PRELIMINARY LIMITED OFFERING MEMORANDUM DATED DECEMBER 1, 2017

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1 This Preliminary Official Statement and the information contained herein are subject to completion or amendment. Under no circumstances shall this Preliminary Official Statement constitute an offer to sell or a solicitation of an offer to buy nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction. PRELIMINARY LIMITED OFFERING MEMORANDUM DATED DECEMBER 1, 2017 NEW ISSUES FULL BOOK-ENTRY NO RATING 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 relating to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Bonds. See TAX MATTERS herein. $25,000,000* CALIFORNIA SCHOOL FINANCE AUTHORITY CHARTER SCHOOL REVENUE BONDS (BRIGHT STAR SCHOOLS-OBLIGATED GROUP), SERIES 2017 Dated: Date of Delivery Due: June 1 as shown on inside cover This cover page contains information for general reference only. It is not intended as a summary of these issues. Investors must read the entire Limited Offering Memorandum to obtain information essential to making an informed investment decision. The California School Finance Authority Charter School Revenue Bonds (Bright Star Schools-Obligated Group), Series 2017, in the aggregate principal amount of $25,000,000* (the Bonds ) will be issued by the California School Finance Authority (the Authority ) pursuant to an Indenture, dated as of December 1, 2017 (the Bond Indenture ), between the Authority and Wilmington Trust, National Association, as trustee (the Trustee ). The Authority will loan the proceeds of the Bonds to Bright Star Education Group (the Borrower ), a California nonprofit public benefit corporation and an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986 (the Code ) pursuant to a Loan Agreement, dated as of December 1, 2017 (the Loan Agreement ), between the Authority and the Borrower and acknowledged by Bright Star Development Group-9334 Lemona, LLC, a California limited liability company (the VAHS Landlord ) and BSDG 4115 MLK LLC, a California limited liability company (the SMCA Landlord and, together with the VAHS Landlord referred to herein as the Landlords ), the sole member of each of which is the Borrower. The Bonds and the interest thereon are payable solely out of certain revenues and income received by the Authority or the Trustee pursuant to the Loan Agreement and Obligation No. 1 relating to the Bonds ( Obligation No. 1 ) issued by the Borrower in an amount equal to the aggregate principal amount of the Bonds pursuant to a Master Indenture of Trust, dated as of December 1, 2017 (the Original Master Indenture ), as supplemented by a Supplemental Master Indenture for Obligation No. 1, dated as of December 1, 2017 (the Supplemental Master Indenture and, together with the Original Master Indenture, the Master Indenture ), each by and between the Borrower, as representative of the Obligated Group, the Landlords, as the initial member of the Obligated Group, and Wilmington Trust, National Association, as master trustee thereunder (the Master Trustee ). The proceeds of the Bonds will be used to (a) finance the acquisition, construction, improvement, furnishing and/or equipping of certain public charter school facilities (as more fully described herein, the Facilities ); (b) fund a debt service reserve account with respect to the Bonds; (c) pay capitalized interest on the Bonds through September 1, 2018; and (d) pay certain expenses incurred in connection with the issuance of the Bonds. See ESTIMATED SOURCES AND USES OF FUNDS and THE PROJECT. The Facilities will be leased to Bright Star Schools, a California nonprofit public benefit corporation and an organization described in Section 501(c)(3) of the Code ( Bright Star ) pursuant to certain leases (the Leases ) between Bright Star and the Landlords. Bright Star will make payments of Rent under the Leases from revenues derived solely from the charter school identified in such Leases. The Bonds are limited obligations of the Authority payable from Payments (as defined herein) received under and required to be deposited with the Trustee pursuant to the Bond Indenture (including amounts payable under the Leases), other amounts held in the funds established by the Bond Indenture (except the Rebate Fund) and payments to be made pursuant to Obligation No. 1. The obligations of the Borrower under the Loan Agreement are payable from the Gross Revenues (as defined herein), which constitute a portion of the Payments. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS. Interest on the Bonds will be payable semiannually on each June 1 and December 1, commencing June 1, The Bonds are being issued as fully registered bonds and initially will be registered in the name of Cede & Co., as nominee for The Depository Trust Company, New York, New York ( DTC ). DTC will act as securities depository for the Bonds. Purchases of beneficial interests in the Bonds will be made in book-entry-only form (without physical certificates) in initial minimum denominations of $250,000 and any integral multiple of $5,000 in excess thereof. For so long as DTC or its nominee, Cede & Co., is the registered owner of the Bonds, (a) payments of the principal of and premium, if any, and interest on such Bonds will be made directly to Cede & Co. for payment to DTC participants for subsequent disbursement to the Beneficial Owners, and (b) all notices, including any notice of redemption will be mailed only to Cede & Co. See APPENDIX F BOOK-ENTRY SYSTEM attached hereto. The Bonds are subject to optional, mandatory and extraordinary redemption prior to maturity as described under THE BONDS Redemption herein. THE PURCHASE AND OWNERSHIP 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 QUALIFIED INSTITUTIONAL BUYERS OR ACCREDITED INVESTORS (EACH AS DEFINED HEREIN). IN ADDITION, EACH INITIAL PURCHASER OF THE BONDS WILL BE REQUIRED TO DELIVER AN INVESTOR LETTER SUBSTANTIALLY IN THE FORM ATTACHED HERETO AS APPENDIX H TO THE AUTHORITY AND THE TRUSTEE SIMULTANEOUSLY WITH ITS PURCHASE OF THE BONDS. See NOTICE TO INVESTORS and TRANSFER RESTRICTIONS herein and APPENDIX H FORMS OF INVESTOR LETTER attached hereto. THE BONDS DO NOT CONSTITUTE A DEBT OR LIABILITY OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF UNDER THE BOND INDENTURE, OTHER THAN THE AUTHORITY, BUT SHALL BE PAYABLE SOLELY FROM THE PAYMENTS AND OTHER AMOUNTS PROVIDED THEREFOR UNDER THE BOND INDENTURE. NEITHER THE STATE OF CALIFORNIA NOR THE AUTHORITY SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF, OR THE REDEMPTION PREMIUM, IF ANY, OR INTEREST ON THE BONDS, EXCEPT FROM THE FUNDS PROVIDED THEREFOR UNDER THE BOND INDENTURE, AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF, INCLUDING THE AUTHORITY, IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR THE REDEMPTION PREMIUM, IF ANY OR INTEREST ON THE BONDS. THE ISSUANCE OF THE BONDS SHALL NOT DIRECTLY OR 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 BOND 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 SCHOOLS (AS DEFINED HEREIN) IN ANY AMOUNT OR AT ANY TIME. INVESTMENT IN THE BONDS INVOLVES A SIGNIFICANT DEGREE OF RISK AND IS SPECULATIVE IN NATURE AS DESCRIBED UNDER CERTAIN RISK FACTORS HEREIN AND OTHER SECTIONS OF THIS LIMITED OFFERING MEMORANDUM. 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, as Bond Counsel to the Authority, the approval of certain matters for the Authority by the Honorable Xavier Becerra, Attorney General of the State of California, the approval of certain matters for the Underwriter by Kutak Rock LLP, Los Angeles, California, as Underwriter s Counsel and the approval of certain matters for the Borrower and relating to the Schools by Musick Peeler & Garrett LLP, Los Angeles, California. It is expected that the Bonds in definitive form will be available for delivery through the facilities of DTC in New York, New York, on or about December, Dated: December, 2017 * Preliminary, subject to change. Honorable John Chiang Treasurer of the State of California as Agent for Sale

2 MATURITY SCHEDULE $25,000,000 * CALIFORNIA SCHOOL FINANCE AUTHORITY CHARTER SCHOOL REVENUE BONDS (BRIGHT STAR SCHOOLS-OBLIGATED GROUP) SERIES 2017 $ % Term Bonds Priced to Yield % due [June 1, 2027] CUSIP $ % Term Bonds Priced to Yield % due [June 1, 2043] CUSIP $ % Term Bonds Priced to Yield % due [June 1, 2053] CUSIP * Preliminary, subject to change. CUSIP is a registered trademark of the American Bankers Association. CUSIP data herein is provided by CUSIP Global Services, managed by S&P Capital IQ on behalf of the American Bankers Association. This data is not intended to create a database and does not serve in any way as a substitute for the CUSIP Services. None of the Underwriter, the Authority, Bright Star or the Borrower is responsible for the selection or correctness of the CUSIP numbers set forth herein.

3 NOTICE TO INVESTORS The Bonds are to be offered and sold (including in secondary market transactions) only to Qualified Institutional Buyers or Accredited Investors (each as defined herein). The Bond Indenture under which the Bonds will be issued contains provisions limiting transfers of the Bonds and beneficial ownership interests in the Bonds only to Qualified Institutional Buyers or Accredited Investors. In addition, the face of each Bond will contain a legend indicating that it is subject to transfer restrictions as set forth in the Bond Indenture, and the initial purchasers of the Bonds will be required to execute and deliver to the Authority and the Trustee an investor letter in the form attached hereto as Appendix H simultaneously with their purchase of the Bonds. Each purchaser of any Bond or ownership interest therein will be deemed to have acknowledged, represented, warranted, and agreed with and to the Authority, the Borrower, the Underwriter and the Trustee as follows: 1. that the Bonds are payable solely from certain revenues derived by the Authority under the Loan Agreement from amounts received by the Trustee pursuant to the Intercept (as defined herein), and from certain funds and accounts established and maintained pursuant to the Bond Indenture; 2. that it is a Qualified Institutional Buyer or an Accredited Investor and that it is purchasing the Bonds for its own account and not with a view to, or for offer or sale in connection with any distribution thereof in violation of the Securities Act of 1933, as amended (the Securities Act ) or other applicable securities laws; 3. 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; 4. that none of the Authority or any of its Board members, officers or employees takes any responsibility for, and the purchaser is not relying upon any such parties with respect to the information appearing anywhere in this Limited Offering Memorandum, other than the information under the headings THE AUTHORITY, and ABSENCE OF MATERIAL LITIGATION The Authority (collectively, the Authority s Portion of this Limited Offering Memorandum) and that none of such parties have participated in the preparation of this Limited Offering Memorandum; 5. that the Bonds and beneficial ownership interests therein may only be transferred to Qualified Institutional Buyers or Accredited Investors; and 6. that the Authority, the Borrower, Bright Star, the Trustee, the Underwriter and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements. See TRANSFER RESTRICTIONS herein. 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. ii

4 The information set forth herein under the headings 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 Bright Star 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, Bright Star or the Borrower since the date hereof. The Authority has not reviewed any appraisal for the Project or any feasibility study or other financial analysis of the Project and has not undertaken to review or approve expenditures for the Project, to supervise the acquisition and renovation of the Project, or to obtain any financial statements of the Borrower and Bright Star. The Authority has not reviewed this Limited Offering Memorandum and is not responsible for any information contained herein, except for the information under the captions THE AUTHORITY and ABSENCE OF MATERIAL LITIGATION The Authority. 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 headings CERTAIN RISK FACTORS, and APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS 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. Neither the Borrower nor Bright Star 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. iii

5 Table of Contents INTRODUCTION... 1 General... 1 The Bonds... 2 Authority for Issuance... 2 Use of Proceeds... 3 Security for the Bonds... 3 Redemption... 8 Certain Risk Factors... 8 Miscellaneous... 8 THE AUTHORITY... 9 THE BONDS... 9 General... 9 Book-Entry-Only System Transfer of Bonds Exchange of Bonds Redemption Defeasance TRANSFER RESTRICTIONS ESTIMATED SOURCES AND USES OF FUNDS THE PROJECT VALOR ACADEMY HIGH SCHOOL (RENDERING) VALOR ACADEMY HIGH SCHOOL (SITE LAYOUT) Appraisals DEBT SERVICE SCHEDULE SECURITY AND SOURCES OF PAYMENT FOR THE BONDS 29 Limited Obligations of the Authority Payments Under the Bond Indenture, Loan Agreement and State Intercept Repair and Replacement Fund The Loan Agreement The Master Indenture Deeds of Trust on the Facilities The Leases Additional Leases Governed by the Master Indenture CHARTER SCHOOLS General Chartering Authority Elements of a Charter Petition Countywide Benefit Charter Schools Statewide Benefit Charter Schools Charter Management Organizations Charter Revocation Amendments to the Charter School Law STATE FUNDING OF EDUCATION General Allocation of State Funding to Charter Schools CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING EDUCATION REVENUES AND APPROPRIATIONS Limitations on Revenues Proposition Kindergarten Through Community Service Public Education Bond Act of Future Initiatives CERTAIN RISK FACTORS Sufficiency of Revenues Operating History; Reliance on Projections Dependence on State Payments That Are Subject to Annual Appropriation and Political Factors Possible Offsets to State Apportionment Default Under the Leases; No Assurance Regarding Subsequent Tenant80 Survival of Leases After a Bond Default and Foreclosure Additional Indebtedness and Additional School Indebtedness Addition and Removal of Members Reserve Account Tax Related Issues Factors That Could Affect the Security Interest in the Facilities; Superior Liens Construction Risks Limitations of Appraisal Limitations on Value of the Facilities and to Remedies Under the Mortgages Bankruptcy Factors Associated With the Schools Operations State Financial Difficulties Budget Delays and Restrictions on Disbursement of State Funds During a Budget Impasse Key Management Other Limitations on Enforceability of Remedies Specific Risks of Charter Schools Risk of Noncontinued Philanthropy or Grants Failure To Provide Ongoing Disclosure Use of the Facilities ABSENCE OF MATERIAL LITIGATION The Authority The Borrower TAX MATTERS APPROVAL OF LEGALITY LIMITED OFFERING OF BONDS CONTINUING DISCLOSURE UNDERWRITING MUNICIPAL ADVISOR FINANCIAL STATEMENTS MISCELLANEOUS APPENDIX A APPENDIX B APPENDIX C APPENDIX D APPENDIX E APPENDIX F APPENDIX G APPENDIX H CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS CONSOLIDATED AUDITED FINANCIAL STATEMENTS OF BRIGHT STAR EDUCATION GROUP AND BRIGHT STAR AND AFFILIATES FOR THE FISCAL YEAR ENDED JUNE 30, 2016 SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL BOND DOCUMENTS SUMMARY OF CERTAIN PROVISIONS OF THE LEASES FORM OF CONTINUING DISCLOSURE AGREEMENT BOOK-ENTRY SYSTEM FORM OF OPINION OF BOND COUNSEL FORMS OF INVESTOR LETTER iv

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7 $25,000,000* CALIFORNIA SCHOOL FINANCE AUTHORITY CHARTER SCHOOL REVENUE BONDS (BRIGHT STAR SCHOOLS-OBLIGATED GROUP), SERIES 2017 INTRODUCTION General * This Limited Offering Memorandum, including the cover page, the inside cover page, and the Appendices hereto (the Limited Offering Memorandum ), is provided to furnish information with respect to the sale and delivery of the California School Finance Authority Charter School Revenue Bonds (Bright Star Schools-Obligated Group), Series 2017, in the aggregate principal amount of $25,000,000* (the Bonds ) issued by the California School Finance Authority (the Authority ). As further described herein, Bright Star Education Group (the Borrower or BSEG ), a California nonprofit public benefit corporation and an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986 (the Code ), will borrow the proceeds of the Bonds for the purpose of, among other things, the acquisition, construction, improvement, furnishing and/or equipping of certain public charter school facilities (as more fully described herein, the Facilities ) to: (a) acquire a newly constructed campus for an existing high school ( Valor Academy High School or VAHS ) located at 9334, 9336 and 9356 Lemona Avenue, Los Angeles, California 91343, (b) acquire adjacent land and construct an athletic field for the new VAHS campus ( VAHS Athletic Field Property ) located at 9404 Lemona Avenue, Los Angeles, California 91343, and (c) construct a new campus for an existing middle school ( Stella Middle Charter Academy or SMCA ) on land that will be subleased subject to a 41-year ground lease agreement between Bethany Baptist Church of West Los Angeles ( SMCA Ground Lessor ), as Landlord and BSDG 4115 MLK LLC ( SMCA Landlord ) as Tenant, located at 4115 W. Martin Luther King, Jr. Boulevard, Los Angeles, California VAHS and SMCA are currently operated by Bright Star Schools ( Bright Star or the Lessee ), a California nonprofit public benefit corporation and an organization described in Section 501(c)(3) of the Code. Upon the issuance of the Bonds, the VAHS Athletic Field Property (as defined below) will be leased by Bright Star Development Group-9334 Lemona, LLC, a California limited liability company (the VAHS Landlord ), the sole member of which is the Borrower, to Bright Star pursuant to the VAHS Lease (as defined below). Without further action by either party effective as of the date the VAHS Landlord acquires title to the VAHS Campus (as defined below, and together with the VAHS Athletic Field Property, the VAHS Facility ) upon completion of construction, the VAHS Campus will be leased by the VAHS Landlord to Bright Star pursuant to the VAHS Lease. Upon the issuance of the Bonds, the SMCA Facility (as defined below) will be subleased by the SMCA Landlord to Bright Star pursuant to the SMCA Lease (as defined below). The Borrower is the initial Obligated Group Representative, and the Landlords are the initial Members of the Obligated Group. * Preliminary, subject to change.

8 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 a Bond Indenture, dated as of December 1, 2017 (the Bond Indenture ), between the Authority and Wilmington Trust, National Association, as trustee (the Trustee ). The Bonds will bear interest payable on June 1 and December 1 of each year, commencing June 1, 2018 (each such date, an Interest Payment Date ) and will be subject to optional, mandatory and extraordinary redemption prior to maturity as set forth under THE BONDS Redemption herein. The proceeds of the Bonds will be loaned to the Borrower pursuant to a Loan Agreement, dated as of December 1, 2017 (the Loan Agreement ), between the Authority and the Borrower and acknowledged by the Landlords. The Bonds and the interest thereon are payable solely out of certain revenues and income received by the Authority or the Trustee pursuant to the Loan Agreement and Obligation No. 1 relating to the Bonds ( Obligation No. 1 ) issued by the Borrower in an amount equal to the aggregate principal amount of the Bonds pursuant to a Master Indenture of Trust, dated as of December 1, 2017 (the Original Master Indenture ), as supplemented by a Supplemental Master Indenture for Obligation No. 1, dated as of December 1, 2017 (the Supplemental Master Indenture and, together with the Original Master Indenture, the Master Indenture ) each by and among the Borrower, as representative of the Obligated Group, the Landlords, as initial members of the Obligated Group, and Wilmington Trust, National Association, as master trustee thereunder (the Master Trustee ). See THE BONDS herein. The Facilities financed with proceeds of the Bonds will be leased to Bright Star pursuant to certain leases (the Leases ) between Bright Star and the Landlords. For information regarding Bright Star generally, see APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS attached hereto. For information regarding the Facilities to be financed with proceeds of the Bonds, see THE PROJECT herein. The Bonds will be issued in initial minimum denominations of $250,000 and any integral multiple of $5,000 in excess thereof and in fully registered form only and, when issued, will be registered in the name of Cede & Co., as nominee of The Depository Trust Company ( DTC ), and beneficial ownership interests in the Bonds are to be sold (including secondary market transactions) only to Qualified Institutional Buyers or Accredited Investors. Pursuant to the Bond Indenture, Qualified Institutional Buyer means a qualified institutional buyer as defined in Rule 144A promulgated under the Securities Act of 1933, as amended (the Securities Act ). Pursuant to the Bond Indenture, Accredited Investor means an accredited investor as defined in Regulation D of the Securities Act. The Bond Indenture and the Bonds contain provisions limiting transfers of the Bonds and beneficial ownership interests in the Bonds to Qualified Institutional Buyers or Accredited Investors. In addition, each initial purchaser of the Bonds and bondholder representative with respect to an initial purchase of the Bonds must execute a letter in the form of APPENDIX H FORMS OF INVESTOR LETTER in connection with its initial purchase of the Bonds. The face of each Bond will contain a legend indicating that such Bond is subject to the transfer restrictions set forth in the Bond Indenture. See TRANSFER RESTRICTIONS and CERTAIN RISK FACTORS Purchases and Transfers of Bonds Restricted to Qualified Institutional Buyers and Accredited Investors herein. Authority for Issuance The Bonds will be issued by the Authority pursuant to the Act, a resolution of the Authority, and the Bond Indenture. See THE AUTHORITY herein. 2

9 Use of Proceeds The proceeds of the Bonds will be used to: (a) acquire a newly constructed campus for an existing high school ( Valor Academy High School or VAHS ) located at 9334, 9336 and 9356 Lemona Avenue, Los Angeles, California ( VAHS Campus ), (b) acquire adjacent land and construct an athletic field for the new VAHS campus ( VAHS Athletic Field Property ) located at 9404 Lemona Avenue, Los Angeles, California 91343, (c) construct a new campus for SMCA ( Stella Middle Charter Academy or SMCA ) on land that will be subleased subject to a 41-year ground lease agreement between Bethany Baptist Church of West Los Angeles ( Bethany Baptist ), as Landlord and BSDG 4115 MLK LLC ( SMCA Landlord ) as Tenant, located at 4115 W. Martin Luther King, Jr. Boulevard, Los Angeles, California ( SMCA Campus ); (d) fund a debt service reserve account with respect to the Bonds; (e) pay capitalized interest on the Bonds through September 1, 2018; and (f) pay certain expenses incurred in connection with the issuance of the Bonds. The VAHS Facility will be used by Bright Star for the operation of Valor Academy High School ( VAHS ) and the SMCA Campus will be used by Bright Star for the operation of Stella Middle Charter Academy ( SMCA and, together with VAHS, the Schools ). The VAHS Campus, VAHS Athletic Field and SMCA Campus will be known as the Facilities. See THE PROJECT herein and APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS attached hereto. Certain proceeds of the Bonds will be held in escrow by the Trustee pursuant to the Bond Indenture and only made available to the Borrower for the Project upon the satisfaction of certain conditions, which must be met on or before December 1, See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Project Fund; Conditions to Release of Bond Proceeds herein. Security for the Bonds The Bonds are limited obligations of the Authority payable from Payments (defined herein) consisting primarily of all moneys received by the Trustee with respect to the Intercept (as defined herein), moneys received by the Authority or the Trustee pursuant to the Loan Agreement and Obligation No. 1 issued by the Borrower pursuant to the Master Indenture, and other amounts held in certain funds established by the Bond Indenture (except the Rebate Fund). See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS herein. Reserve Account On the date of issuance of the Bonds, $, constituting the Reserve Account Requirement for the Bonds, will be deposited in the Bond Reserve Subaccount of the Reserve Account ( Reserve Account ) created under the Indenture funded by proceeds of the Bonds. Amounts in the Reserve Account will be used and withdrawn by the Trustee solely for the purpose of making up any deficiency in the Interest Account or Principal Account that exists on the date when monies on deposit in the Interest Account or the Principal Account are required to be applied, as provided in the Bond Indenture, or (together with any other moneys available therefor) for the payment or redemption of all Bonds then Outstanding. The Reserve Account is anticipated to be sized at maximum annual debt service. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS herein. Obligated Group and Related Parties. The Authority will loan the proceeds of the Bonds to the Borrower. The Borrower has received a determination letter from the Internal Revenue Service recognizing it as an organization described in Section 501(c)(3) of the Code. The Borrower is the sole member of each of the Landlords. The VAHS 3

10 Landlord was formed on February 24, 2014 and has as its purpose owning the VAHS Facility. The SMCA Landlord was formed on August 23, 2017 and has as its purpose leasing the SMCA Facility and subleasing the SMCA Facility for the operation of SMCA. The Landlords are not expected to have any other assets or revenue available to make payments due under the Loan Agreement. Therefore, no financial information with respect to the Landlords is presented in this Limited Offering Memorandum. In connection with the issuance of the Bonds, the Landlords and the Borrower, on its own behalf and as the Obligated Group Representative, will enter into the Master Indenture with the Master Trustee. Under the Master Indenture, each member jointly and severally covenants and agrees (a) to pay or cause to be paid promptly all required payments at the place, on the dates and in the manner provided in the Master Indenture and related supplements and obligations, and (b) to faithfully observe and perform all of the conditions, covenants and requirements of the Master Indenture and related supplements and obligations. However, the liability of the Borrower for such payments is limited to Gross Revenues (as defined in the Indenture). The Landlords will initially be the only members of the Obligated Group. Although additional members may be added to the Obligated Group in connection with future projects and financings, the Borrower and Bright Star make no assurances that additional members will be added to the Obligated Group. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Master Indenture herein. [Remainder of page intentionally left blank] 4

11 The following diagram summarizes the relationships between the Borrower, the Landlords, Bright Star, and the Schools. Obligated Group Representative & Borrower Bright Star holds the charter for the Schools and is the tenant under the Leases. The Schools will initially be the only Obligated Group Schools, which is defined in the Master Indenture to be any charter school operated by Bright Star in a facility leased from a Member of the Obligated Group. Rent under the Leases is payable solely from the revenues derived from the Schools, and any future Obligated Group Schools. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Leases herein. Revenues generated from any other schools whose charters are held or that are operated or managed by Bright Star, or assets and revenues generated from sources other than the Related Projects (as defined in the Master Indenture), are not available for payment of Rent or otherwise available to the Authority, Master Trustee, Trustee or Bondholders. The Obligated Group Schools Valor Academy High School ( VAHS ) - A portion of the proceeds of the Bonds will be applied to finance the acquisition of a new charter school facility for VAHS, an existing public charter high school serving grades 9-12 in the North Hills neighborhood of the San Fernando Valley in North Los Angeles. The VAHS Campus is under construction and currently owned by PCSD 9334 Lemona LLC, a California limited liability company whose sole member is Pacific Charter School Development 5

12 ( PCSD ). Founded in 2004, PCSD is the largest nonprofit charter school facility developer on the West Coast and has developed, constructed and financed dozens of charter school facilities in California and the State of Washington for large CMOs to singe school operators. See THE PROJECT The VAHS Project herein. VAHS is expected to move into and begin operating at the VAHS Facility beginning August Construction of the VAHS Campus is expected to be substantially completed by June Construction of the VAHS Athletic Field is expected to be substantially completed by February See CERTAIN RISK FACTORS Construction Risks herein. For , VAHS currently operates on the 4 th floor of one of the main school buildings on the Panorama High School campus (a Los Angeles Unified School District school) located at 8015 Van Nuys Boulevard, Panorama City, CA Bright Star has been operating out of this site under a Prop. 39 lease since VAHS inception. The existing VAHS site at Panorama High School is about 2.1 miles from the new VAHS campus located at 9334 Lemona Avenue, North Hills, CA Stella Middle Charter Academy ( SMCA ) - A portion of the proceeds of the Bonds will be applied to finance the costs of the construction, improvement, furnishing and/or equipping of a charter school facility for SMCA, an existing public charter middle school serving grades 5-8 in the Westchester and West Adams neighborhoods of West Los Angeles (near LAX airport). SMCA is expected to move into and begin operating at the SMCA Campus beginning August Construction of the SMCA Campus is expected to be substantially completed by July See CERTAIN RISK FACTORS Construction Risks herein. For , SMCA currently operates on two split campuses: (1) Grades 5-6 are located at 2636 S. Mansfield Avenue, Los Angeles, on property owned by and adjacent to St. Agatha Catholic Church ( SMCA West Adams Campus ); and (2) Grades 7-8 are located at 5431 W. 98th St. Los Angeles, CA on a LAUSD owned school campus, formerly home to the now closed 98 th Street Elementary School ( SMCA LAX Campus ). The SMCA West Adams Campus and SMCA LAX Campus are about 7.1 miles apart from each other. Bright Star provides busing between these two sites. Founded in 1951 and located directly under the flight path of LAX airport, 98 th Street Elementary School was closed by LAUSD in the summer of 2004 due to declining enrollment and the threat of future LAX airport expansion plans. Bright Star began operations of SMCA and Bright Star Secondary Charter Academy ( BSSCA ) out of the former 98 th Street Elementary School site in and , respectively. In , SMCA (grades 7-8 only) and BSSCA (all grades 9-12) are currently co-located and operate out of the former 98 th Street Elementary School site. Bright Star expects to operate both SMCA and BSSCA out of the 98 th Street Elementary School site through the school year. Beginning in , SMCA will relocate the new SMCA campus facility and BSSCA will either relocate to another privately leased or Prop. 39 leased site in West Los Angeles. For more information about VAHS and SMCA, see APPENDIX A CERTAIN INFORMATION ABOUT THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS BRIGHT STAR SCHOOLS attached hereto. Bright Star Schools Bright Star Schools ( Bright Star ) is a California nonprofit public benefit corporation formed on November 7, 2002 and is headquartered in Los Angeles, California. Bright Star has received a determination letter from the Internal Revenue Service recognizing it as an organization described in Section 501(c)(3) of the Code. Bright Star operates the Schools and, as Lessee, will lease the Facilities 6

13 from the Landlords, as Lessor (the Lessor ), under the Leases, for use and occupancy by the Schools. However, Bright Star is not a party to the Loan Agreement or the Master Indenture, and Bright Star does not have any liability thereunder in respect to repayment of the Loan, Obligation No. 1 or the Bonds. Bright Star operates seven charter schools in Los Angeles, California serving Transitional Kindergarten ( TK ) through 12th grade. Bright Star currently holds seven charters from the Los Angeles Unified School District ( LAUSD ) serving approximately 2,800 students (for the school year) in the West Adams, Koreatown and Panorama City neighborhoods in Los Angeles, California. At full capacity, Bright Star intends to hold nine charters to serve approximately 4,400 students in TK through 12th grade. Bright Star founded its first school, Stella Middle Charter Academy ( SMCA ), as a fifth through eighth grade school, in August Bright Star subsequently added Bright Star Secondary Charter Academy ( BSSCA ), as a ninth through twelfth grade school, in August 2006, and Rise Kohyang Middle School ( RKMS ), as a sixth through eighth grade school, in August Valor Academy Middle School ( VAMS ) was opened by Hrag Hamalian (the current Executive Director of Bright Star), as a fifth through eighth grade school, in August The concept of merging Bright Star and VAMS was originally conceived in the summer of The leaders of both organizations continued to work closely together until deciding to formally merge the two organizations in January 2013, bringing VAMS under the management of Bright Star. In April 2013, LAUSD approved a material amendment to the charter of VAMS to allow the school to fall under the management of Bright Star. The merger of Bright Star and VAMS was a strategic and deliberate attempt by both organizations to grow their impact in Los Angeles, California and to strengthen organizational capacity by combining best-practices from both organizations. Bright Star opened VAHS in August 2013 based upon demand from VAMS families and community members that desired a high school option for their children. Bright Star opened two schools in the school year, Valor Academy Elementary School ( VAES ) to serve grades TK to fourth grade, which students will matriculate to VAMS, and Rise Kohyang High School ( RKHS ), as a ninth through twelfth grade school, which is fed by students from RKMS. [Remainder of page intentionally left blank] 7

14 The table below summarizes the schools within Bright Star s network. Grades at Full Enrollment BRIGHT STAR Summary of Charter Schools 1 st School Year Enrollment Projected Full Enrollment Charter Expires Charter School Authorizer West Adams Cluster Stella Middle Charter Academy /30/ LAUSD Bright Star Secondary Charter Academy /30/2021 LAUSD San Fernando Valley Cluster Valor Academy ES TK /30/2021 LAUSD Valor Academy MS /30/2019 LAUSD Valor Academy HS 1, /30/ LAUSD Koreatown Cluster Rise Kohyang MS /30/2021 LAUSD Rise Kohyang HS /30/2021 LAUSD Total Network 2,799 3,478 3 Source: Bright Star. 1 Obligated Group School. 2 VAHS is expected to reach full enrollment by Projected full enrollment does not include the opening of the two additional elementary schools (one in the West Adams Cluster planned for Fall 2019 and the other for the Koreatown Cluster planned for Fall 2020) that are projected to be opened in Fall Charter renewal petitions for SMCA and VAHS were submitted to LAUSD on October 10, The LAUSD Charter School Division has recommended that the charter renewal petitions be approved. LAUSD will vote on the charter renewal petitions on December 5, Bright Star anticipates that both charters will be renewed to 6/30/2023. For additional information on Bright Star, the Schools and other charter schools operated by Bright Star, see APPENDIX A CERTAIN INFORMATION ABOUT THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS BRIGHT STAR SCHOOLS ( BRIGHT STAR ). Redemption The Bonds will be subject to optional redemption, extraordinary redemption, and mandatory sinking fund redemption as described below under THE BONDS Redemption. Certain Risk Factors The Bonds may not be a suitable investment for all investors. Prospective purchasers of the Bonds should read this entire Limited Offering Memorandum, including the appendices and the information under the section CERTAIN RISK FACTORS before making an investment in the Bonds. Miscellaneous This Limited Offering Memorandum contains brief descriptions of, among other things, the Bonds, the Bond Indenture, the Loan Agreement, the Leases, the Master Indenture, Obligation No. 1, the 8

15 Borrower, Bright Star and the Schools. All references in this Limited Offering Memorandum to documents are qualified in their entirety by reference to such documents, and references to the Bonds are qualified in their entirety by reference to the form of the Bonds included in the Bond Indenture. Bright Star maintains a website providing additional information about itself and its operations. The information on such website is not included as part of, or incorporated by any reference in, this Limited Offering Memorandum. Any capitalized terms in this Limited Offering Memorandum that are not defined herein will have such meaning as given to them in the Bond Indenture. THE AUTHORITY The Authority is a public instrumentality of the State 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 Bond Indenture. 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 Bond Indenture for all of the provisions relating to the Bonds. The discussion herein is qualified by such reference. General The Bonds are being issued pursuant to the Bond Indenture in the aggregate principal amount set forth on the cover of this Limited Offering Memorandum. The Bonds will initially be delivered as registered Bonds in minimum denominations of $250,000 and any integral multiple of $5,000 in excess thereof ( Authorized Denominations ), and will be transferable and exchangeable only as set forth in the Bond Indenture and as described herein. See TRANSFER RESTRICTIONS herein. The Bonds will be dated the date of issuance and will bear interest at the rates 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 on the inside cover page hereof. The Bonds, when issued, will be registered in the name of Cede & Co., as nominee of DTC, and shall 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 Bond Indenture. So long as Cede & Co. is the registered owner of the Bonds, as nominee of DTC, references herein to the Bondholders, holders or registered owners shall mean Cede & Co. as aforesaid and shall not mean the beneficial owners of the Bonds. The principal and redemption price of and interest on the Bonds shall 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 shall 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 $1,000,000 or more in an aggregate principal amount of the Bonds shall 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 shall designate in writing to the Trustee by the first Record Date for such payment. So long as Cede & Co. is the registered 9

16 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 DTC. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Bondholder on such Record Date and shall be paid to the person in whose name the Bond is registered at the close of business on a Special Record Date for the payment of such defaulted interest. The Special Record Date shall be fixed by the Trustee, notice thereof being given to the Bondholders not less than 10 days prior to such Special Record Date. Book-Entry-Only System DTC will act as securities depository for the Bonds. The Bonds will be issued as fully registered securities without coupons in Authorized Denominations. The Bonds will be registered in the name of Cede & Co., as nominee of DTC or such other name as may be requested by an authorized representative of DTC. One fully registered Bond certificate will be issued for each maturity of a Series of Bonds set forth on the inside cover of this Limited Offering Memorandum, and will be deposited with DTC. For additional information regarding DTC and its book-entry only system, see APPENDIX F-BOOK- ENTRY SYSTEM attached hereto. Transfer of Bonds The registration of any Bond may, in accordance with its terms, be transferred, upon the books required to be kept, by the person in whose name it is registered, in person or by his or her duly authorized attorney, upon surrender of such Bond for cancellation, accompanied by delivery of a written instrument of transfer in a form acceptable to the Trustee, duly executed. The Trustee shall require the payment by the Holder requesting such transfer of any tax or other governmental charge required to be paid with respect to such transfer, and there shall be no other charge to any Holder for any such transfer. The Bonds are subject to certain transfer restrictions under the Bond Indenture, as described herein under TRANSFER RESTRICTIONS. Exchange of Bonds Bonds may be exchanged at the principal corporate trust office of the Trustee for a like aggregate principal amount of the Bonds of the same maturity of other Authorized Denominations. The Trustee shall require the payment by the Holder requesting such exchange of any tax or other governmental charge required to be paid with respect to such exchange, and there shall be no other charge to any Holder for any such exchange. No exchange of Bonds shall be required to be made during the period established by the Trustee for selection of Bonds for redemption and after a Bond has been selected for redemption. Redemption Optional Redemption. The Bonds maturing on and after June 1, 2027 * are subject to redemption prior to their respective stated maturities, at the option of the Borrower, from any amounts in the Redemption Fund, in whole or in part on any date on or after June 1, 2027 *, at a redemption price equal to 100% of the principal amount of Bonds called for redemption, plus accrued interest to the date fixed for redemption, without premium. Extraordinary Optional Redemption From Insurance and Condemnation Proceeds. The Bonds are subject to redemption prior to their respective stated maturities, at the option of the Borrower, as a * Preliminary, subject to change. 10

17 whole or in part on any date from moneys required to be transferred from the Insurance and Condemnation Proceeds Fund to the Special Redemption Account at a redemption price equal to the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium. Extraordinary Optional Construction Related Redemption. The Bonds are subject to redemption in part prior to their respective stated maturities, at the option of the Borrower, from amounts transferred from the Project Fund following Completion of the Project, at a redemption price equal to the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium. Extraordinary Mandatory Redemption from Escrowed Project Proceeds. The Bonds are subject to redemption prior to their stated maturity, in whole or in part, on any date on or before January 1, 2020, from escrowed proceeds of the Bonds transferred to the Redemption Fund from the VAHS Acquisition Account or the SMCA Account of the Project Fund as described under SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Bond Indenture Project Fund; Conditions to Release of Bond Proceeds herein, in accordance with the Bond Indenture, at a redemption price equal to 100% of the principal amount of the Bonds called for redemption plus interest accrued thereon to the date fixed for redemption, without premium, on the earliest date for which notice of redemption can reasonably be given in accordance with the Bond Indenture. Extraordinary Mandatory Redemption Due to Prohibited Use. The Bonds are subject to redemption prior to their stated maturity, as a whole or in part, on any date from Loan prepayments made by the Borrower in the event the Project is used or operated in any manner that violates the provisions of the Act, at a redemption price equal to the principal amount thereof together with interest accrued thereon to the date fixed for redemption, without premium. Mandatory Sinking Account Redemption. * The Bonds are subject to redemption prior to their respective stated maturities in part, by lot, from Mandatory Sinking Account Payments pursuant to the Bond Indenture. Subject to the terms and conditions set forth in the Bond Indenture, the Term Bonds shall be redeemed (or paid at maturity, as the case may be) by application of Mandatory Sinking Account Payments in the following amounts and on the following dates: (i) Term Bonds maturing on June 1, 20 that are issued in an initial principal amount of $ : Mandatory Redemption Date (June 1) Principal Amount + Maturity Notice of Redemption. In connection with the redemption of the Bonds pursuant to the Bond Indenture, the Borrower shall give notice of redemption to the Trustee (with a copy to the Authority) not less than thirty twenty (20) days prior to the redemption date. Notice of redemption of any Bonds shall be given by the Trustee upon such written request of the Borrower. Notice of any redemption of Bonds shall be mailed postage prepaid by the Trustee, not less than twenty (20) days nor more than sixty (60) days prior to the redemption date by first-class mail to the respective Holders thereof at the addresses 11

18 appearing on the bond registration books described in the Bond Indenture. Each notice of redemption shall contain all of the following information: (i) the date of such notice; (ii) the name of the Bonds and the date of issue of the Bonds; (iii) the redemption date; (iv) the redemption price; (v) the dates of maturity of the Bonds to be redeemed; (vi) if less than all of the Bonds of any maturity are to be redeemed, the distinctive numbers of the Bonds of each maturity to be redeemed; (vii) in the case of Bonds 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 such redemption is conditioned upon the receipt by the Trustee, on or prior to the redemption date, of moneys sufficient to pay the redemption price or upon the happening of such other event as shall be specified therein, and if such moneys shall not have been so received said notice shall be rescinded and the redemption shall be cancelled; (xi) a statement that any such redemption notice can be rescinded as provided in the Bond Indenture; and (xii) notice that further interest on such Bonds, if any, will not accrue from and after the designated redemption date. Such redemption notices may state that no representation is made as to the accuracy or correctness of the CUSIP numbers provided therein or on the Bonds. If money is not received as described in the Bond Indenture, the Trustee, within a reasonable time after the date on which such redemption was to occur, shall give notice to the persons and in the manner in which the notice of redemption was given, that such moneys were not so received and that there will be no redemption of the Bonds pursuant to the notice of redemption. Failure of the Trustee to give such notice or any defect therein shall not in any way impair or affect the validity of the proceedings for redemption. Conditional Notice. Any notice of optional redemption may state that such redemption shall be conditioned ( Conditional Notice ) upon the receipt by the Trustee on or prior to the date fixed for such redemption of moneys sufficient to pay the principal of, premium, if any, and interest on such Bonds to be redeemed or upon the occurrence of such other event or condition as shall be set forth in such Conditional Notice, and that, if such moneys shall not have been so received, or if such other event or condition shall have occurred or failed to occur (as the case may be), such Conditional Notice shall be of no force and effect and the redemption of the Bonds specified in the Conditional Notice shall no longer be required. The Trustee shall within a reasonable time thereafter give notice, in the manner in which the original Conditional Notice was given, of the cancellation of such redemption. Effect of Notice. A certificate of the Trustee or the Borrower that notice of call and redemption has been given to Holders and as may be further required in the Continuing Disclosure Agreement as herein provided shall be conclusive as against all parties. The actual receipt by the Holder of any Bond or any other party of notice of redemption shall not be a condition precedent to redemption, and failure to receive such notice, or any defect in the notice given, shall not affect the validity of the proceedings for the redemption of such Bonds or the cessation of interest, if any, on the date fixed for redemption. Notice of redemption having been given, and the redemption price of the Bonds called for redemption being on deposit or otherwise available to the Trustee, the Bonds designated for redemption shall become due and payable on the specified redemption date and interest, if any, shall 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 shall 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 written notice, or oral notice, promptly confirm by written notice, from the Borrower that the Borrower has cured the conditions that caused the Bonds to be subject 12

19 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 to the Holders of the Bonds so called for redemption, with a copy to the Trustee. Notice of rescission of redemption shall 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 shall not be a condition precedent to rescission, and failure to receive such notice or any defect in such notice shall not affect the validity of the rescission. Funds for Redemption. Prior to or on the redemption date of any Bonds there shall be available in the Redemption Fund, or held in trust for such purpose as provided by law, monies for the purpose and sufficient to redeem, at the premiums payable as in the Bond Indenture provided, the Bonds designated in said notice of redemption. Such monies so set aside in the Redemption Fund or in the escrow fund established for such purpose shall be applied on or after the redemption date solely for payment of principal of and premium, if any, on the Bonds to be redeemed upon presentation and surrender of such Bonds, provided that all monies in the Redemption Fund shall be used for the purposes established and permitted by law. Any interest due on or prior to the redemption date shall be paid from the Redemption Fund, unless otherwise provided for to be paid from an escrow fund established for such purpose. If, after all of the Bonds have been redeemed and cancelled or paid and cancelled, there are monies remaining in the Redemption Fund or otherwise held in trust for the payment of redemption price of the Bonds, said monies shall be held in or returned or transferred to the Redemption Fund for payment of any outstanding Bonds of the Borrower payable from said fund; provided, however, that if said monies are part of the proceeds of refunding Bonds of the Borrower, said monies shall be transferred to the fund created for the payment of principal of and interest on such Bonds. If no such refunding Bonds of the Borrower are at such time outstanding, said monies shall be transferred to the general fund of the Borrower as provided and permitted by law. Selection of Bonds for Redemption. When any redemption is made pursuant to any of the provisions of the Bond Indenture and less than all of the Outstanding Bonds are to be redeemed, the Trustee shall 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 shall be specified in a Request of the Borrower and the Mandatory Sinking Account Payments shall be reduced pro-rata. In no event shall 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 shall assign to such Bonds a distinctive number for each such principal amount and, in selecting Bonds for redemption by lot, shall treat such amounts as separate Bonds. The Trustee shall promptly notify the Authority and the Borrower in writing of the numbers of the Bonds selected for redemption. Outstanding when used as of any particular time with reference to Bonds, means all Bonds theretofore, or thereupon being, authenticated and delivered by the Trustee under the Bond Indenture except (a) Bonds theretofore canceled by the Trustee or surrendered to the Trustee for cancellation; (b) Bonds with respect to which all liability of the Authority shall have been discharged in accordance with the Bond Indenture; and (c) Bonds for the transfer or exchange of which, or in lieu of or in substitution for which, other Bonds shall have been authenticated and delivered by the Trustee pursuant to the Bond Indenture. Defeasance Discharge of Bond Indenture. Bonds may be paid or caused to be paid in any of the following ways, provided any other sums payable under the Bond Indenture have also been paid or caused to be paid: (a) by paying or causing to be paid the principal of and interest on the Bonds Outstanding as and 13

20 when the same become due and payable; (b) by depositing with the Trustee, in trust, at or before maturity, money or securities in the necessary amount (as provided in the Bond Indenture) to pay or redeem Bonds Outstanding; or (c) by delivering to the Trustee, for cancellation by it, all Bonds Outstanding. If all Bonds then Outstanding are paid or caused to be paid as provided above and all other sums payable under the Bond Indenture shall also be paid or caused to be paid, and if the Borrower shall have paid all Additional Payments and any indemnification owed to the Authority and any other fees and expenses payable to the Authority pursuant to the Loan Agreement, then and in that case, at the election of the Borrower (evidenced by a Certificate of the Borrower, filed with the Trustee, signifying the intention of the Authority to discharge all such indebtedness and the Bond Indenture), and notwithstanding that any Bonds shall not have been surrendered for payment, the Bond Indenture and the pledge of Payments made under the Bond Indenture and all covenants, agreements and other obligations of the Authority under the Bond Indenture shall cease, terminate, become void and be completely discharged and satisfied, except only as provided in the Bond Indenture. In such event, upon request of the Borrower, the Trustee shall cause an accounting for such period or periods as may be requested by the Borrower to be prepared and filed with the Borrower and shall execute and deliver to the Borrower all such instruments as may be necessary or desirable to evidence such discharge and satisfaction, and the Trustee shall pay over, transfer, assign or deliver to the Borrower all moneys or securities or other property held by it pursuant to the Bond 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 (as provided in the Bond Indenture) 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, 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; provided further, however, that the provisions of the Bond Indenture shall apply in all events. The Bonds may at any time be surrendered to the Trustee for cancellation by the Authority or the Borrower, which Bonds may have been 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 Bond 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 Bond Indenture) shall 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 shall 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 shall have been irrevocably instructed (by the terms of the Bond Indenture or by Request of the Borrower or the Authority) to apply such money to the payment of such principal of and interest on such Bonds and provided, further, that the Trustee shall have received (i) an Opinion of Bond Counsel to the effect that such deposit shall not cause interest on the 14

21 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 Trustee 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 Bond Indenture. Notwithstanding any provision of the Bond Indenture, and subject to applicable escheat laws, any moneys (including interest thereon) 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 Bond 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 Bond 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 Borrower) 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. TRANSFER RESTRICTIONS The Bonds may not be registered in the name of, or transferred to, and the Beneficial Owner cannot be, any person except an Accredited Investor or a Qualified Institutional Buyer; provided however, Bonds registered in the name of DTC or its nominee shall be deemed to comply with this Section so long as each beneficial owner of the Bonds is an Accredited Investor or a Qualified Institutional Buyer. The foregoing limitation shall cease to apply (without notice to or consent of any Bondholder) upon and after receipt by the Trustee from the Borrower of a rating letter by Fitch, S&P or Moody s indicating that the Bonds are rated A- or A3, as applicable, or better. The Trustee shall as soon as practicable, but in no event more than ten calendar days after receipt by the Trustee of such information, notify each Bondholder that (i) the restrictions set forth in the Bond Indenture requiring that the Beneficial Owners of the Bonds be Qualified Institutional Buyers or Accredited Investors shall be of no further force or effect and (ii) the Authorized Denominations shall be $5,000 and any multiple in excess thereof. Pursuant to the Bond Indenture, Qualified Institutional Buyer means a qualified institutional buyer as defined in Rule 144A promulgated under the Securities Act. Pursuant to the Bond Indenture, Accredited Investor means an accredited investor as defined in Regulation D promulgated under the Securities Act. See CERTAIN RISK FACTORS Purchases and Transfers of Bonds Restricted to Qualified Institutional Buyers and Accredited Investors herein. In addition, the face of each Bond will contain a legend indicating that it is subject to transfer restrictions as set forth in the Bond Indenture. See CERTAIN RISK FACTORS Purchases and Transfers of Bonds Restricted to Qualified Institutional Buyers and Accredited Investors herein. On or prior to the date of delivery of the Bonds, the initial purchasers of the Bonds will be required to execute and deliver to the Authority and the Trustee an investor letter in the form attached hereto as APPENDIX H. [Remainder of page intentionally left blank] 15

22 ESTIMATED SOURCES AND USES OF FUNDS The following table sets forth the estimated sources and uses of funds related to the Bonds. Sources: Bond Principal Borrower Equity Contribution 1 Net Original Issue Premium Total Sources: Series 2017 Bonds Uses: Project Fund VAHS Acquisition Account VAHS Athletic Field Account SMCA Account Deposit to Capitalized Interest Fund 2 Deposit to Debt Service Reserve Account Costs of Issuance 3 Total Uses 1 Provided from relocation funds provided under the Comprehensive Settlement and Release Agreement dated August 3, 2017 entered into with the Board of Airport Commissioners of the Department of Airports for the City of Los Angeles ( LAWA ). See THE PROJECT The SMCA Project. 2 Capitalized interest through September 1, * 3 Includes legal, printing, underwriting discount and other professional fees and other miscellaneous costs of issuance. General THE PROJECT The proceeds of the Bonds will be used to (i) finance and refinance the costs of the acquisition, construction, improvement, equipping and/or furnishing of the Facilities; (ii) fund a debt service reserve account for the Bonds; (iii) fund capitalized interest on the Bonds through September 1, 2018; and (iv) pay certain costs of issuance of the Bonds (the Project ). See ESTIMATED SOURCES AND USES OF FUNDS above. The Project is comprised of the VAHS Project and the SMCA Project (each as described below). Bright Star expects to lease the Facilities from the Landlords pursuant the Leases. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Leases herein and APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS attached hereto. The VAHS Project The VAHS Project consists of the acquisition, construction, improvement, furnishing and/or equipping of the VAHS Campus, which consists of (i) a 2.3 acre parcel of land located at 9334, 9336 and 9356 Lemona Avenue, Los Angeles, California 91343, originally improved with three single family homes and several ancillary structures (the VAHS Campus Property ), and (ii) a acre parcel * Preliminary, subject to change. 16

23 residential property located at 9404 Lemona Avenue, Los Angeles, California 91343, located adjacent to the north of the VAHS Campus Property (the VAHS Athletic Field Property and, together, with the VAHS Campus Property, the VAHS Facility ). The existing homes and other improvements on the VAHS Campus Property have been demolished and are being replaced with an approximately 30,000 square foot two-story building consisting of classrooms, a multi-purpose room, a counseling center, a special education center, a teacher s lounge, administrative offices, and an outdoor lunch courtyard. VAHS will be operated at the VAHS Campus Property by Bright Star. The VAHS Campus will accommodate approximately 500 students in grades 9 through 12 and related faculty and administrative staff. Based on building code regulations, the VAHS Campus is anticipated to have a maximum occupancy in excess of 500 students and 42 staff. The VAHS Athletic Field Property will be improved for use by the VAHS Landlord as an artificial turf athletic field. Pacific Charter School Development, Inc. (the PCSD ) entered into that certain Purchase and Sale Agreement and Escrow Instruction dated October 26, 2015 (as amended and assigned from time to time, the Granberg Purchase Agreement ), by and between PCSD, as buyer thereunder, and Arne R. Granberg and Gloria M. Granberg, each individually and each as trustee of the Granberg Family Trust, and Andrew and Karyne Bienvenue (collectively, the Land Sellers ), as sellers thereunder, pursuant to which PCSD agreed to purchase the VAHS Campus Property from the Land Sellers. PCSD entered into the Granberg Purchase Agreement in order to develop the property for the Borrower and to lease the VAHS Campus Property with an option to purchase to Bright Star. On January 17, 2017, PCSD 9334 Lemona Ave LLC ( PCSD LLC ), a California limited liability company the sole member of which is PCSD, completed the purchase and sale of the VAHS Campus Property under the Granberg Purchase Agreement. The costs of the design, entitlement and construction of the VAHS Campus Property have been financed by PCSD LLC, certain equity contributions of BSEG and a $1,500,000 grant from Great Public Schools Now ( GPSN ). PCSD LLC, as landlord, entered into a Lease Agreement with Bright Star, as tenant, on April 11, 2016 (as amended by the First Amendment to Lease, dated June 23, 2017, the PCSD Campus Property Lease Agreement ), and an Amended and Restated Development Agreement (the PCSD Campus Property Development Agreement ) with Bright Star, on June 23, 2017, with the intent of constructing the VAHS Campus Property for Bright Star. Under such PCSD Campus Property Lease Agreement, PCSD is constructing and financing the VAHS Campus Property and leasing it to Bright Star until June 30, Under the Amended and Restated Option Agreement, dated as of June 23, 2017 (the Option Agreement ), by and among the VAHS Landlord (under its original name, Bright Star Development Group, LLC), PCSD LLC, and PCSD, the VAHS Landlord has the option to purchase the VAHS Campus facility from PCSD until June 30, Bright Star determined that under current market conditions it was advantageous to exercise such option early and to purchase the SMCA Campus Property upon the completion of construction, instead of leasing the VAHS Campus Property from PCSD pursuant to the PCSD Campus Property Lease Agreement. Bright Star plans to exercise its rights under the Option Agreement and purchase the VAHS Campus Property upon the completion of construction of the VAHS Campus Project. Concurrently with the purchase of the VAHS Campus Property by Borrower, both the PCSD Campus Property Development Agreement and PCSD Campus Property Lease Agreement terminate. The purchase price of the option will be determined based on the total costs incurred by PCSD or PCSD LLC for the acquisition of the VAHS Campus Property and the development of the VAHS Campus Project, including all acquisition costs, hard costs, soft costs, replacement reserve amount and financing costs, less certain credits for rents paid by the VAHS Landlord or Bright Star under the PCSD Campus Property Lease Agreement, net of certain expenses and offsets. 17

24 The completion of the construction of the VAHS Campus Property, the purchase of the VAHS Campus Property by the VAHS Landlord, the conveyance of deed of trust on the VAHS Campus Property in favor of the Bond Trustee, and the provision to the Bond Trustee of a title policy with respect to the VAHS Campus Property are conditions to the release of Bond proceeds from the VAHS Acquisition Account. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Project Fund; Conditions to Release of Bond Proceeds herein. Great Public Schools Now ( GPSN ) is a California not-for-profit organization dedicated to ensuring all Los Angeles students receive a high-quality education by accelerating the growth of highquality public schools. To help support the growth of such schools, GPSN grants fund the identification and development of new charter school facilities, efforts to recruit and prepare public school teachers and provide support and coaching to public school leaders, and efforts to deepen the conversations between educators and families to create more collaboration and public participation in creating more high-quality public schools. PCSD was awarded the first facility grant from GPSN for the VAHS Campus Property in the amount of $1,500,000 that was distributed upon the receipt of the building permits for the VAHS Campus Property. PCSD and Bright Star transferred this grant to the Borrower for inclusion in the VAHS Campus Property. On September 6, 2017, the VAHS Landlord entered into a Residential Purchase Agreement and Joint Escrow Instructions (the VAHS Athletic Field Property PSA ), pursuant to which the VAHS Landlord has agreed to purchase the VAHS Athletic Field Property from Itzik Alon and Chaim Alon for a purchase price of $1,195,000. The VAHS Athletic Field Property is a acre parcel residential property located 9404 Lemona Avenue, Los Angeles, California, adjacent to the north of the VAHS Campus Property. Pursuant to the VAHS Athletic Field Property PSA, the acquisition of the VAHS Athletic Field Property must close by December 26, The acquisition of the VAHS Athletic Field Property is expected to occur concurrently with the issuance of the Bonds by no later than December 26, Upon acquisition of the VAHS Athletic Field Property, fee ownership of the VAHS Athletic Field Property is to be vested in the VAHS Landlord. Concurrently therewith, PCSD and the Borrower entered into a Project Management Agreement pursuant to which PCSD will provide project management services with respect to the design, entitlement, development, construction and completion of the VAHS Athletic Field Property (the PCSD Professional Services Agreement ). The negotiation of a guaranteed maximum price contract from a licensed contractor with respect to the VAHS Athletic Field and obtaining building permits and a conditional use permit related to the charter school facilities to be located thereon are conditions to the release of Bond proceeds from the VAHS Athletic Field Account. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Project Fund; Conditions to Release of Bond Proceeds herein. [Remainder of page intentionally left blank] 18

25 The following table indicates the anticipated costs for the VAHS Project. VAHS CAMPUS VAHS ATHLETIC FIELD COST DESCRIPTION TOTAL Acquisition Costs $4,132, $1,217, $5,439, Hard Costs New Construction $6,164, $6,164, Sitework $564, , Offsite Construction 20, , Utilities Installation and Other 1 174, , , Sub-Total Hard Costs $6,338, $713, $7,051, Soft Costs Architecture & Engineering $452, $43, $495,500 Entitlements & Due Diligence 106, , , Environmental Reports & 52, , Assessments 83, Inspections & Local Fees 2 286, , , Insurance, Security & Other 3 280, , , Development Fee 455, , , Sub-Total Soft Costs $1,633, $288, $1,921, Financing Costs $629, $629, Contingency Hard Cost Contingency $629, $57, $686, Soft Cost Contingency 37, , , Sub-Total Contingency $666, $77, $743, TOTAL PROJECT BUDGET $13,400, $2,295, $15,695, Source: Bright Star. 1 Utilities installation, environmental remediation, School start-up costs, payment and performance bond, and other hard costs. 2 Local fees, LEED certifications, inspections, and other special inspections. Local fees include plan check fees payable to the Los Angeles Department of Building and Safety (LADBS). 3 Builder's risk insurance, property and liability insurance, pre-occupancy security, legal costs and additional projectrelated fees. 19

26 The following graphics show the proposed VAHS Facility (excluding the VAHS Athletic Field). VALOR ACADEMY HIGH SCHOOL (RENDERING) VALOR ACADEMY HIGH SCHOOL (SITE LAYOUT) 20

27 VAHS Project Team Description. The Borrower has selected the team listed below for the VAHS Project. Developer: Founded in 2004, PCSD ( is a non-profit developer of charter school facilities based in Los Angeles. It was founded in 2004 with seed capital from NewSchools Venture Fund, and it has subsequently received funding from several other high-profile donors including The Broad Foundation, The Walton Family Foundation, and The Bill and Melinda Gates Foundation. PCSD has helped develop facilities for Alliance for College-Ready Public Schools, Aspire Public Schools, Green Dot Public Schools, Inner City Education Foundation, KIPP Los Angeles, Partnerships to Uplift Communities, Fenton Charter Public Schools, Equitas Academy Charter Schools, and Environmental Charter Schools. Architect: NAC Architecture ( was founded in 1979 and has offices in Los Angeles and Washington. The firm has won over 230 design and industry awards in its history and was ranked 6 th among U.S. K-12 design firms by Building Design and Construction magazine in They have designed charter and district school buildings in many southern California cities including Los Angeles, Anaheim, Burbank, Glendale, Norwalk, and Yorba Linda. Contractor: Blackwell Construction Inc. ( is a full service general contractor in the Los Angeles area that was founded in The firm is led by Gary B. Blackwell, a third-generation contractor with 35 years of experience constructing commercial, industrial, residential, and educational buildings. Blackwell Construction has built 22 charter school campuses in the last seven years, including projects for the Alliance for College-Ready Public Schools, Aspire Public Schools, Green Dot Public Schools, and KIPP Los Angeles, as well as Bright Star s Valor Academy Middle School. VAHS Campus Project Construction Contract. PCSD LLC has negotiated a guaranteed maximum price contract dated as of May 8, 2017 with Blackwell Construction, Inc. (the Contractor ) for the construction of the VAHS Campus Project (the VAHS Campus Construction Contract ). The Guaranteed Maximum Price ( GMP ) for the construction of the VAHS Campus Project pursuant to the VAHS Construction Contract is $6,164,222. [Remainder of page intentionally left blank] 21

28 VAHS Approvals; VAHS Project Timeline. The Borrower obtained a Conditional Use Permit ( VAHS Campus CUP ) for its use of the VAHS Campus as a school. The VAHS Campus CUP was approved by the City of Los Angeles on September 22, 2016 and all appeal periods have expired without objection. The Borrower filed its request for a Conditional Use Permit (the VAHS Athletic Field CUP ) for its use of the VAHS Athletic Field Property, which is currently zoned for residential use, under an expedited process on November 15, The Borrower held an intake meeting with the City of Los Angeles Planning Commission. A public hearing before the City of Los Angeles Planning Commission will be required as a part of the process of obtaining the VAHS Athletic Field CUP. After a letter of determination is published with regards to the VAHS Athletic Field CUP, there is an appeal period of 15 days and any interested party can appeal. The Borrower anticipates that the VAHS Athletic Field CUP process will be complete by May of After receiving approval for the VAHS Athletic Field CUP, the architect will submit a Plan Check with the Department of Building and Safety ( DBS ). The Borrower anticipates that building permits for the VAHS Athletic Field Property will be received by August The following table indicates the anticipated construction timeline for the VAHS Project. Current Development & Construction Timeline 1 Milestone Event Date VAHS Campus Construction Begins May 2017 Bond Closing and Acquisition of VAHS Athletic Field Property December 2017 VAHS Campus Project Construction Completed August 2018 VAHS Athletic Field Permits Obtained August 2018 VAHS Campus Project Move-In August 2018 VAHS Athletic Field Construction Begins October 2018 VAHS Athletic Field Construction Completed February 2019 Source: Bright Star. 1 The dates in the Current Development & Construction Timeline table are based on assumptions about meeting certain milestones. In the event of a construction delay, the Borrower anticipates being able to operate out its current Proposition 39 location at Panorama High School until June 30, 2018 and the Current Development & Construction Timeline above would need to be adjusted. See CERTAIN RISK FACTORS Construction Risks herein. Environmental Inspections VAHS Campus. Placeworks ( Placeworks ) performed a Phase I Environmental Site Assessment and Focused Phase II Investigation ( VAHS Campus Phase I and Phase II ESA ) of the VAHS Campus dated December 8, The VAHS Campus Phase I and Phase II ESA revealed no recognized environmental conditions except for the following: (a) former agricultural land use: organochloride pesticides were used and soil sampling found dieldrin to be present in amounts that exceeded the level established for the protection of human health; (b) historical pesticide releases: pesticides used by a farmer were stored in a wooden shed and the property owner recounted two times pesticides were released in the shed, and soil sampling in the shed found dieldrin to be present in amounts that exceed the level established for the protection of human health; and (c) the existing buildings at the Facility may contain Lead-Based Paint and Asbestos-Containing Materials. Placeworks has made recommendations with respect to the remediation of the LBP and ACM during the demolition of the existing improvements on the VAHS Campus, and has additionally made recommendations with respect 22

29 to the remediation of the soil at the VAHS Campus. Alta Environmental ( Alta ) performed an Asbestos and Lead Survey Report of the VAHS Campus dated February 14, Alta identified ACM and LBP on the VAHS Campus and made recommendations with regards to removal of the ABM and LBP. PCSD and the Borrower notified contractors and subcontractors performing the work about the results of the VAHS Campus Phase I and Phase II ESA and the Asbestos and Lead Survey Report and is following all recommendations of Placeworks. The ABM were removed by Resource Environmental, Inc., which issued a Certificate of Completion on April 14, The report prepared in connection with such assessments or investigations speak only as of their date, and such reports are subject to the limitations specified therein, as well as to the general limitation that no environmental assessment can completely eliminate uncertainty regarding the potential for recognized environmental conditions, and related costs, in connection with the VAHS Campus. See CERTAIN RISK FACTORS Limitations on Value of the Facilities and to Remedies Under the Mortgages herein. Environmental Inspections VAHS Athletic Field Property. Placeworks performed a Phase I Environmental Site Assessment ( VAHS Athletic Field Phase I ESA ) of the VAHS Athletic Field Property dated October 12, The VAHS Athletic Field Phase I ESA revealed no recognized environmental conditions except that the existing buildings at the VAHS Athletic Field Property may contain Lead-Based Paint and Asbestos-Containing Materials. Placeworks has made recommendations with respect to the remediation of the LBP and ACM during the demolition of the existing improvements on the VAHS Athletic Field Property. The report prepared in connection with such assessments or investigations speak only as of their date, and such reports are subject to the limitations specified therein, as well as to the general limitation that no environmental assessment can completely eliminate uncertainty regarding the potential for recognized environmental conditions, and related costs, in connection with the VAHS Athletic Field Property. See CERTAIN RISK FACTORS Limitations on Value of the Facilities and to Remedies Under the Mortgages herein. The SMCA Project The SMCA Project consists of the development, construction, improvement, leasing and furnishing of leasehold improvements located on a vacant 0.85 acre portion (the SMCA Site ) of a 3.0 acre parcel of land located at 4115 W. Martin Luther King, Jr. Boulevard, Los Angeles, California The SMCA Landlord entered into a Lease Agreement, dated as of September 1, 2017 (the Original Lease Agreement with Bethany Baptist Church of West Los Angeles (the SMCA Ground Lessor ), as amended by the First Amendment to Lease Agreement, dated as of October 27, 2017 (the Lease Amendment and, together with the Original Lease Agreement, the SMCA Ground Lease ). The SMCA Site is expected to be improved with a 30,820 square foot three-story building consisting of classrooms, a multi-purpose room, a counseling center, a special education center, a teacher s lounge, administrative offices, and an outdoor lunch courtyard (the SMCA Building and, together with the SMCA Site, the SMCA Facility ). SMCA will be operated at the SMCA Facility by Bright Star. The SMCA Facility will accommodate approximately 500 students in grades 5 through 8 and related faculty and administrative staff. Based on building code regulations, the SMCA Facility is anticipated to have a maximum occupancy in excess of 500 students and 42 staff. Pursuant to the SMCA Ground Lease (as defined below), the SMCA Landlord leases the SMCA Site from the Ground Lessor for a term beginning September 1, 2017 and ending on June 30, The SMCA Landlord has two 5-year options to extend the term of the SMCA Ground Lease. The SMCA Ground Lease provides an easement for ingress, egress and parking in favor of the SMCA Landlord for fifty parking spaces at a parking lot owned by the SMCA Ground Lessor located immediately adjacent to the SMCA Site. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Leases Ground Lease; Property Interests Conveyed under the Leases herein, and APPENDIX I SMCA GROUND LEASE attached hereto. 23

30 A portion of the costs of the SMCA Project in the amount of approximately $5,600,000 will be paid for by Bright Star from amounts it received from the Comprehensive Settlement and Release Agreement dated August 3, 2017 ( LAWA Relocation Agreement ) entered into with the Board of Airport Commissioners of the Department of Airports for the City of Los Angeles ( LAWA ). LAWA intends to purchase the property located at 5431 W. 98 th Street, Los Angeles, California (the 98 th Street Property ) from LAUSD, which Bright Star currently leases from Los Angeles Unified School District for the operations of SMCA and Bright Star Secondary Charter Academy ( BSSCA ). Pursuant to the LAWA Relocation Agreement, Bright Star has agreed to vacate the 98 th Street Property by September 1, LAWA has agreed to reimburse Bright Star for up to $16,000,000 of relocation costs and up to $1,750,000 of moving expenses, which Bright Star may allocate between the relocation of SMCA and BSSCA at its sole discretion. In addition, Bright Star expects to use LAWA relocation funds to pay the prepaid rent due under the SMCA Ground Lease for approximately 6 years and 7 months, in the amount of approximately $2,000,000. Under the terms of the LAWA Relocation Agreement, if Bright Star utilizes any relocation funds to purchase a permanent school site, it must enter into an unsecured note and record a subordinate deed of trust in favor of LAWA in an amount equal to the amount of LAWA relocation funds used to purchase the permanent school site. Five years after Bright Star purchases a permanent site, the subordinate deed of trust will be reconveyed to Bright Star and the unsecured note will be terminated. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Leases SMCA Ground Lease and APPENDIX I SMCA GROUND LEASE. [Remainder of page intentionally left blank] 24

31 The following table indicates the anticipated costs for the SMCA Project. COST DESCRIPTION AMOUNT Acquisition Costs (Capitalized lease payments, escrow cost) $ 2,000,000 Hard Costs New Construction $ 10,000,000 Offsite Construction 50,000 Utilities Installation and Other 1 400,000 Sub-Total Hard Costs $ 10,450,000 Soft Costs Architecture & Engineering $ 594,300 Entitlements & Due Diligence 252,500 Environmental Reports & Assessments 83,000 Inspections & Local Fees 2 451,500 Insurance, Security & Other 3 329,700 Management Fee 4 530,000 Sub-Total Soft Costs $ 2,241,000 Contingency $ 1,209,000 TOTAL PROJECT BUDGET $ 15,900,000 Source: Bright Star. 1 Utilities installation, payment and performance bond, and other hard costs. 2 Local fees, LEED certifications, inspections, and other special inspections. Local fees include plan check fees payable to the Los Angeles Department of Building and Safety (LADBS). 3 Builder's risk insurance, property and liability insurance, pre-occupancy security, legal costs and additional project-related fees. 4 To PCSD. SMCA Project Team Description The Borrower has selected PCSD as the developer for the SMCA Project. The Borrower is in the process of selecting an architect and contractor for the SMCA Project. The Borrower intends to negotiate and enter into a guaranteed maximum price contract for the construction of the SMCA Facility (the SMCA Construction Contract ). Pursuant to the Bond Indenture, no disbursements shall be made from the SMCA Account unless the Borrower shall have delivered to the Trustee a copy of the executed SMCA Construction Contract, in an then on deposit and available in the SMCA Account (including any additional equity that the Borrower may deposit in the SMCA Account), and copies of issued building permits related to the charter middle school facility located at 4115 West Martin Luther King, Jr. Boulevard, Los Angeles, California 90008, among other conditions. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Project Fund; Conditions to Release of Bond Proceeds herein. [Remainder of page intentionally left blank] 25

32 SMCA Approvals; SMCA Project Timeline. The SMCA Project was submitted for Site Plan Review on November 15, This process is expected to be completed by February of The Borrower has held several meetings with staff and leadership of the Los Angeles Department of City Planning ( DCP ) and the DBS prior to submitting the application. The SMCA Property is subject to conditions of a Community Planning Implementation Overlay ( CPIO ). The site plan currently complies with all requirements of the CPIO and of DCP. A public hearing is not required for the SMCA Facility and approval is expected to be given by the Director of Planning based on the assigned Staff Planner s report. After this decision, there will be an appeal period of 15 days and any interested party can appeal. If there is no appeal, a determination letter will finalize the site plan. The architect expects to submit a Plan Check with DBS in December The Borrower anticipates obtaining permits for site work, foundation and structure by May 2018 and the remaining construction permits by August The following table indicates the anticipated construction timeline for the SMCA Project. Current Development & Construction Timeline 1 Milestone Event Date Application Filed with the City of Los Angeles November 2017 Building Permits Issued; GMP Signed August 2018 Construction Completed July 2019 Move-In August 2019 Source: Bright Star. 1 The dates in the Current Development & Construction Timeline table are based on assumptions about meeting certain milestones. See CERTAIN RISK FACTORS Construction Risks herein. Environmental Inspections SMCA Facility. Placeworks performed a Phase I Environmental Site Assessment and Focused Phase II Investigation ( SCMA Project Phase I and Phase II ESA ) of the SMCA Property dated July The SCMA Project Phase I and Phase II ESA revealed no recognized environmental conditions except for the following: (a) undocumented removal of two underground storage tanks (USTs); and (b) a cut off metal pipe, approximately 18-inches in diameter, was observed in the western corner of the property. Soil gas sampling was conducted by Placeworks as a components of the SCMA Project Phase I and Phase II ESA to assess for evidence of environmental releases associated with the historical UST s removed from the adjacent church property. The investigation determined that concentrations of chemical constituents in soil gas are below levels of environmental and health risk concerns. Therefore, the recognized environmental condition associated with the removed UST s has been resolved and no further action was recommended by Placeworks in connection therewith. A geophysical survey around the pipe remnant was conducted as a component of the SCMA Project Phase I and Phase II ESA to determine whether the pipe remnant is associated with a subsurface feature of potential environmental concern. The survey determined that buried features may be associated with the pipe remnant. However, due to limitations of the geophysical methods and potential interference from surface features at the site, the source of the anomalies cannot be verified or determined with certainty by Placeworks. Following the geophysical survey, Placeworks concluded that the pipe remnant is unlikely to be associated with a grease interceptor or a UST. According to Placeworks, it is possible the pipe remnant is a vestige of a utility vault vent pipe, or a pipe used for a billboard. Based on evaluation of all available information from the SCMA Project Phase I and Phase II ESA, the soil vapor results, and the geophysical investigation, Placeworks believes that that the pipe remnant is unlikely to represent a significant environmental concern or risk to future occupants of the site. Therefore, Placeworks has determined that the associated recognized environmental concern has been resolved and no further action 26

33 was recommended by Placeworks. The report prepared in connection with such assessments or investigations speak only as of their date, and such reports are subject to the limitations specified therein, as well as to the general limitation that no environmental assessment can completely eliminate uncertainty regarding the potential for recognized environmental conditions, and related costs, in connection with the SMCA Property. See CERTAIN RISK FACTORS Limitations on Value of the Facilities and to Remedies Under the Mortgages herein. Appraisals VAHS Campus Appraisal. Norris Realty Advisors (the Appraiser ) appraised the site that constitutes the VAHS Campus and prepared an Appraisal Report, dated November 3, 2016 (the VAHS Campus Appraisal Report ). The Appraiser used the following methods to estimate the value of the VAHS Campus: (1) the cost approach, which is based upon the proposition that an informed purchaser would pay no more than the cost to produce a substitute property with the same utility as the subject property; (2) the sales comparison approach, which utilizes prices paid in actual market transactions of similar properties to estimate the market value of the subject property; and (3) the income capitalization approach, by which anticipated present and future income, as well as any future reversions, are discounted to their present worth figure through the capitalization process and by which market data is used to establish current economic rents and expense levels to arrive at an expected net income. The VAHS Campus Appraisal Report estimates the current, as-is value of the VAHS Campus as $4,000,000, and the Hypothetical Market Value at Completion and Stabilization as $11,300,000, both subject to assumptions, limited conditions, and certifications described in the VAHS Campus Appraisal Report. Other Appraisals. The Borrower has ordered appraisals on the VAHS Athletic Field Property and the SMCA Property, and an update of the VAHS Campus Appraisal Report, and expects to receive such appraisals by around December 11, Note that the value for the Facilities may not equal the aggregate par amount of the Bonds. See CERTAIN RISK FACTORS Limitations of Appraisal herein. Limitations. The summary of the Appraisals contained in this section is not meant to be exhaustive, and reference should be made to such report for a complete recital of its terms. A complete copy of the Appraisal is available upon request from the Underwriter. The value of each portion of the Project as estimated in the Appraisal represents only the opinion of the Appraiser, and only as of the effective date. The Appraiser has not been engaged to update or revise the estimates contained in the Appraisal since its effective date. See CERTAIN RISK FACTORS Limitations of Appraisal herein. [Remainder of page intentionally left blank] 27

34 DEBT SERVICE SCHEDULE The annual debt service payment requirements of the Bonds are set forth in the table below. Period Ending June Totals Series 2017 Bonds Principal Interest Total Bonds Debt Service 28

35 SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Limited Obligations of the Authority The Bonds are limited obligations of the Authority. The Authority is not obligated to advance any moneys derived from any source other than the Payments (as defined below) and other assets pledged under the Bond Indenture, whether for the payment of the principal of or redemption price or interest on the Bonds. THE BONDS DO NOT CONSTITUTE A DEBT OR LIABILITY OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION THEREOF UNDER THE INDENTURE, OTHER THAN THE AUTHORITY, BUT SHALL BE PAYABLE SOLELY FROM THE PAYMENTS AND OTHER AMOUNTS PROVIDED THEREFOR UNDER THE INDENTURE. NEITHER THE STATE OF CALIFORNIA NOR THE AUTHORITY SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF THE BONDS, OR THE REDEMPTION PREMIUM, IF ANY, OR INTEREST THEREON, EXCEPT FROM THE FUNDS PROVIDED THEREFOR UNDER THE BOND INDENTURE, AND NEITHER THE FAITH AND CREDIT NOR THE TAXING POWER OF THE STATE OF CALIFORNIA OR OF ANY POLITICAL SUBDIVISION HEREOF, INCLUDING THE AUTHORITY, IS PLEDGED TO THE PAYMENT OF THE PRINCIPAL OF OR THE REDEMPTION PREMIUM, IF ANY OR INTEREST ON THE BONDS. 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 BOND 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 SCHOOLS IN ANY AMOUNT OR AT ANY TIME. Payments Under the Bond Indenture, Loan Agreement and State Intercept Payments. The Authority has executed and delivered the Bond Indenture and absolutely assigns to the Trustee all of its rights, title and interest in and to the Payments (except moneys received by the Trustee with respect to the Intercept), the Loan Agreement (except for the Retained Rights), and all moneys and investments in the funds established thereunder (other than the Rebate Fund, as established by the Bond Indenture) for the equal and proportionate benefit, security and protection of all present and future registered owners of the Bonds. The Bonds are payable equally and ratably solely from the Payments under the Bond Indenture. Payments under the Bond 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, (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 not directed to be deposited into any fund or account created and held under the Bond Indenture) or Obligation No. 1, and (iii) all income derived from the investment of any money in any fund or account established pursuant to the Bond Indenture. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL BOND DOCUMENTS THE INDENTURE attached hereto. The Borrower will pay, or cause to be paid, the Loan Repayments from the Gross Revenues of the Borrower, including the Rental Payments, or from any other legally available funds of the Borrower, without any further notice thereof except as may be specifically required by the Loan Agreement. 29

36 Rental Payments under the Bond Indenture means the amounts payable pursuant to the Leases by the Lessee to the Members of the Obligated Group for the use and occupancy of the Facilities, excluding Expenses (as defined in the Leases). Loan Repayments under the Bond Indenture means the amounts due and payable from the Borrower to the Trustee pursuant to the Loan Agreement. Gross Revenues under the Bond Indenture means all revenues, income, receipts and money received by or on behalf of the Members from all lawfully available sources, including (a) gross revenues derived from the operation and possession of each Member s facilities; (b) gifts, grants, bequests, donations and contributions, exclusive of any gifts, grants, bequests, donations and contributions to the extent specifically restricted by the donor to a particular purpose inconsistent with their use for the payment of Required Payments; (c) proceeds derived from (i) accounts receivable, (ii) securities and other investments, (iii) inventory and other tangible and intangible property, and (iv) contract rights and other rights and assets now or hereafter owned by each Member; and (d) rentals received from the lease of space; provided, however, that Gross Revenues shall not include (1) income derived from Defeasance Obligations that are irrevocably deposited in escrow to pay the principal of or interest on any Indebtedness; (2) any gains or losses resulting from the early extinguishment of Indebtedness, the sale, exchange or other disposition of Property not in the ordinary course of business, or the reappraisal, reevaluation or write-up of assets, or any other extraordinary gains or losses; (3) net unrealized gain (losses) on investments on investments and Financial Products Agreements; (4) proceeds of borrowing; (5) condemnation proceeds; (6) insurance proceeds; and (7) income derived from, or accounts receivable for, repayment to any Member of loans made by any other Member or Members. State Intercept Program. Simultaneously with the issuance of the Bonds, the Lessee will deliver the Intercept Notice (as defined below) to the State Controller, including a schedule of transfers for payment directly to the Trustee for certain amounts due and payable under the Bond Indenture, including Additional Payments. Intercept means the apportionment from the State Controller, pursuant to Section (a)(4) of the Education Code and the Intercept Notice, of amounts specified in the Intercept Notice and payable directly to the Trustee. Intercept Notice means any notice from the Schools to the State Controller, pursuant to Section (a)(4) of the Education Code, specifying a transfer schedule for the payment directly to the Trustee of one or more of the following: (x) principal of the Bonds, (y) interest on the Bonds and (z) other costs necessary or incidental to financing pursuant to the Act relating to the Bonds, including Additional Payments, in substantially the form set forth in the Leases, as the same may be amended, supplemented or restated from time to time. Additional Payments include, among other things, to the extent not paid from Loan Repayments, certain fees and expenses of the Trustee and the Authority (including fees and expenses of their counsel and consultants) and fees and expenses of the Rating Agency. However, no moneys deposited in the Revenue Fund pursuant to the Intercept will be deposited to the Rebate Fund. The Lessee may, not later than the fifteenth (15th) calendar day of any month in which payment is scheduled, revise the Intercept Notice and deliver such to the State Controller from time to time as necessary or appropriate to indicate transfers to the Trustee to pay a portion of the amounts due under the Loan Agreement and other costs necessary or incidental to the financing pursuant to the Act, as they come due and to cure any delinquency in payment of such amounts. If at any time the Intercept Notice is revised for any reason, the Lessee will promptly provide the Authority, the California Department of Education and the Trustee with a copy of such revised Intercept Notice. The Intercept Notice may provide additional amounts payable to the Trustee for purposes set forth in the Indenture; provided the Lessee will not grant preference or any prior right of funding access or security in respect to any payment indicated in the Intercept Notice or any other notice delivered pursuant to Section of the Education Code (or any successor provision). 30

37 There is no assurance given to Bondholders that the apportionment under the Intercept will be provided in amounts sufficient and at such times as would provide for the Loan Repayments. The State is undertaking no obligation to provide any level of such apportionment in respect of the Schools. The State may delay, alter, amend or eliminate such funding at any time. The Borrower will promptly provide written notice to each Member when an Intercept payment deposits an insufficient amount of funds into the Revenue Fund, and will instruct or cause each Member, as applicable, to instruct the Lessee (as defined in the Bond Indenture) to cause the Schools to pay any shortfall in Base Rent (as defined in the Leases) directly to the Trustee for deposit in the Revenue Fund. For the five fiscal years beginning in , Bright Star expects to receive at least $5.3 million of annual revenues from the State for the operation of the Schools that could potentially be intercepted through the State Intercept. In comparison, maximum annual debt service on the Bonds is expected to be approximately $1,820,000 *, and therefore Bright Star expects debt service to be paid each year entirely from funds intercepted by the State. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL BOND DOCUMENTS Loan Agreement attached hereto. Allocation of Payments. Promptly upon receipt, the Trustee shall deposit the Payments to the Revenue Fund. On or before May 25 th and November 25 th of each year, the Trustee shall transfer from the Revenue Fund and deposit into the following respective accounts (each of which the Trustee shall establish and maintain within the Revenue Fund), and then to the Repair and Replacement Fund, to the Rebate Fund, and to the Administration Fund, the following amounts, in the following order of priority, the requirements of each such account or fund (including the making up of any deficiencies in any such account resulting from lack of Payments sufficient to make any earlier required deposit) at the time of deposit to be satisfied before any transfer is made to any account or fund subsequent in priority; provided, however, no moneys deposited in the Revenue Fund pursuant to the Intercept shall be deposited to the Repair and Replacement Fund or the Rebate Fund: (a) To the Series 2017 Ground Rent Account, the amount of rent becoming due and payable during the next succeeding six months in respect of the Ground Leases; (b) To the Interest Account, the amount of interest becoming due and payable on the next succeeding Interest Payment Date on all Bonds then Outstanding, until the balance in said account is equal to said aggregate amount of interest, taking into account the amounts to be transferred from the Capitalized Interest Subaccount pursuant to the Bond Indenture; (c) To the Principal Account, one-half of the aggregate amount of principal becoming due to redeem or pay Bonds or to make Mandatory Sinking Account Payments on the next succeeding Principal Payment Date, until the balance in said Principal Account is equal to said aggregate amount of such principal and Mandatory Sinking Account Payments; provided that from the date of delivery of the Bonds until the first Principal Payment Date with respect to the Bonds (if less than twelve months), transfers to the Principal Account shall be sufficient on a monthly pro rata basis to pay the principal and Mandatory Sinking Account Payments becoming due and payable on said Principal Payment Date; (d) To the Reserve Account, (a) the greater of (i) the amount designated for deposit to the Bond Reserve Subaccount of the Reserve Account in a written direction of the Borrower, * Preliminary, subject to change 31

38 and (ii) one-half of the aggregate amount of each prior withdrawal from the Reserve Account for the purpose of making up a deficiency in the Interest Account or Principal Account (until deposits on account of such withdrawal are sufficient to fully restore the amount withdrawn), provided that no deposit need be made into the Reserve Account if the balance in said account is at least equal to the Reserve Account Requirement, and (b) in the event the balance in said account shall be less than the Reserve Account Requirement due to valuation of the Eligible Securities deposited therein in accordance with the Bond Indenture, the amount necessary to increase the balance in said account to an amount at least equal to the Reserve Account Requirement (until deposits on account of such valuation deficiency are sufficient to increase the balance in said account to said amount); (e) To the Repair and Replacement Fund, from and after June 1, 2018, $8,340, until the balance therein is at least equal to the Repair and Replacement Fund Requirement, and thereafter (i) the greater of (A) the amount designated for deposit in the Repair and Replacement Fund in a written direction of the Borrower, and (B) one-sixth of the aggregate amount of each prior withdrawal from the Repair and Replacement Fund, provided that no deposit need be made into the Repair and Replacement Fund if the balance in said account is at least equal to the Repair and Replacement Fund Requirement, and (ii) in the event the balance in said account shall be less than the Repair and Replacement Fund Requirement due to valuation of the Eligible Securities deposited therein in accordance with the Bond Indenture or due to an increase in the Repair and Replacement Fund Requirement, the amount necessary to increase the balance in said account to an amount at least equal to the Repair and Replacement Fund Requirement (until deposits on account of such valuation deficiency, if any, are sufficient to increase the balance in said account to said amount); (f) To the Rebate Fund, such amounts as are required to be deposited therein by the Bond Indenture (including the Tax Certificate); and (g) To the Administration Fund, an amount equal to 1/2 of the annual Administrative Fees and Expenses. Moneys remaining in the Revenue Fund after the foregoing transfers shall be transferred on June 1 and December 1 of each year, commencing June 1, 2018 by the Trustee to or at the direction of the Borrower free and clear of the lien of the Bond Indenture. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL BOND DOCUMENTS BOND INDENTURE and LOAN AGREEMENT herein. For more information on the Project, the Schools, the Borrower and the other members of the Obligated Group, see THE PROJECT and APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS attached hereto. Project Fund; Conditions to Release of Bond Proceeds The Trustee shall establish, maintain and hold in trust a separate fund designated as the Project Fund, and within the Project Fund, the following segregated accounts: (1) the VAHS Acquisition Account, (2) the VAHS Athletic Field Account, and (3) the SMCA Account. The moneys in the Project Fund shall be disbursed pursuant to Requisitions of the Borrower; provided, however, disbursements from such accounts must also satisfy additional escrow release requirements as described below. 32

39 No disbursements shall be made from the VAHS Acquisition Account unless the Borrower shall have delivered to the Trustee the following (the VAHS Acquisition Account Draw Requirements ): (i) a grant deed evidencing fee title interest of the VAHS Landlord to the VAHS Campus Property; (ii) a mortgage, deed of trust, security agreement, assignment of rents and leases and/or financing statement for the charter school facility located at the VAHS Campus Property in the form attached to the Bond Indenture to secure the obligations of the VAHS Landlord; (iii) an ALTA policy of lender s title insurance on the charter school facility located at the VAHS Campus Property, in an aggregate amount not less than the aggregate principal amount of the Bonds allocated to finance such Facility, naming and payable to the Trustee, insuring the fee title interest of the VAHS Landlord to such Facility, subject only to permitted liens, issued by a title insurance company qualified to do business in the State; and (iv) a Certificate of the Borrower to the effect that the representations and warranties of the Borrower contained in the Loan Agreement are true and accurate on and as of the date thereof and that the VAHS Acquisition Account Draw Requirements have been satisfied. No disbursements shall be made from the VAHS Athletic Field Account unless the Borrower shall have delivered to the Trustee the following (the VAHS Athletic Field Account Draw Requirements ): (i) a copy of a guaranteed maximum price contract from a licensed contractor, in an amount not exceeding the amount then on deposit and available in the VAHS Athletic Field Account (including any additional equity that the Borrower may deposit in the VAHS Athletic Field Account); (ii) building permits related to the charter school facility located at the VAHS Athletic Field Property; (iii) a conditional use permit related to the charter school facility located at the VAHS Athletic Field Property; and (iii) a Certificate of the Borrower to the effect that the representations and warranties of the Borrower contained in the Loan Agreement are true and accurate on and as of the date thereof and that the VAHS Athletic Field Account Draw Requirements have been satisfied. No disbursements shall be made from the SMCA Account unless the Borrower shall have delivered to the Trustee the following (the SMCA Account Draw Requirements and, collectively with the VAHS Acquisition Account Draw Requirements and the VAHS Athletic Field Account Draw Requirements, the Draw Requirements ): (i) a copy of a guaranteed maximum price contract from a licensed contractor, in an amount not exceeding the amount then on deposit and available in the SMCA Account (including any additional equity that the Borrower may deposit in the SMCA Account); (ii) a leasehold mortgage, deed of trust, security agreement, assignment of rents and leases and/or financing statement for the charter school facility located at the SMCA Property, in the form attached to the Bond Indenture, to secure the obligations of the SMCA Landlord; 33

40 (iii) an ALTA policy of lender s title insurance on the charter school facility located at the SMCA Property, in an aggregate amount not less than the aggregate principal amount of the Bonds allocated to finance such Facility, naming and payable to the Trustee, insuring the leasehold title interest of the SMCA Landlord to such Facility, subject only to permitted liens, issued by a title insurance company qualified to do business in the State; (iv) Property; and building permits related to the charter school facility located at the SMCA (v) a Certificate of the Borrower to the effect that the representations and warranties of the Borrower contained in the Loan Agreement are true and accurate on and as of the date thereof and that the SMCA Account Draw Requirements have been satisfied. On December 1, 2019, if the Draw Requirements have not been satisfied, then all moneys on deposit in the VAHS Acquisition Account, the VAHS Athletic Field Account or the SMCA Account, as applicable, shall be transferred to the Redemption Fund. Upon the written direction of the Borrower delivered to the Bond Trustee on any date prior to the satisfaction of the Draw Requirements, but in no event later than December 1, 2019, the Borrower may direct the Trustee to (i) transfer all moneys on deposit in the VAHS Acquisition Account, the VAHS Athletic Field Account or the SMCA Account, as applicable, to the Redemption Fund and (ii) mail a notice of redemption in order to redeem certain Bonds on January 1, 2020, as described under the heading THE BONDS Redemption Extraordinary Mandatory Redemption from Escrowed Project Proceeds. Application of Reserve Account On the date of issuance of the Bonds, Bond proceeds in the amount of $ (constituting the Reserve Account Requirement as of such date) will be deposited in the Bond Reserve Subaccount. The Trustee will establish and maintain the Reserve Account. All amounts in the Reserve Account will be used and withdrawn by the Trustee solely for the purpose of making up any deficiency in the Interest Account or Principal Account that exists on the date when monies on deposit in the Interest Account or the Principal Account are required to be applied, as provided in the Bond Indenture, or (together with any other moneys available therefor) for the payment or redemption of all Bonds then Outstanding. The Trustee will notify the Authority and the Borrower immediately of any withdrawal from the Reserve Account for the purpose of making up a deficiency in the Interest Account or Principal Account. The Trustee will notify the Authority immediately of the final maturity, earlier redemption in full of the Bonds or the date on which no Bonds are Outstanding under the Bond Indenture. Amounts on deposit in the Reserve Account will be valued by the Trustee at their fair market value each January 1 and July 1, and the Trustee will notify the Borrower of the results of such valuation. If the amount on deposit in the Reserve Account on the first (1st) Business Day following such valuation is less than one hundred percent (100%) of the Reserve Account Requirement, the Borrower has agreed in the Loan Agreement to make the deposits to the Reserve Account required by the Bond Indenture. If the amount on deposit in the Reserve Account on the first (1st) Business Day following such valuation is greater than the Reserve Account Requirement, then any additional excess will be withdrawn from Bond Reserve Subaccount of the Reserve Account and transferred to the Revenue Fund. 34

41 Repair and Replacement Fund The Bond Indenture establishes a Repair and Replacement Fund. Amounts will be deposited in the Repair and Replacement Fund necessary to cause the deposit therein to be at least equal to the Repair and Replacement Fund Requirement pursuant to the allocation of Payment provisions in the Bond Indenture as described under Allocation of Payments above. Repair and Replacement Fund Requirement means $50,000 provided, however, that the Repair and Replacement Fund Requirement shall initially be $0 as of the date of delivery of the Bonds and shall increase by $1,390 on the first Business Day of each month following the date of delivery of the Bonds until such Repair and Replacement Fund Requirement equals $50,000. The Borrower is required to make payments under the Loan Agreement to fund any shortfalls in the Repair and Replacement Fund Requirement. Amounts in the Repair and Replacement Fund may be requisitioned by the Borrower to fund capital items not budgeted as ordinary maintenance and repair costs related to the Facilities. The Loan Agreement The Authority and the Borrower will execute the Loan Agreement to provide for the loan by the Authority to the Borrower of proceeds from the sale of the Bonds. In consideration of the issuance of the Bonds by the Authority and the application of the proceeds thereof as provided in the Bond Indenture, the Borrower agrees to issue, or cause to be issued, and to cause to be authenticated and delivered to the Authority, Obligation No. 1, pursuant to the Master Indentures and Supplemental Master Trust Indenture for Obligation No. 1, concurrently with the issuance and delivery of the Bonds. The Authority will assign its rights in the Loan Agreement (except for the certain unassigned rights, including the right to receive any Administrative Fees and Expenses payable to the Authority, any Additional Payments, any right to be indemnified, held harmless or defended and rights to receive information, reports, certifications or other documents and any right to receive notices, consents, approvals or inspection or waivers, and the obligation of the Borrower to make deposits pursuant to the Tax Certificate) to the Trustee and will assign Obligation No. 1 to the Trustee. Pursuant to the Loan Agreement, the Borrower agrees to pay, or cause to be paid, from Gross Revenues of the Borrower, to the Trustee for deposit in the Revenue Fund, amounts equal to the aggregate amount of interest payable on the Outstanding Bonds and, on or before the maturity or redemption date of the Bonds, an amount equal to the principal amount and redemption premium, if any, of the Outstanding Bonds. In addition to such Loan Repayments, the Loan Agreement also requires the Borrower to pay Additional Payments to the Authority, to the Trustee or to the appropriate payee, as the case may be, as follows: (a) all taxes and assessments of any type or character charged to the Authority or to the Trustee affecting the amount available to the Authority or the Trustee from payments to be received under the Loan Agreement or in any way arising due to the transactions contemplated by the Loan Agreement (including taxes and assessments assessed or levied by any public agency or governmental authority of whatsoever character having power to levy taxes or assessments) but excluding franchise taxes based upon the capital and/or income of the Trustee and taxes based upon or measured by the net income of the Trustee; provided, however, that the Borrower will have the right to protest any such taxes or assessments and to require the Authority or the Trustee, at the Borrower s expense, to protest and contest any such taxes or assessments levied upon them and that the Borrower will have the right to withhold payment of any such taxes or assessments pending disposition of any such protest or contest unless such withholding, protest or contest would adversely affect the rights or interests of the Authority or the Trustee; 35

42 (b) all reasonable fees, charges and expenses of the Trustee for services rendered under the Bond Indenture and all amounts referred to in the Bond Indenture, as and when the same become due and payable; (c) all reasonable fees, charges and expenses of the Master Trustee for services rendered under the Master Indenture and all amounts referred to in the Master Indenture, as and when the same become due and payable; (d) the reasonable fees and expenses of such accountants, consultants, attorneys and other experts as may be engaged by the Authority or the Trustee to prepare audits, financial statements, reports, opinions or provide such other services required under the Loan Agreement, the other Borrower Documents or the Bond Indenture; (e) all fees and expenses of any Rating Agency, including the S&P Surveillance Fee (if any), and the 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 Bond Indenture, the amount of such deposit, which will 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 pursuant to the Bond Indenture; (f) all amounts necessary for deposit into the Repair and Replacement Fund pursuant to the Bond Indenture; (g) the annual fee of the Authority and 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 Loan Agreement, the other Borrower Documents, the Bonds or the Bond Indenture, 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 Loan Agreement, the other Borrower Documents, the Bonds or the Bond 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 Loan Agreement and the other Borrower Documents; and (h) the amount necessary to replenish any fund established under the Bond Indenture, but only to the extent then required under the Bond Indenture. All such payments shall 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 Bond Indenture. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL BOND DOCUMENTS THE LOAN AGREEMENT. The Master Indenture Joint and Several Obligations of the Obligated Group. Under the Master Indenture, each Member jointly and severally covenants and agrees (a) to pay or cause to be paid promptly all Required Payments at the place, on the dates and in the manner provided in the Master Indenture, in any Related Supplement and any Obligation, and (b) to faithfully observe and perform all of the conditions, covenants and requirements of the Master Indenture, and Related Supplement and any Obligation. Each Member acknowledges and agrees that the time of such payment and performance is of the essence of the obligations under the Master Indenture. 36

43 Initially, the Landlords will be the only members of the Obligated Group. Neither the Borrower nor Bright Star is a member of the Obligated Group. Bright Star is not a party to the Master Indenture, and is obligated solely as Lessee under the Leases, in respect of payment from the sources specified therein relating to the Schools, and is not responsible, party to or otherwise obligated under the Loan Agreement, the Bond Indenture, or the Master Indenture to make payments directly on the Loan, Obligation No. 1 or the Bonds. Subject to the provisions of the Master Indenture permitting withdrawal from the Obligated Group, the obligation of each Member to make Required Payments is a continuing one and is to remain in effect until all Required Payments have been paid in full in accordance with the Master Indenture. All moneys from time to time received by the Obligated Group Representative or the Master Trustee to reduce liability on Obligations, whether from or on account of the Members or otherwise, shall be regarded as payments in gross without any right on the part of any one or more of the Members to claim the benefit of any moneys so received until the whole of the amounts owing on Obligations has been paid or satisfied and so that in the event of any such Member s filing bankruptcy, the Obligated Group Representative or the Master Trustee shall be entitled to prove up the total indebtedness or other liability on Obligations Outstanding as to which the liability of such Member has become fixed. Each such Obligation shall be a primary obligation and shall not be treated as ancillary to or collateral with any other obligation and shall be independent of any other security so that the covenants and agreements of each Member under the Master Indenture shall be enforceable without first having recourse to any such security or source of payment and without first taking any steps or proceedings against any other Person. The Obligated Group Representative and the Master Trustee are each empowered to enforce each covenant and agreement of the Master Indenture, and to enforce the making of Required Payments. The Master Trustee will not take recourse against the Borrower, the Obligated Group Representative or any Member with respect to the failure by the Borrower, the Obligated Group Representative or any Member to make any Required Payment under the Master Indenture (or any Related Supplement) except recourse to the Gross Revenues and the amounts held in the funds and accounts created under the Bond Indenture (except the Rebate Fund) or under the Master Indenture, or to such other security as may from time to time be given for the payment of obligations arising out of the Master Indenture (and any Related Supplement) or any other agreement securing the obligations of the Borrower or any other Member with respect to the Related Bonds. Because the Bonds are payable in full from funds subject to the Intercept, no Gross Revenue Fund will initially be created in connection with the issuance of the Bonds. Subject only to the provisions of the Master Indenture permitting the application thereof for the purposes and on the terms and conditions set forth herein, each Member, respectively, hereby pledges, and to the extent permitted by law grants a security interest to the Master Trustee in, the Gross Revenue Fund and all of the Gross Revenues of the Obligated Group to secure the payment of Required Payments and the performance by the Members of their other obligations under the Master Indenture. Each Member, respectively, shall execute and cause to be filed Uniform Commercial Code financing statements, shall execute and cause to be sent to each Depository Bank and to the Master Trustee a notice of the security interest granted under the Master Indenture and shall execute and deliver such other documents (including, but not limited to, control agreements and continuation statements) as may be necessary or reasonably requested by the Master Trustee in order to perfect or maintain as perfected such security interest or give public notice thereof. For a more detailed discussion of entry to or withdrawal from the Obligated Group, see APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL BOND 37

44 DOCUMENTS THE MASTER INDENTURE. All capitalized terms used and not defined herein have the meanings listed in APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL BOND DOCUMENTS DEFINITIONS. Gross Revenue Fund. Each Member of the Obligated Group agrees in the Master Indenture that, unless otherwise provided in a Related Supplement or if such Related Bonds are payable in full from funds that are subject to the Intercept, so long as any of the Obligations remain Outstanding, all of the Gross Revenues of the Obligated Group shall be deposited as soon as practicable upon receipt in a fund designated as the Gross Revenue Fund which the Members shall establish and maintain, subject to the provisions of the Master Indenture, in one or more accounts at such banking institution or institutions as the Members shall from time to time designate in writing to the Master Trustee for such purpose (the Depository Bank(s) ). Amounts in the Gross Revenue Fund may be used and withdrawn by any Member at any time for any lawful purpose, except as hereinafter provided. In the event that any Member is delinquent for more than one Business Day in the payment of any Required Payment with respect to any Obligation issued pursuant to a Related Supplement, the Master Trustee, upon notice from the Obligated Group Representative or actual knowledge of such delinquency, shall notify the Obligated Group Representative and the Depository Bank(s) of such delinquency, and, unless such Required Payment is paid, or provision for payment is duly made, in a manner satisfactory to the Master Trustee, within five days after receipt of such notice, the Obligated Group Representative or the appropriate Member shall cause the Depository Bank(s) to transfer the Gross Revenue Fund to the name and credit of the Master Trustee. The Gross Revenue Fund shall continue to be held in the name and to the credit of the Master Trustee until six months after the amounts on deposit in said fund are sufficient to pay in full, or have been used to pay in full, all Required Payments in default and all other Events of Default known to the Master Trustee shall have been made good or cured to the satisfaction of the Master Trustee or provision deemed by the Master Trustee to be adequate shall have been made therefor, whereupon the Gross Revenue Fund (except for the Gross Revenues required to make such payments or cure such defaults) shall be returned to the name and credit of the appropriate Members. During any period that the Gross Revenue Fund is held in the name and to the credit of the Master Trustee, the Master Trustee shall use and withdraw amounts in said Fund from time to time (1) first, to pay Ground Rent directly to each respective lessor under each Ground Lease when and as due in the amount designated on a written request of the lessor(s), (2) second to make Required Payments as such payments become due (whether by maturity, redemption, acceleration or otherwise), and, if such amounts shall not be sufficient to pay in full all such payments due on any date, then to the payment of Required Payments ratably without any discrimination or preference, and (3) third, to such other payments in the order which the Master Trustee, in its discretion, shall determine to be in the best interests of the Holders of Obligations without discrimination or preference. During any period that the Gross Revenue Fund is held in the name and to the credit of the Master Trustee, the Members shall not be entitled to use or withdraw any of the Gross Revenues of the Obligated Group unless and to the extent that the Master Trustee at its sole discretion so directs for the payment of current or past due operating expenses of the Members; provided, however, that the Members shall be entitled to use or withdraw any amounts in the Gross Revenue Fund which do not constitute Gross Revenues of the Obligated Group. Each Member agrees to execute and deliver all instruments as may be required to implement the Master Indenture. Each Member further agrees that a failure to comply with the terms of this Section shall cause irreparable harm to the Holders and shall entitle the Master Trustee, with or without notice, to take immediate action to compel the specific performance of the obligations of the Members as provided in the Master Indenture. Limitations on Indebtedness of the Members of the Obligated Group. Under the Master Indenture, each Member covenants and agrees that it will not incur any Additional Indebtedness after the issuance of the Bonds except as follows: 38

45 (a) Long-Term Indebtedness may be incurred if prior to the issuance of such Additional Indebtedness the following is satisfied: an Independent Consultant selected by the Obligated Group Representative provides a written report to the Master Trustee setting forth projections (1) which indicate that a Consolidated Base Rent Coverage Ratio for each of the three consecutive full Fiscal Years beginning in the earlier of: (i) the first full Fiscal Year following the estimated date of completion and initial use of all revenue-producing facilities to be financed with such Additional Indebtedness, based upon a certified written estimated completion date by the consulting engineer for such Facility or Facilities; or (ii) the first full Fiscal Year in which the obligor of such Additional Indebtedness will have scheduled payments of interest on or principal of the Additional Indebtedness to be issued for the payment of which provision has not been made as indicated in the report of such Independent Consultant from proceeds of such Additional Indebtedness, investment income thereon or from other appropriate sources (other than Consolidated Net Operating School Revenue), provides for a Consolidated Base Rent Coverage Ratio, taking into account all Outstanding Long Term Indebtedness and the Additional Indebtedness to be issued, of not less than 1.20:1.00; and (2) the Consolidated Base Rent Coverage Ratio for the Fiscal Year immediately preceding the assumption of the proposed Additional Indebtedness is calculated to be at least 1.10 in such Fiscal Year, or would have been greater than it would otherwise have been absent such proposed Additional Indebtedness. The report of the Independent Consultant shall take into account, as applicable, (i) the audited results of operations and verified enrollment of the Obligated Group Schools, (ii) projected enrollment of the Obligated Group Schools, and (iii) Gross Revenues at the completion of such Facility or Facilities financed with such Additional Indebtedness. In addition, the report of the Independent Consultant shall assume that the Long Term Indebtedness then to be incurred shall have been outstanding for the entire year. (b) Long Term Indebtedness may be incurred for the purpose of refunding any Outstanding Indebtedness, if prior to the incurrence thereof, there is delivered to the Trustee an Officer s Certificate demonstrating that (i) the Maximum Annual Debt Service will not increase by more than 10% after the incurrence of such proposed refunding Long Term Indebtedness and after giving effect to the disposition of the proceeds thereof; (ii) the total Debt Service on the Indebtedness being refinanced will not increase by more than 10% after the incurrence of such proposed refunding Long-Term Indebtedness and after giving effect to the disposition of the proceeds thereof; or (iii) the requirements summarized in paragraph (a)(i) above are met; provided that the foregoing shall not apply to any refinancing with Balloon Indebtedness. (c) Short-Term Indebtedness may be incurred by any Member as long as the Short-Term Indebtedness is made payable from such Member s Gross Revenues. (d) Indebtedness consisting of purchase money obligations with respect to any item of equipment related to the Facility may be incurred without limitation. 39

46 (e) Indebtedness consisting of leases which are considered operating leases under generally accepted accounting principles may be incurred without limitation. (f) Subordinated Indebtedness may be incurred without limitation. Amendment of Leases. There shall be no amendment, modification or termination of any of the Leases without (1) an Officer s Certificate delivered to the Master Trustee stating that the amendment, modification or termination of the Lease contemplated shall not have a material adverse effect on the financial position of the Obligated Group or (2) the prior written consent of the Master Trustee, which consent shall only be given if: (a) in the Opinion of Bond Counsel, such amendment is necessary to preserve the exclusion of interest on the Related Bonds that are Tax-Exempt Bonds from gross income for purposes of federal income taxation or the exemption of interest on such Related Bonds from state income taxation; or (b) (1)(A) the Holders of a majority in principal amount of the Related Bonds then Outstanding consent in writing to such amendment, modification or termination, or (B) in the Opinion of Counsel, such amendment, modification or termination will not materially adversely affect the interests of the Related Bondholders or result in any material impairment of the security given for the payment of the related Bonds, and (2) the Master Trustee shall receive an Opinion of Bond Counsel substantially to the effect that such amendment, modification or termination will not, in and of itself, adversely affect any exclusion of interest on the Related Bonds that are Tax-Exempt Bonds from gross income for purposes of federal income taxation; or (c) it has received a written representation from the Obligated Group Representative to the effect that such amendment or modification will not materially and adversely affect the interests of the Holders of the Related Bonds; provided that, if an Event of Default with respect to the failure to make due and punctual payment of any Required Payment on an Obligation or the failure to observe or perform any covenant or agreement under the Master Indenture (and such failure has not been cured within 60 days) has occurred and is continuing, the Master Trustee rather than the Borrower shall make a determination that such an amendment or modification will not materially and adversely affect the interest of the Holders of the Related Bonds (provided that, in making such determination, the Master Trustee may conclusively rely on written representations of financial consultants or advisors or the opinion or advice of counsel). Rates and Charges; Debt Coverage. Each Member covenants and agrees to fix, charge and collect, or cause to be fixed, charged and collected, rental rates, fees and charges for the use of its Facilities and for the services furnished or to be furnished by the Members so that the Debt Service Coverage Ratio of the Obligated Group as a whole at the end of each Fiscal Year is not less than 1.0:1.0. If the Debt Service Coverage Ratio of the Obligated Group falls below 1.0:1.0, it shall constitute an Event of Default under the Master Indenture. Other Covenants. Each of the Members of the Obligated Group agrees to comply with other covenants set forth in the Master Indenture, including covenants to insure the Facilities against loss or damage. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF THE PRINCPAL BOND DOCUMENTS THE MASTER INDENTURE. Membership in Obligated Group. Additional Members may be added to the Obligated Group from time to time provided that prior to such addition the Master Trustee receives: 40

47 (a) a copy of a resolution of the Governing Body of the proposed new Member which authorizes the execution and delivery of a Related Supplement and compliance with the terms of the Master Indenture; (b) a Related Supplement executed by the Obligated Group Representative, the new Member and the Master Trustee pursuant to which the proposed new Member (1) agrees to become a Member, (2) agrees to be bound by the terms and restrictions imposed by the Master Indenture and the Obligations, and (3) irrevocably appoints the Obligated Group Representative as its agent and attorney-in-fact and grants to the Obligated Group Representative full power to execute Related Supplements authorizing the issuance of Obligations and to execute and deliver Obligations; (c) an Opinion of Counsel addressed to the Master Trustee to the effect that (i) the proposed new Member has taken all necessary action to become a Member, and upon execution of the Related Supplement, such proposed new Member will be bound by the terms of the Master Indenture and (ii) the addition of such Member will not cause the Master Indenture or any Obligations to be subject to registration under the Securities Act of 1933, as amended, or the Trust Indenture Act of 1939, as amended (or, that any such registration, if required, has occurred); (d) an Independent Consultant s or Accountant s report, or an Officer s Certificate, as appropriate, to the effect that the condition described in paragraph (b) under the heading Limitation of Indebtedness of the Members of the Obligate Group above would be met for the incurrence of one dollar of additional Long-Term Indebtedness immediately following the addition of such new Member; (e) an Opinion of Bond Counsel to the effect that the addition of such Member will not result in the inclusion of interest on any Related Bonds that purports to be a tax-exempt Bond in gross income for purposes of federal income taxation, nor cause the Master Indenture nor the Obligations issued under the Master Indenture to be subject to registration under the Securities Act of 1933, as amended or the Trust Indenture Act of 1939, as amended (or unless such registration, if required, has occurred); (f) an Officer s Certificate to the effect that no Member, immediately after the addition of such new Member, would be in default in the performance or observance of any covenant or condition of the Master Indenture; (g) a duly executed and delivered Mortgage encumbering the all Property, Plant and Equipment of such new Member, subject only to Permitted Liens; and (h) any other document, agreement, certificate, waiver or other instrument from such parties, as the Master Trustee reasonably requests. Withdrawal From Obligated Group. Any Member may withdraw from the Obligated Group, and be released from further liability or obligation under the provisions of the Master Indenture, provided that prior to such withdrawal the Master Trustee receives: (a) an Officer s Certificate to the effect that, immediately following withdrawal of such Member, no Member would be in default in the performance or observance of any covenant or condition of the Master Indenture; (b) an Opinion of Bond Counsel to the effect that the withdrawal of such Member is in compliance with the conditions contained in the Master Indenture, and such withdrawal will not result in the inclusion of interest on any Related Bonds that purports to be a tax-exempt Bond in gross income for purposes of federal income taxation, nor cause the Master Indenture nor the Obligations issued under the 41

48 Master Indenture to be subject to registration under the Securities Act of 1933, as amended, or the Trust Indenture Act of 1939, as amended (or unless such registration, if required, has occurred); and (c) either: (i) an Officer s Certificate to the effect that the Related Bonds outstanding under the Master Indenture have been assigned a rating by at least one rating agency and the withdrawal of such Member will not cause a downgrade or withdrawal of such rating; or (ii) an Independent Consultant s report stating that: (A) (1) the forecasted Consolidated Base Rent Coverage Ratio for the two consecutive Fiscal Years immediately following such withdrawal, taking such withdrawal into account, is projected to be at least 1.25:1.00 in each Fiscal Year or would be greater than it would otherwise have been absent such withdrawal; (2) the Consolidated Base Rent Coverage Ratio for the Fiscal Year immediately preceding such withdrawal is calculated to be at least 1.10 in such Fiscal Year, or would have been greater than it would have otherwise been, absent such withdrawal; and (3) such withdrawal will not lower the Consolidated Base Rent Coverage Ratio for the most recent Fiscal Year for which Obligated Group Financial Statements are available by more than twenty percent (20%); or (B) the forecasted Debt Service Coverage Ratio for the two consecutive Fiscal Years immediately following such withdrawal, taking such withdrawal into account, is projected to be not less than 1.00:1.00 in each Fiscal Year or would be greater than it would otherwise have been absent such withdrawal. Upon compliance with the conditions described above, the Master Trustee shall execute any documents reasonably requested by the withdrawing Member to evidence the termination of such Member s obligations under the Master Indenture (including without limitation termination of the pledge of such Member s Gross Revenues) under any Related Supplements and under all Obligations (including, without limitation, reconveyance of the Mortgage encumbering such Member s Property, Plant and Equipment for the benefit of the Master Trustee). Covenant of the Obligated Group Representative. The Obligated Group Representative covenants and agrees that it will not create, assume or suffer to exist any Lien upon (i) any membership interest of the Obligated Group Representative in any Member, or (ii) any rents, money, property or account of any Member except to the extent permitted under the Master Indenture. Deeds of Trust on the Facilities Pursuant to the Master Indenture, the VAHS Landlord, as an initial Member of the Obligated Group, will enter into a Deed of Trust with Assignment of Rents, Security Agreement and Fixture Filing, dated as of December 1, 2017, with respect to the VAHS Athletic Field Property (the VAHS Athletic Field Mortgage ) and will enter into a deed of trust with respective to the VAHS Campus (the VAHS Campus Mortgage ) upon its acquisition of the VAHS Campus. See THE PROJECT The VAHS Project. The SMCA Landlord will enter into a leasehold deed of trust with respect to the SMCA Facility at a later date (the SMCA Mortgage and, collectively with the VAHS Athletic Field Mortgage and the VAHS Campus Mortgage, the Mortgages ). The Mortgages will secure the obligations of the Landlords under the Master Indenture. Each Landlord agrees to supplement its respective Mortgage or to execute and deliver such other deeds of trust or mortgages as may be necessary from time to time to grant to the Master Trustee a first priority Lien on any Property, Plant and Equipment of such Landlords, subject to 42

49 certain permitted liens. The Mortgages also create or will create an absolute assignment of the rents under the Leases in favor of the Master Trustee. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Leases herein. Pursuant to the Master Indenture and in connection with the execution and delivery of the Mortgages, the Landlords agree to obtain, or to cause to be obtained ALTA title insurance policies on its Facilities, in an aggregate amount not less than the aggregate principal amount of the Bonds, insuring the lien of the Mortgages held by the Master Trustee, subject only to Permitted Liens, issued by a title insurance company qualified to do business in the State. See CERTAIN RISK FACTORS Limitations on Value of the Facilities and to Remedies Under the Mortgages herein. The Leases General. Bright Star leases or will lease the Facilities pursuant to the Leases. The primary source of Gross Revenues for the Landlords is the payments of Rent received pursuant to the Leases. Payment of Rent. Pursuant to the Leases, Bright Star will make monthly Rent payments in advance on the twentieth day of each calendar month immediately preceding the month with respect to which Rent is due. In order to provide for secure and orderly payment of the Base Rent component of Rent, for the payment of the Bonds out of such Base Rent payments and for payment of scheduled Additional Rent, Bright Star will deliver or cause to be delivered an Intercept Notice for the Leases. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Payments Under the Bond Indenture, Loan Agreement and State Intercept herein. Rent, as defined under the Leases, comprises the following: (a) Base Rent (as defined in the Leases); (b) Additional Rent (as defined in the Leases); (c) Extraordinary Monthly Rent (as defined in the Leases); and (d) Expenses (as defined in the Leases), together with all other monetary obligations of Bright Star to Borrower or to third parties arising under the terms of the Leases. Under the Leases, in the event that Bright Star receives a notice (an Extraordinary Monthly Rent Notice ) from either the Landlords or the Related Bond Trustee (as defined in the Master Indenture) stating the Related Bond Trustee has not received the payment of Rent with respect to a Related Project on or before that date that such required payment is due, then Bright Star shall pay the Extraordinary Monthly Rent to the Related Bond Trustee within three business days after receipt of the Extraordinary Monthly Rent Notice. Landlords covenant to immediately provide Bright Star with a copy of any Extraordinary Monthly Rent Notice received by Landlords pursuant to the terms of the Master Indenture. Extraordinary Monthly Rent means the amount set forth in such Extraordinary Monthly Rent Notice, which shall be Bright Star s Proportionate Share of the Extraordinary Monthly Rent. Proportionate Share means the amount required to be paid by Bright Star to ensure that all of the required Rent with respect to all of the Related Projects have been timely made. If payable, Extraordinary Monthly Rent will be a component of Rent. Bright Star has agreed to cause all payments of Rent under the Leases to be received by the Master Trustee on behalf of the Landlords in lawful money of the United States on or before the day on which such payments are due, without offset or deduction. Bright Star has agreed to take such action as may be necessary to include all such payments of Rent due under the Leases in its annual budgets, to make, as necessary, annual appropriations for all such payments and to take such action annually as will be required to provide funds in such year for such payments of Rent. Bright Star has agreed to budget for and maintain a Base Rent Coverage Ratio as provided below. Extraordinary Monthly Rent is defined in the Master Indenture and is only applicable to the Obligated Group Schools, which currently is only the Schools. Other Charter Schools operated by Bright 43

50 Star that are not Obligated Group Schools are not required to pay Extraordinary Monthly Rent under any circumstances. The source of payment for the obligations of Bright Star under the Leases will be limited solely and exclusively to assets and revenues derived from operations of the Schools, and any other charter schools operated by Bright Star in the Facilities. Revenue derived from operations of one school is only available to pay Base Rent due with respect to another school through the Extraordinary Monthly Rent provisions of the Leases described above. No other assets or revenues of Bright Star will be available to satisfy its obligations under the Leases, except at the election of Bright Star. Accordingly, if operations of all Obligated Group Schools fail to provide sufficient revenue to provide for the payment of Rent under the Leases, excess revenues produced by operations of any other charter school operated by Bright Star may not be available for the payment thereof. See CERTAIN RISK FACTORS herein. If any Rent is not received by or on behalf of Landlords from Bright Star within ten (10) calendar days after a Landlord has notified Bright Star in writing that payment has not been received by such Landlord, then Bright Star shall immediately pay to the Landlord a late charge equal to five percent (5%) of such delinquent rent as liquidated damages for Bright Star s failure to make timely payment, by paying such sum to the Master Trustee for deposit in the Gross Revenue Fund. In no event shall this provision for a late charge be deemed to grant to Bright Star a grace period or extension of time within which to pay any rent or prevent Landlords from exercising any right or remedy available to Landlords upon Bright Star s failure to pay any rent due under the Leases in a timely fashion. If any Rent remains delinquent for a period in excess of thirty (30) days then, in addition to such late charge, Bright Star shall pay to Landlords interest on any rent that is not paid when due at the Default Interest Rate from the date such amount became due until paid by paying such sum to the Master Trustee by depositing the same in the Gross Revenue Fund. Neither Bright Star s general revenues nor any revenues Bright Star may derive from its operation of schools (other than the Obligated Group Schools pursuant to the Leases), nor from any schools Bright Star may operate in the future, are pledged or otherwise available to make payments under the Leases and with respect to the Bonds. Included in the Rent payable by Bright Star under the Leases are amounts sufficient to pay the Extraordinary Monthly Rent. Covenants. The Leases contain various covenants (including financial reporting covenants), representations and warranties made by Bright Star to the Landlords. Certain of those covenants include: (a) the requirement to operate the Schools on the Premises; (b) compliance by Bright Star with applicable laws, including environmental laws and Applicable Requirements (as defined in the Leases); (c) (d) maintenance and repair covenants; certain sublease and assignment restrictions; (e) covenants to maintain insurance policy coverages required under the Master Indenture as set forth in the Leases; (f) indemnification of the Landlords pursuant to the Leases terms; and 44

51 (g) maintaining its charter with a sponsoring entity and take or cause to be taken all actions required to renew or extend the term of its charter with a sponsoring entity. In addition, the Master Indenture prohibits the amendment, modification, or termination of the Leases without the consent of a majority of bondholders unless certain requirements are met. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Master Indenture Amendment of Leases herein. Financial Covenants. The Leases also contain the following financial covenants on the part of Bright Star, as required by any lease that is governed by the Master Indenture. Base Rent Coverage Ratio. Bright Star covenants and agrees to calculate for each Fiscal Year the Base Rent Coverage Ratio (as defined below) for each Lease based on its audited financial statements for such Fiscal Year, and to provide a copy of such calculation for such period to the Landlords and the Master Trustee annually commencing with the Fiscal Year ending June 30, When the Obligated Group financial statements are delivered, the chief financial officer of the Obligated Group Representative must submit a certificate to the Master Trustee and any Related Bond Issuer (as defined in the Master Indenture) stating that the Obligated Group Representative has made a review of the activities of the Members during the preceding Fiscal Year for the purpose of determining whether or not the Members have complied with all of the terms, provisions and conditions of the Master Indenture and that each Member has kept, observed, performed and fulfilled each and every covenant, provision and condition of the Master Indenture. Bright Star also covenants to maintain its Net Operating School Revenue (defined below) so that the Base Rent Coverage Ratio for each Lease at the end of each Fiscal Year is not less than 1.10 to 1.00; provided that, except as provided below, Bright Star s failure to achieve the required Base Rent Coverage Ratio for each Lease will not constitute an Event of Default if Bright Star promptly engages an Independent Consultant to prepare a report, to be delivered to Bright Star, Landlords and Master Trustee within 45 days of engagement, with recommendations for meeting the required Base Rent Coverage Ratio or, if in the opinion of the Independent Consultant the attainment of such level is impracticable, to the highest level attainable in such Fiscal Year. The Independent Consultant selected and appointed by Bright Star may be rejected upon the written request of the holders of not less than one-third in aggregate principal amount of the Related Bonds then Outstanding; if so rejected, Bright Star covenants to use its best efforts to appoint a new Independent Consultant within 45 days thereof. Any Independent Consultant will be required to submit its recommendations to Landlords and Master Trustee within 90 days after being so retained. Bright Star, on behalf of the Obligated Group Schools, agrees to consider the recommendations of the Independent Consultant, to the extent permitted by law; provided that a failure to implement the recommendations will constitute an Event of Default. Bright Star will not be obligated to retain such an Independent Consultant more often than once during any 24 month period. Notwithstanding the foregoing, Bright Star s failure to achieve a Base Rent Coverage Ratio of 1.00 to 1.00 for each Lease will constitute an Event of Default. For purposes of this Section, Base Rent, Additional Rent, Extraordinary Monthly Rent, and Expenses shall be as defined in the Leases. Educational Management Fees means that portion of an educational management fee, if any, paid to Bright Star or any supporting organization of Bright Star under Internal Revenue Code Section 509(a)(3), or any of their respective affiliates, in connection with management services provided by Bright Star or an affiliate thereof and related to or payable from revenues attributable to the School and to any other charter school operated by Bright Star on the Premises. This fee is subordinate to the payment of Rent due under the Leases. 45

52 Gross School Revenue Gross School Revenues means all revenues, income, receipts and moneys received by Lessee or on behalf of the Lessee from all lawfully available sources attributable to the operations of the School and any other charter school operated by the Lessee at the Facilities, including from any applicable district or county or from the State pursuant to the Charter School Law from any general purpose entitlement, revenue limit, or other State educational funding sources; but excluding gifts, grants, bequests, donations and contributions, to the extent specifically restricted by the donor to a particular purpose inconsistent with their use for Rent payments or operating expenses. Any other income, revenue, receipts, contributions or other monies received by Tenant not specifically described in the immediately preceding sentence shall not constitute Gross School Revenues. Base Rent Coverage Ratio means for any period of time the ratio determined by dividing (i) Net Operating School Revenue (as defined below), by (ii) the amount of scheduled Base Rent under the Leases. Long Term School Indebtedness means Obligated Group School Indebtedness having an original maturity greater than one-year or renewable at the option of Bright Star for a period of greater than one year from the date of original incurrence or issuance thereof unless, by the terms of such Obligated Group School Indebtedness, no such Obligated Group School Indebtedness is permitted to be outstanding thereunder for a period of at least 20 consecutive days during each calendar year. Net Operating School Revenue means Bright Star s Gross School Revenue (defined above) minus its Operating Expenses (defined below); provided, that no determination thereof will take into account: (a) any gain or loss resulting from either the early extinguishment or refinancing of Obligated Group School 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 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; and (f) nonrecurring items which involve the receipt, expenditure or transfer of assets. Operating Expenses means, except as provided below, all unrestricted expenses of Bright Star attributable to operations of the applicable Obligated Group School pursuant to Bright Star s Charter and to any other charter school operated by Bright Star at the Premises, including maintenance, repair expenses, utility expenses, equipment lease and other rental expense (excluding the Base Rent and the Extraordinary Monthly Rent, if any, but including Additional Rent and Expenses), administrative and legal expenses, miscellaneous operating expenses, advertising and promotion costs, payroll expenses (including taxes), the cost of material and supplies used for current operations of Bright Star, the cost of vehicles, equipment leases and service contracts, taxes upon the operations of Bright Star not otherwise taken into account herein, charges for the accumulation of appropriate reserves for current expenses not annually recurrent, but which are such as may reasonably be expected to be incurred in accordance with generally accepted accounting principles, all in such amounts as reasonably determined by Landlords. Operating Expenses shall exclude, however, (i) all subordinated Educational Management Fees, (ii) depreciation and amortization, and (iii) any expenses which are treated as extraordinary in accordance with generally accepted accounting principles. Obligated Group School Indebtedness means Indebtedness (as such term is defined in the Master Indenture) related to or payable from revenues of the applicable Obligated Group School and/or any other charter school operated by Bright Star at the Premises, to the extent the same is related to or 46

53 payable from revenues of the applicable Obligated Group School and/or any other charter school operating by Bright Star at the Premises. Liquidity Covenant. Bright Star shall calculate Consolidated Days Cash on Hand (as defined below) for the Obligated Group Schools for each Fiscal Year, commencing with the Fiscal Year ending June 30, 2019, based upon its audited financial statements for such Fiscal Year and file such reports with the Trustee. For each calculation date, Bright Star, on behalf of the Obligated Group Schools, will maintain Consolidated Days Cash on Hand as of the last day of each Fiscal Year equal to or greater than 45 days. Consolidated Days Cash on Hand means (i) the sum of Cash and Cash Equivalents of the Obligated Group Schools, as shown on Bright Star s audited financial statements for each Fiscal Year, and any State payments accrued to such Fiscal Year and scheduled to be received within two months following the end of such Fiscal Year ( Cash on Hand ); divided by (ii) the Average Daily Expenses for Obligated Group Schools (as calculated for the most recent Fiscal Year ending before such date). Average Daily Expenses for Obligated Group Schools means (A) cash requirements during such Fiscal Year related to or payable from revenues attributable to the schools (the Obligated Group Schools ) operated by Bright Star under the Leases and any other lease concerning facilities, that have been financed with Obligations issued under the Master Indenture (the Obligated Group Leases ) (excluding from such calculation all depreciation and other non-cash items), and including within such calculation on behalf of the Obligated Group Schools in the aggregate (i) all Operating Expenses for such Fiscal Year for the Obligated Group Schools, (ii) subordinated Educational Management Fees and (iii) the maximum Base Rent payable under the Obligated Group Leases, taken as a whole, for any Fiscal Year, divided by (B) 365. Bright Star will provide a certificate to the Landlords and Master Trustee at the time of delivery of its annual audited financial statements for each Fiscal Year indicating whether Bright Star, on behalf of the Obligated Group Schools, has met the requirement set forth above. If the certificate indicates that such cash balance requirement has not been met, Bright Star covenants to retain an Independent Consultant, at the expense of Bright Star, on behalf of the Obligated Group Schools, within 45 days, to make recommendations to increase such balances in the then-current Fiscal Year to the required level or, if in the opinion of the Independent Consultant the attainment of such level is impracticable, to the highest level attainable in such Fiscal Year. The Independent Consultant selected and appointed by Bright Star may be rejected upon the written request of the holders of not less than a majority in aggregate principal amount of the Related Bonds then Outstanding; if so rejected, Bright Star covenants to use its best efforts to appoint a new Independent Consultant within 45 days thereof. Any Independent Consultant will be required to submit its recommendations to the Landlords and Master Trustee within 90 days after being so retained. Bright Star, on behalf of the Obligated Group Schools, agrees to consider the recommendations of the Independent Consultant, to the extent permitted by law; provided that a failure to implement the recommendations will constitute an Event of Default. No proceeds of any Short-Term Indebtedness will be considered unrestricted available cash for purposes of such calculation (other than the proceeds of any working capital loans made to bridge deferrals in State payments or start-up loans from the State of California or the California Department of Education). In the event Bright Star, on behalf of the Obligated Group Schools, fails to have such an amount on deposit, it will not be a default or Event of Default under the Leases. 47

54 Bright Star will not be obligated to retain such an Independent Consultant on behalf of the Obligated Group Schools more often than once during any 24 month period. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL BOND DOCUMENTS DEFINITIONS for capitalized terms not defined herein. Approval of Consultants. The Master Indenture provides that if at any time the members of the Obligated Group are required to engage an Independent Consultant under the provisions of the Master Indenture, such Independent Consultant shall be engaged in the matter set forth below in this section. Upon selecting an Independent Consultant as required under the provisions of the Master Indenture, the Obligated Group Representative will notify the Master Trustee of such selection. The Master Trustee shall, as soon as practicable but in no case longer than five Business Days after receipt of notice, notify the Holders of all Obligations Outstanding under this Master Indenture of such selection. Such notice (which shall be provided by the Obligated Group Representative) shall (i) include the name of the Independent Consultant, (ii) state the reason that the Independent Consultant is being engaged including a description of the covenant(s) of this Master Indenture that require the Independent Consultant to be engaged, and (iii) state that the Holder of the Obligation will be deemed to have consented to the selection of the Independent Consultant named in such notice unless such Holder submits an objection to the selected Independent Consultant in writing (in a manner acceptable to the Master Trustee) to the Master Trustee within 15 days of the date that the notice is sent to the Holders. No later than two Business Days after the end of the 15-day objection period, the Master Trustee shall notify the Obligated Group of the number of objections. If 66.6% or more in aggregate principal amount of the Holders of the Outstanding Obligations have been deemed to have consented to the selection of the Independent Consultant or have not responded to the request for consent, the Obligated Group Representative shall engage the Independent Consultant within three Business Days. If 33.4% or more in aggregate principal amount of the Holders of the Obligations Outstanding have objected to the Independent Consultant selected, the Obligated Group Representative shall select another Independent Consultant which may be engaged upon compliance with the procedures described herein. For further information about the approval of Independent Consultants, including the ability of Holders of the Obligation to object to the selection of Independent Consultants, see APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL BOND DOCUMENTS Approval of Independent Consultants. Financial Reporting. Bright Star agrees to provide Landlords, and upon written request of the Trustee or Master Trustee, to Trustee or Master Trustee as applicable, the following information: (a) If Bright Star is undertaking any construction at the Premises, not later than 60 days after the end of each quarter, a construction progress report with respect to any such construction until such construction is substantially complete. (b) Quarterly unaudited financial information and operating data of the Obligated Group Schools not later than 60 days after the end of each quarter. (c) Quarterly, not later than 60 days after the end of each quarter, a report of the Obligated Group School s quarterly enrollment data. 48

55 (d) Prior to the end of each fiscal year, a copy of the annual budget of the Schools for the subsequent Fiscal Year. (e) Quarterly, not later than 60 days after the end of each quarter, a year to date comparison of the revenue and expenditures in the unaudited financial statements for such quarter to the annual budget for the applicable fiscal year. (f) Quarterly, not later than 60 days after the end of each quarter, a copy of any recommendations of any Independent Consultant received in accordance with the Master Indenture pursuant to the Liquidity Covenant and Base Rent Coverage Ratio described above. (g) Annually, no later than six (6) months after the close of each fiscal year, commencing with the Fiscal Year ending June 30, 2018, copies of the audited financial statements of Bright Star and the Obligated Group Schools for the prior fiscal year prepared in accordance with generally accepted accounting principles applicable to nonprofit corporations from time to time, if available. (h) Annually, no later than six (6) months after the close of each fiscal year, commencing with the Fiscal Year ending June 30, 2019, the certifications and calculations of the Consolidated Days Cash on Hand for the Obligated Group Schools and the Base Rent Coverage Ratio for the Obligated Group Schools as described in the Liquidity Covenant and Base Rent Coverage Ratio described above. (i) Such other information as may be reasonably requested by a Landlord, the Authority, the Trustee or Master Trustee. Limitations on Obligated Group School Indebtedness. Bright Star covenants that it will not incur, assume or guarantee ( incur ), any Obligated Group School Indebtedness (secured or unsecured), except Obligated Group School Indebtedness with respect to purposes specifically benefiting Bright Star, and except as provided below. (a) Nonrecourse Indebtedness. To the extent permitted by applicable law and if no Event of Default under the Leases, or an event that with the giving of notice or passage of time or both would constitute an Event of Default under the Leases, has occurred and is continuing, Bright Star may incur or assume Nonrecourse Indebtedness (as defined below), but limited with Short-Term Indebtedness (as defined below), and Interim Indebtedness (as defined below) to a total aggregate principal amount outstanding at any time not in excess of the greater of: (1) 25% of Operating Expenses in any Fiscal Year, or (2) the maximum amount of advance apportionment and principal apportionment due to the School 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 (collectively Maximum Deferred Apportionment ). Nonrecourse Indebtedness means all Obligated Group School Indebtedness with respect to which the obligee is prevented by applicable law or contractual arrangement from exercising recourse, or any other right or remedy exercisable by a creditor, against all or any part of the Premises or the Improvements in order to pay, satisfy or discharge all or any part of the Obligated Group School Indebtedness. 49

56 (b) Short-Term Indebtedness. Bright Star may incur Short-Term Indebtedness (as defined below) for working capital purposes as in its judgment is deemed expedient, provided that in no event will Bright Star incur Short-Term Indebtedness, together with outstanding Nonrecourse Indebtedness and Interim Indebtedness (defined below) in excess of the greater of: (1) 25% of Operating Expenses in any Fiscal Year, or (2) the Maximum Deferred Apportionment. Short-Term Indebtedness means all Obligated Group School Indebtedness having an original maturity less than or equal to one year and not renewable at the option of Bright Star for a term greater than one year from the date of original incurrence or issuance, provided however, that any Short Term Indebtedness that has been issued as revenue anticipation notes ( RANS ) will not be included or counted as Short Term Indebtedness to the extent that the RANS are secured by deferred state apportionment revenues expressly pledged and deposited in an intercept account to pay such RANS. (c) Interim Indebtedness. Bright Star may incur Interim Indebtedness (as defined below) to finance or refinance existing capital needs as in its judgment is deemed expedient, provided that in no event will Bright Star incur Interim Indebtedness, together with outstanding Nonrecourse Indebtedness and Short-Term Indebtedness, on a combined basis, is in excess of the greater of: (1) 25% of Operating Expenses in any Fiscal Year, or (2) the Maximum Deferred Apportionment. Interim Indebtedness means all Obligated Group School Indebtedness having an original maturity less than or equal to five years and not renewable at the option of Bright Star for a term greater than five years from the date of original incurrence or issuance. (d) Charter School Revolving Fund Loan Program. Notwithstanding the foregoing limitations on Obligated Group School Indebtedness, Bright Star is permitted to obtain loans with respect to the Schools pursuant to the Charter School Revolving Loan Program established under California Education Code Sections through ( Charter School Start-up Loans ) and any such Charter School Start-up Loans existing with respect to any School will not be taken into account in applying the foregoing limitations on Non-Recourse Indebtedness, Short-Term Indebtedness, and Interim Indebtedness. (e) Notwithstanding the foregoing limitations on Obligated Group School Indebtedness, the Program Related Investment Loan is permitted under the Leases. Under the Leases, Program Related Investment Loan means that certain Program Related Investment loan made by Excellent Education Development in the principal amount of $1,000,000 pursuant to that certain Loan Agreement dated December 2, 2014 executed by Excellent Education Development and Tenant, which loan matures November 1, See APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS OPERATING AND FINANCIAL INFORMATION Outstanding Debt attached hereto.. (f) Notwithstanding the foregoing limitations on Obligated Group School Indebtedness, the City National Bank Line of Credit is permitted under the Leases. Under the Leases, City National Bank Line of Credit means that certain Revolving Note and related documents dated February 11, 2013, by and between City National Bank and Tenant (including any and all current or future draws or advances thereunder, up to the maximum principal amount thereof), as amended and extended, which City National Bank Line of Credit matures March 1, See APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, 50

57 THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS OPERATING AND FINANCIAL INFORMATION Outstanding Debt attached hereto. Use of State of California Apportionment. Under the Leases, Bright Star covenants that it will not use the public money, assets and funds for support of the public school system that it receives through apportionment from the State in a manner that conflicts with or constitutes on its part or on the part of each School a violation or breach of any State statute, rule or regulation governing the use of those moneys. The Authority shall be a deemed a third-party beneficiary of under each Lease with respect to this provision. Events of Default; Remedies. A Default is defined as a failure by Bright Star to comply with or perform any of the terms, covenants or other obligations of Bright Star under the Leases. An Event of Default is defined as the occurrence of one or more of the following Defaults, and the failure of Bright Star to cure such Default within any applicable grace period: (a) the abandonment of the Premises; (b) the failure of Bright Star to make any payment of Rent required to be made by Bright Star under the Leases when due, to provide reasonable evidence of insurance required under the Leases, or to fulfill any obligation under the Leases that endangers or threatens life or property, where such failure continues for a period of ten (10) business days following written notice to Bright Star; (c) any material representation or warranty made in the Leases, or in any report, certificate, financial statement, or instrument furnished in connection with the Leases, proves to have been false or misleading when made, in any material respect, and is not promptly corrected; (d) Bright Star violates or fails to observe or perform any covenant or financial covenant contained in the Leases that is stated to be an Event of Default, and fails to cure the same within any notice or grace period contained in the Leases; (e) a Default by Bright Star as to the terms, covenants, conditions or provisions of the Leases, other than those described in (a) through (d) above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Bright Star's Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Default if Bright Star commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion; and (f) the occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a debtor as defined in 11 U.S.C. 101 or any successor statute thereto (unless, in the case of a petition filed against Bright Star, the same is dismissed within 90 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Bright Star s assets located at the Premises or of Bright Star s interest in the Leases, where possession is not restored to Bright Star within sixty (60) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Bright Star s assets located at the Premises or of Bright Star s interest in the Leases, where such seizure is not discharged within sixty (60) days; provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. Upon the occurrence of any Event of Default, a Landlord may, with or without further notice or demand, and without limiting the Landlord in the exercise of any right or remedy that such Landlord may have by reason of such Event of Default: (a) terminate Bright Star s right to possession of the Premises by any lawful means and recover any unpaid Rent, including unpaid Rent after termination of possession that could not have been reasonably avoided, and other monetary damages, (b) continue the Leases and Bright Star s right to possession and recover the Rent as it becomes due, or (c) pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. 51

58 SMCA Ground Lease; Property Interests Conveyed Under the Leases. Upon the issuance of the Bonds, the VAHS Landlord will hold fee simple title to the VAHS Athletic Field Property, and, after construction is completed on the VAHS Campus, will acquire title to the VAHS Campus, subject to that certain Lease Agreement, dated as of December 1, 2017 (the VAHS Lease ), between the VAHS Landlord and Bright Star, as lessee. Upon the issuance of the Bonds, the SMCA Landlord will hold a leasehold interest in the SMCA Site subject to that certain Sublease Agreement, dated as of December 1, 2017 (the SMCA Lease ), between the SMCA Landlord and Bright Star. The following section briefly describes certain provisions of the SMCA Ground Lease. The following discussion does not purport to be a complete summary of the terms of the SMCA Ground Lease and is qualified by reference to the SMCA Ground Lease, which is attached hereto as Exhibit I. SMCA Ground Lease. Due Diligence Period: The Commencement Date is date of mutual execution of the SMCA Ground Lease, September 1, SMCA Landlord shall have sixty (60) days following the Commencement Date (the Due Diligence Period ) to perform all inspections and investigations of the Premises, including the Parking Easement Property described below, to SMCA Landlord s satisfaction, including but not limited to, the following (the Contingencies ): (i) Entering upon the Premises to perform any commercially reasonable inspections, investigations, studies and tests of the Premises, including the improvements thereon, if any; (ii) Performing environmental assessments and soils studies of the Premises and any other investigation SMCA Landlord deems desirable or necessary, including traffic studies and such other studies as may be necessary as part of SMCA Landlord s request for discretionary entitlements; (iii) Investigating such other matters as SMCA Landlord may reasonably desire, including but not limited to applicable Building and Safety and Planning Department requirements for SMCA Landlord s intended use; (iv) Applying for and obtaining discretionary entitlements from the City of Los Angeles and any other governmental agency with authority over the Premises for the construction and operation of a public charter school on the Premises; (v) Surveying the Premises, including but not limited to obtaining a legal description of the Land and Parking Easement Property sufficient for purposes of the Title Policy, and if so required by SMCA Landlord, preparing a Parcel Map of the Land; (vi) Obtaining Title Company s unconditional commitment to issue the Title Policy as of the Delivery Date described below. SMCA Landlord shall have the right to terminate the SMCA Ground Lease prior to the end of the Due Diligence Period (as extended, if applicable, by the Due Diligence Extension Periods) in the event SMCA Landlord, in its sole discretion, provides a written notice of termination to SMCA Ground Lessor and Escrow Holder, in which event the Deposit and any other funds deposited by SMCA Landlord with Escrow Holder, expressly excepting the Due Diligence Extension Payments, shall be refunded to SMCA Landlord, with the exception of One Hundred Dollars ($100.00) of the Deposit (the Independent Consideration ). 52

59 SMCA Landlord shall have three (3) separate options (each, the Due Diligence Extension Option ) to extend the Due Diligence Period for three (3) additional thirty (30) day periods (each, a Due Diligence Extension Period ) for a non-refundable amount of $25, for each of the extensions (each, a Due Diligence Extension Payment ). Within five (5) business days after SMCA Landlord s written notice waiving or approving the Contingencies, Tenant shall deposit with Escrow Holder, for payment to Landlord, $2,000,000.00, less the sum of (i) the Deposit released or payable to SMCA Ground Lessor and (ii) the first Due Diligence Extension Payment if theretofore paid, which shall be promptly paid by Escrow Holder to SMCA Ground Lessor as prepaid Rent (as described in Paragraph 3 hereof) (the Prepaid Rent ). The Prepaid Rent will be applied and credited against the Rent due following the date that is 365 days from the Delivery Date defined hereinbelow (the Rent Commencement Date ) until the Prepaid Rent has been fully applied and credited against the Rent payable hereunder, which is estimated to be approximately six (6) years and seven (7) months from the Rent Commencement Date. No Rent shall be due for the period of time from the Delivery Date until the Rent Commencement Date. Delivery Date/Term. The term of this SMCA Ground Lease shall commence on the Commencement Date and end on June 30th of the 31st calendar year following the Rent Commencement Date (the Initial Term ). SMCA Ground Lessor shall deliver the Premises on or before thirty (30) days from SMCA Landlord s written notice waiving or approving all Contingencies (the Delivery Date ). The Premises delivered on the Delivery Date shall include an easement for ingress, egress and parking in favor of SMCA Landlord, its officers, employees, students and parents (the Parking Easement ) for fifty (50) parking spaces in the SMCA Ground Lessor s parking lot which is immediately adjacent to the Premises (the Parking Easement Property ). As more particularly provided in the Parking Easement, SMCA Landlord shall pay its pro rata share of maintenance and repair expenses associated with its shared use of the Parking Easement Property. On or before the Delivery Date, the Parking Easement shall be recorded in the Official Records of Los Angeles County, California. On or before the expiration of the Due Diligence Period, the parties shall enter into a Shared Areas Agreement pursuant to which SMCA Ground Lessor shall have use of not more than ten (10) classrooms designated by SMCA Landlord and the multipurpose room to be located in the Building to be constructed by SMCA Landlord on the Premises (the Shared Areas ) at nights and weekends when not in use by SMCA Landlord (the Shared Areas Agreement ). The Shared Areas Agreement shall provide that SMCA Ground Lessor may use such classrooms and multipurpose room for educational purposes, and that no Base Rent shall be payable for such use; provided that, as more particularly provided in the Shared Areas Agreement, SMCA Ground Lessor shall pay its pro rata share of all expenses allocable to SMCA Ground Lessor s use of the Shared Areas, including utilities, janitorial services, repairs, maintenance, and security. Options to Extend. SMCA Landlord shall have two (2) options (each Extension Option ) to extend the Initial Term for five (5) years per option (any such extension term(s), the Extension Term and collectively with the Initial Term, the Term ). An Extension Option must be exercised if at all by written notice ( Option Notice ) delivered by SMCA Landlord to SMCA Ground Lessor not less than ten (10) months prior to the then scheduled expiration date of the Term. In the event the Term of this SMCA Ground Lease shall be extended under this paragraph, then all of the terms, covenants and conditions of this SMCA Ground 53

60 Lease shall remain unmodified and in full force and effect, and Base Rent shall continue to be calculated and paid as described in Rental below. Rental. Base Rent, Expenses (as defined below), Additional Rent (as defined below) and all other monetary obligations of SMCA Landlord to SMCA Ground Lessor or to third parties arising under the terms of this SMCA Ground Lease are deemed to be rent ( Rent ). Commencing on the Rent Commencement Date, the Base Rent shall be $24,000 per month. The Base Rent shall increase by 2% annually on the anniversary of the Rent Commencement Date in each successive SMCA Ground Lease Year. For purposes of this SMCA Ground Lease, a SMCA Ground Lease Year is each 12-month period starting as of July 1 and terminating as of the next successive June 30th, provided that the first SMCA Ground Lease Year shall also include that period from the Rent Commencement Date (if prior to July 1) until the next succeeding June 30. Additional Rent shall be the amounts necessary to pay or reimburse SMCA Ground Lessor for Expenses which are not paid directly by SMCA Landlord. Expenses shall mean all costs and expenses of the operation, maintenance, repair or replacement, and insurance of the Premises which are incurred following the Delivery Date, including but not limited to Real Property Taxes in excess of those assessed against the Premises as of tax year of the Delivery Date, utilities allocable to the SMCA Landlord s use of the Premises, personal property taxes and any and all other charges, fees and other governmental levies of any kind and nature whatsoever, including, without limitation, water and sewer charges, rates and rents, license and permit fees allocable to the use, occupancy, operation or maintenance of the Premises, all of which, to the extent possible, shall be paid directly by SMCA Landlord. For purposes of this SMCA Ground Lease SMCA Landlord s pro rata share of any Expenses which are not separately metered or billed to the Premises, shall be that amount for such respective Expense which exceeds the amount of such Expense payable or incurred by SMCA Ground Lessor for the same period in the year. Use. SMCA Landlord shall use the Premises for educational purposes, and other uses reasonably ancillary thereto (the Permitted Use ). No other uses shall be permitted without SMCA Ground Lessor s consent which will not be unreasonably withheld. Such Permitted Use shall include the development, use, and operation of facilities on the Premises to be used by a charter school owned or affiliated with SMCA Landlord, including without limitation Stella Middle Charter Academy (the School ). Assigning or Subletting. SMCA Landlord shall not subsmca Ground Lease all or any part of the Premises or assign this SMCA Ground Lease in whole or in part without SMCA Ground Lessor s prior written consent, such consent not to be unreasonably withheld or delayed; provided, however, that the foregoing shall not prohibit SMCA Landlord from assigning this SMCA Ground Lease or subleasing all or a portion of the Premises, without SMCA Ground Lessor s consent (but with written notice to SMCA Ground Lessor), to the School or other entity which is controlling, controlled by, under common control or otherwise affiliated with SMCA Landlord and/or the School. 54

61 Repair and Maintenance. At all times during the Term and any renewal or extension thereof, SMCA Landlord shall, at SMCA Landlord s sole cost and expense, keep and maintain, or cause to be kept and maintained, the Premises. Real Property Taxes. SMCA Landlord shall pay, prior to delinquency, all general and supplemental real estate taxes and installments of special assessments, including governmental charges or levies of any kind or nature payable through the property tax bill for the Premises (collectively Real Property Taxes ) coming due during the Term on the Premises which are in excess of the Real Property Taxes assessed against the Premises for the tax year of the Delivery Date. Insurance. SMCA Landlord shall maintain insurance ( Insurance ) on the Building and the Premises, which insurance shall include such risks as fire, theft and vandalism, in an amount equal to the full replacement cost of the Improvements as the same shall exist from time to time, as reasonably approved by SMCA Ground Lessor, and as supplemented to meet the requirements of any SMCA Ground Leasehold Mortgagee. Such insurance shall name SMCA Ground Lessor as an additional insured and provide that the proceeds shall be payable to SMCA Ground Lessor and SMCA Landlord as their interest may appear, or SMCA Landlord s SMCA Ground Leasehold Mortgagee, if applicable. SMCA Landlord shall maintain, at its expense, a policy or policies of comprehensive general liability insurance with respect to the Premises with the premiums thereon fully paid on or before the due date, such insurance to afford minimum protection of not less than $1,000,000 combined single limit coverage of bodily injury, property damage or combination thereof. SMCA Ground Lessor shall be listed as an additional insured on SMCA Landlord s policy or policies of comprehensive general liability insurance Damage and Destruction. If the Premises is damaged by fire or other casualty resulting from any act or negligence of SMCA Landlord or any of SMCA Landlord s agents, employees or invitees, Rent shall not be diminished or abated while such damages are under repair, and SMCA Landlord shall be responsible for the costs of repair not covered by Insurance. Subject to subparagraph A above, if the Premises or any part thereof or any appurtenance thereto is damaged by fire, casualty or structural defects that is covered by Insurance, SMCA Landlord shall promptly repair such damage at its sole cost, provided that the proceeds of the Insurance are made available to SMCA Landlord. If a material portion of the Premises is damaged by casualty such that SMCA Landlord is prevented from conducting its business in all or a part of the Premises in a manner reasonably comparable to that conducted immediately before such casualty and SMCA Landlord estimates that the damage caused thereby cannot be repaired within one hundred eighty (180) days after the date of the casualty (the Repair Period ), then, subject to the terms of any SMCA Ground Leasehold Mortgage, SMCA Landlord shall have the option to terminate this SMCA Ground Lease by written notice to SMCA Ground Lessor provided within thirty (30) days of the event. SMCA Landlord shall be relieved from paying Rent and other charges during any portion of the Term that the Premises are inoperable or unfit for occupancy, or use, in whole or in part, for SMCA Landlord s purposes, unless the damage or casualty was caused in whole or in part by SMCA Landlord. 55

62 If a casualty damages the Premises or a material portion of the Building and: (i) SMCA Landlord reasonably estimates that the damage to the Premises cannot be repaired within the Repair Period; (ii) the damage to the Premises exceeds fifty percent (50%) of the replacement cost thereof (excluding foundations and footings), as estimated by SMCA Landlord and such damage occurs during the last year of the Term; (iii) regardless of the extent of damage to the Premises, SMCA Landlord makes a good faith determination that restoring the Building would be uneconomical; or (iv) SMCA Landlord is required to pay any material portion of the insurance proceeds arising out of the casualty to a SMCA Ground Leasehold Mortgagee without the ability to use such proceeds towards the repair or restoration of the Building, then SMCA Landlord may terminate this SMCA Ground Lease by giving written notice of its election to terminate within thirty (30) days after the notice of the damage has been delivered to SMCA Landlord. Following any termination of this SMCA Ground Lease, any Prepaid Rent not otherwise owed to SMCA Ground Lessor for damages, to the extent not credited against Rent, shall be refunded by SMCA Ground Lessor to SMCA Landlord. Right of First Refusal. SMCA Ground Lessor shall provide SMCA Landlord with a true and correct copy of any bona fide offer to purchase the Premises, which SMCA Ground Lessor desires and intends to accept, and hereby grants SMCA Landlord a continuing right of first refusal to purchase the Premises upon the same terms and provisions as such bona fide offer. SMCA Landlord shall have a period of thirty (30) days after receipt of such bona fide offer to notify SMCA Ground Lessor of its election to accept or reject such offer. If SMCA Landlord does not provide written notice of its acceptance, SMCA Landlord shall be deemed to have rejected such offer and SMCA Ground Lessor may enter into an agreement to sell the Premises upon the same terms and conditions as said bona fide offer, but subject to all the terms and conditions of this SMCA Ground Lease, including this right of first refusal, which shall remain in full force and effect with respect to any successor owner. In the event that SMCA Landlord declines to exercise its right of first refusal, and, thereafter, SMCA Ground Lessor and the prospective purchaser modify by more than five percent (5%) (i) the sales price, or (ii) the amount of down payment, or if there is a material change in any seller financing offered, or in the event that the sale is not consummated within 180 days of the date SMCA Ground Lessor notifies SMCA Landlord of any bona fide offer to purchase the Premises, then SMCA Landlord's right of first refusal shall reapply to said transaction. Additional Leases Governed by the Master Indenture Under the Master Indenture, Lease is defined as the Leases and each other lease agreement pursuant to which a Lessee leases a facility at which a School (as defined in the Master Indenture) is located from a Member of the Obligated Group. If a Member of the Obligated Group enters into a Lease (as defined in the Master Indenture), such Lease must contain the following provisions: (a) Extraordinary Monthly Rent. In the event that the Lessee under such Lease receives a notice (an Extraordinary Monthly Rent Notice ) from either the lessor under such Lease (the Lessor ) or the Related Bond Trustee (as defined in the Master Indenture) stating that the Related Bond Trustee has not received the payment of Rent with respect to a Related Project on or before the date that such required payment is due, then such Lessee shall pay the Extraordinary Monthly Rent to the Related Bond Trustee within three (3) Business Days after such Lessee s receipt of the Extraordinary Monthly Rent Notice. The Lessor shall covenant in such Lease to immediately provide the Lessee with a copy of any Extraordinary Monthly Rent Notice received by Lessor pursuant to the terms of the Master Indenture. Extraordinary Monthly Rent means the amount set forth in such Extraordinary Monthly Rent Notice, which shall be the Lessee s Proportionate Share of the Extraordinary Monthly Rent. Proportionate Share means the amount required to be paid by Lessee to ensure that all of the required Rent with respect 56

63 to all of the Related Projects (as that term is defined in the Master Indenture) have been timely made. There is no assurance that the amount of Extraordinary Monthly Rent will be sufficient to cover any Rent not paid by any other Related Project. (b) The definition of Rent set forth under the related Lease shall include, as one component, the Extraordinary Monthly Rent. (c) A Liquidity Covenant substantially similar to the covenant described under the heading The Leases Liquidity Covenant above. (d) A Base Rent Coverage Ratio Covenant substantially similar to the covenant described under the heading The Leases Base Rent Coverage Ratio above. The Landlords are currently the only Members of the Obligated Group, and the only leases (as defined in the Master Indenture) are the Leases, and the only Schools (as defined in the Master Indenture) are Valor Academy High School and Stella Middle Charter Academy. Bright Star and the Borrower provide no assurances that other schools and leases will be added and are subject to the provisions of the Master Indenture. General CHARTER SCHOOLS This section provides a brief overview of California s system for funding charter schools. Prospective purchasers of the Bonds should note that the overview contained in this section and the summary of relevant law noted by cross-reference in the sections that follow are provided for the convenience of prospective purchasers but are not and do not purport to be comprehensive. Additional information regarding various aspects of charter school funding in California is available on numerous State-maintained websites and through other publicly available sources. 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 is usually created or organized by a group of teachers, parents and community leaders, or a communitybased 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. A charter school is generally exempt from the laws governing school districts, except where specifically noted in the law or required by the chartering authority. Charter schools in the State are created pursuant to Part 26.8 (beginning 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 disability, gender, gender identity, gender expression, nationality, race or ethnicity, religion, sexual orientation, or any other characteristic that is contained in the definition of hate crimes set forth in Section of the Penal Code. Public charter schools in the State are required to participate in the California Assessment of Student Performance and Progress (CAASPP) System in the same manner as other pupils attending public schools. 57

64 According to the Charter School Law, the purpose of a charter school is to: (a) improve pupil learning; (b) increase learning opportunities for all pupils, with special emphasis on expanded learning experiences for pupils identified as academically low achieving; (c) encourage the use of different and innovative teaching methods; (d) create new professional opportunities for teachers, including the opportunity to be responsible for the learning program at the school site; (e) provide parents and students with expanded choices in the types of educational opportunities that are available within the public school system; (f) 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 (g) provide vigorous 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 an existing traditional public school), charter developers must present a petition to the governing board of the local school district (or other chartering authority) containing the signatures of either: (a) a number of teachers meaningfully interested in teaching at the school equal to at least 50% of the number of teachers the charter school estimates will be employed, or (b) a number of parents representing at least 50% 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% of the permanent status 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 lottery funds based upon pupil attendance, and may be eligible for other special programmatic aid from State and federal grants. For additional information regarding funding of education in the State and information relating to certain risks and other considerations relevant to a decision to invest in the Bonds, see STATE FUNDING OF EDUCATION and CERTAIN 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 also seek approval from a county board of education for a countywide charter school, which may be granted only if the county board finds that the proposed countywide charter school will offer services to a pupil population that will benefit from those services and that cannot be served as well by a charter school that operates only in one school district in the county. See Countywide Benefit Charter Schools below. A petitioner may seek approval directly from the State Board of Education only if the State Board of Education 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. See Statewide Benefit Charter below. Petitioners may request the county board of education to review a charter petition if the petition has been previously denied by the local school district governing board. If the petitioners elect to submit a petition for establishments of a charter school to the county board of education and the county board of education 58

65 denied the petition, the petitioners may file a petition for establishment of a charter school with the State Board of Education. For information concerning the charter granted with respect to the Schools, see APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS attached hereto. Elements of a Charter Petition Each charter petition for a charter school within a school district, at a minimum, must contain reasonably comprehensive descriptions of each of the following sixteen required elements: (a) (b) (c) measured; (d) (e) (f) a description of the educational program of the charter school; the measurable pupil outcomes identified for use by the charter school; the method by which pupil progress in meeting those pupil outcomes is to be the charter school s governance structure, including parental involvement; the qualifications to be met by individuals employed by the charter school; procedures to ensure health and safety of pupils and staff; (g) the means by which the charter school will achieve racial and ethnic balance among pupils, reflective of the general population residing within the territorial jurisdiction of the chartering district. (h) admission requirements, if applicable. (i) the manner in which annual independent financial audits will be conducted, and the manner in which audit exceptions and deficiencies will be resolved to the satisfaction of the chartering authority. (j) the procedures by which pupils may be suspended or expelled. (k) provisions for employee coverage under the State Teachers Retirement System, the Public Employees Retirement System, or federal social security. (l) the public school attendance alternatives for pupils residing within the district who choose not to attend charter schools. (m) 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. (n) the procedures to be followed by the charter school and the entity granting the charter to resolve disputes relating to provisions of the charter. 59

66 (o) 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. (p) a description of the procedures for closure of the school and disposition of assets, which shall ensure a final audit of the charter school to determine the disposition of all assets and liabilities of the charter school, including plans for disposing of any net assets and for the maintenance and transfer of pupil records. Each chartering authority must identify at least one staff member as a contact person for charter schools, visit each charter school at least once a year, and ensure that charter schools under its authority submits all required reports (including fiscal reports that must be sent four times a year to the district and/ or local county office of education). In addition, each charting authority must monitor the fiscal condition of its charter schools and timely notify the State Department of Education whenever a charter is granted, denied, revoked, or the charter school will cease operation. Charter schools must show a certain level of academic performance to have their charters renewed. The governing board of a school district will deny a petition if it finds one or more of the following: (a) the charter school presents an unsound educational program for the pupils to be enrolled in the charter school, (b) petitioners are demonstrably unlikely to successfully implement the program set forth in the petition, (c) the petition does not contain the number of required signatures, (d) the petition does not contain an affirmation of each of the enumerated conditions, and (e) the petition does not contain comprehensive descriptions of those sixteen required elements enumerated above. Countywide Benefit Charter Schools Education Code Section provides for the creation of countywide benefit charter schools to operate at one or more sites within the geographic boundaries of a county and that provide instructional services that are not generally provided by a county office of education. A county board of education may approve a countywide charter only if it finds, in addition to the other requirements of the Charter School Law, that the educational services to be provided by the charter school will offer services to a pupil population that will benefit from those services and that cannot be served as well by a charter school that operates in only one school district in the county. The provisions governing denial of a charter petition for school district governing boards also apply to the denial of a charter petition to countywide benefit charters. The Obligated Group Schools do not operate pursuant to countywide benefit charters. See APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS attached hereto. Statewide Benefit Charter Schools Education Code Section provides for the creation of statewide benefit charter schools to operate at multiple locations throughout the State of California. A petition for the operation of a state charter school may be submitted to the State Board of Education ( SBE ) for approval. The SBE may not approve a petition for the operation of a state charter school unless it 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 only in one county. As a condition of charter petition approval, the SBE may enter into an agreement with a third party, at the expense of the charter school, to oversee, monitor, and report on, the operations of the charter school. The provisions governing denial of a charter petition for county boards of education, also apply to the denial of a petition to statewide benefit charters. 60

67 The Obligated Group Schools do not operate pursuant to statewide benefit charters. See APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS Charters attached hereto. Charter Management Organizations As the number of charter schools operating pursuant to the Charter School Law has increased over time, nonprofit organizations have been established, referred to as charter management organizations ( CMO ), 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. CMOs may operate at the regional or statewide level. Bright Star functions as the CMO for the Obligated Group Schools and several other schools. See APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS attached hereto. Charter Revocation A charter may be revoked if the chartering authority finds, based on substantial evidence, that a charter school (a) has committed a material violation any of the conditions, standards or procedures set forth in its charter; (b) has failed to meet or to pursue any of the student outcomes identified in its charter; (c) has failed to meet generally accepted accounting principles, or engaged in fiscal mismanagement; or (d) has violated any provision of law. Prior to revoking a charter, the chartering authority must notify the charter school of the violation, afford the charter school a reasonable opportunity to remedy the violation, and, upon failure to remedy the violation, give written notice of intent to revoke and notice of facts in support of revocation to the charter school 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 SBE. See CERTAIN RISK FACTORS Specific Risks of Charter Schools Non-Renewal or Revocation of Charters herein. In addition, the SBE, whether or not it is the chartering 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 (a) gross financial mismanagement that jeopardizes the financial stability of the charter school; (b) illegal or substantially improper use of charter school funds for the personal benefit of any officer, director or fiduciary of the charter school; or (c) 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 SBE that became effective February 13, 2011 require the California Department of Education to identify and notify the SBE 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 SBE 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 SBE to hold a public hearing to consider action including but not limited to charter revocation not later than March 31. See CERTAIN RISK FACTORS Specific Risks of Charter Schools Non-Renewal or Revocation of Charters herein. The Obligated Group Schools have not received any notice from the SBE or its chartering authority regarding any violation or proposal to revoke the Obligated Group Schools charters or of any other violation requiring corrective action. In addition, as noted above, any future adverse decision by the 61

68 governing board of the charter authorizer may be appealed to the local County Board of Education and an adverse decision by such Board of Education, directly or on appeal, may be appealed to the SBE. 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. Neither the Borrower nor any charter school has any control over State legislative or regulatory decision making that could affect the operations or ongoing funding sources for the Obligated Group Schools. For example, Senate Bill 1290, signed into law by the Governor on September 26, 2012, requires 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; and Assembly Bill 948, signed into law by the Governor on September 30, 2014, expanded eligibility for the Charter School Facility Grant Program. For legislative updates, see The parties to this transaction 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. See also CERTAIN RISK FACTORS Specific Risks of Charter Schools Charter School Law herein. Growth in Charter Schools in California California has the largest concentration of charter schools in the nation with more than 603,000 students enrolled in charter schools for the school year, according to the California Charter Schools Association. The California Charter Schools Association also reported that 56 new charter schools opened in the State of California in the school year, bringing the total number of charter schools in California up to 1,254. TOTAL CHARTER SCHOOLS IN CALIFORNIA Fiscal Years Through Fiscal Year Number of Charter Schools , , , , , Source: California Charter School Association 62

69 STATE FUNDING OF EDUCATION General The Charter School Law provides that the State 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 serving 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. Adoption of Annual State Budget. According to the State Constitution, the Governor of the State is required to 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, although this deadline has been breached in previous years. Pursuant to Proposition 25, which was approved by voters in November 2010, the vote requirement to pass a budget bill is a simple majority (50% plus one) of each house of the State Legislature. This vote requirement also applies 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 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, Failure by the State to adopt a budget may restrict the California State Controller's ability to disburse State funds after the beginning of the ensuing fiscal year. Those restrictions were the subject of litigation captioned White v. Davis (also referred to as Jarvis v. Connell) decided on May 29, 2002 by the State Court of Appeal. White v. Davis, was appealed to the California Supreme Court, whose May 1, 2003 decision refined some of the relevant holdings of the Court of Appeals. Those cases held, in part, that the California State Controller may be able to disburse State funds after the beginning of the fiscal year prior to the adoption of the State budget bill or emergency appropriation, if the expenditure, among other things, 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). 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. See CERTAIN RISK FACTORS herein. 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 Fiscal Year 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 neither the Borrower nor the Authority takes any responsibility for informing Beneficial 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, under the heading California Budget. 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 63

70 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 as being available via the foregoing websites is prepared by the respective entities maintaining each website. Such information is expressly not incorporated by reference herein and none of the Authority, the Borrower, or Bright Star make any representation as to the accuracy of its content. Such information may 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 (now found at Article XVI, Sections 8 and 8.5 of the State 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 additional information regarding the various factors becomes available. Over the long run, the guaranteed amount may 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 State 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 lagged the mandated amount. In response, teachers unions, the State Superintendent and others sued the State or Governor in 1995 and 2005 to force them to fund schools in the full amount required. The settlement of the 1995, 2005, 2009 and 2011 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 (QEIA), 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 years , , and ; and by proposing to amend the Constitution s definition of the guaranteed amount and settle up requirement 64

71 under certain circumstances. The State Budget, State Budget, State Budget and the State Budget reverse certain of these trends by, among other things, eliminating certain deferrals, authorizing payments of certain deferred amounts owed to schools subject to State General Fund Revenues and authorizing settle-up payments with respect deferred apportionments of the Proposition 98 minimum guarantee Budget Act. On June 27, 2017, the Governor signed the Budget Act (the Budget ). The following information is drawn from the Department of Finance s summary of the Budget, as well as a summary prepared by the Legislative Analyst s Office (the LAO ). The Budget projects total general fund revenues of $125.9 billion, reflecting a 6% increase over the prior year and driven primarily by a projected 5% increase in personal income, sales and use tax collections. The Budget authorizes expenditures of $125.1 billion. The State is projected to end the fiscal year with total available reserves of $9.9 billion, including $1.4 billion in the traditional general fund reserve and $8.5 billion in the Budget Stabilization Act. With respect to education funding, the Budget revises the Proposition 98 minimum funding guarantees for both fiscal years and , as a result of lower-than-estimated general fund revenue collections. The Budget sets the Proposition 98 minimum funding guarantee for fiscal year at $68.7 billion, a decrease of $379 million from the prior year. However, total Proposition 98 funding exceeded the minimum guarantee by $53 million as a result of various adjustments related to the LCFF and community college apportionments. The Budget revises the minimum funding guarantee for fiscal year at $71.3 billion, reflecting a decrease of $558 million from the prior year. Total spending in fiscal year , however, exceeded the minimum funding guarantee by approximately $29 million, as a result of a $514 million settle-up payment related to an obligation created by understating the minimum guarantee in a prior year. For fiscal year , the Budget sets the minimum funding guarantee at $74.5 billion, reflecting an increase of $3.1 billion (or 4.4%) from the revised prior-year level. Fiscal year is projected to be a Test 2 year, with the change in the minimum funding guarantee attributable to a 3.7% increase in per capita personal income and a projected 0.05% decline in K-12 attendance. With respect to K-12 education, the Budget sets Proposition 98 funding at $64.7 billion, including $45.7 billion from the State general fund, reflecting an increase of $2.7 billion (or 4.3%) from the prior year. Per-pupil spending increases 4.3% to $10,863.Significant proposals or adjustments with respect to K-12 education funding include the following: (a) Local Control Funding Formula. Approximately $1.4 billion in Proposition 98 funding to continue the implementation of the LCFF. Total LCFF funding for school districts and charter schools is set at $57.4 billion, a 2.7% increase from the prior year. The Budget projects that this funding will bring LCFF implementation to approximately 97%. (b) Discretionary Funding. An increase of $877 million in one-time Proposition 98 funding that local educational agencies may use for any purpose. Similar to features included in prior State budgets, these funds would offset any applicable unpaid reimbursement claims for State mandated activities. (c) Maintenance Factor; Settle Up Payment. The Budget provides for an additional maintenance factor payment of $536 million, after which the State s outstanding obligation would be approximately $900 million. The Budget also provides $603 million to fund a settle up payment related to an obligation created in fiscal year when revenue 65

72 estimates understated the minimum funding guarantee. This reduces the State s total settle up obligation to approximately $440 million. (d) Career Technical Education (CTE). The State Budget for fiscal year established the Career Technical Education Incentive Grant Program for local education agencies to establish new or expand high-quality CTE programs. The Budget provides $200 million as the final installment of funding for this program. The Budget also provides the California Department of Education with $15.4 million in on-going Proposition 98 funding to support efforts linking secondary and postsecondary CTE. (e) K-12 Educational Mandates. An increase of $3.5 million Proposition 98 funding to fund a 1.56% Cost of Living Adjustment ( COLA ) to the block grant program for State mandated K-12 educational programs and activities. The Budget establishes a statutory COLA for these programs moving forward. The also provides $61 million to fund a 1.56% COLA to several other categorical programs. (f) Teacher Workforce Initiative. The Budget funds a variety of teacher recruitment and training programs, including (i) $25 million in one-time Proposition 98 funding for grants to assist classified school employees secure bachelor s degrees and teaching credentials; (ii) $11 million in federal Title II funds to establish a program to help local educational agencies attract and support teachers, principals and other school leaders; and (iii) $5 million in one-time Proposition 98 funding for a new program that would encourage teachers to obtain bilingual credentials and teach in bilingual settings. (g) Proposition 39. Passed by voters in November 2012, Proposition 39 increases State corporate tax revenues and requires that, for a five-year period starting in fiscal year , a portion of these additional revenues be allocated to local education agencies to improve energy efficiency and expand the use of alternative energy in public buildings. The Budget allocates $423 million of such funds to support school district and charter school energy efficiency projects in fiscal year (h) After School and Education Safety Program. An increase of $50 million in Proposition 98 funding (for a total of $600 million) to increase per-child reimbursement rates for providers of local after school education and enrichment programs. (i) Proposition 56. Passed by voters in November 2016, Proposition 56 increases the per-pack State sales tax on cigarettes by $2, and requires that a portion of the revenue generated be used for school programs designed to prevent and reduce the use of tobacco and nicotine products. The Budget allocates $32 million of Proposition 56 revenues to support these programs. (j) Charter School Facility Grant Program. Under this program, the State provides certain charter schools with grants to defray the cost of renting and leasing school facilities. The Budget increases the per-student funding rate to $1,117 and provides an ongoing COLA for the program moving forward. See Allocation of State Funding to Charter Schools SB 740 Facilities Grant Program Funding herein. (k) California Equity Performance and Improvement Program. An increase of $2.5 million in onetime Proposition 98 funding for two or more county offices of education to assist local educational agencies and the State Department of Education to promote equity in public schools. 66

73 (l) Proposition 51. A total allocation of $593 million in Proposition 51 bond funds for K-12 school facility projects. (m) Refugee Students. An increase of $10 million in one-time Proposition 98 funding for the State Department of Social Services to provide grants to school districts that serve notable numbers of refugee students.. For additional information regarding the Budget Act, see the State Department of Finance website at and the LAO s website at The information presented in such websites is not incorporated herein by reference and the Borrower can take no responsibility for the continued accuracy of these internet addresses or for the accuracy, completeness or timeliness of the information posted therein. Future Budgets and Budgetary Actions. The Authority, the Borrower, Bright Star and the Schools cannot predict what future actions will be taken 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 beyond the ability of the Authority, the Borrower, Bright Star and the Schools to predict or 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. Certain factors, like an economic recession, could result in State budget shortfalls in any fiscal year and could have a material adverse financial impact on the Authority, the Borrower, Bright Star and the Schools. 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. 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, which local redevelopment agencies have now been dissolved. Redevelopment agencies had sued the State over this latter diversion. However, the lawsuit was decided against the California Redevelopment Association on May 4, Because Proposition 22 reduces the State s authority to use 67

74 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. Allocation of State Funding to Charter Schools General Purpose Entitlement. Under the Charter School Law, each charter school is calculated to have a general purpose entitlement, which has in the past been 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 (grades K-3, grades 4-5, grades 6-8, and grades 9-12) 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 sponsoring local educational agency 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. Categorical Funding. In addition, each charter school has been 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. Categorical block grant funding 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. Local Control Funding Formula. State Assembly Bill 97 (Stats. 2013, Chapter 47) ( AB 97 ), which was enacted in connection with the State Budget Act for Fiscal Year , established a new system for funding school districts, charter schools and county offices of education. Certain provisions of AB 97 were amended and clarified by Senate Bill 91 (Stats. 2013, Chapter 49) ( SB 91 ). Funding. The primary component of AB 97, as modified by SB 91, is the implementation of the Local Control Funding Formula ( LCFF ), which replaces the revenue limit funding system for determining State apportionments, as well as the majority of categorical program funding. Under the LCFF, State allocations will be provided on the basis of target base funding grants per unit of ADA (a Base Grant ) assigned to each of four grade spans (identical to the grade spans previously used for charter school funding). Each Base Grant is subject to certain adjustments and add-ons, as discussed below. The Department of Finance s projections indicate that the LCFF will be fully funded by the Fiscal Year ending June 30, Beginning in fiscal year , an annual transition adjustment is calculated for each charter school, equal to such charter school s proportionate share of appropriations included in the State budget to close the gap between the prior-year funding level and the target allocation following full implementation of the LCFF. In each year, charter schools will have the same proportion of their respective funding gaps closed, with dollar amounts varying depending on the size of the charter school respective funding gaps. 68

75 The Base Grants are based on four uniform, grade-span base rates. For Fiscal Year , the LCFF is expected to provide: (a) a Base Grant for each LEA equivalent to $7,941 per ADA for kindergarten through grade 3; (b) a Base Grant for each LEA equivalent to $7,301 per ADA for grades 4 through 6; (c) a Base Grant for each LEA equivalent to $7,518 per ADA for grades 7 and 8; (d) a Base Grant for each LEA equivalent to $8,939 per ADA for grades 9 through 12. However, the amount of actual funding allocated to the Base Grant, Supplemental Grants and Concentration Grants will be subject to the discretion of the State. Following full implementation of the LCFF, the provision of Cost of Living Adjustments will be subject to appropriation for such adjustment in the annual State budget. The differences among Base Grants are linked to differentials in statewide average revenue limit rates by district type, and are intended to recognize the generally higher costs of education at higher grade levels.] Pursuant to the LCFF, each local education agency ( LEA ) is required to, among other things show progress toward an average class enrollment of no more than 24 pupils in kindergarten through grade 3 unless the LEA has collectively bargained an annual alternative average class enrollment in those grades for each school. Accordingly, the LCFF includes an adjustment to the Base Grant for kindergarten through grade 3 of approximately 10.4% in order to cover the costs associated with class size reduction. In addition, the LCFF includes an adjustment to the Base Grant for grades 9 through 12 of approximately 2.6% in order to cover the costs of, among other things, providing career technical education. Charter schools that serve students of limited English proficiency ( EL students), students from low income families that are eligible for free or reduced priced meals ( LI students) and foster youth are eligible to receive additional funding grants. Enrollment counts are unduplicated, such that students may not be counted as both EL and LI. Foster youth automatically meet the eligibility requirements for free or reduced priced meals, and are therefore not discussed herein separately. Based on the ADA of the given demographic classification, charter schools and school districts are eligible to receive a 20% supplemental grant (the Supplemental Grant ) for students classified as EL students, students eligible to receive a free or reduced price meal ( FRPM ), and students classified as foster youth. The State expects the Supplemental Grants to reflect the additional costs associated with the education of EL, FRPM and LI students. In addition, charter schools and school districts are eligible to receive a concentration grant (the Concentration Grant ) if such charter school or school district has a significant concentration of students classified as EL, FRPM or LI (collectively, Targeted Disadvantaged Students ). The LCFF uses an unduplicated student count to determine the amount of the Supplemental Grant and Concentration Grant authorized for a charter school or school district. A charter school or school district may only count a student one time if such student classified in more than one of the categories EL, FRPM and LI. In the event the percentage of EL or LI students exceeds 55% of the total enrollment of such charter school or school district, as applicable, the LCFF provides additional funding to the school district through a Concentration Grant. The Concentration Grant will be an amount equal to an additional 50% of the school district s adjusted Base Grant for each EL or LI student above the 55% threshold; provided that a charter school may not receive a Concentration Grant for a greater proportion of EL/LI than the school district in which it is located. For certain charter schools that would have received greater funding levels under the prior revenue limit system, the LCFF provides for a permanent economic recovery target ( ERT ) add-on, equal to the difference between the general purpose funding such charter schools would have received under the prior system in fiscal year , and the target LCFF allocations owed to such charter schools in the same year. The ERT add-on will be paid incrementally over the eight-year implementing period of the LCFF. The sum of a school district s or charter school s adjusted Base, Supplemental and Concentration Grants will be multiplied by the school district s P-2 ADA for the current or prior year, whichever is greater (with certain adjustments applicable to small school districts). This funding amount, together with 69

76 any applicable ERT or categorical program add-ons, will yield the total LCFF allocation. Generally, the amount of annual State apportionments received by a school district or charter school will amount to the difference between such total LCFF allocation and such entity s share of applicable local property taxes. Most school districts and charter schools receive a significant portion of their funding from such State apportionments. As a result, decreases in State revenues may significantly affect appropriations made by the Legislature to school districts and charter schools. Accountability. In November 2014, the SBE adopted regulations regarding the expenditure of supplemental and concentration funding. These regulations include a requirement that school districts and charter schools increase or improve services for EL/LI students in proportion to the increase in funds apportioned to such districts on the basis of the number and concentration of such EL/LI students, as well as the conditions under which school districts can use supplemental or concentration funding on a schoolwide or district-wide basis. School districts and charter schools are also required to adopt local control and accountability plans ( LCAPs ) disclosing annual goals for all students, as well as certain numerically significant student subgroups, to be achieved in eight areas of State priority. LCAPs may also specify additional local priorities. LCAPs must specify the actions to be taken to achieve each goal, including actions to correct identified deficiencies with regard to areas of State priority. Charter school LCAPs are required to be included in charter petitions and updated annually. School district LCAPs are required to be adopted every three years, beginning in fiscal year , and updated annually thereafter. Lottery Funding. Charter schools receive funding from the State Lottery Fund, which receives all proceeds from, among other sources, the sale of lottery tickets. Lottery funding is allocated to charter schools per unit of ADA. Lottery funds are distributed quarterly by the State Controller s Office. Funding is based on annual average ADA. Lottery funds are identified as either Proposition 20 funds or non- Proposition 20 funds. Proposition 20 lottery funds may only be used to purchase instructional materials. Non-Proposition 20 lottery funds are unrestricted, except that they may not be used for acquisition of property, construction of facilities, financing of research, or for other non-instructional purposes. SB 740 Facilities Grant Program Funding. Charter schools that meet certain criteria are eligible to receive up to $1,117 per unit of ADA to reimburse an amount up to 75% of their annual facilities rent and lease costs from amounts appropriated under the annual Budget Act (and, if insufficient amounts are appropriated, then on a pro-rata basis) pursuant to the Charter School Facility Grant Program established under Senate Bill 740 (2001) ( SB 740 ). Assembly Bill 104 (2015) amended the provisions of the Education Code modified by SB 740 such that eligibility requires (i) 55% or more of the charter school s students must be eligible for free or reduced cost meals, or (ii) the charter school must be located in the attendance area of a public elementary school in which 55% or more of students are eligible for free or reduced cost meals and the charter school gives a preference in admissions to students who are currently enrolled in that public elementary school and to students who reside in the elementary school attendance area where the charter school is located. SB 740 facilities funding may be used for costs associated with facilities rents and leases, and for costs associated with remodeling buildings, deferred maintenance, installing or extending service systems and other built-in equipment, and improving sites. While it is the intent of the Legislature to appropriate funds sufficient to fund all grant amounts approved under the Program, the Program is subject to the annual Budget Act. In the event insufficient funds are appropriated, the available funds are apportioned on a pro rata basis. In addition to the risk of underfunding, should there be any changes to the free and reduced-price meal eligibility data the amount of grant funds, which is awarded in three disbursements, may be adjusted (or a reimbursement notice provided). 70

77 The SB 740 program is administered by the Authority. In prior years, the program has been undersubscribed, meaning that awards were not limited by the level of appropriation. However, the program is expected to be oversubscribed in the current fiscal year, with awards being reduced on a pro-rata basis. Set forth in the table on the following page are historical data regarding SB 740 funding and awards for the past four fiscal years, and a projection of such data for the current fiscal year. HISTORICAL SB 740 GRANT AWARDS Fiscal Years to No. of Schools Awarded Total Amount Awarded $65,575,246 $75,428,519 $87,477,373 $98,264,924 (1) $150,000,000 (2) Total Funds Appropriated to SB 740 (3) $92,031,000 $92,031,000 $112,031,000 $112,031,000 $112,031,000 Subscription Percentage (4) 71% 82% 78% 87% 134% Total Average Daily Attendance ( ADA ) (5) 109, , , , ,139 Average Award Per ADA (6) $599 $645 $666 $691 Maximum Award Allowed Per ADA (7) $750 $750 $750 $750 $1,117 Source: California Charter Schools Association (1) As of November 30, 2017 (2) Estimated amount awarded. The award amounts will be finalized by the end of September (3) Funds annually appropriated by the State Legislature toward SB 740 grant awards. (4) From to , the SB 740 Program has been undersubscribed. However, for , the Authority anticipates the SB 740 Program will be oversubscribed based on 1st round applications it has received. Based on the additional applications received by the Authority from its 2nd round applications and schools seeking other costs reimbursement, the Authority expects the oversubscription number to grow. The Authority expects to make SB 740 awards by applying a pro-rata reduction in the award amount spread across all eligible applicants. (5) Total ADA from all schools awarded in each fiscal year. The ADA is a current estimate and subject to change. (6) Equal to the Amount Awarded divided by the Total ADA. The Average Award Per ADA is lower than the Maximum Award Allowed Per ADA because a significant number of schools do not qualify for the maximum amount allowed; instead they are capped at 75% of actual rent. For , there is no figure reported because SB 740 applications are still being received and no awards have yet been made. (7) SB 740 Program grant awards are calculated at the lower of: (a) 75% of actual rent paid or (b) maximum award allowed per ADA by State law. From to , the maximum award allowed per ADA by State law was $750 per ADA. Pursuant to a change in State law passed by the State Legislature in June 2017, the maximum award allowed by State law was increased from $750 per ADA to $1,117 per ADA. [Remainder of page intentionally left blank] 71

78 The following tables describe ADA-based state funding of California charter school education for Fiscal Year through : State Funding Of Charter School Education Fiscal Year (Dollars per unit of ADA) Grades K Target LCFF Base Grant $6,952 $7,056 $7,266 $8,149 CTE/CSR Add-ons Lottery Total 1 $7,829 $7,210 $7,420 $8,522 State Funding Of Charter School Education Fiscal Year (Dollars per unit of ADA) Grades K Target LCFF Base Grant $7,011 $7,116 $7,328 $8,490 CTE/CSR Add-ons Lottery Total 1 $7,902 $7,278 $7,490 $8,873 State Funding Of Charter School Education Fiscal Year (Dollars per unit of ADA) Grades K Target LCFF Base Grant $7,083 $7,189 $7,403 $8,577 CTE/CSR Add-ons Lottery Total 1 $7,982 $7,351 $7,565 $8,962 State Funding Of Charter School Education Fiscal Year (Dollars per unit of ADA) Grades K Target LCFF Base Grant $7,08 $7,189 $7,403 $8,577 CTE/CSR Add-ons Lottery Total 1 $8,009 $7,378 $7,592 $8,989 72

79 State Funding Of Charter School Education Fiscal Year (Dollars per unit of ADA) Grades K Target LCFF Base Grant $7,193 $7,301 $7,518 $8,578 CTE/CSR Add-ons Lottery Total 1 $8,135 $7,495 $7,712 $9,133 Sources: California Charter Schools Association; California Department of Education. 1 Excludes Special Education, Nutrition, After School Education and Safety, SB 740, Charter School Facility Grants, 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. 2 Estimated. 3 The Fiscal Year funding amounts are preliminary, used for initial budgeting purposes in general. For specific projections with respect to the School, see APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS PROJECTIONS AND COVERAGE RATIOS attached hereto. For a description of the Schools ADA and funding related thereto, see APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS attached hereto. CONSTITUTIONAL AND STATUTORY PROVISIONS AFFECTING EDUCATION REVENUES AND APPROPRIATIONS Limitations on Revenues 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 1% 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: (a) indebtedness approved by the voters prior to July 1, 1978; or (b) 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 (c) bonded indebtedness incurred by a school district or community college district for the construction, reconstruction, rehabilitation or replacement of school facilities or the acquisition or lease of real property for school facilities, approved by 55% of the voters of the district voting on the ballot proposition, 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 73

80 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. Proposition 30 On November 6, 2012, California voters approved Proposition 30 ( Proposition 30 ), which temporarily increases the State Sales and Use Tax and personal income tax rates on higher incomes. Proposition 30 temporarily imposes an additional tax on all retailers, at the rate of 1/4% of gross receipts of any retailer from the sale of all tangible personal property sold in the State from January 1, 2013 to December 31, Proposition 30 also imposes an additional excise tax on the storage, use, or other consumption in the State of tangible personal property purchased from a retailer on and after January 1, 2013, and before December 31, 2016, for storage, use, or other consumption in the State, at the rate of 1/4% of the sales price of the property. For personal income taxes imposed beginning in the taxable year commencing January 1, 2012 and ending December 31, 2018, Proposition 30 increases the marginal personal income tax rate by: (i) 1% for taxable income over $250,000 but not more than $300,000 (over $340,000 but not more than $408,000 for joint filers) (ii) 2% for taxable income over $300,000 but not more than $500,000 (over $408,000 but not more than $680,000 for joint filers) and (iii) $3% for taxable income over $500,000 (over $680,000 for joint filers). 74

81 The revenues generated from the temporary tax increases will be included in the calculation of the Proposition 98 minimum funding guarantee for school districts and community college districts. From an accounting perspective, the revenues generated from the temporary tax increases will be deposited into the State account created pursuant to Proposition 30 called the Education Protection Account (the EPA ). Pursuant to Proposition 30, funds in the EPA will be allocated quarterly, with 89% of such funds provided to schools districts and 11% provided to community college districts. The funds will be distributed to school districts and community college districts in the same manner as existing unrestricted per-student funding, except that no school district will receive less than $200 per unit of ADA and no community college district will receive less than $100 per full time equivalent student. The governing board of each school district and community college district is granted sole authority to determine how the moneys received from the EPA are spent, provided that, the appropriate governing board is required to make these spending determinations in open session at a public meeting and such local governing boards are prohibited from using any funds from the EPA for salaries or benefits of administrators or any other administrative costs. The California Children s Education and Health Care Protection Act of 2016, also known as Proposition 55, is a constitutional amendment initiative that was passed on the November 8, 2016 general election in California. Proposition 55 extends the increases to personal income tax rates for highincome taxpayers that were approved as part of Proposition 30. Under Proposition 55, the Proposition 30 income tax rate increases on high-income Californians would not expire at the end of 2018, as scheduled under current law. The proposal extends the income tax rate increases through Tax revenue received under Proposition 55 would be allocated 89% to K-12 schools and 11% to community colleges. Under the constitutional amendment, the sales tax rate increase under Proposition 30 would not be extended. Kindergarten Through Community Service Public Education Bond Act of 2016 The Kindergarten Through Community College Public Education Facilities Bond Act of 2016 ( Proposition 51 ) is a voter initiative that was approved by voters on November 8, Proposition 51 authorizes the sale and issuance of $9 billion in general obligation bonds for the new construction and modernization of K-14 facilities. The Borrower makes no guarantee that it will either pursue or qualify for Proposition 51 state facilities funding. K-12 School Facilities. Proposition 51 includes $3 billion for the new construction of K-12 facilities and an additional $3 billion for the modernization of existing K-12 facilities. K-12 school districts will be required to pay for 50% of the new construction costs and 40% of the modernization costs with local revenues. If a school district lacks sufficient local funding, it may apply for additional state grant funding, up to 100% of the project costs. In addition, a total of $1 billion will be available for the modernization and new construction of charter school ($500 million) and technical education ($500 million) facilities. Generally, 50% of modernization and new construction project costs for charter school and technical education facilities must come from local revenues. However, schools that cannot cover their local share for these two types of projects may apply for State loans. State loans must be repaid over a maximum of 30 years for charter school facilities and 15 years for career technical education facilities. For career technical education facilities, State grants are capped at $3 million for a new facility and $1.5 million for a modernized facility. Charter schools must be deemed financially sound before project approval. Community College Facilities. Proposition 51 includes $2 billion for community college district facility projects, including buying land, constructing new buildings, modernizing existing buildings, and purchasing equipment. In order to receive funding, community college districts must submit project proposals to the Chancellor of the community college system, who then decides which projects to submit 75

82 to the Legislature and Governor based on a scoring system that factors in the amount of local funds contributed to the project. The Governor and Legislature will select among eligible projects as part of the annual state budget process. The table below shows the expected use of bond funds under Proposition 51, as set forth in Sections and of the Education Code: Future Initiatives PROPOSITION 51 Use of Bond Proceeds (In Millions) K-12 Public School Facilities New construction $3,000 Modernization 3,000 Career technical education facilities 500 Charter school facilities 500 Subtotal $7,000 Community College Facilities $2,000 Total $9,000 Articles XIIIA, Proposition 98, and Proposition 30 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. CERTAIN 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 Obligated Group and a corresponding reduction in payments made to the Authority are discussed herein. A number of factors could have an adverse impact on the ability of Bright Star to generate revenues needed to meet its obligations under the Leases, which could, in turn, have an adverse effect on the ability of the Borrower and other members of the Obligated Group to generate sufficient revenues to meet their respective obligations to make payments due under the Loan Agreement and Obligation No. 1. The ability of Bright Star to generate sufficient revenues to make payments under the Leases is dependent upon a number of elements, including 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 Schools ability to achieve and maintain enrollment and fundraising levels. This, in turn, is affected by numerous circumstances both within and outside the control of the Obligated Group and Bright Star, 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 ability and energy of the Schools respective faculties and administration; and the benevolence of the Schools supporters. 76

83 There can be no assurance given that revenues of the Obligated Group or the revenues of Bright Star attributable to 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 members of the Obligated Group or Bright Star. See APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS and APPENDIX B CONSOLIDATED AUDITED FINANCIAL STATEMENTS OF BRIGHT STAR AND AFFILIATES FOR THE FISCAL YEAR ENDED JUNE 30, 2016 attached hereto. Sufficiency of Revenues The Bonds are payable primarily from Payments which are derived from payments received under the Loan Agreement and Obligation No. 1. The Landlords will also encumber the Facilities with the Mortgages as security for the obligation to make the payments under the Loan Agreement and Obligation No. 1. The Borrower s primary expected source of the revenues will be the Rent payments the Landlords receive from Bright Star pursuant to the Leases. The Leases provide that Bright Star will be obligated to pay rent thereunder only from revenues derived from operation of the Schools. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Leases herein. Based on present circumstances, including the operating history of the Schools, Bright Star believes it will generate a sufficient amount of such revenues to meet its payment obligations under the Leases, which payments represent the source of payment by the Borrower and other Members of the Obligated Group of debt service on the Bonds. However, the Schools charters may be terminated or not extended or renewed, or the basis of the assumptions utilized by Bright Star and the Borrower to formulate such beliefs may otherwise change. No representation or assurance can be made that the members of the Obligated Group generate or will continue to generate sufficient revenues to meet their obligations under the Loan Agreement and Obligation No. 1 with respect to the Bonds. AS NOTED ELSEWHERE HEREIN, THE OBLIGATION OF BRIGHT STAR TO MAKE PAYMENTS UNDER THE LEASES IS A SPECIAL OBLIGATION LIMITED SOLELY TO THE GROSS SCHOOL REVENUE, WHICH INCOME DERIVES SOLELY FROM THE OPERATION OF THE SCHOOLS AND NOT THE OTHER CHARTER SCHOOLS OPERATED BY, OR ANY OTHER REVENUES OF, BRIGHT STAR. NEITHER THE GENERAL REVENUES OF BRIGHT STAR NOR THE REVENUES BRIGHT STAR MAY DERIVE FROM THE OPERATION OF CHARTER SCHOOLS OTHER THAN THE SCHOOLS, NOR FROM ANY SCHOOLS BRIGHT STAR MAY OPERATE IN THE FUTURE, ARE PLEDGED OR AVAILABLE TO MAKE PAYMENTS WITH RESPECT TO THE LEASES OR THE BONDS. SEE SECURITY AND SOURCES OF PAYMENT FOR THE BONDS HEREIN. Moreover, in addition to the Premises, the Borrower may in the future, for itself or through its affiliates, own other facilities and lease the same to other charter schools, and although Bright Star has established and operates, directly and through its affiliates, other charter schools, the obligations represented by the Loan Agreement and Obligation No. 1 are not secured generally by such other properties of the Borrower s affiliates nor by the revenues of Bright Star that are not derived from operation of the Schools. THE BONDS ARE NOT AND SHALL NOT BE DEEMED TO CONSTITUTE A DEBT OR LIABILITY OF THE STATE OR OF ANY POLITICAL SUBDIVISION THEREOF, OTHER THAN THE AUTHORITY, AND ARE NOT AND SHALL NOT BE DEEMED TO BE A PLEDGE OF THE 77

84 FAITH AND CREDIT OF THE STATE, OR OF ANY POLITICAL SUBDIVISION THEREOF, BUT SHALL BE PAYABLE SOLELY FROM THE FUNDS PROVIDED THEREFOR UNDER THE BOND INDENTURE. NEITHER THE STATE NOR THE AUTHORITY SHALL BE OBLIGATED TO PAY THE PRINCIPAL OF THE BONDS, OR THE REDEMPTION PREMIUM, IF ANY, OR INTEREST THEREON, EXCEPT FROM THE FUNDS PROVIDED THEREFOR UNDER THE BOND INDENTURE. THE ISSUANCE OF THE BONDS SHALL NOT DIRECTLY OR INDIRECTLY OR CONTINGENTLY OBLIGATE THE STATE 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 BOND 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 NOTICES OR TO MAKE FUNDS AVAILABLE TO THE SCHOOLS IN ANY AMOUNT OR AT ANY TIME. Operating History; Reliance on Projections While Bright Star is successfully operating a number of charter schools in California, the Schools has a limited operating history, having opened in fiscal year See Appendix A for information regarding current and projected enrollment of the Schools. No assurance is given that such projections will be met, or that the number of students attending the Schools may not diminish in the future. The projections of revenues and expenses contained in Appendix A are based upon the number of students projected to be enrolled at the Schools and were prepared by Bright Star for the Borrower and have not been independently verified by any party other than Bright Star. No feasibility studies have been conducted with respect to operations of the Facilities pertinent to the Bonds. The projections are forward-looking statements and are subject to the general qualifications and limitations described herein. The Underwriter has not independently verified the Borrower or Bright Star s projections set forth in Appendix A or otherwise, and makes no representations nor gives any assurances that such projections, or the assumptions underlying them, are complete or correct. Further, the projections relate only to a limited number of fiscal years, and consequently do not cover the entire period that the Bonds will be outstanding. BRIGHT STAR PREPARED THE PROJECTIONS BASED ON ASSUMPTIONS ABOUT FUTURE STATE FUNDING LEVELS AND FUTURE OPERATIONS OF THE FACILITIES AND THE SCHOOLS, INCLUDING STUDENT ENROLLMENT AND EXPENSES. THERE CAN BE NO ASSURANCE THAT ACTUAL ENROLLMENT REVENUES AND EXPENSES WILL BE CONSISTENT WITH THE ASSUMPTIONS UNDERLYING SUCH PROJECTIONS. MOREOVER, NO GUARANTEE CAN BE MADE THAT THE PROJECTIONS OF REVENUES AND EXPENSES INCLUDED HEREIN WILL CORRESPOND WITH THE RESULTS ACTUALLY ACHIEVED IN THE FUTURE BECAUSE THERE CAN BE NO ASSURANCE THAT ACTUAL EVENTS WILL CORRESPOND WITH THE PROJECTIONS UNDERLYING ASSUMPTIONS. ACTUAL OPERATING RESULTS MAY BE AFFECTED BY MANY FACTORS, INCLUDING, BUT NOT LIMITED TO, INCREASED COSTS, LOWER THAN ANTICIPATED REVENUES (AS A RESULT OF INSUFFICIENT ENROLLMENT, REDUCED STATE OR FEDERAL AID PAYMENTS, OR OTHERWISE), EMPLOYEE RELATIONS, CHANGES IN TAXES, CHANGES IN APPLICABLE GOVERNMENTAL LAWS, RULES OR REGULATIONS, CHANGES IN DEMOGRAPHIC TRENDS, CHANGES IN EDUCATION COMPETITION AND CHANGES IN LOCAL OR GENERAL ECONOMIC CONDITIONS. THIS RISK IS HEIGHTENED BY THE SCHOOLS LACK OF OPERATING HISTORY. REFER TO APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS TO REVIEW THE PROJECTIONS, THEIR UNDERLYING ASSUMPTIONS, AND THE OTHER FACTORS THAT 78

85 COULD CAUSE ACTUAL RESULTS TO DIFFER SIGNIFICANTLY FROM PROJECTED RESULTS. REFER TO INTRODUCTION ABOVE, FOR QUALIFICATION AND LIMITATIONS APPLICABLE TO FORWARD-LOOKING STATEMENTS. Dependence on State Payments That Are Subject to Annual Appropriation and Political Factors California charter schools such as the Schools may not charge tuition and have no taxing authority. The primary source of revenue generated by charter schools are funds provided by the State for all public schools. The amount of State funds received with respect to any individual school is based on a variety of factors. The amount of funds available in any year to pay the per pupil allowance is subject to appropriation by the California Legislature. The Legislature bases its decisions about appropriations on many factors, including the State s economic performance. Moreover, because some public officials, their constituents, commentators and others have viewed charter schools as controversial, political factors may also come to bear on charter school funding. As a result, the Legislature may not appropriate funds, or may not appropriate funds in a sufficient amount, for the Schools to generate sufficient revenue to allow Bright Star to meet its obligations under the Leases representing debt service payments on the Bonds. No liability would accrue to the State in such event, and the State would not be obligated or liable for any future payments or any damages. If the State were to withhold State aid payments for any reason, even for a reason that is ultimately determined to be invalid or unlawful, the Schools could be forced to curtail or cease operations. See STATE FUNDING OF EDUCATION herein. Possible Offsets to State Apportionment Section of the Education Code provides that if an audit or review requires the Schools 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 State 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 State 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 the funds subject to intercept pursuant to Section of the Education Code ( Section ). Specifically, the funds subject to intercept are funds apportioned for purposes of the charter school block grant or the local control funding formula (as described in Section ) with respect to the Schools. Because the apportionments are the sum of multiple program entitlement calculations as well as prior adjustments, the 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 periodic calculated funds subject to intercept and the amount of cash provided to Bright Star with respect to the Schools by the State. The State Controller may reduce the funding available in the payment schedules for these apportionments 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 79

86 required offsets, or additional offsets not yet authorized by legislation. None of the foregoing offsets is currently applicable to the Schools. Default Under the Leases; No Assurance Regarding Subsequent Tenant If there is a default by the Borrower under the Loan Agreement attributable to a default by Bright Star under the Leases, the initial members of the Obligated Group will likely not have sufficient funds to satisfy its obligations under the Loan Agreement and Obligation No. 1 absent re-leasing or in appropriate cases, selling the Facilities. Were Bright Star to default under the Leases, there is no assurance that the Landlords would be able to find new tenants for the Facilities which could generate revenues in a sufficient amount to allow the Borrower and members of the Obligated Group to make payments under the Loan Agreement and Obligation No. 1 to satisfy debt service on the Bonds or a buyer that would purchase such Facilities for a sufficient amount to allow the Borrower to repay principal and interest due with respect to the Loan Agreement. This risk is heightened by the fact that the Facilities have been and will be improved specifically for use, in whole or in part, as a charter school campus and may not be appropriate to other types of uses and may be subject to restrictions limiting the use of the Facilities. Survival of Leases After a Bond Default and Foreclosure The Landlords, Bright Star, and the Master Trustee will enter into Subordination, Non- Disturbance and Attornment Agreements (the SNDAs ). The SNDAs address the priority of the rights between Bright Star and the Master Trustee following any foreclosure of the mortgage. The SNDAs provide that Bright Star s rights under the Leases to the use, possession and enjoyment of the Facilities will not be disturbed by the Master Trustee following such foreclosure so long as no event of default exists under the Leases. The attornment component of the SNDAs provides that Bright Star will continue to be legally bound by its obligations under a Lease if a new landlord takes over a Lease after acquiring title to a Facility through foreclosure of the mortgage. Additional Indebtedness and Additional School Indebtedness The Master Indenture permits the issuance of Additional Indebtedness on a parity basis with Obligation No. 1 if certain conditions are met. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Master Indenture Limitations on Additional Indebtedness herein. The Borrower expects to acquire, construct and equip additional charter schools in the future. If it does, or for certain other expenses, it may issue Additional Indebtedness which may or may not be on a parity basis with Obligation No. 1 and may or may not be issued through the Master Indenture. If secured on a parity basis, any such parity indebtedness would be entitled to share ratably with the holders of the Bonds and any other holder of parity debt in any moneys realized from the exercise of remedies in the event of a default by the Borrower to the extent provided in the Bond Documents. The amount of any such Additional Indebtedness is undetermined at this time. The issuance of Additional Indebtedness may adversely affect the investment security of the Bonds. Under the Leases, Bright Star may also issue additional Obligated Group School Indebtedness, subject to certain conditions and limitations. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Leases Financial Covenants herein. The issuance of such additional Obligated Group School Indebtedness may adversely affect the investment security of the Bonds. 80

87 Addition and Removal of Members The Master Indenture permits the addition of Members under the Obligated Group, but it also permits the removal of Members, subject to certain conditions and limitations. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Master Indenture Withdrawal From Obligated Group herein. Any such withdrawal of Members from the Obligated Group may decrease the revenues available for payment of debt service on the Bonds and may adversely affect the investment security of the Bonds. Reserve Account The Bond Indenture establishes the Reserve Account within the Revenue Fund for payment of principal of and interest on the Bonds to the extent the Payments are insufficient to make such payments. Although the Borrower believes such reserve to be reasonable and anticipates that the Payments will be sufficient to cover the debt service on the Bonds, there is no assurance that funds on deposit in the Reserve Account and future Payments will be sufficient to cover debt service on the Bonds. Conditions to Release of Bond Proceeds VAHS Construction Account, VAHS Athletic Field Account and SMCA Account. Pursuant to the Bond Indenture, no disbursements shall be made from the VAHS Construction Account, VAHS Athletic Field Account or SMCA Account, as applicable, unless, prior to December 1, 2019, the Borrower is in able to fulfill the Draw Requirements applicable to such account. In the event such conditions are not satisfied, the Bonds are subject to redemption from such unused proceeds in the Project Fund. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS Bond Indenture Project Fund; Conditions to Release of Bond Proceeds herein. Purchases and Transfers of Bonds Restricted to Qualified 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 Qualified Institutional Buyers or Accredited Investors. The Bond Indenture contains provisions limiting transfers of the Bonds and beneficial interests therein to Qualified Institutional Buyers or Accredited Investors. The face of each Bond will contain a legend indicating that the Bond is subject to transfer restrictions as set forth in the Bond Indenture. The Bonds will be issued in minimum denominations of $250,000 and 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. There can be no assurance that there will be a secondary market for the purchase or sale of the Bonds, and there may be no market for the Bonds depending upon prevailing market conditions, the financial condition or market position of firms who make up the secondary market and the financial position and results of operations of the Borrower. The Underwriter is not obligated to create a secondary market for the purchase or sale of the Bonds. Investors should be aware that they might be required to bear the financial risks of 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 81

88 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. 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 earnings 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 report with the Internal Revenue Service (the IRS ). The Authority, the Borrower, and Bright Star have covenanted in certain of 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 Tax-Exempt Status. The tax-exempt status of the Bonds depends upon the maintenance by the Borrower and Bright Star of their respective statuses as organizations 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 taxexempt 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 the Borrower or Bright Star could potentially result in loss of tax exemption of interest on the Bonds and of other existing and future tax-exempt debt of members of the Obligated Group, 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 Bright Star or the Borrower 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 ). Bright Star and its affiliates currently report no UBTI. Bright Star and its affiliates may, however, participate in activities which generate UBTI in the future. If so, the Borrower and Bright Star believe such UBTI would be properly accounted for and reported; 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 the tax-exempt status of the Borrower or Bright Star, as well as the exclusion from gross income for federal income tax purposes of the interest on the Bonds. 82

89 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 management of the Borrower and Bright Star believe that the Facilities will be exempt from California real property taxation. Factors That Could Affect the Security Interest in the Facilities; Superior Liens The Master Trustee s security interest in the Facilities may be subordinated to the interest and claims of others in several instances. Some examples of cases of subordination of prior claims are (a) statutory liens; (b) rights arising in favor of the United States of America or any agency thereof; (c) present or future prohibitions against assignment in any statutes or regulations; (d) constructive trusts, equitable liens or other rights impressed or conferred by any state or federal court in the exercise of its equitable jurisdiction; (e) federal or state bankruptcy or insolvency laws that may affect the enforceability of the Loan Agreement; (d) rights of third parties in amounts not in the possession of the Trustee; and (f) claims that might arise if appropriate financing or continuation statements are not filed in accordance with the California Uniform Commercial Code as from time to time in effect. Construction Risks Construction of the Project is generally subject to all typical construction related risks. Such risks include, among others, labor disputes, defective building materials, schedule delays, unavailability or delays in obtaining permits or inspection approvals, shortages in various labor trades, fire or other property or casualty damage, unanticipated subsoil conditions and financial difficulties on the part of or disputes with a construction manager, key suppliers, contractors or subcontractors. There can be no assurance that construction problems or delays of the types described above, or other problems, will not frustrate the planned completion of any part of the construction of the Facilities. The final construction budget and guaranteed maximum price contract for the Project will be finalized until building permits are issued and certain environmental studies are completed, which are not expected to occur until after the issuance of the Bonds with respect to the SMCA Facility. Any project costs in excess of the funding on deposit in the Project Fund are expected to be paid with Bright Star funds. However, there is no assurance that such funds will be sufficient or received in a timely manner to complete the construction of the Project. VAHS intends to continue to operate out of its current Proposition 39 location for the school year, and SMCA intends to continue to operate out of its current leased locations for the and school years. In the event construction is delayed, Bright Star will negotiate alterative leased facilities for the applicable School, but there is no assurance that suitable alterative facilities will be available on time or within such School s budget. See APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOL OPERATING AND FINANCIAL INFORMATION Facilities and Leases for Current Locations herein. Limitations of Appraisal Appraisals are estimates of value and not an assurance of what any particular property would bring on sale. Appraisals also are subject to numerous other limitations set forth therein. Potential investors should not assume that the appraised values set forth in THE PROJECT represent reliable estimates of what the Facilities would bring in liquidation following an Event of Default. The appraised value for the Facilities may not equal the aggregate par amount of the Bonds. See THE PROJECT Appraisal herein. 83

90 Limitations on Value of the Facilities and to Remedies Under the Mortgages Maintenance of Value. The Facilities is located in a region that has experienced significant real property market volatility over the past several years. There can be no assurance made that, should the Members of the Obligated Group default in making the payments due under Obligation No. 1, including in the event Bright Star defaults in making the Rent payments due under the Leases, the Facilities could be foreclosed upon and sold for the amounts owed under Obligation No. 1. 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 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, storing or disposing the hazardous substance. Any of these potentialities could significantly affect the value of the Project that would be realized upon a default and foreclosure. Foreclosure. In accordance with California's so-called "One-action Rule," California Code of Civil Procedure Section 726, a creditor seeking to exercise its remedies on a defaulted obligation secured by real property must generally first attempt to realize on its real property security by exercising one of the two foreclosure remedies described below, and cannot sue directly on the obligation itself. However, attempts to realize on personal property is generally permitted prior to foreclosing on any real property security. 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 84

91 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. The amount and sources of recovery of any deficiency judgment are subject to any limitation set forth in the loan documents. 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 the Mortgages, a receiver for the Facilities may be appointed by a court. Damage, Destruction or Condemnation. Although the Borrower will be required to cause the Landlords to obtain certain insurance against damage or destruction as set forth in the Loan Agreement and the Mortgages, there can be no assurance that any portion of the Facilities will not suffer losses for which insurance cannot be or has not been obtained or that the amount of any such loss, or the period during which the Landlords, as a result of damage or destruction to the Facilities, cannot generate revenues, will not exceed the coverage of such insurance policies. If the Facilities, or any portion thereof, are damaged or destroyed, or are taken in a condemnation proceeding, the proceeds of insurance or any condemnation award for the Facilities, or any portion thereof, must be applied as provided in the Loan Agreement to restore or rebuild the Facilities or to redeem Bonds. There can be no assurance that the amount of revenues available to restore or rebuild the Facilities, or any portion thereof, or to redeem Bonds will be sufficient for that purpose, or that any remaining portion of the Facilities will generate revenues sufficient to pay the expenses of the Borrower and the Loan Repayments. Seismic. The Facilities are located in a seismically active region of California. The occurrence of severe seismic activity could result in substantial damage to the Project, which could adversely affect the ability of Bright Star to operate the Facilities or make payments due under the Leases and/or the ability of the Borrower to make the Loan Repayments and could adversely affect the value of the Project and the Facilities. Neither the Borrower nor the Landlords are obligated by the Loan Agreement or Master Indenture to maintain earthquake insurance on any portion of the Project and there can be no assurance that the Borrower or the Landlords will obtain such coverage in the future. Flood. Pursuant to the Master Indenture, the Members of the Obligated Group have covenanted that, so long as the Facilities are located in special flood hazard areas as designated by the Federal Emergency Management Agency, the Members of the Obligated Group will maintain, or cause to be maintained flood insurance coverage in an amount equal to or greater than the replacement value of such Facilities. The Facilities are not located in a special flood hazard area. Environmental Risks. There are potential risks relating to liabilities for environmental hazards with respect to the ownership of any real property. If hazardous substances are found to be located on a property, owners of such property may be held liable for costs and other liabilities related to the removal of such substances which costs and liabilities could exceed the value of the Facilities or any portion thereof. See THE PROJECT herein for a description of various environmental reports regarding the Facilities. 85

92 Bankruptcy The rights and remedies of the Beneficial Owners of the Bonds are subject to various provisions of the Federal Bankruptcy Code (the Bankruptcy Code ). If the Borrower, the Landlords or Bright Star were to become a debtor in a bankruptcy case, its revenues and certain of its accounts receivable and other property created or otherwise acquired after the filing of such petition and for up to 90 days prior to the filing of such petition may not be subject to the security interest created under the Mortgages for the benefit of the Beneficial Owners of the Bonds. The filing would operate as an automatic stay of the commencement or continuation of any judicial or other proceeding against such entity, and its property, and as an automatic stay of any act or proceeding to enforce a lien upon or to otherwise exercise control over such property. If the bankruptcy court so ordered, the property of the Borrower or a Member, including accounts receivable and proceeds thereof, could be used for the financial rehabilitation of such entity despite the security interest of the Trustee therein. While the Bankruptcy Code requires that the interest of the Trustee as lien owner is adequately protected before the collateral may be used by the Borrower or a Member, such protection could take the form of a replacement lien on assets acquired or created after the bankruptcy petition is instituted. The rights of the Trustee to enforce liens and security interests against the Borrower s or Member s assets could be delayed during the pendency of the rehabilitation proceedings. The Borrower or Bright Star could file a plan for the reorganization of its debts in any such proceeding which could include provisions modifying or altering the rights of creditors generally, or any class of them, secured or unsecured. The plan, when confirmed by a court, binds all creditors who had notice or knowledge of the plan and discharges all claims against the debtor provided for in the plan. No plan may be confirmed unless certain conditions are met, among which are that the plan is in the best interests of creditors, is feasible and has been accepted by each class of claims impaired thereunder. Each class of claims has accepted the plan if at least two thirds in dollar amount and more than one half in number of the class cast votes in its favor. Even if the plan is not so accepted, it may be confirmed if the court finds that the plan is fair and equitable with respect to each class of non-accepting creditors impaired thereunder and does not discriminate unfairly. Factors Associated With the Schools Operations There are a number of factors affecting schools generally that could have an adverse effect on the Schools and on Bright Star s financial position and ability to operate the Facilities as charter schools and, consequently, on the Borrower s ability to make Loan Repayments necessary to make debt service payments on the Bonds. These factors include, but are not limited to: (a) failure to qualify for statutory reimbursement under state programs; (b) 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; (c) taxes or other charges imposed by federal, state or local governments; (d) the ability to attract a sufficient number of students; (e) changes in existing statutes pertaining to the powers of the Schools and disruption of the Schools operations by real or perceived threats against the Schools, their staff members or students; and (f) decline in the reputation of a School or the ability of the Schools and its management to provide educational services desired and accepted by the population it serves. Potential purchasers should be aware that the Schools may face constant competition for students and there can be no assurance that the Schools will continue to attract and retain the number of students that are needed to generate revenues sufficient to make payments on the Leases that are the source of revenue to debt service on the Bonds. Neither the Borrower nor Bright Star can assess or predict the ultimate effect of the foregoing factors on its operations or financial results of its operations or on its ability to make payments required under the Leases, the Loan Agreement or Obligation No

93 State Financial Difficulties Charter schools, like all public schools, depend on revenues from the State for a large portion of their operating budgets. The availability of State funds for public education is a function of constitutional and statutory provisions affecting school district revenues and expenditures, the condition of the State economy (which affects total revenue available to the State School Fund) and the annual State budget process. Decreases in State revenues may adversely affect education appropriations made by the Legislature. As noted, the Legislature bases its decisions about appropriations on many factors, including the State s economic performance, and, because some public officials, their constituents, commentators and others have viewed charter schools as controversial, political factors may also come to bear on charter school funding. See CERTAIN RISK FACTORS Dependence on State Aid Payments That Are Subject to Annual Appropriation and Political Factors above. The State has previously experienced severe financial difficulties. In prior years, the State s response to its financial difficulties has had a significant impact on Proposition 98 funding and settle-up treatment, as further described in STATE FUNDING OF EDUCATION. In the past, the State has sought to avoid or delay paying settle-up amounts when funding has lagged the guaranteed amount. The State has also sought to avoid increases in the minimum guarantee through various mechanisms by treating any excess appropriations as advances against subsequent years Proposition 98 minimum funding levels rather than current-year increases; by deferring State aid payments from one fiscal year to the next; and by suspending Proposition 98. Continued decreases in State revenues may adversely affect education appropriations made by the Legislature. None of the Borrower, Bright Star or any other party to the Bond transaction can predict how State income or State education funding will vary over the entire term of the Bonds. No party to the Bond transaction takes any responsibility for informing owners of the Bonds about any such changes. Information about the financial condition of the State, as well as its budget and spending for education, is available and regularly updated on various State-maintained websites, including those of the LAO, the Department of Finance and the California State Controller. In addition, various State of California official statements, which contain summaries of current and past State budgets and the impact of those budgets on State education funding, may be found at the website of the California State Treasurer, Such information is prepared by the respective State entity maintaining each such website and not by any of the parties to this transaction. The parties to this transaction take no responsibility for the accuracy, completeness or timeliness of such information or the continued accuracy of the internet addresses noted herein, and no such information is incorporated herein by these references. Budget Delays and Restrictions on Disbursement of State Funds During a Budget Impasse The State Constitution specifies that an annual budget will be proposed by the Governor by January 10 of each year for the next fiscal year (the Governor s Budget ). Under State law, the annual Budget Act cannot provide for projected expenditures in excess of projected revenues for the ensuing fiscal year. State law also requires the Governor to update the Governor s Budget projections and budgetary proposals by May 14 of each year (the May Revision ). The May Revision is normally the basis for final negotiations between the Governor and Legislature to reach agreement on appropriations and other legislation to fund State government for the ensuing fiscal year (the Budget Act ). The Budget Act must be approved by a majority vote of each House of the Legislature and must be in balance. The budget becomes law upon the signature of the Governor. Text of proposed and adopted budgets may be found at the website of the Department of Finance, currently 87

94 under the heading California Budget. Analyses of budgets are prepared by the Legislative Analyst s Office at Such information is prepared by the respective State entity maintaining each such website and not by any of the parties to this transaction. The parties to this transaction take no responsibility for the accuracy, completeness or timeliness of such information or the continued accuracy of the internet addresses noted herein, and no such information is incorporated herein by these references. A State Budget Act must be adopted no later than June 15 of each year. In practice, however, the State Legislature has failed to approve the State Budget Act by the deadline therefor in a number of years. Failure by the State to adopt a Budget Act may restrict the California State Controller s ability to disburse State funds after the beginning of the ensuing fiscal year. See STATE FUNDING OF EDUCATION General Adoption of Annual State Budget herein regarding the ability of the State Controller to disburse State funds in such situations. Any State budget delay would delay the State s appropriation of funds and could negatively impact Bright Star s ongoing viability and its ongoing ability to make payments under the Leases representing debt service on the Bonds. Key Management The creation of, and the philosophy of teaching in, charter schools generally initially may reflect the vision and commitment of a few key persons on the board of directors and/or the upper management of the charter school or its management organization ( Key Directors/Managers ). Loss of any such Key Directors/Managers, and the inability of the Borrower or Bright Star to find comparable qualified replacements, could adversely affect their respective operations or financial results. See Appendix A for more information regarding the management and leadership of the Borrower and Bright Star. 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 corporation 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 Bond Indenture and the Mortgages upon a default depends upon the exercise of various remedies specified in the Loan Agreement, the Bond Indenture and the Mortgages. 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 Bond Indenture and the Mortgages 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 Bond Indenture or the Mortgages. Accordingly, the ability of the Authority or the Trustee to exercise remedies under the Loan Agreement, the Bond Indenture and the Mortgages upon an Event of Default could be impaired by the need for judicial or regulatory approval. 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. Certain amendments have been described elsewhere in this Limited Offering Memorandum. It is likely that additional changes will be made in the 88

95 future, some of which may be adverse to charter schools in general may affect the financial viability of the Schools. 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 because of either educational non-performance or fiscal mismanagement. See CHARTER SCHOOLS herein. Management of Bright Star believes that it has stable relationships with the authorizer of the Schools charters, and representatives of the State Board of Education, each of which, under appropriate circumstances, is authorized to grant charters under the Charter School Law. See APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS herein. Legal Challenges. In addition to non-renewal or revocation, a charter may also be subject to challenge by certain third-parties. No assurance can be given that the Schools charters will not be subjected to legal challenge. See ABSENCE OF MATERIAL LITIGATION the Borrower herein and APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS OPERATING AND FINANCIAL INFORMATION No Material Litigation attached hereto. Any failure of Bright Star to have a charter for the Schools in place could well have a material adverse effect on the Landlords or the Borrower and their ability to generate revenues necessary to make payments under the Loan Agreement and Obligation No. 1 in an amount sufficient to satisfy the debt service requirements for the Bonds. 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 and the other members of the Obligated Group to make payments under the Loan Agreement and Obligation No. 1. See STATE FUNDING OF EDUCATION above. Enrollment Levels. Bright Star s revenues and financial strength will depend in part upon maintaining certain enrollment levels at the Schools. A reduction in enrollment for any School will have a direct result of reducing revenues available to pay amounts due under the Leases. See APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS ENROLLMENT attached hereto. Risk of Reduction in ADA Funding. Since the majority of funds for the Schools operations come from the State on the basis of ADA, the Schools are 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 school 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 Schools are 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 affect the ability of Bright Star to make Rent payments due under the Leases and, consequently, the ability of the Borrower and other members of the Obligated Group to make payments under the Loan Agreement and Obligation No. 1. In addition, the Charter School Law prohibits a charter school from imposing fees or charges for its educational services. Therefore, the Schools are dependent upon receipt of ADA-based funding, as 89

96 well as philanthropic support. There is little Bright Star or the Borrower can do to increase revenues, other than for the Schools to admit a larger number of students. Compliance With the Elementary and Secondary Education Act. Title I of the Elementary and Secondary Education Act, as reauthorized by the Every Student Succeeds Act ( ESSA ) of 2015, requires each state to submit a plan outlining its statewide accountability system to the U.S. Department of Education. The transition to new state plans will begin in the school year. It is unknown how the State s plan for its statewide accountability system as submitted to the U.S. Department of Education or how the implementation of ESSA will impact the Borrower or the Schools. SB 740 Funding. Although the VAHS anticipates receiving funding under SB 740 beginning in school year , and SMCA anticipated receiving funding under SB 740 beginning in school year , there can be no assurance that any particular level of SB 740 funding will be available in future fiscal years, or that the Schools will become or remain eligible for such funding. Claims and Insurance Coverage Litigation could arise from the corporate and business activities of Bright Star or the Borrower. Such litigation may result as a result of either Bright Star s or the Borrower s 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. Such claims may, in whole or in part, constitute a significant liability of a Schools or the Borrower if determined or settled adversely, as may any additional claims for other torts, accidents, or environmental enforcement actions, to the extent such claims exceed the limits of applicable insurance coverage. The Borrower and Bright Star covenant and agree in the Loan Agreement and the Leases that they will maintain, or caused to be maintained, property, general liability and business interruption insurance with respect to the Facilities at levels set forth therein. The Borrower and Bright Star are not obligated by the Loan Agreement or the Leases to maintain earthquake insurance and there can be no assurance that the Borrower or Bright Star will obtain such coverage in the future. See APPENDIX C SUMMARY OF CERTAIN PROVISIONS OF THE PRINCIPAL BOND DOCUMENTS LOAN AGREEMENT attached hereto. Risk of Noncontinued Philanthropy or Grants In the past, Bright Star has received some income from restricted and unrestricted gifts and donations or grants to supplement operating revenues to finance operations and capital needs. Gifts, grants and donations are expected to continue. However, there can be no assurance that projections of this non-operating revenue will be realized or will not decrease, adversely affecting the financial condition of Bright Star. Failure To Provide Ongoing Disclosure The Borrower and Bright Star will enter into a Continuing Disclosure Agreement with Urban Futures, Incorporated, as dissemination agent, pursuant to Securities and Exchange Commission Rule 15c2-12 (the Rule ) in connection with the issuance of the Bonds. Any material failure to comply with the Continuing Disclosure Agreement and the Rule in the future may adversely affect the liquidity of the affected Bonds and their market price in the secondary market. 90

97 Use of the Facilities No assurance can be given as to whether a challenge to the use of the Facilities, including educational use, parking, traffic, noise, or other matters, might be brought that would result in an interruption of the Schools operations and have a material negative impact on the Gross Revenues. Any court order prohibiting the educational use of the Facilities under the applicable zoning laws would entitle the Trustee to submit a claim on the lender s title insurance policy. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS herein. The Authority ABSENCE OF MATERIAL LITIGATION To the knowledge of the Authority, there is no action, suit, proceeding, inquiry or investigation, at law or in equity, before or by any court, governmental agency, public board or body, pending (with service of process having been accomplished) or threatened against the Authority seeking to restrain or enjoin the sale or issuance of the Bonds, or in any way contesting or affecting any proceedings of the Authority taken concerning the sale thereof, the pledge or application of any moneys or security provided for the payment of the Bonds, the validity or enforceability of the documents executed by the Authority in connection with the Bonds, the completeness or accuracy of this Limited Offering Memorandum or the existence or powers of the Authority relating to the sale of the Bonds. The Borrower There is no controversy or litigation of any nature now pending 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. See also APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS OPERATING AND FINANCIAL INFORMATION Litigation herein. Bright Star There is no controversy or litigation of any nature now pending against Bright Star or, to the knowledge of the officers of Bright Star, 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 Schools 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 Bright Star relating to the issuance of the Bonds. See also APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS OPERATING AND FINANCIAL INFORMATION Litigation herein. 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 91

98 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. Bond Counsel is of the further opinion that 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. As discussed further below, legislation has been introduced which, if enacted, would repeal the alternative minimum tax for tax years beginning after December 31, A complete copy of the proposed form of opinion of Bond Counsel is set forth in APPENDIX G FORM OF OPINION OF BOND COUNSEL 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 straightline 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, the Borrower and Bright Star 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. 92

99 In addition, Bond Counsel has relied on, among other things, the opinion of Musick Peeler & Garrett LLP, counsel to the Borrower ( Borrower s Counsel ), regarding the current qualification of the Borrower and Bright Star as organizations 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 opinions are subject to a number of qualifications and limitations. Bond Counsel has also relied upon representations of Bright Star concerning the intended operation of the facilities to be financed by the Bonds as substantially related to the Bright Star s charitable purpose under Section 513(a) of the Code. Except as provided in this paragraph, neither Bond Counsel nor Borrower s Counsel has given any opinion or assurance concerning Section 513(a) of the Code and neither Bond Counsel nor Borrower s Counsel can give or has given any opinion or assurance about the future activities of the Borrower, Bright Star or the Landlords, or about the effect of future changes in the Code, the applicable regulations, the interpretation thereof or the resulting changes in enforcement thereof by the IRS. Failure of either of the Borrower or Bright Star to be organized and operated in accordance with the IRS s requirements for the maintenance of their respective 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 or Bright Star s charitable purposes 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 disposition of, or the accrual or receipt of amounts treated as 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, in whole or in part, 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. Legislation has been introduced in Congress which, if enacted, would significantly change the income tax rates for individuals and corporations and would repeal the alternative minimum tax for tax years beginning after December 31, The introduction or enactment of any such legislative proposals or 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 the potential impact of any pending or proposed federal or state tax legislation, regulations or litigation, as to which Bond Counsel is expected to express 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, the Borrower, and Bright Star, 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, the Borrower and Bright Star 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, Bright Star 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, Bright 93

100 Star 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, the Borrower or Bright Star 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, Bright Star or the beneficial owners to incur significant expense. APPROVAL OF LEGALITY The validity of the Bonds and certain other legal matters are subject to the approving opinion of Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority, the approval of certain matters for the Authority by the Honorable Xavier Becerra, Attorney General of the State, the approval of certain matters for the Underwriter by Kutak Rock LLP, as Underwriter s counsel, and the approval of certain matters by Musick Peeler & Garrett LLP, as counsel to the Borrower. Bond Counsel, the Underwriter and its counsel will receive compensation contingent upon the sale and delivery of the Bonds. A complete copy of the proposed form of Bond Counsel opinion is contained in Appendix G hereto. Neither Bond Counsel nor the Attorney General undertakes any responsibility for the accuracy, completeness or fairness of this Limited Offering Memorandum. Musick Peeler & Garrett LLP will also render certain opinions pertaining to Bright Star as described herein under TAX MATTERS. 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 Qualified 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 heading NOTICE TO INVESTORS herein. Musick Peeler & Garrett LLP will also render certain opinions pertaining to Bright Star as described herein under TAX MATTERS. CONTINUING DISCLOSURE The Borrower, Bright Star and the Trustee, will execute and deliver a Continuing Disclosure Agreement pursuant to which the Borrower and Bright Star will, for the benefit of the Beneficial Owners of the Bonds, periodically compile and deliver to the Trustee certain financial information and operating data relating to the operations of the Borrower, Bright Star, and the Schools, and provide notices of the occurrence of certain enumerated events. These covenants have been made to assist the Underwriter in complying with Securities and Exchange Commission Rule 15c2 12 (the Rule ). A form of the Continuing Disclosure Agreement is attached hereto as Appendix E. None of the Borrower, Bright Star, or the Schools has previously entered into a continuing disclosure undertaking pursuant to the Rule. The Authority has determined that no financial or operating data concerning the Authority is material to an evaluation of the offering of the Bonds or to any decision to purchase, hold or sell Bonds and the Authority will not provide any such information. The Authority shall have no liability to the Holders of the Bonds or any other person with respect to the Rule. 94

101 UNDERWRITING The Bonds are being purchased by Stifel, Nicolaus & Company, Incorporated (the Underwriter ). The Underwriter has agreed to purchase the Bonds at a price of $ (being the principal amount of the Bonds, plus/less aggregate [net] original issue premium/discount of $, less an Underwriter s discount of $ ). 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, institutional investors, banks, 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. The Underwriter is not obligated to create a secondary market for the purchase or sale of the Bonds and there may, in fact, be no market for the Bonds depending upon prevailing market conditions, the financial condition or market position of firms who make up the secondary market and the financial position and results of operations of the Borrower and Bright Star. MUNICIPAL ADVISOR Urban Futures Incorporated (the Municipal Advisor ) has acted as Municipal Advisor to the Borrower in conjunction with the issuance of the Bonds. The Municipal Advisor has assisted the Borrower in preparation of this Limited Offering Memorandum and in other matters related to the planning, structuring, and issuance of the Bonds. The Municipal Advisor will receive compensation contingent upon the sale and delivery of the Bonds. The Municipal Advisor has not audited, authenticated or otherwise independently verified the information set forth in this Limited Offering Memorandum, or any other information related to the Bonds with respect to the accuracy or completeness of disclosure of such information. The Municipal Advisor makes no guaranty, warranty or other representation respecting the accuracy or completeness of this Limited Offering Memorandum or any other matter related to this Limited Offering Memorandum. FINANCIAL STATEMENTS Financial information with respect to the Schools is incorporated in the audited financial statements of Bright Star. The audited financial statements of Bright Star and of the Borrower for the fiscal year ended June 30, 2016, included in this Limited Offering Memorandum as Appendix B, have been audited by Vicenti, Lloyd & Stutzman LLP, independent certified public accountants (the Auditor ), to the extent and for the periods indicated in their respective reports thereon. The Auditor has neither been requested to review this Limited Offering Memorandum, nor requested to consent to the inclusion of such reports herein. Bright Star and the Borrower will represent that, since June 30, 2017, there has been no material adverse change in the financial condition or results of operations of Bright Star or the Borrower. Bright Star expects that the Auditor will deliver final drafts audit reports to Bright Star and the Borrower by the middle of December Neither Bright Star s general revenues nor any revenues Bright Star may derive from its operation of schools other than the Obligated Group Schools, nor from any schools Bright Star may operate in the future, are pledged to make payments under the Leases and with respect to the Bonds. [Remainder of page intentionally left blank] 95

102 MISCELLANEOUS The foregoing and subsequent summaries and descriptions of provisions of the Bonds and the Bond 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 Bond Indenture, the Master Indenture, the Supplemental Master Indenture and the 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 distribution and use of this Limited Offering Memorandum has been approved by the Authority, the Borrower and Bright Star. BORROWER: BRIGHT STAR EDUCATION GROUP, a California nonprofit public benefit corporation By: Title: Chief Business Officer (Signatures continue on following page) 96

103 LESSEE: BRIGHT STAR SCHOOLS, a California nonprofit public benefit corporation By: Title: President [Signatures page to Limited Offering Memorandum] 97

104 [THIS PAGE INTENTIONALLY LEFT BLANK]

105 APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER, THE OBLIGATED GROUP, BRIGHT STAR AND THE SCHOOLS

106 THE BORROWER (BRIGHT STAR EDUCATION GROUP)... A-4 General... A-4 Back-Office & Support Services Provided to Bright Star by BSEG... A-4 Governance... A-5 Executive Team... A-8 Role in the Financing... A-10 THE MEMBERS OF THE OBLIGATED GROUP... A-10 General... A-10 Governance... A-11 Future Members of the Obligated Group... A-12 CHARTER MANAGEMENT ORGANIZATION ( BRIGHT STAR )... A-12 Organization Background... A-12 Charter Schools Operated by Bright Star... A-13 Obligated Group Schools... A-14 History of Bright Star... A-15 Future Growth Plan... A-18 Mission Statement, Core Values & Educational Philosophy... A-19 Educational Program... A-21 Organizational Structure & Executive Team... A-24 Bright Star Board of Directors... A-26 Board Structure & Committees... A-30 Historical Enrollment Information... A-30 Academic Testing & Results... A-31 Parental Support... A-35 Awards and Recognition... A-36 Student & Family Satisfaction Surveys... A-36 THE SCHOOL VALOR ACADEMY HIGH SCHOOL ( VAHS )....A-38 General... A-38 Mission & Vision Statements... A-38 School Administration... A-38 Student Recruitment, Admissions, Enrollment and Wait-list... A-40 Enrollment Distribution by ZIP Code... A-43 Historical Student Retention... A-45 Teacher Retention... A-46 Transportation... A-47 Equipment and Teaching Materials... A-47 Safety Procedures... A-48 Insurance Coverage... A-48 Fundraising... A-48 OPERATING AND FINANCIAL INFORMATION... A-49 Historical Financial Results... A-49 Historical Statements of Financial Position... A-52 Financial Statements... A-55 Employee Benefits... A-55 State Teachers Retirement System... A-55 Outstanding Debt... A-59 SB A-60 Public Charter Schools Grant Program... A-60 Facilities and Leases for Current Locations.... A-60 Litigation... A-61 A-2

107 INCOME PROJECTIONS AND COVERAGE RATIOS... A-62 Projected Income, Base Rent Coverage Ratio and Consolidated Days Cash on Hand... A-62 A-3

108 APPENDIX A CERTAIN INFORMATION REGARDING THE BORROWER (BRIGHT STAR EDUCATION GROUP), THE OBLIGATED GROUP, THE CHARTER MANAGEMENT ORGANIZATION (BRIGHT STAR SCHOOLS) AND THE SCHOOLS (VALOR ACADEMY HIGH SCHOOL AND STELLA MIDDLE CHARTER ACADEMY) Certain statements contained in this Appendix reflect forecasts, projections and forward-looking statements. No assurance can be given that the future results discussed herein will be achieved. Actual results may differ materially from the forecasts described herein. In this respect, the words estimate, project, anticipate, expect, intend, believe and similar expressions are intended to identify forward-looking statements. All projections, forecasts, assumptions, expressions of opinions, estimates and other forward-looking statements are expressly qualified in their entirety by the cautionary statements set forth in this Limited Offering Memorandum. Unless otherwise noted, all information, data, and projections in this Appendix were furnished by the Borrower and/or Bright Star. General THE BORROWER (BRIGHT STAR EDUCATION GROUP) Bright Star Education Group (the Borrower or BSEG ) is a California nonprofit public benefit corporation and organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the Code ). BSEG was formed on February 28, 2013 in order to function as the charter management organization for Bright Star Schools ( Bright Star ) and provides back-office services and school support to the schools in the Bright Star network. Bright Star is a California nonprofit public benefit corporation and organization described in Section 501(c)(3) of the Code. Bright Star is the holder of all school charters and the recipient of all State and federal revenue related to the operation of its affiliated charter schools Back-Office & Support Services Provided to Bright Star by BSEG BSEG s sole purpose is to serve Bright Star and each of its charter schools with a full service offering of back-office and school support functions. BSEG has about 38 full-time employees serving in an executive, administrative or support capacity at BSEG s central office, which is located at 600 South La Fayette Park Place, Suite 302, Los Angeles, California As shown in the graphic to the right, BSEG provides each school with significant programming, business and operational support from its central office in the following areas: (1) academic program, curriculum development, data management and analysis; (2) charter authorization, renewal, compliance; (3) grant application/administration; (4) student recruitment, lottery; (5) principal and teacher recruitment/professional development/training; (6) finance, budgeting, accounting, purchasing, payroll, student data services and financial audits; (7) management of General Services Accounting and Payroll Finance and Budgeting Human Resource Management Legal Coordination Outreach and Enrollment Marketing and Communications School Operations Support School Operations and Compliance Data Management and Mining Facility Management Information and Technology Management Bright Star School Support Services Program Support Instruction and Curriculum Special Education Student and Family Services Talent Recruitment and Development Alumni Support Coaching and Mentorship Strategic Support Facility Development Public Affairs New Charter Development Advancement Source: Bright Star. A-4

109 special education budget; (8) risk management, legal support; (9) facilities development/management; (10) human resources, benefits administration; (11) parental involvement/advocacy, community relations building; (12) public and district relations; (13) information technology and technology support services; and (14) other services including fundraising, food program administration, development and coordination of school policies with the Bright Star Board of Directors and operations. In the school year, Bright Star provided one-time funding to BSEG in the amount of $7,716,326 to allow BSEG to provide central office support to its charter schools. Each charter school in the Bright Star network pays a monthly educational management fee not to exceed 12% of all general purpose entitlement and categorical block grants pursuant to the Agreement for Management Services Between Bright Star Education Group and Bright Star Schools dated August 12, These management fees, along with any additional fundraising for BSEG, are the primary sources of revenue to fund the central office operations for BSEG. In any year, if educational management fees are not used, they are redistributed to the Charter Schools to be placed into reserve accounts. For the year ended June 30, 2017, Valor Academy High School and Stella Middle Charter Academy (the schools to be financed from the Bonds) paid $466,297 and $512,749, respectively, in educational management fees (unaudited) to BSEG. In connection with the Bonds, BSEG will subordinate its educational management fees to the payment of Rent under the Leases (as defined in the forepart of this Limited Offering Memorandum). See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Leases Payment of Rent in the forepart of this Limited Offering Memorandum. In order to implement its strategic growth plan (as discussed further on Page A-18), BSEG anticipates further growth of its central office staff to support new school openings and internal enrollment growth at existing schools. BSEG anticipates continuing to build strength in the areas of governance, fiscal management, and personnel development, as well as building its fundraising programs. BSEG has recently hired certain executive level staff as well as other supporting central office staff. This growth was funded from continued growth in educational management fees that is linked to the internal enrollment growth at existing schools and enrollment growth through the opening of two new schools over the next several years. In addition, BSEG received $2.225 million from the Charter School Growth Fund ($1,150,000 in grants and $1,075,000 in convertible loan, which will convert to grant upon meeting certain milestones). The Charter School Growth Fund is a national nonprofit that makes multi-year philanthropic investments in high-performing charter school networks nationwide. Governance With the founding of BSEG, there are two distinct boards providing oversight and guidance to Bright Star. The Bright Star Board of Directors ( Bright Star Board ) focuses primarily on academic, culture, and discipline issues at the charter schools and is comprised of members who have knowledge and expertise in the areas of education and operations of schools. More information on the Bright Star Board is discussed further on Page A-26. The BSEG Board of Directors ( BSEG Board ) takes on the review and recommendation for most of the central office and business functions provided by BSEG. Two persons serve as directors on both boards to allow for transfer of information between the two entities. The BSEG Board consists of between 3 and 25 members. Under the BSEG governing documents, the BSEG Board is required to meet at least annually for the purpose of organization, appointment of officers and the transaction of such other business as may be properly brought before the meeting. There is no limitation upon the number of consecutive terms to which a director may be reelected. Vacancies on the BSEG Board shall be filled by a vote of a majority of directors then in office. A-5

110 The following table sets forth the members of the BSEG Board. Table 1 BRIGHT STAR EDUCATION GROUP ( BSEG ) Board of Directors Member Position Profession Member Since Term Expires Andrew Murr* + President Adjunct Professor for USC Marshall School of Business/ Retired Bureau Chief, Newsweek Marguerite Rangel* Treasurer Financial Advisor, Park Avenue Securities James Min* Secretary Founder and Managing Partner, Telos Advisors, LLC Marc Mitchell* Director Founder, Dominion Media Scott Layfield* Director Attorney, DLA Piper LLP Larry Klein* + Director Interdisciplinary Studies Department Head, Harvard-Westlake School Michael Solomon* Director Partner, Leonard Green & Partners, L.P., a private equity firm Dean Indot Director Senior Vice President & Senior Relationship Manager, Torrey Pines Bank Source: Bright Star. *Formerly a member of the Bright Star Board and represents date person joined Bright Star Board. + Serves on both the Bright Star Board and BSEG Board Pursuant to its bylaws, the BSEG Board can create various committees to develop and implement academic and management policies that impact BSEG s operations. BSEG currently has a Finance, Facilities and Advancement Committee (only the Finance Committee is active). Each one of the committees is composed of at least two (2) BSEG Board members. Committees generally meet once a month. New BSEG Board members initially serve a provisional one-year term upon which time three additional years can be added. Existing BSEG Board members serve three year terms which can be renewed. All Directors serve on the BSEG Board on a voluntary basis and are not compensated for their service. BSEG Board members cannot engage in any self-dealing transaction, as defined in the bylaws as any transaction to which BSEG is a party and in which one or more of the directors has a material financial interest. Biographies of BSEG s current board of directors are below. Andrew Murr. President. Mr. Murr is an Adjunct Professor at the University of Southern California, where he teaches an advanced writing course. He was formerly the Los Angeles Bureau Chief, correspondent and presidential campaign political reporter for Newsweek. He has co-authored two books: Quest for the Presidency 1992 and Back from the Dead. He received the 1993 National Magazine Award for Best Single-Topic Issue (shared). Mr. Murr received a Bachelor of Arts in English Literature from Yale University. Marguerite Rangel. Treasurer. Ms. Miller is a Financial Advisor with the Park Avenue Securities, a member of Pacific Advisors. Her practice focuses on all aspects of planning for individuals and business owners, with special knowledge in charitable planning, estate tax issues, executive benefits, and business succession. She is a member of the American Association of Life Underwriters and serves on the Wealth Transfer Committee and serves on the boards of numerous nonprofit organizations. Ms. Miller received a Bachelor of Arts in French from Humboldt State University and a JD from the University of San Francisco School of Law. A-6

111 James Min. Secretary. Mr. Min is the Founder and Managing Partner of Telos Advisor, LLC, an investment banking advisory firm focused on growth companies in the technology industry. He was formerly the Managing Director of Montgomery & Co, LLC; a Senior Associate with Thomas Weisel Partner, LLC; the Director of Business Development with Movsio, Inc.; the Director of Business Development and Marketing with Airflash, Inc.; a Senior Analyst with CIBC Oppenheimer; and a Financial Analyst with Bear, Stearns & Co. Inc. Mr. Min received a Bachelor of Arts in Business-Economics and Political Science from the University of California, Los Angeles and an MBA from the University of Chicago. Marc Mitchell. Director. Mr. Mitchell is the Co-Founder and CEO of Dominion Media, a film and TV production company, and the Co-Founder and CEO of Lootsie, Inc., a loyalty and rewards software platform for mobile games and applications. He was formerly the COO of UrbanDaddy, an online lifestyle publication, and the COO of SRC Entertainment. Mr. Mitchell was also a corporate attorney with Chadbourne & Parke LLP, an international law firm. He sits on the Board of Advisors of Refinery29 and ForYourArt and has been the Senior Advisor to Intermedia Vibe Holdings, the parent company to the Vibe and Uptown magazine titles. Mr. Mitchell received a Bachelor of Arts in International Relations from Stanford University and a JD from New York University. Scott Layfield. Director. Mr. Layfield is an attorney with DLA Piper LLP (US) focusing on corporate and restructuring matters. He was formerly an attorney with Cohen & Bordeaux, LLP. Mr. Layfield received a Bachelor of Arts in Economics/Math from the University of California, Santa Barbara, an MBA from Pepperdine University and a JD from Pepperdine University School of Law. Larry Klein. Director. Mr. Klein is a teacher and coach at Harvard-Westlake School, where he chairs the Department of Independent Research and Interdisciplinary Studies and is a member of the Faculty Academic Counsel. He is the Associate Director of the Oxford Tradition, Oxbridge Academic Program, where he is responsible for the administration of a summer academic program at Oxford University. He has formerly served on the Finance Committee and Master Planning Group for the Wesley Group, an independent K-8 school in North Hollywood, California. Mr. Klein received a Bachelor of Arts in History from the University of Virginia and a JD from Washington and Lee University. Michael Solomon. Director. Mr. Solomon is a partner at Leonard Green & Partners, L.P., a private equity firm based in Los Angeles, where he executes buyouts and growth equity investments totaling over $20 billion in total value, provides financial and strategic advice as a member of the Board of Directors of such companies, leads all public market activities of the firm, and leads all non-partner investment professional recruiting and management activities at the firm. He was formerly an Associate with Deutsche Bank Alex. Brown/ BT Securities and served as a Board Associate with Big Brothers Big Sisters of Greater Los Angeles. Mr. Solomon received a Bachelor of Arts in Economics from Pomona College and studied Urban Economic Development, the European Community and British Politics at Oxford University, University College. Dean Indot. Director. Mr. Indot is a Senior Vice President & Senior Relationship Manager at Torrey Pines Bank. He was formerly a Vice President, Commercial Lending at Boston Private Bank; Vice President, Private Banker at 1st Private Bank and Trust; Senior Vice President Relationship Manager at BIT Financial Resource Inc.; CFO/COO at Empyrean Holdings LLC; CEO of Webcraft Solutions Pte.Ltd.; Senior Business Systems Analyst of VerticalNet; and Director of Operations of Netgateway. Mr. Indot received a Bachelor of Arts in Business Administration from California State University, Fullerton, an MBA in Strategy and Finance and an MBA in Real Estate and Strategy from Pepperdine University School of Business and Management. A-7

112 Executive Team BSEG is managed by an executive team consisting of 8 members. The executive team is responsible for the overall, day-to-day management of Bright Star s schools and BSEG s central office team. The table below summarizes the members of the BSEG executive team. Any vacancy in the executive team will be filled by the BSEG Board pursuant to the bylaws of BSEG. Table 2 BRIGHT STAR EDUCATION GROUP Executive Team Members Member Position(s) Year Joined Bright Star Hrag Hamalian Executive Director Melissa Kaplan Deputy Superintendent of Education Saman Bravo-Karimi Chief Business Officer 2017 Jennifer Simmons Vice President of Curriculum and Instruction 2013 China Habte Chief Financial Officer 2007 Leeann Yu Chief Operating Officer 2011 Marni Parsons Vice President of Student and Family Services 2011 Elijah Sugay Vice President of Finance and Facilities Mr. Hamalian was initially the Founder/Executive Director of Valor Academy Charter School (currently known as Valor Academy Middle School or VAMS ) prior to the voluntary merger between Bright Star and Valor Academy Charter School in After the merger, he served as Head of Schools and Chief Cultural Officer at Bright Star for two years prior to being promoted to Executive Director in Note that Ms. Kaplan is on the Executive Team but is an employee of Bright Star. Source: Bright Star. Biographies of the BSEG executive team members are listed below. Hrag Hamalian, Executive Director. Mr. Hamalian was the Founder/Executive Director of Valor Academy Charter School (currently known as Valor Academy Middle School or VAMS ) prior to the voluntary merger of Bright Star and Valor Academy Charter School in He was initially hired at Bright Star as the Head of Schools and Chief Cultural Officer before being promoted to Executive Director in Mr. Hamalian founded Valor Academy Charter School after completing a year-long fellowship with Building Excellent Schools, a nationally-recognized charter-development organization, and a leadership residency at KIPP: Academy of Opportunity. In 2011, Mr. Hamalian was awarded the Gold Award as the alumnus of the decade for Boston College as a result of his work with VAMS. He began his professional work in urban education as a Teach for America Corps ( TFA ) member, teaching 9th grade Biology and Honors Biology at Locke High School (one of the lowest performing highs schools in Los Angeles). At Locke High School, Mr. Hamalian helped found the School of Math and Science and became head of the Biology Department. Mr. Hamalian received a BA in Biology and a BA in Honors English from Boston College and holds a Masters in Secondary Education from Loyola Marymount University and an MBA from UCLA. Melissa Kaplan, Deputy Superintendent of Education. Ms. Kaplan joined Bright Star in 2012 as its Chief Academic Officer. Prior to Bright Star, she was the Chief Academic Officer at Inner City Education Foundation Public Schools ( ICEF ), where she was responsible for managing the academic program at fourteen schools serving 4,500 students in kindergarten through grade 12, coordinating and delivering professional development for more than 150 teachers and administrators, and ensuring the alignment of the curriculum with college readiness standards. Ms. Kaplan has served in a variety of leadership roles including district and site administration, demonstration teacher, and teacher coach. She A-8

113 has worked extensively as a consultant assisting districts and charter management organizations nationally in curriculum development and system building, especially in the area of reading and writing across the curriculum. Before joining the charter school movement, Ms. Kaplan taught English in local school districts in both California and Pennsylvania. She holds a Bachelor s degree in Education from DeSales University and a Masters of Education from UCLA. Saman Bravo-Karimi, Chief Business Officer. Mr. Bravo-Karimi joined Bright Star in Mr. Bravo-Karimi began his career in education in 2011 as a Broad Resident at the Los Angeles Unified School District ( LAUSD ). In his nearly six years at LAUSD, he supported district and school site budgeting, debt management, and fiscal sustainability projects. Prior to LAUSD, Mr. Bravo-Karimi served as a Strategy Consultant for Wells Fargo, providing financial analytics and strategic guidance to the bank. Mr. Bravo-Karimi holds Bachelor s degrees in Economics and History from UCLA and an MBA from UCLA. Jennifer Simmons, Vice President of Curriculum and Instruction. Ms. Simmons joined Bright Star in 2013 and oversees the development, implementation and support of instruction and assessment programs. Prior to joining Bright Star, Ms. Simmons worked as the Director of Mathematics Instruction for Alliance College-Ready Public Schools and ICEF. In those positions, she facilitated the development of curriculum and professional development for mathematics for kindergarten through 12 th grade. She began her career in education as the founding mathematics instructor for Green Dot Public Schools. In addition to teaching, Jennifer served as a mentor-teacher and math coach, providing support to first and second year instructors. Ms. Simmons holds a Bachelor s degree in Computer Science from California State University, Dominguez Hills and an Administrative Services Credential and Masters of Arts in Secondary Teacher Education from the University of Phoenix. China Habte, Chief Financial Officer. Ms. Habte joined Bright Star in 2007 and has over seventeen years of experience working with nonprofit organizations. Prior to Bright Star, she worked for a mid-size public accounting firm, where she spent five years as a senior auditor and an audit manager. In that role, she conducted and managed audits for a variety of nonprofit organizations in the greater Los Angeles area, specializing in government contracts and compliance and evaluation of internal controls. In addition, she organized and presented several in-house trainings and seminars on how to perform audits for nonprofit organizations. She began her career as a senior accountant for an international relief organization followed by a position as controller for a local mental health agency. Ms. Habte holds a Bachelor s degree in Accounting & Finance from California State University, San Bernardino. Leeann Yu, Chief Operating Officer. Ms. Yu joined Bright Star in 2011 and oversees student data, school operations, and information technology. Prior to joining Bright Star, she worked as a financial advisor for Ameriprise Financial, and she also spent a year in Taiwan teaching English to elementary and junior high school students. Ms. Yu accepted an Education Pioneers Fellowship at Partnerships to Uplift Communities (PUC Schools), where she conducted a qualitative study on technology usage and identified best practices that could be implemented across the organization. Additionally, Ms. Yu served for eight years as a board member with the National Teen Leadership Program. She holds a Bachelor s degree in International Development Studies and a minor in Education from UCLA and an MBA from the University of Minnesota. Marni Parsons, Vice President of Student and Family Services. Ms. Parsons joined Bright Star in Prior to joining Bright Star, Ms. Parsons was a Toddler and Parent Group Facilitator at Little Village Nursery School, a Co-Director of La Playa Cooperative Nursery School, an owner of a child care center, a teacher, a counselor and spent time in business and marketing. Ms. Parsons is a sought after speaker for preschools, parent teacher associations, public and private schools, MOMS Clubs, and parenting groups. She holds a Bachelor s degree from Antioch University with a concentration in Child and Adolescent Psychology, a graduate degree certification from Seattle Pacific University and the Parent A-9

114 Coaching Institute, and a certificate from the Positive Discipline Association as a Classroom and Parent Educator. Elijah Sugay, Vice President of Finance and Facilities. Mr. Sugay joined Bright Star in 2009 as the founding Director of Finance & Operations. Prior to joining Bright Star, he was the founding Director of Finance & Operations at Valor Academy Charter School. Mr. Sugay was a Loss Operations Analyst, Internal Audit, for Countrywide Financial and a School Operations Manager with Edison Charter Academy in San Francisco, California. Mr. Sugay graduated from Panorama High School and grew up in the Panorama City community. He holds a Bachelor s degree in Business Administration from UCLA. Role in the Financing Upon the issuance of the California School Finance Authority s Charter School Revenue Bonds (Bright Star Schools Obligated Group), Series 2017 (the Bonds ), the California School Finance Authority (the Authority ) will loan the proceeds of the Bonds to the Borrower pursuant to a Loan Agreement (the Loan Agreement ) between the Authority and the Borrower. In addition, the Borrower is a party to the Master Indenture of Trust (the Master Indenture ), as supplemented by a Supplemental Master Indenture for Obligation No. 1, each by and among the Borrower, as representative of the Obligated Group (defined in the Master Indenture), the Landlords (as defined below), as initial Members of the Obligated Group, and Wilmington Trust, National Association, as master trustee. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS in the forepart of this Limited Offering Memorandum. General THE MEMBERS OF THE OBLIGATED GROUP Bright Star Development Group-9334 Lemona, LLC (the VAHS Landlord ) and BSDG 4115 MLK LLC (the SMCA Landlord, and together with the VAHS Landlord, the Landlords or the Members, and each a Landlord or Member ) are each a California limited liability company, the sole member of each is the Borrower. The Members are the only Members of the Obligated Group (defined in the Master Indenture), and the Borrower is the Obligated Group Representative (defined in the Master Indenture). The Members were formed to support charter schools operated by Bright Star and specifically for the purpose of holding title to property and managing, operating and leasing property, and collecting income. The graphic below the entities involved in the Bond transaction. [Remainder of page intentionally left blank] A-10

115 Obligated Group Representative & Borrower Upon the issuance of the Bonds, the VAHS Athletic Field Property (as defined in the forepart of this Limited Offering Memorandum) will be leased by the VAHS Landlord, as Landlord, to Bright Star (as Tenant ) pursuant to the VAHS Lease (as defined in the forepart of this Limited Offering Memorandum). Without further action by either party effective as of the date the VAHS Landlord acquires title to such property upon completion of construction, the VAHS Campus Property (as defined in the forepart of this Limited Offering Memorandum, and collectively with the VAHS Athletic Field Property, the VAHS Facility ) will be leased by the VAHS Landlord to the Tenant pursuant to the VAHS Lease. Upon the issuance of the Bonds, the SMCA Facility (as defined in the forepart of this Limited Offering Memorandum) will be subleased by the SMCA Landlord, as Landlord, to Bright Star, as Tenant, pursuant to the SMCA Sublease (as defined in the forepart of this Limited Offering Memorandum). The VAHS Facility will be used by Bright Star to operate Valor Academy High School ( VAHS ), and the SMCA Facility will be used by Bright Star to operate Stella Middle Charter Academy ( SMCA, and together with VAHS, the Schools and each a School ). No other Bright Star school (besides the Schools) will be part of the initial Leases. The table below summarizes the lease arrangement between each Member and Bright Star. See INTRODUCTION The Bonds and THE BONDS in the forepart of this Limited Offering Memorandum. A-11

116 Landlord (Lessor) Tenant (Lessee) School Operated by the Bright Star Location Description of Lease Agreement 1 Bright Star 9334, 9336, 9356 Lease Agreement Bright Star Development Group - Valor Academy High and 9404 Lemona (between VAHS Schools 9334 Lemona, LLC School (or VAHS ) Ave., Los Angeles, Landlord and Bright ( Bright Star ) ( VAHS Landlord ) CA Star) 4115 W. Martin Lease Agreement BSDG 4115 MLK Bright Star Stella Middle Charter Luther King, Jr. (between SMCA LLC ( SMCA Schools Academy (or Boulevard, Los Landlord and Bright Landlord ) ( Bright Star ) SMCA ) Angeles, CA Star) 1 For more information please refer to SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Leases in the forepart of this Limited Offering Memorandum. 2 The VAHS Facility site will be located on a consolidated parcel currently situated on four separate legal parcels, including the VAHS Athletic Field Property and the VAHS Campus Property. Source: Bright Star. The VAHS Landlord will hold title to the VAHS Athletic Field Property and, after construction is completed on the VAHS Campus Property, will acquire title to the VAHS Campus Property. The VAHS Landlord is not expected to have revenue other than payments received pursuant to the VAHS Lease. The SMCA Landlord will hold a leasehold interest in the SMCA Facility, and is not expected to have revenue other than payments received pursuant to the SMCA Lease. The activities of the Members are expected to be consolidated with the activities of BSEG in the annual audited financial statements of BSEG. Governance BSEG is the sole member of the Landlords and has been appointed to act as the manager of the SMCA Landlord, and in such capacity is responsible for the management, control and conduct of the Landlords and the appointment of officers (if any) of the Landlords. Although the Landlords are membermanaged, BSEG by acting through its Board of Directors may appoint officers to manage the Landlords, and such officers may be serving simultaneously as officers, employees, or directors of BSEG. There are no appointed officers of the Landlords at this time. Future Members of the Obligated Group Besides VAHS and SMCA, Bright Star currently has five other charter schools in its network. Bright Star may form another limited liability company or other entity in the future to serve as owner and landlord of permanent facilities for any of its other charter schools, which new entity may or may not be added to the Obligated Group. The addition of any future members to the Obligated Group will comply with the requirements under the Master Indenture. See CERTAIN RISK FACTORS Addition and Removal of Members in the forepart of this Limited Offering Memorandum. CHARTER MANAGEMENT ORGANIZATION ( BRIGHT STAR ) The following section presents general information regarding Bright Star Schools ( Bright Star ) as a whole and includes information regarding charter schools operated by Bright Star other than VAHS and SMCA. However, the obligation of Bright Star to pay amounts due under the Lease is limited to the sources of funds described within the Leases. See INTRODUCTION Security for the Bonds and SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Leases in the forepart of this Limited Offering Memorandum. A-12

117 The inclusion in this appendix of information regarding financial results of or the operation of any charter school other than VAHS and SMCA does not indicate that such moneys are available for the satisfaction of obligations under the Leases. Beneficial Owners (as defined in the forepart of this Limited Offering Memorandum) of the Bonds and the Trustee (as defined in the forepart of this Limited Offering Memorandum) will not have any rights against the assets of Bright Star to pay any debt service on the Bonds, except as specifically provided in the documents governing the issuance of the Bonds and the Leases. Organization Background Overview of Current Bright Star Schools Founded on November 7, 2002, Bright Star started with the support of experienced educators, concerned parents and a committed Board of Directors that sought to bring a college-preparatory education to the West Adams neighborhood of Los Angeles, California, where students and families had few good choice school options. Bright Star is a charter management organization that operates charter schools serving transitional kindergarten ( TK ) through 12 th grade. Bright Star currently holds seven (7) charters from the Los Angeles Unified School District ( LAUSD ) serving about 2,800 students (as of August 28, 2017). Bright Star is a California nonprofit public benefit corporation and organization described in Section 501(c)(3) of the Code. The graphic to the right illustrates the three geographic clusters (i.e. Panorama City, Koreatown and West Adams neighborhoods) in Los Angeles where Bright Star operates its current seven schools. At full capacity, Bright Star intends to hold nine charters and operate nine schools that will serve a projected 4,486 students in TK through 12 th grade. For more information see the Future Growth Plan section on Page A-18 of this Appendix A. Charter Schools Operated by Bright Star Bright Star operates the following seven (7) schools as summarized in the table below. Two of the seven schools (Valor Academy High School and Stella Middle Charter Academy) will be part of the Obligated Group and their lease payments made to Bright Star Development Group 9334 Lemona, LLC and BSDG 4115 MLK LLC (as landlords under the Leases), respectively, will secure repayment on the Bonds. For more information on Bright Star Development Group 9334 Lemona, LLC and BSDG 4115 MLK LLC (as the Members of the Obligated Group), please refer to THE MEMBERS OF THE OBLIGATED GROUP on Page A-10 of this Appendix A. Table 3 BRIGHT STAR SCHOOLS A-13

118 Summary of Charter Schools 1 As of August 28, Charter renewal petitions for SMCA and VAHS were submitted to LAUSD on October 10, The LAUSD Charter School Division has recommended that the charter renewal petitions be approved. LAUSD will vote on the charter renewal petitions on December 5, Bright Star anticipates that both charters will be renewed. Source: Bright Star. Obligated Group Schools The following summary refers to the initial charter schools (Valor Academy High School and Stella Middle Charter Academy), which will be Obligated Group Schools. The other charter schools in the Bright Star network will not be part of the Obligated Group Schools. Stella Middle Charter Academy ( SMCA ) In August 2003, Bright Star opened its first school, SMCA, in LAUSD to serve grades 5 through 8. As of August 28, 2017, SMCA serves 502 students (grades 5 through 8). SMCA is part of the West Adams cluster in the Bright Star network. Bright Star currently leases two facilities for SMCA located at 2636 South Mansfield Avenue, Los Angeles, California and 5431 West 98 th Street, Los Angeles, California SMCA is currently busing students from the West Adams and Koreatown neighborhoods in Los Angeles to its two facilities. Bright Star is working with the Pacific Charter School Development, Inc., a California nonprofit public benefit corporation and organization described in Section 501(c)(3) of the Code ( PCSD ), on the development of its permanent facility at 4115 West Martin Luther King, Jr. Boulevard, Los Angeles, California (the SMCA Facility ), which is located just south of the West Adams neighborhood. Valor Academy High School ( VAHS ) In August 2013, Bright Star opened VAHS to serve grades 9 through 12 as a high school option for VAMS students. Along with Valor Academy Middle School A-14

119 ( VAMS ) and Valor Academy Elementary School ( VAES ), VAHS is part of the Panorama City cluster in the Bright Star network. As of August 28, 2017, VAHS serves 473 students (grades 9 through 12). VAHS currently operates out of a Proposition 39 (as defined herein) school site and is co-located with Panorama High School at 8015 Van Nuys Boulevard, Panorama City, California The limited space and operational challenge of co-locating in a Proposition 39 facility have led VAHS to seek development of a permanent school facility at 9334 Lemona Avenue, North Hills, California (the VAHS Facility ). The VAHS Facility will be less than 0.6 miles away from the current campus site for VAMS (versus 2 miles away for the current co-located VAHS site at Panorama High School). The table below shows the student demographics of VAHS and SMCA for the school year. The vast majority of students attending VAHS and SMCA are low-income Latino/Hispanic students - about 87% of VAHS students qualify for free and reduced price meals and about 93% of VAHS students identify as Latino/Hispanic, and about 96% of SMCA students qualify for free and reduced price meals and about 91% of SMCA students identify as Latino/Hispanic (data is for the school year, the most recent date that data is available from DataQuest, California Department of Education). [Remainder of page intentionally left blank] A-15

120 Demographics Table 4 VAHS AND SMCA Student Demographics Valor Academy High School Stella Middle Charter Academy % FRL 87% 96% % ELL 12% 24% % African American 2% 7% % Latino/Hispanic 93% 91% % Minority (Non-White) 98% 99% SBAC ELA (Met/Exceeded) SBAC Math (Met/Exceeded) % 61% 17% 19% Source: DataQuest, California Department of Education and Bright Star. 50% 57% 35% 31% History of Bright Star In August 2003, Bright Star opened its first school, Stella Middle Charter Academy ( SMCA ). Bright Star has established seven (7) schools since founding SMCA in the following communities in Los Angeles. West Adams Cluster: Stella Middle Charter Academy ( SMCA ) and Bright Star Secondary Academy ( BSSCA ) Panorama City Cluster: Valor Academy Elementary School ( VAES ), Valor Academy Middle School ( VAMS ) and Valor Academy High School ( VAHS ) Koreatown Cluster: Rise Kohyang Middle School ( RKMS ) and Rise Kohyang High School ( RKHS ). The timeline on the top of the next page summarizes the major milestones for Bright Star over its last 13 years of operations. A-16

121 BRIGHT STAR SCHOOLS Timeline of Major Milestones Source: Bright Star. Stella Middle Charter Academy ( SMCA ) - In August 2003, Bright Star opened its first school, SMCA, in LAUSD to serve grades 5 through 8. As of August 28, 2017, SMCA serves 502 students (grades 5 through 8). Bright Star currently leases two facilities for SMCA located at 2636 South Mansfield Avenue, Los Angeles, California and 5431 West 98 th Street, Los Angeles, California SMCA is currently busing students from the West Adams and Koreatown neighborhoods in Los Angeles to its two facilities. Bright Star is working with the Pacific Charter School Development, Inc., a California nonprofit public benefit corporation and organization described in Section 501(c)(3) of the Code ( PCSD ), on the development of its permanent facility at 4115 West Martin Luther King, Jr. Boulevard, Los Angeles, California (the SMCA Facility ), which is located just south of the West Adams neighborhood. Bright Star Secondary Charter Academy ( BSSCA ) - In August 2006, Bright Star opened BSSCA in LAUSD to serve grades 9 through 12 to provide a high school option to SMCA parents. As of August 28, 2017, BSSCA serves 534 students (grades 9 through 12). BSSCA is co-located with SMCA at 5431 West 98 th Street, Los Angeles, California Bright Star is currently busing BSSCA students from the West Adams and Koreatown neighborhoods in Los Angeles to its facility. Similar to SMCA, Bright Star is working with PCSD to actively pursue permanent facilities solutions in or near the West Adams neighborhood in Los Angeles for BSSCA, which may include a co-located facility with SMCA. Valor Academy Middle School ( VAMS ) In August 2009, Hrag Hamalian (Bright Star s current Executive Director) founded Valor Academy Charter School ( Valor ) to serve grades 5 through 8 in the Panorama City neighborhood of Los Angeles. Valor was a predecessor charter management organization which founded and operated VAMS from , until Valor voluntarily merged with Bright Star. For more information on the Valor/Bright Star merger, please refer to Voluntary Merger Between Valor Academy Charter School and Bright Star Schools in the next paragraph immediately below. As of August 28, 2017, VAMS serves 496 students (grades 5 through 8). VAMS operates out of a two-story, 31,200 sq. ft. campus facility on a 2.1 acre site located at 9024 Burnet Avenue, North Hills, California which was constructed in 2015 and financed by PCSD Nordhoff, LLC, a California limited liability company, with proceeds of a new market tax credit financing. Pursuant to the financing structure, Bright Star is leasing the facility for VAMS from PCSD Nordhoff, LLC with the option to purchase the facility by December 3, Prior to exercising the option, BSEG may transfer the option to a separate limited liability company. A-17

122 Voluntary Merger Between Valor Academy Charter School and Bright Star Schools After operating for several years, Valor Academy Charter School ( Valor ) had grown to a fully-enrolled middle school serving grades 5 through 8. In order to continue its successful operations, Valor began to explore options for expanding into a high school so that its graduating eighth grade students would have a ninth grade option in Fall After consideration of several options, including opening its own high school, Valor entered into voluntary discussions to merge with Bright Star in the Summer of The leaders of both organizations and their respective board members continued to work closely together until deciding to formally merge the two organizations in January 2013, bringing Valor under the management of Bright Star. In April 2013, LAUSD approved a material amendment to the charter of Valor (later renamed Valor Academy Middle School or VAMS ) to allow the school to fall under the management of Bright Star. The intent of the merger was to create economies of scale by combining two high-performing charter management organizations ( CMO ) who shared a similar academic philosophy and culture. For Valor, the merger enabled the then one-school CMO to expand into high school grades working with a CMO (i.e. Bright Star) who had a successful history operating a quality high school (BSSCA). For Bright Star, the merger enabled the then two-school CMO to continue expansion into a new geographic region (i.e. the Panorama City neighborhood of Los Angeles) with an already established CMO partner (i.e. Valor) in which there was a great need for high-performing charter schools and very little competition. Valor Academy High School ( VAHS ) - In August 2013, Bright Star opened VAHS to serve grades 9 through 12 as a high school option for VAMS students. As of August 28, 2017, VAHS serves 473 students (grades 9 through 12). VAHS currently operates out of a Proposition 39 (as defined herein) school site and is co-located with Panorama High School at 8015 Van Nuys Boulevard, Panorama City, California The limited space and operational challenge of co-locating in a Proposition 39 facility have led VAHS to seek development of a permanent school facility at 9334 Lemona Avenue, North Hills, California (the Facility ). The new Facility will be less than 0.6 miles away from the current campus site for VAMS (versus 2 miles away for the current co-located VAHS site at Panorama High School). Valor Academy Elementary School ( VAES ) In August 2016, Bright Star opened VAES to serve TK through grade 4, which students feed into VAMS. As of August 28, 2017, VAES serves 209 students (grades TK through 2). By the school year, VAES expects to reach full enrollment and serve 460 students. Bright Star currently leases a facility for VAES on the satellite campus of Granada Hills Charter School located at Devonshire Street, Northridge, California VAES is working with PCSD to actively pursue permanent facilities solutions closer to VAMS and VAHS. Rise Kohyang Middle School ( RKMS ) - In August 2012, Bright Star opened RKMS in the Koreatown neighborhood of Los Angeles to serve grades 6 through 8. As of August 28, 2017, RKMS serves 405 students (grades 6 through 8). Bright Star currently subleases a private facility for RKMS located at 3020 Wilshire Boulevard, Suite 250, Los Angeles, California Rise Kohyang High School ( RKHS ) - In August 2016, Bright Star opened RKHS in the Koreatown neighborhood of Los Angeles to serve grade 9 through 12, which is fed by students from RKMS. As of August 28, 2017, RKHS serves 180 students (grades 9 through 10). By the school year, RKHS expects to reach full enrollment and serve 550 students. RKHS currently operates out of a Proposition 39 school site and is co-located with Belmont High School at 1575 West 2 nd Street, Los Angeles, California RKHS intends to continue to incubate at this school until full enrollment. SCMA, BSSCA, VAMS, VAHS, VAES, RKMS, and RKHS are collectively referred to herein as the Charter Schools. For more detail about current facilities and leases, see OPERATING AND FINANCIAL INFORMATION Facilities and Leases for Current Locations herein. A-18

123 Future Growth Plan Bright Star has developed a strategic plan that focuses on expanding its services to existing Bright Star families by offering a full TK through grade 12 model in each of the community (geographic) clusters it serves. Bright Star anticipates growing out its current schools and intends to add an elementary school in Koreatown that feeds into Rise Kohyang Middle School ( RKMS ) and an elementary school in West Adams that feeds into Stella Middle Charter Academy ( SMCA ) in the next several years. At full enrollment, Bright Star would serve a projected 4,486 students in low-income areas of Los Angeles, California. The illustration below shows the current schools and projected schools within Bright Star s school network. BRIGHT STAR SCHOOLS Growth Plan by Geographic Cluster 1 Future school to be opened by Fall Future school to be opened by Fall Source: Bright Star. A-19

124 Mission Statement, Core Values & Educational Philosophy Mission Statement The mission statement of Bright Star is: Our mission is to provide holistic, inclusive support for all students to achieve academic excellence and grow their unique talents so that they find joy and fulfillment in higher education, career, and life. Core Values The four core values of Bright Star are Integridad, Ubuntu, Kohyang and Growth, each as defined below. These core values do not simply apply to students, but to the Bright Star organization as a whole, including teachers, staff and families. (a) Integridad: Integridad mean we need to be the best versions of ourselves, to speak our own truth, and to advocate for those whose voices are not hears. (b) Ubuntu: Ubantu means that our humanity is shared, that we value kindness, and that we support one another to become the people we strive to be. (c) Kohyang: Kohyang means hometown and encourages us to build meaningful connections and strong community tires, because our hometowns are integral to our identities. (d) Growth: Growth means having a mindset that allows us to achieve excellence and gain fulfillment through our pursuit of learning and development. Educational Philosophy Bright Star s educational philosophy is that all students, regardless of race, ethnicity or socioeconomic background, deserve the opportunity to attend college if they so choose. To prepare students for this opportunity, Bright Star offers students a highly structured, rigorous and engaging academic program in a disciplined and safe school environment. At the most basic level its approach to education begins with high expectations. Bright Star believes that its students can and will rise to the challenges set forth in its demanding curriculum. Bright Star s commitment to students academically, socially and emotionally has led to its academic success. See Academic Outcomes for Existing Charter Schools herein. The people at Bright Star do the work they do because they care about and desire to create brighter futures for kids. They also care about transforming communities. Bright Star believes that for communities to thrive, they must create a rising generation of leaders who are both lifelong learners and well-rounded citizens who care about others and invest in the world and neighborhoods that they live in. By serving high need families and communities within those boundaries exceptionally well, Bright Star believes they will be able to raise the overall expectation for education in those neighborhoods and provide examples of best practices to other educators and schools in LAUSD and across the State. Bright Star hopes to always be led by this purpose to serve communities in need by figuring out how to best serve the children of those communities through education. A-20

125 Bright Star Targets Educationally Disadvantaged Communities. Bright Star intentionally targets communities that are educationally disadvantaged. It seeks to serve communities where parent education levels are low because low parent education levels were found to be highly correlated to the parents being unemployed and as a result living in poverty. Low education levels of parents also had a strong impact on the educational level of their children which in turn is highly correlated to intergenerational poverty. ADVANCEMENT PROJECT Highest and High Need Schools in LAUSD Based on the Student Needs Index as of April 1, 2014 The graphic to the right shows, in red and orange circles, the highest and high need schools in LAUSD as measured by a student needs index developed by the Advancement Project, a non-profit civil rights and advocacy organization in Los Angeles as of April 1, Schools identified in the highest and high need categories under the student needs index are ones which have the highest concentration of at-risk youth combined with low test results and poor neighborhood conditions. The areas circled in blue represent the three communities (i.e. Panorama City, Koreatown, West Adams) that Bright Star is currently serving. Panorama City West Adams Koreatown The student needs index measures LAUSD schools that have the greatest needs based on measurement of 12 separate data points including level of academic achievement (3 rd /8 th grade student test results in ELA, number of high school dropouts, number of suspensions and expulsions, etc.), percentage of at-risk students (e.g. English Learner, free and reduced price lunches, foster youth) and neighborhood conditions (e.g. exposure to gun violence, asthma rates, student fitness levels, etc.). There are three primary reasons why Bright Star decides to open a new charter school in a community: 1. A need for stronger education options. (a) The traditional public schools in the community are failing students and families. A-21

126 (b) The community does not contain strong charter school options serving similar grade levels. 2. Strong demand for the charter school from families and the community. (a) A desire for the school has been experienced through Intent to Enroll forms, wait list numbers, and/or other community feedback and anecdotal evidence. (b) The local politics are favorable and collaborative, and will be supportive of the new school. 3. Bright Star has the organizational capacity and capability to serve the community. Educational Program (a) Bright Star s team must have knowledge serving similar populations a strong understanding of the demographics and social and economic challenges faced by the community and how to address them. (b) The opening of a new school will in no way negatively impact the existing schools and students served by the Bright Star network. Bright Star believes in educating the whole child by offering a well-rounded experience for its students. Bright Star has four desired learning outcomes for its students: (1) cultural literacy and civic engagement, (2) mastery of academic skills and knowledge, (3) strong character, and (4) capable management of their own lives. To achieve these learning outcomes, Bright Star focuses on its fundamental building blocks or design elements of its program, including (a) curriculum, (b) school culture, (c) co-curricular and extra-curricular programming, (d) great teaching and leadership, and (e) student, family and community engagement. Curriculum: Bright Star s curriculum emphasizes mastery of fundamental reading, writing, and math skills necessary for success at each grade level and ensuring that its student understand and master the Common Core standards. The core classes include language arts, mathematics, history and science. Bright Star educates its students to be culturally and globally literate and strives to equip its students with today s critical skills through required courses such as Spanish, physical education, music and technology. Bright Star s curriculum includes goals for acquiring literary, geographical, musical, and other cultural knowledge as well as a series of life experience lessons to enrich a student s perspective of the world around them. These programs help students understand how learning and the application of learning can affect their world. Finally, Bright Star pushes its students to become critical thinkers and ensure that they reach the higher levels of Bloom s Taxonomy (analysis, synthesis, and evaluation). Independent Reading Program All students are required to read at least 30 minutes every day (360 days out of the year) and log their reading. After School Tutoring & Enrichment Programs All students may attend after school programs offered at each campus which include: after-school tutoring programs, supervised homework hour, social and activities clubs (yearbook, newspaper, choir club, engineering, debate, creative writing, mentoring, etc.), athletics (basketball, volleyball, wrestling, cheer, flag football, soccer, etc.) and other experiential and life skills building programs. The tutoring programs are run by Bright Star, while the enrichment programs are often ran by outside organizations. A-22

127 Honors & AP Coursework (high school grades) High school students are offered honors and AP courses in Biology, Chemistry, Physics, U.S. History, English Language & Composition, Spanish and others. One-to-One Technology Every student has access to a laptop or notepad computer which can be used to supplement their in-classroom lectures and textbook reading. It also enables each student to keep track of projects/homework assignments, collaborate with students on group projects and communicate with their teachers and counselors in the Connections Program. A-G Subject Completion Required for High School Graduation In order to graduate from a Bright Star, all high school students must complete the A-G subject requirements required for acceptance to a California State University or University of California school. School Culture: Bright Star believes that culture is as important to a school s success as a highquality academic program. Bright Star leverages teaching tools to infuse school culture with the traits it believes are essential to a successful school program. Bright Star teaches its students to be conscientious, compassionate, creative human beings who treat others well. Bright Star begins each school year with Orientation and Team Building programs in order to lay the foundation for school culture for the entire school year. Its Advisory Curriculum monitors and mentors students and emphasizes character and selfmanagement. See Life Experience Lessons herein. Co-Curricular and Extra-Curricular Programming: Bright Star offers a variety of co-curricular and extracurricular programs. Each student has the opportunity to particulate in a daily enrichment program after schools hours, including, among other things, art, creative writing, film club, drama, music, student council, Spanish, sports and dance. In each after-school club, students explore the fundamentals, apply their knowledge and showcase what they have learned. Bright Star also supports individualized afterschool instructional support at each of its campuses. Students are given the opportunity to work with tutors, in quiet study, or on computers, depending on their academic needs. Great Teaching and Leadership: Bright Star believes that hiring and training strong teachers and leaders is critical to its success. Bright Star has implemented a Teacher Mentoring Program for new teachers, and all teachers are part of semi-annual Teacher Planning Teams as well as weekly Professional Learning Communities. Bright Star has additional instructional staff to support teacher development in specialized areas, including two special education coordinators, two literacy coaches, a director of mathematics, and a mentor teacher assigned to new teachers. Teachers receive more than 260 hours of professional development programming annually. Bright Star has implemented an online teacher evaluation platform called Whetstone that allows administrators and coaches to provide immediate feedback. Whetstone is customized to Bright Star s priorities and gives teachers access to their observation notes, debrief conversations, goals and longitudinal data. All potential Bright Star school leaders go through the Principal Teacher in Residence program, which includes professional development activities, classroom observations, on-the-job training, reading, discussion, as well as exposure to and gradual assumption of many of the responsibilities of a Bright Star administrator. Each school administrator is expected to develop a strong network with administrative peers and senior administrators at Bright Star. Student, Family and Community Engagement: Community support is essential for successful school openings and continued school success. Bright Star invests in the whole family through open and frequent two-way communication. They desire to be a visible presence in the community and have established many community-based partnerships. See Bright Star Connections and Parental Support herein. A-23

128 Bright Star s The Connections Program. Bright Star provides each student and family with a counselor to ensure that each student receives academic counseling and support, college counseling and the social services necessary to assist them while at Bright Star and beyond. Each Bright Star counselor typically works with and advises about 133 students to each counselor, which is far below the California student per counselor ratio of 945 to 1 1. This much lower counselor to student ratio enables Bright Star counselors to build personal relationships and trust with students and their families, and to provide much needed emotional and social counseling (in addition to academic/college counseling) to these students that reinforces the curriculum, life lessons and culture promoted at each Bright Star school. In addition to students, Bright Star also recognizes that families may need additional support and education to help students become successful learners. Counselors provide parent education, parent volunteer opportunities and parent engagement resources. Counselors are available twenty-four hours a day, seven days a week, to provide each student and family support as needed. Unlike traditional public schools, Bright Star counselors are typically assigned to a student once and remain with that student and his family over that student s career at Bright Star. This continuity provides a significant advantage to Bright Star counselors by enabling them to better develop long-range strategies and intervention programs to successfully guide their students over time. Life Experience Lessons. Bright Star believes that students must be offered the opportunities to enhance their education with real-life experiences if they are going to succeed in life outside the classroom. All students participate in day trips, which include, among other things, hiking, biking, city-walks, college visits, beach clean-ups, plays, musical performances and museum visits. Students in grades 5 through 12 that have achieved certain academic and citizenship goals have the opportunity to attend overnight trips, which include, among other things, a mid-year trip to a local mountain ski resort and an end-of-year trip to a national location. National locations include, a nature and camping experience in Southern California for 5 th and 9 th graders; a nature and camping experience in Northern California for 6 th and 10 th graders; a canyons tour of the national parks of Nevada, Arizona, and Utah for 7 th and 11 th graders; a trip to Washington D.C. to learn about history and government for 8 th graders; a college experience lesson to either the South, Northeast or Midwest to visit colleges for 9 th, 10 th and 11 th graders; and a senior trip with the location chosen each year by the students as a reward for the hard work and dedication that graduating students have displayed and as a time for reflection and preparation for their journey into college and life. All students participate in day trips. Typically between 30 to 40 percent of students participate in overnight trips. Students are required to pay a small fee for overnight trips, usually ranging from $50 to $100, and scholarships are available for students who cannot afford the cost. The Bright Star Program. When all the components of the Bright Star Program are put together, it is a comprehensive and complex structure. Stakeholders throughout the organization have worked together to identify the program s most critical components and how they work together to allow Bright Star to accomplish its mission. The illustration on the next page highlights and summarizes the most critical educational model components for Bright Star. The pyramid on the bottom represents the fundamental building blocks of Bright Star. Feeding into the fundamental building blocks are the core design principles, including Study Skills, 5 th -12 th Vertical Articulation, Backward Mapping from College Expectations, No Social Promotion, Attention to Detail, More Time on Task, High Expectations, Systems of Accountability, Culture and Revision and Continuous Improvement, Small Learning Communities, Sustainable on Public Funding, and Regular Program Performance Management. 1 Research on School Counseling Effectiveness. California Department of Education. Updated May 16, A-24

129 On top of the core design principles are the students and the desired learning outcomes the knowledge, skills, values, and traits, and interdisciplinary themes that students are expected to receive at each Bright Star school. Finally, Bright Star s Mission Statement helps to inform the rest of the Bright Star model and acts as a guiding light for the schools and staff. Organizational Structure & Executive Team As of November 24, 2017, Bright Star had approximately 342 employees (328 full-time equivalents), the majority being full-time and school-specific employees. Key management and support team members for Bright Star are provided by central office employees (all of which are employees of BSEG). Bright Star s central office is headquartered at 600 South La Fayette Park Place, Suite 302, Los Angeles, California An organizational chart from Summer 2017 for BSEG and Bright Star is on the next page. A-25

130 Table 5 BRIGHT STAR EDUCATION GROUP ( BSEG ) AND BRIGHT STAR SCHOOLS ( BRIGHT STAR ) Organizational Chart A-26

131 As of November 24, 2017, of Bright Star s approximately 328 employees, there were approximately 128 teachers, 107 school support staff and 38 central office professional staff. The following table summarizes the employee staffing for BSEG and Bright Star. Table 6 BRIGHT STAR EDUCATION GROUP AND BRIGHT STAR SCHOOLS (Combined) Employee Staffing & Student-to-Teacher Ratio As of November 24, 2017 Staffing Categories PANORAMA CITY CLUSTER VAES VAM S VAHS WEST ADAMS CLUSTER SMC A BSSC A KOREATOWN CLUSTER RKMS RKHS Centra l Offiice 5 BRIGHT STAR SCHOOLS Teachers Other Credentialed Total s Staff 2 School Administration School Support Staff TOTAL EMPLOYEES Students ,799 Student-to-Teacher 21:1 23:1 21:1 25:1 21:1 23:1 18:1 22:1 Ratio 7 * All staffing numbers rounded to the nearest whole number. 1 Certificated staff. 2 Language Arts Coach, Math Coach, SPED Coordinator, School Psychologist, Counselors, Parent Liaison, All Instructional Coaches, Beginning Teacher Mentor, Vice President of Curriculum and Instruction, Vice President of People Development, Director of Special Education, and Alumni & College Success Coordinator. 3 Principals, assistant principals and deans. 4 Office Manager, Student Data Coordinator, Operations Coordinator, Attendance Officer, Assistant Office Manager, IT Analyst, Office Assistant, Receptionist, IT Helpdesk, IA Manager, Behavior Interventionist, PBIS/School Aide, Student Activities & Project Coordinator, and all other office staff. 5 All central office employees are employees of BSEG. 6 As of August 28, Students divided by the number of Teachers; does not include teaching assistants or Other Credentialed Staff. Source: Bright Star. Bright Star Board of Directors The Bright Star Board consists of between 5 and 20 members. The Los Angeles County Board of Education ( LACOE ) has the right to appoint a representative pursuant to Section 47604(b) of the California Education Code. To date, LACOE has not exercised such right. However, if it does, the number of members would increase to include an appointee. Under the Bright Star governing documents, BSEG, as the sole statutory member, has the right to approve the elected directors of the Bright Star Board, the disposition of all or substantially all of Bright Star s assets, any merger of Bright Star and the principal terms and any amendment of those terms, any election to dissolve Bright Star, and as otherwise required under the California Nonprofit Corporation Law. The membership of BSEG in Bright Star is not transferable. The Bright Star Board is required to meet at least annually for the purpose of organization, selection of directors and officers and the transaction of such other business as may be properly brought before the Bright Star Board. Vacancies on the Bright Star A-27

132 Board are filled by the nomination and election by majority vote of the directors of the Bright Star Board then in office and approved by BSEG. The following table sets forth the members of the Bright Star Board. Member Position Profession Table 7 BRIGHT STAR SCHOOLS ( BRIGHT STAR ) Board of Directors Member Since Term Expires Larry Klein + Chair Interdisciplinary Studies Department Head, Harvard-Westlake School James McGrath Secretary Founding Director, Intellectual Virtues Academy Esther Perez Director Executive Director, Valiente College Preparatory Charter School Greg Gonzalez Director History/ Social Studies Department Head, Harvard-Westlake School Andrew Murr + Director Adjunct Professor for USC Marshall School of Business/ Retired Chief, Newsweek George Leftwich Director Business Consultant and Coach Lois Levy Director Retired Assistant Head of School, Center for Early Education Stephen Green Director Co-Founder and CEO, CoreVessel Inc Kimako Desvignes Director Nurse Manager, U.S. Dept. of Veteran Affairs / Adjunct Faculty, Mount Saint Mary s University Julie Robles Director Preschool Director, Woodcrest Preschool Elizabeth Yeo Director A/R Specialist, BeCore Marketing Andrew Wang Director Renewable Energy Developer, SolarReserve Monica Rosio Director Attorney, Cox, Castle & Nicholson Briseño Carrie Wagner Director Executive Director of Girls Athletic Leadership School David Valentine Director Vice President of Finance and Administration and Chief Financial Officer of The Kavli Foundation Louisa Wee Director Vice President, Marketing Strategy & Analysis and Programmatic Media Buying, Netflix Serves on both the Bright Star Board and BSEG Board. Source: Bright Star. Biographies of Bright Star s board of directors are below. Larry Klein. Chair. For biography, see THE BORROWER (BRIGHT STAR EDUCATION GROUP) Governance herein. James McGrath. Secretary. Mr. McGrath is the Founding Director of Intellectual Virtues Academy, a Long Beach Public High School. He was formerly a Senior Associate Attorney at Aleshire & Wynder, LLP and an Associate Attorney with Bryan Cave LLP. Prior to his time in law, he was an Adjunct Philosophy Professor at Long Beach City College, a Graduate Instructor at Kaplan Inc. and a Mathematics A-28

133 Teacher at Santa Margarita High School. Mr. McGrath received a Bachelor of Arts in Philosophy from the University of California, Berkeley, a Master of Arts in Philosophy from the University of California, Irvine and a JD from the UCLA School of Law. Esther Perez. Director. Ms. Perez is Executive Director and Principal of Valiente College Preparatory Charter School and an Adjunct Faculty Instructor at Loyola Marymount University. She was formerly the Assistant Director of the Loyola Marymount University/ Teach for America Partnership, the Program Director, Special Education at Loyola Marymount University, Educational Support Services, the Director of Special Education at Bright Star and the Special Education Coordinator at Green Dot Public Schools. She began her career as a Teach for America Corps Member, where she taught students with special needs at Chester W. Nimitz Middle School in Los Angeles. She received the Frederick Sontag Prize in Urban Education: English Language Arts Instruction in 2011 and the Frederick Sontag Prize in Urban Education: Mathematics Instruction in 2010 from Boston Public Schools and Harvard Graduate School of Education for outstanding urban educators. Ms. Perez received a Bachelor of Arts in Psychology from the University of California, San Diego, a Master of Arts in Special Education from Loyola Marymount University, a Master of Arts in Educational Leadership from California State University, Northridge and a Doctor of Education in Educational Leadership for Social Justice from Loyola Marymount University. Greg Gonzalez. Director. Mr. Gonzalez is a teacher at Harvard-Westlake School, where he teaches history to 10 th and 11 th graders. He was previously the Academic Dean for 8 th and 9 th grades and an English teacher at Harvard-Westlake School, and a teacher, coach and athletic director at Cantwell Sacred Heart of Mary High School. Prior to teaching, Mr. Gonzalez was a reporter for the Los Angeles Times, the National Sports Daily and the New York Daily News. He has been the director of summer programs to Cambridge University and Barcelona, Spain, where he has been responsible for academic curriculum, budget and residential life. Mr. Gonzalez received a Bachelor of Arts in History from Columbia University and a Master of Arts in Journalism from Columbia University. Andrew Murr. Director. For biography, see THE BORROWER (BRIGHT STAR EDUCATION GROUP) Governance herein. George Leftwich. Director. Mr. Leftwich is an executive coach and business consultant, where he provides a range of executive coaching, organizational and management consulting services. He was formerly the Vice President of Strategy and Communications for Research Affiliates, a global asset management firm; the Vice President of Institutional Sales and Marketing with Ariel Investments, an investment management firm specializing in value investing; and the Assistant Director of the Emerging Market Partnerships, AIG African Infrastructure Fund, an AIG sponsored private equity fund formed to invest in infrastructure-related companies in Africa. He also spent time as an Associate with J.P. Morgan Chase & Co. and as a Financial Analyst with the Emerging Markets Partnership, AIG Asian Infrastructure Fund. Mr. Leftwich received a Bachelor of Arts in Economics from Princeton University, an MBA in Finance from the University of Virginia, and a Master of Arts in Spiritual Psychology from the University of Santa Monica. Lois Levy. Director. Ms. Levy retired after working as the Assistant Head of School at The Center for Early Education, where she was responsible for, among other things, hiring and evaluating teachers, overseeing the school s curriculum, helping organize staff development, and conducting parent grade level meetings, team meetings and faculty meetings. She was formerly a Member of the California Association of Independent Schools ( CAIS ) Task Force on Assessment and on the faculty of CAIS Beginning Teachers Institute. She previously spent time as a Graduate Instructor at the College of Developmental Studies, a director of curriculum/ upper elementary coordinator, a science specialist, and a master teacher. Ms. Levy received a Bachelor of Science in Elementary Education Social Studies from the University of A-29

134 Wisconsin and Master of Arts in Special Education Learning Disabilities from the University of Michigan. Stephen Green. Director. Mr. Green is the Co-Founder and CEO of CoreVessel, Inc., a social media platform designed to help high school students and colleges more effectively find each other through a unique set of data driven algorithms. He is also the President of Delivered Solutions, LLC, a consulting company that works with colleges and universities to create strategies to increase tuition revenue and provide operational guidance. He was formerly the President, Graduate Programs of 2U, Inc., an education technology company that partners with colleges and universities to create online degree programs, an Associate Vice President of After School Programs for The Princeton Review and an English teacher in Queens, New York. Mr. Green received a Bachelors in English and African American Studies from the College of the Holy Cross, a Masters in African-American Studies from Columbia University, and a Masters in English Education from Teachers College, Columbia University. Kimako Desvignes. Director. Ms. Desvignes is the Acting Nurse Manager in the Intensive Care Unit at the Department of Veterans Affairs, Los Angeles, and the Nursing Administrative Supervisor, Per Diem at the Martin Luther King Jr. Community Hospital. She has spent over eighteen years in nursing and nursing management. She is an Adjunct Faculty member at Mount Saint Mary s University and a Nurse Instructor Consultant at UPLIFT University. Ms. Desvignes received a Bachelor of Science in Biology from Mount Saint Mary s University, a Bachelor of Science in Nursing from Mount Saint Mary s University, and a Master of Science in Nursing from Chamberlain College of Nursing. Julie Robles. Director. Ms. Robles is the Preschool Director at Woodcrest Preschool. She was formerly the Center Director at Happy Bear School, the Center Director at KinderCare Learning Center, the Program Coordinator at Washington Mutual Child Care Center, and a preschool teacher. Ms. Robles dual majored in Early Childhood Education and Psychology from Simmons College. Elizabeth Yeo. Director. Ms. Yeo is the Accounts Payable/ Receivable Specialist for BeCore Marketing. She was previously an Office Manager/ Executive Assistant and Bookkeeper to a number of companies and spent time working in IT. She is a United States Navy Veteran and volunteers for the Los Angeles Philharmonic and the Los Angeles Chamber Orchestra. Andrew Wang. Director. Mr. Wang is the Director of Business Development, Asia for SolarReserve, LLC, a privately-held utility-scale CSP technology developer and global independent power producer. He was formerly a Structured Contracts Manager, Energy Supply & Management with Southern California Edison; a Sales Director, Asia-Pacific with Capstone Turbine Corporation; and Mechanical Engineer, Air Quality Management with Sanitation Districts of Los Angeles County. Mr. Wang received a Bachelor of Science in Mechanical Engineering from the University of California, Berkeley, a Master of Science in Environmental Engineering & Science from Stanford University, and an MBA from UCLA. Monica Rosio Briseño. Director. Ms. Rosio Briseño is a Litigation Associate with Cox, Castle & Nicholson LLP, where she focuses on complex litigation including commercial, employment, ERISA and land use matters. She also advises clients in connection with breach of contract claims, real property boundary disputes, administrative enforcement actions and fiduciary duties under multi-employer benefit plans. She formerly was a Judicial Extern for the Honorable Richard A. Paez with the United States Court of Appeals for the Ninth Circuit. She is a Board Member for the Alliance College-Ready Public Schools Young Professionals Board and the Regional Co-Chair of the American Bar Association, Section of Litigation, Judicial Internship Opportunity Mentorship Program. Ms. Rosio Briseño double majored in Political Science and Chicano Studies at the University of California, Los Angeles and received a JD from the University of California, Berkeley. A-30

135 Carrie Wagner. Director. Ms. Wagner is the Founder/ Executive Director of the Girls Athletic Leadership School Los Angeles, an all-girls charter school that empowers girls to succeed academically, lead confidently, live boldly and thrive physically. She was formerly the Chief Operating Officer at Bright Star, the Chief Financial Officer/ Chief Operating Officer at Citizens of the World Charter Schools, and the President of ExED, a nonprofit providing back-office business services to charter schools. Prior to her time in education, she was an Enterprise Manager for New Directions, Inc., a nonprofit that empowers veterans and facilities their successful return to families and society, an Associate in the Corporate Finance Group of Heller Financial and a Senior Accountant with PricewaterhouseCooopers LLP. She is a former Board Chair and elected member of the financial oversight committee of Santa Monica Malibu Unified School District. Ms. Wagner received a Bachelor in Business Administration in Accountancy/Computer Applications from the University of Notre Dame, an MBA in Not-for-profit/ Social Entrepreneurship from UCLA, and a Master of Arts in Spiritual Psychology from the University of Santa Monica. David Valentine. Director. Mr. Valentine is the Vice President of Finance and Administration and Chief Financial Officer of The Kavli Foundation, a foundation that is dedicated to advancing science for the benefit of humanity by promoting public understanding of scientific research and supporting scientists and their work. He was formerly the Executive Director, Fiscal Operations at the University of Pennsylvania, Business Services Division, Controller at the Annenberg Foundation, Finance Manager at GlaxoSmithKline, Business Manager at Quality Care Dialysis, and Commercial Lender at PNC. He is the former Board Chair of Wissahickon Charter School in Philadelphia, Pennsylvania, and Board Treasurer of the Smith Memorial Playground. Mr. Valentine received a Bachelor in Business Administration in Finance from Temple University and an MBA in Technology Management from Drexel University. Louisa Wee. Director. Ms. Wee is the Vice President of Marketing & Analysis and Programmatic Media Buying at Netflix. She was formerly the Senior Vice President of Business Operations at Pluto.TV, Senior Vice President of Strategy, Analytics, and Audience at SpinMedia, Inc., Senior Director of Marketing Monetization and Customer Experience at eharmony.com, Engagement Manager at McKinsey and Company, Associate in the Investment Banking Division at Goldman Sachs, Senior Associate at PricewaterhouseCoopers, and a Senior Associate at Deloitte. Ms. Wee received a Bachelor of Arts in Psychology from USC, a Masters in Accounting from USC, and an MBA from Stanford University Graduate School of Business. Board Structure & Committees Pursuant to its bylaws, the Bright Star Board has created various committees, including a Business and Finance Committee, Academic Committee, and Governance/ Advancement Committee. Each one of the committees is composed of at least two (2) Bright Star Board members. The committees generally meet every second month or more, if necessary. Bright Star is prohibited from entering into a contract or transaction with which a director directly or indirectly has a material financial interest. Historical Enrollment Information The following table presents historical enrollment information at each of Bright Star s existing Charter Schools. [Remainder of page intentionally left blank] A-31

136 Table 8 BRIGHT STAR SCHOOLS Historical Enrollment School Years through Charter Schools OBLIGATED GROUP SCHOOL Valor Academy High School Stella Middle Charter Academy TOTAL OBLIGATED GROUP SCHOOLS OTHER NETWORK SCHOOLS Valor Academy Elementary School Valor Academy Middle School Bright Star Secondary Charter Academy Rise Kohyang Middle School Rise Kohyang High School TOTAL NETWORK 1,610 1,842 2,134 2,287 2,559 2,799 1 First year of instruction was school year. 2 First year of instruction was school year. 3 Enrollment as of August 28, Source: DataQuest, California Department of Education and Bright Star. Academic Testing & Results Academic Performance Index. The Academic Performance Index ( API ) was the historical State of California method of comparing schools based on student test scores. API scores range from 200 to 1,000 and are based on results of statewide standardized tests. API scores are tracked for schools as a whole, and for certain subgroups of students. In addition, growth targets are established by the California Department of Education for schools and subgroups for each year. API scores have not been calculated since the school year, as the State of California transitions from its former academic testing program, the Standardized Testing and Reporting ( STAR ) program, to the new California Assessment of Student Performance and Progress ( CAASPP ) system. The API score for VAMS (grades 5-8) was 879, for SMCA (grades 5-8) was 760, for BSSCA (grades 9-12) was 807 and for RKMS (grades 5-8) was 866. Transition to CAASPP. API scores have, in the past, been calculated using results of the State s STAR program and, for high school students, the California High School Exit Examination ( CAHSEE ). See Academic Performance Index above. Changes to the Education Code enacted in 2013 deleted certain provisions of State law establishing the STAR program and replaced them with the CAASPP, effective July 1, As a means to assess certain elementary and secondary pupils, CAASPP comprises: (a) the State s Smarter Balanced Assessments, composed of (i) summative assessments in English Language Arts ( ELA ) and Mathematics for grades 3 to 8 inclusive, and grade 11; (ii) interim assessments to monitor student progress toward mastery of the Common Core State Standards in ELA and Mathematics; and (iii) a Digital Library consisting of tools and practices designed to help teachers utilize formative assessment processes for improved teaching and learning; (b) alternate assessments for ELA and Mathematics in grades 3 through 8 and 11, that are based on alternate achievement standards and aligned with the Common Core State Standards for students with significant cognitive disabilities; A-32

137 (c) science assessments in grades 5, 8, and 10, measuring specified content standards, currently composed of (i) the California Standards Test ( CST ) for students in public schools, (ii) the California Modified Assessment ( CMA ) for students with an individualized education program, and (iii) the California Alternate Performance Assessment ( CAPA ) for students with significant cognitive disabilities; and (d) the Standards-based Tests in Spanish ( STS ), which are multiple-choice tests that allow Spanish-speaking English learners in grades 2 through 11 to demonstrate their knowledge of California content standards by taking a reading/language arts ( RLA ) assessment in their primary language. SBAC Testing Results. The following tables present a summary of certain demographics and test results for Valor Academy High School (the sole Obligated Group School), Valor Academy Middle School (the sole Bright Star school that feeds into VAHS) and neighborhood LAUSD schools that Bright Star students would otherwise have attended had they not enrolled at Bright Star, indicating for each school the percentages of English Learners ( EL ), recipients of Free and Reduced Price Lunches ( FRL ) and the results for English Language Arts ( ELA ) and Mathematics ( Math ) on the State s Smarter Balanced Assessment ( SBAC ) tests. [Remainder of page intentionally left blank] A-33

138 Table 9 VALOR ACADEMY HIGH SCHOOL ( VAHS ) Competing Schools ( and ) School SBAC SBAC ELA Math ELA Math Distance (miles) (11 th Grade) (11 th Grade) (11 th Grade) (11 th Grade) Demographics Demographics Met/ Exceeded Met/ Exceeded Met/ Exceeded Met/ Exceeded Current Site VAHS 2 61% 19% 62% 17% - Panorama High 46% 16% 33% 10% - Monroe High 47% 17% 34% 12% Sun Valley High 42% 10% 31% 2% 3.0 miles 3.9 miles New Site 2.1 miles 2.1 miles 1.5 miles 5.0 miles FRL 4 EL 4 FRL 4 EL 4 84% 12% 87% 12% 85% 24% 96% 28% 84% 22% 86% 26% 91% 30% 85% 31% LAUSD 54% 25% 55% 24% % 14% 83% 12% Los Angeles 58% 30% 59% 30% % 12% 68% 12% County State of 59% 33% 60% 32% % 12% 57% 11% California 1 Competing schools are neighborhood LAUSD schools that Bright Star students would have attended had they not enrolled at VAHS. 2 Valor Academy High School ( VAHS ) is an Obligated Group School. 3 Data published by the California Department of Education ( CDE ), California Assessment of Students Performance and Progress ( CAASPP ) for the Smarter Balanced Summative Assessments ( SBAC ) on September 27, The CDE only administers the SBAC test to 11 th grade students in high school. 4 Represents student demographics for grades 9 through 12 that qualify for free and reduced price lunches ( FRL ) and Engish learners ( EL ). Source: California Department of Education, California Assessment of Students Performance and Progress, 2016, 2017 and DataQuest, California Department of Education (assessment results and demographic information rounded to nearest whole number). After only three years of operation, VAHS is outperforming competing LAUSD schools by significant margins in ELA and Math and is outperforming LAUSD, Los Angeles County and the State in ELA. Bright Star hired new math coaches to help improve math proficiency at VAHS. A-34

139 School 1 Table 10 STELLA MIDDLE CHARTER ACADEMY ( SMCA ) Competing Schools ( and ) SBAC SBAC ELA (Grades 6 th 8 th ) Met/ Exceeded Math (Grades 6 th 8 th ) Met/ Exceeded ELA (Grades 6 th 8 th ) Met/ Exceeded Math (Grades 6 th 8 th ) Met/ Exceeded Distance (miles) 4115 West MLK, Jr. Blvd. Demographics Demographics FRL 4 EL 4 FRL 4 EL 4 SMCA 2 57% 31% 50% 35% - 98% 22% 96% 24% Johnnie Cochran, Jr. Middle 21% 15% 20% 15% % 26% 89% 30% Audubon Middle 14% 8% 17% 6% % 15% 84% 16% Pio Pico Middle 36% 28% 38% 29% % 32% 87% 31% LAUSD 36% 26% 38% 27% - 81% 17% 82% 20% Los Angeles County 46% 33% 46% 34% - 70% 16% 70% 16% State of California 48% 36% 48% 36% - 61% 17% 61% 19% 1 Competing schools are neighborhood LAUSD schools that Bright Star students would have attended had they not enrolled at SMCA. 2 Stella Middle Charter Academy ( SMCA ) is an Obligated Group School. 3 Data published by the California Department of Education ( CDE ), California Assessment of Students Performance and Progress ( CAASPP ) for the Smarter Balanced Summative Assessments ( SBAC ) on September 27, Represents student performance for grades 6 through 8, except SMCA represents grades 5 through 8. For comparison purposes, SMCA grades 6 through 8 had 61% of its students Met/Exceeded expectations in ELA and 35% in Math in the school year. 4 Represents student demographics for grades 6 through 8 that qualify for free-reduced price lunches ( FRL ) and Engish learners ( EL ), Source: California Department of Education, California Assessment of Students Performance and Progress, 2016, 2017 and DataQuest, California Department of Education (assessment results and demographic information rounded to nearest whole number). For comparison purposes, SBAC results represent grades 6 th through 8 th only. [Remainder of page intentionally left blank] A-35

140 Surrounding Schools. Each Charter School competes for students with LAUSD and charter schools within the Charter School s service areas and, to a limited extent, with private schools operating in the service area of the Charter School. There are numerous charter school networks and campuses that operate in the general areas served by the School, with some schools mentioned in the previous tables. Such charter school networks and campuses also may be pursuing enrollment growth and campus expansion initiatives. College Matriculation. In the academic year, 100% of graduating seniors of Bright Star completed the California A-G course requirements to graduate, and 83% of graduating seniors enrolled in either a two or four year college or university. Data is available for BSSCA and VAHS only. RKHS has not had graduating classes. Advanced Placement Test Results. Advanced Placement ( AP ) is a program which offers college-level curricula and examinations to high school students. Many colleges and universities grant placement and course credit to students who obtain high scores on the tests. AP tests are scored on a scale of 1 through 5, with 1 = No recommendation; 2 = Possibly qualified; 3 = Qualified; 4 = Well qualified; and 5 = Extremely well qualified. The table below presents a summary of the percentage of total AP students with scores of 3+ and the percent of students who took an AP exam for the two Bright Star high schools for which there are historical results (i.e. VAHS and BSSCA) and the State of California. No information is presented with respect to RKHS because it was not in operation prior to the school year. Table 11 VALOR ACADEMY HIGH SCHOOL, BRIGHT STAR SECONDARY CHARTER ACADEMY AND THE STATE OF CALIFORNIA Advanced Placement Test Results School Years through % of Total Students that took AP Tests % of Students with Scores of 3+ % of Total Students that took AP Tests % of Students with Scores of 3+ % of Total Students that took AP Tests % of Students with Scores of 3+ % of Total Students that took AP Tests % of Students with Scores of 3+ VAHS -% -% 25% 60% 32% 59% 39% 42% BSSCA 30% 65% 24% 62% 25% 72% 24% 56% California 18% 64% 19% 64% 20% 63% 21% 62% Source: The College Board, Advanced Placement and DataQuest, California Department of Education. Bright Star s students a higher percentage of students taking AP tests and a higher low-income student population. See Academic Results, Competing Schools and Demographics above. Parental Support Bright Star values parent and family involvement and understands the important role families play in a student s academic success. Bright Star encourages parents to get involved in the school and the greater Bright Star organization. Each Charter School has a School Site Council composed of students, faculty, parents and administrators. The School Site Council is responsible for reviewing the Local Control Funding Formula, Local Control and Accountability Plan and WASC planning and feedback process. BSSCA and VAHS also host parent workshops that focus on information about financial aid and college. A-36

141 Awards and Recognition Bright Star and its Charter Schools have received many awards and recognitions. VAHS was accredited in 2015 through the Western Association of Schools and Colleges ( WASC ), which accreditation assures the educational community, the general public, and other organizations and agencies that an institution has clearly defined objectives appropriate to education; has established conditions under which their achievement can reasonably be expected; appears in fact to be accomplishing them substantially; is so organized, staffed, and supported that it can be expected to continue to do so; and demonstrates that it meets WASC s criteria and accreditation standards. VAMS was recognized in 2014 as a STEM Honor Roll School through the Campaign for Business and Education Excellence, which recognizes higher performing schools in the State, particularly higher poverty schools that are closing achievement gaps and those with a focus on STEM proficiency, in 2012 as a California Distinguished School Award ( CDSA ) winner, given to approximately 5% of public schools within the State that best represent exemplary and quality educational programs, and has been a Network Member of Building Excellent Schools since RKMS was named a 2017 Star School and awarded Honor Roll and STEM Honor Roll recognition by Educational Results Partnership and the Campaign for Business and Education Excellence, was a 2016 Walt Disney Motif Award Winner, which is awarded to the top twenty (20) schools in the country that expose students to high levels of life changing instruction, and received the 2015 California Gold Ribbon School Award, which replaced the CDSA. BSSCA received a gold medal designation by U.S. News & World Report in 2017 (placing it among the top 2% of public high schools in the U.S.) and was named a Spotlight School by GreatSchools in It also was accredited in 2016 through WASC and received the CDSA in SMCA received the California Title I Achieving Schools award in 2011 and the EPIC Faculty Award, a part of the Effective Practice Incentive (EPIC) Program of New Leaders, an organization that provides leadership training to education leaders. Student & Family Satisfaction Surveys Parental voice and input is essential to meeting Bright Star s mission. Bright Star conducts yearend satisfaction surveys, which play a significant role in Bright Star Board s assessment of Bright Star and its staff. For the school year, Bright Star families agreed or strongly agreed with, among other things, the following statements (all survey responses were 90% or above): 96% feel welcome at their child s school; 96% said the staff treats me with respect; 95% said my child is safe on school grounds; 94% said there are multiple adults on the campus who care about my child; 95% said my child s school sets high standard for academic success; and 94% said I am overall satisfied with the education my child is receiving. For the school year, VAHS families agreed or strongly agreed with, among other things, the following statements (all survey responses were 88% or above): 94% feel welcome at their child s school; 94% said the staff treats me with respect; A-37

142 93% said my child is safe on school grounds; 94% said there are multiple adults on the campus who care about my child; 95% said my child s school sets high standard for academic success; and 94% said I am overall satisfied with the education my child is receiving. For the school year, SMCA families agreed or strongly agreed with, among other things, the following statements (all survey responses were 88% or above): 96% feel welcome at their child s school; 96% said the staff treats me with respect; 94% said my child is safe on school grounds; 94% said there are multiple adults on the campus who care about my child; 95% said my child s school sets high standard for academic success; and 92% said I am overall satisfied with the education my child is receiving. Bright Star also enables its students to provide input by completing a year-end survey. Like the parent satisfaction surveys, these student surveys play a significant role in Bright Star Board s assessment of Bright Star and its staff. For the school year, Bright Star students agreed or strongly agreed with, among other things, the following statements (all survey responses were 71% or above): 89% said my class work challenges me academically ; 89% said adults on this campus believe I am capable of academic success ; 82% said I feel safe in this school; 80% said there are ways for me to get additional support if I am struggling academically ; 93% said teachers expect me to be professional and engaged and they also are professional and engaged ; and 96% said I know how I am expected to behave in class and on campus. [Remainder of page intentionally left blank] A-38

143 THE SCHOOLS VALOR ACADEMY HIGH SCHOOL ( VAHS ) AND STELLA MIDDLE CHARTER ACADEMY ( SMCA ) General Valor Academy High School ( VAHS ) was granted a five-year charter from LAUSD that commenced on July 1, VAHS submitted its charter renewal petition on October 10, 2017 for an additional five-years. The LAUSD Charter School Division has recommended that the charter renewal petition be approved, and LAUSD will vote on the charter renewal petitions on December 5, Bright Star anticipates that the charter will be renewed. VAHS currently operates in a Proposition 39 facility colocated with Panorama High School at 8015 Van Nuys Boulevard, Panorama City, California As of August 28, 2017, VAHS serves approximately 473 students in grades 9 through 12. Stella Middle Charter Academy ( SMCA ) was granted a five-year charter from LAUSD that commenced on July 1, SMCA submitted its charter renewal petition on October 10, 2017 for an additional five-years. The LAUSD Charter School Division has recommended that the charter renewal petition be approved, and LAUSD will vote on the charter renewal petitions on December 5, Bright Star anticipates that the charter will be renewed. SMCA currently operates in two facilities located at 2636 South Mansfield Avenue, Los Angeles, California and 5431 West 98 th Street, Los Angeles, California SMCA is currently busing students from the West Adams and Koreatown neighborhoods in Los Angeles to its two facilities. As of August 28, 2017, SMCA serves approximately 502 students in grades 5 through 8. Mission & Vision Statements The mission statement of Bright Star is: Our mission is to provide holistic, inclusive support for all students to achieve academic excellence and grow their unique talents so that they flourish in higher education, career, and life. The vision of all Bright Star schools is: Bright Star students will become leaders who act with integrity and champion equity to enrich our communities and the world. School Administration The principal has overall responsibility for management of the school operations. Below are brief biographies of the school administrators at VAHS and SMCA. Evelyn Licea, Founding Principal, VAHS. Dr. Licea is the founding principal at VAHS. Prior to joining Bright Star, she was an Assistant Principal at the Marc and Eva Stern Math and Science School. Ms. Licea began her education career as a Teach for America Corps Member, where she helped found the Marc and Eva Stern Math and Science School and worked as a Lead Corps Member Specialist, Corps Member Advisor and Professional Learning Community Facilitator for Teach for America. Dr. Licea holds a Bachelor s degree from UCLA, a Masters in Secondary Education from Loyola Marymount University, and a Doctor of Education in Educational Leadership for Social Justice from Loyola Marymount University. Kaitlin Curry, Assistant-Principal, VAHS. Ms. Curry is the Assistant Principal of Instruction. She joined Bright Star as the founding 10 th grade English/ Language Arts teacher at VAHS. Prior to joining Bright Star, she was a Teach for America Corps Member, where she taught English/Language Arts at A-39

144 Freedom Preparatory Academy, a high performing charter school in Memphis, Tennessee. Ms. Curry has a Bachelor s degree in English from Shepherd University and a Masters in Applied Linguistics from Georgetown University. Lora Mancuso, Assistant-Principal, VAHS. Ms. Mancuso is the Assistant Principal of Curriculum and Instruction. She joined Bright Star with its founding 9th grade as the English/Language Arts teacher at VAHS. She has over 10 years of teaching experience. In addition to teaching, Ms. Mancuso has experience providing professional development using research based strategies to K-12th grade teachers throughout the state of California. Ms. Mancuso has a Bachelor's degree in English from California State University, Bakersfield and a Masters in School Administration from Pepperdine University. Stacie Santoya, Assistant-Principal, VAHS. Ms. Santoya is the Assistant Principal of Student and Family Services. She joined Bright Star as the founding 10th grade counselor. Throughout her last 3 years she has also held the position as a Lead Counselor & Director of Counseling. Prior to joining Bright Star she worked as a provisionally licensed professional counselor doing private practice for a small mental health facility. Ms. Santoya has also worked for a variety of school districts in Los Angeles as a counselor, Assistive Technologist, Behavioral specialist, and teacher for LACOE focusing on At Risk youth in the juvenile detention centers. Ms. Santoya holds a Bachelor's degree from San Diego State University, a Masters in Counseling/PPS credential from Loyola Marymount University, and a Certificate in College Counseling from UCLA extension. Darryl Garris, Principal, SMCA Grades 5-6. Mr. Garris is the principal at SMCA, Grades 5-6. He joined Bright Star in 2010 as a math teacher at SMCA and BSSCA before becoming an Assistant Principal of SMCA in the fall of 2013 and Principal of SMCA, Grades 5-6 in the fall of Prior to joining Bright Star, he was a Teacher for America Corps Member and completed his student teaching at Dorsey High School in Los Angeles. Mr. Garris holds a Bachelor of Science in Business Administration from the University of California, Berkeley and a Bachelor of Arts in Environmental Economics & Policy from the University of California, Berkeley. He also holds a Master of Arts in Urban Education, a Master of Arts in School Administration, and a Certificate in Charter School Leadership from Loyola Marymount University's School of Education. Olivia Eagleson, Principal, Stella Middle Charter Academy Grades 7-8. Ms. Eagleson is the Principal of SMCA, Grades 7-8. She joined Bright Star in 2008 as a science teacher prior to becoming Assistant Principal of BSSCA in Prior to joining Bright Star, she was a Teacher for America Corps Member and completed her student teaching at David Starr Jordan High School in Watts. Ms. Eagleson holds a Bachelor of Science in Psychobiology from UCLA, a Master of Arts in Urban Education, a Master of Arts in School Administration and a Certificate in Charter School Leadership from Loyola Marymount University's School of Education. Jane Han, Assistant-Principal, SMCA Grades 5-8. Ms. Han is the Assistant Principal of Instruction SMCA, Grades 5-8. She was a Math Cadre Lead and a Mentor Teacher prior to becoming Assistant Principal in Prior to joining Bright Star, she was a teacher of Mathematics in LAUSD for eight years. Ms. Han holds Bachelor s degrees in History and Sociology with a minor in Mathematics from Columbia University in the City of New York and a Master s degree in Teaching of Mathematics from Stanford University Graduate School Education. A-40

145 Student Recruitment, Admissions, Enrollment and Wait-list Student Recruitment. Each School coordinates a marketing and recruiting strategy that ensures that families in the community it serves are notified about the educational opportunities it offers. These efforts are typically carried out from January through August. Each year, Bright Star conducts an analysis of enrollment trends in order to optimize its efforts to recruit and retain students. Each School conducts a series of public outreach events and campaigns, including (1) distribution of informational materials to community organizations including neighborhood councils, community religious institutions, organizations that serve various racial and ethnic populations, libraries, recreation centers, local businesses, middle schools and faith based organizations; (2) presentations at area elementary schools and middle school high school fairs ; (3) presentations at various multi-ethnic events, including community fairs and festivals, and development of promotional materials in various languages to inform non-english speaking populations about such School; (4) announcements in local media, such as Los Angeles-based English, Spanish and Korean publications; (5) providing opportunities for parents to speak to representatives outside popular shopping venues; (6) targeted marketing via mailers and door hangers and general marketing via posters and an occasional billboard as needed; and (7) hosting an open house and multiple information sessions at its campus throughout the recruitment period. Admissions. Applications are accepted at each School during a publicly advertised open enrollment period each year, and each School must admit all pupils who wish to attend subject to capacity. No test or assessment is administered to students prior to acceptance and enrollment, and admission is not determined solely by the student s place of residence. In the event that a School receives more applications than there are available seats for a particular grade level in a given school year, the School will hold a public random lottery to determine admission for the impacted grade level, with the exception of existing students and siblings, who are guaranteed admission in the following school year. Exemption from the lottery, will be offered to, students who attended the School and siblings of students who currently attend such School and, to not exceed 10% of the total seats, children of teachers and founding parents. All residents of LAUSD will have their names submitted twice into the lottery pool, while all other California residents will only have their names submitted once. This increases the chance of residents of LAUSD getting selected from the lottery. A-41

146 The following admission preferences for each School are utilized in the case of a public random drawing: Preference Current students and siblings of currently admitted students Founding Parents and/or Teachers Residents of the District Rationale Students who attended a School in the previous school year and siblings of students who currently attend such School will be exempt from the lottery. This preference supports convenience for parents who wish to keep their children in the same school and supports a cohesive school community and parent involvement. Children of School founders and/or teachers will be exempt from the lottery and admitted to the school as long as the number admitted by this exemption does not exceed 10% of total enrollment at such School. The Founding Parent priority will adhere to LAUSD s Founding Parent policy. 1 The Founding Parent policy is for parent/s or legal guardian/s or individuals who contribute substantial personal time and effort to develop the new charter school during the established Founding Period, which is typically months prior to charter approval. The School will employ a single lottery with a higher weighting for residents of LAUSD. All students in the lottery living in LAUSD boundaries will have their names submitted twice in the lottery pool. All other California residents. Other California residents 1 Source: Policy for Charter School Authorizing, LAUSD, Approved January 12, 2010, Revised February 7, 2012, Founding Parents/ Founders Preference. At the conclusion of the public random drawing, all students who were not granted admission due to capacity shall be given the option to put their name on a wait-list according to their draw in the lottery. This wait-list will allow students the option of enrollment in the case of an opening during the current school year. In no circumstance will a wait-list carry over to the following school year. Enrollment. The tables below show grade level enrollment for VAHS and SMCA in the school year , as well as projected enrollment by grade level through the school year. [Remainder of page intentionally left blank] A-42

147 Table 12 SMCA AND VAHS Enrollment by Grade Level School Years through Historical Historical Current Projected Projected Projected Projected SMCA Grade Grade Grade Grade Total SMCA VAHS Grade Grade Grade Grade Total VAHS Total Obligated Group Source: Bright Star Schools. VAHS has a student population that is 2% African American, 93% Latino/Hispanic, and 2% White, with 12% of its students classified as English language learners, 12% of its students eligible for special education services and 87% of its students qualifying for the free and reduced price school lunch program (data is for the school year, the most recent date that data is available from DataQuest, California Department of Education). SMCA has a student population that is 7% African American, 91% Latino/Hispanic, and 1% White, with 24% of its students classified as English language learners, 11% of its students eligible for special education services and 96% of its students qualifying for the free and reduced price school lunch program (data is for the school year, the most recent date that data is available from DataQuest, California Department of Education). Bright Star s commitment is to ensure the success of all students, regardless of their background. Wait-List. Bright Star had more than 472 applicants that were not granted admission because there were no available seats at its charter schools. Bright Star actively removes students from its wait-lists after contacting applicants families in order to create active wait-list at each of its charter schools. The most common reason that families will remove students from the wait-list is that the students have enrolled in another school and do not want to change schools mid-year. The table below summarizes the number of applicants at SMCA and VAHS that were not granted admission because there were no available seats and the active wait-list at SMCA and VAHS. A-43

148 Enrollment Distribution by ZIP Code VAHS Table 13 SMCA AND VAHS Applicants Not Granted Admission and Wait-list School Year SMCA VAHS Applicants not granted 61 0 admission 1 Active wait-list Applicants that applied for admission but were not granted admission because there were no available seats. 2 Active wait-list as of October 1, Excludes applicants that originally applied but were no longer interested in enrolling in SMCA or VAHS, respectively. Source: Bright Star. The majority of students that attend VAHS live in the and zip codes. The distribution of students by zip code is shown in the table below. VALOR ACADEMY HIGH SCHOOL Enrollment Distribution by ZIP Code School Year Source: Bright Star VAHS operates out of a Proposition 39 school site and is co-located with Panorama High School at 8015 Van Nuys Boulevard, Panorama City, California Bright Star anticipates completing construction of the new VAHS Facility in the school year, which will be located at 9334 Lemona Avenue, North Hills, California The new VAHS Facility site for VAHS will be only 0.6 miles away from the current VAMS campus (versus the current VAHS site at Panorama High School which is 2 miles away from the VAMS campus). The map below depicts the current and future VAHS site and the percent of students that attend VAHS from each zip code. A-44

149 VALOR ACADEMY HIGH SCHOOL Zip Code Map Showing Locations of the Current & Future Site of VAHS SMCA Source: Bright Star The majority of students that attend SMCA live in the and zip codes. The distribution of students by zip code is shown in the table below. STELLA MIDDLE CHARTER ACADEMY Enrollment Distribution by ZIP Code School Year SMCA Zip Code Enrollment % of Total % % % % % Source: Bright Star A-45

150 SMCA is located in two facilities located 6.9 miles apart at 2636 South Mansfield Avenue, Los Angeles, California and 5431 West 98 th Street, Los Angeles, California SMCA is currently busing students from the West Adams and Koreatown neighborhoods in Los Angeles to its two facilities. Bright Star anticipates completing construction of the new SMCA Facility in the school year, which will be located at 4115 West Martin Luther King, Jr. Boulevard, Los Angeles, California The map below depicts the current and future SMCA site and the percent of students that attend SMCA from each zip code. STELLA MIDDLE CHARTER ACADEMY Zip Code Map Showing Locations of the Current & Future Site of SMCA Historical Student Retention Source: Bright Star The following table sets forth, for each of the years shown, the percentage of students that matriculated from VAMS to VAHS and the percentage of students that attended VAHS in the following year. Based on its successful academic programs, Bright Star enjoys historical student retention at VAHS which exceeds 95% over the past three years; this is a significant accomplishment given that VAHS has been operating out of a co-located building space at Panorama High School during that time. A-46

151 Table 14 VALOR ACADEMY HIGH SCHOOL Historical Student Matriculation and Retention Data School Years through * School Year Student Retention 1 8 th Grade Student Matriculation from VAMS to VAHS to % to % 76% to % 65% * Information is not currently available for the to school years and 8 th grade matriculation from VAMS to VAHS is not available for the to school year. 1 The percentage of VAHS students from the prior year that matriculated to the next grade at VAHS in the new school year. 2 The percentage of graduating 8 th grade VAMS students from the prior year that matriculated into the 9 th grade at VAHS in the new school year. Source: Bright Star. Once the new VAHS Campus Property is opened in the school year, Bright Star expects the VAMS-to-VAHS matriculation rate to increase and to remain high. The following table sets forth, for each of the years shown, the percentage of students that that attended SMCA in the following year. Based on its successful academic programs, Bright Star enjoys historical student retention at SMCA which exceeds 91% over the past three years; this is a significant accomplishment given that SMCA has been operating out of two separate buildings located 6.9 miles apart and is busing students from the West Adams and Koreatown neighborhoods to these two locations. Teacher Retention Table 15 STELLA MIDDLE CHARTER ACADEMY Historical Student Matriculation and Retention Data School Years through * School Year Student Retention to % to % to % * Information is not currently available for the to school years. 1 The percentage of SMCA students from the prior year that matriculated to the next grade at SMCA in the new school year. Source: Bright Star. The following table sets forth the rate of retention of teachers for the last three school years for SMCA and VAHS. For the school year based on Bright Star s payroll register as of November 15, 2017, salaries for credentialed staff, which includes full-time teachers and counselors, ranged from $50,000 to $92,638, with an average salary of $60, All of the teachers have at least a bachelor s degree and 56% have advanced degrees. A-47

152 Table 16 STELLA MIDDLE CHARTER ACADEMY AND VALOR ACADEMY HIGH SCHOOL Teacher Retention Rates School Years through School Year SMCA Teacher Retention VAHS Teacher Retention to % 62% to % 79% to % 83% Source: Bright Star Bright Star believes that most of the turnover is a result of normal transitions such as changes in family status and not based on dissatisfaction or performance. The teacher retention rate for Bright Star as a network from the through the school year as of November 2017 was 90%. Labor Relations. Bright Star believes that employee morale and relations are very strong. No employees of Bright Star are represented by labor organizations or are covered by collective bargaining agreements, and Bright Star is not aware of any union organizing efforts at the present time. Transportation Bright Star does not provide transportation for its VAHS students, but instead encourages public transportation options. Bright Star contracts for bussing for its SMCA and BSSCA, transporting approximately 600 students from the West Adams and Koreatown neighborhoods of Los Angeles, California to its Charter Schools. The State does not require Bright Star to provide transportation for students. Equipment and Teaching Materials VAHS uses a variety of off-the-shelf products and school-created curriculum, and teachers are provided with some planning resources to help align such products with the mission and philosophy of the School and the State adopted Common Core Standards. Teachers also use, among other things, Common Core, Next Generation Science Standards, Smarter Balanced, Smarter Balanced Interim Assessments, EngageNY, Achieve the Core, College Board (AP, PSAT, and SAT), ACT and Aspire, Write Score, and Language Live!, to support English language development. SMCA uses a variety of off-the-shelf products and school-created curriculum, and teachers are provided with planning resources to help align such products with the mission and philosophy of the School and the State adopted Common Core Standards. Teachers also use, among other things, Common Core Standards, Next Generation Science Standards, Smarter Balanced Interim Assessments, Khan Academy, Bridges Math, LindaMood-Bell, College Preparatory Mathematics curriculum, Write Score and ACT Aspire. Bright Star is dedicated to providing an integrated technological curriculum for all students and staff members. VAHS currently has 385 Chromebooks and 50 computers. SMCA currently has 525 Chromebooks and 60 Tablets. A-48

153 Safety Procedures Bright Star makes safety a high priority. The cooperation of students is essential to ensure school safety, and students and staff are encouraged to avoid conduct that is likely to put the student or a staff member at risk. Bright Star has available emergency evacuation routes and signals at each of its schools to ensure the safety of all students and staff, including a lockdown procedure and fire drill plan. Insurance Coverage Bright Star maintains comprehensive property/casualty and commercial general liability insurance related to its facilities and operations. Fundraising Bright Star has raised $570,326 in the school year, $234,065 in the school year, $1,066,842 in the school year and $130,745 in the school year from donors including, among others, the Walton Family Foundation, the Broad Foundation, the Annenberg Foundation, and the Joseph Drown Foundation. In November 2016, Bright Star was selected to be a part of the portfolio of the Charter School Growth Fund, a national nonprofit that invests in the nation s best charter schools, funds their expansion, and helps to increase their impact. BSEG was awarded $2,225,000 ($1,150,000 in grants and $1,075,000 in convertible loan, which will convert to grant upon meeting certain milestones). Most of the philanthropy received has been restricted toward BSEG central office staffing costs to accommodate future growth at Bright Star. PCSD, the developer for the new Facility, has received a $1,500,000 grant from Great Public Schools Now ( GPSN Grant ) that was used to provide equity for the VAHS Campus Property. [Remainder of page intentionally left blank] A-49

154 Historical Financial Results OPERATING AND FINANCIAL INFORMATION The following tables present the statements of activities and changes in net assets for SMCA, VAHS, BSEG and Bright Star as of June 30 of each year. The information in the tables below has been extracted from audited financial statements for fiscal years through and unaudited financial statements for fiscal year VAHS and BESG s first year of operation was [Remainder of page intentionally left blank] A-50

155 Table 17 VAHS AND SMCA Statement of Activities School Years through School (Fiscal) Year (Unaudited) 2 OPERATING ACTIVITIES Revenues: State aid $2,962,359 $3,506,360 $4,792,285 $6,175,110 $7,447,854 Apportionment revenue Categorical grant revenue Property taxes 34,024 1,109,592 1,239,777 1,609,302 2,020,662 Other state revenue 889, , ,189 1,530,744 1,372,779 Federal revenue 325, , , , ,214 Contributions and other income 112, ,683 21,285 76, ,517 Local revenue Other revenue 10, , , , ,594 Total operating revenues $5,134,512 $6,576,897 $8,096,453 $10,311,520 $11,740,752 Expenses: Program services $2,790,940 $4,360,122 $6,664,819 $8,417,904 $9,391,608 Management and general 1,943,408 1,997,837 1,267,477 1,504,219 1,872,474 Support Services Fundraising ,708 Total operating expenses $4,734,348 $6,357,959 $7,932,296 $9,922,123 $11,268,790 Change in net assets from operating activities $400,164 $218,938 $164,157 $389,397 $471,962 NON-OPERATING ACTIVITIES Non-operating revenues: Interest and investment income 2, Net assets released from restriction 6,764,660 - Facility financing 162, Net unrealized loss on investments (14,323) Total non-operating revenues $150, $6,764,660 - Non-operating expenses: - - Write-off of Proposition 1D ,764,660 - Facility expenses 74,080 13, , Total non-operating expenses $74,080 $13,895 $120,143 $6,764,712 - Change in net assets from non-operating - activities $76,854 $(13,895) $(120,143) $(52) Write-off of Proposition 1D 6,764, Transfer of assets to BSEG (465,000) (1,186,747) - - Total change in net assets $12,018 $(981,704) $44,014 $(6,375,315) $471,962 Beginning total net assets 9,275,248 9,287,266 8,305,562 8,349,576 1,974,261 Net asset adjustment - - Ending total net assets $9,287,266 $8,305,562 $8,349,576 $1,974,261 $2,446,223 1 SMCA was unable to convert a project by May 7, 2016 to use the Facility Program Funding. Bright Star recognized $6,764,660 (half of the advanced apportionment from the Office of Public School Construction) as a net asset adjustment, which amount has been returned to the State in the school year. See Outstanding Debt herein. 2 Source: Draft audit report which is being reviewed by Bright Star. A-51

156 Table 18 BRIGHT STAR SCHOOLS ( BRIGHT STAR ) Statement of Activities School Years through School (Fiscal) Year (Unaudited) 4 OPERATING ACTIVITIES Revenues: State aid $9,653,441 $12,988,170 $16,081,559 $19,523,141 Apportionment revenue $4,786, Categorical grant revenue 878, Property taxes 1,517,574 3,066,221 3,420,737 4,270,694 5,371,488 Other state revenue 1,432,324 2,376,108 2,720,004 4,261,596 3,976,381 Federal revenue 1,232,811 2,036,999 2,347,962 2,162,463 2,587,893 Contributions and other income - 601,339 1,199,092 1,112, ,551 Local revenue 214, Other revenue 696,681 1,279, , , ,007 Total operating revenues $10,759,077 $19,013,830 $23,207,082 $28,481,694 $32,938,461 Expenses: Program services 5,606,864 12,290,489 18,336,568 22,941,385 26,208,822 Management and general - 6,324,415 3,559,321 4,079,268 6,128,291 Support services 3,950, Fundraising 2,250 4, ,501 Total operating expenses $9,559,898 $18,619,144 $21,895,889 $27,020,653 $32,361,704 Change in net assets from operating activities 1,199, ,686 1,311,193 1,461, ,757 NON-OPERATING ACTIVITIES Non-operating revenues: Interest and Investment income 177, Net assets released from restriction 6,764,660 - Facility financing Net unrealized loss on investments (14,323) Total non-operating revenues $162, $6,764,660 - Non-operating expenses: Write-off of Proposition 1D 6,764,660 - Write-off of fixed assets , Facility expenses 74,080 42,663 1,038, Total non-operating expenses $74,080 $42,663 $1,697,388 $6,764,712 - Change in net assets from non-operating activities 88,650 (42,663) (1,697,388) (52) - Write-off of Proposition 1D 6,764, Transfer of assets to BSEG - (7,716,326) Total change in net assets $1,287,829 $(7,364,303) $(386,195) $(5,303,671) $576,757 Beginning total net assets 15,227,723 18,297, ,933,159 10,546,964 5,243,293 Net asset adjustment Ending total net assets $16,515,552 $10,933,159 $10,546,964 $5,243,293 $5,820,050 * Consolidated financial statements of the Charter Schools. 1 Bright Star funded BSEG with $7,716,326 of seed money to allow BSEG to provide central office support to its Charter Schools. 2 Upon the merger of Bright Star and Valor Academy Middle School, Valor Academy Middle School transferred $1,781,910 of total net assets to Bright Star. A-52

157 3 SMCA was unable to convert a project by May 7, 2016 to use the Facility Program Funding. Bright Star recognized $6,764,660 (half of the advanced apportionment from the Office of Public School Construction) as a net asset adjustment, which amount has been returned to the State in the school year. See Outstanding Debt herein. 4 Source: Draft audit report which is being reviewed by Bright Star. Table 19 BSEG Statement of Activities School Years through School (Fiscal) Year (Unaudited) 2 OPERATING ACTIVITIES Revenue: Management fees $1,180,780 $2,309,179 $2,739,979 $2,666,246 Other revenue 19,300 42, , ,382 Total operating revenue $1,200,080 $2,351,548 $2,906,496 $3,582,628 Expenses: Program services 1,172,311 2,753,600 2,697,807 3,168,596 Management and general 16,972 36,408 44,314 60,181 Total operating expenses $1,189,283 $2,790,008 $2,742,121 $3,228,777 Change in net assets from operating activities 10,797 (438,460) 164, ,851 NON-OPERATING ACTIVITIES Non-operating revenue: Interest income 46,985 6,815 5,038 5,333 Investment income, net - 160,646 18,850 - Total operating expenses $46,985 $167,461 $23,888 $5,333 Non-operating expenses: Donation to Bright Star Schools - 918, ,000 Facility expenses 76,978 16,845-69,056 Total non-operating expenses $76,978 $935,209 $- $596,056 Change in net assets from non-operating activities (29,993) (767,748) 23,888 (563,723) Transfer of assets from Bright Star Schools 7,739, Total change in net assets $7,720,797 $(1,206,208) $188,263 $(209,872) Beginning total net assets - 7,720,797 6,514,589 6,702,852 Ending total net assets $7,720,797 $6,514,589 $6,702,852 $6,492,980 1 BSEG was initially funded in the amount of $7,739,993, which includes $7,716,326 of seed money from Bright Star plus an additional $23,667 of accrued interest and asset sales, to allow BSEG to provide central office support to Bright Star and the Charter Schools. 2 Source: Draft audit report which is being reviewed by BSEG. Historical Statements of Financial Position The following tables set forth the assets, liabilities and net assets of SMCA, VAHS and the Bright Star and BSEG as of June 30 of each year. The information in the tables below has been extracted from audited financial statements for fiscal years through and unaudited financial statements for fiscal year VAHS and BESG s first year of operation was the fiscal year. [Remainder of page intentionally left blank] A-53

158 Table 20 VAHS AND SMCA Statement of Financial Position School Years through School (Fiscal) Year (Unaudited) 2 ASSETS Current Assets: Cash and cash equivalents $821,269 $504,445 $412,058 $14,416,100 1 $14,912,099 1 Investments temporarily restricted 13,655, ,055, ,642, Accounts receivable 1,566,046 1,029, ,568 1,107, ,495 Prepaid expenses and other assets 43,481 41,989 21, , ,861 Intracompany receivable 201,760 1,303,269 1,666,087 3,170,107 2,166,862 Total current assets $16,287,569 $16,934,529 $16,663,462 $18,890,432 $18,348,317 Long-Term Assets: Long-term accounts receivable Property, plant and equipment, net 61, , ,342 71,283 12,069 Less accumulated depreciation (52,812) (75,298) Total long-term assets $8,623 $208,011 $125,342 $71,283 $12,069 Total assets $16,296,192 $17,142,540 $16,788,804 $18,961,715 $18,360,386 LIABILITIES AND NET ASSETS Current Liabilities: Accounts payable 126,774 78,904 59, , ,869 Payroll liabilities/ accrued liabilities 117, ,229 39,888-49,444 Deferred revenue ,246 Intracompany payable 837,855 1,230,285 2,787,077 1,321,977 Payable to BSEG 967, , , ,307 Total current liabilities $244,266 $2,072,318 $1,674,568 $3,458,134 $2,384,843 Long-Term Liabilities: Loans payable 6,764,660 6,764,660 6,764,660 13,529,320 13,529,320 1 Total long-term liabilities $6,764,660 $6,764,660 $6,764,660 $13,529,320 $13,529,320 Total liabilities $7,008,926 $8,836,978 $8,439,228 $16,987,454 $15,914,163 Net Assets: Unrestricted - undesignated 2,142,013 1,540,902 1,584,916 1,974,261 2,446,223 Unrestricted board designated for facility $380, Temporarily restricted 6,764,660 6,764,660 6,764, Total net assets $9,287,266 $8,305,562 $8,349,576 $1,974,261 $2,446,223 Total liabilities & net assets $16,296,192 $17,142,540 $16,788,804 $18,961,715 $18,360,386 1 SMCA was unable to convert a project by May 7, 2016 to use the Facility Program Funding. Bright Star returned the full amount of $13,874,667.79, which includes accrued interest, to the State in the school year. See Outstanding Debt herein. 2 Source: Draft audit report which is being reviewed by Bright Star. A-54

159 Table 21 BRIGHT STAR SCHOOLS ( BRIGHT STAR ) Statement of Financial Position School Years through School (Fiscal) Year (Unaudited) 4 ASSETS Current Assets: Cash and cash equivalents $6,606,153 $1,471,673 $1,332,696 $15,960,241 1 $16,920,578 1 Investments - temporarily restricted 1 13,655, ,055, ,642, Accounts receivable 3,451,283 3,240,995 2,730,156 2,824,171 3,237,108 Prepaid expenses and other assets 140, , , , ,250 Intracompany receivable - 2,418,224 3,606,295 7,885,336 10,538,318 Total current assets 23,852,732 21,583,780 21,467,854 27,157,994 31,507,254 Long-Term Assets: Long-term accounts receivable - - 1,612,873 1,652,873 1,652,873 Property, plant and equipment, net 126,492 1,411, , , ,118 Less accumulated depreciation (102,477) (378,212) Total long-term assets 24,015 1,033,354 1,819,002 2,047,893 1,879,991 Total assets $23,876,747 $22,617,134 $23,286,856 $29,205,887 $33,387,245 LIABILITIES AND NET ASSETS Current Liabilities: Accounts payable 324, , , , ,193 Payroll liabilities/ accrued liabilities 271, ,649 60,357 20, ,158 Deferred revenue ,588 Intracompany payable - 2,418,224 3,606,295 7,885,336 10,538,318 Payable to BSEG - 1,900, , ,023 1,031,569 Deferred rent liability ,000 Loan payable, current portion ,216 Total current liabilities 596,535 4,919,315 4,975,232 $9,491,351 $13,201,042 Long-Term Liabilities: Loans payable 3 6,764,660 6,764,660 7,764,660 14,471,243 14,366,153 Total long-term liabilities 6,764,660 6,764,660 7,764,660 14,471, ,366,153 2 Total liabilities $7,361,195 $11,683,975 $12,739,892 $23,962,594 $27,567,195 Net Assets: Unrestricted - undesignated 3,334,566 4,168,499 3,782,304 5,243,293 5,820,050 Unrestricted board designated for facility 6,416, Temporarily restricted 3 6,764,660 6,764,660 6,764, Total net assets 16,515,552 10,933,159 10,546,964 5,243,293 5,820,050 Total liabilities & net assets $23,876,747 $ 22,617,134 $23,286,856 $29,205,887 $33,387,245 * Consolidated financial statements of the Charter Schools. 1 Includes $13,529,320 of advanced apportionment from the Office of Public School Construction for SMCA s Charter School Facility Program preliminary apportionment ( Facility Program Funding ). Bright Star was unable to convert a project to final apportionment and use the Facility Program Funding received from the State and returned the full amount of $13,874,667.79, which includes accrued interest, to the State in the school year. See Outstanding Debt herein. 2 Bright Star recognized $6,764,660 of the Facility Program Funding as long term debt. Bright Star recognized the remaining $6,764,660 of Facility Program Funding as long term debt upon the expiration of the grant in the school year after Bright Star was unable to convert a project to final apportionment. The full amount of Facility Program Funding was returned to the State and the account was closed. See footnote 1 above and Outstanding Debt herein. A-55

160 3 Bright Star recognized $6,764,660 (half of the advanced apportionment from the Office of Public School Construction) as a net asset adjustment in the school year, which has been returned to the State in the school year. See Outstanding Debt herein. 4 Source: Draft audit report which is being reviewed by Bright Star. Table 22 BRIGHT STAR EDUCATION GROUP ( BSEG ) Statement of Financial Position School Years through School (Fiscal) Year (Unaudited) 1 ASSETS Current Assets: Cash and cash equivalents $6,104,123 $5,588,545 $5,760,247 $5,116,120 Accounts receivable 1,815, , ,691 1,040,821 Prepaid expenses and deposits 18,279 54,545 60,381 1,191,374 Total current assets $7,937,507 $6,579,084 $6,780,319 $7,348,315 Long-Term Assets: Property, plant and equipment, net ,389 Total long-term assets $135,389 Total assets $7,483,704 LIABILITIES AND NET ASSETS Liabilities Accounts payable 40,727 48,717 66,255 75,348 Accrued liabilities 175,983 15,778 11, ,376 Total liabilities $216,710 $64,495 $77,467 $990,724 Net Assets: Unrestricted 7,720,797 6,514,589 6,702,852 6,492,980 Total net assets 7,720,797 6,514,589 6,780,319 6,492,980 Total liabilities & net assets $7,937,507 $6,579,084 $6,857,786 $7,483,704 1 Source: Draft audit report which is being reviewed by Bright Star. Financial Statements The consolidated audited financial statements of BSEG and of Bright Star and its affiliates (including the Charter Schools) for the year ended June 30, 2016 are set forth in APPENDIX B AUDITED FINANCIAL STATEMENTS OF BRIGHT STAR FOR THE YEAR ENDED JUNE 30, 2016 hereto. The June 30, 2017 audited financials are expected to be completed by the end of December 2017 and will be posted to EMMA thereafter. Employee Benefits Comprehensive health, dental, vision and life insurance plans are available to employees as a part of the benefits package offered by Bright Star. State Teachers Retirement System Through the State, qualified employees of Bright Star participate in the California State Teachers Retirement System ( STRS ). Employees who are not members of STRS contribute to social security. The Charter Schools make employer contributions as required by STRS. A-56

161 The information set forth below regarding the STRS program, other than the information provided by Bright Star regarding its annual contributions thereto, has been obtained from publicly available sources which are believed to be reliable but are not guaranteed as to accuracy or completeness, and should not be construed as a representation by Bright Star or the Underwriter. Bright Star s full-time certificated teachers are members of STRS. STRS provides retirement, disability and survivor benefits to plan members and beneficiaries under a defined benefit program (the STRS Defined Benefit Program ). The STRS Defined Benefit Program is funded through a combination of investment earnings and statutorily set contributions from three sources: employees, employers, and the State. Benefit provisions and contribution amounts are established by State statutes, as legislatively amended from time to time. Prior to fiscal year , and unlike typical defined benefit programs, none of the employee, employer or State contribution rate to the STRS Defined Benefit Program varied annually to make up funding shortfalls or assess credits for actuarial surpluses. In recent years, the combined employer, employee and State contributions to the STRS Defined Benefit Program have not been sufficient to pay actuarially required amounts. As a result, and due to significant investment losses, the unfunded actuarial liability of the STRS Defined Benefit Program has increased significantly in recent fiscal years. In September 2013, STRS projected that the STRS Defined Benefit Program would be depleted in 31 years assuming existing contribution rates continued, and other significant actuarial assumptions were realized. In an effort to reduce the unfunded actuarial liability of the STRS Defined Benefit Program, the State recently passed legislation described below to increase contribution rates. Prior to July 1, 2014, participant employers were required by statute to contribute 8.25% of eligible salary expenditures, while participants contributed 8% of their respective salaries. On June 24, 2014, the Governor approved A.B ( A.B ) as a part of the State Budget. A.B seeks to fully fund the unfunded actuarial obligation with respect to service credited to members of the STRS Defined Benefit Program before July 1, 2014 (the 2014 Liability ), within 32 years, by increasing member, participant employer and State contributions to STRS. Commencing on July 1, 2014, the employee contribution rates will increase over a three-year phase-in period in accordance with the following schedule: Effective Date Member Contribution Rates STRS (Defined Benefit Program) STRS Members Hired Prior to January 1, 2013 STRS Members Hired After January 1, 2013 July 1, % 8.150% July 1, July 1, Source: A.B Pursuant to the Reform Act (defined below), the contribution rates for members hired after the Implementation Date (defined below) will be adjusted if the normal cost increases by more than 1% since the last time the member contribution was set. While the contribution rate for employees hired after the Implementation Date will remain unchanged at 9.205% of creditable compensation for fiscal year commencing July 1, 2017, the STRS actuary currently estimates that member contribution rates for such members will have to increase to % of creditable compensation effective July 1, 2018, based on the new actuarial assumptions discussed below. A-57

162 Pursuant to A.B. 1469, participant employers contribution rates are increasing over a seven-year phase in period in accordance with the following schedule: Effective Date Employer Contribution Rates STRS (Defined Benefit Program) Participant Employers July 1, % July 1, July 1, July 1, July 1, July 1, July 1, Source: A.B Based upon the recommendation from its actuary, for fiscal year and each fiscal year thereafter, the STRS Teachers Retirement Board (the STRS Board ) is required to increase or decrease the participant employers contribution rate to reflect the contribution required to eliminate the remaining 2014 Liability by June 30, 2046; provided that the rate cannot change in any fiscal year by more than 1% of creditable compensation upon which members contributions to the STRS Defined Benefit Program are based; and provided further that such contribution rate cannot exceed a maximum of 20.25%. In addition to the increased contribution rates discussed above, A.B also requires the STRS Board to report to the State legislature every five years (commencing with a report due on or before July 1, 2019) on the fiscal health of the STRS Defined Benefit Program and the unfunded actuarial obligation with respect to service credited to members of that program before July 1, The reports are also required to identify adjustments required in contribution rates for participant employers and the State in order to eliminate the 2014 Liability. Bright Star s contributions to STRS were $704,265 for fiscal year , $1,008,538 for fiscal year and $1,471, for fiscal year according to annual audited financial statements for fiscal years and and from unaudited financial statements for fiscal year Bright Star has budgeted its contribution to STRS to be $1,966,000 for fiscal year according to Bright Star s budget. The State also contributes to STRS, currently in an amount equal to 6.328% of teacher payroll for fiscal year The State s contribution reflects a base contribution rate of 2.017%, and a supplemental contribution rate that will vary from year to year based on statutory criteria. Based upon the recommendation from its actuary, for fiscal year and each fiscal year thereafter, the STRS Board is required, with certain limitations, to increase or decrease the State s contribution rates to reflect the contribution required to eliminate the unfunded actuarial accrued liability attributed to benefits in effect before July 1, For the first time, in fiscal year , the State contribution rate will increase 0.5% of covered payroll (the maximum rate increases allowed per year under current law) to 6.828% In addition, the State is currently required to make an annual general fund contribution up to 2.5% of the fiscal year covered STRS member payroll to the Supplemental Benefit Protection Account (the SBPA ), which was established by statute to provide supplemental payments to beneficiaries whose purchasing power has fallen below 85% of the purchasing power of their initial allowance. A-58

163 State Pension Trust. STRS issues a separate comprehensive financial report that includes financial statements and required supplemental information. Copies of such financial reports may be obtained from STRS as follows: STRS, Post Office Box 15275, Sacramento, California Moreover, STRS maintains a website, as follows: The information presented in such financial report or on such website is not incorporated into this Limited Offering Memorandum by any reference. STRS has substantial statewide unfunded liabilities. The amount of this unfunded liability will vary depending on actuarial assumptions, returns on investments, salary scales and participant contributions. The following table summarizes information regarding the actuarially-determined accrued liability for STRS. Actuarial assessments are forward-looking information that reflect the judgment of the fiduciaries of the pension plan, and are based upon a variety of assumptions, one or more of which may not materialize or be changed in the future. Actuarial assessments will change with the future experience of the pension plan. Fiscal Year Accrued Liability Funded Status STRS (Defined Benefit Program) (Dollar Amounts in Millions) 1 Fiscal Years through Value of Trust Assets (MVA) 2 Unfunded Liability (MVA) 2 Value of Trust Assets (AVA) 3 Unfunded Liability (AVA) $208,405 $147,140 $68,365 $143,930 $64, , ,118 80, ,232 70, , ,176 74, ,614 73, , ,749 61, ,495 72, , ,633 72, ,553 76, , , , ,976 96,728 Source: STRS Defined Benefit Program Actuarial Valuation 1 Amounts may not add due to rounding. 2 Reflects market value of assets, including the assets allocated to the SBPA reserve. Since the benefits provided through the SBPA are not a part of the projected benefits included in the actuarial valuations summarized above, the SBPA reserve is subtracted from the STRS Defined Benefit Program assets to arrive at the value of assets available to support benefits included in the respective actuarial valuations. 3 Reflects actuarial value of assets. Source: STRS Defined Benefit Program Actuarial Valuation. The STRS Board has sole authority to determine the actuarial assumptions and methods used for the valuation of the STRS Defined Benefit Program. Based on the multi-year CalSTRS Experience Analysis (spanning from July 1, 2010, through June 30, 2015), on February 1, 2017, the STRS Board adopted a new set of actuarial assumptions that reflect member s increasing life expectancies and current economic trends. These new assumptions were first reflected in the STRS Defined Benefit Program Actuarial Valuation, as of June 30, 2016 (the 2016 Actuarial Valuation ). The new actuarial assumptions include, but are not limited to: (i) adopting a generational mortality methodology to reflect past improvements in life expectancies and provide a more dynamic assessment of future life spans, (ii) decreasing the investment rate of return (net of investment and administrative expenses) to 7.25% for the 2016 Actuarial Valuation and 7.00% for the June 30, 2017 actuarial evaluation, and (iii) decreasing the projected wage growth to 3.50% and the projected inflation rate to 2.75%. The 2016 Actuarial Valuation continues using the Entry Age Normal Actuarial Cost Method. Based on the change in actuarial assumptions adopted by the STRS Board, recent investment experience and the insufficiency of the contributions received in fiscal year to cover interest on A-59

164 the unfunded actuarial obligation, the 2016 Actuarial Valuation reports that the unfunded actuarial obligation increased by $20.5 billion since the June 30, 2015 actuarial valuation and the funded ratio decreased by 4.8% to 63.7% over such time period. Had the investment rate of return been lowered to 7.00% for the 2016 Actuarial Valuation, the unfunded actuarial obligation and the funded ratio would have been $105.1 billion and 61.8%, respectively. As a result, it is currently projected that there will be a need for higher contributions from the State, employers and members in the future to reach full funding by According to the 2016 Actuarial Valuation, the future revenues from contributions and appropriations for the STRS Defined Benefit Program are projected to be sufficient to finance its obligations, except for a small portion of the unfunded actuarial obligation related to service accrued on or after July 1, 2014 for member benefits adopted after 1990, for which AB 1469 provides no authority to the STRS Board to adjust rates to pay down that portion of the unfunded actuarial obligation. This finding reflects the scheduled contribution rate increases directed by statute, assumes additional increases in the scheduled contribution rates allowed under the current law will be made, and is based on the valuation assumptions and valuation policy adopted by the STRS Board, including a 7.00% investment rate of return assumption. Bright Star can make no representations regarding the future program liabilities of STRS, or whether Bright Star will be required to make additional contributions to STRS in the future above those amounts required under A.B California Public Employees Pension Reform Act of On September 12, 2012, the Governor signed into law the California Public Employee s Pension Reform Act of 2013 (the Reform Act ), which most substantially affects employees hired after January 1, 2013 (the Implementation Date ). For STRS participants hired after the Implementation Date, the Reform Act changes the normal retirement age by increasing the eligibility for the 2% age factor (the age factor is the percent of final compensation to which an employee is entitled to for each year of service) from age 60 to 62 and increasing the eligibility of the maximum age factor of 2.4% from age 63 to 65. Among the other changes to STRS, the Reform Act also: (a) requires all new participants enrolled in STRS after the Implementation Date to contribute at least 50% of the total annual normal cost of their pension benefit each year as determined by an actuary; (b) requires STRS to determine the final compensation amount for employees based upon the highest annual compensation earnable averaged over a consecutive 36-month period as the basis for calculating retirement benefits for new participants enrolled after the Implementation Date (previously 12 months for STRS members who retire with 25 years of service); and (c) caps pensionable compensation for new participants enrolled after the Implementation Date at 100% of the federal Social Security contribution (to be adjusted annually based on changes to the Consumer Price Index for all Urban Consumers) and benefit base for members participating in Social Security or 120% for members not participating in social security (to be adjusted annually based on changes to the Consumer Price Index for all Urban Consumers), while excluding previously allowed forms of compensation under the formula such as payments for unused vacation, annual leave, personal leave, sick leave, or compensatory time off. Outstanding Debt Bright Star currently has an undrawn line of credit in the amount of $2,000,000 from City National Bank, which is secured by all Inventory, Chattel Paper, Accounts, Equipment, General Intangible, Securities and Instruments; whether any of the foregoing is owned now or acquired later; all accessions, additions, replacements, and substitutions relating to any of the foregoing; all records of any kind relating to any of the foregoing; all proceeds relating to any of the foregoing (including insurance, general intangibles and other accounts proceeds). Such capitalized terms shall have the meanings given to such terms in the California Uniform Commercial Code. A-60

165 In December 2014, Bright Star executed a promissory note for $1,000,000 in favor of Excellent Education Development to fund the Bright Star Leverage Loan, which was one element of a new market tax credit financing that funded the acquisition and construction of a permanent facility for Valor Academy Middle School. The promissory note bears an interest rate of 1.5% and matures on November 1, 2020, at which time the note and the new market tax credit financing will need to be refinanced. The financing includes a $1,652,873 loan to the Pacific Charter School Development Facility Project, which is presented as a long-term receivable in Bright Star s audited financial statements. The loan balance as of June 30, 2017 was $892,049. In 2008, the Office of Public School Construction approved SMCA s application for a Charter School Facility Program preliminary apportionment of $24,426,544 to purchase and/or construct a permanent school facility, with approximately $13,529,320 million that was advanced to Bright Star ( Facility Program Funding ). Bright Star recognized $6,764,660 as long term debt and $6,764,660 as temporarily restricted net assets. Bright Star was unable to convert a project to final apportionment and use the Facility Program Funding received from the State, and the account was closed and the money in the amount of $13,874,667.79, which includes accrued interest on the original amount, has been returned to the State in the school year. SB 740 The Charter School Facility Grant Program was enacted pursuant to Senate Bill 740 of 2001 ( SB 740 ). SB 740 provides authority for the State to grant funding assistance to charter schools for rent and lease expenditures subject to certain conditions including, among other things, the percentage of pupil enrollment eligible for free or reduced price meals. Charter schools may qualify for SB 740 funding if (1) 55% or more of the charter school s students are eligible for free or reduced price meals, or (2) the charter school is in the attendance area of a public elementary school in which 55% or more of students are eligible for free or reduced price meals, and the charter school must give a lottery preference to such local students. Eligible schools are awarded $750 per unit of classroom-based ADA, up to 75% of their annual facilities rent and lease costs for the school. Once VAHS and SMCA move into their new Facilities, they expect to be eligible to receive funding under SB 740 by virtue of more than 55% of their students being eligible for free or reduced price meals. There can be no assurance that any particular level of SB 740 funding will be available in future fiscal year, or that SMCA, VAHS or any other Bright Star school will become or remain eligible for such funding. Public Charter Schools Grant Program The California Department of Education administers the Federal Public Charter Schools Grant Program ( PCSGP ), which provides funding to nonprofit entities and local educational agencies to assist in the development to open high-quality charter schools. The primary focus of the PCSGP is to create charter schools that will provide public school choice to students whose assigned traditional public school is chronically low performing. Bright Star has been awarded funds through PCSGP for $575,000 per school over the first three years of operation. VAHS received its final year of PCSGP funding in fiscal year VAES and RKHS received apportionment of its PCSGP funding through July 31, Facilities and Leases for Current Locations Bright Star currently leases two facilities for SMCA and BSSCA. Bright Star leases the facility located at 2636 South Mansfield Avenue, Los Angeles, California from a parochial school to house SMCA s grades 5 and 6 and will pay rent of $156,000 for the school year. Bright Star leases the facility located at 5431 West 98 th Street, Los Angeles, California from LAUSD through a sole A-61

166 occupancy agreement to house SMCA s grades 7 and 8 and BSSCA s grades 9 through 12 and will pay rent of $1 for the school year. Bright Star buses students from the West Adams and Koreatown neighborhoods in Los Angeles to its two facilities. Bright Star is working with the PCSD to actively pursue permanent facilities solutions in or near the West Adams neighborhood in Los Angeles for SMCA and BSSCA. In July 2017, Bright Star was awarded $17,750,000 in a settlement with Los Angeles World Airports to enable the relocation of BSSCA. Of this amount, $16,000,000 is for the acquisition of a new site, and $1,750,000 is for moving expenses and professional fees related to the relocation. Bright Star is leasing a facility with the option to purchase from PCSD for VAMS located at 9034 Burnet Avenue, North Hills, California using a combination of new market tax credits financing and equity. Prior to exercising the option, BSEG may transfer the option to a separate limited liability company. Bright Star expects to refinance the new money tax credit financing and purchase the facility on November 1, The facility was completed on-time and on-budget in August of VAMS will pay $547,000 in lease payments for the school year. VAHS currently operates in a Proposition 39 facility and leases the facilities from LAUSD through a Facility Lease Agreement. Proposition 39, which was passed in 2003, imposes a mandatory duty on school districts to provide their charter school students facilities that are reasonably equivalent to those used by non-charter students within the district. There is no guarantee that space will be available in any given year. VAHS s Proposition 39 location is co-located with Panorama High School at 8015 Van Nuys Boulevard, Panorama City, California and is a year-to-year leases based on space availability. VAHS will pay rent of $203,585 for the school year. The limited space and operational challenge of co-locating in a Proposition 39 facility have led VAHS to seek a permanent school facility. With the support of PCSD, VAHS had secured entitlements for the VAHS Campus Property and construction began in May of The VAHS Campus Property for VAHS is projected to be completed by August of 2018 Bright Star currently leases a facility for VAES on the satellite campus of Granada Hills Charter School located at Devonshire Street, Northridge, California VAES will pay rent of $240,000 for the school year. An amendment to the current lease was executed on March 28, 2017, which extends the lease through June 30, 2019, with an option to extend for one additional year with written notice prior May 1, VAES, working with PCSD, is actively pursuing permanent facilities solutions closer to VAMS and VAHS. Bright Star currently subleases a private facility for RKMS located at 3020 Wilshire Boulevard, Suite 250, Los Angeles, California RKMS will pay rent of $572,256 for the school year. There is one year remaining on the lease through June 2019, and Bright Star is negotiating another two year extension and exploring longer-term options on the property. Bright Star currently leases a facility for RKHS at 600 South La Fayette Park Place, Los Angeles, California RKHS will pay rent of $312, for the school year. This facility is currently being sublet to two other subtenants while there is extra capacity in the school year because RKHS only has grades 9 through 10. BSEG s central office is also located at this site. BSEG contributed the money for the renovations, and it will not pay rent in the school year. BSEG will start paying rent in the school year as a subtenant. The lease is a 30 year lease with two 5-year options to extend. Litigation There is no action, suit, proceeding or investigation at law or in equity, before or by any court, governmental agency or public board or body is pending or, to the knowledge of Bright Star or BSEG, threatened, affecting the validity of the Lease or the Bonds or contesting the corporate existence of BSEG or Bright Star or its authority to operate pursuant to the Charters. A-62

167 Bright Star or BSEG may become subject to lawsuits and claims in the ordinary course of their operations. In the opinion of the management of Bright Star and BSEG, the organizations carry insurance at levels customary in the industry to protect against potential claims. INCOME PROJECTIONS AND COVERAGE RATIOS Projected Income, Base Rent Coverage Ratio and Consolidated Days Cash on Hand Notwithstanding Bright Star s history of performance with respect to its Charter Schools in California, future financial performance of the Schools may not equal or exceed the projections set forth in this Limited Offering Memorandum. No assurance is given that such projections will be met, or that the number of students attending the Schools may not diminish in the future. The projections of revenue and expenses contained in this Appendix A are based upon the number of students projected to be enrolled at the Schools and were prepared by Bright Star for the Borrower and have not been independently verified by any party other than BSEG and Bright Star. See THE SCHOOL Student Recruitment, Admissions, Enrollment and Wait-list herein for information regarding current and projected enrollment of the Schools. No feasibility studies have been conducted with respect to operations of the Facility pertinent to the Bonds. The projections are forward-looking statements and are subject to the general qualifications and limitations described herein. The Underwriter has not independently verified the Borrower s projections set forth in Appendix A or otherwise, and makes no representations nor gives any assurances that such projections, or the assumptions underlying them, are complete or correct. Further, the projections relate only to a limited number of fiscal years, and consequently do not cover the entire period that the Bonds will be outstanding. BSEG AND BRIGHT STAR PREPARED THE PROJECTIONS BASED ON ASSUMPTIONS ABOUT FUTURE STATE FUNDING LEVELS AND FUTURE OPERATIONS OF THE FACILITY, INCLUDING STUDENT ENROLLMENT AND EXPENSES. THERE CAN BE NO ASSURANCE THAT ACTUAL ENROLLMENT REVENUES AND EXPENSES WILL BE CONSISTENT WITH THE ASSUMPTIONS UNDERLYING SUCH PROJECTIONS. MOREOVER, NO GUARANTEE CAN BE MADE THAT THE PROJECTIONS OF REVENUES AND EXPENSES INCLUDED HEREIN WILL CORRESPOND WITH THE RESULTS ACTUALLY ACHIEVED IN THE FUTURE BECAUSE THERE CAN BE NO ASSURANCE THAT ACTUAL EVENTS WILL CORRESPOND WITH THE PROJECTIONS UNDERLYING ASSUMPTIONS. ACTUAL OPERATING RESULTS MAY BE AFFECTED BY MANY FACTORS, INCLUDING, BUT NOT LIMITED TO, INCREASED COSTS, LOWER THAN ANTICIPATED REVENUES (AS A RESULT OF INSUFFICIENT ENROLLMENT, REDUCED STATE OR FEDERAL AID PAYMENTS, OR OTHERWISE), EMPLOYEE RELATIONS, CHANGES IN TAXES, CHANGES IN APPLICABLE GOVERNMENT REGULATIONS, CHANGES IN DEMOGRAPHIC TRENDS, CHANGES IN EDUCATION COMPETITION AND CHANGES IN LOCAL OR GENERAL ECONOMIC CONDITIONS. REFER TO INTRODUCTION IN THE FOREPART OF THIS LIMITED OFFERING MEMORANDUM FOR QUALIFICATION AND LIMITATIONS APPLICABLE TO FORWARD-LOOKING STATEMENTS. The following table sets forth the financial projections and the Base Rent Coverage Ratio and Consolidated Days Cash on Hand for SMCA and VAHS for Fiscal Years through A-63

168 Table 23 VAHS and SMCA Financial Projections School Years through Projected Projected Projected Projected Projected Enrollment (Grades 5-12) ADA ADA % 95.5% 95.5% 95.5% 95.5% 95.5% Revenues LCFF Revenues $ 9,750,078 $ 10,259,487 $ 10,541,963 $ 10,969,292 $ 11,188,678 Federal Revenues 534, , , , ,208 SB 740 Facilities Grant Revenue (1) 146, , , , ,836 Other State Revenues 1,120,012 1,163,770 1,183,539 1,200,631 1,224,644 Local Revenues, Donations & Grants 235, , , , ,493 Total Revenues $ 11,786,478 $ 12,573,552 $ 13,301,493 $ 13,768,310 $ 14,027,859 Expenses Certificated Salaries $ 4,807,637 $ 4,859,739 $ 4,937,650 $ 5,062,920 $ 5,164,178 Classified Salaries 1,416,932 1,474,682 1,509,283 1,545,882 1,576,800 Employee Benefits 1,483,459 1,609,435 1,737,628 1,839,416 1,876,204 Supplies 1,318,040 1,204,822 1,222,839 1,241,215 1,266,040 [A] Current Facilities Rent (2) 483, , [B] Bond Net Debt Service (3) - 937,500 1,820,000 1,821,500 1,816,500 [C] Ground Rent (4) Operating Services (5) 658, , , , ,442 Depreciation 50,115 51,117 52,140 53,182 54,246 Subordinated Educational Management Fees (6) 854, ,371 1,042,622 1,083,209 1,104,873 Other Outgoing Expenses 584, , , , ,961 Total Expenses $ 11,657,276 $ 12,310,561 $ 13,325,126 $ 13,676,152 $ 13,908,244 Net Income $ 129,202 $ 262,991 $ (23,633) $ 92,158 $ 119,615 Add Back: Depreciation 50,115 51,117 52,140 53,182 54,246 Add Back: Subordinated Educational Management Fees (6) 854, ,371 1,042,622 1,083,209 1,104,873 [A] Add Back: Current Facilities Rent (2) 483, , [B] Add Back: Debt Service Bonds (3) - 937,500 1,820,000 1,821,500 1,816,500 [C] Add Back: Ground Rent (4) [D] Net Operating School Revenues $ 1,517,298 $ 2,465,067 $ 2,891,129 $ 3,050,049 $ 3,095,234 A+B+C [E] Base Rent $ 483,866 $ 1,165,588 $ 1,820,000 $ 1,821,500 $ 1,816,500 D/E [F] Base Rent Coverage Ratio (7) 3.14x 2.11x 1.59x 1.67x 1.70x [G] Ending Cash Balance (Obligated Group Schools) (8) $ 2,338,360 $ 2,613,019 $ 2,645,071 $ 2,776,588 $ 2,932,506 Total Expenses 11,657,276 12,310,561 13,325,126 13,676,152 13,908,244 Less: Depreciation (50,115) (51,117) (52,140) (53,182) (54,246) Less: Annual Base Rent (483,866) (1,165,588) (1,820,000) (1,821,500) (1,816,500) Plus: Maximum Annual Base Rent (9) 1,821,500 1,821,500 1,821,500 1,821,500 1,821,500 [H] Operating Expenses for Average Daily Expenses $ 12,944,795 $ 12,915,356 $ 13,274,486 $ 13,622,970 $ 13,858,998 H/365 [I] Average Daily Expenses for Obligated Group Schools $ 35,465 $ 35,385 $ 36,368 $ 37,323 $ 37,970 G/I [J] Consolidated Days Cash on Hand (10) 66 days 74 days 73 days 74 days 77 days (1) SB 740 facilities grant awards are calculated at the lower of: (a) 75% of actual rent paid or (b) $1,117 per ADA. Pursuant to a change in State law passed by the State Legislature in June 2017, the maximum award allowed by State law was increased from $750 per ADA to $1,117 per ADA. In the case of oversubscription to the Facilities Grant Program, all grant awards will be reduced on a pro-rata basis. This is expected to be the case for Accordingly, these revenue A-64

169 projections assume only 75% of the calculated grant award will be received by the Schools. For fiscal years and , the SB 740 grant amount is projected at 75% of 75% of actual annual rent. For fiscal years and beyond, the SB 740 grant amount is projected at 75% of the maximum annual award of $1,117 per ADA ($ per ADA). This assumption is applied to the projections for all future fiscal years, commencing in (see "STATE FUNDING OF EDUCATION - SB 740 Facilities Grant Program Funding"). (2) VAHS currently operates out of a Proposition 39 school site and is co-located with Panorama High School at 8015 Van Nuys Boulevard, Panorama City, CA. Bright Star currently leases two facilities for SMCA located at 2636 South Mansfield Avenue, Los Angeles, CA and 5431 West 98th Street, Los Angeles, CA. (3) Debt service is shown net of capitalized interest on the Bonds through September 1, (4) Represents annual ground rent payable to the Bethany Baptist Church of West Los Angeles ("SMCA Ground Lessor") pursuant to a 40-year ground lease (assuming exercising all extension options) for the premises located at 115 West Martin Luther King, Jr. Boulevard, Los Angeles, CA for the future SMCA campus. As Tenant, BSDG 4115 MLK LLC (which will in turn sublease the property to SMCA upon settlement of the Bonds) deposited $2,000,000 upfront to the SMCA Ground Lessor to fund approximately 6 years and 7 months of prepaid ground rent. See SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Leases Ground Lease; Property Interests Conveyed under the Leases, APPENDIX I SMCA GROUND LEASE and "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS SMCA Ground Lease." (5) Includes services for Special Education, substitute teachers, staff training and professional development programs, school maintenance, insurance, legal costs, etc. (6) Each charter school in the Bright Star network pays a monthly Educational Management Fee (not to exceed 12% of all general purpose entitlement and categorical block grants) pursuant to the Agreement for Management Services Between Bright Star Education Group and Bright Star Schools. These Educational Management Fees, along with any additional fundraising for BSEG, are the primary sources of revenue to fund the central office operations for BSEG. The Educational Management Fees for VAHS and SMCA will be subordinated to the payment of Rent under the Leases (see "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Leases Financial Covenants Base Rent Coverage Ratio Educational Management Fees"). (7) Base Rent Coverage Ratio is calculated annually commencing with the Fiscal Year ending June 30, 2019 (see "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Leases Financial Covenants Base Rent Coverage Ratio"). (8) Represents projected ending cash balance for VAHS and SMCA in aggregate. Cash projections do not assume any factoring of receivables. (9) Maximum Base Rent assumes debt service on the 2017 Bonds plus projected ground lease payments. Projected ground lease payments assume rent escalation of 2% per year. Ground lease payments are shown net of prepaid ground rent for approximately the first 6 years and 7 months of the ground lease (see "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS SMCA Ground Lease"). (10) Consolidated Days Cash on Hand is calculated as of the last day of each Fiscal Year, commencing June 30, Consolidated Days Cash on Hand is the sum of Cash and Cash Equivalents of the Obligated Group Schools as shown on Bright Star's audited financial statements divided by Average Daily Expenses for Obligated Group Schools (see "SECURITY AND SOURCES OF PAYMENT FOR THE BONDS - The Leases - Financial Covenants - Liquidity Covenant"). [Remainder of page intentionally left blank] A-65

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171 APPENDIX B CONSOLIDATED AUDITED FINANCIAL STATEMENTS OF BRIGHT STAR EDUCATION GROUP AND BRIGHT STAR AND AFFILIATES FOR THE FISCAL YEAR ENDED JUNE 30, 2016

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173 Independent Auditor s Report and Financial Statements For the Year Ended June 30, 2016

174 BRIGHT STAR EDUCATION GROUP TABLE OF CONTENTS June 30, 2016 Independent Auditor s Report... 1 Statement of Financial Position... 3 Statement of Activities... 4 Statement of Cash Flows... 5 Statement of Functional Expenses... 6 Notes to the Financial Statements... 7

175 INDEPENDENT AUDITOR S REPORT Board of Directors Bright Star Education Group Los Angeles, CA Report on the Financial Statements We have audited the accompanying financial statements of Bright Star Education Group (BSEG), a California nonprofit public benefit corporation, which comprise the statement of financial position as of June 30, 2016, and the related statements of activities, cash flows and functional expenses for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. -1-

176 Board of Directors Bright Star Education Group Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of BSEG as of June 30, 2016, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. VICENTI, LLOYD & STUTZMAN LLP Glendora, CA November 23,

177 BRIGHT STAR EDUCATION GROUP STATEMENT OF FINANCIAL POSITION June 30, 2016 ASSETS CURRENT ASSETS: Cash and cash equivalents $ 5,760,247 Accounts receivable 959,691 Prepaid expenses and deposits 60,381 Total current assets 6,780,319 Total assets $ 6,780,319 LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Accounts payable $ 66,255 Accrued liabilities 11,212 NET ASSETS: Total current liabilities 77,467 Total liabilities 77,467 Unrestricted 6,702,852 Total net assets 6,702,852 Total liabilities and net assets $ 6,780,319 The accompanying notes are an integral part of these financial statements. -3-

178 BRIGHT STAR EDUCATION GROUP STATEMENT OF ACTIVITIES For the Year Ended June 30, 2016 UNRESTRICTED NET ASSETS OPERATING ACTIVITIES Revenue: Management fees $ 2,739,979 Contributions 166,500 Other revenue 17 Total operating revenue 2,906,496 Expenses: Programs services 2,697,807 Management and general 44,314 Total operating expenses 2,742,121 Change in net assets from operating activities 164,375 NON-OPERATING ACTIVITIES Non-operating revenue: Interest income 5,038 Investment income, net 18,850 Total non-operating revenue 23,888 Change in net assets from non-operating activities 23,888 Total change in unrestricted net assets 188,263 Beginning unrestricted net assets 6,514,589 Ending unrestricted net assets $ 6,702,852 The accompanying notes are an integral part of these financial statements. -4-

179 BRIGHT STAR EDUCATION GROUP STATEMENT OF CASH FLOWS For the Year Ended June 30, 2016 CASH FLOWS from OPERATING ACTIVITIES: Change in Net Assets $ 188,263 Adjustments to reconcile change in net assets to net cash flows from operating activities: (Increase) and decrease in operating assets: Accounts receivable (23,697) Prepaid expenses and deposits (5,836) Increase and (decrease) in operating liabilities: Accounts payable 17,538 Accrued liabilities (4,566) Net cash flows from operating activities 171,702 Net increase in cash and cash equivalents 171,702 Cash and cash equivalents at the beginning of the year 5,588,545 Cash and cash equivalents at the end of the year $ 5,760,247 The accompanying notes are an integral part of these financial statements. -5-

180 BRIGHT STAR EDUCATION GROUP STATEMENT OF FUNCTIONAL EXPENSES For the Year Ended June 30, 2016 Program Services Management and General Total Salaries and wages $ 1,461,097 $ - $ 1,461,097 Other employee benefits 128, ,785 Payroll taxes 116, ,691 Legal expenses 164, ,750 Instructional materials 10,539-10,539 Other fees for services 386, ,843 Advertising and promotion 58,800-58,800 Office expenses - 31,847 31,847 Printing and postage 10,422-10,422 Information technology 91,610-91,610 Occupancy 63,422-63,422 Travel expenses 29,212-29,212 Insurance - 12,467 12,467 Other expenses 175, ,636 Total $ 2,697,807 $ 44,314 $ 2,742,121 The accompanying notes are an integral part of these financial statements. -6-

181 BRIGHT STAR EDUCATION GROUP NOTES TO THE FINANCIAL STATEMENTS For the Year Ended June 30, 2016 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Activities BSEG is a not-for-profit benefit corporation under the laws of the State of California for the purpose of providing back office services to Bright Star Schools and to manage the growth of the network of schools. BSEG is economically dependent on management fees collected from Bright Star Schools. Bright Star Schools is a California non-profit public benefit corporation and operates six public charter schools in the Los Angeles area. Cash and Cash Equivalents BSEG defines its cash and cash equivalents to include only cash on hand, demand deposits, and liquid investments with original maturities of three months or less. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosures. Accordingly, actual results could differ from those estimates. Basis of Accounting The financial statements have been prepared on the accrual method of accounting and accordingly reflect all significant receivables and liabilities. Functional Allocation of Expenses Costs of providing BSEG s programs and other activities have been presented in the statement of functional expenses. During the year, costs are allocated based on accumulated into separate groupings as either direct or indirect. Indirect or shared costs are allocated among program and support services by a method that best measures the relative degree of benefit. Basis of Presentation The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States as prescribed by the Financial Accounting Standards Board. Net Asset Classes BSEG is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. Net assets of BSEG are defined as: Unrestricted: All resources over which the governing board has discretionary control to use in carrying on the general operations of BSEG. Temporarily restricted: These net assets are restricted by donors to be used for specific purposes. BSEG does not currently have any temporarily restricted net assets. Permanently restricted: These net assets are permanently restricted by donors and cannot be used by BSEG. BSEG does not currently have any permanently restricted net assets. Receivables Accounts receivable primarily represent amounts due from Bright Star Schools as of June 30, Management believes that all receivables are fully collectible, therefore no provisions for uncollectible accounts were recorded. -7-

182 BRIGHT STAR EDUCATION GROUP NOTES TO THE FINANCIAL STATEMENTS For the Year Ended June 30, 2016 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Contributed Assets and Services Contributions of donated non-cash assets are recorded at fair value in the period received. Contributions of donated services that create or enhance non-financial assets or that require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation, are recorded at fair values in the period received. Contributions All contributions are considered to be available for unrestricted use unless specifically restricted by the donor. Amounts received that are restricted to specific use or future periods are reported as temporarily restricted. Restricted contributions that are received and released in the same period are reported as unrestricted contributions. Unconditional promises to give expected to be received in one year or less are recorded at net realizable value. Unconditional promises to give expected to be received in more than one year are recorded at fair market value at the date of the promise. Conditional promises to give are not recognized until they become unconditional, that is, when the conditions on which they depend are substantially met. Income Taxes BSEG is a non-profit entity exempt from the payment of income taxes under Internal Revenue Code Section 501(c)(3) and California Revenue and Taxation Code Section 23701d. Accordingly, no provision has been made for income taxes. Management has determined that all income tax positions are more likely than not of being sustained upon potential audit or examination; therefore, no disclosures of uncertain income tax positions are required. BSEG files informational returns in the U.S. federal jurisdiction, and the state of California. The statute of limitations for federal and California state purposes is generally three and four years, respectively. Evaluation of Subsequent Events BSEG has evaluated subsequent events through November 23, 2016, the date these financial statements were available to be issued. NOTE 2: CONCENTRATION OF CREDIT RISK BSEG maintains cash balances held in banks which are insured up to $250,000 by the Federal Depository Insurance Corporation (FDIC). At times, cash in these accounts exceeds the insured amounts. BSEG has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash and cash equivalents.! NOTE 3: RELATED PARTY TRANSACTIONS BSEG relies on management fees collected from Bright Star Schools to provide back office services. As of June 30, 2016, BSEG has received $2,739,979 of management fees and $17 of other revenue from Bright Star Schools. Additionally, BSEG earns interest and investment returns on an investment held by Bright Star Schools, the total investment return for the year ended June 30, 2016 was $18,850. BSEG has related party accounts receivable as of June 30, 2015 of $959,691 related to expenses paid by BSEG for Bright Star Schools and investment return from an investment held by Bright Star Schools. -8-

183 BRIGHT STAR EDUCATION GROUP NOTES TO THE FINANCIAL STATEMENTS For the Year Ended June 30, 2016 NOTE 4: OPERATING LEASE BSEG leases office space from an unrelated third party. The lease requires monthly payments and ends on June 30, Rent expense for the year ended June 30, 2016 was $61,246. Total rent payments for the year ended June 30, 2017 are expected to be $63,

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185 Independent Auditor s Report and Financial Statements For the Year Ended June 30, 2016 Operating: Stella Middle Charter Academy (SMCA) Bright Star Secondary Charter Academy (BSSCA) Rise Kohyang Middle (Rise) Rise Kohyang High (RKH) Valor Academy Elementary School (VES) Valor Academy Middle School (VMS) Valor Academy High School (VHS)

186 BRIGHT STAR SCHOOLS TABLE OF CONTENTS June 30, 2016 Independent Auditor s Report...1 Statement of Financial Position...3 Statement of Activities...5 Statement of Cash Flows...7 Statement of Functional Expenses...9 Notes to the Financial Statements...10 Local Education Agency Organization Structure...18 Schedule of Instructional Time...19 Schedule of Average Daily Attendance...20 Reconciliation of Annual Financial Report with Audited Financial Statements...21 Schedule of Expenditures of Federal Awards...22 Notes to the Supplementary Information...23 Independent Auditor s Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards...24 Independent Auditor s Report on Compliance for Each Major Federal Program, and Report on Internal Control Over Compliance Required by the Uniform Guidance...26 Independent Auditor s Report on State Compliance...28 Schedule of Findings and Questioned Costs...30 Status of Prior Year Findings and Questioned Costs...32

187 INDEPENDENT AUDITOR S REPORT Board of Directors Bright Star Schools Los Angeles, CA Report on the Financial Statements We have audited the accompanying financial statements of Bright Star Schools (the School), a California nonprofit public benefit corporation, which comprise the statement of financial position as of June 30, 2016, and the related statements of activities, cash flows and functional expenses for the year then ended, and the related notes to the financial statements. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor s Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. -1-

188 Board of Directors Bright Star Schools Opinion In our opinion, the financial statements referred to on page one present fairly, in all material respects, the financial position of the School as of June 30, 2016, and the changes in its net assets and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America. Other Matters Supplementary Information Our audit was conducted for the purpose of forming an opinion on the School s financial statements as a whole. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). The accompanying supplementary schedules are presented for purposes of additional analysis and are not a required part of the basic financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, the information is fairly stated, in all material respects, in relation to the financial statements as a whole. Other Reporting Required by Government Auditing Standards In accordance with Government Auditing Standards, we have also issued a report dated November 30, 2016 on our consideration of the School s internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the School s internal control over financial reporting and compliance. VICENTI, LLOYD & STUTZMAN LLP Glendora, CA November 30,

189 BRIGHT STAR SCHOOLS STATEMENT OF FINANCIAL POSITION June 30, 2016 ASSETS CURRENT ASSETS: 1st Page SMCA BSSCA Rise RKH Total Cash and cash equivalents $ 13,933,089 $ 381,502 $ 672,401 $ - $ 14,986,992 Investments - temporarily restricted Accounts receivable - federal and state 475, , ,200-1,578,253 Accounts receivable - other , ,064 Prepaid expenses and deposits 46,773 19, , ,818 Intracompany receivable 2,620,006 2,593, ,438 71,627 5,423,625 Total current assets 17,075,738 3,545,358 1,607,031 71,627 22,299,754 LONG-TERM ASSETS: Long-term accounts receivable Property, plant and equipment, net 71,283 18,843 22,762 44, ,219 Total long-term assets 71,283 18,843 22,762 44, ,219 Total assets $ 17,147,021 $ 3,564,201 $ 1,629,793 $ 115,958 $ 22,456,973 LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Accounts payable $ 121,666 $ 164,329 $ 72,842 $ 5,222 $ 364,059 Payroll liabilities Intracompany payable 2,015,914 2,514, ,963 27,402 5,517,267 Payable to BSEG 178, ,444 89,859 15, ,241 Total current liabilities 2,316,518 2,800,761 1,121,664 47,624 6,286,567 LONG-TERM LIABILITIES: Loans payable 13,529, ,529,320 NET ASSETS: Total long-term liabilities 13,529, ,529,320 Total liabilities 15,845,838 2,800,761 1,121,664 47,624 19,815,887 Unrestricted - undesignated 1,301, , ,129 68,334 2,641,086 Total net assets 1,301, , ,129 68,334 2,641,086 Total liabilities and net assets $ 17,147,021 $ 3,564,201 $ 1,629,793 $ 115,958 $ 22,456,973 The accompanying notes are an integral part of these financial statements. -3-

190 BRIGHT STAR SCHOOLS STATEMENT OF FINANCIAL POSITION June 30, 2016 ASSETS CURRENT ASSETS: 1st Page General Total VES VMS VHS Support Total Cash and cash equivalents $ 14,986,992 $ - $ 483,007 $ 483,011 $ 7,231 $ 15,960,241 Investments - temporarily restricted Accounts receivable - federal and state 1,578, , ,087-2,666,612 Accounts receivable - other 143, , ,559 Prepaid expenses and deposits 167,818 20, , , ,244 Intracompany receivable 5,423, ,008 1,469, , ,092 7,885,336 Total current assets 22,299, ,008 2,574,215 1,814, ,323 27,157,994 LONG-TERM ASSETS: Long-term accounts receivable - - 1,652, ,652,873 Property, plant and equipment, net 157,219 40, , ,020 Total long-term assets 157,219 40,419 1,850, ,047,893 Total assets $ 22,456,973 $ 197,427 $ 4,424,470 $ 1,814,694 $ 312,323 $ 29,205,887 LIABILITIES AND NET ASSETS CURRENT LIABILITIES: Accounts payable $ 364,059 $ 56,015 $ 96,020 $ 52,428 $ 60,001 $ 628,523 Payroll liabilities , ,469 Intracompany payable 5,517,267 16,520 1,484, ,163 95,983 7,885,336 Payable to BSEG 405,241 13, , , ,023 Total current liabilities 6,286,567 85,785 1,821,399 1,141, ,984 9,491,351 LONG-TERM LIABILITIES: Loans payable 13,529, , ,471,243 NET ASSETS: Total long-term liabilities 13,529, , ,471,243 Total liabilities 19,815,887 85,785 2,763,322 1,141, ,984 23,962,594 Unrestricted - undesignated 2,641, ,642 1,661, , ,339 5,243,293 Total net assets 2,641, ,642 1,661, , ,339 5,243,293 Total liabilities and net assets $ 22,456,973 $ 197,427 $ 4,424,470 $ 1,814,694 $ 312,323 $ 29,205,887 The accompanying notes are an integral part of these financial statements. -4-

191 BRIGHT STAR SCHOOLS STATEMENT OF ACTIVITIES For the Year Ended June 30, 2016 OPERATING ACTIVITIES 1st Page SMCA BSSCA Rise RKH Total Revenue and grants: State aid $ 3,415,518 $ 4,392,034 $ 2,403,980 $ - $ 10,211,532 Property taxes 980,392 1,027, ,386-2,715,642 Other state revenue 1,145, , ,307-2,710,606 Federal revenue 326, , ,835-1,049,725 Contributions 39,570 53,430 25, , ,739 Other revenue 107, ,537 28, ,135 Total operating revenue and grants 6,015,734 7,045,691 4,230, ,000 17,542,379 Expenses: Programs services 4,930,497 5,929,532 3,487, ,692 14,528,113 Management and general 925,347 1,007, , ,550,374 Total operating expenses 5,855,844 6,937,494 4,103, ,666 17,078,487 Change in net assets from operating activities 159, , ,471 68, ,892 TEMPORARILY RESTRICTED NET ASSETS Net assets released from restriction (6,764,660) (6,764,660) Change in temporarily restricted net assets (6,764,660) (6,764,660) NON-OPERATING ACTIVITIES Non-operating revenue: Net assets released from restriction 6,764, ,764,660 Total non-operating revenue 6,764, ,764,660 Non-operating expenses: Write-off of Prop 1D 6,764, ,764,660 Facility expenses Total non-operating expenses 6,764, ,764,712 Change in net assets from non-operating activities (52) (52) Total change in net assets (6,604,822) 108, ,471 68,334 (6,300,820) Beginning total net assets 7,906, , ,658-8,941,906 Ending total net assets $ 1,301,183 $ 763,440 $ 508,129 $ 68,334 $ 2,641,086 The accompanying notes are an integral part of these financial statements. -5-

192 BRIGHT STAR SCHOOLS STATEMENT OF ACTIVITIES For the Year Ended June 30, 2016 OPERATING ACTIVITIES 1st Page General Total VES VMS VHS Support Total Revenue and grants: State aid $ 10,211,532 $ - $ 3,110,435 $ 2,759,592 $ - $ 16,081,559 Property taxes 2,715, , ,910-4,270,694 Other state revenue 2,710,606-1,166, ,759-4,261,596 Federal revenue 1,049, , ,949-2,162,463 Contributions 368, , ,269 37, ,112,670 Other revenue 486,135-65,304 41, ,712 Total operating revenue and grants 17,542, ,000 6,393,170 4,295, ,481,694 Expenses: Programs services 14,528, ,637 4,790,228 3,487,407-22,941,385 Management and general 2,550,374 2, , , ,079,268 Total operating expenses 17,078, ,358 5,737,169 4,066, ,020,653 Change in net assets from operating activities 463, , , ,507 (1) 1,461,041 TEMPORARILY RESTRICTED NET ASSETS Net assets released from restriction (6,764,660) (6,764,660) Change in temporarily restricted net assets (6,764,660) (6,764,660) NON-OPERATING ACTIVITIES Non-operating revenue: Net assets released from restriction 6,764, ,764,660 Total non-operating revenue 6,764, ,764,660 Non-operating expenses: Write-off of Prop 1D 6,764, ,764,660 Facility expenses Total non-operating expenses 6,764, ,764,712 Change in net assets from non-operating activities (52) (52) Total change in net assets (6,300,820) 111, , ,507 (1) (5,303,671) Beginning total net assets 8,941,906-1,005, , ,340 10,546,964 Ending total net assets $ 2,641,086 $ 111,642 $ 1,661,148 $ 673,078 $ 156,339 $ 5,243,293 The accompanying notes are an integral part of these financial statements. -6-

193 BRIGHT STAR SCHOOLS STATEMENT OF CASH FLOWS For the Year Ended June 30, 2016 CASH FLOWS from OPERATING ACTIVITIES: 1st Page SMCA BSSCA Rise RKH Total Change in Net Assets $ (6,604,822) $ 108,197 $ 127,471 $ 68,334 $ (6,300,820) Adjustments to reconcile change in net assets to net cash flows from operating activities: Depreciation 69,554 23,945 15, ,495 Write-off of Prop 1D 6,764, ,764,660 (Increase) and decrease in operating assets: Accounts receivable - federal and state 88,167 67,248 (99,859) - 55,556 Accounts receivable - other - - (77,493) - (77,493) Prepaid expenses and deposits (25,023) 3,312 (50,219) - (71,930) Intracompany receivable (1,349,074) (1,446,893) 47,468 (71,627) (2,820,126) Increase and (decrease) in operating liabilities: Accounts payable 63,845 (30,349) 28,155 5,222 66,873 Payroll liabilities (39,888) (39,888) Intracompany payable 1,101,760 1,375, ,276 27,402 3,066,854 Payable to BSEG (24,412) 35,998 9,494 15,000 36,080 Net cash flows from operating activities 44, , ,289 44, ,261 CASH FLOWS from INVESTING ACTIVITIES: Proceeds from sale of investments 13,642, ,642,997 Purchase of fixed assets (15,495) - (24,254) (44,331) (84,080) Net cash flows from investing activities 13,627,502 - (24,254) (44,331) 13,558,917 CASH FLOWS from FINANCING ACTIVITIES: Repayments of debt Net cash flows from financing activities Net increase (decrease) in cash and cash equivalents 13,672, , ,035-14,348,178 Cash and cash equivalents at the beginning of the year 260, , , ,814 Cash and cash equivalents at the end of the year $ 13,933,089 $ 381,502 $ 672,401 $ - $ 14,986,992 Supplemental cash flow disclosure: Interest paid during the fiscal year $ 351 $ 367 $ 260 $ - $ 978! The accompanying notes are an integral part of these financial statements. -7-

194 BRIGHT STAR SCHOOLS STATEMENT OF CASH FLOWS For the Year Ended June 30, 2016 CASH FLOWS from OPERATING ACTIVITIES: 1st Page General Total VES VMS VHS Support Total Change in Net Assets $ (6,300,820) $ 111,642 $ 656,001 $ 229,507 $ (1) $ (5,303,671) Adjustments to reconcile change in net assets to net cash flows from operating activities: Depreciation 109,495-23, ,990 Write-off of Prop 1D 6,764, ,764,660 (Increase) and decrease in operating assets: Accounts receivable - federal and state 55, ,971 (260,554) - (42,027) Accounts receivable - other (77,493) - - (14,495) - (91,988) Prepaid expenses and deposits (71,930) (20,000) (90,606) (150,000) - (332,536) Intracompany receivable (2,820,126) (137,008) (861,869) (154,946) (305,092) (4,279,041) Increase and (decrease) in operating liabilities: Accounts payable 66,873 56,015 19,718 50,676 60, ,283 Payroll liabilities (39,888) (39,888) Intracompany payable 3,066,854 16, , ,032 (51,510) 4,279,041 Payable to BSEG 36,080 13,250 (202,200) 176,553-23,683 Net cash flows from operating activities 789,261 40, , ,773 (296,602) 1,364,506 CASH FLOWS from INVESTING ACTIVITIES: Proceeds from sale of investments 13,642, ,642,997 Purchase of fixed assets (84,080) (40,419) (197,382) - - (321,881) Net cash flows from investing activities 13,558,917 (40,419) (197,382) ,321,116 CASH FLOWS from FINANCING ACTIVITIES: Repayments of debt - - (58,077) - - (58,077) Net cash flows from financing activities - - (58,077) - - (58,077) Net increase (decrease) in cash and cash equivalents 14,348, , ,773 (296,602) 14,627,545 Cash and cash equivalents at the beginning of the year 638, , , ,833 1,332,696 Cash and cash equivalents at the end of the year $ 14,986,992 $ - $ 483,007 $ 483,011 $ 7,231 $ 15,960,241 Supplemental cash flow disclosure: Interest paid during the fiscal year $ 978 $ - $ 321 $ 229 $ - $ 1,528 The accompanying notes are an integral part of these financial statements. -8-

195 BRIGHT STAR SCHOOLS STATEMENT OF FUNCTIONAL EXPENSES For the Year Ended June 30, 2016 Program Services Management and General Total Salaries and wages $ 11,564,510 $ 898,384 $ 12,462,894 Pension expense 943,467 65,071 1,008,538 Other employee benefits 1,138,737 78,540 1,217,277 Payroll taxes 349,245 24, ,336 Management fees 204,420 2,739,979 2,944,399 Legal expenses - 91,362 91,362 Instructional materials 1,684,681-1,684,681 Other fees for services 1,789,480-1,789,480 Advertising and promotion 18,792-18,792 Office expenses 332,505 39, ,098 Printing and postage 158, ,144 Information technology 780, ,794 Occupancy 1,454,391-1,454,391 Travel expenses 156, ,858 Interest - 1,528 1,528 Depreciation 132, ,990 Insurance - 140, ,720 Direct student services 2,133,599-2,133,599 Other expenses 98,772-98,772 Total $ 22,941,385 $ 4,079,268 $ 27,020,653 The accompanying notes are an integral part of these financial statements. -9-

196 BRIGHT STAR SCHOOLS NOTES TO THE FINANCIAL STATEMENTS For the Year Ended June 30, 2016 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Activities Bright Star Schools (the School) is a California non-profit public benefit corporation. Bright Star Schools was incorporated in November 2002 as Stella Middle Charter Academy and was renamed in The School is comprised of: Stella Middle Charter Academy (SMCA) Bright Star Secondary Charter Academy (BSSCA) Rise Kohyang Middle School (Rise) Rise Kohyang High School (RKH) Valor Academy Elementary School (VES) Valor Academy Middle School (VMS) Valor Academy High School (VHS) General Support The School is funded principally through State of California public education monies received through the California Department of Education and the Los Angeles Unified School District. Cash and Cash Equivalents The School defines its cash and cash equivalents to include only cash on hand, demand deposits, and liquid investments with original maturities of three months or less. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, and disclosures. Accordingly, actual results could differ from those estimates. Basis of Accounting The financial statements have been prepared on the accrual method of accounting and accordingly reflect all significant receivables and liabilities. Functional Allocation of Expenses Costs of providing the School s programs and other activities have been presented in the statement of functional expenses. During the year, such costs are accumulated into groupings as either direct or indirect. Indirect or shared costs are allocated among program and support services by a method that best measures the relative degree of benefit. Basis of Presentation The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States as prescribed by the Financial Accounting Standards Board. -10-

197 BRIGHT STAR SCHOOLS NOTES TO THE FINANCIAL STATEMENTS For the Year Ended June 30, 2016 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Net Asset Classes The School is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted, temporarily restricted, and permanently restricted. Net assets of the School are defined as: Unrestricted: All resources over which the governing board has discretionary control to use in carrying on the general operations of the School. Temporarily restricted: These net assets are restricted by donors to be used for specific purposes. The School does not currently have any temporarily restricted net assets. Permanently restricted: These net assets are permanently restricted by donors and cannot be used by the School. The School does not currently have any permanently restricted net assets. Receivables Accounts receivable primarily represent amounts due from federal and state governments as of June 30, Management believes that all receivables are fully collectible, therefore no provisions for uncollectible accounts were recorded. Property, Plant and Equipment Property, plant and equipment are stated at cost if purchased or at estimated fair market value if donated. Depreciation is provided on a straight-line basis over the estimated useful lives of the asset. Contributed Assets and Services Contributions of donated non-cash assets are recorded at fair value in the period received. Contributions of donated services that create or enhance non-financial assets or that require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donation, are recorded at fair values in the period received. Investments Investments are recorded at fair market value. Both unrealized gains and losses from the fluctuation of market value and realized gains and losses from the sale of investments are reflected in the statement of activities if they are material. Property Taxes Secured property taxes attach as an enforceable lien on property as of January 1. Taxes are levied on September 1 and are payable in two installments on or before November 1 and February 1. Unsecured property taxes are not a lien against real property and are payable in one installment on or before August 31. The County bills and collects property taxes for all taxing agencies within the County and distributes these collections to the various agencies. The sponsor agency of the School is required by law to provide in-lieu property tax payments on a monthly basis, from August through July. The amount paid per month is based upon an allocation per student, with a specific percentage to be paid each month. Compensated Absences Accumulated unpaid employee paid time off (PTO) are recognized as a liability of the School. The current portion of the liability, if material, is recognized at year-end. Employees of the School are paid for days or hours worked based upon Board approved schedules which include vacation and sick time. -11-

198 BRIGHT STAR SCHOOLS NOTES TO THE FINANCIAL STATEMENTS For the Year Ended June 30, 2016 NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Revenue Recognition Amounts received from the California Department of Education are recognized as revenue by the School based on the average daily attendance (ADA) of students. Revenue that is restricted is recorded as an increase in unrestricted net assets if the restriction expires in the reporting period in which the revenue is recognized. All other restricted revenues are reported as increases in temporarily restricted net assets. Contributions All contributions are considered to be available for unrestricted use unless specifically restricted by the donor. Amounts received that are restricted to specific use or future periods are reported as temporarily restricted. Restricted contributions that are received and released in the same period are reported as unrestricted revenue. Unconditional contributions expected to be received in one year or less are recorded at net realizable value. Unconditional promises to give expected to be received in more than one year are recorded at fair market value at the date of the promise. Conditional promises to give are not recognized until they become unconditional, that is, when the conditions on which they depend are substantially met. Income Taxes The School is a non-profit entity exempt from the payment of income taxes under Internal Revenue Code Section 501(c)(3) and California Revenue and Taxation Code Section 23701d. Accordingly, no provision has been made for income taxes. Management has determined that all income tax positions are more likely than not of being sustained upon potential audit or examination; therefore, no disclosures of uncertain income tax positions are required. The School files informational returns in the U.S. federal jurisdiction, and the state of California. The statute of limitations for federal and California state purposes is generally three and four years, respectively. Allocations Between Charter Schools For the year ended June 30, 2016, the School has chosen to identify each charter school separately within the basic financial statements. In cases where specific identification of each charter s activities was not possible, items were allocated according to Average Daily Attendance (ADA). Evaluation of Subsequent Events The School has evaluated subsequent events through November 30, 2016, the date these financial statements were available to be issued. NOTE 2: CONCENTRATION OF CREDIT RISK The School maintains cash balances held in banks and revolving funds which are insured up to $250,000 by the Federal Depository Insurance Corporation (FDIC). At times, cash in these accounts exceeds the insured amounts. The School has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on its cash and cash equivalents.! -12-

199 BRIGHT STAR SCHOOLS NOTES TO THE FINANCIAL STATEMENTS For the Year Ended June 30, 2016 NOTE 3: INVESTMENTS AND FAIR VALUE MEASUREMENTS Investments are stated at fair value and are measured on a recurring basis. Levels 1 through 3 have been assigned to the fair value measurement of investments. The fair value level of measurement is determined as follows: Level 1 - Quoted prices in an active market for identical assets. Level 2 - Quoted prices for similar assets and market-corroborated inputs. Level 3 - The School s own assumptions about market participation, including assumptions about risk, developed based on the best information available in the circumstances. Fair values of investments as of June 30, 2016 were as follows: Fixed income (Level 1) $ 2 Returns on investments have been designated for BSEG as part of a re-structuring agreement between Bright Star Schools and BSEG. NOTE 4: PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment in the accompanying financial statements is presented net of accumulated depreciation. The School capitalizes all expenditures for land, buildings and equipment in excess of $5,000. Depreciation expense was $132,990 for the year ended June 30, The components of property, plant and equipment as of June 30, 2016 are as follows: Equipment $ 603,671 Less: accumulated depreciation (208,651) Property, plant and equipment, net $ 395,020 NOTE 5: LONG-TERM LIABILITIES Office of Public School Construction In June 2008, the Office of Public School Construction (OPSC) approved SMCA s application for a Charter School Facility Program (CSFP) preliminary apportionment of $24,426,544 to purchase and/or construct a real property as a permanent middle school facility to accommodate a maximum of 520 students for grades 5 through 8. This apportionment is contingent upon SMCA paying its 50% local matching share obligation (funding agreement) by making payments to the State pursuant to the agreement. In January 2009, SMCA obtained a funding agreement with the State of California. -13-

200 BRIGHT STAR SCHOOLS NOTES TO THE FINANCIAL STATEMENTS For the Year Ended June 30, 2016 NOTE 5: LONG-TERM LIABILITIES SMCA received CSFP advanced apportionments totaling $13,529,320 in prior years. SMCA recognized $6,764,660 as long term debt, and $6,764,660 as temporarily restricted net assets. During the year ended June 30, 2016, SMCA determined it would no longer pursue a project with this funding and wrote off $6,764,660 of previously recognized temporarily restricted revenue. SMCA will repay the total Prop 1D funding received of $13,529,320. This amount is due when requested by the state; as of June 30, 2016 a repayment plan has not been established. Note Payable In December 2014, the School obtained a promissory note for $1,000,000 to fund the Bright Star Leverage Loan in an attempt to secure new market tax credit financing to obtain a facility for long-term use by VMS. The note bears an interest rate of 1.2% and matures on November 1, The note includes a $1,612,873 loan to the Pacific Charter School Development Facility Project, which is presented as a long-term receivable in the statement of financial position. The financing matures on November 1, The loan balance as of June 30, 2016 was $941,923. NOTE 6: LINE OF CREDIT In November 2012, the School obtained an unsecured line of credit of $1 million from City National Bank (CNB). The line of credit bears a variable interest rate equal to CNB s prime rate plus 2.50%. As of June 30, 2016 the School had no outstanding balance.! NOTE 7: COMMITMENT BSSCA entered into a lease agreement with Los Angeles Unified School District (LAUSD) for the property located at 5431 W. 98th Street, Los Angeles, California. The agreement commenced in August 2009 and carries a term that coincides with BSSCA s charter. The agreement does not require BSSCA to pay a lease amount for the use of the property, but instead BSSCA pays a Pro Rata Share Charge for the maintenance of the facility and other services. This Pro Rata Share Charge is negotiated annually and therefore cannot be estimated for future years. VHS entered into a single year co-location agreement with Los Angeles Unified School District for the property located at 8015 Van Nuys Blvd., Los Angeles, California. The agreement does not require VHS to pay a lease amount for the use of the proprerty, but instead VHS pays a Pro Rata Share Charge for the maintenance of the facility and other services. For fiscal year the Pro Rata Share estimated is $143,

201 BRIGHT STAR SCHOOLS NOTES TO THE FINANCIAL STATEMENTS For the Year Ended June 30, 2016 NOTE 8: EMPLOYEE RETIREMENT Multi-employer Defined Benefit Pension Plans Qualified employees are covered under multi-employer defined benefit pension plans maintained by agencies of the State of California. The risks of participating in these multi-employer defined benefit pension plans are different from single-employer plans because: (a) assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers, (b) the required member, employer, and state contribution rates are set by the California Legislature, and (c) if the School chooses to stop participating in the multi-employer plan, it may be required to pay a withdrawal liability to the plan. The School has no plans to withdraw from this multi-employer plan. State Teachers Retirement System (STRS) Plan Description The School contributes to the State Teachers Retirement System (STRS), a cost-sharing multi-employer public employee retirement system defined benefit pension plan administered by STRS. Plan information for STRS is not publicly available. The plan provides retirement, disability and survivor benefits to beneficiaries. Benefit provisions are established by State statutes, as legislatively amended, within the State Teachers Retirement Law. According to the most recently available Comprehensive Annual Financial Report and Actuarial Valuation Report for the year ended June 30, 2015, total STRS net assets are $181 billion, the total actuarial present value of accumulated plan benefits is $242 billion, contributions from all employers totaled $2.55 billion, and the plan is 68.5% funded. The School did not contribute more than 5% of the total contributions to the plan. Copies of the STRS annual financial reports may be obtained from STRS, 7667 Folsom Boulevard, Sacramento, CA and Funding Policy Active plan members hired before December 31, 2012 are required to contribute 9.20% of their salary and those hired after are required to contribute 8.56% of their salary. The School is required to contribute an actuarially determined rate. The actuarial methods and assumptions used for determining the rate are those adopted by the STRS Teachers Retirement Board. Under the 2014 funding plan, employer contributions on compensation creditable to the program will increase every year for the next seven years, up to 19.10% in The required employer contribution rate for year ended June 30, 2016 was 10.73% of annual payroll. The contribution requirements of the plan members are established and may be amended by State statute. -15-

202 BRIGHT STAR SCHOOLS NOTES TO THE FINANCIAL STATEMENTS For the Year Ended June 30, 2016 NOTE 8: EMPLOYEE RETIREMENT The School s contributions to STRS for the past three years are as follows: Year Ended Required Percent June 30, Contribution Contributed 2014 $ 502, % 2015 $ 704, % 2016 $ 1,008, % NOTE 9: OPERATING LEASES On July 1, 2008, SMCA entered into a lease for the property located at 2636 S. Mansfield Avenue, Los Angeles, California. The lease term commenced on August 1, 2008 and ends July 31, SMCA extended the lease and the new agreement commenced on August 1, 2013 and ends July 31, Rent expense for the year ended June 30, 2016 was $155,500. In May 2014, Rise entered into a sublease for the property located at 3020 Wilshire Blvd., Los Angeles, California. The term is from July 1, 2014 through January 31, Rent expense for the year ended June 30, 2016 was $496,248. In August 2014, the School entered into a lease agreement for property in Los Angeles, California to be used by VMS. The lease commenced on July 1, 2015 and ends June 30, Rent expense for the year ended June 30, 2016 was $451,459. Future minimum lease payments are as follows: Year Ended June 30, SMCA Rise VMS Total 2017 $ 149,500 $ 554,376 $ 546,996 $ 1,250, , , ,996 1,274, , , , , , , , ,996 Thereafter - - 2,910,996 2,910,996 Total $ 318,000 $ 1,460,448 $ 5,645,976 $ 7,424,

203 BRIGHT STAR SCHOOLS NOTES TO THE FINANCIAL STATEMENTS For the Year Ended June 30, 2016 NOTE 10: RELATED PARTY TRANSACTIONS Bright Star Education Group (BSEG) is a non-profit corporation organized to provide back office services to Bright Star Schools and to manage the growth of the network of schools. As of June 30, 2016, the School paid $2,739,979 of management fees and $17 of other fees to BSEG. The School has a related party liability as of June 30, 2016 of $957,023 related to expenses paid by BSEG for the School. NOTE 11: CONTINGENCIES The School has received state and federal funds for specific purposes that are subject to review and audit by the grantor agencies. Although such audits could generate disallowances under terms of the grants, it is believed that any required reimbursement would not be material. NOTE 12: SUBSEQUENT EVENTS Rise Kohyang High School and Valor Academy Elementary School opened in August

204 SUPPLEMENTARY INFORMATION

205 BRIGHT STAR SCHOOLS LOCAL EDUCATION AGENCY ORGANIZATION STRUCTURE For the Year Ended June 30, 2016 Bright Star Schools is a non-profit public benefit corporation and operates seven charter schools approved by the Los Angeles School District as follows: Stella Middle Charter Academy (SMCA) charter number 0535 established in 2003 Bright Star Secondary Charter Academy (BSSCA) charter number 0826 established in 2006 Rise Kohyang Middle School (Rise) charter number 1315 established in 2012 Rise Kohyang High School (RKH) charter number established in 2016 Valor Academy Elementary School (VES) charter number established in 2016 Valor Academy Middle School (VMS) charter number 1095 established in 2009 Valor Academy High School (VHS) charter number 1539 established in 2013 The Board of Directors and the Administrators as of the year ended June 30, 2016 were as follows: BOARD OF DIRECTORS Member Office Term Expires/Term Length Larry Klein Board Chairman 2016 (3 years) James McGrath Secretary 2017 (3 years) Stephen Green Member 2018 (3 years) Elizabeth Yeo Member 2019 (3 years) Joyce Richards Member 2018 (3 years) Lois Levy Member 2016 (1 year) Esther Perez Member 2018 (3 years) Greg Gonzalez Member 2018 (3 years) George Leftwich Member 2019 (3 years) Kimako Desvignes Member 2019 (3 years) Andrew Murr Member 2017 (1 year) Julie Robles Member 2019 (3 years) Andrew Wang Member 2018 (3 years) Monica Briseño Member 2017 (1 year) Carrie Wagner Member 2017 (1 year) John Miller Member 2017 (1 year) ADMINISTRATORS Hrag Hamalian Melissa Kaplan Hrag Hamalian Executive Director Head of City Schools Head of Valley Schools -18-

206 BRIGHT STAR SCHOOLS SCHEDULE OF INSTRUCTIONAL TIME For the Year Ended June 30, Minutes Requirement Actual Days Status SMCA: Grade 5 54,000 69, In compliance Grade 6 54,000 69, In compliance Grade 7 54,000 62, In compliance Grade 8 54,000 62, In compliance BSSCA: Rise: Grade 9 64,800 71, In compliance Grade 10 64,800 71, In compliance Grade 11 64,800 71, In compliance Grade 12 64,800 71, In compliance Grade 6 54,000 70, In compliance Grade 7 54,000 70, In compliance VMS: VHS: Grade 5 54,000 73, In compliance Grade 6 54,000 73, In compliance Grade 7 54,000 74, In compliance Grade 8 54,000 74, In compliance Grade 9 64,800 68, In compliance Grade 10 64,800 68, In compliance See independent auditor s report and the notes to the supplementary information. -19-

207 BRIGHT STAR SCHOOLS SCHEDULE OF AVERAGE DAILY ATTENDANCE For the Year Ended June 30, 2016 Second Period Report Annual Report Classroom Based Total Classroom Based Total SMCA: Grades 5 through Grades 7 through Subtotal BSSCA: Grades 9 through Subtotal Rise: Grade Grade Subtotal VMS: Grades 5 through Grades 7 through Subtotal VHS: Grades 9 through Subtotal ADA Totals 2, , , , See independent auditor s report and the notes to the supplementary information. -20-

208 BRIGHT STAR SCHOOLS RECONCILIATION OF ANNUAL FINANCIAL REPORT WITH AUDITED FINANCIAL STATEMENTS For the Year Ended June 30, 2016 SMCA BSSCA Rise VMS VHS Total June 30, 2016 Annual Financial Report Fund Balances (Net Assets) $ 1,272,573 $ 825,707 $ 276,617 $ 1,592,331 $ 513,032 $ 4,480,260 Adjustments and Reclassifications: Increasing (Decreasing) the Fund Balance (Net Assets): Cash and cash equivalents 13,530, ,530,261 Investments - temporarily restricted (13,530,258) (13,530,258) Accounts receivable (46,564) (43,512) 287,974 1,397, ,609 1,867,557 Prepaid expenses and desposits (531,156) (92,229) 101,928 (1,696,030) (14,495) (2,231,982) Intracompany receivable 2,620,006 2,593, ,438 1,469, ,101 7,371,609 Property, plant and equipment, net 2,235 (5,060) 16, , ,726 Accounts payable (2,194,852) (2,515,020) (958,963) (1,484,441) (771,163) (7,924,439) Deferred revenue 13,708, ,708,258 Loans payable (13,529,320) - 645, , ,994 (12,575,014) Net Adjustments and Reclassifications 28,610 (62,267) 231,512 68, , ,718 June 30, 2016 Audited Financial Statement Fund Balances (Net Assets) $ 1,301,183 $ 763,440 $ 508,129 $ 1,661,148 $ 673,078 $ 4,906,978 See independent auditor s report and the notes to the supplementary information. -21-

209 BRIGHT STAR SCHOOLS SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS For the Year Ended June 30, 2016 Federal Grantor/Pass-Through Grantor/Program or Cluster Title Federal CFDA Number Pass Through Entity Identifying Number SMCA BSSCA Rise VMS VHS Total U.S. Department of Education: Pass Through Program From California Department of Education: Title I, Part A, Basic Grants Low-Income and Neglected $ 234,218 $ 188,607 $ 123,829 $ 172,115 $ 127,214 $ 845,983 Special Ed: IDEA Basic Local Assistance Entitlement, Part B, Sec 611 (formerly PL ) ,160 95,505 67,006 87,964 59, ,314 Pass Through Program From Youth Policy Institute: NCLB: Title IV, Part B, 21st Century Community Learning Centers (CCLC) - High School ASSETS , ,400 Total U.S. Department of Education 326, , , , ,893 1,496,697 U.S. Department of Agriculture: Pass Through Program From California Department of Education: Child Nutrition Cluster: Especially Needy Breakfast Program ,159 92, ,156 National School Lunch Program , , ,033 Meal Supplements N/A ,745 21,832 50,577 Total U.S. Department of Agriculture , , ,766 Total Expenditures of Federal Awards $ 326,378 $ 532,512 $ 190,835 $ 668,789 $ 443,949 $ 2,162,463 See independent auditor s report and the notes to the supplementary information. -22-

210 BRIGHT STAR SCHOOLS NOTES TO THE SUPPLEMENTARY INFORMATION For the Year Ended June 30, 2016 NOTE 1: PURPOSE OF SCHEDULES Schedule of Instructional Time This schedule presents information on the amount of instructional time offered by the School and whether the School complied with the provisions of the Educational Code. Schedule of Average Daily Attendance Average daily attendance is a measurement of the number of pupils attending classes of the School. The purpose of attendance accounting from a fiscal standpoint is to provide the basis on which apportionments of state funds are made to charter schools. This schedule provides information regarding the attendance of students at various grade levels. Reconciliation of Annual Financial Report with Audited Financial Statements This schedule provides the information necessary to reconcile the net assets of the charter schools as reported on the Annual Financial Report form to the audited financial statements. Schedule of Expenditures of Federal Awards The accompanying schedule of expenditures of federal awards (the Schedule) is presented on the accrual basis of accounting and includes the federal award activity of the School under programs of the federal government for the year ended June 30, The information in this Schedule is presented in accordance with the requirements of the Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Because the Schedule presents only a selected portion of operations of the School, it is not intended to and does not present the financial position, changes in net assets, or cash flows of the School. Indirect Cost Rate The School has elected to use a rate other than the 10-percent de minimis indirect cost rate allowed under the Uniform Guidance. -23-

211 INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Board of Directors Bright Star Schools Los Angeles, CA We have audited, in accordance with the auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards issued by the Comptroller General of the United States, the financial statements of Bright Star Schools (the School), a nonprofit California public benefit corporation, which comprise the statement of financial position as of June 30, 2016, and the related statements of activities, cash flows and functional expenses for the year then ended, the related notes to the financial statements, and have issued our report thereon dated November 30, Internal Control Over Financial Reporting In planning and performing our audit of the financial statements, we considered the School s internal control over financial reporting (internal control) to determine the audit procedures that are appropriate in the circumstances for the purpose of expressing our opinion on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the School s internal control. Accordingly, we do not express an opinion on the effectiveness of the School s internal control. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct misstatements on a timely basis. A material weakness is a deficiency or a combination of deficiencies in internal control such that there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected and corrected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies. Given these limitations, during our audit we did not identify any deficiencies in internal control that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. -24-

212 INDEPENDENT AUDITOR S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENT AUDITING STANDARDS Compliance and Other Matters As part of obtaining reasonable assurance about whether the School s financial statements are free from material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of non-compliance or other matters that are required to be reported under Government Auditing Standards. Purpose of this Report The purpose of this report is solely to describe the scope of our testing of internal control and compliance and the results of that testing, and not to provide an opinion on the effectiveness of the entity s internal control or on compliance. This report is an integral part of an audit performed in accordance with Government Auditing Standards in considering the entity s internal control and compliance. Accordingly, this communication is not suitable for any other purpose. VICENTI, LLOYD & STUTZMAN LLP Glendora, CA November 30,

213 Board of Directors Bright Star Schools Los Angeles, CA INDEPENDENT AUDITOR S REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM; AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE Report on Compliance for Each Major Federal Program We have audited the compliance of Bright Star Schools (the School) with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Compliance Supplement that could have a direct and material effect on each of its major federal programs for the year ended June 30, The School s major federal programs are identified in the summary of auditor s results section of the accompanying schedule of findings and questioned costs. Management s Responsibility Management is responsible for compliance with federal statutes, regulations, and terms and conditions of federal awards applicable to its federal programs. Auditor s Responsibility Our responsibility is to express an opinion on compliance for each of the School s major federal programs based on our audit of the types of compliance requirements referred to above. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States; and the audit requirements of Title 2 U.S. Code of Federal Regulations Part 200, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance). Those standards and the Uniform Guidance require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about the School s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on compliance for each major federal program. However, our audit does not provide a legal determination of the School s compliance. Opinion on Each Major Federal Program In our opinion, the School complied, in all material respects, with the types of compliance requirements referred to above that could have a direct and material effect on each of its major federal programs for the year ended June 30,

214 INDEPENDENT AUDITOR S REPORT ON COMPLIANCE FOR EACH MAJOR FEDERAL PROGRAM AND REPORT ON INTERNAL CONTROL OVER COMPLIANCE REQUIRED BY THE UNIFORM GUIDANCE Report on Internal Control Over Compliance Management of the School is responsible for establishing and maintaining effective internal control over compliance with the types of compliance requirements referred to above. In planning and performing our audit of compliance, we considered the School s internal control over compliance with the types of requirements that could have a direct and material effect on each major federal program to determine the auditing procedures that are appropriate in the circumstances for the purpose of expressing an opinion on compliance, for each major federal program and to test and report on internal control over compliance in accordance with the Uniform Guidance, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the School s internal control over compliance. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect and correct noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control over compliance is a deficiency, or combination of deficiencies in internal control over compliance such that there is a reasonable possibility, that material noncompliance with a type of compliance requirement of a federal program will not be prevented or detected and corrected on a timely basis. A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Our consideration of internal control over compliance was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over compliance that might be material weaknesses or significant deficiencies. We did not identify any deficiencies in internal control over compliance that we consider to be material weaknesses. However, material weaknesses may exist that have not been identified. Purpose of this Report The purpose of this report on internal control over compliance is solely to describe the scope of our testing of internal control over compliance and the results of that testing based on the requirements of the Uniform Guidance. Accordingly, this report is not suitable for any other purpose. VICENTI, LLOYD & STUTZMAN LLP Glendora, CA November 30,

215 INDEPENDENT AUDITOR S REPORT ON STATE COMPLIANCE Board of Directors Bright Star Schools Los Angeles, CA We have audited Bright Star Schools s (the School) compliance with the types of compliance requirements described in the Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting, published by the Education Audit Appeals Panel for the year ended June 30, The School s State compliance requirements are identified in the table below. Management s Responsibility Management is responsible for the compliance with the State laws and regulations as identified below. Auditor s Responsibility Our responsibility is to express an opinion on the School s compliance based on our audit of the types of compliance requirements referred to below. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America, the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States, and the Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting, published by the Education Audit Appeals Panel. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the specific areas listed below has occurred. An audit includes examining, on a test basis, evidence about the School s compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion on state compliance. Our audit does not provide a legal determination of the School s compliance. Compliance Requirements Tested In connection with the audit referred to above, we selected and tested transactions and records to determine the School s compliance with the laws and regulations applicable to the following items: Description School Districts, County Offices of Education, and Charter Schools: Educator Effectiveness California Clean Energy Jobs Act After School Education and Safety Program Proper Expenditure of Education Protection Account Funds Procedures Performed Yes Not applicable Yes Yes -28-

216 INDEPENDENT AUDITOR S REPORT ON STATE COMPLIANCE Description Unduplicated Local Control Funding Formula Pupil Counts Local Control and Accountability Plan Independent Study-Course Based Immunizations Charter Schools: Attendance Mode of Instruction Nonclassroom-based instructional/independent study Determination of funding for nonclassroom-based instruction Annual instructional minutes classroom based Charter School Facility Grant Program Opinion on State Compliance Procedures Performed Yes Yes Not applicable Yes Yes Yes Not applicable Not applicable Yes Yes In our opinion, the School complied with the laws and regulations of the state programs referred to above in all material respects for the year ended June 30, Purpose of this Report The purpose of this report on state compliance is solely to describe the results of testing based on the requirements of the Guide for Annual Audits of K-12 Local Education Agencies and State Compliance Reporting, published by the Education Audit Appeals Panel. Accordingly, this report is not suitable for any other purpose. VICENTI, LLOYD & STUTZMAN LLP Glendora, CA November 30,

217 BRIGHT STAR SCHOOLS SCHEDULE OF FINDINGS AND QUESTIONED COSTS For the Year Ended June 30, 2016 SECTION I SUMMARY OF AUDITOR S RESULTS Financial Statements Type of report the auditor issued on whether the financial statements audited were prepared in accordance with GAAP: Unmodified Internal control over financial reporting: Material weakness(es) identified? Yes X No Significant deficiency(ies) identified? Yes X None Reported Noncompliance material to financial statements noted? Yes X No Federal Awards Internal control over major federal awards: Material weakness(es) identified? Yes X No Significant deficiency(ies) identified? Yes X None Reported Type of auditor s report issued on compliance for major federal programs: Unmodified Any audit findings disclosed that are required to be reported in accordance with 2 CFR (a)? Yes X No Identification of Major Federal Programs: CFDA Number(s) Name of Federal Program or Cluster Title I, Part A Low Income and Neglected Dollar threshold used to distinguish between type A and type B programs: $750,000 Auditee qualified as low-risk auditee? X Yes No -30-

218 BRIGHT STAR SCHOOLS SCHEDULE OF FINDINGS AND QUESTIONED COSTS For the Year Ended June 30, 2016 All audit findings must be identified as one or more of the following categories: Five Digit Code Finding Types Attendance Inventory of Equipment Internal Control State Compliance Charter School Facilities Program Federal Compliance Miscellaneous Classroom Teacher Salaries Local Control Accountability Plan Instructional Materials Teacher Misassignments School Accountability Report Card There were no findings and questioned costs related to the basic financial statements, federal awards or state awards for June 30,

219 BRIGHT STAR SCHOOLS STATUS OF PRIOR YEAR FINDINGS AND QUESTIONED COSTS For the Year Ended June 30, 2016 There were no findings and questioned costs related to the basic financial statements, federal awards or state awards for the prior year. -32-

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221 APPENDIX C SUMMARY OF PRINCIPAL BOND DOCUMENTS The following are summaries of certain provisions of the Master Indenture, the Supplemental Master Indenture, the Bond Indenture and the Loan Agreement. These summaries do not purport to be complete or definitive and are qualified in their entireties by reference to the full terms of such documents. All capitalized terms used in this Summary of Principal Documents and not defined herein have the same meanings as in the Master Indenture and the Bond Indenture. Definitions Documents. The following are summaries of definitions of certain terms used in the Summary of Principal Accountant means any firm of independent certified public accountants selected by the Obligated Group Representative. Act of Accredited Investor means an accredited investor as defined in Regulation D of the Securities Act means the California School Finance Authority Act, constituting Chapter 18 (commencing with Section 17170) of Part 10 of Division 1 of Title 1 of the Education Code of the State, as now in effect and as it may from time to time hereafter be amended or supplemented. Additional Indebtedness means any Indebtedness (including all Obligations) incurred subsequent to the execution and delivery of the Master Indenture, other than Obligation No. 1. Additional Payments means the payments so designated and required to be made by the Borrower pursuant to the Loan Agreement meaning: (a) All taxes and assessments of any type or character charged to the Authority or to the Bond Trustee affecting the amount available to the Authority or the Bond Trustee from payments to be received hereunder or in any way arising due to the transactions contemplated by the Loan Agreement (including taxes and assessments assessed or levied by any public agency or governmental authority of whatsoever character having power to levy taxes or assessments) but excluding franchise taxes based upon the capital and/or income of the Bond Trustee and taxes based upon or measured by the net income of the Bond Trustee; provided, however, that the Borrower will have the right to protest any such taxes or assessments and to require the Authority or the Bond Trustee, at the Borrower s expense, to protest and contest any such taxes or assessments levied upon them and that the Borrower will have the right to withhold payment of any such taxes or assessments pending disposition of any such protest or contest unless such withholding, protest or contest would adversely affect the rights or interests of the Authority or the Bond Trustee; (b) All reasonable fees, charges and expenses of the Bond Trustee for services rendered under the Bond Indenture and all amounts referred to in the Bond Indenture, as and when the same become due and payable; (c) All reasonable fees, charges and expenses of the Master Trustee for services rendered under the Master Indenture and all amounts referred to in the Master Indenture, as and when the same become due and payable; (d) The reasonable fees and expenses of such accountants, consultants, attorneys and other experts as may be engaged by the Authority or the Bond Trustee to prepare audits, financial statements, reports, opinions or provide such other services required under the Loan Agreement, the other Corporation Documents or the Bond Indenture; OHSUSA: C-1

222 (e) All fees and expenses of the Rating Agency, including the S&P Surveillance Fee (if any), and the 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 Bond Indenture, the amount of such deposit, which will 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 pursuant to the Bond Indenture; Bond Indenture; (f) All amounts necessary for deposit into the Repair and Replacement Fund pursuant to the (g) The annual fee of the Authority and 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 Loan Agreement, the other Corporation Documents, the Bonds or the Bond Indenture, 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 Loan Agreement, the other Corporation Documents, the Bonds or the Bond 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 Loan Agreement and the other Corporation Documents; and (h) The amount necessary to replenish any fund established under the Bond Indenture, but only to the extent then required the Bond Indenture. Administrative Fees and Expenses means any application, commitment, financing or similar fee charged, or reimbursement for administrative or other expenses incurred, by the Authority or the Bond Trustee, including Additional Payments. Affiliate means a corporation, limited liability company, partnership, joint venture, association, business trust or similar entity organized under the laws of the United States of America or any state thereof, directly controlled by or under common control with a Member or any other Affiliate. For purposes of this definition, control means the power to direct the management and policies of a Person through the ownership of at least a majority of its voting securities, or the right to designate or elect at least a majority of the members of its board of directors by contract or otherwise. Authority means the California School Finance Authority, a public instrumentality of the State established by the Act, and its successors and assigns. Authorized Borrower Representative means the Board President of the Borrower, the Board Treasurer of the Borrower or such other person as may be designated by any of such officials or by the Board of the Borrower to sign for the Borrower, by written certificate furnished to the Authority and the Bond Trustee, as a person authorized to act on behalf of the Borrower. Such certificate will contain the specimen signature of such person, will be signed on behalf of the Borrower by any officer of the Borrower and may designate an alternate or alternates. Authorized Denominations means $250,000 and any integral multiple of $5,000 in excess thereof, subject to the Bond Indenture. Authorized Signatory means any member of the Authority and any other person as may be designated and authorized to sign on behalf of the Authority pursuant to a resolution adopted thereby. Balloon Indebtedness means Long-Term Indebtedness 25% or more of the principal of which becomes due (either by maturity or mandatory redemption) during any period of 12 consecutive months, which portion of the principal is not required by the documents governing such Indebtedness to be amortized by redemption prior to such date. OHSUSA: D-2 C-2

223 Base Rent means an amount not less than the greater of (a) debt service due and payable with respect to the related Facility plus any Ground Rent on a related Facility or (b) the amounts provided in the rent schedule attached to the applicable Lease plus any Ground Rent on the related Facility. Beneficial Owner means, (i) when used with reference to the Book Entry Only System, the person who is considered the beneficial owner of the Bonds and, with respect to the Bonds pursuant to the arrangements for book entry determination of ownership applicable to the Depository and, (ii) for purposes of the Bond Indenture, any person who (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds and, with respect to the Bonds (including persons holding such through nominees, depositories or other intermediaries) or (b) is treated as the owner of any Bonds and, with respect to the Bonds for federal income tax purposes. is registered. Bondholder or Holder means, with respect to any Bond, the person in whose name such Bond Bond Counsel means counsel of recognized national standing in the field of law relating to municipal bonds, appointed by the Obligated Group Representative and approved by the Governmental Issuer. Bond Purchase Agreement means and refers to that certain Bond Purchase Agreement, dated the date of sale of the Bonds, among the Authority, the Underwriter and the State Treasurer, as agent for sale on behalf of the Authority, and approved by the Borrower and the Lessee. Bond Reserve Subaccount means the Bond Reserve Subaccount of the Reserve Account established by the Bond Trustee pursuant to the Bond Indenture. Bond Trustee means Wilmington Trust, National Association, or any successor as Trustee as provided in the Bond Indenture. Bond Year means the period beginning on the Closing Date and ending on the first anniversary of the Closing Date and each succeeding one-year period (with the last Bond Year ending on the first date that none of the Bonds remain Outstanding). Bonds means the California School Finance Authority Charter School Revenue Bonds (Bright Star Schools Obligated Group) Series Book Value means, when used in connection with Property, Plant and Equipment or other Property of any Member, the value of such property, net of accumulated depreciation, as it is carried on the books of such Person and in conformity with generally accepted accounting principles, and when used in connection with Property, Plant and Equipment or other Property of the Obligated Group, means the aggregate of the values so determined with respect to such property of each Member determined in such a way that no portion of such value of property of any Member is included more than once. Borrower means Bright Star Education Group, a California nonprofit public benefit corporation, and its successors and assigns. Borrower Documents means the Master Indenture of Trust, the Supplemental MTI for Obligation No. 1, the Loan Agreement, the Bond Purchase Agreement, the Tax Certificate and the Borrower Resolution. Bright Star Schools VAHS Lease means that certain Lease Agreement, dated as of December 1, 2017, between Bright Star Development Group 9334 Lemona, LLC, as lessor, and BSS, as lessee, for the use and occupancy of certain premises for a charter school currently known as Valor Academy High School (or any successor charter school thereto, to the extent permitted under such Lease). OHSUSA: D-3 C-3

224 Bright Star Schools SMCA Lease means that certain Sublease Agreement, dated as of December 1, 2017, between BSDG 4115 MLK LLC, as sublessor, and BSS, as sublessee, for the use and occupancy of certain premises for a charter school currently known as Stella Middle Charter Academy (or any successor charter school thereto, to the extent permitted under such Lease). Business Day means, for purposes of the Bond Indenture, any day other than a Saturday, a Sunday or a day on which banking institutions in the city in which the Principal Corporate Trust Office is located are authorized or obligated by law or executive order to be closed and, for purposes of the Master Indenture, any day other than a Saturday, a Sunday, or a day on which banking institutions in the State of California are authorized or obligated by law or executive order to be closed. Charter School Law means the Charter Schools Act of 1992, constituting Part 26.8, commencing with Section of Division 4 of Title 2 of the Education Code of the State, as now in effect and as it may from time to time hereafter be amended or supplemented. Bonds. Closing Date means, in respect of any Bonds, the date of original issuance and delivery of such Code means the Internal Revenue Code of 1986, or any successor code or law, and any regulations in effect or promulgated thereunder. Completion Certificate means a Completion Certificate in a form substantially similar to EXHIBIT B of the Loan Agreement. Consolidated Base Rent means the sum of all Base Rent for all Lessees of all Facilities and proposed Facilities. Consolidated Base Rent Coverage Ratio means the ratio determined by dividing Consolidated Net Operating School Revenue for such period by the Consolidated Base Rent. Consolidated Net Operating School Revenue means the sum of all Net Operating School Revenue (as such term is defined in the related Lease) for all Lessees of all Facilities and proposed Facilities as that computation would be applied to the operations of an existing or proposed school Lessee of an existing or proposed Facility financed with Related Bonds or to be financed with Additional Indebtedness, and excluding therefrom the payment obligations associated with any loan or other indebtedness to be refinanced or retired from proceeds of the Long-Term Indebtedness then to be incurred. Continuing Disclosure Agreement means, for purposes of the Bond Indenture, the Continuing Disclosure Agreement, dated as of December 1, 2017, among BSS, the Borrower and the Dissemination Agent, as originally executed and as it may be amended from time to time in accordance with the terms thereof and, for purposes of the Master Indenture, the Continuing Disclosure Agreement executed by the Corporation and the Dissemination Agent appointed thereto dated the date of issuance and delivery of the Related Bonds, as originally executed and as it may be amended from time to time in accordance with the terms thereof. Controller means the Controller of the State or any other official of the State charged with the disbursement of State funds to State public schools. Costs of Issuance means and includes all items of expense directly or indirectly payable by or reimbursable to the Authority or the Borrower and related to the original authorization, execution, sale and delivery of the Bonds, including but not limited to costs of preparation and reproduction of documents, fees and expenses of the Authority, the State Treasurer s Office, the Bond Trustee, the Master Trustee, legal fees and charges of bond counsel, special counsel, disclosure counsel, underwriter s counsel and Bond Trustee s counsel, underwriters discount, rating agency fees and any other costs, charges or fees in connection with the original delivery of the Bonds. OHSUSA: D-4 C-4

225 Indenture. Costs of Issuance Fund means the fund by that name established pursuant to the Bond Debt Service Coverage Ratio means for any Fiscal Year the ratio determined by dividing the Income Available for Debt Service for such Fiscal Year by the Debt Service Requirement for such Fiscal Year. Debt Service Requirement means, for any Fiscal Year 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 the Members during such period, taking into account, at the option of the Obligated Group Representative, the following: (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 the Members could reasonably be expected to borrow, not to exceed thirty-five (35) 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 the Members could reasonably be expected to borrow for such term, by issuing Indebtedness, all as set forth in an Officer s Certificate 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 for any twelve (12) consecutive calendar months specified in an Officer s Certificate during the eighteen (18) calendar months immediately preceding the date of calculation of the Debt Service Requirement (or, if such Variable Rate Indebtedness was not Outstanding during such eighteen month period, the average interest rate per annum which would have been in effect). OHSUSA: D-5 C-5

226 (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 a Member, 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 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 an amount 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 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 an Officer s Certificate during the eighteen (18) calendar months immediately preceding the date of calculation of the Debt Service Requirement (or, if such Long-Term Indebtedness was not Outstanding during such eighteen month period, the average rate which would have been in effect). Defeasance Obligations means any obligations authorized under applicable State law and the related financing documents to be deposited in escrow for the defeasance of any Indebtedness. Dissemination Agent means the entity appointed as dissemination agent under the Continuing Disclosure Agreement. Depository means The Depository Trust Company and its successors and assigns, or any other depository selected as set forth in the Bond Indenture which agrees to follow the procedures required to be followed by such depository in connection with the Bonds. Education Code means the Education Code of the State of California. Electronic Notice means notice through telecopy, telegraph, telex, facsimile, transmission, internet, or other electronic means of communication, capable of making a written record. Eligible Securities means any of the following obligations as and to the extent that such obligations are at the time legal investments under the Act for moneys held hereunder and then proposed to be invested therein (provided that the Bond Trustee will be entitled to rely upon a Request of the Borrower as conclusive evidence that the investments described therein are so authorized under the laws of the State) and will be the sole investments in which amounts on deposit in any fund or account created hereunder or under the Loan Agreement will be invested: (1) direct obligations of the United States of America (including obligations issued or held in book-entry form on the books of the Department of the Treasury of the United States of America or any Federal Reserve Bank and CATS and TIGRS) or obligations the timely payment of the principal of and interest on which are fully and unconditionally guaranteed by the United States of America; OHSUSA: D-6 C-6

227 (2) Bonds, debentures, notes or other evidence of indebtedness issued or guaranteed by any of the following federal agencies, provided that such obligations are backed by the full faith and credit of the United States of America (stripped securities will constitute Eligible Securities only if they have been stripped by the agency itself); U.S. Export-Import Bank, Farmers Home Administration, Federal Financing Bank, General Services Administration, U.S. Maritime Administration, U.S. Department of Housing and Urban Development, Government National Mortgage Association, and Federal Housing Administration; (3) Bonds, debentures, notes, or other evidence of indebtedness issued or guaranteed by any of the following non-full faith and credit U.S. government agencies (stripped securities will constitute Eligible Securities only if they have been stripped by the agency itself): Federal Home Loan Bank System, Federal Home Loan Mortgage Corporation ( FHLMC ), Federal National Mortgage Association ( FNMA ), Student Loan Marketing Association, Resolution Funding Corporation or Farm Credit System; (4) Bonds or notes issued by any state or municipality which are rated by S&P, Fitch and Moody s in one of the three highest rating categories assigned by such agencies; (5) repurchase agreements with either a primary dealer on the reporting dealer list of the Federal Reserve or any bank (including an affiliate of the Bond Trustee), which, in either case, is rated A or better by S&P and Moody s, provided that (a) the term of such repurchase agreement is not greater than 30 days, (b) the Bond Trustee or third party acting solely as agent for the Bond Trustee has possession of the collateral, (c) the collateral is valued weekly and the market value of the collateral is maintained at an amount equal to at least 104% (or, if the collateral consists of obligations of FHLMC or FNMA, 105%) of the amount of cash transferred by the Bond Trustee to the dealer bank or securities firm under the repurchase agreement plus interest, (d) failure to maintain the requisite collateral levels will require the Bond Trustee to liquidate the collateral immediately, (e) the repurchase securities are either obligations of, or fully guaranteed as to principal and interest by, the United States or any federal agency backed by the full faith and credit of the United States, (f) the repurchase securities are free and clear of any third- party lien or claim; and (g) there will have been delivered to the Bond Trustee, the Authority and the Borrower an Opinion of Counsel to the effect that such repurchase agreement meets all guidelines under State law for legal investment of public funds; (6) investment agreements, including guaranteed investment contracts ( GICs ) with providers in one of the two highest rating categories of Moody s and S&P; (7) money market funds registered under the Federal Investment Company Act of 1940, whose shares are registered under the Federal Securities Act of 1933, and having a rating by S&P of AAAm-G, AAA-m, or AA-m and if rated by Moody s rated Aaa, Aa1 or Aa2, including such funds for which the Bond Trustee, its affiliates or subsidiaries provide investment advisory or other management services or for which the Bond Trustee or an affiliate of the Bond Trustee serves as investment administrator, shareholder servicing agent, and/or custodian or subcustodian, notwithstanding that (i) the Bond Trustee or an affiliate of the Bond Trustee receives fees from funds for services rendered, (ii) the Bond Trustee collects fees for services rendered pursuant to this Indenture, which fees are separate from the fees received from such funds, and (iii) services performed for such funds and pursuant to this Indenture may at times duplicate those provided to such funds by the Bond Trustee or an affiliate of the Bond Trustee; (8) certificates of deposit secured at all times by collateral described in (1) and/or (2) above, issued by commercial banks, savings and loan associations or mutual savings banks relating to collateral held by a third party, and in which collateral the Bond Trustee on behalf of the Bondholders has a perfected first security interest; (9) certificates of deposit, savings accounts, deposit accounts or money market deposits that are fully insured by FDIC, including BIF and SAIF; (10) commercial paper rated, at the time of purchase, Prime-1 by Moody s and A-1 or better by S&P; OHSUSA: D-7 C-7

228 (11) federal funds or bankers acceptances with a maximum term of one year of any bank which has an unsecured, uninsured and unguaranteed obligation rating of Prime-1 or A-3 or better by Moody s and A-1 or A or better by S&P; (12) shares in a California common law trust established pursuant to Title 1, Division 7, Chapter 5 of the Government Code of the State which invests exclusively in investments permitted by Section of Title 5, Division 2, Chapter 4 of the Government Code of the State as it may be amended; (13) the State of California s Pooled Money Investment Account; (14) the State of California s Local Agency Investment Fund; (15) obligations of a bank or other financial institution rated at least Aa3 by Moody s or AA- by S&P; and (16) any other investments approved in writing by the Authority, provided that such investment does not adversely affect S&P or Moody s then current rating, if any, on the Bonds. EMMA means and refers to the Electronic Municipal Market Access system of the Municipal Rulemaking Securities Board, or any successor which comports with the applicable rules of the United States Securities and Exchange Commission. Environmental Regulations means any federal, state or local law, statute, code, ordinance, regulation, requirement or rule relating to dangerous, toxic or hazardous pollutants, Hazardous Substances or chemical waste, materials or substances. Event of Default means such events specified in the Loan Agreement, the Bond Indenture or the Master Indenture as the context requires. Facility or Facilities, means, for purposes of the Bond Indenture, individually or collectively, as the context will require, the charter school facilities located at (a) 9334 Lemona Avenue, Los Angeles, California 91343, (b) 9336 Lemona Avenue, Los Angeles, California 91343, (c) 9356 Lemona Avenue, Los Angeles, California 91343, (d) 9404 Lemona Avenue, Los Angeles, California 91343, and (e) 4115 West Martin Luther King, Jr. Boulevard, Los Angeles, California 90008, together with the improvements thereon and, for purposes of the Master Indenture, all the real property described in Exhibit A of each Lease, together with the improvements thereon (including improvements constructed with proceeds of an Obligation). Fair Market Value, when used in connection with Property, means the fair market value of such Property as determined by either: (1) an appraisal of the portion of such Property which is real property made within five years of the date of determination by a Member of the Appraisal Institute and by an appraisal of the portion of such Property which is not real property made within five years of the date of determination by any expert qualified in relation to the subject matter, provided that any such appraisal will be performed by a Person which (a) is in fact independent, (b) does not have any direct financial interest or any material indirect financial interest in any Member or Affiliate and (c) is not connected with any Member or Affiliate as an officer, employee, promoter, trustee, partner, director or Person performing similar functions, adjusted for the period, not in excess of five years, from the date of the last such appraisal for changes in the implicit price deflator for the gross national product as reported by the United States Department of Commerce or its successor agency, or if such index is no longer published, such other index certified to be comparable and appropriate in an Officer s Certificate delivered to the Master Trustee; or (2) a bona fide offer for the purchase of such Property made on an arm s-length basis within six months of the date of determination, as established by an Officer s Certificate. OHSUSA: D-8 C-8

229 Financial Products Agreement means an interest rate swap, cap, collar, option, floor, forward or other hedging agreement, arrangement or security, however denominated, identified to the Master Trustee in an Officer s Certificate as having been entered into by a Member with a Qualified Provider not for investment purposes but with respect to Indebtedness (which Indebtedness will be specifically identified in the Officer s Certificate) for the purpose of (1) reducing or otherwise managing the Member s risk of interest rate changes or (2) effectively converting the Member s interest rate exposure, in whole or in part, from a fixed rate exposure to a variable rate exposure, or from a variable rate exposure to a fixed rate exposure. Financial Products Payments means payments periodically required to be paid to a counterparty by a Member pursuant to a Financial Products Agreement. Financial Products Receipts means amounts periodically required to be paid to a Member by a counterparty pursuant to a Financial Products Agreement. Fiscal Year means that period adopted by the Obligated Group Representative as the annual accounting period for the Members. The Fiscal Year is initially the 12-month period commencing on July 1 and ending on June 30 in each year. Fitch means Fitch Ratings, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and assigns, or, if such corporation will be dissolved or liquidated or will no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Borrower. Governing Body means, when used with respect to any Member, its board of directors, board of trustees, or other board or group of individuals in which all of the powers of such Person are vested except for those powers reserved to the corporate membership thereof by the articles of incorporation or bylaws of such Person. Government Obligations means, for purposes of the Master Indenture and the Bond Indenture, noncallable and nonprepayable direct obligations of the United States of America or obligations which as to full and timely payment of principal and interest constitute full faith and credit obligations of the United States of America (excluding therefrom unit investment trusts and money market funds comprised of such securities). Governmental Issuer means any municipal corporation, political subdivision, state, territory or possession of the United States, or any constituted authority or agency or instrumentality of any of the foregoing empowered to issue obligations on behalf thereof, which obligations constitute Related Bonds. Gross Revenue Fund means the fund by that name established pursuant to the Master Indenture. Memorandum. Gross Revenues has the meaning set forth in the forepart of this Limited Offering Ground Lease means the Lease Agreement dated as of September 1, 2017, by and between Bethany Baptist Church of West Los Angeles, a California nonprofit religious corporation, and BSDG 4115 MLK LLC, a California limited liability company, as amended by the First Amendment to Lease Agreement dated as of October 27, 2017, and as the same may be amended and supplemented from time to time. Ground Leases means any lease between any Member, as lessee, and a third party landlord, as lessor, for use and occupancy of any Facilities by such Member. Ground Rent means, for purposes of the Bond Indenture, the rent payments, if any, due to Bethany Baptist Church of West Los Angeles pursuant to the Ground Lease and, for purposes of the Master Indenture, any aggregate rental payment obligation of the Members for use and occupancy of any Facilities pursuant to one or more Ground Leases. OHSUSA: D-9 C-9

230 Guaranty means all loan commitments and all obligations of any Member guaranteeing in any manner whatever, whether directly or indirectly, any obligation of any other Person that would, if such other Person were a Member, constitute Indebtedness. Hazardous Substances means (a) any oil, flammable substance, explosives, radioactive materials, hazardous wastes or substances, toxic wastes or substances or any other wastes, materials or pollutants which (i) pose a hazard to the Project or to persons on or about the Project or (ii) cause the Project to be in violation of any Environmental Regulation; (b) asbestos in any form which is or could become friable, urea formaldehyde foam insulation, transformers or other equipment which contain dielectric fluid containing levels of polychlorinated biphenyls, or radon gas; (c) any chemical, material or substance defined as or included in the definition of waste, hazardous substances, hazardous wastes, hazardous materials, extremely hazardous waste, restricted hazardous waste, or toxic substances or words of similar import under any Environmental Regulation including, but not limited to, the Comprehensive Environmental Response, Compensation and Liability Act ( CERCLA ), 42 USC 9601 et seq.; the Resource Conservation and Recovery Act ( RCRA ), 42 USC 6901 et seq.; the Hazardous Materials Transportation Act, 49 USC 1801 et seq.; the Federal Water Pollution Control Act, 33 USC 1251 et seq.; the California Hazardous Waste Control Law ( HWCL ), Cal. Health & Safety Code et seq.; the Hazardous Substance Account Act ( HSAA ), Cal. Health & Safety Code et seq.; the Underground Storage of Hazardous Substances Act, Cal. Health & Safety Code et seq.; the Porter- Cologne Water Quality Control Act (the Porter-Cologne Act ), Cal. Water Code et seq., the Safe Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65); and Title 22 of the California Code of Regulations, Division 4, Chapter 30; (d) any other chemical, material or substance, exposure to which is prohibited, limited or regulated by any governmental authority or agency or may or could pose a hazard to the health and safety of the occupants of the Project or the owners and/or occupants of property adjacent to or surrounding the Project, or any other person coming upon the Project or adjacent property; or (e) any other chemical, materials or substance which may or could pose a hazard to the environment. Income Available for Debt Service means, unless the context provides otherwise, with respect to the Members as to any period of time, the Gross Revenues less expenses of the Members relating to the operation and management of the Facilities, and less rent period pursuant to any Ground Leases; 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 and contributions to the extent specifically restricted by the donor to a particular purpose inconsistent with their use for the payment of Required Payments; (c) condemnation awards; the net proceeds of insurance (other than business interruption insurance) and (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, including the extinguishment of debt; and (f) nonrecurring items which do not involve the receipt, expenditure or transfer of assets. Indebtedness means all obligations for borrowed money, installment sale, capitalized lease, finance lease or other payment obligations that create a lease liability under generally accepted accounting principles incurred or assumed by a Member (other than Indebtedness of one Member to another Member or the Guaranty by any Member of Indebtedness of any other Member), including Guaranties, Long-Term Indebtedness, Short-Term Indebtedness, Subordinate Indebtedness or any other obligation for payments of principal and interest with respect to money borrowed, provided, however, that if more than one Member will have incurred or assumed a Guaranty of a Person other than a Member, or if more than one Member will be obligated to pay any obligation, for purposes of OHSUSA: D-10 C-10

231 any computations or calculations under the Bond Indenture such Guaranty or obligation will be included only one time. Independent Consultant means, for purposes of the Master Indenture, a Person that (1) does not have any direct financial interest or any material indirect financial interest in any Member or any Affiliate and (2) is not connected with any Member or any Affiliate as an officer, employee, promoter, trustee, partner, director or Person performing similar functions, and designated by the Obligated Group Representative, qualified to pass upon questions relating to the financial affairs of facilities of the type or types operated by the Members and having a favorable reputation for skill and experience in the financial affairs of such facilities. Initial Members means, individually or collectively as the case may be, as of the date of original execution hereof, Bright Star Development Group 9334 Lemona, LLC and BSDG 4115 MLK, each a California limited liability company, or any limited liability company, corporation or other entity which is the surviving, resulting or transferee in any merger, consolidation or transfer of assets permitted under the Master Indenture. Insurance and Condemnation Proceeds Fund means the fund by that name established pursuant to the Master Indenture. Insurance Consultant means a Person (which may be an insurance broker or agent of a Member) which (1) does not have any direct financial interest or any material indirect financial interest in any Member or any Affiliate and (2) is not connected with any Member or any Affiliate as an officer, employee, promoter, underwriter, trustee, partner, director or Person performing similar functions, and designated by the Obligated Group Representative, qualified to survey risks and to recommend insurance coverage for educational facilities and organizations engaged in such operations. Intercept means the apportionment from the State Controller, pursuant to Section (a)(4) of the Education Code (or any successor provision) and the Intercept Notice, of amounts specified in the Intercept Notice and payable directly to the Bond Trustee. Intercept Notice means any notice from the Schools to the State Controller, pursuant to Section (a)(1) and (4) of the Education Code (or any successor provision), specifying a transfer schedule for the payment directly to the Bond Trustee of one or more of the following: (x) principal of the Bonds, (y) interest on the Bonds and (z) other costs necessary or incidental to financing pursuant to the Act relating to the Bonds, including Additional Payments, in substantially the form set forth in the applicable Leases, as the same may be amended, supplemented or restated from time to time. Interest Account means the account by that name in the Revenue Fund established pursuant to the Bond Indenture. Interest Payment Date means each June 1 and December 1, commencing June 1, Irrevocable Deposit means the irrevocable deposit in trust of cash in an amount (or Government Obligations the principal of and interest on which will be in an amount), and under terms sufficient to pay all or a portion of the principal of and/or premium, if any, and interest on, as the same becomes due, of any indebtedness of the Borrower which would otherwise be considered Outstanding. The Bond Trustee with whom such deposit is made may be any trustee or escrow agent authorized to act in such capacity. Landlord and Lessor means each individually, and Landlords and Lessors means collectively, Bright Star Development Group 9334 Lemona, LLC and BSDG 4115 MLK LLC, as owners or lessees of the Facilities and as lessors or sublessors under and pursuant to the related Leases, and their permitted successors and assigns. Lease or Leases means, individually or collectively, the Bright Star Schools VAHS Lease and the Bright Star Schools SMCA Lease, and each other lease agreement pursuant to which a Lessee leases a Facility at which a School is located from a Member of the Obligated Group. OHSUSA: D-11 C-11

232 Lessee means Bright Star Schools, as lessee under the Leases and as operator of charter schools, including the Schools, pursuant and subject to the Charter School Law, and its successors and assigns. Lien means any mortgage or pledge of, security interest in or lien or encumbrance on, any Property, excluding Liens applicable to Property in which any Member has only a leasehold interest unless the Lien is with respect to such leasehold interest. Agreement. Loan means the loan of Bond proceeds from the Authority to the Borrower pursuant to the Loan Loan Agreement means the loan agreement, dated as of December 1, 2017, between the Authority and the Borrower, and as acknowledged by the Landlord, as originally executed or as it may from time to time be supplemented, modified or amended subject to and in accordance with the terms thereof and of the Bond Indenture. Loan Repayments means all of the payments so designated and required to be made by the Borrower pursuant to the Loan Agreement. Long-Term Indebtedness means Indebtedness having an original maturity greater than one year or renewable at the option of a Member 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 20 consecutive days during each calendar year. Mandatory Sinking Account Payment means the amount so designated which is established pursuant to the Bond Indenture with respect to the Bonds. Master Indenture means that certain Master Indenture of Trust, dated as of December 1, 2017, among the Obligated Group Members and the Master Trustee named therein, as originally executed, and as the same may be amended and supplemented from time to time in accordance with its terms. Master Trustee means Wilmington Trust, National Association, a national banking association organized and existing under and by virtue of the laws of the United States of America and, subject to the limitations contained in the Master Indenture, any other corporation or association which may be co-trustee with Wilmington Trust, National Association and any successor or successors to said trustee or co-trustee in the trusts created under the Master Indenture. Members of the Obligated Group means, as applicable, each Member as identified in the Master Indenture. Moody s means Moody s Investors Service, a corporation organized and existing under the laws of the State of Delaware, its successors and assigns, or, if such corporation will be dissolved or liquidated or will no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Borrower. Mortgages means (1) each mortgage, including leasehold deed of trust, deed of trust, security agreement, assignment of rents and leases, and/or financing statement identified in the Master Indenture and (2) any mortgage, including leasehold deed of trust, deed of trust security agreement assignment of rents and leases and/or financing statement encumbering Property, Plant and Equipment for the benefit of Holders executed and delivered in accordance with the Master Indenture. Non-recourse Indebtedness means any Indebtedness secured by a Lien on Property of a Member, liability for which is effectively limited to the Property subject to the Lien with no recourse, directly or indirectly (whether through credit enhancement of such Indebtedness or otherwise), to any other Property of the Members. OHSUSA: D-12 C-12

233 Representative. Obligated Group means all of the Members, which does not include the Obligated Group Obligated Group Financial Statements has the meaning set forth in this summary under the caption MASTER INDENTURE Preparation and Filing of Financial Statements, Reports and Other Information. Obligated Group Representative means the Corporation or such other Member (or Members acting jointly) or other Person as may have been designated to act as Obligated Group Representative under the Master Indenture pursuant to written notice to the Master Trustee executed by all of the Members. Obligation means any obligation of the Obligated Group issued under the Master Indenture, which is to be in the form set forth in a Related Supplement, including, but not limited to, bonds, obligations, debentures, reimbursement agreements, Financial Products Agreements, loan agreements or leases. Reference to a Series of Obligations or to Obligations of a Series means Obligations or Series of Obligations issued pursuant to a single Related Supplement, unless otherwise specified in the Related Supplement. Operating Expenses of the School will have the meaning given thereto in the related Lease. Opinion of Bond Counsel means an Opinion of Counsel by a nationally recognized bond counsel firm experienced in matters relating to the exclusion from gross income for federal income tax purposes of interest payable on obligations of state and political subdivisions. Opinion of Counsel means a written opinion of counsel (which may be counsel for the Authority,) selected by the Authority. If and to the extent required by the provisions of the Bond Indenture, each Opinion of Counsel will include the statements provided for in the Bond Indenture. Optional Redemption Account means the account by that name in the Redemption Fund established pursuant to the Bond Indenture. Outstanding, when used with reference to Indebtedness or Obligations, means, as of any date of determination, all Indebtedness or Obligations theretofore issued or incurred and not paid and discharged other than (a) Obligations theretofore cancelled by the Master Trustee or delivered to the Master Trustee for cancellation, (b) Obligations in lieu of which other Obligations have been authenticated and delivered or have been paid pursuant to the provisions of a Related Supplement regarding mutilated, destroyed, lost or stolen Obligations unless proof satisfactory to the Master Trustee has been received that any such Obligation is held by a bona fide purchaser, (c) any Obligation held by any Member and (d) Indebtedness deemed paid and no longer outstanding pursuant to the terms thereof; provided, however, that if two or more obligations which constitute Indebtedness represent the same underlying obligation (as when an Obligation secures an issue of Related Bonds and another Obligation secures repayment obligations to a bank under a letter of credit which secures such Related Bonds) for purposes of the various financial covenants contained in the Master Indenture, but only for such purposes, only one of such Obligations will be deemed Outstanding and the Obligation so deemed to be Outstanding will be that Obligation which produces the greater amount of Annual Debt Service to be included in the calculation of such covenants. Outstanding, for purposes of the Bond Indenture, when used as of any particular time with reference to Bonds, means (subject to the provisions of the Bond Indenture) all Bonds theretofore, or thereupon being, authenticated and delivered by the Bond Trustee under the Bond Indenture except (a) Bonds theretofore canceled by the Bond Trustee or surrendered to the Bond Trustee for cancellation; (b) Bonds with respect to which all liability of the Authority will have been discharged in accordance with the Bond Indenture; and (c) Bonds for the transfer or exchange of which, or in lieu of or in substitution for which, other Bonds will have been authenticated and delivered by the Bond Trustee pursuant to the Bond Indenture and, for purposes of the Master Indenture, when used with reference to Indebtedness or Obligations, means, as of any date of determination, as of any date of determination, all Indebtedness or Obligations theretofore issued or incurred and not paid and discharged other than (a) Obligations theretofore cancelled by the Master Trustee or delivered to the Master Trustee for cancellation, (b) Obligations in lieu of which other Obligations have been authenticated and delivered or have been paid pursuant to OHSUSA: D-13 C-13

234 the provisions of a Related Supplement regarding mutilated, destroyed, lost or stolen Obligations unless proof satisfactory to the Master Trustee has been received that any such Obligation is held by a bona fide purchaser, (c) any Obligation held by any Member and (d) Indebtedness deemed paid and no longer outstanding pursuant to the terms thereof; provided, however, that if two or more obligations which constitute Indebtedness represent the same underlying obligation (as when an Obligation secures an issue of Related Bonds and another Obligation secures repayment obligations to a bank under a letter of credit which secures such Related Bonds) for purposes of the various financial covenants contained in the Master Indenture, but only for such purposes, only one of such Obligations will be deemed Outstanding and the Obligation so deemed to be Outstanding will be that Obligation which produces the greater amount of Annual Debt Service to be included in the calculation of such covenants. Payments means (i) all moneys (except any money received to be used for the payment of Administrative Fees and Expenses) received by the Bond Trustee with respect to the Intercept, (ii) all moneys, if any, received by the Bond Trustee directly from, or on behalf of, the Borrower, pursuant to the Loan Agreement (excluding Additional Payments not directed to be deposited into the any fund or account created and held under the Bond Indenture) or Obligation No. 1, and (iii) all income derived from the investment of any money in any fund or account established pursuant to the Bond Indenture. Permitted Liens means and includes: (a) Any judgment lien or notice of pending action against any Member so long as such judgment or pending action is being contested in good faith and execution thereon is stayed or while the period for responsive pleading has not lapsed; (b) (i) Rights reserved to or vested in any municipality or public authority by the terms of any right, power, franchise, grant, license, permit or provision of law, affecting any Property; (ii) any liens on any Property for taxes, assessment, levies, fees, water and sewer charges, and other governmental and similar charges and any liens of mechanics, materialmen, laborers, suppliers or vendors for work or services performed or materials furnished in connection with such Property, which are not due and payable or which are not delinquent or which, or the amount or validity of which, are being contested and execution thereon is stayed or which are subject to an installment payment obligation with a tax collection authority and execution thereon is stayed or, with respect to liens of mechanics, materialmen and laborers, have been due for less than 60 days; (iii) covenants, conditions and restriction agreements, easements, rights-of-way, water rights, servitudes, waivers, reservations of abutter s rights, restrictions, governmental requirements and other defects, encumbrances, and irregularities in the title to any Property which do not materially impair the use of such Property or materially and adversely affect the value thereof; (iv) condominium declarations, condominium plans, condominium maps, tract maps, lot splits or lot line adjustment maps affecting the property; and (v) rights reserved to or vested in any municipality or public authority to control or regulate any Property or to use such Property in any manner, which rights do not materially impair the use of such Property in any manner, or materially and adversely affect the value thereof; (c) Any Lien described in the final title policy which summarized certain liens existing on the date of execution of the Master Indenture provided that no such Lien (or the amount of Indebtedness secured thereby) may be increased, extended, renewed or modified to apply to any Property of any Member not subject to such Lien on such date, unless (1) such Lien as so extended, renewed or modified otherwise qualifies as a Permitted Lien or (2) the maturity date of the Indebtedness secured by such Lien is not extended and either the total principal and interest requirements or the maximum annual principal and interest requirements (calculated in a manner consistent with the calculation of the Debt Service Requirement) on such Indebtedness is not increased as a result of the refinancing of such Indebtedness; (d) Any Lien in favor of the Master Trustee securing all Obligations other than Non-recourse Indebtedness on a parity basis, including without limitation the Lien of the Mortgages and the Lien on Gross Revenues; (e) Liens arising by reason of good faith deposits with any Member in connection with leases of real estate, bids or contracts (other than contract for the payment of money), deposits by any Member to secure public or statutory obligations, or to secure, or in lieu of, surety, stay or appeal bonds, and deposits as security for the payment of taxes or assessments or other similar charges; OHSUSA: D-14 C-14

235 (f) Any Lien arising by reason of deposits with, or the giving of any form of security to, any governmental agency or any body created or approved by law or governmental regulation for any purpose at any time as required by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege or license, or to enable any Member to maintain self-insurance or to participate in any funds established to cover any insurance risks or in connection with workers compensation, unemployment insurance, pension or profit sharing plans or other similar social security plans, or to share in the privileges or benefits required for companies participating in such arrangements, and any Lien in the nature of a banker s lien or right of setoff with respect to deposits which any Member is not required to maintain with the bank in question; (g) Any Lien arising by reason of any escrow established to pay debt service with respect to Indebtedness, including Irrevocable Deposits; such proceeds; (h) Any Lien in favor of a trustee on the proceeds of Indebtedness prior to the application of (i) Liens on Property received by any Member through gifts, grants or bequests, such Liens being due to restrictions on such gifts, grants or bequests of Property or the income thereon, up to the Fair Market Value of such Property; (j) Liens securing Non-recourse Indebtedness incurred pursuant to the Master Indenture so long as the Property purchased, acquired, constructed, or equipped with the proceeds of such Non-recourse Indebtedness does not replace any Property of the Members which generated more than 10% of the Total Revenues of the Members for the most recent Fiscal Year for which Obligated Group Financial Statements are available; (k) Liens securing leases of Property; (l) the lease or license of the use of all or a part of any portion of the Property in connection with the proper and economical use of such Property in accordance with customary and prudent business practice; (m) purchase money security interests and security interests existing on any Property prior to the time of its acquisition through purchase, merger, consolidation or otherwise, or placed upon Property to secure a portion of the purchase price thereof, or placed upon instruments evidencing Indebtedness to secure the purchase price thereof, or lessee s interests in leases required to be capitalized in accordance with generally accepted accounting principles; and (n) any other Lien, provided that either (i) the aggregate Book Value of Property subject to Liens created or permitted to exist pursuant to this clause (n) will not exceed 5% of the aggregate Book Value of all Property of the Obligated Group or (ii) the aggregate Fair Market Value of Property subject to Liens created or permitted to exist pursuant to this clause (n) will not exceed 5% of the aggregate Fair Market Value of all Property of the Obligated Group. Person means an individual, corporation, firm, association, partnership, trust or other legal entity or group of entities, including a governmental entity or any agency or political subdivision thereof. Principal Account means the account by that name in the Revenue Fund established pursuant to the Bond Indenture. Principal Corporate Trust Office means, for the Bond Trustee originally appointed under the Bond Indenture, the corporate trust office of Wilmington Trust, National Association, provided however, that for purposes of presentation of Bonds for payment or for registration of transfer and exchange such term means the office or agency of the Bond Trustee at which, at any particular time, its corporate trust agency business will be conducted. Principal Payment Date means the principal and Mandatory Sinking Account Payment dates for the Bonds, which dates occur on June 1 of each year commencing June 1, OHSUSA: D-15 C-15

236 Project has the meaning given to such term in the related Loan Agreement. Project Fund means the fund by that name established pursuant to the Bond Indenture. Property means any and all rights, titles and interests in and to any and all property of or leased by the Borrower whether real (including the Facility) or personal, tangible or intangible and wherever situated whether currently owned or leased or acquired in the future. Property, Plant and Equipment means all Property of the Obligated Group that is considered property, plant and equipment of such Persons under generally accepted accounting principles other than the respective Members interests in the real property, fixtures and equipment identified in the Master Indenture. Qualified Institutional Buyer will have the meaning given to a qualified institutional buyer under Rule 144A of the Securities Act of Qualified Provider means any financial institution or insurance company which is a party to a Financial Products Agreement if the unsecured long-term debt obligations of such financial institution or insurance company (or of the parent or a subsidiary of such financial institution or insurance company if such parent or subsidiary guarantees the performance of such financial institution or insurance company under such Financial Products Agreement), or obligations secured or supported by a letter of credit, contract, guarantee, agreement, insurance policy or surety bond issued by such financial institution or insurance company (or such guarantor parent or subsidiary), are rated in one of the three highest Rating Categories of a national rating agency at the time of the execution and delivery of the Financial Products Agreement. Rating Agency means at any time any nationally recognized rating agency including Fitch, Moody s or S&P, then rating the Bonds at the request of the Authority or the Borrower. Rating Category means (i) with respect to any long-term rating category, all ratings designated by a particular letter or combination of letters, without regard to any numerical modifier, plus or minus sign or other modifier and (ii) with respect to any short-term or commercial paper rating category, all ratings designated by a particular letter or combination of letters and taking into account any numerical modifier, but not any plus or minus sign or other modifier. under the Code. Rebate Analyst means the Person engaged by the Borrower to calculate any rebate liability Rebate Fund means the fund by that name established pursuant to the Bond Indenture. Record Date means, with respect to the Interest Payment Date for the Bonds, the 15 th day of the calendar month immediately preceding such Interest Payment Date, whether or not such day is a Business Day. Redemption Fund means the fund by that name established pursuant to the Bond Indenture. Related Bond Indenture means any indenture, trust agreement, bond resolution or other comparable instrument pursuant to which a series of Related Bonds are issued. Related Bond Issuer means the Governmental Issuer of any issue of Related Bonds. Related Bond Trustee means the trustee and its successors in the trusts created under any Related Bond Indenture, and if there is no such trustee, means the Related Bond Issuer. Related Bonds means the revenue bonds or other obligations issued by any Governmental Issuer, pursuant to a single Related Bond Indenture, the proceeds of which are loaned or otherwise made available to a Member or Members in consideration of the execution, authentication and delivery of an Obligation or Obligations to or for the order of such Governmental Issuer. OHSUSA: D-16 C-16

237 Related Supplement means an indenture supplemental to, and authorized and executed pursuant to the terms of the Master Indenture. Rental Payments means the amounts payable pursuant to any Lease by a Lessee to the Members of the Obligated Group for the use and occupancy of any Facilities, excluding Expenses (as defined in the applicable Lease). Indenture. Repair and Replacement Fund means the fund by such name established pursuant to the Bond Repair and Replacement Fund Requirement means $50,000; provided, however, that the Repair and Replacement Fund Requirement will initially be $0 as of the date of delivery of the Bonds and will increase by $1,390 on the first Business Day of each month following the date of delivery of the Bonds until the Repair and Replacement Fund Requirement equals $50,000. Required Payment means any payment, whether at maturity, by acceleration, upon proceeding for redemption or otherwise, including the purchase price of Related Bonds tendered or deemed tendered for purchase pursuant to the terms of a Related Bond Indenture, required to be made by any Member under the Master Indenture, any Related Supplement or any Obligation. Reserve Account means the account by that name in the Revenue Fund established pursuant to the Bond Indenture. Reserve Account 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. Maximum annual Debt Service and average annual Debt Service, for purposes of this definition, will be calculated on the basis of 12-month periods ending on June 1 of any year in which Bonds are Outstanding. Responsible Officer of the Bond Trustee means any person who at the time and from time to time may be designated, by written certificate, as a person authorized to act on behalf of the Bond Trustee. Such certificate will contain the specimen signature of such person(s) and will be signed on behalf of the Bond Trustee by any officer of the Bond Trustee and may designate an alternate or alternates. Retained Rights means the Authority s right to payment of the Administrative Fees and Expenses, any Additional Payments, 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, approval or inspection thereunder or under the Loan Agreement and the obligation of the Borrower to make deposits pursuant to the Tax Certificate. Revenue Fund means the fund by that name established pursuant the Bond Indenture. S&P means S&P Global Ratings, a business unit of Standard & Poor s Financial Services LLC, its successors and assigns, or, if such corporation will be dissolved or liquidated or will no longer perform the functions of a securities rating agency, any other nationally recognized securities rating agency designated by the Borrower. School means, individually or collectively as the context requires, (a) Valor Academy High School, and (b) Stella Middle Charter Academy. Securities Depositories means The Depository Trust Company, 55 Water Street, 50th Floor, New York, New York Attention: Call Notification Department, Fax (212) or to such other addresses and/or such other securities depositories as the Authority may designate to the Bond Trustee in writing. OHSUSA: D-17 C-17

238 Series means, when used with reference to the Bonds, all of the Bonds authenticated and delivered on original issuance and identified pursuant to the Indenture as a separate Series of Bonds, and any Bonds thereafter authenticated and delivered in lieu of or in substitution for such Bonds pursuant to the Indenture, regardless of variations in maturity, interest rate, sinking fund installments or other provisions. Series 2017 Ground Rent Account means and refers to the account by such name established pursuant to the Bond Indenture. Sinking Fund Installment means, with respect to any Term Bonds, each amount so designated for such Term Bonds requiring payments by the Borrower from the Payments to be applied to the retirement of such Bonds on and prior to the stated maturity date thereof. Special Record Date means the date established by the Bond Trustee pursuant to the Bond Indenture as a record date for the payment of defaulted interest on Bonds. Special Redemption Account means the account by that name in the Redemption Fund established pursuant to the Bond Indenture. State means the State of California. State Controller means the Controller of the State. Supplemental Indenture or Indenture supplemental hereto means any indenture hereafter duly authorized and entered into between the Authority and the Bond Trustee in accordance with the provisions of the Bond Indenture. Supplemental MTI for Obligation No. 1 means the Supplemental Master Indenture for Obligation No. 1, dated as of December 1, 2017, between the Obligated Group Members and the Master Trustee named therein, as originally executed and as the same may be amended and supplemented from time to time in accordance with its terms. Tax Certificate and Agreement means, for purposes of the Bond Indenture, the Tax Certificate and Agreement of the Authority and the Borrower dated the date of issuance of the Bonds, as the same may be amended or supplemented in accordance with its terms and, for purposes of the Master Indenture, the Tax Certificate and Agreement which may be delivered by the Governmental Issuer and the Corporation at the time of the issuance and delivery of any Related Bonds, as the same may be amended or supplemented in accordance with its terms, and any other tax certificate and agreement delivered in connection with the issuance of any Related Bonds. Tax-Exempt Bonds means, for purposes of the Bond Indenture, the California School Finance Authority Charter School Revenue Bonds (Bright Star Schools Obligated Group) Series 2017 and, for purposes of the Master Indenture, any Related Bonds interest on which is excluded from gross income for federal income tax purposes under Section 103 of the Code. Term Bonds means Bonds which are payable on or before their specified maturity dates from Mandatory Sinking Account Payments established for that purpose and calculated to retire such Bonds on or before their specified maturity dates. Total Revenues of the Members means the combined operating and non-operating revenues of the Members for any Fiscal Year, all as determined in accordance with generally accepted accounting principles. Underwriter means Stifel, Nicolaus & Company, Incorporated, its successors and assigns. Variable Rate Indebtedness means Indebtedness the interest on which is payable pursuant to a variable interest rate formula or other determination method rather than at a fixed rate of interest per annum to maturity. OHSUSA: D-18 C-18

239 THE MASTER INDENTURE General The Master Indenture authorizes the issuance of Obligations by the Obligated Group Representative. An Obligation is stated in the Master Indenture to be any obligation of the Obligated Group. The following are summaries of certain provisions of the Master Indenture. Other provisions are summarized in this Limited Offering Memorandum under the caption SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Master Indenture. These summaries do not purport to be complete or definitive and are qualified in their entireties by reference to the full terms of the Master Indenture. Authorization, Issuance and Form of Obligations Authorization of Obligations. Each Member authorizes to be issued from time to time Obligations or Series of Obligations, without limitation as to amount, except as provided in the Master Indenture or as may be limited by law, and subject to the terms, conditions and limitations established in the Master Indenture and in any Related Supplement. Authorization for Issuance of Obligations in Series. From time to time when authorized by the Master Indenture and subject to the terms, conditions and limitations established in the Master Indenture, the Obligated Group Representative may authorize the issuance of an Obligation or a Series of Obligations by entering into a Related Supplement. The Obligation or the Obligations of any such Series may be issued and delivered to the Master Trustee for authentication upon compliance with the provisions hereof and of any Related Supplement. Each Related Supplement authorizing the issuance of an Obligation or a Series of Obligations will specify and determine the Principal Amount of such Obligation or Series of Obligations, the purposes for which such Obligation or Series of Obligations are being issued, the form, title, designation, and the manner of numbering or denominations, if applicable, of such Obligations, the date or dates of maturity or other final expiration of the term of such Obligations, the date of issuance of such Obligations, and any other provisions deemed advisable or necessary by the Obligated Group Representative. Appointment of Obligated Group Representative. Each Member, by becoming a Member, irrevocably appoints the Obligated Group Representative as its agent and true and lawful attorney in fact and grants to the Obligated Group Representative full power to execute Related Supplements authorizing the issuance of Obligations or Series of Obligations, and containing covenants and other provisions related thereto, and to execute and deliver Obligations and documents related thereto. Conditions to the Issuance of Obligations. The issuance, authentication and delivery of any Obligation or Series of Obligations will be subject to the following specific conditions: (a) The Obligated Group Representative and the Master Trustee will have entered into a Related Supplement providing for the terms and conditions of such Obligation and the repayment thereof. (b) The Master Trustee will have received an Officer s Certificate to the effect that each Member will be in full compliance with all warranties, covenants and agreements set forth in the Master Indenture and in any Related Supplement. OHSUSA: D-19 C-19

240 (c) The Master Trustee will have received an Officer s Certificate to the effect that neither an Event of Default nor any event which with the passage of time or the giving of notice or both would become an Event of Default has occurred and is then outstanding or would occur upon issuance of such Obligation or is continuing under the Master Indenture or any Related Supplement. (d) The Master Trustee will have received an Officer s Certificate to the effect that all requirements and conditions to the issuance of such Obligations, if any, set forth in the Related Supplement will have been complied with and satisfied. (e) The Master Trustee will have received an Opinion of Counsel to the effect that: (1) such Obligation and Related Supplement have been duly authorized, executed and delivered by the Obligated Group Representative on behalf of the Obligated Group and constitute valid and binding obligations of the Obligated Group, enforceable in accordance with their terms; and (2) such Obligation is not subject to registration under the Securities Act of 1933, as, amended, and such Related Supplement is not subject to registration under the Trust Indenture Act of 1939, as amended (or that such registration, if required has occurred); (f) If such Obligation constitutes Indebtedness, the requirements of the section of the Master Indenture relating to the incurrence of Additional Indebtedness will have been satisfied. Particular Covenants of Each Member and the Borrower Payment of Required Payments. Each Member jointly and severally covenants and agrees (a) to pay or cause to be paid promptly all Required Payments at the place, on the dates and in the manner provided in the Master Indenture, in any Related Supplement and in said Obligations and (b) to faithfully observe and perform all of the conditions, covenants and requirements of the Master Indenture, any Related Supplement and any Obligation. Each Member acknowledges and agrees that the time of such payment and performance is of the essence of the obligations under the Master Indenture. The obligation of each Member with respect to Required Payments will not be abrogated, prejudiced or affected by: (i) the granting of any extension, waiver or other concession given to any Member by the Master Trustee or any Holder or by any compromise, release, abandonment, variation, relinquishment or renewal of any of the rights of the Master Trustee or any Holder or anything done or omitted or neglected to be done by the Master Trustee or any Holder in exercise of the authority, power and discretion vested in them by the Master Indenture, or by any other dealing or thing which, but for this provision, might operate to abrogate, prejudice or affect such obligation; (ii) the liability of any Member under the Master Indenture ceasing for any cause whatsoever, including the release of any Member pursuant to the provisions of the Master Indenture or any Related Supplement from membership in the Obligated Group; or (iii) any Member s becoming incompetent or otherwise failing to become liable as, or losing eligibility to become, a Member with respect to an Obligation. Subject to the provisions of the Master Indenture permitting withdrawal from the Obligated Group, the obligation of each Member to make Required Payments is a continuing one and is to remain in effect until all Required Payments have been paid in full in accordance with the Master Indenture. All moneys from time to time received by the Obligated Group Representative or the Master Trustee to reduce liability on Obligations, whether from or on account of the Members or otherwise, will be regarded as payments in gross without any right on the part of any one or more of the Members to claim the benefit of any moneys so received until the whole of the amounts owing on Obligations has been paid or satisfied and so that in the event of any such Member s filing bankruptcy, the OHSUSA: D-20 C-20

241 Obligated Group Representative or the Master Trustee will be entitled to prove up the total indebtedness or other liability on Obligations Outstanding as to which the liability of such Member has become fixed. Each such Obligation will be a primary obligation and will not be treated as ancillary to or collateral with any other obligation and will be independent of any other security so that the covenants and agreements of each Member under the Master Indenture will be enforceable without first having recourse to any such security or source of payment and without first taking any steps or proceedings against any other Person. The Obligated Group Representative and the Master Trustee are each empowered to enforce each covenant and agreement, and to enforce the making of Required Payments. Each Member authorizes the Obligated Group Representative and the Master Trustee to enforce or refrain from enforcing any covenant and agreement of the Members under the Master Indenture and to make any arrangement or compromise with any particular Member or Members as the Obligated Group Representative or the Master Trustee may deem appropriate, consistent with the Master Indenture and any Related Supplement. Each Member waives in favor of the Obligated Group Representative and the Master Trustee all rights against the Obligated Group Representative, the Master Trustee and any other Member, insofar as is necessary to give effect to any of the provisions of the Master Indenture. The Master Trustee hereby covenants that it will not take recourse against the Borrower, the Obligated Group Representative or any of the Members with respect to the failure by the Borrower, the Obligated Group Representative or any of the Members to make any Required Payment under the Master Indenture and any Related Supplement except recourse to the Gross Revenues and the amounts held in the funds and accounts created under the Related Bond Indenture (except the Rebate Fund) or hereunder, or to such other security as may from time to time be given for the payment of obligations arising out of this Master Indenture, any Related Supplement or any other agreement securing the obligations of the Borrower or any of the Members with respect to the Related Bonds. Covenants as to Maintenance of Property, Plant and Equipment. Each Member covenants and agrees to: (i) pay and discharge, or cause to be paid pursuant to the Master Indenture, any Ground Rent when and as the same becomes due and payable; (ii) maintain its Property, Plant and Equipment in accordance with all valid and applicable governmental laws, ordinances, approvals and regulations including, without limitation, such zoning, sanitary, pollution and safety ordinances and laws and such rules and regulations thereunder as may be binding upon it; provided, however, that no Member will be required to comply with any law, ordinance, approval or regulation as long as it will in good faith contest the validity thereof; (iii) maintain and operate its Property, Plant and Equipment in good repair, working order and condition, and from time to time make or cause to be made all needful and proper replacements, repairs, renewals and improvements so that the operations of the Members will not be materially impaired; (iv) pay and discharge all applicable taxes, assessments, governmental charges of any kind whatsoever, water rates, meter charges and other utility charges which may be or have been assessed or which may have become liens upon the Property, Plant and Equipment, and make such payments or cause such payments to be made in due time to prevent any delinquency thereon or any forfeiture or sale of the Property, Plant and Equipment or any part thereof, and, upon request, furnish to the Master Trustee receipts for all such payments, or other evidences satisfactory to the Master Trustee; provided, however, that no Member will be required to pay any tax, assessment, rate or charge as provided in the Master Indenture as long as it will in good faith contest the validity thereof or applied for property tax exemption and will have set aside reserves with respect thereto that, in the opinion of the Obligated Group Representative, are adequate or will have entered into an agreement with the applicable taxing authority for the payment of such taxes in installments and any such Member remains in compliance with such agreement; OHSUSA: D-21 C-21

242 (v) at all times comply with all terms, covenants and provisions of any Liens at such time existing upon its Properties or any part thereof or securing any of its Indebtedness noncompliance with which would have a material adverse effect on the operations of the Members or their Properties; and (vi) use its best efforts (as long as it is in its best interests and will not materially adversely affect the interests of the Holders) to maintain all permits, licenses and other governmental approvals necessary for the operation of its Properties; and (vii) use reasonable efforts to maintain any available exemption from ad valorem taxation available for any real estate owned by it. Nothing in the Master Indenture will be construed to require a Member to maintain any permit, license or other governmental approval, or to continue to operate or maintain any Property, Plant or Equipment, if, in the reasonable good faith judgment of the Member, such permit, license, governmental approval or Property, Plant or Equipment is, or within the next succeeding 24 calendar months is reasonably expected to become, inadequate, obsolete, unsuitable, undesirable or unnecessary for the business of the Members and failure to maintain or operate such permit, license, governmental approval, Property, Plant or Equipment will not materially adversely impair the operation of the Members. Insurance. Each Member covenants and agrees that it will keep (or cause to be kept) insurance (including builder s allrisk insurance during any period of construction at a Facility) against loss or damage to any structure constituting any part of the Facilities by fire and lightning, with extended coverage and vandalism and malicious mischief insurance. Said extended coverage insurance will, as nearly as practicable, cover loss or damage by explosion, windstorm, riot, aircraft, vehicle damage, smoke and such other hazards as are normally covered by such insurance. All insurance provided pursuant to the Master Indenture will be in an amount equal to the lesser of (i) one hundred percent (100%) of the replacement cost (without deduction for depreciation) of all buildings, structures and fixtures constituting any part of the Facilities owned by such Member, or (ii) the principal amount of the Related Bonds then outstanding under any Related Bond Indenture, and will be subject to a deductible not to exceed $100,000 per occurrence. Each Member covenants and agrees to procure and maintain (or caused to be procured or maintained), throughout the term of any Related Bond Indenture, business interruption insurance to cover loss, total or partial, of the use of any structures constituting any part of the Facilities as the result of any of the hazards covered by the insurance described above, in an amount sufficient to pay the Required Payments for a period of at least 12 months. Proceeds of such insurance in the amount of at least 12 months of Required Payments will be deposited into the Insurance and Condemnation Proceeds Fund described under this heading and applied to the payment of the Required Payments, in installments as the proceeds are paid to each Member. Each Member covenants and agrees that it will maintain (or cause to be maintained) (i) general liability insurance of not less than $1,000,000 per occurrence and $2,000,000 aggregate and (ii) worker s compensation insurance as required by the laws of the State. An Insurance Consultant will review the insurance requirements of each Member with respect to the Facilities from time to time (but not less frequently than once every five years). If such review indicates that any Member should increase any of the coverages described under this heading, each Member will review such recommendation with the governing body of each Member and will increase such coverage; provided, however, that such coverage is available from reputable insurance companies at a reasonable cost on the open market. Each Member covenants that it will use its best efforts to apply for any grants, loans or other relief available from each state government, as applicable, or the federal government to obtain amounts necessary to rebuild any portion of the Facilities destroyed or damaged in connection with an uninsured or underinsured calamity causing destruction or damage; provided, however, that each Member will not be required to accept such amounts if doing so would jeopardize the integrity of each Member s programs. OHSUSA: D-22 C-22

243 The insurance policies described under the Master Indenture will be carried by insurance companies which are financially responsible and capable of fulfilling the requirements of such policies. All such policies (except liability policies) will name each applicable Member and the Master Trustee as loss payees or additional insureds as their interest may appear, as applicable. Each policy will be in such form and contain such provisions as are generally considered standard for the type of insurance involved and will contain a provision to the effect that the insurer will not cancel or substantially modify the policy provisions without first giving at least 30 days written notice thereof to the Obligated Group Representative, the Governmental Issuer, the Related Bond Trustee and the Master Trustee. In lieu of separate policies, the Members may maintain blanket policies which cover any one or more risks required to be insured against so long as the minimum coverages required under this heading are met. All proceeds of the insurance carried pursuant to the Master Indenture (except proceeds of the liability portion, if any, of such insurance), and proceeds of any condemnation awards with respect to any individual Facility, in each case, in excess of 10% of the Book Value of such Facility will be paid immediately upon receipt by the Members or other named insured parties to the Master Trustee for deposit in the Insurance and Condemnation Proceeds Fund. In the event that the proceeds of any loss or damage to or condemnation of the Facilities will be less than 10% of the Book Value of the Facilities, each Member may retain such proceeds without any formality whatsoever. In the event any of the Members elects to repair or replace the Facilities damaged, destroyed or taken, moneys in the Insurance and Condemnation Proceeds Fund will be disbursed by the Master Trustee after deducting therefrom the reasonable charges and expenses of the Master Trustee in connection with the collection and disbursement of such moneys, for the purpose of repairing or replacing the Facilities damaged, destroyed or taken in the manner and subject to the conditions set forth under this heading with respect to disbursements from the Insurance and Condemnation Proceeds Fund; provided, that unless the Master Trustee receives written notice that after repair and replacement the Facilities will continue to be used for the purposes for which they were constructed or acquired by the Member, no such disbursement will be made prior to receipt by the Master Trustee of the written consent of the Governmental Issuer. If any of the Members will elect not to, or cannot, repair or replace the Facilities damaged, destroyed or taken, as provided in the paragraph above, subject to the paragraph below, the Master Trustee will transfer all amounts in the Insurance and Condemnation Proceeds Fund on account of such damage, destruction or condemnation to the Related Bond Trustee for deposit in the applicable redemption account under the Related Bond Indenture. If all of the amounts deposited in the Insurance and Condemnation Proceeds Fund as described above exceed 10% of the Book Value of the applicable Facility, but are not sufficient to retire all Related Bonds, or an allocable portion thereof, then outstanding with respect to each Facility, the Master Trustee will not transfer said amounts to the applicable redemption account under the Related Bond Indenture unless the Obligated Group Representative will file with the Master Trustee a report of an Independent Consultant showing that Gross Revenues are projected to be at least equal to the Debt Service Requirement on all Related Bonds and Ground Rent obligations of the Members, or an allocable portion thereof in accordance with the terms of the Related Bond Indenture, for each of the three full Fiscal Years immediately following such transfer after giving effect to the retirement of such Related Bonds. In the event such report of an Independent Consultant shows that projected Gross Revenues will not be sufficient to pay the Debt Service Requirement on all such Related Bonds and any Ground Rent obligations of the Members for each of the three full Fiscal Years immediately following such transfer after giving effect to the retirement of such Related Bonds, the Members will apply all amounts in the Insurance and Condemnation Proceeds Fund to the repair or replacement of the Facilities damaged, destroyed or taken, as described above, unless the Obligated Group Representative will file a further report of an Independent Consultant showing that even after making such repair and replacement, Gross Revenues are not projected to be at least equal to 1.10 times the Debt Service Requirement on all Related Bonds and Ground Rent obligations of the Members, or an allocable portion thereof, for each of the full three Fiscal Years immediately following the completion of such repair and replacement, in which event the Master Trustee will transfer all moneys in the Insurance and Condemnation Proceeds Fund as described under this heading. The Master Trustee will establish, maintain and hold in trust a separate fund designated as the Insurance and Condemnation Proceeds Fund, and administer said fund as described under this heading. OHSUSA: D-23 C-23

244 Before any payment from the Insurance and Condemnation Proceeds Fund will be made, the Obligated Group Representative will file or cause to be filed with the Master Trustee a Request of the Obligated Group Representative stating: (1) the item number of such payment; (2) the name of the Person to whom each such payment is due, which may be the Obligated Group Representative in the case of reimbursement for costs of such repair or replacement theretofore paid by the Obligated Group Representative; (3) the respective amounts to be paid; (4) the purpose by general classification for which each obligation to be paid was incurred; (5) that obligations in the stated amounts have been incurred by the Obligated Group Representative and are presently due and payable and that each item thereof is a proper charge against the Insurance and Condemnation Proceeds Fund and has not been previously paid from the Insurance and Condemnation Proceeds Fund; and (6) that there has not been filed with or served upon the Obligated Group Representative any notice of claim of lien, or attachment upon, or claim affecting the right to receive payment of, any of the amounts payable to any of the persons named in such Request, for which adequate security for the payment of such obligation has been posted, or which has not been released or will not be released simultaneously with the payment of such obligation, other than materialmen s or mechanics liens accruing by mere operation of law. Within 5 Business Days of receipt of a Request, the Master Trustee will pay the amount set forth in such Request as directed by the terms thereof out of the Insurance and Condemnation Proceeds Fund. The Master Trustee may conclusively rely upon such Request and will have no responsibility or duty to investigate any of the matters set forth therein. The Master Trustee will not make any such payment if it has received any written notice of claim of lien, attachment upon, or claim affecting the right to receive payment of, any of the moneys to be so paid, that has not been released or will not be released simultaneously with such payment, unless adequate security for the payment of such obligation has been posted. When the repair or replacement of damaged, destroyed or taken property will have been completed, the Obligated Group Representative will deliver to the Master Trustee a Certificate of the Obligated Group Representative stating the fact and date of such completion and stating that all of the costs thereof have been determined and paid (or that all of such costs have been paid less specified claims that are subject to dispute and for which a retention in the Insurance and Condemnation Proceeds Fund is to be maintained in the full amount of such claims until such dispute is resolved). Mortgages; Against Encumbrances. To secure the payment of Required Payments and the performance of the other obligations of the Members under the Master Indenture, each Member grants to the Master Trustee, for the benefit of the Holders of the Obligations, a security interest in the Property, Plant and Equipment of such Member. Each Member covenants and agrees to cause to be filed Uniform Commercial Code financing statements in form and substance satisfactory to the Master Trustee, and to execute and deliver such other documents as the Master Trustee may reasonably require in order to perfect or maintain as perfected such security interest, or give public notice thereof. In furtherance of the foregoing requirement, the Master Trustee covenants and agrees to cause to be filed appropriate continuation statements during the period 90 days preceding each fifth anniversary of the initial delivery of the Master Indenture unless the Obligated Group Representative provides to the Master Trustee, no later than the fifth day next preceding each such fifth anniversary, an Opinion of Counsel to the effect that no continuation statements need be filed in order to maintain the perfection of such security interest until the next succeeding fifth anniversary of the initial delivery of the Master Indenture. Unless project funds allocated to the financing of such facility are escrowed until the filing of a Mortgage, each Member will enter into a mortgage, deed of trust, security agreement, assignment of rents and leases and/or financing statement described in clause (1) of the definition of Mortgages contained in the Master Indenture for each Facility to secure the obligations of the Members under the Master Indenture. Each Member, respectively, agrees to supplement such deed of trust or mortgage or to execute and deliver such other deeds of trust or mortgages as may be necessary from time to grant to the Master Trustee a first priority Lien on any Property, Plant and Equipment of the Member. Except as provided in the immediately preceding paragraph, each Member, respectively, covenants and agrees that it will not create, assume or suffer to exist any Lien upon the Property of the Obligated Group; provided that the following Liens are permitted: (i) a Lien that is subordinate to the Obligations or (ii) a Permitted Lien. OHSUSA: D-24 C-24

245 Notwithstanding the foregoing, each Member, respectively, further covenants and agrees that if such a Lien is created or assumed by any Member, it will make or cause to be made effective a provision whereby all Obligations will be secured prior to any such Indebtedness or other obligation secured by such Lien; provided, however, that notwithstanding the provisions of the Master Indenture, each Member may create, assume or suffer to exist Permitted Liens. Each Member agrees to obtain, or to cause to be obtained, at its own cost and expense, ALTA policies of lender s title insurance on its respective Facilities, in an aggregate amount not less than the aggregate principal amount of the Related Bonds, naming and payable to the Master Trustee, insuring the leasehold or fee title interests, as applicable, of the respective Members to the Facilities, subject only to Permitted Liens, issued by a title insurance company qualified to do business in the State. Upon written request of the Obligated Group Representative, the Master Trustee will execute and deliver such releases, subordinations, requests for reconveyance or other instruments as may be reasonably requested by the Obligated Group Representative in connection with (1) the disposition of Property, Plant and Equipment in accordance with the provisions of the Master Indenture hereof, (2) the withdrawal of a Member pursuant to the Master Indenture, (3) the granting by a Member of any Lien which constitutes a Permitted Lien hereunder, or (4) payment or redemption of Related Bonds. Limitations on Indebtedness. Each Member further covenants and agrees that it will not incur any Additional Indebtedness except as permitted by the Master Indenture as described in SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Master Indenture Limitations on Indebtedness of the Members of the Obligated Group. Amendment of Leases. There will be no amendment, modification or termination of any of the Leases except as permitted by the Master Indenture as described in SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Master Indenture Amendment of Leases. Rates and Charges; Debt Coverage. Each Member covenants and agrees to fix, charge and collect, or cause to be fixed, charged and collected, rental rates, fees and charges for the use of its Facilities and for the services furnished or to be furnished by the Members so that the Debt Service Coverage Ratio of the Obligated Group as a whole at the end of each Fiscal Year is not less than 1.0:1.0. If the Debt Service Coverage Ratio of the Obligated Group falls below 1.0:1.0, it will constitute an Event of Default under the Master Indenture. Each Member further covenants and agrees that each related Lease will contain such provisions as described in SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Master Indenture Additional Leases Governed by the Master Indenture. Sale, Lease or Other Disposition of Property. Each Member covenants and agrees that it will not, in any Fiscal Year, sell, lease (but only a lease that results in the disposition of the Property) or otherwise dispose of any Property, the Book Value of which would cause the aggregate Book Value of Property so transferred in such year to exceed 5% of the Book Value of the Property of the Members (excluding any asset restricted as to use for a particular purpose inconsistent with its use for the payment of principal of, prepayment premium, and interest on Indebtedness or the payment of operating expenses), except for dispositions of assets: (a) (b) In the ordinary course of Business; Any lease (including the Leases) that does not result in the disposition of the Property; OHSUSA: D-25 C-25

246 (c) In connection with a true sale and leaseback under the Code; (d) If prior to the sale, lease or other disposition there is delivered to the Master Trustee an Officer s Certificate stating that such Property has, or within the next succeeding 24 calendar months is reasonably expected to become, inadequate, obsolete, worn out, unsuitable, unprofitable, undesirable or unnecessary and the sale, lease, removal or other disposition thereof will not impair the operations of the Members; (e) To any Person provided that such Property is transferred for fair market value and the net proceeds of such sale or other disposition are applied either (1) to the purchase of replacement Property of substantially similar function and substantially equivalent value (provided that such replacement Property is made part of the security for the Obligations issued under the Master Indenture) or (2) to the payment of redemption price of Related Bonds in a principal amount set forth in the Related Bond Indenture. Before any transfer of Property described in this subsection, the Obligated Group Representative will furnish to the Master Trustee (i) an Officer s Certificate stating that no Event of Default has occurred and is continuing and stating the amount of the net proceeds, if any, of such sale or other disposition, and (accompanied by the report of an Independent Consultant or an Accountant or an Officer s Certificate as appropriate) to the effect that (taking into account the disposition of the Property released) the requirements described above under Limitations on Additional Indebtedness will be satisfied with respect to the incurrence of one dollar ($1) of additional Long-Term Indebtedness, and (ii) an independent appraisal (which will be conducted by an independent appraiser) of the Property so sold or disposed of, showing such Property is to be sold or disposed of at a price equal to its fair market value; or (f) to another Member. In addition to the foregoing limitations, the Members may not sell, lease or otherwise dispose of any Property subject to the Mortgages (the Mortgaged Property ) unless the Master Trustee will be furnished with an Officer s Certificate to the effect that (i) the security of the Mortgage and the ability of the trustee thereunder to foreclose upon the remaining adjoining Mortgaged Property will not be impaired as a result of the disposition of such Property, and (ii) the appropriate Member will have conveyed to the trustee under such Mortgage such rightsof- way, easements and other rights in land as are required for ingress to and egress from the remaining Mortgaged Property, for the utilization of the facilities located thereon and for utilities required to serve such facilities. Consolidation, Merger, Sale or Conveyance. Each Member covenants and agrees that it will not merge or consolidate with any other corporation, entity, or limited liability company not a Member or sell or convey all or substantially all of its assets to any Person not a Member unless: (i) After giving effect to the merger, consolidation, sale or conveyance, the successor or surviving corporation or limited liability company (hereinafter, the Surviving Corporation ) will be the Member, or, if not, the Surviving Corporation will be a corporation or limited liability company organized and existing under the laws of the United States of America or a State thereof and such Surviving Corporation will become a Member pursuant to the Master Indenture and will expressly assume in writing the due and punctual payment of all Required Payments of the disappearing corporation under the Master Indenture, according to their tenor, and the due and punctual performance and observance of all of the covenants and conditions of the Master Indenture and all Obligations issued under the Master Indenture by the execution of a Related Supplement, delivered to the Master Trustee by such Surviving Corporation; (ii) The Master Trustee will have received (i) an Independent Consultant s report that the forecast debt service coverage ratios of the Surviving Corporation, calculated in the same manner as the Debt Service Coverage Ratio, for the two Fiscal Years immediately succeeding the proposed date of such merger, consolidation, sale or conveyance is expected to be greater than the forecast Debt Service Coverage Ratio for such periods had the consolidation or merger not occurred; or (ii) an Independent Consultant s or Accountant s report, or an Officer s Certificate, as appropriate, to the effect that the condition described in the Limitations on Long-Term Indebtedness section of the Master Indenture would be met for the incurrence of one dollar of additional Long-Term Indebtedness; OHSUSA: D-26 C-26

247 (iii) The Master Trustee will have received a report of an Accountant to the effect that the combined net assets of the Members, including the net assets of such Surviving Corporation, calculated as of the end of the most recent Fiscal Year for which Obligated Group Financial Statements are available, will not be less than 90% of the combined net assets of the Members at the end of the most recent Fiscal Year for which Obligated Group Financial Statements are available; (iv) The Master Trustee will have received an Opinion of Bond Counsel to the effect that, such merger, consolidation, sale or other transfer will not in and of itself result in interest on any Related Bond that purports to be a Tax-Exempt Bond becoming includable in gross income for purposes of federal income taxation; and (v) The Master Trustee will have received a duly executed and delivered Mortgage encumbering the Property, Plant and Equipment of the Surviving Corporation, for the benefit of the Master Trustee, subject only to Permitted Liens. Preparation and Filing of Financial Statements, Reports and Other Information. Each Member covenants and agrees that it will keep adequate records and books of accounts in which complete and correct entries will be made (said books will be subject to the inspection of the Master Trustee during regular business hours after reasonable notice). The Obligated Group Representative covenants and agrees that it will furnish to the Master Trustee and any Related Bond Issuer that will request the same in writing: As soon as practicable, but in no event more than 180 days after the last day of each Fiscal Year, one or more financial statements which, in the aggregate, will include all of the Members. Such financial statements: (a) may consist of (i) consolidated or combined financial results including one or more subsidiaries of such Members required to be consolidated or combined with such Member(s) under generally accepted accounting principles or (ii) special purpose financial statements including only Members; (b) will be audited by a firm of independent certified public accountants approved by the Obligated Group Representative as having been prepared in accordance with generally accepted accounting principles (except, if applicable, for required consolidations); (c) will include a combined balance sheet, statement of operations and changes in net assets; and (d) if more than one financial statement is delivered to the Master Trustee pursuant to this clause, each such financial statement will contain, as other financial information, a combining or consolidating schedule from which financial information solely relating to the Members may be derived. Unless a single financial statement (including a single special purpose financial statement) is delivered pursuant to the paragraph above for the entire Obligated Group, as soon as practicable, but in no event more than six months after the last day of each Fiscal Year, an unaudited balance sheet, statement of operations and changes in net assets for such Fiscal Year for the Members (such balance sheet, statement of operations and changes in net assets being referred to in the Master Indenture as the Obligated Group Financial Statements ), prepared by the Obligated Group Representative based on the accompanying unaudited combining or consolidating schedules delivered with the audited financial statement described in the paragraph above. At the time of the delivery of the Obligated Group Financial Statements, a certificate of the chief financial officer of the Obligated Group Representative, stating that the Obligated Group Representative has made a review of the activities of the Members during the preceding Fiscal Year for the purpose of determining whether or not the Members have complied with all of the terms, provisions and conditions of the Master Indenture and that each Member has kept, observed, performed and fulfilled each and every covenant, provision and condition of the Master Indenture on its part to be performed and none of such Members is in default in the performance or observance of OHSUSA: D-27 C-27

248 any of the terms, covenants, provisions or conditions, or if any Member will be in default, such certificate will specify all such defaults, and the nature thereof. Membership in Obligated Group. Additional Members may be added to the Obligated Group from time to time as more particularly described SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Master Indenture Membership in Obligated Group in the forepart of this Limited Offering Memorandum. Withdrawal from Obligated Group. Any Member may withdraw from the Obligated Group, and be released from further liability or obligation under the provisions of the Master Indenture, as more particularly described under SECURITY AND SOURCES OF PAYMENT FOR THE BONDS The Master Indenture Withdrawal From Obligated Group in the forepart of this Limited Offering Memorandum. Inspection of Books. The Governmental Issuer, the Master Trustee, and the Related Bond Trustee will have the right, but not obligation, upon reasonable notice, during business hours, to examine and audit any and all of the Member s records or accounts pertaining to the Obligation, the Required Payment, the Gross Revenues, the Related Bond Indenture, the Loan Agreement, the Related Supplement and the Master Indenture. Upon written notice to the Obligated Group Representative delivered at least five Business Days in advance of an inquiry, the Members will make its management personnel available for periodic inquiries from the Governmental Issuer; provided that the Members will not be obligated to incur any material out-of-pocket costs in connection with such meetings or inquiries. Reports and Information. At the request of the Governmental Issuer, the Master Trustee, the Related Bond Trustee, their agents, employees or attorneys, the Members will furnish to the Governmental Issuer, the Master Trustee and the Related Bond Trustee, such information as may be reasonably requested in writing from time to time relative to compliance by the Members with the provisions of the Master Indenture, including, without limitation, financial statements. Notice. Upon obtaining knowledge of an event of default under any Member Document, the Obligated Group Representative agrees to provide to the Governmental Issuer, the Master Trustee and the Related Bond Trustee notice of such Event of Default (such notice to include a description of the nature of such event and what steps are being taken to remedy such Event of Default). Tax Covenants It is the intention of the Governmental Issuer and each Member that interest on any Tax-Exempt Bonds will be and remain excluded from the gross income of the owners thereof for federal income tax purposes, and to that end the covenants and agreements of the Members in the Master Indenture and in the Tax Certificate are for the benefit of the Related Bond Trustee on behalf of and for each and every owner of Tax-Exempt Bonds. Each Member covenants and agrees that it will not use or permit the use of any of the funds provided by the Governmental Issuer under the loan agreement relating to the Tax-Exempt Bonds or any other funds of the Members, directly or indirectly, or direct the Related Bond Trustee to invest any funds held by it under the Related Bond Indenture, in such manner as would, or enter into, or allow any related person (as defined in Section 147(a)(2) of the Code) to enter into, any arrangement, formal or informal, for the purchase of the Tax- Exempt Bonds that would, or take or omit to take any other action that would cause any Tax-Exempt Bond to be an arbitrage bond within the meaning of Section 148 of the Code or federally guaranteed within the meaning of Section 149(b) of the Code and applicable regulations promulgated from time to time thereunder. In the event that at any time the Obligated Group Representative is of the opinion or becomes otherwise aware that for purposes of the Master Indenture it is necessary to restrict or to limit the yield on the investment of OHSUSA: D-28 C-28

249 any moneys held by the Related Bond Trustee under the Related Bond Indenture, the Obligated Group Representative will determine the limitations and so instruct the Related Bond Trustee in writing and cause the Related Bond Trustee to comply with those limitations under the Related Bond Indenture. The Obligated Group Representative will take such action or actions as may be reasonably necessary in the opinion of Bond Counsel, or of which it otherwise becomes aware, to comply fully with Section 148 of the Code. The Members will not, pursuant to an arrangement, formal or informal, purchase Related Bonds in an amount related to the amount of the related loan, except as otherwise permitted under the Related Bond Indenture. In order to maintain the exclusion of interest on the Tax-Exempt Bonds from the gross income of the owners thereof for federal income purposes, the Obligated Group Representative agrees that it will, concurrently with or before the execution and delivery of any Tax-Exempt Bonds, execute and deliver the Tax Certificate, and will comply with every term of the Tax Certificate. The Obligated Group Representative covenants with the Governmental Issuer, for and on behalf of the Owners of any Tax-Exempt Bonds from time to time outstanding, that so long as any Tax-Exempt Bonds remain outstanding under the Related Bond Indenture, moneys on deposit in any fund, or account in connection with the Tax-Exempt Bonds, whether or not such moneys were derived from the proceeds of the sale of the Tax-Exempt Bonds or from any other sources, and moneys pledged directly or indirectly to the payment or for the securing of the Tax-Exempt Bonds, will not be used by or for the Obligated Group Representative in a manner that will cause the Tax-Exempt Bonds to be arbitrage bonds within the meaning of Section 148 of the Code. The Obligated Group Representative expressly recognizes that, to the extent required by Section 148 of the Code, proceeds of the Tax-Exempt Bonds (including investment proceeds and replacement proceeds) may be required to be invested at a yield not exceeding the yield on the Tax-Exempt Bonds in order to comply with the Master Indenture. In furtherance of the covenant in the Master Indenture, the Obligated Group Representative agrees that it will not direct any investments or reinvestments that would contravene either the investment representations made by the Governmental Issuer in the Tax Certificate or any investment directions provided by the Governmental Issuer and deemed reasonably necessary in the opinion of Bond Counsel to preserve the exclusion from gross income of interest on the Tax-Exempt Bonds for federal income tax purposes. Continuing Disclosure. The Obligated Group Representative covenants and agrees that it will comply with and carry out all of the provisions of the Continuing Disclosure Agreement related to the Obligated Group Representative. Notwithstanding any other provision of the Master Indenture or the Related Indenture, failure of the Obligated Group Representative or the Dissemination Agent to comply with the Continuing Disclosure Agreement related to the Obligated Group Representative will not be considered an Event of Default under the Master Indenture or under the Related Indenture or under the Loan Agreement. Additional Covenants. Each Member of the Obligated Group hereby covenants with respect to their combined operations: (a) (b) (c) (d) (e) (f) To maintain books and records separate from any other unrelated person or entity; To maintain its accounts separate from any other unrelated person or entity; Not to commingle assets with those of any other entity; To conduct its own business in its own name; To pay its own liabilities out of its own funds; To observe all corporate formalities; (g) To pay the salaries of its own employees and maintain a sufficient number of employees in light of its contemplated business operations; (h) Not to guarantee or become obligated for the debts of any other entity or hold out its credit as being available to satisfy the obligations of others, except to the extent permitted under the Master Indenture; OHSUSA: D-29 C-29

250 (i) (j) (k) Not to acquire obligations or securities of its partners, members, or shareholders; To allocate fairly and reasonably any overhead for shared office space; To use separate stationery, invoices, and checks; (l) Except as otherwise expressly permitted under the Master Indenture, not to pledge its assets for the benefit of any other entity or make any loans or advances to any entity; (m) (n) (o) To hold itself out as a separate entity; To correct any known misunderstanding regarding its separate identity; and To maintain adequate capital in light of its contemplated business operations. Defaults Events of Default. Indenture: Any of the following events constitute an Event of Default under the Master (a) Failure on the part of the Obligated Group to make due and punctual payment of any Required Payment on an Obligation. (b) Failure on the part of the Obligated Group to observe and perform any covenant or agreement under the Master Indenture including covenants or agreements contained in any Related Supplement or Obligation (other than failure by the Obligated Group to pay Required Payment on an Obligation, as referred to in (a) above) after the Obligated Group Representative and the Obligated Group will have been given 60 days written notice specifying such default and requesting it be remedied, unless the Master Trustee will have consented to an extension beyond such 60 day period, which extension will not exceed 90 days; provided that the Obligated Group will have commenced cure and be diligently pursuing cure thereof in good faith. (c) Any Member will default in the payment of Indebtedness for borrowed moneys (other than Nonrecourse Indebtedness or an Obligation) with an aggregate principal amount exceeding 5% of the Total Revenues of the Members, whether such Indebtedness now exists or will hereafter be created, and such default will have continued for a period of sixty (60) days after written notice thereof, specifying such default and requiring the same to be remedied, will have been given to such Member, except that, in each case, (i) if such failure can be remedied but not within such 60-day period, such failure will not become an Event of Default for so long as such Member will diligently proceed to remedy the same in accordance and subject to any directions or limitations of time established by the Master Trustee and (ii) if any member in good faith commences proceedings to contest the existence or payment of such Indebtedness, such default will not become an Event of Default. (d) A court having jurisdiction will enter a decree or order for relief in respect of any Member in an involuntary case under any applicable federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of any Member or for any substantial part of the property of any Member, or ordering the winding up or liquidation of its affairs, and such decree or order will remain unstayed and in effect for a period of 60 consecutive days. (e) Any Member will commence a voluntary case under any applicable federal or state bankruptcy, insolvency or other similar law now or hereafter in effect, or will consent to the entry of an order for relief in an involuntary case under any such law, or will consent to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or similar official) of any Member or for any substantial part of its property, or will make any general assignment for the benefit of creditors, or will fail generally to pay its debts as they become due or will take any corporate action in furtherance of the foregoing. OHSUSA: D-30 C-30

251 (f) An Event of Default (as defined in any Related Bond Indenture) will exist under any Related Bond Indenture and any applicable notice and/or cure period will have expired. (g) An Event of Default (as defined in any Related Bond Indenture) will occur under any security instrument provided to the Master Trustee from, on behalf, or for the benefit, of any Member of the Obligated Group (including, if applicable, the expiration of any grace period provided therein). Acceleration; Annulment of Acceleration. Upon the occurrence and during the continuation of an Event of Default under the Master Indenture, the Master Trustee may and, upon (i) the written request of the Holders of at least half in aggregate Principal Amount of Outstanding Obligations or of any Holder if an Event of Default regarding failure to make punctual payments has occurred or (ii) the acceleration of any Obligation pursuant to the terms of the Related Supplement under which such Obligation was issued, will, by notice to the Members, declare all Outstanding Obligations immediately due and payable, whereupon such Obligations will become and be immediately due and payable, anything in the Obligations or in the Master Indenture to the contrary notwithstanding; provided, however, that if the terms of any Related Supplement give a person the right to consent to acceleration of the Obligations issued pursuant to such Related Supplement, the Obligations issued pursuant to such Related Supplement may not be accelerated by the Master Trustee unless such consent is properly obtained pursuant to the terms of such Related Supplement. In such event, there will be due and payable on the Obligations an amount equal to the aggregate Principal Amount of all such Obligations, plus all interest accrued thereon. At any time after the principal of the Obligations will have been so declared to be due and payable and before the entry of final judgment or decree in any suit, action or proceeding instituted on account of such default, if (i) the Obligated Group has paid or caused to be paid or deposited with the Master Trustee moneys sufficient to pay all matured installments of interest and interest on installments of principal and interest and principal or redemption prices and other payments then due (other than the principal or other payments then due only because of such declaration) on all Outstanding Obligations, (ii) the Obligated Group has paid or caused to be paid or deposited with the Master Trustee moneys sufficient to pay the charges, compensation, expenses, disbursements, advances and liabilities of the Master Trustee and any paying agents, (iii) all other amounts then payable by the Obligated Group under the Master Indenture will have been paid or a sum sufficient to pay the same will have been deposited with the Master Trustee, and (iv) every Event of Default (other than a default in the payment of the principal or other payments of such Obligations then due only because of such declaration) will have been remedied, then the Master Trustee may annul such declaration and its consequences with respect to any Obligations or portions thereof not then due by their terms. No such annulment will extend to or affect any subsequent Event of Default or impair any right consequent thereon. Additional Remedies and Enforcement of Remedies. Upon the occurrence and continuance of any Event of Default, the Master Trustee may, and upon the request of (i) the Holders of at least half in aggregate Principal Amount of the Obligations Outstanding, (ii) any Holder which, pursuant to a Related Supplement, is given the right to require the Master Trustee to institute actions pursuant to the Master Indenture, or (iii) any Holder if an Event of Default for failure to make due and punctual payments has occurred, will upon the indemnification of the Master Trustee to its satisfaction therefor, proceed forthwith to protect and enforce its rights and the rights of the Holders under the Master Indenture by such suits, actions or proceedings as the Master Trustee, being advised by counsel, will deem expedient, including but not limited to: (i) enforcement of the right of the Holders to collect and enforce the payment of amounts due or becoming due under the Obligations; (ii) suit upon all or any part of the Obligations; (iii) civil action to require any Person holding moneys, documents or other property pledged to secure payment of amounts due or to become due on the Obligations to account as if it were the trustee of an express trust for the Holders of Obligations; (iv) civil action to enjoin any acts or things, which may be unlawful or in violation of the rights of the Holders of Obligations; (v) exercise any and all remedies under the Mortgage; and (vi) enforcement of any other right or remedy of the Holders conferred by law. Regardless of the occurrence of an Event of Default, the Master Trustee, if requested in writing by the Holders of at least half in aggregate Principal Amount of the Obligations then Outstanding, will, upon being OHSUSA: D-31 C-31

252 indemnified to its satisfaction therefor, institute and maintain such suits and proceedings as it may be advised will be necessary or expedient (i) to prevent any impairment of the security under the Master Indenture by any acts which may be unlawful or in violation of the Master Indenture, or (ii) to preserve or protect the interests of the Holders, provided that such request and the action to be taken by the Master Trustee are not in conflict with any applicable law or the provisions of the Master Indenture and, in the sole judgment of the Master Trustee, not unduly prejudicial to the interest of the Holders of Obligations not making such request, it being understood that, subject to the Master Indenture, the Master Trustee will have no duty or obligation to determine whether or not such action or forbearance may be unduly prejudicial to such Holders. Application of Revenues and Other Moneys After Default. During the continuance of an Event of Default all moneys received by the Master Trustee pursuant to any right given or action taken under the provisions of the Master Indenture, after payment of the costs and expenses of the proceedings resulting in the collection of such moneys and of the fees, expenses and advances incurred or made by the Master Trustee with respect thereto, including fees, expenses and advances of its attorneys, agents and advisors and after payment of all other amounts owed to the Master Trustee under the Master Indenture, will be applied as follows: Unless the principal of all Outstanding Obligations will have become or have been declared due and payable: First: To the payment to the Persons entitled thereto of all installments of interest or the interest portion related to payments then due on the Obligations in the order of the maturity of such installments, and, if the amount available will not be sufficient to pay in full any installment or installments maturing on the same date, then to the payment thereof ratably, according to the amounts due thereon to the Persons entitled thereto, without any discrimination or preference; Second: To the payment to the Persons entitled thereto of the unpaid principal installments or the principal portion related to payments of any Obligations which will have become due, whether at maturity or by call for redemption, in the order of their due dates, and if the amounts available will not be sufficient to pay in full all the Obligations due on any date, then to the payment thereof ratably, according to the amounts of principal installments due on such date, to the Persons entitled thereto, without any discrimination or preference; If the principal of all Outstanding Obligations will have become or have been declared due and payable, to the payment of the principal and interest and payments then due and unpaid upon the Obligations without preference or priority, or of any installment over any other installment, or of any Obligation over any other Obligation, ratably, according to the amounts due, to the Persons entitled thereto without any discrimination or preference. If the principal of all Outstanding Obligations will have been declared due and payable, and if such declaration will thereafter be rescinded and annulled under the provisions of the Master Indenture, then, subject to the provisions of the preceding paragraph in the event that the principal of all Outstanding Obligations will later become due or be declared due and payable, the moneys will be applied in accordance with the provisions of the second paragraph of this section. Whenever moneys are to be applied by the Master Trustee pursuant to the provisions of the Master Indenture, such moneys will be applied by it at such times, and from time to time, as the Master Trustee will determine, having due regard for the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Master Trustee will apply such moneys, it will fix the date upon which such application is to be made and upon such date interest on the amounts of principal to be paid on such dates will cease to accrue. The Master Trustee will give such notices as it may deem appropriate of the deposit with it of any such moneys and of the fixing of any such date, and will not be required to make payment to the Holder of any unpaid Obligation until such Obligation and all unmatured coupons, if any, appertaining to such Obligation will be presented to the Master Trustee for appropriate endorsement of any partial payment or for cancellation if fully paid. Whenever all Obligations and interest thereon have been paid under the provisions of the Master Indenture and all expenses and charges of the Master Trustee have been paid, any balance remaining will be paid to the Person OHSUSA: D-32 C-32

253 entitled to receive the same; if no other Person will be entitled thereto, then the balance will be paid to the Members, their successors, or as a court of competent jurisdiction may direct. Remedies Not Exclusive. No remedy by the terms hereof conferred upon or reserved to the Master Trustee or the Holders is intended to be exclusive of any other remedy, but each and every such remedy will be cumulative and will be in addition to every other remedy given under the Master Indenture or existing at law or in equity or by statute on or after the date hereof. Remedies Vested in the Master Trustee. All rights of action (including the right to file proof of claims) under the Master Indenture or under any of the Obligations may be enforced by the Master Trustee without the possession of any of the Obligations or the production thereof in any trial or other proceedings relating thereto. Any such suit or proceeding instituted by the Master Trustee may be brought in its name as the Master Trustee without the necessity of joining as plaintiffs or defendants any Holders of the Obligations. Subject to the provisions of the Master Indenture, any recovery or judgment will be for the equal benefit of the Holders of the Outstanding Obligations. Master Trustee to Represent Holders. The Master Trustee is irrevocably appointed (and the successive respective Holders of the Obligations, by taking and holding the same, will be conclusively deemed to have so appointed the Master Trustee) as trustee and true and lawful attorney-in-fact of the Holders of the Obligations for the purpose of exercising and prosecuting on their behalf such rights and remedies as may be available to such Holders under the provisions of the Obligations, the Master Indenture, and applicable provisions of any other law. Upon the occurrence and continuance of an Event of Default or other occasion giving rise to a right in the Master Trustee to represent the Holders, the Master Trustee in its discretion may, and upon the written direction of the Holders of at least half in aggregate Principal Amount of the Obligations then Outstanding, and upon being indemnified to its satisfaction therefor, will, proceed to protect or enforce its rights or the rights of such Holders by such appropriate action, suit, mandamus or other proceedings as it will deem most effectual to protect and enforce any such right, at law or in equity, either for the specific performance of any covenant or agreement contained in the Master Indenture, or in aid of the execution of any power granted in the Master Indenture, or for the enforcement of any other appropriate legal or equitable right or remedy vested in the Master Trustee or in such Holders under the Master Indenture, or any other law; and upon instituting such proceeding, the Master Trustee will be entitled, as a matter of right, to the appointment of a receiver of the assets pledged under the Master Indenture, pending such proceedings. All rights of action under the Master Indenture or the Obligations or otherwise may be prosecuted and enforced by the Master Trustee without the possession of any of the Obligations or the production thereof in any proceeding relating thereto, and any such suit, action or proceeding instituted by the Master Trustee will be brought in the name of the Master Trustee for the benefit and protection of all the Holders of such Obligations, subject to the provisions of the Master Indenture. Holders Control of Proceedings. If an Event of Default will have occurred and be continuing, notwithstanding anything in the Master Indenture to the contrary, the Holders of at least a majority in aggregate Principal Amount of Obligations then Outstanding will have the right, at any time, by any instrument in writing executed and delivered to the Master Trustee, to direct the method and place of conducting any proceeding to be taken in connection with the enforcement of the terms and conditions of the Master Indenture or for the appointment of a receiver or any other proceedings under the Master Indenture, provided that such direction is not in conflict with any applicable law or the provisions of this paragraph (including indemnity to the Master Trustee as provided in the Master Indenture) and, in the sole judgment of the Master Trustee, is not unduly prejudicial to the interest of Holders not joining in such direction (it being understood that (subject to the Master Indenture) the Master Trustee will have no duty or obligation to determine whether or not such action or forbearance may be unduly prejudicial to such Holders) and provided further that nothing in this section will impair the right of the Master Trustee in its discretion to take any other action under the Master Indenture which it may deem proper and which is not inconsistent with such direction by Holders. Termination of Proceedings. In case any proceeding taken by the Master Trustee on account of an Event of Default will have been discontinued or abandoned for any reason or will have been determined adversely to the Master Trustee or to the Holders, then the Members, the Master Trustee and the Holders will be restored to their OHSUSA: D-33 C-33

254 former positions and rights under the Master Indenture, and all rights, remedies and powers of the Master Trustee and the Holders will continue as if no such proceeding had been taken. Waiver of Event of Default. No delay or omission of the Master Trustee or of any Holder to exercise any right or power accruing upon any Event of Default will impair any such right or power or will be construed to be a waiver of any such Event of Default or an acquiescence therein. Every power and remedy given under the Master Indenture to the Master Trustee and the Holders of the Obligations, respectively, may be exercised from time to time and as often as may be deemed expedient by them. The Master Trustee may waive any Event of Default which in its opinion will have been remedied before the entry of final judgment or decree in any suit, action or proceeding instituted by it under the provisions hereof, or before the completion of the enforcement of any other remedy under the Master Indenture. Notwithstanding anything contained in the Master Indenture to the contrary, the Master Trustee, upon the written request of the Holders of at least a majority of the aggregate Principal Amount of Obligations then Outstanding, will waive any Event of Default under the Master Indenture and its consequences; provided, however, that, except under the circumstances set forth in the Master Indenture, a default in the payment of the principal of, premium, if any, or interest on or other payment with respect to any Obligation, when the same will become due and payable by the terms thereof or upon call for redemption, may not be waived without the written consent of the Holders of all the Obligations at the time Outstanding. In case of any waiver by the Master Trustee of an Event of Default under the Master Indenture, the Members, the Master Trustee and the Holders will be restored to their former positions and rights under the Master Indenture, respectively, but no such waiver will extend to any subsequent or other Event of Default or impair any right consequent thereon. Appointment of Receiver. Upon the occurrence of any Event of Default unless the same will have been waived as provided in the Master Indenture, the Master Trustee will be entitled as a matter of right if it will so elect, (a) forthwith and without declaring the Obligations to be due and payable, (b) after declaring the same to be due and payable, or (c) upon the commencement of an action to enforce the specific performance hereof or in aid thereof or upon the commencement of any other judicial proceeding to enforce any right of the Master Trustee or the Holders, to the appointment of a receiver or receivers of any or all of the Property of the Members with such powers as the court making such appointment will confer. Each Member, respectively, consents and agrees, and will if requested by the Master Trustee, consent and agree at the time of application by the Master Trustee for appointment of a receiver, to the appointment of such receiver and that such receiver may be given the right, power and authority, to the extent the same may lawfully be given, to take possession of and operate and deal with such Property and the revenues, profits and proceeds therefrom, with like effect as the Member could do so, and to borrow money and issue evidences of indebtedness as such receiver. Remedies Subject to Provisions of Law. All rights, remedies and powers provided by the Master Indenture may be exercised only to the extent that the exercise thereof does not violate any applicable provision of a law, and all the provisions of the Master Indenture are intended to be subject to all applicable mandatory provisions of law which may be controlling and to be limited to the extent necessary so that they will not render the Master Indenture invalid or unenforceable under the provisions of any applicable law. Notice of Default. The Master Trustee will, within 10 days after the Master Trustee has actual knowledge or has received written notice of the occurrence of an Event of Default, mail to all Holders (as the names and addresses of such Holders appear upon the books of the Master Trustee), notice of such Event of Default known to the Master Trustee, unless such Event of Default will have been cured before the giving of such notice (the term Event of Default for the purposes of this section being defined to be the events specified in the Master Indenture, not including any periods of grace provided for in certain subsections of the Master Indenture, and irrespective of the giving of written notice specified in the Master Indenture); and provided that, except in the case of default in the payment of the principal of or premium, if any, or interest or other payments on any of the Obligations and the Events of Default specified in the Master Indenture, the Master Trustee will be protected in withholding such notice OHSUSA: D-34 C-34

255 if and so long as the board of directors, the executive committee, or a trustee committee of directors or Responsible Officers of the Master Trustee in good faith determine that the withholding of such notice is in the interests of the Holders of Obligations. Supplements and Amendments Supplements Not Requiring Consent of Holders. The Obligated Group Representative, acting for itself and as agent for each Member, and the Master Trustee may, without the consent of any of the Holders, enter into one or more Related Supplements for one or more of the following purposes: (a) to cure any ambiguity or formal defect or omission in the Master Indenture; (b) to correct or supplement any provision in the Master Indenture which may be inconsistent with any other provision in the Master Indenture, or to make any other provisions with respect to matters or questions arising under the Master Indenture and which will not materially and adversely affect the interests of the Holders; (c) to grant or confer ratably upon all of the Holders any additional rights, remedies, powers or authority, or to add to the covenants of and restrictions on the Members; (d) to qualify the Master Indenture under the Trust Indenture Act of 1939, as amended, or corresponding provisions of federal laws from time to time in effect; (e) to create and provide for the issuance of an Obligation or Series of Obligations as provided in the Master Indenture; (f) to obligate a successor to any Member as provided in the Master Indenture; or (g) to add a new Member as provided in the Master Indenture. Supplements Requiring Consent of Holders. Other than Related Supplements referred to in the Master Indenture, the Obligated Group Representative, acting for itself and as agent for each Member, and the Master Trustee may, with the consent of the Holders of not less than a majority in aggregate Principal Amount of the Obligations then Outstanding and anything contained in the Master Indenture to the contrary notwithstanding, enter into one or more Related Supplements as the Obligated Group Representative will deem necessary and desirable for the purpose of modifying, altering, amending, adding to or rescinding, in any particular, any of the terms or provisions contained in the Master Indenture; provided, however, that nothing in this section will permit or be construed as permitting a Related Supplement which would: (i) Extend the stated maturity of or time for paying interest on any Obligation or reduce the Principal Amount of or the redemption premium or rate of interest or method of calculating interest payable on any Obligation without the consent of the Holder of such Obligation; (ii) Modify, alter, amend, add to or rescind any of the terms or provisions contained in the Master Indenture so as to affect the right of the Holders of any Obligations in default as to payment to compel the Master Trustee to declare the principal of all Obligations to be due and payable, without the consent of the Holders of all Obligations then Outstanding; or (iii) Reduce the aggregate Principal Amount of Obligations then Outstanding the consent of the Holders of which is required to authorize such Related Supplement without the consent of the Holders of all Obligations then Outstanding. If at any time the Obligated Group Representative will request the Master Trustee to enter into a Related Supplement pursuant to this section, which request is accompanied by a copy of the resolution or other action of its Governing Body certified by its secretary or if it has no secretary, its comparable officer, and the proposed Related Supplement and if the Master Trustee will receive an instrument or instruments purporting to be executed by the Holders of not less than the aggregate Principal Amount or number of Obligations specified in the preceding paragraph for the Related Supplement in question which instrument or instruments will refer to the proposed Related Supplement and will specifically consent to and approve the execution thereof in substantially the form of the copy thereof as on file with the Master Trustee, thereupon, but not otherwise, the Master Trustee may execute such Related Supplement in substantially such form, without liability or responsibility to any Holder of any Obligation, whether or not such Holder will have consented thereto. OHSUSA: D-35 C-35

256 Any such consent will be binding upon the Holder of the Obligation giving such consent and upon any subsequent Holder of such Obligation and of any Obligation issued in exchange therefor (whether or not such subsequent Holder thereof has notice thereof), unless such consent is revoked in writing by the Holder of such Obligation giving such consent or by a subsequent Holder thereof by filing with the Master Trustee, prior to the execution by the Master Trustee of such Related Supplement, such revocation and, if such Obligation or Obligations are transferable by delivery, proof that such Obligations are held by the signer of such revocation. At any time after the Holders of the required Principal Amount or number of Obligations will have filed their consents to the Related Supplement, the Master Trustee will make and file with the Obligated Group Representative a written statement to that effect. Such written statement will be conclusive that such consents have been so filed. If the Holders of the required Principal Amount or number of the Outstanding Obligations will have consented to and approved the execution of such Related Supplement as provided in the Master Indenture, no Holder of any Obligation will have any right to object to the execution thereof, or to object to any of the terms and provisions contained therein or the operation thereof, or in any manner to question the propriety of the execution thereof, or to enjoin or restrain the Master Trustee or the Obligated Group Representative from executing the same or from taking any action pursuant to the provisions thereof. Execution and Effect of Supplements. In executing any Related Supplement permitted by the Master Indenture, the Master Trustee will be entitled to receive and to rely upon an Opinion of Counsel stating that the execution of such Related Supplement is authorized or permitted by the Master Indenture. The Master Trustee may but will not be obligated to enter into any such Related Supplement which materially and adversely affects the Master Trustee s own rights, duties or immunities. Upon the execution and delivery of any Related Supplement in accordance with the Master Indenture, the provisions hereof will be modified in accordance therewith and such Supplement will form a part hereof for all purposes and every Holder of an Obligation theretofore or thereafter authenticated and delivered under the Master Indenture will be bound thereby. Any Obligation authenticated and delivered after the execution and delivery of any Related Supplement in accordance with the Master Indenture may, and, if required by the Obligated Group Representative or the Master Trustee will, bear a notation in form approved by the Master Trustee as to any matter provided for in such Related Supplement. If the Obligated Group Representative will so determine, new Obligations so modified as to conform in the opinion of the Master Trustee and the Governing Body of the Obligated Group Representative to any such Related Supplement may be prepared and executed by the Obligated Group Representative and authenticated and delivered by the Master Trustee in exchange for and upon surrender of Obligations then Outstanding. The Master Trustee will give notice, by first class mail, to the Holders of all Obligations then Outstanding of the execution and delivery of any Related Supplement (other than a Related Supplement entered into for the purposes described in clause (e) of the section above relating to supplements not requiring the consent of Holders), setting forth the effective date of such Related Supplement and a summary of the terms thereof (or, in lieu of such a summary, by attaching the form of such Related Supplement to such notice). Amendment of Related Supplements. Any Related Supplement may provide that the provisions thereof may be amended without the consent of or notice to any of the Holders or pursuant to such terms and conditions as may be specified in such Related Supplement. If a Related Supplement does not contain provisions relating to the amendment thereof, amendment of such Related Supplement will be governed by the provisions of the Master Indenture relating to supplements not requiring the consent of Holders and to supplements requiring the consent of Holders. Satisfaction and Discharge of Master Indenture Satisfaction and Discharge of Indenture. If (i) the Members will deliver to the Master Trustee for cancellation all Obligations theretofore authenticated (other than any Obligations which will have been mutilated, destroyed, lost or stolen and which will have been replaced or paid as provided in any Related Supplement) and not theretofore cancelled, or (ii) upon payment of all Obligations not theretofore cancelled or delivered to the Master Trustee for cancellation, or (iii) (unless otherwise provided for an Obligation in the Related Supplement pursuant to OHSUSA: D-36 C-36

257 which such Obligation was issued) the Members or any thereof will deposit with the Master Trustee (or with a bank or trust company acceptable to the Master Trustee pursuant to an agreement between a Member and such bank or trust company in form acceptable to the Master Trustee) as trust funds cash or Government Obligations or both, sufficient to pay at maturity or upon redemption all Obligations not theretofore cancelled or delivered to the Master Trustee for cancellation, including without limitation principal and interest due or to become due to such date of maturity or redemption date, as the case may be, and if in any case the Members or any thereof will also pay or cause to be paid all other sums payable under the Master Indenture by the Members or any thereof, then the Master Indenture will cease to be of further effect, and the Master Trustee, on demand of the Members or any thereof and at the cost and expense of the Members or any thereof, will execute proper instruments acknowledging satisfaction of and discharging the Master Indenture. The Members will cause a report to be prepared by a firm nationally recognized for providing verification services regarding the sufficiency of funds for such discharge and satisfaction, upon which report the Master Trustee may rely. Each Member, respectively, agrees to reimburse the Master Trustee for any costs or expenses theretofore and thereafter reasonably and properly incurred by the Master Trustee in connection with the Master Indenture or such Obligations. Payment of Obligations After Discharge of Lien. Notwithstanding the discharge of the lien hereof as provided in the Master Indenture, the Master Trustee will nevertheless retain such rights, powers and duties under the Master Indenture as may be necessary and convenient for the payment of amounts due or to become due on the Obligations and the registration, transfer, exchange and replacement of Obligations as provided in any Related Supplement. Nevertheless, any moneys held by the Master Trustee or any paying agent for the payment of the principal of, premium, if any or interest on any Obligation remaining unclaimed for two years after the principal of all Obligations has become due and payable, whether at maturity or upon proceedings for redemption or by declaration as provided in the Master Indenture, will then be paid to the Members and the Holders of any Obligations or coupons not theretofore presented for payment will thereafter be entitled to look only to the members of the Obligated Group for payment thereof as unsecured creditors and all liability of the Master Trustee or any paying agent with respect to such moneys will thereupon cease. General SUPPLEMENTAL MASTER INDENTURE The Supplemental Master Indenture for Obligation No. 1 (the Supplement No. 1 ) provides for the issuance of Obligation No. 1 pursuant to the Master Indenture, and provides the terms and form thereof. The following are summaries of certain provisions of the Supplement No. 1 and Obligation No. 1 issued thereunder. These summaries do not purport to be complete or definitive and are qualified in their entireties by reference to the full terms of the Supplement No. 1. Payments on Obligation No. 1; Credits Principal of and interest and any applicable redemption premium on Obligation No. 1 are payable in any coin or currency of the United States of America that on the payment date is legal tender for the payment of public and private debts. Except as provided in Supplement No. 1 with respect to credits, and the paragraph below regarding prepayment, payments on the principal of and premium, if any, and interest on Obligation No. 1 will be made at the times and in the amounts specified in Obligation No. 1 by the Members (i) depositing the same with or to the account of the Bond Trustee at or prior to the opening of business on the day such payments will become due or payable (or the next succeeding business day if such date is a Saturday, Sunday or bank holiday in the city in which the principal corporate trust office of the Bond Trustee is located), and (ii) giving notice to the Master Trustee and the Bond Trustee of each payment of principal, interest or premium on Obligation No. 1, specifying the amount paid and identifying such payment as a payment on Obligation No. 1. (b) The Members will receive credit for payment on Obligation No. 1, in addition to any credits resulting from payment or prepayment from other sources, as follows: OHSUSA: D-37 C-37

258 (i) On installments of interest on Obligation No. 1 in an amount equal to moneys deposited in the Interest Account created under the Bond Indenture which amounts are available to pay interest on the Bonds and to the extent such amounts have not previously been credited against payments on Obligation No. 1; (ii) On installments of principal of Obligation No. 1 in an amount equal to moneys deposited in the Principal Account created under the Bond Indenture which amounts are available to pay principal of the Bonds and to the extent such amounts have not previously been credited against payments on Obligation No. 1; (iii) On installments of principal and interest, respectively, on Obligation No. 1 in an amount equal to the principal amount of Bonds for the redemption or payment of which sufficient amounts (as determined by the Bond Indenture) in cash or securities are on deposit as provided in the Bond Indenture, to the extent such amounts have not previously been credited against such payments on Obligation No. 1, and the interest on such Bonds from and after the date fixed for payment at maturity or redemption thereof. Such credits will be made against the installments of principal and interest on Obligation No. 1 that would have been used, but for such call for payment or redemption, to pay principal of and interest on such Bonds when due; (iv) On installments of principal and interest, respectively, on Obligation No. 1 in an amount equal to the principal amount of Bonds acquired by any Member and surrendered to the Bond Trustee for cancellation or purchased by the Bond Trustee and canceled, and the interest on such Bonds from and after the date interest thereon has been paid prior to cancellation. Such credits will be made against the installments of principal of and interest on Obligation No. 1 that would have been used, but for such cancellation, to pay principal of and interest on such Bonds when due; and (v) On amounts deposited with the Bond Trustee to satisfy any other payment obligations under the Loan Agreement but not transferred by the Bond Trustee to the Borrower pursuant to the Bond Indenture. Prepayment of the Obligation So long as all amounts that have become due under Obligation No. 1 have been paid or credits for such payments have occurred, the Members will have the right, at any time and from time to time, to pay in advance and in any order of due dates all or part of the amounts to become due under Obligation No. 1. Prepayments may be made by payments of cash or surrender of the Bonds, as contemplated by the preceding section. All such prepayments (and the additional payment of any amount necessary to pay the applicable premium, if any, payable upon the redemption of the Bonds) will be deposited and applied in the manner and subject to the terms and conditions set forth in the Bond Indenture. Notwithstanding any such redemption or surrender of the Bonds, as long as any Bonds remain Outstanding (as defined in the Bond Indenture) or any additional payments required to be made under the Supplemental Master Indenture remain unpaid, the Members will not be relieved of their obligations under the Supplemental Master Indenture. Prepayments made in accordance with the paragraph described above will be credited against amounts to become due on Obligation No. 1 as provided in Supplement No. 1. The Members may also prepay all of their indebtedness under Obligation No. 1 by providing for the payment of Bonds in accordance with the Bond Indenture. Partial Prepayment of Obligation Upon the selection and call for prepayment and the surrender of Obligation No. 1 for prepayment in part only, the Holder will endorse on the Obligation a notice of such partial prepayment, which notice will set forth, over the signature of such Holder, the payment date, the principal amount redeemed and the principal amount remaining unpaid. In lieu thereof, the Holder may surrender the Obligation for a new fully registered Obligation without coupons, and the Obligated Group Representative will then cause to be executed and the Master Trustee will to be authenticated and delivered to, or upon the written order of, the Holder thereof, at the expense of the Members, a new Obligation No. 1 in principal amount equal to the unredeemed portion of Obligation No. 1, which new Obligation No. 1 will be a fully registered Obligation without coupons. OHSUSA: D-38 C-38

259 Such partial prepayment will be valid upon payment of the amount thereof to the registered owner of Obligation No. 1 and the Members and the Master Trustee will be fully released and discharged from all liability to the extent of such payment irrespective of whether such endorsement will or will not have been made upon the reverse of Obligation No. 1 by the Holder thereof and irrespective of any error or omission in such endorsement. Effect of Prepayment On the date cash or securities (as and to the extent permitted by the Bond Indenture), or both, are deposited with the Trustee (for a corresponding amount of Bonds with respect to the Bonds to be redeemed on the date fixed for redemption all as provided in the Bond Indenture), Obligation No. 1 will be deemed paid (in an amount corresponding to the Bonds to be redeemed on the date fixed for redemption) and such corresponding amount of Obligation No. 1 will be deemed not to be outstanding, as defined in the Master Indenture, and will no longer be entitled to the benefits of the Master Indenture. Event of Default The Borrower covenants to exercise any and all remedies available under any Lease and the Master Trustee will foreclose on the related Mortgage upon an Event of Default, at the direction of the Bond Trustee, provided that the Master Trustee will only exercise remedies under the Mortgages described in clause (1) of the definition thereof, set forth in the Master Indenture for the benefit of Obligation No. 1. Miscellaneous No covenant or agreement contained in Obligation No. 1 or the Master Indenture will be deemed to be a covenant or agreement of any officer, agent or employee of any Member or of the Master Trustee in an individual capacity, and no incorporator, member, officer or member of the governing board of any Member will be liable personally on Obligation No. 1 or be subject to any personal liability or accountability by reason of the issuance of Obligation No. 1. The Master Trustee acknowledges and agrees that the Leases provide for payment of rental directly to the Bond Trustee for deposit in the Revenue Fund established in the Bond Indenture and that such deposits constitute credits for purposes of the Supplemental Master Indenture. The Master Trustee further acknowledges that the Members may approve amendments to the Leases subject to the limitations of the Loan Agreement. General THE BOND INDENTURE The Bond Indenture sets forth the terms of the Bonds, the terms for the issuance of Additional Bonds, the application of the Bond proceeds, the nature and extent of the security for the Bonds, various rights of the bondholders, rights, duties and immunities of the Bond Trustee and the rights and obligations of the Authority. The following is a summary of certain provisions of the Bond Indenture. Other provisions are summarized in the Limited Offering Memorandum under the caption THE BONDS, and SECURITY AND SOURCES OF PAYMENT FOR THE BONDS. This summary does not purport to be complete or definitive and reference is made to the Bond Indenture for the complete terms thereof. Pledge and Assignment Pledge and Assignment. (a) Subject only to the provisions of the Bond Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in the Bond Indenture, there are pursuant to the Bond Indenture OHSUSA: D-39 C-39

260 pledged to secure the payment of the principal of and interest on the Bonds in accordance with their terms and the provisions of the Bond Indenture, all of the Payments (except Payments described in clause (i) of the definition thereof) and any other amounts (excluding proceeds of the sale of Bonds) held in any fund or account (other than the Rebate Fund) established pursuant to the Bond Indenture. Said pledge will constitute a lien on and security interest in such assets and will attach and be valid and binding from and after delivery of the Bonds, without any physical delivery thereof or further act. (b) The Authority pursuant to the Bond Indenture assigns to the Bond Trustee, for the benefit of the Holders from time to time of the Bonds, all of the Payments (except Payments described in clause (i) of this definition thereof) and other amounts pledged in the Bond Indenture and all of the right, title and interest of the Authority in, to and under the Loan Agreement (except for the Retained Rights). The Bond Trustee will be entitled to and will receive all of such assigned Payments, and any such 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 Bond Trustee and will forthwith be paid by the Authority to the Bond Trustee. The Bond Trustee also will be entitled to and will (subject to the provisions of the Bond Indenture, including its rights and protections thereunder) take all steps, actions and proceedings following any event of default under the Loan Agreement reasonably necessary in its judgment or as directed in writing by the Holder to enforce, either jointly with the Authority or separately, all of the rights of the Authority assigned to the Bond Trustee and all of the obligations of the Borrower under the Loan Agreement. (c) The Borrower will take all actions necessary for the Bond Trustee to collect directly from the State Controller the amounts set forth in the Intercept Notice on the dates set forth in the Intercept Notice. The Payments described in clause (i) of the definition thereof are assigned to the Bond Trustee, for the benefit of the Holders of the Bonds, by virtue of the filing of the Intercept Notice with the State Controller. The Bond Trustee will be entitled to and will receive all of such assigned Payments. (d) All Payments will be promptly deposited by the Bond Trustee upon receipt thereof in a special fund designated as the Revenue Fund which the Bond Trustee is pursuant to the Bond Indenture directed to establish, maintain and hold in trust. All Payments will be held in trust for the benefit of the Holders from time to time of the Bonds but will nevertheless be disbursed, allocated and applied solely for the uses and purposes in the Bond Indenture set forth. (e) The Bonds are not and will not be deemed to constitute a debt or liability of the State, or any political subdivision thereof, and are not and will not be deemed to be a pledge of the faith and credit of the State, or any political subdivision thereof, other than the Authority, which will be obligated to pay the Bonds solely from the Payments and funds in the Bond Indenture provided therefor. The issuance of the Bonds will not directly or indirectly or contingently obligate the State or any political subdivision thereof to levy or to pledge any form of taxation whatsoever for the Bonds or to make any appropriation for their payment. Nothing in the Bond 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 or to funds available to the Lessee in any amount or at any time. Application of Principal Account. (a) All amounts in the Principal Account will be used and withdrawn by the Bond Trustee solely for the purpose of paying the principal or Mandatory Sinking Account Payments of the Bonds, as provided in the Bond Indenture with respect to Bonds. (b) The Bond Trustee will establish and maintain within the Principal Account a separate subaccount for the Bonds, designated as the Sinking Account, inserting therein the Series and maturity (if more than one such account established) for each Term Bond. On or before June 1 in each year, the Bond Trustee will transfer the amount deposited in the Principal Account on that date pursuant to the Bond Indenture from the Principal Account to the Sinking Account for the purpose of making a Mandatory Sinking Account Payment (if such deposit is required in such month). With respect to the Sinking Account, on each Mandatory Sinking Account Payment date established for the Sinking Account, the Bond Trustee will transfer the amount deposited in the Principal Account pursuant to the Bond Indenture for the purpose of applying the Mandatory Sinking Account Payment required on that date to the redemption (or payment at maturity, as the case may be) of Bonds, upon the notice and in the manner OHSUSA: D-40 C-40

261 provided in the Bond Indenture; provided that, at any time prior to giving such notice of such redemption, the Bond Trustee will apply such moneys to the purchase of Bonds at public or private sale, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as the Borrower may direct, in writing, except that the purchase price (excluding accrued interest) will not exceed the par amount of such Bonds. If, during the 12-month period immediately preceding said Mandatory Sinking Account Payment date, the Bond Trustee has purchased Bonds with moneys in the Sinking Account, or, during said period and prior to giving said notice of redemption, the Borrower has deposited Bonds with the Bond Trustee, or Bonds were at any time purchased or redeemed by the Bond Trustee from the Redemption Fund and allocable to said Mandatory Sinking Account Payment, such Bonds so purchased or deposited or redeemed will be applied, to the extent of the full principal amount thereof, to reduce said Mandatory Sinking Account Payment. In the event of a redemption pursuant to the Bond Indenture, the Borrower will provide the Bond Trustee with a revised sinking fund schedule giving effect to the optional redemption so completed. All Bonds purchased or deposited pursuant to the Bond Indenture will be delivered to the Bond Trustee and cancelled. Any amounts remaining in the Sinking Account when all of the Bonds are no longer Outstanding will be withdrawn by the Bond Trustee and transferred to the Revenue Fund. All Bonds purchased from the Sinking Account or deposited by the Borrower with the Bond Trustee will be allocated first to the next succeeding Mandatory Sinking Account Payment, then to the remaining Mandatory Sinking Account Payments as the Borrower directs. (c) Subject to the terms and conditions set forth in the Bond Indenture, Term Bonds will be redeemed (or paid at maturity, as the case may be) by application of Mandatory Sinking Account Payments in the amounts and on the dates set forth in the Bond Indenture. Establishment and Application of Redemption Fund. The Bond Trustee will establish and maintain a fund separate from any other fund established and maintained hereunder designated as the Redemption Fund, and within the Redemption Fund, a separate Optional Redemption Account and a separate Special Redemption Account. The Bond Trustee will accept all moneys deposited for redemption and will deposit such moneys into the Optional Redemption Account or the Special Redemption Account, as applicable. All amounts deposited in the Optional Redemption Account and in the Special Redemption Account will be accepted and used and withdrawn by the Bond Trustee solely for the purpose of redeeming Bonds, in the manner and upon the terms and conditions specified in the Bond Indenture, at the next succeeding date of redemption for which notice has not been given and at the redemption prices then applicable to redemptions from the Optional Redemption Account and the Special Redemption Account, respectively; provided that, at any time prior to giving such notice of redemption, the Bond Trustee will, upon written direction of the Borrower, apply such amounts to the purchase of Bonds at public or private sale, as and when and at such prices (including brokerage and other charges, but excluding accrued interest, which is payable from the Interest Account) as the Borrower may direct, except that the purchase price (exclusive of accrued interest) may not exceed the redemption price then applicable to such Bonds (or, if such Bonds are not then subject to redemption, the par value of such Bonds); and provided further that in the case of the Optional Redemption Account in lieu of redemption at such next succeeding date of redemption, or in combination therewith, amounts in such account may be transferred to the Revenue Fund and credited against Loan Repayments in order of their due date as set forth in a Request of the Borrower. Rebate Fund. (a) The Bond Trustee will establish and maintain, when required, a fund separate from any other fund established and maintained under the Bond Indenture designated as the Rebate Fund. Within the Rebate Fund, the Bond Trustee will maintain such accounts as will be necessary to comply with instructions of the Borrower given pursuant to the terms and conditions of the Tax Certificate. Subject to the transfer provisions provided in paragraph (e) below, all money at any time deposited in the Rebate Fund will be held by the Bond Trustee in trust, to the extent required to satisfy the Rebate Requirement (as defined in the Tax Certificate), for payment to the federal government of the United States of America. Neither the Authority, the Borrower nor the Holder of any Bonds will have any rights in or claim to such money. All amounts deposited into or on deposit in the Rebate Fund will be governed pursuant to the Bond Indenture and by the Tax Certificate (which is incorporated in the Bond Indenture by reference). The Bond Trustee will be deemed conclusively to have complied with such provisions if it follows the directions of the Borrower including supplying all necessary information in the manner provided in the OHSUSA: D-41 C-41

262 Tax Certificate, which the Bond Trustee will be directed by the Borrower to supply, and will have no liability or responsibility to enforce compliance by the Borrower or the Authority with the terms of the Tax Certificate or any other tax covenants contained in the Bond Indenture. The Bond Trustee will not be responsible for calculating rebate amounts or for the adequacy or correctness of any rebate report or rebate calculations. The Bond Trustee will have no independent duty to review such calculations or enforce the compliance by the Borrower with such rebate requirements. The Bond Trustee will have no duty or obligation to determine the applicability of the Code and will only be obligated to act in accordance with written instructions provided by the Borrower. (b) Upon the Borrower s written direction, an amount will be deposited to the Rebate Fund by the Bond Trustee from deposits by the Borrower, if and to the extent required, so that the balance in the Rebate Fund will equal the Rebate Requirement. Computations of the Rebate Requirement will be furnished by or on behalf of the Borrower in accordance with the Tax Certificate. The Bond Trustee will supply to the Borrower and/or the Authority all necessary information in the manner provided in the Tax Certificate to the extent such information is reasonably available to the Bond Trustee. (c) The Bond Trustee will have no obligation to rebate any amounts required to be rebated pursuant to the Bond Indenture, other than from moneys held in the funds and accounts created under the Bond Indenture or from other moneys provided to it by the Borrower. (d) At the written direction of the Borrower, which direction will comply with the requirements of the Tax Certificate, the Bond Trustee will invest all amounts held in the Rebate Fund in Eligible Securities. Moneys will not be transferred from the Rebate Fund except as provided in paragraph (e) below. The Bond Trustee will not be liable for any consequences arising from such investment. (e) Upon receipt of the Borrower s written directions, the Bond Trustee will remit part or all of the balances in the Rebate Fund to the United States, as so directed. In addition, if the Borrower so directs, the Bond Trustee will deposit money into or transfer money out of the Rebate Fund from or into such accounts or funds as directed by the Borrower s written directions; provided, however, only moneys in excess of the Rebate Requirement may, at the written direction of the Borrower or the Authority, be transferred out of the Rebate Fund to such other accounts or funds or to anyone other than the United States in satisfaction of the arbitrage rebate obligation. Any funds remaining in the Rebate Fund after each 5 year remission to the United States of America, redemption and payment of all of the Bonds and payment and satisfaction of any Rebate Requirement, or provision made therefor satisfactory to the Bond Trustee, will be withdrawn and remitted to the Borrower. (f) Notwithstanding any other provision of the Bond Indenture, the obligation to remit the Rebate Requirement to the United States and to comply with all other requirements the Bond Indenture and the Tax Certificate will survive the defeasance or payment in full of the Tax-Exempt Bonds. Establishment and Application of Project Fund. The Bond Trustee will establish, maintain and hold in trust a separate fund designated as the Project Fund. Moneys in the Project Fund will be disbursed pursuant to Requisitions of the Borrower. Upon completion of the Project, the Borrower will deliver a Completion Certificate to the Bond Trustee and make the final requisition of funds from the Project Fund. Any amounts thereafter remaining in such Project Fund will be transferred by the Bond Trustee, at the direction of the Borrower (i) to the Redemption Fund for the redemption of Bonds pursuant to the Bond Indenture, (ii) to the Interest Account for payment of interest on the Bonds, or (iii) to the Borrower upon delivery to the Bond Trustee of (A) a Completion Certificate, (B) a written request of the Borrower and (C) delivery of an Opinion of Bond Counsel substantially to the effect that such transfer would not, in and of itself, adversely affect the exclusion from gross income for federal income tax purposes of interest on the Bonds. Upon such transfer, the Project Fund will be closed. Establishment and Application of Costs of Issuance Fund; Insurance and Condemnation Proceeds Fund. The Bond Trustee will establish, maintain and hold in trust a separate fund designated as the Costs of Issuance Fund. Moneys deposited in said fund will be used and withdrawn by the Bond Trustee to pay the Costs of OHSUSA: D-42 C-42

263 Issuance of the Bonds upon Requisition of the Borrower stating the person to whom payment is to be made, the amount to be paid, the purpose for which the obligation was incurred and that such payment is a proper charge against said fund, and including a copy of the invoice or statement evidencing the costs incurred. On the 180th day following the initial issuance of the Bonds, or upon the earlier Request of the Borrower, amounts, if any, remaining in the Costs of Issuance Fund will be transferred to the Project Fund. As and when needed, the Master Trustee will establish, maintain and hold in trust a separate fund designated as the Insurance and Condemnation Proceeds Fund, and administer said fund as set forth in the Master Indenture. Establishment and Application of the Repair and Replacement Fund. The Bond Trustee will establish, maintain and hold in trust a separate fund designated as the Repair and Replacement Fund, which will be used solely for the purposes set forth in the Bond Indenture. The Bond Trustee will withdraw funds from the Repair and Replacement Fund to pay for capital items not budgeted as ordinary maintenance and repair costs related to the Facilities. Moneys in the Repair and Replacement Fund will be disbursed upon receipt of a Requisition of the Borrower for payment, and the Bond Trustee will issue its checks for each such disbursement upon receipt of such a requisition. Amounts on deposit in the Repair and Replacement Fund will be valued by the Bond Trustee at their fair market value each June 1 and December 1, beginning June 1, 2021, and the Bond Trustee will notify the Borrower of the results of such valuation in the form of its regular periodic statement. If the amount on deposit in the Repair and Replacement Fund on the first (1 st ) Business Day following such valuation is less than one hundred percent (100%) of the Repair and Replacement Fund Requirement, the Borrower has agreed in the Loan Agreement to make the deposits in the Repair and Replacement Fund required by the Bond Indenture. If the amount on deposit in the Repair and Replacement Fund on the first (1 st ) Business Day following such valuation is greater than the Repair and Replacement Fund Requirement, then any additional excess will be withdrawn from the Repair and Replacement Fund and transferred to the Revenue Fund. When (i) the amount of principal of, and premium, if any, and interest on the Outstanding Bonds is equal to or less than the sum of the balance of the Revenue Fund, the balance of the Redemption Fund and the balance of the Repair and Replacement Fund, and (ii) all other amounts owed under the Loan Agreement and the Bond Indenture will have been paid, moneys held in the Repair and Replacement Fund may be deposited into the Revenue Fund and credited against payments of Loan Repayments required under the Loan Agreement. Application of the Series 2017 Ground Rent Account. Amounts deposited to the Series 2017 Ground Rent Account, which the Bond Trustee is hereby directed to establish, maintain and hold in trust, will be paid directly to the lessor under the Ground Lease to pay Ground Rent when and as due in the amount designated in a written request delivered by or on behalf of the Borrower. Investment of Moneys in Funds and Accounts. All moneys in any of the funds and accounts or subaccounts thereof established pursuant to the Bond Indenture will be invested by the Bond Trustee solely in such Eligible Securities as are specified in a Request of the Borrower, provided, however, that, if the Borrower does not file such a Request with the Bond Trustee, the Bond Trustee will invest to the extent practicable in investments described in clause (7) of the definition of the term Eligible Securities. Investments in any and all funds and accounts established pursuant to the Bond Indenture may be commingled for purposes of making, holding and disposing of investments, notwithstanding provisions in the Bond Indenture for transfer to or holding in a particular fund amounts received or held by the Bond Trustee under the Bond Indenture, provided that the Bond Trustee will at all times account for such investments strictly in accordance with the particular funds to which they are credited and otherwise as provided in the Bond Indenture. The Bond Trustee may act as principal or agent in the making or disposing of any investment. To the extent Eligible Securities are registrable, such investments will be registered in the name of the Bond Trustee. The Bond Trustee may sell or present for redemption, any securities so purchased whenever it will be necessary to provide moneys to meet any required payment, transfer, withdrawal or disbursement from the fund or account to which such securities are credited, and the Bond Trustee will not be liable or responsible for any loss resulting from such investment. The Bond Trustee is pursuant to the Bond Indenture authorized, in making or disposing of any investment permitted pursuant to the Bond Indenture, to deal with itself (in its individual capacity) or with any one or more of its OHSUSA: D-43 C-43

264 affiliates, whether it or such affiliate is acting as an agent of the Bond Trustee or for any third person or dealing as principal for its own account. No float forward or forward purchase agreement or other arrangement, agreement or financial product may be utilized in connection with the Revenue Fund. The Borrower and the Authority acknowledge that to the extent regulations of the Comptroller of the Currency or other applicable regulatory entity grant the Borrower or the Authority, as applicable, the right to receive brokerage confirmations of security transactions as they occur, the Borrower and the Authority specifically waive receipt of such confirmations to the extent permitted by law. The Bond Trustee will furnish the Borrower periodic cash transaction statements which include detail for all investment transactions made by the Bond Trustee under the Bond Indenture. Amounts Remaining in Funds and Accounts. Any amounts remaining in the Revenue Fund or any other fund or account established under the Bond Indenture after payments in full of the Bonds (or after provision for payment thereof as provided in the Bond Indenture) and payment of the fees, charges and expenses of the Bond Trustee and the Authority, will belong and be paid to the Borrower by the Bond Trustee. Covenants Punctual Payment. The Authority will punctually pay, but only out of Payments and pledged funds as in the Bond Indenture provided, the principal and interest to become due in respect of every Bond issued under the Bond Indenture at the times and places and in the manner provided in the Bond Indenture and in the Bonds, according to the true intent and meaning thereof. Extension of Payment of Bonds. The Authority will not directly or indirectly extend or assent to the extension of the maturity of any of the Bonds or the time of payment of any of the claims for interest by the purchase or funding of such Bonds or claims for interest or by any other arrangement except with the written consent of the Bondholders and, if the maturity of any of the Bonds or the time of payment of any such claims for interest will be extended without the written consent of the Bondholders, such Bonds or claims for interest will not be entitled, in case of any default under the Bond Indenture, to the benefits of the Bond Indenture, except subject to the prior payment in full of the principal of all of the Bonds then Outstanding and of all claims for interest thereon which will not have been so extended. Nothing in the Bond Indenture will be deemed to limit the right of the Authority to issue Bonds for the purpose of refunding any Outstanding Bonds, and such issuance will not be deemed to constitute an extension of maturity of Bonds. Encumbrance Upon Payments. The Authority will not create, or permit the creation of, any pledge, lien, charge or other encumbrance upon the Payments and other assets pledged or assigned under the Bond Indenture while any of the Bonds are Outstanding, except the pledge and assignment created pursuant to the Bond Indenture. Subject to this limitation, the Authority expressly reserves the right to enter into one or more other indentures for any of its corporate purposes, including other programs under the Act, and reserves the right to issue other obligations for such purposes. Other Covenants; Amendment of the Loan Agreement or the Leases. Subject to the provisions of the Bond Indenture, the Bond Trustee will promptly collect all amounts due pursuant to the Loan Agreement and subject to its right and protections thereunder, diligently enforce and take all steps, actions and proceedings reasonably necessary for the enforcement of all of the rights of the Authority under the Loan Agreement assigned to it pursuant to the Bond Indenture. The Authority will not amend, modify or terminate any of the terms of the Loan Agreement, or consent to any such amendment, modification or termination, without the prior written consent of the Bond Trustee. The Bond Trustee will give such written consent if but only if (1) it has received a written representation from the Borrower to OHSUSA: D-44 C-44

265 the effect that such amendment or modification will not materially and adversely affect the interests of the Holders of the Bonds; provided that, if an Event of Default described in the Bond Indenture has occurred and is continuing, the Bond Trustee rather than the Borrower will make a determination that such amendment or modification will not materially and adversely affect the interests of the Holders of the Bonds (provided that, in making such determination, the Bond Trustee may conclusively rely on written representations of financial consultants or advisors or the opinion or advice of counsel), or (2) the Holders of a majority in aggregate principal amount of the Bonds then Outstanding consent in writing to such amendment, modification or termination, provided that no such amendment, modification or termination will reduce the amount of Loan Repayments payable to the Authority, or extend the time for making such payments, without the written consent of all of the Holders of the Bonds then Outstanding. The Bond Trustee will promptly collect all amounts due from the Borrower pursuant to the Loan Agreement and Obligation No. 1, will perform all duties imposed upon it pursuant to the Loan Agreement will diligently enforce, and take all steps, actions and proceedings reasonably necessary for the enforcement of, all of the rights of the Authority (other than the Retained Rights) and all of the obligations of the Borrower under the Loan Agreement and Obligation No. 1. Continuing Disclosure. Pursuant to the Loan Agreement, the Borrower has undertaken all responsibility for compliance with continuing disclosure requirements pursuant to Securities and Exchange Commission Rule 15c2-12(b)(5), and the Authority will have no liability to the Holders of the Bonds or any other person with respect to Securities and Exchange Commission Rule 15c2-12. The Bond Trustee pursuant to the Bond Indenture covenants and agrees that, subject to the provisions of the Bond Indenture, it will comply with and carry out all of the provisions of the Continuing Disclosure Agreement and the Loan Agreement applicable to it. Notwithstanding any other provision of the Bond Indenture, failure of the Borrower or the Bond Trustee to comply with the Continuing Disclosure Agreement will not be considered an Event of Default; however, the Bond Trustee at the written request of the Underwriter (as defined in the Continuing Disclosure Agreement) or the Holders of at least 25% aggregate principal amount of Outstanding Bonds, will (but only to the extent the Bond Trustee has been tendered funds in an amount satisfactory to it or it has been otherwise indemnified from and against any loss, liability, cost or expense, including without limitation, fees and expenses of its counsel and agents and additional fees and charges of the Bond Trustee) or any Bondholder or Beneficial Owner may take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause the Borrower to comply with its obligations under the Loan Agreement or, as to any Bondholder or Beneficial Owner, to cause the Bond Trustee to comply with its obligations under the Bond Indenture. For purposes of the Bond Indenture, Beneficial Owner means any person which (1) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries), or (2) is treated as the owner of any Bonds for federal income tax purposes. Tax Covenants. The Authority covenants that it will not take any action, or fail to take any action, if such action or failure to take such action would result in the interest on the Tax-Exempt Bonds not being excluded from gross income for federal income tax purposes under Section 103 of the Code. Without limiting the generality of the foregoing, the Authority covenants that it will comply with the requirements of the Tax Certificate, which is incorporated in the Bond Indenture as if fully set forth in the Bond Indenture. The covenant will survive the payment in full or the defeasance of the Tax-Exempt Bonds. In the event that at any time the Authority is of the opinion that for purposes of the Bond Indenture it is necessary or helpful to restrict or limit the yield on the investment of any moneys held by the Bond Trustee under the Bond Indenture, and provided that such action will not conflict with the requirements of the Tax Certificate, the Authority will so instruct the Bond Trustee in a Request of the Authority (which may be accompanied by a supporting Opinion of Bond Counsel), and the Bond Trustee will take such action as may be directed in accordance with such instructions. OHSUSA: D-45 C-45

266 Notwithstanding any provisions of the Bond Indenture, if the Authority will provide to the Bond Trustee an Opinion of Bond Counsel to the effect that any specified action required under the Bond Indenture is no longer required or that some further or different action is required to maintain the exclusion from federal income tax of interest on the Tax-Exempt Bonds, the Bond Trustee may conclusively rely on such opinion in complying with the requirements of the Bond Indenture and the Tax Certificate, and the covenants under the Bond Indenture will be deemed to be modified to that extent. Intercept Covenants. The Bond Trustee will, on each Interest Payment Date, each Principal Payment Date, or on any date which a transfer from the Controller to the Bond Trustee is scheduled pursuant to the Intercept Notice, notify the Authority and the Borrower of any shortfall in amounts received by the Bond 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 Bond Trustee has sent notice pursuant to the preceding sentence, the Bond Trustee will receive payment of amounts sufficient to cure such shortfall, the Bond Trustee will, within 10 business days thereof, notify the Authority and the Borrower of the receipt of such payment. The Bond Trustee will not be required to take any action in connection with the foregoing except as specifically set forth above. Events of Default; Remedies on Default Under the Bond Indenture Events of Default; Waiver of Default. If one or more of the following events ( Events of Default ) happens, that is to say (a) if default is made by the Authority in the due and punctual payment of the principal of any Bond as the same becomes due and payable (whether at maturity, by declaration or otherwise); (b) if default is made by the Authority in the due and punctual payment of interest on any Bond when and as such interest will become due and payable; or (c) if any occurrence and continuance of an Event of Default under the Loan Agreement; (d) if default is made by the Authority in the performance or observance of any other of the covenants, agreements or conditions on its part in the Bond Indenture or in the Bonds contained, and such default will have continued for a period of 60 days after written notice thereof, specifying such default and requiring the same to be remedied, will have been given to the Authority by the Bond Trustee, or to the Authority, the Borrower and the Bond Trustee by the Holders of not less than a majority in aggregate principal amount of the Bonds at the time Outstanding, except that, in each case, if such failure can be remedied but not within such 60-day period, such failure will not become an Event of Default for so long as the Authority will diligently proceed to remedy the same In accordance and subject to any directions or limitations of time established by the Master Trustee; then and in each and every such case during the continuance of such Event of Default, the provisions of the Bond Indenture will apply. Institution of Legal Proceedings by Bond Trustee. (a) If one or more of the Events of Default will occur, the Bond Trustee in its discretion may, and upon the written request of the Holders of a majority in principal amount of the Bonds then Outstanding, and upon being indemnified to its satisfaction therefor, the Bond Trustee will proceed to protect or enforce its rights or the rights of the holders of Bonds under the Bond Indenture, the Loan Agreement, the Leases and Obligation No. 1, by a suit in equity or action at law, either for the specific performance of any covenant or agreement contained in the Bond Indenture or therein, or in aid of the execution of any power in the Bond Indenture or therein granted, or by mandamus or other appropriate proceeding for the enforcement of any other legal or equitable remedy as the Bond Trustee will determine in support of any of its rights or duties under the Bond Indenture, provided that any such OHSUSA: D-46 C-46

267 request from the Bondholders will not be in conflict with any rule of law or with the Bond Indenture, expose the Bond Trustee to personal liability or be unduly prejudicial to Bondholders not joining therein. (b) Notwithstanding anything to the contrary in the Bond Indenture, the Authority will have no obligation to, and instead the Bond Trustee may, without further direction from the Authority, take any and all steps, actions and proceedings, to enforce any or all rights of the Authority (other than those specifically retained by the Authority pursuant to the Bond Indenture) under the Bond Indenture or the Loan Agreement, including, without limitation, the rights to enforce the remedies upon the occurrence and continuation of an Event of Default and the obligations of the Borrower under the Loan Agreement. (c) Nothing will be deemed to authorize the Bond Trustee to authorize or consent to or accept or adopt on behalf of any Bondholder any plan of reorganization, arrangement, adjustment, or composition affecting the Bonds or the rights of any Bondholder thereof, or to authorize the Bond Trustee to vote in respect of the claim of any Bondholder in any such proceeding without the approval of the Bondholders so affected. (d) Anything in the Indenture or Loan Agreement to the contrary notwithstanding, the Bond Trustee will not be required to enter, take possession of, or take any other action whatsoever with respect to the failure to initiate foreclosure proceedings with respect to the Project unless the Bond Trustee is satisfied that the Bond Trustee will not be subject to any liability under any Environmental Regulations of any kind whatsoever or from any circumstances present at the Project relating to the presence, use, management, disposal or contamination by any environmentally hazardous materials or substances of any kind whatsoever. Application of Moneys Collected by Bond Trustee. Any moneys collected by the Bond Trustee pursuant to the preceding paragraph and any other amounts then held by the Bond Trustee under the Bond Indenture, will be applied in the following order, at the date or dates fixed by the Bond Trustee and, in the case of distribution of such moneys on account of principal upon presentation of the Bonds, and stamping thereon the payment, if only partially paid, and upon surrender thereof, if fully paid: First: To the payment of costs and expenses of collection and reasonable compensation to the Bond Trustee for its own services and for the services of counsel, agents and employees by it properly engaged and employed, and all other expenses and liabilities incurred, and for advances, together with interest on such advances at a rate per annum equal to the Bond yield plus 2 percent, made pursuant to the provisions of the Bond Indenture. Second: In case the principal of any of the Bonds will have become due by declaration or otherwise and remains unpaid, first to the payment of interest in default, and then to the payment of the principal of all Bonds then due and unpaid, in every instance such payment to be made ratably to the persons entitled thereto without discrimination or preference. Whenever moneys are to be applied pursuant to the provision of the Bond Indenture, such moneys will be applied at such times, and from time to time, as the Bond Trustee will determine, having due regard to the amount of such moneys available for application and the likelihood of additional moneys becoming available for such application in the future. Whenever the Bond Trustee will apply such funds, it will fix the date (which will be the Interest Payment Date unless the Bond Trustee will deem another date more suitable) upon which such application is to be made and upon such date interest on the amounts of principal and past-due interest to be paid on such date will cease to accrue. Whenever all principal of and interest on all Bonds have been paid under the provisions of the Bond Indenture and all fees, expenses and charges of the Bond Trustee (including without limitation those of its attorneys) have been paid, any balance remaining in the funds and accounts under the Bond Indenture will be paid to the Borrower. Effect of Delay or Omission to Pursue Remedy. OHSUSA: D-47 C-47

268 No delay or omission of the Bond Trustee or of any Holder of Bonds to exercise any right or power arising from any default will impair any such right or power or will be construed to be a waiver of any such default or acquiescence therein, and every power and remedy given pursuant to the Bond Indenture to the Bond Trustee or to the Holders of Bonds may be exercised from time to time, and as often as will be deemed expedient. In case the Bond Trustee will have proceeded to enforce any right under the Bond Indenture, and such proceedings will have been discontinued or abandoned because of waiver or for any other reason, or will have been determined adversely to the Bond Trustee, then and in every such case the Authority and the Bond Trustee, and the Holders of the Bonds, severally and respectively, will be restored to their former positions and rights under the Bond Indenture in respect to the trust estate; and all remedies, rights and powers of the Authority, the Bond Trustee and the Holders of the Bonds will continue as though no such proceedings had been taken. Remedies Cumulative. No remedy in the Bond Indenture conferred upon or reserved to the Bond Trustee or to any Holder of the Bonds is intended to be exclusive of any other remedy, but each and every such remedy will be cumulative and will be in addition to every other remedy given under the Bond Indenture or now or after the Bond Indenture existing at law or in equity. Covenant to Pay Bonds in Event of Default. The Authority covenants that, upon the happening of any Event of Default, the Authority will pay, but only out of Payments, to the Bond Trustee, upon demand, for the benefit of the Holders of the Bonds, the whole amount then due and payable thereon (by declaration or otherwise) for interest and principal as the case may be, and all other sums which may be due under the Bond Indenture or secured pursuant to the Bond Indenture, including reasonable compensation to the Bond Trustee and its agents and counsel and any expenses or liabilities incurred by the Bond Trustee under the Bond Indenture and, its agents and counsel. In case the Authority will fail to pay the same forthwith upon such demand, the Bond Trustee, in its own name and as trustee of an express trust, will be entitled to institute proceedings at law or in equity in any court of competent jurisdiction to recover judgment for the whole amount due and unpaid, together with costs and reasonable attorneys fees and expenses, subject, however, to the condition that such judgment, if any, will be limited to, and payable solely out of, Payments as in the Bond Indenture provided and not otherwise. The Bond Trustee will be entitled to recover such judgment as aforesaid, either before or after or during the pendency of any proceedings for the enforcement of the Bond Indenture, and the right of the Bond Trustee to recover such judgment will not be affected by the exercise of any other right, power or remedy for the enforcement of the provisions of the Bond Indenture. Bond Trustee Appointed Agent for Bondholders. The Bond Trustee is pursuant to the Bond Indenture appointed the agent and attorney-in-fact of the Holders of all Bonds Outstanding under the Bond Indenture for the purpose of filing any claims relating to the Bonds. Power of Bond Trustee to Control Proceedings. Subject to the Bond Indenture, in the event that the Bond Trustee, upon the happening of an Event of Default, will have taken some action, by judicial proceedings or otherwise, pursuant to its duties under the Bond Indenture, whether upon its own discretion or upon the request of the Holders of a majority in aggregate principal amount of the Bonds then Outstanding, it will have full power, in the exercise of its discretion for the best interests of the Holders of the Bonds, with respect to the continuance, discontinuance, withdrawal, compromise, settlement or other disposal of such action; provided, however, that the Bond Trustee will not, unless there no longer continues an Event of Default under the Bond Indenture, discontinue, withdraw, compromise or settle, or otherwise dispose of any litigation pending at law or in equity, if at the time there has been filed with it a written request signed by the Holders of at least a majority in aggregate principal amount of the Bonds Outstanding under the Bond Indenture opposing such discontinuance, withdrawal, compromise, settlement or other disposal of such litigation. Limitation on Bondholders Right to Sue. OHSUSA: D-48 C-48

269 Notwithstanding any other provision of the Bond Indenture, no Holder of any Bond issued under the Bond Indenture will have the right to institute any suit, action or proceeding at law or in equity, for any remedy under or upon the Bond Indenture, the Loan Agreement or Obligation No. 1, unless (a) such Holder will have previously given to the Bond Trustee written notice of the occurrence of an Event of Default under the Bond Indenture; (b) the Holders of at least a majority in aggregate principal amount of all the Bonds then Outstanding will have made written request upon the Bond Trustee to exercise the powers granted in the Bond Indenture or to institute such action, suit or proceeding in its own name; (c) said Holders will have tendered to the Bond Trustee reasonable indemnity against the costs, expenses and liabilities to be incurred in compliance with such request; and (d) the Bond Trustee will have refused or omitted to comply with such request for a period of 60 days after such written request will have been received by, and said tender of indemnity will have been made to, the Bond Trustee. Such notification, request, tender of indemnity and refusal or omission are pursuant to the Bond Indenture declared, in every case, to be conditions precedent to the exercise by any Holder of Bonds of any remedy under the Bond Indenture; it being understood and intended that no one or more Holders of Bonds will have any right in any manner whatever by his or their action to enforce any right under the Bond Indenture, except in the manner provided in the Bond Indenture, and that all proceedings at law or in equity to enforce any provision of the Bond Indenture will be instituted, had and maintained in the manner provided in the Bond Indenture and for the equal benefit of all Holders of the Outstanding Bonds. The right of any Holder of any Bond to receive payment of the principal of and interest on such Bond out of Payments and the funds pledged in the Bond Indenture, as in the Bond Indenture provided, on and after the respective due dates expressed in such Bond, or to institute suit for the enforcement of any such payment on or after such respective dates, will not be impaired or affected without the consent of such Holder, notwithstanding the foregoing provisions the Bond Indenture. Modification of Indenture Modification Without Consent of Bondholders. Subject to the conditions and restrictions contained in the Bond Indenture, the Authority and the Bond Trustee, from time to time and at any time may enter into an indenture or indentures supplemental to the Bond Indenture, which indenture or indentures thereafter will form a part of the Bond Indenture, including, without limitation, for one or more of the following purposes, provided that the Authority and the Bond Trustee will have received an Opinion of Bond Counsel to the effect that such amendment or modification will not cause the interest on the Tax-Exempt Bonds to be included as gross income for federal income tax purposes and that such amendment or modification is permitted pursuant to the Bond Indenture: (a) to add to the covenants and agreements of the Authority contained in the Bond Indenture, other covenants and agreements thereafter to be observed, or to assign or pledge additional security for the Bonds, or to surrender any right or power in the Bond Indenture reserved to or conferred upon the Authority; provided such amendment or modification will not materially and adversely affect the interests of the Holders of the Bonds; (b) to make such provisions for the purpose of curing any ambiguity, inconsistency or omission, or of curing, correcting or supplementing any defective provision, contained in the Bond Indenture, or in regard to such matters or questions arising under the Bond Indenture as the Authority may deem necessary or desirable and not inconsistent with the Bond Indenture; (c) to modify, amend or supplement the Bond Indenture or any indenture supplemental to the Bond Indenture in such manner as to permit the qualification of the Bond Indenture or thereof under the Trust Indenture Act of 1939, as amended, or any similar federal statute after the Bond Indenture in effect, and, if they so determine, to add to the Bond Indenture or any indenture supplemental to the Bond Indenture such other terms, conditions and provisions as may be permitted by said Trust Indenture Act of 1939, as amended, or similar federal statute; provided such amendment or modification will not materially affect the interests of the Holders of the Bonds; OHSUSA: D-49 C-49

270 (d) in connection with an amendment of any agreement permitted pursuant to the Bond Indenture for the purpose of conforming the terms, conditions and covenants of the Bond Indenture to the corresponding or related provisions of such amended agreement; Bonds. (e) (f) to modify or eliminate the book-entry registration system for the Bonds; or to comply with requirements of a Rating Agency to obtain or maintain a rating on any Any supplemental indenture authorized by the provisions of the Bond Indenture may be executed by the Authority and the Bond Trustee without the consent of the Holders of any of the Bonds at the time Outstanding, notwithstanding any of the provisions of the Bond Indenture, but the Bond Trustee will not be obligated to enter into any such supplemental indenture which affects the Bond Trustee s own rights, duties or immunities under the Bond Indenture or otherwise. The Bond Trustee will mail an executed copy of a supplemental indenture authorized pursuant to the Bond Indenture and any document related thereto or executed in connection therewith to the Borrower and each Rating Agency then rating the Bonds promptly after execution by the Authority and the Bond Trustee. The Authority will mail drafts of any such documents to such parties prior to execution thereof. Modification with Consent of Bondholders. With the consent of the Holders of not less than a majority in aggregate principal amount of the Bonds at the time Outstanding), the Authority and the Bond Trustee may from time to time and at any time, with an Opinion of Bond Counsel to the effect that such amendment or modification will not, in and of itself, cause the interest on the Tax-Exempt Bonds to be included as gross income for federal income tax purposes, enter into an indenture or indentures supplemental to the Bond Indenture for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of the Bond Indenture or of any supplemental indenture; provided, however, that no such supplemental indenture will (1) extend the fixed maturity of any Bonds or reduce the rate of interest thereon or extend the time of payment of interest, or reduce the amount of the principal thereof or (2) reduce the aforesaid percentage of Holders of Bonds whose consent is required for the execution of such supplemental indentures or extend the time of payment or permit the creation of any lien on the Payments or the assets pledged in the Bond Indenture prior to or on a parity with the lien of the Bond Indenture or deprive the Holders of the Bonds of the lien created pursuant to the Bond Indenture upon the Payments or the assets pledged in the Bond Indenture, without the consent of the Holders of all of the Bonds then Outstanding. Upon the filing with the Bond Trustee of evidence of the consent of Bondholders, as aforesaid, the Bond Trustee will join with the Authority in the execution of such supplemental indenture unless such supplemental indenture affects the Bond Trustee s own rights, duties or immunities under the Bond Indenture or otherwise, in which case the Bond Trustee may in its discretion, but will not be obligated to, enter into such supplemental indenture. It will not be necessary for the consent of the Bondholders under the Bond Indenture to approve the particular form of any proposed supplemental indenture, but it will be sufficient if such consent will approve the substance thereof. Promptly after the execution by the Authority and the Bond Trustee of any supplemental indenture pursuant to the provisions of the Bond Indenture, the Authority will mail a notice to the Bond Trustee setting forth in general terms the substance of such supplemental indenture, and the Bond Trustee, upon receipt of such notice, will mail such notice to the Borrower and the Bondholders at the addresses shown on the Bond registration books maintained by the Bond Trustee, at the expense of the Borrower. Any failure of the Authority or the Bond Trustee to give such notice, or any defect therein, will not, however, in any way impair or affect the validity of any such supplemental indenture. The Bond Trustee will mail an executed copy of such supplemental indenture and any amendment of the Loan Agreement permitted under the Bond Indenture to the Borrower, each Rating Agency then rating the Bonds OHSUSA: D-50 C-50

271 promptly after execution by the Authority, the Bond Trustee, and in the case of the Loan Agreement, the Borrower. The Authority will mail drafts of any such documents to such parties prior to execution thereof. Effect of Supplemental Indenture. Upon the execution of any supplemental indenture pursuant to the provisions of the Bond Indenture will be, and will be deemed to be, modified and amended in accordance therewith, and the respective rights, duties and obligations under the Bond Indenture of the Authority, the Bond Trustee and all Holders of Outstanding Bonds will thereafter be determined, exercised and enforced under the Bond Indenture subject in all respects to such modifications and amendments, and all the terms and conditions of any such supplemental indenture will be part of the terms and conditions of the Bond Indenture for any and all purposes. Opinion of Counsel as to Supplemental Indenture. Subject to the provisions of the Bond Indenture and the requirement of the Bond Indenture for an Opinion of Bond Counsel, the Bond Trustee and the Authority may receive an Opinion of Counsel as conclusive evidence that any supplemental indenture executed pursuant to the provisions of the Bond Indenture complies with the requirements of the Bond Indenture and will have no liability to Holders in excluding any Supplemental Indenture in reliance on an Opinion of Bond Counsel. Notation of Modification on Bonds; Preparation of New Bonds. Bonds authenticated and delivered after the execution of any supplemental indenture pursuant to the provisions of the Bond Indenture may bear a notation, in form approved by the Authority, as to any matter provided for in such supplemental indenture, and if such supplemental indenture will so provide, new Bonds, so modified as to conform, in the opinion of the Authority, to any modification of the Bond Indenture contained in any such supplemental indenture, may be prepared by the Authority, authenticated by the Bond Trustee and delivered without cost to the Holders of the Bonds then Outstanding, upon surrender for cancellation of such Bonds, in equal aggregate principal amounts. General LOAN AGREEMENT The Loan Agreement is an agreement between the Authority and the Borrower whereby the Authority agrees to lend the proceeds of the Bonds to the Borrower and the Borrower agrees to make payments to the Bond Trustee sufficient to pay debt service on the Bonds. The following is a summary of certain provisions of the Loan Agreement. This summary does not purport to be complete or definitive and reference is made to the Loan Agreement for the complete terms thereof. Loan Financing; Loan Repayments; Indemnification; Construction Draws Agreement to Issue Bonds and Application of Bond Proceeds; Obligation No. 1. To fund the Loan and for the other purposes set forth in the Bond Indenture, the Authority, concurrently with the execution of the Loan Agreement, will issue, sell and deliver the Bonds and direct the proceeds thereof to be deposited with the Bond Trustee and applied as provided in the Bond Indenture. The Authority and the Borrower pursuant to the Loan Agreement agree that the proceeds of the Bonds will be applied solely in accordance with the Bond Indenture. The Borrower pursuant to the Loan Agreement approves the terms and provisions of the Bond Indenture and, to the extent applicable, agrees to be bound by such terms. OHSUSA: D-51 C-51

272 The Borrower agrees that, except as otherwise provided in the Loan Agreement, so long as any Bond remains Outstanding, Obligation No. 1 will be issuable only as a single obligation without coupons, registered as to principal and interest in the name of the Bond Trustee, and no transfer of Obligation No. 1 will be registered under the Master Indenture or be recognized by the Borrower except for transfers to a successor Bond Trustee. Upon the principal of Obligation No. 1 being declared immediately due and payable, Obligation No. 1 may be transferred if and to the extent that the Bond Trustee requests that the aforementioned restrictions on transfers of the Loan Agreement be terminated. The Loan; Loan Repayments; Additional Payments. (a) The Loan. The Authority agrees, upon the terms and conditions therein specified, to loan to the Borrower that portion of the proceeds received by the Authority from the sale of the Bonds by causing such proceeds to be deposited with the Bond Trustee for disposition as provided in the Bond Indenture. The obligation of the Authority to make the Loan is limited solely to such sale proceeds of the Bonds received by the Authority and will be deemed fully discharged upon the deposit of the proceeds of the Bonds with the Bond Trustee pursuant thereto. (b) Loan Repayments. In consideration of the issuance of the Bonds by the Authority and the loan of the proceeds thereof to the Borrower, the Borrower agrees that, on or before the 25th day of each month and as long as any of the Bonds remain Outstanding, it will pay to the Bond Trustee for deposit in the Revenue Fund such amount as is required by the Bond Trustee to make the transfers and deposits required on such date by the Bond Indenture. Notwithstanding the foregoing, if five business days prior to any interest or principal payment date with respect to the Bonds, the aggregate amount in the Revenue Fund is for any reason insufficient or unavailable to make the required payments of principal (or Redemption Price) of or interest on the Bonds then becoming due (whether by maturity, redemption or acceleration), the Borrower will promptly provide written notice to each Member and forthwith pay (or cause to be paid) the amount of any such deficiency (which, in the event there is more than one Member of the Obligated Group, such deficiency will be made up by the various Members of the Obligated Group as set forth in the Master Indenture of Trust) to the Bond Trustee. Each payment by the Borrower to the Bond Trustee under the Loan Agreement (the Loan Repayments ) will be in lawful money of the United States of America and paid to the Bond Trustee at its designated corporate trust office and held, invested, disbursed and applied as provided in the Bond Indenture. Notwithstanding anything to the contrary in the Loan Agreement, the Borrower will instruct or cause the Lessor to instruct the Lessee to cause each School to pay any shortfall in Base Rent directly to the Bond Trustee for deposit in the Revenue Fund. The Borrower will pay, or cause to be paid, the Loan Repayments from the Gross Revenues of the Borrower, including the Rental Payments, or from any other legally available funds of the Borrower, without any further notice thereof except as may be specifically required by the Loan Agreement. The Loan Repayments payable by the Borrower under the Loan Agreement are expected to be equal in the aggregate to an amount which, together with other funds in the Revenue Fund then available for the payment of principal and interest on the Bonds, will be sufficient to provide for the payment in full of the interest on, premium, if any, and principal of the Bonds as the same become due and payable. Additional Payments. In addition to the Loan Repayments, the Borrower will also pay certain Trustee fees, Authority expenses, costs of issuance and other miscellaneous amounts to the Authority or to the Bond Trustee, as the case may be. Events of Default and Remedies Events of Default. Any one of the following which occurs and continues will constitute an Event of Default under the Loan Agreement: (a) failure by the Borrower to pay or cause to be paid the Loan Repayments when due; or OHSUSA: D-52 C-52

273 (b) failure by the Borrower to pay or cause to be paid when due any other amounts required to be paid under the Loan Agreement and continuation of such failure to pay for 10 Business Days following the giving of written notice thereof to the Borrower; or (c) failure of the Borrower or the Landlord to observe and perform any covenant, condition or agreement on its part to be observed or performed under the Loan Agreement (other than failure by the Borrower to pay the amounts required to be paid under the Loan Agreement as referred to in the Loan Agreement, and other than as provided in subparagraph (e) below) after the Borrower will have been given 60 days written notice specifying such default and requesting it be remedied, unless the Bond Trustee will have consented to an extension beyond such 60-day period, which extension will not exceed 90 days; provided that the Borrower, Lessor or a Member of the Obligated Group will have commenced cure and be diligently pursuing cure thereof in good faith; or (d) voluntary initiation by the Borrower or any Member of the Obligated Group of any proceeding under any federal or state law relating to bankruptcy, insolvency, arrangement, reorganization, readjustment of debt or any other form of debtor relief, or the initiation against the Borrower or any Member of the Obligated Group of any such proceeding that will remain undismissed for 60 calendar days, or failure by the Borrower or any Member of the Obligated Group to promptly have discharged any execution, garnishment or attachment of such consequence as would impair the ability of the Borrower or any Member of the Obligated Group to carry on its operations, or assignment by the Borrower for the benefit of creditors, or the entry by the Borrower or any Member of the Obligated Group into an agreement of composition with creditors or the failure generally by the Borrower or any Member of the Obligated Group to pay its debts as they become due; (e) occurrence and continuance of an Event of Default under the Bond Indenture or the Master Indenture, provided, however, that an Event of Default under the Bond Indenture arising solely from the actions or inactions of the Authority or the Bond Trustee will not be an Event of Default under the Loan Agreement; or (f) any representation or warranty made in the Loan Agreement or any statement or representation made by the Borrower in any certificate, report, opinion, financial statement or other instrument furnished in connection with the Loan or any of the Borrower Documents proves to be false or misleading in any material respect when made. Remedies. (a) Upon the occurrence of an Event of Default in accordance with the provisions described above under the caption Events of Default and at any time thereafter during the continuance of such Event of Default, the Bond Trustee, subject to the Bond Trustee s right and protections under the Indenture, may take one or more or any combination of the following remedial steps: (i) By written notice to the Borrower, declare the unpaid indebtedness on the Bonds and all amounts then due and payable under the Loan Agreement, whether by acceleration of maturity or otherwise, to be immediately due and payable, whereupon the same will become immediately due and payable; and (ii) Take whatever action at law or in equity may appear necessary or desirable to collect the amounts then due and thereafter to become due under the Loan Agreement, or to enforce performance and observance of any obligation, agreement or covenant of the Borrower or the Landlord under the Loan Agreement, the Bonds or any other Corporation Document. Any amounts collected pursuant to action taken by the Bond Trustee under the Loan Agreement will be applied in accordance with provisions of the Bond Indenture. Notwithstanding anything therein to the contrary, the Loan may be separately and independently accelerated with or without an acceleration of Bonds. (b) If the Bond Trustee will have proceeded to enforce the rights of the Authority under the Loan Agreement and such proceedings will have been discontinued or abandoned for any reason or will have been OHSUSA: D-53 C-53

274 determined adversely to the Bond Trustee or the Authority, then the Borrower, the Landlord, the Bond Trustee and the Authority will be restored respectively to their several positions and rights under the Loan Agreement, and all rights, remedies and powers of the Borrower, the Authority and the Bond Trustee will continue as though no such proceedings had taken place. Additional Remedies. In addition to the above remedies, if an Event of Default occurs under the Loan Agreement, the Authority and the Bond Trustee will have the right and remedy, without posting bond or other security, to have the provisions of the Loan Agreement specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such breach will cause irreparable injury to the Bond Trustee and the Authority and that money damages will not provide an adequate remedy thereto. Amendments; Modifications in Writing. Except as otherwise provided in the Loan Agreement or the Bond Indenture, subsequent to the initial issuance of Bonds and prior to their payment in full, or provision for such payment having been made as provided in the Bond Indenture, the Loan Agreement may be effectively amended, changed, modified, altered or terminated only as permitted under the Bond Indenture, by written instrument executed by the parties to the Loan Agreement. The Authority agrees pursuant to the Loan Agreement that it will not consent to an amendment of the Bond Indenture without the approval of the Borrower. OHSUSA: D-54 C-54

275 APPENDIX D SUMMARY OF CERTAIN PROVISIONS OF THE LEASES The following is a brief summary of the Leases (as defined below). The summary does not purport to be complete or definitive and is qualified in its entirety by reference to the Leases. DEFINITIONS Unless otherwise defined below, all capitalized terms used in this Appendix D shall have the meanings ascribed to such terms in the forepart of this Limited Offering Memorandum. Unless otherwise noted, these provisions apply to each Lease. As used in this Appendix D, the capitalized terms shall have the following meanings: Bond Documents means the Loan Agreement, the Deed of Trust, the Lease, the Master Indenture of Trust (the Master Indenture ), the Indenture, the Supplemental Master Indenture for Obligation No. 1, the Bond Purchase Agreement, the Intercept Notice, and any related documents and instruments. Condemnation means if the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power Extraordinary Monthly Rent shall mean the amount set forth in an Extraordinary Monthly Rent Notice, which shall be the Tenant s Proportionate Share of the Extraordinary Monthly Rent. Fair Market Base Rent shall mean the fair market rent of comparable premises (including square footage, location and quality of the Premises) to the Premises subject to the terms and provisions of the Lease, including without limitation Tenant s obligation to pay the Additional Rent (if any) and Expenses, and shall apply if the Loan is no longer outstanding, and means the Base Rent component of Rent for the Extension Term (or so much thereof during which the Loan is not outstanding), which shall be the Fair Market Base Rent determined in accordance with the Lease. Landlord or each Landlord means either Bright Star Development Group Lemona, LLC, a California limited liability company (the VAHS Landlord ), whose sole member is the Bright Star Education Group (the Borrower ), a California nonprofit public benefit corporation, with respect to the Bright Star Schools VAHS Lease (as defined below) or BSDG 4115 MLK LLC, a California limited liability company (the SMCA Landlord ), whose sole member is the Borrower, with respect to the Bright Star Schools SMCA Lease. Landlords means both the VAHS Landlord and the SMCA Landlord. Lease or each Lease means either that certain Lease Agreement dated December 1, 2017 by and between the VAHS Landlord, as Landlord, and Bright Star Schools, a California nonprofit public benefit corporation ( Tenant ), as Tenant (the Bright Star Schools VAHS Lease ), related to the VAHS Facility (as defined below), or that certain Sublease Agreement dated December 1, 2017 by and between the SMCA Landlord, as Sublandlord, and Tenant, as Subtenant (the Bright Star Schools SMCA Lease ) related to the SMCA Facility. Leases means both the Bright Star Schools VAHS Lease and the Bright Star Schools SMCA Lease. The Bright Star Schools SMCA Lease is subject to the SMCA Ground Lease described below. SMCA Ground Lease means that certain Lease Agreement dated as of September 1, 2017 between the Bethany Baptist Church of West Los Angeles, a California nonprofit religious corporation ( SMCA Ground Lessor ) as ground landlord and the SMCA Landlord, as ground tenant for the SMCA Facility. The Tenant agrees to be bound by and comply with the SMCA Ground Lease and to satisfy all applicable terms and conditions of the SMCA Ground Lease for the benefit of both the SMCA Ground Lessor and the SMCA Landlord. References herein to the SMCA Ground Lease herein are qualified in their entirety by the terms and conditions of the SMCA Ground Lease attached to this Limited Offering Memorandum. D-1

276 Proportionate Share means the amount required to be paid by Tenant to ensure that all of the required Rent with respect to all of the Related Projects have been timely made. Related Project means any project financed by Indebtedness that remains Outstanding. School or Each School means either Valor Academy High School ( VAHS ), which operates under a charter issued to Tenant by the Los Angeles Unified School District with respect to the VAHS Facility and Stella Middle Charter Academy ( SMCA ), which operates under a charter issued to Tenant by the Los Angeles Unified School District, with respect to the SMCA Facility. Schools means both the VAHS and SMCA. Tenant means Bright Star Schools, a California nonprofit public benefit corporation in its capacity as operator of and holder of the charter for the Schools. PROVISIONS RELATED TO THE LEASES Parties. Tenant shall lease the Premises, as defined in the Leases, from the VAHS Landlord pursuant to the Bright Star Schools VAHS Lease and from the SMCA Landlord pursuant to the Bright Star Schools SMCA Lease. The Premises. (i) Under the Bright Star Schools VAHS Lease, the Premises consist of all of the land and improvements, on the parcel of real property commonly referred to as (a) upon acquisition by the VAHS Landlord, Lemona Avenue, Los Angeles, California, (the VAHS Campus Property ), and (b) upon funding of the Loan, 9404 Lemona Avenue, Los Angeles, California (the VAHS Athletic Field Property ) (collectively the VAHS Campus Property and the VAHS Athletic Filed Property are referred to as the VAHS Facility ); (ii) Under the Bright Star Schools SMCA Lease, the Premises will consist of the SMCA Landlord s interest in the land and improvements on the parcel of real property leased by the SMCA Landlord pursuant to the SMCA Ground Lease, commonly referred to as part of 4115 Martin Luther King Jr. Boulevard, Los Angeles, California 90008, together with the SMCA Landlord s rights to use the Parking Easement described in the Bright Star Schools SMCA Lease (the SMCA Facility ). The legal description of the SMCA Facility will be determined on or before the expiration of the Due Diligence Period described in the SMCA Ground Lease, whereupon the SMCA Ground Lease and Bright Star Schools SMCA Lease will be amended to attach such legal descriptions of the SMCA Facility and Parking Easement. In addition, Tenant s use of certain portions of the SMCA Facility shall be subject to the terms of the Shared Areas Agreement more particularly described in the SMCA Ground Lease. Premises. (iii) Collectively the VAHS Facility and SMCA Facility are referred to in this Summary as the Term. (i) The initial term of the Bright Star Schools VAHS Lease shall be for approximately thirty-four (34) years commencing on the funding of the Loan, and ending on June 1, 2051 (the VAHS Initial Term ), or such other later date if Tenant exercises any of Extension Options described in the Lease (such date, as it may be extended, the VAHS Expiration Date ). (ii) The initial term of the Bright Star Schools SMCA Lease shall be for approximately thirty-two (32) years commencing on the funding of the Loan and ending on June 1, 2050 (the SMCA Initial Term ). Extension Options. (i) Tenant shall have three (3) five-year options to extend the VAHS Initial Term for the Bright Star Schools VAHS Lease (such extension terms collectively, the VAHS Extension Term and, collectively with the VAHS Initial Term, the VAHS Term ) on the terms and conditions, and at the Rent, set forth in the Bright Star Schools VAHS Lease. D-2

277 (ii) Tenant shall have two (2) five-year options to extend the SMCA Initial Term for the Bright Star Schools SMCA Lease (such extension terms collectively the SMCA Extension Term ) and collectively with the SMCA Initial Term, the SMCA Term ) on the terms and conditions and at the Rent set forth in the Bright Star Schools SMCA Lease. RENT DEFINED Subject to the terms of the Leases, Rent is defined as and shall consist of the sum of (i) Base Rent, (ii) Additional Rent, (iii) Extraordinary Monthly Rent, and (iv) Expenses (all as defined below), together with all other monetary obligations of Tenant to Landlord or to third parties arising under the terms of the Leases. Rent under the Bright Star Schools SMCA Lease shall also include all Rent payable by the SMCA Landlord under the SMCA Ground Lease. BASE RENT So long as the Loan is outstanding, Base Rent under each Lease shall be payable in accordance with the schedule set forth in Exhibit B attached to each Lease, subject to downward adjustment in the event of any redemption or defeasance of all or a portion of the Bonds or prepayment of all or a portion of the Loan. In the event of redemption or defeasance of all of the Bonds prior to the Expiration Date of each Lease such that no Bonds remain outstanding and prepayment of all of the Loan prior to the Expiration Date and without termination of each Lease, commencing on the first day of the first calendar month following such defeasance or full prepayment, the Base Rent of each Lease shall be revised to be the Fair Market Base Rent determined in accordance with each Lease. In no event, however, shall Base Rent be less than the debt service due and payable by Landlord under the Master Indenture with respect to the Premises. ADDITIONAL RENT Tenant shall be responsible for the payment of Additional Rent. Additional Rent shall be paid to each Landlord on demand or, if such Additional Rent is ongoing and can be calculated on a periodic basis, on a monthly basis pursuant to a written schedule from time to time delivered by each Landlord. The amount projected as Additional Rent during the Term of each Lease, assuming no Extraordinary Monthly Rent, is as set forth on Exhibit B to each Lease. Additional Rent shall consist of the following: (b) All amounts required to reimburse each Landlord, or satisfy each Landlord's obligations, for any fees, expenses, taxes, indemnities, assessments or other payments that the Borrower is obligated to pay under the terms of the Loan Agreement, including, but not limited to, such amounts as described in the Loan Agreement. (c) Any other amounts required to be paid by each Landlord in order for each Landlord to meet its obligations under the Bond Documents on a full and timely basis. EXTRAORDINARY MONTHLY RENT In the event that Tenant receives a notice (an "Extraordinary Monthly Rent Notice") from either the Landlord under each such Lease or the Related Bond Trustee (as defined in the Master Indenture of Trust) stating the Related Bond Trustee has not received the payment of Rent with respect to a Related Project on or before that date that such required payment is due, then such Tenant shall pay the Extraordinary Monthly Rent to the Related Bond Trustee within three business days after such Tenant's receipt of the Extraordinary Monthly Rent Notice. Landlord covenants to immediately provide Tenant with a copy of any Extraordinary Monthly Rent Notice received by Landlord pursuant to the terms of the Master Indenture of Trust. "Extraordinary Monthly Rent" means the amount set forth in such Extraordinary Monthly Rent Notice, which shall be Tenant's Proportionate Share of the Extraordinary Monthly Rent. "Proportionate Share" means the amount required to be paid by Tenant to ensure that all of the required Rent with respect to all of the Related Projects have been timely made. There is no assurance that the amount of Extraordinary Monthly Rent will be sufficient to cover any Rent not paid by any other Related Project. If payable, Extraordinary Monthly Rent shall be added to and be a component of Base Rent. D-3

278 EXPENSES Tenant shall be responsible for all Expenses, which Tenant shall pay directly to the providers of any of the items comprising Expenses prior to delinquency, or shall pay to or reimburse each Landlord within thirty (30) days after receiving a statement from Landlord itemizing (with reasonable description) all charges included thereon. Expenses shall mean all costs and expenses of the ownership, operation, maintenance, repair, or replacement, and insurance of the Premises, as determined by standard accounting practices, including, by way of illustration only, and not by way of limitation, to the extent they apply to the Premises, the aggregate of the Maintenance Expenses and the General Expenses set forth below: (a) Maintenance Expenses means all costs of maintaining and repairing the Premises, the parking area, athletic fields and other portions of the Premises, deferred maintenance, installing or extending service systems and other built-in equipment, and improving the Premises, including without limitation all of the following: (i) All maintenance, replacement and repair costs of air conditioning, heating and ventilation equipment and systems, elevators (if any), landscaping, service areas, parking lots, athletic fields, building exteriors (including painting), signs and directories, repairing and replacing roofs, walls, structural compliments of the Premises, and cost of compliance with applicable laws(including any required upgrades or retrofitting). (ii) Supplies, materials, labor, equipment, and utilities used in or related to the repair and maintenance of the Premises and such common areas. (iii) Capital improvements made to the Premises (whether funded in full or amortized with reasonable financing charges) which may be required by any government authority or which will improve the operating efficiency of the Premises. (b) Expenses: General Expenses means all of the following, to the extent not included in Maintenance (i) Tenant and collected by Landlord. (ii) (iii) Gross receipts taxes, whether assessed against Landlord or assessed against Water, sewage, and waste or refuse removal charges. Gas, electricity, telephone and other utilities. (iv) The cost of monthly or annual contracts for systems or services such as alarm systems, security systems, internet services, janitorial services or landscaping services. Premises. (v) (vi) (vii) All janitorial, cleaning, landscaping, sweeping and repair services relating to the The costs of signs and directories. The cost of compliance with applicable laws. (viii) Reasonable costs incurred by Landlord for operating expenses, including the day-to-day management (if any), including the cost of management personnel (if any), together with any of Landlord s administrative expenses such as state filings, preparation of tax returns or notices, and all taxes, charges, or fees in connection therewith to the extent related to the Premises. (ix) Subject to Section 4.6 and 9.2, Real Property Taxes (as defined in the Lease) and personal property taxes (as described in the Lease), if any D-4

279 (x) Amounts required to be paid as deductibles in connection with any insurance required under the Bond Documents. (xi) Any other costs or expenses incurred by Landlord under each Lease, and with respect to the Bright Star Schools SMCA Lease, any other costs and expenses incurred by the SMCA Landlord under the SMCA Ground Lease. PAYMENT All Rent required to be paid in monthly installments under each Lease shall be paid in advance on the twentieth (20th) day of the calendar month immediately preceding the month with respect to which such Rent is due. All Rent shall be paid in lawful money of the United States, without any abatement, deduction or offset whatsoever (except as specifically provided herein), and without any prior demand therefore. All Rent shall be paid to the Master Trustee for deposit in the Revenue Fund (as that term is defined in the Bond Documents), and at such address as the Master Trustee notifies Tenant, or at such other place as each Landlord may designate from time to time, with the approval of the Master Trustee as long as Landlord has any obligations pursuant to the terms of the Bond Documents. Notwithstanding the foregoing, Tenant shall receive a credit for Rent owed to Landlord to the extent the Bond Trustee receives monies on behalf of Tenant under the Intercept. Rent for any period during the Term hereof which is for less than one full calendar month shall be prorated based upon the actual number of days of said month. Subject to the terms of the Indenture, and so long as any of the Bonds or the Loan remains outstanding, Tenant shall through the Intercept Notice, cause the State Controller to transfer the portion of the State Apportionment described in the Intercept Notice and attributable to the School to the Bond Trustee for deposit in the Revenue Fund (as defined in the Indenture). Landlord shall have the right, but not the obligation, to collect and impound, in advance, any or all components of Expenses or other Rent based upon Landlord's reasonable estimate of Tenant's future liability for such amounts for any calendar year or other period selected by Landlord. At the end of the calendar year or other period with respect to which any such estimate was prepared, Landlord shall reconcile Tenant's actual obligation for such component of Expenses or other Rent and the estimated amounts previously paid by Tenant. SOURCE OF RENT PAYMENTS Notwithstanding anything in each Lease to the contrary, Tenant's obligation to pay the Rent and the other monetary payments provided for in the Lease to any person or entity, including the Landlord, the Authority or the Bond Trustee, and their respective successors and assigns, is limited to, and shall not exceed, Gross School Revenues (as defined in Exhibit C to the Lease), if any, and under no circumstances shall Tenant be required to advance any moneys derived from any source of income other than, or pay Rent or any other monetary obligation under the Lease which is in excess of, the Gross School Revenues, nor shall any other funds or property of Tenant be liable for the payment of Rent or any other monetary obligation under the Lease, and such persons and entities shall look exclusively thereto for satisfaction of any claims under the Lease. Landlord covenants that it shall not take recourse against Tenant with respect to the failure by Tenant to make any payment under the Lease except recourse to the Gross School Revenues. Nothing contained in the Lease shall be construed to release Landlord from the performance of any of the agreements on its part contained in the Lease, and in the event Landlord shall fail to perform any such agreements on its part, Tenant may institute such action against Landlord as Tenant may deem necessary to compel performance so long as such action does not abrogate the obligations of Tenant contained in the first sentence of the preceding paragraph. Tenant may, however, at Tenant s own cost and expense and in Tenant s own name or in the name of Landlord prosecute or defend any action or proceeding or take any other action involving third persons which Tenant deems reasonably necessary in order to secure or protect Tenant s right of possession, occupancy and use under the Lease, and in such event Landlord agrees to cooperate fully with Tenant and to take such action necessary to effect the substitution of Tenant for Landlord in such action or proceeding if Tenant shall so request. USE In addition to any other restrictions on Tenant's use of the Premises described in each Lease, such Premises shall be used by Tenant for the School described in each Lease, for any related and ancillary school and educational D-5

280 purposes, any related administrative purposes, and any related incidental legal uses. Notwithstanding the foregoing, Tenant shall use and occupy the Premises only for "educational facilities" as defined in Section 17173(f) of the Education Code of the State of California in order to operate a charter school that is exempt from federal income taxation under Section 501(a) of the Internal Revenue Code (the "Code") as an organization described in Code Section 501(c)(3) and that qualifies as an "educational organization" as described under Code Section 170(b)(1)(A)(ii); provided that Tenant shall not rent the Premises as residential rental property to others, or permit any subtenant to rent the Premises as residential rental property to others. MAINTENANCE; REPAIRS Tenant Fully Responsible. During the Term, under each Lease, except in cases of damage or destruction due to casualty loss, or in the event of Condemnation, and except in case of the initial construction of the Improvements, all repair, maintenance, restoration, retrofitting, construction or reconstruction with respect to the Improvements shall be the sole responsibility of Tenant, and Landlord shall have no duty to undertake any such repair, maintenance, restoration, retrofitting, construction or reconstruction, or to pay any costs of the same. Provided, however, that Landlord shall provide Tenant access to the moneys in the Repair and Replacement Fund, and to any moneys in the Insurance and Condemnation Proceeds Fund to the extent necessary or appropriate to pay the costs of or to reimburse Tenant for its obligations under the Lease, in accordance with the terms and provisions of the Indenture related to the Repair and Replacement Fund and the Insurance and Condemnation Proceeds Fund. Compliance With Applicable Requirements. If any applicable building codes, applicable laws, covenants or restrictions of record, regulations, and ordinances (the Applicable Requirements ) require, during the Term, the construction of an addition to or an alteration of the Premises, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Premises Tenant agrees to undertake and complete such construction, alteration, remediation, reinforcement or other modification, and the costs therefor shall be incurred solely by Tenant. Liens. Tenant shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Tenant at or for use on the Premises, which claims are or may be secured by any mechanic s or materialmen s lien against the Premises or any interest therein. Tenant shall give Landlord not less than ten (10) days notice prior to the commencement of any work in, on, or about the Premises, and Landlord shall have the right to post notices of non-responsibility. If Tenant shall contest the validity of any such lien, claim or demand, then Tenant shall, at its sole expense defend and protect itself, Landlord and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. INSURANCE Liability. Tenant shall keep in force such liability insurance policies and in such amounts as required in the Master Indenture, provided that the Tenant under the Bright Star Schools SMCA Lease shall provide such insurance, as required under the SMCA Ground Lease, supplemented to meet the terms of the Bond Documents. The premium for such insurance shall be paid by Tenant and shall be deemed an Expense under the Lease. Premises. Tenant shall obtain and keep in force a policy or policies of property insurance in the name, and for the benefit, of Landlord, with loss payable to Landlord and to any lender, including the Bond Trustee and the Master Trustee, insuring loss or damage to the Premises. In addition, the Tenant under the Bright Star Schools SMCA Lease shall name the SMCA Ground Lessor as an additional insured. The amount of such insurance shall be as set forth in the Master Indenture, provided that the Tenant under the Bright Star Schools SMCA Lease shall provide such insurance, as required under the SMCA Ground Lease, supplemented to meet the terms of the Bond Documents. The premium for such insurance shall be paid by Tenant and shall be deemed an Expense under the Lease. Rental Interruption. Tenant shall also obtain and keep in force, for the benefit of Landlord, rental interruption insurance insuring Landlord for the amounts of Base Rent arising from an interruption of the payment of the Base Rent, Additional Rent and Expenses otherwise payable by Landlord covering a period of at least 12 months. The limits of such insurance shall be based upon the highest monthly amount of Base Rent and Additional D-6

281 Rent shown on Exhibit B, as revised from time to time. The premium for such insurance shall be paid by Tenant and shall be deemed an "Expense" under the Lease. DAMAGE OR DESTRUCTION Definitions (a) fire or other casualty. Damage shall mean damage or destruction to the improvements on the Premises from (b) Insured Loss shall mean Damage that was caused by an event required to be covered by the insurance described in the Lease, irrespective of any deductible amounts or coverage limits involved. Damage. The Tenant under the Bright Star Schools SMCA Lease is delegated and assumes all rights and obligations of the SMCA Landlord under the SMCA Ground Lease, including the right and obligation to make repairs. Subject to the terms of the Master Indenture, Landlord under each Lease shall be entitled to any and all insurance proceeds that are available as a result of any Insured Loss. Under the Bright Star Schools SMCA Lease, the SMCA Landlord shall make such proceeds available to Tenant, which shall have obligation to repair, as provided under the SMCA Ground Lease. Under the Bright Star Schools VAHS Lease, the VAHS Landlord may, at its election, proceed to reconstruct the Improvements subject to such Damage to their condition existing immediately prior to the Damage, utilizing available insurance proceed and any amounts voluntarily contributed by Landlord in its sole discretion. If Landlord elects not to undertake such restoration or if under the SMCA Ground Lease, the SMCA Landlord has the right, and elects not to undertake such restoration, Tenant may (i) if such damage is material, terminate the Lease by providing written notice to Landlord, and to Bond Trustee, Master Trustee and Authority and SMCA Ground Lessor, if applicable under the SMCA Ground Lease, within 30 days after receipt by Tenant of Landlord s notice of its election not to undertake such restoration, or (ii) require Landlord to restore and rebuild the Premises, so long as the following conditions are met: (c) The amount of insurance proceeds that are available for restoration, plus any funds that may have been deposited by Tenant, are sufficient to restore and rebuild the Premises to their character, condition and utility immediately prior to the casualty (or to such other condition as Tenant reasonably demonstrates will generate sufficient revenue for Tenant to meet its obligation to pay all Rent thereafter accruing); (d) The amount of available proceeds of rental interruption insurance plus any funds deposited by Tenant equals an amount determined by Landlord to be sufficient to pay the Rent accruing during the period between the date of such casualty and the date the restoration or rebuilding is substantially completed. (e) The restoration or rebuilding is estimated by Landlord to be completed at least twelve (12) months prior to the Maturity Date of the Bonds. (f) In lieu of making any deposit of funds as described above, Tenant shall have the right to provide other assurances of the payment of restoration costs and Rent acceptable to Landlord in its sole discretion, such as a letter of credit. Damage Uninsured Loss. If Damage that is not an Insured Loss occurs, (a) Tenant may repair such damage as soon as reasonably possible at Tenant s expense, in which event the Lease shall continue in full force and effect or, (b) if Tenant elects not to undertake such repair, and such Damage is material, if so permitted under the SMCA Ground Lease, if applicable, Landlord or Tenant may terminate the Lease by providing written notice to the other party, and to Bond Trustee, Master Trustee and Authority, within 30 days after receipt by Landlord of knowledge of the occurrence of such Damage. ASSIGNMENT AND SUBLETTING By Tenant. Tenant shall not sublease, assign, mortgage, pledge, hypothecate or encumber the Lease or any of Tenant's interest under the Lease without the prior written consent of Landlord (which shall not be unreasonably D-7

282 withheld). Tenant acknowledges that, pursuant to the Bond Documents, Landlord may be required to obtain the Authority's approval to a sublease, assignment or other transfer of Tenant's interest in the Lease and that Landlord's disapproval shall be deemed reasonable if based on any such disapproval by the Authority. Tenant acknowledges that the financing of the Premises through the Tax-Exempt Bonds may restrict the assignees which could be approved by Landlord. In addition, Tenant shall not sublease, assign, mortgage, pledge, hypothecate, or encumber the Lease unless it receives an Opinion of Bond Counsel confirming that such action will not result in use or operation of the Premises not in conjunction with a charter school under the Act. By Landlord. Tenant acknowledges that Landlord's interest in the Premises are subject to a deed of trust in favor of the Master Trustee and that certain of the Landlord's rights under the Lease are assigned to the Master Trustee as security for the Bonds under the Master Indenture. DEFAULT; EVENT OF DEFAULT A Default is defined as a failure by Tenant to comply with or perform any of the terms, covenants or other obligations of Tenant under the Lease. An Event of Default is defined as the occurrence of one or more of the following Defaults, and the failure of Tenant to cure such Default within any applicable grace period: (a) the abandonment of the Premises. (b) The failure of Tenant to make any payment of Rent required to be made by Tenant under the Lease, whether to Landlord or to a third party, when due, to provide reasonable evidence of insurance or surety bond required under the Lease, or to fulfill any obligation under the Lease that endangers or threatens life or property, where such failure continues for a period of ten (10) business days following written notice to Tenant. (c) Any material representation or warranty made in the Lease, or in any report, certificate, financial statement, or instrument furnished in connection with the Lease, proves to have been false or misleading when made, in any material respect, and is not promptly corrected. (d) Tenant violates or fails to observe or perform any covenant contained in Section 2 of Exhibit C, and fails to cure the same within any notice or grace period contained in Exhibit C. (e) A Default by Tenant as to the terms, covenants, conditions or provisions of the Lease, other than those described in subparagraphs (a) through (d) above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Tenant s Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Default if Tenant commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (f) A Default by Tenant as to the terms, covenants, conditions or provisions of this Lease, other than those described in subparagraphs (a) through (e) above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Tenant's Default is such that more than 30 days are reasonably required for its cure, then it shall not be deemed to be a Default if Tenant commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion. (g) The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a debtor as defined in 11 U.S.C. 101 or any successor statute thereto (unless, in the case of a petition filed against Tenant, the same is dismissed within 90 days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant s assets located at the Premises or of Tenant s interest in the Lease, where possession is not restored to Tenant within sixty (60) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant s assets located at the Premises or of Tenant s interest in the Lease, where such seizure is not discharged within sixty (60) days; provided, however, in the event that any provision of this subparagraph is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions. D-8

283 (h) Under the Bright Star Schools SMCA Lease, a Default by the Tenant in the performance of any obligations of the SMCA Landlord under the SMCA Ground Lease which is not cured within any applicable cure period provided under the SMCA Ground Lease. REMEDIES Upon the occurrence of any Event of Default, Landlord may, with or without further notice or demand, and without limiting Landlord in the exercise of any right or remedy that Landlord may have by reason of such Event of Default: (a) Terminate Tenant s right to possession of the Premises by any lawful means, in which case the Lease shall terminate and Tenant shall immediately surrender possession to Landlord. In such event Landlord shall be entitled to recover from Tenant: (i) the unpaid Rent that had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid Rent that would have been earned after termination until the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid Rent for the balance of the term after the time of award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided; and (iv) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant s failure to perform its obligations under the Lease or that in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys fees of Landlord and the Authority, and that portion of any leasing commission paid by Landlord in connection with the Lease applicable to the unexpired term of the Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent. Efforts by Landlord to mitigate damages caused by Tenant s Event of Default of the Lease shall not waive Landlord s right to recover damages under the Lease. If termination of the Lease is obtained through the provisional remedy of unlawful detainer, Landlord shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Landlord may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under the Lease was not previously given, a notice to pay rent or quit, or to perform or quit given to Tenant under the unlawful detainer statute shall also constitute the notice required by the Lease. In such case, the applicable grace period required by the Lease and the unlawful detainer statute shall run concurrently, and the failure of Tenant to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and an Event of Default under the Lease entitling Landlord to the remedies provided for in the Lease and/or by said statute. (b) Continue the Lease and Tenant s right to possession and recover the Rent as it becomes due. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect Landlord s interests, shall not constitute a termination of Tenant s right to possession. (c) Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of the Lease and/or the termination of Tenant s right to possession shall not relieve Tenant from liability under the Lease, including under any indemnity provisions of the Lease as to matters occurring or accruing during the term of the Lease or by reason of Tenant s occupancy of the Premises. DEFAULT INTEREST Any monetary payment due Landlord under the Lease not received by Landlord when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date on which it was due for non-scheduled payments, shall bear interest computed at the rate of 10% per annum (but not in excess of the maximum rate allowed by law) ( Default Interest Rate ) from the date when due as to scheduled payments, or the 31st day after it was due as to non-scheduled payments. AMENDMENTS D-9

284 Subject to the terms of the Master Indenture of Trust, the Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Tenant s obligations under the Lease, Tenant agrees to make such reasonable non-monetary modifications to the Lease as may be reasonably required by a lender in connection with the obtaining of normal financing or refinancing of the Premises. FINANCIAL AND OPERATING COVENANTS - EXHIBIT C TO THE LEASE Pursuant to Exhibit C to the Lease, Tenant agrees to do the following, so long as any Bonds remain Outstanding: (a) Operate the School at the Premises, and shall not cease to operate the School at the Premises without the prior written consent of the Holders of a majority in principal amount of the Bonds then Outstanding; (b) Take all reasonable steps to maintain the continued effectiveness of, and to renew, the charter for the operation of the School at the Premises; (c) permit Landlord to discuss Tenant s affairs with Tenant s officers, and to provide Landlord access to Tenant s books and records related to the Premises; (d) Give the Authority rights of notice and cure in the event of a Tenant default; (e) Observe the Base Rent Coverage Ratio Covenant under the Lease, as follows: Tenant covenants and agrees to calculate for each Fiscal Year its Base Rent Coverage Ratio for each Lease based on its audited financial statements for such Fiscal Year, and to provide a copy of such calculation for such period to the Landlord and the Master Trustee annually commencing with the Fiscal Year ending June 30 of the Fiscal Year in which the Lease is executed or June 30, 2019, whichever is later. Tenant also covenants to maintain its Net Operating School Revenue so that its Base Rent Coverage Ratio at the end of each Fiscal Year is not less than 1.10 to 1.00; provided that, except as provided below, Tenant s failure to achieve the required Base Rent Coverage Ratio will not constitute an Event of Default under any Lease if Tenant promptly engages an Independent Consultant to prepare a report, to be delivered to Tenant, Landlord and Master Trustee within 45 days of engagement, with recommendations for meeting the required Base Rent Coverage Ratio or, if in the opinion of the Independent Consultant the attainment of such level is impracticable, to the highest level attainable in such Fiscal Year. The Independent Consultant selected and appointed by Tenant may be rejected upon the written request of the holders of not less than a majority in aggregate principal amount of the Related Bonds then Outstanding; if so rejected, Tenant covenants to use its best efforts to appoint a new Independent Consultant within 45 days thereof. Any Independent Consultant will be required to submit its recommendations to Landlord and Master Trustee within 90 days after being so retained. Tenant, on behalf of the Obligated Group Schools, agrees to consider implement the recommendations of the Independent Consultant, provided that the failure of Lessee to implement the recommendations of the Independent Consultant, to the extent permitted by law, shall be an Event of Default under the Lease. Tenant will not be obligated to retain such an Independent Consultant more often than once during any 24 month period. Notwithstanding the foregoing, Tenant s failure to achieve a Base Rent Coverage Ratio of 1.00 to 1.00 will constitute an Event of Default hereunder. (i) For purposes of this Section, "Base Rent." "Additional Rent," "Extraordinary Monthly Rent," and "Expenses" shall be as defined in the Lease. (ii) Educational Management Fees means [any fee or charge, including any funds transfer recognized as an expenditure for accounting purposes, charged by Tenant for management services provided to the School, including pursuant to a Management Agreement, which fee shall be subordinate to the payment of Rent due under the Lease.] (iii) Gross School Revenues means all revenue, income, receipts and money received by the Tenant or on behalf of Tenant from all lawfully available sources attributable to its operation of the School and to any other charter school operated by Tenant in the property subject to the Lease, including from any D-10

285 applicable district or county or from the State pursuant to the Charter School Law from any general purpose entitlement, revenue limit, or State educational funding sources; but excluding gifts, grants, bequests, donations and contributions, to the extent specifically restricted by the donor to a particular purpose inconsistent with their use for Rent payments or operating expenses. Any other income, revenue, receipts, contributions or other monies received by Tenant not specifically described in the immediately preceding sentence shall not constitute Gross School Revenues. (iv) Base Rent Coverage Ratio" means for any period of time the ratio determined by dividing (i) Net Operating School Revenue (as defined below), by (ii) the amount of scheduled Base Rent under the Lease. (v) "Net Operating School Revenue" means Tenant's Gross School Revenues (defined above) minus its Operating Expenses (defined below); provided, that no determination thereof will take into account: (a) any gain or loss resulting from either the early extinguishment or refinancing of Obligated Group School 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 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; and (f) nonrecurring items that involve the receipt, expenditure or transfer of assets. (vi) "Operating Expenses" means, except as provided below, all unrestricted expenses of Tenant attributable to operations of the applicable Obligated Group School pursuant to Tenant's Charter and to any other charter school operated by the Tenant at the Premises, including maintenance, repair expenses, utility expenses, equipment lease and other rental expense (excluding the Base Rent and the Extraordinary Monthly Rent, if any, but including Additional Rent and Expenses), administrative and legal expenses, miscellaneous operating expenses, advertising and promotion costs, payroll expenses (including taxes), the cost of material and supplies used for current operations of Tenant, the cost of vehicles, equipment leases and service contracts, taxes upon the operations of Tenant not otherwise mentioned herein, charges for the accumulation of appropriate reserves for current expenses not annually recurrent, but that are such as may reasonably be expected to be incurred in accordance with generally accepted accounting principles, all in such amounts as reasonably determined by Landlord. "Operating Expenses" shall exclude, however, (i) all subordinated Educational Management Fees, (ii) depreciation and amortization, and (iii) any expenses that are treated as extraordinary in accordance with generally accepted accounting principles. (vii) Obligated Group School Indebtedness means Indebtedness (as such term is defined in the Master Indenture) related to or payable from revenues of the applicable Obligated Group School and to any other charter school operated by Tenant at the Facility subject to the Lease. (viii) "Consolidated Days Cash on Hand" means (i) the sum of cash and cash equivalents of the Obligated Group Schools, as shown on Tenant's audited financial statements for each Fiscal Year, and any State payments accrued to such Fiscal Year and scheduled to be received within two months following the end of such Fiscal Year ("Cash on Hand"); divided by (ii) the Average Daily Expenses for Obligated Group Schools (as calculated for the most recent Fiscal Year ending before such date). (ix) Average Daily Expenses for Obligated Group Schools means (A) cash requirements during such Fiscal Year related to or payable from revenues attributable to the Obligated Group Schools (excluding from such calculation all depreciation and other non-cash items), and including within such calculation on behalf of the Obligated Group Schools in the aggregate (i) all Operating Expenses for such Fiscal Year for the Obligated Group Schools, (ii) subordinated Educational Management Fees, and (iii) the maximum Base Rent payable under the Leases for all Obligated Group Schools between Tenant and any member of the Obligated Group for that year or any other year, divided by (B) 365. (x) Tenant will provide a certificate to the Landlord and Master Trustee at the time of delivery of its annual audited financial statements for each Fiscal Year indicating whether Tenant, on behalf of D-11

286 the Obligated Group Schools, has met the requirement set forth above. If the certificate indicates that such cash balance requirement has not been met, Tenant covenants to retain an Independent Consultant, at the expense of Tenant, on behalf of the Obligated Group Schools, within 45 days, to make recommendations to increase such balances in the then-current Fiscal Year to the required level or, if in the opinion of the Independent Consultant the attainment of such level is impracticable, to the highest level attainable in such Fiscal Year. The Independent Consultant selected and appointed by Tenant may be rejected upon the written request of the holders of not less than a majority in aggregate principal amount of the Related Bonds then Outstanding; if so rejected, Tenant covenants to use its best efforts to appoint a new Independent Consultant within 45 days thereof. Any Independent Consultant will be required to submit its recommendations to the Landlords (as defined in the Related Bond Indenture) and Master Trustee within 90 days after being so retained. Tenant, on behalf of the Obligated Group Schools, agrees to implement the recommendations of the Independent Consultant, to the extent permitted by law. (xi) No proceeds of any Short Term Indebtedness will be considered unrestricted available cash for purposes of such calculation (other than the proceeds of any working capital loans made to bridge deferrals in State payments or start-up loans from the State of California or the California Department of Education). (xii) In the event the Obligated Group Schools fails to have such an amount on deposit, it will not be a default or Event of Default under the Lease. (xiii) Tenant will not be obligated to retain such an Independent Consultant on behalf of the Obligated Group Schools more often than once during any 24 month period. (f) Observe the Limitations on Tenant Indebtedness under the Lease, as follows: Tenant covenants that it will not incur, assume or guarantee ("incur"), any Obligated Group School Indebtedness (secured or unsecured), except Obligated Group School Indebtedness with respect to purposes specifically benefiting Tenant, and except as provided below. (i) Nonrecourse Indebtedness. To the extent permitted by applicable law and if no Event of Default under the Lease, or an event that with the giving of notice or passage of time or both would constitute an Event of Default under the Lease, has occurred and is continuing, Tenant may incur or assume Nonrecourse Indebtedness (as defined below), but limited with Short-Term Indebtedness (as defined below), and Interim Indebtedness (as defined below) to a total aggregate principal amount outstanding at any time that is not in excess of the greater of (A) the maximum amount of advance apportionment and principal apportionment due to the School 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 (collectively Maximum Deferred Apportionment ), and (B) an amount not to exceed 25% of Operating Expenses for the applicable Fiscal Year. a. "Nonrecourse Indebtedness" means all Obligated Group School Indebtedness with respect to which the obligee is prevented by applicable law or contractual arrangement from exercising recourse, or any other right or remedy exercisable by a creditor, against all or any part of the Premises or the Improvements in order to pay, satisfy or discharge all or any part of the Obligated Group School Indebtedness. (ii) Short-Term Indebtedness. Tenant may incur Short-Term Indebtedness (as defined below) for working capital purposes as in its judgment is deemed expedient, provided that in no event will Tenant incur Short-Term Indebtedness, together with outstanding Nonrecourse Indebtedness and Interim Indebtedness (defined below) in excess of the greater of (A) the Maximum Deferred Apportionment, and (B) an amount not to exceed 25% of Operating Expenses for the applicable Fiscal Year. a. "Short-Term Indebtedness" means all Obligated Group School Indebtedness having an original maturity less than or equal to one year and not renewable at the option of Tenant for a term greater than one year from the date of original incurrence or issuance, provided however, that any Short Term Indebtedness that has been issued as revenue anticipation notes ("RANS") will not be included or counted as Short Term Indebtedness to the extent that the RANS are secured by deferred state apportionment revenues expressly pledged and deposited in an intercept account to pay such RANS. D-12

287 (iii) Interim Indebtedness. Tenant may incur Interim Indebtedness (as defined below) to finance or refinance existing capital needs as in its judgment is deemed expedient, provided that in no event will Tenant incur Interim Indebtedness, together with outstanding Nonrecourse Indebtedness and Short-Term Indebtedness, on a combined basis, is in excess of the greater of (A) the Maximum Deferred Apportionment, and (B) an amount not to exceed 25% of Operating Expenses for the applicable Fiscal Year. a. "Interim Indebtedness" means all Obligated Group School Indebtedness having an original maturity less than or equal to five years and not renewable at the option of Tenant for a term greater than five years from the date of original incurrence or issuance. (iv) Charter School Revolving Fund Loan Program. Notwithstanding the foregoing limitations on Obligated Group School Indebtedness, Tenant shall be permitted to obtain loans with respect to the School operated under Tenant s Charter pursuant to the Charter School Revolving Loan Program established under California Education Code Sections through ( Charter School Start-up Loans ) and any such Charter School Start-up Loans existing with respect to any School will not be taken into account in applying the foregoing limitations on Non-Recourse Indebtedness, Short-Term Indebtedness, and Interim Indebtedness. (v) City National Bank Line of Credit. Notwithstanding the foregoing limitations on Obligated Group School Indebtedness, Tenant shall be permitted to borrow that certain existing revolving line of credit loan (the "City National Bank Line of Credit") made by City National Bank in the maximum principal amount of $1,000,000, made pursuant to, among other documents, that certain Revolving Note and related documents dated February 11, 2013, by and between City National Bank and Tenant (including any and all current or future draws or advances thereunder, up to the maximum principal amount thereof), as amended and extended, which Heritage Bank Line of Credit matures March 1, 2017, and so long as the City National Bank Line of Credit is the only Obligated Group School Indebtedness outstanding and taken into account in applying the foregoing limitations on Non- Recourse Indebtedness, Short-Term Indebtedness, and Interim Indebtedness, the principal balance of the Heritage Bank Line of Credit (not in excess of $1,000,000) may exceed the forgoing limitations on Non-Recourse Indebtedness, Short-Term Indebtedness, and Interim Indebtedness; provided, however, that any renewal, refinancing or replacement thereof following such maturity shall comply with the foregoing limitations on Non-Recourse Indebtedness, Short-Term Indebtedness, and Interim Indebtedness.. (vi) Program Related Investment Loan. Notwithstanding the foregoing limitations on Obligated Group School Indebtedness, Tenant shall be permitted to borrow that certain existing program related investment loan (the Program Related Investment Loan") made by Excellent Education Development in the principal amount of $1,000,000 pursuant to that certain Loan Agreement dated December 2, 2014 executed by Excellent Education Development and Tenant, which loan matures November 1, 2020; and the Program Related Investment Loan will not be taken into account in applying the foregoing limitations on Non-Recourse Indebtedness, Short-Term Indebtedness, and Interim Indebtedness. (vii) Observe the Reporting Obligations under the Lease: Tenant agrees to provide Landlord, and upon written request of the Bond Trustee or Master Trustee, to Bond Trustee or Master Trustee as applicable, the following information: (a) If Tenant is undertaking any construction at the Premises, not later than 60 days after the end of each fiscal quarter of Tenant commencing with the Fiscal Quarter ending March 31, 2018, a construction progress report with respect to any such construction until such construction is substantially complete. (b) After the end of each fiscal quarter of Tenant commencing with the Fiscal Quarter ending March 31, 2019, quarterly unaudited financial information and operating data of the School not later than 60 days after the end of each quarter. (c) After the end of each fiscal quarter of Tenant commencing with the Fiscal Quarter ending March 31, 2019, quarterly, not later than 60 days after the end of each quarter, a report of the School's quarterly enrollment data and waitlist data by grade for the previous fiscal quarter. D-13

288 (d) the subsequent Fiscal Year. Prior to the end of each fiscal year, a copy of the annual budget of the School for (e) Quarterly, not later than 60 days after the end of each quarter, a year to date comparison of the revenue and expenditures in the unaudited financial statements for such quarter to the annual budget for the applicable fiscal year. (f) Quarterly, not later than 60 days after the end of each quarter, a copy of any recommendations of any Independent Consultant received in accordance with the Master Indenture of Trust pursuant to the liquidity covenant and coverage ratio covenant under the Obligated Group Leases described above. (g) Annually, no later than six (6) months after the close of each fiscal year, commencing with the Fiscal Year ending June 30, 2019, copies of the audited financial statements of Tenant and the Schools for the prior fiscal year prepared in accordance with generally accepted accounting principles applicable to nonprofit corporations from time to time, if available. (h) Annually, no later than six (6) months after the close of each fiscal year, commencing with the Fiscal Year ending June 30, 2019, the certifications and calculations of the Consolidated Days Cash on Hand for the Schools and the Base Rent Coverage Ratio for each School as described in the Liquidity Covenant and Coverage Ratio covenant under the Obligated Group Leases described above. (i) Such other information as may be reasonably requested by Landlord, the Authority, the Bond Trustee or Master Trustee. D-14

289 APPENDIX E FORM OF CONTINUING DISCLOSURE AGREEMENT This Continuing Disclosure Agreement (the Disclosure Agreement ), dated as of December 1, 2017, is executed and delivered by and among Bright Star Education Group, a California nonprofit public benefit corporation (the Borrower ), Bright Star Schools, a California nonprofit public benefit corporation ( Bright Star ) and Urban Futures, Incorporated, as dissemination agent (the Dissemination Agent ) in connection with the issuance by the California School Finance Authority (the Authority ) of its Charter School Revenue Bonds (Bright Star Schools-Obligated Group), Series 2017 (the Bonds ). The Bonds are being issued pursuant to an Indenture dated as of December 1, 2017 (the Bond Indenture ) between the Authority and Wilmington Trust, National Association, as trustee (the Trustee ). The proceeds of the Bonds are being loaned by the Authority to the Borrower pursuant to a Loan Agreement dated as of December 1, 2017 (the Loan Agreement ). Pursuant to the Loan Agreement, the Borrower has covenanted and agreed to provide the continuing disclosure of certain financial information and operating data and timely notices of the occurrence of certain events. Section 1. Purpose of Disclosure Agreement. This Disclosure Agreement is being executed and delivered by the Borrower and Bright Star for the benefit of the Registered Owners of the Bonds (for such purpose beneficial owners of the Bonds shall also be considered Registered Owners of the Bonds) and to assist Stifel, Nicolaus & Company, Incorporated (the Participating Underwriter ), in complying with the Rule. Section 2. Defined Terms. In addition to the definitions set forth in the Bond Indenture, the Leases (as herein defined) or the Loan Agreement, which apply to any capitalized term used in this Disclosure Agreement unless otherwise defined herein, the following capitalized terms shall have the following meanings: Annual Report means any Annual Report provided by Bright Star pursuant to, and as described in, Sections 3 and 4 of this Disclosure Agreement. Authority means the California School Finance Authority, its successors and assigns. Beneficial Owner means any person which (a) has the power, directly or indirectly, to vote or consent with respect to, or to dispose of ownership of, any Bonds (including persons holding Bonds through nominees, depositories or other intermediaries); or (b) is treated as the owner of any Bonds for federal income tax purposes. Bond Indenture means the Indenture, dated as of December 1, 2017, between the Authority and the Trustee. Bonds means the Authority s Charter School Revenue Bonds (Bright Star Schools-Obligated Group), Series Borrower means Bright Star Education Group, a California nonprofit public benefit corporation and an organization described in Section 501(c)(3) of the Internal Revenue Code of Bright Star means Bright Star Schools, a California nonprofit public benefit corporation and an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986.

290 Disclosure Representative means the chief financial officer of Bright Star or such other officer, agent or employee as Bright Star shall designate in writing to the Dissemination Agent from time to time. Dissemination Agent means Urban Futures, Incorporated, as dissemination agent under this Disclosure Agreement, its successors and assigns. EMMA means the Electronic Municipal Market Access system operated by the MSRB and the primary portal for complying with the continuing disclosure requirements of the Rule. Events Notices means the notices required to be given by Bright Star pursuant to Section 5 of this Disclosure Agreement. Fiscal Year means the 12-month accounting period used with respect to the operations of Bright Star ending June 30 of each year; provided, however, Bright Star, by resolution duly passed, may change such accounting period to end on another date if such change is found and determined to be necessary or appropriate for budgetary or other fiscal purposes. Landlord means, together, the VAHS Landlord and the SMCA Landlord. Leases mean, together, the VAHS Lease and the SMCA Lease. VAHS Lease means that certain Lease Agreement, dated as of December 1, 2017, between the VAHS Landlord and Bright Star, as lessee. VAHS Landlord means Bright Star Development Group-9334 Lemona, LLC, a California limited liability company, the sole member of which is the Borrower. Limited Offering Memorandum means the Limited Offering Memorandum dated, 2017] relating to the Bonds. Master Trust Indenture means that certain Master Indenture of Trust, dated as of December 1, 2017, by and between the Borrower, the Landlords and Wilmington Trust, National Association, as Master Trustee thereunder. Member has the meaning ascribed thereto in the Master Trust Indenture. MSRB means the Municipal Securities Rulemaking Board, located at 1900 Duke Street, Suite 600, Alexandria, Virginia 22314, its successors and assigns. Operations Report means the financial information and operating data required to be transferred by Bright Star to the Dissemination Agent pursuant to the Section 3 of this Disclosure Agreement. Participating Underwriter means Stifel, Nicolaus & Company, Incorporated, as original purchaser of the Bonds, its successors and assigns. Quarterly Report means the financial information and operating data required to be transferred by Bright Star to the Dissemination Agent pursuant to the Section 6 of this Disclosure Agreement. Repository means EMMA. E-2

291 Rule means SEC Rule 15c2-12(b)(5) promulgated by the SEC under the Securities Exchange Act of 1934, as amended or supplemented by the SEC from time to time. Schools means Valor Academy High School and Stella Middle Charter Academy. SEC means the Securities and Exchange Commission, its successors and assigns. Trustee means Wilmington Trust, National Association, its successors and assigns. Section 3. Provision of Annual Reports. (a) Bright Star shall provide, or shall cause the Dissemination Agent to provide, to the MSRB, not later than 180 days after the end of Bright Star s Fiscal Year, commencing with the Fiscal Year ending June 30, 2018 (except as hereinafter provided), an Annual Report which is consistent with the requirements of Section 4 of this Disclosure Agreement. The Annual Report may be submitted as a single document or as separate documents comprising a package, and may include by reference other information as provided in Section 4 of this Disclosure Agreement; provided that the audited financial statements of Bright Star (and any information determined from the audited financial statement) may be submitted separately from the balance of the Annual Report and later than the date required above for the filing of the Annual Report if they are not available by that date. If Bright Star s Fiscal Year changes, it shall give notice of such change in the same manner as for a Listed Event under Section 5(d). The Borrower hereby agrees to provide to Bright Star any information required from the Borrower for the Annual Report. The Annual Report shall be submitted on a standard from in use by industry participants or other appropriate form and shall identify Bonds by name and CUSIP number, if available. (b) Bright Star shall be responsible for the preparation of the Annual Report. Not later than five Business Days prior to the date specified in Section 3(a) for providing the Annual Report to the MSRB, Bright Star shall provide the Annual Report to the Dissemination Agent. If by such date, the Dissemination Agent has not received a copy of the Annual Report, the Dissemination Agent shall contact Bright Star to determine if Bright Star is or expects to be in compliance with the first sentence of Section 3(a) above. (c) The Dissemination Agent shall transmit the Annual Report to the MSRB in electronic format accompanied by identifying information as prescribed by the MSRB. Section 4. Content of Annual Reports. (a) The Annual Report shall be in a format suitable for filing with the MSRB and shall contain or include by reference the following: (i) The audited financial statements of Bright Star for the prior Fiscal Year beginning with the Fiscal Year ending June 30, 2018, prepared in accordance with generally accepted accounting principles applicable to nonprofit corporations from time to time, if available. (ii) For the Fiscal Years ended June 30, 2019 and thereafter, an Executed Certificate for Annual Filing of Certain Financial and Operating Covenants completed substantially in the form attached hereto as Exhibit A. E-3

292 (iii) For the Fiscal Years ended June 30, 2018 and thereafter, the enrollment data with respect to the Schools provided to the State of California under the Charter School Law. (b) Any or all of the items listed above may be included by specific reference to other documents, including any official statement or prospectus of debt issues for the benefit of the Schools or related public entities, which have been submitted to the MSRB. If the document included by reference is a final official statement, it must be available from the MSRB. Bright Star shall clearly identify each such other document so included by reference. Bright Star and the Borrower are solely responsible for the content and format of the Annual Report, and the Dissemination Agent shall have no liability or responsibility for content, format, accuracy or completeness of such Annual Report. (c) Any or all of the Disclosure Reports may be incorporated by reference from other documents, including official statements, which have been submitted to the Repository. If the Disclosure Report information is changed or this Disclosure Agreement is amended in accordance with its terms, then Bright Star is to include in the next Disclosure Report to be delivered thereunder, to the extent necessary, an explanation of the reasons for the amendment and the effect of any change in the type of financial information or operating data provided. Section 5. Reporting of Listed Events. (a) Pursuant to the provisions of this Section 5, Bright Star shall give, or cause to be given, notice of the occurrence of any of the following events with respect to Bonds, if material: (i) the satisfaction of escrow conditions and release of funds from either Project Fund account; (ii) (iii) (iv) non-payment related defaults; modifications to rights of Bond holders; Bond calls; (v) unless described in Section 5(b)(vii) below, other material notices or determinations with respect to the tax exempt status of the Bonds or other events affecting the tax exempt status of the Bonds; (vi) release, substitution or sale of property securing repayment of Bonds; (vii) the consummation of a merger, consolidation or acquisition involving any Member or Bright Star or the sale of all or substantially all of the assets of any Member or Bright Star (other than in the ordinary course of business) or the entry into a definitive agreement to undertake such an action or the termination of a definitive agreement relating to any such actions other than in accordance with its terms; or (viii) trustee. appointment of a successor or additional trustee or change in name of a (b) Pursuant to the provisions of this Section 5, Bright Star shall give, or cause to be given, notice of the occurrence of any of the following events with respect to Bonds: E-4

293 (i) (ii) (iii) (iv) difficulties; (v) difficulties; (vi) principal and interest payment delinquencies; defeasances; rating changes; unscheduled draws on debt service reserves reflecting financial unscheduled draws on any credit enhancements reflecting financial substitution of credit or liquidity providers, or their failure to perform; (vii) adverse tax opinions affecting the tax exempt status of the Bonds, the issuance by the Internal Revenue Service of proposed or final determinations of taxability, Notice of Proposed Issue (IRS Form 5701-TEB); (viii) tender offers; and (ix) bankruptcy, insolvency, receivership or a similar proceeding by the Borrower or Bright Star. For purposes of the event identified in Section 5(b)(ix) above, the event is considered to occur when any of the following occur: the appointment of a receiver, fiscal agent or similar officer for Bright Star or the Borrower in a proceeding under the U.S. Bankruptcy Code or in any other proceeding under state or federal law in which a court of governmental authority has assumed jurisdiction over substantially all of the assets or business of Bright Star or the Borrower, or if such jurisdiction has been assumed by leaving the existing governing body and officials or officers in possession but subject to the supervision and orders of a court or governmental authority, or the entry of an order confirming a plan of reorganization, arrangement or liquidation by a court or governmental authority having supervision or jurisdiction over substantially all of the assets or business of Bright Star or the Borrower. (c) Upon the occurrence of a Listed Event specified in Section 5(a), Bright Star shall as soon as possible determine if such event would be material. The Dissemination Agent shall have no responsibility for such determination. (d) If Bright Star has determined that the occurrence of a Listed Event specified in Section 5(a) would be material, or upon the occurrence of a Listed Event specified in Section 5(b), Bright Star shall notify the Dissemination Agent in writing within three business days of the occurrence of such event in a format suitable for filing with the MSRB, with instructions to the Dissemination Agent to file a notice of the occurrence of such Listed Event pursuant to Section 5(e). (e) If the Dissemination Agent has been instructed in writing by Bright Star to report the occurrence of a Listed Event and has received a notice of the occurrence in a format suitable for filing with the MSRB, the Dissemination Agent shall file such notice with the MSRB with a copy to the Participating Underwriter in a timely manner not in excess of ten business days after the occurrence of the event. E-5

294 (f) The Borrower hereby agrees to provide to Bright Star notice of any events specified in this Section 5 of which it has actual notice within five days of receipt of such notice by the Borrower. Section 6. Provision of Quarterly Reports. (a) Bright Star agrees to provide, or shall cause the Dissemination Agent to provide, to the MSRB, not later than 60 days after the end of each of Bright Star s fiscal quarters, commencing with the fiscal quarter ending March 31, 2018, a Quarterly Report which is consistent with the requirements of Section 7 of this Disclosure Agreement. The Quarterly Report may be submitted as a single document or as separate documents constituting a package, and may include by reference other information as provided in Section 7 of this Disclosure Agreement. The Borrower hereby agrees to provide to Bright Star any information required from the Borrower for the Quarterly Reports. (b) Bright Star shall be responsible for the preparation of the Quarterly Report. Not later than five business days prior to the date specified in Section 6(a) for providing the Quarterly Report to the MSRB, Bright Star agrees to provide the Quarterly Report to the Dissemination Agent. If by such date, the Dissemination Agent has not received a copy of the Quarterly Report, the Dissemination Agent shall contact Bright Star to determine if Bright Star are or expect to be in compliance with the first sentence of Section 6(a) above. (c) The Dissemination Agent shall transmit the Quarterly Report to the MSRB in electronic format accompanied by identifying information as prescribed by the MSRB. Section 7. Content of Quarterly Reports. (a) Bright Star s Quarterly Report shall be in a format suitable for filing with the MSRB and shall contain or include by reference the following: (i) a construction progress report with respect to any Facility being constructed, until such construction is substantially complete; (ii) for the Obligated Group, the Officer Certificate executed in connection with any addition or withdrawal of a Member pursuant to the Master Trust Indenture; (iii) the unaudited financial statements and operating data of the Schools for the previous fiscal quarter of the type and in the format provided in audited financial statements of Bright Star for the prior Fiscal Year; (iv) for the Schools, enrollment data; (v) for the last fiscal quarter of each Fiscal Year, a copy of Bright Star s budget for the subsequent Fiscal Year; (vi) a year-to-date comparison of the revenues and expenditures in the unaudited financial statements to the annual budget; (vii) recommendations of any consultant received in accordance with the Master Trust Indenture during such fiscal quarter; E-6

295 (viii) notice of any threatened termination of any license, charter or other official approval or accreditation which is material to the activities of Bright Star or of any Schools, or of the commencement of any litigation or other governmental or judicial proceeding in which an outcome adverse to Bright Star could result in a judgment in excess of available insurance coverage or otherwise have a material adverse effect on the operations or financial condition of Bright Star, and any other event which reasonably could be expected to have a material adverse effect on the operations or financial condition of Bright Star; (ix) management discussion of any significant variance between budgeted and actual revenues and expenditures during the previous fiscal quarter; (x) Team; and any change in Key Management Personnel for the Bright Star Executive (xi) the amount and repayment terms of any Additional Indebtedness (as defined in the Master Trust Indenture) of the Borrower or any debt or capital leases of Bright Star entered into after the date of this Disclosure Agreement. (b) Any or all of the items listed in Section 7(a) above may be included by specific reference to other documents, including any official statement or prospectus of debt issues for the benefit of the Schools or related public entities, which have been submitted to each of the MSRB. If the document included by reference is a final official statement, it must be available from the Municipal Securities Rulemaking Board. Bright Star shall clearly identify each such other document so included by reference. Bright Star is solely responsible for the content and format of the Quarterly Report, and the Dissemination Agent shall have no liability or responsibility for content, format, accuracy or completeness of such Quarterly Report. Section 8. Use of EMMA. Any filings required to be made with or notices to be given to the MSRB under this Disclosure Agreement shall be effected by sending the filing or notice to EMMA at in an electronic format accompanied by identifying information as prescribed by the MSRB, or to such other entity and in such other format as may be designated under the Rule. The Dissemination Agent agrees to comply with the provisions of EMMA in making such filings and giving such notices under this Disclosure Agreement. Section 9. Termination of Reporting Obligation. The obligations of Bright Star, the Borrower and the Dissemination Agent under this Disclosure Agreement shall terminate upon the legal defeasance, prior redemption, prepayment or payment in full of all of Bonds. If such termination occurs prior to the final maturity of Bonds, Bright Star shall give notice of such termination in the same manner as for a Listed Event under Section 5(d) hereof. Section 10. Annual Conference Calls. Bright Star shall schedule annual conference calls by January 30 of each year (following the end of the School Year) for Beneficial Owners to be held during normal business hours (for both prevailing Eastern Time and prevailing Pacific Time), and shall provide the Dissemination Agent and the Participating Underwriter with a notice of date and time for such call and contact telephone information. Section 11. Failure To File. If Bright Star does not provide to the Dissemination Agent a copy of an Annual Report or a Quarterly Report by the applicable dates required in Section 3(a) or 6(a) above, the Dissemination Agent in a timely manner shall send a notice to the Borrower, Bright Star and the Participating Underwriter and the MSRB in substantially the form attached as Exhibit B. If the Borrower E-7

296 or Bright Star files any report directly with MSRB, the Borrower shall promptly provide the Dissemination Agent with a confirmation or documentation reasonably required by the Dissemination Agent confirming that the filing of such report was made in a timely manner on or before the date required herein (or if not as of such date, specifying the date of filing) and that such filing contained the information required by this Disclosure Agreement. Section 12. Dissemination Agent. Bright Star may, from time to time, appoint or engage a Dissemination Agent to assist it in carrying out its obligations under this Disclosure Agreement, and may discharge any such Dissemination Agent, with or without appointing a successor Dissemination Agent. The Dissemination Agent shall not be responsible in any manner for the content of any notice or report prepared by Bright Star pursuant to this Disclosure Agreement. If at any time there is not any other designated Dissemination Agent, Bright Star shall be the Dissemination Agent. The initial Dissemination Agent shall be the Trustee. Any person succeeding to all or substantially all of the Trustee s corporate trust business shall be the successor to the Trustee hereunder without the execution or filing of any paper or any further act. The Dissemination Agent may resign its duties under this Disclosure Agreement upon 60 days prior written notice to Bright Star. Section 13. Amendment; Waiver. Notwithstanding any other provision of this Disclosure Agreement, Bright Star, the Borrower and the Dissemination Agent may amend this Disclosure Agreement, and any provision of this Disclosure Agreement may be waived; provided that the following conditions are satisfied: (a) if the amendment or waiver relates to the provisions of Section 3(a), 4, 5(a), 6 or 7(a) it may only be made in connection with a change in circumstances that arises from a change in legal requirements, change in law, or change in the identity, nature or status of an obligated person with respect to Bonds, or the type of business conducted; (b) the undertaking, as amended or taking into account such waiver, would, in the opinion of nationally recognized bond counsel, have complied with the requirements of the Rule at the time of the original execution and delivery of Bonds, after taking into account any amendments or interpretations of the Rule, as well as any change in circumstances; and (c) the proposed amendment or waiver either (i) is approved by the Holders of Bonds in the same manner as provided in the Bond Indenture for amendments to the Bond Indenture with the consent of Holders; or (ii) does not, in the opinion of nationally recognized bond counsel or another party unaffiliated with Bright Star, materially impair the interests of the Holders or Beneficial Owners of Bonds. In the event of any amendment or waiver of a provision of this Disclosure Agreement, Bright Star shall describe such amendment in the next Annual Report, and shall include, as applicable, a narrative explanation of the reason for the amendment or waiver and its impact on the type (or, in the case of a change of accounting principles, on the presentation) of financial information or operating data being presented by Bright Star. In addition, if the amendment relates to the accounting principles to be followed in preparing financial statements, notice of such change shall be given in the same manner as for a Listed Event under Section 5(d). Section 14. Additional Information. Nothing in this Disclosure Agreement shall be deemed to prevent Bright Star from disseminating any other information, using the means of dissemination set forth in this Disclosure Agreement or any other means of communication, or including any other information in any Annual Report or notice of occurrence of a Listed Event, in addition to that which is required by this Disclosure Agreement. If Bright Star chooses to include any information in any Annual Report or notice E-8

297 of occurrence of a Listed Event in addition to that which is specifically required by this Disclosure Agreement, Bright Star shall have no obligation under this Disclosure Agreement to update such information or include it in any future Annual Report or notice of occurrence of a Listed Event. Section 15. Default. In the event of a failure of Bright Star, the Borrower or the Dissemination Agent to comply with any provision of this Disclosure Agreement, the Dissemination Agent (at the written direction of the Holders of not less than 25% in aggregate principal amount of Bonds then outstanding and upon being indemnified to its satisfaction therefor, shall, or the Participating Underwriter or any Holder of Bonds may, take such actions as may be necessary and appropriate, including seeking mandate or specific performance by court order, to cause Bright Star or the Dissemination Agent, as the case may be, to comply with its obligations under this Disclosure Agreement. A default under this Disclosure Agreement shall not be deemed an event of default under Bonds, the Bond Indenture, or the Loan Agreement, and the sole remedy under this Disclosure Agreement in the event of any failure of Bright Star or the Dissemination Agent to comply with this Disclosure Agreement shall be an action to compel performance. The Dissemination Agent shall not be required to take any action whatsoever to cause Bright Star to comply with its obligations under this Dissemination Agreement other than those specifically set forth in Section 3 hereof. Section 16. Duties, Immunities and Liabilities of Dissemination Agent. The Dissemination Agent shall have only such duties as are specifically set forth in this Disclosure Agreement, and no implied covenants or obligations of the Dissemination Agent shall arise in this Disclosure Agreement. Bright Star and the Borrower agree jointly and severally to indemnify and save the Dissemination Agent, its officers, directors, employees and agents, harmless against any loss, fees, expenses and liabilities which it may incur arising out of the disclosure of information pursuant to this Disclosure Agreement or arising out of or in the exercise or performance of their powers and duties hereunder, including the costs and expenses (including attorneys fees) of defending against any claim of liability, but excluding liabilities due to the Dissemination Agent s negligence or willful misconduct, as the case may be. The obligations of Bright Star under this Section shall survive resignation or removal of the Dissemination Agent, termination of this Disclosure Agreement and payment of Bonds. The Dissemination Agent shall have no liability for Bright Star s failure to report any event or any financial information or operating data as to which Bright Star has not provided an information report in format suitable for filing with the MSRB. The Dissemination Agent shall have no duty or obligation to review any information provided to it hereunder and shall not be deemed to be acting in a fiduciary capacity. The obligations of Bright Star under this Section shall survive resignation of the Dissemination Agent or the termination of this Dissemination Agreement. In the absence of bad faith on its part, the Dissemination Agent may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Dissemination Agent by the Disclosure Representative and conforming to the requirements of this Disclosure Agreement. In the case of any Annual Reports or description of any Listed Events, or any opinions which by any provision hereof are specifically required to be furnished to the Dissemination Agent, the Dissemination Agent shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Disclosure Agreement, but shall be under no duty to verify independently or investigate the accuracy or completeness of any information contained therein or the correctness of any opinion furnished hereunder. No provision of this Disclosure Agreement shall require the Dissemination Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers. The Dissemination Agent may rely and shall be protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, or other paper or document believed by it to be genuine and to have been signed or presented by the Disclosure Representative. The Dissemination Agent may consult with counsel of its choice and the written advice of such counsel or any opinion of counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good E-9

298 faith and in reliance thereon, it being understood that for purposes of this provision, that such counsel may be counsel to Bright Star. Bright Star shall not be liable for the fees and expenses of any such counsel consulted by the Dissemination Agent without the prior consent of Bright Star. The Dissemination Agent shall not be bound to make any investigation into the facts or matters stated in and Annual Report or description of a Listed Event. To the extent not otherwise provided in this Disclosure Agreement, the Dissemination Agent shall be entitled to discharge its obligation hereunder in like manner as specified in the Bond Indenture for the discharge of the obligations of the Trustee thereunder. Section 17. Notices. Any notices or communications to or among any of the parties to this Disclosure Agreement may be given as follows: to Bright Star and Borrower: to Dissemination Agent: Bright Star Schools 600 South La Fayette Park Place, Suite 302 Los Angeles, California Attention: Executive Director Urban Futures, Incorporated East 17 th Street, Suite 245 Tustin, California A copy of each notice shall be sent to the Participating Underwriter as follows: Stifel, Nicolaus & Company, Incorporated Suite South Figueroa Street Los Angeles, CA Attention: John Kim Any person may, by written notice to the other persons listed above, designate a different address or telephone number(s) to which subsequent notices or communications should be sent. Section 18. Beneficiaries. This Disclosure Agreement shall inure solely to the benefit of Bright Star, the Dissemination Agent, the Participating Underwriter, the Trustee and Holders and Beneficial Owners from time to time of Bonds, and shall create no rights in any other person or entity. Section 19. Fees and Expenses. Except to the extent limited by Section 15 hereof, the Dissemination Agent shall be entitled to payment and reimbursement from Bright Star for its services rendered hereunder and all rightful advances and other expenses reasonably made or incurred by the Dissemination Agent. Section 20. Counterparts. This Disclosure Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute one instrument. Section 21. Choice of Law. This Disclosure Agreement shall be governed by and construed in accordance with the laws of the State of California; provided that to the extent this Disclosure Agreement addresses matters of federal securities laws, including the Rule, this Disclosure Agreement shall be construed in accordance with such federal securities laws and official interpretations thereof. Section 22. Severability. If any portion of this Disclosure Agreement shall be held invalid or inoperative, then, so far as is reasonable and possible (a) the remainder of this Disclosure Agreement shall E-10

299 be considered valid and operative, and (b) effect shall be given to the intent manifested by the portion held invalid or inoperative. Section 23. Other Instruments. Bright Star and the Dissemination Agent covenant and agree that they will execute such other and further instruments and documents as are or may become necessary or convenient to effectuate and carry out this Disclosure Agreement. Section 24. Captions, Titles, and Headings. The captions, titles, and headings used in this Disclosure Agreement are for convenience only and shall not be construed in interpreting this Disclosure Agreement. Section 25. Entire Agreement. This Disclosure Agreement contains the entire understanding among the parties and supersedes any prior understandings or written or oral agreements between them respecting the subject matter of this Disclosure Agreement. E-11

300 IN WITNESS WHEREOF, the undersigned have duly authorized, executed and delivered this Continuing Disclosure Agreement as of the date first written above. URBAN FUTURES, INCORPORATED, as Dissemination Agent By Authorized Officer BRIGHT STAR EDUCATION GROUP, a California nonprofit public benefit corporation By: Name: Title: BRIGHT STAR SCHOOLS, a California nonprofit public benefit corporation By: Name: Title: E-12

301 EXHIBIT A FORM OF CERTIFICATE FOR ANNUAL FILING OF CERTAIN FINANCIAL AND OPERATING COVENANTS Name of Issuer: Name of Bond Issue: Dissemination Agent: Name of Borrower: California School Finance Authority California School Finance Authority Charter School Revenue Bonds (Bright Star Schools-Obligated Group) Series 2017 Urban Futures, Incorporated Bright Star Education Group Date of Issuance: December, 2017 The undersigned authorized representative of Bright Star Schools ( Bright Star ), is providing to the Dissemination Agent the following operational information as required under Section 4 of the Continuing Disclosure Agreement, dated as of December 1, 2017 (the Disclosure Agreement ), between the Dissemination Agent, the Borrower and Bright Star. The Disclosure Agreement requires that this information be provided to the Dissemination Agent within 180 days of the end of each fiscal year. Defined terms used in this certificate and not defined herein shall have the meaning granted to such terms in the Disclosure Agreement or, if not defined therein, in the Master Trust Indenture. The information contained below is unaudited. 1. The undersigned is familiar with the provisions of the Leases, and based on such review and familiarity, Bright Star has fulfilled all of its obligations thereunder throughout Fiscal Year preceding the date hereof, and there have been no Defaults or Events of Default under the Leases (or, if there has been a Default or Event of Default in the fulfillment of any such obligation in such Fiscal Year, attached hereto as Appendix I is additional information specifying each such Default or Event of Default known to the undersigned and the nature and status thereof and the actions taken or being taken to correct such Default or Event of Default). 2. All insurance required by the Leases is in full force and effect as of the date hereof. 3. Obligated Group Financial Covenants As of June 30, 20 : (a) (b) The Debt Service Coverage Ratio pursuant to Section 3.07 of the Master Trust Indenture for the Fiscal Year ended June 30, 20 was x. Cash and cash equivalents of the Obligated Group Financed Schools on hand was days, (cash and cash equivalents of the Obligated Group Financed Schools on hand as shown on Bright Star School s audited financial statements for each Fiscal Year, and any State payments accrued to such Fiscal Year and scheduled to be received within two months following the end of such Fiscal Year ( Cash on Hand ) in the amount of $, divided by (ii) the Average Daily Expenses for Obligated Group Financed Schools for the 20 - fiscal year of $ ), results in Consolidated Days Cash on Hand of days, which [does/does not] comply with the liquidity covenant in Section 5A of Exhibit B of the Leases. (This financial covenant calculation only needs to be calculated once among the Obligated Group Financed Schools.) E-13

302 4. Individual School Tenants Financial Covenants (To be completed for each Individual School Bright Star, except as noted below.) As of June 30, 20 : (a) Base Rent Coverage Ratio was x, which [does/does not] comply with the Base Rent Coverage Ratio covenant in Section of the Leases. 5. The following information with respect to the Schools: Years) (a) Enrollment by Grade Level (Actual for Prior + Projected for Two Following Valor Academy High School Grade Level th Grade 10 th Grade 11 th Grade 12 th Grade Totals Stella Middle Charter Academy Grade Level th Grade 6 h Grade 7 th Grade 8 th Grade Totals (b) Student Retention by Grade Level (Prior Year) School Year th Grade 10 th Grade 11 th Grade 12 th Grade Totals School Year h Grade 6 th Grade 7 th Grade 8 th Grade Totals Valor Academy High School Did Not Re-Enrolled Re-Enroll Stella Middle Charter Academy Did Not Re-Enrolled Re-Enroll % Re-Enrolled % Re-Enrolled E-14

303 (c) Teacher Retention Rate (Prior Year) Valor Academy High School Number of School Year Number of Teachers Teachers That Did Not Return 1 Teacher Retention Rate % Stella Middle Charter Academy Number of School Year Number of Teachers Teachers That Did Not Return 1 Teacher Retention Rate % 1 Defined as teachers that left voluntarily or were removed from their position. It does not include teachers that remained in their position or moved to another position within the Bright Star organization. (d) The States Smarter Balanced Assessment scores (Prior Year), indicating for English language arts and literacy ( ELA/L ) and mathematics ( Math ) the aggregate percentages of students meeting or exceeding standards Grades Obligated Group Schools (1) Valor Academy High School ( VAHS ) 9-12 Stella Middle Charter Academy ( SMCA ) 5-8 LOCAL HIGH SCHOOLS - VAHS Panorama High School 9-12 Monroe High School 9-12 Sun Valley High School 9-12 Smarter Bal. Assessment ELA/L (Met/Exceeded %) (2) Smarter Bal. Assessment Math (Met/Exceeded %) (2) LOCAL MIDDLE SCHOOLS - SMCA Johnnie Cochran, Jr. Middle 6-8 Audobon Middle 6-8 Pio Pico Middle 6-8 COUNTY/ STATE LAUSD (High Schools) 9-12 LAUSD (Middle Schools) 5-8 State of California (High Schools) 9-12 State of California (Middle Schools) 5-8 (1) (2) Any additional Obligated Group Schools shall be added. Represents aggregate percentages of test-taking students that met or exceeded standards. E-15

304 (e) As of, 20, Bright Star had students on a waiting list to attend Valor Academy High School. As of, 20, Bright Star had students on a waiting list to attend Stella Middle Charter Academy. This certificate is being provided by Bright Star Schools to the Dissemination Agent on a date which is [within][outside] of 180 days from the end of its prior fiscal year. Dated: BRIGHT STAR SCHOOLS By Name Title E-16

305 EXHIBIT B NOTICE TO REPOSITORIES OF FAILURE TO FILE ANNUAL OR QUARTERLY REPORT Name of Issuer: Name of Bond Issue: Dissemination Agent: Name of Borrower: Name of Charter Schools: California School Finance Authority California School Finance Authority Charter School Revenue Bonds (Bright Star Schools-Obligated Group) Series 2017 Urban Futures, Incorporated Bright Star Education Group Date of Issuance: December, 2017 NOTICE IS HEREBY GIVEN that the Borrower has not provided an [Annual Report][Quarterly Report] with respect to the above-named Bonds as required by the Continuing Disclosure Agreement, dated as of December 1, 2017, between the undersigned Dissemination Agent, the Borrower and Bright Star. The Borrower anticipates that the [Annual Report][Quarterly Report] will be filed by. Dated: URBAN FUTURES, INCORPORATED, as Dissemination Agent By Authorized Signatory cc: Stifel, Nicolaus & Company, Incorporated E-17

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307 APPENDIX F BOOK-ENTRY SYSTEM The information in this Appendix has been provided by DTC for use in securities offering documents, and neither the Authority nor the Borrower takes any responsibility for the accuracy or completeness thereof. The Authority and the Borrower cannot and do not give any assurances that DTC, DTC Participants or Indirect Participants will distribute to the Beneficial Owner either (a) payments of interest, principal or premium, if any, with respect to the Bonds or (b) certificates representing ownership interest in or other confirmation of ownership interest in the Bonds, or that they will so do on a timely basis or that DTC, DTC Participants or DTC Indirect Participants will act in the manner described in this Limited Offering Memorandum. The current Rules applicable to DTC are on file with the Securities and Exchange Commission and the current Procedures of DTC to be followed in dealing with DTC Participants are on file with DTC. As used in this appendix, Securities means the Bonds, Issuer means the Authority and the Borrower. The Depository Trust Company ( DTC ), New York, New York will act as securities depository for the Bonds. The Bonds will be issued as fully-registered securities registered in the name of Cede & Co. (DTC s partnership nominee) or such other name as may be requested by an authorized representative of DTC. One fully registered Bond certificate will be issued for each maturity of each Series of Bonds, each in the aggregate principal amount of that maturity of Bonds, and will be deposited with DTC. DTC, the world s largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a banking organization within the meaning of the New York Banking Law, a member of the Federal Reserve System, a clearing corporation within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Securities Exchange Act of DTC holds and provides asset servicing for over 3.5 million issues of U.S. and non-u.s. equity issues, corporate and municipal debt issues, and money market instruments (from over 100 countries) that DTC s participants ( Direct Participants ) deposit with DTC. DTC also facilitates the post-trade settlement among Direct Participants of sales and other securities transactions in deposited securities, through electronic computerized book-entry transfers and pledges between Direct Participants accounts. This eliminates the need for physical movement of securities certificates. Direct Participants include both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation ( DTCC ). DTCC is the holding company for DTC, National Securities Clearing Corporation and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its regulated subsidiaries. Access to the DTC system is also available to others such as both U.S. and non-u.s. securities brokers and dealers, banks, trust companies, and clearing corporations that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly ( Indirect Participants ). DTC has a Standard & Poor s rating of AA+. The DTC Rules applicable to its Participants are on file with the Securities and Exchange Commission. More information about DTC can be found at Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Bonds on DTC s records. The ownership interest of each actual purchaser of each Bond ( Beneficial Owner ) is in turn to be recorded on the Direct and Indirect Participants records. Beneficial Owners will not receive written confirmation from DTC of their purchase. Beneficial Owners are, however, expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which the Beneficial Owner entered into the transaction. Transfers of ownership interests in the Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on

308 behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in Bonds, except in the event that use of the book-entry system for the Bonds is discontinued. To facilitate subsequent transfers, all Bonds deposited by Direct Participants with DTC are registered in the name of DTC s partnership nominee, Cede & Co., or such other name as may be requested by an authorized representative of DTC. The deposit of Bonds with DTC and their registration in the name of Cede & Co. or such other DTC nominee do not affect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Bonds; DTC s records reflect only the identity of the Direct Participants to whose accounts such Bonds are credited, which may or may not be the Beneficial Owners. The Direct and Indirect Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by DTC to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time. Beneficial Owners of Bonds may wish to take certain steps to augment the transmission to them of notices of significant events with respect to the Bonds, such as redemptions, defaults, and proposed amendments to the Bond documents. For example, Beneficial Owners of Bonds may wish to ascertain that the nominee holding the Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners. In the alternative, Beneficial Owners may wish to provide their names and addresses to the registrar and request that copies of notices be provided directly to them. Redemption notices shall be sent to DTC. If less than all of the Bonds within an issue are being redeemed, DTC s practice is to determine by lot the amount of the interest of each Direct Participant in such issue to be redeemed. Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote with respect to Bonds unless authorized by a Direct Participant in accordance with DTC s MMI Procedures. Under its usual procedures, DTC mails an Omnibus Proxy to the Authority as soon as possible after the record date. The Omnibus Proxy assigns Cede & Co. s consenting or voting rights to those Direct Participants to whose accounts Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy). Redemption proceeds, distributions, and dividend payments on the Bonds will be made to Cede & Co., or such other nominee as may be requested by an authorized representative of DTC. DTC s practice is to credit Direct Participants accounts upon DTC s receipt of funds and corresponding detail information from the Authority or the Trustee, on payable date in accordance with their respective holdings shown on DTC s records. Payments by Participants to Beneficial Owners will be governed by standing instructions and customary practices, as is the case with securities held for the accounts of customers in bearer form or registered in street name, and will be the responsibility of such Participant and not of DTC, the Trustee, or the Authority, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of redemption proceeds, distributions, and dividend payments to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Authority or the Trustee, disbursement of such payments to Direct Participants will be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners will be the responsibility of Direct and Indirect Participants. DTC may discontinue providing its services as depository with respect to the Bonds at any time by giving reasonable notice to the Authority or the Trustee. Under such circumstances, in the event that a successor depository is not obtained, Bond certificates are required to be printed and delivered. F-2

309 The Authority may decide to discontinue use of the system of book-entry-only transfers through DTC (or a successor securities depository). In that event, Bond certificates will be printed and delivered to DTC. The information in this Appendix concerning DTC and DTC s book-entry system has been obtained from sources that the Borrower believes to be reliable, but neither the Authority nor the Borrower take responsibility for the accuracy thereof. F-3

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311 APPENDIX G FORM OF OPINION OF BOND COUNSEL Upon the delivery of the Bonds, Orrick, Herrington & Sutcliffe LLP, Bond Counsel to the Authority, proposes to deliver its final approving opinion with respect to the Bonds in substantially the following form: California School Finance Authority Los Angeles, California Ladies and Gentlemen: California School Finance Authority Charter School Revenue Bonds (Bright Star Schools Obligated Group) Series 2017 (Final Opinion) We have acted as bond counsel to the California School Finance Authority (the Authority ) in connection with the issuance of $ aggregate principal amount of California School Finance Authority Charter School Revenue Bonds (Bright Star Schools Obligated Group) Series 2017 (the Bonds ). The Bonds are issued pursuant to an Indenture, dated as of December 1, 2017 (the Indenture ), between the Authority and Wilmington Trust, National Association, as trustee (the Trustee ). The Indenture provides that the Bonds are issued for the stated purpose of making a loan of the proceeds thereof to Bright Star Education Group, a California nonprofit public benefit corporation (the Borrower ) pursuant to a Loan Agreement, dated as of December 1, 2017 (the Loan Agreement ), between the Authority, the Borrower and Bright Star Development Group-9334 Lemona, LLC, a California limited liability company. Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture. In such connection, we have reviewed the Indenture, the Loan Agreement, the Master Indenture of Trust, the Supplemental Master Indenture for Obligation No. 1, the Intercept Notice, the Leases, the Tax Certificate and Agreement, opinions of counsel to the Authority, the Borrower, the Landlords, BSS and the Trustee, certificates of the Authority, the Borrower, the Landlords, BSS, the Trustee and others, and such other documents, opinions and matters to the extent we deemed necessary to render the opinions set forth herein. We have relied on the opinion of Musick Peeler & Garrett LLP, counsel to the Borrower, the Landlords and BSS, regarding, among other matters, the current qualification of the Borrower and BSS as organizations described in Section 501(c)(3) of the Internal Revenue Code of 1986 (the Code ) and the use of the facilities financed or refinanced with the proceeds of the Bonds in activities that are not considered unrelated trade or business activities of the Borrower within the meaning of Section 513 of the Code. We note that such opinion is subject to a number of qualifications and limitations. We have also relied upon representations of BSS concerning the intended operation of the facilities to be financed or refinanced with the proceeds of the Bonds in activities that are not considered unrelated trade or business activities of BSS within the

312 meaning of Section 513 of the Code. Failure of the Borrower or of BSS to be organized and operated in accordance with the Internal Revenue Service's requirements for the maintenance of its respective status as an organization described in Section 501(c)(3) of the Code, or use of the Bond-financed or refinanced facilities in activities that are considered unrelated trade or business activities of the Borrower and BSS within the meaning of Section 513 of the Code, may result in interest on the Bonds being included in gross income for federal income tax purposes, possibly from the date of issuance of the Bonds. The opinions expressed herein are based on an analysis of existing laws, regulations, rulings and court decisions and cover certain matters not directly addressed by such authorities. Such opinions may be affected by actions taken or omitted or events occurring after the date hereof. We have not undertaken to determine, or to inform any person, whether any such actions are taken or omitted or events do occur or any other matters come to our attention after the date hereof. Accordingly, this letter speaks only as of its date and is not intended to, and may not, be relied upon or otherwise used in connection with any such actions, events or matters. Our engagement with respect to the Bonds has concluded with their issuance, and we disclaim any obligation to update this letter. We have assumed the genuineness of all documents and signatures presented to us (whether as originals or as copies) and the due and legal execution and delivery thereof by, and validity against, any parties other than the Authority. We have assumed, without undertaking to verify, the accuracy of the factual matters represented, warranted or certified in the documents, and of the legal conclusions contained in the opinions, referred to in the second and third paragraphs hereof. Furthermore, we have assumed compliance with all covenants and agreements contained in the Indenture, the Loan Agreement, the Master Indenture of Trust, the Supplemental Master Indenture for Obligation No. 1, the Leases, the Intercept Notice and the Tax Certificate, including (without limitation) covenants and agreements compliance with which is necessary to assure that future actions, omissions or events will not cause interest on the Bonds to be included in gross income for federal income tax purposes. In addition, we have assumed that actions of the Borrower, the Landlords and BSS and other persons will not cause any of the Bonds to exceed the $150,000,000 limitation on qualified 501(c)(3) bonds that do not finance hospital facilities set forth in Section 145(b) of the Code. We call attention to the fact that the rights and obligations under the Bonds, the Indenture, the Loan Agreement, the Master Indenture of Trust, the Supplemental Master Indenture for Obligation No. 1, the Leases, the Intercept Notice and the Tax Certificate and their enforceability may be subject to bankruptcy, insolvency, receivership, reorganization, arrangement, fraudulent conveyance, moratorium and other laws relating to or affecting creditors' rights, to the application of equitable principles, to the exercise of judicial discretion in appropriate cases, and to the limitations on legal remedies against instrumentalities of the State of California. We express no opinion with respect to any indemnification, contribution, liquidated damages, penalty (including any remedy deemed to constitute a penalty), right of set-off, arbitration, judicial reference, choice of law, choice of forum, choice of venue, non-exclusivity of remedies, waiver or severability provisions contained in the foregoing documents, nor do we express any opinion with respect to the state or quality of title to or interest in any of the real or personal property described in or as subject to the lien of the Indenture, the Loan Agreement, the Master Indenture of Trust, the Supplemental Master Indenture for Obligation No. 1, the Leases or the accuracy or sufficiency of the description contained therein of, or the remedies available to enforce liens on, any such property. Our services did not include financial or other non-legal advice. Finally, we undertake no responsibility for the accuracy, completeness or fairness of the G-2

313 Limited Offering Memorandum or other offering material relating to the Bonds and express no opinion with respect thereto. Based on and subject to the foregoing, and in reliance thereon, as of the date hereof, we are of the following opinions: 1. The Bonds constitute the valid and binding limited obligations of the Authority. 2. The Indenture has been duly executed and delivered by, and constitutes the valid and binding obligation of, the Authority. The Indenture creates a valid pledge, to secure the payment of the principal of and interest on the Bonds, of the Payments (except Payments pursuant to the Intercept Notice) and any other amounts (excluding proceeds of the sale of the Bonds) held by the Trustee in any fund or account established pursuant to the Indenture, except the Rebate Fund, subject to the provisions of the Indenture permitting the application thereof for the purposes and on the terms and conditions set forth in the Indenture. The Bonds are further secured by apportionments from the State Controller, pursuant to Section of the Education Code and the Intercept Notice, of amounts specified in the Intercept Notice and paid directly to the Trustee. 3. The Loan Agreement has been duly executed and delivered by, and constitutes a valid and binding agreement of, the Authority. 4. 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. Interest on the Bonds is not a specific preference item for purposes of the federal individual or corporate alternative minimum taxes, although we observe that it is included in adjusted current earnings when calculating corporate alternative minimum taxable income. We express no opinion regarding other tax consequences related to the ownership or disposition of, or the amount, accrual or receipt of interest on, the Bonds. Faithfully yours, ORRICK, HERRINGTON & SUTCLIFFE LLP G-3

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315 APPENDIX H FORMS OF INVESTOR LETTER FORM OF INVESTOR LETTER FOR PURCHASER The Honorable John Chiang Treasurer of the State of California 915 Capitol Mall, Room 261 Sacramento, California Wilmington Trust, National Association 650 Town Center Drive, Suite 600 Costa Mesa, California California School Finance Authority 304 South Broadway Los Angeles, California Stifel, Nicolaus & Company, Incorporated 515 S. Figueroa Street, Suite 1800 Los Angeles, California Re: $ California School Finance Authority Charter School Revenue Bonds (Bright Star Schools Obligated Group) Series 2017 Ladies and Gentlemen: The undersigned (the Investor ) hereby acknowledges that it is purchasing $ aggregate principal amount of California School Finance Authority (the Authority ) Charter School Revenue Bonds (Bright Star Schools Obligated Group) Series 2017 (the Bonds ), issued pursuant to an indenture, dated as of December 1, 2017 (the Indenture ), between the Authority and Wilmington Trust, National Association (the Trustee ). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture. This letter is being provided pursuant to a Bond Purchase Agreement, dated [December, 2017] (the Purchase Agreement ), among the Authority, the Treasurer of the State of California, as agent for sale on behalf of the Authority, Stifel, Nicholas & Company, Incorporated (the Underwriter ), and approved by Bright Star Education Group (the Borrower ) and Bright Star Schools ( BSS or the Lessee ). The undersigned acknowledges that the Bonds are being delivered for the purpose of financing or refinancing the acquisition, construction, improvement and equipping of certain charter school facilities located in Los Angeles, California (collectively, the Project ) on behalf of the Borrower, as more particularly described in the Loan Agreement, dated as of December 1, 2017 (the Loan Agreement ), by and between the Authority and the Borrower and approved and acknowledged by Bright Star Development Group Lemona, LLC and BSDG 4115 MLK LLC (together, the Lessors ). The undersigned further acknowledges that the Lessors will lease the charter school facilities to the Lessee pursuant to certain leases (the Leases ) between the Lessors and the Lessee. The Bonds and the interest thereon are payable solely out of certain revenues and income received by the Authority or the Trustee pursuant to the Loan Agreement and Obligation No. 1 relating to the Bonds ( Obligation No. 1 ) issued by the Borrower in an amount equal to the aggregate principal amount of the Bonds pursuant to a Master Indenture of Trust, dated as of December 1, 2017 (the Master Indenture ), as supplemented by a Supplemental Master Indenture for Obligation No. 1, dated as of December 1, 2017 (the First Supplemental Master Indenture ), by and between the Borrower, as representative of the Obligated Group, the Lessor, as the initial Member of the Obligated Group (the Member ), and Wilmington Trust, National Association, as master trustee (the Master Trustee ). The Indenture, the Loan Agreement, the Leases, the Master Trust Indenture, and the First Supplemental Master Indenture are referred to herein as the Bond Documents.

316 In connection with the sale of the Bonds to the Investor, the Investor hereby makes the following representations upon which you may rely: 1. The Investor has authority and is duly authorized to purchase the Bonds and to execute this letter and any other instruments and documents required to be executed by the Investor in connection with the purchase of the Bonds. 2. The Investor is either (a) a qualified institutional buyer as defined in Rule 144A of the Securities Act of 1933, as amended (the Act ) or (b) an accredited investor as defined under Regulation D promulgated under the Act, and therefore has sufficient knowledge and experience in financial and business matters, including in the purchase and ownership of municipal obligations, to be able to evaluate the risks and merits of the investment represented by the Bonds. 3. The Bonds are being acquired by the Investor for investment and not with a view to, or for resale in connection with, any distribution of the Bonds, and the Investor intends to hold the Bonds solely for its own account for investment purposes for an indefinite period of time, and does not intend at this time to dispose of all or any part of the Bonds. However, the Investor may sell the Bonds at any time the Investor deems appropriate, subject to the transfer restrictions set forth in the Bonds and in the Indenture. The Investor understands that it may need to bear the risks of this investment for an indefinite time, since a sale of the Bonds, or any portion thereof, prior to maturity may not be possible. 4. The Investor understands that the Bonds are not registered under the Act and that such registration is not legally required as of the date hereof and further understands that the Bonds (a) are not being registered or otherwise qualified for sale under the Blue Sky laws and regulations of any state, (b) will not be listed in any stock or other securities exchange, and (c) may not be readily marketable due to restrictions on transfer. 5. The Investor acknowledges that it has either been supplied with or been given access to information, including financial statements and other financial information, which it has requested from the Borrower and to which a reasonable investor would attach significance in making investment decisions, and the Investor has had the opportunity to ask questions and receive answers from knowledgeable individuals, including its own counsel, concerning the Borrower, the Project, the Member, the Lessee, the Bond Documents and the Bonds and the security therefor so that, as a reasonable investor, the Investor has been able to make a decision to purchase the Bonds. The Investor has received a copy of the Preliminary Limited Offering Memorandum, dated December 1, 2017 (the Preliminary Limited Offering Memorandum ), and the Limited Offering Memorandum, dated December, 2017 (the Limited Offering Memorandum ). The Investor acknowledges that it has not relied upon any advice, counsel, representation or information of the Authority set forth under the captions THE AUTHORITY and ABSENCE OF MATERIAL LITIGATION The Authority in the Preliminary Limited Offering Memorandum.. 6. The Investor acknowledges that the obligations of the Authority under the Indenture are special, limited obligations payable solely from amounts paid to the Authority or the Trustee pursuant to the Loan Agreement and Obligation No. 1 and the Authority shall not be directly or indirectly or contingently or morally obligated to use any moneys or assets of the Authority to pay any portion of the costs of the Project, the Costs of Issuance, or any other costs or expense in connection with the Project, the Costs of Issuance, the Bonds or the Bond Documents. The Investor understands that the Bonds are not secured by any pledge of any moneys received or to be received from taxation by the Authority (which has no taxing power), the State of California or any political subdivision or taxing district thereof; that the Bonds will never represent or constitute a general obligation or a pledge of the faith and credit of the Authority, the State of California or any political subdivision thereof; that no right will exist to have taxes levied by the State of California or any H-2

317 political subdivision thereof for the payment of principal of or interest on the Bonds and that the liability of the Authority and the State of California with respect to the Bonds is subject to further limitations as set forth in the Bonds and the Indenture. 7. The Investor has made its own inquiry and analysis with respect to the Bonds and the security therefor, and other material factors affecting the security and payment of the Bonds. The Investor is aware that the business of the Borrower, the Member and the Lessee involves certain economic and regulatory variables and risks that could adversely affect the security for the Bonds. The Investor has reviewed the documents executed in conjunction with the issuance of the Bonds, or summaries thereof, including, without limitation, the Indenture, the Master Indenture, the First Supplemental Master Indenture, the Leases and the Loan Agreement. 8. The Investor acknowledges and agrees that the Authority takes no responsibility for, and makes no representation to the Investor, or any subsequent purchaser, with regard to, a sale, transfer or other disposition of the Bonds in violation of the provisions hereof, or any securities law or income tax law consequences thereof. The Investor also acknowledges that, with respect to the Authority s obligations and liabilities, the Investor is solely responsible for compliance with the sales restrictions on the Bonds in connection with any subsequent transfer of the Bonds made by the Investor. 9. The Investor agrees that it is bound by and will abide by the provisions of the Indenture relating to transfer, the restrictions noted on the face of the Bonds and this Investor Letter. The Investor also covenants to comply with all applicable federal and state securities laws, rules and regulations in connection with any resale or transfer of the Bonds by the Investor. 10. The Investor acknowledges that the sale of the Bonds to the Investor is made in reliance upon the certifications, representations and warranties herein by the addressees hereto. 11. The Investor hereby waives any and all claims, actions, or causes of action which the Investor may have from and after the date hereof against the Authority, counsel to the Authority, and their respective members, officers, agents, and employees, growing out of any action (other than willful misconduct) which the Authority took or could have taken in connection with the authorization, execution, delivery, and sale of the Bonds or the purchase of the Bonds by the undersigned or in connection with any statements or representations which induced the undersigned to purchase the Bonds. This waiver does not go to the Borrower, the Underwriter, Bond Counsel, the Lessee, or their counsel, their respective members, officers, agents, or employees. 12. The interpretation of the provisions hereof shall be governed and construed in accordance with California law without regard to principles of conflicts of laws. Notwithstanding anything to the contrary in this paragraph 12, the waiver by the Investor does not apply to Bond Counsel or the Underwriter. H-3

318 Date:, 2017 Very truly yours, NAME OF PURCHASER By: Name: Title: H-4

319 FORM OF INVESTOR LETTER FOR BONDHOLDER REPRESENTATIVE The Honorable John Chiang Treasurer of the State of California 915 Capitol Mall, Room 261 Sacramento, California Wilmington Trust, National Association 650 Town Center Drive, Suite 600 Costa Mesa, California California School Finance Authority 304 South Broadway Los Angeles, California Stifel, Nicolaus & Company, Incorporated 515 S. Figueroa Street, Suite 1800 Los Angeles, California Re: $ California School Finance Authority Charter School Revenue Bonds (Bright Star Schools Obligated Group) Series 2017 Ladies and Gentlemen: The undersigned (the Investor ) hereby acknowledges that it is purchasing $ aggregate principal amount (the Purchased Bonds ) of California School Finance Authority (the Authority ) Charter School Revenue Bonds (Bright Star Schools Obligated Group) Series 2017 (the Bonds ), issued pursuant to an indenture, dated as of December 1, 2017 (the Indenture ), between the Authority and Wilmington Trust, National Association (the Trustee ). Capitalized terms not otherwise defined herein shall have the meanings ascribed thereto in the Indenture. This letter is being provided pursuant to a Bond Purchase Agreement, dated [December, 2017] (the Purchase Agreement ), among the Authority, the Treasurer of the State of California, as agent for sale on behalf of the Authority, Stifel, Nicholas & Company, Incorporated (the Underwriter ), and approved by Bright Star Education Group (the Borrower ) and Bright Star Schools ( BSS or the Lessee ). The undersigned acknowledges that the Bonds are being delivered for the purpose of financing or refinancing the acquisition, construction, improvement and equipping of certain charter school facilities located in Los Angeles, California (collectively, the Project ) on behalf of the Borrower, as more particularly described in the Loan Agreement, dated as of December 1, 2017 (the Loan Agreement ), by and between the Authority and the Borrower and approved and acknowledged by Bright Star Development Group Lemona, LLC and BSDG 4115 MLK LLC (together, the Lessors ). The undersigned further acknowledges that the Lessors will lease the charter school facilities to the Lessee pursuant to certain leases (the Leases ) between the Lessors and the Lessee. The Bonds and the interest thereon are payable solely out of certain revenues and income received by the Authority or the Trustee pursuant to the Loan Agreement and Obligation No. 1 relating to the Bonds ( Obligation No. 1 ) issued by the Borrower in an amount equal to the aggregate principal amount of the Bonds pursuant to a Master Indenture of Trust, dated as of December 1, 2017 (the Master Indenture ), as supplemented by a Supplemental Master Indenture for Obligation No. 1, dated as of December 1, 2017 (the First Supplemental Master Indenture ), by and between the Borrower, as representative of the Obligated Group, the Lessor, as the initial Member of the Obligated Group (the Member ), and Wilmington Trust, National Association, as master trustee (the Master Trustee ). The Indenture, the Loan Agreement, the Leases, the Master Trust Indenture, and the First Supplemental Master Indenture are referred to herein as the Bond Documents. In connection with the sale of the Bonds, the undersigned (the Bondholder Representative ) hereby makes the following representations upon which you may rely: H-5

320 1. The Bondholder Representative is a qualified institutional buyer as defined in Rule 144A of the Securities Act of 1933, as amended (the Act ) or a registered investment adviser as defined in the Investment Advisers Act of 1940, responsible for managing at least $1 billion in assets. 2. The Bondholder Representative has discretionary authority over the investments of its clients who will be the owners of the Purchased Bonds (the Owners ), is the duly appointed representative if the Owners of all of the Purchased Bonds and is authorized to act on behalf of the Owners. 3. Each Owner is an accredited investor as defined in Regulation D of the Act, or a qualified institutional buyer as defined in Rule 144A of the Act, and therefore has sufficient knowledge and experience in financial and business matters, including the purchase and ownership of municipal obligations, to be able to evaluate the risks and merits of the investment represented by the Purchased Bonds. 4. The Bondholder Representative, on behalf of itself and each Owner, understands that the Bonds are not registered under the Act and that such registration is not legally required as of the date hereof and further understands that the Bonds (a) are not being registered or otherwise qualified for sale under the Blue Sky laws and regulations of any state, (b) will not be listed in any stock or other securities exchange, and (c) may not be readily marketable due to restrictions on transfer. 5. The Bondholder Representative, on behalf of itself and each Owner, acknowledges that it has either been supplied with or been given access to information, including financial statements and other financial information, which it has requested from the Borrower and to which a reasonable investor would attach significance in making investment decisions, and the Bondholder Representative, on behalf of itself and each Owner, has had the opportunity to ask questions and receive answers from knowledgeable individuals, including its own counsel, concerning the Borrower, the Project, the Member, the Lessee, the Bond Documents and the Bonds and the security therefor so that, as a reasonable investor, the Bondholder Representative, on behalf of itself and each Owner, has been able to make a decision to purchase the Bonds. The Bondholder Representative, on behalf of itself and each Owner, has received a copy of the Preliminary Limited Offering Memorandum, dated December 1, 2017 (the Preliminary Limited Offering Memorandum ), and the Limited Offering Memorandum, dated December, 2017 (the Limited Offering Memorandum ). The Bondholder Representative, on behalf of itself and each Owner, acknowledges that it has not relied upon any advice, counsel, representation or information of the Authority set forth under the captions THE AUTHORITY and ABSENCE OF MATERIAL LITIGATION The Authority in the Preliminary Limited Offering Memorandum. 6. The Bondholder Representative, on behalf of itself and each Owner, acknowledges that the obligations of the Authority under the Indenture are special, limited obligations payable solely from amounts paid to the Authority or the Trustee pursuant to the Loan Agreement and Obligation No. 1 and the Authority shall not be directly or indirectly or contingently or morally obligated to use any moneys or assets of the Authority to pay any portion of the costs of the Project, the Costs of Issuance, or any other costs or expense in connection with the Project, the Costs of Issuance, the Bonds or the Bond Documents. The Bondholder Representative, on behalf of itself and each Owner, understands that the Bonds are not secured by any pledge of any moneys received or to be received from taxation by the Authority (which has no taxing power), the State of California or any political subdivision or taxing district thereof; that the Bonds will never represent or constitute a general obligation or a pledge of the faith and credit of the Authority, the State of California or any political subdivision thereof; that no right will exist to have taxes levied by the State of California or any political subdivision thereof for the payment of principal of or interest on the Bonds and that the liability of the Authority and the State of California with respect to the Bonds is subject to further limitations as set forth in the Bonds and the Indenture. H-6

321 7. The Bondholder Representative, on behalf of itself and each Owner, has made its own inquiry and analysis with respect to the Bonds and the security therefor, and other material factors affecting the security and payment of the Bonds. The Bondholder Representative and each Owner are aware that the business of the Borrower, the Member and the Lessee involves certain economic and regulatory variables and risks that could adversely affect the security for the Bonds. The Bondholder Representative, on behalf of itself and each Owner, has also reviewed the documents executed in conjunction with the issuance of the Bonds, or summaries thereof, including, without limitation, the Indenture, the Master Indenture, the First Supplemental Master Indenture, the Leases and the Loan Agreement. 8. The Bondholder Representative, on behalf of itself and each Owner, acknowledges and agrees that the Authority takes no responsibility for, and makes no representation to the Bondholder Representative or such Owner, or any subsequent purchaser, with regard to, a sale, transfer or other disposition of the Bonds in violation of the provisions hereof, or any securities law or income tax law consequences thereof. The Bondholder Representative, on behalf of itself and each Owner, also acknowledges that, with respect to the Authority s obligations and liabilities, the Bondholder Representative and such Owner are solely responsible for compliance with the sales restrictions on the Bonds in connection with any subsequent transfer of the Bonds made by such Owner or by the Bondholder Representative on behalf of such Owner. 9. The Bondholder Representative, on behalf of itself and each Owner, agrees that it is bound by and will abide by the provisions of the Indenture relating to transfer, the restrictions noted on the face of the Bonds and this Investor Letter. The Bondholder Representative and each Owner will comply with all applicable federal and state securities laws, rules and regulations in connection with any resale or transfer of the Purchased Bonds by such Owner, or by the Bondholder Representative on behalf of such Owner. 10. The Bondholder Representative, on behalf of itself and each Owner, acknowledges that the sale of the Bonds to such Owner is made in reliance upon the certifications, representations and warranties herein by such Owner and by the Bondholder Representative on behalf of itself and on behalf of such Owner. 11. The Bondholder Representative, on behalf of itself and each Owner, hereby waives any and all claims, actions, or causes of action which such Owner or the Bondholder Representative on behalf of such Owner may have from and after the date hereof against the State Treasurer, the Authority, counsel to the Authority, counsel to the State Treasurer and their respective members, officers, agents, and employees, growing out of any action (other than gross negligence or willful misconduct) which the Authority or the State Treasurer took or could have taken in connection with the authorization, execution, delivery, and sale of the Bonds or the purchase of the Bonds by the undersigned or in connection with any statements or representations which induced the undersigned to purchase the Bonds. 12. The interpretation of the provisions hereof shall be governed and construed in accordance with California law without regard to principles of conflicts of laws. Notwithstanding anything to the contrary in this paragraph 12, the waiver by the Bondholder Representative, on behalf of itself and each Owner, does not apply to Bond Counsel or the Underwriter. H-7

322 Date:, 2017 Very truly yours, NAME OF BONDHOLDER REPRESENTATIVE By: Name: Title: H-8

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