challenge which could result in taxes, interest and penalties with respect to unreported UBTI and in some cases could ultimately affect their tax-exempt status, as well as the exclusion from gross income for federal income tax purposes of the interest on the Bonds. Exemption from Property Taxes. In recent years, State, county and local taxing authorities have been undertaking audits and reviews of the operations of tax-exempt corporations with respect to their real property tax exemptions. The Borrower expects the Facilities will be exempt from general ad valorum property taxes. The Borrower expects to pay special taxes on the Facilities (See APPENDIX A: INFORMATION CONCERNING THE PROJECT AND THE BORROWER FINANCIAL PROJECTIONS ). Potential Legislation. From time to time, there are Presidential proposals, proposals of various federal committees, and legislative proposals in the Congress and in the states that, if enacted, could alter or amend the federal and state tax matters referred to herein or adversely affect the marketability or market value of the Bonds or otherwise prevent holders of the Bonds from realizing the full benefit of the tax exemption of interest on the Bonds. Further, such proposals may impact the marketability or market value of the Bonds simply by being proposed. One such proposal is the American Jobs Act of 2011 (S.1549) (the "Jobs Bill") which was introduced in the Senate on September 13, 2011 at the request of the President. If enacted in its current form, the Jobs Bill could adversely impact the marketability and market value of the Bonds and prevent certain bondholders (depending on the financial and tax circumstances of the particular bondholder) from realizing the full benefit of the tax exemption of interest on the Bonds. It cannot be predicted whether or in what form any such proposal might be enacted or whether if enacted it would apply to bonds issued prior to enactment. In addition, regulatory actions are from time to time announced or proposed and litigation is threatened or commenced which, if implemented or concluded in a particular manner, could adversely affect the market value, marketability or tax status of the Bonds. It cannot be predicted whether any 47

60 such regulatory action will be implemented, how any particular litigation or judicial action will be resolved, or whether the Bonds would be impacted thereby. Purchasers of the Bonds should consult their tax advisors regarding any pending or proposed legislation, regulatory initiatives or litigation. The disclosures and opinions expressed herein are based upon existing legislation and regulations as interpreted by relevant judicial and regulatory authorities as of the date of issuance and delivery of the Bonds, and no opinion is expressed as of any date subsequent thereto or with respect to any proposed or pending legislation, regulatory initiatives or litigation. Other Limitations on Enforceability of Remedies There exists common law authority and authority under various state statutes pursuant to which courts may terminate the existence of a nonprofit corporation or undertake supervision of its affairs on various grounds, including a finding that the Borrower has insufficient assets to carry out its stated charitable purposes or has taken some action which renders it unable to carry out such purposes. Such court action may arise on the court s own motion or pursuant to a petition of a state attorney general or other persons who have interests different from those of the general public, pursuant to the common law and statutory power to enforce charitable trusts and to see to the application of their funds to their intended charitable uses. In addition to the foregoing, the realization of any rights under the Loan Agreement, the Sublease, the Indenture and the Deeds of Trust upon a default depends upon the exercise of various remedies specified in the Loan Agreement, the Sublease, the Indenture and the Deeds of Trust. These remedies may require judicial action which is often subject to discretion and delay. Under existing law, certain of the remedies specified in the Loan Agreement, the Sublease, the Indenture and the Deeds of Trust may not be readily available or may be limited. For example, a court may decide not to order the specific performance of the covenants contained in the Loan Agreement, the Sublease, the Indenture and the Deeds of Trust. Accordingly, the ability of the Authority or the Trustee to exercise remedies under such documents upon an Event of Default could be impaired by the need for judicial or regulatory approval. The Authority ABSENCE OF MATERIAL LITIGATION There is no litigation pending (with service of process having been accomplished) against the Authority concerning the validity of the Bonds. The Borrower There is no controversy or litigation of any nature now pending (with service of process having been accomplished) against the Borrower or, to the knowledge of the officers of the Borrower, threatened, which seeks to restrain or enjoin the sale or issuance of the Bonds or in any way contests or affects the validity of the Bonds, or any proceedings of the Borrower taken concerning the issuance or sale of the Bonds, or the pledge or application of any moneys or security provided for the payment of the Bonds, the use of the Bond proceeds or the existence or powers of the Borrower relating to the issuance of the Bonds. TAX MATTERS In the opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority ( Bond Counsel ), based upon an analysis of existing laws, regulations, rulings and court decisions, and assuming, among other matters, the accuracy of certain representations and compliance with certain covenants, interest on the Bonds is excluded from gross income for federal income tax purposes under Section 103 of the Code and is exempt from State of California personal income taxes. In the further opinion of Bond Counsel, interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although Bond Counsel observes that such interest is included in adjusted current earnings when calculating corporate 48

61 alternative minimum taxable income. A complete copy of the proposed form of opinion of Bond Counsel is set forth in APPENDIX F hereto. To the extent the issue price of any maturity of the Bonds is less than the amount to be paid at maturity of such Bonds (excluding amounts stated to be interest and payable at least annually over the term of such Bonds), the difference constitutes original issue discount, the accrual of which, to the extent properly allocable to each Beneficial Owner thereof, is treated as interest on the Bonds which is excluded from gross income for federal income tax purposes and State of California personal income taxes. For this purpose, the issue price of a particular maturity of the Bonds is the first price at which a substantial amount of such maturity of the Bonds is sold to the public (excluding bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers). The original issue discount with respect to any maturity of the Bonds accrues daily over the term to maturity of such Bonds on the basis of a constant interest rate compounded semiannually (with straight-line interpolations between compounding dates). The accruing original issue discount is added to the adjusted basis of such Bonds to determine taxable gain or loss upon disposition (including sale, redemption, or payment on maturity) of such Bonds. Beneficial Owners of the Bonds should consult their own tax advisors with respect to the tax consequences of ownership of Bonds with original issue discount, including the treatment of Beneficial Owners who do not purchase such Bonds in the original offering to the public at the first price at which a substantial amount of such Bonds is sold to the public. Bonds purchased, whether at original issuance or otherwise, for an amount higher than their principal amount payable at maturity (or, in some cases, at their earlier call date) ( Premium Bonds ) will be treated as having amortizable bond premium. No deduction is allowable for the amortizable bond premium in the case of bonds, like the Premium Bonds, the interest on which is excluded from gross income for federal income tax purposes. However, the amount of tax-exempt interest received, and a Beneficial Owner s basis in a Premium Bond, will be reduced by the amount of amortizable bond premium properly allocable to such Beneficial Owner. Beneficial Owners of Premium Bonds should consult their own tax advisors with respect to the proper treatment of amortizable bond premium in their particular circumstances. The Code imposes various restrictions, conditions and requirements relating to the exclusion from gross income for federal income tax purposes of interest on obligations such as the Bonds. The Authority and the Borrower have made certain representations and covenanted to comply with certain restrictions, conditions and requirements designed to ensure that interest on the Bonds will not be included in federal gross income. Inaccuracy of these representations or failure to comply with these covenants may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of original issuance of the Bonds. The opinion of Bond Counsel assumes the accuracy of these representations and compliance with these covenants. Bond Counsel has not undertaken to determine (or to inform any person) whether any actions taken (or not taken), or events occurring (or not occurring), or any other matters coming to Bond Counsel s attention after the date of issuance of the Bonds may adversely affect the value of, or the tax status of interest on, the Bonds. Accordingly, the opinion of Bond Counsel is not intended to, and may not, be relied upon in connection with any such actions, events or matters. In addition, Bond Counsel has relied, among other things, on the opinion of Derek Austin, Esq., Counsel to the Borrower, regarding the current qualification of the Borrower as an organization described in Section 501(c)(3) of the Code and the intended operation of the facilities to be financed by the Bonds as substantially related to the Borrower s charitable purpose under Section 513(a) of the Code. Such opinion is subject to a number of qualifications and limitations. Furthermore, Counsel to the Borrower cannot give and has not given any opinion or assurance about the future activities of the Borrower, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or changes in enforcement thereof by the IRS. Failure of the Borrower to be organized and operated in accordance with the Internal Revenue Service s requirements for the maintenance of its status as an organization described in Section 501(c)(3) of the Code, or to operate the facilities financed by the Bonds in a manner that is substantially related to the Borrower s charitable purpose under Section 513(a) of the Code, may result in interest payable with respect to the Bonds being included in federal gross income, possibly from the date of the original issuance of the Bonds. Although Bond Counsel is of the opinion that interest on the Bonds is excluded from gross income for federal income tax purposes and is exempt from State of California personal income taxes, the ownership or 49

62 disposition of, or the accrual or receipt of interest on, the Bonds may otherwise affect a Beneficial Owner s federal, state or local tax liability. The nature and extent of these other tax consequences depends upon the particular tax status of the Beneficial Owner or the Beneficial Owner s other items of income or deduction. Bond Counsel expresses no opinion regarding any such other tax consequences. Current and future legislative proposals, if enacted into law, clarification of the Code or court decisions may cause interest on the Bonds to be subject, directly or indirectly, to federal income taxation or to be subject to or exempted from state income taxation, or otherwise prevent Beneficial Owners from realizing the full current benefit of the tax status of such interest. As one example, the Obama Administration recently announced a legislative proposal which, for tax years beginning on or after January 1, 2013, generally would limit the exclusion from gross income of interest on obligations like the Bonds to some extent for taxpayers who are individuals and whose income is subject to higher marginal income tax rates. Other proposals have been made that could significantly reduce the benefit of, or otherwise affect, the exclusion from gross income of interest on obligations like the Bonds. The introduction or enactment of any such legislative proposals, clarification of the Code or court decisions may also affect, perhaps significantly, the market price for, or marketability of, the Bonds. Prospective purchasers of the Bonds should consult their own tax advisors regarding any pending or proposed federal or state tax legislation, regulations or litigation, and regarding the impact of future legislation, regulations or litigation, as to which Bond Counsel expresses no opinion. The opinion of Bond Counsel is based on current legal authority, covers certain matters not directly addressed by such authorities, and represents Bond Counsel s judgment as to the proper treatment of the Bonds for federal income tax purposes. It is not binding on the IRS or the courts. Furthermore, Bond Counsel cannot give and has not given any opinion or assurance about the future activities of the Authority or the Borrower, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the enforcement thereof by the IRS. The Authority and the Borrower have covenanted, however, to comply with the requirements of the Code. Bond Counsel s engagement with respect to the Bonds ends with the issuance of the Bonds, and, unless separately engaged, Bond Counsel is not obligated to defend the Authority, the Borrower or the Beneficial Owners regarding the tax-exempt status of the Bonds in the event of an audit examination by the IRS. Under current procedures, parties other than the Authority, the Borrower and their appointed counsel, including the Beneficial Owners, would have little, if any, right to participate in the audit examination process. Moreover, because achieving judicial review in connection with an audit examination of tax-exempt bonds is difficult, obtaining an independent review of IRS positions with which the Authority or the Borrower legitimately disagrees, may not be practicable. Any action of the IRS, including but not limited to selection of the Bonds for audit, or the course or result of such audit, or an audit of bonds presenting similar tax issues may affect the market price for, or the marketability of, the Bonds, and may cause the Authority, the Borrower or the Beneficial Owners to incur significant expense. APPROVAL OF LEGALITY Legal matters incident to the issuance or delivery of the Bonds are subject to the unqualified approving opinion of Orrick, Herrington & Sutcliffe LLP, San Francisco, California, Bond Counsel to the Authority. Certain legal matters will be passed upon for the Borrower by its counsel, Derek Austin, Esq., Campbell, California, for the Authority by the Honorable Kamala D. Harris, Attorney General of the State, and Orrick, Herrington & Sutcliffe LLP, San Francisco, California, as Disclosure Counsel. Bond Counsel and the Attorney General undertake no responsibility for the accuracy, completeness or fairness of this Limited Offering Memorandum. No rating for the Bonds has assigned. NO RATING Following a determination by the Borrower that an investment grade rating for the Bonds (Baa3 or higher by Moody s or BBB- or higher by S&P or Fitch) is reasonably attainable, the Borrower may seek a rating on the Bonds from any Rating Agency selected by the Borrower (Moody s, S&P or Fitch). 50

63 LIMITED OFFERING OF BONDS The Bonds are exempt from registration under federal securities law but are being offered only to a limited number of sophisticated investors and will be sold only to purchasers who are Approved Institutional Buyers or Accredited Investors. By purchasing the Bonds, each investor is deemed to have made the acknowledgments, representations, warranties and agreements set forth under the caption TRANSFER RESTRICTIONS herein. CONTINUING DISCLOSURE The Borrower will execute and deliver a Continuing Disclosure Agreement pursuant to which it will, for the benefit of Beneficial Owners of the Bonds, annually compile and deliver to the Trustee certain financial information and operating data relating to the operations of the Borrower (an Annual Report ), and provide notices of the occurrence of certain enumerated events, if material. An Annual Report will be provided by the Trustee to any person who requests it. A form of Continuing Disclosure Agreement is attached hereto as APPENDIX D. These covenants have been made in order to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2-12(b)(5) (the Rule ). The Borrower has never failed to comply in all material respects with any previous undertaking with regard to the Rule to provide annual reports or notices of material events. UNDERWRITING The Bonds are being purchased by Westhoff, Cone & Holmstedt (the Underwriter ). The Underwriter has agreed to purchase the Bonds at a price of $27,046,250 (being the principal amount of the Bonds less an Underwriter s discount of $453,750). The Bond Purchase Agreement ( Bond Purchase Agreement ) pursuant to which the Bonds are being purchased by the Underwriter provides that the Underwriter will purchase all of the Bonds if any are purchased. The obligation of the Underwriter to make such purchase is subject to certain terms and conditions set forth in the Bond Purchase Agreement. The Underwriter may offer and sell the Bonds to certain dealers and others at prices different from the prices stated on the inside cover page of this Limited Offering Memorandum. The offering prices may be changed from time to time by the Underwriter. 51

64 MISCELLANEOUS The foregoing and subsequent summaries and descriptions of provisions of the Bonds and the Indenture and all references to other materials not purporting to be quoted in full are only brief outlines of some of the provisions thereof and do not purport to summarize or describe all of the provisions thereof, and reference is made to said documents for full and complete statements of their provisions. The appendices attached hereto are a part of this Limited Offering Memorandum. Copies, in reasonable quantity, of the Indenture and Loan Agreement may be obtained during the offering period upon request directed to the Underwriter. NONE OF THE INFORMATION IN THIS LIMITED OFFERING MEMORANDUM HAS BEEN SUPPLIED OR VERIFIED BY THE AUTHORITY OTHER THAN, THE INFORMATION UNDER THE CAPTIONS THE AUTHORITY AND ABSENCE OF MATERIAL LITIGATION THE AUTHORITY. THE AUTHORITY MAKES NO REPRESENTATION OR WARRANTY, EXPRESSED OR IMPLIED, AS TO THE ACCURACY (OTHER THAN IN THE SECTIONS IDENTIFIED ABOVE) OR COMPLETENESS OF INFORMATION IN THIS LIMITED OFFERING MEMORANDUM. The delivery of this Limited Offering Memorandum has been duly authorized by the Authority. This Limited Offering Memorandum has been reviewed and approved by the Borrower. LIVERMORE VALLEY CHARTER SCHOOL and LIVERMORE VALLEY CHARTER PREPARATORY HIGH SCHOOL, OPERATED AS TRI-VALLEY LEARNING CORPORATION By: TRI-VALLEY LEARNING CORPORATION, a California nonprofit public benefit corporation By: /s/ Bill Batchelor Authorized Officer 52

65 APPENDIX A INFORMATION CONCERNING THE PROJECT AND THE BORROWER TRI-VALLEY LEARNING CORPORATION Appendix A 1 A-1

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67 TRI-VALLEY LEARNING CORPORATION Appendix A Table of Contents Section Page I. Tri-Valley Learning Corporation...A-3 II. III. IV. Management Team...A-16 The Project...A-21 Financial Projections...A-31 A-2

68 I. TRI-VALLEY LEARNING CORPORATION History and Founding Tri-Valley Learning Corporation ("TVLC"), is a California nonprofit public benefit corporation that is exempt from income tax as an organization described in Section 501(c)(3) of the Internal Revenue Code. TVLC provides quality, public education choices for all families in the Tri-Valley region and beyond. TVLC currently operates two charter schools: Livermore Valley Charter School ("LVCS") and Livermore Valley Charter Preparatory High School ("LVCP"), collectively "School" and/or the "Schools". TVLC has two pending charter petitions: Portola Academy, a transitional K 8 school, and Tassajara Prep, a College Prep high school. TVLC and its Management Team are described in greater detail in Sections II and III herein. LVCS was founded in 2004 as a K-8 program by a collaborative group of parents and educators in response to the Livermore school district's decision to close two magnet schools due to budget cuts. Together, parents and educators endeavored to create a school that embraced proven and innovative teaching techniques to best prepare children for the 21st century. LVCS is currently housed at 543 Sonoma Avenue, Livermore, CA 94550, and serves 932 K 8 students. This site was originally an elementary school within the local school district until its closure in 1983; after which it housed an alternative high school, home school center, and adult school for the local school district. Twenty-seven (27) additional portable trailers have been installed since 2005 to accommodate LVCS growth. Please see the location map on page 22. LVCS is the product of roughly 18 months of hard work by a group of about 100 committed parents and teachers. The charter petition drew praise from California charter school advocates and has been used as a model for other charter schools statewide. The impetus for creating LVCS was choice for children, as is reflected on the school s website ( and in the name of the school s fundraising foundation, Choice for Children Education Foundation ("CCEF"). The founders of LVCS dreamed of an education for children that encompassed more than just the core curriculum, while focusing on the skills that would make children competent citizens and life-long learners. They dreamed of an education that included small class size, enrichment in the areas of art, music, physical education, science, and foreign language, and a curriculum driven by the most current research in education. They sought to include parents and families as an integral part of the elementary school from day one, and in fact the families literally toiled for a month's time upon occupation of the school site on August 1, 2005 until opening day, making the school a magnificent showpiece and a warm, lively, and inviting campus for students, parents, staff and visitors alike. The extraordinary parent and staff commitment to volunteerism and financial support for the benefit of the school has continued and strengthened since opening day at LVCS. This same unwavering support for choice in education, led to LVCS' community to begin discussing the possibility of a charter high school in May They wanted to provide students attending LVCS, with an opportunity to remain in the same educational system. The State Board of Education approved the petition for LVCP in July 2009, and the School opened in August LVCP s philosophy of education is a natural progression from that of the LVCS. The High School provides a college preparatory education in an individualized, creative, collaborative, experiential and A-3

69 I. TRI-VALLEY LEARNING CORPORATION (continued) emotionally supportive environment that challenges every student to reach his or her potential. LVCP is currently housed at 2451 Portola Ave., Livermore, CA LVCP opened with a freshman class of just under 110 students; in year two, TVLC expanded to 220 students in ninth and tenth grade. At capacity and full built out to twelfth grade, the School will serve 648 students. TVLC operates each School under a separate charter approved by the State Board of Education. The charter for LVCS was extended for five years by the California State Board of Education (the "SBE") in June Charter Status Each School (LVCS and LVCP) has applied for, and received, a charter (the "Charter") from the California State Board of Education (the "SBE"). The LVCS Charter was renewed in June 2008 for five years but no assurance can be given that any further renewals of either Charter will be approved. However, LVCS high student test scores and continued educational innovations indicate that another five-year renewal is eminent. The Schools Charters were approved and expire as shown in Table 1: Table 1. Charter Status School Date of Charter Expiration Date LVCS July 2008 June 30, 2013 LVCP July 2009 June 30, 2015 The Charters have no limit on the number of renewals that may be granted so long as certain specific criteria are met in accordance with the provisions of Chapter 2 of Part 26.8 of the California Education Code. See "Charter Schools in California" in Section VIII herein. The Schools must file annual reports with the SBE setting forth certain formative and summative data to demonstrate that the School is meeting or making progress towards all of the performance standards described by the California State Testing and Report Program ("STAR") and other assessments. Under the Charters, disagreements with the SBE are subject to mediation. The Charters and Federal law require teachers to meet the credential requirements defined in the California Education Code. See "Charter Schools in California" in Section VIII herein. All teachers are required to take a drug and tuberculosis test. The Charters require the Schools to conduct their financial operations in accordance with the established policies of the SBE. The Charters and State law require each School to produce an annual audit. The Charters require the Schools to pay for any services that the SBE provides beyond the level of support given by the SBE to its existing schools, in accordance with a separate memorandum of understanding and requires the School to maintain a balanced budget. Annually, each School must report to the SBE that it is self-supporting and operating at no cost to the SBE. A-4

70 I. TRI-VALLEY LEARNING CORPORATION (continued) A Charter may be revoked if the respective School (i) commits a material violation of any of the conditions, standards or procedures set forth therein, or (ii) fails to meet or to pursue any of the outcomes identified in the respective Charter, or (iii) fails to meet generally accepted standards of fiscal management of (iv) violates any provision of law. Fundraising and Discretionary/Dedicated Budgets TVLC maintains consistent per-student fundraising that has grown annually along with the growth of the schools and student populations. Below is a summary of the historic fundraising efforts and the related, dedicated TVLC Support Entity associated with the annual donation. TVLC has four fundraising entities which contribute annually to LVCS and LVCP and make up the discretionary budget, as shown in Table 2. TVLC staff and administration utilize the discretionary charitable contributions from CCEF and LVCS PTO (LVCS) and the LVCP Foundation (LVCP) to fund educational and specialized programs rarely seen at the local school district programs. These programs include, remediation specialist for achieving students and students in need of extra support, art and music programs, early child development and age appropriate science programs, and extra-curricular student enrichment. The Choice for Children Education Foundation ("CCEF") is a charitable foundation which strives to provide supplemental support for the Schools. CCEF works to provide funds through donations and grants. Over the past 5 years, donations have grown annually to average more than $500k annually, with the fundraising in excess of $700k to support the Schools. TVLC utilizes a conservative cash received approach to utilizing fundraising revenue in its operating budgets. Funds raised are deferred to the following fiscal year and used on an actual basis, not projected from past fundraising levels. While TVLC believes CCEF and LVCS PTO will continue to provide support to the Schools, there can be no assurance of any particular level of financial support. Table 2. TVLC Historical Donations by Entity Donor CCEF $620k $390k $385k $421k $362k $448k LCZC $25k $20k $25k n/a n/a n/a LVCS PTO $60k $70k $50k $45k $30k $41k LVCP Foundation $50k n/a n/a n/a n/a n/a n/a = Entity did not exist. Note: 2005 student population was 550. A-5

71 I. TRI-VALLEY LEARNING CORPORATION (continued) LVCS discretionary budget includes: LVCS Remediation specialists for reading and math; Full time librarian; Counseling services; Annual technology refresh; Art and music specialists: Science specialists; and Annual supply budgets for these related areas. These programmatic areas represent approximately $480K annually at LVCS ( ). Should LVCS/TVLC endure budgetary reduction in ADA revenue from state ADA or reduction in fund raising revenue, these areas could be reduced entirely and the programs will still meet state and charter petition requirements. The LVCS charter petition maintains a 20:1 student teacher ratio in grades K-5 to take advantage of the K-3 CSR (class size reduction) funding. However, California has historically relaxed CSR guidelines to compensate for ADA reductions. As the CSR revenues are hypothetically reduced, LVCS would offset the lost revenue by increasing class size proportionally in grades K-5. LVCP discretionary budget includes: LVCP Remediation specialists for reading and math; Full time counselors (4 at build-out); Annual technology refresh; Elective specialists: Science specialists; Sports & Extra-Curricular Activities, and; Annual supply budgets for these related areas. A-6

72 I. TRI-VALLEY LEARNING CORPORATION (continued) Enrollment LVCS presently has 932 students enrolled in the school year. LVCS has completed its lottery process and will increase enrollment to 1,112 for the academic year. (See Table 3 on the following page.) There are 198 students currently attending LVCP in the 9th and 10th grades. LVCP has also completed its lottery process and its fall 2012 enrollment will grow to 369 students with the addition of an 11 th grade class. LVCP is expected to continue to grow rapidly though school year , when TVLC expects that the High School will have a total enrollment of approximately 648 students. (See Table 3 on the following page.) Each school receives state funding based on Average Daily Attendance (ADA), rather than on actual enrollment. For further information see "Charter Schools in California" in Section VIII herein. The following table presents historical and projected ADA by grade. Relationship between Enrollment and Average Daily Attendance In Table 3, there is information about school enrollment, but State payments for students are based upon average daily attendance ("ADA") which, in most cases, is lower than enrollment. This is because the enrollment number represents the total number of pupils that are enrolled as of the previous June 30. ADA is a running average of students in attendance on a given day, and thus often is lower than actual enrollment (though not always, and there is provision in the law for ADA growth during a school year). A-7

73 I. TRI-VALLEY LEARNING CORPORATION (continued) Table 3. Historical and Projected Enrollment LVCS and LVCP Historical & Projected Enrollment by Grade Grade TK/K LVCS LVCS LVCS LVCS LVCS LVCS LVCS LVCS LVCS LVCP LVCP LVCP LVCP Total Enrollment ,011 1,130 1,481 1,653 1,773 1,918 Waiting List For the last five school years, LVCS had students on its waiting list at the beginning of the school year. Table 4 presents LVCS's historical waiting list data by grade level. LVCP did not have a waiting list in its first two years of operations, because its enrollment was expanding rapidly; however, the high school is expected to have a waiting list after filling its enrollment for Table 4. Waiting List School Year Grade K Total n/a n/a n/a n/a A-8

74 I. TRI-VALLEY LEARNING CORPORATION (continued) Retention Table 5 presents TVLC's K-8 retention rates for the last four years in terms of the percentage of students in each grade who remained enrolled and moved on to the next grade level the following school year. With few exceptions (and no exceptions recently), the number of potential students on the waiting list for each grade level (as shown in Table 4) exceeds the number of students in such grade level who left TVLC. Table 5. Retention Students Returning First Day First Day Retention Rate Grade Students Grade Students Grade Students K 100 K 100 K n/a % % % % % % % % Students Returning First Day First Day Retention Rate Grade Students Grade Students Grade Students K 100 K 100 K n/a % % % % % % % % A-9

75 I. TRI-VALLEY LEARNING CORPORATION (continued) Students Returning First Day First Day Retention Rate Grade Students Grade Students Grade Students K 100 K 100 K n/a % % % % % % % % Students Returning First Day First Day Retention Rate Grade Students Grade Students Grade Students K 100 K 100 K n/a % % % % % % % % A-10

76 I. TRI-VALLEY LEARNING CORPORATION (continued) Academic Performance LVCP students earned an outstanding 820 API score based on their California STAR exams last spring. This score places LVCP among the best high schools in the state. The API score topped the local Livermore High School. This score places LVCP among the best high schools in the state and is very impressive for a first year school. Table 6 shows certain information on student performance for the Elementary School. Table 6. Student Performance at LVCS Livermore Valley Charter School (Elementary) Academic Results Student Count & API Scores School Year Grades API AYP Met SSR K Yes N/A K Yes K Yes K Yes K Yes K Yes 7 Statistical information, consisting of a school s Academic Performance Index ("API") score and rankings can be found at the California Department of Education s website at The API is an annual measure of the academic performance and progress of schools in California. API scores range from 200 to 1,000, with a statewide target of 800. Each school s API decile ranking (with 10th being the highest and 1st the lowest) is expressed relative to all California schools and to statistically matched "similar schools". The LVCS Elementary School (K-8) has been a top performing school since the day it opened its doors. The API score for the Elementary School increased from 865 in 2009 to 900 in The Elementary School is one of only two Livermore schools to earn a score of 900 or better in It scored 902 in 2011, and was the only K-8 in Livermore to earn a score over 811. A-11

77 I. TRI-VALLEY LEARNING CORPORATION (continued) The Elementary School met 9 out of 9 of the Federal 2011 Adequate Yearly Progress (AYP) criteria. It met all 2011 participation rate and proficiency rate criteria. When compared to the local schools, TVLC schools are the top performers. Disaggregated 2011 data shows that LVCS grades 2-5 had an API of 932, and grades 6-8 had an API of 866. These numbers, compared to the local school districts, are shown in greater detail in Table 7: Table 7. Academic Performance 2011 API Comparison between LVCS and LVJUSD Schools Elementary Schools API Middle Schools API K-8 Schools API LVCS (2-5) 932 LVCS (6-8) 866 LVCS (K-8) 902 LVJUSD Elementary Schools: Altamont Creek Elementary School Arroyo Seco Elementary School Emma Smith Elementary School Leo R. Croce Elementary School Marylin Avenue Elementary School Rancho Las Positas Elementary School Sunset Elementary School LVJUSD Middle Schools: 858 Andrew N. Christensen Middle School LVJUSD K-8 Schools: 795 Junction K Joe Michell East Avenue Middle School William Mendenhall Middle School While the LVJUSD schools produce high scores relative to average California public school systems, the Livermore Valley Charter School has surpassed the performance of local schools in state administered tests. Teachers As of August, 2011, the Schools employed 85 full time teachers, as shown in Table 8. All teaching staff is credentialed, on emergency credential, or waiver as now required by the State. 100% of teachers at the Schools earned a bachelor s degree and 68% have earned a master s or doctorate degree. A-12

78 I. TRI-VALLEY LEARNING CORPORATION (continued) Many teachers have previous teaching experience; however, many also have backgrounds in other professions. These include law, journalism, radio broadcasting, military, counseling, environmental education, fundraising, small business ownership, technology. Teachers receive bi-annual reviews, formative and summative evaluations and official counseling. Teachers are eligible to receive a yearly bonus, depending upon the availability of funds. The Schools provide their teachers a minimum of 5 full days of professional development each year. Table 8. Number of Educators (All instructional personnel) School Year Total With Full Credential Table 9 sets forth the teaching experience for teachers at the Schools for the school year. Table 9. Teacher Experience Professional Teaching Experience Number of Teachers Percent of Teachers Over 4 years 72 85% 2 to 4 years 9 11% First year teachers 4 5% Teacher Retention 72 of the 85 teachers at the Schools taught last year at the Schools. A-13

79 I. TRI-VALLEY LEARNING CORPORATION (continued) Non-Teaching Employees As of September 1, 2011, the number of classified employees of the Schools was 18. These non-teaching employees include a COO, Corporate Counsel, Development Director, 1 Counselor, 2 Office Managers, 1 IT Director, 1 IT Intern, an Accounting Manager, one Data administrative assistant, 1 Office assistant, and 2 custodians, 6 campus aids. Table 10 sets forth the number of non-teaching employees of the Schools. Table 10. Number of Non-Teaching Employees School Year Employees Competing Schools Table 11 shows the competing high schools within 5 miles of LVCP in terms of their address, grade levels, enrollment and proximity to LVCP. Table 11. Area Public School Options - LVCP Livermore High School Granada High School 600 Maple St. 400 Wall St. Livermore, CA Livermore, CA Grades 8 12 Grades ,058 students 2,291 students 1 mile from LVCP 2 miles from LVCP A-14

80 I. TRI-VALLEY LEARNING CORPORATION (continued) Table 12. Area Public School Options - LVCS Altamont Creek Elementary School Andrew N. Christensen Middle School 6500 Garaventa Ranch Rd Haggin Oaks Ave. Livermore, CA Livermore, CA Grades K 5 Grades students 627 students 7 miles from LVCS 7 miles from LVCS Arroyo Seco Elementary School East Avenue Middle School 5280 Irene Way 3951 East Ave. Livermore, CA Livermore, CA Grades K 5 Grades students 692 students 5 miles from LVCS 3 miles from LVCS Emma Smith Elementary School Joe Michell School 391 Ontario Dr Elaine Ave. Livermore, CA Livermore, CA Grades K 5 Grades K students 447 students 1 mile from LVCS 1 mile from LVCS Junction K 8 School Leo R. Croce School 298 Junction Ave Scenic Ave. Livermore, CA Livermore, CA Grades K 8 Grades K students 610 students 2 miles from LVCS 6 miles from LVCS Marilyn Avenue Elementary School Rancho Las Positas Elementary School 800 Marylin Ave. 401 East Jack London Blvd. Livermore, CA Livermore, CA Grades K 5 Grades K students 519 students 1 mile from LVCS 3 miles from LVCS Sunset Elementary School William Mendenhall Middle School 1671 Frankfurt Way 1701 El Padro Dr. Livermore, CA Livermore, CA Grades K 5 Grades students 841 students 2 miles from LVCS 1 mile from LVCS A-15

81 II. MANAGEMENT TEAM Contact Information Names and addresses of key contacts at TVLC are as follows: Government and Management Mr. Bill Batchelor Chief Operating Officer 2451 Portola Avenue Livermore, CA (925) ext. 103 (925) (Fax) TVLC is governed by a seven-member Board of Directors. TVLC s Directors are appointed by the members of TVLC s Board, or are elected by the school sites. Although the bylaws of TVLC provide that Trustees shall serve terms of three years, there is no limit on the numbers of consecutive terms that Trustees may serve. Brief biographies of the seven members of TVLC s Board of Directors follow. TVLC Board of Directors Len Di Giovanni Member (term expires 2013) Len Di Giovanni, Co-founder / COO of Boresha International Inc., brings 30 years of success directing multi-faceted business units, with a unique blend of skills and a proven record of achieving results. As a results driven leader, Len is passionate about "creating an organization and environment that allows people to succeed and grow with the end result being revenue, bottom line and interpersonal improvement." Len s successful approach to business stems from his experience in various executive leadership positions where he has created corporate teams, customer service support, developed sales and marketing strategic plans, and headed new business development. He has been involved in the marketing of emerging solutions within the Consumer Products, Hardware, Aerospace, Direct Marketing, Floor Covering and Import industries. Len graduated from St. Mary s College in Kansas with a Bachelor of Arts Degree in Business Administration and English. He served in the United States Army as 1st lieutenant field artillery, and in Vietnam as a Forward Observer and appointed Battery Executive Officer, receiving two Bronze Stars for his exceptional service. Len believes in community outreach and service, voluntarily serving on several Board of Directors seats including The Floor Covering Installation Contractors Association, Just Say Y.E.S. Foundation, Shiloh Christian Fellowship, Global Education Partnership, the Advisory Board of Floor Universe, and as a teacher of Biblical Studies at the college level. Len and his wife Sue live in Pleasanton. Having raised four children they are now actively participating in and speaking into the lives of their six grandchildren. Neil Cowles Vice President (term expires 2012) Neil Cowles is the Chief Executive Officer of Tolven Inc., an open source healthcare software and services provider that is changing the existing paradigm of healthcare information systems adoption in the global healthcare marketplace. Born in Norwich, England, Neil Cowles trained and practiced as a radiographer in England and Australia prior to focusing on healthcare management, information technology and business management. Between 1994 and 1999, Cowles held a number of executive positions with Shared Medical Systems (SMS) in Europe, joining Torex Plc as Technical Director in A-16

82 II. MANAGEMENT TEAM (continued) 1999, a board position where he was responsible for application development, product strategy and business outsourcing. Cowles has extensive experience in business management and acquisitions and mergers. In 2002, Neil Cowles joined Oracle EMEA (Europe, Middle East and Africa) where he was responsible for developing healthcare business opportunities across EMEA. In 2004, Neil Cowles transferred to Oracle Corporation to take responsibility for the global healthcare and life sciences application strategy group, where his responsibilities included both clinical and business systems. At the beginning of 2006, Neil Cowles left Oracle Corporation to become one of the co-founders and the Chief Operating Officer of Tolven Inc., which is focused on a consumer-centric, industry standards approach to delivering healthcare information solutions. Neil Cowles and his wife Kristen have two children, the oldest of which commenced Kindergarten at LVCS in Neil Cowles joined the TVLC Board in November Rick Swiers President (term expires 2013) Rick Swiers holds a B.S. in Mass Communications from the University of Tennessee and a MBA in Management from Fairleigh Dickinson University. He has an extensive background in communications technology and has held key management positions with a number of leading edge technology companies domestically and internationally. He was co-chair for the LVCS Charter Submittal Committee as well as co-chair of the Legal Committee and a Choice for Children Education Foundation board member. He has one child who graduated LVCS and is currently attending LVCP. His other child was one of the 2008 LVCS 8th grade graduating class. Tim Hall Member (term expires 2014) Tim Hall holds a Degree in Hispanic Studies from the University of Barcelona, Spain, a BA in Spanish from San Francisco State University, MS Computer Science, Santa Clara University and a BS in Math from San Francisco State University. Tim has a California Multiple Subjects Teaching Credential with a Bilingual Certificate and a Math Specialist Certificate. He is a retired Software Engineer from Lockheed Martin and a Computer Programming Instructor with over 30 years of experience. He is a retired Independent Software Developer and creator of FileWave and GraceLAN, winners of MacWorld and MacWEEK Software of the Year Awards. Tim has been a volunteer elementary school music teacher and a volunteer in the Big Brother program. Tim is a founder of Tassajara Preparatory High School. Jerry Mullins Member (term expires 2012) Jerry Mullins participated in the creation of the Livermore Valley Charter School and served on its board during the initial years of the school s operation. Three of his children have attended LVCS; his daughter currently attends LVCS, and two sons promoted from LVCS and are currently attending LVCP. A graduate of the U.S. Naval Academy, Jerry served in Naval Aviation in both the Mediterranean and Western Pacific before completing a Ph.D. at the University of Michigan. He joined Lawrence Livermore National Laboratory in 1979, where his principal assignments have involved research on the proliferation of weapons of mass destruction. He has also served in Washington as Special Advisor to the Assistant Secretary of State for Political-Military Affairs, and he has been a Ford Foundation fellow at the Stanford University Center for International Security and Cooperation. John Zukoski Treasurer (term expires 2013) John Zukoski has been practicing as a tax accountant and financial advisor since John concentrates in personalized financial and tax planning services for individuals and corporations. In order to more A-17

83 II. MANAGEMENT TEAM (continued) completely service his clients and remain on top of the changing dynamics of the profession, he attends seminars and classes. John began his career in 1990, John formed A to Z, CPA s, PC using his experience and contacts to grow a practice that concentrates in highly personalized tax and financial planning services. John s diverse background affords him the unique opportunity of utilizing the angles of both tax and investment strategies when working with clients. John is a member of the California Society CPA, and American Institute of Certified Public Accountants. John is a Graduate of Cal State University Hayward, BS, Business Management Dave Vopnford Member (term expires 2013) Dave Vopnford holds a BA in Business Administration from the University of Washington. He has an extensive background in project management, application development and financial systems design. He is currently employed at Topcon Positioning Systems here in Livermore as a Technical Analyst designing web applications, developing reporting systems, and championing technical innovation. Outside the office Dave enjoys coaching LYSL youth soccer where his teams are generally recognized for their positive attitude, ability and most importantly simply having fun. Executive Management All of Tri-Valley Learning Corporation s senior officers are appointed by its Board of Directors. The principal officers of TVLC are as follows: Bill Batchelor Chief Operating Officer (TVLC) Bill Batchelor holds a bachelor's degree in Finance Business Administration from the University of Colorado at Boulder. He has fourteen years experience in financial planning. Mr. Batchelor was a founder of Tri-Valley Learning Corporation, and now serves as its COO. He has been working actively in non-profits for ten years, the past six in charter schools. He has extensive experience in school governance, finance, facilities, and legal issues. Tara Aderman Principal - Livermore Valley Charter School (LVCS) Ms. Aderman earned her Administrative Credential in She has eight years teaching experience and was recognized as the 2005 Teacher of the Year in Monterey County. Ms. Aderman spent many years as Adjunct Site Faculty member with the Cal State teach program mentoring new teachers and is a certified Tribes trainer. She earned her Master s degree in Curriculum and Education and is looking forward to completing her Ed.D in School Administration. Mrs. Aderman has been invited to present at national, state and local conferences and has had various journal articles published. Lauren Kelly Principal - Livermore Valley Charter Preparatory High School (LVCP) Ms. Kelly graduated from San Francisco State University with a Bachelor of Arts degree in Broadcasting and Communication. She received her California Clear Teaching Credential in Mathematics and Journalism, along with her Master of Education in Secondary Education from the University of California, Los Angeles (UCLA), where she was a participant in the Principal Leadership Institute (PLI). Ms. Kelly also earned a second Master of Education in Educational Administration, and her Administrative Credential at UCLA s PLI. Ms. Kelly has taught and coached in public and private middle and high schools. She appeared in the Who s Who Among America s Teachers in 2002 through student nomination. She has been a Vice Principal at Amador Valley High School and at Harvest Park A-18

84 II. MANAGEMENT TEAM (continued) Middle School for the Pleasanton Unified School District. Through her leadership, each school was named as a National School of Character. Her focus has also been on working with test data, teachers, and counselors to ensure that all students achieve equitable and successful outcomes. The Association of California School Administrators named Ms. Kelly the regional Co-Administrator of the year in In the corporate world, she developed, wrote and implemented training programs for employees and customers. She co-founded Hoop Masters in Los Angeles, a non-profit, co-ed youth basketball program designed for children who wanted to experience athletics at the local and national level, and worked with youth from more than 85 schools. Dr. Douglas Treadway Facilities Project/Executive Team Coaching (TVLC) Dr. Treadway received his Ph.D. in Counseling Psychology from Northwestern University. He received two post-doctoral fellowships, one to study international environmental sustainability at Harvard University and the other with the Kellogg Foundation and the University of Minnesota to study the higher education and economic development relationship in Asia/Pacific Rim countries. Dr. Treadway currently serves as Director of the China Extension Program for the University of California Berkeley, and as Interim President of San Jose City College in San Jose, CA. He is a visiting professor in Leadership Studies at the University of San Diego. Dr. Treadway has 15 years experience as a professor of counseling and psychology, 24 years thereafter as a college and university president, and has been Chancellor of the North Dakota University System. He is active in the Association of Sustainability in Higher Education and the Society for College and University Planning, and was instrumental in the design and construction of the first new college campus (Ohlone Newark) in the world to achieve the Green Building Council s highest award (Platinum LEED). Dr. Douglas Treadway offers his expertise in creating innovative, sustainable facilities and learning environments to the TVLC facilities projects. Dr. Treadway will be also be working to formalize partnerships between our high schools and top-tier regional higher education institutions to provide students the opportunity to take university-accredited courses and receive full college credit from many of the premier colleges and universities throughout the region. He will bring the research and expertise of Stanford University as a higher education partner in the planning and construction of the Livermore Valley Charter School (LVCS) and LVCP facilities. By applying the latest research and best industry practices, Dr. Treadway will be helping LVCS and LVCP build state-of-the-art schools that maximize learning for all students in Livermore, CA, and beyond. Dr. Treadway has been an active community, regional and national leader, serving as the president of the board for a regional hospital and the community symphony. He is the author of 20 research and scholarly publications in the fields of higher education, community, and human development. A-19

85 II. MANAGEMENT TEAM (continued) Josefina Powe Accounting Manager (TVLC) Ms. Powe has an extensive background in Accounting and Management with over 20 years of experience. Before joining TVLC she was employed as a Controller in manufacturing, engineering and property management. She has worked as an accounting manager in the areas of distribution, finance, and higher education. Josefina is experienced in setting up corporate accounting and finance systems, and budgetary processes. She has expertise in setting up in-house payroll systems and human resources management. Julie Lassig Director of Development (TVLC) Ms. Lassig holds a B.S. in Chemical Engineering from Rensselaer Polytechnic Institute. She worked in microelectronics, semiconductor capital equipment, and technical industries for over fifteen years with responsibilities that included managing technical and sales support activities for national and international accounts, directing development projects, and creating technical and marketing communications (including press releases, data sheets, advertisements, and product description guides). She ran her own technical writing business for over 4 years providing services to high-tech companies in California and New York. Julie s passion is education. She has worked as a grant writer and program specialist for Ohlone College, has served on numerous school technology committees, has been a piano teacher, a substitute math and science teacher, and a mentor for pre-engineering students at the community college level. A-20

86 III. THE PROJECT The Project At present, TVLC s two existing schools, Livermore Valley Charter School ("LVCS"), K-8, and Livermore Valley College Preparatory High School ("LVCP"), operate from leased campuses owned by the Livermore Unified School District in accordance with Proposition 39 and a facilities use agreement. The Project and the facilities use agreement with the District allow LVCS and LVCP students to move from their leased facilities to a new campus. (See the Location Map of Current and Proposed Facilities on page A-22) The Project involves TVLC s purchase of most of the Montevina office park development located on North Canyons Parkway at its intersection with Constitution Drive in the City of Livermore ("Montevina"). The real estate to be acquired includes (a) 15 of the 16 buildings totaling 98,400 square feet on 9.88 acres within Phase I, and (b) a vacant 12.4-acres parcel comprising Phase II of Montevina. Montevina comprises one and two-story office buildings ranging in size from 3,600 to 13,200 square feet, averaging 6,560 square feet per building. Of the 16 Phase I buildings, 14 of the buildings have never been occupied and are in shell condition with no interior walls, finished ceilings, bathrooms, or floor coverings, but the electrical panels and roofmounted HVAC units have been installed. Four of the 14 buildings are two-story with installed elevators. The 15th building is at 3252 Constitution Drive and was previously sold. The 16th building in Phase I of Montevina is at 3110 Constitution Drive and will be leased by TVLC with an option to purchase. TVLC will convert the 16 buildings into a state of the art K-8 facility for LVCS with athletic and extracurricular facilities to serve both LVCS and LVCP. The shell spaces of the existing buildings in the Montevina business park will be converted to high quality classroom environments, staff and administrative spaces. The buildings will include 38 classrooms, 3 Science labs and MathTech rooms, 2 Music rooms, 2 Art rooms, 2 World Language Rooms, 2 Science Specialist rooms, 6 Teacher workrooms/storage spaces, 1 Media/Student Center, 2 Teacher Lounges, 4 Flex Learning Spaces for 1:1 learning, 3 Flex learning spaces for group learning, 14 Boys' restrooms, 14 girls' restrooms, 10 unisex staff restrooms, 2 custodian rooms, 2 electrical rooms, 2 Reception/Waiting space, 10 Offices, 2 Copy rooms, 4 Conference rooms, 1Dining area, and a large multi-purpose space. (See Site Development Maps on Page A-26 and A-27) Both Phase I and Phase II of Montevina have been approved by the City of Livermore and are fully permitted for school use. A-21

87 III. THE PROJECT (continued) Tri-Valley Learning Corporation Location Map of Current and Proposed Facilities A-22

88 III. THE PROJECT (continued) A-23

89 III. THE PROJECT (continued) A-24

90 III. THE PROJECT (continued) Montevina Phase II A-25

91 III. THE PROJECT (continued) A-26

92 III. THE PROJECT (continued) A-27

93 III. THE PROJECT (continued) A-28

94 III. THE PROJECT (continued) Table 13 shows the breakdown of the Project costs totaling $39.8 million: Table 13. Project Costs Project Costs Dollar Description Amount Acquisition of Land and Buildings - $16,400,000 Montevina Phase I Construction of Improvements - 9,500,000 Montevina Phase I Acquisition of Land - 6,000,000 Montevina Phase II Site Improvements - 3,500,000 Montevina Phase II Acquisition of Administration Building 3,140,000 Architectural, Engineering, Environmental, Legal and Other Consultants 1,273,000 Total Project Costs $39,813,000 When construction commences, it is expected that the Facilities will be renovated by Devcon Construction Incorporated ( Devcon ) of Stockton, California under a Standard Design-Build Agreement (the "Construction Contract") at a maximum price of $13,000,000. Devcon's extensive list of projects has led to the growth of its employee base at every level. As of 2012, the firm has over 160 administrative/office staff employees, a field staff of over 137, and 60 field superintendents. Founded in May 1976, the company generated sales in excess of $6 million by December of that same year. In the following years, activity climbed steadily to $775 Million in 2007, $910 Million in 2008, $382 Million in 2009, and $470 Million in Sales volume for 2011 was approximately $435 Million. In its thirty-six year history, the company has built over thirty million square feet of office, commercial, K-12, higher education and industrial space throughout Northern California. Devcon's Officers are: Gary Filizetti, President Bret Sisney, Vice President/Controller Justine Pereira, Secretary The Devcon Project Team for TVLC s Project is Warren Tilbury and James Woodbury. Mr. Tilbury joined Devcon Construction, Inc. in October of 1992 as a Project Manager bringing with him some twenty-four years previous experience in the construction industry. Mr. Tilbury holds a Bachelor of Science in Construction Management from San Jose State University and an Associate of Science Degree from Modesto Junior College, Modesto. He is also a graduate of the Construction Management Certificate Program at U.C. Davis and is a LEED Accredited Professional. Warren holds a Contractor's (B) License (inactive). Mr. Tilbury has extensive experience in all phases of projects including demolition, pre-construction, design, and construction services for university housing, university buildings, municipal buildings, airport A-29

95 III. THE PROJECT (continued) terminals, and hotels. He has also worked on numerous commercial projects including restaurants, offices and retail space. Mr. Woodbury joined Devcon Construction, Inc. in January of 2001 in the capacity of Project Engineer and was promoted to Project Manager in January of As a project manager for Devcon his responsibilities include client contact; coordination between the architect, designers, and engineers; estimating; managing interiors and building shells; scheduling of projects for maximum efficiency; and cost control, materials and labor management. James holds a Bachelor of Science in Architectural Engineering with a minor in Construction Management from California Polytechnic State University - San Luis Obispo. He is also a LEED Accredited Professional. Mr. Woodbury has worked on and/or managed numerous projects that included pre-construction, construction, build-out, renovations, and tenant improvements for Apple, Menlo College, Cisco, Calisolar Inc., Lifescan Inc., Tri-Valley Learning Corporation, and Goldman Sachs amongst other. TVLC has also retained the services of an owner representative construction manager: Douglas H. Roth Real Estate Management Services Project Management - Colliers International Managing Director - Development Management Associates Mr. Roth has had executive responsibility in the real estate industry for twenty-seven years, functioning as the manager or advisor in assignments where innovation is essential to success. His technical experience at all LEED levels of sustainability covering, retail, office, biotech, medical, industrial, technology, and mixed-use properties makes his leadership the hallmark among teams of engineering professionals. Doug brings the unique perspective gained from the combination of over $800 million of completed project value along with the ability to assume responsibility for results under the diverse requirements of strategic planning and project implementation. In the arena of redevelopment, he has utilized innovative tax financing tools and advanced scheduling to achieve entitlement goals considered insurmountable in the regulatory arena. When confronting environmental or brownfield challenges, Doug has managed the engineering teams through this complex path and earned the respect of his peers all levels. Through the design and construction phases, he has the ability to combine technical specialties with the complex legal issues of construction management to execute the cost and schedule goals essential to the success of the assignment. PROFESSIONAL EXPERIENCE Development Management Associates, Inc.: Managing Director Hewlett-Packard Company: Corporate RE Project Management Nicholas L. Sica, Inc.: Development Consultant Nova Partners, Inc.: Development Consultant Sutter Health - Palo Alto Medical Foundation: Asst. Project Director A-30

96 IV. FINANCIAL PROJECTIONS Fiscal Year Ending June Actual Projected Projected Projected Projected Projected Enrollment 1,130 1,481 1,653 1,773 1,918 1,918 Average Daily Attendance 1,093 1,474 1,589 1,700 1,839 1,839 REVENUES General Purpose Block Grant $ 5,807,223 $ 8,303,785 $ 9,380,497 $ 9,757,965 $ 11,243,085 $ 11,445,461 Categorical Block Grant $ 481,545 $ 680,280 $ 775,980 $ 809,530 $ 941,530 $ 941,530 Federal Income $ 177,000 $ 212,063 $ 241,313 $ 257,313 $ 270,075 $ 270,075 Class Size Reduction $ 428,400 $ 428,000 $ 428,000 $ 428,000 $ 428,000 $ 428,000 Lottery $ 141,773 $ 211,400 $ 235,760 $ 244,300 $ 277,900 $ 277,900 Other State Revenues $ 520,521 $ 627,331 $ 707,495 $ 747,732 $ 778,064 $ 778,064 Donations $ 525,000 $ 580,000 $ 740,000 $ 780,000 $ 850,000 $ 850,000 Other Local Revenues $ 303,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000 Facilities Revenue $ - $ - $ - $ - $ - $ - Total Revenues $ 8,384,462 $ 11,192,859 $ 12,659,045 $ 13,174,840 $ 14,938,654 $ 15,141,029 EXPENSES Personnel - Dedicated $ 5,556,949 $ 6,525,786 $ 7,578,485 $ 8,062,107 $ 9,600,859 $ 9,744,871 Personnel - Discretionary $ 831,744 $ 885,027 $ 861,402 $ 838,715 $ 1,028,819 $ 1,044,252 Books & Supplies - Dedicated $ 314,013 $ 398,000 $ 406,000 $ 431,000 $ 441,000 $ 441,000 Books & Supplies - Discretionary $ 64,500 $ 29,201 $ 29,566 $ 29,939 $ 30,322 $ 30,322 Services & Other Operating Expenses $ 649,118 $ 570,119 $ 574,847 $ 579,386 $ 591,408 $ 591,408 Capital Outlay $ - $ 118,426 $ 127,540 $ 143,681 $ 149,850 $ 149,850 Special Tax Payments $ - $ 187,646 $ 187,646 $ 187,646 $ 187,646 $ 187,646 Lease Payments $ 495,305 $ 215,452 $ 224,730 $ 234,037 $ 243,376 $ 243,376 Total Expenses $ 7,911,629 $ 8,929,658 $ 9,990,217 $ 10,506,512 $ 12,273,280 $ 12,432,725 Income Available for Debt Service $ 472,833 $ 2,263,201 $ 2,668,828 $ 2,668,328 $ 2,665,374 $ 2,708,304 Bond Debt Service $ - $ 1,260,749 $ 2,135,063 $ 2,134,663 $ 2,133,213 $ 2,135,713 Bond Debt Service Coverage Ratio n/a 180% 125% 125% 125% 127% Annual Issuer's Fee $ - $ 5,500 $ 5,456 $ 5,409 $ 5,359 $ 5,305 Annual Rating Surveillance Fees $ - $ 8,000 $ 8,000 $ 8,000 $ 8,000 $ 8,000 Annual Trustee Fees $ - $ 7,500 $ 7,500 $ 7,500 $ 7,500 $ 7,500 Total Debt Service Including Fees $ - $ 1,281,749 $ 2,156,019 $ 2,155,572 $ 2,154,072 $ 2,156,518 Outstanding Tax-Exempt Bonds $ - $ 27,500,000 $ 27,280,000 $ 27,045,000 $ 26,795,000 $ 26,525,000 Net Revenues after Debt Service $ 472,833 $ 981,452 $ 512,810 $ 512,757 $ 511,302 $ 551,787 Deposit to Liquidity Fund (1) $ - $ 490,726 $ 256,405 $ 256,378 $ 255,651 $ 275,893 Cumulative Balance of Liquidity Fund (1) $ - $ 490,726 $ 747,131 $ 1,003,509 $ 1,259,160 $ 1,535,054 Shortfall in Liquidity Fund (2) ## 2,136,013 1,645,286 1,388,882 1,132, , ,959 Beginning Balance of QSCB Account $ - $ - $ - $ - $ 256,378 $ 515,875 Deposit to QSCB Account $ - $ - $ - $ 256,378 $ 255,651 $ 275,893 Interest 1.50% $ - $ - $ - $ - $ 3,846 $ 7,738 Ending Balance of QSCB Account $ - $ - $ - $ 256,378 $ 515,875 $ 799,507 Unamortized QSCBs $ 15,000,000 $ 15,000,000 $ 15,000,000 $ 14,743,622 $ 14,484,125 $ 14,200,493 Debt Burden 5.9% 13.2% 18.6% 18.0% 15.9% 15.7% (1) Annual deposit to Liquidity Fund equals 50% of Net Revenues until Cumulative Balance of Liquidity Fund equals Maximum Annual Debt Service on Bonds. (2) Liquidity Fund Requirement equals Maximum Annual Debt Service on Bonds. Not applicable in 2012; represents the Requirement at closing. A-31

97 IV. FINANCIAL PROJECTIONS (continued) Fiscal Year Ending June Projected Projected Projected Projected Projected Projected Enrollment 1,918 1,918 1,918 1,918 1,918 1,918 Average Daily Attendance 1,839 1,839 1,839 1,839 1,839 1,839 REVENUES General Purpose Block Grant $ 11,651,479 $ 11,861,205 $ 12,074,707 $ 12,292,052 $ 12,513,309 $ 12,738,548 Categorical Block Grant $ 941,530 $ 941,530 $ 941,530 $ 941,530 $ 941,530 $ 941,530 Federal Income $ 270,075 $ 270,075 $ 270,075 $ 270,075 $ 270,075 $ 270,075 Class Size Reduction $ 428,000 $ 428,000 $ 428,000 $ 428,000 $ 428,000 $ 428,000 Lottery $ 277,900 $ 277,900 $ 277,900 $ 277,900 $ 277,900 $ 277,900 Other State Revenues $ 778,064 $ 778,064 $ 778,064 $ 778,064 $ 778,064 $ 778,064 Donations $ 850,000 $ 850,000 $ 850,000 $ 850,000 $ 850,000 $ 850,000 Other Local Revenues $ 150,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000 Facilities Revenue $ - $ - $ - $ - $ - $ - Total Revenues $ 15,347,047 $ 15,556,774 $ 15,770,276 $ 15,987,620 $ 16,208,877 $ 16,434,117 EXPENSES Personnel - Dedicated $ 9,891,045 $ 10,039,410 $ 10,190,001 $ 10,342,851 $ 10,497,994 $ 10,655,464 Personnel - Discretionary $ 1,059,915 $ 1,075,814 $ 1,091,951 $ 1,108,331 $ 1,124,956 $ 1,141,830 Books & Supplies - Dedicated $ 441,000 $ 441,000 $ 441,000 $ 441,000 $ 441,000 $ 441,000 Books & Supplies - Discretionary $ 30,322 $ 30,322 $ 30,322 $ 30,322 $ 30,322 $ 30,322 Services & Other Operating Expenses $ 591,408 $ 591,408 $ 591,408 $ 591,408 $ 591,408 $ 591,408 Capital Outlay $ 149,850 $ 149,850 $ 149,850 $ 149,850 $ 149,850 $ 149,850 Special Tax Payments $ 187,646 $ 187,646 $ 187,646 $ 187,646 $ 187,646 $ 187,646 Lease Payments $ 243,376 $ 243,376 $ 243,376 $ 243,376 $ 243,376 $ 243,376 Total Expenses $ 12,594,562 $ 12,758,826 $ 12,925,554 $ 13,094,784 $ 13,266,551 $ 13,440,896 Income Available for Debt Service $ 2,752,486 $ 2,797,948 $ 2,844,721 $ 2,892,837 $ 2,942,326 $ 2,993,221 Bond Debt Service $ 2,131,813 $ 2,131,863 $ 2,135,513 $ 2,132,413 $ 2,134,788 $ 2,134,163 Bond Debt Service Coverage Ratio 128% 130% 132% 134% 137% 139% Annual Issuer's Fee $ 5,248 $ 5,187 $ 5,121 $ 5,051 $ 4,976 $ 4,897 Annual Rating Surveillance Fees $ 8,000 $ 8,000 $ 8,000 $ 8,000 $ 8,000 $ 8,000 Annual Trustee Fees $ 7,500 $ 7,500 $ 7,500 $ 7,500 $ 7,500 $ 7,500 Total Debt Service Including Fees $ 2,152,561 $ 2,152,550 $ 2,156,134 $ 2,152,964 $ 2,155,264 $ 2,154,560 Outstanding Tax-Exempt Bonds $ 26,240,000 $ 25,935,000 $ 25,605,000 $ 25,255,000 $ 24,880,000 $ 24,485,000 Net Revenues after Debt Service $ 599,925 $ 645,398 $ 688,588 $ 739,873 $ 787,062 $ 838,662 Deposit to Liquidity Fund (1) $ 299,963 $ 189,822 $ - $ - $ - $ - Cumulative Balance of Liquidity Fund (1) $ 1,946,190 $ 2,136,013 $ 2,136,013 $ 2,136,013 $ 2,136,013 $ 2,136,013 Shortfall in Liquidity Fund (2) ## 189, Beginning Balance of QSCB Account $ 799,507 $ 1,111,462 $ 1,450,833 $ 1,816,889 $ 2,214,079 $ 2,640,822 Deposit to QSCB Account $ 299,963 $ 322,699 $ 344,294 $ 369,937 $ 393,531 $ 419,331 Interest 1.50% $ 11,993 $ 16,672 $ 21,762 $ 27,253 $ 33,211 $ 39,612 Ending Balance of QSCB Account $ 1,111,462 $ 1,450,833 $ 1,816,889 $ 2,214,079 $ 2,640,822 $ 3,099,765 Unamortized QSCBs $ 13,888,538 $ 13,549,167 $ 13,183,111 $ 12,785,921 $ 12,359,178 $ 11,900,235 Debt Burden 16.7% 16.5% 16.3% 16.0% 15.8% 15.6% (1) Annual deposit to Liquidity Fund equals 50% of Net Revenues until Cumulative Balance of Liquidity Fund equals Maximum Annual Debt Service on Bonds. (2) Liquidity Fund Requirement equals Maximum Annual Debt Service on Bonds. A-32

98 IV. FINANCIAL PROJECTIONS (continued) Fiscal Year Ending June Projected Projected Projected Projected Projected Projected Enrollment 1,918 1,918 1,918 1,918 1,918 1,918 Average Daily Attendance 1,839 1,839 1,839 1,839 1,839 1,839 REVENUES General Purpose Block Grant $ 12,967,842 $ 13,201,263 $ 13,438,886 $ 13,680,786 $ 13,927,040 $ 14,177,727 Categorical Block Grant $ 941,530 $ 941,530 $ 941,530 $ 941,530 $ 941,530 $ 941,530 Federal Income $ 270,075 $ 270,075 $ 270,075 $ 270,075 $ 270,075 $ 270,075 Class Size Reduction $ 428,000 $ 428,000 $ 428,000 $ 428,000 $ 428,000 $ 428,000 Lottery $ 277,900 $ 277,900 $ 277,900 $ 277,900 $ 277,900 $ 277,900 Other State Revenues $ 778,064 $ 778,064 $ 778,064 $ 778,064 $ 778,064 $ 778,064 Donations $ 850,000 $ 850,000 $ 850,000 $ 850,000 $ 850,000 $ 850,000 Other Local Revenues $ 150,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000 Facilities Revenue $ - $ - $ - $ - $ - $ - Total Revenues $ 16,663,411 $ 16,896,832 $ 17,134,455 $ 17,376,355 $ 17,622,609 $ 17,873,295 EXPENSES Personnel - Dedicated $ 10,815,296 $ 10,977,525 $ 11,142,188 $ 11,309,321 $ 11,478,961 $ 11,651,145 Personnel - Discretionary $ 1,158,957 $ 1,176,342 $ 1,193,987 $ 1,211,897 $ 1,230,075 $ 1,248,526 Books & Supplies - Dedicated $ 441,000 $ 441,000 $ 441,000 $ 441,000 $ 441,000 $ 441,000 Books & Supplies - Discretionary $ 30,322 $ 30,322 $ 30,322 $ 30,322 $ 30,322 $ 30,322 Services & Other Operating Expenses $ 591,408 $ 591,408 $ 591,408 $ 591,408 $ 591,408 $ 591,408 Capital Outlay $ 149,850 $ 149,850 $ 149,850 $ 149,850 $ 149,850 $ 149,850 Special Tax Payments $ 187,646 $ 187,646 $ 187,646 $ 187,646 $ 187,646 $ 187,646 Lease Payments $ 243,376 $ 243,376 $ 243,376 $ 243,376 $ 243,376 $ 243,376 Total Expenses $ 13,617,855 $ 13,797,469 $ 13,979,777 $ 14,164,820 $ 14,352,638 $ 14,543,273 Income Available for Debt Service $ 3,045,556 $ 3,099,363 $ 3,154,678 $ 3,211,535 $ 3,269,971 $ 3,330,022 Bond Debt Service $ 2,131,513 $ 2,132,113 $ 2,135,613 $ 2,131,663 $ 2,135,613 $ 2,131,763 Bond Debt Service Coverage Ratio 142% 144% 146% 149% 152% 155% Annual Issuer's Fee $ 4,813 $ 4,723 $ 4,626 $ 4,523 $ 4,412 $ 4,294 Annual Rating Surveillance Fees $ 8,000 $ 8,000 $ 8,000 $ 8,000 $ 8,000 $ 8,000 Annual Trustee Fees $ 7,500 $ 7,500 $ 7,500 $ 7,500 $ 7,500 $ 7,500 Total Debt Service Including Fees $ 2,151,826 $ 2,152,336 $ 2,155,739 $ 2,151,686 $ 2,155,525 $ 2,151,557 Outstanding Tax-Exempt Bonds $ 24,065,000 $ 23,615,000 $ 23,130,000 $ 22,615,000 $ 22,060,000 $ 21,470,000 Net Revenues after Debt Service $ 893,730 $ 947,028 $ 998,939 $ 1,059,850 $ 1,114,446 $ 1,178,466 Deposit to Liquidity Fund (1) $ - $ - $ - $ - $ - $ - Cumulative Balance of Liquidity Fund (1) $ 2,136,013 $ 2,136,013 $ 2,136,013 $ 2,136,013 $ 2,136,013 $ 2,136,013 Shortfall in Liquidity Fund (2) ## Beginning Balance of QSCB Account $ 3,099,765 $ 3,593,126 $ 4,120,537 $ 4,681,815 $ 5,281,967 $ 5,918,420 Deposit to QSCB Account $ 446,865 $ 473,514 $ 499,470 $ 529,925 $ 557,223 $ 589,233 Interest 1.50% $ 46,496 $ 53,897 $ 61,808 $ 70,227 $ 79,230 $ 88,776 Ending Balance of QSCB Account $ 3,593,126 $ 4,120,537 $ 4,681,815 $ 5,281,967 $ 5,918,420 $ 6,596,429 Unamortized QSCBs $ 11,406,874 $ 10,879,463 $ 10,318,185 $ 9,718,033 $ 9,081,580 $ 8,403,571 Debt Burden 15.4% 15.2% 15.0% 14.7% 14.6% 14.3% (1) Annual deposit to Liquidity Fund equals 50% of Net Revenues until Cumulative Balance of Liquidity Fund equals Maximum Annual Debt Service on Bonds. (2) Liquidity Fund Requirement equals Maximum Annual Debt Service on Bonds. A-33

99 IV. FINANCIAL PROJECTIONS (continued) Fiscal Year Ending June Projected Projected Projected Projected Projected Projected Enrollment 1,918 1,918 1,918 1,918 1,918 1,918 Average Daily Attendance 1,839 1,839 1,839 1,839 1,839 1,839 REVENUES General Purpose Block Grant $ 14,432,926 $ 14,692,719 $ 14,957,188 $ 15,226,417 $ 15,500,493 $ 15,779,501 Categorical Block Grant $ 941,530 $ 941,530 $ 941,530 $ 941,530 $ 941,530 $ 941,530 Federal Income $ 270,075 $ 270,075 $ 270,075 $ 270,075 $ 270,075 $ 270,075 Class Size Reduction $ 428,000 $ 428,000 $ 428,000 $ 428,000 $ 428,000 $ 428,000 Lottery $ 277,900 $ 277,900 $ 277,900 $ 277,900 $ 277,900 $ 277,900 Other State Revenues $ 778,064 $ 778,064 $ 778,064 $ 778,064 $ 778,064 $ 778,064 Donations $ 850,000 $ 850,000 $ 850,000 $ 850,000 $ 850,000 $ 850,000 Other Local Revenues $ 150,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000 $ 150,000 Facilities Revenue $ - $ - $ - $ - $ - $ - Total Revenues $ 18,128,495 $ 18,388,287 $ 18,652,756 $ 18,921,986 $ 19,196,061 $ 19,475,070 EXPENSES Personnel - Dedicated $ 11,825,913 $ 12,003,301 $ 12,183,351 $ 12,366,101 $ 12,551,593 $ 12,739,866 Personnel - Discretionary $ 1,267,254 $ 1,286,263 $ 1,305,557 $ 1,325,140 $ 1,345,017 $ 1,365,193 Books & Supplies - Dedicated $ 441,000 $ 441,000 $ 441,000 $ 441,000 $ 441,000 $ 441,000 Books & Supplies - Discretionary $ 30,322 $ 30,322 $ 30,322 $ 30,322 $ 30,322 $ 30,322 Services & Other Operating Expenses $ 591,408 $ 591,408 $ 591,408 $ 591,408 $ 591,408 $ 591,408 Capital Outlay $ 149,850 $ 149,850 $ 149,850 $ 149,850 $ 149,850 $ 149,850 Special Tax Payments $ 187,646 $ - $ - $ - $ - $ - Lease Payments $ 243,376 $ 243,376 $ 243,376 $ 243,376 $ 243,376 $ 243,376 Total Expenses $ 14,736,768 $ 14,745,520 $ 14,944,863 $ 15,147,197 $ 15,352,565 $ 15,561,014 Income Available for Debt Service $ 3,391,726 $ 3,642,768 $ 3,707,893 $ 3,774,789 $ 3,843,496 $ 3,914,056 Bond Debt Service $ 2,135,463 $ 2,136,013 $ 2,133,413 $ 2,135,100 $ 2,135,850 $ 2,132,750 Bond Debt Service Coverage Ratio 157% 169% 172% 175% 178% 182% Annual Issuer's Fee $ 4,167 $ 4,031 $ 3,886 $ 3,731 $ 3,565 $ 3,388 Annual Rating Surveillance Fees $ 8,000 $ 8,000 $ 8,000 $ 8,000 $ 8,000 $ 8,000 Annual Trustee Fees $ 7,500 $ 7,500 $ 7,500 $ 7,500 $ 7,500 $ 7,500 Total Debt Service Including Fees $ 2,155,130 $ 2,155,544 $ 2,152,799 $ 2,154,331 $ 2,154,915 $ 2,151,638 Outstanding Tax-Exempt Bonds $ 20,835,000 $ 20,155,000 $ 19,430,000 $ 18,655,000 $ 17,825,000 $ 16,940,000 Net Revenues after Debt Service $ 1,236,597 $ 1,487,224 $ 1,555,095 $ 1,620,458 $ 1,688,581 $ 1,762,418 Deposit to Liquidity Fund (1) $ - $ - $ - $ - $ - $ - Cumulative Balance of Liquidity Fund (1) $ 2,136,013 $ 2,136,013 $ 2,136,013 $ 2,136,013 $ 2,136,013 $ 2,136,013 Shortfall in Liquidity Fund (2) ## Beginning Balance of QSCB Account $ 6,596,429 $ 7,313,673 $ 8,702,391 $ 10,170,309 $ 11,716,457 $ 13,344,383 Deposit to QSCB Account $ 618,298 $ 1,279,013 $ 1,337,381 $ 1,393,594 $ 1,452,180 $ 1,455,451 Interest 1.50% $ 98,946 $ 109,705 $ 130,536 $ 152,555 $ 175,747 $ 200,166 Ending Balance of QSCB Account $ 7,313,673 $ 8,702,391 $ 10,170,309 $ 11,716,457 $ 13,344,383 $ 15,000,000 Unamortized QSCBs $ 7,686,327 $ 6,297,609 $ 4,829,691 $ 3,283,543 $ 1,655,617 $ - Debt Burden 14.2% 12.9% 12.7% 12.6% 12.4% 12.2% (1) Annual deposit to Liquidity Fund equals 50% of Net Revenues until Cumulative Balance of Liquidity Fund equals Maximum Annual Debt Service on Bonds. (2) Liquidity Fund Requirement equals Maximum Annual Debt Service on Bonds. A-34

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101 APPENDIX B AUDITED FINANCIAL STATEMENTS OF TRI-VALLEY FOR THE FISCAL YEAR ENDED JUNE 30, 2011 B-1

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