fpcs revenue bonds series 2006

NEW ISSUE - BOOK ENTRY ONLY RATINGS: See “Ratings” herein

In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, Bond Counsel, under existing law and assuming continuing compliance with the federal tax law, interest on the Series 2003 Bonds is excluded from gross income for federal income tax purposes. Interest on the Series 2003 Bonds will not be treated as an item of tax preference for purposes of the alternative minimum tax imposed on individuals and corporations under the Internal Revenue Code of 1986, as amended (the “Code”); however, interest paid to corporate holders of the Series 2003 Bonds may be subject to alternative minimum tax and foreign branch profits tax under circumstances described under “Tax Exemption” herein. Interest on the Series 2003 Bonds is exempt from District taxation, except estate, inheritance and gift taxes.

$44,880,000DISTRICT OF COLUMBIA

Revenue Bonds(Friendship Public Charter School, Inc. Issue)

Series 2003Dated: November 1, 2003 Due: June 1, as shown below

The Series 2003 Bonds will be issued and secured under the provisions of an Indenture of Trust by and between the District of Columbia (the “District”) and Wells Fargo Bank Minnesota, N.A., as Trustee (the “Trustee”) and will be payable solely from the Receipts and Revenues of the District from the Loan Agreement between

FRIENDSHIP PUBLIC CHARTER SCHOOL, INC.

(the “Friendship School”) and the District, dated November 1, 2003 (the “Loan Agreement”). A promissory note evidencing the obligation of the Friendship School to repay the loan of the proceeds of the Series 2003 Bonds (the “Series 2003 Note”) will be delivered by the Friendship School as security for its obligations under the Loan Agreement. The obligation of the Friendship School to make payments pursuant to the Loan Agreement and the Series 2003 Note is an unconditional general obligation of the Friendship School secured by (a) a pledge of the Friendship School’s 2003 Project Formula Payments, (b) the Series 2003 Mortgage, and (c) the Debt Service Reserve Fund (each as hereinafter defined). See “SECURITY AND SOURCES OF PAYMENT.” The Friendship School will use the loan proceeds to (a) finance and refinance all or a portion of the costs of acquisition and/or leasing, construction, renovating, furnishing and equipping of four schools, including two elementary schools, one middle school and one high school (the “2003 Project”), (b) fund a portion of the Debt Service Reserve Fund, and (c) pay certain costs related to the issuance of the Series 2003 Bonds. See “THE 2003 PROJECT” and “ESTIMATED SOURCES AND USES OF FUNDS.”

The Series 2003 Bonds are issuable only as registered bonds in denominations of $5,000 or any integral multiple of thereof. The Series 2003 Bonds initially will be registered in the name of Cede & Co. as nominee for The Depository Trust Company, New York, New York (“DTC”). Purchases of the Series 2003 Bonds will be in book-entry form only under the book-entry system maintained by DTC through brokers and dealers that are, or act through, DTC Participants. Beneficial Owners of the Series 2003 Bonds will not receive registered certificates representing their interests in the Series 2003 Bonds. So long as DTC or its nominee, Cede & Co., is the registered owner of the Series 2003 Bonds, payments of the principal of and the premium, if any, and interest on the Series 2003 Bonds will be made, when due, directly to DTC by the Trustee, and the Trustee will have no obligation to make payments to any Beneficial Owner of any Series 2003 Bond. Disbursement of such payments to the Beneficial Owners is the responsibility of DTC Participants and the Indirect Participants, as more fully described herein. See “THE SERIES 2003 BONDS – Book-Entry Only System.” An investment in the Series 2003 Bonds involves certain risks, certain of which are described in “BONDHOLDERS’ RISKS.”

THE SERIES 2003 BONDS SHALL BE SPECIAL OBLIGATIONS OF THE DISTRICT. THE SERIES 2003 BONDS ARE WITHOUT RECOURSE TO THE DISTRICT. THE SERIES 2003 BONDS SHALL NOT BE GENERAL OBLIGATIONS OF THE DISTRICT, SHALL NOT BE A PLEDGE OF OR INVOLVE THE FAITH AND CREDIT OR THE TAXING POWER OF THE DISTRICT, SHALL NOT CONSTITUTE A DEBT OF THE DISTRICT AND SHALL NOT CONSTITUTE LENDING OF THE PUBLIC CREDIT FOR PRIVATE UNDERTAKINGS AS PROHIBITED BY THE HOME RULE ACT. PUBLIC CHARTER SCHOOLS ARE NOT GOVERNMENTAL ENTITIES AND DO NOT HAVE TAXING POWERS. THE SERIES 2003 BONDS SHALL NOT GIVE RISE TO ANY PECUNIARY LIABILITY OF THE DISTRICT AND THE DISTRICT SHALL HAVE NO OBLIGATION WITH RESPECT TO THE PURCHASE OF THE SERIES 2003 BONDS. PRINCIPAL OF, AND INTEREST AND PREMIUM, IF ANY, ON THE SERIES 2003 BONDS WILL BE PAYABLE SOLELY FROM THE RECEIPTS AND REVENUES OF THE DISTRICT FROM THE LOAN AGREEMENT (INCLUDING A PLEDGE OF THE 2003 PROJECT FORMULA PAYMENTS), THE SERIES 2003 NOTE, THE 2003 FORMULA PAYMENTS AND THE SERIES 2003 MORTGAGE.

The scheduled payment of principal of and interest on the Series 2003 Bonds when due will be guaranteed under an insurance policy to be issued concurrently with the delivery of the Series 2003 Bonds by ACA Financial Guaranty Corporation (“ACA”).

Interest on the Series 2003 Bonds is payable semiannually on June 1 and December 1 each year, commencing June 1, 2004. The Series 2003 Bonds are subject to optional, mandatory and extraordinary redemption prior to their maturities as set forth in the Indenture and as described under “THE SERIES 2003 BONDS – Redemption of the Series 2003 Bonds” herein.

MATURITIES, AMOUNTS, INTEREST RATES AND PRICES AND YIELDS

$9,230,000 Serial Bonds

DueJune 1

PrincipalAmount

InterestRate Yield

DueJune 1

PrincipalAmount

InterestRate Yield

20052006200720082009

$755,000 775,000 795,000

1,000,000 870,000

3.00%3.003.005.003.25

2.10%2.452.823.203.50

20102011201220132014

$ 1,000,000 950,000 1,000,000 1,000,000 1,085,000

5.00%4.005.005.004.30

3.81%4.104.344.474.59

$4,930,000 $7,820,000 $7,800,000

$15,100,000

5.750% Term Bonds Due June 1, 2018, Yield 4.96% 5.000% Term Bonds Due June 1, 2023, Yield 5.32% 5.125% Term Bonds Due June 1, 2027, Yield 5.41%5.250% Term Bonds Due June 1, 2033, Yield 5.45%

(accrued interest from November 1, 2003 to be added)

The Series 2003 Bonds are offered subject to prior sale when, as and if issued by the District, and accepted by the Underwriter subject to the receipt of the approving legal opinion of Ballard Spahr Andrews & Ingersoll, LLP, Washington DC, Bond Counsel, and to certain other conditions. Certain legal matters will be passed upon for the Friendship School by Hunton & Williams LLP; for the Underwriter by Nixon Peabody LLP; and for the District by the Office of Corporation Counsel. The Series 2003 Bonds are expected to be available for delivery to DTC in New York, New York on or about November 12, 2003.

CITIGROUPDated: November 7, 2003

Community Vision … World Class Education

The Series 2003 Bonds have not been registered under the Securities Act of 1933, as amended, and the Indenture has not been qualified under the Trust Indenture Act of 1939, as amended, in reliance upon exemptions contained in such acts.

No dealer, broker, salesperson or other person has been authorized by the District, the Friendship School or

the Underwriter to give any information or to make any representations with respect to the Series 2003 Bonds, other than those contained in this Official Statement, and, if given or made, such other information or representations must not be relied upon as having been authorized by any of the foregoing. This Official Statement does not constitute an offer to sell or solicitation of an offer to buy, nor shall there be any sale of the Series 2003 Bonds by or to any person in any jurisdiction in which it is unlawful to do so. The Underwriter has reviewed the information in this Official Statement in accordance with and as part of its responsibilities to investors under the federal securities laws as applied to the facts and circumstances of this transaction, but the Underwriter does not guarantee the accuracy or completeness of such information.

Certain information with respect to the Friendship School has been obtained from the Friendship School and other sources that are believed to be reliable, but such information is not guaranteed as to accuracy or completeness and is not to be construed as a representation of the District or the Underwriter. The information and expressions of opinion herein are subject to change without notice, and neither the delivery of this Official Statement nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the parties referred to above since the date hereof. OTHER THAN WITH RESPECT TO INFORMATION CONCERNING THE DISTRICT CONTAINED IN “THE DISTRICT” AND “LITIGATION” HEREIN, NONE OF THE INFORMATION IN THIS OFFICIAL STATEMENT HAS BEEN SUPPLIED OR VERIFIED BY THE DISTRICT, AND THE DISTRICT MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION.

OTHER THAN WITH RESPECT TO INFORMATION CONCERNING ACA FINANCIAL GUARANTY CORPORATION (“ACA”) CONTAINED UNDER THE CAPTION “BOND INSURANCE” HEREIN, NONE OF THE INFORMATION IN THIS OFFICIAL STATEMENT HAS BEEN SUPPLIED OR VERIFIED BY ACA AND ACA MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO (I) THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION; (II) THE VALIDITY OF THE SERIES 2003 BONDS; OR (III) THE TAX EXEMPT STATUS OF THE INTEREST ON THE BONDS.

IN CONNECTION WITH THIS OFFERING, THE UNDERWRITER MAY OVERALLOT OR EFFECT

TRANSACTIONS THAT STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES 2003 BONDS AT LEVELS ABOVE THOSE THAT MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.

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DISTRICT OF COLUMBIA

MAYOR

Anthony A. Williams

EXECUTIVE OFFICERS

Eric W. Price, Deputy Mayor for Planning and Economic Development Robert J. Spagnoletti, Corporation Counsel Natwar M. Gandhi, Chief Financial Officer

COUNCIL OF THE DISTRICT OF COLUMBIA

Linda W. Cropp, Chairman

Harold L. Brazil At Large Kathleen Patterson Ward 3 David A. Catania At Large Adrian Fenty Ward 4 Phil Mendelson At Large Vincent B. Orange, Sr. Ward 5 Carol Schwartz At Large Sharon Ambrose Ward 6 Jim Graham Ward 1 Kevin P. Chavous Ward 7 Jack Evans Ward 2 Sandra Allen Ward 8

BOND COUNSEL

Ballard Spahr Andrews & Ingersoll, LLP Washington, D.C.


BOARD OF TRUSTEES

Donald L. Hense, Chair Floretta Dukes McKenzie, Board Vice-Chair

Ed Walter, Treasurer, Chair of Finance Committee Victor E. Long, Secretary, Parent Representative

Theodora Brown, Member, Chair of Discipline Committee Michelle Coley, Member, Parent Representative

Jan Gillespie, Member Gregory Prince, Member

Helen Ver Standig, Member Chris White, Member

SENIOR STAFF

Vonelle Middleton Chief Academic Officer Mary Procter Chief of Staff

Kimberly Campbell Deputy Chief of Staff Catherine Sanwo Chief Financial Officer

Ulf Zeitler Director of Technology

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TABLE OF CONTENTS Page

INTRODUCTORY STATEMENT ...............................................................................................................................1 THE DISTRICT ............................................................................................................................................................2 PUBLIC CHARTER SCHOOL PROGRAM................................................................................................................2 FRIENDSHIP PUBLIC CHARTER SCHOOL.............................................................................................................4 THE SERIES 2003 BONDS..........................................................................................................................................4

General ......................................................................................................................................................................4 Book-Entry Only System...........................................................................................................................................5 Redemption of the Series 2003 Bonds.......................................................................................................................7 Selection of Series 2003 Bonds for Redemption .......................................................................................................9 Notice of Redemption................................................................................................................................................9 No Partial Redemption After Default ......................................................................................................................10 Mutilated, Destroyed, Lost or Stolen Series 2003 Bonds ........................................................................................10 Transfer and Exchange of Bonds.............................................................................................................................10

SECURITY AND SOURCES OF PAYMENT...........................................................................................................11 Bond Insurance ........................................................................................................................................................11 The Loan Agreement and Payment Obligations ......................................................................................................11 Debt Service Reserve Fund .....................................................................................................................................11 Series 2003 Mortgage..............................................................................................................................................12 Sources and Timing of Payments ............................................................................................................................12 Additional Bonds.....................................................................................................................................................13 Other Covenants of the Friendship School ..............................................................................................................14 Defeasance...............................................................................................................................................................14 Special Obligations..................................................................................................................................................14

BOND INSURANCE..................................................................................................................................................14 Payment Pursuant to Bond Insurance Policy ...........................................................................................................14 ACA’s Rights Under the Financing Documents......................................................................................................15 ACA Financial Guaranty Corporation.....................................................................................................................15

THE 2003 PROJECT...................................................................................................................................................16 ESTIMATED SOURCES AND USES OF FUNDS ...................................................................................................17 DEBT SERVICE SCHEDULE ...................................................................................................................................17 BONDHOLDERS’ RISKS..........................................................................................................................................18

General ....................................................................................................................................................................18 Nonrenewal or Revocation of Charter .....................................................................................................................19 Funding and Future Changes to Charter School Laws ............................................................................................19 Performance By Managers ......................................................................................................................................19 Foreclosure Delays and Deficiency .........................................................................................................................20 Damage or Destruction of the Project......................................................................................................................20 Factors Associated With Education.........................................................................................................................20 Competition for Students.........................................................................................................................................20 Covenant To Maintain Tax-Exempt Status of the Series 2003 Bonds.....................................................................21 Additional Bonds and Additional Indebtedness ......................................................................................................21 Future Legislation....................................................................................................................................................21 Risks of Real Estate Investment ..............................................................................................................................21 Environmental Regulation .......................................................................................................................................21 Prepayment Risks ....................................................................................................................................................22 Market Factors.........................................................................................................................................................22 Enforceability of Remedies; Bankruptcy.................................................................................................................22

TAX EXEMPTION.....................................................................................................................................................22 LEGAL INVESTMENT IN DISTRICT OBLIGATIONS..........................................................................................23 LEGAL MATTERS ....................................................................................................................................................23 LITIGATION ..............................................................................................................................................................24

The District ..............................................................................................................................................................24 The Friendship School.............................................................................................................................................24

FINANCIAL STATEMENTS.....................................................................................................................................24

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UNDERWRITING ......................................................................................................................................................24 RATINGS....................................................................................................................................................................24 RELATIONSHIP OF THE PARTIES.........................................................................................................................25 CONTINUING DISCLOSURE...................................................................................................................................25 MISCELLANEOUS....................................................................................................................................................26 APPROVAL AND CONSENT TO DISTRIBUTION ................................................................................................27 Appendix A - Certain Information Regarding Friendship Public Charter School Appendix B-1 - Audited Financial Statements of the Friendship School for Year Ended June 30, 2002 Appendix B-2 - Audited Financial Statements of the Friendship School for Year Ended June 30, 2003 Appendix C - Certain Defined Terms and Summary of Certain Provisions of the Indenture and the Loan

Agreement Appendix D - Summary of Certain Provisions of the 2003 Mortgage Appendix E - Proposed Form of Bond Counsel Opinion Appendix F - Specimen Bond Insurance Policy Appendix G - Form of Continuing Disclosure Agreement

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OFFICIAL STATEMENT

$44,880,000 DISTRICT OF COLUMBIA

REVENUE BONDS (FRIENDSHIP PUBLIC CHARTER SCHOOL, INC. ISSUE)

SERIES 2003

INTRODUCTORY STATEMENT This Official Statement, including the cover page and the Appendices attached hereto, is provided to

furnish certain information relating to the issuance by the District of Columbia (the “District”) of its $44,880,000 District of Columbia Revenue Bonds (Friendship Public Charter School, Inc.) Series 2003 (the “Series 2003 Bonds”). The Series 2003 Bonds are being issued pursuant to the Indenture of Trust dated as of November 1, 2003 (the “Indenture”) between the District and Wells Fargo Bank Minnesota, N.A., as trustee (the “Trustee”).

The proceeds of the Series 2003 Bonds will be loaned (the “Loan”) to Friendship Public Charter School, Inc., a not-for-profit corporation organized pursuant to the laws of the District of Columbia and recognized as a 501(c)(3) organization by the Internal Revenue Service (the “Friendship School”), pursuant to the Loan Agreement dated as of November 1, 2003 (the “Loan Agreement”), between the District and the Friendship School. The Friendship School will use the Loan proceeds to (a) finance and refinance all or a portion of the costs of acquisition and/or leasing, construction, renovating, furnishing and equipping of four schools, including two elementary schools, one middle school and one high school (the “2003 Project”), (b) to fund a portion of the Debt Service Reserve Fund, and (c) pay certain costs related to the issuance of the Series 2003 Bonds. See “THE 2003 PROJECT” and “ESTIMATED SOURCES AND USES OF FUNDS.”

To evidence its obligations to repay the Loan, the Friendship School will issue its promissory note in the amount of the Series 2003 Bonds (the “Series 2003 Note”). The Series 2003 Note will be an unconditional general obligation of the Friendship School, secured by a pledge of its 2003 Project Formula Payments and the Series 2003 Mortgage (each as hereinafter defined). As security for the Series 2003 Bonds, the District will assign to the Trustee the Series 2003 Note, all of its rights under the Loan Agreement (except for the Reserved Rights of the District), all amounts in the funds and accounts held by the Trustee under the Indenture (except for amounts held in the Arbitrage Rebate Fund), including certain investment earnings thereon, and all other property constituting the Trust Estate, including (a) the Debt Service Reserve Fund, (b) all right, title and interest of the District in the Deed of Trust and Security Agreement granted by the Friendship School with respect to the 2003 Project relating to the three facilities owned by the Friendship School (the “Deed of Trust”), and in the Leasehold Deed of Trust and Security Agreement granted by the Friendship School relating to the Leased Portion of the 2003 Project (the “Leasehold Deed of Trust”), each dated as of November 1, 2003 and each in favor of the Trustee as assignee of the District (together the “Series 2003 Mortgage”), and (c) a pledge of the Friendship School’s 2003 Project Formula Payments. See “SECURITY AND SOURCES OF PAYMENT.”

THE SERIES 2003 BONDS SHALL BE SPECIAL OBLIGATIONS OF THE DISTRICT. THE SERIES 2003 BONDS ARE WITHOUT RECOURSE TO THE DISTRICT. THE SERIES 2003 BONDS SHALL NOT BE GENERAL OBLIGATIONS OF THE DISTRICT, SHALL NOT BE A PLEDGE OF OR INVOLVE THE FAITH AND CREDIT OR THE TAXING POWER OF THE DISTRICT, SHALL NOT CONSTITUTE A DEBT OF THE DISTRICT AND SHALL NOT CONSTITUTE LENDING OF PUBLIC CREDIT FOR PRIVATE UNDERTAKINGS AS PROHIBITED BY THE HOME RULE ACT. PUBLIC CHARTER SCHOOLS ARE NOT GOVERNMENTAL ENTITIES AND DO NOT HAVE TAXING POWERS. THE SERIES 2003 BONDS ARE PAYABLE SOLELY FROM THE RECEIPTS AND REVENUES OF THE DISTRICT FROM THE LOAN AGREEMENT AND THE SERIES 2003 NOTES AND ARE SECURED BY A PLEDGE OF THE TRUST ESTATE, ALL OF WHICH SHALL, EXCEPT AS MAY BE EXPRESSLY AUTHORIZED IN THE INDENTURE, BE USED FOR NO OTHER PURPOSE THAN TO PAY THE PRINCIPAL OF, AND PREMIUM,

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IF ANY, AND INTEREST ON, THE SERIES 2003 BONDS. THE SERIES 2003 BONDS SHALL NOT GIVE RISE TO ANY PECUNIARY LIABILITY OF THE DISTRICT, AND THE DISTRICT SHALL HAVE NO OBLIGATION WITH RESPECT TO THE PURCHASE OF THE SERIES 2003 BONDS, UPON ISSUANCE, SALE AND DELIVERY OF THE SERIES 2003 BONDS.

Summaries of certain provisions of the Indenture, the Loan Agreement, the Series 2003 Note and the Series 2003 Mortgage are set forth in APPENDICES C and D. These summaries do not purport to be complete and are qualified in their entirety by reference to, and should be read only in conjunction with, the documents themselves, copies of which are on file with the Trustee. Capitalized terms not otherwise defined in this Official Statement have the meanings given them in “Definitions” in APPENDIX C. The “Bonds” means, collectively, the Series 2003 Bonds and any Additional Bonds. The “Notes” means, collectively, the Series 2003 Note and any Additional Notes.

THE DISTRICT

The District is a duly created and validly existing government constituted as a body corporate for municipal purposes under the District of Columbia Home Rule Act, approved December 24, 1973 (P.L. 93-198; 87 Stat. 774; D.C. Official Code §§ 1-201.01 et seq., as amended (the “Home Rule Act”). The District was granted home rule authority over local matters by the Home Rule Act. The District has the power to contract and to be contracted with, to sue and to be sued, to plead and to be impleaded, to have a seal and to exercise all other powers of a municipal corporation not inconsistent with the United States Constitution, the laws of the United States of America and the laws of the District. The United States Congress retains the ultimate legislative authority over the District pursuant to Article 1, Section 8 of the United States Constitution and by the Home Rule Act.

The District government is organized with a Mayor exercising executive powers and the 13-member Council of the District (the “Council”) exercising legislative powers. The Council discharges the powers delegated in the Home Rule Act by enacting acts or adopting resolutions approved by a majority of its members present and voting. The Bonds have been duly authorized for issuance, sale and delivery pursuant to Section 490 of the Home Rule Act and the Friendship Public Charter School, Inc. Revenue Bond Project Emergency Approval Resolution of 2003, (the “Resolution”), R 15-208, adopted by the Council on July 8, 2003.

The Florida Department of Banking and Finance, Division of Securities and Investor Protection requires an issuer of municipal securities to satisfy certain disclosure requirements in connection with securities issued by the issuer in which there has been a default with respect to principal and interest unless the issuer believes in good faith that such disclosure is not appropriate (3E-400.003(2), F.A.C.). Since the creation of the revenue bond program, three revenue bond issues of the District have gone into default. The first, issued to make a loan to a wholesale meat processor, was resolved as a part of a bankruptcy action. The second, issued to make a loan to a hospital, was resolved as a part of the reorganization of such hospital’s affiliates. The third, issued to make a loan to a primary school, was resolved when another primary school purchased the bond financed school building and satisfied all bond-related obligations. The District believes in good faith that the disclosure described in the Florida requirements is not appropriate and that these defaults are not material in connection with the issuance of the Series 2003 Bonds because the defaults do not relate to any general obligation bonds or notes issued by the District or any other revenue bonds issued by the District, and do not affect the Series 2003 Bonds or the availability of sufficient revenues to pay debt service thereon. Furthermore, the revenue bonds of the District issued on behalf of the defaulting wholesale meat processor, hospital and primary school are not payable from the revenues of the District or monies securing the Series 2003 Bonds.

PUBLIC CHARTER SCHOOL PROGRAM

The District of Columbia Public Charter School Board (the “Public Charter School Board”) was created by the United States Congress in 1996 (the act is entitled “District of Columbia School Reform Act of 1995”; P.L. 104-134; 110 Stat. 107) and concurrently established by the Council of the District of Columbia (D.C. Code §§ 38-1802.01 et seq. and specifically § 38-1802.14) (the “Public Charter School Laws”) to provide a mechanism for the establishment of public charter schools in the District. Congress empowered both the Public Charter School Board and the District of Columbia Board of Education to establish and monitor public charter schools. As of September

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2003, the Public Charter School Board has chartered 23 schools, of which 22 are currently operating and the Board of Education has chartered 21 schools, 15 of which are currently operating.

The seven-member founding Public Charter School Board was appointed by the Mayor of the District from a list of 15 recommendations presented to him by the United States Secretary of Education. The Board is responsible for receiving and reviewing applications for new public charter schools; awarding or denying requests or charters; monitoring operations of the public charter schools it has chartered; and renewing and revoking charters. The Friendship School is a public charter school that is approved, regulated and monitored by the Public Charter School Board.

All public charter schools in the District receive public funds pursuant to the provisions of the Public Charter School Laws. The public charter schools are funded pursuant to the Uniform Per Student Funding Formula (D.C. Official Code § 38-2901 et seq.) (the “Funding Formula”) which provides that all students in the District’s public schools and the public charter schools receive the same amount of per pupil operating funding (the “Operating Funding”). The Funding Formula provides a base foundation level and that level is multiplied by various weighting factors depending on the grade of the student, any special needs, and other related factors. In addition, the Funding Formula provides that public charter schools also receive a facilities allowance on a per pupil basis (the “Facilities Fee”). Generally, the statute provides that the Facilities Fee is calculated using District of Columbia Public Schools’ capital budgets and total public schools student enrollments. In previous years the Facilities Fee was paid in two installments. Beginning in the District’s fiscal year 2004 and succeeding fiscal years, the Facilities Fee is required to be paid in one installment pursuant to D.C. Official Code § 38-2908 et seq. The statute also sets forth the criteria for establishing the official number of pupils in each school for purposes of applying the Funding Formula.

For the past two years, Operating Funding has been paid in four equal installments, as provided in temporary legislation and/or appropriations legislation for each year. The Council has adopted emergency legislation providing for the continuation of this quarterly payment process through January 4, 2004. Legislation that could extend the quarterly payment process an additional 225 days after its adoption has been adopted by the Council and signed by the Mayor of the District and is awaiting transmittal to Congress for a 30-day Congressional review period before becoming law. Permanent legislation to provide for the quarterly payment process was introduced for Council consideration in July 2003. The original statutory authority required the Operating Funding to be paid in two payments. The first 75% of the Operating Funding was required to be paid not later than October 15 and the balance was required to be paid not later than May 1. While there can be no assurance that the District will continue the quarterly payment process, the Friendship School expects that the Council will continue to approve the quarterly payments. See “BONDHOLDER RISKS – Funding and Future Changes to Charter School Laws” herein for more information pertaining to operating funding and related legislation.

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Set forth below is a chart reflecting the historical Operating Funding and Facilities Fee levels on a Fiscal Year Basis.

Payment (Per Pupil) 2001 2002 2003 2004 (Proposed)

Base Operating Funding $5,728 $5,907 $6,419 $6,551 Grades K-3 and 6-8 6,014 6,202 6,611 6,747 Grade 4-5 5,728 5,907 6,419 6,551 Grades 9-12 7,446 7,679 7,510 7,664

Facilities Allowance 1,482 1,422 1,580 1,981

Special Education Level 1 1,260 1,299 3,530 3,603 Level 2 4,582 4,726 5,456 5,568 Level 3 9,909 10,219 9,628 9,826 Level 4 18,330 18,903 17,331 17,687

Source: District of Columbia Office of the Chief Financial Officer

Public charter schools are a growing portion of all public schools in the District. Enrollment in public charter schools in the District is more fully described in APPENDIX A.

FRIENDSHIP PUBLIC CHARTER SCHOOL

The Friendship School is a public charter school under the District’s Public Charter School Law and is approved, regulated and monitored by the Public Charter School Board. The Friendship School is a not-for-profit corporation under the laws of the District and recognized as a 501(c)(3) organization under the Internal Revenue Code.

The Friendship School was established in 1998 and is the largest public charter school in the District, operating four campuses that, as of October 2003, enrolled a total of 3,017 students in grades K-12. All public charter schools must be accredited by one of a group of associations set forth in the Public Charter School Law. The Friendship School has been accepted by Middle States Association as a candidate for accreditation.

The Friendship School has a management contract with Edison Schools, Inc. (“Edison”), a publicly-held for-profit corporation that as of September 30, 2003, operated or provided management services for 130 schools in 19 states and the District of Columbia. The Friendship School entered into a five-year management contract with Edison in 1998. The Friendship School and Edison entered into a new 5-year management contract as of November 1, 2003. The new management contract provides that the Friendship School may terminate the management contract for various reasons at any or all Friendship School sites. If Edison’s management services were terminated or not renewed, the Friendship School would be faced with finding another educational and administrative services provider or with managing the Friendship School sites itself. See APPENDIX A for more details pertaining to the Friendship School and Edison, including a summary of key provisions of the new management agreement. See “BONDHOLDERS’ RISKS – Performance by Manager” for additional information on Edison. Further information about the Friendship School and its operations is also contained in APPENDIX A. Certain financial information about the Friendship School is contained in APPENDIX B.

THE SERIES 2003 BONDS

General

The Series 2003 Bonds will be dated November 1, 2003, will be issued in denominations of $5,000 or any integral multiple thereof, and will bear interest at the rates and will mature on the dates and in the amounts set forth

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on the cover page of this Official Statement. Interest on the Series 2003 Bonds will be payable on each June 1 and December 1 (the “Interest Payment Dates”), commencing June 1, 2004. The Series 2003 Bonds will bear interest from and including November 1, 2003, if the date of authentication is prior to the first Interest Payment Date, and otherwise from the Interest Payment Date that is, or that immediately precedes, the date of authentication (unless payment of interest on the Series 2003 Bonds shall be in default, in which case such Series 2003 Bonds shall bear interest from the date to which interest has been paid or duly provided for).

The Bonds initially will be issued as one fully registered bond for each maturity in the name of Cede & Co., as registered owner and nominee for The Depository Trust Company, New York, New York (“DTC”), which will act as securities depository for the Bonds. Purchases of Bonds will be in book-entry form only, in the principal amount of $5,000 or any integral multiple thereof. As long as DTC or its nominee, Cede & Co., is the registered owner of the Bonds, payments of principal of, premium, if any, on and interest on the Bonds will be made by the Trustee directly to Cede & Co.

Book-Entry Only System

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 separately stated maturity of the Bonds in the aggregate principal amount of such maturity, and will be deposited with DTC or its agent.

DTC 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 1934. DTC holds securities that its participants (the “Direct Participants”) deposit with DTC. DTC also facilitates the settlement among Direct Participants of securities transactions, such as transfers and pledges, in deposited securities through electronic computerized book-entry changes in Direct Participants’ accounts, thereby eliminating the need for physical movement of securities certificates. Direct Participants include securities brokers and dealers, banks, trust companies, clearing corporations, and certain other organizations. DTC is owned by a number of its Direct Participants and by the New York Stock Exchange, Inc., the American Stock Exchange LLC, and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as securities brokers and dealers, banks and trust companies that clear through or maintain a custodial relationship with a Direct Participant, either directly or indirectly (the “Indirect Participants”). The Rules applicable to DTC and its Direct and Indirect Participants are on file with the Securities and Exchange Commission.

Purchases of Bonds under the DTC system must be made by or through Direct Participants, which will receive a credit for the Series 2003 Bonds on DTC’s records. The ownership interest of each actual purchaser of a beneficial interest in the Bonds (“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, but Beneficial Owners are expected to receive written confirmation 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 Series 2003 Bonds are to be accomplished by entries made on the books of Direct and Indirect Participants acting on 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 only system for the Bonds is discontinued. See “THE SERIES 2003 BONDS”.

To facilitate subsequent transfers, all Series 2003 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 Series 2003 Bonds with DTC and their registration in the name of Cede & Co. or such other nominee do not effect any change in beneficial ownership. DTC has no knowledge of the actual Beneficial Owners of the Series 2003 Bonds; DTC’s records reflect only the identity of the Direct Participants to whose accounts such Series 2003 Bonds are credited, which may or may not be the Beneficial Owners. The

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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 Series 2003 Bonds may wish to take certain steps to augment transmission to them of notices of significant events with respect to the Series 2003 Bonds, such as redemptions, defaults, and proposed amendments to the security documents. Beneficial Owners of Series 2003 Bonds may wish to ascertain that the nominee holding the Series 2003 Bonds for their benefit has agreed to obtain and transmit notices to Beneficial Owners, or in the alternative, Beneficial Owners may wish to provide their names and addresses to the Trustee and request that copies of the notices be provided directly to them.

Redemption notices shall be sent to Cede & Co. If less than all of the Series 2003 Bonds within a single maturity 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 such other DTC nominee) will consent or vote with respect to the Series 2003 Bonds. Under its usual procedures, DTC mails an Omnibus Proxy to the District 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 the Series 2003 Bonds are credited on the record date (identified in a listing attached to the Omnibus Proxy).

Principal of, redemption premium, if any, and interest payments on the Series 2003 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 Trustee, on the 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, the District or the Friendship School, subject to any statutory or regulatory requirements as may be in effect from time to time. Payment of principal, redemption premium, if any, and interest to Cede & Co. (or such other nominee as may be requested by an authorized representative of DTC) is the responsibility of the Trustee, disbursement of such payments to Direct Participants shall be the responsibility of DTC, and disbursement of such payments to the Beneficial Owners shall be the responsibility of Direct and Indirect Participants.

So long as a nominee of DTC is the registered owner of the Series 2003 Bonds, references herein to the bondholders or the holders or owners of the Series 2003 Bonds (other than under the caption “TAX MATTERS”) will mean DTC and will not mean the Participants, the Indirect Participants or the Beneficial Owners of the Series 2003 Bonds. The District and the Trustee will recognize DTC or its nominee as the holder of all of the Series 2003 Bonds for all purposes, including the payment of the principal of, or the redemption price of and interest on, the Bonds, as well as the giving of notices and any consent or direction required or permitted to be given to or on behalf of the bondholders under the Indenture.

NONE OF THE DISTRICT, THE TRUSTEE, THE UNDERWRITER OR THE FRIENDSHIP SCHOOL SHALL HAVE ANY RESPONSIBILITY OR OBLIGATION TO PARTICIPANTS OR THE PERSONS FOR WHOM PARTICIPANTS ACT AS NOMINEES WITH RESPECT TO PAYMENTS OR NOTICES TO PARTICIPANTS, INDIRECT PARTICIPANTS OR BENEFICIAL OWNERS.

None of the District, the Trustee, the Underwriter or the school can give any assurances that DTC, Participants, Indirect Participants or others will distribute payments of the principal of, or redemption price of and interest on the Series 2003 Bonds paid to DTC or its nominee, as the registered owner of the Series 2003 Bonds, or any redemption or other notices, to the Beneficial Owners or that they will do so on a timely basis or that DTC will serve and act in the manner described in this Official Statement.

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Redemption of the Series 2003 Bonds

Optional Redemption. The Series 2003 Bonds maturing after June 1, 2014 shall be subject to optional redemption by the District, at the written direction of the Friendship School, in the Friendship School’s sole discretion, on or after June 1, 2014 in whole or in part at any time, at a redemption price equal to 100% of the principal amount of the Series 2003 Bonds being redeemed, plus accrued interest to the redemption date.

Mandatory Sinking Fund Redemption. The Series 2003 Bonds maturing on June 1, 2018, will be redeemed in part, prior to their scheduled maturity, on June 1 of the years and in the principal amounts shown below, by lot, at a redemption price of 100% of the of the principal amount to be redeemed, plus accrued interest to the redemption date, without premium:

Year (June 1) Principal Amount

2015 $ 1,130,000 2016 1,195,000 2017 1,265,000 2018 1,340,000 (Final Maturity)

Total

$4,930,000

The Series 2003 Bonds maturing on June 1, 2023, will be redeemed in part, prior to their scheduled maturity, on June 1 of the years and in the principal amounts shown below, by lot, at a redemption price of 100% of the principal amount, plus accrued interest to the redemption date, without premium:


2019 $ 1,415,000 2020 1,485,000 2021 1,560,000 2022 1,640,000 2023 1,720,000 (Final Maturity)

Total

$7,820,000



2024 $ 1,805,000 2025 1,900,000 2026 1,995,000 2027 2,100,000 (Final Maturity)

Total

$7,800,000

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2028 $ 2,205,000 2029 2,320,000 2030 2,445,000 2031 2,575,000 2032 2,705,000 2033 2,850,000 (Final Maturity)

Total

$15,100,000

In the event any Series 2003 Bonds subject to mandatory sinking fund redemption have been optionally redeemed, the principal amount of Series 2003 Bonds subject to mandatory sinking fund redemption on each Sinking Fund Installment Date following such redemption shall be reduced by an amount specified with respect to each such Sinking Fund Installment by the Friendship School by written notice to the Trustee and the Paying Agent at least 5 business days prior to the date the Trustee is to send notice of redemption to bondholders, provided that the aggregate amount of such reductions shall not exceed the aggregate principal amount of Series 2003 Bonds optionally redeemed. If the Friendship School fails to make any such determination, the principal amount of Series 2003 Bonds subject to mandatory sinking fund redemption shall be reduced by applying the principal amount of Series 2003 Bonds optionally redeemed as a credit against the amounts required to be redeemed by mandatory sinking fund redemption in inverse order of their due dates.

The principal amount required to be redeemed pursuant to a mandatory sinking fund redemption may be reduced, at the option of the Friendship School in its sole discretion, by the principal amount of any Series 2003 Bond purchased by the Friendship School in the open market and surrendered to the Trustee for cancellation at least 45 days prior to the mandatory sinking fund redemption date. If the Friendship School delivers such Series 2003 Bonds and fails to specify otherwise, the principal amount of Series 2003 Bonds subject to mandatory sinking fund redemption shall be reduced by applying the principal amount of the surrendered Series 2003 Bonds as a credit against the amounts required to be redeemed by mandatory sinking fund redemption in inverse order of their due dates.

Special Mandatory Redemption. The Series 2003 Bonds will be subject to redemption in part, on May 25, 2020, in an amount determined by multiplying the Leased Percentage by the amount of Outstanding Bonds at a Redemption Price equal to 100% of the principal amount being redeemed, plus accrued interest thereon, without premium, to the Redemption Date in the event that as of April 15, 2020 the Lease Agreement with respect to the Leased Portion has not been extended, renewed or replaced through the final maturity of the Series 2003 Bonds and notice of such extension, renewal or replacement has not been provided to the Trustee by the Friendship School. See APPENDIX A for more information on the status of the Leased Portion of the 2003 Project.

Extraordinary Optional Redemption. The Series 2003 Bonds and any Additional Bonds will be subject to extraordinary redemption, at the written direction of the Friendship School, in its sole discretion, in whole or in part (but in part only in the case of (a) and (b) below), at a price equal to 100% of the principal amount thereof, plus accrued interest thereon by reason of occurrence of the following events:

(a) The 2003 Project or any Additional Project or a material portion thereof shall have been damaged or destroyed to such an extent that, in the judgment of the Friendship School (expressed in a Board of Trustees resolution), (i) it cannot be reasonably restored within a period of 270 days to the condition thereof immediately preceding such damager or destruction, (ii) the Friendship School is thereby prevented from carrying on its normal operations at the 2003 Project or any Additional Project for a period of not less

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than nine (9) consecutive months, or (iii) it would not be economically feasible for the Friendship School to replace, repair, rebuild or restore the same;

(b) Title to, or the temporary use of, any portion of the 2003 Project or any Additional Project shall have been taken under the exercise of the power of eminent domain by any governmental body or by any person, firm or corporation acting under governmental authority, or any portion of the 2003 Project or any Additional Project is damaged or destroyed, and the Friendship School determines in accordance with the Loan Agreement to prepay the Series 2003 Note and any Additional Note, in whole or in part, with the Net Proceeds received in connection with such exercise or casualty; or

(c) As a result of (i) any changes in the Constitution of the United States of America or the Home Rule Act, (ii) other legislative or administrative action (federal or local), (iii) a final decree, judgment or order of any court or administrative body (federal or local) entered after any contest which may be undertaken at the option of the Friendship School in good faith, or (iv) an assertion of a bona fide claim against the District or the Friendship School after any of which the Loan Agreement or the Series 2003 Note become or may become void or unenforceable or impossible of performance in accordance with the intent and purposes of the parties as express in the Loan Agreement.

The scheduled payment of principal of and interest on the Series 2003 Bonds when due (including mandatory sinking fund payments will be guaranteed under an insurance policy (the “Bond Insurance Policy”) as described in “SECURITY AND SOURCES OF PAYMENT – Bond Insurance” and “BOND INSURANCE”. Optional, Special Mandatory and Extraordinary Redemption payments are NOT guaranteed by the Bond Insurance Policy. See “BOND INSURANCE” for more details pertaining to the Bond Insurer and APPENDIX F for a specimen of the Bond Insurance Policy.

Selection of Series 2003 Bonds for Redemption

The Trustee shall select Series 2003 Bonds for redemption solely from funds available for that purpose in accordance with the provisions of the Indenture, in such order as the Friendship School in its discretion may determine by written instructions to the Trustee (no fewer than 45 days in advance of the redemption date) and by lot within maturities; provided, however, that (a) the portion of any Series 2003 Bond to be redeemed shall be equal to an Authorized Denomination; and (b) in selecting Series 2003 Bonds for redemption, the Trustee shall treat each Series 2003 Bond as representing that number of Bonds that is obtained by dividing the principal amount of such Bonds by $5,000.

Notice of Redemption

In the event any of the Series 2003 Bonds are to be called for redemption, the Registrar shall give notice, in the name of the District, of the redemption of such Bonds. Each notice shall (a) specify the Series 2003 Bonds to be redeemed by CUSIP number, registration number, date of issue, interest rate, maturity date, the redemption date, the Redemption Price and the place or places where amounts due upon such redemption will be payable (which shall be the Principal Office of the Paying Agent) and, if fewer than all of the Series 2003 Bonds are to be redeemed, the registration numbers or portions of such Series 2003 Bonds to be redeemed and, in the case of Series 2003 Bonds in a denomination other than the minimum Authorized Denomination, the portions of the Series 2003 Bonds which are to be redeemed in part, (b) state that on the redemption date the Series 2003 Bonds or portions thereof to be redeemed shall cease to bear interest, and (c) any conditions to the redemption. The notice may set forth any additional information relating to the redemption.

Such notice shall be given by first class mail, return receipt requested, not more than 45 days and not fewer than 30 days prior to the date fixed for redemption to the Owners of Series 2003 Bonds or portions of Series 2003 Bonds to be redeemed at the addresses shown on the registration books of the Registrar as of the third day next preceding the date on which notice by mail is given, or, if any such day is not a Business Day, the Business Day next preceding such day (a “Redemption Record Date”). The failure to give notice by mail to any Owner of any Series 2003 Bonds to be redeemed, or any defect therein, shall not affect the validity of the proceedings for redemption of any other Bonds for which notice was properly given. Upon presentation and surrender of Series

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2003 Bonds so called for redemption at the place or places of payment, such Series 2003 Bonds or such portions thereof shall be redeemed.

On the redemption date the principal amount of each Bond or portion thereof to be redeemed, together with the accrued interest on such Series 2003 Bonds or portion thereof to the redemption date, shall become due and payable. If notice of redemption has been given to the Owners of Series 2003 Bonds to be redeemed and if moneys to pay the Redemption Price are on deposit with the Trustee or the Paying Agent in accordance with the provisions of the Indenture, and if all conditions, if any, to the redemption are satisfied, then (1) no further interest shall accrue on any of the Series 2003 Bonds to be redeemed, whether or not such Series 2003 Bonds have been surrendered for payment, and (2) the Series 2003 Bonds to be redeemed shall no longer be Outstanding under the Indenture, and the District shall be under no further liability with respect to such Series 2003 Bonds.

With respect to any notice of redemption of Series 2003 Bonds, the notice may state that the redemption shall be conditional upon receipt by the Trustee of moneys sufficient to pay the principal of, premium, if any, and interest on the Series 2003 Bonds to be redeemed, and that if such moneys shall not have been so received, the Trustee shall give notice, in the manner redemption notice was given, that such moneys were not received and that the redemption will not occur.

No Partial Redemption After Default

If there has occurred and is continuing an Event of Default under the Indenture, and payment of the Series 2003 Bonds has been accelerated, there shall be no redemption of fewer than all the Series 2003 Bonds then Outstanding.

Mutilated, Destroyed, Lost or Stolen Series 2003 Bonds

In case any Series 2003 Bond becomes mutilated, destroyed, lost or stolen, the District shall execute and the Trustee or the Authenticating Agent, as the case may be, shall authenticate a new Series 2003 Bond of the same date, maturity, series and denomination to replace such Series 2003 Bond; provided that in the case of any mutilated Series 2003 Bond, such mutilated Series 2003 Bonds shall first be surrendered to the Trustee or the Paying Agent, and in the case of any lost, stolen or destroyed Series 2003 Bond, there shall be first furnished to the District and the Trustee or the Paying Agent evidence of such loss, theft or destruction satisfactory to the District and the Trustee or the Paying Agent, together with an indemnity satisfactory to them. The Owner may be required to pay (a) the reasonable fees of the District, the Trustee and the Paying Agent and (b) any tax or governmental charges in connection with the issuance of the new Series 2003 Bond.

Transfer and Exchange of Bonds

Upon registration of transfer, the District shall issue and the Trustee or the Authenticating Agent, as the case may be, will authenticate in the name of the transferee a new Series 2003 Bond or Series 2003 Bonds in an Authorized Denomination of the same Series and maturity and in the same aggregate principal amount as the surrendered Series 2003 Bond or Series 2003 Bonds. Each Series 2003 Bond to be registered for transfer must be surrendered at the Principal Office of the Registrar and must be duly endorsed for transfer or accompanied by a written instrument of transfer satisfactory to the Registrar and duly executed by the registered Owner or his duly authorized attorney.

Upon surrender for exchange of any Series 2003 Bond at the Principal Office of the Registrar, duly executed by the registered Owner or his duly authorized attorney, and upon payment of the charges of the Registrar, the Trustee or the Authenticating Agent for exchange, the District shall issue and the Trustee or the Authenticating Agent, as the case may be, shall authenticate and deliver a new Bond of like aggregate principal amount of other Authorized Denominations of the same Series and maturity.

The Trustee and the Registrar will not be required to register the transfer or exchange of any Series 2003 Bond (a) during the 15 days prior to the selection of Series 2003 Bonds to be redeemed or (b) after a notice of the redemption of any Series 2003 Bond or portion thereof has been mailed, unless the transferee of such Series 2003

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Bond or portion thereof delivers a written acknowledgment to the Registrar of such call for redemption and agrees in writing to be bound by such call for redemption.

SECURITY AND SOURCES OF PAYMENT

Bond Insurance

The scheduled payment of principal of and interest on the Series 2003 Bonds when due will be guaranteed under an insurance policy (the “Bond Insurance Policy”) to be issued concurrently with the delivery of the Series 2003 Bonds by ACA (the “Bond Insurer”). So long as the Series 2003 Bonds are Outstanding and the Bond Insurer has not failed to comply with its payment obligations under the Bond Insurance Policy, the Bond Insurer will be deemed to be the sole Series 2003 Bondholder for the purpose of obtaining Series 2003 Bondholder consents as provided under the Indenture. See “BOND INSURANCE” for more details pertaining to the Bond Insurer and APPENDIX F for a specimen of the Bond Insurance Policy.

The Loan Agreement and Payment Obligations

The Series 2003 Bonds will be special obligations of the District payable by the District solely from Receipts and Revenues of the District pursuant to the Loan Agreement, as evidenced by the Series 2003 Note issued by the Friendship School to the District. The Series 2003 Note will be an unconditional general obligation of the Friendship School, secured by a pledge of its 2003 Project Formula Payments and the Series 2003 Mortgage. As security for the Series 2003 Bonds, the District will assign to the Trustee the Series 2003 Note, all of its rights under the Loan Agreement (except for the Reserved Rights of the District), all amounts in the funds and accounts held by the Trustee under the Indenture (except for amounts held in the Arbitrage Rebate Fund), including certain investment earnings thereon, and all other property constituting the Trust Estate, including (a) the Debt Service Reserve Fund, (b) all right, title and interest of the District in the Series 2003 Mortgage, and (c) a pledge of the Friendship School’s 2003 Project Formula Payments. The Series 2003 Note will provide for payment of the principal, premium, if any, and interest corresponding to the payments due on the Series 2003 Bonds (“2003 Loan Payments”) and Additional Payments, which include professional fees, litigation expenses, the Program Fee, Administrative Costs, Issuance Costs and redemption expenses, all as described in the Loan Agreement. The Friendship School’s ability to generate revenues and its overall financial condition may be adversely affected by a wide variety of future events and conditions. See “BONDHOLDERS’ RISKS” and APPENDIX A.

According to the Loan Agreement, the District, by its participation as issuer of the Bonds, is not constrained in any way from making any future modifications, amendments, or changes to the method by which the 2003 Project Formula Payments are calculated or the manner or timing of disbursement of the 2003 Project Formula Payments, or the amount of the 2003 Project Formula Payments, nor is the District constrained from suspending or discontinuing any such payments in accordance with District law. Any such changes with respect to the 2003 Project Formula Payments will not affect the Friendship School’s obligations to make 2003 Loan Payments or any other payments due under the Loan Agreement with respect to the Series 2003 Bonds. The Bonds shall constitute special obligations of the District, shall be without recourse to the District, shall not constitute general obligations of the District, shall not constitute a pledge of or involve the faith and credit or the taxing power of the District, shall not constitute a debt of the District and shall not constitute lending of the public credit for private undertakings as prohibited by Section 602(a)(2) of the Home Rule Act.

Debt Service Reserve Fund

On the date of closing there will be deposited in the Debt Service Reserve Fund established under the Indenture an amount equal to the Debt Service Reserve Fund Requirement. It is expected that the Debt Service Reserve Fund will be initially funded pursuant to a loan obtained by the Friendship School (the “Loan”) from the District of Columbia Public Charter School Credit Enhancement Fund Committee and from available Series 2003 Bond proceeds. Moneys, including certain investment earnings, in the Debt Service Reserve Fund will be used to pay debt service on the Series 2003 Bonds whenever the moneys in the Debt Service Fund are insufficient for such purpose.

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The Friendship School is obligated to repay the Loan to the provider of the Loan; but only after payment in full of the Series 2003 Bonds. Interest earnings on the Loan are repaid to the Loan provider. The Loan is secured by a subordinate lien on the 2003 Project.

Series 2003 Mortgage

The Series 2003 Mortgage consists of the Deed of Trust on the three facilities of the 2003 Project owned by the Friendship School and the Leasehold Deed of Trust on the fourth facility of the 2003 Project leased by the Friendship School. See APPENDIX D for a description of certain terms of the Series 2003 Mortgage.

Sources and Timing of Payments

Unconditional General Obligation. Under the Loan Agreement, the Friendship School’s obligation to make 2003 Loan Payments is an unconditional general obligation of the Friendship School.

Pledge of 2003 Project Formula Payments. In addition, under the Loan Agreement, the Friendship School will pledge and assign to the District for the benefit of the Trustee all of the Friendship School’s 2003 Project Formula Payments. The 2003 Project Formula Payments will be deposited directly with the Trustee and will be disbursed as set forth in the Indenture.

“2003 Project Formula Payments” means the quarterly payments based on the number of students attending the charter school facilities comprising the 2003 Project operated by the Friendship School which are payable, allocable or awarded to the Borrower by the District pursuant to D.C. Official Code §§ 38-2901 et seq. and 38-1801 et seq., as it may be amended or supplemented, and arranged by the Friendship School to be paid directly to the Trustee as security for the Series 2003 Bonds. See “PUBLIC CHARTER SCHOOL PROGRAM”.

Timing of Payments. Under the Loan Agreement, the Friendship School is required to make its 2003 Loan Payments on a quarterly basis which are timed to coincide with its quarterly receipt of its 2003 Project Formula Payments. If the schedule of receipt of the 2003 Project Formula Payments changes, then the Indenture and the Loan Agreement provide that the timing of the Friendship School’s obligation to make 2003 Loan Payments will be adjusted accordingly. See “PUBLIC CHARTER SCHOOL PROGRAM”.

Application of Revenues to Payments. As set forth in the Indenture, when the Trustee receives any 2003 Project Formula Payment or any Loan Payment, the Trustee must apply such funds deposited into the Revenue Fund in the following order:

First, an amount equal to one-half of the interest due on the Series 2003 Bonds on the next Interest Payment Date must be transferred to the Interest Account of the Debt Service Fund;

Second, an amount equal to one-fourth of the principal due on the Series 2003 Bonds on the next scheduled Bond Payment Date must be transferred to the Principal Account of the Debt Service Fund or the Sinking Fund Payment Account of the Debt Service Fund, as applicable;

Third, an amount equal to one-quarter of the amount necessary to restore the Debt Service Reserve Fund to the Debt Service Reserve Fund Requirement if such deficiency is due to a withdrawal from the Debt Service Reserve Fund or an amount equal to one-half of the amount necessary to restore the Debt Service Reserve Fund to the Debt Service Reserve Fund Requirement if such deficiency is a result of a change in the value of investments on deposit in the Debt Service Reserve Fund following a Valuation Date, which amount shall be transferred to the Debt Service Reserve Fund or, if a Reserve Fund Credit Facility is in place, used to reimburse the provider of such facility for any amounts owed under the terms of such facility to the extent necessary to reinstate the full coverage amount of such facility;

Fourth, an amount equal to any Additional Payments due to the Insurer and the District under the Loan Agreement for which the Trustee has received written notice from the Insurer or the District, as well as an amount

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equal to any Additional Payment of regular fees of the Trustee due under the Loan Agreement, shall be transferred to the Additional Payments Account of the Debt Service Fund to make any payments due and payable thereunder; and

Fifth, so long as no Event of Default has occurred and is continuing under the Indenture or any of the other Bond Documents, any remaining amount shall be paid to the Friendship School.

In the event any 2003 Project Formula Payment is missed or delayed by the District, upon receipt of the next 2003 Project Formula Payment or any other Loan Payment received from the Friendship School, the Trustee will deposit such funds into the Revenue Fund and shall apply the moneys received as necessary to satisfy the provisions above.

Additional Bonds

The District may issue Additional Bonds for the Friendship School secured by a pledge of the 2003 Project Formula Payments and subject to certain conditions set forth in the Indenture. The purposes for which Additional Bonds may be issued include (a) to finance, refinance or reimburse the Friendship School for Costs of any Additional Project involving the acquisition, construction, renovation, equipping or refinancing of new facilities (not part of the 2003 Project) that will enable the Friendship School to enroll additional students at its charter schools (provided such enrollment shall not cause the total enrollment to exceed the maximum number of students authorized in the Charter School Agreement), (b) to complete the 2003 Project or any Additional Project, (c) to provide extensions, additions, improvements or repairs to the 2003 Project or any Additional Project, (d) to refund any or all of the Outstanding Bonds issued under the Indenture, or (e) to pay costs associated with the Additional Bonds (including the funding of any reserves, capitalized interest, working capital or costs of issuance).

The District may not issue any Additional Bonds for the Friendship School unless certain documents are first filed with the Trustee in accordance with the requirements of the Indenture. These documents include, among others:

(1) certificates evidencing that neither the District nor the Friendship School are then in default with respect to covenants and conditions of the Indenture, the Loan Agreement or any other Bond Document;

(2) a written report of an Independent Consultant, reflecting audited results of operations and verified enrollment, to the effect that, based on reasonable assumptions concerning student enrollment, the Friendship School is expected after the issuance of the Additional Bonds to generate or receive sufficient amounts from the 2003 Project Formula Payments and any additional formula payments pledged with respect to the Additional Bonds to operate and maintain all of the Friendship School’s facilities and satisfy all of its then outstanding financial obligations, including, without limitation, its obligations under the Loan Agreement;

(3) with respect to Additional Bonds for the purpose of Additional Projects, a written report of an Independent Consultant stating that the facilities to be financed as an Additional Project (the costs of which will be financed with the proceeds of the Additional Bonds) have been in operation for at least one full academic year and also stating that, based on the audited results of operations for the most recently completed fiscal year for the 2003 Project and the Additional Projects, the Net Income of the Friendship School will be at least 1.25 times the maximum aggregate annual debt service on all Bonds then outstanding and the proposed Additional Bonds;

(4) with respect to Additional Bonds for the purpose of completing the 2003 Project, or for Additional Projects, or for the purposes of providing extensions, additions, improvements or repairs to the 2003 Project or any Additional Project, a written report of an Independent Consultant dated the date of issuance of the Additional Bonds stating that, based on the audited results of operations for the most recently completely fiscal year for the 2003 Project and any Additional Project, the Net Income of the Friendship School will be at least 1.25 times the maximum aggregate annual debt service on all Bonds then outstanding for the first full fiscal year following the issuance of the Additional Bonds;

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(5) a written opinion of counsel to the Friendship School to the effect that appropriate amendments have been made to the Loan Agreement and the Additional Note, and that the Loan Agreement as amended and the Additional Note constitute legal valid and binding obligations of the Friendship School; and

(6) a written opinion of Bond Counsel to the effect that the Tax-Exemption for the Series 2003 Bonds and any Additional Bonds previously issued will not be adversely affected by the issuance of the Additional Bonds.

Additional Bonds issued to refund Outstanding Bonds are not required to comply with (2) and (3) above if both the total and the maximum annual debt service payable on all Outstanding Bonds after the issuance of the Additional Bonds is less than the total and maximum annual debt service on all Bonds Outstanding prior to the issuance of the Additional Bonds.

Prior to the issuance of any Additional Bonds, the District and the Friendship School are also required to deliver to the Trustee an amended Loan Agreement, an Additional Note, and a Supplemental Indenture, each subject to requirements set forth in the Indenture.

Other Covenants of the Friendship School

In the Loan Agreement, the Friendship School will make certain other covenants with respect to its finances, its maintenance of the 2003 Project, disposition of assets, its use of proceeds of the Series 2003 Bonds and its maintenance of tax-exempt status. See “CERTAIN DEFINED TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE AND THE LOAN AGREEMENT – The Loan Agreement – Covenants of the Borrower” in APPENDIX C.

Defeasance

When the interest on, and the principal or redemption price of, all Bonds issued under the Indenture have been paid, or there has been deposited with the Trustee an amount of cash or noncallable Defeasance Securities sufficient to pay when due all such interest, principal and redemption price, then all right, title and interest of the Trustee in the security provided by the Indenture shall cease, and all collateral under it shall be released See “CERTAIN DEFINED TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE INDENTURE AND THE LOAN AGREEMENT– The Indenture -- Defeasance” in APPENDIX C.

Special Obligations

As described on the cover of this Official Statement, the Series 2003 Bonds are special obligations of the District, payable solely from the Receipts and Revenues of the District pursuant to the Loan Agreement.

BOND INSURANCE

The following information has been furnished by ACA Financial Guaranty Corporation (“ACA”) for use in the Official Statement. Reference is made to APPENDIX F for a specimen of ACA's policy.

Payment Pursuant to Bond Insurance Policy

ACA has made a commitment to issue a bond insurance policy (the “Policy”) relating to the Series 2003 Bonds effective as of the date of issuance of the Series 2003 Bonds. Under the terms of the Policy, ACA unconditionally and irrevocably guarantees the full and complete payment required to be made by or on behalf of the District to the Trustee or paying agent (as designated in the documentation providing for the issuance of and securing the Series 2003 Bonds) for the Series 2003 Bonds, for the benefit of any owner, or, at the election of ACA, directly to such owner, that portion of the principal of and interest on the Series 2003 Bonds which shall become Due for Payment but shall be unpaid by reason of Nonpayment by the District (as such terms are defined in the Policy). ACA will make such payments to or for the benefit of each owner on the later of the day on which such principal and interest becomes Due for Payment or within one Business Day following the Business Day on which

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ACA shall have received Notice of Nonpayment (as such terms are defined in the Policy). The Policy is non-cancelable for any reason.

The Policy will insure an amount equal to (i) the principal of (either at the stated maturity or pursuant to a mandatory sinking fund payment) and interest on, the Series 2003 Bonds as such payments shall become Due for Payment but shall not be so paid by reason of Nonpayment by the District (except that in the event of any acceleration of the due date of such principal by reason of mandatory or optional redemption or acceleration resulting from default or otherwise, other than pursuant to a mandatory sinking fund payment, the payments guaranteed by the Policy shall be made in such amounts and at such times as such payments of principal would have been due had there not been any such acceleration); and (ii) the reimbursement of any such payment which is subsequently recovered from any owner of the Series 2003 Bonds pursuant to a final non-appealable order of a court of competent jurisdiction that such payment constitutes an avoidable preference to such owner within the meaning of any applicable bankruptcy law (a “Preference”).

The Policy does not insure against loss of any redemption premium which may at any time be payable with respect to any Bond. The Policy does not, under any circumstance, insure against loss relating to: (i) optional or mandatory redemptions (other than mandatory sinking fund redemptions); (ii) any payments to be made on an accelerated basis; (iii) payments of the purchase price of Series 2003 Bonds upon tender by an owner thereof; or (iv) any Preference relating to (i) through (iii) above. The Policy also does not insure against nonpayment of principal of or interest on the Series 2003 Bonds resulting from the insolvency, negligence or any other act or omission of the Trustee or paying agent for the Series 2003 Bonds.

Upon receipt of telephonic or electronic notice, such notice subsequently confirmed in writing by registered or certified mail, or upon receipt of written notice by registered or certified mail, by ACA from the Trustee or paying agent or any owner of a Bond the payment of an insured amount for which is then due, that such required payment has not been made, ACA on the due date of such payment or within one business day after receipt of notice of such nonpayment, whichever is later, will make a deposit of funds, in an account with the Trustee or paying agent, or its successor, sufficient for the payment of any such insured amounts which are then due. Upon presentment and surrender of such Series 2003 Bonds or presentment of such other proof of ownership of the Series 2003 Bonds, together with any appropriate instruments of assignment to evidence the assignment of the insured amounts due on the Series 2003 Bonds as are paid by ACA, and appropriate instruments to effect the appointment of ACA as agent for such owners of the Series 2003 Bonds in any legal proceeding related to payment of insured amounts on the Series 2003 Bonds, such instruments being in a form satisfactory to ACA, ACA shall disburse to such owners or the paying agent payment of the insured amounts due on such Series 2003 Bonds, less any amount held by the paying agent for the payment of such insured amounts and legally available therefor.

ACA’s Rights Under the Financing Documents

Under the financing documents, ACA has certain rights to consents, notices and to control certain procedures, including, without limitation, the right to control proceedings, without the consent of bondholders, following an event of default under the financing documents. Reference is made to the provisions of the financing documents for a more complete description of ACA’s rights thereunder.

ACA Financial Guaranty Corporation

ACA is domiciled in the State of Maryland and licensed to do business in and subject to regulation under the laws of all 50 states, the District of Columbia, the Commonwealth of Puerto Rico, the Virgin Islands of the United States and the Territory of Guam. State laws regulate the amount of both the aggregate and individual risks that may be insured, the payment of dividends by ACA, changes in control and transactions among affiliates. Additionally, ACA is required to maintain contingency reserves on its liabilities in certain amounts and for certain periods of time.

As of June 30, 2003, ACA had, on an unaudited basis, admitted assets of $330,091,761, total liabilities of $194,949,459, and total capital and surplus of $135,142,302, as determined in accordance with statutory accounting practices prescribed or permitted by insurance regulatory authorities.

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For further information about ACA, see the selected financial and statistical information for ACA Financial Guaranty Corporation at http://www.aca.com/financials/index.html. Copies of ACA's year-end financial statements prepared in accordance with statutory accounting practices are available without charge from ACA. The address of ACA is 140 Broadway 47th Floor, New York, New York 10005. The telephone number of ACA is (888) 427-2833.

Fitch Ratings and Standard & Poor's Ratings Services rate the financial strength of ACA “A”. Each rating of ACA should be evaluated independently. The ratings reflect the respective rating agency's current assessment of the creditworthiness of ACA and its ability to pay claims on its policies of insurance. Any further explanation as to the significance of the above ratings may be obtained only from the applicable rating agency. The above ratings are not recommendations to buy, sell or hold the Series 2003 Bonds, and such ratings may be subject to revision or withdrawal at any time by the rating agencies. Any downward revision or withdrawal of any of the above ratings may have an adverse effect on the market price of the Series 2003 Bonds. ACA does not guaranty the market price of the Series 2003 Bonds nor does it guaranty that the ratings on the Series 2003 Bonds will not be revised or withdrawn.

OTHER THAN WITH RESPECT TO INFORMATION CONCERNING ACA FINANCIAL GUARANTY CORPORATION (“ACA”) CONTAINED UNDER THE CAPTION “BOND INSURANCE” HEREIN, NONE OF THE INFORMATION IN THIS OFFICIAL STATEMENT HAS BEEN SUPPLIED OR VERIFIED BY ACA AND ACA MAKES NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO (I) THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION; (II) THE VALIDITY OF THE SERIES 2003 BONDS; OR (III) THE TAX EXEMPT STATUS OF THE INTEREST ON THE SERIES 2003 BONDS.

THE 2003 PROJECT

The Series 2003 Bonds will be used to finance and refinance all or a portion of the costs of acquisition and/or leasing, construction, renovation, furnishing and equipping of four elementary and/or secondary school facilities (grades K-12) of the Borrower, including land, buildings, improvements and personal property, The four school facilities are as follows:

(1) Chamberlain Elementary School, an elementary school with grades Kindergarten through 5, located at 1345 Potomac Avenue, S.E. (Lots 847 and 848, square 1046),

(2) Woodridge Elementary School, an elementary school with grades Kindergarten through 5, located at 2959 Carlton Avenue, N.E. (Lot 812, square 4339); and

(3) Junior Academy at Blow Pierce, a middle school with grades 6 through 8, located at 729 19th Street, N.E. (Lots 833, 834 and 835, square 4515), and

(4) Collegiate Academy at Carter G. Woodson, a high school with grades 9 through 12, located at 4095 Minnesota Avenue, N.E. (Lot 813, square 5078).

The Series 2003 Bonds will be used to refinance all of the Friendship School’s existing long term debt as set forth in the table below and to finance capital improvements including certain technology enhancements, expansion of the Woodridge campus and upgrade of HVAC systems. See APPENDIX A for more information on anticipated capital improvements to the Friendship School facilities.

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OUTSTANDING DEBT TO BE REFINANCED

Lender and

Debt Description

Original Amount

Date

Incurred

Final

Maturity

Amount Outstanding

(Nov. 12, 2003)

Edison Schools, Inc. (20 year, fixed rate note)

$13,460,065 11/5/2001 6/30/2021 $13,150,679

Bank of America (5 year, variable rate note)

11,445,000 11/8/2000 11/8/2005 9,307,359


4,343,113 11/8/2000 11/30/2005 4,108,953

Total $26,566,991

ESTIMATED SOURCES AND USES OF FUNDS

The proceeds to be derived from the sale of the Series 2003 Bonds (excluding accrued interest), together with certain other moneys, are estimated to be applied as follows:

Sources: Principal Amount of Series 2003 Bonds $ 44,880,000Less: Net Original Issue Discount (507,292)Friendship School Cash Contribution 307,970Debt Service Reserve Fund Loan 3,000,000Total Sources $ 47,680,678 Uses: Repayment of Outstanding Debt of Friendship School $ 26,566,991Other Costs of 2003 Project 14,258,909Deposit to Debt Service Reserve Fund 3,179,905Costs of Issuance* 3,674,873Total Uses $ 47,680,678

* Includes Underwriter’s discount, bond insurance premium and other expenses associated with the issuance of the Series 2003 Bonds.

DEBT SERVICE SCHEDULE

The following table sets forth the interest and principal requirements for the Series 2003 Bonds. Upon issuance of the Series 2003 Bonds, the Friendship School will have no other material long-term debt outstanding. The principal amounts of the Series 2003 Bonds at maturity or upon mandatory sinking fund redemption become due on June 1 in each of the years listed below.

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Year (June 1)

Principal or Sinking Fund Installments

Interest

Total Debt Service

2004 $ 1,312,299 $ 1,312,299 2005 $ 755,000 2,249,655 3,004,655 2006 775,000 2,227,005 3,002,005 2007 795,000 2,203,755 2,998,755 2008 1,000,000 2,179,905 3,179,905 2009 870,000 2,129,905 2,999,905 2010 1,000,000 2,101,630 3,101,630 2011 950,000 2,051,630 3,001,630 2012 1,000,000 2,013,630 3,013,630 2013 1,000,000 1,963,630 2,963,630 2014 1,085,000 1,913,630 2,998,630 2015 1,130,000 1,866,975 2,996,975 2016 1,195,000 1,802,000 2,997,000 2017 1,265,000 1,733,288 2,998,288 2018 1,340,000 1,660,550 3,000,550 2019 1,415,000 1,583,500 2,998,500 2020 1,485,000 1,512,750 2,997,750 2021 1,560,000 1,438,500 2,998,500 2022 1,640,000 1,360,500 3,000,500 2023 1,720,000 1,278,500 2,998,500 2024 1,805,000 1,192,500 2,997,500 2025 1,900,000 1,099,994 2,999,994 2026 1,995,000 1,002,619 2,997,619 2027 2,100,000 900,375 3,000,375 2028 2,205,000 792,750 2,997,750 2029 2,320,000 676,988 2,996,988 2030 2,445,000 555,188 3,000,188 2031 2,575,000 426,825 3,001,825 2032 2,705,000 291,638 2,996,638 2033 2,850,000 149,625 2,999,625

Total $ 44,880,000 $ 43,671,736 $ 88,551,736

BONDHOLDERS’ RISKS

Certain bondholder risks associated with the purchase and holding of the Series 2003 Bonds are summarized below. Not all relevant risks may be identified and market fluctuations in prevailing interest rates will affect the value of the Series 2003 Bonds.

General

The ability of the Friendship School to make payments under the Series 2003 Note and the Loan Agreement depends primarily upon future revenues and expenses of the Friendship School. Future revenues and expenses of the Friendship School are subject to conditions that may change to an extent that cannot be determined at this time. Changes in revenues and expenses will depend on, among other things, continued receipt of the 2003 Project Formula Payments from the District. This in turn will be affected by the abilities of management as well as by general economic conditions beyond management’s control and the competitive environment. All of these factors are unpredictable. No assurances can be given that revenues of the Friendship School will not decrease or that the revenues available to the Friendship School from its operations and development efforts will be available in amounts sufficient to make the required payments under the Loan Agreement and the Notes. See “MANAGEMENT DISCUSSION OF RECENT FINANCIAL PERFORMANCE” in APPENDIX A.

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Nonrenewal or Revocation of Charter

The Charter was granted by the Public Charter School Board in 1998 with an initial term of 15 years extending through 2013. Pursuant to its terms, and the Public Charter School Law, the Charter may thereafter be renewed by the Board for successive terms of up to five years. The Public Charter School Board has the authority to conduct a review of the Friendship School’s charter every five years and to revoke the Charter or refuse to renew it if the Public Charter School Board determines that the Friendship School (a) committed a violation of applicable laws or a material violation of the conditions, terms, standards, or procedures set forth in the Charter, including violations relating to the education of children with disabilities, or (b) failed to meet approved goals and student academic achievement expectations. The Public Charter School Law further provides that the Public Charter School Board must revoke the Charter if it determines that the Friendship School (1) engaged in a pattern of nonadherence to generally accepted accounting principles, (2) engaged in a pattern of fiscal mismanagement, or (3) is no longer economically viable. There can be no assurance that the District will continue its charter school program for the term of the Charter.

Funding and Future Changes to Charter School Laws

Future changes to either the Public Charter School Law or applicable District funding laws by the Council could be adverse to the financial interest of the Friendship School and could adversely impact the security for the Bonds. The Council could make future modifications, amendments, or changes to the method by which the 2003 Project Formula Payments are calculated or the manner or timing of disbursement of the 2003 Project Formula Payments, or the amount of the 2003 Project Formula Payments. There can also be no assurance that the Council will not in the future amend either the Public Charter School Law or applicable funding laws in a manner which is adverse to the interest of the owners of the Bonds.

For example, in recent years Operating Funding has been paid in four equal installments, as provided in temporary legislation and/or appropriations legislation for each year. The Council has adopted emergency legislation providing for the continuation of this quarterly payment process. In addition, temporary legislation has been adopted by the Council and signed by the Mayor and is awaiting transmittal to Congress for a 30-day Congressional review period before becoming law, and permanent legislation was introduced in July 2003 for the same purpose. Thus, although the Friendship School expects that the Council will continue to approve the quarterly payments, there can be no assurances that the District will continue the quarterly payment process. See “PUBLIC CHARTER SCHOOL PROGRAM”.

In addition, the revenues received by the Friendship School from the District constitute an appropriation subject to the Anti-Deficiency Act. Anti-Deficiency Act, 31 USCS § 1341; D.C. Official Code §47-105. The Anti-Deficiency Act prohibits the District from spending any amount above the amount specifically appropriated for the purpose approved annually by the Congress as part of the District’s budget. If overspending during a District fiscal year has occurred or is anticipated and agencies do not reduce spending to the authorized levels, the Chief Financial Officer of the District is authorized to take actions that are intended to ensure spending reductions. Such actions can include apportionment of the budget and reducing budget authority for agencies.

Performance By Managers

The Friendship School’s four facilities are managed by a management company, Edison Schools Inc. (“Edison”). Edison is a for-profit company which, as of September 30, 2003, manages schools in 19 states as well as the District. Edison has operated the four facilities pursuant to a contract that was in effect from 1998 through 2003. A new management contract was in effect as of November 1, 2003. The new management contract has a five year term, subject to renewal and termination, all as described in more detail in APPENDIX A. If the new management contract were terminated or not renewed, the Friendship School would have to find a replacement manager for the schools, or operate the schools itself, and failure to do so could materially adversely affect its ability to generate sufficient revenues to pay the Series 2003 Bonds. Failure by Edison to perform its management duties properly could also adversely affect the Friendship School’s ability to attract students and generate revenues sufficient to pay the Series 2003 Bonds and could necessitate termination of a management contract for cause.

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On May 14, 2002, the Securities and Exchange Commission (the “SEC”) announced a settlement with Edison in which Edison agreed to a cease and desist order involving certain accounting practices. Edison, whose common stock is registered with the SEC under the Security Exchange Act of 1934, has stated in its filings with the SEC that it has sustained substantial net losses in each fiscal period since it began operation and expects losses to continue. Its stock price has dropped significantly from 2001 levels. The Friendship School cannot predict Edison’s future financial condition or whether and to what extent a decline in Edison’s financial condition will affect Edison’s performance under its management contract with the Friendship School.

On July 14, 2003, Edison announced a merger transaction that is intended to result in the conversion of Edison from a publicly traded to a privately-held corporation. The other merger parties are private entities created solely for the purpose of the conversion, in which it is anticipated that all stockholders of Edison will receive cash in exchange for their outstanding shares of Edison common stock. After the consummation of the merger, Edison’s stock will no longer be traded on any securities exchange and Edison will become a privately-held company of the same name. The merger agreement anticipates that key senior management of Edison will remain in place as senior management of the new privately-held Edison, which will be controlled by H. Christopher Whittle, the current Chief Executive Officer and Director of Edison, and Affiliates of Liberty Partners, a private equity firm based in New York. Edison has publicly stated that if the merger transaction does not occur, Edison may face certain financial difficulties.

Foreclosure Delays and Deficiency

Should Receipts and Revenues from the Loan Agreement be insufficient to pay the principal of and interest on the Series 2003 Bonds, the Trustee may seek to foreclose the respective interest held by Friendship School under the Series 2003 Mortgage. The buildings are not general purpose buildings and would not be suited for most types of commercial use. No assurance can be given that the value of the facilities constituting the 2003 Project at the time of such foreclosure would be sufficient to meet all remaining principal and interest payments on the Series 2003 Bonds. In addition, the time necessary to institute and complete foreclosure proceedings could substantially delay receipt of funds from a foreclosure.

Damage or Destruction of the Project

The Loan Agreement requires that the 2003 Project be insured against certain risks. There can be no assurance that the amount of insurance required to be obtained with respect to the 2003 Project will be adequate or that the cause of any damage or destruction to the 2003 Project will be as a result of a risk which is insured. Further, there can be no assurance of the ongoing creditworthiness of the insurance companies with which the Friendship School obtains insurance policies.

Factors Associated With Education

There are a number of factors affecting schools in general, including the Friendship School, that could have an adverse effect on the Friendship School’s financial position and its ability to make the payments required under the Loan Agreement. These factors include, but are not limited to, the ability to attract a sufficient number of students; increasing costs of compliance with federal or District regulatory laws or regulations, including, without limitation, laws or regulations concerning environmental quality. Work safety and accommodating persons with disabilities; any unionization of the work force of Edison with consequent impact on wage scales and operating costs; changes in existing statutes pertaining to the powers of the Friendship School and legislation or regulations which may affect program funding. The Friendship School cannot assess or predict the ultimate effect of these factors on its operations or financial results of operations.

Competition for Students

The Friendship School competes for students with the public schools, the other public charter schools within the District and private and parochial schools that are located in the District and the surrounding communities. There can be no assurance that the Friendship School will continue to attract and retain the number of

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students that are needed to produce the Receipts and Revenues necessary to pay the debt service on the Series 2003 Bonds. See “ADMISSIONS AND DEMOGRAPHICS” in APPENDIX A.

Covenant To Maintain Tax-Exempt Status of the Series 2003 Bonds

The excludability from gross income for federal income taxation purposes of the interest on the Series 2003 Bonds is based on the continuing compliance by the Friendship School and the District with certain covenants contained in the Indenture, the Loan Agreement and the Tax Certificate. These covenants relate generally to restrictions on the use of the facilities financed with proceeds of the Series 2003 Bonds, restrictions on leasing such facilities, restrictions on the terms of management contracts relating to such facilities, arbitrage limitations, and rebate of certain excess investment earnings, if any, to the federal government. Failure to comply with such covenants could cause interest on the Series 2003 Bonds to become subject to federal income taxation retroactive to the date of issuance of the Series 2003 Bonds.

The Series 2003 Bonds will not be subject to any special redemption upon a determination that interest on the Series 2003 Bonds is taxable.

Additional Bonds and Additional Indebtedness

The Indenture permits the District to issue Additional Bonds secured by a pledge of the 2003 Project Formula Payments and additional Project Formula Payments if the Friendship School can satisfy certain asset liquidity and other conditions set forth in the Indenture. Additional Bonds may be issued equally and on a parity with the Series 2003 Bonds and may be payable from Receipts and Revenues of the District from the Loan Agreement if certain conditions are met. See “SECURITY AND SOURCES OF PAYMENT—Issuance and Delivery of Additional Bonds”.

Future Legislation

Future legislation and regulations affecting non-profit schools, their tax-exempt status and educational institutions in general could adversely affect the operations of the Friendship School.

Risks of Real Estate Investment

There are many risks related to any investment in real estate, not within control of the Friendship School. These risks may have substantial bearing on the value of assets encumbered by the Series 2003 Mortgage. Such risks include environmental matters, fire or other casualty, condemnation, increased taxes, changes in demand for such facilities, decline in local and general economic conditions and changing governmental regulations. Accordingly, there can be no assurances that a sale or foreclosure under the Series 2003 Mortgage would result in sufficient funds to pay all principal and interest due on the Series 2003 Bonds after a default.

Environmental Regulation

The facilities constituting the 2003 Project are subject to various federal, State and local laws and regulations governing health and the environment. In general, these laws and regulations could result in liability to the owner of the 2003 Project (and to any mortgagee holding a mortgage lien on the 2003 Project, particularly following any foreclosure proceeding) for remediating adverse environmental conditions on or relating to the 2003 Project, whether arising from preexisting conditions or conditions arising as a result of the activities conducted in connection with the ownership and operation of the 2003 Project.

Friendship School has addressed and continues to address various environmental matters at the 2003 Project. Costs incurred by the Friendship School with respect to environmental remediation or liability could adversely impact its financial condition and its ability to own and operate the 2003 Project and its other school campuses. If excessive costs are incurred by the Friendship School in connection with remediating environmental problems or from liability to third parties, such costs could make it impractical to continue or such costs could make it more difficult to successfully sell the 2003 Project if the Friendship School’s Charter were not renewed or the

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mortgage were foreclosed. For specific information with respect to environmental matters at the 2003 Project, see “OTHER INFORMATION – Environmental Matters” in APPENDIX A.

Prepayment Risks

A portion of the Series 2003 Bonds may be required to be paid prior to their stated maturity upon redemption (as described under “THE SERIES 2003 BONDS – Redemption – Special Mandatory Redemption”) and upon an acceleration following the occurrence of certain events of default under the Indenture. If the Series 2003 Bonds become due upon an acceleration, special or extraordinary redemption, interest on the Series 2003 Bonds shall cease on the date determined by the Trustee for tender of payment and a premium may not be payable. There can be no assurance that there would be sufficient funds available to pay the principal of and interest on the Series 2003 Bonds under such circumstances.

Market Factors

The financial condition of the Friendship School as well as the market for the Series 2003 Bonds could be affected by a variety of factors, many of which are beyond the Friendship School’s control. There can be no assurance that an adverse event will not occur that might affect the market price of and the market for the Series 2003 Bonds. If a significant event should occur in the affairs of the Friendship School, the market for and the market value of the Series 2003 Bonds could also be adversely affected.

Enforceability of Remedies; Bankruptcy

The realization of any rights upon a default by the Friendship School will depend upon the exercise of various remedies specified in the Indenture and the Loan Agreement. These remedies may require judicial action, which is often subject to discretion and delay. Under existing law, certain of the remedies specified in the Indenture and the Loan Agreement 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. Accordingly, the Trustee’s ability to exercise its remedies under the Loan Agreement and the Indenture upon a default by the Friendship School could be impaired by the need for judicial approval.

Bankruptcy proceedings by the Friendship School also could have adverse effects on holders of the Series 2003 Bonds, including (a) delay in enforcement of their remedies, (b) subordination of their claims to claims of those supplying goods and services to the Friendship School after the initiation of bankruptcy proceedings and to the administrative expenses of bankruptcy proceedings, and (c) imposition without their consent of a plan of reorganization reducing or delaying payment of the Series 2003 Bonds. The United States Bankruptcy Code contains provisions intended to ensure that, in any plan of reorganization not accepted by at least a majority of any class of creditors such as the holders of the Series 2003 Bonds, such class of creditors will have the benefit of their original claim or the “indubitable equivalent” of it, although the plan may not provide for payment in full of the Bonds. The effect of these and other provisions of the United States Bankruptcy Code cannot be predicted and may be affected significantly by judicial interpretation.

TAX EXEMPTION

In the opinion of Ballard Spahr Andrews & Ingersoll, LLP, Bond Counsel, interest on the Series 2003 Bonds is excludable from gross income for purposes of federal income tax under existing laws as enacted and construed on the date of initial delivery of the Series 2003 Bonds, assuming the accuracy of the certifications of the District and the Friendship School and continuing compliance by the District and the Friendship School with the requirements of the Internal Revenue Code of 1986, as amended (the “Code”). Interest on the Series 2003 Bonds will not be an item of tax preference for purposes of either individual or corporate federal alternative minimum tax, but interest on Series 2003 Bonds held by a corporation (other than an S corporation, regulated investment company, real estate investment trust, financial asset securitization investment trust or real estate mortgage investment conduit) may be indirectly subject to federal alternative minimum tax because of its inclusion in the adjusted current

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earnings of a corporate holder. Interest on Series 2003 Bonds held by foreign corporations may be subject to the branch profits tax imposed by the Code.

Ownership of the Series 2003 Bonds may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, financial institutions, property and casualty insurance companies, individual recipients of Social Security or Railroad Retirement benefits, certain S corporations, and taxpayers who may be deemed to have incurred or continued debt to purchase or carry the Series 2003 Bonds. Bond Counsel expresses no opinion as to such collateral tax consequences.

The Series 2003 Bonds maturing June 1, 2009, 2011, 2014, 2023, 2027 and 2033 are offered at a discount (“original issue discount”) equal generally to the difference between public offering price and principal amount. For Federal income tax purposes, original issue discount on a Series 2003 Bond accrues periodically over the term of the Series 2003 Bond as interest with the same tax exemption and alternative minimum tax status as regular interest. The accrual of original issue discount increases the Holder’s tax basis in the Series 2003 Bond for determining taxable gain or loss from sale or from redemption prior to maturity. Holders should consult their tax advisers for an explanation of the accrual rules.

The Series 2003 Bonds maturing June 1, 2005, 2006, 2007, 2008, 2010, 2012, 2013 and 2018 are offered at a premium (“original issue premium”) over their principal amount. For Federal income tax purposes, original issue premium is amortizable periodically over the term of a Series 2003 Bond through reduction in the Holder’s tax basis for the Series 2003 Bond for determining taxable gain or loss from sale or from redemption prior to maturity. Amortizable premium is accounted for as reducing the tax-exempt interest on the Series 2003 Bond rather than creating a deductible expense or loss. Holders should consult their tax advisers for an explanation of the amortization rules.

In the opinion of Bond Counsel, interest on the Series 2003 Bonds is exempt from District taxation, except inheritance, estate and gift taxes.

LEGAL INVESTMENT IN DISTRICT OBLIGATIONS

Section 486 of the Home Rule Act (§ 1-204.86 of the District of Columbia Official Code), provides that, notwithstanding any restriction on the investment of funds by fiduciaries contained in any other District law, all domestic insurance companies and associations, executors, administrators, guardians, trustees and other fiduciaries within the District may legally invest any sinking funds, monies, trust funds or other funds belonging to them or under or within their control in any bond issued in accordance with the Home Rule Act and the District of Columbia Official Code. Section 486 of the Home Rule Act also provides that all federal building and loan associations and federal savings and loan associations and banks, trust companies, building and loan associations and savings and loan associations domiciled in the District, may purchase, sell, underwrite, and deal in, for their own account or for the account of others, all bonds issued in accordance with the Home Rule Act and the District of Columbia Official Code, such as the Series 2003 Bonds.

LEGAL MATTERS

Legal matters incident to the issuance of the Series 2003 Bonds and with regard to the tax status of the interest thereon are subject to the legal opinion of Ballard Spahr Andrews & Ingersoll, LLP, Bond Counsel. Bond Counsel’s approving opinion will be substantially in the form set forth in APPENDIX E to this Official Statement. Certain legal matters will also be passed upon for the District by the Office of Corporation Counsel; for the Friendship School by Hunton & Williams LLP; and for the Underwriter by Nixon Peabody LLP.

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LITIGATION

The District

There is no litigation of any nature against the District now pending or to the knowledge of the District threatened restraining or enjoining the issuance, sale, execution or delivery of the Series 2003 Bonds or in any way contesting or affecting the validity of the Series 2003 Bonds or any proceedings of the District with respect to the Series 2003 Bonds or the existence or powers of the District which would have a material adverse effect on the obligations of the District with respect thereto.

The Friendship School

There is no litigation of any nature against the Friendship School now pending or to the knowledge of the Friendship School threatened restraining or enjoining the issuance, sale, execution or delivery of the Series 2003 Bonds or in any way contesting or affecting the validity of the Series 2003 Bonds or any proceedings of the Friendship School with respect to the Series 2003 Bonds or the existence or powers of the Friendship School which would affect the obligations of the Friendship School with respect thereto. See “OTHER INFORMATION – Litigation” in APPENDIX A.

FINANCIAL STATEMENTS

The financial statements of the Friendship School as of and for the years ended June 30, 2002 and June 30, 2003, included in APPENDICES B-1 and B-2 to this Official Statement have been audited by Maner Costerisan & Ellis, P.C., independent certified public accountants, as set forth in their reports on the financial statements included in APPENDICES B-1 and B-2.

UNDERWRITING

Citigroup Global Markets, Inc. (the “Underwriter”), has agreed, pursuant to a Bond Purchase Agreement, to purchase the Series 2003 Bonds at a price of $43,876,183.85 (the par amount of the Series 2003 Bonds, $44,880,000, minus $507,292.05 in net original issue discount, and minus $496,524.10 in Underwriter’s discount), plus accrued interest of $68,739.46, for a total of $43,944,923.31.

The obligation of the Underwriter to pay for the Series 2003 Bonds is subject to certain terms and conditions set forth in the Bond Purchase Agreement. The Bond Purchase Agreement provides that the Underwriter will purchase all of the Series 2003 Bonds if any are purchased and will make a public offering of the Series 2003 Bonds at the initial public offering prices shown on the cover page of this Official Statement. The Friendship School has agreed in the Bond Purchase Agreement to indemnify the Underwriter against certain liabilities relating to this Official Statement.

The Underwriter may offer and sell Series 2003 Bonds to certain dealers (including dealers depositing Series 2003 Bonds into unit investment trusts) and others at prices lower than the public offering prices stated on the cover page hereof. The initial public offering prices may be changed from time to time by the Underwriter.

RATINGS

Standard & Poor’s Ratings Services (“Standard & Poor’s”) has given the Series 2003 Bonds the rating of “A” based on the issuance by ACA of its Policy upon delivery of the Series 2003 Bonds. Standard & Poor’s has also assigned an underlying rating on the Series 2003 Bonds of BBB.

These ratings reflects only the views of Standard & Poor’s and any desired explanation of the significance of such ratings should be obtained from Standard & Poor’s at: Standard & Poor’s Ratings Services, 55 Water Street,

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New York, New York. Generally, a rating agency bases its rating on the information and materials provided to it and on investigations, studies and assumptions of its own. There is no assurance any such rating will continue for any given period of time or that such rating will not be revised downward or withdrawn entirely by the rating agency if, in the judgment of such rating agency, circumstances so warrant. Any such downward revision or withdrawal of such rating may have an adverse effect on the market price of the Series 2003 Bonds.

RELATIONSHIP OF THE PARTIES

The Friendship School’s Special Counsel serves as bond counsel to the District in connection with other unrelated matters. The Friendship School’s Special Counsel and Bond Counsel each represent the Underwriter in connection with other unrelated matters.

CONTINUING DISCLOSURE

The Friendship School has undertaken in a Continuing Disclosure Agreement to comply with the provisions of Rule 15c2-12 (the “Rule”), promulgated by the Securities and Exchange Commission (the “SEC”), by providing to the NRMSIRs (as hereinafter defined) certain annual financial information and material event notices required by the Rule. A further description of these obligations and the information to be provided pursuant to the Rule is contained in the Continuing Disclosure Agreement, which is included in APPENDIX G. The undertaking requires the Friendship School to provide only limited information at specified times.

The Friendship School has not previously undertaken to provide continuing disclosure pursuant to the Rule.

The District is not deemed to be a material obligated person for purposes of the Rule and, therefore, is not required to provide Annual Reports or Event Notices with respect to the Series 2003 Bonds.

The number of NRMSIRs varies from time to time. As of the date of this Official Statement, the SEC has recognized each of the following entities as a nationally recognized municipal securities information repository (each, a “NRMSIR”):

Bloomberg Municipal Repository 100 Business Park Drive Skillman, New Jersey 08558 Telephone: (609) 279-3225 Facsimile: (609) 279-5962 E-mail: [email protected]

FT Interactive Data Attn: NRMSIR 100 William Street New York, New York 10038 Telephone: (212) 771-6999 Facsimile: (212) 771-7390 (Secondary Market Information) (212) 771-7391 (Primary Market Information) E-mail: [email protected]

DPC Data Inc. One Executive Drive Fort Lee, New Jersey 07024 Telephone: (201) 346-0701 Facsimile: (201) 947-0107 E-mail: [email protected]

Standard & Poor’s J. J. Kenny Repository 55 Water Street, 45th Floor New York, New York 10041 Telephone: (212) 438-4595 Facsimile: (212) 438-3975 E-mail: [email protected]

As of the date of this Official Statement no state information depository (“SID”) has been created for the District. If, however, a SID is hereafter created for the District, the Friendship School is obligated to make filings and provide notices to the SID as required by the Rule. Investors and other interested parties may contact any NRMSIR for additional information concerning its services. The Friendship School makes no representation as to

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the scope of the services provided to the secondary market by any NRMSIR or as to the costs for the provision of such services by any NRMSIR.

MISCELLANEOUS

The Friendship School has furnished all information herein relating to the Friendship School. Any statements herein involving matters of opinion, whether or not expressly so stated, are intended as such and not as representations of fact, and no representation is made that any of such statements will be realized. Neither this Official Statement nor any statement which may have been made orally or in writing with respect to this Official Statement nor any statement made as described under “Continuing Disclosure” is to be construed as a contract with the Beneficial Owner of any Bond.

All of the summaries of the provisions of the Bonds, Indenture and Loan set forth herein (exclusive of financial and statistical data), and all other summaries and references to such other materials not purporting to be quoted in full, are only brief outlines of certain provisions thereof and are made subject to all of the detailed provisions thereof, to which reference is hereby made for further information, and do not purport to be complete statements of any or all such provisions of such documents.

All estimates and assumptions herein have been made on the best information available and are believed to be reliable, but no representations whatsoever are made that such estimates or assumptions herein will be realized. To the extent statements made herein involve anything other than matters of opinion, whether or not expressly so stated, they are intended merely as such and not as representations of fact.

The information set forth herein, or in the Appendices, should not be construed as representing all of the conditions affecting the Friendship School.


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APPROVAL AND CONSENT TO DISTRIBUTION

The Friendship School has approved the use and distribution of this Official Statement in connection with the offering and sale of the Series 2003 Bonds.

The District has consented to the legally permitted distribution of this Official Statement and has authorized the execution hereof but assumes no responsibility as to the accuracy or completeness of the information in this Official Statement other than that set forth in “THE DISTRICT” and in “LITIGATION – District of Columbia”.

DISTRICT OF COLUMBIA

By: /s/ Michael Vincent Hodge Director, Revenue Bond - Enterprise Zone Program

FRIENDSHIP PUBLIC CHARTER SCHOOL

By: /s/ Donald L. Hense Chairman and Chief Executive Officer

APPENDIX A

CERTAIN INFORMATION REGARDING FRIENDSHIP PUBLIC CHARTER SCHOOL

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APPENDIX A


GENERAL INFORMATION History and Mission

Friendship Public Charter School, Inc. (“Friendship School”) is a District of Columbia not-for-profit corporation organized in 1998 and recognized as a 501(c)(3) corporation by the Internal Revenue Service. Friendship School was founded by Friendship House Association, a social service agency that has served disadvantaged families in the District of Columbia (the “District”) since 1904. In 1997, incoming president Donald L. Hense convened a task force to identify strategies for improving economic and educational opportunity for low-income citizens. The task force recommended that Friendship House Association apply to open a school under the District’s newly passed charter school law. In 1998, Friendship House Association partnered with Edison Schools, Inc. (“Edison”), a school management company that in 1997 had implemented its school design in 25 public and public charter schools, to help Friendship School prepare its charter application. Friendship House Association sponsored the charter application, oversaw the organization of Friendship School, and worked with Edison to identify facilities.

Friendship School received preliminary charter approval in March 1998 and in September 1998 signed a 15-year charter with D.C. Public Charter School Board to operate a multi-site charter school educating up to 3,234 students per year. Soon thereafter, Friendship School entered into a formal management agreement with Edison (the “Management Agreement”) to adapt the Edison school design to local needs and to manage a multi-site school under the leadership of Friendship Schools’ Board of Trustees (the “Board of Trustees”). In late 1998, Friendship School obtained three vacant school buildings from the District of Columbia Public Schools and in 2000 obtained a fourth vacant building. Friendship School secured financing through Edison and Bank of America, and began a three-year capital improvement program to renovate the facilities. From 1998 to 2000, Friendship School successfully opened four campus sites, one in each building.

In the spring of 2002, Friendship School was accepted as a candidate for accreditation through the

Middle States Association. Accreditation is expected in the spring of 2004. The Strategic Plan prepared for accreditation states the school’s mission as follows:

The mission of Friendship Public Charter School is to prepare students to become ethical, literate, well-rounded and self-sufficient citizens. In partnership with Friendship House and with students’ families, FPCS provides a world-class education that motivates students to reach high academic standards, to enjoy learning, to achieve success, and to contribute actively to their communities.

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Governance Board of Trustees

Friendship School is governed by a Board of Trustees consisting of ten members (the “Trustees”). The bylaws provide for a Board of Trustees with up to eleven members, with each member serving a three year term. There is no limit on the number of terms that a Trustee may serve. The Board of Trustees meets at least quarterly, with special meetings called as necessary. The Board of Trustees has three active Committees: (i) Student Discipline, which rules on expulsions and major suspensions recommended by principals; (ii) Finance, which oversees financial performance including financial relations with Edison; and (iii) Accountability, which oversees school performance. In 2002, four members were added to the Board of Trustees, adding members with expertise in finance, philanthropy, educational administration and higher education. The Board of Trustees sets policy for the school and monitors the performance of Edison, as the school management company. Donald L. Hense is the Chief Executive Officer of Friendship School as well as the Chairman of the Board of Trustees. Name Position Occupation Years of

Service Donald L. Hense Board Chair President of Friendship House

CEO of Friendship School

5 Floretta Dukes McKenzie

Board Vice-Chair Former D.C. Superintendent of Public Schools; Educational administration and consulting

5

W. Edward Walter Treasurer, Chair of Finance Committee

Chief Financial Officer, Host Marriott Corporation

2

Victor E. Long Secretary, parent representative

Attorney. Formerly with D.C. Corporation Counsel. Partner Regan, Halperin and Long

5

Theodora Brown Member, Chair of Discipline Committee

Attorney. Professor of corporate and non-profit law at the University of the District of Columbia

4

Michelle Coley Member, parent representative

Financial Advisor 1

Jan Gillespie Member Assistant Superintendent for Curriculum, Camden, New Jersey Public Schools. Former Edison Vice-President

2

Gregory Prince Member President, Hampshire College 1 Helen Ver Standig Member Business and philanthropy 5 Chris White Member Real estate and philanthropy.

“I Have a Dream” sponsor of 30 kids.

2

Below are biographies for the Trustees of the Friendship School.

Donald L. Hense, Board Chair. Mr. Hense is Chief Executive Officer of Friendship

Public Charter School and President of Friendship House Association, the school’s founding organization. He received his A.B. from Morehouse College and completed all requirements for an Ed.D. but the dissertation at Stanford University’s Graduate School of Education. Over the past two decades, he

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has served as development director or government relations director for the Children's Defense Fund, the Urban League of New York, Dartmouth College, Howard University, and Whitman Walker Clinic.

Dr. Floretta Dukes McKenzie, Board Vice-Chair and Chair of the Accountability Committee, and member of the Nominating Committee. She is President of The McKenzie Group, an educational consulting firm, and former DC Superintendent of Schools. Ms. McKenzie received her B.S. from D.C. Teachers College, her M.A. from Howard University and her Ed.D. from George Washington University.

W. Edward Walter, Treasurer, Chair of the Finance Committee. He is Executive Vice President and Chief Financial Officer of Host Marriott Corporation and responsible for negotiating the hotel management agreements with Marriott Corporation. Mr. Walter received his B.A. from Colgate University and his J.D. from Georgetown University.

Victor E. Long, Secretary, member of the Finance and Discipline Committees and parent representative. He is a partner in the law firm Regan, Halperin and Long, and a former attorney in the Office of the DC Corporation Counsel. Mr. Long received his B.A. from Johns Hopkins University and his J.D. from Northeastern University School of Law. He is Second Vice-President of the Board of Friendship House Association.

Theodora Brown, Chair of the Discipline Committee. She is an attorney in private practice and professor of law at the University of the District of Columbia, specializing in corporate and non-profit law. Ms. Brown received here A.A. from Strayer College, her B.B.A. from University of the District of Columbia and her J.D. from Temple University School of Law. She is also a former parent representative.

Michelle Coley, member of the Discipline Committee and parent representative. She is a financial advisor.

Jan Gillespie, member of the Accountability Committee. She is Assistant Superintendent for Curriculum and Instruction for Camden Public Schools, former Cluster Superintendent for Philadelphia Public Schools, and former Edison Schools Operations Vice-President. Ms. Gillespie received her B.S. from Cheyney University and her M.S. from Temple University.

Dr. Gregory Prince, member of the Accountability Committee. He is President of Hampshire College in Amherst, Massachusetts. Mr. Prince received his B.A., M.Phil, and Ph.D. from Yale University.

Helen Ver Standig, member of the Finance Committee. She is a D.C.-based business woman and philanthropist and founder of the Madame Wellington jewelry stores. She has served on many non-profit boards.

Chris White, member of the Finance Committee. He is Chairman and Chief Executive Officer of Global Events Partners, philanthropist, and board member of the “I Have A Dream” Foundation, Teach for America, Junior Achievement Foundation, and other non-profit organizations. He received his B.A. from Tufts University.

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Friendship School Central Staff Four full-time central staff employees report directly to Mr. Hense, as well as two central staff

members who are shared with Edison. The central staff is responsible for keeping the Board of Trustees informed and implementing its policies. Responsibilities include: (i) ensuring compliance with District law and the regulatory requirements of the D.C. Public Charter School Board; (ii) collecting and analyzing school performance data; (iii) overseeing the financial management and performance of the school manager, Edison; (iv) facilities operation and finance; (v) responding to parent requests for discipline hearings; (vi) fund-raising; and (vii) public relations. The Board of Trustees provides guidance to the Friendship School staff in carrying out these activities.

Name Position Responsibilities Years of

Service Mary E. Procter Chief of Staff Financing, facilities, relations

with Edison

6 Kimberly Campbell Deputy Chief of Staff Fund-raising, government

relations, and marketing

1 Catherine Sanwo Chief Financial

Officer Financial management; reporting oversight of Edison finance

1

Algelyta Johnson Office Manager Book-keeping; Manages discipline hearings

2

Positions Shared with Edison Vonnelle Middleton Chief Academic

Officer (also Acting Head of School, Collegiate Academy)

Develops educational policies in collaboration with CEO and Campus Principals

2

Ulf Zeitler Director of Technology

Develops technology policies and oversees implementation

2

Below are biographies for the central staff of the Friendship School.

Mary E. Procter, Chief of Staff. Following a career in strategic planning and financial management for the Federal government, most recently the Department of State, she came to Friendship House as Director of Planning and Evaluation in January 1997 and assumed her present position in Fall 1999. She has served on the Board of Harvard Overseers and the Edna McConnell Clark Foundation Board. Ms. Procter received her B.A. from Harvard College, and her M.P.A in government economics from the Woodrow Wilson School of Princeton University.

Kimberly Campbell, Deputy Chief of Staff. Prior to joining Friendship School in July 2003, she was responsible for financial oversight of charter schools for the D.C. Public Charter School Board and prior to that, she was the Budget Analyst for Charter Schools with the D.C. Office of the Chief Financial Officer. Ms. Campbell received her B.A. from Syracuse and her M.P.A. from the Maxwell School of Government at Syracuse University, with a focus on urban education.

Catherine Sanwo, Chief Financial Officer. She was a Business Services Manager for Edison Schools for the Friendship Edison Junior Academy before assuming her present position in October 2002. Previously she was a financial analyst for Hartford Financial Services. She received her B.A. in business from the University of Kansas and her M.B.A. from Howard University.

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Algelyta Johnson, Office Manager. She was an auditor for the audit firm Williams and Adley before assuming her present position in December 2001. She received her B.S. in Business from Wilberforce College in Ohio and is currently enrolled in a M.B.A. program at Trinity College.

Vonnelle Middleton, Chief Academic Officer. She has been a founding principal of the St. Louis Career Academy (commended as one of six best new urban high schools in 1996 by the Department of Education) and of the Friendship-Edison Junior Academy at Blow-Pierce. Currently, she also serves as Director of Achievement, Design and Discipline for Edison Schools. Ms. Middleton has a B.A. degree from Fisk University in Nashville, her Masters in Guidance and Counseling from Lincoln University in Jefferson City, Missouri, and her Ed. S. in Educational Administration from the University of Missouri in Kansas City, Missouri. She is certified as a Secondary Principal.

Ulf Zeitler, Director of Technology. He oversees technology development in all four campuses, in collaboration with the Campus Principals, and also serves as Community Technology Manager for Edison Schools. Before joining Friendship, Mr. Zeitler served as Associate Director of Information Technology at the American Federation of State, County and Municipal Employees and as Chief of Criminal Justice Information Systems for the Metropolitan Police Department of Washington, D.C. Organization Chart Below is an organization charter depicting the governance and management structure of Friendship School.

Authorization and Public Oversight

The District of Columbia School Reform Act of 1995, which became effective on April 26, 1996 (the “School Reform Act”), gave two entities the power to authorize and monitor charter schools: the partially elected, partially appointed D.C. Board of Education and the D.C. Public Charter School Board (the “Public Charter School Board”). The Public Charter School Board was created in 1996 and is governed by members appointed by the Mayor of the District from a list of candidates submitted to the

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Mayor by the U.S. Board of Education. In 1998, Friendship School was granted a 15 year, renewable charter by the Public Charter School Board.

The School Reform Act requires the Public Charter School Board to monitor the schools under its authority and to conduct a thorough review of school performance every five years. To comply with these requirements, the Public Charter School Board has created a review process that requires each school to develop an accountability plan that specifies measurable objectives in the areas of student academic performance, student non-academic performance, and organizational performance. Schools report on their progress towards meeting these objectives in an annual report. In addition to the annual report, the Public Charter School Board requires that schools submit quarterly financial reports. The Public Charter School Board also conducts an annual full-day site visit and issues a lengthy annual compliance report on each school, as well as a summary “school performance report” issued to the public.

For the past five years, the Public Charter School Board has consistently found Friendship School in compliance with its regulations and has made positive statements about Friendship School in its official documents. Three of the Friendship School sites are meeting or exceeding all of their academic performance targets. The fourth site, the Collegiate Academy, after initial performance shortfalls, was commended in 2003 by the Public Charter School Board for improvement, especially in math. Friendship School is one of several Public Charter School Board schools that have been switched from monthly to quarterly financial reporting as a reward for timely and complete reporting.

The Public Charter School Board’s fifth-year review for Friendship School will take place during 2003-2004. Schools meeting most of their performance targets automatically pass the review as set forth in explicit Five Year Review Criteria. Friendship School is meeting or exceeding almost all of the performance targets set forth in the site accountability plans.

A final requirement of the fifth-year review is that a school enter the accreditation process. In May 2002, Friendship School satisfied this requirement by earning accreditation candidacy from the Middle States Association of Schools and Colleges (“MSASC”). Full accreditation is expected in April of 2004 from MSASC. School Management Company

Edison is the nation’s largest school management company. Currently, Edison manages 130 schools in 20 States and the District of Columbia with 70,000 students in kindergarten through twelfth grade. Approximately two-thirds of Edison-managed schools are traditional public schools and one-third are charter schools. Edison is currently a publicly-held for-profit corporation, but subject to an affirmative shareholder vote, will imminently execute a going-private transaction led by the Edison management group and Liberty Partners after which Edison would no longer be a publicly-held company. (See “BONDHOLDERS’ RISK - Performance by Managers” in Official Statement).

By operating a national school system, Edison offers its partners economies of scale, a broad pool of human and financial resources, and access to its ongoing research and development in education. Edison has developed and implements in all of its schools a program involving a common curriculum, instructional methods, and school organization. The staff at Edison’s headquarters in New York is organized into divisions dedicated to curriculum development, student achievement monitoring, teacher recruitment, teacher training, and school operations. The staff provides support to individual schools in all these areas.

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For Friendship School, Edison performs day-to-day management services as outlined in the performance-based Management Agreement. Under the current five-year Management Agreement, which expires in 2008, the principal of each campus is hired (and dismissed) jointly by Edison and the Friendship School Board of Trustees. Edison hires and supervises all other employees, who are, however, Friendship School employees. Among other services, Edison also provides teacher training, technical assistance in the implementation of the school design (including evaluation), procurement, bookkeeping, and payroll. Edison prepares a budget for each campus each year, which must be approved by the Friendship School Board of Trustees. Edison provides quarterly and annual financial reports to the Friendship School Board of Trustees and cooperates with the independent auditor, Maner Costerisan and Ellis, that prepares the Friendship School audited financial statements.

Edison Management Agreement—2003-2008

A second five-year Management Agreement between Friendship School and Edison was signed on November 1, 2003 (the “Management Agreement”). The Management Agreement has been reviewed by Bond Counsel and has been determined to be in full compliance with Internal Revenue Service requirements for tax-exempt financing.

Under the key provisions of the 2003-2008 Management Agreement, Friendship School will: • Retain all savings from operating the campus budgets. • Own all new information technology and school furniture purchased after the

Management Agreement is signed. • Retain from annual per pupil charter payments a Technology Reserve of $200 per pupil

to be used for future purchases of technology and a Facilities Reserve ramping up to $150 per pupil to be used for current and future capital improvements in the school builidings (each indexed for changes in per capita DC charter school revenues)

• Annually retain an Operating Reserve of 5% of Total Revenues as a source of liquid assets.

• Have the right to use in perpetuity intellectual property generated by Friendship employees while supervised by Edison and the right to jointly license such intellectual property with Edison for sale or license to third parties.

• Have the right to purchase curriculum at its depreciated value if the Management Agreement is terminated.

Friendship School, furthermore, may terminate the Management Agreement:

• If there is an adverse material change in Edison finances for 90 days or more that negatively impacts Edison's educational or administrative services.

• For one or more campuses if academic performance fails to meet accountability targets. • For convenience after three years.

Edison will:

• Receive an annual per capita management fee in FY 2004 and 2005 of $1,358 per student, indexed for changes in per capita DC charter school revenues, a portion of which will be subordinated. The subordinate fee will be funded jointly with the Friendship School Operating Reserve described above.

• In FY 2006, the per capita fee will be set at 96.2% of the FY 2005 level per pupil, also indexed for changes in DC revenues. In FY 2007 and 2008, the per capita fee management fee will be set at 96% of the FY 2006 level per pupil, also indexed.

• Report to Friendship School quarterly on student performance at all campuses. • Provide an extensive list of services to Friendship School as detailed in the Agreement. • Assist in the opening of any additional schools or the expansion of existing schools.

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Friendship House Partnership

Friendship House Association remains a close partner of Friendship School. Friendship House Association operates an after school program and family literacy program at the two elementary sites and a Youth Development program at the Collegiate Academy. Friendship House Association handles payroll and support services for central Friendship School staff, afterschool extended learning, and summer school. Further, Friendship House Association’s staff collaborate with Friendship School staff in designing and developing services to meet families’ needs. Friendship House Association and Friendship School are coordinating their strategic planning efforts to jointly develop “community learning centers” close to each Friendship School site to provide family counseling and adult literacy classes. Three members of the Friendship School Board of Trustees, including Board Chair Donald Hense, are also Friendship House Association Trustees.

FACILITIES

Campuses

Friendship School conducts its academic program at four campuses located in the northeastern and southeastern quadrants of the District of Columbia. Friendship owns three of the sites and leases the fourth, the Carter G. Woodson Collegiate Academy, from the District of Columbia. All four buildings were surplus public school buildings obtained from the District of Columbia government, three by purchase and the fourth by lease. The sites are described below:

CHAMBERLAIN ELEMENTARY CAMPUS Principal: Dr. John Pannell Chamberlain is located at 1345 Potomac Avenue, SE in Ward Six. Chamberlain opened as a campus of Friendship School in September, 1998 and currently serves 839 students in grades K through 5. Friendship School initially leased the property from the D.C. government and then purchased the property in November 2000. The site of the Chamberlain School is an irregular shaped tract containing approximately 1.5 acres. The Chamberlain school building was constructed in 1938 and expanded in 1965. The building is a three story masonry structure with a two story addition and a basement. The building, including the basement, contains approximately 80,660 square feet of space, and includes a cafeteria and a gymnasium that also serves as an auditorium with a portable stage. A portion of the proceeds of the Series 2003 Bonds will be used to upgrade the HVAC system at the Chamberlain Elementary campus (see the “2003 Project” herein). WOODRIDGE ELEMENTARY CAMPUS Principal: Marian Bobo Woodridge is located at 2959 Carlton Avenue, NE in Ward 5. Woodridge opened as a campus of Friendship School in September, 1998 and currently serves 335 students in grades K through 5. Friendship School initially leased the property from the D.C. government and then purchased it in November 2000. The site of Woodridge Elementary School consists of approximately 115,000 square feet. The Woodridge school building was constructed in 1927 and expanded in 1932 and 1962. The building is a two story masonry structure with a basement. The building, including the basement, contains approximately 37,600 square feet of space and includes a multi-purpose

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room that serves as a cafeteria, gymnasium and auditorium. A portion of the proceeds of the Series 2003 Bonds will be used to expand the Woodridge campus to serve grades 6 through 8 (see the “2003 Project” herein). BLOW-PIERCE JUNIOR ACADEMY CAMPUS Principal: Raymond Miller, Jr. Blow-Pierce is located at 725 19th Street, NE in Ward Six. Blow-Pierce opened as a campus of Friendship School in September 1999 and currently serves 751 students in grades 6 – 8. Friendship School initially leased the property from the D.C. government and then purchased it in November 2000. The site of the Blow-Pierce School consists of approximately 4 acres. The Blow-Pierce school building was constructed in 1969. The building is an irregular shaped one and three story masonry structure, with a partial basement having an open court yard in the center and a playground on the east side. The building, including the basement and boiler room, contains approximately 62,994 square feet of space and includes a cafeteria which also serves as an auditorium with a stage, and a gymnasium. A portion of the proceeds of the Series 2003 Bonds will be used to upgrade the HVAC system at the Blow-Pierce campus (see the “2003 Project” herein). See “OTHER INFORMATION - Environmental Regulation”. CARTER G. WOODSON COLLEGIATE ACADEMY CAMPUS Head of School: Michael Jackson Principals: Michael Cordell and Brian Beck Woodson is located at 4095 Minnesota Avenue, NE, in Ward Seven. Woodson opened as a campus of Friendship School in September 2000 and currently serves 890 students in grades 9 – 12. Friendship School currently has a 20-year lease from the D.C. government for the Woodson School site, and has negotiated a 99-year lease to replace it. A resolution approving the 99-year lease is expected to be approved by the City Council of the District of Columbia by the end of 2003. No opposition is anticipated. The Woodson school building was constructed in 1955. The building is comprised of three linked 3-to-5 story masonry structures with a basement. The building contains approximately 151,558 square feet including a gymnasium that can be partitioned into two smaller gymnasiums, a cafeteria with a full commercial kitchen and an auditorium with stage that can seat 650 people. The site consists of 2.45 acres and abuts an athletic field managed by the D.C. Department of Parks and Recreation that has been traditionally used by the occupants of the Woodson building.

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Administration Principals/Head of School Friendship School sites are led by highly qualified school principals who report jointly to Edison and to Friendship School. Because of the complexity of school management at the secondary level, two principal positions have been created at the Friendship Collegiate Academy, supervised by a Head of School. The Head of School focuses on external partnerships for the school and establishing a safe but challenging school culture. This administrative structure at the Collegiate Academy was implemented in June 2002. The education and experience of each principal is summarized below:

Dr. John Pannell, Principal of Chamberlain Elementary. Dr. John Pannell became the founding principal of Chamberlain Elementary from a distinguished career in D.C. Public Schools. As Principal of the largest elementary school, Malcolm X for eight years, he was named D.C. Principal of the Year three times and Ward Eight Principal of the Year twice. Dr. Pannell has a B.A. from Howard University, a M.A. in Urban Learning from George Washington University, a Certificate in School Administration from the University of the District of Columbia and an Honorary Doctorate in Pedagogy from the New England College in Henniker, New Hampshire.

Marian Bobo, Principal of Woodridge Elementary. Before becoming Principal of Woodridge,

Ms. Bobo was the Academy Director at Chamberlain Elementary for four years and Assistant Principal of Browne Junior High School in D.C. for three years. She has a B.A. in Education and Psychology from Howard University, a M.A. in Educational Administration from Trinity College in D.C., and is certified in Education Administration in D.C.

Raymond Miller, Jr., Principal of the Junior Academy at Blow-Pierce. Before becoming

Principal of the Junior Academy, Mr. Miller was Principal of Ron Brown Middle School in D.C. for two years, Assistant Principal of Anacostia Senior High, and Dean of Students at Cardozo Senior High. Mr. Miller has a B.A. in History from Virginia State University, a M.A. in Educational Leadership from George Mason University, and is a candidate for a Doctorate in Education at George Washington University.

Michael Jackson, Head of School, Collegiate Academy at Carter G. Woodson. Before

becoming Head of School, Mr. Jackson was the principal of high schools in Beaufort County, South Carolina, and Warren, Ohio, and the principal of junior high and middle schools in Philadelphia and Elyria, Ohio. Mr. Jackson has been nominated for the National Principal of the Year for the National Association of Secondary School Principals. Mr. Jackson has a B.S.E. and a M.S.E. in Education Administration from Drake University in Iowa. He is certified at the levels of Superintendent and High School Principal in South Carolina, Ohio, and Pennsylvania.

Michael Cordell, Principal Upper School, Collegiate Academy (11th and 12th grades). Mr.

Cordell served as the Academy Director for the Collegiate Academy before becoming Upper School Principal. Previously, Mr. Cordell was Academy Director for the Chicago International Charter School (also an Edison School). Mr. Cordell has a B.A. in Political Science from Washington University in St. Louis, Missouri, a M.A. in Political Science from Marquette University in Wisconsin, and is a Candidate for Doctorate in Education in George Washington University. He is certified in Educational Administration in the District of Columbia.

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Brian Beck, Principal Lower School, Collegiate Academy (9th and 10th grades). Before becoming Lower School Principal, Mr. Beck was Academy Director for Chicago International Charter School (also an Edison School) from 1997 to 2002. Mr. Beck has a B.A. in Psychology from Oregon State, where he also played on the varsity football team, and a M.A. in Educational Administration from Trinity College in South Dakota.

Other School Leaders Principals are supported by Academy Directors who are required to have advanced degrees in educational administration. Academic Directors function like Assistant Principals in regular public schools but have significant responsibilities for instructional leadership. Academic Directors review lesson plans and observe teachers and also handle student discipline and relations with parents. The onsite leadership team at each of the four campuses also includes a business services manager, a student support manager, a special education coordinator, and several lead teachers. Each lead teacher is responsible for a “House” of four to six classroom teachers and 90 – 120 students. Lead teachers organize professional development for the teachers in their house during a daily common planning period; they mentor beginning teachers and organize assistance to individual students in the House who are having trouble learning. Beginning in 2003-2004, a team of three Achievement Coordinators, working under the leadership of Ms. Middleton, the Chief Academic Officer, identifies and carries out specific objectives for improving student achievement at each campus. Administrators and faculty are aggressively recruited in local and national searches. Incentives for high-quality staff include a more professional work environment than most public schools, opportunity to implement a challenging and innovative school design, and opportunity for rapid advancement for talented administrators and teachers.

THE 2003 PROJECT

The Series 2003 Bonds will be used to finance and refinance all or a portion of the costs of acquisition and/or leasing, construction, renovation, furnishing and equipping of four elementary and/or secondary school facilities (grades K-12) of Friendship School, including land, buildings, improvements and personal property. The four school facilities are as follows:

1. Chamberlain Elementary School;

2. Woodridge Elementary School;

3. Junior Academy at Blow Pierce; and

4. Collegiate Academy at Carter G. Woodson.

The 2003 Bonds will also be used to refinance all of the Friendship School’s existing long term debt as follows:

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Lender and

Debt Description

Original Amount

Date

Incurred

Final Maturity

Amount Outstanding

(Nov. 12, 2003)


$13,460,065 11/5/2001 6/30/2021 $13,150,679

Bank of America (5 year, variable rate note)

11,445,000 11/8/2000 11/8/2005 9,307,359


4,343,113 11/8/2000 11/30/2005 4,108,953

Total $26,566,991

$12,500,000* of the proceeds of the Series 2003 Bonds will finance three major capital projects for Friendship School. The capital projects will include:

Building Upgrades ($4,000,000*). At the Chamberlain campus, projects include a major replacement of the Heating Ventilation Air Conditioning (HVAC) systems, repairing interior doors and conducting site work on the walks. A major replacement of the HVAC system will also be accomplished at the Blow-Pierce Junior Academy campus, with one of the goals being to address the air quality issues identify at the campus. See “OTHER INFORMATION - Environmental Regulation” in this Appendix A .

Woodridge Expansion ($5,000,000*). There will be constructed a 25,000 square foot addition to

the Woodridge campus. The purpose of the addition will be to add a middle school to the existing elementary school and will provide grades 6, 7 and 8. The addition will include a gymnasium, classrooms and offices and a library media center allow for an additional 250 students and 20 additional staff.

Technology Fund ($3,500,000*). Friendship School plans to replace and upgrade all of

instructional technology in its four campuses, including the purchase of laptops for all teachers. Furthermore, Friendship School will purchase 25 mobile computer labs, each of which is a movable cart with 32 wireless laptops.

* Estimated amounts.

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ADMISSIONS AND DEMOGRAPHICS Like all District public charter schools, Friendship School is tuition free to any District resident

and can not discriminate in admissions for any reason, including prior school performance, aptitude, or learning disability. If a public charter school is overenrolled, the only preference that may be given is to siblings of current students; otherwise spaces must be determined by a random lottery.

Although Friendship School enrolls students from 20 different zip codes, the majority of students live less than one mile from their school site. In 2002-2003, 99.8% of students were African American. 64% of students in grades K – 12 were certified for free or reduced price lunch due to poverty. (47% of students in grades 9 – 12 applied for free lunch; many students who were eligible did not apply. 5% of students in grades K – 5 and 13% of students in grades 6 – 12 were identified as students with disabilities. Enrollment History

Enrollment by Campus 1999-2004

Campus 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Chamberlain 904 906 837 839 839 Woodridge 383 404 397 404 335 Blow Pierce 724 761 759 718 751

Woodson NA 423 721 947 1092

Total 2011 2494 2714 2908 3017 Source: Friendship School.

Enrollment by Grade Chamberlain Elementary

Grade 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Kindergarten 169 144 103 119 103

1st Grade 162 167 145 117 126 2nd Grade 138 152 175 138 131 3rd Grade 159 150 140 191 148 4th Grade 138 145 138 150 177 5th Grade 138 147 136 124 154

Total 904 906 837* 839 839 *Note: The target enrollment at Chamberlain Elementary was adjusted downward to 837 in the fall of 2001 to relieve overcrowding in smaller classrooms. Source: Friendship School.

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Enrollment By Grade

Woodridge Elementary

Grade 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004 Kindergarten 47 45 43 42 31

1st Grade 65 69 58 50 49 2nd Grade 81 72 75 71 52 3rd Grade 57 85 84 73 69 4th Grade 77 58 80 80 67 5th Grade 56 75 57 88 67

Total 383 404 397 404 335* * Note: Represents a temporary decline due to a miscalculation of the expected yield of students. Source: Friendship School.

Enrollment By Grade Junior Academy at Blow-Pierce

Grade 1999-2000 2000-2001 2001-2002 2002-2003 2003-2004

6th Grade 257 188 209 153 181 7th Grade 322 308 272 294 294 8th Grade 145 265 278 271 276

Total 724 761 759 718 751 Source: Friendship School.

Enrollment By Grade Collegiate Academy at Carter G. Woodson

Grade 2000-2001 2001-2002 2002-2003 2003-2004

9th Grade 318 343 340 335 10th Grade 105 271 300 346 11th Grade NA 107 211 244 12th Grade NA NA 96 167

Total 423 721 947 1092 Source: Friendship School.

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Future Growth

Friendship School’s charter permits it to enroll up to 3,234 students at its four campuses. Friendship School plans to add a middle school of about 250 students in grades 6 through 8 to the Woodridge campus by September 2004 or September 2005, depending on construction schedules. This addition, on land currently occupied by the Woodridge Campus, will be financed with a portion of the proceeds of the Series 2003 Bonds. When fully enrolled, the Woodridge middle school, combined with enrollment at Friendship’s other campuses, will enable Friendship to reach the enrollment cap established in its Charter School Agreement.

Business and educational leaders in the District have expressed interest in Friendship School

opening one or more schools to match the success of the existing four schools and extend the Friendship model to other neighborhoods within the District. Friendship School actively seeks sites for additional schools and will seek to expand the authority under its existing charter as these opportunities arise. Friendship School will also seek to add charter authority for pre-school and pre-kindergarten and will add these grades over the next several years to its two existing elementary campuses. If granted by the District, the authority for the pre-school and pre-kindergarten will be in addition to its existing authority and will permit Friendship to increase its enrollment.

Market Share

Friendship School’s share of total charter school and public school enrollment has increased steadily since 1999. The District reported a total public and public charter school enrollment of 80,038 for school year 2001-2002. Of these, 11,589 attended charter schools and 68,449 attended the District’s public schools. The following chart shows these enrollment figures.

Public School and Public Charter School Enrollment

School Year Friendship Schools1 All Charter Schools*2 D.C. Public Schools2 1999-2000 2,011 6,991 70,762 2000-2001 2,494 11,203 68,978 2001-2002 2,714 11,589 68,449 2002-2003 2,908 N/A N/A

* Includes Friendship 1Source: Friendship School 2Source: District of Columbia Official Statements

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Competition Competition by Campus The Friendship campuses differ somewhat in their competitive position because of grades served, location and access to public transportation.

Chamberlain Elementary Campus. Chamberlain has drawn both from students within walking distance and from students who come by public transportation. The school is located within several blocks of two different public housing projects, which are served by one of the poorest performing regular public elementary schools in the District. The neighborhood has one charter school that competes for fifth graders, and another charter school will open in 2004 for pre-k and early grades. The school also attracts significant numbers of students by bus and METRO since it is located on both major lines. For students coming from across the Anacostia River, there is some competition from two newly renovated regular public schools. However, the strong academic performance of Chamberlain and the outstanding reputation of its principal, John Pannell, have kept the school full and waiting lists of several hundred students when applications are closed in August.

Woodridge Elementary Campus. Woodridge is located in a neighborhood of working

class and middle class families. It draws from students within walking distance and also from families who are willing to drive their children to school. There are no nearby charter schools although one charter school will locate within a dozen blocks in September 2004 and will compete for students in grades 4 and 5 (as well as middle school grades when Woodridge adds its middle school.) Regular public schools in the neighborhood are of mixed quality, and do compete for some students. Woodridge also attracts students from private and parochial schools. Woodridge’s strong academic performance over five years, in the top ranks of charter schools and regular public schools (see below), and its newly appointed seasoned administrator, Marian Bobo, who was Academy Director at Chamberlain for four years, should help maintain the school’s competitive edge. Less than half of the Woodridge fifth grade students go on to sixth grade at the Blow-Pierce Junior Academy; they will be the major source of students in the middle school to be added in September 2004.

Blow-Pierce Junior Academy. Blow-Pierce is located in a low-income neighborhood

from which it draws many of its students. It draws the majority of the fifth graders from Chamberlain, for whom transportation is generally easier, and less than half of the Woodridge fifth graders, for most of whom transportation is more difficult. Junior Academy is acquiring a reputation for preparing eighth graders for the competitive high schools including Duke Ellington School for the Arts and this factor attracts strong numbers of applicants. The Junior Academy competes for students with the best junior highs in the city, as its academic performance increases steadily. In 2003-2004, favorable word of mouth among students is expected to be stimulated by the exposure of all students to self-directed project-based learning using a newly installed “Smart-lab” and to career-shaped “academies” within the Junior Academy, linked to those in the Collegiate Academy. The Junior Academy has a good reputation for school safety and calm, furthered by the current principal, Raymond Miller, which is of great importance to parents of middle school students.

Collegiate Academy at Carter G. Woodson. From its opening in September 2000,

Collegiate has competed successfully with the three closest District public high schools, Eastern, H.D. Woodson High School and Anacostia High School. These three high schools are now on the list of six high schools designated by the District of Columbia as “sending schools” for poor

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academic performance under the Federal No Child Left Behind Act. Collegiate attracts some students who are having trouble in the competitive academic high schools and has had success in getting them onto honor rolls. Two charter schools, Paul PCS and Southeast Academy, and one regular public junior high school encourage large numbers of their students to attend Collegiate in the 9th grade. Collegiate also draws from the closest Catholic secondary school. Located at a METRO stop, Collegiate attracts students from across the District and to some extent competes with charter high schools in distant parts of the District. Collegiate, however, is the only charter high school that offers a full range of athletics, including football, as well as solid academics. In addition, Collegiate offers opportunities for certification in certain information technologies and emergency medicine, and will begin offering college-level courses on campus in 2004. These features are expected to be significant attractors of applicants. Collegiate had waiting lists of several hundred when enrollment closed in September.

Competitive Advantages Several competitive advantages make it likely that Friendship School will be able to continue to meet its enrollment targets.

Academic Performance and Reputation. On District-wide standardized tests in spring 2002, the Friendship School’s elementary schools ranked in the top 10 among over 140 public and public charter schools for achievement growth. Only one charter junior high school and no public junior highs raised scores faster than the Friendship Junior Academy. Further, Friendship School has maintained a strong reputation among experts and opinion leaders in the District. Academic achievement and reputation is the most important criteria parents use to select schools in an environment of public school choice.

Location. There are relatively few charter schools in the eastern half of the District. Friendship

Schools attract students from the four eastern Wards, including the heavily populated Wards 7 and 8 across the Anacostia River. The Friendship Collegiate Academy is located one block from a Metro station, which is an important consideration for high school students.

Facilities. Friendship School owns three large, fully renovated former District public school

buildings and has a 20-year lease on a fourth building which is in the process of being converted to a long term (99-year) lease. Charter schools chartered since 2000 have not had access to vacant public school buildings, due to a change in the District’s public schools facilities policy. The Collegiate Academy is the only charter high school with a full gymnasium and an auditorium that seats 650.

School Design and Technology. The Edison design, with its longer school day and year and its

variety of innovative practices, has proven attractive to parents. Every family with a child in grades three and above may borrow a free computer for home use and technology is integrated throughout the curriculum. Friendship School has made significant investments in state-of-the art instructional technology. Creative Learning “SmartLabs” have been installed in the Junior Academy and the Collegiate Academy. Students in 6th and 9th grades are receiving intensive instruction in designing and carrying out engineering, communications and other technology-intensive projects using the SmartLabs. Using proceeds of the Series 2003 Bonds, Friendship School will purchase carts with 32 wireless laptops for each House (every 4-6 classrooms) so that the use of computers can be fully integrated with instruction in every classroom.

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Friendship House Association Partnership. The Friendship School’s close relationship to an

established District, community-based organization gives Friendship School credibility among leaders in the District’s political, business, and education communities and provides access for parents to educational and employment support.

Academic Performance

The primary measure of academic performance in the District is the Stanford Achievement Test, Ninth Edition (SAT-9), which is administered in reading and mathematics to every student in public or charter schools from grades 1 – 12.

Scores are typically reported in two forms: percentile ranks and skill levels. Percentile ranks indicate roughly the percentage of students nationwide who scored below the student’s score. Skill levels indicate the degree of mastery relative to grade level: below basic, basic, proficient, and advanced. Average skill is also indicated by what is called the “Normal Curve Equivalent” or NCE. This is a measure that translates raw scores on various tests into performance on a scale of 1 to 100. The D.C. Public Charter School Board reports Mean NCE for Friendship School and all the charter schools under its jurisdiction. The tables of performance from 1999-2003 for Friendship School and for 2001-2003 for Friendship compared to other charter schools authorized by the DCPCSB all are drawn from the September 2003 publication of the DCPCSB called School Performance Reports. Edison assesses Friendship Schools and most of its other schools using national percentile ranking, labeled “National Percentile Rank of Mean NCE.”

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In the table below of Friendship School progress in national percentile ranks (created by the Edison School student assessment department) there have been dramatic gains at the elementary and middle school levels and steady percentile ranks at the high school level.

Friendship Public Charter School—Stanford Achievement Test 9

National Percentile Rank of Mean NCE (1999-2003)

Spring 99 Spring 00 Spring 01 Spring 02 Spring 03 Total Gain Reading

Chamberlain 35 39 42 52 51 +16 Woodridge 30 44 45 50 41 +11 Junior Academy - 29 32 38 39 +10 Collegiate Academy - - 29 26 26 -3

Math Chamberlain 38 44 45 57 55 +17 Woodridge 34 46 45 57 50 +16 Junior Academy - 27 31 37 39 +12 Collegiate Academy - - 36 30 40 +4

Source: Student Achievement Monitoring Dept.—Edison.

The table below displays the data on the same set of Stanford-9 tests, showing changes in skill

levels (Mean NCE) rather than national percentile rank. This table also shows significant achievement increases at the elementary level, consistent increases at the junior academy level, and declines followed by gains at the high school level. The new administrative leadership structure at the Collegiate Academy, installed in June 2002, has already had an impact on student performance on the SAT-9.

Friendship Public Charter School—Stanford Achievement Test 9 Mean NCE (1999-2003)

NCE=Normal Curve Equivalent; converts raw score to 100 units Spring 99 Spring 00 Spring 01 Spring 02 Spring 03 Total Gain

Reading Chamberlain 43 45 46 53 55 +12 Woodridge 40 48 49 51 50 +10 Junior Academy - 39 41 43 46 +7 Collegiate Academy - - 39 34 37 -2

Math Chamberlain 44 47 48 56 57 +13 Woodridge 40 49 47 55 54 +14 Junior Academy - 38 40 42 46 +8 Collegiate Academy - - 43 38 47 +4 Source: School Performance Reports, D.C. Public Charter School Board, September 2003.

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The following table shows the percent of students scoring Below Basic on the Stanford-9 test. These students have not mastered even the minimum level of knowledge and skills for their grade levels. The two elementary campuses have reduced the percentage of Below Basic students by more than half over the four years since 1999; the Junior Academy has reduced the percentage by more than a third. The reduction in students unable to perform at minimum grade level is particularly impressive for math. The Collegiate Academy has not yet reduced Below Basic students in reading but has begun to make headway in math, and made a 22-point drop in Below Basic math from Spring 2002 to Spring 2003.

Friendship Public Chart School Percentage of Students Scoring Below Basic

Stanford-9 Test Achievement Test

Spring 99 Spring 00 Spring 01 Spring 02 Spring 03 Change

Reading Chamberlain 29.5 25.8 22.8 13.7 12.3 -17.2 Woodridge 36.7 20.5 18.4 18.0 18.6 -18.1 Junior Academy - 32.3 27.0 26.7 20.6 -11.7 Collegiate Academy - - 38.6 52.6 47.6 +9.0

Math Chamberlain 33.7 26.2 28.0 17.4 17.0 -16.7 Woodridge 42.6 29.0 34.0 15.5 20.0 -22.6 Junior Academy - 73.5 72.4 63.3 54.5 -19.0 Collegiate Academy - - 70.8 88.3 66.4 -4.4 Source: School Performance Reports, D.C. Public Charter School Board, September 2003. The following table shows the percent of students scoring at or above National Average on the Stanford 9 test.

Friendship Public Charter School Percentage of Students Scoring At or Above the National Average

Stanford-9 Achievement Test Campus Reading 2002 Reading 2003 Math 2002 Math 2003 Chamberlain 54.3 61.6 59.9 60.9 Woodridge 50.8 51.1 51.5 57.3 Junior Academy 32.7 39.4 39.4 38.3 Collegiate Academy 16.7 19.2 18.1 41.8 Source: School Performance Reports, D.C. Public Charter School Board, September 2003. Comparison with Academic Performance of D.C. Public Schools 1999-2002

As of the Stanford-9 tests from spring 2002, the Friendship Woodridge School had raised reading scores faster, since 1999, than all but 5 of the 116 public and public charter schools for which data was available. Friendship Chamberlain ranked 11th on the same scale. In mathematics, Woodridge and Chamberlain ranked 7th and 11th respectively, again out of 116 total schools. In absolute scores (as opposed to gains), Woodridge and Chamberlain outperformed all but two schools with comparable percentages of low-income students.

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In reading gains for the spring 2002 tests, the Friendship Junior Academy ranked fourth among 24 public and public charter schools in the District since 1999. The Junior Academy ranked 9th of 24 in mathematics. The Junior Academy, has also outperformed its District public school peers, raising scores by 4 percentile points in both math and reading since spring 2000. None of the 16 District public school middle and junior high schools matched these gains over the same time period. The following table shows the top 25 District public and public charter schools (out of a total of 116 schools), ranked by NCE gain from Spring 1999 through Spring 2002.

MATHEMATICS READING

School 2002 1999 NCE Gain School 2002 1999

NCE Gain

1 Moten 84.3 41.1 43.2

2 Drew 64 41.6 22.4

3 Langdon 64.9 44.3 20.6

4 West 70 52.3 17.7

5 Shadd 45 27.7 17.3

6 Draper 54.4 38 16.4

7 FPCS - Woodridge 55.2 39.9 15.3

8 Burrville 74.6 59.7 14.9

9 Powell 53.2 38.9 14.3

10 Mcgogney 44.3 30.2 14.1

11 FPCS - Chamberlain 55.8 43.8 12

12 Smothers 54.4 42.6 11.8

13 Hendley 50.4 38.6 11.8

14 Wheatley 62.3 50.6 11.7

15 Tyler 45.4 33.9 11.5

16 Maury 58.5 47.2 11.3

17 Rudolph 52.9 42.3 10.6

18 Plummer 45.6 35.6 10

19 Harris, C.W. 51.2 41.4 9.8

20 Wilkinson 37.7 27.9 9.8

21 Cleveland 67 57.5 9.5

22 Randle Highlands 65.2 55.9 9.3

23 Turner 46.4 37.1 9.3

24 Miner 52.3 43.1 9.2

25 Barnard 54.1 45.4 8.7 Source: Friendship School.

1 Moten 70.8 38.9 31.9

2 Drew 62.9 41.8 21.1

3 Sail PCS 35.8 19.9 15.9

4 Shadd 41.9 28.3 13.6

5 West 62.2 49.1 13.1

6 FPCS - Woodridge 51.3 39.7 11.6

7 Burrville 70 58.9 11.1

8 Hendley 49.1 38.1 11

9 Langdon 59.9 49 10.9

10 Draper 51.1 40.7 10.4

11 FPCS - Chamberlain 52.6 42.6 10

12 Brookland 58.1 49.7 8.4

13 Arts & Tech PCS 36.7 28.5 8.2

14 Simon 46.4 38.5 7.9

15 Randle Highlands 62.8 55 7.8

16 Savoy 54.1 47.1 7

17 Harris, C.W. 48.5 41.5 7

18 Malcolm X 44.7 37.8 6.9

19 Plummer 46.3 39.8 6.5

20 Powell 49.6 43.2 6.4

21 Burroughs 58.8 52.6 6.2

22 Turner 42.9 37 5.9

23 Rudolph 48.3 42.7 5.6

24 Barnard 48.5 43.1 5.4

25 Cleveland 55.6 50.5 5.1

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Comparison with Academic Performance of D.C. Charter Schools Authorized by the D.C. Public Charter School Board 2001-2003 The following tables show the SAT-9 NCE scores in reading and math for D.C. public charter schools overseen by the D.C. Public Charter School Board for 2001 through 2003. The scores come from the D.C. Public Charter School Board School Performance Report published in September 2003.

D.C. Public Charter School Board Elementary Schools: Reading SAT-9 Scores 2003—Mean NCE

D.C. Public Charter School Board Elementary Schools: Math SAT-9 Scores 2003—Mean NCE

NCE Rank

School 2003 SAT-9 Mean NCE

Scores

Gain Since 2001

NCE Rank

School 2003 SAT-9 Mean NCE

Scores

Gain Since 2001

1 Capitol City 57.9 +6.5 1 KIPP 68.2 NA 2 Friendship

Chamberlain

55.0

+9.0

2 Friendship Chamberlain

56.7

+9.1

3 Friendship Woodridge

50.4

+1.7

3

Capitol City

55.5

+10.4

4 KIPP 49.4 NA* 4 Friendship Woodridge 53.9 +6.5 5 Howard Road 46.9 NA 5 Howard Road 49.5 NA 6 Southeast Academy 43.7 +3.0 6 Southeast Academy 45.4 +1.1 7 Meridian 41.1 +3.6 7 Meridian 42.1 +3.8 8 Tri-Community 40.5 NA 8 Arts & Technology 37.6 +10.0 9 Arts & Technology 39.3 +8.1 9 Tri-Community 32.6 NA

10 Tree of Life 30.0 +14.4 10 Tree of Life 25.4 +1.0 *NA means school not open in Spring 2001 Source: School Performance Reports, D.C. Public Charter School Board, Source: School Performance Reports, D.C. Public Charter School Board, September 2003. September 2003.

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D.C. Public Charter School Board Schools—Secondary Schools: Reading SAT-9 Scores

D.C. Public Charter High Schools: Reading SAT-9 Scores

NCE Rank

School 2003 SAT-9

Mean NCE Scores

Gain Since 2001 NCE Rank

School 2003 SAT-9

Mean NCE Scores

Gain Since 2001

1 Friendship Junior Academy

45.7

+4.5

1

Paul Junior High

53.6

+5.3

2 Paul Junior High 45.6 -0.1 2 Cesar Chavez 50.8 -2.6 3 SEED 43.6 +1.3 3 Friendship Collegiate 46.9 +3.5 4 Washington Math

Science & Technology 42.8 +0.9 4 Friendship

Junior Academy

45.9

+6.2 5 Sasha Bruce 38.2 NA 5 SEED 45.3 +1.4 6 Cesar Chavez 38.1 -2.2 6 Washington Math

Science & Technology

43.0

-2.8 7 Marriott Hospitality 37.3 +2.6 7 Thurgood Marshall 38.6 NA 8 Friendship Collegiate

Academy

36.2

-2.1

8 Marriott Hospitality

38.2

+0.4

9 Thurgood Marshall 33.5 NA 9 Sasha Bruce 35.9 NA 10 New School for

Enterprise & Technology

29.4

-4.0

10 Maya Angelou

35.2

+1.1

11 Maya Angelou 28.6 +0.1 11 New School for Enterprise & Develop

34.8

-0.7

Source: School Performance Reports, D.C. Public Charter School Board Source: School Performance Reports, D.C. Public Charter School Board, September 2003. September 2003.

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FINANCIAL INFORMATION Payments from the District of Columbia Financial Statements

Friendship School has audited financial statements for the fiscal years ended June 30, 1999, 2000, 2001, 2002, and 2003. In addition, Friendship School has unaudited financial statements by campus for the year ended June 30, 2003, as well as for previous fiscal years, as prepared by Edison. The audited financial statements have been prepared for the past five years by Maner, Costerisan & Ellis of Lansing Michigan, an accounting firm familiar with charter schools managed by Edison. The audited financial statements are attached to the Official Statement as Appendix B.

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A summary of the historical data in the Statements of Financial Position is included below.

FRIENDSHIP PUBLIC CHARTER SCHOOL, INC. STATEMENTS OF FINANCIAL POSITION

JUNE 30, 2003, 2002 AND 2001

2003 2002 2001

ASSETS

CURRENT ASSETS: Cash and cash equivalents $2,713,631 $ 3,845,400 $ 6,039,904 Prepaid expenses 102,646 Grants receivable 1,061,044 1,100,865 355,194

TOTAL CURRENT ASSETS $3,774,675 4,946,265 6,497,744

Property and equipment, net depreciation 28,462,601 28,570,025 28,622,160 Deposits 113,483 97,395 TOTAL NONCURRENT ASSETS 28,576,084 28,667,420 28,622,160

TOTAL ASSETS $ 32,350,759 $ 33,613,685 $ 35,119,904

LIABILITIES AND NET ASSETS

CURRENT LIABILITIES: Accounts payable and accrued expenses $ 2,568,819 $ 3,114,654 $ 5,848,844 Deferred revenue 782,320 1,257,771 76,583 Due to student groups 23,049 Notes payable - line of credit 12,957,320 Current portion of long-term debt 1,453,044 1,156,206 667,781

TOTAL CURRENT LIABILITIES 4,804,183 5,528,631 19,573,577 LONG TERM DEBT - less current portion $ 25,522,478 27,005,827 14,893,262

TOTAL LIABILITIES 30,326,661 32,534,458 34,466,839

NET ASSETS Undesignated - unrestricted 2,024,098 1,079,227 653,065

TOTAL LIABILITIES AND NET ASSETS $ 32,350,759 $ 33,613,685 $ 35,119,904

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2003 2002 2001REVENUE:

Pupil revenue 26,442,669$ 22,580,576$ 20,373,280$ Federal grants 2,462,414 1,867,699 1,776,904 Summer School 855,730 475,487Interest 98,753 151,282 186,693 Other 45,800 76,582 129,515

TOTAL REVENUE 29,905,366 25,151,626 22,466,392

EXPENSES:Personnel and salaries 14,955,251 11,712,158 10,190,242 Direct student costs 795,774 631,053 661,607 Occupancy 1,690,468 1,263,517 1,309,056 Office 692,430 533,555 282,664 Charter fee 146,075 112,294 102,155 Management fee 5,471,531 5,736,618 7,109,991 Food service 471,337 247,540 123,635 Admin services - Friendship House Association 94,187 184,103 151,054 21st century grant 28,741 110,583 83,568 Community technology center grant 155,826 193,097 211,611 Reading excellence 375,353Extended learning 191,599 146,559Family literacy 43,425Counseling grant 123,901Summer school 787,425 454,189D.C. kids 8,680Interest 2,052,719 2,317,715 737,594 Other 154,116 284,632 90,389 Depreciation 773,762 745,746 588,183

TOTAL EXPENSES 28,960,495 24,725,464 21,641,749

CHANGE IN NET ASSETS 944,871 426,162 824,643

NET ASSETS (DEFICIT):Beginning of year 1,079,227 653,065 (171,578)

End of year 2,024,098$ 1,079,227$ 653,065$

FRIENDSHIP PUBLIC CHARTER SCHOOL, INC.STATEMENTS OF ACTIVITIES

YEARS ENDED JUNE 30, 2003, 2002, AND 2001

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Management Discussion of Historical Summary of Financial Statements Following is a brief discussion of the highlights of the financial statements over the years 2001, 2002 and 2003. For more detail please see the financial statements in Appendix B and the accompanying notes: Statements of Financial Position

Fixed Assets, Lines of Credit and Long-term Debt. In summer 1999, Friendship School purchased the renovations carried out to three school buildings--Chamberlain, Woodridge and Blow-Pierce--from Edison, which had funded the renovation costs. Friendship School converted a no-interest line of credit from Edison into a term loan carrying 10 percent interest. In November 2000, Friendship School purchased the three school buildings from the District and entered into a formal loan with Edison, still carrying 10 percent interest. At the same time, Friendship School entered into a Bank of America variable-interest mortgage, in order to repay Edison a portion of the initial renovation costs. In the summer of 2001, Friendship School purchased from Edison the renovations to the Carter G. Woodson building and entered into a term note with Edison, carrying a 10 percent interest rate.

Accounts Receivable and Accounts Payable. Friendship School receives Federal grants to support its schools. The Federal grant year runs until September 30. In all three fiscal years, Friendship School’s final Federal categorical education grant payment was not received until after the end of the fiscal year. In all three fiscal years Friendship delayed in paying Edison its share of the District charter payments for policy reasons until after the end of the fiscal year.

Deferred Revenue. Beginning in the summer of 2000, Friendship School assumed the responsibility of administering summer school, initially on two campuses, then three campuses and in the summers of 2002 and 2003 on all four campuses. In 2002 and 2003 per pupil revenue for summer school was received from the District government before the end of the fiscal year and expended in the following fiscal year. In 2001, the summer school revenue was received after the start of the new fiscal year 2002. Also in FY 2002, Friendship School received a multi-year grant for Reading Excellence (child and family literacy) that was not expended until FY 2003.

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Statements of Activities

Pupil Revenue. The payments from the District government include three components: base per pupil allotment which varies by grade level, per pupil facilities allowance and per pupil special education payments. The table below shows what each of these payments were for the four fiscal years. Payments are received quarterly, in July for the following school year, in October, in January and in April, except that twenty-five percent of the facilities allowance portion of the payment is received in July and the remainder is received in October. Historical District funding levels are shown below. FY 2001 FY 2002 FY 2003 FY 2004 Base Per Pupil $5,728 $5,907 $6,419 $6,551 Grades k-3 and 6-8 6,014 6,202 6,611 6,747 Grades 4-5 5,728 5,907 6,419 6,551 Grades 9-12 7,446 7,679 7,510 7,664 Facilities Allowance per pupil $1,482 $1,482 $1,536 $1,981 Special Education per pupil Level 1 $1,260 $1,299 $3,530 $3,603 Level 2 4,582 4,726 5,456 5,568 Level 3 9,909 10,219 9,628 9,826 Level 4 18,330 18,903 17,331 17,687 Source: District Chief Financial Officer Official Payment Forms.

Federal Grants: Federal grant payments include Federal categorical education grants (Title I, II, etc. of the Elementary and Secondary Education Act) and specific grants obtained by Friendship School to support extended learning--21st Century Community Learning Center grant, Community Technology Center, and the Reading Excellence grant in 2002.

Management Fee: Under the first five year agreement with Edison (1998-2003), the management fee consisted of a target Gross Site Contribution negotiated as part of each campus budget, plus the savings Edison generated by operating the school campuses efficiently. Thus management fees varied from year to year. As described above, the second five year Management Contract specifies a fixed per capita fee plus a subordinated per capita fee. In FY 2003, Friendship and Edison negotiated a fixed management fee consisting of the budgeted Gross Site Contribution plus an additional amount of $300,000.

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Annual Budgeting

The annual budget process begins in April when Friendship and Edison agree on the projected charter and federal grant revenues, overall salary targets and other broad policy changes. Principals develop preliminary budgets using detailed Edison school budget templates and then negotiate with Friendship and Edison managers.

Preliminary estimates of District per pupil charter payments for the following year are used in constructing the campus budgets. The District charter payments are not final until the District budget is passed by the U.S. Congress, usually in the fall of each year. Final negotiations among the principals, Edison headquarters and the Friendship School Chief of Staff take place in June and July and a preliminary budget is approved by the Friendship Board. The budget is then modified when the final revenue numbers are available in the fall.

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Pro Forma Revenue and Expenses Friendship School has prepared the following schedule of pro forma revenue and expenses for the fiscal years 2002 through 2007.

2002Actual

2003Actual

2004 Budget

2005Projected

2006Projected

2007Projected

Total Enrollment 2,687 2,908 3,017 3,172 3,222 3,272 REVENUES Base Revenue 17,476,706 19,915,931 21,304,340 22,831,104 23,742,350 24,687,276 Special Education 1,283,653 1,948,275 2,300,000 2,467,336 2,565,572 2,667,178 Facilities Allowance 3,820,217 4,578,463 5,978,658 6,440,825 6,705,910 6,980,224 Federal Grants 1,520,594 1,803,181 1,962,117 2,120,360 2,204,788 2,292,113 Total Revenues 24,101,170 28,245,850 31,545,116 33,859,626 35,218,621 36,626,791

Operating Expenses Total Direct Operating Expenses 14,160,747 17,836,975 20,197,360 21,606,482 22,514,916 23,593,033 Charter Board G&A 695,811 1,016,588 876,000 897,900 920,348 943,356 Facility Rent Costs -- - 260,000 260,000 260,000 260,000 Chartering Authority Fee (0.5% of Rev.) 112,294 146,075 157,726 169,298 176,093 183,134 Extended Learning/Other 155,239 191,599 152,000 230,625 236,391 242,300 Total Departmental Expenses 15,124,091 19,191,237 21,643,086 23,164,305 24,107,748 25,221,824

Cash Flow before Debt Service, Reserves and Fees 8,977,079 9,054,613 9,902,030 10,695,321 11,110,873 11,404,967

Base Management Fee (9%) 5,471,531 2,839,060 3,047,366 3,169,676 3,296,411 Cash Flow Available for Debt Service 3,583,082 7,062,969 7,647,954 7,941,197 8,108,556

Net Debt Service 1,238,587 2,995,660 2,993,010 2,989,760 Existing Debt Service 3,333,284 3,268,765 1,218,177 Reserves Facilities Reserve Fund -- -- 157,726 338,596 528,279 549,402 Technology Reserve -- -- 472,600 613,400 644,400 654,400 Curriculum and Furniture Charges Reserve -- -- 684,000 568,000 517,000 527,000

Cash Flow After Debt Service & Reserves 5,643,795 314,317 3,291,880 3,132,298 3,258,508 3,387,994 Operating Reserve - 1,577,256 1,692,981 1,760,931 1,831,340 Subordinated Management Fee 5,736,618 - 1,261,805 1,354,385 1,232,652 1,098,804 Cash Flow After Debt Service, Reserves, & Fees (92,823) 314,317 452,819 84,932 264,925 457,851

Total Accumulated FPCS Reserve 2,030,075 3,807,989 5,833,845 8,123,036 Accumulated Unrestricted Liquid Asset Fund 1,025,216 2,125,654 3,270,259 4,460,630 Accumulated FPCS Controlled Reserve

1,004,859 1,683,335 2,563,586 3,662,406

DEBT SERVICE COVERAGE RATIOS Debt Service Ratio After Fixed Management Fees 2.87 2.55 2.65 2.71 Debt Service Ratio After Fixed Management Fees and Reserves 2.34 2.05 2.09 2.13 Debt Service Ratio After Reserves & Management Fees 1.83 1.59 1.68 1.77

A-31

OTHER INFORMATION Pension Plans and Benefits

Under District Charter School Law, all former employees of D.C. Public Schools on leaves of absence to work in charter schools, are entitled to participate in the D.C. Public School retirement system. Friendship School has nine current employees, including administrators, for whom payroll deductions have been transmitted to the D.C. retirement system. For other employees, Edison offers 403B pension plans with limited matching of employee contributions by Edison. The Friendship School Board is investigating options for additional pension coverage for employees.

Edison provides health insurance and disability insurance for all Friendship School employees. Insurance All insurance for Friendship School is purchased by Edison as agreed in the Management Agreement. The insurance agent is Willis of Tennessee. The insurance includes:

• General liability insurance for operation of each of the four campuses: $5 million each claim; $5 million annual aggregate and $250,000 deductible for indemnifiable claims and no deduction for non-indemnifiable claims (Federal Insurance Company--Educators Legal Liability.

• Blanket Business Personal Property. $40 million • Excess Liability. $25 million each occurrence. $25 million aggregate.

Environmental Matters

In connection with the acquisition of the four facilities constituting the 2003 Project, Friendship School had Phase I environmental studies for all these facilities.

Asbestos. Prior to renovations of the Friendship School’s facilities in 1998 and 2000, certain asbestos containing material (“ACM”) was identified and removed. A relatively small amount of ACM that remains within occupied portions of the Friendship School’s facilities has been documented and is being controlled according to an Operations and Maintenance Control Plan that includes a review by a privately contracted firm of all maintenance activities to ensure that ACM is not disturbed, a six-month review of all remaining ACM to ensure it remains in good condition, and a full scale re-inspection of the facilities at least every three years. All activities with respect to ACM have been performed in accordance with Occupational Safety and Health Administration, Environmental Protection Agency, and District of Columbia Regulations.

Air Quality at the Junior Academy Blow-Pierce. As a result of the Phase I study for the Junior Academy at Blow-Piece, Friendship School had an air quality test performed there. The air quality test indicated that volatile organic compounds at the site indicated the presence of Tetrachloroethylene and Methylene Chloride, attributed most likely to vapor compounds (gases or vapors that evaporate from groundwater or other liquids) intrusion through the foundation of the school campus.

Additionally, prior air sampling documented on-site groundwater contamination that has been

attributed to, in part, to nearby off-site dry cleaning facilities. The groundwater is not used for potable purposes and is at a depth of approximately 20-30 feet; therefore, the groundwater impact is not considered to be a risk.

A-32

As a result of the presence of these compounds in the air samples, a Human Health Baseline Risk Assessment was recommended and conducted in 1999. The Human Health Baseline Risk Assessment report resulted in a number of conclusions, most notably, the quantification of risk associated with potential receptor populations (i.e. staff, students, and visitors) and exposure routes indicated that all non-cancer hazard indices (associated with volatile constituents) were below the USEPA’s acceptable levels and posed no risk. The cancer risk estimate for the future occupational teacher exposure to groundwater through volatilization to indoor air (1.1 in a million) slightly exceeded the USEPA’s threshold of 1 in a million. All remaining cancer risk estimates (associated with volatile constituents) were below the USEPA’s acceptable level (i.e., the point of departure).

Based on the findings of the 1999 air-sampling event, it was recommended that, at a minimum,

semi-annual indoor air monitoring be conducted at the site to assess levels of potential volatile organic compounds in indoor air. As a result of this recommendation, Friendship School recently hired an independent consultant to provide an indoor air screening to investigate the possible volatilization of volatile organic compounds from the impacted groundwater table at the facility.

The results of the most recent sampling at the site were compared to current Occupational Safety

and Health Administration (OSHA) permissible exposure limits (PELs), National Institute for Occupational Safety and Health (NIOSH) recommended exposure limits (RELs), and EPA Region III Risk Based Concentrations (RBCs). The volatile organic compounds identified in the grab air samples were below the current OSHA permissible exposure limits (PELs) and/or the NIOSH RELs. However, the presence of Tetrachloroethylene and Methylene Chloride were again identified in a number of samples.

Methylene chloride was identified in three indoor air samples as well as in the sample collected

from outside (in the courtyard) of the building. Methylene chloride is a common laboratory contaminate and was identified in the laboratory control sample at levels similar to those found in the field samples and, therefore, appears to be attributed to the laboratory analyzing the samples and not from sample locations at the property.

The levels identified in the most recent sampling are considered to be only slightly higher than previously recorded levels, and as a precaution, the consultant has recommended an updated risk assessment to confirm that the most recent levels of Tetrachloroethylene have not altered the findings of the 1999 Human Health Baseline Risk Assessment. The levels of Tetrachloroethylene identified in three of the four samples were higher than the highest level of Tetrachloroethylene identified in the 1999 VOC air-sampling event, as well as in concentrations higher than the EPA Region III RBCs (0.31 ug/m3). It should be noted that the RBC is merely a threshold for which concentrations below are considered to be no risk; while concentrations above indicate that there may be some risk, for which a further risk assessment is generally recommended. In addition to the consultant’s recommendations, an additional avenue of remediation is as follows. As a potential remediation solution to the current indoor air quality issues, the design of the upcoming HVAC upgrade can be modified to create positive pressure within the facility. See “THE 2003 PROJECT” in this Appendix A. The modification of the HVAC system to create positive pressure may in fact inhibit the apparent vapor intrusion, therefore, potentially reducing and/or eliminating the indoor air quality issues at the facility. It is recommended that following the completion of the HVAC upgrade, an indoor air screening be performed, similar in scope to the previous screenings. The results of the screening can then be compared to the results of the previous screenings, most likely indicating a decrease from previous levels. Should the results not show a marked improvement, alternative remediation solutions can be explored, including, but not limited to, a Property Condition Assessment to investigate

A-33

potential pathways for which the volatile organic compounds may be entering the building (i.e. foundation cracks, etc.). Litigation Friendship School is not aware of any litigation pending or threatened wherein any unfavorable decision would have a materially adverse effect on the financial condition, property or operations of Friendship School, except as follows: School Food Authority. The first lawsuit in which Friendship School has been named as a party is lawsuit brought against Friendship Food Service System, Inc., et al. by the Preferred Meal Systems, Inc. (“PMS”) in the Superior Court of the District of Columbia, Civil Action No. 02-CA9834. The complete list of defendants named by Preferred Meal Systems, Inc. is as follows:

a. Friendship Food Service System, Inc.; b. Friendship Public Charter School, Inc., School Food Authority; and c. Friendship House Association, Inc.

The Friendship Public Charter School, Inc., School Food Authority (“Friendship/SFA”) named in this lawsuit was, until October 1999, an unincorporated enterprise, which, in actuality, operated under the auspices of Friendship Public Charter School, Inc. In October 1999, Friendship Food Service Systems, Inc., became an incorporated entity under the laws of the District of Columbia to operate this function, and, at all times thereafter, has been the entity that was responsible for the administration of the School Food Authority. The named Friendship Entities are collectively defending this lawsuit in a vigorous fashion. Efforts have been made to have the lawsuit dismissed by motion, based on an alleged accord and satisfaction, but, to date, the Superior Court has not been willing to do so. No trial date has yet been set for this litigation and it is anticipated that no trial will occur before January 2, 2004. The lawsuit concerns meals served under a summer program operated by the D.C. Department of Parks and Recreation and has nothing to do with Friendship School operations. Special Education. The second lawsuit in which Friendship School has been named as a party, captioned: Jenel Buie, et al, v. District of Columbia, et al. No. 1:02CV02-363 (D.D.C., filed December 10, 2002) Ms. Lizette Buie, mother of Jenel Buie, a former student at the Collegiate Academy, is appealing an administrative hearing officer’s determination issued by Mr. Herbert St. Clair on October 31, 2002. Ms. Buie seeks reimbursement for the tuition costs incurred by Jenel while she attended Educational Transition Services, a private interim placement, between September 4, 2002, and September 20, 2002. The hearing officer found that Ms. Buie had delayed in interviewing for a permanent placement for Jenel the 2002-2003 school year, and therefore had not complied with an earlier hearing officer’s determination issued July 17, 2002. The parent argued that DCPS had not provided an appropriate interim placement during September of 2002, and therefore should be liable for the costs of Jenel's interim private placement. Friendship-Edison was a party to the hearing officer's decision issued, July 17, 2002, and by virtue of that agreement participated in the October 2002 hearing, and was named as a defendant in the subsequent appeal. Friendship-Edison has filed a Motion to Dismiss in the proceeding. However the case is currently stayed pending further proceedings at the administrative level.

APPENDIX B-1

AUDITED FINANCIAL STATEMENTS OF THE FRIENDSHIP SCHOOL

FOR YEAR ENDED JUNE 30, 2002

i


REPORT ON FINANCIAL STATEMENTS

YEARS ENDED JUNE 30, 2002 AND 2001

ii

C O N T E N T S

Page

Independent auditors' report...............................................................................................................1

Financial statements

Statements of financial position............................................................................................2

Statements of activities .........................................................................................................3

Statements of cash flows.......................................................................................................4

Notes to financial statements ............................................................................................5 – 10

1

INDEPENDENT AUDITORS’ REPORT

To the Board of Trustees August 8, 2002Friendship Public Charter School, Inc.Washington, D.C.

We have audited the statements of financial position of Friendship Public Charter School, Inc. as of June 30, 2002 and 2001, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the School’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America, 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Friendship Public Charter School, Inc. as of June 30, 2002 and 2001, and the change in its net assets and its cash flows for the years then ended in conformity with accounting principles generallyaccepted in the United States of America.

In accordance with Government Auditing Standards, we have also issued our report dated August 8, 2002 on our consideration of Friendship Public Charter School’s internal control over financial reporting andour tests of its compliance with certain provisions of laws, regulations, contracts and grants. That report is anintegral part of an audit performed in accordance with Government Auditing Standards and should be read inconjunction with this report in considering the results of our audit.

2002 2001

ASSETSCURRENT ASSETS: Cash and cash equivalents 3,845,400$ 6,039,904$ Prepaid expenses 97,395 102,646 Grants receivable 1,100,865 355,194

TOTAL CURRENT ASSETS 5,043,660 6,497,744

PROPERTY AND EQUIPMENT, less accumulated depreciation 28,570,025 28,622,160

TOTAL ASSETS 33,613,685$ 35,119,904$


CURRENT LIABILITIES: Accounts payable and accrued expenses 3,079,122$ 5,848,844$ Deferred revenue 1,257,771 76,583 Due to student groups 35,532 23,049 Notes payable - line of credit 12,957,320 Current portion of long-term debt 1,156,206 667,781

TOTAL CURRENT LIABILITIES 5,528,631 19,573,577

LONG TERM DEBT - less current portion 27,005,827 14,893,262

TOTAL LIABILITIES 32,534,458 34,466,839

NET ASSETS Undesignated - unrestricted 1,079,227 653,065

TOTAL LIABILITIES AND NET ASSETS 33,613,685$ 35,119,904$

JUNE 30, 2002 AND 2001

FRIENDSHIP PUBLIC CHARTER SCHOOL, INC.STATEMENTS OF FINANCIAL POSITION

See notes to financial statements. 2

2002 2001REVENUE:

Pupil revenue 22,580,576$ 20,373,280$Federal grants 1,867,699 1,776,904Summer School 475,487Interest 151,282 186,693Other 76,582 129,515

TOTAL REVENUE 25,151,626 22,466,392

EXPENSES:Personnel and salaries 11,712,158 10,190,242Direct student costs 631,053 661,607Occupancy 1,263,517 1,309,056Office 533,555 282,664Charter fee 112,294 102,155Management fee 5,736,618 7,109,991Food service 247,540 123,635Administration services - Friendship House Association 184,103 151,05421st century grant 110,583 83,568Community technology center grant 193,097 211,611Extended learning 146,559Family literacy 43,425Summer school 454,189D.C. kids 8,680Interest 2,317,715 737,594Other 284,632 90,389Depreciation 745,746 588,183

TOTAL EXPENSES 24,725,464 21,641,749

CHANGE IN NET ASSETS 426,162 824,643

NET ASSETS (DEFICIT):Beginning of year 653,065 (171,578)

End of year 1,079,227$ 653,065$




2002 2001INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: Cash flows from operating activities: Change in net assets 426,162$ 824,643$ Adjustments to reconcile change in net assets to net cash provided (used) by operating activities: Depreciation 745,746 588,183 Grants receivable (745,671) 418,957

Prepaid expenses 5,251 (102,646) Accounts payable and accrued expenses (2,769,721) 4,860,640 Deferred revenue 1,181,188 (273,910) Due to student groups 12,483 18,148

Total adjustments (1,570,724) 5,509,372

Net cash provided (used) by operating activities (1,144,562) 6,334,015

Cash flows from investing activities: Purchase of property and equipment (693,612) (16,772,747)

Cash flows from financing activities:Proceeds of notes payable 13,616,559 28,745,543Payments on principal of notes payable (13,972,889) (12,983,689)

Net cash provided (used) by financing activities (356,330) 15,761,854

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,194,504) 5,323,122

CASH AND CASH EQUIVALENTS: Beginning of year 6,039,904 716,782

End of year 3,845,400$ 6,039,904$


FRIENDSHIP PUBLIC CHARTER SCHOOL, INC.STATEMENTS OF CASH FLOWS


FRIENDSHIP PUBLIC CHARTER SCHOOL, INC.NOTES TO FINANCIAL STATEMENTS

5

NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements of the Friendship Public Charter School, Inc. (the Charter) have beenprepared on the accrual basis. The Charter's accounting policies are described below to enhance the usefulness of the financial statements to the reader.

The Charter is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. The Charter has no temporarily or permanently restricted activity or net assets.

Cash and cash equivalents - The Charter considers short-term highly liquid investments (including money market funds) with maturities of three months or less as cash equivalents.

Receivables - Grants receivable consist primarily of grant reimbursements outstanding at year end. No allowance is considered necessary and no provision for bad debts have been recorded.

Deferred revenue - Deferred revenue consists of funds received prior to the close of the fiscal year foroperating summer school during the months of July and August of the subsequent fiscal year.

Property and equipment is recorded at cost and depreciated over the remaining estimated useful lives using the straight-line method.

Functional allocation of expenses - The costs of providing the various programs and other activities have been summarized on a functional basis in the notes to the financial statements. Accordingly, certain costs have been allocated among program services and management and general based upon time and floor studies.

NOTE 2 - NATURE OF ORGANIZATION, RISKS, AND UNCERTAINTIES

Organization - The Friendship Public Charter School, Inc. is a public charter school authorized under Section 2203 of the District of Columbia School Reform Act of 1995 by the District of Columbia PublicCharter School Board. The Charter operates two K-5, one 6-8, and one 9 - 12 instructional programs under a management agreement with the Edison Schools, Inc. which substantially provides all educational materials for a management fee. The Charter has been granted tax exempt status under the provisions of Section 501(c)(3) of the Internal Revenue Code and, as such, is not subject to federal income taxes other than those arising from unrelated business income.

The Charter is required to disclose significant concentrations of credit risk regardless of the degree of such risk. Financial instruments which potentially subject the Charter to concentrations of credit risk consist principally of temporary cash investments and receivables. The Charter places its temporary cash investments with high-credit-quality financial institutions. Although such investments and cash balances exceeded thefederally insured limits at certain times during the year and at year-end they are, in the opinion of management,subject to minimal risk. The Charter has established policies for extending credit based upon factorssurrounding the credit risk of specific customers, historical trends and other information. Concentrations of credit risk with respect to trade receivables are limited due to the nature of the organizations which fund the Charter’s grant activities.


6

NOTE 2 - NATURE OF ORGANIZATION, RISKS, AND UNCERTAINTIES (Concluded)

The process of preparing financial statements in conformity with generally accepted accountingprinciples requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues,and expenses. Such estimates primarily relate to unsettled transactions and events as of the date of thefinancial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following at June 30, 2002 and 2001:

2002 2001

Leasehold improvements 26,110,886$ 25,417,275$Building 3,678,086 3,678,086Land 408,677 408,677Software 25,218 25,218

30,222,867 29,529,256

Less accumulated depreciation and amortization 1,652,842 907,096

28,570,025$ 28,622,160$

NOTE 4 - NOTE PAYABLE – LINE OF CREDIT

The terms of the note payable are as follows:

2002 2001

Term note - Edison Schools, under a $15,000,000revolving credit agreement. The note is secured byleasehold improvements and bears inerest at 10% -$ 12,957,320$


7

NOTE 5 – LONG-TERM DEBT

Long-term debt consists of the following at June 30:

2002 2001

Term Note - Edison Schools, under a $15,000,000 revolvingcredit agreement. The note is secured by leaseholdimprovements and bears interest at 10%, The note is beingamortized over 20 years which requires monthly paymentsof approximately $131,000. Final maturity scheduled forJuly 2021. 13,394,839$ -$

Note Payable - Bank of America, dated November 8, 2000.The note is secured by land and buildings and bears aninterest rate at 1.5% over LIBOR (3.34% at June 30, 2002).The note requires monthly principal and interest paymentsof $97,395 and has a balloon payment maturing onNovember 8, 2005. 10,541,297 11,258,980

Note payable - Edison Schools, dated November 8, 2000.The note is secured by leasehold improvements and bears aninterest rate of 10%. The note requires monthly interest andprincipal payments of $41,912 and has a balloon paymentmaturing on November 30, 2005. 4,225,897 4,302,063

28,162,033 15,561,043Less current portion 1,156,206 667,781

27,005,827$ 14,893,262$


8

NOTE 5 – LONG-TERM DEBT (Concluded)

Maturities of long-term debt are as follows:

Year endingJune 30,

2003 1,156,206$2004 1,219,5142005 1,562,5182006 11,991,9492007 370,818

2008 and thereafter 11,861,028

Total 28,162,033$

NOTE 6 - LEASES

The Charter leases the Carter G. Woodson buildings from the District of Columbia Public Schools.This lease is treated as an operating lease by the Charter.

Rent expenses for the years ended June 30, 2002 and 2001 after available credits for leaseholdimprovements was $63,000. The schedule of future minimum lease payments (after credit for leaseholdimprovement) required under the Carter G. Woodson lease is as follows:

Year endingJune 30,

2003 63,000$2004 63,0002005 63,0002006 63,0002007 63,000

2008 and thereafter 834,750

1,149,750$

The Charter plans to enter into bond financing in order to purchase the Carter G. Woodson building and enter into a ground lease for the land sometime in this fiscal year, thereby eliminating the above leasepayments. No estimate is available of the cost of the ground lease.

All leases with the District of Columbia Public School contain an option to purchase the facilitiesduring the term of the lease.


9

NOTE 7 - RETIREMENT PLAN

Under the Public School Reform Act (the Charter School Law) teachers and administrators who have taken leave of absence from DC Public Schools remain in District of Columbia Teachers’ Retirement Plan. Teachers who resign from DC Public Schools to take positions in charter schools may elect to remain in the Retirement Plan. However, to date there is no mechanism for depositing employee or employer contributions to the Retirement Plan. A Memorandum of Agreement is in draft form between the Public Charter School Board and several DC agencies responsible for retirement.

Benefits are payable to employees at retirement or disability, and refunds are made upon death ortermination prior to retirement. Employees contribute 7 percent of their salaries, employers (D.C. government and, eventually the Charter) make contributions based upon actuarially determined funding requirements. As of June 30, 2002, the Charter through Edison Schools held all employee contributions for intended distributionto the plan. The Charter has not been notified of any employer contributions required to be made into the plan.

Participants who retire at age 55 with 30 years of service, at 60 with 20 years, or at 62 with 5 years are entitled to an annual annuity, payable monthly for life, equal to 1.5% percent of their average salary for the highest consecutive 3 years for each year of service up to 5 years, 1.75 percent for each year over 5 years, and 2percent for each year over 10 years, up to a maximum of 80 percent, excluding credit for unused sick leave.Benefits vest upon reaching 5 years of service and increase after retirement based upon inflation. Refunds are made if separation occurs before 5 years of service.

Additional information relating to this plan is available in the District of Columbia Public School’s Comprehensive Annual Financial Report (CAFR).

NOTE 8 - MANAGEMENT AGREEMENT - EDISON SCHOOLS, INC.

The Charter has entered into a five year management agreement beginning July 1, 1998 with Edison Schools, Inc. for operations of the Charter. Edison has provided financing to the Charter to support operations including initial capital outlay. Edison is required to provide equipment necessary for operation of the Charter and purchases equipment for that purpose. Therefore, the Charter does not maintain title to the equipment anddoes not account for equipment as fixed assets. Under the terms of the management agreement, Edison’scompensation for operating the Charter is the excess revenue over costs to operate the Charter. Included in the management fee is an interest and depreciation factor which attempts to cover Edison School’s initialinvestment in the capital outlay over time.

NOTE 9 – RELATED PARTY

The Charter receives administrative services from Friendship House Association, a 501(c)(3) nonprofitorganization under common control. Administrative services amounted to $184,103 and $151,054 for theyears ended June 30, 2002 and 2001, respectively.


10

NOTE 10 - FUNCTIONAL ALLOCATION OF EXPENSES

In accordance with Statement of Financial Accounting Standards No. 117, Financial Statements of Not-for-Profit Organizations, the Charter allocates expenses as they relate to program and managementfunctions.

2002 2001

Educational activities 18,876,552$ 14,429,603$Management and general 5,848,912 7,212,146

24,725,464$ 21,641,749$

The management and general classification included the management fee earned by Edison Schools. The management fee includes an interest and depreciation factor which attempts to cover Edison School’sinitial investment in capital outlay over time.

NOTE 11 – PENDING LITIGATION

The Charter is a defendant in a lawsuit filed by a vendor for alleged breach of contract. The suit seeks to recover damages of approximately $265,000 plus court costs. The Charter contends it did not enter into a contract with the vendor. A settlement is now being negotiated by Friendship Food Service Systems, theoriginal contracting party, which is expected to be in the range of $180,000 to $220,000. The allocation of this cost among Friendship Food Service Systems, Friendship Public Charter School and Edison Schools cannot be determined at this date.

APPENDIX B-2

AUDITED FINANCIAL STATEMENTS OF THE FRIENDSHIP SCHOOL

FOR YEAR ENDED JUNE 30, 2003

i


REPORT ON FINANCIAL STATEMENTS


ii

C O N T E N T S

Page

Independent auditors' report...............................................................................................................1

Financial statements

Statements of financial position............................................................................................2

Statements of activities .........................................................................................................3

Statements of cash flows.......................................................................................................4

Notes to financial statements ............................................................................................5 – 10

1

INDEPENDENT AUDITORS’ REPORT

To the Board of Trustees September 24, 2003Friendship Public Charter School, Inc.Washington, D.C.

We have audited the statements of financial position of Friendship Public Charter School, Inc. as of June 30, 2003 and 2002, and the related statements of activities and cash flows for the years then ended. These financial statements are the responsibility of the School’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America, and the standards applicable to financial audits contained in Government Auditing Standardsissued 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Friendship Public Charter School, Inc. as of June 30, 2003 and 2002, and the change in its net assets and its cash flows for the years then ended in conformity with accounting principles generallyaccepted in the United States of America.

In accordance with Government Auditing Standards, we have also issued our report dated September 24, 2003 on our consideration of Friendship Public Charter School’s internal control over financial reporting and our tests of its compliance with certain provisions of laws, regulations, contracts and grants. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit.

2003 2002ASSETS

CURRENT ASSETS: Cash and cash equivalents 2,713,631$ 3,845,400$ Grants receivable 1,061,044 1,100,865

TOTAL CURRENT ASSETS 3,774,675 4,946,265

NONCURRENT ASSETS: Property and equipment, net 28,462,601 28,570,025 Deposits 113,483 97,395

TOTAL NONCURRENT ASSETS 28,576,084 28,667,420

TOTAL ASSETS 32,350,759$ 33,613,685$


CURRENT LIABILITIES: Accounts payable and accrued expenses 2,568,819$ 3,114,654$ Deferred revenue 782,320 1,257,771 Current portion of long-term debt 1,453,044 1,156,206

TOTAL CURRENT LIABILITIES 4,804,183 5,528,631

LONG-TERM DEBT - less current portion 25,522,478 27,005,827

TOTAL LIABILITIES 30,326,661 32,534,458

NET ASSETS Undesignated - unrestricted 2,024,098 1,079,227

TOTAL LIABILITIES AND NET ASSETS 32,350,759$ 33,613,685$

JUNE 30, 2003 AND 2002

FRIENDSHIP PUBLIC CHARTER SCHOOL, INC.STATEMENTS OF FINANCIAL POSITION


2003 2002REVENUE:

Pupil revenue 26,442,669$ 22,580,576$Federal grants 2,462,414 1,867,699Summer school 855,730 475,487Interest 98,753 151,282Other 45,800 76,582

TOTAL REVENUE 29,905,366 25,151,626

EXPENSES:Personnel and salaries 14,955,251 11,712,158Direct student costs 795,774 631,053Occupancy 1,690,468 1,263,517Office 692,430 533,555Charter fee 146,075 112,294Management fee 5,471,531 5,736,618Food service 471,337 247,540Administration services - Friendship House Association 94,187 184,10321st century grant 28,741 110,583Community technology center grant 155,826 193,097Reading excellence 375,353Extended learning 191,599 146,559Family literacy 43,425Counseling grant 123,901Summer school 787,425 454,189D.C. kids 8,680Interest 2,052,719 2,317,715Other 154,116 284,632Depreciation 773,762 745,746

TOTAL EXPENSES 28,960,495 24,725,464

CHANGE IN NET ASSETS 944,871 426,162

NET ASSETS:Beginning of year 1,079,227 653,065

End of year 2,024,098$ 1,079,227$




2003 2002INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: Cash flows from operating activities: Change in net assets 944,871$ 426,162$ Adjustments to reconcile change in net assets to net cash provided (used) by operating activities:

Depreciation 773,762 745,746 Grants receivable 39,821 (745,671) Deposit (16,088) 5,251 Accounts payable and accrued expenses (545,835) (2,769,721) Deferred revenue (475,451) 1,181,188 Due to students and other groups 12,483

Total adjustments (223,791) (1,570,724)

Net cash provided (used) by operating activities 721,080 (1,144,562)

Cash flows from investing activities: Purchase of property and equipment (666,338) (34,373)

Cash flows from financing activities: Proceeds of notes payable 29,535 12,957,320 Payments on principal of notes payable (1,216,046) (13,972,889)

Net cash used by financing activities (1,186,511) (1,015,569)

NET DECREASE IN CASH AND CASH EQUIVALENTS (1,131,769) (2,194,504)

CASH AND CASH EQUIVALENTS: Beginning of year 3,845,400 6,039,904

End of year 2,713,631$ 3,845,400$

SUPPLEMENTAL DISCLOSURE INFORMATION: Cash interest paid 2,165,105$ 2,228,440$


FRIENDSHIP PUBLIC CHARTER SCHOOL, INC.STATEMENTS OF CASH FLOWS



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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The financial statements of the Friendship Public Charter School, Inc. (the Charter) have beenprepared on the accrual basis. The Charter's accounting policies are described below to enhance the usefulness of the financial statements to the reader.

The Charter is required to report information regarding its financial position and activities according to three classes of net assets: unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. The Charter has no temporarily or permanently restricted activity or net assets.

Cash and cash equivalents - The Charter considers short-term highly liquid investments (including money market funds) with maturities of three months or less to be cash equivalents.

Receivables - Grants receivable consists primarily of grant reimbursements outstanding at year end. No allowance is considered necessary and no provision for bad debts have been recorded.

Deferred revenue - Deferred revenue consists primarily of funds received prior to the close of thefiscal year for operating summer school during the months of July and August of the subsequent fiscal year.

Property and equipment is recorded at cost and depreciated over the remaining estimated useful lives using the straight-line method.

Functional allocation of expenses - The costs of providing the various programs and other activities has been summarized on a functional basis in the notes to the financial statements. Accordingly,certain costs have been allocated among program services and management and general expensesbased on management’s estimates.

Certain reclassifications have been made to the prior years’ financial statements to conform to thecurrent year’s presentation. The reclassifications had no effect on previously reported activities or net assets.

NOTE 2 - NATURE OF ORGANIZATION, RISKS, AND UNCERTAINTIES

Organization - The Friendship Public Charter School, Inc. is a public charter school authorized under Section 2203 of the District of Columbia School Reform Act of 1995 by the District of Columbia PublicCharter School Board. The Charter operates two K-5, one 6-8, and one 9-12 instructional programs under a management agreement with the Edison Schools, Inc. which substantially provides all educational materials for a management fee. The Charter has been granted tax-exempt status under the provisions of Section 501(c)(3) of the Internal Revenue Code and, as such, is not subject to federal income taxes other than those arising from unrelated business income.


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NOTE 2 - NATURE OF ORGANIZATION, RISKS, AND UNCERTAINTIES (Concluded)

The Charter is required to disclose significant concentrations of credit risk regardless of the degree of such risk. Financial instruments that potentially subject the Charter to concentrations of credit risk consist principally of temporary cash investments and receivables. The Charter places its temporary cash investments with high-credit-quality financial institutions. Although such investments and cash balances exceeded thefederally insured limits at certain times during the year and at year-end they are, in the opinion of management,subject to minimal risk. The Charter has established policies for extending credit based upon factorssurrounding the credit risk of specific customers, historical trends and other information. Concentrations of credit risk with respect to trade receivables are limited due to the nature of the organizations that fund theCharter’s grant activities.

The process of preparing financial statements in conformity with accounting principals generallyaccepted in the United States of America requires the use of estimates and assumptions regarding certain types of assets, liabilities, revenues, and expenses. Such estimates primarily relate to unsettled transactions andevents as of the date of the financial statements. Accordingly, upon settlement, actual results may differ from estimated amounts.

Under the terms of the grant agreements, the final determination of allowable expenses are subject to interpretation and adjustments by grantor agencies.

NOTE 3 - PROPERTY AND EQUIPMENT

Property and equipment consists of the following at June 30, 2003 and 2002:

2003 2002

Leasehold improvements 26,186,188$ 26,110,886$Building 3,685,554 3,678,086Land 408,677 408,677Computer equipment 583,567Software 25,218 25,218

30,889,204 30,222,867Less accumulated depreciation and amortization 2,426,603 1,652,842

28,462,601$ 28,570,025$


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NOTE 4 – LONG-TERM DEBT

Long-term debt consists of the following at June 30:

2003 2002

Term Note - Edison Schools, under a $15,000,000 revolving credit agreement. The note is secured by leasehold improvements and bears interest at 10%. The note is being amortized over 20 years which requires monthly principal and interest payments of approximately $131,000. Final maturity is scheduled for July 2021. 13,153,301$ 13,394,839$

Note Payable - Bank of America, dated November 8, 2000.The note is secured by land and buildings and bears an interest rate at 1.5% over LIBOR (1.11% at June 30, 2003).The note requires monthly principal and interest payments of $97,395 and has a balloon payment maturing on November 8, 2005. 9,687,863 10,541,297

Note payable - Edison Schools, dated November 8, 2000.The note is secured by leasehold improvements and bears an interest rate of 10%. The note requires monthly principal and interest payments of $41,912 and has a balloon payment maturing on November 30, 2005. 4,134,358 4,225,897

26,975,522 28,162,033Less current portion 1,453,044 1,156,206

25,522,478$ 27,005,827$


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NOTE 4 - LONG-TERM DEBT (Concluded)

Maturities of long-term debt are as follows:

Year endingJune 30,

2004 1,453,044$2005 1,509,6202006 11,728,9242007 352,4902008 389,400

2009-2013 2,651,0192014-2018 4,361,7452019-2021 4,529,280

Total 26,975,522$

NOTE 5 - LEASES

The Charter leases school facilities from the District of Columbia Public Schools and administrative offices from an unrelated entity under operating leases expiring through 2020.

Future minimum operating lease payments required over the next five years are as follows:

2004 112,048$2005 113,1002006 75,5912007 63,0002008 63,000

Rent expense for the years ended June 30, 2003 and 2002 after available credits for leaseholdimprovements was $108,048 and $63,000, respectively.

All leases with the District of Columbia Public School contain an option to purchase the facilitiesduring the term of the lease.


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NOTE 6 - RETIREMENT PLAN

Under the Public School Reform Act (the Charter School Law) teachers and administrators who have taken leave of absence from DC Public Schools remain in District of Columbia Teachers’ Retirement Plan. Teachers who resign from DC Public Schools to take positions in charter schools may elect to remain in the Retirement Plan.

Benefits are payable to employees at retirement or disability, and refunds are made upon death ortermination prior to retirement. Employees contribute 8.5% and 7% percent of their salaries into the plan in 2003 and 2002 respectively, employers (D.C. government and, eventually the Charter) make contributions based upon actuarially determined funding requirements.

Participants who retire at age 55 with 30 years of service, at 60 with 20 years, or at 62 with 5 years are entitled to an annual annuity, payable monthly for life, equal to 1.5% percent of their average salary for the highest consecutive 3 years for each year of service up to 5 years, 1.75 percent for each year over 5 years, and 2percent for each year over 10 years, up to a maximum of 80 percent, excluding credit for unused sick leave.Benefits vest upon reaching 5 years of service and increase after retirement based upon inflation. Refunds are made if separation occurs before 5 years of service.

Additional information relating to this plan is available in the District of Columbia Public School’s Comprehensive Annual Financial Report (CAFR).

Teachers and administrators who are not part of the DC Public School Teachers’ Retirement Plan may participate in a 403(b) plan. Under the plan employee contributions are matched 50% by the Charter on the first one thousand dollars of employee contributions.

NOTE 7 - MANAGEMENT AGREEMENT - EDISON SCHOOLS, INC.

The Charter has entered into a five year management agreement beginning July 1, 1998 with Edison Schools, Inc. (Edison) for operations of the Charter. Edison has provided financing to the Charter to support operations including initial capital outlay. Edison is required to provide equipment necessary for operation of the Charter and purchases equipment for that purpose. Therefore, the Charter does not maintain title to the equipment and does not account for equipment as fixed assets purchased by Edison. Under the terms of aseparately negotiated agreement for 2003, Edison’s management fee for operating the Charter is based on a fixed fee and pupil count formula. As of the report date, the Charter is in negotiation for renewal of theagreement for the fiscal years 2004 through 2008.


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NOTE 8 – RELATED PARTY

The Charter’s central administrative staff, who perform exclusively Charter duties, are legallyemployees of Friendship House Association (FHA), a 501(c)(3) nonprofit organization under common control.Certain administrative services are also obtained from FHA. The total payroll and fringe benefit costs of the central administrative staff and the cost of the administrative services amounted to approximately $600,000 and$500,000 for the years ended June 30, 2003 and 2002, respectively. Related party payables to FHA were$52,128 and $51,258 for the years ended June 30, 2003 and 2002, respectively.

Friendship Food Service System is organized as a separate 501(c)(3) nonprofit organization undercommon control. The Charter receives meals for students and USDA compliance reporting from Friendship Food Service Systems. Payments to Friendship Food Service Systems were $487,515 and $247,540 for the years ending June 30, 2003 and 2002, respectively.

NOTE 9 - FUNCTIONAL ALLOCATION OF EXPENSES

In accordance with Statement of Financial Accounting Standards No. 117, Financial Statements ofNot-for-Profit Organizations, the Charter allocates expenses as they relate to program and managementfunctions.

2003 2002

Educational activities 22,703,071$ 18,876,552$Management and general 6,257,424 5,848,912

28,960,495$ 24,725,464$

The management and general classification included the management fee earned by Edison Schools. The management fee includes depreciation factor designed to cover Edison School’s initial investment incapital outlay over time.

NOTE 10 – PENDING LITIGATION

The Charter along with certain related parties are named defendants in a lawsuit filed by a vendor for alleged breach of contract. The suit seeks damages of approximately $600,000. The Charter contends it did not enter into a contract with the vendor and intends to vigorously defend its position. No liability has beenrecorded at June 30, 2003 for this contingency.

NOTE 11 – SUBSEQUENT EVENT

The Charter intends to issue $45,000,000 of revenue bonds in November 2003 to finance the purchase and renovation of currently leased and owned school facilities as well as the refinancing of substantially all of the long-term debt outstanding at the time of the bond issue.

APPENDIX C

CERTAIN DEFINED TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE

INDENTURE AND THE LOAN AGREEMENT

APPENDIX C

CERTAIN DEFINED TERMS AND SUMMARY OF CERTAIN PROVISIONS OF THE

INDENTURE AND THE LOAN AGREEMENT

The following are summaries of the Indenture and the Loan Agreement. These summaries do not purport to set forth all of the provisions of such documents, to which reference is made for the complete and actual terms thereof.

DEFINITIONS OF CERTAIN TERMS IN THE INDENTURE AND THE LOAN AGREEMENT

Certain terms used in the Indenture and the Loan Agreement are defined below unless otherwise defined herein or the context clearly indicates otherwise. Any capitalized term used in this Official Statement regarding the Indenture and the Loan Agreement and not defined herein has the meaning given such term by the Indenture and the Loan Agreement.

“Accountant” means a firm of independent certified public accountants designated by the Borrower no member of which is an employee or officer of the Borrower or its affiliates.

“Accounts” means the accounts created by Section 4.01 of the Indenture.

“Additional Bonds” means any bonds issued by the District pursuant to the Indenture subsequent to the Series 2003 Bonds.

“Additional Note” means any promissory note of the Borrower payable to the order of the District and evidencing the Borrower’s obligation to repay the Loan and to make Additional Payments with respect to any Additional Bonds.

“Additional Payments” means the Loan Payments in accordance with Section 3.09 of the Loan Agreement.

“Additional Payments Account of the Debt Service Fund” means the Additional Payments Account created by Section 4.01 of the Indenture.

“Additional Project” means any project undertaken by the Borrower that is financed, refinanced or reimbursed pursuant to the Home Rule Act and the Indenture by the District through the issuance of Additional Bonds.

“Administrative Costs” means all costs, charges and expenses incurred by the District (other than the District’s own routine expenses) with respect to the implementation and administration of the Bond Documents and any transaction or event to be effected by the Bond Documents; and also, to the extent set forth in Article XIII of the Loan Agreement, the compensation of, reimbursement of expenses to, the attorneys fees of, and advances payable to, the Trustee, the Paying Agent, any co-paying agent, the Authenticating Agent and the Registrar.

“Aggregate Debt Service” shall mean the aggregate amount of principal payments, interest payments and mandatory sinking fund redemption payments paid or payable in any fiscal year of the Borrower pursuant to the Bond Documents, reduced by any proceeds of Bonds deposited pursuant to the Indenture or any Supplemental Indenture to pay principal of or interest on the Bonds.

“Application” means the Application for Tax-Exempt Bond Financing of the Friendship Public Charter School, Inc. for the District’s Industrial Revenue Bond Program, dated April 11, 2003, and the amendments thereto.

“Arbitrage Rebate Fund” means the Arbitrage Rebate Fund created pursuant to Section 4.01 of the Indenture which shall not be deemed a part of the Trust Estate, but which shall be held by the Trustee.

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“Assign” or “Assigned” or “Assignment” means the District’s assignment of the Note, without recourse and without warranty, and delivery of the Note, to the Trustee.

“Assignment of Deed of Trust” means the Assignment of Deed of Trust and Security Agreement, made as of November 1, 2003, by the District in favor of the Trustee.

“Assignment of Leasehold Deed of Trust” means the Assignment of Leasehold Deed of Trust and Security Agreement, made as of November 1, 2003, by the District in favor of the Trustee.

“Authenticating Agent” means Wells Fargo Bank Minnesota, N.A., or any successor of or agent of the Authenticating Agent, appointed pursuant to Section 10.09 of the Indenture.

“Authorized Delegate” means the Mayor or the Deputy Mayor for Planning and Economic Development or any officer or employee of the executive office of the Mayor to whom the Mayor has delegated or to whom the foregoing individuals have subdelegated any of the Mayor’s functions.

“Authorized Denomination” means $5,000 and any integral multiple of $5,000.

“Authorizing Actions” means the Home Rule Act and the Resolution.

“Beneficial Owners” means, when the Bonds are held by a Bond Depository, the Owner of any Bonds which are held for such Owner by a Bond Depository in the form of a Global Certificate.

“Board”, when used in connection with the Borrower, means its Board of Trustees or its Executive Committee.

“Bond” or “Bonds” means the Series 2003 Bonds and any Additional Bonds issued from time to time under the Indenture.

“Bond Counsel” means Ballard Spahr Andrews & Ingersoll, LLP, as bond counsel to the District, or such firm or firms of attorneys designated as such from time to time by the Mayor with respect to the Bonds.

“Bond Depository” means The Depository Trust Company, its successors and assigns, and any other securities depository which meets the qualifications set forth in Section 12.01 of the Indenture.

“Bond Documents” means the Series 2003 Bonds, the Indenture, the Loan Agreement, the Bond Purchase Agreement, the Preliminary Official Statement, the Official Statement, the Program Fee Agreement, the Series 2003 Note, the Tax Certificate, the Series 2003 Mortgage, the Assignment of Deed of Trust, the Assignment of Leasehold Deed of Trust and all other agreements, documents, certificates and instruments executed and delivered in connection with the issuance, sale and delivery of the Series 2003 Bonds and the closing of the Loan, as well as any document executed and delivered in connection with the issuance of Additional Bonds.

“Bondholder” or “Holder” or “Holder of Bonds” or “holder of Bonds” or “Owner” or “Owner of Bonds” or “owner of Bonds” means the person in whose name any Bond is registered on the registration books maintained by the Registrar pursuant to Section 2.06 of the Indenture.

“Bond Payment Date” means any Interest Payment Date or any Sinking Fund Installment Date and any other date on which the principal, premium (if any) or interest on the Bonds is to be paid to the Owners thereof (whether at maturity thereof, or by acceleration of maturity or after notice of redemption or purchase or prepayment or otherwise).

“Bond Proceeds” means the original proceeds derived from the issuance, sale and delivery of the Bonds to the Underwriter.

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“Bond Purchase Agreement” means the Bond Purchase Agreement dated November 7, 2003, among the Borrower, the District and the Underwriter, with respect to the purchase and sale of the Series 2003 Bonds.

“Bond Year” means the period beginning on the date of delivery of the Series 2003 Bonds and extending through May 31, 2004 and each 12-month period beginning on June 1 and extending through May 31 thereafter.

“Borrower” means Friendship Public Charter School, Inc., a nonprofit corporation organized under the laws of the District of Columbia, with its principal place of business in the District of Columbia, and its successors and assigns.

“Borrower Representative” means the Board Chair of the Borrower or such other persons as may be designated to act on behalf of the Borrower by a written certificate furnished to the District and the Trustee containing the specimen signatures of such person or persons and signed on behalf of the Borrower by its Board Chair.

“Borrower’s General Certificate” means the General Certificate of Borrower, dated the Closing Date.

“Business Day” or “business day” means any day other than a day on which (i) banks located in each of the cities in which the Principal Offices of (a) the Trustee, (b) the Paying Agent or (c) the Registrar or (ii) The New York Stock Exchange are authorized by law, regulation or executive order to be closed.

“Certificate of Completion” means the Certificate of Completion provided for in Section 5.11(a) of the Loan Agreement.

“Certificated Bonds” means the Bonds authorized to be authenticated and delivered pursuant to the conditions and terms of Section 2.12 of the Indenture.

“Charter School Agreement” means the Charter School Agreement dated as of September 4, 1998 between the District of Columbia Public Charter School Board and the Borrower authorizing the Borrower to operate as a public charter school in the District of Columbia, and any amendments, modifications and supplements thereto.

“Closing Date” or “Closing” or “Issuance Date” means with respect to any Series of Bonds, the date of original issuance and delivery of such Bonds.

“Code” means the Internal Revenue Code of 1986, as amended, including, when appropriate, the statutory predecessor of the Code, and all applicable regulations (whether proposed, temporary or final) under that Code and the statutory predecessor of the Code, and any official rulings and judicial determinations under the foregoing applicable to the Bonds.

“Completion Date” means the date on which each Project is completed, as that date is certified pursuant to Section 5.11(a) of the Loan Agreement.

“Construction Contracts” means all contracts between the Borrower and others which relate to construction aspects of the renovation, improvement, furnishing and equipping of the Project.

“Costs” means, with respect to the Project, all items permitted to be financed, refinanced or reimbursed under the provisions of the Home Rule Act, the Resolution and the Code and which are or were paid or incurred, including, but not limited to:

(i) all costs paid or incurred by or on behalf of the Borrower under the terms of any Construction Contract, including the costs of acquiring, constructing, installing and equipping utilities services and other facilities deemed necessary to the construction, renovation, improvement, furnishing or equipping of the Project;

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(ii) all costs paid or incurred by or on behalf of the Borrower for land, labor or materials used in connection with the construction, renovation, improvement, furnishing or equipping of the Project, or interests therein, including reimbursement to the Borrower for all advances and payments made in connection with the Project prior to (to the extent permitted by the Code) or after delivery of the Bond;

(iii) all costs paid or incurred by or on behalf of the Borrower for payment and performance or other bonds and any and all types of insurance that may be necessary or appropriate to have in effect during and for the renovation, improvement, furnishing and equipping of the Project;

(iv) all costs paid or incurred by or on behalf of the Borrower for legal, engineering and architectural services, including the costs of the Borrower for test borings, surveys, estimates, plans, drawings, specifications, preliminary investigations and studies, and for supervising construction, as well as for the performance of all other duties required by or consequent to the renovation, improvement, furnishing and equipping of the Project;

(v) all fees, costs, charges, and expenses paid or incurred or to be paid or incurred in connection with the authorization, preparation, printing, issuance, sale and delivery of the Bonds, to the extent permitted by the Code including, but not limited to, Administrative Costs, the Program Fee, underwriting, legal, accounting, rating agency, any Depository fees, feasibility study fees and other financial fees, bond insurer fees, if any, costs and expenses, certain fees paid to financial institutions and insurance companies, compensation to financial advisors and other persons (other than full-time employees of the District) and entities performing services on behalf of the District or the Borrower, and all other fees, costs and expenses incurred in connection with the development of the Bond Documents;

(vi) recording fees, filing fees and costs of title insurance, if any; and

(vii) any sums required to reimburse the Borrower (to the extent permitted by the Code) for advances made by the Borrower for any of the above items or for any other costs incurred and/or work done by the Borrower which are properly chargeable to capital accounts maintained with respect to the Project.

“Costs of Issuance” or “Issuance Costs” means those items described in paragraph (v) under the definition of “Costs.”

“Costs of Issuance Fund” means the Costs of Issuance Fund created by Section 4.01 of the Indenture.

“Continuing Disclosure Agreement” means the Continuing Disclosure Agreement, dated as of November 1, 2003, between the Trustee and the Borrower.

“Council” means the Council of the District of Columbia.

“Counsel” means any attorney or attorneys duly admitted to practice law before the highest court of any state or the District and acceptable to the Borrower who have regularly engaged in the practice of law as their primary occupation for at least five (5) years and none of whom are officers, full-time employees, directors or members of the Borrower or full-time employees of the District.

“Credit Enhancement Account” means the Credit Enhancement Account of the Debt Service Reserve Fund created by Section 4.01 of the Indenture.

“Credit Enhancement Account Earnings” means the investment earnings on amounts held in the Credit Enhancement Account of the Debt Service Reserve Fund.

“Debt Service Fund” means the Debt Service Fund created by Section 4.01 of the Indenture.

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“Debt Service Reserve Fund” means the Debt Service Reserve Fund created by Section 4.01 of the Indenture.

“Debt Service Reserve Fund Requirement” means, as of any date of calculation, an amount equal to the lesser of (a) 100% of the maximum annual debt service payable on all Bonds Outstanding; (b) 10% of the original principal amount of all Bonds issued under the Indenture, or (c) 125% of the average annual debt service on all Bonds Outstanding.

“Deed of Trust” means the Deed of Trust and Security Agreement made as of November 1, 2003 by the Borrower to the trustees named therein.

“Default” or “Event of Default” means with respect to any Default or Event of Default under the Indenture, any occurrence or event specified in Section 7.01 of the Indenture or with respect to any Default or Event of Default under the Loan Agreement, any occurrence or event specified in Section 15.01 of the Loan Agreement.

“Defeasance Securities” means the following obligations or securities with respect to which neither the Borrower nor any of its subsidiaries is the obligor which may be used for all purposes, including defeasance investments in refunding escrow accounts: (i) cash deposits (insured at all times by the Federal Deposit Insurance Corporation or otherwise collateralized with obligations described in the next paragraph); (ii) direct obligations of (including obligations issued or held in book entry form on the books of the Department of Treasury) the United States of America (in the event these securities are used for defeasance, they shall be non-callable and non-prepayable); (iii) obligations of the following federal agencies so long as such obligations are backed by the full faith and credit of the United States of America (in the event these securities are used for defeasance, they shall be non-callable and non-prepayable): (A) U.S. Export-Import Bank (Eximbank), (B) Rural Economic Community Development Administration, (C) Federal Financing Bank, (D) U.S. Maritime Administration, (E) U.S. Department of Housing and Urban Development (PHAs), (F) General Services Administration, (G) Small Business Administration, (H) Government National Mortgage Association (GNMA), (I) Federal Housing Administration, and (J) Farm Credit System Financial Assistance Corporation.

“Depository,” “DTC,” or “Bond Depository” means The Depository Trust Company, of New York, New York and/or its nominee, Cede & Co. or any successors, Substitute Depositories or assigns thereof in whose name or names the Global Certificates shall be registered on the books of the Registrar.

“Determination Letter” means the letter dated February 5, 1999, issued by the Internal Revenue Service to the Borrower, verifying that the Borrower is an organization described in Section 501(c)(3) of the Code (except for taxation of unrelated business taxable income under Section 511 of the Code) which is exempt from Federal income taxation under Section 501(a) of the Code and which is not a “private foundation” as defined in Section 509 of the Code.

“District” means the District of Columbia and its successors and assigns.

“District Agreements” means the Employment Agreement and the Memorandum of Understanding.

“Employment Agreement” means the First Source Employment Agreement, dated March 4, 2003, between the District of Columbia Department of Employment Services and the Borrower.

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

“Event of Noncompliance” means an Event of Noncompliance as defined in Section 7.17 of the Loan Agreement.

“Facilities Reserve Fund” has the meaning given that term in Section 7.29 of the Loan Agreement.

“Fiscal Quarter” means each of the four periods in each Fiscal Year consisting of three consecutive calendar months.

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“Fiscal Year” means a period of 12 consecutive months ending on each June 30, or such other consecutive twelve-month period as may be adopted the Board of the Borrower, of which the Trustee is given written notice.

“Fitch” means Fitch Ratings.

“Funds” means the funds created by Section 4.01 of the Indenture.

“Global Certificate” means, when the Bonds are held by a Depository, the Bonds in the form of one Global Certificate representing the entire aggregate principal amount of Bonds due on a maturity date which shall be registered in the name of such Depository.

“Governmental Units” has the meaning given that term in Section 1.103-1 of the Regulations.

"Guaranty" means any guaranty, loan commitment or other obligation of the Borrower guaranteeing in any manner, whether directly or indirectly, any Indebtedness of any other person (other than the Borrower).

“Hazardous Substances” means any substance including, but not limited to, substances or materials which have been shown to have significant adverse effects on human health or which are subject to regulation under the Toxic Substances Control Act, 15 U.S.C. § 2601 et seq., substances defined as “hazardous substances,” “toxic materials,” or “hazardous wastes” in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), 42 U.S.C. Sec. 9061 et seq., Hazardous Materials Transportation Act, 49 U.S.C. Sec. 1802 et seq., the Resource Conservation and Recovery Act of 1976, as amended, 49 U.S.C. Sec. 6901 et seq., Superfund Amendments and Reauthorization Act of 1986, as amended, any materials regulated by the District under statues regulating environmental pollution or hazards of any kind whatsoever, and shall specifically include petroleum and all its refined fractions, natural gas, coal, asbestos and polychlorinated biphenyl (“PCB’s”) and any other materials, even if not regulated under the laws of the United States or the District, which may or could pose, to the best of the Borrower’s knowledge, a hazard to the health and safety of the users of the Project or to the owners of property adjacent to the site of the Project; provided, however, that Hazardous Substances shall not include cleaning and other maintenance related materials and supplies in type and quantity customary for buildings of the nature of the Project being used in a customary and safe manner, including printing and photocopying materials and supplies used in connection with printing/duplication being used in a customary and safe manner.

“Home Rule Act” means the District of Columbia Home Rule Act, approved December 24, 1973 (P.L. 93-198; 87 Stat. 774; D.C. Official Code, §§ 1-201.01 et seq.), as amended.

“Indebtedness” means all obligations for payments of principal and interest with respect to money borrowed, incurred or assumed by the Borrower, including guaranties, purchase money mortgages, financing or capital leases, installment purchase contracts, derivatives in the form of credit default swaps or total-rate-of-return swaps or other similar instruments in the nature of a borrowing by which the Borrower will be unconditionally obligated to pay. Nothing in this definition or otherwise shall be construed to count Indebtedness more than once.

“Indemnitees” means, individually and collectively, the Insurer, the Trustee, the Registrar, the Paying Agent and the District and its elected and appointed officials, officers, employees and agents involved in the administration of the District’s revenue bond program, or the issuance, sale and delivery of the Bonds and the Loan of the Bond Proceeds (including those persons employed by the District under personal employment contracts but excluding Independent Counsel).

“Indenture” means the Indenture of Trust, dated as of November 1, 2003, between the District and the Trustee, and any and all amendments, modifications and supplements to the Indenture.

“Independent” means any Person not an employee or officer of the Borrower or its affiliates.

“Independent Consultant” means an Independent professional consulting, financial advisory or accounting firm selected by the Borrower and not unacceptable to the Trustee and the Insurer, having the skill and experience

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necessary to render the particular report required and having a favorable and nationally recognized reputation for such skill and experience.

“Independent Insurance Consultant” means an Independent professional insurance or actuarial consultant or firm selected by the Borrower and not unacceptable to the Trustee and the Insurer, having the skill and experience necessary to render the particular report required and having a favorable and nationally recognized reputation for such skill and experience.

“Information Services” means Financial Information, Inc.’s “Daily Called Bond Service,” 30 Montgomery Street, 10th Floor, Jersey City, New Jersey 07302, Attention: Editor; Kenny Information Services’ “Called Bond Service,” 55 Broad Street, 28th Floor, New York, New York 10004; Moody’s “Municipal and Government Manual,” 99 Church Street, 8th Floor, New York, New York 10007, Attention: Municipal News Reports; and Standard and Poor’s “Called Bond Record,” 25 Broadway, 3rd Floor, New York, New York 10004; or, in accordance with then-current guidelines of the Securities and Exchange Commission, such other addresses and/or such other services providing information with respect to called bonds, or if there are no such services, as the District may designate in a Certificate of the District delivered to the Trustee.

“Insurance Policy” means the insurance policy issued by the Insurer guaranteeing the scheduled payment of principal of and interest on the Series 2003 Bonds when due.

“Insurance Reimbursement Expenses” means: (a) any and all charges, fees, costs and expenses which the Insurer may reasonably pay or incur, including, but not limited to, fees and expenses of attorneys, accountants, consultants and auditors and reasonable costs of investigations, in connection with (i) any accounts established to facilitate payments under the Insurance Policy, (ii) the administration, enforcement, defense or preservation of any rights in respect of the Indenture or any other Bond Document including defending, monitoring or participating in any litigation or proceeding (including any bankruptcy proceeding in respect of the District or the Borrower or any affiliate thereof) relating to the Indenture or any other Bond Document, any party to the Indenture or any other Bond Document or the transaction contemplated by the Bond Documents (the “Transaction”), (iii) the foreclosure against, sale or other disposition of any collateral securing any obligations under the Indenture or any other Bond Document, or the pursuit of any remedies under the Indenture or any other Bond Document, to the extent such costs and expenses are not recovered from such foreclosure, sale or other disposition, or (iv) any amendment, waiver or other action with respect to, or related to, the Indenture or any other Bond Document whether or not executed or completed; costs and expenses shall include a reasonable allocation of compensation and overhead attributable to time of employees of the Insurer spent in connection with the actions described in clauses (ii) - (iv) above; and the Insurer reserves the right to charge a reasonable fee as a condition to executing any amendment, waiver or consent proposed in respect of the Indenture or any other Bond Document; and (b) in addition to any and all rights of reimbursement, subrogation and any other rights pursuant to the Indenture or any other Bond Documents or under law or in equity, any and all charges, fees, costs, claims, losses, liabilities (including penalties), judgments, demands, damages, and expenses which the Insurer or its officers, directors, shareholders, employees, agents and each Person, if any, who controls the Insurer within the meaning of either Section 15 of the Securities Act of 1933 or Section 20 of the Securities Exchange Act of 1934 may reasonably pay or incur, including, but not limited to, fees and expenses of attorneys, accountants, consultants and auditors and reasonable costs of investigations, of any nature in connection with, in respect of or relating to the transactions contemplated by the Indenture or any other Bond Document by reason of: (i) any omission or action (other than of or by the Insurer) in connection with the offering, issuance, sale, remarketing or delivery of the Series 2003 Bonds; (ii) the negligence, bad faith, willful misconduct, misfeasance, malfeasance or theft committed by any director, officer, employee or agent of the District or the Borrower in connection with any transaction arising from or relating to the Indenture or any other Bond Document; (iii) the violation by the District or the Borrower of any law, rule or regulation, or any judgment, order or decree applicable to it; (iv) the breach by the District or the Borrower of any representation, warranty or covenant under the Indenture or any other Bond Document or the occurrence, in respect of the District or the Borrower, under the Indenture or any other Bond Document of any “Event of Default” or “event of default” or any event which, with the giving of notice or lapse of time or both, would constitute any “Event of Default” or “event of default”; or (v) any untrue statement or alleged untrue statement of a material fact contained in any official statement or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such claims arise out of or are based upon any untrue statement or omission in information included in an official statement and furnished by the Insurer in writing expressly for use therein.

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“Insurer” means ACA Financial Guaranty Corporation, or any successor thereto or assignee thereof.

“Interest Account of the Debt Service Fund” or “Interest Account” means the Interest Account created by Section 4.01 of the Indenture.

“Interest Payment Date” means each June 1 and December 1, beginning June 1, 2004, while the Series 2003 Bonds are Outstanding and, with respect to any Additional Bonds, such dates as are specified in the Supplemental Indenture pursuant to which such Additional Bonds are issued.

“Interested Bondholders” means Holders of $1,000,000 or more in aggregate principal amount of Bonds.

“Investment Agreement” means a permitted investment, approved by the Insurer.

“Lease Agreement” means the Lease Agreement by and between the Borrower and the District, dated as of May 26, 2000, providing for the lease to the Borrower of the Leased Portion, and any amendments, modifications, extensions, renewals or replacement thereof.

“Leased Percentage” means the percentage of the total Costs of the 2003 Project attributable to the Leased Portion (as described in the Loan Agreement)

“Leased Portion” means the Woodson School located at 4095 Minnesota Avenue, N.E., Washington, D.C. leased by the Borrower from the District pursuant to that certain Lease Agreement, dated as of May 26, 2000.

“Leasehold Deed of Trust and Security Agreement” means the Leasehold Deed of Trust and Security Agreement made as of November 1, 2003 by the Borrower to the trustees named therein.

“Lien” means any lien, security interest or other charge or encumbrance of any kind, or any other type of preferential arrangement, including, without limitation, the lien or retained security title of a conditional vendor and any easement, right of way or other encumbrance on title to real property.

“Liquid Assets” means the cash, investments and other current assets owned by the Borrower.

“Liquid Funds” means the unrestricted cash and market value of unrestricted marketable securities of the Borrower (excluding any Funds and Accounts held under the Indenture and pledged as a part of the Trust Estate and any amounts donated to the Borrower and subject to any restriction imposed by such donor).

“Liquidity Facility” means a written commitment to provide money to purchase or retire any Indebtedness if (i) on the date of delivery of such Liquidity Facility the unsecured indebtedness of the provider of such Liquidity Facility is rated by each Rating Agency in one of its three highest long-term rating categories or the highest short-term rating category and (ii) as of any particular date of determination, no amount realized under such Liquidity Facility for the payment of the principal or the purchase or redemption price of such Indebtedness (exclusive of amounts realized for the payment of the maturing principal of or accrued interest on such Indebtedness) shall be required to be repaid by the Borrower for a period of at least one year.

“Loan” means the District’s loan of the Bond Proceeds to the Borrower for the purpose of financing, refinancing or reimbursing Costs of the Project.

“Loan Agreement” means the Loan Agreement, dated as of November 1, 2003, between the District and the Borrower, and any and all amendments, modifications and supplements to the Loan Agreement.

“Loan Payments” shall have the meaning provided in the Loan Agreement.

“Long-Term Indebtedness” means all of the following Indebtedness incurred or assumed by the Borrower:

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(i) any obligation for the payment of money borrowed for an original term, or renewable at the option of the Borrower for a period from the date originally incurred, longer than one year, including Additional Bonds;

(ii) any obligation for the payment of money under leases that are required to be capitalized under generally accepted accounting principles;

(iii) any obligation for the payment of money under installment purchase contracts having an original term in excess of one year; and

(iv) any Guaranty of any Indebtedness that would be described in item (i), (ii) or (iii) above if such Indebtedness were incurred directly by the Borrower.

“Mail” or “Notice” or “notice” or “Notice by Mail” means, unless expressly provided otherwise, mail by first-class prepaid postage to Owners of the Bonds at the addresses shown in the registration books maintained under the Indenture or delivery of all notices or instruments under the Indenture to the District, the Borrower, the Trustee and the Bond Depository. Any notice to Owners given by mail shall be deemed given and received when delivered by the Registrar to the United States Postal Service, or its successor, postage prepaid. In case, by reason of suspension of regular mail service or by reason of any other cause, it shall be impracticable to give such notice by Mail, then such notification as shall be made with the approval of the Registrar shall constitute a sufficient notification for every purpose hereunder.

“Management Agreement” means the Management Agreement, dated as November 1, 2003, between The Friendship Public Charter School, Inc. and Edison Schools, Inc. and any amendment thereto or such other replacement management agreement with the Borrower and acceptable to the Insurer.

“Manager” means Edison Schools, Inc. and any successor or assigns thereto or such other replacement manager acceptable to the Borrower and the Insurer.

“Mayor” means the Mayor of the District of Columbia or an Authorized Delegate.

“Memorandum of Understanding” means the Memorandum of Understanding, dated as of the Closing Date, between the District of Columbia Department of Human Rights and Local Business Development and the Borrower.

“Moody’s” means Moody’s Investors Service, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and assigns.

“Nationally Recognized Bond Counsel” means such firm or firms approved by the District in writing and found in the current edition of The Bond Buyer’s Municipal Marketplace (the “Red Book”), its successor publication or, if such publication or its successor ceases to exist, a comparable publication selected by the District. The term “Nationally Recognized Bond Counsel” shall include Bond Counsel.

“Net Income” means for any Fiscal Year, all operating revenue of the Borrower from any source (including 2003 Project Formula Payments and any additional formula payments pledged with respect to Additional Bonds), less all operating expenses, of the Borrower, including the fixed or base portion of any management fees, as determined in accordance with generally accepted accounting principles consistently applied. In calculating Net Income, there shall be excluded: extraordinary gains and losses; any gains or losses from the disposition of capital assets (other than investment securities) or the refinancing of indebtedness; unrealized gains and unrealized losses from the sale of securities; the proceeds received from insurance policies and condemnation awards (other than the proceeds of business interruption insurance) and interest, amortization, depreciation and deposits to the Facilities Reserve Fund and to the Technology Reserve Fund.

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“Net Proceeds” means when used with respect to any insurance proceeds from third-party policies required under the Loan Agreement or any condemnation award, the amount remaining after deducting all expenses (including attorneys’ fees) incurred in the collection of such insurance proceeds or condemnation award.

“Non-Recourse Indebtedness” means Indebtedness which neither constitutes a general obligation of the Borrower nor is secured by a pledge or lien on the Trust Estate and that is payable solely from (i) property of the Borrower, or the revenues of such property (a) the purchase or improvement of which was financed by such Indebtedness or (b) that could be disposed of by the Borrower pursuant to the Loan Agreement; (ii) payments made to the Borrower pursuant to pledges or contributions to the Borrower; or (iii) guarantees or payments from a person other than the Borrower.

“Note” means collectively, the Series 2003 Note and any Additional Note issued in connection with the issuance of Additional Bonds.

“Official Statement” means the Official Statement, dated November 7, 2003, prepared in connection with the sale and delivery of the Series 2003 Bonds.

“Optional Redemption Account of the Redemption Fund” means the Optional Redemption Account created by Section 4.01 of the Indenture.

“Outstanding” or “outstanding” means, except as provided under the Indenture, when used with reference to Bonds, as of any particular date, all Bonds authenticated and delivered under the Indenture, as applicable, except:

(i) any Bond canceled by the Registrar or the Trustee, as applicable, (or delivered to the Registrar or Trustee for cancellation, as applicable) at or before such date;

(ii) any Bond, the payment, redemption or purchase and cancellation of the principal and interest on which provision shall have been made as provided in Article IX of the Indenture; and

(iii) any Bond in lieu of or in substitution for which a new Bond shall have been authenticated and delivered pursuant to the Indenture.

“Parity Indebtedness” means Long-Term Indebtedness, other than Additional Bonds, which is secured on a parity basis with the Bonds.

“Paying Agent” means Wells Fargo Bank Minnesota, N.A. and any other corporation that may at any time be substituted in its place in accordance with Section 10.06 of the Indenture, and its successors.

“Permitted Encumbrances” means:

(i) any liens, deposits, endorsements, guaranties and other encumbrances incurred in the ordinary course of business;

(ii) any lien arising by reason of any good faith deposit of the Borrower in connection with any lease of real estate, bid or contract (other than any contract for the payment of money), any deposit by the Borrower to secure any public or statutory obligation, or to secure, or in lieu of, any surety, stay or appeal bond, and any deposit as security for the payment of taxes or assessments or other similar charges;

(iii) any lien arising by reason of any deposit 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 the Borrower to maintain self-insurance or to participate in any funds established to cover any insurance risk or in connection with workers’ compensation, unemployment insurance, any pension or profit sharing plan or other social security, or to share in the privileges or benefits required for the participation of the Borrower in such arrangements;

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(iv) any judgment lien against the Borrower, so long as such judgment is being contested in good faith and execution thereon is stayed, or in the absence of such contest and stay, such judgment lien will not materially impair or subject the assets or financial operations of the Borrower to material loss or forfeiture;

(v) any right 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 of the Borrower; any lien on any property of the Borrower for taxes, assessments, levies, fees, water and sewer rents or charges and other governmental and similar charges and any lien of any mechanic, materialman, laborer, supplier or vendor for work or services performed or materials furnished in connection with such property that is not due and payable or that is not delinquent or the amount or validity of which is being contested and execution thereon stayed;

(vi) the Indenture and the Loan Agreement; and any lien or encumbrance described in the Loan Agreement in existence on the date of issuance of the Series 2003 Bonds, provided that such lien or encumbrance is not extended, renewed or modified to apply to any property of the Borrower not subject to such lien or encumbrance on such date, unless the lien or encumbrance, as so extended, renewed or modified, otherwise qualifies as a Permitted Encumbrance without reference to this clause;

(vii) any lien on property received by the Borrower through any gift, grant or bequest constituting a restriction imposed by the donor, grantor or testator on such gift, grant or bequest or the income therefrom, provided that so long as the Bonds shall remain Outstanding, any such lien shall attach solely to the property which is the subject of such gift, grant or bequest, and the Indebtedness, if any, secured by such lien shall not have been assumed by the Borrower;

(viii) any lien on any property securing any additional indebtedness, including the issuance of Additional Bonds;

(ix) any lease permitted under the terms of the Loan Agreement;

(x) any lien placed upon any tangible real or personal property being acquired by the Borrower to secure all or a portion of the purchase price thereof; and

(xi) such easements, rights-of-way, servitudes, restrictions and other defects, liens and encumbrances as do not materially impair the use of the Project for their intended purposes or the value of the Project.

“Permitted Investments” means (i) Defeasance Securities; (ii) direct obligations of any of the following federal agencies which obligations are not fully guaranteed by the full faith and credit of the United States of America: (A) senior debt obligations rated in the highest long-term rating category by at least two nationally recognized rating agencies issued by the Fannie Mae (FNMA) or Freddie Mac (FHLMC), (B) senior debt obligations of the Federal Home Loan Bank System, and (C) senior debt obligations of the federal agencies identified in clause (iii) of the definition of “Defeasance Securities” other Government Sponsored Agencies approved by the Insurer; (iii) U.S. dollar denominated deposit accounts, federal funds and bankers’ acceptances with domestic commercial banks which either (A) have a rating on their short-term certificates of deposit on the date of purchase in the highest short-term rating category of at least two nationally recognized rating agencies, (B) are insured at all times by the Federal Deposit Insurance Corporation, or (C) are collateralized with direct obligations of the United States of America at one hundred two percent (102%) valued daily (all such certificates must mature no more than three hundred sixty (360) days after the date of purchase (Ratings on holding companies are not considered as the rating of the bank); (iv) commercial paper which is rated at the time of purchase in the highest short-term rating category of at least two (2) nationally recognized rating agencies and which matures not more than two hundred seventy (270) days after the date of purchase; (v) investments in (A) money market funds subject to SEC Rule 2a-7 and rated in the highest short-term rating category of at least two nationally recognized rating agencies and (B) public sector investment pools operated pursuant to SEC Rule 2a-7 in which the District’s deposit shall not exceed 5% of the aggregate pool balance at any time and such pool is rated in one of the two highest short-term rating categories of at least two nationally recognized rating agencies; (vi) pre-refunded municipal obligations

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defined as follows: any bonds or other obligations of any state of the United States of America or of any agency, instrumentality or local governmental unit of any such state which are not callable at the option of the obligor prior to maturity or as to which irrevocable instructions have been given by the obligor to call on the date specified in the notice; and, (A) which are rated, based on an irrevocable escrow account or fund (the “escrow”), in the highest long-term rating category of at least two (2) nationally recognized rating agencies; or (B) (i) which are fully secured as to principal and interest and redemption premium, if any, by an escrow consisting only of cash or direct obligations of the United States of America, which escrow may be applied only to the payment of such principal of and interest and redemption premium, if any, on such bonds or other obligations on the maturity date or dates thereof or the specified redemption date or dates pursuant to such irrevocable instructions, as appropriate, and (ii) which escrow is sufficient, as verified by a nationally recognized independent certified public accountant, to pay principal of and interest and redemption premium, if any, on the bonds or other obligations described in this paragraph on the maturity date or dates specified in the irrevocable instructions referred to above, as appropriate; (vii) general obligations of states with a short-term rating in one of the two (2) highest rating categories and a long-term rating in one (1) of the two (2) highest rating categories of at least two (2) nationally recognized rating agencies (in the event such obligations are variable rate obligations, the interest rate on such obligations must be reset not less frequently than annually); (viii) investment agreements approved in writing by the Insurer (including the Investment Agreement); (ix) investments in units of a money market fund that is rated in the highest letter and numerical rating category by a Rating Agency, including funds for which the Trustee and its affiliates provide investment advisory or other management services; and (x) other forms of investments (including repurchase agreements) approved in writing by the Insurer.

“Person” or “person” means an individual, corporation, partnership, association, joint stock company, joint venture, trust, unincorporated organization or government or any agency or political subdivision thereof.

“Plans” means with respect to the Project, all plans, drawings and specifications prepared in connection with the Project, as the same may be amended from time to time.

“Preliminary Official Statement” means the Preliminary Official Statement, dated November 3, 2003, prepared in connection with the sale and delivery of the Series 2003 Bonds.

“Principal Account of the Debt Service Fund” or “Principal Account” means the Principal Account created by Section 4.01 of the Indenture.

“Principal Office” means the office maintained by any person for the transaction of business or such other office as shall be designated by such person in writing to the Trustee, the Paying Agent, the Registrar, the Authenticating Agent, the District and the Borrower, and specifically means the office or offices with respect to:

(i) the Trustee, the office designated under the Indenture or such other office as is designated in writing to the Paying Agent, the Registrar, the Authenticating Agent, the District and the Borrower;

(ii) the Paying Agent, the office designated under the Indenture or such other office as is designated in writing to the Trustee, the District, the Registrar, the Authenticating Agent and the Borrower;

(iii) the Authenticating Agent, the office designated under the Indenture or such other office as is designated in writing to the Trustee, the District, the Registrar, the Paying Agent and the Borrower;

(iv) the Registrar, the office designated under the Indenture or such other office as is designated in writing to the Trustee, the Paying Agent, the Authenticating Agent, the District and the Borrower;

(v) the District, the office designated under the Indenture or such other offices as is designated in writing to the Trustee, the Paying Agent, the Authenticating Agent, the Registrar and the Borrower; and

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(vi) the Borrower, the office designated under the Indenture or such other office as is designated in writing to the Trustee, the Paying Agent, the Authenticating Agent, the Registrar and the District.

“Program Fee” means the fee payable by the Borrower to the District in connection with the issuance of the Bonds and the administration of the District’s revenue bond program which fee shall be payable as provided in the Program Fee Agreement.

“Program Fee Agreement” means the Program Fee Agreement, dated the Closing Date, between the District and the Borrower.

“Project” means the 2003 Project and any Additional Project financed with Additional Bonds.

“Project Fund” means the Project Fund created by Section 4.01 of the Indenture.

“Property” shall mean any and all rights, titles and interests in and to any and all property whether real or personal, tangible or intangible, or mixed and wherever situated.

“Property, Plant and Equipment” means all Property of the Borrower which is classified as property, plant and equipment under generally accepted accounting principles.

“Rating Agency” shall mean Fitch, Moody’s, S&P or any other nationally recognized rating agency maintaining a rating of any Bonds.

“Rebate Amount” means that portion of any income or interest earned by, or increment to, any Fund, Account or pledged funds established pursuant to the Indenture or the Loan Agreement or other gross proceeds (within the meaning of Section 148(f)(6)(B) of the Code) due to the investment thereof which shall be required to be paid to the United States by the provisions of Section 148(f) of the Code and which shall not be deemed part of the Trust Estate but which shall be held by the Trustee.

“Rebate Monitor” means the entity selected by the Borrower to perform the functions of the Rebate Monitor as required under the Indenture and Loan Agreement.

“Receipts and Revenues of the District from the Loan Agreement and the Note” means all funds (including 2003 Project Formula Payments) received by the Trustee from or on behalf of the Borrower for the account of the District as Loan Payments (excluding the Program Fee and the Administrative Costs paid on the Closing Date) and all other funds received by the Trustee pursuant to the terms of the Loan Agreement which, under the provisions of the Indenture, the Loan Agreement or the Note, are to be credited against Loan Payments or other amounts owed by the Borrower, including, without limitation, any investment proceeds thereon.

“Record Date” means the 15th of the month immediately preceding each Interest Payment Date; provided, that if any such date is not a Business Day, the Record Date shall be the Business Day immediately preceding such day.

“Redemption Fund” means the Redemption Fund created by Section 4.01 of the Indenture.

“Redemption Price” means, when used with respect to a Bond or any portion thereof, the principal amount of such Bond or portion thereof and premium (if any).

“Registrar” or “Bond Registrar” means Wells Fargo Bank Minnesota, N.A., or any other trust association organized and existing under the laws of the United States of America or any state which shall have been substituted in its place under the Indenture, and their respective successors.

“Regulations” means the Federal Income Tax Regulations, as amended, including proposed and temporary regulations.

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“Related Person” has the meaning given that term in Section 144(a)(3) of the Code.

“Requirement(s) of Law” has the meaning ascribed to such term in Section 6.02(c) of the Loan Agreement.

“Reserve Fund Credit Facility” means a letter of credit, insurance policy, surety bond or other credit facility approved in writing by the Bond Insurer and delivered to the Trustee, for deposit into the Debt Service Reserve Fund in satisfaction of the Debt Service Reserve Fund Requirement and issued by a financial institution whose long-term rating is in one of the two highest rating categories of the Rating Agency.

“Reserved Rights of the District” means (i) the District’s rights to (a) the payment of the Program Fee, (b) the payment of Administrative Costs, (c) reimbursement of expenses incurred by or on behalf of the District in connection with the financing, refinancing or reimbursement of the Costs of the Project on the Closing Date and (d) indemnification of the District, and (ii) any rights of the District to receive notices, certificates, requests, requisitions, directions, opinions, payments and other communications under the Bond Documents, including, but not limited to, those rights specified in Sections 2.12, 2.14, 2.17, 6.08, 6.09, 6.10, 7.13, 8.01, 8.02, 8.07, 10.01, 10.06, 10.08, 11.02, 12.02, 12.04 and 12.06 of the Indenture and Sections 10.02, 15.02 and 16.10 of the Loan Agreement. Unless expressly stated otherwise, no provision in the Bond Documents shall be construed so as to preclude the District from exercising those rights and remedies otherwise afforded to it under District of Columbia law, including, but not limited to, those which are uniquely governmental in nature.

“Resolution” means the Friendship Public Charter School, Inc. Revenue Bond Project Emergency Approval Resolution of 2003, R15-208 adopted by the Council of the District of Columbia on July 8, 2003.

“Revenue Fund” means the Revenue Fund created by Section 4.01 of the Indenture.

“S&P” means Standard & Poor’s Rating Group, a Division of McGraw-Hill, Inc., a corporation organized and existing under the laws of the State of Delaware, its successors and assigns, or if S&P shall be dissolved or liquidated or shall no longer perform the functions of a securities rating agency, “S&P” shall be deemed to refer to any other nationally recognized securities rating agency designated by the District, at the direction of the Borrower and acceptable to the Insurer, by notice to the Trustee and the Borrower.

“Series” means the Bonds issued at any one time or otherwise issued as one series under the provisions of the Indenture.

“Series 2003 Bonds” means the $44,880,000 District of Columbia Revenue Bonds (Friendship Public Charter School, Inc. Issue), Series 2003.

“Series 2003 Mortgage” means collectively, the Deed of Trust and Security Agreement granted by the Borrower with respect to the 2003 Project relating to the three facilities owned by the Borrower and the Leasehold Deed of Trust and Security Agreement granted by the Borrower relating to the Leased Portion of the 2003 Project, each dated as of November 1, 2003 and each in favor of the Trustee, as assignee of the District.

“Series 2003 Note” means the Borrower’s promissory note substantially in the form attached to the Loan Agreement as Exhibit C, dated the Closing Date for the Series 2003 Bonds, payable to the order of the District, in the face amount of $44,880,000 evidencing the Borrower’s obligation to repay the Loan and to make the Loan Payments, and all renewals, extensions, modifications and substitutions for the Series 2003 Note.

“Short-Term Indebtedness” means any Indebtedness (i) incurred or assumed by the Borrower for a term not exceeding 365 days, except any such Indebtedness with respect to which a Liquidity Facility is then in effect, and (ii) any Guaranty of any Indebtedness that would be described in clause (i) above if such Indebtedness were incurred directly by the Borrower.

“Sinking Fund Installment Date” means the dates upon which a Sinking Fund Installment shall be due pursuant to Section 3.01(b) of the Indenture.

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“Sinking Fund Installments” means the payments required to be made by the District pursuant to Section 3.01(b) of the Indenture.

“Sinking Fund Payment Account of the Debt Service Fund” means the Sinking Fund Payment Account created by Section 4.01 of the Indenture.

“Special Record Date” shall mean the special record date established by the Trustee pursuant to Section 7.03(c) of the Indenture for purposes of paying principal and interest to any Bondholder following an Event of Default.

“Special Redemption Account of the Redemption Fund” shall mean the Special Redemption Account created by Section 4.01 of the Indenture.

“Subordinate Indebtedness” means any subordinate Indebtedness issued by the Trustee or the Borrower in accordance with the Indenture.

“Substitute Depository” means a Depository appointed under the Indenture and qualified under the Indenture to replace a predecessor Depository but shall not include a successor of any Depository.

“Supplemental Indenture” means any indenture entered into by the District and the Trustee amending, modifying or supplementing the Indenture, any Supplemental Indenture or any Bond in accordance with the terms of the Indenture.

“Tax Certificate” means the Tax Certificate of the District and the Borrower, dated the Closing Date for the Series 2003 Bonds, executed by an Authorized Delegate and a Borrower Representative.

“Taxes” means all taxes, water rents, sewer rents, assessments, fees and other District, governmental or municipal or public or private dues, charges, levies and tax liens which are or may be levied, imposed or assessed upon all or any part of the Project or upon the rents, issues, income or profits of it, and all taxes levied on the operations of the Borrower, whether the taxes be income taxes, franchise taxes, excise taxes or other taxes.

“Tax-Exempt Organization” means a nonprofit corporation organized under the laws of one of the states of the United States or the District which is an organization described in Section 501(c)(3) of the Code and exempt (except with respect to unrelated trade or business income) from federal income taxes under Section 501(a) of the Code or any predecessor or successor provisions of similar import heretofore or hereafter enacted.

“Tax-Exemption for the Bonds” or “Tax-Exempt,” or “Tax Exemption” means (A) the exclusion from gross income for federal income tax purposes of the interest payable on the Bonds under Section 103 of the Code, or its successor provision, and (B) the exemption of the Bonds and the interest thereon from District taxation, except estate, inheritance and gift taxes, as provided in Section 485 of the Home Rule Act, or its successor provision.

“Technology Reserve Fund” has the meaning given that term in Section 7.29 of the Loan Agreement.

“Term of the Loan Agreement” means the term of the Loan Agreement as specified under Section 16.06 of the Loan Agreement.

“Trust Estate” means, at any particular time, all right, title and interest of the District in and to the Loan Agreement and the Note (except for the Reserved Rights of the District) including, without limitation, the Receipts and Revenues of the District from the Loan Agreement and the Note (except for the Reserved Rights of the District), all right, title and interest of the District in all 2003 Project Formula Payments, monies, securities and obligations, including Permitted Investments (including the investment income from Permitted Investments except Credit Enhancement Account Earnings) which at such time are deposited or are required to be deposited with, or are held or are required to be held by or on behalf of, the Trustee in trust under any of the provisions of the Indenture, all cash and securities now or hereafter held in the Funds (except the Arbitrage Rebate Fund) and Accounts (except Credit Enhancement Account Earnings) created or established under the Indenture and all investment earnings on

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the Funds and Accounts (except Credit Enhancement Account Earnings), all right, title and interest of the District in and to the Deed of Trust, the Leasehold Deed of Trust and Security Agreement and all other property of every name and nature which is now pledged, assigned or transferred, or which may from time to time in the future be pledged, assigned or transferred, to the Trustee, by delivery or by writing of any kind, as and for security under the Indenture, whether by the District or by anyone on the District's behalf, or with the District's written consent, except for monies or obligations deposited with or paid to the Trustee for the redemption or payment of Bonds which are deemed to have been paid in accordance with Article IX of the Indenture, funds held pursuant to Section 2.18 of the Indenture, and monies representing the Rebate Amount.

“Trustee” means Wells Fargo Bank Minnesota, N.A. a national banking association organized and existing under the laws of the United States, as trustee under the Indenture, its successors and its and their assigns, and any co-trustee appointed and serving under the Indenture.

“UCC” means the Uniform Commercial Code as in effect in the District.

“Unrestricted Liquid Assets Fund” has the meaning given to that term in Section 7.28 of the Loan Agreement.

“Underwriter” means Citigroup Global Markets Inc., with respect to the Series 2003 Bonds and, as to Additional Bonds, any entity appointed in connection with the issuance of such Bonds.

“Valuation Date” means (i) with respect to the Debt Service Reserve Fund, the tenth Business Day prior to each Interest Payment Date provided, however, that if amounts on deposit in the Debt Service Reserve Fund are less than the Debt Service Reserve Fund Requirement, such date shall be the last Business Day of each calendar month until the amounts on deposit in the Debt Service Reserve Fund at least equal the Debt Service Reserve Fund Requirement, and (ii) with respect to all other Funds and Accounts, the last Business Day of each calendar month.

“Value,” when used with respect to Funds held as part of any Fund or Account under the Indenture, shall be determined as of each Valuation Date or at such other times as required in the Loan Agreement or the Indenture and shall mean the value calculated as follows:

(i) as to investments the bid and asked prices of which are published on a regular basis in The Wall Street Journal (or, if not there, then in The New York Times): the average of the bid and asked prices for such investments so published on or most recently prior to such time of determination;

(ii) as to investments the bid and asked prices of which are not published on a regular basis in The Wall Street Journal or The New York Times: the average bid price at such time of determination for such investments by any two nationally recognized government securities dealers (selected by the Trustee in its absolute discretion) at the time making a market in such investments or the bid price published by a nationally recognized pricing service;

(iii) as to certificates of deposit, bankers acceptances and investment agreements: the face amount thereof, plus accrued interest; and

(iv) as to any investment not specified above, the value thereof established by prior agreement between the District, the Trustee and the Insurer.

“2003 Project” means, individually and collectively, those charter school facilities the costs of which will or are to be financed or refinanced, in whole or in part by the proceeds of the Series 2003 Bonds, as described in further detail in Exhibit B to the Loan Agreement.

“2003 Project Formula Payments” means the quarterly payments based on the number of students attending the charter school facilities comprising the 2003 Project operated by the Borrower which are payable, allocable or awarded to the Borrower by the District pursuant to D.C. Official Code §§ 38-2901 et seq. and 38-1801 et seq. as it

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may be amended or supplemented and the Charter School Agreement and arranged by the Borrower to be paid directly to the Trustee as security for the Bonds.

THE INDENTURE

The following is a summary of certain provisions of the Indenture. Such summary does not purport to be complete or definitive and reference is made to the Indenture for a full and complete statement of the terms and provisions and for the definition of capitalized terms used in this summary and not otherwise defined under “DEFINITIONS OF CERTAIN TERMS IN THE INDENTURE AND THE LOAN AGREEMENT.”

Pledge and Assignment. In order to secure the payment of the principal of, and interest and premium, if any, on the Series 2003 Bonds and any Additional Bonds issued under the Indenture either at their maturity or prior redemption according to their tenor and effect and to secure the performance and observance by the District of all the covenants and obligations expressed or implied in the Indenture and in the Bonds, the District conveys, transfers, assigns and pledges the Trust Estate to and grants a security interest in the Trust Estate, to the Trustee and to its successors in trust and assigns, forever, such conveyance, transfer, assignment, pledge and security interest to be effective without the recording of the Indenture or any other instrument.

Replacement Bonds. When Bonds are no longer held by a Bond Depository upon the conditions specified in the Indenture, the District shall, at the direction of the Borrower, direct that Certificated Bonds be issued in lieu of Global Certificates. In such event the Global Certificates shall be canceled and destroyed by the Trustee in accordance with applicable law. The Trustee shall, upon request, furnish to the Paying Agent, the Authenticating Agent and the Borrower evidence of the cancellation and destruction of such Global Certificates and specifying such Global Certificates by number, and the District shall thereupon execute and the Authenticating Agent shall authenticate and deliver Certificated Bonds. Upon the issuance of Certificated Bonds, the Trustee and the Authenticating Agent may require payment by the Bondholder of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation to the issuance of such Certificated Bonds. The execution by the District of any Certificated Bonds shall constitute full and due authorization of such Certificated Bonds. Certificated Bonds shall be entitled to all the same benefits under the Indenture as Global Certificates.

Books. The District shall cause books for the registration and registration of transfer of the Bonds as provided in the Indenture to be kept by the Registrar. The Registrar shall maintain and keep, at the Principal Office of the Registrar, books for the registration and registration of transfer of the Bonds, which at all reasonable times shall be open for inspection by the District, the Trustee, the Paying Agent and the Borrower. Upon presentation of any Bond entitled to registration or registration of transfer at the Principal Office of the Registrar, the Registrar shall register or register the transfer of the Bond in the registration books, under such reasonable regulations as the Registrar may prescribe. The Registrar shall make all necessary provisions to permit the exchange, registration and transfer of the Bonds at the Principal Office of the Registrar.

Non-presentment of Bonds. In the event any Bond shall not be presented for payment when the principal of such Bond becomes due, either at maturity, at the date fixed for redemption of the Bond, or otherwise, or if any interest check shall not be cashed, if funds sufficient to pay such Bond or interest shall have been made available by the District to the Trustee or the Paying Agent for the benefit of the Owner of the Bond, all liability of the District to the Owner of the Bond for the payment of such Bond or interest, as the case may be, shall forthwith cease, terminate and be completely discharged, upon which event it shall be the duty of the Trustee to segregate such funds and to hold such segregated funds in trust, uninvested and without liability for interest on such funds, for the benefit of the Owner of such Bond or interest, as the case may be, who shall thereafter be restricted exclusively to such funds for any claim of whatever nature on his part under the Indenture or on, or with respect to, such Bond or interest, as the case may be, provided that any money deposited with the Trustee for the payment of the principal of, and premium, if any, or interest on any Bond and remaining unclaimed for one year (or such period of time as is then specified by the law governing unclaimed or abandoned property) after such principal and premium, if any, or interest has become due and payable shall be paid pursuant to the law governing unclaimed or abandoned property.

Creation of Funds and Accounts; Deposit of and Use of Moneys. The Funds and separate Accounts within the Funds created for the Bonds under the Indenture shall be held and administered by the Trustee in accordance with the terms of the Indenture and as described below concerning certain Funds:

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Debt Service Fund. A Debt Service Fund will be established comprised of a Sinking Fund Payment Account, an Interest Account, a Principal Account and an Additional Payments Account. An amount of Bond Proceeds equal to the accrued interest on the Bonds as of the Closing Date will be deposited into the Interest Account of the Debt Service Fund. Thereafter, there will be deposited in the Debt Service Fund by the Trustee Loan Payments, Additional Payments and Sinking Fund Installments. Moneys in the Debt Service Fund shall be used solely for the payment of mandatory sinking fund payments, the payment of principal of and premium (if any) on the Bonds as the same become due and payable at maturity, upon redemption or upon acceleration of maturity, interest on and premium (if any) on the Bonds as the same become due and payable (including sinking fund payments) and the payment of Additional Payments.

Redemption Fund. A Redemption Fund shall be established comprised of an Optional Redemption Account and a Special Redemption Account. Moneys in the Redemption Fund shall be used solely for the payment of principal of the Bonds, accrued interest to the redemption date, if any, and premium, if any, upon redemption of the Bonds.

Payment of Interest. Interest on the Series 2003 Bonds shall be payable semi-annually on each Interest Payment Date. The Series 2003 Bonds shall mature and be payable, subject to prior redemption, on the terms and conditions set forth in the Indenture.

Payment of Principal and Premium. Principal of, premium (if any) on, and interest on, the Bonds shall be payable in any coin or currency of the United States of America which, at the time of payment, is legal tender for the payment of public and private debts, but only from the Receipts and Revenues of the District from the Loan Agreement and the Note. If the Bonds are not in book-entry form, principal of, premium (if any) on, and interest accrued on the Bonds to the last Interest Payment Date shall be payable at the Principal Office of the Paying Agent upon presentation and surrender of the Bonds as the same become due.

Investments. Moneys in any certain Funds or Accounts created under the Indenture shall, at the direction of the Borrower, be invested and reinvested by the Trustee in Permitted Investments and such investments applied pursuant to and in accordance with the Indenture.

Redemption. The Bonds shall be subject, pursuant to the terms of the Indenture, to optional redemption, extraordinary optional redemption, special mandatory redemption and mandatory sinking fund redemption. (See “The Bonds - Redemption” for a description of the provisions regarding redemption.)

No Pecuniary Liability. Each and every covenant made in the Indenture is predicated upon the condition that the District shall not have any pecuniary liability for the (a) payment of the principal, premium, if any, on, or interest on, the Bonds, or (b) performance of any pledge, mortgage, obligation or agreement created by or arising out of the Indenture or the issuance of the Bonds. Neither the Bonds nor the interest on the Bonds nor any obligation or agreement of the District under the Indenture or the other Bond Documents shall be construed to constitute an indebtedness of the District within the meaning of any constitutional or statutory provision.

No Personal Liability. Subject to Section 11.04 of the Indenture, no covenant, stipulation, obligation or agreement of the District in the Indenture, the Bonds, the Loan Agreement or any other Bond Document shall be deemed to be a covenant, stipulation, obligation or agreement of any present or future elected or appointed official, officer, employee or agent of the District in his or her individual capacity, and neither the members of the Council nor any official executing the Bonds shall be liable personally on the Bonds or be subject to any personal liability or accountability by reason of the issuance of the Bonds or by reason of the covenants, stipulations, obligations or agreements of the District contained in the Indenture, the Bonds or the Loan Agreement.

Performance of Covenants of the District; Representations. The District will at all times faithfully perform any and all covenants, undertakings, stipulations and provisions contained in the Indenture, in any and every Bond executed, authenticated and delivered under the Indenture, and in all proceedings pertaining to the Bonds.

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No Disposition of Trust Estate. Except as permitted by the Indenture or the other Bond Documents, the District will not sell, lease, pledge, assign or otherwise dispose of or encumber its interest in the Trust Estate and will promptly pay or cause to be discharged or make adequate provision to pay or discharge, or cause the Borrower to pay or discharge, as provided in the Loan Agreement, any lien or charge on any part of the Trust Estate not permitted by the Indenture.

Tax Covenant. The District, the Trustee, the Registrar and the Paying Agent covenant for the benefit of the Holders of the Bonds that they will, to the extent within their control, take no action and permit no action to be taken which would adversely affect the Tax-Exemption for the Bonds. This covenant shall survive the defeasance or payment in full of the Bonds, notwithstanding any other provision of the Indenture, until the requirements for payment of any Rebate Amounts pursuant to Section 148(f) of the Code have been fully satisfied.

Removal of Trustee. The Trustee may be removed at any time (provided that no Event of Default has occurred and is then continuing) at the request of the Borrower or the Issuer (with the approval of the District) by providing at least 30 days’ written notice of the removal and of the appointment of a successor by the District to the Trustee to be removed, the Paying Agent, the Authenticating Agent and the Registrar. Such removal shall take effect upon the appointment of a successor Trustee and the acceptance of such appointment by such successor. Upon the termination of the Indenture, and upon the removal or resignation of the Trustee, any reasonable costs associated with any accounting or similar process requested of the Trustee which is duplicative in nature or in excess of the accounting or similar process ordinarily required under the Indenture and previously provided by the Trustee, shall be a proper charge against the Trust Estate pursuant to the Indenture.

Events of Default. Each of the following events will constitute an Event of Default under the Indenture:

(a) A failure to pay the principal (including principal comprising Sinking Fund Installments) of, or premium, if any, on any Bond when the same becomes due and payable, at maturity, upon redemption or otherwise;

(b) A failure to pay any installment of interest on any Bond when the same becomes due and payable;

(c) An Event of Default under the Loan Agreement; and

(d) A failure by the District to observe or perform any covenant, condition, agreement or provision, other than as specified in clauses (a) or (b) above, contained in the Bonds or in the Indenture which is to be observed or performed by the District, which failure continues for a period of forty-five (45) days after written notice, specifying the failure and requesting that it be remedied, has been given to the District, and the Borrower (with a copy to the Insurer) by the Trustee, unless the Trustee agrees in writing to an extension of time prior to expiration of the 45-day period; provided however, that if the failure stated in the notice cannot be corrected the Trustee and the Insurer will not unreasonably withhold their consent to an extension of time if corrective action is instituted by the District or by the Borrower on behalf of the District within the applicable period and is being diligently pursued until the Event of Default is corrected.

Acceleration of Maturity. Upon the occurrence of an Event of Default, the Trustee may, and shall, at the direction of the Insurer or the Owners of Bonds representing 51% of the principal amount of the Bondholders with the written consent of the Insurer, by written notice to the District and the Borrower, declare the principal of the Bonds to be immediately due and payable, whereupon that portion of the principal of the Bonds thereby coming due and the interest thereon accrued to the date of payment shall, without further action, become and be immediately due and payable, anything in the Indenture or in the Bonds to the contrary notwithstanding.

Anything in the Indenture to the contrary notwithstanding, upon the occurrence and continuance of an Event of Default as defined in the Indenture, the Insurer shall be entitled to control and direct the enforcement of all rights and remedies granted to the Bondholders or the Trustee for the benefit of the Bondholders under the Indenture, including, without limitation: (i) the right to accelerate the principal of the Bonds as described in the

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Indenture, and (ii) the right to annul any declaration of acceleration, and the Insurer shall be entitled to approve all waivers of events of default.

Notice of Events of Default. The Trustee will provide written notice of the occurrence and continuing of any Event of Default to the Borrower, the District, the Insurer and all Owners of Bonds within thirty (30) days after obtaining knowledge of such Event of Default.

Rescission or Annulment of Acceleration. At any time after the principal of the Bonds shall 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, or before the completion of the enforcement of any other remedy under the Indenture, the Trustee, by written notice to the District, the Borrower, the Registrar and the Paying Agent, may annul such declaration and its consequences if: (i) moneys have accumulated in the Debt Service Fund sufficient to pay all arrears of interest, if any, upon all of the Outstanding Bonds (except the interest accrued on such Bonds since the last Interest Payment Date) and the principal of all matured Bonds (except the principal of any Bonds due solely as a result of such declaration); (ii) moneys have accumulated and are available sufficient to pay the charges, compensation, expenses, disbursements, advances and liabilities of the Trustee, and (iii) every other default known to the Trustee in the observance or performance of any covenant, condition or agreement contained in the Bonds or in the Indenture (other than a default in the payment of the principal of such Bonds then due solely as a result of such declaration) shall have been remedied to the satisfaction of the Trustee. No such annulment shall extend to or affect any subsequent default or impair any right consequent thereon.

Restoration to Former Position. In case any proceedings taken by the Trustee or the Bondholders on account of any Default in respect of the Bonds have been discontinued or abandoned for any reason, or shall have been determined adversely to the District or the Bondholders, then and in every such case the District, the Trustee and the Bondholders will be restored to their respective former positions and rights under the Indenture, and all rights, remedies, powers and duties of the Trustee will continue as though no such proceeding had been taken.

Bondholders’ Right to Direct Proceedings. Anything in the Indenture to the contrary notwithstanding, but subject in all respects to the provisions of Sections 6.04, 7.02, 7.03 and 7.06 of the Indenture, the Holders of a majority of the aggregate principal amount of the Outstanding Bonds under the Indenture have the right, by an instrument in writing executed and delivered to the Trustee, to direct the method and place of conducting all remedial proceedings to be taken by the Trustee under the Indenture, provided that (i) such direction will not be otherwise than in accordance with law and the provisions of the Indenture, and (ii) the Trustee will have the right to decline to follow such direction.

Limitation on Bondholders’ Right to Institute Proceedings. No Bondholder has any right to institute any suit, action or proceeding in equity or at law for the execution of any trust thereunder or for any other remedy thereunder unless (i) such Holder previously has given to the Trustee written notice of the Event of Default on account of which such suit, action or proceeding is to be instituted, (ii) the Holders of not fewer than 25% of the aggregate principal amount of the Outstanding Bonds have made written request to the Trustee after the right to exercise such powers or right of action, as the case may be, shall have accrued, and have afforded the Trustee a reasonable opportunity either to proceed to exercise the powers granted by the Indenture or to institute such action, suit or proceeding in its or their name, and (iii) there has been offered to the Trustee reasonable security and indemnity against the costs, expenses and liabilities to be incurred therein or thereby, and the Trustee has refused or neglected to comply with such request within a reasonable time. Such notification, request and offer of indemnity are declared in every such case, at the option of the Trustee, to be conditions precedent to the execution of the powers and trusts of the Indenture or to any other remedy thereunder; provided, however, that the Holders of not fewer than 25% of the aggregate principal amount of the Outstanding Bonds may institute any such suit, action or proceeding in their own names for the benefit of all Bondholders.

It is understood and intended that, except as otherwise provided above, (i) no one or more Bondholders has any right in any manner whatsoever to affect, disturb or prejudice the security of the Indenture or to enforce any right thereunder except in the manner therein provided, (ii) all proceedings at law or in equity shall be maintained in the manner therein provided and for the benefit of all Holders of the Outstanding Bonds, and (iii) that any individual right of action or other right given by law to one or more of such Holders is restricted by the Indenture to the rights and remedies therein; provided however that nothing therein will affect or impair the right of any Holder of any

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Bond to enforce payment of the principal, premium, in any, and interest, on such Bond at the time and place, from the source and in the manner expressed therein and in the Bonds.

No Remedy Exclusive. No remedy conferred upon or reserved to the Trustee or to the Bondholders under the Indenture is intended to be exclusive of any other remedy or remedies, and each and every such remedy shall be cumulative and shall be in addition to every other remedy given under the Indenture or now or in the future existing at law or in equity or by statute.

No Waiver of Remedies. No delay or omission of the Trustee or of any Bondholder to exercise any right or power accruing upon any Default will impair any such right or power or be construed to be a waiver of any such Default or an acquiescence in the Default. Every power and remedy given under the Indenture to the Trustee and to the Bondholders may be exercised from time to time and as often as may be deemed expedient.

Limitations on Modifications of the Indenture and the Loan Agreement. Neither the Indenture nor the Loan Agreement shall be modified, supplemented or amended in any respect subsequent to the first issuance of the Bonds except as provided in and in accordance with and subject to the provisions of the Indenture.

Supplemental Indentures Without Bondholder Consent. The District and the Trustee may, from time to time and at any time, without the consent of or notice to the Bondholders, but with the consent of the Borrower, enter into Supplemental Indentures as follows:

(i) To cure any formal defect, omission, inconsistency or ambiguity in, or to clarify any provision contained in the Indenture.

(ii) To grant, confer or impose upon the Trustee, the Registrar or the Paying Agent, for the benefit of the Bondholders, any additional rights, remedies, powers, authority, security, liabilities or duties which may lawfully be granted, conferred or imposed and which are not contrary to or inconsistent with the Indenture as previously in effect, provided that no such additional liabilities or duties shall be imposed upon the Trustee, the Registrar or the Paying Agent without its respective consent.

(iii) To add to the covenants and agreements of, and limitations and restrictions upon, the District in the Indenture, other covenants, agreements, limitations and restrictions to be observed by the District which are not contrary to or inconsistent with the Indenture as previously in effect.

(iv) To confirm, as further assurance, any pledge under, and the subjection to any claim, lien or pledge created or to be created by, the Indenture, of the Receipts and Revenues of the District from the Loan Agreement and the Notes or of any other moneys, securities or funds.

(v) To make correlative amendments and modifications to the Indenture regarding exchangeability of Bonds of different denominations and similar amendments and modifications of a technical nature.

(vi) To make amendments or additions which do not materially adversely affect the interests of Holders of Outstanding Bonds.

(vii) To comply with the requirements of the Trust Indenture Act of 1939, as from time to time amended, if applicable.

(viii) To make any change in accordance with Section 4.16(c) of the Indenture in connection with a change in the timing of payment of 2003 Project Formula Payments.

(ix) To provide for the amendment of the provisions concerning registration of the Bonds under a book-entry system or when the Bonds are in certificated form.

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(x) To preserve the exemption from federal income taxation of the interest paid on the Bonds.

(xi) To provide additional collateral to the Bondholders.

(xii) To obtain or maintain the rating of the Series 2003 Bonds or any Series of Additional Bonds by any Rating Agency.

(xiii) To provide for the issuance of Additional Bonds in accordance with Section 2.05 of the Indenture.

(xiv) To provide for the amendment of provisions concerning rebate subject to the delivery to the District, the Trustee and the Borrower of an opinion of Bond Counsel stating that the Supplemental Indenture is authorized by and complies with the terms of the Indenture, is permitted by law and will be valid and binding upon the District in accordance with its terms, and will not adversely affect the Tax-Exemption for the Bonds.

(xv) To make any change (including a change in Section 4.10 of the Indenture) to reflect any provision in the Code or the interpretations thereof by the Internal Revenue Service, provided that such change does not materially adversely affect the rights of any Bondholder.

Notwithstanding the foregoing, notice by the Trustee to the Insurer and the written consent of the Insurer shall be required for any Supplemental Indenture which addresses paragraph (vi) or (viii) above.

Supplemental Indentures With Bondholder Consent. Owners of not fewer than 51% in aggregate principal amount of the Bonds then Outstanding have the right from time to time to consent to and approve the execution and delivery by the District and the Trustee of any Supplemental Indenture deemed necessary or desirable by the District at the direction of the Borrower, and with the prior written consent of the Insurer, for the purposes of modifying, altering, amending, supplementing or rescinding, in any particular, any of the terms or provisions contained in the Indenture, provided, however, that, unless approved in writing by the Insurer and the Owners of all the Bonds then Outstanding nothing contained in the Indenture shall permit, or be construed as permitting, (i) a change in the times, amounts or currency of payment of the principal of or interest on any Outstanding Bond, a change in the terms of principal amount or premium, if any, of any Outstanding Bond or the rate of interest on any Outstanding Bond or a reduction in the principal amount or premium, if any, of any Outstanding Bond or (ii) the creation of a claim or lien upon, or a pledge of, the Receipts and Revenues of the District from the Loan Agreement and the Note ranking prior to the claim, lien or pledge created by the Indenture or (iii) a preference or priority of any Bond or Bonds over any other Bond or Bonds, except as provided in the Indenture or (iv) a reduction in the aggregate principal amount of Bonds, the consent of the Bondholders of which is required for any such Supplemental Indenture under the Indenture or which is required, under Section 8.08 of the Indenture, for any modification, alteration, amendment or supplement to the Loan Agreement.

Notice. If at any time the District at the direction of the Borrower requests the Trustee to enter into any Supplemental Indenture for any of the purposes described in Section 8.02 of the Indenture, the Trustee will cause notice of the proposed Supplemental Indenture to be given by Mail to the Borrower, the Insurer and all Owners of Outstanding Bonds not fewer than fifteen (15) days in advance of the proposed effective date of such amendment. Such notice will briefly set forth the nature of the proposed Supplemental Indenture and state that a copy of it is on file at the office of the Trustee for inspection by all Bondholders.

No Right to Object. If the Insurer and the Bondholders of not fewer than the percentage of Bonds required by the Indenture consent to and approve the execution and delivery of the Supplemental Indenture as provided in the Indenture, no Bondholder will have any right to object to the execution and delivery of such Supplemental Indenture, or to object to any of the terms and provisions contained in it or to its operation, or in any manner to question the propriety of its execution and delivery, or to enjoin or restrain the District or the Trustee from executing and delivering the same or from taking any action pursuant to its provisions.

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Consent of the Borrower Required. The Trustee and the District will not enter into any Supplemental Indenture without the prior written consent of the Borrower.

Amendment of Loan Agreement Without Bondholder Consent. Without the consent of or notice to the Bondholders, the District and the Borrower may modify, alter, amend or supplement the Loan Agreement, and the Trustee may consent to the modification, alteration, amendment or supplement, as may be (a) required by the provisions of the Loan Agreement and the Indenture, (b) necessary or advisable (i) in connection with the issuance of Additional Bonds in accordance with the Indenture, (ii) for the purpose of curing any formal defect, omission, inconsistency or ambiguity in the Loan Agreement or clarifying any provision of the Loan Agreement or (iii) in connection with any other change in the Loan Agreement which is not materially adverse to the Bondholders. A revision of Exhibit B to the Loan Agreement which does not conflict with the Authorizing Actions will not be deemed to be a modification, alteration, amendment or supplement to the Loan Agreement for any purpose of the Indenture, except that the written consent of the District and the Insurer will be required prior to any such revision. Before the District enters into, and the Trustee consents to, any modification, alteration, amendment or supplement to the Loan Agreement pursuant to the Indenture, there will have been delivered to the District and the Trustee an opinion of Bond Counsel stating that the modification, alteration, amendment or supplement is authorized or permitted by the Indenture and the Authorizing Actions, complies with their respective terms, and upon execution and delivery, will be valid and binding upon the District and the Borrower in accordance with its terms and will not adversely affect the Tax-Exemption for the Bonds. The Trustee will provide the Insurer with written notice of any amendment or supplement to the Loan Agreement executed and delivered pursuant to the Indenture.

Amendment of Loan Agreement With Bondholder Consent. Except in the case of modifications, alterations, amendments or supplements referred to in the Indenture, the District will not enter into, and the Trustee will not consent to, any amendment, change or modification of the Loan Agreement without the written approval or consent of the Insurer and the Owners of not fewer than 51% in aggregate principal amount of Bonds then Outstanding given and procured as provided in the Indenture: provided, however, that unless approved in writing by the Insurer and the Owners of all Bonds then Outstanding, nothing contained in the Indenture will permit, or be construed as permitting, a change in the obligations of the Borrower under the Loan Agreement. If at any time the District or the Borrower requests the consent of the Trustee to any such proposed modification, alteration, amendment or supplement of the Loan Agreement, the Trustee will cause notice of the proposed modification, alteration, amendment or supplement to be given in the same manner as provided by the Indenture with respect to Supplemental Indentures. The notice will briefly set forth the nature of the proposed modification, alteration, amendment or supplement and will state that copies of the instrument embodying the same are on file at the Principal Office of the Trustee for inspection by all Owners. The District may enter into, and the Trustee may consent to, any such proposed modification, alteration, amendment or supplement subject to the same conditions and with the same effect as provided in the Indenture with respect to Supplemental Indentures.

Determination of Adverse Effect on Holders of Bonds. Notwithstanding any other provision of the Indenture or the Loan Agreement to the contrary, in determining whether the rights of Holders of Bonds shall be adversely affected by any action taken pursuant to the terms and provisions of Article VIII of the Indenture, the Trustee shall consider the effect on the Holders of the Bonds as if there were no Insurance Policy then in effect.

Discharge of Indenture. Subject to the provisions set forth in Section 9.03 of the Indenture, if the District pays or causes to be paid to the Owner of any Bond secured by the Indenture, the principal of, premium, if any, on, and interest due and payable, and thereafter to become due and payable, on that Bond, or any portion of that Bond, then that Bond or portion of that Bond will cease to be entitled to the lien, benefit and security of the Indenture. Subject to the provisions set forth in Section 9.03 of the Indenture, if the District pays or causes to be paid to the Owners of all the Bonds secured by the Indenture, the principal of and interest due and payable on the Bonds and thereafter to become due and payable on the Bonds, and pays or causes to be paid, or makes other satisfactory arrangements with respect to, all other sums owing under the Indenture by the District, including all necessary and proper fees, compensation and expenses of the Trustee, the Registrar, the Paying Agent and any co-paying agent, then, and in that case, the right, title and interest of the Trustee in and to the Trust Estate will terminate. In that event, the Trustee will assign, transfer and turn over the Trust Estate, including, without limitation, any surplus in the Debt Service Fund and any balance remaining in any other Fund created under the Indenture, to the Borrower, except as otherwise provided in the Indenture.

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Defeasance. Any Bond will be deemed to be paid within the meaning of the preceding paragraph and for all purposes of the Indenture when (a) payment of the principal, premium, if any, plus interest on the Bond to its due date (whether such due date is by reason of maturity or upon redemption as provided in the Indenture) either (i) has been made or caused to be made in accordance with the terms of the Bond or (ii) has been provided for by irrevocably depositing in trust for the benefit of the Bondholders and irrevocably setting aside exclusively for such payment, cash or Defeasance Securities, and (b) all necessary and proper fees, compensation and expenses of the Trustee, the Authenticating Agent, the Registrar and the Paying Agent pertaining to the Bonds with respect to which the deposit is made are paid or the payment of such amount is provided for to the satisfaction of the Trustee. At such times as a Bond is deemed to be paid under the Indenture, as provided above, such Bond will no longer be secured by or entitled to the lien or benefit of the Indenture. Notwithstanding the foregoing, no deposit under clause (a)(ii) above will be deemed a payment of such Bonds until (a) proper notice of redemption of such Bonds has been previously given in accordance with the Indenture or (b) in the event such Bonds are not to be redeemed within the next succeeding forty-five (45) days, until the Borrower has given the Trustee, on behalf of the District, irrevocable instructions to notify, as soon as practicable, the Owners of the Bonds in accordance with the Indenture that the deposit required by clause (i)(b) above has been made with the Trustee, that the Bonds are deemed to have been paid in accordance with the Indenture and further stating that the maturity or redemption date upon which moneys are to be available for the payment of the principal of, or premium, if any, of such Bonds, plus interest on such Bonds to their due date or the maturity of such Bonds.

To accomplish the defeasance of Bonds, in addition to the other provisions set forth in Article IX of the Indenture, the District shall cause to be delivered (i) a report of an Accountant as shall be acceptable to the Insurer (“Accountant”) verifying the sufficiency of the escrow established to pay the Bonds in full on the maturity or redemption date (including interest to the redemption date) (“Verification”), (ii) an escrow deposit agreement (which shall be acceptable in form and substance to the Insurer), (iii) an opinion or opinions of Nationally Recognized Bond Counsel to the effect that the Bonds are no longer Outstanding under the Indenture and that the defeasance of the Bonds will not adversely affect the Tax-Exemption on the Bonds and (iv) an opinion of Bankruptcy Counsel to the effect that payment of such moneys to the Bondholders would not constitute a voidable preference under Section 547 of the United States Bankruptcy Code in the event the Borrower or the District were to become a debtor under the United States Bankruptcy Code. Each Verification and opinion shall be acceptable in form and substance, and addressed, to the District, the Trustee and the Insurer. Any substitution of securities deposited in the escrow shall require an additional Verification acceptable in form and substance, and addressed, to the District, the Trustee and the Insurer. The Borrower will not cause the District to exercise any optional redemption of Bonds secured by the escrow agreement or any other redemption other than mandatory sinking fund redemptions unless (i) the right to make any such redemption has been expressly reserved in the escrow deposit agreement and such reservation has been disclosed in detail in the disclosure document for the refunding bonds, and (ii) as a condition of any such redemption there shall be provided to the Insurer a Verification as to the sufficiency of escrow receipts without reinvestment to meet the escrow requirements remaining following such redemption. The District and the Borrower will not amend the escrow deposit agreement or enter into a forward purchase agreement or other agreement with respect to rights in the escrow without the prior written consent of the Insurer. The Insurer shall be provided with final drafts of the above-referenced documentation not less than five Business Days prior to the funding of the escrow. The Bonds shall be deemed Outstanding under the Indenture unless and until they are in fact paid and retired or the terms set forth in Article IX of the Indenture are met.

Acceptance of Trusts. The Trustee accepts and agrees to execute the trusts created under the Indenture, but only upon the additional terms set forth therein, to all of which the District agrees and the respective Bondholders agree by their acceptance of delivery of any of the Bonds. The obligations and duties of the Trustee will be determined solely by reference to the Indenture and neither the assignment of the Note nor the pledge and assignment of the Trust Estate will impose on the Trustee any liability, obligation or duty imposed on the District under the Indenture and the other Bond Documents and, except as expressly set forth in the Indenture, no duties, express or implied, will be imposed on the Trustee. The Trustee acknowledges that it may receive notice from the District pursuant to the Loan Agreement and that it may be directed by the District to forward copies of any such notice to the Holders of the Bonds and to the information repositories referred to in the Continuing Disclosure Agreement. The Trustee shall be permitted in the ordinary course of its business to engage in banking business with the Borrower and the District as if it were not Trustee under the Indenture.

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Limitations on Liability. The Trustee may execute any of the trusts or powers contained in the Indenture and perform the duties required by it under the Indenture by or through attorneys, agents, receivers, or employees, and shall be entitled to rely on the advice of counsel concerning all matters relating to the trusts and its duties under the Indenture. Except for an entity wholly owned by, or under common control or common ownership with the Trustee, the Trustee shall not be responsible for any negligence or willful misconduct of any attorney, agent (selected by the consent of the Borrower unless such selection occurs after an Event of Default) or receiver selected by it with due care.

Bond Insurance. Notwithstanding any provisions set forth in the Indenture to the contrary, for so long as an Insurance Policy relating to the Series 2003 Bonds shall be in force and effect, the following provisions shall govern:

(a) To the extent that the Indenture confers upon or gives or grants to the Insurer any right, remedy or claim under or by reason of the Indenture, the Insurer is explicitly recognized as being a third party beneficiary thereunder and may enforce any such right, remedy or claim conferred, given or granted thereunder.

(b) Any provision of the Indenture which requires the consent of Bondholders, shall also require the consent of the Insurer; provided, however, that so long as the Series 2003 Bonds are Outstanding and the Insurer has not failed to comply with its payment obligations under the Insurance Policy, the Insurer will be deemed to be the sole Series 2003 Bondholder for the purpose of obtaining Series 2003 Bondholder consents as provided in the Indenture.

(c) Any reorganization or liquidation plan with respect to the Borrower must be acceptable to the Insurer. In the event of any reorganization or liquidation, the Insurer shall have the right to vote on behalf of all Bondholders who hold Bonds insured by the Insurer absent a default by Insurer under the Insurance Policy.

(d) Any notice that is required to be given to Bondholders, nationally recognized municipal securities information repositories or state information depositories pursuant to Rule 15c2-12(b)(5) adopted by the Securities and Exchange Commission or to the Trustee (or paying agent) pursuant to the Indenture or the other Bond Documents shall also be provided to the Insurer. All notices required to be given to the Insurer shall be in writing and shall be sent to the address set forth in Section 11.12 of the Indenture.

(e) The rights of the Insurer to direct or consent to actions of the District, the Trustee or the Holders of the Series 2003 Bonds under the Indenture shall be suspended during any period in which the Insurer is in default in its payment obligations under the Insurance Policy (except to the extent of amounts previously paid by the Insurer and due and owing to the Insurer) and shall be of no force or effect in the event the Insurance Policy is no longer in effect or the Insurer asserts that the Insurance Policy is not in effect or the Insurer shall have provided written notice that it waives such rights.

Payment Procedure Under the Insurance Policy. (a) In the event that on the second (2nd) Business Day prior to the Interest Payment Date on the Series 2003 Bonds, the Paying Agent has not received sufficient moneys to pay all principal of and interest on the Series 2003 Bonds due on the second (2nd) following business day, the paying agent shall immediately notify the Insurer or its designee on the same business day by telephone or electronic mail, confirmed in writing by registered or certified mail, of the amount of the deficiency.

(b) If the deficiency is made up in whole or in part prior to or on the Interest Payment Date, the Paying Agent shall so notify the Insurer or its designee.

(c) In addition, if the Paying Agent has notice that any Bondholder has been required to disgorge payments of principal or interest on the Series 2003 Bonds pursuant to a final non-appealable order by a court of competent jurisdiction that such payment constitutes an avoidable preference to such Bondholder within the meaning of any applicable bankruptcy laws, then the Paying Agent shall notify the Insurer or its designee of such fact by telephone or electronic notice, confirmed in writing by registered or certified mail.

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(d) The Paying Agent is irrevocably designated, appointed, directed and authorized to act as attorney-in-fact for Holders of the Bonds as follows: (i) if and to the extent there is a deficiency in amounts required to pay interest on the Series 2003 Bonds, the Paying Agent shall (A) execute and deliver to the Insurer, in form satisfactory to the Insurer, an instrument appointing the Insurer as agent for such Holders in any legal proceeding related to the payment of such interest and an assignment to the Insurer of the claims for interest to which such deficiency relates and which are paid by the Insurer, (B) receive as designee of the respective Holders (and not as Paying Agent) in accordance with the tenor of the Insurance Policy payment from the Insurer with respect to the claims for interest so assigned, and (C) disburse the same to such respective holders; and (ii) if and to the extent of a deficiency in amounts required to pay principal of the Series 2003 Bonds, the Paying Agent shall (a) execute and deliver to the Insurer, in form satisfactory to the Insurer, an instrument appointing the Insurer as agent for such Holder in any legal proceeding related to the payment of such principal and an assignment to the Insurer of the Series 2003 Bond surrendered to the Insurer in an amount equal to the principal amount thereof which has not previously been paid or for which moneys are not held by the Paying Agent and available for such payment (but such assignment shall be delivered only if payment from the Insurer is received), (b) receive as designee of the respective Holders (and not as Paying Agent) in accordance with the tenor of the Policy payment therefor from the Insurer, and (c) disburse the same to such Holders.

(e) Payments with respect to claims for interest on and principal of Series 2003 Bonds disbursed by the Paying Agent from proceeds of the Insurance Policy shall not be considered to discharge the obligation of the District with respect to such Series 2003 Bonds, and the Insurer shall become the Owner of such unpaid Series 2003 Bond and claims for the interest in accordance with the tenor of the assignment made to it under the provisions of the Indenture, or otherwise.

(f) Irrespective of whether any such assignment is executed and delivered, the District and the Paying Agent agree for the benefit of the Insurer that: (i) they recognize that to the extent the Insurer makes payments directly or indirectly (as by paying through the Paying Agent), on account of principal of or interest on the Series 2003 Bonds, the Insurer will be subrogated to the rights of such Holders to receive the amount of such principal and interest from the District, with interest thereon as provided and solely from the sources stated in the Indenture and the Series 2003 Bonds; and (ii) they will accordingly pay to the Insurer the amount of such principal and interest, with interest thereon as provided in the Indenture and the Series 2003 Bonds, but only from the sources and in the manner provided in the Indenture for the payment of principal of and interest on the Series 2003 Bonds to Holders, and will otherwise treat the Insurer as the Owner of such rights to the amount of such principal and interest.

(g) The Insurer shall be entitled to pay principal or interest on the Series 2003 Bonds that shall become Due for Payment but shall be unpaid by reason of Nonpayment by the District or the Borrower (as such terms are defined in the Insurance Policy) and any amounts due on the Series 2003 Bonds as a result of acceleration of the maturity thereof in accordance with the Indenture, whether or not the Insurer has received a Notice (as defined in the Insurance Policy) of Nonpayment or a claim upon the Insurance Policy.

THE LOAN AGREEMENT

The following is a summary of certain provisions of the Loan Agreement. Such summary does not purport to be complete or definitive and reference is made to the Loan Agreement for a full and complete statement of its terms and provisions and for the definition of capitalized terms used in this summary and not otherwise defined under “DEFINITIONS OF CERTAIN TERMS IN THE INDENTURE AND THE LOAN AGREEMENT.”

The Loan. In order to provide funds for the financing, refinancing or reimbursing of Costs of the 2003 Project, the District will, concurrently with the execution and delivery of the Loan Agreement and receipt of the agreed upon purchase price for the Series 2003 Bonds from the Underwriter (i) issue, sell and deliver the Series 2003 Bonds to the Underwriter and (ii) make the Loan to the Borrower on the terms and conditions set forth in the Loan Agreement. Neither the District nor the Trustee in any way warrants or represents that amounts on deposits in the Project Fund or the Costs of Issuance Fund will be sufficient to fund, in whole or in part, any disbursements requested by the Borrower.

Payments with Respect to the Series 2003 Bonds. The Borrower will make payments on the Loan sufficient to pay when due the principal of, premium, if any, on, and interest on, the Series 2003 Bonds, on the dates,

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in the amounts, at the times and in the manner provided in the Loan Agreement, in the Indenture and the Series 2003 Bonds, whether at maturity, upon acceleration, upon redemption or otherwise, provided that the obligation of the Borrower to make any payment under the Loan Agreement will be deemed to be satisfied and discharged to the extent of a corresponding payment made under the Series 2003 Note in all cases in lawful money of the United States of America. The Borrower acknowledges and agrees that as further provided in the Indenture, the 2003 Project Formula Payments shall be applied by the Trustee in accordance with Section 4.16 of the Indenture to pay debt service on the Series 2003 Bonds, and the Borrower shall receive a credit for each such payment by the Trustee against its obligation to make Loan Payments under the Loan Agreement. The obligation of the District, as required pursuant to the Indenture, to cause deposits to be made into the Interest Account of the Debt Service Fund for payment of interest then due on the Series 2003 Bonds on the Interest Payment Date and into the Principal Account of the Debt Service Fund and the Redemption Fund for payment of principal of, and premium, if any, on the Series 2003 Bonds on the date for payment, shall be reduced by the amount of moneys in the applicable Account of the Debt Service Fund or the Redemption Fund, as applicable, available for such purposes. It is understood and agreed that all payments payable under this Section 3.08 of the Loan Agreement are being assigned, pursuant to the Indenture, by the District to the Trustee for the benefit of the Owners of the Series 2003 Bonds and the Additional Payment obligees. The Borrower hereby consents to that assignment. The District directs the Borrower, and the Borrower agrees to pay to the Trustee, at the Trustee’s Principal Office, all payments payable by the Borrower pursuant to this Section 3.08 of the Loan Agreement. Receipt of a payment by the Trustee from the Borrower shall, to the extent of the payment received, discharge the obligations of the District to the Bondholders under the Bond Documents (and the concurrent obligations of the Borrower under the Series 2003 Note, the Loan Agreement and the other Bond Documents applicable to the Loan).

Additional Payments. In addition to the payments described above with respect to the payment of the Series 2003 Bonds, the Borrower will pay, or will cause to be paid upon receipt of a Borrower requisition in accordance with the Loan Agreement, Additional Payments, upon receipt by the Borrower of a request therefor. Anything to the contrary notwithstanding, Additional Payments are subsumed within the definition of Loan Payments and as such are to be paid by the Borrower when due in accordance with the Loan Agreement, in lawful money of the United States of America. The District directs the Borrower to pay to the Trustee, at the Trustee’s Principal Office, all payments payable by the Borrower pursuant to Section 3.09 of the Loan Agreement (except for the Issuance Costs which may be paid directly by the Borrower to the payee) and the payments to the District which shall be governed by Section 3.10 of the Loan Agreement. Each of the following items constitutes Additional Payments:

(a) The reasonable fees and expenses of the Trustee, Paying Agent, Registrar, and such accountants, consultants, attorneys and other experts as may be engaged by the District or the Trustee to prepare audits, financial statements, reports, or any required opinions, or to provide such other services required under the Loan Agreement or the Indenture;

(b) The reasonable fees and expenses of the District in connection with any litigation which may at any time be instituted involving the Loan Agreement, the Note, the Bonds or the Indenture or any other Bond Document, or in connection with the supervision or inspection of the Borrower, its properties, assets or operations or otherwise in connection with the administration of the Loan Agreement;

(c) All Issuance Costs;

(d) All reasonable expenses incurred in connection with any redemption of the Bonds;

(e) All amounts relating to the Insurance Policy and to the Insurance Reimbursement Expenses which are due and owing to the Insurer;

(f) All amounts required to be rebated to the federal government; and

(g) The Program Fee and all Administrative Costs.

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Effect of Failure of Borrower to Make Payments. In the event that the Borrower fails to make any payment required by Section 3.08 or 3.09 of the Loan Agreement, the item or installment in default will continue as an obligation of the Borrower until the amount in default is fully paid.

Payment Obligations of the Borrower Unconditional. The obligations of the Borrower to make the Loan Payments required of the Borrower by the Loan Agreement and the Note, and to perform and observe the terms and provisions of the Loan Agreement are absolute and unconditional and shall be secured by a pledge by the Borrower of its 2003 Project Formula Payments. The obligations to make Loan Payments and the manner and time of such payments will not be subject to any defense or claimed defense or any right of set off or any counterclaim or recoupment arising out of (i) any actual or alleged breach by the District, the Paying Agent, the Registrar, the Authenticating Agent, the Trustee, or any other party of any obligation owed to the Borrower, under the Loan Agreement or otherwise, or out of any indebtedness or liability at any time owing to the Borrower by the District, the Paying Agent, the Registrar, the Trustee or any other party, (ii) the insolvency, bankruptcy, liquidation or dissolution of the District (if permitted by law) or any Owner of any of the Bonds, and (iii) any other matter or event which might otherwise be construed as relieving the Borrower of any of its obligations under any of the Bond Documents. Accordingly, until such time as the principal of, premium, if any, and interest on the Bonds has been fully paid or provision for payment in full of the Bonds has been made in accordance with the Indenture, the Borrower (i) will not (a) suspend or discontinue any Loan Payments due under the Loan Agreement or (b) fail to perform the obligations imposed on it by the Loan Agreement and (ii) will not, except as provided in the Loan Agreement, terminate the Term of the Loan Agreement for any cause.

2003 Project Formula Payments from the District. (a) The Borrower represents and warrants that it has made arrangements with the appropriate District officials for all of the Borrower’s 2003 Project Formula Payments made after the Issuance Date to be deposited directly with the Trustee for subsequent deposit into the Revenue Fund established pursuant to Section 4.16 of the Indenture; provided, however, that in the event any 2003 Project Formula Payments are made inadvertently directly to the Borrower, the Borrower shall immediately deposit such payments with the Trustee. The Borrower shall take all necessary action to have the 2003 Project Formula Payments continue to be deposited directly with the Trustee throughout the term of the Loan Agreement.

(b) The Borrower acknowledges that (i) the Borrower’s right to receipt of the 2003 Project Formula Payments depends on the Borrower’s performance as a qualified and certified charter school under the agreements and obligations related thereto; (ii) the 2003 Project Formula Payments are moneys of the Borrower pledged by the Borrower for payment of the Series 2003 Bonds; (iii) the District, by its participation in this financing as issuer of the Bonds, is not constrained in any way from making any future modifications, amendments, or changes to the method by which such 2003 Project Formula Payments are calculated or the manner or timing of disbursement of such 2003 Project Formula Payments, or the amount of such 2003 Project Formula Payments, nor constrained from suspending or discontinuing any such payments in accordance with District law; (iv) any such changes with respect to the 2003 Project Formula Payments shall not affect the Borrower’s obligations to make Loan Payments or any other payments due under the Loan Agreement with respect to the Series 2003 Bonds; and (v) the Bonds shall constitute special obligations of the District, shall be without recourse to the District, shall not constitute general obligations of the District, shall not constitute a pledge of or involve the faith and credit or the taxing power of the District, shall not constitute a debt of the District and shall not constitute lending of the public credit for private undertakings as prohibited by Section 602(a)(2) of the Home Rule Act. The Bonds shall never constitute or give rise to any pecuniary liability of the District or any of its elected or appointed officials, officers, employees or agents, and the District shall not have any obligation with respect to the purchase of the Bonds.

(c) In the event of any change in District law regarding the timing of the 2003 Project Formula Payments, the Borrower will send written notice to the Trustee, the District and the Insurer of such change. In connection with any such change, the Borrower shall at its expense either arrange for the opinion of Bond Counsel contemplated by Section 4.16(c) of the Indenture to be delivered, or, if such opinion cannot be delivered, assist in the delivery of the required Supplemental Indenture and any amendment to the Loan Agreement that may be required in connection therewith.

Covenants of the Borrower. As a further inducement to the District to issue the Bonds, to execute and deliver the Indenture and the Loan Agreement and to close the Loan, and as a further inducement to any Holder from time to time of the Bonds to purchase the Bonds, the Borrower covenants, among other things, that:

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(a) It will not consolidate with or merge into another legal entity or permit one or more other legal entities to consolidate with or merge into it, nor will it sell, convey or otherwise transfer substantially all of its assets (each, a “Transaction”); provided that the Borrower may, so long as no Event of Default exists or would exist by reason thereof, undertake any Transaction if: (a) the surviving, resulting or transferee entity shall, concurrently with such Transaction, assume in writing all of the obligations of the Borrower under the Loan Agreement, (b) the Insurer consents to merger, sale, conveyance or transfer, (c) the surviving, resulting or transferee entity shall be qualified to do business in the District in accordance with then-applicable law and procedures, as certified by the appropriate District agency, (d) the surviving, resulting or transferee entity is in compliance with each of the District Agreements at the time of the consummation of such Transaction, (e) the surviving, resulting or transferee entity shall deliver to the Issuer and the Trustee the certification required from it as set forth in the Loan Agreement, (f) all licenses then currently in existence will be maintained by the surviving Entity upon giving effect to the Transaction, and (g) the Trustee and the Insurer shall have received, to its reasonable satisfaction, such other information and documents, certificates and opinions as the Trustee and the Insurer may reasonably require. Prior to the consummation of such Transaction, (i) the Borrower shall deliver to the Issuer and the Trustee and opinion of Bond Counsel to the effect that such Transaction will not adversely affect the exclusion of interest on the Bonds from gross income for Federal income tax purposes and does not violate the Act, Code or the Resolution, and (ii) the surviving, resulting or transferee entity’s certification to the Issuer and the Trustee to the effect that each of the conditions stated in clauses (a) through (h) of the preceding sentence is and will remain satisfied as of the date of such consummation and that such consummation will not cause any such condition not to be satisfied.

(b) It will comply with all laws, statutes, ordinances, rules, regulations, court orders and decrees of any governmental, quasi-governmental or other public or quasi-public authority or regulatory body which may at any time be applicable to the Borrower (the “Requirements of Law”) and agrees to correct all violations of such Requirements of Law, of which the Borrower has actual notice. Notwithstanding the foregoing, the Borrower shall have, to the extent permitted by law, the right to contest any such Requirement of Law, and to defer compliance therewith pending the outcome of such contest, provided that (a) the Borrower conducts such contest at its own expense and prosecutes such contest diligently and in good faith, (b) during the pendency of such contest (1) there will be no adverse effect upon any lien or security interest created by the Bond Documents, (2) the Trustee will not by reason thereof be subject to any criminal or civil liability, and (3) there will be no impairment of the insurance coverage required under the Loan Agreement, and (c) the Borrower shall (1) prior to the commencement of such contest, notify the Trustee of its intention to commence such contest, (2) provide such security as may be reasonably requested by the Trustee to assure (A) discharge of any tax, assessment, penalty, fine, liability or charge that could arise out of such non-compliance and/or contest, and (B) compliance with such Requirement of Law, in the event the Borrower is unsuccessful in such contest, and (3) keep the Trustee apprised of the course and outcome of such contest.

(c) It will maintain, or obtain when needed, all necessary permits, licenses, certifications, accreditations and other governmental authorizations necessary to conduct its operations substantially as they are currently conducted or as in the future they may be conducted.

(d) It will not enter into any contracts or agreements, perform any acts, or require the District to enter into any contracts or agreements or perform any acts, which would materially adversely affect any of the Reserved Rights of the District or the rights of the Bondholders or the Insurer under the Bond Documents.

(e) It will maintain its existence as a non-profit corporation and will not take any action or omit to take any action if the action or omission will result in a modification or termination of its status as an organization described in Section 501(c)(3) of the Code which is not a “private foundation” as defined in Section 509(a) of the Code, or its classification as an organization organized and operated for educational purposes and not for pecuniary profit within the meaning of the Securities Act of 1933, as amended.

(f) It will not pledge or permit to be pledged its 2003 Project Formula Payments, except as may be permitted by the Indenture and the Loan Agreement.

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(g) Except for the Permitted Encumbrances, the Borrower will not create or suffer to be created or suffer to exist upon the Project any interest, mortgage, leasehold interest or other lien, security interest or other similar right or interest, servitude, easement, right-of-way, license, encumbrance, irregularity or defect in title, cloud on title, restriction, reservation or covenant running with the land.

(h) It will not transfer, sell, lease or dispose otherwise of any portion of the Project except as may be permitted by the Indenture and the Loan Agreement.

(i) It will permit, on at least three (3) days written notice, the District and its designated representatives (including inspectors, agents, accountants and attorneys) to enter the Project at reasonable times, so as not to interfere with the operations of the Borrower, in order to inspect (in order to ensure compliance with the provisions of the Loan Agreement) (i) the Project, (ii) all books of accounts and records pertaining to the Project, and (iii) the operation of the Project, and will cooperate with the District so that the District can effectively inspect the Project. The inspection by the District does not (i) constitute the making of any warranty by the District as a result of their inspection of the Project, or (ii) impose a duty upon the District to inform the Borrower of any defects discovered in connection with such inspection.

(j) It will make its representatives and agents available at reasonable times, as reasonably requested by the Trustee and the District, to discuss its compliance with the terms of the Loan Agreement.

(k) It will, at its sole cost and expense, procure, renew, observe and comply with all conditions and requirements necessary to preserve its permits, certificates, licenses, certificates, approvals or other authorizations required by law for the approved uses of the Project and it will observe and comply or see to the observing or complying with all conditions and requirements necessary to preserve or renew those permits, certificates and licenses.

(l) It will not use or permit the use of the Project to violate any zoning, building or other ordinance, regulation, law, restrictive covenant or agreement applicable to the Project. The Borrower will not initiate, join in, or consent to any change in, any restrictive covenant, easement, zoning ordinance, or other public or private restriction affecting the Project. The Borrower will (i) promptly perform and observe, or cause to be performed and observed, all of the terms, covenants and conditions of all instruments of record which would materially and adversely affect the Project for its intended uses and (ii) do or cause to be done all things necessary to preserve intact and unimpaired any and all material easements, appurtenances and other interests and rights in favor of the Project.

(m) It will, consistent with the Authorizing Actions and its status as an organization described in Section 501(c)(3) of the Code which is exempt from federal income taxation under Section 501(a) of the Code and which is not a “private foundation” as defined in Section 509(a) of the Code, use and operate the Project or cause the Project to be used or operated solely as “elementary or secondary school facilities” within the meaning of the Home Rule Act, for related purposes and/or for any other use which is permissible under the Authorizing Actions. Neither the Bond Proceeds nor the earnings on moneys in the Project Fund will be used for any purpose for which bonds could not be issued under the Authorizing Actions. No change will be made in the character and use of the Project that will in any way adversely affect the Tax-Exemption for the Bonds.

(n) It will, at its sole cost and expense, keep, maintain and preserve the Project in good and safe condition, working order and repair (normal wear and tear excepted) and fit for its intended use, and will from time to time make all reasonably necessary and proper repairs, replacements and renewals required in order to keep the Project in a condition which satisfies this covenant.

(o) To the extent applicable, it will timely pay or cause to be paid all Taxes properly levied against or with respect to the Project or any part of it before they become delinquent and before any penalty for non-payment becomes applicable. The Borrower shall, if requested by the Trustee, promptly after payment, supply the Trustee with copies of paid receipts evidencing timely payment of all Taxes. Notwithstanding the foregoing, the Borrower shall have the right to promptly contest, in good faith, the validity, imposition or amount of any Taxes by timely and appropriate proceedings, unless by nonpayment

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the security afforded pursuant to the terms of the Indenture will be materially endangered, in which event the Taxes and governmental charges shall be paid immediately. In the event of a contest, the Borrower may permit the contested Taxes to remain unpaid (as allowed by law) during the period of the contest, including any appeal period, provided that it (i) gives the Trustee written notice of its intention to contest, (ii) diligently prosecutes the contest and (iii) at all times effectively stays or prevents any judicial sale, loss or forfeiture of the Project for non-payment of the Taxes by posting a bond (in form and amount satisfactory to the Trustee) or otherwise. In the event that the Borrower shall fail to pay any of the foregoing items required by the Loan Agreement to be paid by the Borrower, the Trustee may (but shall be under no obligation to) pay the same, and any amounts so advanced therefor by the Trustee shall become an additional obligation of the Borrower to the party making the advancement, which amounts the Borrower agrees to pay. Notwithstanding anything to the contrary herein, the fact that the District is participating in the financing, refinancing or reimbursing of Costs of the Project shall not be interpreted as meaning that the Borrower is eligible for any decrease in or immunity from any applicable tax, assessment, charge or levy ordinarily imposed by the District, nor shall any provision of the Loan Agreement be interpreted as a waiver by the District of the requirement that contested Taxes be paid to the extent that such payment is a requirement of any law, ordinance, regulation, matter of general policy of the District or other document or instrument unrelated to the Loan Agreement.

(p) The Borrower shall keep proper books of record and account in which full, true and correct entries will be made of all dealings or transactions of or in relation to the business and affairs of the Borrower in accordance with generally accepted accounting principles consistently applied, and will furnish to the Insurer and/or the Trustee, as set forth below the following:

(i) As soon as available, and in any event within 120 days after the close of each Fiscal Year of the Borrower, (A) to the Insurer and, upon the request of the Trustee, to the Trustee, the complete audited financial statements of the Borrower, including the statement of financial position as of the end of such Fiscal Year and the related activities and cash flows for such Fiscal Year, setting forth in each case in comparative form the corresponding figures for the preceding Fiscal Year, all in reasonable detail, certified and prepared by an Independent certified public accountant in accordance with generally accepted accounting principles (together with a copy of any audit letters and management letters delivered by the Independent certified accountant in connection with such financial statements), consistently applied and fairly presenting the financial condition of the Borrower as of the end of such Fiscal Year, certified as to accuracy, completeness and conformity with the Loan Agreement by the chief financial officer or chief executive officer of the Borrower, and (B) to the Insurer and, upon the request of the Trustee, to the Trustee, computations as of the end of each Fiscal Year regarding the Borrower’s compliance with Article VII of the Loan Agreement, certified as to accuracy, completeness and conformity with the Loan Agreement by the chief financial officer or chief executive officer of the Borrower.

(ii) Simultaneously with the delivery of each set of financial statements referred to in Section (i) above, a certificate signed by the chief executive officer or by the chief financial officer of the Borrower and delivered to the Insurer and to the Trustee stating that (A) under his or her supervision the Borrower has made a review of its activities during the preceding annual period, for the purpose of determining whether or not the Borrower has complied with all of the terms, provisions and conditions of the Loan Agreement, and (B) no Event of Default (or event that with the giving of notice or passage of time would constitute such an Event of Default) has occurred, or if an Event of Default has occurred, such certificate shall specify each such Event of Default, the nature and status thereof and any remedial steps taken or proposed to correct such default, and to the best of its knowledge, the Borrower has kept, observed, performed and fulfilled each and every covenant, provision and condition of the Loan Agreement on its part to be performed.

(q) The Borrower will have the right to remodel the Project and to make such substitutions, alterations, additions, modifications and improvements to the Project (a “Change”) as the Borrower, in its sole discretion (but subject to the provisions of the Loan Agreement), may from time to time deem to be desirable for the Borrower’s use, the costs of which Changes shall be paid by the Borrower.

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(r) Notwithstanding the foregoing, no Change shall be made in any part of the Project if the Change would adversely affect the Tax-Exemption for the Bonds or in any way change, within the meaning of the Home Rule Act, the character of the Project or any part thereof as “elementary or secondary school facilities” or other permitted undertaking under the Home Rule Act as then in effect. Prior to the adoption of any substantial amendment or change in the use or proposed use of any component of the Project, the Borrower shall notify the District, the Insurer and the Trustee and shall furnish the District, the Insurer and the Trustee with such information relating thereto as may be reasonably requested, including, in the case of any such change or amendment to the use of the applicable Project component, an opinion of Bond Counsel to the effect that such proposed amendment or change in the use or proposed use thereof complies with this Section.

(s) The sources and uses of the Series 2003 Bond Proceeds attached hereto as Exhibit G are the true, correct and accurate sources and uses in connection with the 2003 Project.

Taxes. To the extent applicable, the Borrower will timely pay or cause to be paid all Taxes properly levied against or with respect to the Project or any part of it before they become delinquent and before any penalty for non-payment becomes applicable. The Borrower shall, promptly after payment, supply the Trustee with copies of paid receipts evidencing timely payment of all Taxes. Notwithstanding the foregoing, the Borrower shall have the right to promptly contest, in good faith, the validity, imposition or amount of any Taxes by timely and appropriate proceedings, unless by nonpayment the security afforded pursuant to the terms of the Indenture will be materially endangered, in which event the Taxes and governmental charges shall be paid immediately. In the event of a contest, the Borrower may permit the contested Taxes to remain unpaid (as allowed by law) during the period of the contest, including any appeal period, provided that it (a) gives the Trustee written notice of its intention to contest, (b) diligently prosecutes the contest and (c) at all times effectively stays or prevents any judicial sale, loss or forfeiture of the Project for non-payment of the Taxes by posting a bond (in form and amount satisfactory to the Trustee) or otherwise. In the event that the Borrower shall fail to pay any of the foregoing items required by this Section to be paid by the Borrower, the Trustee may (but shall be under no obligation to) pay the same, and any amounts so advanced therefor by the Trustee shall become an additional obligation of the Borrower to the party making the advancement, which amounts the Borrower agrees to pay. Notwithstanding anything to the contrary herein, the fact that the District is participating in the financing, refinancing or reimbursing of Costs of the 1999 Project shall not be interpreted as meaning that the Borrower is eligible for any decrease in or immunity from any applicable tax, assessment, charge or levy ordinarily imposed by the District, nor shall any provision of the Loan Agreement be interpreted as a waiver by the District of the requirement that contested Taxes be paid to the extent that such payment is a requirement of any law, ordinance, regulation, matter of general policy of the District or other document or instrument unrelated to the Loan Agreement.

Special Covenants

Tax Certificate. An Authorized Delegate shall, on or prior to the date of issuance of the Bonds, either alone or in conjunction with any officer, employee, consultant or agent of the District, and a Borrower Representative will on or prior to the Issuance Date execute and deliver to the Trustee a Tax Certificate which will include the form of certification required by the Regulations under Section 148 of the Code to evidence that the Bonds do not constitute “arbitrage bonds” within the meaning of Section 148 of the Code and the Regulations (including, but not limited to, securing compliance with the ongoing requirements of Sections 148(d) and (f), the rebate and non-purpose investment rules).

Reciprocal Covenants. The District and the Borrower covenant to and for the benefit of the Owners of the Bonds that so long as any of the Bonds remain Outstanding, they will take no action that will cause moneys on deposit in any Fund or Account established or maintained in connection with the Bonds, whether or not such moneys are or were derived from Bond Proceeds or investment income therefrom or from any other sources, to be used in a manner which will cause the Bonds to be classified as “arbitrage bonds” within the meaning of Section 148 of the Code and the Regulations.

Form 8038. The Borrower covenants to provide, on or before the Closing Date, true and accurate information sufficient for the District with the assistance of Bond Counsel to file, on or within the legally permitted

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period after the Closing Date, Form 8038 (Information Return for Private Activity Bond Issues) with the Internal Revenue Service.

General Tax Covenant. The Borrower covenants that it will not act in a manner which would adversely affect the Tax-Exemption for the Bonds. The Borrower covenants that it will not fail to take any action necessary to be taken in order that the interest on the Bonds shall qualify, and continue to qualify, to be excludable from gross income for federal income tax purposes under Section 103 of the Code. Such covenants shall survive the defeasance of the Bonds notwithstanding any other provision of the Loan Agreement.

Rebate Monitor. To assist and act on behalf of the Borrower in the performance of the above covenants, the Borrower will, if required, during the term of the Bonds and for at least thirty (30) days thereafter, retain an Independent party to act as Rebate Monitor. In the event that a Rebate Monitor is appointed and the Rebate Monitor becomes unable to perform its function as Rebate Monitor, the Borrower will, if required, appoint another Independent party with the approval of the District and will give prompt notice to the Trustee thereof. In the event the Borrower does not appoint a successor Rebate Monitor, the District will, if required, appoint a successor Rebate Monitor, the expense of which will be borne by the Borrower, and will give prompt notice to the Trustee thereof. The Borrower further covenants that, during the term of the Bonds, in the event the Borrower sells or otherwise disposes of the Project, it will require that the transferee execute covenants similar to those in this Section in the sale or other documents concerning the disposition and will require such transferee to include such covenants in future transfer documents. The special covenants of the Borrower in the Loan Agreement concerning compliance with Section 148 of the Code will survive the defeasance or payment in full of the Bonds notwithstanding any other provision of the Loan Agreement until the requirements for payment of any Rebate Amounts pursuant to Section 148(f) of the Code have been fully satisfied.

Non-Discrimination Certification. The District and the Borrower agree that prior to the original issuance, sale and delivery of the Series 2003 Bonds and any Additional Bonds, the District shall certify, based on the information contained in the written certification of the Borrower, that, as to the respective Project, (i) the Borrower is in compliance with the provisions of Title 1, Chapter 25 of the District of Columbia Code (D.C. Code §§ 1-2501 et seq., as amended) and (ii) the Borrower does not wholly or partially deny, restrict or abridge or condition the use of, or access to, any of its facilities and services to any person otherwise qualified, for a discriminatory reason, based upon the race, color, religion, national origin, sex (except as permitted under Title 1, Chapter 25 of the District of Columbia Code), age, marital status, personal appearance, sexual orientation, family responsibilities, political affiliation, source of income or physical handicap of any individual.

Non-Discrimination Borrower Certification. The Borrower agrees to furnish to the District a written certification in form and content acceptable to the District and sufficient to enable the District to deliver timely the certification provided for in (a) above.

Additional Indebtedness. The Borrower shall not incur or permit to exist any Indebtedness except as follows:

(a) Indebtedness evidenced by the Loan Agreement;

(b) Installment sales agreements and purchase money mortgages with a term of less than one year;

(c) Short-Term Indebtedness in an aggregate principal amount which, together with any Short-Term Indebtedness then outstanding, shall not exceed an amount as provided in the Loan Agreement, and acceptable to the Insurer, of the Borrower’s unrestricted cash and investments;

(d) Parity Indebtedness so long as the Borrower has obtained (i) the prior written consent of the Insurer and (ii) evidence in the form of a written report of an Independent Consultant dated the date of issuance of the Parity Indebtedness stating that (a) the facilities to be financed as an Additional Project (the “Additional Facilities”), the costs of which will be financed with the proceeds of the Parity Indebtedness have been in operation for at least one full academic year, (b) based on the audited results of operations for

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the most recently completed Fiscal Year for the 2003 Project and the Additional Facilities, the Net Income of the Borrower shall be at least 1.25 times maximum annual debt service on all Bonds and Parity Indebtedness then-outstanding and the proposed Parity Indebtedness. The report of the Independent Consultant shall take into account the audited results of operations of the 2003 Project and any Additional Facilities for the most recently completed Fiscal Year, actual student enrollment for the 2003 Project and any Additional Facilities for the most recently completed Fiscal Year and shall assume that the proposed Parity Indebtedness shall have been outstanding for the entire year;

(e) Long-Term Indebtedness issued for the purpose of refunding (whether in advance or otherwise) any outstanding Indebtedness of the Borrower (“Refunding Indebtedness”), if the Trustee and the Insurer shall have received a certificate of the Borrower to the effect that, after giving effect to the proposed refunding, the annual Debt Service Requirement on all outstanding Long-Term Indebtedness will be reduced;

(f) Non-Recourse Indebtedness;

(g) Subordinate Indebtedness; and

(h) Additional Bonds issued in conformance with the provisions of Section 2.05 of the Indenture.

Use of Bond Proceeds. The Borrower covenants that the Bond Proceeds and earnings thereon will be used solely for payment of Costs or as otherwise may be explicitly permitted in the Loan Agreement. The Borrower covenants that none of the Bond Proceeds or earnings thereon will be used for any purpose for which bonds could not be issued under the Authorizing Actions.

Use of Bond Proceeds; Use of Project. The Borrower covenants that, except as described in the Tax Certificate, none of the Bond Proceeds or earnings with respect to any Fund and no part of the Project will be used (i) by the Borrower directly or indirectly in any Borrower activity which constitutes an unrelated trade or business as defined in Section 513(a) of the Code or (ii) in any trade or business carried on by any person or persons who are not Tax-Exempt Organizations or Governmental Units, or (iii) by any other Tax-Exempt Organization in an unrelated trade or business as defined in Section 513(a) of the Code.

Loans of Bond Proceeds. The Borrower covenants that, except as described in the Tax Certificate, no portion of the proceeds of the Bonds will be used directly or indirectly to make or finance loans (except as permitted by Section 141(c) of the Code) to Persons other than Tax-Exempt Organizations or Governmental Units.

Rebate and Yield Restriction Compliance. The Borrower covenants and agrees, with respect to compliance with Section 148 of the Code, that on behalf of the District it will do and perform all acts and things necessary to be done by it in order to assure that the continuing requirements of Section 148 of the Code are met with respect to the Bonds.

Rebate Calculations and Payments. Within thirty (30) days after the end of each Bond Year and within five (5) days after payment in full of all Outstanding Bonds, if necessary, the Borrower shall calculate the Rebate Amount as of the end of that Bond Year or the date of such payment and shall notify the Trustee of that amount. If the amount then on deposit in the Arbitrage Rebate Fund created under the Indenture is less than the Rebate Amount (taking into account the amount or amounts, if any, previously paid to the United States pursuant to Section 411 of the Indenture and this Section), the Borrower shall, within five (5) days after the date of the aforesaid calculation, deposit or cause to be deposited to the credit of the Arbitrage Rebate Fund an amount sufficient to cause the Arbitrage Rebate Fund to contain an amount equal to the Rebate Amount. The obligation of the Borrower to make or cause to be made such payments shall remain in effect and be binding upon the Borrower notwithstanding the release and discharge of the Indenture. The Borrower shall obtain such records of the computations made pursuant to this Section as are required under Section 148(f) of the Code and shall retain such records for at least six (6) years after the maturity or retirement of the Bonds.

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Use of Project. (a) The Borrower agrees that no part of the Project will be used for sectarian religious instruction or as a place of sectarian religious worship, whether conducted by or on behalf of the Borrower, by any other Person using the Project or in connection with any part of a sectarian program of a school for any religious denomination or in a manner which is otherwise prohibited by the Establishment of Religion Clause of the First Amendment to the Constitution of the United States of America and the decisions of the United States Supreme Court interpreting the same or by any comparable provisions of the Home Rule Act, District law and the decisions of the Court of Appeals of the District interpreting the same. The District or the Trustee may, upon at least three (3) days written notice to the Borrower, conduct such reasonable inspections as the District or the Trustee deems necessary to ensure compliance with this Section.

Event of Noncompliance with Respect to Certain District Requirements. The Borrower agrees to comply with the District Agreements, the execution and performance of each of which by the Borrower induced the District to issue the Series 2003 Bonds. In the event that it is determined that an Event of Noncompliance (as defined below) has occurred and is continuing with respect to the Borrower under either of the District Agreements, the District may (i) seek enforcement of any right under the applicable District Agreement and seek any available administrative, legal or equitable remedy to obtain specific performance or other relief thereunder and (ii) after the conclusion of any final administrative or judicial proceedings, if any, with respect to such Event of Noncompliance, direct the Trustee to give written notice of such Event of Noncompliance to the Insurer, the Holders of the Bonds and to the information repositories referred to in the Continuing Disclosure Agreement. The occurrence of an Event of Noncompliance shall not be an Event of Default under Section 15.01 of the Loan Agreement and any notice from the Trustee described in clause (ii) of the immediately preceding sentence shall so state.

For purposes of this Section, “Event of Non-compliance” shall mean: (i) a failure to comply with Section 7.16 of the Loan Agreement; (ii) a failure to meet the job notice and periodic reporting requirements contained in the Employment Agreement for a period of six months or more; or (iii) a material failure to meet, or to undertake in good faith to meet, the Borrower’s Memorandum of Understanding contracting and procurement commitments, as determined by calculation of the total Project expenditures for the Project to be financed, refinanced or reimbursed with proceeds of the Bonds, which failure has continued beyond any applicable cure period; provided that there shall not be an Event of Non-compliance if the Borrower is contesting, in good faith, the existence of said Event of Non-compliance, or compliance is stayed or restricted by an administrative or judicial proceeding or determination, or the District has elected not to declare the existence of such Event of Non-compliance.

Termination of Lease Agreement. The Borrower shall provide notice to the Trustee and the Insurer of any failure by the Borrower to extend, renew or replace the Lease Agreement by April 15, 2020 so that the lease of the Leased Portion is effective through the final maturity of the Bonds.

Environmental Covenant. (a) The Borrower shall maintain compliance with all applicable legal requirements relating to the use, generation, handling, storage or disposal by any person of Hazardous Substances at, on or from the Project, except any such requirements the non-compliance with which would not, in the aggregate, have a materially adverse effect on the Borrower or the Project.

(b) The Borrower has acknowledged receipt of the Indoor Air Quality Screening – Findings Summary, dated October 29, 2003, prepared by ATC Associates, Inc., relating to the Borrower’s Blow Pierce Campus and covenants to undertake the actions set forth under the heading “Recommendations” therein.

Operating Covenant. (a) Net Income must be equal to at least 1.25x maximum annual debt service on all Long-Term Indebtedness of the Borrower as of the end of the first Fiscal Year after the date of issuance of the Series 2003 Bonds and thereafter until the Series 2003 Bonds have been paid in full. The Borrower’s failure to achieve the required debt service coverage ratio shall not constitute an Event of Default under the Loan Agreement if the Borrower timely engages (within thirty (30) days of any such failure) an Independent Consultant, such Independent Consultant prepares within forty-five (45) days of engagement (or such longer period of time as shall be acceptable to the Insurer) a report to be delivered to the Borrower, the Trustee and the Insurer with recommendations for meeting the required coverage ratio and the Borrower implements within thirty (30) days of receipt of the report (or such longer period of time as shall be acceptable to the Insurer) the Independent Consultant’s reasonable recommendations; provided, however, that implementation is not required to the extent not legally permissible, where compliance with such recommendations would constitute a material default under the Management

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Agreement or where the Borrower and the Insurer mutually agree that compliance would be inappropriate or unreasonable.

(b) Notwithstanding the provisions of subsection (a) above, in no event may Net Income available to pay the principal of and interest on the Series 2003 Bonds fall below 1.0x maximum annual debt service on the Outstanding Series 2003 Bonds.

Disposition of Liquid Assets. No Liquid Assets which are a part of the 2003 Project or which otherwise secure the Series 2003 Bonds may be sold or otherwise disposed of unless (i) fair market value is received in return, or (ii) the total market value of Liquid Assets disposed of in any Fiscal Year does not exceed one percent (1%) of all Liquid Assets of the Borrower. Notwithstanding the foregoing, no accounts receivable which are a part of the 2003 Project or otherwise secure the Series 2003 Bonds may be sold, pledged, factored or otherwise disposed of under any circumstances.

Financial Statements; Periodic Reporting. (a) In addition to delivery of the audited financial statements of the Borrower as required pursuant to the Loan Agreement, the Borrower shall provide, within forty-five (45) days after the close of each quarter of the Borrower’s fiscal year, a copy of the Borrower’s unaudited financial statements to the Insurer (Attn. Surveillance) at the notice address set forth in Section 11.12 of the Indenture.

(b) The Borrower also shall provide or cause to be provided to the Insurer the following: (i) concurrently with delivery of the annual audited financial statements of the Borrower for each Fiscal Year as set forth in Section 7.22(a) of the Loan Agreement, a report (including supporting calculations), together with a certificate signed by an authorized officer of the Borrower, which confirms compliance with the terms set forth in Sections 7.20, 7.28 and 7.29 of the Loan Agreement, as well as any other financial covenants required to be satisfied by the Borrower for such fiscal period and which states whether any event of default under the Bond Documents (or event that with the giving of notice or passage of time would constitute such an event of default) has occurred and is continuing as of the date of such certificate, which such report also will include, until the fifth (5th) anniversary of the date of issuance of the Series 2003 Bonds, a statement as to the then-current balance in the Unrestricted Liquid Assets Fund (for informational purposes only) established pursuant to Section 7.28 of the Loan Agreement; (ii) no later than thirty (30) days following each September 30, a certificate signed by a Borrower Representative, setting forth demand and enrollment statistics for the new academic year, including, without limitation, enrollment, applications, acceptances and matriculations, average standardized examination scores and other relevant data with respect to the Borrower’s activities for such period; (iii) no later than forty-five (45) days after the end of each fiscal quarter, each of the following: (a) a copy of the quarterly report prepared for the governing board the Borrower for such fiscal quarter, (b) a certificate signed by an Borrower Representative stating whether any event of default under the Bond Documents (or event that with the giving of notice or passage of time would constitute such an event of default) has occurred and is continuing as of the date of such certificate; and (iv) a copy of the preliminary annual budget for such fiscal year and a copy of the final budget when approved, concurrently with delivery to the District of Columbia Public Charter School Board.

(c) The Borrower shall cause the Manager to deliver to the Insurer copies of certain specified reports, notices and certificates as required to be delivered under the Management Agreement. Concurrently with delivery to the governing board (District of Columbia Charter School Board), the Borrower shall deliver to the Insurer copies of any periodic reports, notices and certificates.

(d) The Insurer shall have the right to receive such additional information as it may reasonably request.

Notice of Threatened Termination of 2003 Project Licenses, Accreditation or Other Official Approvals. The Borrower shall provide or cause to be provided to the Insurer copies of any notice of threatened termination of any license, accreditation or other official approval material to the operations of the 2003 Project or the commencement of any litigation or other governmental or judicial proceeding in which an outcome adverse to the Borrower or the 2003 Project 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 the Borrower, and any other event which reasonably could be expected to have a material adverse effect on the operations or financial condition of the

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Borrower or the 2003 Project, within five (5) business days after the Borrower has knowledge of such threatened termination, the commencement of such litigation or proceeding or the occurrence of such other event.

Manager; Management Agreement. (a) The Borrower shall permit the Insurer to discuss the affairs, finances and accounts of the Borrower or any information the Borrower may reasonably request regarding the security for the Series 2003 Bonds with appropriate officers of the Borrower and shall grant the Insurer access to the facilities, including the 2003 Project, books and records of the Borrower with respect to the 2003 Project on any Business Day upon reasonable prior notice.

(b) The Borrower shall use its reasonable judgment to terminate the Manager for cause in accordance with the Management Agreement upon the occurrence of an event giving rise to the right of the Borrower to terminate the Manager for cause under the Management Agreement. In addition to the foregoing, the Borrower hereby acknowledges and expressly agrees to terminate the Manager for cause at the direction of the Insurer upon a failure by the Borrower to comply with Section 7.20(b) of the Loan Agreement.

Accounting. The Insurer shall have the right to direct an accounting at the Borrower’s expense and the Borrower’s failure to comply with such direction within thirty (30) days after written notice of the direction from the Insurer shall be deemed an Event of Default under the Loan Agreement.

Negative Pledge. The Borrower shall not create or allow to exist any liens on any of its plant, property and equipment which is a part of the 2003 Project or which otherwise secures the Series 2003 Bonds, including the Unrestricted Liquid Assets Fund described in Section 7.28 of the Loan Agreement, except as permitted by the Loan Agreement.

Compliance with Borrower’s Investment Policy. The Borrower shall comply in all material respects with its written investment policy relating to the investment of the Borrower’s funds (excluding funds and accounts held under the Indenture which shall be governed by the terms therein) and shall not change or amend its investment policy without the express written consent of the Insurer.

Unrestricted Liquid Assets Fund. (a) The Borrower shall establish on or before the Issuance Date an account with a commercial bank or trust company (which commercial bank or trust company may be the Trustee), which account shall be known as the “Unrestricted Liquid Assets Fund”. The District shall have no right, title or interest in the Unrestricted Liquid Assets Fund, and such fund and the amounts on deposit therein shall not be a part of the Trust Estate. The Trustee shall have no responsibility for the administration of the Unrestricted Liquid Assets Fund or for the maintenance and reporting of amounts on deposit therein. The Unrestricted Liquid Assets Fund shall be funded with Liquid Funds by the Borrower on or before the Issuance Date with an amount agreed upon by the Borrower and the Insurer (delivery of the Insurance Policy on the Issuance Date shall conclusively establish the Insurer’s approval of the amount of such deposit). The Borrower shall cause the balance of Liquid Funds on deposit in the Unrestricted Liquid Assets Fund to increase annually such that the Unrestricted Liquid Assets Fund shall have an available balance of Liquid Funds equal to at least fifteen percent (15%) of the 2003 Project Formula Payments on the fifth anniversary of the Issuance Date and shall have an available balance of Liquid Funds equal to at least twenty percent (20%) of the 2003 Project Formula Payments on the tenth anniversary of the Issuance Date. Commencing on the fifth anniversary of the Issuance Date and in each Fiscal Year thereafter, the Borrower shall provide to the Insurer a semi-annual report (including supporting calculations), together with a certificate signed by a Borrower Representative, which confirms compliance with the liquidity covenant determined as of January 1 and as of the end of each Fiscal Year. Each report and certificate prepared for the six-month period ended January 1 shall be delivered to the Insurer by January 10 of such year, and each report and certificate prepared for the six-month period from January 1 to the end of the Fiscal Year shall be delivered concurrently with delivery of the annual audited financial statements of the Borrower for such Fiscal Year. Failure to achieve the required balances within the Unrestricted Liquid Assets Fund shall not constitute an Event of Default under the Loan Agreement if the Borrower engages an Independent Consultant acceptable to the Insurer and implements the Independent Consultant’s recommendations or if the Borrower undertakes such actions as otherwise approved by the Insurer at the Borrower’s request. The Insurer shall give written notice to the Trustee of an Event of Default under this Section, and the Trustee shall be entitled to rely conclusively on such notice. Until such time as such written notice of the Insurer shall be received by the Trustee, the Trustee shall not be held to have actual or constructive notice of any Event of Default under this Section or event that with the giving of notice or the passage of time would result in

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an Event of Default under this Section, notwithstanding that the Unrestricted Liquid Assets Fund may be established as a separate account with the Trustee.

(b) The Borrower shall invest amounts on deposit in the Unrestricted Liquid Assets Fund in Permitted Investments or in accordance with the Borrower’s investment policy.

(c) Amounts held in the Unrestricted Liquid Assets Fund shall be subject to a valid springing lien for the benefit of the Insurer upon, and during the continuance of specified defaults pursuant to a collateral pledge agreement acceptable to the Insurer (creation, and, to the extent possible, perfection confirmed in a legal opinion acceptable to the Insurer).

(d) Notwithstanding the provisions set forth in paragraph (a) of this Section, but subject to the provisions set forth in Section 7.26 of the Loan Agreement, amounts on deposit in the Unrestricted Liquid Assets Fund may be withdrawn and expended by the Borrower for the following purposes: (i) payment of any amounts representing an operating shortfall resulting from a surplus in expenses (including operating expenses, debt service payments and any required funding reserves) as compared to 2003 Project Formula Payments received by the Borrower, and (ii) any capital expenditure, other than capital expenditures funded with amounts on deposit in the Facilities Reserve Fund and the Technology Reserve Fund in accordance with Section 7.29 of the Loan Agreement, needed in connection with the 2003 Project. To the extent that such amounts are expended for the purposes set forth in the immediately preceding sentence, the failure to maintain the required balance in the Unrestricted Liquid Assets Fund shall not constitute an Event of Default under the Loan Agreement.

Facilities Reserve Fund and Technology Reserve Fund. (a) The Borrower shall establish on or before the Issuance Date two accounts, each with a commercial bank or trust company (which commercial bank or trust company may be the Trustee), which accounts shall be known as the “Facilities Reserve Fund” and the “Technology Reserve Fund”. The District shall have no right, title or interest in the Facilities Reserve Fund or the Technology Reserve Fund, and such funds and the amounts on deposit therein shall not be a part of the Trust Estate. The Trustee shall have no responsibility for the administration of either the Facilities Reserve Fund or the Technology Reserve Fund or for the maintenance and reporting of amounts on deposit therein.

(b) The Borrower shall fund or cause to be funded in the Facilities Reserve Fund on the Issuance Date an amount agreed upon by the Borrower and the Insurer (delivery of the Insurance Policy on the Issuance Date shall conclusively establish the Insurer’s approval of the amount of such deposit) and annually thereafter such amounts as shall be determined by the Insurer and the Borrower such that the amount on deposit in the Facilities Reserve Fund shall be not less than $460,000 as of the Fiscal Year ended June 30, 2005. Amounts on deposit in the Facilities Reserve Fund may be withdrawn and expended by the Borrower for the 2003 Project for the purposes set forth in Section 8.8(b) of the Management Agreement.

(c) The Borrower shall fund or cause to be funded in the Technology Reserve Fund at the times set forth in the Management Agreement an amount equal to Two Hundred Dollars ($200) per pupil (indexed for changes and per capita District Charter School Revenues) of the 2003 Project Formula Payments. Amounts on deposit in the Technology Reserve Fund may be withdrawn and expended by the Borrower for the purposes set forth in Section 8.8(a) of the Management Agreement.

(d) The Borrower shall invest amounts on deposit in the Facilities Reserve Fund and in the Technology Reserve Fund in Permitted Investments or in accordance with the Borrower’s investment policy.

Damage, Destruction and Condemnation. Prior to payment in full of the Bonds (or provision for payment in full of the Bonds having been made in accordance with the Indenture), the Borrower will be obligated to continue to pay all amounts payable pursuant to the Note and the Loan Agreement as and when due, notwithstanding the fact that (i) the Project or any portion of them are destroyed or are damaged by fire or other casualty or (ii) title to, or any interest in, or the temporary use of the Project or any part of them are taken under the exercise of the power of eminent domain made by any governmental body or by any person, firm or corporation, acting under governmental authority. Prompt written notice of any taking, loss, damage or destruction of any part of the Project of or any official notice thereof or of the institution of any proceeding therefore by any public instrumentality, body, agency or officer shall be given to the Trustee, the Insurer and to the District by the party first informed thereof.

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Insurance

Coverage. Effective on the Closing Date and until the Loan is paid in full, the Borrower shall maintain, at its sole cost and expense, insurance coverage on the Project, either with reputable insurance companies duly qualified to conduct business in the District and rated at least “A” by S&P or having an Alfred M. Best Company, Inc. rating of “A-” or higher or such other ratings service as shall be acceptable to the Insurer, in amounts and against risks, as determined by an Independent Insurance Consultant for insurance matters as of the Closing Date, and as provided below, customarily insured against by borrowers similarly situated, or through self-insurance which meets the requirements of the Insurer, but in all events, at least to the following extent: (i) “All-Risk” fire and extended coverage hazard insurance covering the Project in an aggregate amount not less than 100% of the agreed upon full insurable replacement value of the Project; (ii) during the course of any construction, reconstruction, remodeling or repair of the Project, builders’ all-risk extended coverage insurance (non-reporting Completed Value with Special Cause of Loss form) in amounts based upon the completed replacement value of the Project and endorsed to provide that occupancy by any person shall not void such coverage (provided, however, that such insurance may be obtained and maintained by a contractor); (iii) business interruption insurance (including rental value if the Project is leased in whole or part) equal to not less than twelve (12) months estimated budgeted operating expenses; and (iv) general liability insurance and professional liability insurance in amounts and with such coverage limitations as determined by an Independent Insurance Consultant, customarily insured against by borrowers similarly situated, which coverage shall be reviewed at least once every other year.

The Borrower may provide self-insurance (for liability only), subject to annual review by an Independent Insurance Consultant. All insurance policies required under the Loan Agreement shall contain a standard New York Mortgage clause in favor of the Trustee and the Insurer (as mortgagee/loss payee) and the general liability insurance policies shall be endorsed to show the Insurer as additional insured. Copies of all such policies, or a certificate or certificates of the insurers that such insurance is in full force and effect, shall be provided to the Insurer (together with receipts indicating that premiums are being paid on an annual or more frequent basis in accordance with the terms of each such policy) and, prior to expiration of any such policy, the Borrower shall furnish to the Insurer satisfactory evidence that such policy has been renewed or replaced or is no longer required. All insurance policies shall provide for thirty (30) days’ prior written notice to the Borrower, the Trustee and the Insurer of any cancellation, reduction in amount or material change in coverage.

Disposition of the Project. The Project may be leased, transferred or sold, as a whole, by the Borrower only upon compliance with the provisions of Sections 6.02(b) of the Loan Agreement.

The Borrower’s Option to Prepay the Loan. Subject to and in accordance with the redemption provisions of the Indenture, the Borrower has and is granted the option in its sole discretion to prepay the Loan, in whole or in part, and, if in whole, to terminate the Loan Agreement by paying to or depositing with the Trustee or other escrow agent, for deposit into the Debt Service Fund, the Redemption Fund, or other escrow fund an amount which, when added to the amounts on deposit (including interest to be earned thereon) and available for that purpose in other Funds held by the Trustee, will be sufficient on the redemption date to pay the Loan in full, pay all Additional Payments, and redeem the Bonds in their entirety in accordance with the provisions of the Indenture.

The Borrower has, and is granted, the option in its sole discretion to prepay the amounts required to be made under Section 3.08 of the Loan Agreement in whole and to cancel or terminate the Loan Agreement if any of the following events shall have occurred:

(a) The Project or a material portion thereof shall have been damaged or destroyed to such an extent that, in the judgment of the Borrower expressed in a Resolution of the Board, (A) they cannot be reasonably restored within a period of 270 days to the condition thereof immediately preceding such damage or destruction, (B) the Borrower is thereby prevented from carrying on its normal operations at such Project for a period of not less than nine (9) consecutive months, or (C) it would not be economically feasible for the Borrower to replace, repair, rebuild or restore the same;

(b) Title to, or the temporary use of, any portion of the Project shall have been taken under the exercise of the power of eminent domain by any governmental body or by any person, firm or corporation acting under governmental authority, or any portion of the Project is damaged or destroyed, and

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the Borrower determines in accordance with Section 9.02 of the Loan Agreement to prepay the Note, in whole or in part, with the Net Proceeds received in connection with such exercise or casualty; or

(c) As a result of (i) any changes in the Constitution of the United States of America or the Home Rule Act, (ii) other legislative or administrative action (federal or local), (iii) a final decree, judgment or order of any court or administrative body (federal or local), entered after any contest which may be undertaken at the option of the Borrower in good faith or (iv) an assertion of a bona fide claim against the District or the Borrower, after any of which the Loan Agreement or the Note becomes or may become void or unenforceable or impossible of performance in accordance with the intent and purposes of the parties as expressed in the Loan Agreement.

The Borrower has the option to prepay a portion of the amounts payable under the Loan Agreement in part at any time, if any of the following events shall have occurred:

(a) Title to, or the temporary use of, any portion of the Project shall have been taken under the exercise of the power of eminent domain by any governmental body or by any person, firm or corporation acting under governmental authority, or any portion of the Project is damaged or destroyed, and the Borrower determines in accordance with Section 9.02 of the Loan Agreement to prepay the Note, in whole or in part, with the Net Proceeds received in connection with such exercise or casualty; provided, however, that such prepayment shall be permitted only to the extent that the compensation, awards or other payments therefor are not applied to the repair, restoration, rebuilding or replacement of the portion of the Project so affected; or

(b) The Project or a portion thereof shall have been damaged or destroyed to such an extent that, in the judgment of the Borrower, (A) it cannot be reasonably restored to the condition thereof immediately preceding such damage or destruction, (B) the Borrower is thereby prevented from carrying on its normal operations at such portion of such Project for a period of not less than three (3) consecutive months, or (C) it would not be economically feasible for the Borrower to replace, repair, rebuild or restore the same; provided, however, that such prepayment shall be permitted only to the extent that any moneys received pursuant to insurance carried with respect to such Project are not applied to the repair, restoration, rebuilding or replacement of such Project.

Limitations on Liability. (a) Notwithstanding any other provision of the Loan Agreement or the Bonds to the contrary, in accordance with the Authorizing Actions, the Bonds shall constitute special obligations of the District. The Bonds are without recourse to the District. The Bonds shall not constitute general obligations of the District, shall not constitute a pledge of or involve the faith and credit or the taxing power of the District, shall not constitute a debt of the District and shall not constitute a lending of the public credit for private undertakings as prohibited by Section 602(a)(2) of the Home Rule Act. The Bonds shall never constitute or give rise to any pecuniary liability of the District or any of its elected or appointed officials, officers, employees or agents, and the District will not have any obligation with respect to the purchase of the Bonds.

(b) The District shall have no liability or obligation for the payment of any Costs of Issuance.

(c) The District’s issuance of the Bonds and the Loan to the Borrower shall in no way be construed as obligating the District in any way to any person or entity for the payment of any expense incurred with respect to the Project. Accordingly, no person or entity contracting with the Borrower with respect to the Project shall be reimbursed by the District under any circumstances.

No covenant, obligation or agreement contained in any of the Bond Documents will be considered to be a covenant, obligation or agreement of any elected or appointed official, officer, employee or agent of the District in his or her individual capacity, and neither the members of the Council nor the Mayor nor any official executing any of the Bond Documents nor any other District official will be liable personally or be subject to any personal liability or accountability by reason of anything stated in or omitted from any of the Bond Documents. No person, including the Borrower, will have any claims against the District or any of its elected or appointed officials, officers, employees or agents for damages suffered as a result of the District’s failure to perform any covenant, undertaking or obligation under the Bond Documents, nor as a result of the incorrectness of any representation in or omission

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from any of the Bond Documents unless the District or its elected or appointed officials, officers, employees or agents have willfully acted in a fraudulent manner.

Events of Default. Each of the following will constitute an Event of Default by the Borrower under the Loan Agreement:

(a) If (i) any material representation, warranty or statement made by the Borrower in or pursuant to the Loan Agreement, or any material written information furnished by the Borrower in or pursuant to the Loan Agreement or any of the other Bond Documents or otherwise in connection with the financing, refinancing or reimbursing of Costs of the Project, or (ii) any material representation, warranty or statement made in any certificate, financial statement, requisition for funds or other instrument furnished by the Borrower in connection with the Loan Agreement or any of the other Bond Documents or otherwise in connection with the sale of the Bonds or the financing, refinancing or reimbursing of Costs of the Project, is incorrect, untrue or misleading and adversely affects the validity or enforceability of the Bonds under the law of the District or the Tax-Exemption for the Bonds;

(b) The failure of the Borrower to make any Debt Service Payment when due;

(c) The failure of the Borrower to observe or perform any covenant, condition or agreement to be observed or performed by it other than as referred to in (b) above or (d) below of this section, for a period of 45 days after written notice from the District, the Insurer or the Trustee which specifies the failure and requests that it be remedied, unless the District, the Insurer and the Trustee agree in writing to an extension of time prior to expiration of the 45 day period, provided, however, if the failure stated in the notice cannot be corrected within the applicable period, the District and the Trustee will not unreasonably withhold their consent to an extension of time if corrective action is instituted by the Borrower within the applicable period and is being diligently pursued until the Event of Default is corrected;

(d) The occurrence of an Event of Default under the Indenture;

(e) If the Borrower shall: (i) voluntarily be adjudicated a bankrupt or insolvent, (ii) seek or consent to the appointment of a receiver or trustee for itself or for all or any part of its property, (iii) file a petition seeking relief under the bankruptcy or similar laws of the United States, the District or any state or any other competent jurisdiction, (iv) make a general assignment for the benefit of creditors, (v) admit in writing its inability to pay its debts as they mature, (vi) be involuntarily declared bankrupt if a court of competent jurisdiction shall enter an order, judgment or decree appointing, without the consent of the Borrower, a receiver or trustee for it for all or any part of the Borrower’s property or approving a petition filed against any such party seeking relief under the bankruptcy or other similar laws of the United States, the District or any state or other competent jurisdiction, and such order, judgment or decree shall be consented to or remain in force undischarged or unstayed for a period of 60 days after the date on which such petition was filed; or (vii) have a creditor file a petition in bankruptcy or for the appointment of a receiver or for similar relief against the Borrower for reorganization of any such party pursuant to any federal, District or state bankruptcy similar laws, and if such petition shall be consented to by such party or not be discharged or dismissed within 60 days after the date on which such petition was filed; or

Rights and Remedies on Default. (a) Upon the occurrence and continuance of any Event of Default described in the Loan Agreement, and upon the Bonds being declared immediately due and payable in accordance with the Indenture, then the Loan Payments will, without further action or demand, become and be immediately due and payable. Any waiver of any Event of Default under the Indenture and a rescission and annulment of its consequences will constitute a waiver of the corresponding Event of Default or Events of Default under the Loan Agreement and a rescission and annulment of the consequences of that Event of Default or those Events of Default. Any indebtedness under the Loan Agreement shall be capable of being separately and independently accelerated with or without an acceleration of the Bonds under the Indenture.

(b) Upon the occurrence and continuance of any Event of Default described in the preceding section under the caption “Events of Default” unless waived, the Trustee may take one or any combination of the following remedial steps:

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(i) If reasonably necessary in the opinion of the Trustee, have reasonable access to and inspect, examine and make copies of, the books and records and any and all accounts, data and income tax and other tax returns of the Borrower to the extent related to the Project or the Bonds.

(ii) Take whatever action at law or in equity may appear necessary or desirable to collect the amounts due on the Notes and thereafter to become due, to enforce performance and observance of any obligation, agreement or covenant of the Borrower under the Bond Documents or enforce the rights of the Borrower against third parties.

(iii) Withhold any and all payments, disbursements, advances and reimbursements from the proceeds of the Bonds or the Project Fund or to which the Borrower may otherwise be entitled and apply those proceeds or moneys in the Project Fund to the payment of any obligation of the Borrower under the Bond Documents.

Amendments, Changes and Modifications. Subsequent to the issuance of the Bonds and prior to their payment in full, the Loan Agreement may not be effectively amended, changed, modified, altered or terminated without the prior written consent of the District, the Insurer and the Borrower as provided in the Indenture. A copy of any amendments to the Loan Agreement shall be sent to the applicable Rating Agencies.

Term of Agreement. The Loan Agreement will remain in full force and effect from its date to and including the later of the date of the Note and all of the Bonds and the fees and expenses of the District, the Insurer, the Trustee, the Registrar and the Paying Agent have been fully paid (or until provision for payment in full has been made in accordance with the terms of the Bond Documents).

APPENDIX D

SUMMARY OF CERTAIN PROVISIONS OF THE 2003 MORTGAGE

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APPENDIX D

SUMMARY OF CERTAIN PROVISIONS OF THE 2003 MORTGAGE

The following is a summary of the 2003 Mortgage. This summary does not purport to set forth all of the provisions of the 2003 Mortgage, to which reference is made for the complete and actual terms thereof.

The Series 2003 Mortgage consists of the Deed of Trust of the three facilities of the 2003 Project owned by the Friendship School and a Leasehold Deed of Trust on the fourth facility of the 2003 Project leased by Friendship School under a ground lease agreement. The Deed of Trust on the three facilities owned by Friendship School will grant, for the benefit of the holders of the Bonds, a first priority lien in the land and the improvements of the three facilities of the 2003 Project. The Leasehold Deed of Trust on the fourth facility leased by Friendship School will grant, for the benefit of the holders of the Bonds, a first priority lien on the leasehold interest held by the Friendship School in the land and improvements of the fourth facility of the 2003 Project. The Series 2003 Mortgage will incorporate by reference the provisions of the Series 2003 Loan Agreement. Upon an event of default by Friendship School, the Bond Trustee will have the right to choose whatever remedies are available under the Series 2003 Mortgage to protect the interest of the holders of the Bonds in the four facilities. Simultaneously with the issuance and delivery of the Series 2003 Bonds, the Trustee will receive a mortgagee title insurance policy payable to the Trustee, covering the owned and leased facilities of the 2003 Project and securing the Series 2003 Note.

The Series 2003 Mortgage will also grant a first priority security interest in certain personal property which constitutes a part of the Facilities. To continue the perfection of the security interest in such personal property, continuation statements meeting the requirements of the District of Columbia UCC must be filed every five years.

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APPENDIX E

PROPOSED FORM OF BOND COUNSEL OPINION

November __, 2003 District of Columbia 1350 Pennsylvania Avenue, N.W. Washington, D.C. 20004

$44,880,000 District of Columbia Revenue Bonds

(Friendship Public Charter School, Inc. Issue) Series 2003

Ladies and Gentlemen:

We have acted as bond counsel to the District of Columbia in connection with the issuance and sale by the District of Columbia (the “District”) of its $44,880,000 District of Columbia Revenue Bonds (Friendship Public Charter School, Inc. Issue) Series 2003 (the “Bonds”). The Bonds are issued under and pursuant to an Indenture of Trust dated as of November 1, 2003 (the “Indenture”) between the District and Wells Fargo Bank Minnesota, N.A., as trustee (the “Trustee”). Capitalized terms not defined herein shall have the meanings provided in the Indenture.

The Bonds are issued pursuant to the District of Columbia Home Rule Act, approved December 24, 1973 (P.L. 93-198, 87 Stat. 774; D.C. Code §§1-201 et seq.), as amended (the “Home Rule Act”) and Friendship Public Charter School Revenue Bond Project Emergency Approval Resolution of 2003, Resolution No. 15-208, adopted by the Council of the District of Columbia on July 8, 2003.

The District will lend the proceeds of the Bonds to Friendship Public Charter School, Inc. (the “Borrower”), a District of Columbia nonprofit corporation, pursuant to a Loan Agreement dated as of November 1, 2003 (the “Loan Agreement”) between the District and the Borrower, to finance, refinance, or reimburse the Borrower for all or a portion of the costs of acquisition and/or leasing, construction, renovation, furnishing and equipping of four elementary and/or secondary school facilities (grades K-12) of the Borrower, including land, buildings, improvements and personal property, all located in the District and owned or leased by the Borrower (the “2003 Project)”, to fund if necessary or appropriate any working capital costs, to fund any required debt service reserve fund or other reserve fund, to pay certain costs of issuance for the Bonds and to pay the cost of any credit enhancement.

The Borrower has represented that it is an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended (the “Code”), and is exempt from federal income tax under Section 501(a) of the Code, except for unrelated business income subject to taxation under Section 511 of the Code. The Borrower has covenanted that, throughout the term of the Loan Agreement, it will cause to be done all things necessary to obtain, preserve and to keep in full force and effect its existence in good standing as a nonprofit corporation and as an organization described in Section 501(c)(3) of the Code which is exempt from federal income taxation under Section 501(a) of the Code (except as to unrelated trade or business income) and will not perform any acts nor enter into any agreements which would cause any revocation or adverse modification of such federal income tax status.

Under the Indenture, the District has covenanted that it will comply with the requirements of Section 148 of the Code pertaining to arbitrage bonds. In addition, an authorized official of the District responsible for issuing the Bonds and an authorized representative of the Borrower have each executed a certificate stating the reasonable expectations of the District and the Borrower on the date of issuance of the Bonds as to future events that are material for the purposes of such requirements of the Code. The District also has delivered for filing with the

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Internal Revenue Service a report of the issuance of the Bonds as required by the Code as a condition of the exclusion from gross income of the interest on the Bonds for federal income tax purposes.

In our capacity as bond counsel, we have examined the law and such certified proceedings, specimen of the Bonds, opinions of counsel to other parties to the transaction upon which certain reliance has been placed, documents, records and other papers as we have deemed relevant and necessary to render the opinions set forth below. In particular, we have relied upon the opinion of Hunton & Williams LLP, as counsel for the Borrower, as to all matters concerning the due authorization, execution and delivery by, and the binding effect upon and enforceability against, the Borrower of the Loan Agreement and the legal status of the Borrower as an organization exempt from federal income tax under Section 501(a) of the Code as described in Section 501(c)(3) of the Code.

As to questions of fact material to our opinion, we are relying upon (i) representations of the District and the Borrower contained in the documents underlying the issuance of the Bonds, (ii) certified proceedings and other certifications of public officials furnished to us and (iii) other certifications given to us, without undertaking to verify any of the foregoing by independent investigation.

We have assumed the accuracy and truthfulness of all public records and of all certifications, documents, written opinions and other proceedings provided to us, the authenticity of all documents submitted to us as originals, the genuineness of all signatures appearing on documents we have examined, the conformity of the originals of all documents submitted to us as certified or photostatic copies and the legal capacity of natural persons executing all executed documents.

Based on the foregoing, we are of the opinion that, under existing law:

1. The District is a body politic and corporate duly created and organized and validly existing for municipal purposes under the Constitution of the United States of America and the Home Rule Act, with corporate power and authority to enter into and perform its obligations under the Indenture and the Loan Agreement to issue the Bonds, to apply the proceeds of the Bonds in the manner described in the Indenture and to pledge and assign to the Trustee the Trust Estate under the Indenture.

2. The Indenture and the Loan Agreement have been duly authorized, executed and delivered by the District and, assuming due authorization, execution and delivery by the Trustee and the Borrower, respectively, constitute valid and binding agreements of the District enforceable against the District in accordance with their terms, subject to the last paragraph hereof.

3. The Bonds have been duly and validly authorized, executed and issued by the District and constitute valid and binding special obligations of the District, payable solely from and secured by the revenues and receipts pledged thereto. The Bonds are not a general obligation of the District, are without recourse to the District, are not a pledge of and do not involve the faith and credit or taxing power of the District, and do not constitute lending of the public credit for private undertakings as prohibited by Section 602(a) of the Home Rule Act.

4. Under existing law, interest on the Bonds is exempt from District taxation except estate, inheritance and gift taxes.

5. Interest on the Bonds (including original issue discount) is excludable from gross income for purposes of federal income tax under existing laws as enacted and construed on the date of initial delivery of the Bonds, assuming the accuracy of the certifications of the District and the Borrower and continuing compliance by the District and the Borrower with the requirements of the Code. Interest on the Bonds will not be an item of tax preference for purposes of either individual or corporate federal alternative minimum tax, but interest on the Bonds held by a corporation (other than an S corporation, regulated investment company, real estate investment trust, real estate mortgage investment conduit or financial asset securitization investment trust) may be indirectly subject to federal alternative minimum tax because of its inclusion in the adjusted current earnings of a corporate holder. Interest on Bonds held by foreign corporations may be subject to the branch profits tax imposed by the Code.

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Ownership of the Bonds may result in collateral federal income tax consequences to certain taxpayers, including, without limitation, financial institutions, property and casualty insurance companies, individual recipients of Social Security or Railroad Retirement benefits, certain S corporations, and taxpayers who may be deemed to have incurred or continued indebtedness to purchase or carry the Bonds. We express no opinion as to such collateral tax consequences.

We have not been engaged to review, nor have we undertaken to review, the accuracy, completeness or sufficiency of the Preliminary Official Statement dated November 3, 2003 or the Official Statement dated November 7, 2003 or other offering materials relating to the Bonds, and we express no opinion herein relating thereto.

The rights of owners of the Bonds and the enforceability of the Bonds, the Indenture and the Loan Agreement may be subject to bankruptcy, insolvency, reorganization, moratorium and other similar laws affecting creditors' rights to the extent constitutionally applicable and subject to the exercise of judicial discretion in appropriate cases.

Very truly yours,

APPENDIX F

SPECIMEN BOND INSURANCE POLICY

ACA Financial Guaranty Corporation 140 Broadway, 47th Floor For information, contact:

New York, NY 10005 (212) 375-2000 (888) 427-2833

BOND INSURANCE POLICY

Policy Number: Effective Date:

Issuer:

Bonds:

ACA FINANCIAL GUARANTY CORPORATION (“ACA”), a Maryland stock insurance company, in consideration of the payment of the premium and subject to the terms and conditions contained in this Policy (which includes each endorsement hereto), hereby unconditionally and irrevocably agrees to pay to the trustee (the “Trustee”) or paying agent (the “Paying Agent”) (as designated in the documentation providing for the issuance of and securing the Bonds) for the Bonds, for the benefit of any Owner, or, at the election of ACA, directly to such Owner, that portion of the principal of and interest on the Bonds which shall become Due for Payment but shall be unpaid by reason of Nonpayment by the Issuer.

ACA will make such payments to or for the benefit of each Owner on the later of the day on which such principal or interest becomes Due for Payment or the Business Day next following the Business Day on which ACA shall have received Notice of Nonpayment. ACA will disburse to or for the benefit of the Owner the face amount of principal of and interest on the Bond which is then Due for Payment but is unpaid by reason of Nonpayment by the Issuer but only upon receipt by ACA, in form reasonably satisfactory to it, of (i) evidence of the Owner’s right to receive payment of the principal or interest then Due for Payment and (ii) evidence, including any appropriate instruments of assignment, that all of the Owner’s rights to payment of such principal or interest then Due for Payment shall thereupon vest in ACA. Notice of Nonpayment will be deemed received on a given Business Day if it is received prior to 1:00 p.m. Eastern prevailing time on such Business Day; otherwise, it will be deemed received on the next Business Day. Upon disbursement in respect of a Bond, ACA shall become the owner of the Bond, appurtenant coupon, if any, or right to payment of principal of or interest on such Bond and shall be fully subrogated to all of the Owner’s rights thereunder, including the Owner’s right to payment thereof to the extent of any payment by ACA hereunder. Payment by ACA to the Trustee or Paying Agent for the benefit of the Owners shall, to the extent thereof, discharge the obligation of ACA under this Policy.

This Policy is non-cancelable for any reason and the premium on this Policy is not refundable for any reason, including the payment of the Bonds prior to their maturity.

The following terms shall have the meanings specified for all purposes of this Policy. The term “Owner” means, as to a particular Bond, the person other than the Issuer or any party whose direct or indirect obligation constitutes the underlying security for the Bonds, who at the time of Nonpayment, is entitled under the terms of such Bond to payment thereof. “Due for Payment” means (a) when referring to the principal of a Bond, the stated maturity date thereof or the date on which the same shall have been duly called for mandatory sinking fund redemption and does not refer to any earlier date on which payment is due by reason of call for redemption (other than by mandatory sinking fund redemption), acceleration or other advancement of maturity unless ACA shall elect, in its sole discretion, to pay such principal due upon such acceleration together with any accrued interest to the date of acceleration and (b) when referring to interest on a bond, the stated date for payment of interest. “Nonpayment” with respect to a Bond means the failure of the Issuer to have provided sufficient funds to the Trustee or the Paying Agent for payment in full of all principal and interest Due for Payment on such Bond. “Nonpayment” shall also include any payment of principal or interest made to an Owner by or on behalf of the Issuer of such Bond which has been recovered from such Owner pursuant to a final, non-appealable order of a court of competent jurisdiction that such payment constitutes an avoidable preference to such Owner within the meaning of any applicable bankruptcy law. “Notice” means telephonic or electronic notice, subsequently confirmed in writing, or written notice by registered or certified mail, from an Owner, the Trustee or the Paying Agent to ACA, which notice shall specify (a) the person or entity making the claim, (b) the Policy Number, (c) the claimed amount and (d) the date such claimed amount became Due for Payment. “Business Day” means any day other than a Saturday, Sunday or a day on which banking institutions in the State of Maryland or the Insurer’s Fiscal Agent are authorized or required by law to remain closed.

ACA may appoint a fiscal agent (the “Insurer’s Fiscal Agent”) for purposes of this Policy by giving written notice to the Trustee and the Paying Agent specifying the name and notice address of the Insurer’s Fiscal Agent. From and after the date of receipt of such notice by the Trustee and the Paying Agent (a) copies of all notices required to be delivered to ACA pursuant to this Policy shall be simultaneously delivered to the Insurer’s Fiscal Agent and to ACA and shall not be deemed received until received by both and (b) all payments required to be made by ACA under this Policy may be made directly by ACA or by the Insurer’s Fiscal

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Agent on behalf of ACA. The Insurer’s Fiscal Agent is the agent of ACA only and the Insurer’s Fiscal Agent shall in no event be liable to any Owner for any act of the Insurer’s Fiscal Agent or any failure of ACA to deposit or cause to be deposited sufficient funds to make payments due under this Policy.

There shall be no acceleration payment due under this Policy except at the sole option of ACA.

IN WITNESS WHEREOF, ACA has caused this Policy to be affixed with its corporate seal and to be executed on its behalf by its duly authorized representative.

ACA FINANCIAL GUARANTY CORPORATION [SEAL]

____________________________________ Authorized Representative

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APPENDIX G

FORM OF CONTINUING DISCLOSURE AGREEMENT This CONTINUING DISCLOSURE AGREEMENT (the “Disclosure Agreement”), dated as of November 1, 2003, is executed and delivered by the Friendship Public Charter School, Inc. (the “Friendship School”) in connection with the issuance of the $44,880,000 District of Columbia Revenue Bonds (Friendship Public Charter School, Inc. Issue), Series 2003 (the “Series 2003 Bonds”).

1. Purpose of the Disclosure Agreement. This Disclosure Agreement is being executed and delivered for the benefit of the holders of the Series 2003 Bonds and delivered in order to assist Citigroup Global Markets, Inc. (the “Underwriter”) in complying with the provisions of Section (b)(5)(i) of Rule 15c-12 (the “Rule”) promulgated by the Securities and Exchange Commission (the “SEC”) under the Securities and Exchange Act of 1934, as the same may be amended from time to time. Capitalized terms used and not defined herein shall have the meanings given to such terms in the Trust Indenture, dated as of November 1, 2003, between Wells Fargo Bank Minnesota, N.A., and the District of Columbia.

2. Annual Disclosure. (a) The Friendship School will provide annually certain financial information and operating data in accordance with the provisions of Section (b)(5)(i) of the Rule as follows:

(i) audited financial statements of the Friendship School, prepared in accordance with generally accepted accounting principles; and

(ii) the annual financial and operating data with respect to the Friendship School of the type appearing in the charts of Appendix A to the Official Statement dated November 7, 2003, describing (A) enrollment data, (B) academic performance, (C) pupil revenue, and (D) summary of revenue and expenses as set forth on page A-27 of the Official Statement.

(b) The Friendship School will provide annually the financial information and operating data described in subsection (a) above (the “Continuing Disclosure”) within 150 days after the end of the Friendship School’s fiscal year, commencing not later than November 30, 2004, for the Friendship School’s fiscal year ending June 30, 2004, to each nationally recognized municipal securities information repository (“NRMSIR”) and to the appropriate state information depository (“SID”), if any is hereafter created. A current list of the NRMSIRs is attached as Exhibit A hereto.

(c) Any of the Continuing Disclosure may be included by specific reference to other documents previously provided to each NRMSIR and to the appropriate SID, if any is hereafter created, or filed with the SEC; provided, however, that any final official statement incorporated by reference must be available from the Municipal Securities Rulemaking Board (the “MSRB”).

(d) The Friendship School will provide in timely manner to each NRMSIR or the MSRB and to the appropriate SID, if any is hereafter created, notice specifying any failure of the Friendship School to provide the Continuing Disclosure by the date specified.

3. Event Disclosure. The Friendship School will provide in a timely manner to each NRMSIR or the MSRB and with the appropriate SID, if any is hereafter created, notice of the occurrence of any of the following events with respect to the Bonds, if material:

(a) principal and interest payment delinquencies; (b) non-payment related defaults; (c) unscheduled draws on debt service reserves reflecting financial difficulties; (d) unscheduled draws on any credit enhancement reflecting financial difficulties; (e) substitution of credit or liquidity providers, or their failure to perform; (f) adverse tax opinions or events affecting the tax-exempt status of the Bonds; (g) modifications to rights of Bondholders; (h) bond calls; (i) defeasance of all or any portion of the Bonds; (j) release, substitution, or sale of property securing repayment of the Bonds; and (k) rating changes.

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4. Termination. The covenants and obligations of the Friendship School specified in Sections 2 and 3 above will terminate upon the redemption, legal defeasance (within the meaning of the Rule) or payment in full of all the Bonds.

5. Amendment. The Friendship School reserves the right to modify its obligations contained in Sections 2 and 3 above without the consent of Bondholders, provided that such modification complies with the Rule as it exists at the time of modification.

6. Defaults. (a) If the Friendship School fails to comply with any covenant or obligations regarding Continuing Disclosure specified in this Disclosure Agreement, any holder (within the meaning of the Rule) of Bonds then outstanding may, by notice to the Friendship School, proceed to protect and enforce its rights and the rights of the holders by an action for specific performance of the Friendship School’s covenant to provide the Continuing Disclosure.

(b) Notwithstanding anything herein to the contrary, any failure of the Friendship School to comply with any covenant or obligations regarding Continuing Disclosure specified in this Disclosure Agreement (i) shall not be deemed to constitute an event of default under the Bonds, the Indenture or the Loan Agreement, and (ii) shall not give rise to any right or remedy other than that described in Section 6(a).

7. Additional Disclosure. The Friendship School may from time to time disclose certain information and data in addition to the Continuing Disclosure. Notwithstanding anything herein to the contrary, the Friendship School shall not incur any obligations to continue to provide, or to update, such additional information or data.

FRIENDSHIP PUBLIC CHARTER SCHOOLS, INC.

By: Print name:

Title:

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Exhibit A Continuing Disclosure Agreement

List of Nationally Recognized Municipal Securities Information Repositories at the time of execution and delivery of the Disclosure Agreement.

This list may change from time to time. The Disclosure Agreement requires that information and notices be provided to each Repository. This list should be checked for changes each time information or notice is to be provided. A current list may be obtained from the Securities and Exchange Commission over the Internet at http://www.sec.gov/consumer/nrmsir.htm.

Bloomberg Municipal Repository 100 Business Park Drive Skillman, New Jersey 08558 Telephone: (609) 279-3225 Facsimile: (609) 279-5962 E-mail: [email protected]

FT Interactive Data Attn: NRMSIR 100 William Street New York, New York 10038 Telephone: (212) 771-6999 Facsimile: (212) 771-7390 (Secondary Market Information) (212) 771-7391 (Primary Market Information) E-mail: [email protected]

DPC Data Inc. One Executive Drive Fort Lee, New Jersey 07024 Telephone: (201) 346-0701 Facsimile: (201) 947-0107 E-mail: [email protected]

Standard & Poor’s J. J. Kenny Repository 55 Water Street, 45th Floor New York, New York 10041 Telephone: (212) 438-4595 Facsimile: (212) 438-3975 E-mail: [email protected]

There are presently no State Information Depositories as of the time of execution and delivery of this Disclosure Agreement.

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